The Challenges For Treasury To “Legislate”

Last week, the U.S. Treasury surprised almost no one by concluding in Revenue Ruling 2023-02 that IRC section 1014’s basis step-up does not apply to irrevocable grantor trusts that are not included in the grantor’s estate. So, what is notable about a revenue ruling to which maybe 100 people paid attention?

Well, less than a month ago, on March 20, 2023, Senators Warren, Sanders, Van Hollen, and Whitehouse, asked Secretary Yellen to take various actions to “limit the ultra-wealthy’s abuse of trusts” for estate and gift tax purposes (hereinafter the “Letter”). The requested actions included among other items:

· Revoking Revenue Ruling 85-13 and following Rothstein v. US, 735 F.2d 704 (2d Cir. 1984);

· Revoking Revenue Ruling 2004-64 and confirming that the conclusion in a 1994 private letter ruling (PLR 9444033) applied instead; and

· Clarifying that intentionally defective grantor trusts are not entitled to stepped-up basis under IRC section 1014.

Many of the recommended actions had been raised in the previous Congress, most prominently as part of the Build Back Better legislative effort, but none of the proposals were enacted.

So, with the release of Revenue Ruling 2023-02, Treasury addressed one of the senators’ requests. This action raises the question: can Treasury wave its wand to do what Congress declined to do?

Governing through administrative actions has become significantly more challenging since the Supreme Court in Mayo Foundation v. U.S., 562 U.S. 44 (2011), held that Treasury must follow the same set of administrative procedures as other agencies. Stating it was “not inclined to carve out an approach to administrative review good for tax law only,” the Court concluded that Treasury regulations must not be arbitrary or capricious and must be in accordance with the state.

To answer the question of how Treasury could legislate through administrative actions post Mayo and its later confirming case, CIC Services, LLC v. IRS, 593 U.S. __(2021), let’s examine the challenges Treasury could face if it decided to implement the first and second requested actions. How might a court respond to four things: (i) the revocation of a revenue ruling; (ii) the issuance of a replacement ruling; (iii) the issuance of new regulations; and (iv) reliance on a private letter ruling following revocation of a revenue ruling?

Can Treasury Repeal a Cornerstone Revenue Ruling?

Can Treasury repeal a long-standing ruling like Revenue Ruling 85-13? Normally, one would say that the Treasury can rescind previous guidance whenever it wants. After all, if Treasury has the power to create revenue rulings, it presumably has the power to destroy them. To be sure, Treasury revokes and modifies rulings all the time by issuing superseding revenue rulings.

Generally, Treasury revokes revenue rulings when the underlying statute changes. It does not often rescind a revenue ruling without a substantive change. Here, we have no legislative change or clear indication that a majority of Congress would prefer to see the ruling revoked. Moreover, we have what most consider a significant revenue ruling. It has been relied on since the 1980s. In the realm of individual income tax, Revenue Ruling 85-13 is cornerstone. Most of the IRS guidance and the rules around individual income tax rely on this ruling. Without the ruling, Treasury isn’t just going back to square one; it’s back to examining the underlying rationale of Rothstein, which was the case that Treasury wanted to overrule via Revenue Ruling 85-13.

Let’s flip things for a minute and assume that taxpayers were to argue that Revenue Ruling 85-13 was wrong in 2023 and follow the Rothenstein court decision. Given the Supreme Court’s assertion in Davis v United States, 495 U.S. 472 (1990), that administrative interpretations are entitled to “considerable weight where they involve the contemporaneous construction of a statute and . . . have been in long use,” a taxpayer would have difficulty arguing that an almost 40-year-old revenue ruling would not be entitled to deference. See also, United States v. Wisconsin Power & Light Co., 38 F.3d 329, 335 (7th Cir. 1994) (stating that long-standing interpretations in revenue rulings are entitled to deference, but hinging decision more on the Seminole Rock doctrine).

If that is the case, how can Treasury rescind a long-standing revenue ruling that is a cornerstone of almost 40 years of interpretation and rulemaking without something more? If we essentially have a revenue ruling that has risen to a quasi-regulation, the Administrative Procedures Act (APA) could apply, which would subject the rescission to notice and comment rulemaking procedures. It seems like an interesting question post-Mayo and CIC Services whether Treasury would have to follow APA rules to revoke Revenue Ruling 85-13.

Even if Treasury could rescind Revenue Ruling 85-13, could that rescission be retroactive? This is a complicated question. But it would be a significant change in the government’s historical approach. It seems logical that the agency should not be able to change the rules on taxpayers who took actions or positions based on Revenue Ruling 85-13. In fact, since 1953, the prefatory language of the Internal Revenue Bulletin has explicitly assured taxpayers that they can rely on rulings as precedents in deciding cases. [1]

Can Treasury Replace Revenue Rule 85-13 with Another Revenue Ruling?

Under Revenue Ruling 85-13, a transfer between a grantor trust and a grantor is non-taxable for federal income tax purposes. At the time, Treasury considered the revenue ruling necessary, because the Second Circuit decided against the IRS’ position in Rothstein, holding that transfers between a grantor and the grantor trust were taxable.

Assuming Treasury were to revoke Revenue Ruling 85-13, what type of guidance would it use to follow Rothstein? It could replace Revenue Ruling 85-13 with a new revenue ruling but that raises the question of what precedential authority the ruling would have. In other words, would the new revenue ruling have the force of law?

It has been long debated, and is still unsettled, whether revenue rulings should receive Chevron-style deference (the ruling is like a law) or Skidmore-style deference (the court decides how much deference the ruling gets). Under United States v. Mead Corp., the Supreme Court created an analytical framework for evaluating deference to agency pronouncements like a revenue ruling, the so-called Step Zero. In Mead, the Supreme Court concluded that tariff classification rulings do not qualify for Chevron-style deference. Instead, the Court opined that the Skidmore factors should be applied to determine if some lower level of deference is due.

So, how binding would revenue rulings be under a Skidmore scale? Most likely, they would score low on the Skidmore scale. In fact, the IRS does not always claim in litigation that revenue rulings deserve deference and has occasionally withdrawn them before or during litigation.[2] At times, the IRS even argued that the revenue rulings are merely advisory. Electronic Arts, Inc. v. Commissioner, 118 T.C. 226, 278 n. 13 (2002).

Finally, could a new revenue ruling be viewed as an IRS attempt to relitigate its Rothenstein position? If so, courts have historically given a jaundiced eye towards revenue rulings issued to buttress the government’s litigation position. Revenue rulings issued in anticipation of litigation typically do not receive even Skidmore deference. For example, in Fribourg Navigation Co. v. Commissioner, 383 U.S. 272 (1966), the Court criticized the IRS for a revenue ruling issued on the eve of trial as “a sudden and unwarranted volte-face” from prior positions. Replacing Revenue Ruling 85-13 might not be as extreme as in Fribourg, but it could be seen as similar.[3]

Issuing Regulations Post Tax Exceptionalism

Instead of replacing Revenue Ruling 85-13 with another a revenue ruling, Treasury could issue a regulation. That, however, will be a much larger lift than a revenue ruling. With the Supreme Court’s holdings in Mayo and CIC Services, Treasury no longer enjoys the “tax exceptionalism” that previously let it issue regulations without the traditional APA notice and comment rulemaking.

Now, two rules are clear: (1) the notice and comment rulemaking requirements of the APA apply to the IRS and Treasury; and (2) there will be more pre-enforcement challenges to Treasury and IRS rules and regulations under the APA. As has been shown in cases litigated since CIC Services, enacting regulations for Treasury will be significantly more difficult.

Can Treasury Rescind Revenue Ruling 2004-64 and Rely on a Private Letter Ruling?

Besides requesting the revocation of Revenue Ruling 85-13, the Letter asks Treasury to revoke Revenue Ruling 2004-64. This revenue ruling concludes that gift tax does not apply when a grantor pays income tax on behalf of the trust. As with Revenue Ruling 85-13, the question would be whether Revenue Ruling 2004-64 is cornerstone of interpretation and rulemaking on which taxpayers have relied. If it could be rescinded, the Letter argues, the IRS could apply the reasoning in PLR 9444033 to justify the application of gift tax to the grantor’s income tax payments.

The limits of a private letter ruling are often misunderstood. A private letter ruling issued for a particular transaction applies only to that transaction and not to any similar transaction in the same tax year or any other tax year. Treas. Reg. 601.201(l)(6); Rev. Proc. 2023-1.

Private letter rulings also are not binding on the IRS or taxpayers who did not request them. IRC section 6110(k)(3) precludes them from being used or cited as precedent unless the Secretary indicates otherwise via regulations. The Joint Committee Staff Explanation of the 1976 Act stated, “If all publicly disclosed written determinations were to have precedential value, the IRS would be required to subject them to considerably greater review than is provided under present procedures.” Joint Committee on Taxation, General Explanation of the Tax Reform Act of 1976, 94th Cong., 2d Sess. 309 (1976). Based on this explanation, the statute was meant to prevent taxpayers from relying on other taxpayers’ rulings.

Courts have interpreted IRC section 6110(j)(3) to mean letter rulings cannot be cited as authority. The Tax Court specifically states that private letter rulings are merely the position of a litigating party, e.g., the IRS relative to that taxpayer, and have no substantive authority. The Tax Court has refused to consider private letter rulings that a taxpayer offered as precedent in support of the taxpayer’s position, [4] but has allowed them as evidence of IRS practice.[5]

To be sure, Treasury can issue a revenue ruling, subject to this analysis. It cannot, however, rely on private letter rulings.


Will it really be that easy for Treasury to act on the Letter’s requests? Not really. The end of “tax exceptionalism” by Mayo and CIC Services has made it a lot harder for Treasury to issue tax guidance. Like all other agencies, Treasury must now follow traditional notice and comment rulemaking procedures for its guidance to have the force of law. This process will be much more time consuming than in the past. Given the full plate Treasury already has with the regulations required by the Inflation Reduction Act of 2022, is Treasury committed to expending time and resources under the new post-tax exceptionalism world on these additional priorities?

The views expressed are those of the author and do not necessarily reflect the views of Ernst & Young LLP or any other member firm of the global Ernst & Young organization.

[1] See also TAM 8805002 (limiting the retroactive revocation of a ruling because the taxpayer acted in good faith reliance); PLR 200116032 (same).

[2] See, e.g., Dixon v. United States, 381 U.S. 68 (1965); Silco, Inc. v. United States, 779 F.2d 282, 287 (5th Cir. 1986); Nissho Iwai Am. Corp. v. Commissioner, 89 T.C. 765, 778 (1987); Beneficial Foundation, Inc. v. United States, 8 Cl. Ct. 639, 644–645 (1985).

[3] See also, AMP

, Inc. v. United States
, 185 F.3d 1333, 1338–39 (Fed. Cir. 1999) (“[a] revenue ruling issued at a time when the I.R.S. is preparing to litigate is often self-serving and not generally entitled to deference by the courts.

[4] Abdel-Fattah v. Commissioner, 134 T.C. 10 (2010).

[5] See Taproot Administrative Services, Inc. v. Commissioner, 133 T.C. 202, 207 n.10 (2009) (citing Hanover Bank v. Commissioner, 369 U.S. 672, 687 (1962)). See also Belk v. Commissioner, T.C. Memo. 2013-154.

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