IRS Cuts to Transactional No-Rule List Won’t Upend Tax Advice

The US is often one of several relevant jurisdictions in transactions or restructurings among multinational groups. While tax rulings or clearance letters are more common in many other jurisdictions, a US tax ruling generally hasn’t been possible for most transactions—or feasible where it is possible.

US advisers frequently offer a written opinion that gives a “should” level of comfort. Those experienced in US tax know that a “should” opinion from a reputable firm is a high level of assurance. But those unfamiliar may mistakenly view the US adviser as not confident in their advice.

This scenario could change with this month’s Rev. Proc. 2024-1 and 2024-3, which remove corporate provisions around liquidations, corporate formations, and acquisitive reorganizations from its 2024 no-rule list. The new guidance also provides for a 12-week fast-track letter ruling process.

The wide reach of the no-rule list is part of the reason “should” level opinions are often sought. The other is the potentially long timeline for obtaining a ruling.

But while this generous expansion will prompt more ruling requests going forward, and US advisers will no longer have to sheepishly state that a ruling isn’t possible, it is unlikely to alter the way that US tax advice is delivered.

Corporate Multinationals

Large multinational groups are generally most concerned with their effective tax rate. Securing rulings could reduce risk of unexpected movements in ETR by giving some certainty in audits, both with the IRS and external financial statement auditors.

However, a letter ruling is only as good as the facts and representations that support it. Within the representations of the letter ruling request are likely to be statements about tax conclusions that still can’t be ruled on—for example, business purpose. Therefore, a ruling may be the starting point rather than the end of inquiry.

Further, the law requires IRS letter rulings to be published for public inspection. Identifying information can be deleted, but the facts for some taxpayers may be so unique that the redactions don’t obscure their identities. Additionally, transactions sometimes contain tax planning elements that the company and their advisers would rather keep between themselves and the IRS.

Mergers and Acquisitions

Tax diligence on a target company can be stressful for the target’s internal tax team during a transaction process. Being able to provide a buyer’s advisers with letter rulings for significant tax matters would allow the internal tax team to work on forward-looking projects.

It could also be a way to preserve or accelerate value. Avoiding price chips for uncertain positions and reducing escrowed amounts could put more cash into seller’s hands sooner.

Here, timing is likely to be the gating issue. The fast-track timeline combined with the time to draft and submit a ruling request could still be slower than the transaction timeline, especially when an investment fund is involved. Rulings will often remain out of the question unless the target entity obtains them before the launch of the sales process.

Insurance

In many cases, tax liability insurance can be coupled with a US tax opinion or memo from a tax adviser as an alternative to seeking a private letter ruling.

Tax insurance has been a particularly attractive option in the context of an M&A transaction operating on a fast timeline or for a position on which the IRS doesn’t issue rulings. Given the speed of M&A transactions, insurance may be preferable to seeking a ruling, even with the fast-track process. Insurance can also provide greater certainty to a taxpayer on issues, such as business purpose tests, which can’t be covered in rulings.

Coverage under a tax insurance policy is tailored to a specific potential tax liability and can include coverage for potential interest, insurable penalties, and gross up to the extent proceeds from the insurance policy are taxable on receipt by the insured.

As with a ruling request, a taxpayer would need to attest to the accuracy of the facts, factual assumptions, and factual representations in a tax insurance policy representations letter. Exclusions to coverage are generally limited to change of law, fraud, and material misrepresentation of key facts (qualified by the actual knowledge of the insured).

Role of Advisers

Whether it’s a letter ruling, a US tax opinion, or an insurance policy covering a tax position, the representations required of and signed off by the taxpayer will be critical for a positive outcome. Advisers who regularly draft advice on these topics will have the knowledge to ensure that a representation for any of the above purposes is accurate and satisfies the technical requirements.

While the balance of work between opinions and letter rulings is likely to shift toward the latter given these new rules, advisers likely will maintain a significant role in assisting multinational groups with their most important transactions.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Marek Krawczyk is partner and head of US business tax at Andersen. He works with Europe-based corporate and individual clients with corporate or partnership investment on their US-related issues.

Ben Furtick is senior tax underwriter at Certa Insurance Partners, with experience spanning US corporate and partnership taxation, international provisions of US tax, and global operational taxes.

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