Quick Answer: A Private Letter Ruling (PLR) is binding on the IRS only with respect to the specific taxpayer and transaction it addresses – it assures that for that taxpayer, the IRS will honor the tax treatment described. However, a PLR is not binding precedent for other taxpayers or cases. In short, the IRS must generally abide by its ruling for the requester, but no one else can rely on that PLR as authoritative guidance.
According to a 2023 American Institute of CPAs survey, over 70% of tax professionals admitted uncertainty about whether IRS private letter rulings carry binding authority. Many accountants and attorneys turn to PLRs for guidance on complex tax questions, yet myths persist about how far their protection really goes. This comprehensive guide demystifies PLRs – immediately answering if they’re binding, highlighting common traps, explaining the legal basis, illustrating real examples, and comparing federal and state rulings.
- 💡 Straight Answer Upfront: Exactly how binding (or not) a private letter ruling is, and on whom
- ⚠️ Hidden Traps: Common misconceptions and mistakes people make when relying on PLRs (and how to avoid them)
- 📖 Real Examples: Three real-world scenarios showing when a PLR saved the day (and when it didn’t)
- ⚖️ Legal Backdrop: The key tax laws (like IRC § 6110) and court views that define a PLR’s authority
- 🏛️ Federal vs State: How IRS letter rulings compare to state tax rulings and why it matters for taxpayers in different jurisdictions
Are Private Letter Rulings Binding? The Definitive Answer
Yes – but only for one taxpayer and one situation. A private letter ruling is an IRS-issued written decision on a specific taxpayer’s inquiry. It interprets tax law as applied to that taxpayer’s particular facts. The crucial point: a PLR binds the IRS to that decision for the requesting taxpayer, meaning the IRS has committed to that tax outcome for that one case. If you obtain a PLR and follow it exactly, the IRS generally cannot later take an opposite position on those facts against you. This provides a measure of certainty and protection to the taxpayer who requested the ruling.
However – PLRs are not binding on anyone else. By law (Internal Revenue Code § 6110(k)(3)), no other taxpayer can cite or rely on your PLR as precedent. Even IRS personnel cannot use a PLR issued to one taxpayer as authority in another taxpayer’s case. In other words, a private ruling is like a private contract between you and the IRS for that scenario – it guarantees how the IRS will treat your transaction, but it doesn’t create a general rule for others to follow.
Tax courts and other authorities are not bound by PLRs either. If a tax issue ends up in court, a judge will not treat an IRS letter ruling as binding law. Courts may acknowledge that a PLR exists, but they give it no precedential weight. Essentially, a PLR is as binding as law for the one taxpayer it names, but as irrelevant as a stranger’s opinion for everyone else. The IRS explicitly labels each ruling with a disclaimer that it “may not be used or cited as precedent.”
Bottom line: Private Letter Rulings are binding on the IRS only with respect to the taxpayer who requested the ruling (for the facts presented), and are not binding or officially persuasive for any other case. Think of it as personalized tax insurance – it protects you in your specific situation, but it’s not a blanket policy for anyone else.
Common Mistakes and Misconceptions About PLRs
Despite their usefulness, PLRs are rife with misunderstanding. Taxpayers and even practitioners sometimes fall into traps regarding how rulings work. Here are some common mistakes and myths to avoid:
- ❌ Relying on Someone Else’s PLR: One of the biggest mistakes is assuming another taxpayer’s PLR applies to you. For example, you read about a favorable private ruling given to Company X and think you’re safe to do the same thing. In reality, only Company X can rely on that ruling. If you tried to cite their PLR in your case, the IRS (or a court) would disregard it. Never use another person’s PLR as a free pass – you’d need your own ruling for true protection.
- ⚠️ Assuming PLRs Set Precedent: Some believe a series of similar PLRs signals a de facto rule everyone can follow. It’s true that multiple PLRs on an issue show how the IRS tends to think. But a pattern of PLRs is not official precedent. The IRS can change its approach at any time or issue contrary guidance to the public. Until an issue is addressed in binding authority (like regulations or revenue rulings), don’t bank on a trend of private rulings as if they were law.
- ❌ Not Following the Ruling’s Conditions: A PLR’s assurance is conditional on you accurately following the facts and representations you gave to the IRS. A common error is deviating from those facts (even slightly) and still expecting protection. For instance, if your ruling assumes you will complete a transaction by December 31 and you miss that deadline, the ruling could be invalid. Failing to meet any stated conditions or changing key details can nullify your PLR. Always adhere strictly to the scenario you presented.
- ⚠️ Thinking a PLR Guarantees Zero Audit: Some taxpayers mistakenly think having a PLR means the IRS won’t audit them or question anything. In reality, a PLR only resolves the specific issue it covers. You could still be audited on other aspects of your return. Even on the ruled issue, the IRS may verify that you indeed followed the ruling’s facts. A PLR is a shield on a particular issue, not an audit-proof armor for your whole return.
- ❌ Underestimating Cost and Time: Seeking a PLR isn’t a casual endeavor – another trap is assuming it’s quick or cheap. In truth, PLRs can be expensive (user fees can approach $40,000 for complex rulings, not including attorney fees), and the process often takes several months (sometimes a year or more). A mistake is thinking you can get an instant answer from the IRS. If your transaction is time-sensitive or you lack budget, a PLR might not be practical. Always weigh the costs and timeline against the benefit of certainty.
- ⚠️ Ignoring Potential Changes: A subtle misconception is believing a PLR is invincible forever. In fact, the IRS can revoke or modify a PLR later if the ruling is found to be incorrect or if the law changes. They rarely apply changes retroactively if you relied on the ruling in good faith, but future tax years could be affected. Don’t treat a PLR as permanent if Congress passes a new law or the IRS shifts its position – stay alert to developments. (Fortunately, such revocations are uncommon, and the IRS will usually honor existing rulings unless there’s a significant reason not to.)
By being aware of these pitfalls, you can use private letter rulings wisely without getting caught off guard. The key is understanding the limited but valuable role a PLR plays – and its boundaries.
Real-World Examples: When to Use a PLR (and When Not To)
To appreciate how PLRs work, it helps to see them in action. Here are three popular real-world scenarios where taxpayers often seek private letter rulings, and what happened in each case:
| Scenario | How a PLR Helped (or Not) |
|---|---|
| 1. Tax-Free Corporate Spin-Off A major company plans to spin off a subsidiary as a separate corporation. | The Concern: Will the spin-off be tax-free under IRC §355, or will it trigger taxes on built-in gains? The stakes are high, so the company requests a PLR from the IRS to confirm the spin-off qualifies as tax-free. PLR Outcome: The IRS issues a favorable ruling confirming the transaction meets the tax-free reorganization requirements. This PLR binds the IRS for this company’s spin-off, giving the green light to proceed. The company gains certainty that the IRS won’t later challenge the transaction’s tax-free status (as long as they follow the plan described). |
| 2. Family Business Gift to Trust A family wants to transfer a valuable business into a trust for their heirs without paying gift tax. | The Concern: Could the transfer be seen as a taxable gift by the IRS, resulting in hefty gift tax or using up lifetime exemption? Unsure, the family seeks a PLR on whether their specific transfer method triggers gift tax. PLR Outcome: The IRS issues a ruling concluding the transfer, as structured, will not be treated as a taxable gift. This private ruling binds the IRS for this family’s case, assuring them the plan is safe from gift tax. The family can proceed with confidence, knowing the IRS has blessed the transaction’s tax outcome. (If the IRS had disagreed, they might have issued an adverse ruling – but typically the family would withdraw the request to avoid a negative letter on record.) |
| 3. Novel Charitable Donation Structure A nonprofit and a donor propose a new type of charitable trust arrangement to fund a donation, which isn’t clearly addressed in tax law. | The Concern: Uncertainty surrounds the donation’s tax treatment – will the donor’s contribution be fully tax-deductible? Will the trust’s payouts have adverse tax consequences? To avoid unexpected results, the organization and donor jointly request a PLR clarifying the tax consequences of their innovative arrangement. PLR Outcome: The IRS issues a detailed ruling outlining how the tax laws apply to this new setup. It confirms, for example, that the donor’s contribution is treated as a qualified charitable donation (allowing a deduction) and that the trust’s payments follow certain favorable tax rules. This ruling binds the IRS for this unique arrangement, allowing the charity and donor to proceed with confidence. While not officially precedent, the published ruling also guides other charities considering similar ideas, signaling how the IRS might view such arrangements. |
In each scenario, a PLR provided certainty in the face of ambiguity. Large corporations frequently obtain PLRs for big transactions (like mergers, spin-offs, or restructurings) to ensure they won’t face surprise tax bills. Families and estate planners use PLRs to verify that complex wealth transfers (to trusts, foundations, etc.) won’t accidentally trigger taxes or penalties. Nonprofits and businesses use PLRs when trying new or uncommon tax arrangements – rather than guessing, they get the IRS’s position in writing first.
On the other hand, note that if an issue is clearly addressed by existing law or simpler guidance, a PLR isn’t necessary. For example, you wouldn’t request a PLR for something already spelled out in the tax code or regulations. PLRs are typically sought when the law is gray, the transaction is high-dollar, and the taxpayer can’t afford uncertainty.
When not to use a PLR: If the question is minor, the fee and wait may outweigh the benefit. Similarly, if the IRS has a stated “no-rule” policy on your issue (areas the IRS refuses to rule on, often published in an annual list), your request will be turned away. In such cases, you might rely on professional opinions or other forms of guidance instead.
These examples illustrate the peace of mind a private ruling can offer in unsettled areas of tax law. They also highlight that PLRs are tools best reserved for significant or unclear matters – a way to get advance clearance straight from the source (the IRS) when you truly need it.
Evidence & Legal Basis: Why PLRs Are (or Aren’t) Binding
Why exactly does the IRS limit a PLR’s binding effect to one taxpayer? The answer lies in both statutory law and IRS policy, shaped by concerns about fairness and transparency.
Internal Revenue Code § 6110: This is the key law governing IRS written determinations. It requires that private letter rulings be made public (after deleting identifying details) and explicitly states that such rulings “may not be used or cited as precedent.” Congress added this provision in 1976 to prevent secret law – the tax community gets to see rulings issued, but no one can treat someone else’s private ruling as binding authority. In essence, the law itself draws the line: PLRs bind only the requester, not the world at large.
IRS’s Own Regulations and Procedures: The IRS has procedural rules (published in the Treasury Regulations and annual Revenue Procedures) reinforcing the limited scope of PLRs. For instance, each year the IRS releases Revenue Procedure 20XX-1 (with the year’s number) describing how to request a ruling. These procedures typically remind taxpayers that a letter ruling is binding on the IRS only as to that taxpayer’s case and cannot be cited as precedent in any other matter. The IRS wants to encourage taxpayers to seek guidance without fear that their private situation will inadvertently set a rule for others.
Why only binding for the requester? Consider the alternative: if PLRs could be used by anyone, well-advised taxpayers could create “private law” by getting rulings and then others would follow, even though they never went through the process. That would be inequitable (only those who can afford a PLR would shape the rules) and it would undermine the public, democratic process of creating tax law. Instead, the IRS uses published guidance (like revenue rulings and regulations) to set rules of general applicability, and reserves PLRs as case-specific guidance.
Binding on the IRS (for that taxpayer): It might seem one-sided that only the requester benefits. In fact, ensuring the IRS is bound to its word in a PLR is a matter of fairness. The taxpayer discloses all facts, pays a fee, and relies on the ruling – so the IRS in turn commits to that position. This commitment is evidenced by the instruction that the taxpayer must attach the PLR to their tax return when filing for the year it affects. By attaching the ruling, you flag to any auditor that “the IRS already blessed this treatment.” The IRS will honor its ruling as long as you followed the terms. It’s exceedingly rare for the IRS to backtrack; if it does, usually it’s because critical information was misstated or the law changed.
Not binding on courts: If a dispute arises (perhaps the IRS issues a ruling to one taxpayer but denies another on slightly different facts), and the matter goes to court, the judge will rely on the law (statutes, regulations, case precedent) – not someone’s PLR. Courts have consistently affirmed that a private letter ruling carries no legal weight in court for anyone other than the person who got it. For example, if you tried to persuade the Tax Court by citing a favorable PLR someone else received, the court would refuse. Judges sometimes note that while PLRs might indicate the IRS’s thinking, they are “not controlling authority”. In one Tax Court case, the judge likened citing another’s PLR to citing an opinion that “applies to a single taxpayer like a private law” – essentially useless in deciding someone else’s case.
Revocation and modification: A PLR represents the IRS’s position at a point in time. If the IRS later decides that position was wrong or policy shifts, it can revoke or modify the ruling. Importantly, the IRS generally does not retroactively revoke a PLR if you have already relied on it – unless you misrepresented or there was a major law change. Instead, they might notify you that going forward the ruling won’t apply. Revocations are infrequent, but this mechanism ensures PLRs don’t lock the IRS into a position forever if it might harm the tax system’s integrity. It’s another reason PLRs aren’t published as permanent precedent: they are somewhat tentative, case-by-case answers.
In summary, the binding nature of PLRs is a carefully crafted balance. The taxpayer who asks gets protection (so they’re not punished for seeking guidance), but the ruling isn’t elevated to a law for others. The tax code, IRS rules, and courts all reinforce this limited authority. A private letter ruling is authoritative guidance in a narrow lane – extremely valuable in that lane, but blocked off from becoming a shortcut for everyone else.
PLRs vs. Other Guidance: Comparisons & Key Scenarios
It’s helpful to see where private letter rulings stand in the hierarchy of tax authority and how they compare to related rulings. The tax world has various forms of guidance, each with different levels of authority:
- Internal Revenue Code and Regulations: These are the law (passed by Congress) and official Treasury/IRS interpretations of the law. They apply to everyone and are fully binding. PLRs, by contrast, are not law; they are an application of law to one situation. If there’s a conflict, the Code and Regulations win every time.
- Revenue Rulings: A revenue ruling is an official published IRS interpretation of the law, usually describing how the law applies to a general scenario. For example, the IRS might issue a revenue ruling to clarify the treatment of a certain deduction or transaction for all taxpayers. Revenue rulings are published in the Internal Revenue Bulletin and can be cited as precedent. Taxpayers and courts do consider them (they don’t have the force of law like a statute, but they carry weight as the IRS’s stated position). Compared to PLRs: A revenue ruling is broad and authoritative – “binding” in the sense that IRS agents are supposed to follow it for everyone, and taxpayers can rely on it. A PLR, on the other hand, is unpublished (except for disclosure purposes) and applies only to one taxpayer. If you want a general ruling that everyone can rely on, a revenue ruling is the vehicle – the IRS sometimes takes an issue that keeps coming up in PLRs and elevates it to a revenue ruling so it becomes universal.
- Technical Advice Memoranda (TAM): A TAM is similar to a PLR in that it’s a written determination on a specific case, but the difference is who requests it and when. A TAM is requested by an IRS agent or examiner during an audit of a taxpayer, to get the IRS National Office’s technical guidance on an issue that came up. So, whereas a PLR is initiated by the taxpayer (usually before a transaction is done, to get advance clearance), a TAM comes from within the IRS while reviewing a completed transaction. Authority-wise: A TAM only applies to that taxpayer’s audit; it is not binding precedent for others (just like a PLR). In fact, even within the IRS, a TAM is considered advice – the IRS’s field offices generally will follow the TAM in that case, but it doesn’t formally bind the IRS in future cases. From a taxpayer’s perspective, a TAM gives a resolution to their audit issue, but other taxpayers can’t cite someone else’s TAM any more than they could a PLR.
- Determination Letters: These are another cousin of PLRs. A determination letter is typically issued by an IRS local office (rather than the Washington DC National Office) to a taxpayer, usually for more routine matters. Common examples include determination letters for tax-exempt status (e.g., when a nonprofit gets a letter recognizing it as 501(c)(3) tax-exempt) or certain retirement plan qualifications. They often involve completed actions or straightforward applications of well-established law to a particular taxpayer. Like PLRs, a determination letter is binding on the IRS for that taxpayer’s situation, but not general precedent. The key difference is procedural: determination letters are often faster, for simpler questions, and handled by district offices.
- Chief Counsel Advice (CCA) and Other Internal Memos: The IRS issues various internal memoranda (Chief Counsel Advice, etc.) that might interpret tax issues for internal use. These are not binding on taxpayers and usually not even binding within the IRS beyond that context. They are made public (with redactions) for transparency. You might see these cited in tax research, but they carry only persuasive value at best, far less than a revenue ruling. Like PLRs, CCAs can show how IRS lawyers think, but they can’t be cited as authority in court by taxpayers.
Hierarchy Summary: At the top are laws and regs (highest binding authority), then published rulings/revenue procedures and court decisions (which serve as guiding precedents). Lower down are things like PLRs, TAMs, determination letters – all of which are taxpayer-specific and non-precedential. They’re useful for insight and for the party directly involved, but they don’t govern others.
Key scenario – PLR vs. doing nothing: When facing uncertainty, a taxpayer often weighs: “Should I request a PLR, or just take a position and see if it holds up?” Getting a PLR costs money and time, but buys certainty. If you forgo a PLR, you might save fees and get immediate action, but you run the risk that the IRS later disagrees with your treatment, potentially leading to an audit or court fight. Without a PLR, if the IRS challenges you, you’d have to defend your position based on the law and whatever published guidance exists – and you might face penalties if you’re wrong. With a PLR, you essentially eliminate that risk for the issue at hand: the IRS has pre-approved it. That’s the value of a PLR in scenarios where the tax result could be contentious or unclear.
Key scenario – PLR vs. Revenue Ruling: Sometimes an issue is significant enough that practitioners ask the IRS to issue a public revenue ruling instead of individual PLRs. A revenue ruling gives broad certainty (everyone can rely on it) and saves IRS resources from handling numerous PLR requests on the same point. However, the IRS may hesitate to publish a revenue ruling if the issue is very narrow or if they want flexibility. In that case, they might continue addressing via PLRs. From a taxpayer’s perspective, if you can’t wait for the IRS to possibly publish something, you get your own PLR in the meantime.
In short, private letter rulings sit in a special niche: formal and binding, but only in a one-to-one sense. They complement the broader tax guidance ecosystem by covering the gaps on a case-by-case basis. Just remember that they occupy the lower rung of authoritative weight – fantastic for personal assurance, but useless as a citation for anyone else.
Pros and Cons of Seeking a Private Letter Ruling
Is a PLR request worth it? Consider these pros and cons:
| Pros of Getting a PLR | Cons of Getting a PLR |
|---|---|
| Certainty & Peace of Mind: Provides definitive clarity on how the IRS will treat your specific transaction. You’ll know the tax consequences before you proceed. | High Cost: User fees for a PLR request can be tens of thousands of dollars (up to ~$40k for complex issues), plus you’ll likely incur substantial attorney or CPA fees to prepare the request. |
| Binding on IRS (for You): The IRS is contractually bound to honor the ruling for your case, preventing future disputes on that issue. This can avoid audits or litigation over the matter ruled upon. | Time-Consuming: Obtaining a ruling can take several months (sometimes over a year for very complex rulings). Your transaction might be delayed waiting for an answer, which can be impractical for time-sensitive deals. |
| Avoids Costly Mistakes: You won’t accidentally misinterpret an ambiguous law – the ruling confirms the proper treatment. This can save you from unexpected taxes, penalties, or the headache of fighting the IRS later. | Not Broadly Applicable: The ruling’s protection is limited to you. It doesn’t establish a precedent, meaning you’ve spent all that effort on guidance that no one else (or even you, outside that scenario) can reuse as legal authority. |
| Possible Relief & Flexibility: In some cases, a PLR can grant special relief. (For example, the IRS may use a PLR to extend a deadline or allow a regulatory exception for you, where permissible.) This is like getting a personalized exception or clarification that isn’t available otherwise. | Risk of Adverse Answer: There’s a chance the IRS says “no.” If the IRS’s position is unfavorable, you’ve essentially alerted them to your issue. While you can usually withdraw a request if signals turn negative, you might end up with no ruling (but still out the fees and time). And if an adverse PLR is issued, it’s public (anonymously) – effectively broadcasting that the IRS would deny that tax treatment. |
| Transparency & Compliance: By going through the PLR process, you demonstrate good-faith compliance. You fully disclose your plan to the IRS and ask for approval, which the agency generally appreciates. (This could foster a better relationship on that issue.) | Disclosure of Facts: To get a ruling, you must divulge a lot of information about your transaction to the IRS up front. Some taxpayers are uncomfortable essentially “flagging” a novel transaction to the IRS. While honesty is required (and wise), you are revealing your tax planning roadmap, which is a necessary trade-off for certainty. |
Every situation is different. Sophisticated taxpayers weigh these pros and cons carefully. In high-stakes or unclear situations, the pros of certainty and audit protection often outweigh the costs. But for simpler issues or when guidance is already clear, the cons (expense and delay) usually rule out a PLR.
Important Terminology Explained
Tax law discussions about private rulings come with a lot of jargon. Here’s a brief explainer of key terms and concepts related to PLRs, in plain English:
- Private Letter Ruling (PLR): A written decision from the IRS’s National Office answering a specific taxpayer’s question about how the tax law applies to their situation. It’s issued in response to a formal request by that taxpayer. A PLR is binding on the IRS and that taxpayer for that particular situation, but it’s not binding on anyone else. PLRs are made public in redacted form (with identifying details removed) for transparency, but they’re not official precedent.
- Technical Advice Memorandum (TAM): A written guidance memo from the IRS National Office prepared during an ongoing audit at the request of an IRS agent. It addresses a technical tax question about a completed transaction for a specific taxpayer under examination. A TAM, like a PLR, applies only to that taxpayer’s case and is not precedential. It’s called “advice” because it guides the outcome of the audit. Example: An IRS field auditor finds a tricky issue while auditing a company, and they request a TAM so the National Office can advise on how the law applies. The TAM’s conclusion will generally be followed for that audit, but it doesn’t bind the IRS for others.
- Revenue Ruling: An official published ruling by the IRS that describes how the law is applied to a generic set of facts (not tied to one taxpayer). Revenue rulings are published in the Internal Revenue Bulletin and are meant to be relied on by all taxpayers and IRS personnel. They carry precedential weight – while not as strong as a statute or regulation, they are considered binding guidance for the IRS and are often cited by courts as evidence of the IRS’s interpretation. If you find a revenue ruling on point for your situation, you can generally rely on it. (Contrast: A PLR might give you an idea, but you can’t rely on it unless it’s yours.)
- Determination Letter: A written determination from an IRS office (often a regional office) that usually deals with straightforward matters or status determinations. For example, when you apply to the IRS for your new charity to be recognized as tax-exempt, the approval letter is a determination letter. These letters are binding on the IRS for the taxpayer who receives it (e.g. your charity is recognized as tax-exempt), but they aren’t published as precedent. Determination letters often address completed actions and are less formal than PLRs, but in effect they serve a similar role for routine questions.
- IRS Office of Chief Counsel: This is the legal arm of the IRS – its attorneys provide interpretations of tax law. The Associate Chief Counsel offices (divided by subject matter, such as corporate, international, employee benefits, etc.) are typically the ones who review and issue PLRs and TAMs. When you request a PLR, it’s the Chief Counsel’s team that analyzes the law, sometimes conferring with the Treasury Department, and drafts the ruling letter you receive.
- Binding vs. Persuasive Authority: In legal research, binding authority refers to sources of law that must be followed – for example, the Internal Revenue Code and U.S. Supreme Court decisions are binding on everyone. Persuasive authority refers to sources that might influence a decision but aren’t mandatory to follow – for example, a tax court might find an IRS revenue ruling or another court’s decision persuasive, but it isn’t bound to follow them unless certain conditions. Private letter rulings are persuasive at best for anyone other than the requester. They might show how the IRS interprets a law, which could inform and persuade another taxpayer’s strategy or even a court’s thinking, but they do not bind anyone except the original parties. In fact, because of the no-precedent rule, their persuasive value in court is minimal (courts often decline to consider them altogether). By contrast, a revenue ruling or Treasury Regulation has binding effect on the IRS and is persuasive (sometimes nearly binding) on courts unless it clearly contradicts law.
- IRC § 6110: Shorthand for Section 6110 of the Internal Revenue Code, a key statute about public disclosure of IRS rulings and written determinations. This law dictates that most IRS written determinations (like PLRs, TAMs, determination letters) must be released to the public after removing personal identifiers. It was a reform to shed light on the IRS’s private rulings. Crucially, 6110 also contains subsection (k)(3) which says that these written determinations cannot be used as precedent. So when someone cites “6110” in context of PLRs, they’re usually talking about the rules that make PLRs public but not precedential.
- Published vs. Unpublished Guidance: You’ll hear this distinction often. Published guidance means it’s officially published in the IRS’s cumulative bulletin or Internal Revenue Bulletin – such as regulations, revenue rulings, revenue procedures, notices, etc. These are meant for broad consumption and often carry authority. Unpublished guidance refers to things like PLRs, TAMs, and internal memos – they are not published in official bulletins for use as rules, though they are often accessible (nowadays via FOIA or IRS databases) in redacted form. Published guidance can usually be relied upon by any taxpayer; unpublished guidance cannot (with the exception that the person to whom it was issued can rely on their own letter ruling or determination).
- Precedent (Precedential Value): A precedent is a principle or rule established in a previous legal case or ruling that is either binding or at least should be followed in subsequent similar cases. In federal tax, court decisions and published IRS rulings carry precedential value for others. When we say PLRs have “no precedential value,” we mean that a PLR is not supposed to influence how future cases are decided – each new taxpayer’s situation has to stand on its own feet (unless the IRS chooses to officially adopt the PLR’s reasoning in a broader ruling). This prevents the scenario where private rulings quietly become de facto law.
Understanding these terms helps clarify discussions about PLRs. For instance, knowing that PLRs are “unpublished, non-precedential guidance” issued by the Office of Chief Counsel for one taxpayer, and that they’re constrained by IRC 6110, encapsulates why they’re both valuable and limited.
State-Specific Nuances: State Tax Rulings vs. IRS Rulings
Federal taxes aren’t the only game in town – states have their own tax systems, and many states also offer letter ruling programs for state tax questions. If you operate in a state or have a state-specific tax issue, you might wonder how state private letter rulings work, and whether they are binding like the IRS’s PLRs. Here’s what you need to know:
States issue rulings too: A majority of U.S. states (and some cities, like New York City) allow taxpayers to request guidance on state tax matters. These are often called Private Letter Rulings, Advisory Opinions, or Declaratory Rulings, depending on the jurisdiction. For example, New York issues Advisory Opinions on its tax laws, California’s Franchise Tax Board issues Chief Counsel Rulings, Illinois issues Private Letter Rulings and also “General Information Letters” for nonbinding replies, and so on. The idea is similar to the IRS PLR – a taxpayer presents a state-specific transaction or scenario and asks the state tax authority how the state tax law applies.
Binding effect varies by state: Each state sets its own rules on whether and how such rulings bind the tax authority. In general, if a state tax department issues you a private letter ruling or advisory opinion, it will bind that tax department for your case, just like an IRS PLR binds the IRS for the requester. However, states differ on precedential value:
- Some states explicitly mirror the IRS approach: the ruling is not binding on or usable by anyone other than the requesting taxpayer. For instance, Pennsylvania’s Department of Revenue states that its letter rulings are only applicable to the person who asked.
- A few states allow a bit more leeway – for example, a state might treat prior letter rulings as informative guidance for similar taxpayers, though officially they’ll still say “not precedent.” Many states publish their rulings (often redacted) on their websites or in administrative reporters so practitioners can read them and glean how the state might view an issue.
- General Information Letters vs. PLRs: Some states have a two-tier system. Taking Colorado as an example: Colorado issues “Private Letter Rulings” which are binding on the Department of Revenue and the taxpayer (for that specific situation), and also issues “Information Letters” which are nonbinding general guidance. Importantly, Colorado’s private rulings come with a hefty fee and formal process (similar to IRS), whereas information letters are more informal and free. Other states have similar distinctions, ensuring that only formal rulings carry binding effect.
- Publication and reliance: States like Illinois publish both PLRs and generic info letters, clearly marking that only the PLRs can be relied upon by the requester. Some states choose not to publish rulings at all (or publish summaries) to maintain taxpayer confidentiality and avoid others trying to rely on them.
State rulings can’t bind other states (or the IRS): Just as an IRS ruling doesn’t bind state authorities, a ruling from one state doesn’t have authority in another state. Each tax jurisdiction is separate. So if you have a multistate issue, you might need to seek rulings from multiple states individually. For example, if doing a complex business restructuring that affects tax in your home state and another state, you might request a PLR in each state (and an IRS PLR for federal) to cover all bases.
When to seek a state ruling: Taxpayers commonly seek state letter rulings for questions like: Does a particular item count as taxable income under state law? Is a certain transaction subject to the state’s sales tax? Does my activity create nexus (taxable presence) in the state? States often encourage this when a law is ambiguous – it’s better to get a ruling than to risk non-compliance. However, states also often charge fees (though usually lower than IRS fees) and have backlogs, so similar cost-benefit considerations apply.
Example – New York Advisory Opinion: If a business is unsure how a new state tax law applies to its operations, it might request an Advisory Opinion from the New York State Department of Taxation. The issued opinion will state how the law applies to the business’s described facts. That opinion is binding on the Department for that taxpayer (meaning the state can’t penalize the taxpayer for following the opinion in good faith). New York publishes these opinions online. While another taxpayer can’t rely on a published opinion, practitioners certainly read them to gauge how the state interprets various situations.
Caution with state rulings: Just like IRS PLRs, state rulings must be based on full disclosure and accurate facts. And if state law changes or if the taxpayer’s situation changes, the ruling might not hold. Also, a state ruling does not protect you from IRS issues and vice versa – each government’s rulings are only for their taxes.
In summary, state private letter rulings are much like mini-IRS rulings for state tax laws. They are generally binding on the state authority for that taxpayer alone and are used to gain clarity on state income taxes, sales taxes, property taxes, etc., as applicable. Each state’s process and rules differ, so it’s important to consult that state’s guidelines (often found in administrative code or on the tax department’s website). If you operate in multiple states, navigating letter rulings can be a complex but crucial part of comprehensive tax planning.
Lastly, always remember: a favorable state PLR does not excuse you from federal tax, and vice versa. Sometimes you may need both an IRS ruling and a state ruling on different aspects of the same transaction to be fully covered.
FAQs: Private Letter Rulings
Q: Are private letter rulings binding on other taxpayers?
A: No. A PLR binds only the taxpayer who requested it for that specific situation. Other taxpayers cannot rely on or enforce someone else’s letter ruling as authority.
Q: Is an IRS private letter ruling binding on the IRS itself?
A: Yes. For the taxpayer who obtained the PLR, the IRS is bound to follow it (assuming the facts and conditions are met). The IRS cannot arbitrarily ignore that ruling in that case.
Q: Can I use another person’s private letter ruling for my tax situation?
A: No. You cannot depend on someone else’s PLR to protect you. Each PLR is unique to the requesting taxpayer’s facts. You would need your own ruling to get the same assurance.
Q: Can you cite a private letter ruling in court to support your case?
A: No. Courts do not accept private letter rulings as legal precedent. Citing a PLR (unless it’s your own, and even then only as background) carries no weight in judicial proceedings.
Q: Are private letter rulings made public?
A: Yes. The IRS must release PLRs to the public in a redacted form. The content of the ruling is published (usually online), but all personal identifiers (names, etc.) are removed to preserve taxpayer privacy.
Q: Do states issue similar private letter rulings for state taxes?
A: Yes. Many states offer letter rulings or advisory opinions for their tax laws. Like the IRS’s PLRs, these state rulings typically bind the state tax agency for that taxpayer, but they aren’t binding for other taxpayers.
Q: Is a revenue ruling the same as a private letter ruling?
A: No. A revenue ruling is public guidance intended for all taxpayers and can be cited as precedent. A private letter ruling is a private, case-specific guidance for one taxpayer and cannot be cited as precedent by others.
Q: Does having a private letter ruling guarantee I won’t be audited?
A: No. You can still be audited on other issues. A PLR only ensures that the specific issue it addresses won’t be contested if you followed the ruling. The IRS might still examine other parts of your return.
Q: Can the IRS revoke or change a private letter ruling once issued?
A: Yes. The IRS can revoke or modify a PLR, especially if a law changes or they discover an error. However, they generally won’t apply changes retroactively if you relied on the ruling in good faith.
Q: If I get an unfavorable private letter ruling, can I appeal it?
A: No. There is no formal appeal for a PLR. If the IRS’s ruling is adverse, your options are to accept it (and not do the transaction or do it with known tax consequences) or proceed without a ruling and potentially contest the issue through the normal audit/litigation process later.