Winning by Losing: The Strategy of Adverse Private Letter Rulings

Every year, the Internal Revenue Service (IRS) issues hundreds of Private Letter Rulings (PLRs) responding to formal taxpayer inquiries about how tax law will apply to their proposed situations and transactions (which functionally bind the IRS with respect to the taxpayer). Although the Internal Revenue Code formally forbids relying on PLRs as precedent, taxpayers and practitioners closely monitor and structure their operations and advice around PLRs.

     Taxpayers can withdraw a PLR request at any time for any (or no) reason. Furthermore, requesting taxpayers know far in advance whether the PLR will be favorable or adverse. Because taxpayers typically do not want a formal government letter presumptively committing to an adverse position, it is assumed that only a handful of adverse PLRs exist and, in theory, none should exist. But in fact, a significant number of adverse PLRs do exist, and this Article is the first systematic empirical analysis of them. It examines a unique dataset of 473 adverse PLRs, stretching from 1977 through 2024, drawn from review of approximately 10,000 PLRs. Only ninety-five (20.1%) can be explained by human foibles like taxpayer apathy and mistakes. The rest—a significant majority—appear to be strategic actions by requesting taxpayers. Notably, sixty-five (13.7%) likely were obtained for highly strategic reasons motivated by PLRs’ normative force: to generate backlash against the IRS and to level competitive playing fields.

      Examining adverse PLRs begins to map the substantive world of PLRs and leads to several normative implications for PLRs and the tax system. Such implications include broadening and formalizing third-party input and feedback on PLRs and modifying processes to avoid inequitable access to consequential guidance. Finally, based on the parallels between the highly strategic uses of adverse PLRs and impact litigation, this Article proposes using PLRs to pursue public interest, pro-fisc policies that counteract aggressive and even abusive tax positions.

      The original datasets and figures used in this Article are preserved in the Harvard Dataverse Repository at https://doi.org/10.7910/DVN/TVZJVZ.