How to Understand & Use PLRs

L1: How to Understand & Use PLRs Private Letter Rulings (PLRs۝) are just what the title suggests; they are private in the sense that the contents & decisions reached within the ruling are only binding on the Service with respect to the submitting taxpayer. Further, please keep in mind that in this arena, what you see published might only be 3 – 4 pages total; whereas the PLR submission might have been 20 pages & imbedded in those 20 pages are a lot of relevant facts & issues which influenced the outcome & language of the PLR but were none-the-less, not replicated in the ruling itself. Thus there is good reason for PLRs to only be binding to one taxpayer & similarly can not be used as precedent۝ (we will work on this word some more in a minute) by other taxpayers. In summary, another taxpayer just does not have all the detail facts & circumstances at his or her disposal. Further, another taxpayer did not pay any money & you don’t get something for nothing with the IRS.
All this being said; then how should we use PLRs both as practitioners or general taxpayers? As practitioners, we all view one PLR as a good start; but only a good start. The first is always to toughest, but it is not the finish line. We wait and see if anyone else submits a similar PLR request and also gets a favorable ruling. Then we group rulings of like nature and attempt to abstract the fundamental theory involved without getting immersed in the detail facts & circumstances. I liken PLRs to a horse race:
?1st PLR is a good start out of the gate.
?2nd PLR is being in the lead going into the 3rd turn.
?3rd PLR is the finish line.
Presuming that all three PLRs are affirmative and clean, then what does the finish line mean? To me, it means that I have seen sufficient theoretical consistency that:
?I understand the theory and I know how to apply it correctly.
?I can tell the next taxpayer who calls that there is no need to file for a 4th PLR, three is enough.
?I am willing, in lieu of a 4th PLR, to render an official & binding opinion on my own and be highly confident that I am correct and will never be faced with a malpractice claim.
Admittedly, other practitioners have different rules for themselves; some only need to see two PLRs; others need to see _ dozen. My personal rule is three and that seems to work.
Next, let’s talk about precedent۝. Every PLR issued contains the language This document may not be used or cited as precedent. Section 6110(j)(3) of the IRC۝. In short this means that Taxpayer B may not cite Taxpayer A’s PLR as dispositive proof that B’s transactions are permissible. The reasoning for this is actually correct. There is simply too much fact & circumstance data unavailable to taxpayer B in A’s ruling to determine if B’s facts & circumstances are identical or sufficiently close in order to come to the same conclusion. Conversely, let’s take the case of three PLRs where we have abstracted the theory and discarded, as best possible, all of the detail facts & circumstances. Essentially we have self-developed an information letter or revenue ruling (although written by ourselves & not the IRS). Further, we can informally۝ call the right people at the IRS and ask: Have we got this right?۝ Lastly, when we do have it right, typically the IRS will say two things: Yes, you have it right; Don’t send another PLR request, we have enough to do.
Lastly, and no one really wants to go here, just because Congress (the authors of the Internal Revenue Code) say a PLR can not be cited as precedent does not make it so. The courts (Tax and District) have regularly over-ruled Congress on this issue and have been willing to receive into evidence a group of PLRs all on the same theoretical subject as having set precedent. However, even in these cases, the Courts will tend to take a narrow construct of what actual precedent is being set. Bottom line, practitioners and taxpayers alike really don’t want to go here.
So what is a taxpayer to do when (s)he sees a PLR that is on point۝ with respect to something (s)he want to do? First, I would suggest some economic analysis; e.g. taxpayers with a $100,000 IRA contemplating some advanced distribution tactics are probably best served by dropping the idea. So what if the distribution goes from $5600 to $5850 per year; $250 per year is just not worth it. Conversely, this same issue might mean an annual difference of $25,000 for some one with a materially larger IRA. Secondly, I would suggest that the taxpayer look at the economic costs involved:
?Go it alone. Out-of-pocket costs are zero. However, the risk remains that the taxpayer might be wrong and suffer the pain of the 10% penalty plus interest some years down the road. Remember these costs are cumulative such that the total price for being wrong equal to 100% of one year’s distribution by the seventh year.
?Get a binding opinion from either a CPA or tax attorney on your proposed transactions. Costs are likely to be between $750 and $1500. In the event you are found to wrong, you may then rely upon the professional’s written opinion to recover the damages.
?Get your own PLR. Costs are likely to be in the $3000 to $10,000 range depending on the complexity of your facts & circumstances. In addition, the IRS does not work for free; 2004 fees are $625 & $2570 for taxpayers with gross income under or over $200,000, respectively.
So let’s say you call me and say: I want to start a SEPP plan and perform annual recalculation going forward; will you write me a binding opinion that this is permissible?۝ Unfortunately, my answer has to be NO because I have only seen one PLR on point. I am hopeful that I will see more in the coming months but I can not be certain. Thus, you have two choices: one, wait & see what happens during the remainder of the year; two, pony up to the bar, lay down your own $5,000 and get your own PLR on point.
TheBadgerwjstecker@wispertel.net 2004-05-15 10:37, By: TheBadger, IP: [66.250.23.21]