Comments on IRS comfort rulings policy, January 20, 1990.

Comments on IRS Comfort Rulings Policy

January 20, 1990

The purpose of this letter is to confirm Tax Executives Institute's previous comments to you and other National Office representatives concerning Revenue Procedure 89-34, Announcement 89-104, and Announcement 89-105 -- all of which relate to the Internal Revenue Service's decision to curtail the issuance of so-called comfort rulings.

Overview

Tax Executives Institute commends the IRS for its willingness to evaluate and fine-tune the tax guidance process and welcomes the opportunity to comment on means by which the IRS can improve the quality and timeliness of its "product": tax guidance. The IRS's reassessment of the "no comfort ruling" policy -- reflected in Announcement 89-104's suspension of Revenue Procedure 89-34 pending the receipt of public comments -- is consistent with the commitment to quality initiated by Larry Gibbs and continued under the leadership of Fred Goldberg.

As you know, TEI has long been interested in streamlining and improving the process by which taxpayers are provided guidance. More than two years ago, in a letter to then-Secretary of the Treasury James A. Baker, III, the Institute set forth a series of recommendations on improving the tax regulatory process. We are pleased that some of TEI's recommendations have already been adopted and that others are under active consideration. The Institute looks forward to working with the IRS as the review process continues.

Concerns about the Process

We would be less than candid if we did not express some reservations over the manner in which the IRS's "no comfort ruling" policy was adopted and announced by the IRS in May 1989. Stated simply, we believe that the quality process should entail bringing the "customer" into the decision-making process much earlier -- clearly before a decision is made or announced. We recognize that broadening the circle of people involved in the review process may slow it down, but suggest that delay can often prove salutary.

Thus, the "firestorm" that developed between the release of Revenue Procedure 89-34 and the release of Announcements 89-104 and 89-105 (manifested most prominently at the June 14, 1989, meeting of the Commissioner's Advisory Group) might well have been avoided, or at least tempered, had taxpayer reaction been tested before the formal issuance of the revenue procedure. It would be a mistake, however, to construe our concern about the process as criticism of the IRS's efforts to develop creative approaches to providing timely and useful tax guidance. Innovation, which almost defintiion entails risk, should continue to be encouraged.

The Limits of the

"Either/Or" Approach to

the Resource Allocation Issue

The stated justification for the IRS's "no comfort ruling" policy is resource allocation: in order to expedite the issuance of regulations and other forms of "public" guidance, the time and money devloted to providing "private" guidance in the form of comfort rulings must be substantially curtailed. TEI certainly appreciates that the IRS's budget is scarcely a never-emptying cornucopia, but we caution against justifying the "no comfort ruling" policy exclusively on resource allocation grounds.

We submit that there are too many variables involved to predict (or promise) that regulations will be issued more promptly if the "no comfort ruling" policy is implemented as announced or, alternatively, that regulatory delays will occur if that policy dies aborning. Thus, although the "either/or," comfort ruling/regulations approach that has been articulated has a mathematical logic to it, we seriously doubt that such a clear reciprocal relationship between the two forms of private and public guidance will be borne out by experience. We also agree with those who have suggested that, at least to a limited extent, the either/or approach represents a false dichotomy. Given the diverse areas in which the Office of Chief Counsel expends resources (including, for example, Counsel's involvement in examinations), we question whether the IRS's hewing to a strick either/or approach is particularly helpful. Based on the full range of alternatives outlined in Announcement 89-104, we assume the IRS now agrees.

Defining the Customer: Whose

Comfort Is It, Anyway?

In the November 13, 1989, issue of Tax Notes (at page 813), you stated that, in assessing the merits of the "no comfort ruling" policy, the full range of IRS services and programs had to be evaluated. You thereby evinced a clear understanding that the issue is not simply "comfort rulings versus regulations." "Everything is up for grabs," you were quoted as stating: "What the customer wants is very important."

That latter statement reflects a firm appreciation of the quality process: the goal is to give the "customer" what he (or she) wants and needs. Fundamental to the process, of course, is properly defining who is the customer. TEI believes, and we certainly hope the IRS agrees, that the primary customer of the guidance process is the taxpayer -- not the practitioner. Although such a proposition may seem evident (after all, the practitioner serves as the taxpayer's agent), we suggest that its importance is not always fully appreciated. Thus, we consider somewhat myopic the perspective of some who have excoriated the IRS in announcing its "no comfort ruling" policy: the comfort level at issue in their criticism seems to be that of practitioners, not their clients.

To be sure, on a case-by-case basis, a practitioner's concerns will no doubt mirror those of his or her client. When the issue is viewed systematically, however, the fact that taxpayers and their advisers are substantively "on the same side" should not be construed to necessarily mean that a total unity or commonality of interests exists between them -- especially with respect to administrative or process issues.

In this regard, we wish to distance ourselves from the suggestion that comfort rulings continue to be issued but that user fees be increased to recoup the costs to the IRS of administering the program. To the cynic -- or perhaps merely one who regards Revenue Procedure 89-34 as creating a practitioner, not a taxpayer, problem -- the result of such a policy would be to provide comfort to practitioners while exacting the cost from taxpayers. As subsequently discussed, the user fee question has broad policy implications concerning the overall funding of the tax system (including, in particular, the extension of the funding mechanism to the audit function), which TEI believes should be fully explored before any decision is made to increase such fees.

Specific Comments on

Announcement 89-104

and Announcement 89-105

In Announcement 89-104, the IRS announced the suspension until February 5, 1990, of Revenue Procedure 89-34 and outlined several measures that could be taken to improve the private rulings process. In Announcement 89-105, the IRS sought to clarify the scope of Revenue Procedure 89-34. Taken together, the two announcements forthrightly address (either expressly or through the future actions they portend) most legitimate concerns about the IRS's "no comfort ruling" policy.

TEI believes the initiatives set forth in Announcement 89-104 merit favorable consideration. The promulgation of a list of "no ruling" areas and the delineation of the type of "extraordinary circumstances" that will give rise to exceptions to the no ruling policy will go a long way toward alleviating taxpayer concerns. Indeed, the Institute submits that the development of a "no rulings" issue list is essential to the effective implementation of the "no comfort ruling" policy.

Our members would also welcome the development of a "no action letter" procedure in the tax field, analogous to that which the Securities and Exchange Commission has long employed. Such an approach, coupled with the increased use of checklists or safe harbors (even if those safe harbors are more stringent than the treatment the taxpayer might secure if it chose to litigate the issue), could bring a fuller measure of certainty to the tax law.

The Institute believes there is also considerable merit in the IRS's developing a "fast-track" approach in respect of certain types of ruling requests. For example, where the ruling request involves the application of taxpayer's facts to a "settled" issue of law, the request could be considered on an expedited basis. Specifically, the IRS could confine its review to the taxpayer's statement of facts (deferring consideration of the underlying documents until audit), and issue a ruling based on that statement. If the IRS subsequently determined that the taxpayer's statement of facts was incomplete or inaccurate, the taxpayer's ability to rely on the ruling would be attenuated. We believe that taxpayers would be willing to accept the lower level of certainty accorded by "fast-track" rulings as a legitimate price for issuance of the rulings on a more timely basis. (1)

As previously suggested, TEI question the wisdom of substantially increasing the user fees for private rulings. With respect to most of the Institute's members, we doubt whether a doubling, tripling, or even quadrupling of the current fees would materially affect the number of ruling requests being filed; although the user fee program can prove to be an irritant, most companies represented by the Institute's membership can well afford user fees. Thus, while we can appreciate the "every dollar helps" concept,we do not believe such increases would have any substantive effect, at least in respect of the class of taxpayers represented by TEI's membership. A decision to increase user fees could, however, effectively punish smaller taxpayers.

With respect to whether the private ruling process should be self-funding, our concerns are more fundamental. The Institute believes, as a matter of policy, that the cost of administering the tax system should be borne by taxpayers as a whole--not shifted to particular taxpayers whose affairs are unavoidably uncertain (and, hence, who need a ruling to prudently conduct their business affairs) or whose returns happen to be audited. The private rulings program benefits the tax system as a whole; ruling requests alert the IRS to emerging issues that may properly become the subject of published guidance (or audit scrutiny) and, notwithstanding section 6110(j)(3), provide guidance to taxpayers other than those to whom they are issued.

In summary, although higher user fees might well be justified in respect of comfort rulings (since those rulings by definition do not bring new issues to the attention of the IRS), we do not believe a case for even the limited self-funding of such private rulings has been made. (2)

Turning to Announcement 89-105, the Institute has only a few specific comments. To the extent the "no comfort ruling" policy is implemented, we recommend that care be taken to prevent the comfort/no comfort decision from becoming as cumbersome and time-consuming as preparation of the comfort ruling itself would be. Thus, although we commend the IRS for stating that good faith disputes about whether an issue is clearly and adequately addressed by published authority will be resolved in the taxpayer's favor (Q&A-7), the IRS should not feel obliged to explain its no-ruling decision in excruciating and authoritative detail. In other words, the letter advising a taxpayer that no ruling will be issued because the ruling falls within the scope of Revenue Procedure 89-34 should not itself become a form of comfort ruling.

Improving the Published Ruling

Process

TEI submits that a necessary concomitant to curtailing the private ruling process must be the expansion of the IRS's system of providing public, or published, guidance. Thus, to the extent the implementation of Revenue Procedure 89-34 and Announcement 89-105 permits a redeployment of resources previously committed to the private ruling process, those resources must be dedicated to the development and publication of revenue rulings, regulations, and other forms of official (publishede guidance.

We suggest, however, that the timely issuance of additional revenue rulings requires more than a shifting of resources previously allocated to the preparation of comfort rulings. Specifically, we recommend that consideration be given to several possible systemic changes that could expedite the issuance of revenue rulings.

In its December 18, 1987, letter to then-Secretary Baker on the need to improve the tax regulatory process, TEI discussed several ways in which the process could be improved. We devoted considerable attention to the so-called two-track approach -- whereby both the IRS and the Treasury Department are involved in the development of rulings and regulations -- which we continue to believe contributes mightily to the delays that mark the tax guidance process. In our comments, we set forth several (not necessarily mutually exclusive) alternatives for consideration, including the following:

* Giving the Treasury Department exclusive jurisdiction over all regulations. Alternatively, the IRS could be assigned responsibility for developing proposed and temporary regulations, with the Treasury Department's approval being required before the promulgation of final regulations.

* Limiting the Treasury Department's involvement in the development of proposed and temporary regulations to designated issues of major importance (as agreed to by the Assistant Secretary of the Treasury and the Commissioner of Internal Revenue).

* Giving the IRS exclusive jurisdiction over rulings and other forms of administrative guidance. (3)

TEI believes that these suggestions continue to have merit, and we recommend that they again be considered.

Another approach would be to reevaluate the criteria for designating proposed published rulings as Category I, II, and II-X rulings. According to an IRS memorandum prepared in connection with the June 14, 1989, meeting of the Commissioner's Advisory Group, Category II rulings are those that present significantly policy issues, those that will have a major impact on large numbers of taxpayers, those that are politically sensitive, and those of overwhelming technical complexity. Category I contains rulings that do not meet these criteria, and Category II-X is reserved for Category II rulings that urgently require publication.

Pursuant to a 1985 agreement between the IRS and the Treasury Department, Treasury is to respond to Category I and Category II-X rulings within three weeks and to Category II rulings within two months. If the Category I deadline passes without the Treasury action, the 1985 agreement authorizes the IRS to publish the ruling. The June 14, 1989, memorandum states, however, that in practice rulings are rarely if ever published without affirmative Treasury clearance.

We understand that the Treasury Department frequently fails to respond to proposed rulings withinthe timeframe set forth in the 1985 agreement and, further, that the IRS has not undertaken to exercise the authority granted under that agreement to publish Category I rulings in the agbsence of a timely Treasury response. We recommend that the Treasury Department and IRS explore means by which more discipline can be imposed on the government's rulings review process. In particular, consideration should be given to routinely issuing Category I rulings after the expiration of the agreed-upon review period except where the Treasury expressly interposes an objection.

Conclusion

Tax Executives Institute appreciates this opportunity to present our views on improving the tax guidance process. We would be pleased to meet with you to elaborate on our concerns and our recommendations. If you should have any questions about the Institute's position, please do not hesitate to call either Linda B. Burke, chair of our IRS Administrative Affairs Committee, at [phone], or the Institute's professional staff (Timothy J. McCormally or Mary L. Fahey) at [phone].

(1) This proposal is similar to that set forth in the ABA Section of Taxation's submission dated January 5, 1990, which coined the phrase "Limited Review Ruling." Although we believe the proposal has merit, we have some qualms about making the procedure mandatory (except with respect to areas that would otherwise fall within the scope of the "no comfort ruling" policy).

(2) Given the Institute's opposition to financing the tax system through user fees and the poor precedent the self-funding of the comfort ruling program could be, TEI would prefer the implementation of Revenue Procedure 89-34 in its current form to the imposition of substantial user fees.

(3) On a related subject, TEI believes that the private ruling process should be streamlined by limiting the Treasury Department's role in reviewing proposed rulings; specifically, absent extraordinary circumstances, the Treasury Department should not be involved in the private ruling process. Similarly, we believe that the levels of IRS review given to rulings -- both private and published -- should be limited.