PLR 200613022: IRS retroactively revokes earlier payment ruling

Plain-English summary

The IRS revoked an earlier letter ruling that had treated a taxpayer's payment to another party as ordinary income to the recipient and a deductible business expense to the payer. It said the earlier ruling no longer accorded with the IRS's views. The revocation applied retroactively because the earlier ruling concerned a transaction completed before that ruling was issued. The taxpayer could separately request relief limiting the retroactive effect under section 7805(b). This letter did not provide a replacement ruling on the payment's tax treatment.

Ruling snapshot

• Question: Would the earlier payment ruling remain in effect, and would its revocation be prospective only?
• Outcome: Revocation with retroactive effect, subject to a possible separate relief request.
• Key authorities: IRC § 7805(b); Rev. Proc. 2005-1, §§ 11.06, 11.10, 11.11.

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224
Number: 200613022
Third Party Communication: None
Release Date: 3/31/2006
Date of Communication: Not Applicable
Index Number: 61.00.00-00, 61.49-00,
162.00-00, 162.02-00
Person To Contact:
------------------------, ID No. -------------
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Telephone Number:
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Refer Reply To:
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CC:ITA:B04
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PLR-143840-05
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Date: October 28, 2005

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Legend

Taxpayer = -------------------------------------------
B = ------------------------------------

Dear -------------------:

This letter concerns LTR 200518014 (PLR-129030-04) issued to Taxpayer on December 30, 2004. In LTR 200518014, the Internal Revenue Service (Service) concluded that Taxpayer’s payment to B under an agreement is included in B’s gross income as ordinary income under §§ 61 and 64 of the Internal Revenue Code. In addition, the Service concluded that the payment from Taxpayer to B under the agreement is an ordinary and necessary business expense deductible under § 162. In a telephone conversation with your authorized representative, we informed you of our intention to revoke the letter ruling. The purpose of this letter, therefore, is to revoke LTR 200518014 because it is not in accord with the views of the Service.

If a letter ruling is revoked or modified, the revocation or modification applies to all taxable years open under the statute of limitations unless the Service uses its discretionary authority under § 7805(b) to limit the retroactive effect of the revocation or modification. Under § 7805(b)(8), the Secretary of the Treasury or his delegate may prescribe the extent, if any, to which any ruling relating to the internal revenue laws shall be applied without retroactive effect. For the reasons discussed below, LTR 200518014 is revoked with retroactive effect. If, however, you wish to request that retroactivity be limited under § 7805(b), you may submit your request in accordance with section 11.11 of Rev. Proc. 2005-1, 2005-1 I.R.B. 48, to our office. We will give such request careful consideration and you will be given the opportunity for a conference of right.
PLR-143840-05
2

Section 11.06 of Rev. Proc. 2005-1 provides that except in rare or unusual circumstances, the revocation of a private letter ruling will generally not be applied retroactively to the taxpayer for whom the letter ruling was issued or to a taxpayer whose liability was directly involved in the letter ruling provided:

1) There has been no change in the applicable law;

2) The letter ruling was originally issued for a proposed transaction; and

3) The taxpayer directly involved in the letter ruling acted in good faith in relying on
the letter ruling, and revoking or modifying the letter ruling retroactively would be
to the taxpayer’s detriment.

In the present case, it is our view that LTR 200518014 was not issued in connection with a proposed transaction. As provided in section 11.10 of Rev. Proc 2005-1, a taxpayer is not protected against the retroactive revocation of a letter ruling involving a transaction completed before the issuance of the letter ruling.

In accordance with the Power of Attorney on file with this office, a copy of this letter is being sent to your authorized representative. If you have any questions, please contact
-------------------------of our office at --------------------.

Sincerely,

Michael J. Montemurro
Branch Chief, Branch 4
(Income Tax & Accounting)