No – a private letter ruling (PLR) is not considered a secondary authority for general tax law.
It’s a unique form of IRS guidance that is binding only on the IRS and the requesting taxpayer, and not on others. In 2020 alone, the IRS issued 777 private letter rulings, underscoring how often businesses and individuals seek personalized tax answers straight from the source. Yet confusion abounds: if a PLR isn’t “primary” law for everyone, where does it fit? This comprehensive guide will clarify the authority of PLRs under U.S. tax law and how to use them wisely.
What You’ll Learn (in 5 Quick Bullets)
- 📜 Primary vs. Secondary Tax Sources: What counts as primary authority (law) vs. secondary authority (commentary) – and why the distinction matters.
- ⚖️ PLR Legal Status: Whether IRS private letter rulings are binding precedent, merely persuasive guidance, or something in between (hint: they’re not ordinary secondary sources).
- 🏛️ Federal vs. State Rulings: How private letter rulings work at the federal level under IRS rules, and variations in state tax rulings across different states.
- 💡 Real Examples & Use Cases: How tax professionals and businesses use PLRs in practice – including real-world scenarios, court reactions, and lessons learned.
- 🚩 Pros, Cons & Pitfalls: The advantages of obtaining a PLR (certainty, IRS backing) versus the downsides (cost, limitations), common mistakes to avoid, and expert tips for using PLRs effectively.
Primary vs. Secondary Tax Authority – Why It Matters
In tax law, not all sources of guidance carry equal weight. Primary authorities are the law itself – they include the Internal Revenue Code (statutes passed by Congress), Treasury regulations, tax treaties, and court decisions. These are binding on taxpayers, the IRS, and courts. For instance, if a tax statute or a U.S. Tax Court decision says something, that’s primary authority; everyone must follow it or risk penalty.
Secondary authorities, on the other hand, are interpretations, explanations, or commentary about the law. These include tax textbooks, treatises, journal articles, and analyst opinions. Secondary sources are never legally binding. They can be persuasive or informative, but a taxpayer cannot rely on a secondary authority to justify a tax position if it conflicts with primary law. For example, an article or a tax service’s opinion might help you understand a complex provision, but it isn’t the law itself.
Why does this distinction matter? When you’re researching a tax question or defending a position, citing primary authority is crucial. Tax professionals (and the IRS and courts) give far more weight to a section of the tax code or a regulation than to someone’s commentary about it. Misidentifying something as primary vs. secondary can lead to errors – e.g., thinking you have solid legal backing when you only have a non-binding opinion.
Where do IRS rulings fit in? The IRS issues various kinds of guidance documents. Some IRS guidance is considered primary authority: for example, Revenue Rulings (which are published interpretations of law by the IRS) carry weight and can generally be cited by everyone. But other forms of IRS guidance are not so clear-cut in authority. This brings us to Private Letter Rulings (PLRs), which occupy a special niche in the hierarchy.
What Is a Private Letter Ruling (PLR)?
A Private Letter Ruling is an official, written determination from the IRS in response to a specific taxpayer’s inquiry. In plain terms, it’s like getting a personalized answer from the IRS about how the tax law applies to your particular situation. Taxpayers typically request a PLR when they plan a transaction or arrangement and want to know the tax consequences before they proceed. The goal is to obtain certainty – essentially asking, “Dear IRS, if I do X, how will you treat it under the tax law?”
How does it work? The taxpayer (or their tax attorney) submits a detailed request letter to the IRS, laying out the facts, the relevant law, and the question on which they want a ruling. There’s a user fee for this service – often very steep (for complex business transactions, the fee in 2024 is around $38,000+, though small businesses or specific requests can qualify for reduced fees). The IRS’s Office of Chief Counsel reviews the request. They may ask follow-up questions or require additional information. If the IRS agrees to rule, they will issue a private letter ruling letter addressed to that taxpayer, explaining how the law applies to the presented facts.
A PLR request might cover scenarios like:
- Planned Transactions: e.g., a company wants to spin off a subsidiary tax-free under Internal Revenue Code §355 and seeks assurance that the IRS won’t later challenge it.
- Uncertain Tax Treatments: e.g., a business with a novel cryptocurrency transaction asking if it will be treated as a taxable event.
- Relief Provisions: e.g., requesting a time extension or special relief (often called a §9100 relief ruling) when a deadline in the tax regs was missed.
Not every topic can get a PLR. The IRS annually publishes a list of areas where it won’t issue rulings (often because the issues are too fact-specific or inherently uncertain, such as whether something has “business purpose” or “economic substance”). If your question falls into a “no ruling” category, your request will be rejected.
If the IRS does issue a ruling, it will state something like: “Based on the facts presented, we rule that [specific tax outcome] results.” For instance, “the proposed spin-off, as described, will qualify as tax-free under §355.” It may also include caveats and conditions – if the taxpayer’s actual facts differ from what was presented, the ruling can be void.
Binding effect (for that taxpayer): When you receive a PLR, it’s as good as gold for you. The IRS is bound by that ruling with respect to your case. That means if you carry out the transaction exactly as described, the IRS can’t turn around later and assess tax or penalties contrary to the ruling. In a sense, for that taxpayer’s issue, the PLR functions like “primary law” because the IRS has committed to a position.
Authority of Private Letter Rulings – Binding for One, Persuasive (Maybe) for Others
Here’s the key point: a private letter ruling is not general authority that others can rely on. It is not a “primary authority” for anyone except the taxpayer who got the ruling. For everyone else, a PLR is at best a form of non-binding guidance – you might call it a “persuasive” authority or simply a reference point, but technically it falls outside the primary/secondary authority dichotomy that applies in legal citation.
Under federal law, private letter rulings have no precedential value. Congress codified this in the tax code (specifically in Internal Revenue Code § 6110(k)(3)), which explicitly states that IRS written determinations (like PLRs) may not be used or cited as precedent. In simple terms, if Taxpayer A receives a letter ruling, Taxpayer B cannot point to A’s ruling and say “the IRS must give me the same result.” Nor can Taxpayer B cite that ruling in court as a legal authority to support their case.
Why such a rule? Fairness and consistency. The IRS issues PLRs in private to specific taxpayers, often involving nuanced facts. Without this no-precedent rule, there’d be a risk that savvy, well-funded taxpayers could effectively “create” their own private law by securing a favorable ruling and then everyone else would try to piggyback on it. So the law ensures that while PLRs must be disclosed (after redacting identifying details) for transparency, they officially do not set general precedent.
PLR = Secondary authority? In day-to-day tax research, practitioners often treat PLRs as a type of secondary authority or reference material. They are certainly not primary authority in the way a statute, regulation, or published court case is. However, PLRs also differ from typical secondary sources (like textbooks) because they reflect the IRS’s direct interpretation of the law on specific facts. They come from the horse’s mouth (the IRS), but they’re limited in scope.
A good way to think of a private letter ruling is as non-binding guidance. It tells you how the IRS approached a situation. If you find a PLR on point with your client’s issue, you can glean insight from it. It might give you comfort or a warning about how the IRS might view a similar transaction. But you must remember: it’s not “authority” you can cite to compel the IRS or a court to adopt the same conclusion.
In fact, even IRS personnel cannot rely on someone else’s PLR as precedent in an audit or litigation. Each PLR explicitly states that it’s only binding for that taxpayer. If an IRS agent encounters a similar situation with another taxpayer, they are not obligated to follow the outcome of the prior PLR (though they might informally take note of it).
What About Revenue Rulings and Other IRS Guidance?
It’s useful to contrast PLRs with Revenue Rulings. A Revenue Ruling is also an IRS interpretation of law on a set of facts, but it is published in the Internal Revenue Bulletin and meant to be relied upon by all taxpayers and IRS personnel. In essence, revenue rulings are precedential – they are considered a form of primary authority (administrative authority). For example, if a Revenue Ruling says “losses from theft are deductible under XYZ circumstances,” any taxpayer can cite that ruling and expect the IRS to generally follow it (unless later revoked or superseded).
Interestingly, the IRS sometimes takes a private letter ruling (or a series of them on the same issue) and, recognizing the broader importance, reissues the guidance as a published Revenue Ruling. When they do that, the once-private ruling’s conclusion graduates to become binding on everyone. But until and unless that happens, a PLR remains a one-taxpayer deal.
Other similar IRS determinations include Technical Advice Memoranda (TAMs) and Chief Counsel Advice (CCA). Like PLRs, these are case-specific advice documents (TAMs arise during IRS audits for a specific case, CCAs are internal counsel advice). These too are non-precedential – an auditor can’t say “we gave this advice in another case, so it binds this case.” They are made public for transparency but carry no official weight for other cases.
Federal vs. State: Do States Treat Private Rulings Differently?
The concept of private rulings isn’t unique to the IRS. Most U.S. states have their own version of letter rulings or advisory opinions for state tax questions. State revenue departments often allow businesses or individuals to request guidance on how state tax law applies to a prospective transaction, similar to a PLR. For example, a company might ask a state’s Department of Revenue whether a certain sale is subject to state sales tax.
The binding effect at the state level usually mirrors the federal approach:
- A state private letter ruling (sometimes called a “revenue ruling,” “private tax opinion,” or simply “letter ruling” depending on the state) is generally binding on the state tax authority and the requesting taxpayer.
- However, it typically cannot be cited as binding precedent by other taxpayers in that state. In other words, if your competitor got a ruling from the State of California on a tax issue, you cannot assume it will automatically apply to you.
That said, practices can vary. Some states publish their rulings periodically and, while they disclaim precedential effect, those rulings can still be a valuable window into how the state would likely view similar facts. A few states might treat certain published rulings or opinions more like guidance for everyone, but by and large they stick to the model that only the addressee is covered. Notably, almost every state offers some ruling process (only a couple of states historically did not issue advisory rulings). Terms and procedures differ – some states charge fees, others do not; some provide rulings quickly via an informal letter or phone call, others require a formal submission.
For tax advisors operating across multiple jurisdictions, the lesson is to never assume a state will honor another taxpayer’s ruling. Always check that state’s rules. Often, the safest route if the issue is important enough (and not clearly answered by law) is to request your own ruling from the state tax authority.
How Tax Professionals Use PLRs in Practice (with Examples)
If private letter rulings can’t be cited as official precedent, you might wonder: why do tax professionals pay attention to them at all? The answer is that PLRs, despite their limitations, are incredibly informative. They reveal the IRS’s thinking on nuanced issues and can flag how the IRS might approach a similar case. Here are a few ways practitioners use PLRs, with illustrative examples:
- Planning Guidance: Suppose a law firm is helping a client structure a complex merger. There’s no clear statute or regulation on one aspect of the deal, but they find a PLR from last year where the IRS blessed a similar merger structure. While the firm can’t cite that PLR as binding law, it gives them confidence that the IRS is likely to view their client’s deal favorably. They might model the transaction closely after the one in the PLR or at least advise the client that “the IRS has privately approved something analogous before.”
- Avoiding Pitfalls: Imagine an investor wants to use a creative strategy to defer taxes. The CPA discovers an old private letter ruling where the IRS denied the favorable treatment in a somewhat comparable scenario. This is a red flag. The CPA can warn the client that although the ruling isn’t official precedent, it shows the IRS’s inclination – and the client’s approach might not fly. Thus, PLRs can indirectly save taxpayers from walking into a trap.
- Supporting Arguments (Cautiously): In administrative dealings (like an IRS audit or appeals conference), a tax attorney might reference a PLR informally: “We’re aware the IRS ruled in PLR 2021-xxxx that activity X qualified as a business, not a hobby.” They will immediately acknowledge the PLR isn’t binding, but bringing it up might encourage the IRS agent to see reason or consider consistency. Some agents might ignore it, but others could find it persuasive if the facts align closely.
To make these scenarios more concrete, consider the following table of example PLR situations:
| Example Scenario | Private Letter Ruling Outcome & Effect |
|---|---|
| A family business wants to transfer shares to a trust without triggering gift tax. | The family obtains a PLR confirming the transfer won’t be a taxable gift under certain conditions. Result: The family proceeds confidently. Another family can’t rely on that PLR, but it signals how the IRS might view similar trust transfers. |
| A tech startup asks if its grant of stock options qualifies for a tax exception. | The IRS issues a PLR saying the stock options qualify for favorable treatment under section XYZ for that startup. Result: The startup follows through. Other startups can’t cite this ruling in court, but tax advisors note the IRS’s interpretation for future reference. |
| A real estate investor seeks a ruling on a like-kind exchange involving unusual property types. | The PLR given to the investor approves the exchange as tax-free under §1031. Result: The investor safely completes the swap. Others with similar property swaps can’t assume the same outcome without their own ruling, but they glean how the IRS analyzed the “unusual” property. |
| A corporation gets a PLR on an international tax issue (e.g., whether a certain income is foreign-derived and exempt). | The PLR concludes the income is exempt under a specific treaty provision. Result: The corporation enjoys the tax benefit. International tax attorneys take note; while not precedent, it guides how they advise other clients on similar treaty questions. |
In all these examples, the PLRs provided clarity for the requesting taxpayer. Other taxpayers in analogous positions still must be cautious – they might pursue their own PLR or find primary authority to support the outcome – but the publicly released PLRs have given them a roadmap of the IRS’s approach.
Courts and PLRs: It’s worth noting how courts treat private letter rulings. Generally, courts give PLRs little to no weight in deciding cases. Judges have explicitly stated that a PLR outcome for one taxpayer has “no precedential value” for others. For instance, in Fowler v. Commissioner (Tax Court 1995), the court refused to accept a taxpayer’s argument that relied on another person’s letter ruling, emphasizing it was not binding authority. However, once in a while, courts might mention a PLR in passing if it illustrates a point or the IRS’s position – but they will not consider it as a legal precedent. So when arguing a case, lawyers stick to primary sources (Code, regulations, court opinions) and perhaps use PLRs only as a persuasive footnote if at all.
Pros and Cons of Seeking a Private Letter Ruling
Should a business or individual seek a private letter ruling? It depends on the situation. PLRs have clear advantages but also significant drawbacks. Let’s break them down:
| Advantage | Disadvantage |
|---|---|
| Certainty & Peace of Mind: A PLR gives definitive assurance on how the IRS will treat your specific transaction. This can be invaluable for tax planning – no guessing or “gray area” worries. | Costly: Requesting a PLR is expensive. User fees can run into five figures (tens of thousands of dollars for complex rulings). On top of that, you’ll likely incur substantial legal/accounting fees to prepare the request. |
| Binding on IRS (for you): Once issued, the IRS is bound to honor the ruling as long as you follow the facts. This protects you from audit surprises or penalties on that issue. | Time-Consuming: It often takes several months (sometimes a year or more) to get a PLR. Business decisions might be delayed waiting for the IRS’s answer. It’s not a quick process. |
| Custom Tailored: The guidance is specific to your facts. You can design a transaction and get approval that fits those facts exactly. It’s not one-size-fits-all, but rather made-to-order advice. | Not Precedential for Others: The PLR gives you no edge in arguing broader tax issues beyond your case. If a similar issue arises for a related entity or a future year, you might need another ruling. It doesn’t “make law” that anyone else (or any court) must follow. |
| Penalty Protection: If you have a PLR in hand and you follow it, you generally won’t face accuracy-related penalties on that issue – the IRS told you what to do, and you did it. (This is as good as it gets for audit protection on that question.) | Public Disclosure: Although your name is scrubbed, the ruling will be made public (published in a redacted form on the IRS’s website). Competitors or others might glean what you’re up to. In sensitive matters, that publicity could be undesirable. |
| Strategic Withdrawal Option: If during the process it becomes clear the IRS is leaning toward “no,” you often have the chance to withdraw your request (and avoid an adverse ruling on record). | No Guarantee of Favorable Outcome: The IRS could say “no” – issuing an adverse ruling. While you can usually withdraw a request to prevent a negative letter from being published, you might still end up without the blessing you hoped for, after spending time and money. |
In summary, obtaining a PLR makes sense when the stakes are high and ambiguity in the law could lead to catastrophic tax consequences if guessed wrong. For instance, companies often seek PLRs on big mergers, spin-offs, or new financial products. The cost and wait are justified by the need for certainty. Conversely, for routine issues or small-dollar questions, a PLR is usually overkill.
Common Mistakes to Avoid with Private Letter Rulings
Even savvy taxpayers can make missteps when it comes to private letter rulings. Here are some common mistakes and misconceptions to watch out for:
- Confusing a PLR with “the law”: One taxpayer’s PLR is not the law for anyone else. A frequent rookie error is citing a private letter ruling in a tax memo or planning scenario as if it were a binding regulation or case. Remember that PLRs are limited and non-precedential. Always check if there’s a true primary authority (like a Code section, regulation, or court case) that supports your position – that’s what you should cite to clients or the IRS. Use PLRs only as a hint or supportive commentary, never as the linchpin of your argument.
- Ignoring factual differences: “Close” is not good enough with PLRs. If you find a letter ruling that seems to favor your situation, make sure your facts align almost exactly. A small difference in facts could lead the IRS to a different result. For example, a PLR might approve a tax-free reorganization because certain conditions were met (say, a 2-year holding period). If your plan doesn’t include that same condition, the PLR’s reasoning might not apply. Don’t assume your case is covered by someone else’s ruling if any material facts diverge.
- Not following the PLR’s conditions: If you obtained a PLR yourself, be very careful to do exactly what you promised in your request. The ruling is conditioned on the facts you presented. If you deviate from those facts or fail to meet a stated condition, the PLR’s protection could be void. For instance, if the ruling said a transfer wouldn’t be taxable provided a certain step is completed within 1 year, and you take 2 years, the IRS might disregard the ruling.
- Failing to update after law changes: A PLR is based on the law at the time it’s issued. If the tax law changes (Congress amends the Code, new regulations, or a court decision alters interpretation), your PLR might become obsolete. Don’t rely on an old PLR without checking that its legal underpinning is still valid. For example, if you got a PLR in 2019 and the IRS issues a new regulation in 2021 that conflicts with it, the ruling could be revoked or simply not honored going forward.
- Overlooking simpler alternatives: Sometimes taxpayers rush to request a PLR when they don’t need to. This can be a costly mistake. Always research whether the issue is already clearly addressed by existing authority. If there’s a well-known revenue ruling or regulation on point, the IRS will likely refuse to issue a PLR (because they won’t rule on matters that are already settled by published authority). Or they might issue one that just says “see the existing rule.” Similarly, minor questions might be answered by an IRS FAQ or publication (though those aren’t binding either, they’re much easier to get). Save the PLR for when you truly hit a wall on what the law requires.
FAQs: Quick Answers on Private Letter Rulings
Q: Can I rely on someone else’s private letter ruling for my taxes?
A: No. You cannot assume another taxpayer’s PLR will protect you. It’s not legally binding for anyone except the person who obtained it. At best, it’s a hint of the IRS’s thinking.
Q: Are IRS private letter rulings considered primary authority?
A: No. They are not primary authority for general use. A PLR is essentially a one-off interpretation, binding only in that case. It’s more like guidance – persuasive but not official precedent for others.
Q: Is a private letter ruling binding on the IRS?
A: Yes – but only for the requesting taxpayer’s specific situation. The IRS must honor its ruling in that case. It isn’t bound to apply that ruling to any other taxpayer.
Q: Do courts care about private letter rulings?
A: No. Courts don’t view PLRs as authoritative. A judge won’t be swayed because the IRS ruled a certain way for someone else. At most, a PLR might get a passing mention, not influence the outcome.
Q: Can I get a state tax letter ruling similar to an IRS PLR?
A: Yes. Most states offer a ruling process for state tax questions. Like IRS PLRs, a state ruling will bind the tax agency for your case, but you cannot cite it as precedent for other taxpayers or future cases.