Estate tax claims: Are you relying on faulty tax authority?

When presented with a tax controversy, it’s easy to inadvertently rely on faulty authority. This is particularly true in the estate tax realm where most guidance is very specific to a unique set of facts, and one minor change in facts could lead to an entirely different result.

Suppose, for example, that you’re representing the estate of a deceased grantor who held the majority of a closely held business. You file the estate tax return, and the IRS, after conducting a thorough audit, determines that the business was undervalued. You contemplate challenging the IRS assessment in tax court and discover a private letter ruling (PLR) with several similar facts that supports the estate’s claim after extensive research. Time, money, and effort are spent on pursuing the position. You argue your case and, to everyone’s surprise, the tax court rules in favor of the IRS. Why? Simply put, your facts weren’t as close to the PLR as you thought, and PLRs don’t have precedential value for any taxpayer other than the one who originally requested it.

Tax authorities to trust
So, what sources can you trust for estate tax guidance? In general, the Internal Revenue Code (IRC) is enacted by Congress and is the bedrock of tax authority. The Treasury is vested with the power to interpret and enforce the IRC — power that’s largely delegated to the IRS. The highest level of guidance that the Treasury and the IRS can issue are regulations that directly interpret or enact provisions of the IRC. Accordingly, practitioners relying directly on the IRC and the corresponding regulations can rest assured that their position is adequately supported.

The Internal Revenue Code (IRC) is enacted by Congress and is the bedrock of tax authority.
Still, the IRC and regulations are only valuable to the extent they directly address an issue. If they don’t, then it’s necessary to look at the next tier of guidance: revenue rulings and revenue procedures.

Revenue rulings are the IRS’s interpretation of how the IRC and regulations apply to a specific set of facts. Similar to regulations, they apply generically to all taxpayers, but still only to the extent a taxpayer has that same set of facts. Revenue procedures, on the other hand, provide return filing or other instructions concerning a particular area of tax law.

The IRS is generally bound by its own revenue rulings and revenue procedures so they can generally be relied on by taxpayers.

Additional tax guidance to use with caution

The IRS furnishes additional guidance through written determinations, statements, and internal legal guidance. Although each of these items provide insight into the IRS’s views or position on a given issue, they generally can’t be used as binding authority. This guidance includes:

• Private letter ruling (PLR). A PLR is the IRS’s determination on a taxpayer’s request for a conclusion on its specific facts. These letters are binding only on the taxpayer who requested it. A PLR doesn’t have any precedential value to other taxpayers. In addition, the fees associated with a PLR request can be upwards of $50,000. Relying on another PLR to support your case, therefore, can be dangerous and should be considered with caution.
• Technical advice memorandum (TAM). A TAM is a final IRS position on an issue presented by a specific taxpayer under exam. The guidance is issued from the IRS Office of Chief Counsel at the request of IRS personnel during the course of a proceeding, in response to technical or procedural questions. However, as with a PLR, a TAM is only applicable with respect to the specific issue and taxpayer at hand. As such, a TAM cannot be relied on as binding authority for other taxpayers.
• Chief counsel advice (CCA). A CCA is written guidance or advice provided by the IRS Office of Chief Counsel to IRS field employees. CCAs provide legal interpretations based on either specific fact patterns or a range of fact patterns. While CCAs can provide insight into IRS positions, they’re also not precedential. As such, CCAs cannot be relied upon by taxpayers as binding authority.
• An action on decision (AOD). An AOD is a memorandum issued by the IRS Office of Chief Counsel, stating the litigation position the IRS intends to follow in the future with regard to a previous court decision. In most cases, these memos explain why the IRS disagrees with the decision and indicates that the IRS will not follow the results of that decision, except in jurisdictions where it’s legally required to. Knowledge of the IRS’s litigation position with regard to a specific set of facts can be a valuable tool. It cannot, however, be relied upon as binding authority, as the IRS isn’t required to follow its previously stated litigation position in future cases.

Although PLRs, TAMs, CCAs, and AODs provide insight into the IRS’s position on issues, they generally can’t be used as binding authority.

Use caution
It’s important to recognize the tax authority when gathering support for your position. Relying on the IRC — the bedrock of tax authority — and corresponding revenue rulings and revenue procedures, for the most part, can be viewed as reliable authority. We recommend caution when using more informal guidance such as written determinations and statements.