Sirius XM claims in a Tax Court petition that the IRS improperly took a position contrary to a 1999 private letter ruling when it determined that two subsidiaries no longer qualify as an insurance company.
The case raises troubling questions for taxpayers that have complicated structures and transactions and need the ability to request and rely upon IRS guidance, Jason B. Freeman of Freeman Law PLLC told Tax Notes.
The dispute centers on a 1999 letter ruling obtained by Cross Country Motor Club Inc., a Sirius subsidiary that provides roadside assistance services to automotive manufacturers and insurance providers (Cross Country was formerly part of Agero Holdings Inc., which Sirius acquired in 2013).
Cross Country offers no-risk contracts and risk-based contracts. In the letter ruling request, the company said around 70 percent of total revenue came from risk-based contracts. In its letter ruling, issued in April 1999, the IRS determined that the company qualifies as an insurance company under section 831 because the issuance of risk-based contracts was its primary and predominant business.
In June 1999 the IRS also granted Cross Country’s request to adopt an accounting method in line with section 832(b)(4), which permits insurance companies to defer a portion of premium revenue. Under the IRS’s accounting method ruling, Cross Country was to apply section 832(b)(4) for risk-based contracts and apply section 451 for non-insurance contracts.
In 2013 the IRS audited the 2010 tax returns of Cross Country and a related entity, Cross Country Motor Club of California Inc. The exam team issued a draft notice of proposed adjustment in 2016, asserting that the companies no longer qualify for insurance company status and can’t defer income under section 832.
The exam team provided Sirius with a final revenue agent report in April 2018, and in June, the IRS issued a notice of deficiency for $41 million.
The notice states that Cross Country Motor Club Inc. and Cross Country Motor Club of California Inc. don’t qualify as insurance companies because more than half their business for the 2010 tax year was the issuance of contracts that can’t be considered insurance or annuity contracts within the meaning of sections 831(c) and 816(a).
Procedures Weren’t Followed
Sirius claims in its petition, filed September 7, that the IRS failed to follow its established procedures for revoking private letter rulings, and claims that the IRS abused its discretion by not limiting the retroactive effect of its determination.
The company said the exam team ignored IRS rules limiting its authority to take a position contrary to a letter ruling, as well as guidelines on the procedural steps required to revoke a letter ruling.
The company cited reg. section 601.201(l)(2), which states that if the exam team believes a previously issued letter ruling should be modified or revoked, it must inform the taxpayer of the potential revocation, develop the facts and consider the taxpayer’s arguments, and forward its findings and recommendations to the National Office via a request for technical advice.
Sirius said that under reg. section 601.105(b)(5)(i)(c), only the National Office can revoke a letter ruling.
The exam team didn’t seek to modify, revoke, or withdraw the letter ruling or the accounting method ruling, nor did it submit a request for technical advice to the National Office, Sirius said, adding that it informed the exam team multiple times that it was required to coordinate with the National Office if it wanted to revoke the letter ruling.
According to Sirius, the exam team said the company could seek technical advice.
Sirius asks the Tax Court to determine that the IRS abused its discretion by failing to limit the retroactive effect of its decision to take a position contrary to the letter ruling. The company says the adjustments shouldn’t be made retroactively because it made no misstatements or omission of material facts; the facts subsequently developed aren’t materially different from the facts on which the letter ruling was based; there has been no change in law; and the ruling was issued on a prospective transaction.
Alternatively, the court should determine that the subsidiaries are insurance companies for section 832 purposes, said Sirius.
Troubling Situation
Freeman noted that Treasury regulations provide that revocation of a letter ruling will be applied retroactively only under limited circumstances, such as when the underlying facts change materially.
“But Sirius maintains that these exceptions aren’t in play. If that is the case, it would be very troubling for the IRS to retroactively change a position that it previously expressed in a private letter ruling to the taxpayer,” Freeman said.
Retroactively applying a change in position wouldn’t only be contrary to existing authority, it would also be troubling as a matter of tax administration policy, Freeman said.
“There’s a written procedure that dictates the process for an audit team to propose to modify or reverse a position in a private letter ruling, as well as the grounds that generally allow for such a modification or reversal,” Freeman said. Based on Sirius’s petition, he said “there doesn’t appear to be any indication that the IRS followed those procedures here.”
Sirius is being represented by Rajiv Madan and Royce Tidwell of Skadden, Arps, Slate, Meagher & Flom LLP. Madan and Tidwell were part of the team that successfully argued to the Tax Court that the IRS abused its discretion when it canceled Eaton Corp.’s advance pricing agreements.
The Sirius case is docket number 17641-18.