You Can Obtain a Private Ruling From the IRS, but It May Not Be Cheap or Easy

Q: My wife and I have a financial situation that we believe conforms to the facts covered in a private-letter ruling received by another set of taxpayers. We would

like a similar decision and have been advised that we need to get our own private ruling. How do we do this? Is there a specific form that the IRS provides? Does an attorney have to handle this or can we do it ourselves?

--P.J.

A: The Internal Revenue Service does not provide a specific form, and it scatters the steps you must follow through several different publications.

The process you must follow to get a private-letter ruling is spelled out in various installments of “Revenue Procedures,” a regular feature in the IRS’ Cumulative Bulletin, a weekly publication available in most law libraries. Typically, the first “Revenue Procedures” published each year lists the necessary information.

However, depending on the type of ruling you want, you must submit supporting documents and materials that deal with your particular situation. These are published in other Cumulative Bulletins. Some of these bulletins could be a few years old; some will be recent. The “Revenue Procedures” that applies to your case will tell you which branch of the IRS national office you should send your request to.

Until several years ago, the IRS did not charge for private rulings. However, when its mailbox began bulging with such requests, fees were imposed. They now range from $200 for determinations on simple matters to about $3,650 for complex issues. There are also attorney fees to consider.

Could you handle this by yourself? Possibly. But it might be time-consuming and complicated. However, if you know that the IRS has already issued a private ruling similar to one that you want, your task could be easier. You would be wise to submit a copy of the first ruling with the other materials required.

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Q: Are there any procedures a stockholder can follow to legally abandon worthless stocks in his portfolio? What if the price of these shares is so low that it would cost more to sell them than it would generate, thus forcing the holder to lose even more money to get rid of the shares? How long after declaring the shares worthless can the holder claim the loss on his tax filing?

--T.J.H.

A: Federal law does not spell out when you can claim a capital loss on a soured investment. The law says only that you may claim the loss when you are “reasonably sure” that you have no hope of recovering any part of your investment. In fact, you technically don’t even have to sell your shares to declare your loss. Our expert says that any time it would cost you more (in brokerage commissions) to sell than you would realize from a sale, you can write off your investment.

The call is yours. However, be warned that the IRS can--and often does--challenge these determinations, so you would not want to act too hastily. If your call is successfully challenged by the IRS, you would be subject to back taxes and penalties. On the other hand, you do not want to wait too long to recognize a capital loss. The statute of limitations on these matters is three years.

As you can see, the IRS requires you to walk a fine line. Our advisors recommend that you take the loss as soon as you have evidence to reasonably conclude that the investment is gone. If you have any doubts, it probably wouldn’t hurt to consult an attorney, accountant or other trusted professional.

Your losses are treated identically under federal and California tax laws. These laws allow you to deduct your capital losses to offset all your capital gains in a given year. If you have any remaining capital losses, you may deduct up to $3,000 per year against your ordinary income.

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Q: My wife and I owned our home as joint tenants between 1959 and her death in 1992. I took sole title to the house in 1994. I sold it in 1995. I am 67. My understanding is that I am not eligible for the $125,000 one-time exemption on the profit from the sale because my wife, having died five years ago, did not satisfy the requirement of living in the house for three of the last five years. But it didn’t really matter because I bought a new house for much more. But now can I take advantage of the exemption when I sell the new house?

--L.C.

A: You could have taken advantage of the profit exemption when you sold your house, even if your deceased wife could not meet the eligibility requirements. She didn’t have to--only you did. The same applies to your current house. So long as you meet the requirements--you are at least 55, you have lived in the house three of the last five years and the house is your principal residence--you are entitled to it.

One caveat: If you remarry and your new wife has already taken advantage of the exemption, your eligibility is lost.

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Carla Lazzareschi cannot answer mail individually but will respond in this column to financial questions of general interest. Write to Money Talk, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053, or e-mail carla.lazzareschi@latimes.com