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Reduced Letter Ruling Fees Will Aid Compliance, ABA Members Say

DEC. 21, 2022

Reduced Letter Ruling Fees Will Aid Compliance, ABA Members Say

DATED DEC. 21, 2022
DOCUMENT ATTRIBUTES
  • Authors
    Hall, C. Wells, III
  • Institutional Authors
    American Bar Association Section of Taxation
  • Subject Area/Tax Topics
  • Jurisdictions
  • Tax Analysts Document Number
    2022-40530
  • Tax Analysts Electronic Citation
    2022 TNTF 246-18
    2022 TPR 52-12

December 21, 2022

Douglas O'Donnell
Acting Commissioner
Internal Revenue Service
1111 Constitution Avenue, NW
Washington, DC 20224

Re: Comments on User Fees for Private Letter Ruling Requests

Dear Acting Commissioner O'Donnell:

Enclosed are comments with respect to user fees on private letter ruling requests. These comments are submitted on behalf of the Section of Taxation and have not been reviewed or approved by the House of Delegates or the Board of Governors of the American Bar Association. Accordingly, they should not be construed as representing the position of the American Bar Association.

The Section of Taxation would be pleased to discuss these comments with you or your staff.

Sincerely,

C. Wells Hall, III
Chair, Section of Taxation
American Bar Association
Washington, DC

Enclosure

cc:
Hon. Lily Batchelder, Assistant Secretary (Tax Policy), Department of the Treasury
Thomas West, Deputy Assistant Secretary (Tax Policy), Department of the Treasury
Krishna P. Vallabhaneni, Tax Legislative Counsel, Department of the Treasury
William M. Paul, Principal Deputy Chief Counsel and Deputy Chief Counsel (Technical), Internal Revenue Service
Drita Tonuzi, Deputy Chief Counsel (Operations), Internal Revenue Service
Kathryn Zuba, Associate Chief Counsel (Procedure & Administration), Internal Revenue Service
Rachel Leiser Levy, Associate Chief Counsel (Employee Benefits, Exempt Organizations, and Employment Taxes), Internal Revenue Service


AMERICAN BAR ASSOCIATION
SECTION OF TAXATION

Comments on User Fees for Private Letter Ruling Requests

These comments (“Comments”) are submitted on behalf of the American Bar Association Section of Taxation (the “Section”) and have not been reviewed or approved by the House of Delegates or Board of Governors of the American Bar Association. Accordingly, they should not be construed as representing the position of the American Bar Association.

Principal responsibility for preparing these Comments was exercised by Adam Abrahams; Jeff Alberty; Laura Al-Shathir, Chair of the S Corporations Committee; Kevin Anderson; Brianne deSellier; Anna Gooch; Chelsea Rubin; Christine Speidel; and Gafar Zaaloff. Brad Gould, Immediate Past Chair of the S Corporations Committee; and Rochelle Hodes, on behalf of the Administrative Practice Committee also participated in the drafting process. These Comments have been reviewed by John Colvin of the Committee on Government Submissions, and Lisa Zarlenga, the Section's Vice Chair for Government Relations.

Although members of the Section may have clients who might be affected by the federal tax principles addressed by these Comments, no member who has been engaged by a client (or who is a member of a firm or other organization that has been engaged by a client) to make a government submission with respect to, or otherwise to influence the development or outcome of one or more specific issues addressed by, these Comments has participated in the preparation of the portion (or portions) of these Comments addressing those issues. Additionally, while the Section's diverse membership includes government officials, no such official was involved in any part of the drafting or review of these Comments.

Contact: Laura E. Al-Shathir
314-505-5424
alshathir@capessokol.com

Date: December 21, 2022


Table of Contents

EXECUTIVE SUMMARY

BACKGROUND

DISCUSSION

I. Adjust for inflation the gross income thresholds for reduced PLR User Fees

A. Background

B. Recommendations and Explanations

II. Reduce to zero the PLR user fee for requests made by taxpayers whose income is at or below 250% of the federal poverty line

A. Background

B. Recommendation and Explanation

III. Lower the PLR user fee for requests pertaining to less complex issues, examples of which are included in these Comments

A. Background

B. Recommendations

C. Explanations

IV. Simplify the PLR Submission Process for Requests Presenting Less Complex Issues

A. Background

B. Recommendation and Explanation

V. Conclusion


EXECUTIVE SUMMARY

The private letter ruling (“PLR”) process is a key tool in furthering effective tax administration that is mutually beneficial to the Internal Revenue Service (the “Service”) and to taxpayers. It affords taxpayers opportunities for obtaining advance assurance on the appropriate tax treatment of proposed or completed transactions before the return is filed, as well as requesting relief with respect to certain untimely elections. For the Service, the transparency and certainty achieved during the PLR process reduce the Service's costs for compliance and enforcement.1 Additionally, the PLR process provides the Service with an opportunity to determine areas that may benefit from published guidance, as well as issues that require further study.

Despite the utility of PLRs, in recent years, fewer taxpayers have requested them.2 In 2021, the Service acknowledged that high user fees may, in part, explain the decline in the number of rulings requested and sought input on how the fee structure for PLRs could better align with specific rulings requested.3

In a prior meeting between the Section and the Service at which this topic was discussed, the Service requested that the Section provide recommendations for revising PLR user fees. We appreciate the opportunity and accordingly submit these Comments in response to such request.

The Section believes the interests of both the Service and taxpayers would be better served if the Service revises PLR user fees in accordance with the following recommendations:

1. Adjust for inflation the gross income thresholds for reduced PLR user fees.

2. Reduce to zero the PLR user fee for requests made by taxpayers whose income is at or below 250% of the federal poverty line.

3. Lower the PLR user fee for requests presenting less complex issues, examples of which are included in these Comments.

4. Simplify the PLR submission process for requests presenting less complex issues, examples of which are included in these Comments.

BACKGROUND

I. Benefits of the PLR Process and Automatic or Simplified Late Election Relief

For a taxpayer receiving a favorable PLR, there are two main benefits. First, the ruling provides certainty regarding the tax treatment or tax consequences of the relevant matter so long as the facts and circumstances are as represented in the request.4 Second, provided there is no fraud, malfeasance, or misrepresentation of a material fact, both the requesting taxpayer and the Service are bound by the ruling, protecting the requesting taxpayer from changes on audit.5

Outside of the PLR process, the Service has provided opportunities for automatic late election relief without the requirement to seek a PLR. For instance, Treas. Reg. § 301.9100-26 and several revenue procedures provide automatic or simplified relief for certain late elections where corrective action is taken within prescribed time frames.7 Opportunities for automatic or simplified relief without having to file a PLR request reduce the burden and cost on both taxpayers and the Service, benefit overall tax administration, and give effect to taxpayer rights under section 7803(a)(3).8

Apart from opportunities for automatic or simplified relief, taxpayers can also seek advice from the Service through an information letter,9 customer service assistance,10 low-income taxpayer clinics (“LITCs”), and volunteer income tax assistance (“VITA”) programs.11 However, these alternatives are not adequate substitutes for a PLR or automatic or simplified relief insofar as they do not offer the certainty or protection from changes during an audit. In addition, their availability is limited by their very nature.

II. PLR User Fee Amounts

Section 7528(a) provides that the Secretary shall establish a program requiring the payment of user fees for requests to the Service for ruling letters, opinion letters, and determination letters, and other similar requests. Section 7528(b)(1) directs the Secretary to establish fees for PLR requests that vary according to categories or subcategories established by the Secretary after taking into account the average time for (and difficulty of) complying with requests in each category. Section 7528(b)(2) provides that the Secretary shall provide for exemptions and reduced fees as determined by the Secretary to be appropriate.

In accordance with the directive contained in section 7528, the Service has established a menu of user fees for different categories of PLRs, including a reduced user fee for taxpayers with gross income below certain thresholds. These PLR user fees are set forth in Appendix A of the annual revenue procedure relating to PLRs, closing agreements, information letters, determination letters, and oral advice.12 Nearly every year, the Service adjusts PLR user fees, including the reduced fees, in accordance with OMB Circular A-25. However, the criteria for eligibility for reduced PLR user fees, which is based on gross income,13 have remained the same since 2001.14

For 2022, the user fee for a PLR generally ranges from $5,000 to $38,000, with $38,000 being the standard fee.15 Fees for specific types of request vary. For example, the user fee for a ruling request filed under Treas. Reg. § 301.9100-3 for late election relief is $12,600, while the user fee for a request for a ruling on an accounting method or period issue ranges from $5,000 to $12,500. Requests for substantially identical rulings generally range from $245 to $3,800, based on the understanding that the additional incremental time needed to provide a substantially identical ruling is more limited than the amount of time needed to analyze the transaction and issue the initial ruling.16

Requests for rulings by requesters with gross income under certain specified thresholds also qualify for reduced PLR user fees. Specifically, for ruling requests involving a “personal, exempt organization, government entity, or business tax issue,” a reduced user fee of $3,000 applies where the requester's gross income is less than $250,000, and a reduced user fee $8,500 applies where the requester's gross income is less than $1 million and $250,000 or more.17 There are special rules for computing the gross income of businesses for purposes of qualifying for a reduced PLR user fee, which essentially disallow the cost of goods sold adjustment.18 Moreover, when a closely-held business entity is more than 50% owned by a single individual, the income of the individual and the business must be aggregated, effectively counting the passthrough income generated by the business twice.19

III. Need for Revisions to PLR User Fees and PLR Simplification

The PLR user fees, in combination with professional fees generally incurred to prepare and shepherd a PLR though the process, can be prohibitively expensive for all but the most financially well-off individuals and businesses.

While the Service has followed the directive under section 7528(b)(2) and provided reduced user fees for PLRs based on the gross income of the requester, the threshold for determining eligibility has not been adjusted for inflation or otherwise since 2001, leaving fewer taxpayers eligible for reduced fees. We recommend that the gross income threshold be adjusted for inflation, as discussed in these Comments.

Further, no complete exemption from a user fee is offered, despite the Service having authority under section 7528(b)(2) to prescribe rules that exempt certain categories of taxpayers from paying any user fee. We recommend that requests made by individual taxpayers whose income is at or below 250% of the federal poverty line be exempt from a PLR user fee, for the reasons set forth in these Comments.

Finally, while the Service has provided for lower PLR user fees based on the average time for (and difficulty of) complying with requests, many issues that can be easily resolved in the PLR process require the highest user fee, despite involving topics that are not complicated. For instance, under Revenue Procedure 2022-1, the PLR user fee for late regulatory election relief is $12,600 rather than $38,000.20 However, PLR requests in circumstances that are similar in complexity, such as those seeking relief for inadvertent terminations of S corporation status under section 1362(f) that do not qualify for relief under Revenue Procedure 2022-19, are subject to the full $38,000 user fee, rather than the lower amount.21 For these types of ruling requests, the Service, taxpayers, and overall tax administration would benefit from providing simplified processes for processing the PLR request, as more fully described in these Comments.

DISCUSSION

I. Adjust for Inflation the Gross Income Thresholds for Reduced PLR User Fees

A. Background

A PLR requester may qualify for a reduced PLR user fee based on the requester's gross income. Currently, for a request involving a personal, exempt organization, governmental entity, or business tax issue, a reduced PLR user fee applies if: (a) the person requesting the ruling has gross income of less than $250,000 (to qualify for the lowest PLR user fee, currently $3,000); or (b) the person requesting the ruling has gross income of less than $1 million and $250,000 or more (to qualify for a second tier of reduced PLR user fee, currently $8,500).22

When adjusted for inflation, $250,000 in January of 2001 equates to almost $425,000 in July 2022, and $1 million in January 2001 equates to almost $1.7 million in July 2022.23 While the amount of PLR fees has been adjusted upwards over time, the gross income threshold for determining whether a person requesting a PLR qualifies for a reduced user fee has remained unchanged since 2001 and has not been adjusted for inflation.24 If the gross income thresholds were adjusted for inflation from 2001 forward, a requester with gross income under $425,000 would qualify for the lowest PLR user fee, and a requester with gross income under $1.7 million would qualify for the second tier.

It has been the experience of many members of the Section that very few clients, especially business clients, have sufficiently low gross income to qualify for the reduced PLR user fee. At the same time, the user fee is often seen as so high as to be a barrier to those clients' seeking certainty or protection on audit from the PLR process, often amounting to a substantial fraction of the potential tax adjustment. Adjusting the gross income threshold for inflation from 2001 forward to determine eligibility for the reduced PLR user fees would lower the cost barrier for more ruling seekers, make access to the process more equitable, and contribute to more effective tax administration.

B. Recommendations and Explanations

We recommend that the gross income thresholds to qualify for a reduced PLR user fee for a request involving a personal, exempt organization, governmental entity, or business tax issue (currently set forth in Revenue Procedure 2022-1, Appendix A, Section (4)) be adjusted for inflation experienced between 2001 and the present, and then, adjusted annually for inflation in each successive year.

II. Reduce to Zero the PLR User Fee for Requests Made by Taxpayers Whose Income Is At or Below 250% of the Federal Poverty Line

A. Background

Unlike other programs that offer an affordable fee or a fee waiver for individuals with gross income at or below 250% of the federal poverty line (“Low Income Individuals”),25 the PLR user fee structure does not offer such relief.26 Rather, despite the fact that section 7528(b)(2) authorizes the Service to exempt or reduce user fees, currently there is only a reduced user fee of $3,000 available to individual taxpayers with gross income of less than $250,000 requesting a ruling for “personal, exempt organizations, government entity, or business tax issues.”27 It is our experience that the current reduced PLR user fee is unaffordable for Low Income Individuals, and Low Income Individuals often cannot afford expensive representation necessary to request a PLR, making the PLR program inaccessible for these taxpayers.28

Furthermore, the reduced fee for individuals with less than $250,000 in gross income is available to 94% of the U.S. population.29 As such, the fee structure fails to reflect the drastic differences in income and access to tax resources across the individual taxpayer population. For an individual at the top of this range, a $3,000 user fee represents 1.2% of that individual's yearly income; for a Low Income Individual, the reduced user fee represents at least 8.8% of yearly income.30 For Low Income Individuals, paying a fee of, or at a minimum of, nearly 10% of their annual income is unrealistic and practically impossible.

B. Recommendation and Explanation

Because the current PLR user fee structure is inaccessible for Low Income Individuals and blocks access to a valuable resource for these taxpayers, we recommend that the applicable PLR user fee for PLR requests made by individuals whose gross income is at or below 250% of the federal poverty line be waived.

If the Service does not adopt this recommendation, at a minimum, we believe that adoption of an affordable user fee for Low Income Individuals is warranted, mirroring the structure of user fees for other programs. For example, the installment agreement program offers a reduced fee of $43 for Low Income Individuals.31 This fee generally is affordable for most Low Income Individuals and provides the Service with some revenue for the service provided. While not as effective as an exemption, creating a system to determine user fees for PLRs similar to the system applicable to installment agreements would expand access to the PLR program for Low Income Individuals while still providing some assurance that the PLR is needed and will not be frivolously requested.

Like high-income taxpayers, Low Income Individuals face a wide range of issues with uncertain tax treatment. These issues include, but are not limited to, the taxability of settlements under section 104, certain cancelled debt payments under section 108, and certain foster care payments under section 131. Additionally, Low Income Individuals face uncertainty regarding the tax treatment of transactions involving fee-shifting statutes and improperly issued or incorrect Forms 1099.32 It is impossible to anticipate all legal issues for which PLRs may be necessary in the future for Low Income Individuals. For that reason, we do not recommend limiting the availability of waived or lowered PLR user fees by subject matter for Low Income Individuals.

In short, because Low Income Individuals face uncertainty on a variety of issues and because the current PLR user fee, even the reduced PLR user fee, is prohibitively high for these taxpayers, we recommend a complete exemption from the PLR user fee for individuals with gross income at or less than 250% of the federal poverty line. In the alternative, we recommend a fee commensurate with the reduced fee charged to Low Income Individuals for setting up an installment payment arrangement.

III. Lower the PLR User Fee for Requests Pertaining to Less Complex Issues, Examples of Which are Included in these Comments

A. Background

Section 7528(b)(1) directs the Secretary to establish fees for PLR requests that vary based on the average time for, and difficulty of, complying with the request. Currently, Revenue Procedure 2022-1 provides for a PLR user fee lower than the standard fee for: accounting period requests, requests for changes in methods of accounting, and letter ruling requests under Treas. Reg. § 301.9100-3 and section 1362(b)(5).33 Notably, beginning in 2022, the Service added ruling requests under section 1362(b)(5) (authority to treat late S elections as timely) as a category of ruling request that is eligible for a reduced user fee, putting those requests on par with the reduced PLR user fee for section 9100 relief.

Despite several categories of issues being eligible for reduced PLR user fees, it has been our experience that the PLR user fees associated with many ruling requests continue to be disproportionally high compared to the complexity of the issues presented. Accordingly, in these Comments, we identify several issues for which we recommend that a lower PLR user fee apply, based on the relatively low complexity of the request, the anticipated corresponding reduced time for the Service to review the request, and, for certain S corporation issues, the critical need for the requested relief to ensure proper tax compliance, all in accordance with the directive of section 7528(b)(1).

We have not identified all the issues for which a lower than standard PLR user fee should apply and therefore emphasize that the list of issues identified in these Comments is not intended to be an exhaustive list of all issues for which a lower than standard PLR user fee could be merited.

B. Recommendations

We recommend that a lower PLR user fee apply to the following requests:

S Corporations — Requests for relief under section 1362(f) (relief for inadvertent invalid elections or terminations and missing shareholder consents);

S Corporations — Requests for consent under section 1362(g) (election after termination of S corporation election);

Exempt Organizations — Requests for confirmation that income is excludable from gross income under section 115(1); and

Exempt Organizations — Requests for confirmation that activities are in furtherance of one or more exempt purposes described in section 501(c)(3).

C. Explanations

1. S Corporations — Requests for relief under Section 1362(f)

There are countless ways in which an S corporation election or qualified subchapter S subsidiary (“QSub”) election may inadvertently be invalid or terminate. These “foot-faults” may have significant and long-lasting ramifications insofar as the entity would find itself subject to subchapter C or subchapter K, rather than subchapter S, triggering a host of issues for itself, its owners, and its tax advisors, as well as the Service.

As one example of such a foot-fault, an entity may have an impermissible shareholder and therefore be ineligible for S corporation status. Having an impermissible shareholder may result from a variety of circumstances, including a trust shareholder failing timely to elect to be an electing small business trust (“ESBT”) or a current income beneficiary failing timely to make an election for a qualified subchapter S trust (“QSST”). As another example, an entity may inadvertently create a second class of stock by way of issuing preferred stock, even if such stock does not ever actually yield non-pro rata distributions.34

Fortunately, relief is available for late elections under section 1362(b)(5) and for inadvertent invalid elections or terminations under section 1362(f). Specifically, section 1362(b)(5) authorizes the Secretary to treat late S corporation elections as timely upon a finding of reasonable cause. Section 1362(f) authorizes the Secretary to treat an entity as a valid S corporation or QSub if it determines that the circumstances causing the election's ineffectiveness or termination are inadvertent and other factors to which the S corporation and its shareholders attest are present.

To secure relief under either section 1362(b)(5) or section 1362(f), the entity must seek a PLR and pay the associated PLR user fee, unless (1) it meets the criteria for simplified relief set forth in Revenue Procedure 2013-30,35 and (2) its circumstances fall within one of the categories the Service has identified as not affecting the validity or continuation of a corporation's S election or qualifies for retroactive corrective relief under Revenue Procedure 2022-19.36

First, Revenue Procedure 2013-30 provides for relief for many, but not all, requests for relief under section 1362(b)(5). To be eligible for relief under Revenue Procedure 2013-30, the relief must be sought within three years and 75 days after the intended effective date of the late S corporation election.37 If relief is sought outside that time frame, other criteria are required to be satisfied for the relief for the late S corporation election to be granted.38 If such criteria are not met, the requesting entity is faced with filing a request for a PLR and paying a significant PLR user fee for a request that otherwise would have qualified for automatic relief with no user fee had the error been identified and relief requested within the requisite deadline. In these cases, missing the three-year and 75-day deadline turns automatic relief that carries no user fee into a request that requires the taxpayer to pay a $12,600 user fee. In some cases, missing the deadline by only one day can cost a taxpayer $12,600 along with the professional fees necessary to make a request for a PLR. Furthermore, it is our view that missing the three-year and 75-day deadline does not raise the complexity of the analysis if the other requirements for relief set forth in Revenue Procedure 2013-30 are satisfied. To the extent that relief outside the three-year and 75-day deadline causes potential taxes due from years for which the statute of limitations has closed, those issues may nevertheless be addressed through the simplified procedure or PLR process.

However, Revenue Procedure 2013-30 provides relief for very few types of issues arising under section 1362(f). Revenue Procedure 2013-30 provides for simplified relief for a failure of a shareholder to timely file an ESBT or QSST election. Therefore, it appears that Revenue Procedure 2013-30 provides relief under section 1362(f) insofar as it corrects a failed S corporation election resulting from an invalid shareholder in these limited circumstances.

Second, following the recent issuance of Revenue Procedure 2022-19, many common “foot-faults” requiring relief under section 1362(f) through the PLR process now fall within one of categories of issues no longer necessitating a PLR.39 This very welcome guidance provides a great deal of much anticipated certainty to taxpayers seeking relief under section 1362(f).

Where an entity must apply for a PLR for section 1362(b)(5) relief because simplified relief under Revenue Procedure 2013-30 is not available, a reduced PLR user fee of $12,600 generally applies. On the other hand, to secure relief from an inadvertent invalid election or termination under section 1362(f) (where certainty under Revenue Procedure 2022-19 is not available), in most instances an S corporation or a QSub must seek a PLR under section 1362(f) and pay the general PLR user fee, currently $38,000.40

Like relief under section 1362(b)(5), relief under section 1362(f) is essential to an S corporation's ongoing tax compliance obligations. Having certainty regarding the status of an S corporation election is critical to the S corporation, its shareholders, its advisors, and the Service to ensure proper tax reporting and payment obligations. It is not merely a matter of convenience or preference but may be required for ongoing tax and payment obligations as well as to enable tax preparers to satisfy various legal, professional, and ethical obligations. For this reason, relief under section 1362(f) should qualify for the same lower user fee applicable to section 1362(b)(5).

Further, providing a lower PLR user fee for requests under section 1362(f) would not unfairly burden the Service due to the simplified mechanism provided in section 1362(f) and Treas. Reg. § 1.1362-4 to secure relief. In this respect, relief under section 1362(f) resembles the simplicity of relief under Treas. Reg. § 301.9100-3 insofar as both involve an analysis of criteria that are easily attested to by the requester and verified by the Service. For this reason, relief under section 1362(f) should qualify for the same lower user fee applicable to requests under Treas. Reg. § 301.9100-3.

In short, we believe the essential nature of ensuring clarification regarding proper S corporation status due to an inadvertent invalid election or termination, particularly given the straightforward nature of requests for relief under section 1362(f) and Treas. Reg. § 1.1362-4, warrant a reduced PLR user fee.

2. S Corporations — Requests for Consent under Section 1362(g)

Section 1362(g) authorizes the Secretary to consent to an election for a corporation to re-elect S corporation status prior to the fifth taxable year following a termination of an S corporation election, where it otherwise would have been prevented from so electing. To request relief under section 1362(g), a taxpayer must request a PLR and pay the general PLR user fee (unless it qualifies for a reduced PLR user fee based on gross income).

We do not believe the decision to grant relief under section 1362(g) involves a complicated analysis. A survey of PLRs issued under section 1362(g) indicates that the Service rarely (if ever) grants the taxpayer's request for consent to make a second S corporation election in the absence of an intervening change in control of the corporation.41 Even in certain cases involving transfers of control to an employee stock ownership plan, the Service will deny a consent for a second S corporation election if selling shareholders have availed themselves of the benefits of section 1042.42 Thus, in most cases, it is only necessary for the taxpayer to demonstrate that the requisite 50% change in ownership has occurred between the date of termination of the first S corporation election and the intended effective date of the second election. Accordingly, it is our recommendation that the same lower user fee applicable to requests under Treas. Reg. § 301.9100-3 apply for taxpayers seeking consent under section 1362(g).

3. Exempt Organizations — Requests for Confirmation that Income is Excludable from Gross Income under Section 115(1)

Section 115(1) provides that gross income does not include income derived from any public utility or the exercise of any essential governmental function and accruing to a state or any political subdivision thereof.

Governmental entities may, but are not required to, seek a PLR under section 115(1) concluding that all of their income is excludable from gross income. These requests are often straightforward because there is a wide latitude in determining whether income is derived from an essential government function. The Service explained in Revenue Ruling 77-26143 that, “Congress did not desire in any way to restrict a state's participation in enterprises that might be useful in carrying out projects that are desirable from the standpoint of a state government and that are within the ambit of a sovereign to conduct.”

Accordingly, due to the broad deference to states and political subdivisions to determine what is an essential government function, we believe these rulings require less time-consuming analysis. It is therefore our recommendation that that the same lower user fee applicable to requests under Treas. Reg. § 301.9100-3 apply for requests for rulings under section 115(l).

4. Exempt Organizations — Requests for Confirmation that Activities are in Furtherance of One or More Exempt Purposes Described in Section 501(c)(3)

Section 501(c)(3) provides for exemption from federal income tax for organizations that are organized and operated exclusively for scientific or educational purposes (among others). Organizations apply for recognition of section 501(c)(3) status by submitting Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code, to the Service along with a user fee of $600 within 27 months of their date of formation.44

Form 1023 requires organizations to explain, in detail, their past, present, and future activities that further exempt purposes, and the Service issues a determination letter based on those activities as described. However, it is common for organizations to conduct new activities that were not described in an initial application. Organizations are not permitted to amend their Form 1023 or seek an updated determination letter based on updated descriptions of their activities; however, they are able to seek a PLR that an activity furthers one or more exempt purposes under § 501(c)(3).

Given that the analysis for whether an activity furthers an exempt purpose under section 501(c)(3) is the same analysis that EO Determinations Specialists apply during the Form 1023 application process, a reduced PLR user fee is warranted when an exempt organization seeks a ruling that one or more activities that had been not included on the original Form 1023 further an exempt purpose. Providing these types of rulings on a reduced fee basis puts existing organizations on a similar basis with newly formed taxpayers that would be able to describe the same activity on the Form 1023 and receive the Service's approval that the activity further an exempt purpose under section 501(c)(3) for only a $600 user fee.

Accordingly, it is our recommendation a user fee of $600 apply for requests for rulings that activities further an exempt purpose under section 501(c)(3).

IV. Simplify the PLR Submission Process for Requests Presenting Less Complex Issues

A. Background

The Service has created mechanisms for securing automatic or simplified relief in lieu of the PLR process for a variety of requests for relief, including relief from late regulatory elections under Treas. Reg. § 301.9100-2, relief from late entity classification elections under Revenue Procedure 2009-41,45 relief from late elections under subchapter S under Revenue Procedure 2013-30, provided relief is requested within prescribed timeframes,46 and relief from certain inadvertent invalid S corporation elections or terminations pursuant to Revenue Procedure 2022-19.47 In the case of automatic late election relief under Treas. Reg. § 301.9100-2, the relief is obtained by filing an original or amended tax return consistent with requirements for filing the election. In the case of relief from a late entity classification election, the taxpayer simply includes the statement explaining why the entity classification election was not filed on time on the Form 8832. In the case of relief from late elections under subchapter S, the requester attests to the requirements contained in Revenue Procedure 2013-30, including providing an explanation regarding reasonable cause, in the submission. Revenue Procedure 2022-19 identifies areas where the Service considers relief to be unnecessary and provides for retroactive corrective relief procedures in other areas.

From the perspective of the taxpayer and the advisor assisting with requesting automatic or simplified relief in these circumstances, the time and complexity are greatly reduced compared with the cumbersome process of complying with the requirements of a formal PLR request. We believe such elections are easier for the Service to review and process than a typical PLR request.

B. Recommendation and Explanation

As described above in Section III of these Comments, we have recommended that a lower PLR user fee apply to requests involving less complex issues. These types of requests are also ripe for a more simplified PLR submission than those that otherwise normally apply to PLRs in general by their very nature.

Specifically, we recommend that for these types of ruling requests, the Service consider adopting a form-based submission, similar to the procedure for requesting automatic accounting method changes (by filing Form 3115) or an approach similar to requests for relief under Revenue Procedure 2013-30 (late relief under subchapter S) or Revenue Procedure 2022-19 (relief from frequently encountered S corporation validity issues), whereby the requester may attest to the criteria necessary for securing the ruling. We believe that this type of approach would result in increased accessibility, improved taxpayer compliance, and reduced cost and demand on the Service's resources.

V. Conclusion

Our expectation is that implementing our recommendations will contribute to increased voluntary compliance and more effective tax administration, resulting in more certainty for taxpayers as well as the Service. In view of the above, we respectfully request that the Service revise the PLR user fees per the recommendations in these Comments.

FOOTNOTES

1See Counsel Statement and Invitation for Public Comment on PLR User Fee Increase; January 4, 2021; https://www.irs.gov/newsroom/counsel-statement-and-invitation-for-public-comment-on-plr-user-fee-increase.

2Id.

3Id.

4Although PLRs cannot be relied upon by any taxpayer other than the taxpayer requesting the ruling, they also provide valuable guidance to the public and can be used as authority for purposes of penalty protection. Treas. Reg. § 1.6662-4(d)(3)(iii).

5Here, “audit” includes both true examinations and non-audit compliance activities that have a substantially identical impact on low-income taxpayers. See National Taxpayer Advocate, 2017 Annual Report to Congress, Vol. 1 at 50 (Dec. 31, 2017), https://www.taxpayeradvocate.irs.gov/wp-content/uploads/2020/08/ARC17_Volume1_MostSeriousProblems.pdf (describing “unreal” audits).

6Unless otherwise indicated, references to a “section” are to a section of the Internal Revenue Code of 1986, as amended (the “Code”) and all “Treas. Reg. §” references are to the Treasury regulations promulgated under the Code, all as in effect as of the date of these Comments.

7See e.g., Rev. Proc. 2009-41, 2009-39 I.R.B. 439 (regarding late entity classification elections; Rev. Proc. 2013-30, 2013-36 I.R.B. 173 (regarding late S corporation elections), and Rev. Proc. 2022-19, 2022-41 I.R.B. 282 (regarding domestic “no rule” areas, including inadvertent invalid elections or terminations).

8See generally Saltzman & Book, IRS Practice and Procedure, chapter 3A.05 (regarding late elections); IRC § 7803(a)(3) (including the right to finality, the right to pay no more than the correct amount of tax, and the right to a fair and just tax system).

9Information letters, though free for taxpayers, have two main drawbacks. First, the advice in the information letter is not specific to the requesting taxpayer's situation. Second, the advice in the information letter is not binding on the taxpayer or the Service. I.R.M. 32.3.3.1, Scope of Information Letters (Aug. 11, 2004); Information Letters, IRS, https://apps.irs.gov/app/picklist/list/informationLetters.html (last visited Apr. 11, 2022).

10Like other forms of informal guidance, information received from Service customer service representatives cannot be relied on. Richmond v. Commissioner, T.C. Memo. 2009-207 at *2 (“[T]he authoritative sources of Federal tax law are in the statutes, regulations, and judicial decisions,” not in informal advice or publications.) (citing Zimmerman v. Commissioner, 71 T.C. 367, 371 (1978)). See, e.g., Rubel v. Commissioner, 856 F.3d 301 (3d Cir. 2017) (finding that subsequent correspondence from the IRS did not extend deadline to file petition); Matuszak v. Commissioner, 862 F.3d 192 (2d Cir. 2017) (finding that incorrect information provided by Service representatives could not excuse untimely filed petition); Nauflett v. Commissioner, 892 F.3d 649 (4th Cir. 2018) (same).

11LITCs “represent low income taxpayers in controversies with the IRS, . . . including audits, appeals, collection matters, and federal tax litigation.” Low Income Taxpayer Clinics, IRS, https://www.irs.gov/advocate/low-income-taxpayer-clinics (updated Feb. 18, 2022). In general, a taxpayer requests a PLR for certainty before taking a position on a tax return. Therefore, at the time that a taxpayer requests a PLR, there is not yet a “controversy” for an LITC to assist with. Similarly, VITA and Tax Counseling for the Elderly (“TCE”) programs are limited to tax return preparation for low-income and other qualifying individuals. Free Tax Return Preparation for Qualifying Taxpayers, IRS, https://www.irs.gov/individuals/free-tax-return-preparation-for-qualifying-taxpayers (updated Mar. 21, 2022). Therefore, LITCs cannot provide pre-filing advice to taxpayers and VITA/TCE programs likely cannot provide advice on complicated tax questions.

12See, e.g., Rev. Proc. 2022-1, 2022-1 I.R.B. 1, Appendix A.

13Appendix A, paragraph (B), of each year's PLR revenue procedure includes rules for determining gross income for different types of requesters. The term “gross income” as used in the revenue procedure could mean gross receipts or other amounts depending on the type of taxpayer making the request. See, e.g., Rev. Proc. 2022-1, 2022-1 I.R.B. 1, Appendix A, § B(3).

14Compare Rev. Proc. 2001-1, 2001-1 I.R.B. 1, Appendix A with Rev. Proc. 2022-1, 2022-1 I.R.B. 1, Appendix A (containing the same thresholds).

15Rev. Proc. 2022-1, 2022-1 I.R.B. 1, Appendix A, § A.

16Id.

17Id.

18Id. at § B(3).

19Id. at § B(5)(b).

20Rev. Proc. 2022-1, Appendix A, § A(3)(b), 2022-1 I.R.B. 1. Even at $12,600 rather than $38,000, the user fee under Rev. Proc. 2022-1 for section 9100 relief and relief under section 1362(b)(5) can be prohibitively high for many taxpayers.

212022-41 I.R.B. 282. Notably, this Revenue Procedure afforded S corporations and their shareholders the opportunity for relief from certain common circumstances resulting in an inadvertent termination or inadvertently invalid S election without requesting a PLR.

22Rev. Proc. 2022-1, Appendix A, § A(4), 2022-1 I.R.B. 1.

24See infra note 17.

25See, e.g., IRC §§ 7526(b)(1)(B) (providing that LITCs are to generally serve taxpayers with incomes under 250% of the federal poverty level); 7122(c)(3) (excepting “low-income taxpayers” with adjusted gross income not exceeding 250% of the federal poverty level from offer in compromise user fees).

26Office of Management and Budget Circular A-25 generally requires agency user fees to cover the agency's costs relating to the service. However, an exception may be requested. 58 Fed. Reg. 38,142 (July 15, 1993). OMB has approved an exception for low-income taxpayers relating to installment agreements, for example. See T.D. 9798, User Fees for Installment Agreements, 81 Fed. Reg. 86,955 (Dec. 2, 2016).

27Rev. Proc. 2022-1, 2022-1 I.R.B. 1, Appendix A.

28Furthermore, free services available to these taxpayers may not be able to prepare a PLR request. In particular, LITCs and VITA sites, though free resources for low-income taxpayers, cannot generally prepare or request a PLR.

29The U.S. Income Distribution: Trends and Issues (R44705), Figure 1, Congressional Research Service (Jan. 13, 2021), https://fas.org/sgp/crs/misc/R44705.pdf. Per the most recent data, 94% of U.S. households have income of less than $250,000.

30Specifically, for an individual with income of $249,999, $3,000 is 1.2% of that individual's income. For an individual living alone at 250% of the 2022 federal poverty line ($33,975), $3,000 is 8.8% of that individual's income. See Annual Update of the HHS Poverty Guidelines, 87 Fed. Reg. 3315, 3316 (Jan. 21, 2022).

31See Treas. Reg. § 300.1(b)(3). The fee is $31 for a low-income taxpayer “when the taxpayer pays by way of a direct debit from the taxpayer's bank account with respect to online payment agreements.” Id.

32See, e.g., PLR 201552001 (Aug. 25, 2015); PLR 201015016 (Jan. 5, 2010).

33Rev. Proc. 2022-1, Appendix A, § A, 2022-1 I.R.B. 1.

34See § 1361(b)(1)(D); Treas. Reg. § 1.1361-1(l).

35Rev. Proc. 2013-30, 2013-36 I.R.B. 173.

36Rev. Proc. 2022-19, 2022-41 I.R.B. 282.

37Rev. Proc. 2013-30, § 4.02, 2013-36 I.R.B. 173.

38Specifically, to qualify for relief under Revenue Procedure 2013-30 to treat S corporation elections as timely after the expiration of the three-year, 75-day deadline, the following conditions must be satisfied: (1) the corporation is not seeking late corporate classification election relief concurrently with a late S corporation election; (2) the corporation fails to qualify as an S corporation solely because the Form 2553 was not timely filed; (3) the corporation and all of its shareholders reported their income consistent with S corporation status for all years; (4) at least six months have elapsed since the date the corporation first filed its tax return for the first S corporation year; (5) neither the corporation nor any of its shareholders was notified by the Service of any problem regarding S corporation status within six months of the date on which the Form 1120-S for the first year was timely filed; and (6) the completed election form includes the statement from all shareholders that they have reported their income consistent with S corporation status for all years. Rev. Proc. 2013-30, § 5.04, 2013-36 I.R.B. 173.

39See, Rev. Proc. 2022-19, 2022-41 I.R.B. 282.

40We have assumed but would appreciate the Service to confirm that if an S corporation election is inadvertently ineffective or terminates due to a failure to timely file a QSST or ESBT election where relief for that late election is secured through Revenue Procedure 2013-30, then the S corporation would not need to seek relief under section 1362(f).

41Pursuant to Treas. Reg. § 1.1362-5(a), the corporation has the burden of establishing that consent should be granted. The fact that more than 50% of the stock in the corporation is owned by persons who did not own stock in the corporation on the date of the termination “tends to establish that consent should be granted.”

42In PLR 201845011 (Aug. 14, 2018), the Service granted consent where the corporation represented that the selling shareholder did not make an election under section 1042. In contrast, in PLR 200851003 (Sep. 9, 2008), the Service denied consent where two selling shareholders made a section 1042 election.

431977-2 C.B. 45.

44§ 508(a).

45Rev. Proc. 2009-41, 2009-39 I.R.B. 439.

46Rev. Proc. 2013-30, 2013-36 I.R.B. 173.

47Rev. Proc. 2022-19, 2022-41 I.R.B. 282.

END FOOTNOTES

DOCUMENT ATTRIBUTES
  • Authors
    Hall, C. Wells, III
  • Institutional Authors
    American Bar Association Section of Taxation
  • Subject Area/Tax Topics
  • Jurisdictions
  • Tax Analysts Document Number
    2022-40530
  • Tax Analysts Electronic Citation
    2022 TNTF 246-18
    2022 TPR 52-12
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