t c memo united_states tax_court robert r villwock petitioner v commissioner of internal revenue respondent docket no 10245-o1l filed date robert r villwock pro_se wendy s harris and karen lynne baker for respondent memorandum opinion panuthos chief special_trial_judge this matter is before the court on respondent’s motion for summary_judgment and to impose a penalty under sec_6673 filed pursuant to rule respondent contends that there is no dispute as to ' unless otherwise indicated all section references are to the internal_revenue_code as amended and all rule references continued - - any material fact with respect to this levy action and that respondent’s determination to proceed with collection of petitioner’s outstanding tax_liability for should be sustained as a matter of law summary_judgment is intended to expedite litigation and avoid unnecessary and expensive trials fla peach corp v commissioner 90_tc_678 summary_judgment may be granted with respect to all or any part of the legal issues in controversy if the pleadings answers to interrogatories depositions admissions and any other acceptable materials together with the affidavits if any show that there is no genuine issue as to any material fact and that a decision may be rendered as a matter of law rule a and b 98_tc_518 affd 17_f3d_965 7th cir 90_tc_753 85_tc_527 the moving party bears the burden of proving that there is no genuine issue of material fact and factual inferences will be read in a manner most favorable to the party opposing summary_judgment 85_tc_812 79_tc_340 continued are to the tax_court rules_of_practice and procedure as explained in detail below there is no genuine issue as to any material fact and a decision may be rendered as a matter of law accordingly we shall grant respondent’s motion for summary_judgment background a petitioner’s form 1040a for on or about date petitioner submitted to respondent a form 1040a u s individual_income_tax_return for the taxable_year on the form 1040a petitioner listed his occupation as computer programmer petitioner entered zeros on applicable lines of the income portion of the form 1040a specifically including line for wages line 1lb for taxable pensions and line for adjusted_gross_income petitioner also entered zero on line for total_tax petitioner then claimed a refund of dollar_figure egual to the amount of federal_income_tax that had been withheld from his wages petitioner attached to the form 1040a a form_w-2 wage and tax statement disclosing that he was paid wages of dollar_figure by harrah’s-las vegas and had withholding of federal_income_tax of dollar_figure during the taxable_year and a form 1099-r distributions from pensions annuities retirement or profit-sharing_plans ira’s insurance contracts etc disclosing that he received a distribution of dollar_figure from the q4e- thrift_plan for employees of the federal reserve system and had withholding of dollar_figure during the taxable_year petitioner also attached to the form 1040a a four-page typewritten statement that stated in part as follows i robert r villwock am submitting this as part of my income_tax return even though i know that no section of the internal_revenue_code establishes an income_tax_liability provides that income taxes have to be paid on the basis of a return in addition to the above i am filing even though the privacy_act notice as contained in booklet informs me that i am not required to file it does so in at least two places a the privacy_act notice states that i need only file a return for any_tax i may be liable for since no code section makes me liable for income taxes this provision notifies me that i do not have to file an income_tax return please note that my return also constitutes a claim_for_refund pursuant to code sec_6402 it should also be noted that i had zero income according to the supreme court’s definition of income i am also putting the irs on notice that my tax_return and claim_for_refund does not constitute a frivolous_return pursuant to code sec_6702 in addition please do not notify me that the irs is changing my return since there is no statute that allows the irs to do this you might prepare a return pursuant to code sec_6020 where no return is filed but in this case a return has been filed and no statute authorizes irs personnel to change that return note the word income is not defined in the internal_revenue_code however as stated above it can only be a derivative of corporate activity b respondent’s deficiency_notice and petitioner’s response on date respondent issued a notice_of_deficiency to petitioner for the taxable_year in the notice respondent determined a deficiency in federal_income_tax of dollar_figure and an accuracy-related_penalty under sec_6662 a and b for negligence or disregard of rules or regulations of s477 the deficiency in income_tax was based on respondent’s determination that petitioner failed to report wages a taxable_distribution from a retirement_plan and gambling winnings by letter dated date petitioner wrote to the director of respondent’s service_center in ogden utah acknowledging receipt of the notice_of_deficiency dated date but challenging the director’s authority to send me the notice in the first place -- - petitioner knew that he had the right to contest respondent’s deficiency determination by filing a petition for redetermination with this court however petitioner chose not to do so accordingly on date respondent assessed the determined deficiency and accuracy-related_penalty as well as statutory interest on that same day respondent sent petitioner a notice titled we changed your account informing him that he had a liability for and requesting that he pay it by letter dated date petitioner acknowledged receipt of this notice but failed to pay the amount owing on date respondent sent petitioner a second notice of balance due for petitioner failed to pay the amount owing c respondent’s final notice and petitioner’s response on date respondent mailed to petitioner a final notice---notice of intent to levy and notice of your right to a hearing in respect of his outstanding tax_liability for on date petitioner filed with respondent a form request for a collection_due_process_hearing petitioner requested verification from the secretary that all applicable in this regard petitioner’s letter dated date stated in pertinent part as follows the notice also tells me that if i want to ‘contest this deficiency in court before making any payment’ that i must ‘file a petition with the united_states tax court’ laws and administrative procedures were followed with regard to the assessment and collection of the tax_liability in question d the appeals_office hearing on date petitioner attended an administrative hearing in las vegas nevada conducted by appeals officer lavada harmon the appeals officer following the hearing the appeals officer prepared an appeals_office memorandum which recited that petitioner did not raise any valid issue during the hearing and that the appeals officer informed petitioner of the court’s opinion in 115_tc_576 the appeals_office memorandum also stated that the appeals officer concluded that all administrative and procedural requirements were followed with regard to the assessment and collection of the tax_liability in question the record in this case includes a literal plain english transcript of petitioner’s account for the taxable_year dated date as well as a form_4340 certificate of assessments payments and other specified matters dated date both documents were attached to respondent’s motion for summary_judgment which was served on petitioner br respondent’s notice_of_determination on date respondent’s appeals_office issued to petitioner a notice_of_determination concerning collection action s under sec_6320 and or with regard to his tax - - liability for in the notice the appeals_office concluded that respondent’s determination to proceed with collection by way of levy should be sustained f petitioner’s petition and motion to dismiss on date petitioner filed with the court a petition for lien or levy action seeking review of respondent’s notice_of_determination ’ the petition includes the following allegations the appeals officer failed to obtain verification from the secretary that the requirements of any applicable law or administrative procedure were met as required under sec_6330 the appeals officer failed to provide petitioner with a copy of the tax_return from which the assessments were made or a copy of form 23c and the appeals officer failed to demonstrate that petitioner received a valid notice_of_deficiency or notice_and_demand for payment concurrently with the filing of his petition petitioner filed a motion to dismiss for lack of jurisdiction in which he asked the court to declare as invalid the determination at issue since the appeals officer issued the determination without providing at the hearing numerous documents and supporting evidence petitioner attached to his motion a memorandum at the time that the petition was filed petitioner resided in las vegas nevada --- - of law in which he repeated many of the allegations in the petition petitioner’s motion to dismiss was called for hearing at the court’s motions session in washington d c counsel for respondent appeared and was heard there was no appearance by or on behalf of petitioner by order dated date the court denied petitioner’s motion g respondent’s motion for summary_judgment as stated respondent filed a motion for summary_judgment and to impose a penalty under sec_6673 respondent contends that petitioner is barred under sec_6330 c b from challenging the existence or amount of his underlying tax_liability in this proceeding because petitioner received a notice_of_deficiency for the tax in question respondent also contends that the appeals officer’s review of transcripts from respondent’s computer systems including the literal transcript dated date and the form_4340 dated date satisfied the verification requirement of sec_6330 finally respondent contends that petitioner’s behavior warrants the imposition of a penalty under sec_6673 by notice of filing dated date the court notified petitioner of the filing of respondent’s motion for summary_judgment and directed petitioner to file an objection if any to respondent’s motion on or before date the court did -- - not receive an objection or any other response from petitioner pursuant to a further order respondent’s motion was called for hearing at the court's motions session in washington d c counsel for respondent appeared and was heard there was no appearance by or on behalf of petitioner nor did petitioner file with the court a written_statement pursuant to rule c discussion sec_6331 provides that if any person liable to pay any_tax neglects or refuses to pay such tax within days after notice_and_demand for payment the secretary is authorized to collect such tax by levy on the person’s property sec_6331 provides that at least days before enforcing collection by levy on the person's property the secretary is obliged to provide the person with a final notice_of_intent_to_levy including notice of the administrative appeals available to the person sec_6330 generally provides that the commissioner cannot proceed with collection by levy until the person has been given notice and the opportunity for an administrative review of the matter in the form of an appeals_office hearing and if dissatisfied with judicial review of the administrative determination see 115_tc_35 114_tc_176 sec_6330 prescribes the matters that a person may raise at an appeals_office hearing in sum sec_6330 c provides that a person may raise collection issues such as spousal defenses the appropriateness of the commissioner’s intended collection action and possible alternative means of collection sec_6330 b provides that the existence and amount of the underlying tax_liability can be contested at an appeals_office hearing only if the person did not receive a notice_of_deficiency for the taxes in question or did not otherwise have an earlier opportunity to dispute the tax_liability see 114_tc_604 goza v commissioner supra sec_6330 provides for judicial review of the administrative determination in the tax_court or a federal district_court as may be appropriate a summary_judgment petitioner challenges the assessment made against him on the ground that the notice_of_deficiency dated date is invalid however the record shows that petitioner received the notice_of_deficiency and disregarded the opportunity to file a petition for redetermination with this court see sec_6213 it follows that sec_6330 b generally bars petitioner from challenging the existence or amount of his underlying tax_liability in this collection review proceeding even if petitioner were permitted to challenge the validity of the notice_of_deficiency petitioner’s argument that the notice is invalid because respondent’s service_center director is not properly authorized to issue notices of deficiency is frivolous and groundless see 118_tc_162 goza v commissioner supra further as the court_of_appeals for the fifth circuit has remarked we perceive no need to refute these arguments with somber reasoning and copious citation of precedent to do so might suggest that these arguments have some colorable merit 737_f2d_1417 5th cir suffice it to say that petitioner is a taxpayer subject_to the federal_income_tax see secs l a a and that compensation_for labor or services rendered constitutes income subject_to the federal_income_tax sec_61 640_f2d_1014 9th cir we likewise reject petitioner’s argument that the appeals officer failed to obtain verification from the secretary that the requirements of all applicable laws and administrative procedures were met as required by sec_6330 the record shows that the appeals officer obtained and reviewed transcripts of account with regard to petitioner’s taxable_year - - federal tax assessments are formally recorded on a record of assessment sec_6203 the summary record through supporting records shall provide identification of the taxpayer the character of the liability assessed the taxable_period if applicable and the amount of the assessment sec_301_6203-1 proced admin regs sec_6330 does not require the commissioner to rely on a particular document to satisfy the verification requirement imposed therein 118_tc_365 ndollar_figure weishan v commissioner tcmemo_2002_88 lindsey v commissioner tcmemo_2002_87 tolotti v commissioner tcmemo_2002_86 duffield v commissioner tcmemo_2002_53 kuglin v commissioner tcmemo_2002_51 in this regard we observe that the transcripts of account on which the appeals officer relied contained all the information prescribed in sec_301_6203-1 proceed admin regs see weishan v commissioner supra lindsey v commissioner supra tolotti v commissioner supra duffield v commissioner supra kuglin v commissioner supra ’ to the extent that petitioner may still be arguing that the appeals officer failed to provide him with a copy of the verification we note that sec_6330 does not require that the appeals officer provide the taxpayer with a copy of the verification at the administrative hearing 118_tc_162 in any event the record shows that petitioner received both a literal transcript anda form_4340 for the taxable_year petitioner has not alleged any irregularity in the assessment procedure that would raise a question about the validity of the assessment or the information contained in the transcript see davis v commissioner t c pincite mann v commissioner tcmemo_2002_48 accordingly we hold that the appeals officer satisfied the verification requirement of sec_6330 cf 117_tc_117 petitioner also contends that he never received a notice_and_demand for payment of his tax_liability for the requirement that the secretary issue a notice_and_demand for payment is set forth in sec_6303 which provides in pertinent part sec a general_rule ---where it is not otherwise provided by this title the secretary shall as soon as practicable and within days after the making of an assessment of a tax pursuant to sec_6203 give notice to each person liable for the unpaid tax stating the amount and demanding payment thereof xk k the transcript of account which the appeals officer relied upon in issuing the notice_of_determination shows that respondent sent petitioner a notice that he owed taxes for on the same date that respondent made assessments against petitioner for the tax and accuracy-related_penalty determined in the notice_of_deficiency such a notice constitutes a notice_and_demand for payment within the meaning of sec_6303 see eg 953_f2d_531 9th cir weishan v commissioner supra see also 7_f3d_137 9th cir petitioner acknowledged receipt of this notice in his letter to respondent dated date petitioner has failed to raise a spousal defense make a valid challenge to the appropriateness of respondent’s intended collection action or offer alternative means of collection these issues are now deemed conceded rule b in the absence of a valid issue for review we conclude that respondent is entitled to judgment as a matter of law sustaining the notice_of_determination dated date b imposition of a penalty under sec_6673 we turn now to that part of respondent’s motion that moves for the imposition of a penalty on petitioner under sec_6673 as relevant herein sec_6673 authorizes the tax_court to require a taxpayer to pay to the united_states a penalty not in excess of dollar_figure whenever it appears that proceedings have been instituted or maintained by the taxpayer primarily for delay or that the taxpayer's position in such proceeding is frivolous or groundless the court has indicated its willingness to impose such a penalty in lien and levy cases pierson v commissioner t c pincite and has in fact imposed a penalty in several such cases roberts v commissioner supra imposing a penalty of dollar_figure smeton v commissioner t c - memo imposing a penalty of dollar_figure newman v commissioner tcmemo_2002_135 imposing a penalty of dollar_figure yacksyzn v commissioner tcmemo_2002_99 imposing a penalty of dollar_figure watson v commissioner tcmemo_2001_213 imposing a penalty of dollar_figure davis v commissioner tcmemo_2001_87 imposing a penalty of dollar_figure we are convinced that petitioner instituted the present proceeding primarily for delay we note that during the administrative process the appeals officer informed petitioner of the court’s opinion in pierson v commissioner supra petitioner nevertheless continued to press his meritless arguments under the circumstances it is clear that petitioner regards this proceeding as nothing but a vehicle to protest the tax laws of this country and to espouse his own misguided views which we regard as frivolous and groundless in short having to deal with this matter wasted the court’s time as well as respondent’s and taxpayers with genuine controversies may have been delayed under the circumstances we shall grant that part of respondent’s motion that moves for the imposition of a penalty in that we shall impose a penalty on petitioner pursuant to sec_6673 of dollar_figure in order to give effect to the foregoing an appropriate order granting respondent’s motion and decision for respondent will be entered


office_of_chief_counsel internal_revenue_service memorandum number release date cc pa slriopel gl-136857-15 uilc date date to jessica r nolen senior attorney office_of_chief_counsel from thomas w curteman jr branch chief procedure administration subject validity of the ex post facto clause barring restitution-based assessments made under sec_6201 this memorandum responds to your request for assistance this advice may not be used or cited as precedent issue whether the service is barred from making a restitution-based assessment under sec_6201 because the statute is retroactively applied and therefore violates the ex post facto clause of the u s constitution summary conclusion because the firearms excise_tax improvement act of confers authority to the service to assess and collect criminal restitution ordered after date the service is not retroactively applying sec_6201 to the restitution ordered against ------- in ------- the failure to pay penalties assessed on each tax period as they relate to the restitution-based assessment however are inappropriate gl-136857-15 background in conducting our analysis we have relied only on the facts submitted which are outlined below if we have misrepresented any facts or if any relevant facts have been omitted please contact our office immediately as our analysis and resulting conclusions may change the taxpayer ----------------was convicted of three counts of falsifying ------------- income_tax returns in violation of sec_7206 for the tax years ------------------------------ on - ------------------------ the u s district_court for the ---------------------------------- ordered restitution in the amount of dollar_figure---------------- the service assessed against ------- the amount of restitution on ------------------- plus penalties in the following manner tax period ------------------------ ------------------------ ------------------------ restitution assessment penalty for late payment of code tax code -------------------- -------------------- -------------------- ---------------- ------------- ---------------- interest on these assessments has accrued pursuant to sec_6601 the service also applied --------- payments of restitution to these liabilities on -------------------- the service issued a final notice_of_intent_to_levy to collect unpaid restitution amounts and the taxpayer timely filed a cdp hearing request on ----------------------------------- representative sent a letter to the irs office of appeals contesting the proposed levy action against the taxpayer among other things the representative alleged that the irs should be barred from making a restitution based assessment pursuant to sec_6201 because it is a retroactive application in violation of the ex post facto provision of the united state s constitution analysis a the restitution-based assessments were appropriate and did not violate the ex post facto clause of the constitution in the president executed the firearms excise_tax improvement feti act which among other things authorized the commissioner to assess and collect the amount of restitution under an order pursuant to section of title for restitution orders relating to the failure to pay any_tax imposed under title_26 sec_6201 section c of the feti act provides that the effective date of the amendments to title_26 relating to criminal restitution shall apply to restitution ordered after the date of the enactment of this act feti act pub_l_no sec_3 124_stat_2497 the feti act was enacted on date therefore the gl-136857-15 amendments to title_26 apply to restitution ordered after date see cc notice_2011_18 q a the service can only assess the amount of restitution once the final judgment is issued and the taxpayer’s appeal concludes or the right to make an appeal expires sec_6201 article i of the constitution prohibits congress from passing ex post facto laws u s const art i ex post facto laws are criminal or punitive statutes that retroactively impose punishment for an act that was not criminal when committed retroactively increase punishment for a crime after its commission or deprive a defendant of a defense that was available at the time the crime was committed 703_f3d_930 6th cir in its analysis the sixth circuit considers whether the statute is retroactive and if so whether the statutory scheme is civil or criminal and if civil whether the statute is so punitive either in purpose or effect as to negate congress’s intent to deem it civil id citing 538_us_84 u s v coccia 598_f3d_293 6th cir the sixth circuit considers the following factors to determine whether a punitive purpose or effect exists whether the sanction involves an affirmative disability or restraint whether it has historically been regarded as a punishment whether it comes into play only on a finding of scienter whether its operation will promote the traditional aims of punishment-retribution and deterrence whether the behavior to which it applies is already a crime whether an alternative purpose to which it may rationally be connected is assignable for it and whether it appears excessive in relation to the alternative purpose assigned sanders f 3d pincite citing 372_us_144 on ------------------------ the district_court ordered the taxpayer to pay restitution in the amount of dollar_figure------------ for making false statements on an income_tax return for tax periods ------------------------------ which represent ------- violations under sec_7206 all appeal deadlines expired for the taxpayer on ------------------- since the effective date of the feti act is date and the service made its restitution-based assessments on -------------------- sec_6201 is not retroactively applied see 514_us_499 497_us_37 the fact that the restitution-based assessments are based on unpaid -------------- taxes in ------------------------------ does not render sec_6201 retroactive see portley v grossman 100_us_714 holding no constitutional violation in applying an amendment when the defendant committed federal offenses prior to its enactment but violated his parole after the fact additionally sec_6201 is civil and not a criminal statute although the statute is a civil statute it is not punitive because the statutory language does not sanction punish or criminalize behavior sanders f 3d pincite citing cuthall v sundquist 193_f3d_466 6th cir rather the purpose of the statute is to direct the service to assess and collect the amount of restitution already ordered by a federal court in an earlier criminal proceeding see 507_f3d_998 6th cir the service assessed an amount equal to the court-ordered gl-136857-15 restitution for the taxpayer as evenly split among the ------------------------------ tax periods by assessing the amount already ordered by the sentencing court the amount of the restitution-based assessment is not excessive because it is no greater than the amount of restitution ordered by the sentencing court id b the failure to pay penalties relating to the restitution-based assessment are inappropriate and should be abated sec_6651 provides for two failure to pay ftp penalties sec_6651 provides a penalty for the failure to pay the amount shown as tax on any return on or before the date prescribed for payment sec_6651 provides a penalty for failure to pay any amount in respect of any_tax required to be shown on a return which is not so shown within calendar days from the date of notice_and_demand based on the facts of this particular case sec_6651 does not apply --------- tax_liability arises from underreporting -------------- income rather than a failure to pay an amount reported as due and owing on the day the return was filed similarly the conditions that must be met for sec_6651 to apply are not present in this case sec_6651 applies if a taxpayer files a tax_return which omits or underreports the correct_tax and the taxpayer further fails to pay that correct_tax after notice_and_demand has been issued the amount of the correct_tax and the extent to which ------- underreported the ------------- tax_liability were not facts determined in the criminal case and were not material facts with respect to --------- sentencing none of these facts are found in either the criminal case’s opinion or the restitution order these facts in addition to the issuance of notice_and_demand must be determined at least by the service before this penalty can be applied the amount of tax reported on a return is immaterial in making a restitution-based assessment because the only prerequisites for a restitution-based assessment are effectively whether a federal court ordered restitution for failure to pay a tax and the amount of that restitution see sec_6201 alternatively the amount of the restitution could conceivably include the ftp penalty if the restitution order or an underlying court document specifically included it or if the defendant agreed to it in a plea agreement see u s c a describing how the court determines restitution ordered under u s c although ------- was convicted of falsifying ------------- tax returns he did not enter into a plea agreement which included any discussion of penalties and his restitution order did not show an amount of restitution attributed to penalties thus neither the sec_6651 or the a penalty applies based on the restitution-based assessment although these penalties could conceivably be imposed following a civil tax examination of the tax periods at issue as discussed in prior advice interest under sec_6601 will accrue on a restitution-based assessment as it would on any other title_26 assessment accordingly underpayment interest generally will accrue from the last date prescribed for payment as determined under sec_6601 of the liability that is the subject of the restitution order to the date of payment see also cc notice_2011_18 q a


internal_revenue_service department of the treasury index no washington dc contact person a 9g j q telephone number in reference to pgg dom p st jan plr-109362-98 re partnership a partnership b partnership c state a state b state c company company company company process licensee location y w w a a v dear e n a n e o h b t d u n o this letter responds to the ruling_request of partnership a as supplemented with information submitted the contracts as modified with company a for the dated april on behalf of partnership a three rulings are requested partnership a will produce a qualified_fuel within the meaning of sec_29 of the internal_revenue_code engineering procurement and construction of the facilities satisfy the requirement in sec_29 contract before january entitled to the tax_credit under sec_29 fuel sold to unrelated persons provided the facilities producing the fuel were placed_in_service by the deadline in sec_29 for placing facilities in service to qualify for june the tax_credit for a binding written partnership a will be on the qualified and we understand the facts as presented by partnership a's authorized representative to be as follows s plr-109362-98 a i partnership a is a limited_partnership formed for the and one facility in state c purpose of raising capital to build four facilities for producing synthetic_fuel b partnership b with a percent interest and the limited partners will be four institutional investors with percent of the interests the general_partner will be two facilities in state a one facility in state each facility in state b and state c is owned by a separate project limited_liability_company are owned by the same project limited_liability_company project limited_liability companies are owned by partnership a the reason for separate project limited_liability companies is ensure that creditors of one project do not have a claim against the other projects classified as purposes a disregarded_entity for federal_income_tax each project limited_liability_company is the two facilities in state a all to each project limited_liability_company signed a binding each construction_contract provides for written contract with company a before january engineering procurement and construction of the facilities ona turnkey basis liquidated_damages of at least percent of the contract_price a description of the facility to be constructed a completion date and a maximum price for the facility modified to subcontract the work to company b configuration and equipment and to change the locations of the facilities contracts are binding written contracts under applicable state law partnership a represents that the construction the contracts have been to refine for the partnership c sold the interests in the project limited_partnership a agreed to pay partnership c for each liability companies to partnership a on june capital project limited_liability_company as follows cash at closing and equal to a percentage of the sec_29 credits on fuel sold through by the project limited_liability_company contingent installment payments over time an amount of to raise the partners in partnership a will contribute capital to partnership a to pay the purchase_price to partnership c and the operating costs of the project limited_liability companies the contingent installment payments to partnership c will be subordinated for each project limited_liability_company where aa ye operating cash_flow for the combined plr-109362-98 a deficit in there is projects or before january any subordinated amounts plus interest will be paid on regardless of cash availability partnership b has an option to purchase the project limited_liability companies during a six-month period in from partnership a for fair_market_value company c is the site lessor for the facilities in state b company c is also supplying a few supervisory and state c employees to help the project limited_liability companies manage the facilities facilities sources an affiliate of company c is acting as broker for selling the output from the facilities in the spot market additional coal fines may be purchased from other is supplying coal fines for the company c company d is the site lessor for the facilities in state a is also the operator of the facilities company d company d supplying the high-moisture low-sulphur low-btu sub-bituminous coal for the facilities currently company d output from the facilities on a spot basis expected that the output will be sold under contract to a large utility at an arm's-length price in the future it is buying the is is partnership a represents that the licensee has a license to use a patented process called the process for authorizing it converting coal feedstock into synthetic_fuel sublicensed the use of the process to each project limited_liability_company liability company the right to use the process at designated locations in exchange for the sublicense grants each project limited royalty payments licensee according to partnership a the process was developed to upgrade lower-ranked coals and coal waste material by chemically converting them into a synthetic_fuel without the need to subject partnership a the coal feedstock to high heat claims that the chemical reaction yields a fuel that differs significantly in chemical composition from the coal feedstock used to produce it reagent that reacts with the feedstock in a manner that reduces oxygen content reduces inherent moisture makes the coal less reactive increases volatile matter and raises the fuel's heating value btu content the process uses a quinoline-based chemical ie pyrolysis plr-109362-98 ragg1t b04 the coal feedstock will consist of waste coal such as coal pond fines and coarse coal refuse recovered from gob piles or coal from conventional supply sources such as the location that can be significantly upgraded using the process small particles of waste coal usually less than rejected from coal cleaning operations and stored in settling ponds pond fines contain significant amounts of recoverable coal but are difficult to process because of their size and high moisture content size of coal pond fines make them unsuitable for use as feedstock for carbonization liquefaction and gasification applications reducing the moisture content of the feedstock material and chemically bonding it into a useable solid the high moisture content and small particle the process overcomes these limitations by pond fines are in diameter a fuel or the total moisture content of coal includes surface moisture acquired from exposure to moisture in the environment and inherent moisture also known as equilibrium moisture that is jionically ie chemically bonded to the coal reagent reacts with the coal structure to produce a chemically active solid that rejects surface moisture eliminates the ionic bonding between inherent moisture and coal resulting in synthetic_fuel that has a much lower inherent moisture content eliminate ionically-bound moisture because thermally-dried coal rapidly absorbs moisture from the air to return the ionically-bound moisture to its original level by contrast thermal drying cannot permanently the process the process by removing oxygen functional groups the process results in a synthetic_fuel that has a much lower inherent moisture content the process also alters the ionic structure of the surface of the synthetic coal pellet making the synthetic_fuel hydrophobic rejects surface moisture as opposed to coal's natural hydrophilic state attracts surface moisture thus process permanently removes inherent moisture from the feedstock material and causes the synthetic_fuel to reject surface moisture so that the synthetic_fuel produced by the process maintains its low total moisture content even when exposed to rain or groundwater result from chemical changes to the coal feedstock partnership a claims that both of these effects the the process converts the coal feedstock into a synthetic_fuel by use of the following five steps in stepyone mineral matter is removed from the coal feedstock and the feedstock is sized to form coal particles no larger than in diameter the plr- coal feedstock is stockpiled next to the fuel production plant in step two the prepared coal feedstock is transported from the stockpile to the mixing apparatus using a specially-designed bin and feeder system that can handle high-moisture fine-sized coal the feeder system controls the rate of delivery of the feedstock to the plant and monitors the feed rate with a weight belt system also is equipped with variable feed drivers to maintain accurate control of the feed rate content of the feedstock is monitored computerized process control system that controls the mixing time and the reagent feed rate the weight and moisture data are fed toa this according to partnership a step three of the process initiates the chemical change by uniformly blending the process the reagent and the coal feedstock in a high-efficiency mixer coal feedstock is fed continuously into the reactor ie mixing apparatus by the conveyor and feeder system and the process reagent is fed at a controlled rate and is uniformly mixed with the feedstock heated to f to form an emulsion before it reactor given coal feedstock are determined in the laboratory prior to the processing rank particle size of the feedstock coal structure and the feed rate of the unprocessed material to reduce viscosity the reagent is is fed into the the reagent dosage is sensitive to the coal the concentration and rate of feed of the reagent for a the the chemical reaction in the third step continues for partnership a represents that no heat or pressure is hours necessary for the chemical reaction to occur equally well with low- and high-rank coals as well as waste however the effects coals including pond fines of coal ranks are most dramatic with pond fines and low-rank coals because of in addition the their high total moisture and oxygen content chemical reaction between the process reagent and coal feedstock causes the coal to become bonded of traditional reforming equipment such as briquetting or pelletizing equipment to form a hard mass bonding occurs without the use the process works step four involves reforming the chemically altered output from the reactor to increase the ease of handling of the final the output from the reactor is fed into a reforming product apparatus to produce briquettes pellets or extrusions rejected from the reformed synfuel is collected afd drained step five involves conveying the synthetic_fuel to a curing pile where the desiccation non-thermal drying and agglomeration water s c gos plr-109362-98 binding processes continue until completed in hours desiccated synthetic_fuel can then be stored or shipped to customers without risk of spontaneous combustion the partnership a represents that comparing coal samples before and after the process reveals significant chemical changes in all elemental components as well as in total moisture which includes surface and ionically bound moisture changes occur in oxygen content moisture content and heating value the most significant sec_29 of the code allows a credit for qualified the production of which is attributable to the taxpayer fuels sold by the taxpayer to an unrelated_person during the tax_year the credit for the tax_year is an amount equal to dollar_figure adjusted for inflation multiplied by the barrel-of-oil_equivalent of qualified_fuels sold sec_29 c of the code defines qualified_fuels to include liquid gaseous or solid synthetic fuels produced from coal including lignite including such fuels when used as feedstocks sec_29 of the code defines the term barrel-of-oil_equivalent with respect to any fuel as that amount of the fuel which has a btu content of million with certain exceptions not applicable here sec_29 defines barrel to mean united_states gallons sec_29 and f of the code provide that sec_29 applies with respect to qualified_fuels which are produced in a facility placed_in_service after december and before january january and which are sold before sec_29 of the code modifies sec_29 in the a facility producing qualified_fuels described in section case of c c which qualified_fuels include solid synthetic fuels produced from coal or lignite for purposes of sec_29 b treated as placed_in_service before january facility is placed_in_service before date pursuant to a binding written contract in effect before january sec_29 b provides that if the facility is originally placed_in_service after december sec_29 a provides that sec_29 such a facility is if the to be to is vee plr-109362-98 be applied by substituting for the date therein january the effect of this provision is the time during which the production of the facility meeting the above binding-contract rule and is placed_in_service after may be sold and qualify for the credit december to extend to date in revrul_86_100 1986_2_cb_3 the internal revenue of the code and its regulations are relevant a iii provided a credit for the cost of service ruled that the definition of the term synthetic_fuel under sec_48 to the interpretation of the term under sec_29 c former sec_48 equipment used for converting an alternate_substance into a synthetic liquid gaseous or solid fuel both sec_29 and former sec_48 contain almost identical language and have the same overall congressional intent namely to encourage energy conservation and aid development of domestic energy production ii of the income_tax regulations a synthetic_fuel differs significantly in chemical composition as opposed to physical composition from the alternate_substance used to produce it substance under sec_1_48-9 i under sec_1_48-9 the ruling notes that coal is an alternate based on the representations of partnership a including the preponderance of proffered data on the significant difference in the chemical composition of the fuel to be produced from that of the coal the fuel to be produced using the process will be a solid synthetic_fuel from coal within the meaning of revrul_86_100 and sec_1_48-9 accordingly the process produces a qualified_fuel as defined in sec_29 c ii of the regulations of the code a construction_contract is binding only if it is enforceable a contract containing a provision limiting damages to a specified amount eg by use of a liquidated_damages under local law against a taxpayer and it does not limit damages to provision an amount equal to at least five percent of the total_contract_price for example should be treated as not limiting damages the construction contracts were executed prior to date description of the facilities to be constructed a completion date and a maximum price are binding under applicable state law and that the contracts provide for liquidated_damages of at least five péf cent of the contract_price the contracts include such essential features as a is represented that the contracts it plr-109362-98 accordingly based on the facts as presented by partnership a and partnership a's authorized representative we conclude as follows partnership a with use of the process in the facilities will produce a qualified_fuel within the meaning of sec_29 c of the code the contracts as modified with company a for the engineering procurement and construction of the facilities satisfy the requirements of sec_29 the code for a binding written contract before date of partnership a will be entitled to the credit pursuant to sec_29 to unrelated persons provided the facilities were placed_in_service by the deadline in sec_29 gq june qualify for the tax_credit for placing facilities in service to of the code on the qualified_fuel sold temporary or final regulations this ruling is directed only to the taxpayer who requested sec_6110 of the code provides that it may not be it used or cited as precedent pertaining to one or more of the issues addressed in this ruling have not been adopted therefore this ruling will be modified or revoked by the adoption of temporary or final regulations to the extent the regulations are inconsistent with any conclusions in the ruling i r b revproc_99_1 are satisfied a ruling is not revoked or modified retroactively except in rare or unusual circumstances however when the criteria in section dollar_figure of see section dollar_figure of revproc_99_1 yo a plr-109362-98 in accordance with the power_of_attorney on file with this office the original of this letter is being sent to partnership a's first-named authorized representative and a copy is being sent to partnership a sincerely yours barth e bag hil harold e bur assistant to the branch chief t branch office of assistant chief_counsel passthroughs and special industries


internal_revenue_service number release date index no cc tege eb ec plr-112345-02 july legend company plan z corporation plan z this is in reply to a letter dated date submitted on behalf of company and z corporation by their authorized representative in which rulings are requested under sec_423 of the internal_revenue_code with respect to the plan and certain aspects of a proposed merger of company and z corporation the facts submitted are that company's board_of directors adopted the plan on date that its shareholders approved the plan on date effective date and that it was most recently amended on date at the times of its adoption and approval it was intended that the plan qualify as an employee_stock_purchase_plan as defined in sec_423 of the code under the plan options to purchase shares of company common_stock are offered during a month period the first of which commenced on november and ends on october within which there are four purchase periods through through through and through an employee is eligible to participate in the plan if the employee is regularly employed by company or by any designated subsidiary_corporation of company on a full-time or part-time hours or more per week on a regular schedule basis thus there is no minimum-period-of-service requirement that an employee must satisfy in order to participate in the plan z corporation's board_of directors adopted plan z on january and its shareholders approved plan z on april at the times of its adoption and approval it was intended that plan z qualify as an employee_stock_purchase_plan under plan z options to purchase shares of corporation z common_stock are offered during successive six-month purchase periods through and through in september of the boards of directors of company and z corporation agreed to a plan of merger under which z corporation would merge with a subsidiary_corporation of company z corporation would be the surviving corporation and z corporation would become a wholly owned subsidiary of company at the effective time of the merger effective time the employees of z corporation will become employees of company's corporate group within six to nine months after the effective time z corporation will be merger into company the merger agreement provides that plan z will be terminated no later than the effective time and that in conjunction with that termination the rights of participants in plan z with respect to plan z's offering period then underway will be determined by treating the last business_day prior to or if more administratively feasible the last payroll date of corporation z immediately prior to the effective time as the last day of such offering period therefore on that last business_day or last payroll date all outstanding options granted under plan z will be exercised thereafter the shares so purchased will be converted into shares of the common_stock of company and such shares will be administered and treated in the same manner as the z corporation shares purchased under plan z would have been administered and treated under plan z had there been no merger under the plan the current purchase period began on may and will end on october if the effective time occurs prior to may z corporation employees who participated in plan z and who become employees of company will begin participation in the plan on may if the effective time occurs on or after may the former z corporation employees will have a special entry date and purchase period under the plan and begin participation in the plan on approximately june the former z corporation employees will exercise the options to be granted to them under the plan on the last day of the plan's purchase period ending on october in pertinent portion sec_421 of the code provides that if a share of stock is transferred to an individual in a transfer in which the requirements of sec_423 are met no income results to the individual at the time of the transfer no deduction under sec_162 is allowable at any time to the employer_corporation with respect to the share transferred and no amount other than the price paid under the option is considered as received by the employer_corporation for the share transferred under sec_421 if the transfer of a share of stock to an individual pursuant to his exercise of an option would otherwise meet the requirements of sec_423 except that there is a failure to meet any of the holding_period requirements of sec_423 then any increase in the income of such individual or deduction from the income of his employer_corporation for the taxable_year in which such exercise occurred attributable to such disposition is treated as an increase in income or a deduction from income in the taxable_year of such individual or of such employer_corporation in which such disposition occurred sec_423 of the code provides that sec_421 will apply to the transfer of a share of stock to an individual pursuant to the exercise of an option granted under an employee_stock_purchase_plan if no disposition of the stock is made by the individual within two years after the date of grant of the option nor within one year after the transfer of such share to him or her and at all times during the period beginning with the date that the option is granted and ending months before the date of its exercise the optionee remains an employee of the granting corporation a parent or subsidiary_corporation of such corporation or a corporation or parent or subsidiary_corporation of such corporation issuing or assuming a stock_option in a transaction to which sec_424 applies for purposes of these determinations sec_424 of the code defines parent_corporation as any corporation other than the employer_corporation in an unbroken chain of corporations ending with the employer_corporation if at the time of the granting of the option each of the corporations other than the employer_corporation owns stock possessing percent or more of the total combined voting power of all classes of stock in one of the other corporations in such chain sec_424 defines subsidiary_corporation as any corporation other than the employer_corporation in an unbroken chain of corporations beginning with the employer_corporation if at the time of the granting of the option each of the corporations other than the last corporation in the unbroken chain owns stock possessing percent or more of the total combined voting power of all classes of stock in one of the other corporations in such chain sec_1 c of the income_tax regulations provides in part that for purposes of sec_421 and sec_423 of the code the words the date of the granting of the option and the time such option is granted and similar phrases refer to the date or time when the corporation completes the corporate action constituting an offer of stock for sale to an individual under the terms and conditions of a statutory option for purposes of determining when an option is granted a corporation completes corporate action within the meaning of sec_1 c of the regulations when pursuant to the terms of its offer the number of shares of stock that may be purchased is fixed and determinable if an offer to sell stock does not designate a fixed and determinable maximum number of shares that an employee may purchase corporate action has not been completed see revrul_68_317 1968_1_cb_186 and revrul_70_358 1970_2_cb_96 both of which are clarified by revrul_73_223 1973_1_cb_206 sec_423 of the code defines an employee_stock_purchase_plan as a plan that meets the requirements set forth in paragraphs through of that section among those requirements sec_423 provides that an employee_stock_purchase_plan must be approved by the stockholders of the granting corporation within_12_months before or after the plan is adopted in pertinent portion sec_1_423-2 of the regulations provides that the plan as adopted and approved must designate the aggregate number of shares that may be issued under the plan and the corporations or class of corporations whose employees will be offered options under the plan sec_1_423-2 provides that after the initial adoption and approval any increase in the aggregate number of shares that may be issued under the plan other than an increase merely reflecting a change in capitalization such as a stock_dividend or stock split-up is treated as the adoption of a new plan requiring the approval of the stockholders within_12_months of such adoption similarly a change in the designation of corporations whose employees may be offered options under the plan is treated as the adoption of a new plan requiring stockholder approval unless the plan provides that designations may be made from time to time among a group consisting of the grantor corporation and its parent or subsidiary corporations any other changes in the terms of the plan may be made without stockholder approval sec_423 of the code provides that under the terms of the plan all employees granted options under the plan must have the same rights and privileges except that the amount of stock that may be purchased by any employee under his or her option may bear a uniform relationship to the total compensation or the basic or regular rate of compensation of employees and the plan may provide that no employee may purchase more than a maximum amount of stock designated therein sec_1_423-2 of the regulations provides that sec_423 does not prohibit the delaying of the grant of an option to any employee who is barred from being granted an option solely by reason of such employee's failing to meet a minimum service requirement until the employee meets the requirement sec_423 of the code provides that under the terms of the plan no employee may be granted an option which permits his or her rights to purchase stock under all employee stock_purchase_plans of his employer_corporation and its parent and subsidiary corporations to accrue at a rate which exceeds dollar_figure of fair_market_value of such stock determined at the time such option is granted for each calendar_year in which such option is outstanding at any time for purposes of this limitation the right to purchase stock under an option accrues when the option or any portion thereof first becomes exercisable during the calendar_year the right to purchase stock under an option accrues at the rate provided in the option but in no case may such rate exceed dollar_figure of fair_market_value of such stock determined at the time such option is granted for any one calendar_year and a right to purchase stock which has accrued under one option may not be carried over to any other option see also sec_1 i if the regulations applying the above law to the information submitted we rule as follows the designation of z corporation by the plan committee as the sole corporation along with any z subsidiaries do designated whose employees will be offered the opportunity to commence participation in the plan on a special entry date in early june of and for a special shortened purchase period will not be treated as the adoption of a new plan requiring approval of shareholders under sec_423 nor violate the equal rights and privileges requirement of sec_423 the grant_date of options granted under the plan for purposes of sec_423 is the entry date contemplated by sec_2 of the plan or the special entry date offered to former employees of z corporation and in calculating calendar_year 's dollar_figure limitation for former employees of z corporation participating in the plan both the fair_market_value of company stock determined at the time the option is granted purchased through the exercise of options granted under the plan and the fair_market_value of z corporation common_stock determined at the time the option is granted purchased under options exercised under plan z just prior to the effective time must be taken into account except as ruled above no opinion is expressed regarding the federal tax consequences of the transaction described above under any provision of the internal_revenue_code in particular please note that no opinion is expressed regarding whether the plan qualifies as an employee_stock_purchase_plan under sec_423 of the code additionally please note that we express no opinion on requested ruling which concerned certain determinations to be made by the plan_administrator because that ruling presents a question of fact finally please note that if the plan is amended the above rulings may not remain in effect this ruling is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent a copy of this letter should be attached to company's federal_income_tax return for the year in which the plan is implemented a copy is enclosed for that purpose sincerely yours robert b misner senior technician reviewer executive compensation branch office of the division counsel associate chief_counsel tax exempt and government entities enclosures copy of this letter copy for purposes


internal_revenue_service number release date index number ------------------------ ------------------------------ ---------- -------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------------ id no ------------- telephone number --------------------- refer reply to cc psi b04 plr-109552-11 date date ---------------- -------------------------- -------------------------------------- trust date taxpayer taxpayer’s wife --------------- year year x attorney accountant law firm ------- ------- ----------- ------------------------ ----------------------- ------------------------------------ dear ------------- this letter responds to your letter dated date and subsequent correspondence submitted by your authorized representative requesting an extension of time pursuant to sec_2642 of the internal_revenue_code and sec_301_9100-1 and sec_301_9100-3 of the procedure and administration regulations to allocate generation-skipping_transfer gst_exemption to a transfer to trust facts on date taxpayer created trust an irrevocable_trust for the benefit of taxpayer’s wife children and grandchildren in the same year year taxpayer transferred to trust certain tangible_property and cash having an aggregate value of dollar_figurex attorney drafted trust and in written correspondence advised taxpayer of the application of the gst tax to future distributions from trust unless gst_exemption was allocated to any transfer to trust attorney provided a copy of the correspondence to plr-109552-11 accountant who was preparing taxpayer’s form_709 united_states gift and generation-skipping_transfer_tax return for year taxpayer relied on accountant to report the year transfer accurately and to allocate appropriately taxpayer’s gst_exemption to the transfer although taxpayer’s timely-filed form_709 properly reported the transfer for year accountant failed to allocate gst_exemption to the transfer in year taxpayer hired new legal counsel law firm law firm alerted taxpayer that gst_exemption had not been allocated to taxpayer’s transfer in year taxpayer requests an extension of time to allocate his available gst_exemption to his transfer to trust in year taxpayer requests that such allocation be based on the value of the property transferred to the trust on the date of transfer law and analysis sec_2601 imposes a tax on every generation-skipping_transfer a generation-skipping_transfer is defined under sec_2611 as a taxable_distribution a taxable_termination and a direct_skip sec_2602 provides that the amount of the tax is the taxable_amount multiplied by the applicable_rate sec_2641 defines the applicable_rate as the product of the maximum_federal_estate_tax_rate and the inclusion_ratio with respect to the transfer under sec_2642 the inclusion_ratio with respect to any property transferred in a generation-skipping_transfer is generally defined as the excess if any of over the applicable_fraction the applicable_fraction as defined in sec_2642 is a fraction the numerator of which is the amount of gst_exemption allocated to the trust or to property transferred in a direct_skip and the denominator of which is the value of the property transferred to the trust or involved in the direct_skip sec_2631 as effective in the year at issue provides that for purposes of determining the inclusion_ratio every individual shall be allowed a gst_exemption of dollar_figure which may be allocated by such individual or his executor to any property with respect to which such individual is the transferor sec_2631 provides that any allocation under sec_2631 once made shall be irrevocable sec_2632 provides that any allocation by an individual of his or her gst_exemption under sec_2631 may be made at any time on or before the date prescribed for filing the estate_tax_return for such individual’s estate determined with regard to extensions regardless of whether such a return is required to be filed sec_2642 provides that the secretary shall by regulation prescribe such circumstances and procedures under which extensions of time will be granted to make plr-109552-11 an allocation of gst_exemption described in sec_2642 or and an election under sec_2632 or c such regulations shall include procedures for requesting comparable relief with respect to transfers made before the date of the enactment of sec_2642 sec_2642 provides that in determining whether to grant relief under sec_2642 the secretary shall take into account all relevant circumstances including evidence of intent contained in the trust instrument or instrument of transfer and such other factors as the secretary deems relevant for purposes of determining whether to grant relief under this paragraph the time for making the allocation or election shall be treated as if not expressly prescribed by statute notice_2001_50 2001_2_cb_189 provides that under sec_2642 the time for allocating the gst_exemption to lifetime transfers and transfers at death the time for electing out of the automatic allocation rules and the time for electing to treat any trust as a generation-skipping_transfer_trust are to be treated as if not expressly prescribed by statute the notice further provides that taxpayers may seek an extension of time to make an allocation described in sec_2642 or b or an election described in sec_2632 or c under the provisions of sec_301_9100-3 sec_301_9100-1 provides that the commissioner has the discretion to grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make a regulatory election or a statutory election but no more than months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-3 provides in part that requests for relief subject_to sec_301_9100-3 will be granted when the taxpayer provides the evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and the grant of relief will not prejudice the interests of the government under sec_301_9100-3 a taxpayer is deemed to have acted reasonably and in good_faith if the taxpayer reasonably relied on a qualified_tax professional including a tax professional employed by the taxpayer and the tax professional failed to make or advise the taxpayer to make the election based on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-3 have been satisfied accordingly taxpayer is granted an extension of time of days from the date of this letter in which to allocate his available gst_exemption to his transfer to trust in year the allocation of taxpayer’s gst_exemption will be effective as of the date of the transfer to trust and the value of the transfer for gift_tax purposes will be used in determining the amount of gst_exemption to be allocated plr-109552-11 the allocation should be made on a supplemental form_709 and filed with the internal_revenue_service center cincinnati ohio a copy of this letter should be attached to the supplemental form_709 a copy of this letter is enclosed for this purpose except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayers requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative the ruling contained in this letter is based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request_for_ruling it is subject_to verification on examination sincerely leslie h finlow senior technician reviewer branch office of associate chief_counsel passthroughs special industries enclosures copy for sec_6110 purposes copy of this letter


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc corp 4-plr-107640-02 date date parent sub a sub b sub c llc1 llc2 llc3 sub a llc sub b llc plr-107640-02 sub c llc business a business b business c acquirer a b c d e year date u date v date w date x date y state a dear this letter responds to your date request for rulings regarding certain federal_income_tax consequences of a partially completed and proposed transaction the information submitted in that request and in later correspondence is summarized below the rulings contained in this letter are based on facts and representations submitted by the taxpayer and accompanied by a penalties of perjury statement executed by an appropriate party this office has not verified any of the materials plr-107640-02 submitted in support of the request for rulings verification of the information representations and other data may be required as part of the audit process summary of facts publicly traded parent is the common parent of an affiliated_group_of_corporations that files a consolidated federal_income_tax return parent is a registered_holding_company under the public_utility holding_company act of puhca parent conducts indirectly several businesses including business a business b and business c parent wholly owns llc llc2 and llc3 in year parent formed sub a to acquire a facility engaged in business b the adjusted_basis of sub a’s depreciable_property is approximately dollar_figurea consisting entirely of sec_1245 property within the meaning of sec_1245 of the internal_revenue_code on date u parent acquired sub c and as a result became a registered_holding_company under puhca prior to the completion of step i below sub c was a holding_company that indirectly conducted business a through several wholly owned subsidiaries and business c through wholly owned sub b sub b conducts business c directly and through several wholly owned subsidiaries the sub b subsidiaries sub c owes approximately dollar_figureb to a sub b subsidiary the sub c payable the adjusted tax basis of the assets owned by sub b and the sub b subsidiaries inclusive of the sub c payable is approximately dollar_figurec in connection with parent’s acquisition of sub c the securities_and_exchange_commission the sec in a date v order the date v sec order required parent to sell sub b and the sub b subsidiaries within three years of the date of the date v sec order in order to comply with sec_11 of puhca which limits a registered_holding_company to ownership of a single integrated public_utility system and to such nonutility businesses as are reasonably incidental or economically necessary or appropriate to the operation of the integrated system in order to comply with the date v sec order parent and sub c entered into a purchase agreement with acquirer purchaser pursuant to the purchase agreement sub c llc as successor to sub c will sell sub b and the sub b subsidiaries to purchaser in a transaction as described below on date w parent applied for a supplemental order from the sec which was subsequently amended on date x the date x sec order requesting an order that i the sale of sub b and the sub b subsidiaries in the manner described below complies with the date v sec order and ii approving as necessary and appropriate to effectuate sec_11 of puhca the use of the cash proceeds received by sub c llc to repay the sub c payable and a portion of parent’s existing debt securities and the assumption by purchaser of the sub b and sub b subsidiaries liabilities the sec plr-107640-02 issued the date x sec order on date x proposed transaction in order to comply with the date v sec order parent has proposed and partially completed the following transaction i on date y sub c was converted from a state a business_trust into a state a limited_liability_company by merging sub c into sub c llc a state a limited_liability_company owned percent by parent and percent by llc ii sub a will convert from a corporation into a limited_liability_company the sub a llc by merging sub a into sub a llc parent will wholly own sub a llc iii certain sub b subsidiaries will be converted from corporations into limited_liability companies each of such limited_liability companies the sub b subsidiary llcs will be wholly owned directly or indirectly through another sub b subsidiary llc by sub b iv immediately after step iii sub b will convert to a limited_liability_company the sub b llc that will be wholly owned by sub c llc v parent will elect by checking the box pursuant to sec_301_7701-3 to change the classification of llc and llc for federal_income_tax purposes from disregarded entities to associations taxable as corporations following the election parent will own no assets directly other than the stock of its subsidiaries including llc and llc which will be treated as corporations and the membership interests in sub a llc sub c llc llc and several other disregarded limited_liability companies the other disregarded llcs sub c llc will own no assets directly other than the stock of its subsidiaries and all of the interests of sub b llc vi shortly after completion of step v parent will cause sub c llc to sell all of the membership interests in sub b llc to purchaser for i dollar_figured ii approximately dollar_figureb in respect of the sub c payable iii the amount of sub b llc’s cash on the closing date and iv the assumption of approximately dollar_figuree of sub b llc’s liabilities vii parent will use the cash proceeds from the sale of sub b llc to repay the sub c payable and to retire parent securities within two years after the closing date of the sale representations parent has made the following representation in connection with the proposed transaction plr-107640-02 a parent is a registered_holding_company as defined in sec_2 of puhca and sec_1083 of the code b none of llc sub c llc sub b llc the sub b subsidiary llcs or sub a llc will elect to be treated as an association_taxable_as_a_corporation under sec_301_7701-3 c the conversions of sub a sub b sub c and each of the sub b subsidiaries that will be converted from corporations to limited_liability companies constitute tax free liquidations to the liquidating corporations under sec_337 and to their parent distributee under sec_332 d sub a is the owner of the sub a facility for federal_income_tax purposes and is entitled to claim depreciation_deductions with respect thereto e the sale of the interests in sub b llc to purchaser will close within the three year period prescribed in the date v sec order f parent will timely and accurately file a form_982 with its federal_income_tax return for the taxable_year in which the sale of sub b llc occurs rulings provided that the date x sec order becomes final in substantially the form submitted and based solely on the information submitted and the representations set forth above we rule as follows sub a llc llc sub c llc sub b llc and each of the sub b subsidiary llcs will be disregarded as entities separate from parent no gain will be recognized by parent indirectly through sub c llc upon the sec required sale of all of the membership interests in sub b llc to acquirer as described above sec_1081 parent will reduce the basis of its property in accordance with sec_1082 assuming parent’s adjusted_basis in the depreciable_property held by sub a llc exceeds the amount of gain on the sale of sub b llc that is deferred under sec_1081 parent will be required to write down the adjusted_basis of each item of depreciable_property owned by sub a llc and the other disregarded llcs by the percentage obtained by dividing the amount of gain deferred under sec_1081 on the sale of sub b llc by the aggregate adjusted_basis of all the depreciable_property owned by sub a llc and the other disregarded llcs sec_1082 pursuant to sec_1_1245-4 gain will be recognized by parent under plr-107640-02 sec_1245 in the amount by which the basis_of_property other than sec_1245 property is reduced pursuant to the application of sec_1082 caveats no opinion is expressed about the tax treatment of the proposed transaction under any other provisions of the code or regulations or the tax treatment of any conditions existing at the time of or effects resulting from the proposed transaction that are not specifically covered by the above rulings in particular no opinion is expressed on i whether the conversions described in representation c qualify under sec_332 and sec_337 or ii whether sub a is the owner of the sub a facility as described in representation d procedural statements this ruling letter is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent each taxpayer involved in this transaction should attach a copy of this ruling letter to the taxpayer’s federal_income_tax return for the taxable_year in which the transaction covered by this letter is completed under a power_of_attorney on file in this office a copy of this letter is being sent to the taxpayer and an additional authorized representative sincerely lewis k brickates acting branch chief branch office of associate chief_counsel corporate


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to plr-162226-01 cc psi b5 date date legend taxpayer state a corporation b city c substation d city e company f urban renewal area g a b dear this letter responds to your letter of date and subsequent correspondence submitted on behalf of taxpayer requesting a private_letter_ruling that amounts paid_by a local development authority in connection with the design construction and installation of a substation upgrade represents a contribution to the capital of taxpayer under sec_118 of the internal_revenue_code and not contributions in aid of construction under sec_118 taxpayer provides the following representations facts taxpayer is an investor-owned regulated_public_utility company organized and existing under the laws of state a taxpayer is engaged principally in the business of electrical generation transmission and distribution taxpayer files a consolidated_return with its parent_corporation b both are accrual calendar_year taxpayers that file a consolidated_return with the district_director of the internal_revenue_service in city c taxpayer intends to install two new high voltage circuit breakers at substation d in city e the total cost of the upgrade is expected to be a the new circuit breakers will have a high-speed communication network with other circuit breakers on either side of the power loop in the area when a problem occurs on the loop the new circuit breakers will isolate the faulty section quickly this upgrade is expected to reduce outage times from the current seconds to seconds the upgrade will primarily benefit industrial customers in a designated revenue allocation district taxpayer represents that the city e development authority a state entity charged with making infrastructure improvements to promote economic growth in the state is funding one half of the cost of the upgrade in order to promote economic growth in deciding to fund this particular project the city e development authority is seeking to attract high technology companies to the area by assuring a reliable power supply for the manufacturing of technology related products a private manufacturing company located in city e company f is funding the other half of the circuit breaker costs company f uses approximately b percent of the power distributed through substation d taxpayer notes that the city e development authority will fund the circuit breakers through the issuance of tax increment bonds pursuant to state law city and county municipalities in state a declare certain areas to be urban renewal areas in turn the board_of directors of the city e development authority possesses the authority to recommend the creation of revenue allocation districts within any existing urban renewal area in the present case substation d is located in the urban renewal area g a designated revenue allocation district the city e development authority will issue the bonds to finance certain improvements including the circuit breaker project payable solely from incremental increases if any in property taxes in the revenue allocation district the incremental increases represent the difference between what the property_tax would have been before improvement compared to taxes assessed and collected by the city or county after the improvement ie the taxes assessed on the increased value of the property taxpayer asserts that while the payment for the circuit breakers will lead to more reliable electrical service to customers in urban renewal area g the upgrade will not result in new or additional capacity to customers the taxpayer further asserts the provision of more reliable electric service is an infrastructure improvement aimed at benefitting the area served by the taxpayer as a whole by encouraging economic growth in the area law and analysis sec_61 and sec_1_61-1 of the income_tax regulations provide that gross_income means all income from whatever source derived unless excluded by law sec_118 provides that in the case of a corporation gross_income does not include any contribution_to_the_capital_of_the_taxpayer sec_118 as amended by section a of the tax_reform_act_of_1986 the act provides that for purposes of subsection a except as provided in subsection c the term contribution to the capital of taxpayer does not include any contribution_in_aid_of_construction ciac or any other contribution as a customer or potential customer sec_1_118-1 of the income_tax regulation provides in part that sec_118 applies to contributions to capital made by persons other than shareholders for example the exclusion applies to the value of land or other_property contributed to a corporation by a government unit or by a civic group for the purpose of enabling the corporation to expand its operating facilities however the exclusion does not apply to any money or property transferred to the corporation in consideration for goods or services rendered or to subsidies paid to induce the taxpayer to limit production the legislative_history to sec_118 indicates that the exclusion_from_gross_income for nonshareholder contributions to capital of a corporation was intended to apply to those contributions that are neither gifts because the contributor expects to derive indirect benefits nor payments for future services because the anticipated future_benefits are too intangible the legislative_history also indicates that the provision was intended to codify the existing law that had developed through administrative and court decisions on the subject h_r rep no 83rd cong 2d sess s rep no 83rd cong 2d sess in general the amendment made by section of the act to sec_118 was intended to require a regulated_public_utility to include in income the value of any ciac made to encourage the provision of services by the utility to a customer as a result under the act all ciacs even those received by a regulated_public_utility such as the taxpayer are includable in the gross_income of the receiving corporation the house ways_and_means_committee report house report states that property including money is a ciac rather than a contribution_to_capital if it is contributed to provide or encourage the provision of services to or for the benefit of the person making the contribution h_r rep no 99th cong 1st sess vol c b a utility is considered as having received property to encourage the provision of services if any one of the following conditions is met the receipt of the properties is a prerequisite to the provision of the services the receipt of the property results in the provision of services earlier than would have been the case had the property not been received or the receipt of the property otherwise causes the transferor to be favored in any way the house report also states that the repeal of the special exclusion does not affect transfers of property that are not made for the provision of services but rather relates to the benefit of the public as a whole h_r rep no 99th cong 1st sess vol c b notice_87_82 1987_2_cb_389 provides additional guidance on the treatment of ciacs notice_87_82 provides examples of a governmental entity paying for utility_services both as the primary beneficiary and also on behalf of third party customers the notice provides for example assume a utility receives a payment relating to the relocation or extension of utility facilities to a newly constructed municipal building eg a public hospital civic center or museum whose operations are conducted for the benefit of the community at large assume also that payment of the relocation fee was required in order to obtain utility_services for the new_building since the relocation fee is a prerequisite to the provision of services to the customer the fee is a ciac and included in gross_income even though the customer is exclusively engaging in activities for the public benefit similarly payments that are made to a utility as a prerequisite to the utility providing new or additional services to particular customers are treated as ciacs and included in gross_income because such payments are a prerequisite to the provision of services by the utility although a governmental entity may be making the payment in question notice c b pincite emphasis added in the instant case the customers located in the urban renewal area g will receive the benefit of more reliable electrical services resulting from city e development authority’s payment to taxpayer for upgrading taxpayer’s circuit breakers we disagree with the taxpayer’s assertion that the phrase new or additional services in notice_87_82 is limited to situations involving increased capacity rather the term new or additional services includes an enhancement or upgrade of service of the type occurring in the present case ie the provision of more reliable electrical service for utility customers as notice_87_82 provides a payment resulting in new or additional services by a utility transferee to particular customers will constitute a ciac notwithstanding a governmental entity may be making the payment based solely on the foregoing analysis and the representations made by the taxpayer we rule that the payment to taxpayer by the city e development authority constitutes a ciac under sec_118 and therefore the payment cannot be considered a contribution_to_capital under sec_118 in accordance with the power_of_attorney we are sending a copy of this letter to taxpayer and to taxpayer’s second authorized representative this ruling is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent sincerely walter h woo senior technician reviewer branch office of the associate chief_counsel passthroughs and special industries enclosure copy