United States

IRS addresses additions to corporate “no-rule” policy


At the American Bar Association Tax Section's Midyear Meeting, William Alexander, IRS associate chief counsel (corporate), addressed cutbacks to the private letter ruling program while speaking at the Affiliated and Related Corporations session. Rev. Proc. 2014-3 added Granite Trust transactions, the treatment of hook equity, and failures to file Form 1122 to the IRS' no-rule program. Although taxpayers can no longer seek rulings in these areas, it appears these additions to the no-rule policy are not due to the IRS rethinking its positions.

Granite Trust transactions

Section 3.01(33) of Rev. Proc. 2014-3 provides that the IRS will no longer issue rulings or determination letters under sections 267, 304, 331, 332, 351 and 1502 regarding the treatment of transactions in which stock of a corporation is transferred with a plan or intention that the corporation be liquidated in a transaction intended to qualify under section 331. In addressing this addition to the no-rule policy, Mr. Alexander stated that "this is not a commentary on substantive law" and that "this is not the launching of a crusade against Granite Trust transactions." Further, Mr. Alexander indicated "this is not an expression of regret for any of the [rulings] that were issued in this area." Thus, while the IRS will no longer issue rulings in this area, the no-rule policy does not indicate that these types of transactions will come under scrutiny or that the IRS is contemplating reversing some of its prior guidance in this area.

Hook stock

Section 4.02(11) of Rev. Proc. 2014-3 provides that the IRS will no longer issue rulings or determination letters on the treatment or effects of hook equity, including as a result of the issuance, ownership or redemption of such stock. Hook equity is defined as an ownership interest in a business entity that is held by another business entity where at least 50 percent of the interest (by vote or value) in the latter entity is held directly or indirectly by the former entity.

Mr. Alexander noted the IRS is "not rethinking all applications of hook stock or hook equity. This is not an under-study area." Alternatively, "transactions involving hook equity tend to raise a lot of complicated issues…and [the agency] has to withdraw some resources from the program." Thus, like the Granite Trust no-rule policy, this is another area where the legal underpinnings are not at issue and, instead, the no-rule policy is merely an IRS cost-saving mechanism.  

Failure to file Form 1122

Section 3.01(73) of Rev. Proc. 2014-3 provides that the IRS will no longer issue rulings, but may issue determination letters, where a member of an affiliated group fails to file Form 1122 or fails to join in the filing of a consolidated return due to a mistake in law or fact. 

Krishna Vallabhaneni, attorney-advisor, U.S. Department of Treasury, indicated that this change was put in place because determination letters are easier for the IRS and less costly for the taxpayers. He also said the goal is for the government to develop guidance to enable affiliated groups to resolve these types of missteps on their own, through some type of automatic-relief revenue procedure. Mr. Alexander added that the IRS is contemplating the development of some type of do-it-yourself self-help program. 

While additions to the no-rule policy are unfortunate for taxpayers looking for certainty from the IRS, the statements from Mr. Alexander and Mr. Vallabhaneni serve as welcome notice that the view of the IRS has not changed on the underlying issues.

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