internal_revenue_service number release date index number ---------------------------- -------------------------------------------- -------------------------------------- ------------------------------- in re ------------------------ -------------------------------- ------------------------------------- ------------------------------- department of the treasury washington dc third party communication date of communication month dd yyyy person to contact ---------------- id no ------------- telephone number --------------------- refer reply to cc tege eoeg teb plr-148695-04 date date legend state a b c d e f g h i obligations notes date date ------------- ------------ ---------- ------------ ---------------------------------------------- ---------- ---------- ---- --------------------- --------------------- ------------------------------------------ ------------------------------------- ------------------- ------------------- ------------------------------------------------------------------------------------------ ----------- ------------------ ------------------ ------------------- ------------------- ----------------------- plr-148695-04 date date date date date date year code state deficit budget account subaccount ----------------------------------------------------------------------------------------------------------- fund special fund serie sec_1 bonds ------------------------------------------------------ --------------------------------------------------- -------------------------------------- -------------------------------------- ----------------------------- ----------------------------------------------------------------------------------------- --------------------------------------------------------------------------- ----------------------------------------------------------------------------------------- --------------------------------------------------------------------------- --------------------------------------------- serie sec_2 bonds --------------------------------------------- serie sec_3 bonds ----------------------------------------------------------------------------------------- --------------------------------------------------------------------------- ------------------------------------------------------------------------ dear ------------- amounts if any in state’s general fund special fund and budget account described this letter is in response to your request on behalf of state for a ruling that ------------------------------------------------------------------------------------------ state is facing a substantial shortfall in cash available for normal working_capital plr-148695-04 below will not result in other replacement_proceeds of the bonds within the meaning of sec_1_148-1 facts and representations state’s general fund is the principal operating fund the general fund through which most of state’s expenditures are paid state revenues not designated by law to be deposited elsewhere are placed in the general fund state also has a special fund that was created to protect state from unforeseen revenue reductions and unanticipated expenditure increases the special fund under state law state’s controller may transfer as necessary from the special fund such amounts as are needed to meet cash needs of the general fund the controller must repay any money transferred without payment of interest as soon as there are sufficient moneys in the general fund payments to meet the shortfall state issued approximately dollar_figurea in obligations on date that matured on date proceeds of the obligations were deposited in state’s general fund and paid ongoing state expenditures not payable from other revenues state represents that proceeds of the obligations were in a sufficient amount to cover state’s cash management needs in the beginning months of fiscal_year but that expected cash receipts were less than expected cash expenditures during the remainder of that fiscal_year by at least dollar_figureb to cover the expected additional shortfall state issued notes on date that matured on date state represents that it continues to experience budget shortfalls to address the existing cumulative budget deficit state’s code was amended to permit state to issue bonds described below in the total amount of dollar_figurec to finance the state deficit state’s director of finance has certified that the state deficit is dollar_figured state’s constitution was also amended to create an account in the general fund the budget account that includes a subaccount the subaccount that will be used to retire the bonds the amendment requires state’s controller to transfer from the general fund to the budget account on certain dates a specified percentage of the estimated amount of general fund revenues the transfers are not required in any fiscal_year if the resulting balance in the account would exceed percent of the general fund revenues estimate set forth in the budget bill for that fiscal_year or dollar_figuree whichever is greater over the bonds’ term dollar_figuree may exceed percent of the general fund revenues estimate funds transferred to the budget account are deemed to be general fund revenues the transfers to the budget account may be suspended or reduced for a fiscal_year as specified by an executive_order issued by the governor no later than date of the preceding fiscal_year however state represents that it is reasonably expected that the governor would only act to suspend or reduce the transfers if there were a projected shortfall in the general fund for the upcoming fiscal_year and any suspended amount of the money transferred to the budget account in each fiscal_year percent state has issued three series of bonds on date state issued serie sec_1 and plr-148695-04 would be needed to cover the projected shortfall a projected shortfall in the upcoming fiscal_year could include a budget shortfall occurring in the current fiscal_year up to a total amount of dollar_figuref for all fiscal years will be deposited in the subaccount money in this subaccount will be continuously appropriated to the treasurer to be used to retire the bonds in the event any transfer to the budget account is suspended or reduced in any fiscal_year the transfer from the budget account would be suspended or similarly reduced for that fiscal_year bonds issued serie sec_2 bonds on date state issued the serie sec_3 bonds together with the serie sec_1 bonds and serie sec_2 bonds the bonds all three series of bonds have a term of approximately g years which is longer than two years state represents that the term of the bonds is necessary in light of the long-term financial distress it has experienced and reasonably expects to continue experiencing based on current fiscal_year cash flows for the general fund state estimates that it will continue to have ongoing deficits in its general fund allocated to the payment of a portion of the state deficit which included the remaining principal_amount of the obligations and notes and to the payment of working_capital expenditures arising after the bonds were issued state represents that by date approximately two months after the bonds were issued using a proceeds spent last method of expenditure under sec_1_148-6 all of the proceeds of the bonds were spent and there was a zero balance in the general fund the special fund and the budget account newly created fund the fund within the state treasury which consists primarily of the net_proceeds of special sales_tax revenues the special sales_tax revenues are amounts collected by state from proceeds of a new statewide tax on retailers for the sale of all tangible_personal_property sold at retail within state and an excise_tax imposed by state on the storage use or other consumption in state of tangible_personal_property purchased from any retailer amounts deposited in the fund are not available for any other purpose other than payment of the principal interest premium if any and replenishment of reserves of the bonds state law provides that special sales_tax revenues deposited in the fund do not constitute general fund revenues and amounts held in the fund may not be borrowed by or be available for transfer to the general fund deposited into various accounts within the fund to fund debt service on the bonds any the bonds are payable from and secured_by a pledge of amounts on deposit in a the proceeds of the bonds were deposited in the general fund and immediately under the master indenture the special sales_tax revenues collected are sec_103 provides that except as provided in subsection b gross_income plr-148695-04 surplus special sales_tax revenues in excess of those needed for scheduled debt service payments are deposited into a supplemental redemption account the master indenture requires the state treasurer to transfer money from the supplemental redemption account into a redemption fund which must be applied for the redemption purchase or defeasance of the bonds the master indenture also provides that any money received by state from the subaccount will be deposited in a redemption fund and applied to the redemption purchase or defeasance of the bonds law and analysis does not include interest on any state_or_local_bond sec_103 provides in part that subsection a shall not apply to any arbitrage_bond within the meaning of sec_148 sec_148 defines an arbitrage_bond as any bond issued as part of an issue any portion of the proceeds of which are reasonably expected at the time of issuance of the bond to be used directly or indirectly to acquire higher_yielding_investments or to replace funds which were used directly or indirectly to acquire higher_yielding_investments sec_148 further provides that a bond is an arbitrage_bond if the issuer intentionally uses any portion of the proceeds of the issue of which such bond is a part in a manner described in or sec_1_148-2 generally provides that under sec_148 the direct or indirect investment of the gross_proceeds of an issue in higher_yielding_investments causes the bonds of an issue to be arbitrage_bonds sec_1_148-1 defines gross_proceeds as proceeds and replacement_proceeds of an issue issue if the amounts have a sufficiently direct nexus to the issue or to the governmental purpose of the issue to conclude that the amounts would have been used for that governmental purpose if the proceeds of the issue were not used or to be used for that governmental purpose for this purpose governmental purposes include the expected use of amounts for the payment of debt service on a particular date the mere availability or preliminary earmarking of amounts for a governmental purpose however does not in itself establish a sufficient nexus to cause those amounts to be replacement_proceeds replacement_proceeds include but are not limited to sinking funds pledged funds and other replacement_proceeds described in sec_1_148-1 to the extent that those funds or amounts are held by or derived from a substantial beneficiary of the issue extent that the issuer reasonably expects as of the issue_date that the term of an issue will be longer than is reasonably necessary for the governmental purposes of the issue and there will be available amounts during the period that the issue remains sec_1_148-1 provides that amounts are replacement_proceeds of an sec_1_148-1 provides that replacement_proceeds arise to the sec_1_148-10 provides that an action overburdens the tax-exempt_bond sec_1_148-10 provides that bonds of an issue are arbitrage_bonds under plr-148695-04 outstanding longer than necessary whether an issue is outstanding longer than necessary is determined under sec_1_148-10 replacement_proceeds are created under sec_1_148-1 at the beginning of each fiscal_year during which an issue remains outstanding longer than necessary in an amount equal to available amounts of the issuer as of that date sec_1_148-1 provides as a safe_harbor that replacement_proceeds do not arise under sec_1_148-1 for the portion of an issue that is to be used to finance restricted working_capital expenditures if that portion is not outstanding longer than years sec_148 if an abusive arbitrage device under sec_1_148-10 is used in connection with the issue sec_1_148-10 provides that any_action is an abusive arbitrage device if the action has the effect of i enabling the issuer to exploit the difference between tax-exempt and taxable interest rates to obtain a material financial advantage and ii overburdening the tax-exempt_bond market market if it results in issuing more bonds issuing bonds earlier or allowing bonds to remain outstanding longer than is otherwise reasonably necessary to accomplish the governmental purposes of the bonds based on all the facts and circumstances whether an action is reasonably necessary to accomplish the governmental purposes of the bonds depends on whether the primary purpose of the transaction is a bona_fide governmental purpose eg an issue of refunding bonds to achieve a debt service restructuring that would be issued independent of any arbitrage benefit an important factor bearing on this determination is whether the action would reasonably be taken to accomplish the governmental purpose of the issue if the interest on the issue were not excludable from gross_income under sec_103 assuming that the hypothetical taxable interest rate would be the same as the actual tax-exempt_interest rate factors evidencing an overissuance include the issuance of an issue the proceeds of which are reasonably expected to exceed by more than a minor portion the amount necessary to accomplish the governmental purposes of the issue or an issue the proceeds of which are in fact substantially in excess of the amount of sale proceeds allocated to expenditures_for the governmental purposes of the issue one factor evidencing an early issuance is the issuance of bonds that do not qualify for a temporary period under sec_1_148-2 e or e one factor evidencing that bonds may remain outstanding longer than necessary is a term that exceeds the safe harbors against the creation of replacement_proceeds under sec_1_148-1 these factors may be outweighed by other factors however such as bona_fide cost underruns or long-term financial distress c ii b replacement_proceeds arise to the extent a working_capital reserve is directly or indirectly financed with the proceeds of the issue regardless of the expenditure of proceeds of the issue thus for example if an issuer that does not maintain a working_capital reserve borrows to fund a working_capital reserve the issuer sec_1_148-1 provides that except as otherwise provided sec_1 sec_1_148-6 provides that except as otherwise provided in sec_1 plr-148695-04 will have replacement_proceeds to determine the amount of a working_capital reserve maintained an issuer may use the average amount maintained as a working_capital reserve during annual periods of at least year the last of which ends within year before the issue_date for example the amount of a working_capital reserve may be computed using the average of the beginning or ending monthly balances of the amount maintained as a reserve net of unexpended gross_proceeds during the year period preceding the issue_date sec_1_148-1 provides that replacement_proceeds do not arise under paragraph c ii a of the section with respect to an issue all of the net_proceeds of which are spent within months of the issue_date under sec_148 or that is not subject_to the rebate requirement under the exception provided by sec_148 d or d proceeds of an issue may only be allocated to working_capital expenditures as of any date to the extent that those working_capital expenditures exceed available amounts as defined in sec_1_148-6 as of that date ie a proceeds-spent-last method for this purpose proceeds include replacement_proceeds described in sec_1_148-1 available to an issuer for working_capital expenditure purposes of the type financed by an issue except as otherwise provided available amount excludes proceeds of the issue but includes cash investments and other_amounts held in accounts or otherwise by the issuer or a related_party if those amounts may be used by the issuer for working_capital expenditures of the type being financed by an issue without legislative or judicial action and without a legislative judicial or contractual requirement that those amounts be reimbursed sec_1_148-6 provides that a reasonable working_capital reserve is treated as unavailable any working_capital reserve is reasonable if it does not exceed percent of the actual working_capital expenditures of the issuer in the fiscal_year before the year in which the determination of available amounts is made for this purpose only in determining the working_capital expenditures of an issuer for a prior fiscal_year any expenditures whether capital or working_capital expenditures that are paid out of current revenues may be treated as working_capital expenditures initially we note that the bonds do not meet the safe_harbor against replacement_proceeds under sec_1_148-1 because the term of the bonds is longer than years we must decide whether the bonds will be outstanding longer than is reasonably necessary for the governmental purposes of the issue and whether there will be available amounts in the state’s general fund special fund and budget account during a period that the bonds are outstanding longer than necessary whether bonds sec_1_148-6 defines available amount as any amount that is the governmental purpose of the bonds is to fund a portion of the state deficit state has mechanisms in place that provide for the early retirement of the bonds plr-148695-04 are outstanding longer than is reasonably necessary for the governmental purpose of the issue is determined under sec_1_148-10 and is based on a weighing of factors which includes paying the remaining principal_amount of the obligations notes and working_capital expenditures arising after the bonds were issued state represents that it has experienced and reasonably expects to continue experiencing severe long-term financial distress based on current fiscal_year cash flows for the general fund state estimates that it will continue to have ongoing cash_flow deficits in its general fund issuing the bonds with the term of approximately g years provides state with a reasonable and affordable debt service expense over the term of the bonds which takes into account state’s severe economic situation should state’s financial situation improve during the years the bonds are outstanding the master indenture requires that any excess special sales_tax revenues remaining after scheduled payments of principal and interest on the bonds are made must be applied on an annual basis to the redemption purchase or defeasance of the bonds the master indenture also provides that the money in the subaccount must be applied to the redemption purchase or defeasance of the bonds it is expected that suspension or reduction of transfers from the general fund to the budget account and hence to the subaccount will only occur if there is a projected shortfall in the general fund for the upcoming fiscal_year and any suspended amount would be needed to cover the projected shortfall outstanding longer than reasonably necessary for the governmental purpose of the issues state acknowledges that in the future there may be available amounts because amounts in the budget account alone could reach the greater of e or percent of the estimated general fund revenues for the current_year however since we conclude that the term of the bonds is not outstanding longer than is necessary to accomplish the governmental purposes of the issues we find that amounts in the general fund the special fund and the budget account will not result in other replacement_proceeds within the meaning of sec_1_148-1 under sec_1_148-1 because a working_capital reserve is financed with the proceeds of the bonds sec_1_148-1 provides that replacement_proceeds arise to the extent that a working_capital reserve is directly or indirectly financed with proceeds of the issue since by date all of the proceeds of the bonds were spent and there was a zero balance in the general fund the special fund and the budget account the bonds will meet the safe_harbor under sec_1_148-1 accordingly we conclude that sec_1_148-1 will not cause working_capital accordingly considering all the facts and circumstances the bonds will not be we must also decide whether working_capital replacement_proceeds will arise plr-148695-04 replacement_proceeds to arise with respect to the bonds conclusion based on all the facts and circumstances we conclude that amounts if any in the state’s general fund special fund and budget account if any will not be treated as other replacement_proceeds of the bonds within the meaning of sec_1_148-1 the ruling contained in this letter is based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter including whether interest on the bonds is tax exempt the code provides that it may not be used or cited as precedent letter is being sent to your taxpayer in accordance with the power_of_attorney on file with this office a copy of this this ruling is directed only to the taxpayer s requesting it sec_6110 of except as expressly provided herein no opinion is expressed or implied sincerely assistant chief_counsel exempt_organizations employment_tax government entities by timothy l jones senior counsel tax exempt bond branch


internal_revenue_service number release date index number ------------------------------ --------------------------- ----------------------------------- re ------------------------- -------------------- department of the treasury washington dc person to contact -------------------- id no ------------ telephone number -------------------- refer reply to cc psi b04 - plr-111635-10 date date legend donor -------------------------- ------------------------------------- date ------------------ trust ------------------------------------------------------- child ----------------------------------- child ------------------------------- child ----------------------------------- child --------------------------------------------- trust ------------------------------------------ trust -------------------------------------- trust ------------------------------------------- trust ---------------------------------------------------- year ------ company ------------------- accounting firm ------------------------- dear ------------------- this responds to the letter dated date and subsequent correspondence submitted by your authorized representative requesting an extension of time under sec_2642 of the internal_revenue_code and sec_301_9100-3 of the procedure and administration regulations to make an allocation of generation-skipping_transfer gst_exemption with respect to transfers to trust sec_1 and the facts and representations submitted are summarized as follows on date prior to date donor created trust an irrevocable_trust and funded trust with shares of stock in company under the terms of trust the trustee was directed to divide the trust corpus into four separate trusts one trust for the benefit of each of donor’s children and their descendants pursuant to this directive the trustee plr-111635-10 established trust for the benefit of child and his descendants trust for the benefit of child and his descendants trust for the benefit of child and his descendants and trust for the benefit of child and her descendants donor filed a year form_709 united_states gift and generation-skipping_transfer_tax return in preparing the form_709 accounting firm failed to allocate donor's available gst_exemption to the year transfers to trust sec_1 and it is represented that to date no taxable_distributions taxable terminations or any other gst taxable events have occurred with respect to any of the trusts that would result in a gst tax_liability on the part of any of the trusts or their beneficiaries donor has sufficient gst_exemption remaining and available to allocate gst_exemption with respect to the year transfers to trust sec_1 and sec_2601 imposes a tax on every generation-skipping_transfer gst made by a transferor to a skip_person a generation-skipping_transfer is defined under sec_2611 as a taxable_distribution a taxable_termination and a direct_skip sec_2602 provides that the amount of the gst tax is determined by multiplying the taxable_amount by the applicable_rate sec_2641 provides that the term applicable_rate means with respect to any gst the product of the maximum_federal_estate_tax_rate and the inclusion_ratio with respect to the transfer under sec_2642 the inclusion_ratio with respect to any property transferred in a generation-skipping_transfer is generally defined as the excess of over the applicable_fraction the applicable_fraction as defined in sec_2642 is a fraction the numerator of which is the amount of gst_exemption under sec_2631 allocated to the trust or to property transferred in a direct_skip and the denominator of which is the value of the property transferred to the trust or involved in the direct_skip sec_2631 as in effect for the tax_year at issue provided that for purposes of determining the inclusion_ratio every individual shall be allowed a gst_exemption of dollar_figure which may be allocated by such individual or his executor to any property with respect to which such individual is the transferor sec_2631 provides that any allocation under sec_2631 once made shall be irrevocable sec_2632 provides that any allocation by an individual of his or her gst_exemption under sec_2631 may be made at any time on or before the date prescribed for filing the estate_tax_return for such individual's estate determined with regard to extensions regardless of whether such a return is required to be filed sec_26_2632-1 of the generation-skipping_transfer_tax regulations provides that an allocation of gst_exemption to property transferred during the transferor's lifetime is made on form_709 plr-111635-10 sec_2642 provides that except as provided in sec_2642 if the allocation of the gst_exemption to any transfers of property is made on a gift_tax_return filed on or before the date prescribed by sec_6075 for such transfer the value of such property for purposes of determining the inclusion_ratio under sec_2642 shall be its value as finally determined for purposes of chapter within the meaning of sec_2001 sec_2642 provides that the secretary shall by regulation prescribe such circumstances and procedures under which extensions of time will be granted to make an allocation of gst_exemption described in sec_2642 or and an election under sec_2632 or c such regulations shall include procedures for requesting comparable relief with respect to transfers made before the date of the enactment of this paragraph sec_2642 provides that in determining whether to grant relief under sec_2642 the secretary shall take into account all relevant circumstances including evidence of intent contained in the trust instrument or instrument of transfer and such other factors as the secretary deems relevant for purposes of determining whether to grant relief the time for making the allocation or election shall be treated as if not expressly prescribed by statute notice_2001_50 2001_2_cb_189 provides that under sec_2642 the time for allocating the gst_exemption to lifetime transfers and transfers at death the time for electing out of the automatic allocation rules and the time for electing to treat any trust as a generation-skipping_trust are to be treated as if not expressly prescribed by statute the notice further provides that taxpayers may seek an extension of time to make an allocation described in sec_2642 or b or an election described in sec_2632 or c under the provisions of sec_301_9100-3 sec_301_9100-1 provides that the commissioner has discretion to grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make a regulatory election or a statutory election but no more than months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-3 provides the standards used 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 in accordance with sec_2642 and notice_2001_50 taxpayers may seek an extension of time to make an allocation described in sec_2642 or b or an election described in sec_2632 or c under the provisions of sec_301_9100-3 plr-111635-10 requests for relief under sec_301_9100-3 will be granted when the taxpayer provides the evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government under sec_301_9100-3 a taxpayer is deemed to have acted reasonably and in good_faith if the taxpayer reasonably relied on a qualified_tax professional including a tax professional employed by the taxpayer and the tax professional failed to make or advise the taxpayer to make the election based on the facts submitted and representations made we conclude that the requirements of sec_301_9100-3 are satisfied therefore donor is granted an extension of time of days from the date of this letter to make allocations of donor's available gst_exemption with respect to the year transfers to trust sec_1 and the allocations will be effective as of the date of the transfers to the trusts and the gift_tax values of the transfers to the trusts will be used in determining the inclusion_ratio with respect to each trust the allocations should be made on supplemental form sec_709 for the appropriate calendar_year and filed with the internal_revenue_service cincinnati service center- stop cincinnati ohio a copy of this letter should be attached to each supplemental form_709 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 except as specifically ruled herein we express no opinion on the federal tax consequences of the transaction under the cited provisions or under any other provisions of the code specifically we are not ruling on whether trust sec_1 and will have zero inclusion ratios as a result of donor’s allocations of gst_exemption to the year transfers to the trusts the rulings in this letter pertaining to the federal estate and or generation-skipping_transfer_tax apply only to the extent that the relevant sections of the internal_revenue_code are in effect during the period at issue plr-111635-10 this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent in accordance with a 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 and special industries by ____________________________ lorraine e gardner senior counsel branch office of associate chief_counsel passthroughs and special industries enclosures copy for sec_6110 purposes copy of this letter


internal_revenue_service number release date index number ---------------------- ----------------------------- ---------------------- ------------------------- re --------------------------------------------------- --------------------------- department of the treasury washington dc person to contact ------------------- id no ------------- telephone number --------------------- refer reply to cc fip - plr-111862-04 date date --------------------------------------------------------------------------------- --------------------------------------------------------------------------------- ---------------------------------- ------------------------------------------------------------- --------------------------------------------------------------- legend trust a ------------------------------------------------------------------------------------------------------------------ trust b corporation a corporation b ------------------------------------------------------------------------------------------------------------- lp llc a llc b property date date date date state --------------------------------------------- -------------------------------------- ------------------------------- ----------------------- ---------------------- ---------------------- ---------------------- ------------ --- --- ------------------- ----------------------------- --------------------------------------------------------------------------------- plr-111862-04 x percent y percent law firm ----------------------------------------------------------------------------------------------------------------- m n dear -------------- this letter responds to your submission filed on behalf of trust a in its capacity as the successor-in-interest to trust b and corporation b requesting an extension of time under sec_301_9100-1 and sec_301_9100-3 of the procedure and administration regulations to file an election to treat corporation b as a taxable_reit_subsidiary of trust b under sec_856 of the internal_revenue_code for the period from date through date facts real_estate_investment_trust reit for federal_income_tax purposes corporation a holds the majority of interests in trust a on date trust b merged with and into trust a with trust a surviving the merger prior to the merger trust b was a state real_estate_investment_trust that elected to be treated as a reit for federal_income_tax purposes trust b was the general_partner and x percent interest holder in lp through which trust b conducted its operations in connection with the merger trust a acquired trust b’s interest in lp becoming lp’s new general_partner trust a represents that it currently holds a y percent interest in lp through llc a lp owns property llc b was formed solely to facilitate financing for property as the lender on a note to llc a on date llc b acquired all of the shares of corporation b and all of the interests in llc a law firm assisted trust b with the legal aspects of these acquisitions trust a represents that law firm did not advise trust b to make a sec_856 taxable_reit_subsidiary election furthermore on date law firm issued a tax opinion in conjunction with the merger stating that each of trust b’s corporate subsidiaries qualified as either a sec_856 qualified_reit_subsidiary or a sec_856 taxable_reit_subsidiary trust a is a state real_estate_investment_trust that has elected to be treated as a corporation b is a state corporation owned indirectly by lp through llc b_trust a represents that after the merger it discovered that trust b had never in support of the requested ruling trust a has submitted the affidavits of m a tax plr-111862-04 made an election for corporation b to be treated as a taxable_reit_subsidiary thereafter on date trust a and corporation b jointly filed a form_8875 to treat corporation b as a taxable_reit_subsidiary with regard to trust a effective as of date trust a represents that it is not aware of any specific facts indicating that trust b’s failure to make an election for corporation b had been discovered by the internal_revenue_service prior to this request trust a represents that it is not seeking to alter a return position for trust b for which an accuracy related penalty has been or could be imposed under sec_6662 trust a also represents that trust b has not used nor had the opportunity to use hindsight in making this request and that facts have not changed since the original due_date of the election that make the election more advantageous finally trust a represents that the government’s grant of an extension of time to file the election for corporation b will not place trust b in a better position generally and specifically will not result in a lower tax_liability for trust b than had the election been timely made partner with law firm and n an associate with law firm law and analysis included a change for tax years beginning after date to the reit provisions of sec_856 this change allows a reit to form a taxable_reit_subsidiary that can perform activities that otherwise would result in impermissible income the election under sec_856 is made on a form_8875 taxable_reit_subsidiary election officers of both the reit and the taxable_reit_subsidiary must jointly sign the form which is filed with the irs service_center in ogden ut sec_856 provides that a reit and a corporation other than a reit may jointly elect to treat such corporation as a taxable_reit_subsidiary to be eligible for treatment as a taxable_reit_subsidiary sec_856 provides that the reit must directly or indirectly own stock in the corporation and the reit and the corporation must jointly elect such treatment the election is irrevocable once made unless both the reit and the subsidiary consent to its revocation in addition the election and the revocation may be made without the consent of the secretary availability of form_8875 taxable_reit_subsidiary election according to the announcement this form is to be used for tax years beginning after for eligible entities to elect treatment as a taxable_reit_subsidiary the instructions to form_8875 provide that the subsidiary and the reit can make the election at any time during the the ticket to work and work incentives improvement act of p l in announcement 2001_1_cb_716 the service announced the plr-111862-04 tax_year the effective date of the election however depends on when the form_8875 is filed the instructions further provide that the effective date of the election cannot be more than months and days prior to the date of filing the election or months after the date of filing the election if no date is specified on the form the election is effective on the date the form is filed with the service sec_301_9100-1 provides that the commissioner has discretion to grant a reasonable extension of time to make a regulatory election defined in sec_301_9100-1 as an election whose due_date is prescribed by regulations or by a revenue_ruling a revenue_procedure a notice or an announcement published in the internal_revenue_bulletin or a statutory election but no more than months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i will use to determine whether under the particular facts and circumstances of each situation the commissioner will grant an extension of time for regulatory elections that do not meet the requirements of ' sec_301_9100-3 provides that subject_to paragraphs b i through iii of ' when a taxpayer applies for relief under this section before the failure to make the regulatory election is discovered by the service the taxpayer will be deemed to have acted reasonably and in good_faith sec_301_9100-3 provides that the interests of the government are prejudiced if granting relief would result in the taxpayer having a lower tax_liability in the aggregate for all years to which the regulatory election applies than the taxpayer would have had if the election had been timely made taking into account the time_value_of_money conclusion sec_301_9100-3 through c i sets forth rules that the service generally based on the information submitted and representations made we conclude that trust a as successor-in-interest to trust b and corporation b have satisfied the requirements for granting a reasonable extension of time to elect under sec_856 to treat corporation b as a taxable_reit_subsidiary of trust b for the period from date through date therefore trust a as successor-in-interest to trust b and corporation b are granted a period of time not to exceed days from the date of this letter to submit the form_8875 this ruling is limited to the timeliness of the filing of the form_8875 this ruling s application is limited to the facts representations code sections and regulations cited herein no opinion is expressed with regard to the qualification of trust a or trust b as reits under subchapter_m of the code no opinion is expressed with regard to whether the tax_liability of trust b or corporation b is not lower in the aggregate for all years to which the election applies than such tax_liability would have been if the election had been timely made taking into plr-111862-04 account the time_value_of_money upon audit of the federal_income_tax returns involved the director s office will determine the tax_liability for the years involved if the director s office determines that the tax_liability is lower that office will determine the federal_income_tax effect this ruling is directed only to the taxpayers who requested it sec_6110 provides that it may not be used or cited as precedent sincerely ________________________ elizabeth a handler chief branch office of associate chief_counsel financial institutions products enclosures copy of this letter copy for sec_6110 purposes


internal_revenue_service index no number release date cc dom p si - plr-121914-98 date x a date year dear this is in reply to your letter dated date submitted on behalf of x requesting a ruling under sec_1362 of the internal_revenue_code the information submitted states that x was incorporated on date a as x's vice president represents that it was the intent of x's shareholders that x elect to be an s_corporation effective for year x's first taxable_year the attorney that provided assistance in forming x states that the shareholders intended that x elect to be an s_corporation and that x’s accounting firm was to take care of x’s s election however a form_2553 election by a small_business_corporation was not timely filed for that year because x's accountants did not process the election as x’s shareholders had understood that they would x and its shareholders filed their federal_income_tax returns for year consistent with their belief that x had made a timely s election effective for that year sec_1362 of the code provides that if -- a an election under sec_1362 is made for any taxable_year after the date prescribed by sec_1362 for making such election for such taxable_year or no such election is made for any taxable_year and b the secretary determines that there was reasonable_cause for the failure to timely make such election the secretary may treat such an election as timely made for such taxable_year 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 for x’s first taxable_year accordingly provided x makes an election to be an s_corporation by filing a completed form_2553 with the appropriate service_center effective for its year taxable_year within days following the date of this letter then such election will be treated as timely made for x’s year taxable_year a copy of this letter should be attached to the form_2553 except as specifically set forth above no opinion is expressed concerning the federal tax consequences of the facts described above under any other provision of the code including whether x was or is a small_business_corporation under sec_1361 of the code this ruling is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent 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 yours j thomas hines senior technician reviewer branch office of the assistant chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc psi 5-plr-114300-00 date date legend partnership state a city b agency c city d a b c d e f g dear this letter responds to partnership’s authorized representative’s letter dated date and subsequent correspondence submitted on behalf of partnership requesting a private_letter_ruling concerning the low-income_housing tax_credit under sec_42 of the internal_revenue_code specifically we are asked to rule that for purposes of sec_42 partnership may include as part of the proceeds of tax- exempt bonds subject_to the volume_cap under sec_146 the investment_proceeds from the investment of the sale proceeds of such bonds that accrue during the project_period net of rebate amounts attributable to the project_period partnership has made the following representations plr-114300-00 facts partnership is a state a limited_partnership which was formed to develop and operate a low-income_housing project the project in city b partnership is a calendar_year accrual basis taxpayer the internal_revenue_service office that will have examination jurisdiction over partnership’s tax_return is in city d in a agency c issued tax-exempt housing bonds the bonds which are subject_to the volume_cap imposed by sec_146 to finance the debt portion of the project the original face_amount of the bonds was dollar_figureb issued at par originally partnership’s budget for the project as approved by agency c in connection with the issuance of the bonds showed an estimated aggregate basis of dollar_figurec for the buildings and the land making up the project to be primarily financed by the bonds the face_amount of the bonds constituted approximately d percent of the aggregate basis of dollar_figurec for the buildings and the land making up the project however partnership has revised its earlier estimate of projected aggregate basis for the buildings and the land making up the project from dollar_figurec to dollar_figuree this increase is mainly due to the following initially unanticipated factors a sharp increase in drywall prices fencing found necessary to protect against vandalism that occurred during construction a shortage of contractors in city b due to a sharp increase in building activity there which forced partnership to hire contractors outside of city b and pay them a premium and waiving the partnership’s exemption from certain local impact fees to facilitate local approvals accordingly the face_amount of the bonds is now expected to constitute less than percent of the aggregate basis of dollar_figuree of the buildings and land making up the project partnership expects to place the project in service by the end of f partnership estimates that there will be approximately dollar_figureg in investment earnings from the temporary investment of the sale proceeds of the bonds that accrue through the date the project is placed_in_service net of any arbitrage rebate under sec_148 partnership represents that utilization of investment_proceeds earned to the placed-in-service date of the project will allow the project to satisfy the percent test of sec_42 discussion sec_42 provides a tax_credit for investment in low-income_housing buildings placed_in_service after date sec_42 provides that the amount of credit determined under sec_42 for any taxable_year with respect to any building shall not exceed the housing_credit_dollar_amount allocated to such building under sec_42 sec_42 provides that an allocation generally shall be taken into plr-114300-00 account under sec_42 only if it is made not later than the close of the calendar_year in which the building is placed_in_service sec_42 provides that the aggregate housing_credit_dollar_amount which a housing_credit_agency may allocate for any calendar_year is the portion of the state housing_credit ceiling allocated under sec_42 for such calendar_year to such agency sec_42 provides that sec_42 does not apply to any portion of the credit otherwise allowable under sec_42 which is attributable to eligible_basis financed by any obligation the interest on which is exempt from tax under sec_103 if - i such obligation is taken into account under sec_146 and ii principal payments on such financing are applied within a reasonable period to redeem obligations the proceeds of which were used to provide such financing for purposes of sec_42 sec_42 provides that if percent or more of the aggregate basis of any building and the land on which the building is located is financed with such tax-exempt obligations sec_42 does not apply to any portion of the low-income_housing_credit allowable under sec_42 with respect to such building sec_1_42-1t of the temporary income_tax regulations provides that no housing_credit allocation is required in order to claim a credit under sec_42 with respect to the entire qualified_basis as defined in sec_42 of a qualified low- income building if percent or more of the aggregate basis of the building and land on which the building is located is financed with the proceeds of tax-exempt_bonds which are taken into account for purposes of the volume_cap under sec_146 sec_1_141-1 of the income_tax regulations defines proceeds for purposes of sec_141 as the sale proceeds of an issue other than those sale proceeds used to retire bonds on the issue that are not deposited in a reasonably required reserve or replacement fund for this purpose proceeds also include any investment_proceeds from investments that accrue during the project_period net of rebate amounts attributable to the project_period sec_1_141-1 defines project_period as the period beginning on the issue_date and ending on the date that the project is placed_in_service sec_1_148-1 defines sale proceeds as any amounts actually or constructively received from the sale of the issue including amounts used to pay underwriters’ discount or compensation and accrued interest other than pre-issuance accrued interest plr-114300-00 sec_1_148-1 defines investment_proceeds as any amounts actually or constructively received from investing proceeds of an issue based on the relevant law as set forth above the term proceeds in sec_1_42-1t includes any investment_proceeds from investment of the sale proceeds that accrue during the project_period net of rebate amounts attributable to the project_period in the present case partnership represents that there will be approximately dollar_figureg in investment earnings from the temporary investment of the sale proceeds of the bonds that accrue through the date the project is placed_in_service net of any arbitrage rebate under sec_148 accordingly for purposes of sec_42 we conclude that investment_proceeds from the investment of the sale proceeds of the bonds that accrue during the project_period net of rebate amounts attributable to the project_period may be included as part of partnership’s proceeds of the bonds no opinion is expressed or implied regarding the application of any other provisions of the code or regulations including sec_103 and sections specifically we express no opinion on whether the project qualifies for the low-income_housing tax_credit under sec_42 the validity of costs included in the project’s basis whether and when the 50-percent aggregate basis requirement in sec_42 is met or whether any other requirement of sec_42 is met in accordance with the power_of_attorney filed with this request we are sending a copy of this letter_ruling to partnership’s first authorized representative this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent sincerely harold e burghart assistant to the branch chief enclosure copy branch office of assistant chief_counsel passthroughs and special industries


office_of_chief_counsel internal_revenue_service memorandum number release date cc ita b05 ------------- postn-131398-06 third party communication none date of communication not applicable uilc date date to associate area_counsel thousand oaks sbse attn steve roth from william a jackson chief branch income_tax accounting subject specified liability losses and insurance recoveries this chief_counsel_advice responds to your request for assistance dated date as modified on date this advice may not be used or cited as precedent we have condensed your inquiries into four issues legend taxpayer ------------------------------------------------- issues may a taxpayer claim a deduction under sec_165 or sec_162 for an amount with respect to which the taxpayer has a right or expectation of recovery through insurance or otherwise when does the prospect of an insurance recovery prevent a taxpayer from deducting as a sec_162 expense or a sec_165 loss amounts arising out of various claims against the taxpayer postn-131398-06 if a sll expense is disallowed as a deduction in a taxable_year either because of the actual recovery_of such expense during the taxable_year or because of insurance recoveries anticipated to be received in a subsequent taxable_year how does that affect the utilization of the expense in determining the amount of a taxpayer’s sll if a taxpayer satisfies the requirements to deduct a sll expense in one taxable_year and deducts such expense for that year but receives a reimbursement of the deducted expense through insurance recoveries in a subsequent taxable_year how is that reimbursement treated for federal_income_tax purposes may the service require the taxpayer to reduce its sll expense deductions for the taxable_year of recovery by the amount of the recovery netting do deductions for legal fees incurred in asserting claims for insurance reimbursements for product_liability expenses qualify as product_liability deductions conclusions a taxpayer may not claim a sec_165 loss deduction to the extent the taxpayer has a claim for reimbursement for which there is a reasonable_prospect_of_recovery a taxpayer may not claim a sec_162 business_expense deduction to the extent the taxpayer has a right to reimbursement even if the right is not certain or is subject_to a contingency the standards reasonable_prospect_of_recovery under sec_165 and right to reimbursement under sec_162 are highly factual whether a taxpayer claims a deduction for an expense under sec_165 or sec_162 the deduction should be denied if based on the facts and circumstances the taxpayer has insurance coverage that appears to provide a right to reimbursement and there is no indication that an exception to coverage applies a sll expense must be allowed as a deduction for the taxable_year in order to generate a sll for that year the taxpayer generally must include the amount of reimbursement for prior year sll expenses in gross_income in the taxable_year of reimbursement pursuant to the tax_benefit_rule to be eligible to generate a sll sec_172 simply requires an item to qualify as a sll expense and to be deductible under sec_162 or sec_165 for product_liability expenses for the taxable_year neither sec_172 nor the regulations thereunder provide any authority to net recoveries of sll expenses deducted in prior taxable years against unrelated sll expenses for the current taxable_year in determining sll deductions for the current taxable_year deductions for legal and other fees incurred in connection with resolving issues that do not bear on taxpayer’s product_liability to third party claimants but relate only to taxpayer’s claims against its insurers do not qualify as product_liability deductions postn-131398-06 facts taxpayer manufactures products that are sold to a broad range of customers various parties have asserted claims and filed lawsuits against taxpayer seeking damages claimed to be attributable to alleged defects in taxpayer products a certain amount of these claims will result in actual liability to taxpayer allowable product_liability claims either through concession settlement or judgments taxpayer has also incurred liabilities for environmental remediation taxpayer has liability insurance coverage for some of these liabilities for federal_income_tax purposes taxpayer deducts allowable product_liability claims for the taxable_year paid taxpayer reduces the amount claimed as a deduction for the taxable_year to the extent taxpayer receives insurance reimbursement for the paid claim in the same taxable_year if taxpayer receives insurance reimbursement for a product_liability claim paid in a prior taxable_year taxpayer includes the reimbursement in gross_income rather than reducing its current deduction for unrelated product_liability claims paid for federal_income_tax purposes taxpayer deducts allowable environmental remediation liabilities for the taxable_year paid taxpayer takes anticipated insurance recoveries for environmental remediation liabilities previously paid into account when taxpayer believes the right to the reimbursement is fixed and determinable which may or may not be for the taxable_year in which the environmental remediation liabilities are claimed as deductions taxpayer accounts for environmental remediation liabilities based on each cleanup site if taxpayer believes that it has a fixed and determinable right to reimbursement for cleanup costs at a particular site for a taxable_year taxpayer will reduce its deduction for environmental remediation expenses for that site for the taxable_year by the amount of the anticipated recovery taxpayer includes anticipated recoveries in excess of actual expenses for a particular site for the taxable_year in gross_income taxpayer does not reduce its deductions for environmental remediation expenses for one site by anticipated insurance recoveries of expenses_incurred at a different site law sec_172 a provides a deduction equal to the aggregate of the nol carryovers and carrybacks to the taxable_year sec_172 generally provides an nol_carryback period consisting of each of the taxable years preceding the taxable_year of the loss and an nol_carryover period equal to each of the taxable years following the taxable_year of the loss however sec_172 provides a 10-year nol_carryback period for a specified_liability_loss sll references to the code refer to the internal code of as applicable to the taxable years at issue likewise section references refer to sections of that code postn-131398-06 with certain modifications a corporate taxpayer’s nol for a taxable_year equals the excess if any of the deductions allowed to the taxpayer by chapter of the code over the taxpayer’s gross_income for the taxable_year see sec_172 sec_1_172-2 sec_172 defines a sll as the sum of certain deductions to the extent taken into account in computing the nol for the taxable_year deductions for product_liability fall into the set of deductions that may generate a sll product_liability deductions include any amount allowable as a deduction under sec_162 or sec_165 which is attributable to product_liability or expenses_incurred in the investigation or settlement of or opposition to claims against the taxpayer on account of product_liability sec_172 defines the term product_liability as liability of the taxpayer for damages on account of physical injury or emotional harm to individuals hereafter referred to as personal injury or damage to or loss of the use of property on account of any defect in any product which is manufactured leased or sold by the taxpayer but only if such injury harm or damage arises after the taxpayer has completed or terminated operations with respect to and has relinquished possession of such product sec_1_172-13 expands upon the statutory definition by providing that the term product_liability does not include liabilities arising under warranty theories relating to repair or replacement of the property that are essentially contract liabilities pursuant to sec_172 expenses that taxpayer incurs in the investigation settlement or opposition to product_liability claims against taxpayer such as legal fees may qualify as product_liability deductions however sec_1_172-13 provides that indirect corporate expenses or expenses for overhead do not qualify as product_liability deductions sec_172 also includes within the class of deductions that may generate a sll certain deductions allowable for satisfying five types of federal or state law liabilities provided the deductions are not allowable under either sec_468 or sec_468a the act or failure to act giving rise to such liability occurs at least years before the beginning of the taxable_year and the taxpayer used an accrual_method of accounting throughout the period or periods during which such act or failure to act occurred federal or state law liabilities requiring the remediation of environmental contamination constitute one of the five types of qualifying liabilities analysis issue may a taxpayer claim a deduction under sec_165 or sec_162 for an amount with respect to which the taxpayer has a right or expectation of recovery through insurance or otherwise when does the prospect of an insurance recovery postn-131398-06 prevent a taxpayer from deducting as a sec_162 expense or a sec_165 loss amounts arising out of various claims against the taxpayer standards under sec_165 sec_165 and the related treasury regulations cited in the request for chief_counsel_advice directly address when insurance recoveries or the prospect of insurance recoveries prevent a taxpayer from deducting losses sec_165 allows a deduction for any loss sustained during the taxable_year and not_compensated_for_by_insurance_or_otherwise losses must be bona_fide evidenced by closed and completed transactions fixed by identifiable events and sustained during the taxable_year sec_1_165-1 d no portion of the loss with respect to which reimbursement may be received is sustained for purposes of sec_165 until it can be ascertained with reasonable certainty whether or not the reimbursement will be received whether a reasonable_prospect_of_recovery exists with respect to a claim for reimbursement of a loss is a question of fact to be determined upon examination of all facts and circumstances sec_1_165-1 if in the year of the casualty or other event a portion of the loss is not covered by a claim for reimbursement with respect to which there is a reasonable_prospect_of_recovery then that portion of the loss is sustained during the taxable_year in which the casualty or other event occurs sec_1_165-1 a taxpayer will not sustain a loss for purposes of sec_165 for amounts covered by claims for reimbursement from insurance_companies or otherwise until the taxable_year in which the taxpayer no longer has a reasonable_prospect_of_recovery with respect to its claims because they have been resolved for example through settlement adjudication or abandonment sec_1_165-1 a reasonable_prospect_of_recovery exists when a taxpayer has a bona_fide claim for recoupment from third parties or otherwise and there is a substantial possibility that the claims will be decided in the taxpayer’s favor 61_tc_795 aff’d 521_f2d_786 4th cir a taxpayer is not required to be an incorrigible optimist however so that claims with remote or nebulous potential for success do not defer a loss deduction id the reasonableness of a prospect of recovery is primarily tested on the basis of objective facts known or reasonably foreseeable at the end of the taxable_year of the loss although subjective facts also may be considered id pincite julicher v commissioner tcmemo_2002_55 the fact that a settlement or favorable judgment may occur in the future does not postpone the deduction as long as at the close of the loss_year there exists no reasonable_prospect_of_recovery id one factor to consider in determining whether there is a reasonable_prospect_of_recovery is whether the taxpayer has filed a claim or lawsuit against third parties to recover the loss julicher v commissioner filing of lawsuit to recover loss gives rise to an inference of a reasonable_prospect_of_recovery concord instruments corporation v postn-131398-06 commissioner tcmemo_1994_248 taxpayer’s pursuit of claim for reimbursement from insurer precluded deduction in years at issue the sixth circuit concluded that a trustee who filed a lawsuit relating to the embezzlement of the trust’s funds had reasonable grounds for his belief that there were good prospects of recovery so that the loss deduction was appropriately claimed in the year the legal proceedings were concluded 266_f2d_154 6th cir another factor is whether insurers or other responsible parties have denied liability for the taxpayer’s claim in gale v commissioner the tax_court noted that the denial of liability by the taxpayers’ insurer was not a decisive factor in determining whether they had a reasonable_prospect_of_recovery in light of the taxpayers’ decision to commence a lawsuit against the insurer 41_tc_269 see also julicher v commissioner denial of liability by insurance_company is not the sole factor in determining whether a reasonable_prospect_of_recovery exists clem v commissioner tcmemo_1991_414 denial of liability by insurer is a significant factor in determining the reasonableness of the prospects of recovery but must be viewed in light of the surrounding facts and circumstances standards under sec_162 sec_162 does not expressly address the issue of when insurance recoveries or the prospect of insurance recoveries prevent a taxpayer from deducting expenses that are otherwise deductible under that section sec_162 provides that a taxpayer may deduct all ordinary and necessary expenses paid_or_incurred during the taxable_year in carrying_on_a_trade_or_business see also sec_1_162-1 treas reg a however specifically limits the deduction for amounts paid_or_accrued as compensation_for injuries to the amount not_compensated_for_by_insurance_or_otherwise a deduction for an expense for which there is a right or expectation of reimbursement may be disallowed because these payments are not expenses of the taxpayer and are instead in the nature of an advance or a loan the extent to which the right must be established has varied some cases have denied the deduction because the right of reimbursement was fixed others have allowed the deduction because the right of reimbursement was uncertain and other cases have denied the deduction even if the taxpayer’s right to reimbursement was subject_to a contingency a fixed or established right of reimbursement precludes a taxpayer from deducting expenses that would otherwise be deductible under sec_162 revrul_79_263 1979_2_cb_82 no deduction for portion of expenses for which the taxpayer knows he will be reimbursed since the taxpayer suffers no economic detriment with respect to these expenses a right to reimbursement is sufficiently fixed to preclude a deduction when the right has matured without further substantial contingency 68_tc_620 nonacq on other gds 1978_2_cb_3 a fixed_right of reimbursement has been shown through written postn-131398-06 agreements specifically providing that the taxpayers’ expenses were to be reimbursed or written statements from a third party authorizing the taxpayer to incur the expenses see 710_f2d_1400 9th cir 61_f2d_950 2d cir webbe v commissioner tcmemo_1987_426 aff’d 902_f2d_688 8th cir revrul_78_388 1978_2_cb_110 a taxpayer’s moving_expenses for which the taxpayer has a fixed_right of reimbursement are not deductible under sec_162 or sec_165 in 212_f2d_552 5th cir the taxpayer paid for roof repairs to a building the taxpayer rented for business purposes after questioning the high cost of the repairs the owner nonetheless agreed to pay and requested that the bills be forwarded the taxpayer instead paid for additional repairs and notified the owner but received no reimbursement the court held that the taxpayer was not entitled to deduct the cost of the repairs as an ordinary and necessary business_expense because the taxpayer had a right to reimbursement despite the owner’s ultimate failure to reimburse if the right to reimbursement is not fixed the deduction may be allowed see 39_tc_846 taxpayer had no right to reimbursement at the time the expenses were incurred allegheny corporation v commissioner 28_tc_298 acq 1957_2_cb_3 deduction not precluded by contingent possibility of future reimbursement from assets of debtor of legal fees and costs for representation in bankruptcy proceeding in 37_tc_158 acq 1962_2_cb_4 the taxpayer was allowed a deduction in the year expenses were paid for moving machinery as the result of a condemnation action because there was no fixed_right of reimbursement but only an indefinite and general right to recover its expenses the court concluded that although the taxpayer had a general right to reimbursement of moving_expenses conflicting evidence at hearings to determine the amount of compensation indicated the lack of definiteness of the taxpayer’s right in 31_f3d_651 8th cir a taxpayer was allowed a deduction under sec_162 in the taxable_year it transferred money to a_trust to provide for the satisfaction of a judgment after three insurers denied liability even though the taxpayer recovered some insurance proceeds in subsequent years an expectation of reimbursement rather than a fixed and absolute right of reimbursement may be sufficient to preclude a deduction under sec_162 revrul_80_348 1980_2_cb_31 holds that travel_expenses that otherwise would be allowable as a deduction under sec_162 may not be deducted if there is an expectation of reimbursement even if the reimbursement is not received until a later year a line of cases has held that an attorney representing clients on a contingent_fee basis may not deduct advances to or expenses paid on behalf of the clients as ordinary and necessary business_expenses the amounts were to be repaid from any recovery and although generally the taxpayers screened cases they accepted to maximize recoveries the taxpayers never recovered of the expenditures 356_f2d_755 5th cir cert_denied 385_us_832 63_tc_562 53_tc_217 aff’d 447_f2d_484 9th cir acq 1971_2_cb_2 nonacq in part 1982_2_cb_2 silverton v commissioner tcmemo_1977_198 aff’d 647_f2d_172 9th cir cert_denied 454_us_1033 watts v commissioner tcmemo_1968_183 in 61_tc_140 aff'd 505_f2d_1302 5th cir which involved a fixed_right to reimbursement the court characterized burnett as holding that even a contingent right to reimbursement is sufficient to disallow a deduction based on these authorities we conclude that a right of reimbursement precludes a deduction for a business_expense under sec_162 even if there is not a certainty of reimbursement a mere possibility of reimbursement does not preclude a deduction in most cases if the taxpayer has an insurance_policy that on its face covers the item in question and there is no indication that an exception to coverage applies then a deduction under sec_162 should be disallowed as the taxpayer would have a fixed contractual right to reimbursement conclusion-issue a taxpayer may not claim a sec_165 loss deduction to the extent the taxpayer has a claim for reimbursement for which there is a reasonable_prospect_of_recovery a taxpayer may not claim a sec_162 business_expense deduction to the extent the taxpayer has a right to reimbursement even if the right is not certain or is subject_to a contingency the standards reasonable_prospect_of_recovery under sec_165 and right to reimbursement under sec_162 are highly factual whether a taxpayer claims a deduction for an expense under sec_165 or sec_162 the deduction should be denied if based on the facts and circumstances the taxpayer has insurance coverage that appears to provide a right to reimbursement and there is no indication that an exception to coverage applies under sec_165 if in the year of the loss there is a claim for reimbursement with respect to which there is a reasonable_prospect_of_recovery then the loss deduction is deferred until the taxable_year in which there is no longer a reasonable_prospect_of_recovery under sec_162 if in the year of the expenditure the taxpayer has a right to reimbursement even if subject_to a contingency or not certain the taxpayer may not deduct the expenses in that year if the taxpayer receives less reimbursement than expected in subsequent taxable years then the taxpayer may take a deduction for the we note two cases that addressed whether expenses relating to flood-damaged property were deductible under sec_162 r r hensler v commissione73_tc_168 acq in result 1980_2_cb_1 action on dec date allowed the deduction under sec_162 rather than sec_165 because the expense was in the nature of a repair in louisville and nashville railroad company v commissioner tcmemo_1987_616 the taxpayer was required to deduct the cost of restoring railroad track and grading damaged in a hurricane under sec_165 rather than sec_162 because the taxpayer substantially replaced rather than repaired the damaged property however neither case addresses the effect of a claim for reimbursement or compensation on deductibility postn-131398-06 portion of the expenses that are not reimbursed and for which the taxpayer no longer has a right to reimbursement application of the standards evidence that the service should consider in determining whether a taxpayer has a reasonable prospect or expectation of reimbursement includes the terms of the insurance_policy for example does the policy cover the types of claims at issue under what circumstances may coverage be denied a copy of any insurance claims correspondence from the insurance_company indicating the likelihood of coverage past history of insurance coverage of similar claims standard industry practice with claims of a similar nature opinions of insurance adjusters or other insurance_company representatives notes or correspondence from any legal counsel as to whether the insurance claims are collectible and whether the taxpayer has pursued legal action against the insurance_company issue if a sll expense is disallowed as a deduction in a taxable_year either because of the actual recovery_of such expense during the taxable_year or because of insurance recoveries anticipated to be received in a subsequent taxable_year how does that affect the utilization of the expense in determining the amount of a taxpayer’s sll sec_172 defines a sll as the sum of certain deductions to the extent taken into account in computing the nol for the taxable_year thus a deduction must be allowed for the taxable_year in order to be included in the nol for that year further to be included in a sll for the taxable_year a product_liability expense must be deductible under sec_162 or sec_165 for that year therefore sll expenses not deductible for a taxable_year cannot generate either an nol or sll for that taxable_year the expense may only generate a sll for the taxable_year in which it is an allowable deduction issue if a taxpayer satisfies the requirements to deduct a sll expense in one taxable_year and deducts such expense for that year but receives a reimbursement of the deducted expense through insurance recoveries in a subsequent taxable_year how is that reimbursement treated for federal_income_tax purposes may the service require the taxpayer to reduce its sll expense deductions for the taxable_year of recovery by the amount of the recovery netting sec_111 is a codification of part of the judicially created tax_benefit_rule there are two components to the rule an inclusionary component and an exclusionary component under the inclusionary component an amount deducted for a taxable_year may be included in gross_income under sec_61 in a subsequent taxable_year as a result of an event occurring in the subsequent year that is fundamentally inconsistent with the premise on which the deduction was initially based 460_us_370 the inclusionary component applies if had the later event occurred within the taxable_year in which the original expense was paid_or_incurred the event would have foreclosed the deduction for that expense id pincite however the amount of an item otherwise includable in gross_income pursuant to the inclusionary component of the tax_benefit_rule may be limited by the exclusionary component of the tax_benefit_rule sec_111 provides that g ross income does not include income attributable to the recovery during the taxable_year of any amount deducted in any prior taxable_year to the extent such amount did not reduce the amount of tax_imposed_by_chapter_1 of the code for this purpose sec_111 provides that an increase in a carryover which has not expired before the beginning of the taxable_year in which the recovery takes place shall be treated as reducing tax_imposed_by_chapter_1 of the code a taxpayer may satisfy the requirements to deduct sll expenses in a taxable_year but still receive reimbursement for those expenses in a subsequent taxable_year through insurance recoveries if so the later reimbursement constitutes an event fundamentally inconsistent with the prior deduction within the meaning of hillsboro thus if a taxpayer derives a tax_benefit from deducting such expenses the taxpayer must include the amount of reimbursed sll expenses in gross_income pursuant to the inclusionary component of the tax_benefit_rule if the taxpayer takes reimbursements into account at the time the right to reimbursement becomes fixed and determinable and the taxpayer derived a tax_benefit from deducting such expenses in a prior taxable_year the taxpayer must include the anticipated reimbursements of sll expenses in gross_income pursuant to the inclusionary component of the tax_benefit_rule at that time the request for chief_counsel_advice raises the issue of whether the amount of product_liability expenses deducted in prior taxable years but reimbursed in the current taxable_year can be netted against unrelated current product_liability expenses thereby reducing the taxpayer’s product_liability deduction for the current taxable_year rather than increasing the taxpayer’s gross_income we find no support for this position in the applicable statutes regulations or legislative_history pertaining to product_liability losses to be eligible to generate a sll sec_172 simply requires an item to qualify as a product_liability expense and to be deductible under sec_162 or sec_165 for the taxable_year neither sec_172 nor the regulations thereunder provide any authority to net recoveries of product_liability expenses deducted in prior taxable years against unrelated product_liability expenses for the current taxable_year in determining product_liability deductions for the current taxable_year nor can we find any indication in the legislative_history to the product_liability_loss provisions that congress intended such netting likewise in determining taxpayer’s sll deductions for a taxable_year we find no support for offsetting the excess of amounts taken into account pertaining to postn-131398-06 reimbursements of environmental remediation expenses over actual expenses for one remediation site against environmental remediation expenses for unrelated sites issue do deductions for legal fees incurred in asserting claims for insurance reimbursements for product_liability expenses qualify as product_liability deductions the 10-year carryback for nols generated by product_liability deductions traces its origins to the revenue act of the act under sec_172 deductions allowable under either sec_162 or sec_165 for expenses_incurred in the investigation or settlement of or opposition to claims against the taxpayer emphasis supplied on account of product_liability qualify as product_liability deductions the conference_report to the act discusses this provision as follows product_liability losses include not only the liability for damages under product_liability claims but also the expenses_incurred in the investigation or settlement of or opposition to product_liability claims indirect corporate expense or overhead is not to be allocated to product_liability claims so as to become a product_liability_loss only expenses directly incurred in connection with the product_liability claims are to be included in determining the amount of the product_liability losses for the year h_r conf_rep no 95th cong 2d sess sec_1_172-13 defines product_liability in part as sec_162 or sec_165 deductions for e xpenses including settlement payments incurred in connection with the investigation or settlement of or in opposition to claims against the taxpayer emphasis supplied on account of alleged product_liability finally subject_to an exception not relevant here sec_1_172-13 provides that a mounts paid for insurance against product_liability risks are not paid on account of product_liability when a defect in one of taxpayer’s products results in personal injury property damage or loss of use of property this gives the injured parties a cause of action against taxpayer thereby resulting in a claim against taxpayer consequently expenses_incurred in connection with the investigation or settlement of or opposition to the injured parties’ product_liability claims against taxpayer fall within the scope of sec_172 by entering into a contractual arrangement for indemnification taxpayer may transfer some or all of the risk of loss from such claims to one or more insurance_companies however expenses that relate solely to taxpayer’s assertions of its claims for indemnification from its insurers pertain to claims against its insurers rather than claims against taxpayer consequently deductions for such expenses do not fall within the scope of sec_172 and cannot qualify as product_liability deductions postn-131398-06 certain expenses may be incurred both in connection with the determination of product_liability claims against taxpayer and in connection with taxpayer’s claims against its insurers for example legal and investigatory expenses_incurred to determine if an accident gives rise to a product_liability claim against taxpayer may also be pertinent to determining if that claim falls within the scope of taxpayer’s insurance coverage if taxpayer incurs the expense in connection with a product_liability claim that is asserted or may be asserted against taxpayer a deduction for such an expense qualifies as a product_liability deduction notwithstanding that the expense may be germane to determining if taxpayer has a valid claim for insurance reimbursement for any loss attributable to that claim on the other hand issues involving an insured’s right to indemnification from its liability insurer may have no relevance to the insured’s primary liability to the third party claimant see eg america fire and casualty co v tankersly ala failure to give notice of accident as soon as practicable as required by insurance_policy released insurer from its obligation to defend and indemnify the insured gerrard realty corp v american states insurance co wis 2d failure to timely notify insurer of civil_action against insured extinguished insurer’s indemnification obligation deductions for legal and other fees incurred in connection with resolving issues that do not bear on taxpayer’s product_liability to third party claimants but relate only to taxpayer’s claims against its insurers do not qualify as product_liability deductions to make a proper determination each deduction for legal and other fees must be analyzed to determine whether the fees relate to the taxpayer’s product_liability to third parties to the taxpayer’s claims against its insurers or to both types of claims 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 we hope this information has been useful please call us at --------------------if you have any questions regarding this advice however once taxpayer’s liability to third parties has been established subsequently incurred expenses that in the absence of such establishment might have been relevant to both taxpayer’s liability to third parties and taxpayer’s claim for insurance reimbursement claim no longer have any relevance to taxpayer’s liability to third parties