Benjamin M. Willis, contributing editor with Tax Notes Federal, and William D. Alexander, of counsel of tax at Skadden, Arps, Slate, Meagher & Flom LLP, discuss tax guidance and step transaction.
Here are a few highlights . . .
On the IRS’s private letter ruling program
William Alexander: [PLRs are] not as efficient as writing regulations or revenue rulings because it's one taxpayer at a time instead of [being] for the whole country, but it's nevertheless a very important tool. I was very fortunate because when I got to corporate at the IRS, corporate already had a very effective ruling program and one that was very highly regarded, and for good reason. I think it's a useful tool for the government. It lets the government learn about transactions, address issues that would perhaps not merit a full project for published guidance, [and] try to work things out in a lower-risk environment.
I think one of the reasons why corporate’s ruling program was in fact so successful and remains successful is because it basically treats the private letter ruling program as [though it is] not in fact finding precedent, and that it is basically an administrative matter—a conversation with the taxpayer and the exam group, which the rest of the country is fortunate enough to be able to look in on, but is not really [witnessing]. I think when you approach rulings in that spirit it enables you to work through the problems in a practical way.
On Rev. Rul. 78-130
William Alexander: [Rev. Rul. 78-130] was an interesting case because I think many of us in the government approach 78-130 initially as something that was rendered obsolete by the 1984 law changed to D reorganizations. Yet what you will see in the 2015 rulings is that in fact the 1978 ruling was declared revoked rather than obsolete and these two words are used differently.
Obsolete means that a law change has occurred that makes the bottom-line answer or some part of the answer no longer valid on a revenue ruling and is, in a sense, an instruction to revenue agents. So, if that instruction is no longer valid, something should be done to make sure that it's not followed. In theory, the ruling can be obsolete even if the government doesn't declare it obsolete . . . but in the end, what you'll see is that the 1978 ruling was revoked. Revoked means that the government came to think that there was at least some aspect of the ruling that was wrong on the day it was published, even back in 1978.
One of my colleagues in government very forcefully and persuasively made the case that the reasoning behind the non-application of Section 351 was in fact never correct. That rationale is expressed in the two replacement rulings from 2015. The other interesting aspect of that regulation is of course that any time you write about whether a form will be respected or a transaction will be recast in the corporate tax area, you get into all sorts of interesting issues of policy and history behind the statute, and certainly this is no different.
On dealing with substance over form and step transactions
William Alexander: I think if you work in the corporate tax area, questions about substance over form and the step transaction doctrine and recasting transactions are part of the thing that makes this narrow corner of the tax law so intriguing and so fascinating. I’ve sometimes said to people that one of the reasons why I come to work every day is because I'm convinced that this is the day that finally it will all make sense and we'll rationalize all of these authorities about when you do recast and when you don't.
I will say that when I was in the government I think I worked on a number of projects where the government, in a sense, tried to channel the application of these doctrines based on the purposes of the statute and their history in order to try to yield more predictable results and not to disrupt the treatment of transactions . . . but rather to produce results that were more certain and were more likely to be understood, and therefore the same for all parties.
Check the box regulations really change[d] the name of the game for a lot of taxpayers with respect to how they approached their ability to move in and out of corporate status and liquidate corporations.