Is There a Difference Between Published and Private Letter Rulings?

In this tax tidbits column, Julian Block discusses IRS letter rulings, deductions for freelancers, the "wash rule" and other topics that may arise during the busy season.

Mar 4th 2020
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Question. The IRS issues published letter rulings and private letter rulings. Are there important differences between the published ones and the private ones?

Answer. The IRS explains that taxpayers generally may rely on published rulings in determining how the agency will view their own transactions that arise out of similar facts and circumstances. It cautions that private rulings are different. They may be relied upon only by the recipients, and they aren’t precedents.

Nevertheless, it can prove helpful for taxpayers and their advisers to know about private rulings. The favorable ones provide them with some indications that the agency will look kindly on their proposed transactions. The unfavorable ones alert them to possible agency disapproval of those transactions.

Double tax break for freelancers and other self-employed persons. The write-offs that they claim on Schedule C don’t just reduce the amounts they show as profits on Schedule C, thereby reducing the amount of their business incomes subject to income taxes. They also reduce the amount of their business incomes subject to self-employment taxes, as calculated on Schedule SE. Many self-employed individuals and other freelancers get nicked more for self-employment taxes than for income taxes.

“Wash sale” rule merely delays claiming tax loss. The rule prohibits a tax deduction for a loss on the sale of stocks or other securities if you buy” substantially identical” stock within either 30 days before or 30 days after the sale date (Internal Revenue Code Section 1091)

But you’re entitled to add the disallowed loss to the cost of your new stock for purposes of figuring gain or loss on a subsequent sale. And when you sell that new holding, the disallowed loss will decrease any profit or increase your loss at that time. Consequently, the wash sale restriction delays, but doesn’t permanently take away, your tax loss.

It’s possible to unload the stock to nail down an immediate loss deduction for tax purposes and still maintain your position in one of two ways. You’re always free to sell and allow at least 31days to elapse before you repurchase. Of course, the obvious hitch is that the stock may increase in value during the waiting period.

The other course of action is to “double up,” that is, buy the same amount you already hold, wait at least 31 days, then sell the original shares. Your risk is that your loss doubles if the stock declines while you sweat out the wait. On the plus side, your profit doubles if the stock price increases in the interim.

Still another way to accomplish your goal, if you’re unwilling to wait 31 days, is to sell your stock and buy shares of a different company in the same or a similar industry. Unsurprisingly, the drawback to this maneuver is that the substitute investment may fail to perform as well as the original investment.

Commuting deductions. Usually, the IRS adamantly opposes deductions for commuting costs between home and work. The agency considers those outlays to be nondeductible personal expenses, no matter how necessary. It makes absolutely no difference that your work location is in a remote area not serviced by public transportation or that disability or illness rules out using public transportation. 

Expenses included and excluded from 50-percent ceiling on deductions for business meals. Besides meals charges, expenses subject to the ceiling include meal-related taxes and tips, room rentals for dinners, but not transportation to and from business meals, such as cab fares to restaurants. 

An example: The charge for a business meal comes to $160, which includes $130 for food and beverages, $10 for sales taxes and $20 for tips. The limit on the deduction is $80, which is 50 percent of $160. However, cab fare to the restaurant of $12, including tip, is 100 percent deductible.

IRS ruling okays loophole for meal deductions. The usual 50 percent limit on write-offs for business meals doesn’t apply to outlays that qualify as marketing expenses. Letter Ruling 9414040 permits a full deduction for a real estate broker who provides meals for potential customers responding to business solicitations. The ruling notes that the meals are just for customers who participate in sales presentations, not for co-workers or business associates.

A letter ruling or private letter ruling is a written statement by the IRS in response a taxpayer’s request for guidance. It applies the tax laws to a specific set of facts.

Additional articles. A reminder for accountants who would welcome advice on how to alert clients to tactics that trim taxes for this year and even give a head start for next year: Delve into the archive of my articles (more than 300 and counting). 

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