This month a federal claims court ruled that private-letter rulings (PLRs) issued by the Internal Revenue Service were inadmissible as evidence in a tax case related to contingent liabilities. The case, decided on September 1 by Judge Lynn Bush, focuses on AmerGen Energy Co., a power-generation company that was integrated into its parent Exelon in 2008. The decision sheds new light on the usefulness of an IRS PLR with respect to U.S. courts.
In the case, AmerGen purchased three nuclear power plants and took over their operation in 1998 and 1999. However, a dispute between the power company and the IRS arose concerning the tax treatment of nuclear decommissioning liabilities that were assumed by AmerGen. To “win” the argument, AmerGen had to show that the assumed liabilities were not contingent; that is, the power company had to illustrate that the decommissioning costs were fixed and determinable at the time of the purchases.
The treatment of these assumed decommissioning liabilities was the subject of PLRs issued to the sellers of the power plants. In AmerGen’s view, the rulings issued to the sellers constitute evidence that the liabilities assumed by the power company were fixed and determinable at the time of the purchases.
But in this latest court ruling, the United States contends that the PLRs are not admissible in court, and argues that the IRS rulings are irrelevant to AmerGen’s claims in this suit. As a result, the court ruled in favor of the United States.1
AmerGen and the IRS disagreed on two major issues: the relevance of a PLR issued to one taxpayer, and the litigation of a different tax claim brought by another taxpayer. Indeed, the court noted that PLRs “may not be used or cited as precedent.”2 In fact, Bush noted that most courts “do not find PLRs, issued to other taxpayers, to be of precedential value in deciding the tax claims before them.”
She cited several cases to support her AmerGen decision. For example, in Lucky Stores, Inc. & Subsidiaries v. Commissioner, 153 F.3d 964 (9th Cir. 1998), a circuit court ruled that “…taxpayers other than those to whom such rulings…were issued are not entitled to rely on them….” Judge Bush’s decision continued that this court, in Vons Cos. v. United States, 51 Fed. Cl. 1 (2001), examined the tax code’s Sec. 6110(k)(3) and relevant case law and noted that the use of PLRs in tax litigation is “limited.”
In the Vons case, the court also said that PLRs “may be relied upon not for their substance” but rather only as an indication of either the IRS’s administrative practice (that it has issued rulings regarding a particular subject), or that under Int’l Bus. Machs. Corp. v. United States, 343 F.2d 914 (Ct. Cl. 1965), the commissioner has abused his discretion under the tax code’s Sec. 7805(b) in issuing different rulings to two directly competing taxpayers. In short, PLRs cannot be used to advance a particular interpretation of the Internal Revenue Code and they cannot be used “for their substance.”
Therefore, in the court’s view, AmerGen seeks either to impermissibly rely on the PLRs as precedent or wishes to use the PLRs as evidence of an abuse of discretion — as PLRs were found to be evidence of such an abuse in IBM. Neither of AmerGen ‘s proposed uses is permissible in this case.
The facts of the AmerGen case do not resemble the IBM case and, thus, IBM “is of no avail” to AmerGen. IBM is only applicable in the narrowest of circumstances: where a taxpayer learns of a favorable ruling issued to its direct competitor; promptly attempts to secure a similar PLR; encounters significant delay in obtaining a PLR from the IRS; pays taxes for a lengthy period, during which time its competitor is relieved from paying the same taxes due to an erroneous PLR; and sues once that competitor’s favorable PLR has been revoked only prospectively whereas its own tax liability has been applied retroactively.
In such cases, a taxpayer would likely be able to show that the IRS abused its discretion under Section 7805(b). But in the AmerGen case, there is no allegation that the PLRs issued to the sellers of the plants were erroneous or that unfair retroactive application of the tax laws is at issue in this case. Therefore, IBM provides no support for the relevance of PLRs to this case.
AmerGen also suggests that “the PLRs are likely binding on Defendant in this action.” This statement, in the court’s view, is not supported by the “weight of authority.” Indeed, the court concluded, “there is no plausible reading of precedent that supports this view.”
The only other case extensively cited by AmerGen is Corelli v. Commissioner, 66 T.C. 220 (1976). There, Corelli sought discovery and admissions related to a PLR issued to another taxpayer as part of the defense against a negligence penalty for underpayment of income taxes. Corelli’s circumstances, in the court’s estimation, are distinguishable from the AmerGen case and, in any event, Corelli does not provide persuasive authority as to the relevance or binding nature of the sellers’ PLRs in the action. The court, therefore, rejected reliance on Corelli for any purpose.
AmerGen argued that its status as an “interested party” in the very transactions that were the subject of the PLRs somehow makes those PLRs relevant to its tax claims in this suit. In essence, the power company argued that its status as the buyer of the plants renders the PLRs issued to the sellers of those plants relevant, because the sellers’ PLRs implicate the transaction involving AmerGen. This argument was also rejected: “…plaintiff relies on a variety of authorities for this proposition, none of which are binding on this court and all of which appear to be distinguishable on their facts….”
The court concluded that the facts of this case are not within the factual bounds of the ruling in IBM. In addition, the court found that the PLRs issued to the sellers of the plants are irrelevant to the subject matter. In these circumstances, it is clear that requests for admission related to the sellers’ PLRs are “objectionable.” The PLRs at issue here are, the court concluded, irrelevant, and the United States shall not be required to respond to requests for admission regarding these PLRs.
It is difficult to conceive of a situation, outside of the impossibly narrow facts attending the IBM case, where a response to requests for admission of PLRs issued to another taxpayer would ever be honored by a court.
Contributor Robert Willens, founder and principal of Robert Willens LLC, writes a weekly tax column for CFO.com.
11 See AmGen Energy Co., LLC v. United States, _F.3d_ (Fed. Cl. 2010).
2 See Section 6110(k)(3) of the Internal Revenue Code.