Revenue Rulings, Letter Rulings, and Similar Pronouncements
Question 1
0
128
MC
1
4
In addition to Treasury
Regulations, another type of guidance issued by the IRS is the Revenue Ruling. Revenue Rulings differ from
Treasury Regulations in a number of ways. They are issued much more frequently than regulations for
starters. Second, they are much narrower in focus, addressing the application of the tax law to a specific
fact pattern. Generally speaking, Revenue Rulings address an issue that has come to the Service's attention
as the result of an inquiry from a taxpayer or a revenue agent in the field. Other times, they are issued in
response to an issue the Service perceives to be frequently encountered, and in some cases, they represent
the IRS' response to a court decision.
Because Revenue Rulings are issued so much more frequently than regulations, and because they tend to
deal with specific fact patterns, it is often easier to find a Revenue Ruling addressing a particular issue than
a regulation. For example, suppose our client's son was kidnapped last year, and she paid a ransom of
$250,000 to get him back. While she wasn't concerned about taxes at the time the kidnapping occurred, we
are now doing her tax return and need to know if the ransom payment is deductible. We begin with a search
of the IRC – click on the “+” sign beside “Internal Revenue Code, Treasury Regulations, Committee Reports
(RIA)” to open up the folder. Check the boxes beside "Internal Revenue Code" and “Internal Revenue Code
History” and search for ransom.
One document comes up: "§168 Accelerated cost recovery system." Scrolling down through the document,
the only reference to "Ransom" is to "a project in Ransom, Pennsylvania which will burn coal waste ..."
Clearly, this does not address our question.
Now click on “Final, Temporary & Proposed Treasury Regulations” and repeat the search. Again, one
document comes up -- temporary regulations under Sec. 132, Working Condition Fringes. The regs discuss
the deductibility by an employer of transportation expenses furnished for employees working in dangerous
regions outside the United States. Again, not our issue.
So now we turn our attention to Revenue Rulings. Click on the box beside "IRS Rulings and Releases." In the
search box, type ransom payments (without quote marks). Eleven documents come back. Included in the
documents identified by RIA are documents directing interested parties to contact Margaret Ransom with the
IRS, and documents containing the word "payment." Reading through the first two or three documents
indicates that our search was again inefficient.
Go back to the original search screen, click the box beside "Rulings & Other Docs," and do a search for
"ransom payments" with quotation marks around the two words. Now only one document comes back ...
Rev. Rul 72-112. Read this ruling.
Which of the following statements is most accurate from your reading of the ruling?
a. Ransom payments made in connection with a kidnapping while a taxpayer is in another country
would not be deductible as theft losses, because the crime did not occur in the United States, and
therefore the kidnapper would not be subject to penalty under the law of the state in which the
taxpayer lives.
b. Ransom payments are only deductible as theft losses if kidnapping and extortion are explicitly
defined as "theft" under local law in the state where the kidnapping occurred.
c. Because kidnapping involves the taking of a taxpayer's child (or other family member), and
children or other family members do not constitute "property," ransom payments extorted from a
taxpayer by a kidnapper are not deductible as theft losses.
d. Although this ruling does not address the deductibility of "pre-emptive" payments made by a
taxpayer to prevent a third party from kidnapping a family member, the ruling's determination
that losses resulting "from a taking of property that is illegal under the law of the state where it
occurred and that the taking was done with criminal intent" suggests that such payments would be
deductible as theft losses.
Question 2
1
132
MC
1
4
Revenue Rulings are
initially published in the Internal Revenue Bulletin (IRB), which is issued weekly by the IRS. Twice per year,
IRBs are accumulated into the hardbound Cumulative Bulletin. Citations to Revenue Rulings generally
reference the Cumulative Bulletin (CB), if the appropriate volume has been published (i.e., if the Ruling is
more than 6 months or so old). The proper citation to a Revenue Ruling begins with the year of issuance and
the number of the ruling -- e.g., Revenue Ruling 79-162 refers to the 162nd ruling issued in 1979. This
particular ruling is published in the 1979 Cumulative Bulletin, volume 1, on page 116. It is therefore
properly cited as follows:
Rev. Rul. 79-162, 1979-1 CB 116.
To find this ruling, go to the gray column on the left-hand side of the screen and click on "Rulings/IRB”
under the heading “Find by Citation.” That brings up a template with a variety of options for finding Revenue
Rulings, Revenue Procedures, Notices, etc. by citation.
Input 1979-162 in the box on the first row of the template, and click the "Search" box to the right of that
row. No documents are found. Go back and input 79-162. Now it comes up.
Read Rev. Rul. 79-162. Which of the following statements is not true?
a. The IRS determined that the costs of attending a stop smoking course are personal, living, or
family expenses which are not deductible under IRC Section 262.
b. Under Revenue Ruling 79-162, the cost of completing a "stop-smoking" course is deductible as a
medical expense only if the course was recommended by the taxpayer's physician.
c. The IRS determined that the taxpayer's participation in the program was not for the purpose of
curing any specific ailment or disease, and thus was not deductible as a medical expense.
d. The IRS' position in this ruling relies on its determination that the stop smoking program is merely
beneficial to the general health of an individual, rather than for the prevention or alleviation of a
physical or mental defect or illness.
Question 3
2
134
MC
1
4
Your supervisor tells you
that she remembers reading a Revenue Ruling specifically allowing the deduction of costs related to a stop
smoking course in the past few years. She remembers that it was a Revenue Ruling, but she does not
remember exactly when it came out. Your job is to find it.
To find this ruling, let's do a more advanced search. Go back to the Research tab. Under Primary Source
Materials, click on the plus sign (+) beside the box labeled "IRS Rulings and Releases." Then check the box
beside "Revenue Rulings (1954-Present)." Type "smoking" in the search box and click search. Nine
documents come up. The first one, Rev. Rul. 99-28, is the only one that could be described as having been
issued in the “last few years.” (Your supervisor is old). Read this Ruling.
Which of the following statements is not true?
a. The ruling allows taxpayers to deduct the cost of purchasing prescription drugs to alleviate the
effects of nicotine withdrawal.
b. The Service ruled that uncompensated amounts paid by taxpayers for participation in a smokingcessation program, for prescribed drugs designed to alleviate nicotine withdrawal, and for nicotine
gum and nicotine patches that do not require a prescription, are deductible as medical expenses.
c. Revenue Ruling 99-28 revokes Revenue Ruling 79-162.
d. Expenses for smoking cessation programs are deductible only if not compensated for by insurance
or otherwise.
Question 4
3
130
MC
1
4
The Service occasionally
uses Revenue Rulings to announce its agreement or lack thereof (referred to as acquiescence or
nonacquiescence) with a particular decision of the courts. These rulings are not necessarily issued
contemporaneously with the court's decision. For example, Revenue Ruling 70-333, 1970-1 CB 38
announces that the IRS will not follow the Tax Court decision in Perry A. Nichols, 43 TC 842 (1965). Find
and read this Revenue Ruling.
Why did the Service wait five years to announce its intention not to follow the Tax Court's decision in
Nichols?
a. No reason was given in the Ruling for the delay.
b. Because new legislation was implemented subsequent to the Nichols case disallowing a deduction
for losses incurred in tax avoidance schemes.
c. Because the issue did not come up again until several years after the Nichols decision. When the
Service saw the same issue beginning to show up on several other taxpayers' returns, it decided to
announce that it did not agree with the Tax Court's decision.
d. Because a court decision in a more recent case ruled that no deduction is allowed for expenses
incurred in a transaction entered into merely to secure tax benefits. The Service reasoned that this
decision rendered the earlier decision in Nichols moot.
Question 5
4
136
MC
1
4
In addition to stating its
disagreement with a court decision, the Service may also change its mind with respect to a position it has
previously taken in a prior Revenue Ruling. Indeed, we just read an example of this with respect to smoking
"cessation" programs. In the example we read, the IRS changed its mind and decided to take a more
favorable position from the taxpayer's perspective, allowing a deduction for something which had previously
been nondeductible.
In other cases, the IRS decides to disallow a deduction or other form of tax benefit that it previously had
determined was allowable. Taxpayers get especially upset when the Service applies its change of mind
retroactively. Yet, the courts have upheld the Service's right to apply its Revenue Rulings retroactively.
For example, find and read White, 88-2 USTC ¶9624, in which a District Court in New Mexico ruled that the
IRS had the right to apply its position in a 1982 revenue ruling (Rev. Rul. 82-173, 1982-2 CB 58) to
taxpayers' 1979 and 1980 income tax returns. (As an aside, note the importance of providing accurate
citations—how many cases do you think would come up if you searched for “White”? I get 8,385.)The issue
appeared particularly unfair to the taxpayers involved, who correctly argued that prior to 1979, and perhaps
as late as 1982, the Service had not disallowed the deduction in question. Thus, they argued that the
retroactive disallowance of the deduction on their 1979 and 1980 tax returns constituted an abuse of
discretion by the IRS. Sadly, the court disagreed, citing IRC §7805, and concluding that a Revenue Ruling
"will generally be applied retroactively unless otherwise stated."
As it turns out, Congress changed Section 7805 in 1996. What does the statute now say about the
retroactive application of Revenue Rulings?
a. Only rulings issued within 18 months of the enactment of a new statute may be applied
retroactively.
b. Section 7805 now forbids the retroactive application of regulations and rulings.
c. Rulings may now be retroactively applied only to the extent necessary to prevent abuse or to
correct a procedural defect in the issuance of any prior ruling.
d. The IRS retains the discretion to issue rulings on a retroactive basis.
Question 6
5
138
MC
1
4
Although the IRS has the
authority to apply a Revenue Ruling retroactively, it does not have the authority to use a Revenue Ruling to
force an interpretation that the statute does not support. Revenue Rulings do not have the same authority
as Treasury Regulations, and certainly not the same authority as the statutes themselves. Indeed, the
courts are quite comfortable ruling against the position taken by the IRS in a Revenue Ruling.
For example, read the following case:
Stubbs, Overbeck & Associates, Inc, 28 AFTR 2d 71-5122 (CA-5).
Based upon a reading of this case, which of the following statements is incorrect?
a. A Revenue Ruling is merely the opinion of a lawyer in the IRS and should be evaluated as such.
b. Revenue Rulings are binding on the IRS, but not on the taxpayer.
c. The court noted that the Revenue Ruling on which the IRS was basing its case (Rev. Rul. 59-371,
1959-2 CB 236) was inconsistent with other Revenue Rulings published by the IRS.
d. A Revenue Ruling will be disregarded by the courts if it is not a reasonable interpretation of the
Internal Revenue Code.
Question 7
6
38
MC
1
4
Sticking with Revenue
Rulings, assume our client owned a vacation home in a foreign country. Due to political differences between
that country and the United States, the government of the foreign country confiscated all property owned by
non-citizens. In consequence, our client lost her vacation home. Can she deduct the loss as a casualty or
theft loss under section 165(c)?
a. Yes, confiscation by the foreign country is equivalent to theft, and the loss is deductible as a theft
loss.
b. Yes. Although the loss does not constitute a theft because it is not a crime under local law (the
country in which the confiscation occurred), it is sudden and unexpected, and thus is comparable
to a fire, storm or shipwreck.
c. The loss is a casualty loss, but since it occurred in a foreign country, it can only be deducted
against foreign-source income earned in that country.
d. No. Seizure of a taxpayer's personal, non-business property by a foreign government does not
constitute a casualty or theft according to the IRS.
Question 8
7
140
MC
1
4
The IRS also issues
pronouncements called Revenue Procedures. Revenue Procedures, as the name implies, generally
communicate information about procedural matters -- e.g., how to report income triggered by a change in
accounting method, circumstances under which a preparer penalty can be avoided, etc. Revenue Procedures
are also used to communicate to the public when certain basic amounts used in the calculation of tax liability
are changed.
For example, since at least 1993, tax rate schedules, exemption amounts, standard deduction amounts,
mileage allowances, etc. have been indexed for inflation. Indexing is based on the change in the consumer
price index from year to year, and can result in significant increases in these amounts over time. For
example, Code Section 151(d) provides that the "exemption amount" is $2,000.
Search the Revenue Procedures library for inflation adjustments. What is the allowable exemption amount
for personal and dependency exemptions for calendar year 2010?
a. The inflation adjusted exemption amount for 2010 has not been determined yet, because we don't
have complete information regarding the consumer price index for calendar year 2009.
b. $3,500
c. $3,000
d. $3,650
Question 9
8
143
MC
1
4
In addition to Revenue
Rulings, which address specific fact situations and are issued for the use of all taxpayers and preparers, the
IRS also issues Letter Rulings (or Private Letter Rulings) to individual taxpayers. Letter Rulings, like Revenue
Rulings, focus on specific factual situations and explain how the IRS believes the tax law should be applied
in those situations. Unlike revenue rulings, however, letter rulings are intended to apply solely to the
taxpayer to whom the ruling is addressed. They have no authority for any other taxpayer. Indeed, for a long
time the Service did not publish these rulings.
The publishing firms won the right to publish letter rulings long ago, however, and they are now available to
taxpayers and preparers to assist in determining how the law should be applied in particular circumstances
similar to those faced by a taxpayer to whom a letter ruling has previously been issued. Although the IRS
can change its mind, and a letter ruling cannot be cited as precedent, they are still very useful to
researchers. At a minimum, they provide persuasive evidence in a dispute with the IRS. One can use a letter
ruling to show that their position is reasonable, and if handled with tact, the ruling can be very helpful in
these situations.
It is easy to search on RIA Checkpoint for private letter rulings. Indeed, one box in the primary sources
section is labeled Private Letter Rulings & Technical Advice Memoranda. Check this box.
We are searching for letter rulings on what constitutes unforeseen circumstances under Code Sec. 121. Type
121 into the Search box and click "Search." Note that 549 documents come up. This is too many for an
efficient search. Hit the back button and type "unforeseen circumstances." This returns only 148 documents.
Although this is quite an improvement, it is still too much for our purposes. Hit back one more time and type
in "unforeseen circumstances” and Sec. 121. (Note: it is very important that you place the quote marks in
the right place in this search). This brings back 17 documents.
Under which of the following circumstances would acquisition of a dog qualify as an "unforeseen
circumstance" allowing a taxpayer to sell his or her house before meeting the 2 year requirement and still be
allowed to claim a partial exclusion under Sec. 121?
a. Taxpayer accepted a new job with the police department's K-9 unit. Officers in the K-9 unit must
live with their dogs. Moreover, regulations require that K-9 officers maintain a fenced kennel for
their dogs. Taxpayer's neighborhood association forbade construction of a kennel. Accordingly,
taxpayer sold his home and purchased another one where he was allowed to construct a kennel.
b. Taxpayer trains seeing eye dogs. He recently obtained a new dog to train. The dog began jumping
over the fence in taxpayer's backyard. The neighborhood association will not permit taxpayer to
build a higher fence. Therefore, taxpayer sold his home and purchased another one with a higher
fence.
c. Taxpayer's dog died. She replaced the dog with a young puppy and subsequently discovered that
she did not have enough room for the puppy to exercise. He was destroying her furniture, so she
sold her house and purchased another home with a fenced yard.
d. One year ago, taxpayer adopted a child with learning disabilities. Taxpayer purchased a home in a
nice neighborhood which he and his adopted child moved into shortly after the adoption. A doctor
that was treating taxpayer's child suggested that getting a dog might help the child to develop
socialization skills. Taxpayer sold his house and purchased another house with a fenced yard.
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