internal_revenue_service national_office technical_advice_memorandum date number release date third party contact index uil no case-mis no ----------------------------------------------------------- ----------------------- tam-114875-04 cc psi b05 taxpayer's name taxpayer's address taxpayer's identification no years involved date of conference ----------------------------------------------------- ---------------------------------- ---------------------------------- ---------------- ---------- ----------------- legend taxpayer year issue ----------------------------------------------------- ------- may taxpayer treat as a contribution_to_capital under ' a of the internal_revenue_code the continued dumping and subsidy offset offset it received from the federal government under the continued dumping and subsidy offset act of cdsoa conclusion taxpayer may not treat as a contribution_to_capital under ' a the offset it received from the federal government under the cdsoa facts taxpayer manufactures x taxpayer petitioned the federal government to stop the dumping of x by foreign manufacturers the federal government imposed an tam-114875-04 antidumping duty order on foreign manufacturers of x antidumping duties are imposed after a determination is made that a class of foreign merchandise is being or likely being sold at less than fair_market_value and a determination is made that an industry in the united_states is materially injured or threatened with material injury or that the establishment of an industry in the united_states is materially retarded by reason of the dumping under the cdsoa duties assessed pursuant to an antidumping duty order must be distributed on an annual basis to the affected domestic producers for qualifying expenditures the distribution is known as the offset u s c 1675c a the term affected domestic producer is defined in u s c 1675c b to include any manufacturer that a was a petitioner with respect to which an order has been entered and b remains in operation the term qualifying expenditure is defined in u s c 1675c b to mean an expenditure incurred after the issuance of the order in any of the following categories a manufacturing facilities b equipment c research_and_development d personnel training e acquisition of technology f health care benefits to employees paid for by the employer g pension benefits to employees paid for by the employer h environmental equipment training or technology i acquisition of raw materials and other inputs and j working_capital or other funds needed to maintain production taxpayer received an offset in year once received an offset may be used for any purpose taxpayer used the payment to reduce its debt taxpayer did not include the offset on its income_tax returns for year no provision of the cdsoa statute exempts offsets from income_tax taxpayer contends that the offset is excluded from income under ' a as a nonshareholder contribution_to_capital law and analysis senator dewine for himself and other senators made a statement in the congressional record when the cdsoa was introduced to the committee on finance his statement included the following as my colleagues know the tariff act of gives the president the authority to impose duties and fines on imports that are being dumped in u s markets or subsidized by foreign governments our bill would take the act one step further currently revenues raised through import duties and fines go to the u s treasury under our bill duties and fines would be transferred to injured u s companies as compensation_for damages caused by dumping or subsidization tam-114875-04 current law also does not contain a mechanism to help injured u s industries recover from the harmful effects of foreign dumping and subsidization these foreign practices have reduced the ability of our injured domestic industries to reinvest in plant equipment people r d technology or to maintain or restore health care and pension benefits the end result is this continued dumping or subsidization jeopardizes renewed investment and prevents additional reinvestment from being made cong rec s497 daily ed date statement of sen dewine 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 was enacted in treas reg ' published in provides as follows sec_118 also 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 governmental_unit or by a civic group for the purpose of inducing the corporation to locate its business in a particular community or 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 for the purpose of inducing the taxpayer to limit production see sec_362 for the basis_of_property acquired by a corporation through a contribution to its capital by its stockholders or by nonstockholders regarding ' h_r rep no pincite and s rep no pincite state the following i n the case of a corporation gross_income is not to include any contribution_to_the_capital_of_the_taxpayer this in effect places in the code the court decisions on this subject it deals with cases where a contribution is made to a corporation by a governmental_unit chamber of commerce or other association of individuals having no proprietary interest in the corporation in many such cases because the contributor expects to derive indirect benefits the contribution cannot be called a gift yet the anticipated future_benefits may also be so intangible as to not warrant treating the contribution as a payment for future services one of the court decisions on this subject is 286_us_285 during world war i most of the railroads in the united_states were under the control of the united_states government following the war the railroads were returned to private operation to help the railroads adjust to post-war tam-114875-04 operation the congress enacted the transportation act of the statute guaranteed a minimum operating income for six months after relinquishment of government control the taxpayer received payments pursuant to the statute but did not include the payments in income claiming that the payments were a gift or a contribution_to_capital the court disagreed holding that a t he sums received under the act were not subsidies or gifts bthat is contributions to the capital of the railroads id pincite the court reasoned that the taxpayers awere bound to operate their properties in order to avail themselves of the government s proffer under the terms of the statute no sum could be received save as a result of operation id in addition the court reasoned that the payments amight be used for the payment of dividends of operating_expenses of capital charges or for any other purpose within the corporate authority just as any other operating revenue might be applied id pincite accord 286_us_290 a companion case another court decision on this subject is 319_us_98 the facts involved the payment of cash to the taxpayer by prospective customers to cover the estimated cost of construction of the extension of the taxpayer s electric utility service facilities to the prospective customers the taxpayer contended that the payments were gifts or contributions to capital the court disagreed holding that a t he payments were to the customers the price of the service id pincite the court reasoned that ait overtaxes the imagination to regard the farmers and other customers who furnished these funds as makers either of donations or contributions to the company the transaction neither in form nor in substance bore such a semblance id pincite another court decision on this subject is 339_us_583 the facts involved the payment of cash and the transfer of other_property to the taxpayer by certain community groups as an inducement to the location or expansion of the taxpayer s factory operations in the communities the taxpayer contended that the properties so acquired were gifts or contributions to capital the court agreed holding that athe assets transferred to petitioner by the community groups represented contributions to capital id pincite the court reasoned that a t he contributions to petitioner were provided by citizens of the respective communities who neither sought nor could have anticipated any direct service or recompense whatever their only expectation being that such contributions might prove advantageous to the community at large id pincite the court in 412_us_401 listed the following characteristics of a nonshareholder contribution_to_capital it certainly must become a permanent part of the transferee s working_capital structure it may not be compensation such as a direct payment for a specific quantifiable service provided for the transferor by the transferee it must be bargained for the asset transferred tam-114875-04 foreseeably must result in benefit to the transferee in an amount commensurate with its value and the asset ordinarily if not always will be employed in or contribute to the production of additional income and its value assured in that respect id pincite for a transfer to qualify as a nonshareholder contribution_to_capital under sec_118 the transferor must have the requisite motivation and the transfer must have the requisite economic_effect on the recipient corporation if either is lacking then the transfer does not qualify as a contribution_to_capital taxpayer contends that the offset payments serve a public benefit by restoring fair trade so that jobs and investments in the united_states are not lost through distributions to benefit affected domestic producers willing to produce and invest in the united_states this type of resulting indirect benefit is within the contemplation of sec_118 nonshareholder capital contributions taxpayer distinguishes the offset payments from the subsidies in texas pacific railway taxpayer states that the offset payments are allocated among recipients based on certain expenditures made and not measured by deficiencies in operating income as was the case in texas pacific railway in addition a recipient of the offset is not required to show damages suffered by the recipient we do not agree with taxpayer’s characterization of the offset as a contribution_to_capital the government s motive for the offset is to assist taxpayer in recouping losses suffered from illegal dumping involving x products entering the united_states the offset was distributed to taxpayer as compensation_for damages caused by dumping and not as a contribution to the permanent working_capital of taxpayer affected u s industries are presumed to have been harmed by dumping the amount of the offset is measured by reference to specified qualifying expenditures including noncapital operating_expenses here as in texas pacific railway once taxpayer receives the offset taxpayer may use it for the payment of dividends operating_expenses or capital charges or for any other purpose within the corporate authority just as any other operating revenue might be applied taxpayer used the offset to reduce its debt the offset failed to become a permanent part of taxpayer s working_capital structure because it was not restricted to the acquisition of capital assets the present case is similar to texas pacific railway in other ways in texas pacific railway the purpose of the government payments was to help the railroads get back on their feet after several years of government control during world war i here the purpose of the offset is to help injured u s industries recover from the harmful effects of foreign dumping and subsidization cong rec s497 daily ed date here as in texas pacific railway under the terms of the statute no offset can be received unless taxpayer remains in operation u s c 1675c b b tam-114875-04 caveat s a copy of this technical_advice_memorandum is to be given to taxpayer sec_6110 of the code provides that it may not be used or cited as precedent


department of the treasury internal_revenue_service washington d c jul tax_exempt_and_government_entities_division uniform issue list legend taxpayer a individual b plan x amount amount amount company c financial advisor d law firm e company f dear page this is in response to your request dated date as supplemented by correspondence dated december april29 and may from your authorized representative in which you request a waiver of the 60-day rollover requirement contained in sec_402 of the internal_revenue_code the code the following facts and representations have been submitted under penalty of perjury in support of the ruling requested taxpayer a represents that she as an alternate_payee received a distribution from plan x totaling amount taxpayer a represents that she timely rolled over amount of amount but did not roll over amount of amount which was withheld for federal_income_tax taxpayer a asserts that her failure to accomplish a rollover of amount within the 60-day period prescribed by sec_402 of the code was due to taxpayer a's lack of funds and taxpayer a's physical and mental condition which impaired her ability to handle financial matters taxpayer a further represents that amount has been withheld for federal_income_tax purposes taxpayer a represents that pursuant to a qualified_domestic_relations_order qdro under the retirement equity act she was an alternate_payee assigned monies from her ex-spouse individual b's account in plan x prior to the plan x distribution taxpayer a received two letters from company c addressing plan x's pre distribution 60-day direct_rollover election_period and withholding on distributions taxpayer a received a letter dated april15 from company c providing her days until date to make and submit an affirmative distribution election with respect to her qdro monies in plan x the letter and distribution election form allowed taxpayer a to elect a lump sum distribution or a direct_rollover into a qualified_individual retirement account ira or tax-qualified plan the letter explained that an automatic lump sum distribution with percent withholding would be made if she failed to return the election form by the due_date the letter included a tax information document entitled your rollover options which explained that if a direct_rollover is not done an indirect rollover of the full distribution can be done within days after receipt of the payment the document further noted that in an indirect rollover due to the withholding requirements an individual wishing to roll over the full amount must use other funds to make up for the amount withheld taxpayer a represents that she failed to open the letter and failed to return the election form due to her documented severe physical and mental condition which impaired her ability to manage her financial affairs taxpayer a received a second letter from company c sent on date notifying her that the automatic plan x distribution would be made although taxpayer a opened this letter taxpayer a represents that she failed to understand the significance of its contents due to her worsening physical and mental condition taxpayer a then received the date distribution of amount from plan x a portion of the distribution was paid to her in the form of a distribution check dated date in the amount of amount amount was withheld for federal income taxes page taxpayer a's father helped taxpayer a hire a financial planning firm financial advisor to address what to do with the distribution check on date taxpayer a and her father met with financial advisor d and left the check and the letters from company c for review by financial advisor d on date after reviewing the check and letters financial advisor d explained to taxpayer a that company c's letters included information about the date election deadline and that since taxpayer a did not respond by the deadline she received the automatic distribution with withholding to address the situation taxpayer a completed an ira account application at financial advisor d to open a traditional rollover ira with company f and gave her consent for financial advisor to contact an attorney on her behalf on date taxpayer a retained the services of law firm e to assist her with filing her request for a private_letter_ruling at the suggestion of financial advisor d taxpayer a represents that on date financial advisor d cashed the date distribution check for amount and within the 60-day rollover period deposited it into taxpayer a's new ira taxpayer a did not deposit amount into the ira because she did not have access to funds to replace the withheld amounts taxpayer a represents that she now has amount available to deposit into an ira based on the facts and representations you request a ruling that the internal_revenue_service the service waive the 60-day rollover requirement contained in sec_402 of the code with respect to the distribution of amount sec_402 of the code provides that if any portion of the balance_to_the_credit of an employee in a qualified_trust is paid to the employee in an eligible_rollover_distribution and the distributee transfers any portion of the property received in such distribution to an eligible_retirement_plan and in the case of a distribution_of_property other than money the amount so transferred consists of the property distributed then such distribution to the extent transferred shall not be includible in gross_income for the taxable_year in which paid sec_402 states that such rollover must be accomplished within days following the day on which the distributee received the property an ira constitutes one form of eligible_retirement_plan sec_402 of the code provides that an eligible_rollover_distribution shall not include any distribution to the extent such distribution is required under sec_401 a of the code sec_402 of the code provides in relevant part that the secretary may waive the 60-day requirement under sec_402 where the failure to waive such requirement would be against equity or good conscience including casualty disaster or other events beyond the reasonable control of the individual subject_to such requirement only distributions that occurred after date are eligible for the waiver under sec_402 page4 sec_3405 of the code provides that the payor of an eligible_rollover_distribution shall withhold from the distribution an amount equal to percent of the distribution unless the distributee elects under sec_401 a a to have the distribution paid directly to an eligible_retirement_plan sec_401 a of the code provides the rules for governing direct transfers of eligible rollover distributions sec_1_401_a_31_-1 q a-15 of the income_tax regulations regulations provides in relevant part that an eligible_rollover_distribution that is paid to an eligible_retirement_plan in a direct_rollover is a distribution and rollover and not a transfer of assets and liabilities sec_1_402_c_-2 q a-12 of the regulations provides that the eligible_rollover_distribution rules apply to distributions to a spousal distributee such as a former spouse who is an alternate_payee under a qualified_domestic_relations_order sec_1_402_c_-2 q a-11 of the regulations provides that because the amount withheld as income_tax under sec_3405 of the code is considered an amount distributed under sec_402 of the code an amount equal to all or any portion of the amount withheld can be contributed as a rollover to an eligible_retirement_plan within the 60-day period in addition to the net amount of the eligible_rollover_distribution actually received by the employee if all or any portion of an amount equal to the amount withheld is not contributed as a rollover it is included in the employee's gross_income to the extent required under sec_402 and also may be subject_to the percent additional income_tax under sec_72 of the code revproc_2003_16 2003_4_irb_359 date provides that in determining whether to grant a waiver of the 60-day rollover requirement pursuant to sec_402 of the code the service will consider all relevant facts and circumstances including errors committed by a financial_institution inability to complete a rollover due to death disability hospitahzation incarceration restrictions imposed by a foreign_country or postal error the use of the amount distributed for example in the case of payment by check whether the check was cashed and the time elapsed since the distribution occurred taxpayer a asserts that she did not roll over amount because she did not have the funds available during the 60-day rollover period however taxpayer a also asserts that although she was able to roll over amount within the 60-day rollover period her severe mental and physical condition prevented her from electing a direct_rollover prior to the 60-day rollover period taxpayer a asserts that but for her severe mental and physical condition she would have made a direct_rollover and would have had the funds available to rollover the information presented and documentation submitted by taxpayer a is consistent with her assertion that her failure to accomplish a timely rollover of amount page was mainly due to her severe mental and physical condition which prevented her from returning her withholding election form therefore pursuant to sec_402 of the code the service hereby waives the 60-day rollover requirement with respect to the distribution of amount from plan x taxpayer a is granted a period of days from the issuance of this ruling letter to contribute amount into a ira another qualified_plan provided all other requirements of sec_402 of the code except the 60-day requirement are met with respect to such contribution the contribution of amount will be considered a rollover_contribution within the meaning of sec_402 of the code this ruling does not authorize the rollover of amounts that are required to be distributed by sec_401 a of the code no opinion is expressed as to the tax treatment of the transaction described in this ruling under the provisions of any other section of either the code or regulations which may be applicable this letter 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 pursuant to a power_of_attorney on file with this office a copy of this letter is being sent to your authorized representatives if you wish to inquire about this ruling please contact id at se t ep ra t1 please address all correspondence to sincerely yours carlton a watkins manager employee_plans technical group enclosures deleted copy of ruling letter notice of intention to disclose cc


office_of_chief_counsel internal_revenue_service memorandum number release date cc fip b06 gecho postf-131767-14 uilc date april to jack forsberg senior counsel large business international from patrick white senior counsel financial institutions products subject treatment of warranty obligation reserve as sec_475 losses this chief_counsel_advice responds to your request for assistance dated date this advice may not be used or cited as precedent legend taxpayer ------------------------------------- year year ------- ------- issue whether the book reserve losses reported by taxpayer with respect to its repurchase and indemnity obligations arising from the breach of mortgage sale contract warranty and representations w r obligations were properly treated as sec_475 mark-to- market losses on securities conclusion the book reserve losses reported by taxpayer from its repurchase and indemnity obligations arising from the breach of w r obligations were not properly treated as sec_475 mark-to-market losses on securities postf-131767-14 facts taxpayer originated and sold mortgages prior to and during years under audit to private investors and other large purchasers under the terms of the sales contracts or other relevant documents purchasers were generally entitled to force the repurchase of the mortgages by taxpayer and or pursue other indemnification from taxpayer to compensate for taxpayer’s or other originator’s breach of warranties and representations that caused the value of the mortgages to be materially and adversely impaired typically asserted defects included those involving failures to follow proper underwriting or valuation standards taxpayer made numerous representations and warranties related to the appraisal insurance underwriting and general quality of the mortgage loans and the underlying mortgaged property the agreements generally prescribed procedures by which taxpayer had to make purchasers whole for any material breach including providing purchasers the right to demand taxpayer to repurchase defective mortgages and indemnify the purchaser for costs some purchasers had a formal process by which they would request review of mortgage files associated with defective mortgages the full process allowed for appeals and the negotiation over remedies independent of forcing the repurchase of defective mortgages taxpayer expended considerable resources challenging repurchase demands frequently averting repurchase with its appeals the parties to the representative agreement stipulated that taxpayer’s obligations to cure substitute or repurchase defective mortgage loans and to indemnify the purchaser constituted the sole remedies respecting taxpayer’s breach of its warranties the agreement stipulated that unless otherwise agreed to by the purchaser and taxpayer the repurchase price was the stated principal balance of the relevant mortgage unpaid stated_interest plus all reasonable and necessary costs incurred by the purchaser that arose from the breach any cause of action related to breach of the w r obligations accrued upon a discovery of the breach by the purchaser or notice given by taxpayer b failure by taxpayer to cure or repurchase and c demand by the purchaser that taxpayer comply with the agreement the representative agreement expressly stated that taxpayer’s intent was to undertake a sale of mortgages and not the issuance of a debt_instrument or the sale of another security it further stated that the parties intended to treat the transactions for accounting and federal_income_tax purposes as sales of mortgage loans the agreement made provision for payment of the purchase_price of mortgage loans at closing but not for the payment of premium for the purchase of options consistent therewith the w r obligations were not reported or described as securities in taxpayer’s public reporting for book purposes taxpayer estimated and reported an aggregate loss reserve for its w r obligations in calculating the reserve which it determined on an undiscounted basis taxpayer evaluated trends in defaults repurchase demand activity successful postf-131767-14 appeal rates actual losses market conditions and such other factors that it judged significant taxpayer’s position -- taxpayer contends that the w r obligations were securities under sec_475 in filing its year and year returns taxpayer took the position that its aggregate reported book loss reserve for its w r obligations represented sec_475 mark-to-market losses on securities taxpayer maintains that as part of each sale the purchaser acquires a derivative right to put the loans back to taxpayer for originations that are defective and breach the representations and warranties in the sales contracts in essence taxpayer contends that the sales contract remedies which include the right of a purchaser of mortgages to demand repurchase for breach should be viewed as separate securities upon which gain_or_loss is determined under sec_475 it follows from taxpayer’s argument that the purchasers of the mortgages not only acquired the mortgages in the sales contract but also purchased separate put options on such mortgages law and analysis for an accrual basis taxpayer to properly claim a deduction for a liability the liability must be incurred that is it must meet the all_events_test and economic_performance requirements in sec_461 and sec_1_461-1 a liability is incurred in the taxable_year in which all the events have occurred that established the fact of the liability the amount of the liability can be determined with reasonable accuracy and economic_performance has occurred with respect to the liability sec_1_461-1 and sec_1_461-4 a securities_dealer is generally required by sec_475 to mark any security which it holds at the close of the taxable_year so that such dealer recognizes any gain_or_loss as if such security were sold for its fair_market_value on the last business_day of such taxable_year sec_475 requires that proper adjustment shall be made in the it is not known whether taxpayer would contend that the w r obligations should be viewed as puts on pools of mortgages or perhaps more consistent with the definition of an option a series of options on each sold mortgage in a pool the reserve for warranty losses on the sale of the mortgages would not be properly treated as either a deduction or reduction of sales_price see 45_tc_158 declining to follow 230_f2d_722 5th cir t he basic question is simply whether a taxpayer may exclude from current income amounts actually received or accrued merely because future expenditures may offset such amounts in part or in whole the statute does not permit the deferral of such income to be offset in a later year by expenses_incurred in that later year nor does it permit the same result to be reached by excluding a portion of the receipts from current income through the medium of crediting such excluded amounts to a reserve for future expenditures which are thus in effect deducted prior to the time they are actually made or incurred see generally 481_us_239 postf-131767-14 amount of any gain_or_loss subsequently realized for gain_or_loss taken into account by the mark a dealer_in_securities is defined by sec_475 to be a taxpayer who regularly purchases securities from or sells securities to customers in the ordinary course of a trade_or_business or regularly offers to enter into assume offset assign or otherwise terminate positions in securities with customers in the ordinary course of a trade_or_business sec_475 broadly defines the term security as relevant here a security includes a note bond debenture or other evidence_of_indebtedness as described in sec_475 under sec_475 a security further includes an evidence of an interest in or a derivative financial_instrument in any security described in sec_475 or any currency including any option forward_contract short position and any similar financial_instrument in such a security or currency the w r obligations were not sec_475 securities the w r obligations were not securities described in sec_475 taxpayer should not be permitted to disavow the form of its transaction taxpayers generally are bound to the form of their transactions see 417_us_134 the service however is not necessarily so bound and can make adjustments to reflect a transaction’s true substance 293_us_465 364_us_361 232_f2d_873 4th cir t he commissioner or the courts may look through the form of a transaction to the substance thereof but the choice to disregard its classification of a transaction does not lie with the taxpayer in form taxpayer’s w r obligations were standard provisions in mortgage sales contracts designed to provide purchasers compensation_for taxpayer’s failure to deliver mortgages of the quality that the purchasers bargained for the w r obligations were material and integral to the sales contracts not independent financial instruments investments positions or bets on the value of those mortgages the value of the w r obligations was generally derived from the mortgage loans but that value was not realizable but for a breach by taxpayer of a relevant obligation discovery and failure to cure thus unlike the value of options or similar derivative financial instruments the value of the w r obligation is generally driven by non-market forces including things like discovery of a breach failure to cure negotiations and the quality of appeal arguments neither the w r obligation terms nor any others in the representative agreement suggest that the parties intended that a separate option or more aptly a series of postf-131767-14 separate options or other similar derivative financial_instrument was independently entered into either for federal_income_tax purposes or otherwise rather the representative contract specified that the only consideration paid was specifically for the sale of mortgages no separate option premium was paid consistent therewith the contract included a representation by taxpayer that it had determined that the disposition of the mortgage loans pursuant to the agreement would be afforded sale treatment for accounting and tax purposes remedy or damage provision rights are not considered options courts have repeatedly rejected the notion that rights to liquidated or other damages in a bilateral sales contract cause such contracts to be treated as options the tenth circuit opinion in 145_f2d_365 10th cir is perhaps the most analogous and instructive case to the facts at hand as it involved a seller of property claiming that a sales contract that included unwind and liquidated damage provisions should be treated as an option the taxpayer in w a drake sold a farm pursuant to a contract of sale that contained a liquidated_damages provision that gave the taxpayer as the seller the right to keep any sales proceeds paid up to the point of the purchaser’s breach of its obligation to make ongoing timely payment of deferred sale proceeds at which time the purchaser would be obligated to return the farm to the taxpayer the taxpayer claimed that the purchaser had merely entered into an option to purchase the property as the purchaser’s default caused the property to be returned to the taxpayer the tenth circuit was not convinced the court looked to the entire contract to conclude that the sales contract created enforceable obligations and was more than just a mere option to purchase in particular it stated that the right to cancel unwind the sale in the event of default by the purchaser did not convert an otherwise binding contract into an option contract further the ability of the purchaser to default and forfeit only the property and proceeds previously remitted was not viewed as a put option other courts have been consistently unreceptive to characterizing executory sales contracts as options based on the operation of damage provisions in those contracts more particularly courts have not confused the right to accept or pay liquidated_damages as indicating that an otherwise executory bilateral contract should be characterized as an option the service failed in 422_f2d_887 ct_cl to convince the u s court of claims that a taxpayer that had forfeited a dollar_figure down payment as liquidated_damages for its failure to go forward with a bilateral sales contract caused the contract to be an option contract the court held that the agreement was not an option because options are rights possessed under a unilateral contract and do not arise under failures from bilateral contracts the court at the lower court level the tax_court in w a drake rejected the apparent contention by the taxpayer that the sale transaction should be severed into discrete parts the tax_court stated that it was not impressed by taxpayer’s argument that the sale could be broken up into several parts concluding that the transaction was only the sale of the farm 3_tc_33 postf-131767-14 of claims stated it is also clear that the insertion of a provision for liquidated_damages in the event of plaintiff’s breach did not convert the bilateral contract into an option id pincite the w r obligations are not severable put options generally the service and courts have refused to treat embedded rights in contracts or financial instruments as options the bifurcation of convertible debt into debt and an option on equity was rejected by the court_of_appeals for the second circuit in 453_f2d_300 2d cir the taxpayer therein argued that the convertible_bonds could be bifurcated because convertible debt is analogous to bond-warrant investment units which have been recognized under the tax law to contain two distinct and divisible obligations the court rejected the taxpayer’s argument because bond-warrant investment_unit components are sold separately on the market whereas convertible_bonds are indivisible units chock full o’ nuts f 2d pincite further the court stated that a holder could exercise a bond-warrant investment_unit without forfeiting the bond while a holder of a convertible_bond must forfeit the bond in order to exercise the conversion feature similarly the tax_court in 57_tc_633 rejected the claim by a taxpayer a corporate issuer of convertible debt that it could effectively bifurcate convertible debt into both debt and an option so as to allocate part of the debt issuance proceeds to the option feature hunt foods t c pincite the court rejected the corporation’s contention stating that an investment_unit contains two separate securities an obligation and an option which are legally and physically independent of one another and have their own separate markets id pincite by contrast the court viewed the convertible debt to be a single security because the debt and option features did not have physical and legal independence and could not be sold separately cf revrul_88_31 1988_1_cb_302 a put option that was issued as part of an investment_unit was considered a separate item of property where it was separately transferrable after a short_period of time revrul_2003_97 2003_2_cb_380 in the case at hand the w r obligations were physically and legally dependent and intertwined with the sales contracts the w r obligations were not designed to be separately assignable and they would not have existed but for the sales contracts the w r obligations and associated remedy rights preserved the value of the bargain struck in the sales contracts making the terms mutually interdependent any attempt to bifurcate the contracts into sales of the mortgages plus options would be inconsistent with the terms of the contracts and economic realities see also 83_f3d_649 4th cir the ability to walk away from a sales contract by forfeiting a deposit though resembling an option is merely part of a bilateral sales contract the court in hunt foods also expressed concern that bifurcating the convertible debt would have been contrary to the practice that has apparently generally been followed throughout the years and ignores the realities of a convertible debenture id pincite a similar concern would arise here if warranty provisions in sales contracts were viewed as separate items of property independent from the sales contracts as the postf-131767-14 based on the above the w r obligations were not sec_475 securities therefore the w r obligation reserve losses were not permitted to be taken as sec_475 mark- to-market losses by taxpayer during the years in question case development hazards and other considerations no opinion is being expressed on any aspects of this issue except as addressed above thus this should not be read to express or imply an opinion on the treatment of contingent options under the federal_income_tax law further this advice does not express an opinion on whether taxpayer’s estimated aggregate loss_reserves would be considered to be an accurate determination of its mark-to-market losses even if the w r obligations were considered sec_475 securities this writing may contain privileged information any unauthorized disclosure of this writing may undermine our ability to protect the privileged information if disclosure is determined to be necessary please contact this office for our views please call grace cho at if you have any further questions _____________________________ patrick white senior counsel branch office of associate chief_counsel financial institutions and products cc -------------------------------------------- ---------------------------------- -------------------------------------------- ---------------------------------------------------------- --------------------------- established tax_accounting for expenses of satisfying sale warranties would be upended for sec_475 dealers and traders


internal_revenue_service number release date index numbers ----------------------------- ------------------------------------ ------------------------ ------------------------------------------------------------ ------- --------------------------------------- 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 plr-112141-09 date date legend x --------------------------------------------------- -------------------------------------- d1 d2 country ------------------- ------------------- --------------------- dear --------------- this is in response to a letter dated date submitted on behalf of x requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations to file an election under sec_301_7701-3 to be treated as a disregarded_entity for federal tax purposes facts according to the information submitted x was formed on d1 under the laws of country x intended to be treated as a disregarded_entity for federal tax purposes effective d2 however x inadvertently failed to timely file form_8832 entity classification election to be treated as a disregarded_entity for federal tax purposes effective d2 plr-112141-09 law and analysis sec_301_7701-3 provides that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes an eligible_entity with a single owner can elect to be classified as an association or to be disregarded as an entity separate from its owner sec_301_7701-3 provides guidance on the classification of a foreign eligible_entity for federal tax purposes generally a foreign eligible_entity is treated as an association if all members have limited_liability unless the entity makes an election to be treated otherwise a foreign eligible_entity with a single owner having limited_liability may elect to be treated as a disregarded_entity pursuant to the rules of sec_301_7701-3 sec_301_7701-3 and iii provides that an entity classification election must be filed on form_8832 and can be effective up to days prior to the date the form is filed or up to months after the date the form is filed sec_301_7701-3 provides that an election under sec_301_7701-3 must be signed by - a each member of the electing entity who is an owner at the time the election is filed or b any officer manager or member of the electing entity who is authorized under local law or the entity’s organizational documents to make the election and who represents to having such authorization under penalties of perjury sec_301_7701-3 provides that if a purchasing_corporation makes an election under sec_338 regarding an acquired subsidiary an election under sec_301 c i for the acquired subsidiary can be effective no earlier than the day after the acquisition_date within the meaning of sec_338 under sec_301_9100-1 the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six 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 section b defines the term regulatory election as including an election whose due_date is prescribed by a regulation published in the federal_register sec_301_9100-1 through provide the standards that the commissioner will use to determine whether to grant an extension of time to make an election sec_301_9100-1 sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides rules for requesting extensions of time for regulatory elections that do not meet the requirements of sec_301_9100-2 plr-112141-09 requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government conclusion based solely on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-3 have been satisfied as a result x is granted an extension of time of days from the date of this letter to file a properly executed form_8832 effective d2 with the appropriate service_center to elect to be classified as a disregarded_entity a copy of this letter should be attached to the form_8832 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 taxpayer requesting it sec_6110 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 sincerely curt g wilson curt g wilson associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes


department of the treasury internal_revenue_service washington d c contact person identification_number tleo l telephone number employer_identification_number uniform issue list date nov legend l m n q a b dear sir or madam we have considered your ruling_request relating to the effect a proposed restructuring will have on your organization under sec_501 of the internal_revenue_code and whether certain activities will constitute unrelated_trade_or_business under sec_513 facts l formerty known as m is aa nonprofit corporation that has been recognized as exempt from federal_income_tax under sec_501 of the code as an organization described in sec_501 and which is not a private_foundation by virtue of being described in sec_509 l is the parent_corporation of a health care system operating primarily in southern a l was formed as a result of an affiliation between n and o pursuant to which l was established as the sole member of each of these organizations each of these organizations has been recognized as exempt from federal_income_tax under sec_501 of the code as an -2- as the sole member of each of these organizations each of these organizations has been recognized as exempt from federal_income_tax under sec_501 of the code as an organization described in sec_501 which is not a private_foundation because it is described in sec_509 this affiliation was the subject of private_letter_ruling dated b effective date n and owere each merged with and into l pursuant to a statutory merger under the law of the state of a the mergers as a result of the mergers n and o ceased to exist as separate legal entities prior to the mergers nwas the sole member of five nonprofit_corporations which were described in sec_501 of the code and was the sole shareholder of a a business corporation all of these corporations were engaged in health care activities or in related supporting activities recently one of the tax-exempt corporations has been dissolved and the business corporation is in the process of being dissolved prior to the mergers o was the sole member of four a nonprofit_corporations which were described in sec_501 c of the code collectively the four subordinate organizations of n and the four subordinate organizations of o together with any other entities controlled directly or indirectly by q are referred to as the subsidiaries prior to the mergers n and o were responsible for the local network operations of their respective affiliated operating units subject_to the control of l after the affiliation l n and o determined that n and o were no longer needed to function as local area networks as originally contemplated and that their elimination would further enhance the structural and financial integration of the two health care systems served by nand in contemplation of the mergers l n o and the subsidiaries entered into an affiliation agreement dated date the affiliation agreement in accordance with the affiliation agreement l continues to function as a community-based and community-governed regional integrated health care network without the existence ofnorq l’s near-term priorities continue to include establishing strategic direction and policy overseeing and directing the integration of the functions and the operations of the subsidiaries and the achievement of operating efficiencies and cost reductions through the elimination of duplicative functions and securing managed care contracts for l and the subsidiaries ts long- term priorities continue to include promoting the structural and financial integration of the health care services provided by the subsidiaries to enhance the provision of health care to communities served by l’s health system the certificate of incorporation of each of the subsidiaries has been amended and restated to reflect l as each of the subsidiaries’ sole member the bylaws of each of the subsidiaries have been amended to grant l significant governance management and financial authority with respect to each of the subsidiaries pursuant to the affiliation agreement l has the right to determine the types of services each of the subsidiaries provides and each subsidiary and each of its affiliated entities must comply with the directives of l’s board_of trustees the affiliation agreement also provides that each subsidiary must use its best efforts to ensure that its management maintains an effective working relationship with l’s chief_executive_officer to effectuate u's objectives to that end l’s chief_executive_officer has the authority to participate in performance evaluations and goal setting of the management of each of the subsidiaries under l's bylaws physicians must comprise no less than percent but no more than percent of the voting members of l’s board_of trustees in addition 's bylaws include a substantial conflicts of interest policy l has made the following representations he a at ail times at least a majority of the members of l’s board_of trustees will be comprised of independent members of the community at all times at least a majority of a quorum of l's board_of trustees will be comprised of independent members of the community at all times at least a majority of the members of l’s governance committee will be comprised of independent members of the community l's conflicts of interest policy applies to all of the subsidiaries the tax-exempt hospitals that l controls have adopted an open medical staff policy under which they accept for admission to their respective medical staffs all qualified physicians who apply the tax-exempt hospitals that l controls have adopted a charity care policy that applies to all persons without regard to age race or socio- economic status and that they communicate this policy to their respective employees and to the general_public the tax-exempt hospitals that controls have adopted a policy to provide health care services to all persons without regard to their ability to pay and without regard to age race or socio-economic status and that they communicate this policy to their respective employees and to the general_public the tax-exempt hospitals that l controls have adopted a policy to offer emergency health care service sec_24 hours a day to all persons without regard to their ability to pay and without regard to age race or socio- economic status and that they communicate this policy to their respective employees and to the general_public the tax-exempt hospitals that l controls have adopted a policy relating to the performance of affordable health care education programs for the benefit of the community and that they communicate this policy to their respective employees and to the general_public the tax-exempt hospitals that l controls have adopted a policy relating to the performance of medical education programs for physicians and other 21s -4 health care professionals in the community k l the tax-exempt hospitals that l controls conduct medical_research programs for the benefit of the community the tax-exempt hospitals that l controls have adopted a policy that they will use any surplus of revenués over expenses for the benefit of the community such as to improve the quality of patient care to expand their respective facilities or to advance their respective medical training education or research programs rulings requested after the mergers l will continue to qualify as exempt from federal income_taxation under sec_501 of the code as an organization described in sec_501 after the mergers l will continue to be a public charity under sec_509 of the code after the mergers l’s provision of management or other services loans capital contributions and or the transfer of assets personnel or resources to any of the subsidiaries will not adversely affect the tax-exempt status of l and will not constitute an unrelated_trade_or_business to l under sec_513 of the code applicable law sec_501 of the code provides an exemption from federal_income_tax for organizations described in sec_501 sec_501 of the cade provides for the exemption from federal_income_tax of organizations organized and operated exclusively for charitable scientific or educational_purposes provided no part of the organization's net_earnings inures to the benefit of any private_shareholder_or_individual sec_1 c -1 a of the income_tax regulations provides that for an organization to be exempt as one described in sec_501 of the code it must be both organized and operated exclusively for one or more exempt purposes under sec_1 c -1 d i b of the regulations an exempt_purpose includes a charitable purpose sec_1_501_c_3_-1 of the regulations provides that an organization is organized exclusively for one or more exempt purposes only if its articles of organization a limit the purposes of such organization to one or more exempt purposes and b do not expressiy empower the organization to engage otherwise than as an insubstantial part of its activities in activities which in themseives are not in furtherance of one or more exempt purposes sec_1_501_c_3_-1 of the regulations provides that an organization is operated exclusively for one or more exempt purposes only if it engages primarily in activities which accomplish one or more of such exempt purposes specified in sec_501 of the code an organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt_purpose in 326_us_279 the court stated that the presence ofa single nature will destroy the exemption regardless of the number or importance of truly purposes nonexempt purpose if substantial in exempt sec_1_501_c_3_-1 of the regulations provides that the term charitable is used in sec_501 of the code in its generally accepted legal sense the promotion of heaith has long been recognized as a charitable purpose see restatement second trusts sec_368 sec_372 4a scott fratcher the law of trusts sec_368 sec_372 ed ae revrul_69_545 1969_2_cb_117 states that a properly organized nonprofit_hospital meets the community benefit standard and thus qualifies for exemption as a charitable_organization under sec_501 c of the code where its board_of trustees is controlled by independent civic leaders it has a medical staff open to all qualified physicians in the area consistent with the size and nature of its facilities it operates a full-time emergency room open to all persons without regard to the ability to pay and it provides hospital care for everyone in the community able to pay the cost thereof either themselves through private health insurance or with the aid of public programs the application of the community benefit standard to exempt hospitals and other exempt health care organizations was sustained in 506_f2d_1278 d c cir vacated on other grounds 426_us_26 and in 71_tc_158 acq 1981_2_cb_2 sec_511 of the code imposes a tax on the unrelated_business_income of organizations described in sec_501 sec_512 of the code defines unrelated_business_taxable_income as the gross_income derived by an organization from any unrelated_trade_or_business regularly carried on by it less the allowable deductions which are directly connected with the carrying on of the trade_or_business with certain modifications sec_513 of the code defines unrelated_trade_or_business as any trade_or_business the conduct of which is not substantially related aside from the need of the organization for funds or the use it makes of the profits derived to the exercise of the organization's exempt purposes or functions sec_1_513-1 of the regulations provides in part that a trade_or_business is related to exempt purposes only where the conduct of the business activities has a causal relationship to the achievement of exempt purposes and it is substantially related for purposes of sec_513 of the code only if the causal relationship is a substantial one thus for the conduct of trade_or_business from which a particular amount of gross_income is derived to be substantially related to purposes for which exemption is granted the production or distribution of goods or the performance of the services from which the gross_income is derived must contribute importantly to the accomplishment of exempt purposes rationale following the mergers l’s activities pursuant to the affiliation agreement will promote the charitable health care purposes of the subsidiaries at least a majority of the members of l's board_of trustees and its governance committee will be comprised of independent members of the community and a majority of a quorum of the board_of trustees will be comprised of independent members of the community l has adopted a conflicts of interests policy that also applies to the subsidiaries the taxeeaxempt-hospitals that l controls have adopted the following policies an open medical staff policy a charity care policy a policy that they will provide health care services to all persons without regard to their ability to pay and without regard to their age race or socio-economic status a policy to offer hours emergency heaith care services to all persons without regard to their ability to pay and without regard to their age race or socio-economic status a policy relating to the performance of affordable health care education programs for the benefit of the community a policy retating to the performance of medical education programs for physicians and a policy that they will use any surplus of revenue over expenses for the benefit of the community these hospitals conduct medical_research programs for the benefit of the community therefore l satisfies the community benefit standard of revrul_69_545 supra as a result l will continue to be organized and operated exclusively for charitable purposes under sec_501 of the code contributions to organizations exempt from federal_income_tax under sec_501 of the code or income derived from the performance of services by related sec_501 organizations do not fall within the definition of unrelated_business_income under section dollar_figure nor create taxable gain_or_loss to the transferor or transferee l’s entering into the affiliation agreement with the subsidiaries will not adversely affect its status as an organization described in sec_501 because l will continue to be organized and operated exclusively for the promotion of health within the meaning of revrul_69_545 supra the provision of management or other services loans capital contributions and the transfer of assets personnel or resources between l and the subsidiaries pursuant to the affiliation agreement will not adversely affect its tax-exempt status under sec_501 because these activities will facilitate its charitable purposes of promoting health for the benefit of the community within the meaning of revrul_69_545 in addition l will continue to qualify as a supporting_organization under sec_509 ruling sec_1 after the mergers l will continue to qualify as exempt from federal income_taxation under sec_501 of the code as an organization described in sec_501 after the mergers l will continue to be a public charity under sec_509 of the code after the mergers l’s provision of management or other services loans capital contributions and or the transfer of assets personnel or resources to any of the 2p subsidiaries will not constitute an unrelated_trade_or_business to l under sec_513 of the code these rulings are based on the understanding that there will be no material changes in the facts upon which they are based these rulings do not address the applicability of any section of the code or regulations to the facts submitted other than with respect to the sections described these rulings are directed only to the organization that requested them and may not be used or cited by others as precedent we are informing your exempt_organizations area manager of this action please keep a copy of this letter in your permanent records if you have any questions about these rulings please contact the person whose name and telephone number are shown in the heading of this jeter in accordance with the power_of_attorney currently on file with the internal_revenue_service we are sending a copy of this letter to your authorized representative sincerely aligned marvin friedlander marvin friedlander manager exempt_organizations technical group ye


internal_revenue_service number release date index number ---------------------- ---------------------------------- ----------------------------------- re ----------------------------------- 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-119878-16 date date legend decedent spouse date date ------------------------------------------------- ---------------------- -------------------------- --------------------------- dear ---------------- this letter responds to your personal representative’s letter of date requesting an extension of time pursuant to sec_301_9100-3 of the procedure and administration regulations to make the election under sec_2010 of the internal_revenue_code portability election to allow a decedent’s surviving_spouse to take into account that decedent’s deceased spousal unused exclusion dsue amount the facts and representations are as follows decedent died on date survived by spouse date is a date after the effective date of the amendment to sec_2010 which provides for portability of a dsue amount to a surviving_spouse to obtain the benefit of portability of decedent’s dsue amount to spouse decedent’s estate was required to file form_706 united_states estate and generation-skipping_transfer_tax return on or before the date that is nine months after decedent’s date of death or the last day of the period covered by an extension decedent’s form_706 was due on date but the estate did not file a form_706 to make the portability election the estate discovered its failure to elect portability after the due_date for making the election it is represented that the value of decedent’s gross_estate is less than the basic exclusion amount in the year of decedent’s death including any taxable_gifts made during her lifetime plr-119878-16 you request an extension of time pursuant to sec_301_9100-3 to elect portability of decedent’s dsue amount pursuant to sec_2010 law and analysis sec_2001 imposes a tax on the transfer of the taxable_estate of every decedent who is a citizen or resident_of_the_united_states sec_2010 provides that a credit of the applicable credit_amount shall be allowed to the estate of every decedent against the tax imposed by sec_2001 sec_2010 provides that the applicable credit_amount is the amount of the tentative_tax that would be determined under sec_2001 if the amount with respect to which such tentative_tax is to be computed were equal to the applicable_exclusion_amount on date congress amended sec_2010 effective for estates of decedents dying and gifts made after date to allow portability of a decedent’s unused applicable_exclusion_amount between spouses tax relief unemployment insurance reauthorization and job creation act of pub_l_no sec_303 124_stat_3296 sec_2010 provides that the applicable_exclusion_amount is the sum of the basic exclusion amount and in the case of a surviving_spouse the dsue amount sec_2010 generally provides that the basic exclusion amount is dollar_figure to be adjusted for inflation annually after calendar_year sec_2010 defines the dsue amount to mean the lesser_of a the basic exclusion amount or b the excess of -- i the applicable_exclusion_amount of the last deceased spouse of the surviving_spouse over ii the amount with respect to which the tentative_tax is determined under sec_2001 on the estate of such deceased spouse sec_2010 provides that a dsue amount may not be taken into account by a surviving_spouse under sec_2010 unless the executor of the estate of the deceased spouse files an estate_tax_return on which such amount is computed and makes an election on such return that such amount may be so taken into account the election once made shall be irrevocable no election may be made if such return is filed after the time prescribed by law including extensions for filing such return sec_2010 provides that the secretary shall prescribe regulations as may be necessary or appropriate to implement sec_2010 plr-119878-16 sec_20_2010-2t a of the estate_tax regulations as in effect on date provides that to allow a decedent’s surviving_spouse to take into account that decedent’s dsue amount the executor of the decedent’s estate must elect portability of the dsue amount on a timely-filed form_706 under sec_20_2010-2t a the due_date of an estate_tax_return required to elect portability is nine months after the decedent’s date of death or the last day of the period covered by an extension if an extension of time for filing has been granted under sec_20_2010-2t a the portability election is made by timely filing a complete and properly prepared estate_tax_return unless the executor satisfies the requirements for the election not to apply in sec_20_2010-2t a i sec_301_9100-1 provides that the commissioner may 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 six months except in the case of taxpayer who is abroad under all subtitles of the code except subtitles e g h and i sec_301_9100-1 provides that the term statutory election means an election whose due_date is prescribed by statute the term regulatory election means an election whose due_date is prescribed by a regulation published in the federal_register or a revenue_ruling revenue_procedure notice or announcement published in the internal_revenue_bulletin sec_301_9100-3 provides the standards the commissioner will use to determine whether to grant an extension of time to make an election whose due_date is prescribed by a regulation and not expressly provided by statute a request for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-3 provides that 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 the due_date for the portability election is prescribed by statute in the case of an estate required to file an estate_tax_return under sec_6018 see sec_2010 sec_6075 and sec_6018 in the case of an estate that is not required to file an estate_tax_return under sec_6018 the due_date is prescribed by regulation see sec_20_2010-2t a see also sec_20_2010-2 and revproc_2014_18 2014_7_irb_513 sec_2 accordingly in the latter case a taxpayer may seek an extension of time to elect portability under the provisions of sec_301_9100-3 plr-119878-16 sec_6018 requires the filing of an estate_tax_return in all cases where the gross_estate exceeds the basic exclusion amount in effect under sec_2010 for the calendar_year which includes the date of death for purposes of this determination under sec_6018 the basic exclusion amount is reduced but not below zero by the sum of -- a the amount of the adjusted_taxable_gifts within the meaning of sec_2001 made by the decedent after date plus b the aggregate amount allowed as a specific exemption under sec_2521 as in effect before its repeal by the tax reform act of with respect to gifts made by the decedent after date it is represented that based on the value of the gross_estate and taking into account any taxable_gifts decedent’s estate is not required to file an estate_tax_return under sec_6018 under these facts the commissioner has discretionary authority under sec_301_9100-3 to grant to decedent’s estate an extension of time to elect portability based on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-3 have been satisfied accordingly we grant an extension of time of days from the date of this letter in which to elect portability under sec_2010 the election should be made by filing a complete and properly-prepared form_706 and a copy of this letter within days from the date of this letter to the cincinnati service_center at the following address internal_revenue_service cincinnati service_center stop cincinnati oh for purposes of electing portability a form_706 filed by decedent’s estate within days from the date of this letter will be considered to be timely filed the rulings contained in this letter are 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 rulings it is subject_to verification on examination if it is later determined that based on the value of the gross_estate and taking into account any taxable_gifts decedent’s estate is required to file an estate_tax_return pursuant to sec_6018 the commissioner is without authority under sec_301_9100-3 to grant to decedent’s estate an extension of time to elect portability and the grant of the extension referred to in this letter is deemed null and void this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent plr-119878-16 in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely associate chief_counsel passthroughs special industries by lorraine e gardner lorraine e gardner senior counsel branch office of associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes


t c summary opinion united_states tax_court everardo garcia petitioner v commissioner of internal revenue respondent docket no 11987-11s filed date everardo garcia pro_se linette b angelastro and jordan scott musen for respondent summary opinion panuthos chief special_trial_judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect when the petition was filed pursuant to sec_7463 the decision to be entered is not reviewable by any other court and this opinion shall not be treated as precedent for any other case unless otherwise indicated subsequent section references are to the internal_revenue_code code in effect for the year in issue and all rule references are to the tax_court rules_of_practice and procedure in a notice_of_deficiency dated date respondent determined a deficiency in petitioner’s federal_income_tax of dollar_figure and a sec_6662 accuracy-related_penalty of dollar_figure for tax_year after a concession the issues for decision are whether petitioner is entitled to deductions claimed on schedule c profit or loss from business whether petitioner is entitled to deductions claimed on schedule e supplemental income and loss in excess of the amounts allowed by respondent whether petitioner is subject_to restrictions under sec_32 from receiving an earned_income_tax_credit for tax years and and whether petitioner is liable for the accuracy-related_penalty under sec_6662 background some of the facts have been stipulated and we incorporate the stipulation of facts supplemental stipulation of facts and the accompanying exhibits by thi sec_1respondent concedes that petitioner did not receive dollar_figure of unreported income from omnilife usa in reference petitioner resided in california when his petition was filed petitioner’s testimony was given through an interpreter at trial petitioner timely filed a joint federal_income_tax return for tax_year although petitioner filed a joint_return he was single during petitioner’s return was prepared by jir business management service in petitioner was self-employed as a performer in a mariachi group petitioner also owned two rental properties one property was an apartment complex in lompoc with four apartments lompoc apartment complex and the other was a single-family residence petitioner filed with his return a schedule c on which he reported gross_receipts and claimed car and truck expenses for his business activity petitioner also filed a schedule e on which he reported rental income and expenses for the two rental properties 2many of the documents petitioner submitted were attached as exhibits to the supplemental stipulation of facts which was filed after trial respondent objected to introduction of a number of those exhibits on the grounds of relevancy authenticity and hearsay we need not and do not rule on the admissibility of those exhibits because any additional deductions we allow are not allowed on the basis of documents to which respondent objects 3respondent asserted at trial that petitioner’s return preparer was under indictment for filing fraudulent_returns and for identity theft on date respondent issued a notice_of_deficiency to petitioner disallowing certain deductions that petitioner claimed on schedules c and e as follows schedule c expense amount claimed car and truck dollar_figure schedule e expense amount claimed utilities repairs depreciation expense or depletion management fees legal and other professional fees dollar_figure big_number big_number big_number big_number amount disallowed dollar_figure amount disallowed dollar_figure big_number big_number big_number big_number amount allowed --- amount allowed dollar_figure big_number --- --- the notice_of_deficiency also determined that petitioner recklessly or intentionally disregarded rules and regulations when he claimed the earned_income_tax_credit for and he is therefore subject_to the restrictions in sec_32 for and respondent also determined an accuracy-related_penalty under sec_6662 discussion the commissioner’s determination set forth in a notice_of_deficiency is presumed correct and a taxpayer generally bears the burden of proving otherwise rule a 290_us_111 deductions are a matter of legislative grace and the taxpayer bears the burden of proving entitlement to any deduction claimed rule a 292_us_435 pursuant to sec_7491 the burden_of_proof may shift to the commissioner if the taxpayer produces credible_evidence with respect to any relevant factual issue and meets other requirements petitioner does not contend that sec_7491 shifts the burden_of_proof to respondent nor does the record establish that petitioner satisfies the sec_7491 requirements sec_162 allows a deduction for ordinary and necessary expenses paid_or_incurred during the taxable_year in carrying on any trade_or_business in order for an expense to be necessary it must be appropriate and helpful to the taxpayer’s business welch v helvering u s pincite an expense will be considered ordinary if it is a common or frequent occurrence in the type of business in which the taxpayer is involved 308_us_488 to be engaged in a trade_or_business an individual must be involved in an activity with continuity and regularity and the primary purpose for engaging in the activity must be for income or profit 480_us_23 taxpayers must keep sufficient records to substantiate any deductions claimed sec_6001 as a general_rule if the trial record provides sufficient evidence that the taxpayer has incurred a deductible expense but the taxpayer is unable to adequately substantiate the precise amount of the deduction to which he is otherwise entitled the court may estimate the amount of the deductible expense and allow the deduction to that extent bearing heavily against the taxpayer whose inexactitude in substantiating the amount of the expense is of his own making 39_f2d_540 2d cir we cannot estimate the amount however unless the taxpayer proves that he or she paid_or_incurred some deductible expense and provides some basis from which we can develop a reasonable estimate 245_f2d_559 5th cir in the case of expenses paid_or_incurred with respect to listed_property eg passenger automobiles or other_property used as a means of transportation sec_274 overrides the cohan doctrine and provides that these expenses are deductible only if the taxpayer meets stringent substantiation requirements sec_274 sec_280f see 560_f2d_973 9th cir rev’g on other grounds tcmemo_1974_59 50_tc_823 aff’d per curiam 412_f2d_201 2d cir sec_1_274-5t temporary income_tax regs fed reg date i schedule c car and truck expenses petitioner claimed and respondent disallowed a deduction for schedule c car and truck expenses of dollar_figure petitioner submitted a document titled mileage travel to substantiate the amount claimed on his schedule c but when he was asked at trial about the amount of car and truck expenses he claimed petitioner stated i have no idea passenger automobiles are listed_property under sec_280f sec_274 disallows any deduction with respect to listed_property unless the taxpayer adequately substantiates the amount of the expense the time and place of the travel or use of the property the business_purpose of the expense and the business relationship of the persons using the property although petitioner introduced a mileage log to document the amount of travel he did not introduce evidence of the business purposes for which he used the vehicle we find that petitioner has not satisfied the strict substantiation requirements of sec_274 and we conclude that he is not entitled to any deduction for car and truck expenses for ii schedule e deductions a utilities petitioner claimed a deduction of dollar_figure for utilities related to the lompoc apartment complex and respondent disallowed dollar_figure of that amount petitioner testified that he had all the receipts to substantiate the claimed deduction but he was uncertain whether he submitted all of the receipts as exhibits he provided copies of utility bills canceled checks and bank statements to substantiate his claimed deduction for utility expenses many of the receipts that petitioner submitted to substantiate his deduction duplicated amounts respondent previously allowed respondent allowed a dollar_figure deduction for utility expenses which corresponds to the city of lompoc utility bills attached to the stipulation of facts as pages through of exhibit 18-p in addition to the amounts respondent already allowed petitioner submitted documents that substantiate a portion of the disallowed deduction for utility expenses petitioner established that he paid an additional dollar_figure for utilities to the city of lompoc which petitioner was billed for on date but did not pay until date petitioner also substantiated utility payments made to the southern california gas co petitioner submitted a gas bill dated date for the lompoc apartment complex although that bill does not relate to the year at issue it does provide the account number that corresponds to the lompoc apartment complex the bank statements and canceled checks that petitioner submitted establish that petitioner paid dollar_figure to the southern california gas co in on the basis of the documents petitioner submitted to substantiate his claimed deduction for utility expenses petitioner is entitled to an additional dollar_figure deduction for utility expenses above the dollar_figure respondent allowed for b repairs petitioner claimed a deduction of dollar_figure for repairs related to the lompoc apartment complex and respondent disallowed dollar_figure of that amount to substantiate the deduction he claimed petitioner submitted plumbing bills from w m rieck plumbing bank statements and copies of canceled checks respondent allowed a deduction of dollar_figure for repairs and some of the plumbing bills that petitioner submitted duplicated the amount already allowed in addition to the amounts respondent already allowed petitioner submitted documents that substantiate a portion of the disallowed deduction for repairs petitioner established that he paid an additional dollar_figure to w m rieck plumbing on date for which he is entitled to a deduction petitioner’s documents also established that he made payments totaling dollar_figure in to mid-coast glass co home depot and ace hardware and for pest control services petitioner did not testify about these amounts and it is not clear from the substantiating documents that these expenses related solely to the lompoc apartment complex it is clear from the record that petitioner did incur repair expenses for the lompoc apartment complex and we find that most of these payments related to the lompoc apartment complex using our best judgment we estimate that petitioner is entitled to additional deductions of dollar_figure for the plumbing expense and dollar_figure for the remaining repairs for a total deduction of dollar_figure above the dollar_figure respondent allowed for c schedule e depreciation petitioner claimed dollar_figure in depreciation_deductions for both the lompoc apartment complex and the single-family rental home in of that amount dollar_figure was for the lompoc apartment complex the amount was determined by using the straight-line method a cost_basis of dollar_figure and a recovery_period of years respondent disallowed the dollar_figure depreciation deduction for the lompoc apartment complex and contends that petitioner did not establish the cost or other basis of the building or that it is depreciable a taxpayer is allowed to deduct a reasonable allowance for the exhaustion and wear_and_tear of property used in a trade_or_business or held_for_the_production_of_income sec_167 pursuant to sec_168 the depreciation deduction for any tangible_property is generally determined by using the applicable_depreciation_method the applicable convention and the applicable_recovery_period the period for depreciation of an asset begins when the asset is first placed into service sec_1_167_a_-10 income_tax regs generally depreciation is computed by using the cost of the property as its basis sec_167 sec_1011 sec_1012 sec_1_167_g_-1 income_tax regs if depreciable_property and nondepreciable_property such as real_property with improvements are bought for a lump sum the cost must be apportioned between the land and the improvements 506_us_546 sec_1_167_a_-5 income_tax regs under sec_1_167_a_-5 income_tax regs the depreciation allowance must be based on the proportionate value of the building in relation to that of the land at the time of acquisition to establish the basis for the disallowed portion of his claimed depreciation deduction relating to the lompoc apartment complex petitioner submitted a buyer’s estimated settlement statement an asset life history worksheet and an asset entry worksheet the estimated settlement statement is dated date provides an estimated closing date of date for petitioner’s purchase of the lompoc apartment complex and lists the purchase_price as dollar_figure the asset life history worksheet uses dollar_figure as petitioner’s basis in the property to calculate the yearly allowable_depreciation and the asset entry worksheet states that of the property is used for business there is nothing in the record that apportions the dollar_figure purchase_price for the lompoc apartment complex between the land and the improvements at the time of acquisition petitioner has not established that he is entitled to a depreciation deduction under sec_167 nor has he provided us a basis on which we might estimate the claimed depreciation expense attributable to the lompoc apartment complex see cohan v commissioner f 2d pincite accordingly we sustain respondent’s determination that petitioner is not entitled to a depreciation deduction in excess of that already allowed with respect to the taxable_year d schedule e management fees petitioner claimed and respondent disallowed a dollar_figure deduction for management fees for the lompoc apartment complex petitioner did not provide any receipts to substantiate the management fees but he credibly testified that he paid the manager dollar_figure in cash per month we allow petitioner the dollar_figure deduction on the basis of his testimony e schedule e legal and other professional fees petitioner claimed and respondent disallowed a dollar_figure deduction for legal and other professional fees for the lompoc apartment complex when petitioner was questioned about the deduction he said i don’t know what that might be i have no idea petitioner submitted several documents to try to substantiate the deduction among the documents are a retainer agreement between petitioner and consumer protection legal services inc dated date and a copy of a check dated date for dollar_figure payable to first housing of america petitioner also submitted copies of two additional checks payable to first housing of america dated february and date for dollar_figure and dollar_figure respectively and a check dated date for dollar_figure payable to gary lane petitioner may have incurred legal and other professional fees during in relation to the lompoc apartment complex but his testimony and the documents submitted do not provide a basis to estimate the claimed expense see cohan v commissioner f 2d pincite some of the documents relate to years other than and the documents that do relate to do not establish that the amounts paid were for legal or other professional fees we sustain respondent’s determination disallowing the deduction for legal and other professional fees iii earned_income_tax_credit the notice_of_deficiency determined on the basis of the adjustments respondent made to petitioner’s earned_income that petitioner was not entitled to the earned_income_tax_credit eitc the notice_of_deficiency also determined that petitioner’s claim of the eitc for was due to reckless or intentional disregard of the rules or regulations and is thus restricted under sec_32 a denial of eitc under sec_32 sec_32 provides a credit in an amount equal to the credit percentage of so much of the taxpayer’s earned_income as does not exceed the earned_income amount sec_32 however provides that n o credit shall be allowed under subsection a for the taxable_year if the aggregate amount of disqualified_income of the taxpayer for the taxable_year exceeds dollar_figure this amount is increased for inflation under sec_32 disqualified_income includes gross_income from rent over the sum of the deductions allocable to that gross_income sec_32 petitioner reported income of dollar_figure on his schedule e for this amount did not exceed the allowable_amount of disqualified_income for tax_year see sec_32 and j respondent in the notice_of_deficiency determined that petitioner was not entitled to certain deductions claimed on his schedule e even after the additional deductions that we have allowed petitioner’s disqualified_income exceeds the allowable_amount for tax_year see id accordingly petitioner is not entitled to the eitc claimed for tax_year b sec_32 restriction sec_32 disallows the eitc for the period of taxable years after the most recent taxable_year for which there was a final_determination that the taxpayer’s claim of credit under this section was due to reckless or intentional_disregard_of_rules_and_regulations but not due to fraud the eitc petitioner claimed on his return was determined in the notice_of_deficiency to be due to petitioner’s reckless or intentional disregard of the rules and regulations regarding the earned_income_tax_credit under sec_32 respondent further asserted at trial that petitioner recklessly or intentionally disregarded the rules and regulations because respondent think s what happened is petitioner went to a return preparer who essentially disregarded the tax law in the preparation of the return because normal software would have kicked out if you had schedule e income that high though petitioner was unable to substantiate all of the disallowed deductions he did establish that he was entitled to deductions greater than respondent allowed and provided credible testimony that he wanted to cooperate and did not understand his return preparer’s legal problems although petitioner is not entitled to the eitc for because of the adjustments to his earned_income we are satisfied that petitioner’s claim of the eitc for tax_year was not due to a reckless or intentional_disregard_of_rules_and_regulations thus petitioner is not subject_to the restriction under sec_32 for and iv accuracy-related_penalty sec_6662 and b and imposes a penalty of of the portion of an underpayment_of_tax attributable to the taxpayer’s negligence disregard of rules or regulations or substantial_understatement_of_income_tax negligence includes any failure to make a reasonable attempt to comply with the code including any failure to keep adequate books_and_records or to substantiate items properly see sec_6662 sec_1_6662-3 income_tax regs a substantial_understatement includes an understatement of income_tax that exceeds the greater of of the tax required to be shown on the return or dollar_figure see sec_6662 sec_1_6662-4 income_tax regs with respect to a taxpayer’s liability for any penalty sec_7491 places on the commissioner the burden of production thereby requiring the commissioner to come forward with sufficient evidence indicating that it is appropriate to impose the penalty 116_tc_438 once the commissioner meets his burden of production the taxpayer must come forward with persuasive evidence that the commissioner’s determination is incorrect see id pincite see also rule a welch v helvering u s pincite petitioner claimed some deductions on his return that he is unable to substantiate furthermore the underpayment_of_tax required to be shown on his return is a substantial_understatement_of_income_tax because the understatement exceeds dollar_figure which is greater than of the tax required to be shown on the return see sec_6662 d sec_1_6662-3 income_tax regs respondent’s burden of production under sec_7491 has been satisfied the sec_6662 accuracy-related_penalty does not apply with respect to any portion of an underpayment if the taxpayer proves that there was reasonable_cause for such portion and that he acted in good_faith with respect thereto sec_6664 the determination of whether a taxpayer acted with reasonable_cause and in good_faith depends on the pertinent facts and circumstances including the taxpayer’s efforts to assess the proper tax_liability the knowledge and the experience of the taxpayer and the reliance on the advice of a professional such as an accountant sec_1_6664-4 income_tax regs reliance upon expert advice will not exculpate a taxpayer who supplies the return preparer with incomplete or inaccurate information 14_tc_255 reliance on a preparer or software is not reasonable where even a cursory review of the return would reveal inaccurate entries see pratt v commissioner tcmemo_2002_279 the underpayment at issue is attributable to the schedule c and e adjustments that respondent made we are satisfied that petitioner whose command of the english language is limited made a good-faith effort to properly determine his federal_income_tax liability and that the underpayment results from reliance on the advice of a return preparer combined with an honest misunderstanding of fact or law that is reasonable in the light of his experience and knowledge accordingly we hold that petitioner is not liable for the sec_6662 accuracy-related_penalty for to reflect the foregoing decision will be entered under rule


internal_revenue_service number release date index number ---------------------------------- ---------------------------------------------------- ---------------------- -------------------------- legend department of the treasury washington dc third party communication none date of communication not applicable_person to contact --------------------------------------------- telephone number --------------------- refer reply to cc psi b02 plr-142128-07 date date x state --------------------------------------------------------------------------------------------------- ----------------------- ------ --------------------------- d1 dear ---------------- this responds to a letter dated date submitted on behalf of x by x’s authorized representative requesting a ruling under sec_1362 of the internal_revenue_code the information submitted states that x was incorporated in state on d1 it was intended that x elect s_corporation treatment effective d1 however a form_2553 election by a small_business_corporation was not timely filed for x sec_1362 provides that a small_business_corporation may elect to be an s_corporation sec_1362 provides the rule on when an s election will be effective generally if an s election is made within the first two and one-half months of a corporation's taxable_year then the corporation will be treated as an s_corporation for the year in which the election is made sec_1362 provides that if an s election is made after the first plr-142128-07 two and one-half months of a corporation's taxable_year then the corporation will not be treated as an s_corporation until the taxable_year after the year in which the s election is made sec_1362 provides that if an election under sec_1362 is made for any taxable_year after the date prescribed by sec_1362 for making the election for the taxable_year or no sec_1362 election is made for any taxable_year and the secretary determines that there was reasonable_cause for the failure to timely make the election then the secretary may treat the election as timely made for such taxable_year and sec_1362 shall not apply based solely on the facts and the representations submitted we conclude that x has established reasonable_cause for failing to make a timely election to be an s_corporation effective d1 accordingly provided that x makes an election to be an s_corporation by filing a completed form_2553 with the appropriate service_center effective d1 within days following the date of this letter then such election will be treated as timely made for x's taxable_year beginning d1 a copy of this letter should be attached to the form_2553 except as specifically set forth above no opinion is expressed or implied as to the federal_income_tax consequences of the transaction described above under any other provision of the code specifically no opinion is expressed concerning whether x is in fact an s_corporation for federal tax purposes this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent pursuant to the power_of_attorney on file with this office a copy of this letter is being sent to x’s authorized representative sincerely j thomas hines chief branch office of the associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes