The value of an IRS General Counsel Memorandum.

CPAs researching tax issues frequently find the IRC and related regulations ambiguous. If they are unable to find court cases that address the issue at hand, they may need to turn to private letter rulings or to IRS general counsel memoranda (GCMs), which are background documents the IRS uses to support a ruling. However, is it safe to rely on these as precedent;

The First Circuit Court of Appeals was asked to decide whether a pension fund created through collective bargaining was tax-exempt as a labor organization under IRC section 501 (c)(5). For the years at issue, the code and regulations--as interpreted by published revenue rulings--were ambiguous. The taxpayer cited a GCM as precedent for the exemption. The court was asked to address the usability of the cited memo.

Result: For the IRS. The pension fund was not tax-exempt. In reaching its decision, the court ignored the GCM cited by the taxpayer and searched the legislative history to determine the fund's tax-exempt status. Citing Treasury regulations section 1.6661-3(b)(2), the court said it was ignoring the memo because it is not precedent. The regulation says private letter rulings and GCMs are not authoritative.

With this case, the First Circuit joined several other courts in holding that GCMs are informal determinations and therefore not precedent. In its opinion, the court cited the two prior cases that addressed the tax-exemption issue. It rejected the Second Circuit Court of Appeals use of the cited GCM in Morganbesser and based its rejection on the decision in Stitching, which refused to follow Morganbesser because that case had failed to apply the correct standard and had relied on a "dubious" GCM.

It is important to note two issues the First Circuit decision failed to address.

1. IRC section 6661, the authority for regulations section 1.6661-3, was repealed and replaced by section 6662. Treasury regulations issued under section 6662 provide that both private letter rulings and GCMs are substantial authority, reversing the position under the old regulations cited by the court.

2. In spite of their supposed lack of precedential value, in Rowan Cos., 452 US 247 (1981), the U.S. Supreme Court considered private letter rulings to determine how the IRS interpreted the code.

The Supreme Court's use of private letter rulings can be interpreted to require similar use of GCMs by other courts. Comparing GCMs with private letter rulings, though, reveals some interesting differences.

* A private letter ruling is the IRS response to a specific fact situation.

* A GCM, on the other hand, generally is guidance--extensively crossreferenced and updated to reflect current IRS policy--for IRS district offices to use in formulating positions. Because they constitute working law, GCMs are useful to CPAs as a research tool to interpret the code consistently. They also appear to provide a better foundation than letter rulings for well-reasoned decisions.

The First Circuit's refusal to even consider the memo cited by the taxpayer can be interpreted as lowering a GCM's value below that of a letter ruling. Therefore, CPAs need to be careful about relying on GCMs until their status is clarified.

* John F.Tuppe,; et al. v. U.S., 134 F.3d 444-98 USTC P 50,148.

Prepared by Edward Schnee, CPA, PhD, Joe Lane Professor of Accounting and director, MTA program, Culverhouse School of Accountancy, University of Alabama, Tuscaloosa.