internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc corp 1-plr-124350-01 date date parent company company company company holding_company sub sub sub sub sub plr-124350-01 sub sub sub sub shareholder shareholder shareholder shareholder shareholder a b c d e f g plr-124350-01 h j k deed business l country u country v state x country y country z this letter is in reply to your letter dated date requesting rulings with respect to a plan_of_reorganization described below the proposed transaction additional information relating to the proposed transaction was submitted in letters dated july september september october november december and date and january february march and date the information submitted for consideration is summarized below parent is a publicly held country v corporation parent is engaged in business l through its subsidiaries company is a country u corporation parent owns a percent of company directly and indirectly company is a country y corporation company is a wholly owned subsidiary of company holding_company is a country y corporation holding_company is active through certain lower tier subsidiaries which are primarily engaged in business l holding_company is a wholly owned subsidiary of company holding_company has never been a controlled_foreign_corporation cfc within the meaning of sec_957 of the internal_revenue_code_of_1986 as amended the code plr-124350-01 sub is a country y holding_company sub is a wholly owned subsidiary of holding_company sub has never been a cfc within the meaning of sec_957 of the code sub is a country z holding_company prior to the proposed transaction sub will have been a cfc within the meaning of sec_957 of the code sub owns b percent of sub shareholder a state x corporation owns c percent of sub shareholder a state x corporation owns d percent of sub shareholder a country y corporation is a wholly owned subsidiary of shareholder and owns e percent of sub sub is a country z corporation prior to the proposed transaction sub will have been a cfc within the meaning of sec_957 of the code sub owns f percent of sub sub owns g percent of sub sub is actively_engaged_in_business l sub sub sub sub and sub are actively_engaged_in_business l and are wholly owned direct and indirect lower tier country z subsidiaries of sub sub is a country z holding_company prior to the proposed transaction sub will have been a cfc within the meaning of sec_957 of the code company owns h percent of sub shareholder a country y corporation is a lower tier subsidiary of parent and owns j percent of sub shareholder an unrelated country z limited_liability_company owns k percent of sub shareholder is a wholly owned subsidiary of company which is a country y corporation company is a cfc within the meaning of sec_957 of the code and is a wholly owned subsidiary of company a us corporation that is a lower tier subsidiary of parent the above corporations represent that in order to accomplish corporate business purposes they desire to streamline company 2’s corporate structure and eliminate several holding_companies to accomplish these goals they have submitted the following proposed plan_of_reorganization the proposed transaction a b company will move its management and control to country z becoming a tax resident of country z in accordance with a treaty between country y and country z company will remain a country y corporation for country y domestic corporate law purposes holding_company will move its management and control to country z becoming a tax resident of country z in accordance with a treaty between country y and country z holding_company will remain a country y corporation for country y domestic corporate law purposes plr-124350-01 c d sub will move its management and control to country z becoming a tax resident of country z in accordance with a treaty between country y and country z sub will remain a country y corporation for country y domestic corporate law purposes company will acquire all of the assets of holding_company sub sub sub and sub in accordance with country z corporate law by completing the following five sequential transactions in a single operation resulting from a single agreement the deed approved by company holding_company sub sub sub and sub i ii iii iv v sub will merge into sub the sub shareholders will be entitled to shares of sub in accordance with a specified exchange ratio for each sub share held the allotment of sub shares to the sub shareholders will take place only in a virtual way upon the actual cancellation of the sub shares the sub shareholders will ultimately be allotted only company shares sub will merge into sub the sub shares outstanding will be cancelled sub will merge into sub the sub shareholders will be entitled to shares of sub in accordance with a specified exchange ratio for each sub share held the allotment of sub shares to the sub shareholders will take place only in a virtual way upon the actual cancellation of the sub shares the sub shareholders will ultimately be allotted only company shares sub will merge into holding_company the sub shareholders will be entitled to shares of holding_company in accordance with a specified exchange ratio for each holding_company share held the allotment of holding_company shares to the sub shareholders will take place only in a virtual way upon the actual cancellation of the sub shares the sub shareholders will ultimately be allotted only company shares holding_company will merge into company the holding_company shareholders will be entitled to shares of company in accordance with a specified exchange ratio for each holding_company share held company shares will be issued to the holding_company shareholders in accordance with their proportionate interests in the merged corporations plr-124350-01 the deed specifies that if any one of the above mergers fails to be implemented all of the mergers described in the deed will be canceled we hold that for federal_income_tax purposes the five transactions required to effect the proposed country z unitary merger described above will be treated as the following sequence of transactions sub will acquire all of the assets of sub in exchange for sub stock and the assumption of all of the liabilities of sub the shareholders of sub will be deemed to receive sub shares in exchange for their sub shares sub will acquire all of the assets of sub and the sub shares outstanding will be cancelled pursuant to a plan deemed to be adopted after the merger of sub into sub sub will acquire all of the assets of sub in exchange for sub stock and the assumption of all of the liabilities of sub the shareholders of sub will be deemed to receive sub shares in exchange for their sub shares holding_company will acquire all of the assets of sub in exchange for holding_company stock and the assumption of all of the liabilities of sub the shareholders of sub will be deemed to receive holding_company shares in exchange for their sub shares company will acquire all of the assets of holding_company in exchange for company stock and the assumption of all of the liabilities of holding_company the shareholders of holding_company will receive company shares in exchange for their holding_company shares the parties submitted the following representations with respect to step d i the sub merger ai bi the fair_market_value of the sub stock deemed received by each sub shareholder will be approximately equal to the fair_market_value of the sub stock deemed surrendered in the exchange the sub shareholders company shareholder and shareholder will receive no consideration other than sub stock no sub shares will be exchanged for cash in lieu of fractional share interests and there will be plr-124350-01 no dissenters to the transaction neither sub nor persons related to sub within the meaning of sec_1_368-1 of the income_tax regulations the regulations acquired stock of sub in connection with the reorganization for consideration other than sub stock sub neither redeemed its stock nor made distributions to its shareholders in connection with the reorganization sub will acquire at least percent of the fair_market_value of the net assets and at least percent of the fair_market_value of the gross assets held by sub immediately prior to sub merger for purposes of this representation amounts used by sub to pay its reorganization expenses all redemptions and any distributions except for regular normal dividends made by sub immediately preceding the transfer will be included as assets of sub held immediately prior to the sub merger after the sub merger the shareholders of sub shareholder company and shareholder will be in control of sub within the meaning of sec_368 and sec_304 of the code sub has no plan or intention to dispose_of any of the assets of sub acquired in the sub merger other than dispositions made in the normal course of its business operations and other than the dispositions described as part of this proposed transaction the fair_market_value of the assets of sub transferred to sub will equal or exceed the sum of the liabilities assumed by sub as determined under sec_357 of the code the total adjusted_basis of the assets of sub transferred to sub will equal or exceed the sum of the liabilities assumed by sub as determined under sec_357 of the code the liabilities of sub assumed by sub as determined under sec_357 of the code were incurred by sub in the ordinary course of its business and are associated with the assets transferred following the sub merger sub and its successors sub holding_company and company will continue the historic_business of sub and its subsidiary sub and use a significant portion of the historic_business_assets of sub and its subsidiary sub in a business ci di ei fi gi hi ii ji at the time of the sub merger neither sub nor sub will have outstanding any warrants options convertible securities or any other type plr-124350-01 or right pursuant to which any person could acquire stock in sub that if exercised or converted would affect the acquisition or retention of control of sub by company shareholder and shareholder as defined in sec_368 and sec_304 of the code ki li sub sub and the shareholders of sub will pay their respective expenses if any incurred in connection with sub merger there is no intercorporate indebtedness existing between sub and sub that was issued acquired or will be settled at a discount mi no two parties to the sub merger are investment companies as defined in sec_368 and iv of the code ni neither sub nor sub is under the jurisdiction of a court in a title_11_or_similar_case within the meaning of sec_368 of the code the parties submitted the following representations with respect to step d ii the sub merger aii sub on the date of the adoption of the plan_of_liquidation and at all times until the final liquidating_distribution is completed will be the owner of at least percent of the single class of outstanding_stock of sub for the purpose of this representation the plan_of_liquidation of sub is considered to be adopted after the sub merger bii no shares of the stock of sub will have been redeemed during the three years preceding the adoption of the plan of complete_liquidation of sub cii all distributions from sub to sub pursuant to the plan of complete_liquidation will be made within a single taxable_year of sub dii as soon as the first liquidating_distribution has been made sub will cease to be a going concern and its activities will be limited to winding up its affairs paying its debts and distributing its remaining assets to its shareholders eii sub will retain no assets following the final liquidating_distribution fii sub will not have acquired assets in any nontaxable_transaction at any time except for acquisitions occurring more than three years prior to the date of adoption of the plan_of_liquidation gii no assets of sub have been or will be disposed of by either sub or plr-124350-01 sub except for dispositions in the ordinary course of business dispositions occurring more than three years prior to adoption of the plan_of_liquidation and except as otherwise described as part of this proposed transaction hii except as otherwise described as part of this proposed transaction the liquidation of sub will not be preceded or followed by the reincorporation in or transfer or sale to a recipient corporation recipient of any of the businesses or assets of sub if persons holding directly or indirectly more than percent in value of the stock of sub also hold directly or indirectly more than percent in value of the stock of recipient for purposes of this representation ownership will be determined by application of the constructive_ownership rules of sec_318 as modified by sec_304 of the code iii no assets of sub will have been distributed in_kind transferred or sold to sub except for i transactions occurring in the normal course of business and ii transactions occurring more than three years prior to adoption of the liquidation plan jii sub will report all earned_income represented by assets that will be distributed to its shareholders such as receivables being reported on a cash_basis unfinished construction contracts commissions due etc kii lii the fair_market_value of the assets of sub will exceed its liabilities both at the date of the adoption of the plan of complete_liquidation and immediately prior to the time the first liquidating distributing is made there is no intercorporate debt existing between sub and sub no intercorporate debt has been cancelled forgiven or discounted except for transactions that occurred more than three years prior to the date of adoption of the plan of complete_liquidation mii sub is not an organization that is exempt from federal_income_tax under sec_501 or any other provision of the code nii all other transactions undertaken contemporaneously with in anticipation of in conjunction with or in any way related to the proposed liquidation of sub have been fully disclosed the parties submitted the following representations with respect to step d iii the sub merger aiii the fair_market_value of the sub stock deemed received by each sub plr-124350-01 shareholder will be approximately equal to the fair_market_value of the sub stock deemed surrendered in the exchange biii the sub shareholders company shareholder shareholder shareholder shareholder and shareholder will receive no consideration other than sub stock no sub shares will be exchanged for cash in lieu of fractional share interests and there will be no dissenters to the transaction neither sub nor persons related to sub within the meaning of sec_1_368-1 of the regulations acquired stock of sub in connection with the reorganization for consideration other than sub stock sub neither redeemed its stock nor made distributions to its shareholders in connection with the reorganization ciii sub will acquire at least percent of the fair_market_value of the net assets and least percent of the fair_market_value of the gross assets held by sub immediately prior to sub merger for purposes of this representation amounts used by sub to pay its reorganization expenses all redemptions and any distributions except for regular normal dividends made by sub immediately preceding the transfer will be included as assets of sub held immediately prior to the sub merger diii after the sub merger the shareholders of sub company shareholder shareholder shareholder shareholder and shareholder will be in control of sub within the meaning of sec_368 and sec_304 of the code eiii sub has no plan or intention to dispose_of any of the assets of sub acquired in the sub merger other than dispositions made in the normal course of its business operations and other than the dispositions made in the normal course of its business operations and other than the dispositions described as part of this proposed transaction fiii the fair_market_value of the assets of sub transferred to sub will equal or exceed the sum of the liabilities assumed by sub as determined under sec_357 of the code giii the total adjusted_basis of the assets of sub transferred to sub will equal or exceed the sum of the liabilities assumed by sub as determined under sec_357 of the code hiii the liabilities of sub assumed by sub as determined under sec_357 of the code were incurred by sub in the ordinary course of its business and are associated with the assets transferred plr-124350-01 iiii following the sub merger sub and its successors holding_company and company will continue the historic_business of sub and use a significant portion of the historic_business_assets of sub in a business jiii at the time of the sub merger neither sub nor sub will have outstanding any warrants options convertible securities or any other type or right pursuant to which any person could acquire stock sub that if exercised or converted would affect the acquisition or retention of control of sub by company shareholder shareholder shareholder shareholder and shareholder as defined in sec_368 and sec_304 of the code kiii sub sub and the shareholders of sub will pay their respective expenses if any incurred in connection with the sub merger liii there is no intercorporate indebtedness existing between sub and sub that was issued acquired or will be settled at a discount miii no two parties to the sub merger are investment companies as defined in sec_368 and iv of the code niii neither sub nor sub is under the jurisdiction of a court in a title_11_or_similar_case within the meaning of sec_368 of the code the parties submitted the following representations with respect to step d iv the sub merger aiv the fair_market_value of the holding_company stock deemed received by each sub shareholder will be approximately equal to the fair_market_value of the sub stock deemed surrendered in the exchange biv the sub shareholders company shareholder shareholder shareholder shareholder and shareholder will receive no consideration other than holding_company stock no sub shares will be exchanged for cash in lieu of fractional share interests and there will be no dissenters to the transaction neither holding_company nor persons related to holding_company within the meaning of sec_1_368-1 of the regulations acquired stock of sub in connection with the reorganization for consideration other than holding_company stock sub neither redeemed its stock nor made distributions to its shareholders in connection with the reorganization civ holding_company will acquire at least percent of the fair_market_value of the net assets and at least percent of the fair_market_value of the plr-124350-01 gross assets held by sub immediately prior to sub merger for purposes of this representation amounts used by sub to pay its reorganization expenses all redemptions and any distributions except for regular normal dividends made by sub immediately preceding the transfer will be included as assets of sub held immediately prior to the sub merger div after the sub merger the shareholders of sub company shareholder shareholder shareholder shareholder and shareholder will be in control of holding_company within the meaning of sec_368 and sec_304 of the code eiv holding_company has no plan or intention to dispose_of any of the assets of sub acquired in the sub merger other than dispositions made in the normal course of its business operations and other than the dispositions described as part of this proposed transaction fiv the fair_market_value of the assets of sub transferred to holding_company will equal or exceed the sum of the liabilities assumed by holding_company as determined under sec_357 of the code giv the total adjusted_basis of the assets of sub transferred to holding_company will equal or exceed the sum of the liabilities assumed by holding_company as determined under sec_357 of the code hiv the liabilities of sub assumed by holding_company as determined under sec_357 of the code were incurred by sub in the ordinary course of its business and are associated with the assets transferred iiv following the sub merger holding_company and its successor company will continue the historic_business of sub and use a significant portion of the historic_business_assets of sub in a business jiv at the time of the sub merger neither sub nor holding_company will have outstanding any warrants options convertible securities or any other type or right pursuant to which any person could acquire stock in holding_company that if exercised or converted would affect the acquisition or retention of control of holding_company by company shareholder shareholder shareholder shareholder and shareholder as defined in sec_368 and sec_304 of the code kiv holding_company sub and the shareholders of sub will pay their respective expenses if any incurred in connection with the sub merger plr-124350-01 liv there is no intercorporate indebtedness existing between sub and holding_company that was issued acquired or will be settled at a discount miv no two parties to the sub merger are investment companies as defined in sec_368 and iv of the code niv neither sub nor holding_company is under the jurisdiction of a court in a title_11_or_similar_case within the meaning of sec_368 of the code the parties submitted the following representations with respect to step d v the holding_company merger av the fair_market_value of the company stock received by each holding_company shareholder will be approximately equal to the fair_market_value of the holding_company stock surrendered in the exchange bv the holding_company shareholders company shareholder shareholder shareholder shareholder and shareholder will receive no consideration other than company stock no holding_company shares will be exchanged for cash in lieu of fractional share interests and there will be no dissenters to the transaction neither company nor persons related to company within the meaning of sec_1_368-1 of the regulations acquired stock of holding_company in connection with the reorganization for consideration other than company stock holding_company neither redeemed its stock nor made distributions to its shareholders in connection with the reorganization cv company will acquire at least percent of the fair_market_value of the net assets and at least percent of the fair_market_value of the gross assets held by holding_company immediately prior to holding_company merger for purposes of this representation amounts used by holding_company to pay its reorganization expenses all redemptions and any distributions except for regular normal dividends made by holding_company immediately preceding the transfer will be in included as assets of holding_company held immediately prior to the holding_company merger dv after the holding_company merger the shareholders of holding_company company shareholder shareholder shareholder shareholder and shareholder will be in control of company within the meaning of sec_368 and sec_304 of the code plr-124350-01 ev company has no plan or intention to dispose_of any of the assets of holding_company acquired in the holding_company merger other than dispositions made in the normal course of its business operations fv the fair_market_value of the assets of holding_company transferred to company will equal or exceed the sum of the liabilities assumed by company as determined under sec_357 of the code gv the total adjusted_basis of the assets of holding_company transferred to company will equal or exceed the sum of the liabilities assumed by company as determined under sec_357 of the code hv the liabilities of holding_company assumed by company as determined under sec_357 of the code were incurred by holding_company in the ordinary course of its business and are associated with the assets of holding_company in a business iv jv following the holding_company merger company will continue the historic_business of holding_company and use a significant portion of the historic_business_assets of holding_company in a business at the time of the holding_company merger neither holding_company nor company will have outstanding any warrants options convertible securities or any other type or right pursuant to which any person could acquire stock in company that if exercised or converted would affect the acquisition or retention of control of company by company shareholder shareholder shareholder shareholder and shareholder as defined in sec_368 and sec_304 of the code kv company holding_company and the shareholders of holding_company will pay their respective expenses if any incurred in connection with the holding_company merger lv there is no intercorporate indebtedness existing between holding_company and company that was issued acquired or will be settled at a discount mv no two parties to the holding_company merger are investment companies as defined in sec_368 and iv of the code nv neither holding_company nor company is under the jurisdiction of a court in a title_11_or_similar_case within the meaning of sec_368 of the code plr-124350-01 based solely on the information submitted and on the representations set forth above we hold as follows with respect to the sub merger the acquisition by sub of substantially_all of the assets of sub solely in exchange for sub voting_stock and sub 2’s assumption of sub 4’s liabilities if any followed by sub 4’s distribution of sub stock will constitute a reorganization within the meaning of sec_368 of the code for purposes of this ruling substantially_all means at least percent of the fair_market_value of the net assets and at least percent of the fair_market_value of the gross assets of sub sub and sub will each be a_party_to_a_reorganization within the meaning of sec_368 of the code no gain_or_loss will be recognized to sub on the transfer of substantially_all of its assets to sub subject_to liabilities in exchange for sub voting_stock sec_361 and sec_357 of the code no gain_or_loss will be recognized to sub upon the receipt of substantially_all of the assets of sub in exchange for sub voting_stock sec_1032 of the code no gain_or_loss will be recognized to the sub shareholders by reason of the exchange of their shares of sub stock solely for shares of sub voting_stock sec_354 of the code no gain_or_loss will be recognized to sub upon the distribution of sub voting_stock to the sub shareholders sec_361 of the code the basis of the sub assets in the hands of sub will be the same as the basis of those assets in the hands of sub immediately prior to the transfer sec_362 of the code the holding_period of the sub assets in the hands of sub will include the period during which such assets were held by sub sec_1223 of the code the basis of the shares of sub voting_stock received by the sub shareholders will be the same in each instance as their basis in the sub stock surrendered in exchange therefor sec_358 of the code the holding_period of the sub voting_stock received by the sub plr-124350-01 shareholders will include the holding_period of the sub stock surrendered in exchange therefor provided that such sub stock is held as a capital_asset on the date of the exchange sec_1223 of the code the taxable_year of sub will end on the date of the transfer of its assets to sub sec_381 of the code and sec_1_381_b_-1 of the regulations pursuant to sec_381 and sec_381 a -1 of the code sub will succeed to and take into account as of the date of the proposed transfer as defined in sec_1_381_b_-1 of the regulations the items of sub described in sec_381 of the code subject_to the conditions and limitations specified in sec_381 sec_382 sec_383 and sec_384 of the code and the regulations thereunder as provided by sec_381 of the code and sec_1_381_c_2_-1 of the regulations sub will succeed to and take into account the earnings_and_profits or deficit in earnings_and_profits of sub as of the date of transfer any deficit in the earnings or profits of either sub or sub will be used only to offset the earnings_and_profits accumulated after the date of transfer sec_381 of the code based solely on the information submitted and on the representations set forth above we hold as follows with respect to the sub merger the acquisition by sub of all of the assets of sub will be treated as a complete_liquidation of sub under sec_332 of the code no gain_or_loss will be recognized to sub on the distribution of its assets to sub sec_336 sec_337 and sec_337 of the code no gain_or_loss will be recognized to sub upon the receipt of the assets of sub sec_332 of the code the basis of the sub assets in the hands of sub will be the same as the basis of those assets in the hands of sub immediately prior to the transfer sec_334 of the code the holding_period of the sub assets in the hands of sub will include the period during which such assets were held by sub sec_1223 of the code the tax_year of sub will end on the date of the transfer of its plr-124350-01 assets to sub sec_381 of the code and sec_1_381_b_-1 of the regulations pursuant to sec_381 and sec_381 a -1 of the code sub will succeed to and take into account as of the date of the proposed transfer as defined in sec_1_381_b_-1 of the regulations the items of sub described in sec_381 of the code subject_to the conditions and limitations specified in sec_381 sec_382 sec_383 and sec_384 of the code and the regulations thereunder as provided by sec_381 of the code and sec_1_381_c_2_-1 of the regulations sub will succeed to and take into account the earnings_and_profits or deficit in earnings_and_profits of sub as of the date of transfer any deficit in the earnings or profits of either sub or sub will be used only to offset the earnings_and_profits accumulated after the date of transfer sec_381of the code based solely on the information submitted and on the representations set forth above we hold as follows with respect to the sub merger the acquisition by sub of substantially_all of the assets of sub solely in exchange for sub voting_stock and sub 1's assumption of sub 2's liabilities if any followed by sub 2's distribution of sub stock will constitute a reorganization within the meaning of sec_368 of the code for purposes of this ruling substantially_all means at least percent of the fair_market_value of the net assets and at least percent of the fair_market_value of the gross assets of sub sub and sub will each be a_party_to_a_reorganization within the meaning of sec_368 of the code no gain_or_loss will be recognized to sub on the transfer of substantially_all of its assets to sub subject_to liabilities in exchange for sub voting_stock sec_361 and sec_357 of the code no gain_or_loss will be recognized to sub upon the receipt of substantially_all of the assets of sub in exchange for sub voting_stock sec_1032 of the code no gain_or_loss will be recognized to the sub shareholders by reason of the exchange of their shares of sub stock solely for shares of sub voting_stock sec_354 of the code no gain_or_loss will be recognized to sub upon the distribution of sub voting_stock to the sub shareholders sec_361 of the plr-124350-01 code the basis of the sub assets in the hands of sub will be the same as the basis of those assets in the hands of sub immediately prior to the transfer sec_362 of the code the holding_period of the sub assets in the hands of sub will include the period during which such assets were held by sub sec_1223 of the code the basis of the shares of sub voting_stock received by the sub shareholders will be the same in each instance as their basis in the sub stock surrendered in exchange therefor sec_358 of the code the holding_period of the sub voting_stock received by the sub shareholders will include the holding_period of the sub stock surrendered in exchange therefor provided that such sub stock is held as a capital_asset on the date of the exchange sec_1223 of the code the taxable_year of sub will end on the date of the transfer of its assets to sub sec_381 of the code and sec_1_381_b_-1 of the regulations pursuant to sec_381 and sec_381 a -1 of the code sub will succeed to and take into account as of the date of the proposed transfer as defined in sec_1_381_b_-1 of the regulations the items of sub described in sec_381 of the code subject_to the conditions and limitations specified in sec_381 sec_382 sec_383 and sec_384 of the code and the regulations thereunder as provided by sec_381 of the code and sec_1_381_c_2_-1 of the regulations sub will succeed to and take into account the earnings_and_profits or deficit in earnings_and_profits of sub as of the date of transfer any deficit in the earnings or profits of either sub or sub will be used only to offset the earnings_and_profits accumulated after the date of transfer sec_381 of the code based solely on the information submitted and on the representations set forth above we hold as follows with respect to the sub merger the acquisition by holding_company of substantially_all of the assets of sub solely in exchange for holding_company voting_stock and holding company's assumption of sub 1's liabilities if plr-124350-01 any followed by sub 1’s distribution of holding_company stock will constitute a reorganization within the meaning of sec_368 of the code for purposes of this ruling substantially_all means at least percent of the fair_market_value of the net assets and at least percent of the fair_market_value of the gross assets of sub holding_company and sub will each be a_party_to_a_reorganization within the meaning of sec_368 of the code no gain_or_loss will be recognized to sub on the transfer of substantially_all of its assets to holding_company subject_to liabilities in exchange for holding_company voting_stock sec_361 and sec_357 of the code no gain_or_loss will be recognized to holding_company upon the receipt of substantially_all of the assets of sub in exchange for holding_company voting_stock sec_1032 of the code no gain_or_loss will be recognized to the sub shareholders by reason of the exchange of their shares of sub stock solely for shares of holding_company voting_stock sec_354 of the code no gain_or_loss will be recognized to sub upon the distribution of holding_company voting_stock to the sub shareholders sec_361 of the code the basis of the sub assets in the hands of holding_company will be the same as the basis of those assets in the hands of sub immediately prior to the transfer sec_362 of the code the holding_period of the sub assets in the hands of holding_company will include the period during which such assets were held by sub sec_1223 of the code the basis of the shares of holding_company voting_stock received by the sub shareholders will be the same in each instance as their basis in the sub stock surrendered in exchange therefor sec_358 of the code the holding_period of the holding_company voting_stock received by the sub shareholders will include the holding_period of the sub stock surrendered in exchange therefor provided that such sub stock is held as a capital_asset on the date of the exchange sec_1223 of the code plr-124350-01 the taxable_year of sub will end on the date of the transfer of its assets to holding_company sec_381 of the code and sec_1 b - a of the regulations pursuant to sec_381 and sec_381 a -1 of the code holding_company will succeed to and take into account as of the code of the date of the proposed transfer as defined in sec_1_381_b_-1 of the regulations the items of sub described in sec_381 of the code subject_to the conditions and limitations specified in sec_381 sec_382 sec_383 and sec_384 of the code and the regulations thereunder as provided by sec_381 of the code and sec_1_381_c_2_-1 of the regulations holding_company will succeed to and take into account the earnings_and_profits or deficit in earnings_and_profits of sub as of the date of transfer any deficit in the earnings or profits of either sub or holding_company will be used only to offset the earnings_and_profits accumulated after the date of transfer sec_381 of the code based solely on the information submitted and on the representations set forth above we hold as follows with respect to the holding_company merger the acquisition by company of substantially_all of the assets of holding_company solely in exchange for company voting_stock and company 2's assumption of holding company's liabilities if any followed by holding company's distribution of company stock will constitute a reorganization within the meaning of sec_368 of the code for purposes of this ruling substantially_all means at least percent of the fair_market_value of the net assets and at least percent of the fair_market_value of the gross assets of holding_company company and holding_company will each be a_party_to_a_reorganization within the meaning of sec_368 of the code no gain_or_loss will be recognized to holding_company on the transfer of substantially_all of its assets to company subject_to liabilities in exchange for company voting_stock sec_361 and sec_357 of the code no gain_or_loss will be recognized to company upon the receipt of substantially_all of the assets of holding_company in exchange for company voting_stock sec_1032 of the code no gain_or_loss will be recognized to the holding_company shareholders by reason of the exchange of their shares of holding plr-124350-01 company stock solely for shares of company voting_stock sec_354 of the code no gain_or_loss will be recognized to holding_company upon the distribution of company voting_stock to the holding_company shareholders sec_361 of the code the basis of the holding_company assets in the hands of company will be the same as the basis of those assets in the hands of holding_company immediately prior to the transfer sec_362 of the code the holding_period of the holding_company assets in the hands of company will include the period during which such assets were held by holding_company sec_1223 of the code the basis of the shares of company voting_stock received by the holding_company shareholders will be the same in each instance as their basis in the holding_company stock surrendered in exchange therefor sec_358 of the code the holding_period of the company voting_stock received by the holding_company shareholders will include the holding_period of the holding_company stock surrendered in exchange therefor provided that such holding_company stock is held as a capital_asset on the date of the exchange sec_1223 of the code the taxable_year of holding_company will end on the date of the transfer of its assets to company sec_381 of the code and sec_1_381_b_-1 of the regulations pursuant to sec_381 and sec_381 a -1 of the code company will succeed to and take into account as of the date of the proposed transfer as defined in sec_1_381_b_-1 of the regulations the items of holding_company described in sec_381 of the code subject_to the conditions and limitations specified in sec_381 sec_382 sec_383 and sec_384 of the code and the regulations thereunder as provided by sec_381 of the code and sec_1_381_c_2_-1 of the regulations company will succeed to and take into account the earnings_and_profits or deficit in earnings_and_profits of holding_company as of the date of transfer any deficit in the earnings or profits of either holding_company or company will be used only to offset the earnings_and_profits accumulated after the date of transfer sec_381 of the code plr-124350-01 we express no opinion about the tax treatment of the transaction under other provisions of the code or the regulations or about 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 specifically no opinion is expressed regarding whether any or all of the above-referenced foreign_corporations are passive foreign investment companies within the meaning of sec_1297 of the code if it is determined that any or all of the above-described foreign_corporations are passive foreign investment companies no opinion is expressed with respect to the application of sec_1291 through of the code to the proposed transaction in particular in a transaction in which gain is not otherwise recognized regulations under sec_1291 of the code may require gain recognition notwithstanding any other provision of the code additionally no opinion is expressed regarding the application of sec_367 of the code to the successive reorganizations or the application of sec_367 of the code to the sec_332 liquidation see sec_1_367_b_-4 and d and sec_1_367_e_-2 of the regulations the rulings contained in this letter are based upon 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 submitted in support of the request for a ruling as part of the audit process the taxpayer may be required to verify the information representations and other data submitted this ruling letter has no effect on any earlier documents and 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 each affected taxpayer must attach a copy of this letter to the taxpayer’s federal_income_tax return for the taxable_year in which the transaction covered by this letter_ruling is consummated in accordance with the power_of_attorney on file in this office a copy of this letter is being sent to the taxpayer cc sincerely yours associate chief_counsel corporate by lisa a fuller assistant to the chief branch


t c memo united_states tax_court paul f and eleanore m nichols petitioners v commissioner of internal revenue respondent docket no filed date paul f and eleanore m nichols pro sese jeremy l mcpherson for respondent memorandum findings_of_fact and opinion laro judge petitioners petitioned the court to redetermine respondent’s determination that they are liable for federal_income_tax deficiencies for and of dollar_figure and dollar_figure respectively and for accuracy-related_penalties under sec_6662 of dollar_figure and dollar_figure we decide the following issues -2 - whether the trusts petitioners used during and should be disregarded for federal_income_tax purposes because the trusts were shams we hold they should whether petitioners are liable for the accuracy-related_penalties under sec_6662 we hold they are unless otherwise noted section references are to the applicable versions of the internal_revenue_code rule references are to the tax_court rules_of_practice and procedure findings_of_fact some facts were stipulated and are so found the stipulated facts and the exhibits submitted therewith are incorporated herein by this reference petitioners resided in fair oaks california when they petitioned the court they filed and federal_income_tax returns on date and on date respectively they did not report on those tax returns social_security_benefits income from self-employment and income received by the jrep trust perj trust and csm business_trust collectively referred to as trusts’ petitioners established the trusts on date petitioners were the initial trustees of csm business_trust csm trust and mr nichols was an initial trustee of perj trust and ' we use the words trust and trustee in our findings_of_fact for narrative convenience we do not intend our use of those terms to indicate any conclusion about the substance of the transactions at issue -3- of jrep trust perj trust was the sole beneficiary of csm trust during and perj trust was the sole beneficiary of jrep trust the address of each of the trusts was the same as the address of petitioners’ principal_residence on date petitioners transferred a parking lot sweeping business to csm trust before this transfer mr nichols had operated the business as a sole_proprietorship under the name clean sweep maintenance petitioners then transferred their principal_residence to perj trust petitioners transferred the equipment of the sweeping business to jrep trust urep trust leased the equipment of the sweeping business to csm trust on date petitioners signed and notarized a certification of revocable_living_trust and loan agreement in the certification petitioners stated that they are the trustors tt is not clear from the record who were the trustees of any of the trusts during the relevant years james a nichols petitioners’ son filed and federal_income_tax returns for all three trusts in his capacity as trustee in the case at hand robert hogue mr hogue cosigned with petitioners the stipulation of facts as a trustee of jrep and perj trusts in addition mr hogue filed petitions with the court on behalf of these trusts see csm trust v commissioner docket no oll jrep trust v commissioner docket no 9795-0o1l perj trust v commissioner docket no 9794-01l perj trust v commissioner docket no jrep trust v commissioner docket no ol because of mr hogue’s failure to establish his capacity as a trustee the court dismissed those cases on the ground that they were not filed by a proper party of perj trust they stated further that perj trust is revocable at their discretion on date petitioners signed a uniform residential_loan application in the loan application mr nichols stated that he had been self-employed for years as the owner-operator of a sweeping business doing business as clean sweep maintenance petitioners also listed their personal checking and savings accounts those same accounts were the bank accounts of csm trust jrep trust and perj trust during and petitioners were the only persons who had signatory authority over those bank accounts csm trust filed partnership returns for and perj trust was indicated as a partner holding a 99-percent profit interest in csm trust and ms nichols was said to be a partner holding a 1-percent profit interest in csm trust those returns were filed under the same employer_identification_number as had been used on the trust income_tax returns filed in the name of csm trust for taxable years before on their and federal_income_tax returns petitioners understated their interest_income by dollar_figure and dollar_figure respectively petitioners also did not report social_security the record does not indicate why csm trust filed partnership returns for those years -5- benefits of dollar_figure and dollar_figure which they received during the respective years on date petitioners sent a letter to respondent with respect to the examination of their tax returns the record does not establish the taxable_year s to which this letter pertained the letter stated this letter is to inform you that according to sec_6001 we have never been served notice by the secretary the law says we will be served notice by the secretary as to such books records and documents that the law requires us to keep not wanting to skip over the most important part of this law but it clearly states that this law only applies to every person liable for any_tax as to the authority to examine us our research has shown that the only ir code section that comes close to authorizing some type of agent to examine books_and_records is ir code sec_7602 yet this ir code section has never been published in the federal_register under title_26 only under title this tells us that unless you are a title agent batf you do not have investigative authority as to you telling us that we have a tax_liability it just may not be correct let us review how a tax_liability is created according to the ir code in order to determine liabilities the secretary must file an assessment and furnish a copy to the taxpayer upon request so pursuant to that section please either furnish us with such a record or notify us that none has been made pursuant to ir code sec_6201 or as a consequence of the secretary not exercising ir code sec_6020 until such time that you furnish us a --6- copy of such an assessment there is no assessment there is no tax_liability and you do not have the authority by any ir code section to examine or investigate our tax_return any further correspondence from you should be signed according to that code section or you will be in violation of irs code sec_7214 if we do not have a reply from you within days we will consider this matter dropped on date petitioners mailed to respondent another letter statement of protest the letter stated let this letter serve as a written protest that we do not agree with any of the adjustments shown in irs form 4549-cg income_tax examination changes as to form_4549 income_tax examination changes please be advised that we disagree with the examination_report in all aspects and will not accept it as an sic lawful official documents if the examiners report is a lawful official document then the examiner failed to sign the report under penalty of perjury as per sec_6065 where is the taxing statute that congress mandates you identify as to any_tax liability that we may have opinion by notice_of_deficiency dated date respondent determined that the trusts were shams and should be ignored for tax purposes accordingly respondent determined petitioners underreported their taxable_income by the amount of income _7- reported by the trusts in their petition petitioners only deny having unreported income without specifically addressing any of respondent’s arguments we agree with respondent respondent’s determinations of deficiencies in the notice_of_deficiency are presumed correct and petitioners bear the burden of proving those determinations wrong rule a 290_us_111 in certain circumstances if a taxpayer introduces credible_evidence with respect to any factual issue relevant to ascertaining the taxpayer’s liability for tax sec_7491 a places the burden_of_proof on the commissioner see sec specifically sec_7491 and provides in part sec_7491 burden shifts where taxpayer produces credible_evidence --- general_rule --if in any court_proceeding a taxpayer introduces credible_evidence with respect to any factual issue relevant to ascertaining the liability of the taxpayer for any_tax imposed by subtitle a or b the secretary shall have the burden_of_proof with respect to such issue limitations ----paragraph shall apply with respect to an issue only if-- a the taxpayer has complied with the requirements under this title to substantiate any item b the taxpayer has maintained all records required under this title and has cooperated continued - a rule a sec_7491 is effective with respect to examinations commenced after date see internal_revenue_service restructuring and reform act of publaw_105_206 sec c 112_stat_727 although the relevant examination was conducted after date petitioners failed to meet the requirements of sec_7491 and in that they did not present any credible_evidence with respect to any factual issue relevant to ascertaining their tax_liability and they did not maintain all records and cooperate with reasonable requests by respondent for information and documents the burden is on the taxpayer to show that the prerequisites of sec_7491 are satisfied snyder v commissioner tcmemo_2001_255 citing h conf rept pincite 1998_ 3_cb_747 because petitioners failed to meet the requirements of sec_7491 they bear the burden of proving that respondent’s determinations of deficiencies in the notice_of_deficiency are wrong a_trust is disregarded for tax purposes if in substance it is no more than a paper entity a sham lacking any valid purpose other than the avoidance of tax markosian v commissioner continued with reasonable requests by the secretary for witnesses information documents meetings and interviews and -9- t c this is so even if the trust was formed and had a separate existence under local law 79_tc_714 affd 731_f2d_1417 9th cir petitioners never introduced a scintilla of evidence which would disprove respondent’s determinations that the trusts are shams in fact petitioners failed to establish the very existence of the trusts petitioners unsuccessfully attempted to prove the existence of the trusts by form sec_1041 u s income_tax return for estates and trusts filed with respondent those forms do not persuade us that the trusts indicated in the forms actually existed petitioners have failed to introduce into evidence any document establishing the terms of the trusts nor have they obtained the testimony of james a nichols who is described on the trust returns as trustee petitioners were made aware of the need for the trust documents during the examination of their returns for the years in issue and during discovery they have not demonstrated that they lacked access to those documents nor have they shown that james a nichols is unavailable to testify we infer from petitioners’ failure to produce such evidence that either it does not exist or if it does exist it would be negative to petitioners 886_f2d_1237 9th cir affg 89_tc_1063 6_tc_1158 affd 162_f2d_513 10th cir snyder v commissioner supra we conclude on the basis of our analysis and on the record before us that the trusts were shams accordingly we will ignore them for federal_income_tax purposes we sustain respondent’s determination that petitioners are liable for the deficiencies in federal income taxes for and we now turn to the issue of the accuracy-related_penalties respondent determined that petitioners are liable for accuracy-related_penalties under sec_6662 and d as a result of a substantial_understatement_of_income_tax respondent has the burden of production with respect to these penalties sec_7491 sec_6662 imposes an accuracy-related_penalty in the amount of percent of the portion of the underpayment attributable to any substantial_understatement_of_income_tax sec_6662 the understatement is defined as the excess of the amount of tax required to be shown on the return over the amount of tax_shown_on_the_return reduced by any rebate sec_6662 under sec_6662 the understatement is substantial if the amount of the understatement exceeds the greater of percent of the tax required to be shown on the return or dollar_figure we also note that the income which was reported by the trusts and which respondent has treated as unreported income of petitioners primarily derived from mr nichols’s sweeping business --11- we conclude that respondent satisfied his burden of production with respect to these accuracy-related_penalties and that petitioners are liable for the same petitioners failed to report the income purportedly received by the trusts petitioners’ tax_return for showed dollar_figure as tax due while the actual tax due was dollar_figure petitioners’ tax_return for showed dollar_figure as tax due while the actual tax due was dollar_figure it follows that petitioners’ understatements of income taxes for and were substantial petitioners failed to present any evidence that either of those understatements was due to reasonable_cause nor did petitioners present any evidence that they had made adequate_disclosure or that any exception applies in their case to the imposition of accuracy-related_penalties for and we sustain respondent’s determination that petitioners are liable for accuracy-related_penalties under sec_6662 for and we have considered all arguments made by the parties and have found those arguments not discussed herein to be irrelevant and or without merit to reflect the foregoing decision will be entered for respondent


t c memo united_states tax_court bryan rock products inc and subsidiary petitioner v commissioner of internal revenue respondent docket no filed date walter a pickhardt for petitioner john c schmittdiel for respondent memorandum opinion tannenwald judge respondent determined deficiencies in petitioner's federal income taxes for the taxable years ending date and date in the amounts of dollar_figure and dollar_figure respectively the sole issue for decision is whether petitioner is entitled to a 14-percent depletion_allowance under sec_613 for the red dolomitic limestone mined and sold by petitioner as landscaping rock this case was submitted fully stipulated under rule the stipulation of facts and attached exhibits are incorporated herein by this reference background petitioner is a minnesota corporation with its principal office in shakopee minnesota for the taxable years ending date and date and respectively petitioner was the common parent of a consolidated_group of corporations that joined in the filing of a consolidated corporate_income_tax return petitioner mines a material referred to as either dolomite or dolomitic limestone from three quarries in shakopee minnesota and additional quarries in bayport hastings and denmark minnesota this material comes within the meaning of either dolomite or limestone or both as those terms are used in sec_613 hereinafter we will refer to this material as dolomite petitioner's dolomite comes from the oneonta dolomite and shakopee formation of the prairie du chien group an expansive sedimentary rock deposit extending throughout southeastern minnesota and into portions of wisconsin and iowa unless otherwise indicated all statutory references are to the internal_revenue_code in effect for the years in issue and all rule references are to the tax_court rules_of_practice and procedure oneonta dolomite is composed of both limestone and dolomite with the latter distinguishable from the former by reason of its greater magnesium content petitioner's dolomite is of insufficient purity to be considered metallurgical or chemical grade most limestone and dolomite in minnesota and neighboring states is of a buff or brownish-gray color petitioner mines buff and brownish-gray dolomite from its quarries petitioner also has mined a reddish-brown colored dolomite from two of its quarries at shakopee minnesota the reddish color most likely is caused by its iron oxide content we shall refer to this particular dolomite as red dolomite during and petitioner mined red dolomite from its merriam quarry located in shakopee minnesota petitioner currently mines red dolomite from it sec_169 quarry which is located approximately one-half mile from the merriam quarry road material is aggregate2 used in the construction of roads typically a base consisting of crushed and graded aggregate is placed on roadbeds parking lots and in utility trenches to provide support for the overlying pavement or utility road material aggregates are also material mixed with aggregate is rock composed of mineral crystals of one or more kinds or of mineral rock fragments any of several hard materials as sand gravel or slag used for mixing with cement material to form concrete mortar or plaster webster's ninth new collegiate dictionary asphaltic cement or concrete to produce asphalt or concrete the types of material suited for this use include crushed limestone and dolomite other quarried rock and sand and gravel concrete aggregate is aggregate used in the production of concrete it is generally made up of washed and graded natural aggregate deposits or crushed quarry rock typically occupie sec_65 to percent of the concrete volume and influences various properties of concrete most rocks can be used as concrete aggregate with the exception of rocks containing any appreciable amounts of shale soft porous materials or chert rip rap is a pile of rocks and boulders placed as an erosion control measure and slope stabilizer to protect slopes piers abutments walls or other structures there are specific size requirements and gradations for different classes of rip rap rip rap may be any type of durable field or quarried stone free of soil or other debris in southeastern and central minnesota where limestone is abundant limestone and dolomite are used for rip rap in northern minnesota where carbonaceous deposits are not available field stone taconite and granite are used as rip rap ballast is a material which is placed on a railroad bed to provide a stable foundation for the track and ties ballast distributes train loading drains the roadbed and resists deformation of the railbed ballast can be any rock of specific size and gradation where it is durable and resists degradation in minnesota railroads generally use granite gabbro or taconite for ballast dolomite is not generally used because it is softer than desirable rubble is a loose mass of angular fragments of rock or masonry crumbled by natural or human forces and irregular fragments or pieces of rock used in masonry or the masonry made with such rocks the type of angular rock which may be incorporated in the rubble could be virtually any type of rock that is used in manmade structures petitioner processes and sells the dolomite that it mines for the following products driveway and road base rock concrete aggregate utility and bedding rock and specialty rock specialty rock includes rip rap agricultural lime aglime red ball diamond aggregate and landscaping rock petitioner did not sell dolomite for use as ballast during the years at issue petitioner sells driveway and road base rock which is available in sizes ranging from a maximum3 of to a maximum of in diameter for use as a base upon which a driveway or road surface concrete or asphalt is laid this product includes dolomite fines a powdery material created when dolomite each product size actually includes a range of rock sizes the maximum size within that range is used to label that size for example size rock may range from to the size may range from to is crushed when compacted dolomite fines facilitate the hardening of the roadbed the concrete aggregate sold by petitioner is a washed dolomite ranging in size from to in diameter it is used together with water fine aggregate usually sand and cement as an ingredient in concrete during the years at issue only the merriam quarry of all of petitioner's quarries had washing facilities the utility and bedding rock sold by petitioner is dolomite ranging in size from to in diameter with smaller sizes included in the product some dolomite fines are included but not to the extent they are included with road base utility and bedding rock is used as a base for concrete pipe or pvc pipe especially sewer pipe the rip rap sold by petitioner consists of dolomite used for erosion control especially around waterways petitioner sells rip rap as small a sec_4 to in diameter but also in a small boulder size in diameter and sometimes larger the aglime sold by petitioner is a fine pulverized dolomite material crushed to a size generally no larger than a grain of white rice which is used to neutralize soil acidity and to provide magnesium to soil compositions the red ball diamond aggregate sold by petitioner is identical to aglime in size and composition but unlike aglime always has a red color petitioner's customers used this product as a ball diamond surface the red landscaping rock sold by petitioner is washed crushed red dolomite sold in two sizes the larger size is screened to an individual diameter size of not less than and not more than in diameter red landscaping rock the smaller size is screened to an individual diameter size of not less than and not more than in diameter red landscaping rock the red landscaping rock sold by petitioner was identical to the washed red rock that petitioner sold for use as a concrete aggregate petitioner does not run reflectance tests dry brightness test or other test relating to the measurement of the color of its red landscaping rock petitioner does not sell red landscaping rock on bid in direct competition with a bona_fide bid to sell a mineral listed in sec_613 a common use of landscaping rock including petitioner's red landscaping rock is to lay it on the ground several inches deep to act as a border or buffer between adjoining areas or structure in a landscape or outdoor area landscape rock is also used to separate shrubs and other plantings from adjoining walkways driveways and lawn areas landscaping rock reduces maintenance eg trimming spraying weeding because it inhibits weed and grass growth in areas where growth is not desired in this regard landscaping rock is often used over plastic sheeting or a similar weed barrier consistent appearance including color and size is a consideration for customers purchasing landscaping rock color is not normally a consideration for customers purchasing dolomite for use as driveway and road base rock concrete aggregate unless it is an exposed aggregate utility and bedding rock aglime and rip rap rocks used for landscaping purposes include limestone dolomite quartzite sandstone granite pumice marble scoria baked clay or shale diabase gabbro and river rock in addition to the various aggregates sold for landscaping rock organic materials such as shredded hardwood or bark chips are sold for landscaping purposes on each of petitioner's price lists for and the red landscaping rock was identified as red decorative rock the red landscaping rock was not so designated on its price lists for the red landscaping rock was identified as washed red rock which was the same designation given to rock sold as concrete aggregate on its price lists for the red landscaping rock was identified as red rock which was the same designation given to rock sold as concrete aggregate in general during the years in issue the geographical market for dolomite sold by petitioner for use as driveway and road base rock utility and bedding rock and rip rap consisted of an area no greater than a 30-mile radius from the quarry out of which the dolomite was extracted most of the dolomite sold by petitioner as a concrete aggregate was for use within a mile radius from the quarry out of which the dolomite was extracted however petitioner sometimes sold concrete aggregate to truckers who having made deliveries in the twin cities area would purchase a load of concrete aggregate as a back haul for delivery beyond a 30-mile radius in contrast petitioner regularly sold aglime and red ball diamond aggregate for use beyond a 30-mile radius from the quarry out of which the dolomite was extracted petitioner sold dolomite for use as red landscaping rock to charge customers in the following areas minnesota wisconsin north dakota south dakota and iowa red landscaping rock occasionally was sold in other states as well petitioner does not maintain records of the quantity of red landscaping rock sold within a 30-mile radius of its quarries in shakopee for depletion purposes petitioner identified instances when it sold washed red rock or red rock as concrete aggregate and when it sold this rock for landscaping purposes for and petitioner claimed percentage_depletion under sec_613 equal to percent of sales less royalties on its dolomite sold for use as red landscaping rock petitioner also claimed 14-percent depletion on dolomite sold for use as aglime and as red ball diamond aggregate petitioner claimed 5-percent depletion on dolomite sold for use as driveway and road base rock concrete aggregate utility and bedding rock and rip rap respondent determined that the proper rate of depletion for petitioner's red landscaping rock i sec_5 percent not percent respondent has not proposed adjustments in connection with petitioner's depletion deductions except for those claimed for dolomite sold as red landscaping rock discussion sec_611 provides for a reasonable allowance for depletion in the case of mines this allowance is the percentage specified in subsection b of the gross_income_from_the_property excluding from such gross_income an amount equal to any rents or royalties_paid_or_incurred by the taxpayer in respect of the property sec_613 sec_613 provides in relevant part percent-- a gravel peat pumice sand scoria shale and stone except stone described in paragraph sec_613 specifies a 14-percent depletion rate for all_other_minerals including but not limited to dolomite limestone stone used or sold for use by the mine owner or operator as dimension stone or ornamental_stone except that unless sold on bid in direct competition with a bona_fide bid to sell a mineral listed in paragraph the percentage shall be percent for any such other mineral when used or sold for use by the mine owner or operator as rip rap ballast road material rubble concrete aggregates or for similar purposes initially respondent argues that petitioner's red landscaping rock should be classified as stone under sec_613 because the red landscaping rock was not used for its chemical or metallurgical properties this classification would result in a 5-percent depletion rate prior to the enactment of the code the predecessor to sec_613 provided a percent depletion rate for sand gravel and stone a 10-percent rate for dolomite and a 15-percent rate for chemical and metallurgical grade limestone sec_114 of the code as amended by the revenue act of ch sec a 65_stat_452 54_tc_668 affd 453_f2d_578 3d cir however in sec_613 of the code the qualifiers chemical grade and metallurgical grade were dropped from limestone dolomite was added to the percent now percent depletion rate category and the use test ie when used or sold for use by the mine owner or operator as rip rap ballast road material rubble concrete aggregates or for similar purposes was added thus whether limestone is of chemical grade is no longer a factor g w h corson inc v commissioner supra see also 69_tc_378 chemical attributes test rejected for use of oyster shells accordingly the chemical and metallurgical properties foundation of respondent's argument falls by the wayside the parties have agreed that petitioner's red landscaping rock qualifies as either dolomite or limestone as dolomite and limestone both are listed in sec_613 and those terms are more specific than stone sec_613 rather than sec_613 governs our determination of the proper depletion rate since petitioner did not sell its red landscaping rock on bid in direct competition with a bona_fide bid to sell a mineral listed in sec_613 the focus of this case is on the use test we are asked to decide whether petitioner sold its red landscaping rock for a purpose similar to rip rap ballast road material rubble or concrete aggregates the enumerated uses congress added the use test in in order to prevent discrimination in percentage_depletion rates between materials which are used competitively for the same purposes s rept 83d cong 2d sess when the minerals in the category all_other_minerals otherwise entitled to a depletion rate of percent are used for certain purposes for which crushed stone is commonly used they are to be entitled to a percentage_depletion rate of percent id congress specified these certain purposes as rip rap ballast road material rubble concrete aggregates or for similar purposes sec_613 the use test is one of actual use not possible uses the statutory language speaks in terms of actual use sec_613 when used or sold for use the legislative_history clearly points in the same direction s rept supra pincite the house version of this section had included dimension stone and ornamental_stone in the enumerated uses but in the final bill those were eliminated and instead stone used or sold for use as dimension stone or ornamental_stone was included in the list of all_other_minerals thus entitling stone used for those purposes to the higher depletion rate id pincite dimension stone means blocks and slabs of natural stone subsequently cut to definite shapes and sizes and used or sold for such uses as building stone excluding rubble monumental stone paving blocks curbing and flagging sec_1_613-2 income_tax regs ornamental_stone means blocks and slabs of natural stone subsequently cut to definite shapes and sizes and used or sold for use for making ornaments or statues id the enumerated uses are generally construction uses c j langenfelder son inc v commissioner supra pincite we have interpreted similar purposes to include those uses reasonably commercially competitive with the enumerated uses g w h corson inc v commissioner t c pincite in g w h corson inc v commissioner supra the taxpayer mined dolomitic limestone for its use in manufacturing poz-o-pac and corson's masonry cement poz-o-pac was a product composed of hydrated lime fly ash an aggregate and water it was used primarily as a base for road surface other manufacturers of poz-o-pac used gravel instead of limestone we found that the function of the limestone in the poz-o-pac was similar to the function of road material in the laying of asphalt and other forms of roadways poz-o-pac also competed with concrete and the limestone in the poz-o-pac had a significant use similar to a concrete aggregate the primary use of the taxpayer's masonry cement was as a mortar we found that the limestone in the product served the purpose of aggregate comparable to that mixed with portland cement to make other masonry cements or mortars the taxpayer's limestone acted as a functional substitute for and thus in actual competition with materials used as road material and concrete aggregate consequently we held that the lower depletion rate applied to the limestone so used by the taxpayer in c j langenfelder son inc v commissioner supra the taxpayer dredged oyster shells for sale as cultch a surface to which oyster larvae could attach and grow into mature oysters mollusk shells including oyster shells are listed in sec_613 following g w h corson inc v commissioner supra we rejected respondent's argument that use for physical rather than chemical attributes leads to the lower depletion rate and applied the use test we found that the use of oyster shells as cultch was not a construction use respondent argued that construction stones could have been used competitively with oyster shells as oyster cultch and therefore that to allow the taxpayer the higher depletion rate would discriminate against miners of construction stones c j langenfelder son inc v commissioner supra pincite we rejected respondent's potential-for-use argument and found that used as oyster cultch oyster shells did not compete commercially with materials that would qualify as rip rap ballast road materials rubble and concrete aggregate we therefore held that the exception circumscribed by the use test did not apply entitling the taxpayer to the higher depletion rate in 528_f2d_51 4th cir the court_of_appeals for the fourth circuit interpreted the use test to mean sold or used for the same purpose as and in competition with construction stones the taxpayers' marble and quartzite chips were used in the manufacture of terrazzo flooring and architectural precast panels respectively for their distinctive coloring and decorative qualities the court_of_appeals found that these features distinguished the chips from ordinary hard stone and that the chips did not compete with ordinary construction stones it held that the taxpayers were entitled to the higher depletion rate in bonsal co v united_states ustc par aftr 2d w d n c the only case dealing with rock used for landscaping purposes the district_court looked strictly to the statutory language of sec_613 and did not consider competition to be a significant consideration it held that the uses of quartzite for roofing mosaic panels golf course sandtraps and landscaping were not purposes similar to rip rap ballast road material rubble or concrete aggregates in the conventional sense and allowed the taxpayer the higher depletion rate for these uses in the instant case respondent argues that landscaping is a construction use and that petitioner's red landscaping rock competes with materials that could be used for one of the enumerated uses including petitioner's red rock used as concrete aggregate since actual use is the focus of the use test whether the sale of petitioner's red landscaping rock competes with the sale of its same rock as concrete aggregate is not a determination in this connection we think it highly significant that petitioner kept detailed records that separated the sales of red rock for concrete aggregate from sales of the same rock as landscaping rock and claimed only the percent on the former furthermore although the legislative_history records congress' concern about competition between the listed minerals and common respondent has not questioned the accuracy of these records either as to allocations of quantities or sales amounts cf reagan v commissioner tcmemo_1973_266 where respondent did not question the application of the 5-percent and 14-percent rates to different uses of the same mineral stone the use test as written in the statute does not extend to include each use where common stone could be used in keeping with this court's previous decisions involving the use test we think the critical test herein is whether the subject rock in fact competed commercially with common stone in the specific use placed at issue petitioner's red rock when used as landscaping rock is not used for a purpose which is a functional substitute for one of the enumerated uses thus it does not compete commercially with the enumerated uses cf 54_tc_668 it is used for a decorative purpose not for a construction use its purpose although not exactly that of dimension stone ie stone used for building stones paving blocks curbing and flagging is more similar to the use of dimension stone than to the enumerated uses many of the other materials sold as landscaping rock are among those listed as all_other_minerals in sec_613 the geographic market for petitioner's red landscaping stone is much greater than for the same stone when sold as concrete aggregate these factors indicate that petitioner's red landscaping rock is competing with the other minerals not with ordinary stone we find that petitioner's red landscaping rock was not sold for a purpose similar to rip rap ballast road material rubble or concrete aggregates therefore petitioner is entitled to the 14-percent depletion rate for its red landscaping rock in accordance with the above holding decision will be entered for petitioner