The following article is adapted and reprinted from the M&A Tax Report, Vol. 9, No. 9, April 2001, Panel Publishers, New York, NY.


By Robert W. Wood

Okay, so maybe this paraphrase of Shakespeare is not too clever. Still, all readers of The M&A Tax Report know that getting a ruling from the IRS used to be pretty standard fair among tax practitioners. Our readers also know that, at least in the M&A arena, getting a ruling (or even thinking seriously about asking for one) seems to be growing rarer. Most of the analysis in this area is subtle.

Yet, perhaps the least subtle index on rulings is the annually announced list of boundaries for rulings. The IRS annually publishes its "no-rule" list. Although some features of that list don't change much from year to year, there have been some noticeable changes in the reorganization arena this year.

New Year's Resolution

Along about New Year's Day every year, the IRS publishes a revenue procedure to list no-ruling areas. This year, Revenue Procedure 2001-3, 2001-1 I.R.B. 111 (Tax Analysts Doc. No. 2001-915, 2001 TNT 5-28), had a few surprises. For 2001, the IRS broadened the scope of various reorganization transactions on which it will not issue rulings. The IRS combined, simplified and expanded its position with respect to A, B, C E and F reorganizations (all under Section 368), as well as liquidations under Section 332 and capitalizations under Section 351.

The good news is that the IRS will now issue rulings on an entire transaction, not merely on significant sub-issues, if there is a significant sub-issue in a reorganization that would otherwise be excluded from normal ruling policy. (Say this slowly three times to get it, or simply read on for further explanation....)

The apparent objective of the Service is to attempt to encourage taxpayers to apply for rulings on transactions involving Sections 368 and 351 where there are "significant" issues that are not essentially free from doubt. Of course, the IRS wants to conserve its resources, and does not especially want to be ruling on transactions, in which the tax consequences are clear under controlling authorities. See Rev. Proc. 2001-3, §3.01(29).

Ruling Theory: Kafka at Work?

When you ponder it, there has always been a real O. Henry-like irony about the entire subject of IRS letter rulings. Or maybe it is more like Kafka, not humorously ironic but downright existential. After all, the "can't I get a ruling" question by definition will always involve an issue that you are really concerned about, and over which you think there may be some doubt. To be certain you don't have a tax problem, you really want a ruling, don't you? Paradoxically, these tough cases are precisely the areas in which the Service will almost never rule!

On the other hand, if you think the tax consequences of a transaction are quite clear, and you probably don't need a ruling, you can usually get one simply because the tax consequences are not controversial. Go figure. Anyone who finds that this is not more than a little strange has probably been working with the tax law for too long (I suppose I count myself in that category, too!). Both Dilbert and Kafka have apparently been at work in the IRS for many years.

Happily, though, the cubicle (or is that Rubik's cube?) may be opening at least a little. Although the puzzling dichotomy between what rulings are available and what are not will not go away anytime soon, this January saw a loosening of the rules that should be helpful to many tax professionals and their clients.

What's a "Significant Issue"?

The new hot question under Revenue Procedure 2001-3 is what constitutes a "significant issue." This is important because unless an issue is significant, it will not fall into the IRS' new (and liberalized) ruling policy. Since the IRS seems to be fond of tripartite tests, perhaps it is no surprise that an issue must meet three tests to be considered "significant":

Not surprisingly, the IRS won't just take your word for it that these three requirements have been met. To obtain a ruling on a transaction involving a "significant issue," the taxpayer must (in the ruling request itself), explain the significance of the issue, set forth the authorities most closely related to the issue, and explain why those authorities do not resolve the issue. In most cases my guess is that this won't be too difficult to do.

Overlapping Authorities

One of the sub-quandaries of applying for a ruling has always been the phenomenon of overlap. The IRS position has long been that it could not (or would not, anyway) issue a ruling under any Code Section if a transaction qualifies under one of the no-rule sections, as well as under a section which is not listed in the no-rule sections. To put it another way, if your proposed transaction could qualify under one section for a ruling and you apply for the ruling, you may get a response that because your transaction also qualifies under another provision that is on the no-rule list, the IRS won't rule. (Ever feel like a mouse caught in a maze?)

This may seem to put a premium on structuring the transaction to avoid the no-rule list, or anything close to it. Yet, it also puts a premium on knowing about the clear overlap that exists in various Code Sections vis a vis each other. In some ways it just doesn't seem fair.

Fortunately, another piece of good news is that this "no overlap" position has been eliminated in Revenue Procedure 2001-3. Time will tell how well this will work, but it should eliminate at least one of the hurdles to getting a ruling that has existed for quite some time. Focusing on the fact that the Service has eliminated the overlap prohibition and that it will rule on an entire transaction as long as you have a "significant issue," it is clear that our collective position now is better than it was in December before Revenue Procedure 2001-3 was issued.

Happy (True) Millenium?

Not only has the overlap problem been eliminated, but there is an actual encouragement for taxpayers to come into the National Office to ask for a ruling. The impetus is strong enough that it should cover rulings that in the old days might have been too controversial (or simply too tough) to be the subject of a ruling. In recent years, the fact that the government would not rule on an entire transaction, and would only rule on significant sub-issues, did not seem to accomplish the goal the Service presumably sought. Surely, the idea was that IRS resources would be conserved, and the Service would rule only on significant sub-issues.

In fact, most taxpayers did not want to traipse in to the Service and get only a significant sub-issue ruling. If the entire transaction could not be blessed, in some ways it did not seem worth the effort and expense of applying for a ruling. If you could only get a significant sub-issue ruling, perhaps there was concern that the entire transaction would not be bulletproof. Plus, the transaction would have been highlighted by virtue of the ruling request itself, even if some part of the transaction was the subject of a favorable ruling.

Timing and More

Whatever the reasoning in the past, it seems to me that Revenue Procedure 2001-3 contains several very positive developments. Yet, what about timing? Taxpayers still have to expect the usual 4-6 month delay. One of the great mysteries of tax practice is how some rulings can be issued in less than 60 days (my personal best record!) and some take well over a year (something else that I hate to admit has happened to me). I think (although I have conducted no formal survey on this topic) that 4-6 months is still a pretty accurate average. Many taxpayers (and many deals) simply can't wait that long.

Still, it is good to see the National Office stirring the pot a bit in its annual New Year's resolution revenue procedure. Hopefully, more transactions that are difficult, controversial and interesting will be the subject of rulings.

To Rule or Not to Rule: That is the Question, Vol. 9, No. 9, The M&A Tax Report (April 2001), p. 1.