Tax Brake with Robert G. Nath, Esq.

This procedure is known as a “letter ruling,” sometimes a “private letter ruling.” The IRS has long had a ruling system in which taxpayers can write to the IRS, requesting that it issue a formal ruling on the tax results of certain contemplated transactions. If the IRS rules, then both taxpayer and the IRS are bound by the ruling. It's like an insurance policy if you are unsure about the tax result.

In one recent matter, a couple asked the IRS to rule that the support and maintenance they had agreed to would be considered alimony and therefore deductible. They also asked the IRS to rule that payment of a lump sum would not result in taxable income to husband or wife. The IRS ruled favorably; that is, the support payments were considered “incidental to” the divorce decree even though a long time had elapsed between the payment and the actual divorce. The IRS also ruled that the lump sum transfer was “related to the cessation of the marriage,” which was the relevant standard.

These formal rulings are published (without names) and are available to anyone. However, you can't simply write the IRS and ask a question, such as, “What is the best way to structure this payment in our divorce.” These letter rulings are elaborate and structured. There is a long list of information the IRS requires before it will rule at all, and it will NOT rule in some tax areas at all. Because of the complexity of these letter rulings, normally only large dollar items are submitted, and then, only if there is enough time for the IRS to rule (sometimes 6 months or longer, depending on how much additional information the IRS requests).

But if the case is important enough, and you have enough time, it might make sense to consider asking for a letter ruling. This is especially so if the tax result of the transaction you are contemplating is not truly clear.