The question came up recently whether there are options to test a plan or transaction for tax liability before executing the plan, particularly in situations where it is not clear how the tax rules and laws will be applied to a difficult circumstance.

The Internal Revenue Service addresses these situations by providing the opportunity to apply for a private letter ruling.

In the application for a PLR, the taxpayer provides a detailed description of the facts and circumstances of the plan and transaction. The IRS will review the information and the applicable laws and rules, and then provide a letter of guidance on how the IRS would decide on the matter if the action was taken.

The PLR is specific to the particular circumstances set forth in the application and is not binding on other cases. These rulings are meant to provide how the IRS will rule on the fact scenario provided, but these cannot be relied upon as precedence for other cases, even if the facts are substantially similar.

A PLR is valuable to taxpayers because of the certainty it provides for complex transactions. Additionally, these help streamline the review process after the transaction or plan is implemented because the IRS already has reviewed the specific facts of the case.

The IRS will provide two types of rulings: a “comfort ruling” in situations that are clearly addressed by the rules or law, and rulings on significant or new issues not covered in the related laws or regulations.

In some circumstances, the IRS will redact the private information from a PLR and issue it as a revenue ruling. Once issued as a revenue ruling, these become precedence for similar cases.

The IRS publishes the guidelines for requesting a private letter ruling annually. There are many questions that must be answered, and the request must be filed properly in order to receive a PLR. Along with the application, a fee must be paid. The fee varies based on the complexity of the issue being reviewed.

For complex issues, the fees can exceed $30,000. In addition to the IRS fees, there would be the fees and expenses for the professional services needed to draft and file the application. It can take up to 90 days to receive an answer to an application.