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January 31, 2012
News Analysis: The New Limits on Corporate Letter Rulings Explained
by Amy S. Elliott

Full Text Published by Tax Analysts®

[Editor's Note: Addendum: This article was updated on February 6, 2012, to reflect the increase after publication of the fee for a private letter ruling to $18,000 per ruling.]

Thirty-six years ago, Tax Analysts prevailed over the IRS in a suit to make public the so-called secret law contained in private letter rulings. The rulings enable a taxpayer to seek certainty on the federal tax consequences of a planned transaction.

But before public disclosure was ordered by the courts and later mandated by Congress with the enactment of section 6110, a handful of firms pooled their resources to create a private library of rulings to give their clients better insight into the agreements the IRS was willing to make with taxpayers.

Although the rulings are now public, insiders continue to have an advantage in the IRS's letter ruling program today. Practitioners in the know have developed strategies to increase the chance that their ruling request will be handled by a preferred attorney within chief counsel. In response, IRS Associate Chief Counsel (Corporate) William Alexander has implemented a set of rules designed to limit the effectiveness of those strategies in his office.

This article is based on conversations Tax Analysts had with practitioners from eight different firms that regularly submit rulings to the Office of Associate Chief Counsel (Corporate) and includes the comments of many of those practitioners. Although the strategies are also used to secure rulings from other offices, this article will focus only on Corporate, which is the only office within chief counsel with no specialized branches -- all six branches of Corporate can handle all issues under the office's jurisdiction.


Forum Shopping

The basic strategy practitioners use to improve their odds of getting an expeditious and favorable ruling isn't nefarious, it's good business practice: Make contact with an attorney in chief counsel before requesting the ruling.

With an $18,000-per-ruling user fee (for requests received after February 4) plus the cost of attorney hours to prepare the request, "you could spend a couple hundred thousand dollars of your client's money and then literally the day it's submitted the IRS tells you that you never had a shot," one practitioner said of the risk of submitting a ruling request cold.

But it's who you know and how you go about it that matters. Practitioners from five firms with sizable ruling practices told Tax Analysts that they have successfully placed rulings with specific IRS attorneys using some variation of the following general approach: Make direct, extended contact with an IRS attorney with whom you have a positive relationship, possibly including a pre-submission conference. Then, if that attorney indicates that a favorable ruling on your transaction is likely, reference the contact with that attorney in the ruling request cover letter and give that attorney a heads-up when submitting the ruling request so that he or she can run interference with the individual in the office responsible for ruling assignment. (Practitioners at three other firms declined to say whether they themselves had placed ruling requests with particular attorneys in Corporate.)

Less sophisticated taxpayer representatives or practitioners without a positive relationship with a chief counsel attorney might rely exclusively on the published ruling procedures to navigate the letter ruling process, mailing their requests in cold. Rev. Proc. 2012-1 contains no indication that requesters have the ability to direct their rulings to specific attorneys or branches within chief counsel. In fact, the revenue procedure explicitly states that "a letter ruling request submitted following a pre-submission conference will not necessarily be assigned to the branch that held the pre-submission conference."

Speaking October 21, 2010, at a Practising Law Institute conference on corporate tax strategies in New York, Alexander encouraged taxpayers to call his office in advance of submitting a ruling request. "You don't have to send in a ruling request cold," he said. "You can talk to somebody in our shop before you send it in, and that's usually a good idea."

Alexander then admitted that his office permits a degree of forum shopping and disclosed that he has put a system in place to address abuses. "In general we will tolerate a certain amount of people calling in," he said. "And to some extent, that can result in sort of latching on to a particular reviewer or a particular docket attorney as the person who's going to handle your case. But in fact we do try to impose limits on practitioners' abilities to place their own work. I'm not going to disclose the algorithms to you, but they in fact exist."

At the same conference, Lee Kelley, who at the time served as IRS deputy associate chief counsel (corporate), added, "I strongly suggest that you don't make promises to your clients about who will handle your case. . . . We have to look at the overall workload of the division and make decisions about who is best suited when the case comes in to handle it." Kelley is now serving as senior counsel in Treasury's Office of Tax Policy.

Lawrence Axelrod, special counsel, IRS Office of Associate Chief Counsel (Corporate), added at the same conference that if a ruling involves a close call, there is a good chance it will get elevated. In those cases, "forum shopping will not help," he said.


The Limits Exposed

While Alexander's ruling assignment system isn't public, Tax Analysts spoke to several practitioners who are familiar with it, including at least two with firsthand, specific knowledge of its parameters.

The system effectively caps the number of times that a firm can get a ruling from a particular attorney at Corporate. If a firm seeks a ruling from the same attorney (generally the reviewer, who signs the ruling) two or three times, then that attorney has an obligation to decline involvement in any subsequent requests by that firm and to refer future ruling-related inquiries to the front office for assignment. The limit does not apply by branch but only by attorney, and it doesn't reset each year. The system also may cap the number of back-to-back rulings to which an attorney may be assigned that address the same subject -- such as section 355 spinoffs.

The system is designed to make the attorney ruling assignment at the earliest stage possible -- usually before the actual request arrives in the office.

As Alexander explained at the 2010 PLI conference, Corporate tries not to "scramble work around after people have become heavily embedded in it" but instead aims to make assignments in the early stages of the ruling process. Although he acknowledged that his office sometimes ends up reassigning cases later, he said, "It's not the most efficient way to proceed, and we don't do it all that often."


A New Set of Rules

Forum shopping isn't new, but Alexander's way of dealing with it is. While the Office of Associate Chief Counsel (Corporate) has historically faced similar forum-shopping pressures, it isn't clear that it has ever imposed detailed guidelines for distributing work among its attorneys, according to practitioners familiar with the matter.

"This has come up before where all of a sudden IRS Corporate gets worried about this," said one practitioner. "They put a few barriers in, but then it always falls off." Another noted that placing rulings with favored reviewers or docket attorneys was common in the past and was allowed by the person who was assigning the rulings. "That's just the way it was," the practitioner said.

According to Eric Solomon, co-director of national tax and of the Americas Tax Center at Ernst & Young LLP in Washington and IRS associate chief counsel (corporate) from 1990 to 1995, Corporate has generally charged an individual in the front office with assigning rulings. That practice continues today.

Alexander's approach to forum shopping is a double-edged sword. He seems to be attacking the problem in a more sincere, deliberate, and practical way than his office has in the past, but his approach essentially greenlights a limited amount of forum shopping. A practitioner may still have the ability to influence ruling assignments -- at least a couple of times.

While some level of forum shopping may have always plagued Corporate, several practitioners said they are concerned with the way Alexander has chosen to address it. One practitioner said he believes Alexander's policy has been "applied sort of haphazardly" and may be more trouble than it's worth. The practitioner said that rather than attacking the problem with arbitrary guidelines, Corporate should selectively target abuses on an ad hoc basis.


The System in Action

At least two practitioners who spoke to Tax Analysts were certain that Alexander's new ruling assignment system had affected their forum-shopping success rates.

"I'm confident that it's been applied to us a few times," said one practitioner. He said that several times practitioners in his firm haven't been able to place rulings with preferred Corporate attorneys and that in at least one of those cases the ruling process ultimately didn't go as smoothly or as efficiently as expected.

Another practitioner said he was told by his attorney contact within chief counsel that his ruling would be reassigned to another branch because of a new ruling assignment system. The practitioner said that if a firm believes it needs a specific branch for a ruling, the system "forces us to go through painful efforts to coordinate" within the firm to ensure that its limited ability to place rulings isn't wasted on the wrong ones. He said Alexander's effort to contain forum shopping "is admirable but flawed."

To get a better sense of the impact of the system, Tax Analysts reviewed private letter rulings released by the Office of Associate Chief Counsel (Corporate) and published in Tax Notes Today from 2008 through 2011 -- four years spanning the periods before and after the implementation of Alexander's system (see charts). The data on rulings signed by one of the most highly sought-after attorneys in Corporate -- Richard K. Passales, senior counsel in branch 4 -- may give some indication of both the onetime prevalence of forum shopping and the impact that Alexander's rules have had on the practice. Twenty-four percent of the 218 rulings issued in 2008 and 2009 -- likely prior to the implementation of Alexander's system -- that didn't involve section 9100 relief were reviewed by Passales. By comparison, in 2010 and 2011 -- likely after Alexander's system was implemented -- Passales reviewed only 6 percent of the 224 rulings issued by Corporate that didn't involve section 9100 relief.


Figure 1. Number of Non-9100 Relief Rulings
by Reviewing Attorney, 2008-2011



Source: A survey of private letter rulings published by Tax Analysts between January 1, 2008, and December 31, 2011. Every effort was taken to identify all the rulings issued by Corporate during that time and to exclude from the sample any rulings with an index number of 9100. The result was 442 rulings: 112 in 2008, 106 in 2009, 133 in 2010, and 91 in 2011. Johnson refers to George R. Johnson.

Figure 2. Non-9100 Relief Ruling Breakout
by Branch of Reviewing Attorney



Source: A survey of private letter rulings published by Tax Analysts between January 1, 2008, and December 31, 2011. Every effort was taken to identify all the rulings issued by Corporate during that time and to exclude from the sample any rulings with an index number of 9100. The result was 442 rulings: 112 in 2008, 106 in 2009, 133 in 2010, and 91 in 2011. Branch breakout was based on the branch of the reviewing attorney, as it was listed and if it was listed (attorneys may have switched branches during the sample, and attorneys in the front office don't have a branch).

Source: A survey of private letter rulings published by Tax Analysts between January 1, 2008, and December 31, 2011. Every effort was taken to identify all of the rulings issued by Corporate during that time and to exclude from the sample any rulings with an index number of 9100. The result was 442 rulings: 112 in 2008, 106 in 2009, 133 in 2010, and 91 in 2011. Johnson refers to George R. Johnson. Branch breakout was based on the branch of the reviewing attorney, as it was listed and if it was listed (attorneys may have switched branches during the sample and attorneys in the front office don't have a branch).


Impact of Influence

The practitioners who spoke with Tax Analysts were adamant that although the benefits of forum shopping are real, they don't view those benefits as improper. One pointed out that a small number of Corporate attorneys are pursued by the same people over and over again "not because they can pull a fast one but because they are reasonable people" who will try and understand a taxpayer representative's arguments. "And if you can convince them, they'll actually be an advocate," he said.

Tax Analysts heard that same sentiment again and again. "It's not that you're trying to get special treatment when you make a phone call over there; you just want to get fair treatment," one practitioner said. It takes some attorneys much longer to understand a complicated transaction, and when a high-dollar deal is on the line, taxpayers want attorneys who are adept. "Typically when a person's not that good, their visceral reaction is to just say, 'We can't do that,' because they don't know and they don't want to give anything away," the practitioner said.

Solomon -- the only practitioner who was willing to speak to Tax Analysts on the record for this article -- said taxpayer representatives simply want "expeditious, thoughtful consideration of ruling requests," adding, "Companies are under a lot of pressure to get a timely private letter ruling, and so you can understand why practitioners would have a desire to find someone who might be able to help in an effective and timely way."


Time Is Money

Practitioners won't readily call into question the fundamental principle that the same ruling will be issued no matter which attorney in Corporate is assigned to it. They cite quicker turnaround as the main reason for seeking out their preferred attorneys. But it's not as if Corporate hasn't already done a lot to focus on timeliness in its ruling program. It's the only office in chief counsel with an advertised process to provide expedited treatment for a significant portion of its rulings.

Started as a pilot in 2005, the now-permanent process enables taxpayers with transactions involving section 368 reorganizations or section 355 spinoffs to request expedited handling. According to Rev. Proc. 2012-1, if expedited treatment is granted, Corporate "will endeavor to complete and issue the letter ruling . . . within ten weeks of receiving the ruling request."

When asked at the 2010 PLI conference whether his office is generally able to meet the 10-week turnaround when expedited treatment has been granted, Alexander said that it generally is met. He added that attorneys in Corporate "try to get the average case done within a four-month span."

While turnaround times have likely increased in the last two years because of Corporate's shrinking workforce, what hasn't changed is the frequent practitioner praise of many attorneys in Alexander's office.

"The IRS people in the corporate branch have killed themselves to beat some taxpayer deadlines," Michael L. Schler, a partner at Cravath, Swaine & Moore LLP, said at the 2010 PLI conference. "They've actually done a very good job at that, working literally evenings and weekends like private lawyers. Some people think it's hard to believe, but people in the government really do that sometimes."


Branch Envy

The external reasons for clamping down on forum shopping address only one side of the story. A practitioner familiar with the new ruling assignment system said internal reasons also factored into the decision.

"The external reason was that they didn't want to give the impression that because certain branches handled a lot of the rulings, that a favorable ruling could be obtained by submitting a ruling request to that particular branch," the practitioner said. The internal reason was to spread the work around.

Private letter rulings are worked both by a reviewing attorney and by a docket attorney. If a docket attorney was assigned to a branch whose reviewers were not inclined to work on a lot of rulings, it was harder for that attorney to get exposure to private letter ruling work, the practitioner said.

        Table 1. Rulings by Reviewing Attorney and Primary Code Section
 ______________________________________________________________________________

 Reviewer: Bates

            301      302      331      332      338      351      355      368
            __________________________________________________________________

                                                                    5        4

            382      385     1502     1504    Excluded   Total
            __________________________________________________

              2                                             11

 Reviewer: Bishop

            301      302      331      332      338      351      355      368
            __________________________________________________________________

                                1        2                          5        4

            382      385     1502     1504    Excluded   Total
            __________________________________________________

              1        5        2                    4      24

 Reviewer: Brickates

            301      302      331      332      338      351      355      368
            __________________________________________________________________

                       4                                   7        2       18

            382      385     1502     1504    Excluded   Total
            __________________________________________________

                                         1           2      34

 Reviewer: Burns

            301      302      331      332      338      351      355      368
            __________________________________________________________________

                       1                                            2

            382      385     1502     1504    Excluded   Total
            __________________________________________________

                                1        1           2       7

 Reviewer: Carlisle

            301      302      331      332      338      351      355      368
            __________________________________________________________________

              1                                   2                 2        3

            382      385     1502     1504    Excluded   Total
            __________________________________________________

                                                             8

 Reviewer: Cohen

            301      302      331      332      338      351      355      368
            __________________________________________________________________

                                         1        2                 2        3

            382      385     1502     1504    Excluded   Total
            __________________________________________________

                                3                    2      13

 Reviewer: Decker

            301      302      331      332      338      351      355      368
            __________________________________________________________________

              2                          1                          2

            382      385     1502     1504    Excluded   Total
            __________________________________________________

                                1                            6

 Reviewer: Duffley

            301      302      331      332      338      351      355      368
            __________________________________________________________________

                                                                    1        3

            382      385     1502     1504    Excluded   Total
            __________________________________________________

                                                     1       5

 Reviewer: Fleming

            301      302      331      332      338      351      355      368
            __________________________________________________________________

                                1        3                 2        9        5

            382      385     1502     1504    Excluded   Total
            __________________________________________________

              3                 5        7           4      39

 Reviewer: Fuller

            301      302      331      332      338      351      355      368
            __________________________________________________________________

                                         1                          6        9

            382      385     1502     1504    Excluded   Total
            __________________________________________________

              3                 2                           21

 Reviewer: Goode

            301      302      331      332      338      351      355      368
            __________________________________________________________________

                                         1                         17        2

            382      385     1502     1504    Excluded   Total
            __________________________________________________

                                         1                  21

 Reviewer: Hankin

            301      302      331      332      338      351      355      368
            __________________________________________________________________

              1                                            1        7        2

            382      385     1502     1504    Excluded   Total
            __________________________________________________

                                2                     1     14

 Reviewer: Heinecke

            301      302      331      332      338      351      355      368
            __________________________________________________________________

                                                           1       10        1

            382      385     1502     1504    Excluded   Total
            __________________________________________________

                                3        1           2      18

 Reviewer: Jennings

            301      302      331      332      338      351      355      368
            __________________________________________________________________

                                         1                          2        2

            382      385     1502     1504    Excluded   Total
            __________________________________________________

              7                 1                    1      14

 Reviewer: Kelley

            301      302      331      332      338      351      355      368
            __________________________________________________________________

                                         2                          5        4

            382      385     1502     1504    Excluded   Total
            __________________________________________________

                                3        1           1      16

 Reviewer: Milnes-Vasquez

            301      302      331      332      338      351      355      368
            __________________________________________________________________

                       1        1                                            1

            382      385     1502     1504    Excluded   Total
            __________________________________________________

              7                 1        1           1      13

 Reviewer: Passales

            301      302      331      332      338      351      355      368
            __________________________________________________________________

              8        8                 6                 1       32       11

            382      385     1502     1504    Excluded   Total
            __________________________________________________

                                                            66

 Reviewer: Russell

            301      302      331      332      338      351      355      368
            __________________________________________________________________

             12                 1        1                          1        2

            382      385     1502     1504    Excluded   Total
            __________________________________________________

              1                 1                    1      20

 Reviewer: Serbes

            301      302      331      332      338      351      355      368
            __________________________________________________________________

                                1        3                 1        2        3

            382      385     1502     1504    Excluded   Total
            __________________________________________________

              3                 2                    3      18

 Reviewer: Voorhees

            301      302      331      332      338      351      355      368
            __________________________________________________________________

              1                                                     2        1

            382      385     1502     1504    Excluded   Total
            __________________________________________________

              1                 2        2                   9

 Reviewer: Weiss

            301      302      331      332      338      351      355      368
            __________________________________________________________________

              3                          3                 3       14        2

            382      385     1502     1504    Excluded   Total
            __________________________________________________

              4                 2        1           2      34

 Reviewer: Excluded

            301      302      331      332      338      351      355      368
            __________________________________________________________________

                                         2        1        2       13        2

            382      385     1502     1504    Excluded   Total
            __________________________________________________

              1                 6                           31

 Reviewer: Total

            301      302      331      332      338      351      355      368
            __________________________________________________________________

             28       14        5       27        5       18      141       82

            382      385     1502     1504    Excluded   Total
            __________________________________________________

             33        5       37       16           31    442
 ______________________________________________________________________________

 Note: This table contains data on private letter rulings released by the IRS
 Office of Associate Chief Counsel (Corporate) and published by Tax Notes Today
 from 2008 through 2011. Rulings with an index number of 9100 were excluded.
 The remaining rulings were broken down by primary index number (the first one
 listed on the letter ruling) as it corresponds to IRC sections. Code sections
 that were listed as primary in fewer than five rulings over the period and
 attorneys who reviewed fewer than five rulings over the period were excluded
 from named columns/rows and then re-included in the totals.

 Some highlights of the table:

    57 percent of primary section 302 rulings were reviewed by Passales.

    44 percent of primary section 1504 rulings were reviewed by Fleming.

    43 percent of primary section 301 rulings were reviewed by Russell.

    23 percent of primary section 355 rulings were reviewed by Passales.

    22 percent of primary section 368 rulings were reviewed by Brickates.

With forum-shopping practitioners jockeying to get their rulings in front of the best people, some branches have become more sought after than others. And attorneys within Corporate are sensitive to that reality. Practitioners said that Alexander has imposed rules so that in some situations, a reviewer is required to go outside of his branch to find a docket attorney with whom to work the case.

                Table 2. Rulings in Which Docket Attorney Branch
                     Didn't Match Reviewing Attorney Branch
 ______________________________________________________________________________

                                                            Total
 Reviewing                                                  Number     Percent-
 Attorney                                      Total        of         age of
 Branch       2008    2009    2010    2011     Mismatches   Rulings    Rulings
 ______________________________________________________________________________

 1               1       5       1       3             10        75         13%

 2              --       2       6       3             11        66         17%

 3               2      --       1       5              8        38         21%

 4               1      --       1       4              6       113          5%

 5               3       1       6       1             11        49         22%

 6               2       2       3       5             12        84         14%

 n/a             2      --       4       3              9        17         53%

 Total
 mismatches     11      10      22      24             67       442         15%

 Total
 number of
 rulings       112     106     133      91            442

 Percentage
 of rulings    10%      9%     17%     26%            15%
 ______________________________________________________________________________

 Note: This chart contains data on the number of instances when the reviewing
 attorney's branch number (as listed on the bottom of the ruling) didn't match
 the docket attorney's branch number (as referenced in the "Reply to" line of
 the ruling). They are organized by reviewing attorney branch and year, and the
 percentage of total number of rulings (by reviewing attorney branch and year)
 is also provided. Data include rulings issued by Corporate and published by
 Tax Notes Today from 2008 through 2011, excluding rulings with an index number
 of 9100.

The practical implications that forum shopping has on attorney staff development and workload distribution within Corporate aren't lost on practitioners. They recognize that continually loading up a couple branches with the bulk of the letter ruling work has compelled Alexander to implement changes that may not always produce the best results for their clients.

Alexander "had to lay down the law; it's totally understandable," said one practitioner. And with the federal government's resources shrinking thanks to budget cuts, practitioners are nervous that Corporate's "skeleton crew" may not be able to withstand much more pressure.


Vibrant and Valuable

It isn't hard to find examples of the power of Corporate's ruling program. On January 6, The Wall Street Journal reported that Yahoo Inc. is considering engaging in a cash-rich split-off transaction to avoid as much as $4 billion in taxes. But it will reportedly go ahead with the deal only if it can get a ruling from the Office of Associate Chief Counsel (Corporate) that the transaction will qualify for tax-free treatment under section 355.

In spite of its influence, Corporate is a relatively small part of chief counsel. It is currently staffed by fewer than 50 of the approximately 650 attorneys assigned to the IRS National Office.

Its size hasn't prevented it from developing what practitioners describe as the most vibrant ruling program among all of the offices within chief counsel. According to a practitioner at a firm that regularly seeks rulings from several offices within chief counsel, "Without any question, the corporate part of chief counsel is the best-run, best-operated, most thoughtful group. If I had to go to somebody blind, I'd rather go to Corporate than any of the other divisions."

But it's not just the private sector that benefits from the letter ruling program. In 1975, shortly after Tax Analysts prevailed in the D.C. Circuit in its challenge to the IRS over public disclosure of private letter rulings (Tax Analysts & Advocates v. IRS, 405 F. Supp. 1065 (D.D.C. 1975)), the Joint Committee on Taxation wrote in a report (JCS-36-75) that the letter ruling program is invaluable to the IRS because it provides advance knowledge of and an opportunity to review novel transactions, creates benchmarks for Exam agents, and encourages voluntary compliance by providing certainty to taxpayers sooner.

One practitioner said Corporate's letter ruling program is the "only window into the transactional market" available for chief counsel attorneys. The published guidance and litigation support they provide are important, but "the letter rulings program sharpens them for that," he said.

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