department of the treasury internal_revenue_service washington d c date mar contact person significant index nuimber ‘contact number ope ed t legend y o n o x dear sir or madam this is in reply to your ruling_request of date requesting that your proposed grant will be a qualifying_distribution under sec_4942 a of the internal_revenue_code f your organization is exempt from federal_income_tax under sec_501 c of the code and is a private_foundation under sec_509 of the code c is exempt from federal_income_tax under sec_501 of the code is not a private_foundation under sec_509 of the code and is not controlled by f or any substantial_contributor to f f will put x dollars of its funds into an escrow account with a bank as the escrow agent under the terms of the escrow agreement the grant funds in the escrow will be released to the publicly supported charity c specifically chosen by f if within two years c raises a particular sum of money for itself through its own fundraising if c does not raise this required challenge grant sum f's grant funds in the escrow account will be paid to another public charity to be selected by f prior to expiration of the time period of the escrow for the challenge grant the escrow agreement requires that all of its funds and any income therefrom will never revert back to f the income from the escrow account will be payable to c such income can also be counted in c's fundraising goal for this challenge grant the terms of the escrow agreement are reflected in similar grant agreement between f and c f specifies and charity c agrees that c must use the grant funds as an endowment for c in which only the income on the funds and not the principal may be expended by c a qualifying f's grant also requires that any charity receiving any funds from the escrow account must meet the sec_4942 and sec_4942 a ii of the code in that the grantee must not be an organization controlled by f or any of f's disqualified persons under sec_4946 of the code and the grantee must not be a private_foundation under sec_509 of the code unless the grantee is also an operating_foundation under sec_4942 of the code distribution_requirements for the ‘grantee under sec_501 of the code provides for the exemption from federal_income_tax of nonprofit_organizations organized and operated exclusively for charitable and or the other exempt purposes stated in that section sec_509 a of the code describes certain organizations exempt from federal_income_tax under sec_501 of the code that are private_foundations subject_to the private_foundation provisions of chapter of the code sec_509 sec_509 a and a of the code describe organizations exempt from federal_income_tax under sec_501 of the code that are not private_foundations sec_4942 of the code imposes excise_tax on any private_foundation that does not make qualifying distributions of its annual distributable_amount for exempt purposes including reasonable sec_4942 g a of the code provides that in general a qualifying_distribution is any amount to accomplish one or more of the purposes described in sec_170 of the code which includes charitable purposes that section further provides that a private_foundation does not make any qualifying_distribution under sec_4942 of the code where the distribution is a contribution to i an organization controlled by the grantor foundation or by one or more of the grantor's disqualified persons or ii any private_foundation that is not also an operating_foundation under sec_4942 j of the code necessary administrative expenses paid and sec_53_4942_a_-3 b of the foundation and similar excise_taxes regulations provides that a grant by a private_foundation will be a qualifying_distribution under sec_4942 of the code if the grant is its income set-aside by the grantor private_foundation for no more than five years as part of the grantor’s matching grant for a grantee public charity sec_4942 of the code provides that an amount of income that is set_aside for a specific project within one or more purposes of sec_170 b of the code may be treated as a qualifying_distribution if the amount meets the set-aside_requirements of sec_4942 b of the code 26f sec_4942 of the code provides in pertinent part that an amount set_aside for a specific project may be treated as a qualifying_distribution if at the time of the set-aside the private_foundation establishes to the satisfaction of the secretary that the amount set_aside will be paid for the specific project within five years and that the suitability test for a set-aside under sec_4942 b i of the code is met sec_4942 of the code provides a suitability test in which the private_foundation at the time of the set-aside must establish to the satisfaction of the secretary that the specific project is one that can better be accomplished by the set-aside of income rather than by the immediate payment of funds sec_53_4942_a_-3 b of the regulations provides that the amounts of income set_aside for a specific project for one or more of the purposes in sec_170 c or c b of the code may be treated as qualifying distributions for the tax_year s in which such amounts are set_aside but not in the tax_year in which actually paid if the requirements of sec_4942 i of the code are met the foundation establishes to the satisfaction of the commissioner that the amount set_aside will be paid for the specific project within months after it is set_aside and the set-aside otherwise meets the suitability test of sec_53_4942_a_-3 of the regulations sec_53_4942_a_-3 of the regulations provides that its suitability test for a set- aside is met if the foundation establishes that the specific project is one in which relatively long-term grants or expenditures must be made this regulation allows as a suitable specific project a set-aside of income by a foundation where grants are made as part of a matching-grant program sec_53_4942_a_-3 i of the regulations provides that a private_foundation must obtain internal_revenue_service approval of its set-aside of income under the suitability test by applying before the end of the tax_year in which the amount is set_aside sec_4945 of the code imposes excise_tax on any amount_paid or incurred by a private_foundation that constitutes a taxable_expenditure under sec_4945 of the code or incurred by sec_4945 of the code provides that a taxable_expenditure means any amount_paid an organization unless such organization is described in sec_509 a or a or is an exempt_operating_foundation under d or b the grantor private_foundation exercises expenditure_responsibility with respect or such grant in accordance with sec_4945 of the code a private_foundation as a grant to sec_4945 of the code on expenditure_responsibility requires that the grantor private_foundation must obtain reports from the grantee as to the grantee's uses of the grant ‘ - in the case of sec_53_4945-5 of the regulations provides that a grant described in sec_4945 d of the code the granting private_foundation must require reports on the use of the funds compliance with the terms of the grant and the progress made by the grantee toward achieving the purposes for which the grant was made the grantee must make its reports as of the end of its annual_accounting_period within which the grant or any portion thereof is received and as of all such subsequent periods until the grant funds are expended in full or the grant is otherwise terminated such reports shall be furnished to the grantor within a reasonable period of time after the close of the annual_accounting_period of the grantee for which such reports are made within a reasonable period of time after the close of its annual_accounting_period during which the use of the grant funds is completed the grantee must make a final report with respect to all expenditures made for such grant funds including salaries travel and supplies and indicating the progress made toward the goals of the grant the grantor need not conduct any independent verification of such reports unless it has reason to doubt their accuracy or reliability you have timely sought approval of your set-aside of income in advance of the time when the amounts of income are to be set_aside as required by sec_4942 b i of the code and sec_53_4942_a_-3 i of the regulations your set-aside for charitable purposes of required g a of the code and sec_53_4942_a_-3 of the regulations this challenge grant will of a specific project within the sec_170 be the section code for by as you represent that your amounts of income to be set_aside for this specific challenge grant project will be paid out for this project within no more than months from the time when the first amount is set_aside as required by sec_4942 of the code and sec_53_4942_a_-3 of the regulations your project is better accomplished by this set-aside of income rather than by immediate payment under the suitability test of sec_4942 b i of the code and sec_53_4942_a_-3 of the regulations because this challenge grant is a matching grant allowed as a suitable specific project for the set-aside of income thus your specific project of providing funds for this challenge grant meets the requirements for a set-aside of income under the suitability test of sec_4942 of the code and sec_53_4942_a_-3 of the regulations your foundation f will pay the amount of x dollars to the bank escrow account which will be for no longer than a two year period this payméfit by f is an amount set_aside by f for a charitable purpose f's payment constitutes challenge or matching grant which will later be actually paid to either the primary donee c or if the matching funds are not raised by c then to an alternative public charity either of which will satisfy the requirements for a qualifying_distribution grantee under sec_4942 of the code accordingly we rule that f's payment of x dollars into the bank escrow account will be a set_aside for a grant to publicly supported exempt charity c or another alternative publicly supported exempt charity and will be a qualifying_distribution by f under sec_4942 g a of the code in f's tax_year in which f sets aside such grant amount into the bank escrow account because f's grant is paid to the bank escrow account f's payment to the bank is described in sec_4945 of the code and thus f must exercise expenditure_responsibility under sec_4945 of the code with respect to its grant sec_53_4942_a_-3 of the regulations provides that any set-aside approved by the internal_revenue_service must be evidenced by the entry of a dollar amount in your books_and_records as a pledge or obligation to be paid at a future date or dates further the amount of the set-aside must be taken into account in determining your minimum_investment_return see sec_53_4942_a_-2 of the regulations and any income attributable to a set-aside must be taken into account in computing your adjusted_net_income see sec_53_4942_a_-2 of the regulations also the income attributable to this set-aside will be a qualifying_distribution in the tax_year when it is paid from the escrow to the qualified charitable_organization under sec_4942 of the code because this in your permanent records and include a copy in your private foundation's annua return on form_990-pf letter could help to resolve any questions please keep it this ruling letter is directed only to the organization that requested it sec_6110 of the code provides that it may not be used or cited as precedent sincerely garland a carter manager exempt_organizations technical group


internal_revenue_service number release date index number --------------------------------- -------------------------- ---------------------------- ------------------------------ department of the treasury washington dc third party communication none date of communication not applicable_person to contact ----------------------- id no ------------------- --------------------------------------------------- telephone number ---------------------- refer reply to cc psi b02 plr-149152-12 date date legend x y -------------------------------------------- ----- ----------------- -------------------------- ------- ----------------- date ------------------------ date date country ------------------ -------------------------- ----------------------- dear ----- ------------- this is in response to a letter dated date and subsequent correspondence submitted on behalf of x by x’s authorized representative requesting that the service grant x an extension of time under sec_301_9100-1 of the procedure and administration regulations to elect to treat y as a disregarded_entity for federal tax purposes according to the information submitted y was formed under the laws of country on date through its wholly owned subsidiaries x acquired y on date y is a foreign_entity eligible to be treated as a disregarded_entity for u s income_tax purposes y’s default classification was an association_taxable_as_a_corporation y represents that it intended to elect to be treated as a disregarded_entity for federal tax purposes effective date y prepared and timely filed a form_8832 entity classification election plr-149152-12 however y mistakenly filed a form_8832 to be treated as an association_taxable_as_a_corporation its default classification effective date sec_301_7701-3 provides in part 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 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 unless the entity elects otherwise a foreign eligible_entity is treated as an association if all members have limited_liability a foreign eligible_entity with a single owner having limited_liability may elect to be treated as a disregarded_entity pursuant to the rules under sec_301_7701-3 sec_301_7701-3 provides that an entity classification election must be filed on form_8832 and can be effective up to days prior to the election filing_date or more than months after the election filing_date sec_301_9100-1 provides that 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 sec_301_9100-1 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 by which the commissioner will determine whether to grant an extension of time to make an election sec_301_9100-2 provides the rules governing automatic extensions of time for making certain elections sec_301_9100-3 describes the conditions under which the commissioner will grant requests for relief that do not meet the requirements of sec_301_9100-2 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 granting relief will not prejudice the interests of the government based solely on the facts submitted and representations made we conclude that the requirements of sec_301_9100-3 have been satisfied accordingly y is granted an extension of days from the date of this letter to elect to be classified as a disregarded_entity for federal tax purposes effective date the elections should be made by filing form_8832 with the appropriate service_center a copy of this letter should be attached to each election this ruling is contingent on y filing within days of this letter all required returns and amended income_tax returns consistent with the requested relief in this letter to the extent appropriate these returns must include but are not limited to form plr-149152-12 information_return of u s persons with respect to disregarded entities such that the forms and returns reflect the consequences of the relief granted in this letter a copy of this letter should be attached to any such returns 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 of the internal_revenue_code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter will be sent to y's authorized representative sincerely associate chief_counsel passthroughs special industries by _______________________________ charlotte chyr senior technician reviewer branch office of the associate chief_counsel passthroughs special industries enclosure copy of this letter copy for sec_6110 purposes cc


internal_revenue_service department of the treasury index number washington dc number release date person to contact telephone number refer reply to cc dom p si br - plr-111268-00 date date legend x state d1 this responds to your letter dated date submitted on behalf of x requesting relief under sec_1362 of the internal_revenue_code facts x began doing business under state law on d1 the shareholder of x intended that x elect to be treated as an s_corporation effective d1 however the election to be treated as an s_corporation was not timely filed law and analysis sec_1362 provides that a small_business_corporation can elect to be treated as an s_corporation sec_1362 provides when an s election becomes effective if an s election is made within the first two and one-half months of a corporation’s taxable_year then that corporation will be treated as an s_corporation for the year in which the election was made if an election is made after the first two and one-half months of a corporation’s taxable_year then the corporation will generally not be treated as an s_corporation until the following taxable_year however sec_1362 provides that if no election is made pursuant to sec_1362 or if the election is made after the date prescribed for making such an plr-111268-00 election and the secretary determines reasonable_cause existed for the failure to timely make the election then the secretary can treat such an election as timely made for that taxable_year and effective as of the first day of that taxable_year in the present case x failed to timely elect s_corporation treatment effective d1 however x has established reasonable_cause for not making a timely election and is thus entitled to relief under sec_1362 conclusion based solely on the facts submitted and representations made and provided that x otherwise qualifies as a subchapter_s_corporation we conclude that x will be recognized as an s_corporation effective d1 within days from the date of this letter x should submit a properly completed form_2553 with a copy of this letter attached to the relevant service_center 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 s requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to the taxpayer s dianna k miosi sincerely dianna k miosi chief branch office of the assistant chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes


internal_revenue_service p o box cincinnati oh release number release date date date department of the treasury employer_identification_number contact person - id number contact telephone number legend w nationality y university z x date state dear vil you asked for advance approval of your scholarship grant procedures under internal_revenue_code sec_4945 this approval is required because you a nonexempt_charitable_trust nect described in sec_4947 that is also a private_foundation you requested approval of your scholarship program to fund the education of certain qualifying students our determination we approved your procedures for awarding scholarships effective x the effective date of your request based on the information you submitted and assuming you will conduct your program as proposed we determined that your procedures for awarding scholarships meet the requirements of code sec_4945 as a result expenditures you make under these procedures won't be taxable description of your request you provide scholarships for undergraduate and graduate students to study home economics nutrition and related curriculums in the past you have provided up to four awards annually however the number of scholarships that will be awarded each year and the amount of each scholarship will vary depending on the amount of funds available to be distributed you publicize the scholarship program on y’s website and through their also awards made under these procedures are scholarship or fellowship grants and are not taxable to the recipients if they use them for qualified_tuition_and_related_expenses subject_to the limitations provide in code sec_117 letter catalog number 58263t financial aid office first preference shall be given to girls of w ancestry and of limited means from z mining towns sound moral character scholastic ability and economic necessity will be considered as qualifying characteristics each year your trustee advises your scholarship committee of the amount available for scholarships and reminds the committee of the current scholarship criteria the current scholarship committee consists of faculty members from y faculty from local high schools in z and former scholarship recipients the members of the scholarship committee review the scholarship applications and rank the applications based on the applicants’ moral character scholastic ability and economic necessity the scholarship committee then submits their selection to the trustee the trustee reviews the recommendations from the committee to ensure that the students meet the criteria and makes the final selection all scholarships are awarded on an objective and non-discriminatory basis no scholarship may be awarded to any disqualified_person as defined in code sec_4946 the trustee pays the scholarship proceeds directly to the university college students are reimbursed directly for books supplies equipment and expenses required for their course of study the trustee provides a letter to each university college specifying that the acceptance of the funds constitutes their agreement to i refund any unused portion of the scholarship if a scholarship recipient fails to meet any term or condition of the scholarship and ii notify the trustee if the scholarship recipient fails to meet any term or condition of the scholarship if the university college will not agree to such terms or if funds are paid directly to the scholarship recipient the trustee will obtain the needed reports and grade transcripts from the scholarship recipient basis for our determination the law imposes certain excise_taxes on the taxable_expenditures of private_foundations code sec_4945 a taxable_expenditure is any amount a private_foundation pays as a grant to an individual for travel study or other similar purposes however a grant that meets all of the following requirements of code sec_4945 is not a taxable_expenditure e e e the foundation awards the grant on an objective and nondiscriminatory basis the irs approves in advance the procedure for awarding the grant the grant is a scholarship or fellowship subject_to the provisions of code sec_117 the grant is to be used for study at an educational_organization described in code sec_170 other conditions that apply to this determination_letter catalog number 58263t e e e e e e this determination only covers the grant program described above this approval will apply to succeeding grant programs only if their standards and procedures don't differ significantly from those described in your original request this determination applies only to you it may not be cited as a precedent you cannot rely on the conclusions in this letter if the facts you provided have changed substantially you must report any significant changes to your program to the cincinnati office of exempt_organizations at internal_revenue_service exempt_organizations determinations p o box cincinnati oh you cannot award grants to your creators officers directors trustees foundation managers or members of selection committees or their relatives all funds distributed to individuals must be made on a charitable basis and further the purposes of your organization you cannot award grants for a purpose that is inconsistent with code sec_170 you should keep adequate_records and case histories so that you can substantiate your grant distributions with the irs if necessary please keep a copy of this letter in your records if you have questions please contact the person listed at the top of this letter sincerely director exempt_organizations letter catalog number 58263t enclosure redacted letter notice


t c no united_states tax_court stephen and ann schwalbach petitioners v commissioner of internal revenue respondent docket no filed date ps rented a building to a personal_service_corporation for use in a business activity in which p materially participated on ps' federal_income_tax return ps offset the rental income with unrelated passive losses relying on sec_1_469-2 and sec_1_469-4 income_tax regs r determined that ps could not offset the rental income with the passive losses because the rental income was recharacterized as nonpassive_income ps argue that sec_1_469-2 income_tax regs is invalid as applied to them because the meaning of the word activity as used therein does not include attributing a c corporation's activity to a material participant in that activity without reference to sec_1_469-4 income_tax regs which ps argue is invalid because r prescribed the rules of that section without complying with the notice and comment requirements of the administrative_procedure_act apa u s c sec_553 and c held r complied with the notice and comment requirements of the apa id when r prescribed sec_1_469-4 income_tax regs and neither that section nor sec_1_469-2 income_tax regs is invalid due to a lack of compliance with those requirements jay b kelly for petitioners blaine c holiday for respondent laro judge petitioners petitioned the court to redetermine respondent's determination of an dollar_figure deficiency in their federal_income_tax and a dollar_figure accuracy-related_penalty under sec_6662 following concessions by petitioners the primary issue left to be decided is whether sec_1_469-2 and sec_1_469-4 income_tax regs are valid as applied to recharacterize the rental income of an individual who rents property to a personal_service_corporation for use in a business in which the individual materially participates we hold they are we also decide whether petitioners are liable for the accuracy-related_penalty determined by respondent we hold they are not unless otherwise indicated section references are to the internal_revenue_code in effect for the subject year rule references are to the tax_court rules_of_practice and procedure dollar amounts are rounded to the nearest dollar findings_of_fact some facts have been stipulated the stipulations of fact and the exhibits submitted therewith are incorporated herein by this reference petitioners resided in river falls wisconsin when they petitioned the court they filed a joint federal_income_tax return which was prepared by a certified_public_accountant the c p a petitioners presented the c p a with all relevant information to prepare the return and he prepared the return based on his understanding of the tax law as of the time that the c p a prepared the return he had been practicing accountancy as a c p a for approximately years and he had performed work for petitioners including preparing their individual and business tax returns for at least years petitioners rely on the c p a for business and tax_advice stephen schwalbach dr schwalbach practices dentistry in river falls he is employed full time by associated dentists of river falls f k a river falls dental association associated dentists a personal_service_corporation that he owns equally with another dentist named timothy knotek associated dentists' business is based in a building the river falls building owned by petitioners and let to associated dentists under a lease dated date petitioners' schedule e supplemental income and loss reported net_income of dollar_figure on the rental of the river falls building to associated dentists this schedule also reported that petitioners had realized a dollar_figure loss renting a commercial building sited in hudson wisconsin and that they had realized dollar_figure of net_income renting a residential house sited in river falls petitioners also reported on this schedule that they had realized a dollar_figure passive loss on an investment in an s_corporation named golfview heights inc and that they had realized a dollar_figure passive loss on an investment in a partnership named south main dental partners petitioners took into account all these items of income and loss the effect of which was that they reported net passthrough and rental income of dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure respondent determined that the three losses aggregating dollar_figure dollar_figure dollar_figure dollar_figure could offset only the dollar_figure gain resulting in an adjustment increase in income of dollar_figure according to the notice_of_deficiency on schedule e part i of your return in regards to property b ie the river falls building you reported a net profit of dollar_figure this property is related to your corporation for which you are a material participant you further offset passive losses of dollar_figure from other companies shown on schedule e part ii against the non-passive income from related property b sec_469 changes the net_income from the related rental property b from non-passive to passive_income further on schedule e part v of your return your total net profit that you reported on your return was dollar_figure however it has been determined that your total net profit on schedule e is dollar_figure your increase in net profit of dollar_figure is based on the unallowable loss of dollar_figure as summarized below actually the regulations under sec_469 change the net_income from the rental property from passive to nonpassive_income based on our reading of the entire notice_of_deficiency we conclude that respondent's mischaracterization in the notice_of_deficiency is merely a typographical error therefore your taxable_income for is increased by dollar_figure passive losses as corrected loss from schedule e property a part i dollar_figure loss from schedule e part ii big_number total corrected passive losses big_number allowable passive_income profit from schedule e property c part i unallowable loss big_number on date dr schwalbach paid dollar_figure for a interest in big_number shares of stock in a corporation named impression delivery corp impression the total purchase_price was dollar_figure approximately weeks later the big_number shares were sold for dollar_figure and days after the sale dr schwalbach purchased an interest in another big_number shares of impression petitioners did not recognize a loss in on the sale of the stock because the c p a considered the purchase-sale-purchase as a wash_sale under sec_1091 in petitioners upon the advice of the c p a reported a short-term_capital_loss of dollar_figure on their schedule d capital_gains_and_losses with respect to impression's stock the c p a rendered his advice after ascertaining that impression had ceased operations and was facing litigation over allegedly fraudulent practices respondent disallowed the dollar_figure loss reported by petitioners according to the notice_of_deficiency it has not been established that the company known as impression delivery corp was insolvent or out of business in the year further it has not been established that you had an adjusted_basis in this company in order to claim this loss petitioners concede that they may not deduct this loss for respondent also determined that petitioners were liable for the accuracy-related_penalty under sec_6662 on account of negligence respondent determined that this penalty applied to the total underpayment shown in the notice_of_deficiency the total underpayment was attributable to the disallowed capital_loss the increased income from the passive loss adjustment and two de_minimis computational adjustments opinion the instant dispute involves the recharacterization rule_of sec_1_469-2 income_tax regs and the attribution rule_of sec_1_469-4 income_tax regs respondent used these rules to recharacterize petitioners' rental income from the river falls building from passive_income to nonpassive_income petitioners do not argue that respondent misapplied these rules or that the commissioner lacked the authority to prescribe them petitioners' sole argument is that sec_1_469-2 income_tax regs is invalid as applied to them because petitioners allege the commissioner prescribed sec_1_469-4 income_tax regs which is necessary to apply the recharacterization rule to a material participant of a c corporation's activity without complying with the notice and comment requirements of the administrative_procedure_act apa u s c sec_553 and c the notice and comment requirements of the apa provide b general notice of proposed rule making shall be published in the federal_register the notice shall include-- a statement of the time place and nature of public rule making proceedings reference to the legal authority under which the rule is proposed and either the terms or substance of the proposed rule or a description of the subjects and issues involved except when notice or hearing is required by statute this subsection does not apply-- a to interpretative rules general statements of policy or rules of agency organization procedure or practice or b when the agency for good cause finds and incorporates the finding and a brief statement of reasons therefor in the rules issued that notice and public procedure thereon are impracticable unnecessary or contrary to the public interest c after notice required by this section the agency shall give interested persons an opportunity to participate in the rule making through submission of written data views or arguments with or without opportunity for oral presentation after consideration of the relevant matter presented the agency shall incorporate in the rules adopted a concise general statement of their basis and purpose u s c sec_553 and c we disagree with petitioners' assertion that sec_1_469-2 and sec_1_469-4 income_tax regs are invalid when applied to a material participant of an activity conducted by a c_corporation sec_1_469-2 income_tax regs was prescribed by the commissioner under the broad regulatory authority that congress delegated to him through sec_469 and sec_7805 t d c b and is effective for taxable years ending after date sec_1_469-11 income_tax regs that section provides in relevant part sec_1_469-2 passive_activity_loss -- f property rented to a nonpassive activity an amount of the taxpayer's gross rental_activity income for the taxable_year from an item of property equal to the net rental_activity income for the year in relevant part sec_469 provides l regulations --the secretary or_his_delegate see sec_7701 shall prescribe such regulations as may be necessary or appropriate to carry out provisions of section including regulations-- which specify what constitutes an activity material_participation or active_participation for purposes of this section which provide that certain items of gross_income will not be taken into account in determining income or loss from any activity requiring net_income or gain from a limited_partnership or other passive_activity to be treated as not from a passive_activity sec_7805 generally provides that the secretary or_his_delegate see sec_7701 shall prescribe all needful rules and regulations for the enforcement of the internal_revenue_code from that item of property is treated as not from a passive_activity if the property-- i is rented for use in a trade_or_business activity in which the taxpayer materially participates for the taxable_year the fact that sec_1_469-2 income_tax regs was prescribed by the commissioner pursuant in part to the specific grant of authority stated in sec_469 and that sec_1_469-2 income_tax regs contains substantive rules that are legislative in character means that the promulgation of sec_1_469-2 income_tax regs is not excepted from the notice and comment requirements of the apa supra see 467_us_837 142_f3d_973 7th cir 795_f2d_1303 7th cir 81_tc_17 see also 105_tc_227 sec_1_469-2t temporary income_tax regs fed reg date is a legislative_regulation because it was issued under the specific grant of authority contained in sec_469 sec_1_469-2 income_tax regs was issued on date and it reads nearly verbatim as it appeared when it was proposed on date see notice of proposed rulemaking fed reg date text of sec_1_469-2t temporary income_tax regs fed reg date served as the text of the proposed_regulations the notice of proposed rulemaking complied with the notice and comment requirements of the apa supra inter alia it set forth by cross-reference the substance of the proposed_regulations including the subjects issues and rules involved and it invited written comments fed reg the notice of proposed rulemaking also invited requests for a public hearing and stated that a public hearing would be held upon the request of any commentator at a time and place to be published in the federal_register id sec_1_469-4 income_tax regs was prescribed by the commissioner under the broad regulatory authority that congress delegated to him through sec_469 and sec_7805 t d 1994_2_cb_81 and is generally effective for taxable years ending after date sec_1_469-11 income_tax regs sec_1_469-4 income_tax regs provides sec_1_469-4 definition of activity -- a scope and purpose this section sets forth the rules for grouping a taxpayer's trade_or_business activities and rental activities for purposes of applying the passive_activity_loss and credit limitation rules of sec_469 a taxpayer's activities include those conducted through c corporations that are subject_to sec_469 sec_1_469-1t temporary income_tax regs fed reg date provides that a c_corporation is subject_to sec_469 if it is a personal_service_corporation the second sentence of sec_1_469-4 income_tax regs which contains the attribution rule in dispute is a change from two previous sets of proposed_regulations which the commissioner issued to define the word activity with respect to both sets of proposed_regulations the commissioner issued a notice of proposed rulemaking that set forth either in the document or by cross-reference to another document the substance of the proposed_regulations including the subjects issues and rules involved and invited written comments and requests for a public hearing fed reg date first set of proposed_regulations fed reg date second set of proposed_regulations the notice of proposed rulemaking on the first set of proposed_regulations stated that a public hearing would be held upon the request of any commentator at a time and place to be published in the federal_register fed reg the notice of proposed rulemaking on the second set of proposed_regulations referenced a separate document that stated that the commissioner was holding a hearing on the proposed_regulations on date pincite p m in room internal_revenue_service building constitution avenue n w washington d c fed reg on date the commissioner announced that the hearing had been when the commissioner issued the notice of proposed rulemaking on the first set of proposed_regulations he also issued temporary regulations defining the word activity see sec_1_469-4t temporary income_tax regs fed reg date the text of the temporary regulations served as the text of the proposed_regulations fed reg changed to date pincite a m in room internal_revenue_service building constitution avenue n w washington d c fed reg date as is true in the case of sec_1_469-2 income_tax regs the fact that sec_1_469-4 income_tax regs was prescribed by the commissioner pursuant in part to the specific grant of authority stated in sec_469 and that sec_1_469-4 income_tax regs contains substantive rules that are legislative in character means that the promulgation of sec_1_469-4 income_tax regs is not excepted from the notice and comment requirements of the apa u s c sec_553 and c see chevron u s a inc v natural_resources defense council inc u s pincite bankers life cas co v united_states f 3d pincite water quality association employees' benefit corp v united_states f 2d pincite wing v commissioner t c pincite see also schaefer v commissioner t c pincite sec_1_469-2t temporary income_tax regs fed reg is a legislative_regulation because it was issued under the specific grant of authority contained in sec_469 sec_469 the section of the code to which sec_1_469-2 and sec_1_469-4 income_tax regs relate was enacted by congress as part of the tax_reform_act_of_1986 tra publaw_99_514 100_stat_2085 in response to congressional concern that certain categories of taxpayers were engaging in activities which generated losses in order to use those losses to escape taxation on income from unrelated activities see schaefer v commissioner t c pincite sec_469 which is generally effective for taxable years beginning after date tra sec_501 100_stat_2241 was designed by congress to thwart a taxpayer's attempt to reduce taxable_income by losses which were attributable to activities in which the taxpayer did not materially participate ie passive activities sec_469 generally prevents a taxpayer from deducting passive_activity_losses from income unrelated to a passive_activity requiring that passive losses be used only to offset passive_income a passive_activity_loss includes all losses from passive activities and a rental_activity is generally defined by sec_469 to be a passive_activity passive_income does not include certain types of income such as portfolio_income ie interest dividends annuities or royalties gain on the disposition of property and earned_income sec_469 the linchpin of sec_469 is the determination of each activity in which a taxpayer participates and congress delegated to the commissioner the responsibility of prescribing the meaning of the word activity see sec_469 the first set of proposed_regulations set forth a voluminous and complex mechanical test for determining a taxpayer's activities see fed reg date see also sec_1_469-4t temporary income_tax regs fed reg serves as text of proposed_regulations as applicable herein sec_1_469-4t temporary income_tax regs fed reg provided b operations conducted through nonpassthrough entities for purposes of applying sec_469 and the regulations thereunder a taxpayer's activities do not include operations that the taxpayer conducts through one or more entities other than passthrough entities the following example illustrates the operation of this paragraph b ii b example i a an individual owns stock of x a closely_held_corporation that is directly engaged in the conduct of a real_estate development business a participates in x's real_estate development business but does not own any interest in the business other than through ownership of the stock of x ii x is subject_to sec_469 and does not hold the real_estate development business through another entity accordingly for purposes of sec_469 and the regulations thereunder the operations of x's real_estate development business are treated as part of x's activities iii a is also subject_to sec_469 but a's only interest in the real_estate development business is held through x x is a c_corporation and therefore is not a passthrough_entity thus for purposes of sec_469 and the regulations thereunder a's activities do not include the operations of x's real_estate development business accordingly a's participation in x's business is not participation in an activity of a and is not taken into account in determining whether a materially participates or significantly participates in any activity following comments and a hearing on the first set of proposed_regulations see announcement 1989_36_irb_27 date the commissioner withdrew the proposed_regulations and allowed the related temporary regulations to expire under the 3-year sunset provision of sec_7805 see fed reg the commissioner's actions were driven in part by public criticism that the proposed_regulations were overly long and complex burdensome for small taxpayers and mechanically inflexible id contemporaneously with the withdrawal of the proposed_regulations the commissioner on date issued a second set of proposed_regulations defining the word activity fed reg in contrast with the first set the second set contained a simple facts-and- circumstances approach to identify a taxpayer's activities id in further contrast with the first set of proposed_regulations the second set did not address the treatment of activities which were conducted through a c_corporation in which the taxpayer owned an interest the commissioner finalized the proposed_regulations defining the word activity in late to read in relevant part as set forth above in sec_1_469-4 income_tax regs t d 1994_2_cb_81 before doing so the commissioner considered the comments that were proffered on the subject fed reg date as was true with respect to the first set of proposed_regulations but which was untrue with respect to the second set the final regulations addressed the treatment of activities which were conducted through a c_corporation in a complete reversal from the position stated in the first set of proposed_regulations the final regulations provided an attribution rule under which a taxpayer's activities include activities conducted through a c_corporation subject_to sec_469 sec_1_469-4 income_tax regs in line with this attribution rule the preamble to the final regulations stated a commentator requested clarification on whether activities conducted through a c_corporation may be grouped with activities not conducted through the c_corporation the final regulations clarify that in determining whether a taxpayer materially or significantly participates in an activity a taxpayer may group that activity with activities conducted through c corporations that are subject_to sec_469 that is personal service and closely held c corporations t d c b pincite as we understand the thrust of petitioners' argument an application of sec_1_469-2 income_tax regs to the material participant of a c_corporation activity is vague because absent regulations the meaning of the word activity does not attribute to an individual the activities of a c_corporation according to petitioners the breadth of the word activity must be known in order to apply the rules of sec_469 and the regulations thereunder and the commissioner did not settle on a meaning for that word until he issued sec_1_469-4 income_tax regs in even then petitioners claim the attribution rule set forth in sec_1_469-4 income_tax regs is a substantial change from the rules set forth in the proposed_regulations which petitioners allege means that the commissioner should have given notice and allowed comment on the attribution rule pursuant to the apa u s c sec_553 and c because the commissioner did not petitioners conclude the attribution rule_of sec_1_469-4 income_tax regs is invalid which in turn invalidates the recharacterization rule_of sec_1_469-2 income_tax regs to the extent that it attributes the activities of a c_corporation to an individual who materially participates in that activity we disagree with petitioners' assertion that sec_1_469-2 and sec_1_469-4 income_tax regs are invalid as applied in the instant case with respect to sec_1_469-2 income_tax regs and sec_469 in general the uncertainty as to the breadth of a provision does not mean that it is inoperative until regulations are issued clarifying the breadth of it see 332_us_194 114_f3d_983 9th cir 106_tc_274 in the absence of regulations a provision may be interpreted in light of all pertinent evidence textual and contextual of its meaning see 506_us_168 331_us_1 284_us_552 although congress instructed the commissioner to prescribe regulations under sec_469 which would specify what constitutes an activity see sec_469 this does not mean that sec_469 or the regulations thereunder require the commissioner to define the word activity in order for the statutory and regulatory provisions to be effective we find nothing in the statutory text or in its legislative_history that conditions the effectiveness of sec_469 on the issuance of regulations see trans city life ins co v commissioner t c pincite 106_tc_216 105_tc_71 as to petitioners' assertion concerning the new language that appeared in sec_1_469-4 income_tax regs the change in language from the proposed_regulations was substantial up until the final regulations the commissioner had not publicly taken the position that an individual's activities could include activities conducted through a c_corporation the mere fact however that the commissioner adopted a new position in sec_1_469-4 income_tax regs does not necessarily mean that the commissioner was required to give another notice and allow another comment period on that position the commissioner is not required by the apa supra to include in proposed_regulations every precise rule that ultimately appears in the final regulations 660_f2d_954 ndollar_figure 4th cir 375_f2d_43 9th cir 210_f2d_24 d c cir the consensus among the courts of appeals is that a final rule must differ substantially from a proposed rule in order to require another round of notice and comment but even when it does differ substantially the final rule will not require another notice and comment period if it is in character with the original proposal and a logical outgrowth of the notice and comments on the proposed rule 116_f3d_520 d c cir 89_f3d_740 11th cir 904_f2d_1276 9th cir 887_f2d_760 7th cir 870_f2d_177 5th cir 855_f2d_108 3d cir 824_f2d_1258 1st cir 791_f2d_1016 2d cir american paper inst v epa f 2d pincite n whether a final rule meets such a test rests on whether 'the purposes of notice and comment have been adequately served ' 1_f3d_522 n 7th cir quoting 935_f2d_1303 d c cir 40_f3d_1266 d c cir quoting fertilizer inst v epa f 2d pincite the critical inquiry is whether commentators have had a fair opportunity to present their views on the final plan in a way that the commissioner might find convincing american water works association v epa f 3d pincite fertilizer inst v epa supra 647_f2d_1189 d c cir 598_f2d_637 1st cir 504_f2d_646 1st cir see also american med association v united_states f 2d pincite natural_resources defense council v epa f 2d pincite 719_f2d_1283 5th cir wing v commissioner t c pincite stated differently the commissioner's final regulations are not subject_to another notice and comment period where the proposed_regulations fairly apprise interested persons of subjects and issues that may be addressed in the final regulations wing v commissioner t c pincite see also 705_f2d_506 d c cir 568_f2d_284 3d cir the purposes of notice and comment are adequately served when proposed rules generate diverse public comment are fair to affected parties and give affected parties an opportunity to develop evidence in the record 38_f3d_582 d c cir small refiner lead phase-down task force v epa f 2d pincite the purpose of notice and comment is not adequately served on the other hand where interested persons could not reasonably anticipate the final rules from the proposed rules 863_f2d_1420 9th cir see also american water works association v epa f 3d pincite 963_f2d_412 d c cir where the final rules deviate too sharply from the proposed rules notice is inadequate afl-cio v donovan 757_f2d_330 d c cir small refiner lead phase-down task force v epa f 2d pincite our review of the evolution of sec_1_469-4 income_tax regs leads us to conclude that the amendments contained therein are in character with the original scheme for sec_469 and the regulations thereunder and are a logical outgrowth of the comments which were made on the two sets of proposed_regulations the commissioner offered affected persons the opportunity to develop an evidentiary record on the promulgation of sec_1_469-4 income_tax regs by inviting them to comment publicly on the substance of each set of the proposed_regulations the first set of proposed_regulations dealt specifically with the attribution rule stating that a corporation's activities will not be attributed to an individual who conducts the activity through the corporation although the second set of proposed_regulations was silent on this rule including whether the commissioner was considering abandoning it we read nothing in the second set of proposed_regulations that would lead us to believe that the commissioner was proposing to retain the rule given the additional fact that the commissioner not only invited comments on both sets of the proposed_regulations but held hearings as well we do not believe that commentators were deprived of their right to comment on the matter included in sec_1_469-4 income_tax regs the first and second set of proposed_regulations fairly apprised interested parties of the wide range of issues that the commissioner had to address in the final rules defining the word activity and the fact that the commissioner invited comments on both sets of proposed_regulations allowed commentators to express their views on the final plan in a way that the commissioner could find convincing the fact that persons who were interested in the matter of sec_1_469-4 income_tax petitioners assert that agents of the commissioner stated publicly that the lack of an attribution rule as it applied to c corporations in the first set of proposed_regulations would be retained in the final regulations we give these assertions no weight even assuming arguendo that the statements were made these oral statements are not binding on the commissioner 283_f2d_503 9th cir 49_f2d_111 4th cir government is not bound by agents acting beyond the scope of their authority affg 19_bta_337 41_tc_316 affd 353_f2d_429 3d cir see also 304_f2d_469 regs could have seen and anticipated an attribution rule therein may also be understood from the legislative_history of sec_469 the legislative_history speaks directly to an attribution rule stating explicitly the conferees believe that clarification is desirable regarding the regulatory authority provided to the treasury with regard to the definition of income that is treated as portfolio_income or as otherwise not arising from a passive_activity the conferees intend that this authority be exercised to protect the underlying purpose of the passive loss provision ie preventing the sheltering of positive_income_sources through the use of tax losses derived from passive business activities examples where the exercise of such authority may if the commissioner so determines be appropriate include the following related_party leases or sub-leases with respect to property used in a business activity that have the effect of reducing active business income and creating passive_income h conf rept vol ii at ii-197 1986_3_cb_147 in sum we believe that the purposes of notice and comment were adequately served in the commissioner's promulgation of sec_1_469-4 income_tax regs the commissioner adopted the attribution rule pursuant to an explicit congressional grant of authority and commentators had a fair opportunity to present their views on the contents of that rule the rule derives directly from the legislative_history to sec_469 and it is both in character with the original proposal for sec_469 and the regulations thereunder and a logical outgrowth of the two rounds of notice and comment on the proposed_regulations whereas petitioners would force the commissioner to comply with the apa supra upon the issuance of any taxpayer-unfriendly rule the apa id does not require such a draconian result we sustain respondent's determination on this issue in so doing we decline petitioners' invitation to allow them to apply the rules of sec_1_469-4t temporary income_tax regs fed reg in lieu of the rules stated in sec_1_469-4 income_tax regs simply put the effective date and transition_rules related to the regulatory rules under sec_469 do not allow them to use it see sec_1_469-11 income_tax regs as to the accuracy-related_penalty sec_6662 imposes an accuracy-related_penalty equal to percent of the portion of an underpayment that is attributable to among other things negligence petitioners will avoid this charge if the record shows that they were not negligent ie they made a reasonable attempt to comply with the provisions of the internal_revenue_code and they were not careless reckless or in intentional disregard of rules or regulations sec_6662 942_f2d_444 7th cir affg 94_tc_96 drum v commissioner tcmemo_1994_433 affd without published opinion 61_f3d_910 9th cir see also 925_f2d_348 9th cir negligence defined as a lack of due care or a failure to do what a reasonable and prudent person would do under similar circumstances affg 92_tc_1 good_faith reliance on the advice of counsel or a qualified accountant can in certain circumstances be a defense to the accuracy-related_penalty for negligence see eg 91_tc_396 affd without published opinion 940_f2d_1534 9th cir 86_tc_492 affd 864_f2d_1521 10th cir 59_tc_473 51_tc_467 in those cases the taxpayer must establish the adviser had sufficient expertise to justify reliance the taxpayer provided necessary and accurate information to the adviser and the taxpayer actually relied in good_faith on the adviser’s judgment see ellwest stereo theatres v commissioner tcmemo_1995_610 the record shows that petitioners acted reasonably with respect to the items reported on their tax_return they consulted their long-time business and tax adviser an experienced and knowledgeable accountant and they supplied him with the information necessary to prepare their return the c p a advised petitioners on what he believed was the correct reporting position of the items reported in the return and petitioners relied on and followed his advice under the facts herein we believe that petitioners' reliance on the c p a to prepare a correct return was reasonable and we hold for them on this issue in reaching our holdings herein we have considered all arguments by the parties for contrary holdings and to the extent not discussed above find those arguments to be irrelevant or without merit to reflect the foregoing decision will be entered for respondent as to the deficiency and for petitioners as to the accuracy-related_penalty


internal_revenue_service number release date index number --------------- ----------------------------------- ---------------------------- ----------------------- ---------------------------------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ---------------- id no ------------ telephone number --------------------- refer reply to cc fip b02 plr-111324-11 date date legend taxpayer partnership trs a dear ------------ -------------------------------- --------------------------- --------------------------- -------------------------- this is in reply to a letter dated date requesting rulings on behalf of taxpayer the requested rulings concern the qualification of amounts received from the rental of certain properties as rents_from_real_property for purposes of sec_856 of the internal_revenue_code facts taxpayer is a calendar_year taxpayer that uses an accrual_method of accounting and that elected to be taxed as a real_estate_investment_trust reit under sec_856 of the code taxpayer is the managing general_partner of partnership owning approximately --- of the outstanding common units of partnership partnership indirectly owns and operates numerous real properties the properties trs a is a wholly-owned subsidiary of partnership that has jointly elected with taxpayer to be treated as a taxable_reit_subsidiary trs of taxpayer pursuant to sec_856 at certain of the properties taxpayer rents space on outdoor steel billboard structures affixed to the properties the steel billboard structures the steel billboard structures range in width from feet to feet and in height from feet to feet depending on the property the steel billboard structures are mounted either on the plr-111324-11 roof of the building or on an exterior wall of the building they may also be free- standing towers issue a steel billboard structure mounted on the roof of a building is typically braced back to multiple columns installed in the building’s structure ie existing structural support columns of the building are exposed and structural steel column extensions are installed above the roof a horizontal steel frame of wide flange beams is installed connecting the column extensions above the roof plane and supporting the sign a steel billboard structure mounted on the wall of a building is constructed by exposing the building’s structural columns and spandrel beams the exterior of the building is removed locally to expose the structural columns and new extensions of structural steel are attached to the existing structure to extend sign connections beyond the exterior face of the building the exterior of the building is then reconstructed around the new connection a tower steel billboard structure is constructed on concrete foundations which are anchored into the earth often extending feet or more into the earth a steel mast or columns then extends up from the foundations if columns are used it is typical to truss between them with diagonal members from the foundations to the top of the sign which provides bracing for wind loads on the sign taxpayer represents that the structural_components of the steel billboard structures have never been moved and are designed and constructed to remain in place permanently issue in certain cases taxpayer will rent the steel billboard structures directly to end users for fixed amounts under lease agreements the rent under some leases the rent will include payment for certain noncustomary services such as services relating to the installation of the vinyl signs and maintaining the sign lighting the noncustumary services in these cases taxpayer will enter into a services agreement with trs a to provide the noncustomary services in addition taxpayer may enter into a brokerage agreement with trs a to provide brokerage services to taxpayer in connection with the rental of the steel billboard structures to end users in other leases the rent will not include payment for the noncustomary services instead the end users will contract directly with trs a or unrelated third parties for any services and will pay arm’s length compensation to trs a or the third parties plr-111324-11 in either case taxpayer represents that it will not perform any services in connection with the renting of the steel billboard structures to occupants other than usual and customary services and activities permitted by landlords with respect to their property or by trustees with respect to taxpayer any noncustomary services will be performed by trs a taxpayer represents that it will compensate trs a for the noncustomary services and any brokerage services on an arm’s length basis taxpayer further represents that trs a will use its own employees and bear all of its own costs relating to the noncustomary services and the brokerage services such as its employees’ salaries and the costs of their uniforms equipment and supplies trs a may contract with unrelated third parties to provide some of the noncustomary services and or brokerage services trs a will report amounts received from taxpayer for the noncustomary services and brokerage services as gross_income on its income_tax return issue taxpayer will rent certain steel billboard structures that are potential future sites of electric signs to trs a under lease agreements for rent based on a percentage of gross_receipts taxpayer represents that the rent paid_by trs a will include only customary services that can be provided by a reit and will be at a market rate trs a will construct and install on the leased steel billboard structures an aluminum grid for placement of light emitting diode led screens led screens and structures ancillary to such aluminum grid and led screens the electric signs trs a will be the owner of the electric signs installed in the steel billboard structures and will be engaged in the electric sign business trs a will use its own employees and bear all of its own costs relating to the electric sign business trs a may contract with unrelated third parties to provide services relating to the electric sign business taxpayer represents that the steel billboard structure space to be leased to trs a is unique space at each property the remaining space at each property will be leased to unrelated tenants and will not be comparable in terms of character or use to the steel billboard structure space rented to trs a taxpayer represents that space comparable to the steel billboard structure space does not exist within each property but that rent paid_by trs a will be substantially comparable to rent paid_by unrelated tenants for similar spaces in the same geographic area law and analysis issue sec_856 provides that at least percent of a reit's gross_income must be derived from among other sources rents_from_real_property plr-111324-11 sec_856 provides that at least percent of a reit's gross_income must be derived from among other sources rents_from_real_property sec_856 provides that at the close of each quarter of its tax_year at least percent of the value of a reit’s total assets must be represented by real_estate_assets cash and cash items including receivables and government securities sec_856 provides that the term real_estate_assets for purposes of sec_856 means real_property including interests_in_real_property and interests in mortgages on real_property and shares or transferable certificates of beneficial_interest in other reits that meet the requirements of sec_856 through sec_856 provides that the term interests_in_real_property includes fee ownership and co-ownership of land or improvements thereon leaseholds of land or improvements thereon options to acquire land or improvements thereon and options to acquire leaseholds of land or improvements thereon but does not include mineral oil or gas royalty interests sec_1_856-3 of the income_tax regulations provides in part that the term real_estate_assets means real_property sec_1_856-3 provides that real_property includes land or improvements thereon such as buildings or other inherently permanent structures thereon including items which are structural_components of such buildings or structures in addition the term real_property includes interests_in_real_property local law definitions will not be controlling for purposes of determining the meaning of real_property for purposes of sec_856 and the regulations thereunder under the regulations real_property includes for example the wiring in a building plumbing systems central heating or central air-conditioning machinery pipes or ducts elevators or escalators installed in a building or other items which are structural_components of a building or other permanent structure the term does not include assets accessory to the operation of a business such as machinery printing press transportation equipment which is not a structural_component of the building office equipment refrigerators individual air-conditioning units grocery counters furnishings of a motel hotel or office building etc even though such items may be termed fixtures under local law under sec_1_856-3 a reit that is a partner in a partnership is deemed to own its proportionate share of each of the assets of the partnership and to be entitled to the income of the partnership attributable to that share for purposes of sec_856 the interest of a partner in the partnership's assets is determined in accordance with the partner's capital interest in the partnership the character of the various assets in the hands of the partnership and items of gross_income of the partnership retain the same character in the hands of the partners for all purposes of sec_856 plr-111324-11 revrul_71_220 c b considers a reit that develops a mobile home community on land that it had purchased the community is situated in a planned site that has a country club marina parks churches and schools when units are delivered they are set on foundations consisting of pre-engineered blocks the wheels and axles are removed from the units and the units are affixed to the ground by six or more steel straps each unit has a carport or screened porch attached to it in addition each unit is connected to water sewer gas electric and telephone facilities revrul_71_220 concludes that the mobile homes are real_property within the meaning of sec_856 and sec_1_856-3 revrul_75_424 1975_2_cb_269 concerns whether various components of a microwave transmission system are real_estate_assets for purposes of sec_856 the system consists of transmitting and receiving towers built upon pilings or foundations transmitting and receiving antennae affixed to the towers a building equipment within the building and waveguides the waveguides are transmission lines from the receivers or transmitters to the antennae and are metal pipes permanently bolted or welded to the tower and never removed or replaced unless blown off by weather the transmitting multiplex and receiving equipment is housed in the building prewired modular racks are installed in the building to support the equipment that is installed upon them the racks are completely wired in the factory and then bolted to the floor and ceiling they are self-supporting and do not depend upon the exterior walls for support the equipment provides for transmission of audio or video signals through the waveguides to the antennae also installed in the building is a permanent heating and air conditioning system the transmission site is surrounded by chain link fencing the revenue_ruling holds that the building the heating and air conditioning system the transmitting and receiving towers and the fence are real_estate_assets the ruling further holds that the antennae waveguides transmitting receiving and multiplex equipment and the prewired modular racks are assets accessory to the operation of a business and therefore not real_estate_assets revrul_80_151 1980_1_cb_7 provides two examples that illustrate how the service will apply the criteria set forth in 65_tc_664 acq 1980_1_cb_1 in determining whether outdoor advertising displays are inherently permanent structures or tangible_personal_property that qualified for the now- repealed investment_tax_credit the criteria which are in the form of questions are is the property capable of being moved and has it in fact been moved is the property designed or constructed to remain permanently in place are there circumstances that tend to show the expected or intended length of fixation that is are there circumstances that show the property may or will have to be moved how substantial a job is removal of the property and how time-consuming is it how much damage will the property sustain upon its removal what is the manner of affixation of the property to the land the steel billboard structures are substantial structures that are part of the building structures or separately constructed structures in the case of the tower steel plr-111324-11 billboard structures and are designed and constructed to remain permanently in place the steel billboard structures range in width from feet to feet and in height from feet to feet typically several stories high each of the structures and structural_components has never been moved because the construction and permanency of the steel billboard structures are substantially comparable to the transmitting and receiving towers in revrul_75_424 and the mobile home units in revrul_71_220 they are inherently permanent structures further the steel billboard structures are not assets accessory to the operation of a business based on the facts as represented by taxpayer we conclude that the steel billboard structures are real_estate_assets and interests_in_real_property for purposes of sec_856 and c issue sec_856 provides that rents_from_real_property include subject_to exclusions provided in sec_856 a rents from interests_in_real_property b charges for services customarily furnished or rendered in connection with the rental of real_property whether or not such charges are separately_stated and c rent attributable to personal_property leased under or in connection with a lease of real_property but only if the rent attributable to the personal_property for the taxable_year does not exceed percent of the total rent for the tax_year attributable to both the real and personal_property leased under or in connection with the lease sec_1_856-4 provides that for purposes of sec_856 and c the term rents_from_real_property includes charges for services customarily furnished or rendered in connection with the rental of real_property whether or not the charges are separately_stated services rendered to tenants of a particular building will be considered customary if in the geographic market in which the building is located tenants in buildings of a similar class are customarily provided with the service in particular geographic areas where it is customary to furnish electricity or other utilities to tenants in buildings of a particular class the submetering of those utilities to tenants in the buildings will be considered a customary service sec_1_856-4 provides that the trustees or directors of a reit are not required to delegate or contract out their fiduciary duty to manage the trust itself as distinguished from rendering or furnishing services to the tenants of its property or managing or operating the property thus the trustees or directors may do all those things necessary in their fiduciary capacities to manage and conduct the affairs of the trust itself sec_856 provides that any impermissible_tenant_service_income is excluded from the definition of rents_from_real_property sec_856 defines impermissible_tenant_service_income to mean with respect to any real or personal_property any amount received or accrued directly or indirectly by the reit for services plr-111324-11 furnished or rendered by the reit to tenants at the property or for managing or operating the property sec_856 provides that if the amount of impermissible_tenant_service_income exceeds one percent of all amounts received or accrued during the tax_year directly or indirectly by the reit with respect to the property the impermissible_tenant_service_income of the reit will include all of the amounts received or accrued with respect to the property sec_856 provides that the amounts treated as received by a reit for any impermissible tenant service shall not be less than percent of the direct_cost of the reit in furnishing or rendering the service sec_856 provides certain exclusions from impermissible_tenant_service_income sec_856 provides that for purposes of sec_856 services furnished or rendered or management or operation provided through an independent_contractor from whom the reit does not derive or receive any income shall not be treated as furnished rendered or provided by the reit and there shall not be taken into account any amount which would be excluded from unrelated_business_taxable_income under sec_512 if received by an organization described in sec_511 sec_512 provides in part that there shall be excluded from the computation of unrelated_business_taxable_income all rents_from_real_property and all rents from personal_property leased with such real_property if the rents attributable to such personal_property are an incidental amount of the total rents received or accrued under the lease determined at the time the personal_property is placed_in_service sec_1_512_b_-1 provides that payments for the use or occupancy of rooms and other space where services are also rendered to the occupant such as for the use or occupancy of rooms or other quarters in hotels boarding houses or apartment houses furnishing hotel services or in tourist camps or tourist homes motor courts or motels or for the use or occupancy of space in parking lots warehouses or storage garages do not constitute rent from real_property generally services are considered rendered to the occupant if they are primarily for his convenience and are other than those usually or customarily rendered in connection with the rental of rooms or other space for occupancy only the supplying of maid service for example constitutes such service whereas the furnishing of heat and light the cleaning of public entrances exits stairways and lobbies and the collection of trash are not considered as services rendered to the occupant in revrul_2002_38 2002_2_cb_4 a reit pays its trs to provide noncustomary services to tenants the reit does not separately state charges to tenants for the services thus a portion of the amounts received by the reit from tenants represents an amount received for services provided by the trs trs employees perform all of the services and trs pays all of the costs of providing the plr-111324-11 services the trs also rents space from the reit for carrying out its services to tenants the revenue_ruling concludes that the services provided to the reit’s tenants are considered to be rendered by the trs rather than the reit for purposes of sec_856 accordingly the services do not give rise to impermissible_tenant_service_income and do not cause any portion of the rents received by the reit to fail to qualify as rents_from_real_property under sec_856 in this case any noncustomary services provided to tenants at the steel billboard structures will be provided by trs a and the fees for the services will be either a separately_stated from the rents received by taxpayer and collected and retained by trs a or b included in the rent received by taxpayer and taxpayer will compensate trs a on an arm’s-length basis for providing the services all costs associated with providing the noncustomary services will be paid_by trs a accordingly income from services provided by trs a to tenants of taxpayer at each of the steel billboard structures will be excepted from the definition of impermissible_tenant_service_income and the amounts received by taxpayer from tenants of the steel billboard structures will not be treated as other than rents_from_real_property under sec_856 issue sec_856 provides that rents_from_real_property does not include any amount received or accrued directly or indirectly from any person if the reit owns directly or indirectly in the case of a corporation stock possessing percent or more of the total combined voting power of all classes of stock entitled to vote or percent or more of the total value of shares of all classes of stock of the corporation or in the case of any person that is not a corporation an interest of percent or more in the assets or net profits of the person sec_856 provides that rent received by a reit from its trs will not be excluded from rents_from_real_property under sec_856 if the terms of the limited rental exception of sec_856 are met the requirements of sec_856 are met with respect to any property if at least percent of the leased space of the property is rented to persons other than trss of the reit and other than persons described in sec_856 but only to the extent that the amounts paid to the reit as rents_from_real_property without regard to sec_856 from the property are substantially comparable to the rents paid_by the other tenants of the reit’s property for comparable space in order to meet the limited rental exception of sec_856 amounts paid to a reit as rents_from_real_property must be substantially comparable to rents paid_by the other tenants of the reit’s property for comparable space in the instant case space leased by trs a is unmarketable for traditional use and is unique at the property remaining leases at the property although all or substantially_all leased to unrelated plr-111324-11 tenants is not comparable in terms of character or use to the space rented to trs a in these circumstances where no comparable leased space exists within a property sec_856 may be satisfied by comparing the rent paid_by trs a to rent paid_by unrelated tenants for comparable space in the same geographic area accordingly we conclude that amounts paid to taxpayer by trs a for the rental of the steel billboard structures with respect to which there is no comparable space will not fail to qualify for the limited rental exception of sec_856 if the rent paid_by trs a is substantially comparable to rents paid_by unrelated tenants for comparable space in the same geographic area except as specifically ruled upon above no opinion is expressed concerning any federal_income_tax consequences relating to the facts herein under any other provision of the code specifically we do not rule whether taxpayer otherwise qualifies as a reit under part ii of subchapter_m of chapter of the code or whether rents paid to taxpayer by trs a satisfy the requirements of sec_856 concerning comparable rents this ruling is directed only to the taxpayer requesting it taxpayer should attach a copy of this ruling to each tax_return to which it applies sec_6110 of the code provides that this ruling 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 representatives sincerely jonathan d silver jonathan d silver assistant to the branch chief branch office of associate chief_counsel financial institutions products