IRS New No-Rule Policy: The IRS announced a new no-rule policy substantially restricting its ruling practice concerning corporate nonrecognition transactions effective for ruling requests after August 23, 2013

Sullivan & Cromwell LLP - June 25, 2013

The Internal Revenue Service (the “IRS”) has announced today a new no-rule policy effective for ruling requests postmarked or, if not mailed, received after August 23, 2013 (including any supplemental letter requests), according to which the IRS will no longer rule on whether a transaction qualifies for nonrecognition treatment under section 332, 351, 355, 368 or 1036 of the Internal Revenue Code (the “Code”, and such provisions, the “Nonrecognition Provisions”). Under the new no-rule policy, the IRS will rule, however, on one or more issues under the Nonrecognition Provisions to the extent that such issue or issues are significant and subject to uncertainty; the number of significant issues that may be the subject of a single letter ruling are not limited (the “new no-rule policy”).

This is a meaningful departure from the current IRS ruling practice. At present, subject to certain exceptions, the IRS will rule on an entire transaction if the IRS determines that the taxpayer’s ruling request presents a significant issue.

A significant issue, for purposes of the new no-rule policy, is defined as “an issue of law the resolution of which is not essentially free from doubt and that is germane to determining the tax consequences of the transaction.” The IRS further clarified that an issue the resolution of which is not essentially free from doubt under one Code section may nevertheless not be germane to determining the tax consequences of the transaction if, for instance, another Code section provides the same consequences as the first Code section.

The IRS is encouraging taxpayers submitting a letter ruling request on a significant issue under the new no-rule policy to call the Office of Associate Chief Counsel (Corporate) before submitting the ruling request to discuss whether the IRS will entertain such a letter ruling request.