With the increased availability of electronic tax research services, CPA tax practitioners have easier access to potential authority to support positions their clients want to take. In addition to revenue rulings, there also are field service announcements (FSAs) and general counsel memorandums (GCMs), among others. After finding one of these items in the course of his or her research, a practitioner must decide how much to rely on it. Recently, the Court of Federal Claims had an opportunity to address this issue.
Vons Companies Inc. sued for a tax refund as the result of a denied deduction for a contribution it made to its pension plan. The company argued that revenue ruling 76-28 permitted the deduction. To bolster its claim of deductibility and to distinguish prior court decisions, the company asked the IRS to turn over certain letter rulings and other background documents. In deciding whether to force the IRS to turn over the requested documents, the court had to examine the precedential value of each class of documents.
Result. Partially for the taxpayer and partially for the IRS. The first pronouncement the court examined was a revenue ruling. The court pointed out that the value of a revenue ruling as precedent differs depending on whether the IRS or a taxpayer is seeking to enforce the ruling. If the IRS is trying to enforce it, the courts should weigh the ruling based on how long it has withstood challenges and how persuasive it is. However, if a taxpayer is trying to enforce a ruling, the court may view it differently and give it a different weight. Based on a long line of prior precedent, the court reiterated the IRS could revoke a revenue ruling retroactively even if a taxpayer relied on it to its detriment. The reason the IRS is permitted to revoke a ruling is to prevent a taxpayer from paying less tax than it owes by forcing the IRS to enforce an incorrect interpretation.
Vons also requested information about letter rulings (LTR) and technical advice memoranda (TAM). Under IRC section 6110(k)(3) these are not precedent and may not be cited by anyone other than the taxpayers to whom they are issued. There is one minor exception, based on a case involving IBM. If two taxpayers are competitors and both request letter rulings and one gets a favorable decision and the other gets an unfavorable one, the losing taxpayer can use both rulings to argue the IRS abused its discretion by attempting to apply a new standard retroactively. This is a very limited exception. The general rule, as the U.S. Supreme Court said in Hill , is that courts should eschew any reliance on LTRs or TAMs.
The last item Vons sought to obtain from the IRS was a GCM. These are similar to LTRs in that they are not precedent. However, since they are well researched and documented, the court said the taxpayer could use them as a research and planning tool.
In recent years there has been an apparent increase in reliance on LTRs, TAMs and GCMs. This case reminds taxpayers and their CPAs that these documents are not precedent. A taxpayer that treats them as such does so at his or her own risk.
Vons Companies Inc. v. United States, 2002-1 USTC p. 50, 158.
Prepared by Edward J. Schnee, CPA, PhD, Joe Lane Professor of Accounting and director, MTA program, Culverhouse School of Accountancy, University of Alabama, Tuscaloosa.