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.”