Daily Tax Update - June 25, 2013: IRS Announces More Restrictive Letter Ruling Policy for Corporate Transactions

IRS Announces More Restrictive Letter Ruling Policy for Corporate Transactions:  Today, in Rev. Proc. 2013-32, the IRS announced that it will broaden its no-ruling policy with respect to whether a transaction qualifies for nonrecognition treatment under section 332, 351, 355, or 1036, or on whether a transaction constitutes a reorganization within the meaning of section 368. 

Prior to the effective date of the revenue procedure, the IRS would not issue a letter ruling on whether a transaction qualified for nonrecognition treatment under section 332, 351 (except for certain transfers undertaken before section 355 distributions), or 1036, or whether a transaction constituted a reorganization within the meaning of section 368(a)(1)(A), section 368(a)(1)(B), section 368(a)(1)(C), section 368(a)(1)(E), or section 368(a)(1)(F), or the tax consequences (such as nonrecognition and basis) that resulted from the application of such Code sections, unless the IRS determined that there was a significant issue.  If the IRS determined that there was a significant issue, and to the extent the transaction was not described in another no-rule area, the IRS would rule on the entire transaction and not just the significant issue. 

Pursuant to the revenue procedure, the IRS will no longer rule on whether a transaction qualifies for nonrecognition treatment under section 332, 351, 355, or 1036, or on whether a transaction constitutes a reorganization within the meaning of section 368 (collectively, the “Nonrecognition Provisions”), regardless of whether the transaction presents a significant issue and regardless of whether the transaction is an integral part of a larger transaction that involves other issues upon which the IRS will rule.

The IRS will rule, however, on one or more issues under the Nonrecognition Provisions to the extent that such issue or issues are “significant.”

The revenue procedure also discontinues the pilot program for letter rulings on issues arising in the context of section 355 distributions (Rev. Proc. 2009-25, 2009-24 I.R.B. 1088).  Under this program, a taxpayer could request a letter ruling on part of a larger transaction or on a particular issue under a Code section that a transaction presented.  The IRS, in turn, would issue a letter ruling on the particular issue raised in the letter ruling request and not on any other issue (including, in some cases, qualification of the distribution under section 355) or on any other aspect of the transaction.

The revenue procedure cites the need to conserve IRS resources as the reason behind the more restrictive letter ruling policy.  The revenue procedure applies to all ruling requests received (or postmarked if mailed) after August 23, 2013.  The revenue procedure can be accessed at Revenue Procedure 2013-32.

IRS Issues Report Outlining Next Steps To Fix Problems Uncovered in Exempt Organizations Review:  Internal Revenue Service Principal Deputy Commissioner Danny Werfel has issued a report outlining new actions and next steps to fix problems uncovered with the review of tax-exempt applications and improve the wider processes and operations in place at the IRS.  The three-part report covers a wide range of areas Commissioner Werfel and his leadership team examined during the past month.  The report cites actions to hold management accountable and identifies immediate steps to improve the process for approving tax-exempt applications.  Werfel also outlines actions needed to protect and improve wider IRS operations, ranging from compliance areas to taxpayer service.  The report can be accessed here.