The current situation in which there have been no changes in law and the Proposed Regulations are nevertheless overturning years of
private ruling determinations demonstrates that the rules in their current form fail to accurately depict pertinent industry facts.
Section 6110 thus represented Congress's bid to remove the Service's written determinations from FOIA jurisdiction, (38) at least partly in order to answer "significant additional questions raised since [Tax Analysts and Fruehauf]." (39) These issues included the provision of safeguards to prevent the disclosure of identity of recipients of rulings, but the House report also cites the question of "whether
private rulings should be available as 'precedent' for other taxpayers." (40) It therefore appears that the concern spurring the enactment of section 6110(k)(3)--the desire to restrict the precedential value of written determinations--was a key motivating force behind section 6110.
Private rulings involve the application of the law to the taxpayer's specific facts; hence, they are not designed to serve as general guidance.
Moreover, by issuing public guidance earlier rather than later, scarce government and taxpayer resources that would otherwise be devoted to the resolution of these issues through examinations, appeals,
private rulings, and litigation would be freed for other uses.
Moreover, there are a number of private letter rulings that apply this concept to situations where domestic corporations transferred their stock to employees of their foreign subsidiaries.(28) These
private rulings apply the revenue ruling and the regulations just as they are applied in wholly domestic situations, without any suggestion that the cross-border nature of the transaction has any effect on the analysis.
A typical situation that should qualify as a corporate business purpose would exist where employees or a new executive must be offered stock to retain their services in a particular division, and it is not practical to give them an interest in the whole business or more than 20 percent of a subsidiary.(2) In some instances, employee threats to leave the company were mentioned in
private rulings, but that should not be required to obtain a ruling.
TEI questions whether the IRS can or should modify the
private ruling process in order to address capitalization issues separately from other forms of
private rulings.
In a profusion of public and
private rulings, industry specialization (ISP) issue papers, and other pronouncements of policy, the Internal Revenue Service has endeavored to clarify and solidify its position.(2) Although the IRS repeatedly asserts that Indopco "does not change the fundamental legal principles for determining [if the expenditure] must be capitalized,"(3) the Court's decision has sparked a renewed focus on capitalization issues.
These statements represent a radical departure from the current consolidated return regulations, the applicable case law (both pre- and post-1966),
private rulings that consistently hold that the consolidated return regulations establish methods of reporting rather than methods of accounting.[7] No explanation, discussion, illustration, or rationale is set forth in either the proposed regulations or the preamble.
The statute was intended to constitute a safe harbor for taxpayers affected by two limited
private rulings. It did not represent a wholesale revision (or rejection) of the general principles for computing E&P.
Where the
private ruling process is used, however, the facts are obscured, the legal analysis is shielded from scrutiny, and taxpayers as a whole are disadvantaged.
