In Questions the IRS Will Not Answer, Emily Cauble provides an important analysis and critique of the Internal Revenue Service’s “no-rule” areas—topics on which the IRS will not, or ordinarily will not, issue private letter rulings. Cauble focuses on fact-intensive issues that fall into this prohibited space. Her motivating examples involve the classification of gifts under the Duberstein standard, the boundary between nondeductible personal outlays and deductible medical expenses under § 213, and intent-oriented aspects of the related party antiabuse rule for like-kind exchanges under § 1031(f). Fundamentally, however, Cauble’s approach is normative: she searches for, then evaluates, potential rationales for administrative reticence in giving private guidance in situations where the facts are likely determinative.
Cauble presents—then largely rejects—eight reasons that might justify an administrative refusal to rule on fact-sensitive issues.
First, these types of rulings might consume too many public-sector resources, even after accounting for user fees and audit costs. Second and third, taxpayers might be prone to misrepresentations in the ruling process, or, for structural or temporal reasons, taxpayers might not have access to all of the relevant facts. Either problem could lead to low-quality or muddled guidance. Fourth, revenue agents, acting on audit, might be better deciders of fact-specific issues than the IRS national office, which handles letter rulings. Fifth, sixth, and seventh, fact-dependent rulings might yield bad quasi-precedent. We know that taxpayers look to redacted letter rulings when planning transactions, and cluttering the field with chaff might cause holistic harm to our public-private tax system. Alternatively, some letter rulings could act (and have acted) as Trojan horses, and a series of rulings, each innocuous on its face, could cohere into a “roadmap for tax abuse.” Finally, scattershot rulings might undermine rule-of-law or horizontal equity norms, and perhaps tax compliance, by implying different results for similarly situated taxpayers. Finally, eighth: no-rule areas might represent a mechanism to shunt taxpayers to other sources of advice. As noted, Cauble discredits each of these reasons in turn, arguing that any deficiencies are overstated or more appropriately redressed through means less categorical than a refusal to issue guidance.
Cauble’s comprehensive analysis is nuanced and compelling, and the IRS should welcome her invitation to revisit the appropriateness of each item in its expanding annual recitation of no-rule areas. Still, I was left hoping for something along the lines of a Grand Unified Theory of no-rule policy, or perhaps a Lebowskian Persian rug just to tie everything together. One such approach might look to the aggregate social costs of implementing a tax system. From this perspective, the relevant resource costs aren’t just public; the cost of a letter ruling includes, for example, private advisors’ fees and in-house expenses. This adjustment could be positive or negative, depending on how these costs compare to those of purely private advice, such as a tax opinion. Similarly, the revenue effects of rulings or no-rulings depends on what positions taxpayers take, on deals done or foregone as a result, on the audit lottery and the odds of detection, and so on. Admittedly, it’s a CERN-level project to sort through this stuff, and there seem to be many potentially fruitful avenues to explore, should Cauble or others continue in this vein.
Another empirical angle to Cauble’s analysis involves abandoned or withdrawn letter ruling requests, which she acknowledges but, for perhaps obvious reasons, does not address in detail. Adding these defunct requests to her inquiry would listen to Holmes’s dog that didn’t bark—though, much like my childhood pets, this dog would bark at (known) friends rather than (unknown) strangers. Publicly available letter rulings—the ones we all hear about—generally are the success stories, especially from the perspective of taxpayers. (Indeed, taxpayers may be asked to draft their own ruling letters, subject to IRS comment.) The ruling requests that ultimately don’t make widespread noise—the failures—also should inform our normative views on no-rule areas. Others have noted this information deficit. In light of Cauble’s article, Congress perhaps should require the IRS to redact and release abandoned or withdrawn letter ruling requests when it designates a no-rule area—flushing the system, in a sense, of material that might inform taxpayers in their private decisionmaking.
Finally, Cauble’s discussion implicates all kinds of questions about the ruling process more generally. For me, one might consider the other end of the spectrum: letter rulings that the IRS views as trivial enough to relegate to lower-level administrative processes. Late election relief comes to mind, as does relief from violations of tax status. Check-the-box elections are illustrative: relief that once required a letter ruling became a de rigueur process under a Revenue Procedure, then that process segued to a few lines on the last page of Form 8832. This evolution could be characterized as the emergence of a type of taxpayer-favorable no-rule area, and I am curious about how this example might fare under Cauble’s list of reasons and rebukes of those reasons.
Overall, Cauble’s important article affirms and expands scholarly inquiry into advance tax rulings. Cauble not only gives a comprehensive critique of no-rule areas; she also opens potential lines of inquiry into other aspects of the IRS’s letter ruling process. Cauble’s work should be essential reading for researchers and policymakers in administrative law and institutional design, as well as in taxation.