internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc psi - plr-115169-00 date date x a d1 d2 year dear this letter responds to your letter dated date and subsequent correspondence submitted by you as x’s authorized representative requesting a ruling under sec_1362 of the internal_revenue_code the information submitted states that x was incorporated on d1 of year a the president of x represents that x was intended to be an s_corporation from its inception this intent is evidenced by the notes taken by one of x’s attorneys at a meeting on d2 of year which indicate that x would be an s corp a further represents that x relied on its attorneys to file the documents necessary for obtaining s_corporation status however due to a misunderstanding among x’s attorneys no form_2553 election by a small_business_corporation was prepared or filed for x 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 year taxable_year accordingly provided that 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 a power_of_attorney on file with this office a copy of this letter is being forwarded to x sincerely yours jeanne m sullivan assistant to the chief branch office of the associate 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 b1-plr-121684-03 date august legend x y state d1 dear this letter responds to the letter dated date and related correspondence written on behalf of x requesting an extension of time under sec_301_9100-1 through of the procedure and administration regulations to file an election to treat its wholly owned subsidiary y as a qualified_subchapter_s_subsidiary qsub under sec_1361 of the internal_revenue_code facts according to the information submitted x and y were incorporated under the laws of state on d1 y transferred all of its stock to x in an effort to restructure the business x intended to file an election to treat y as a qsub as of d1 but x inadvertently failed to timely file the election effective d1 law and analysis sec_1361 defines a qsub as a domestic_corporation that is not an ineligible_corporation if percent of the stock of the corporation is owned by an s_corporation and the s_corporation elects to treat the corporation as a qsub sec_1_1361-3 of the income_tax regulations provides that the election will be effective on the date specified on the election form or on the date the qsub election is filed if no date is specified the effective date specified on the election cannot be more plr-121684-03 than two months and days prior to the date of filing and cannot be more than months after the date of filing 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_9100-3 to make a regulatory election sec_301_9100-1 defines a regulatory election to mean an election whose due_date is prescribed by a regulation published in the federal_register or a revenue_ruling revenue_procedure notice or announcement published in the internal_revenue_bulletin requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-3 conclusion based solely on the facts submitted and representations made we conclude that x has satisfied the requirements of sec_301_9100-1 and sec_301_9100-3 accordingly x is granted an extension of time of sixty days from the date of this letter to elect to treat y as a qsub effective as of d1 the election should be made by filing form_8869 qualified_subchapter_s_subsidiary election with the appropriate service_center a copy of this letter should be attached to the election 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 internal_revenue_code specifically no opinion is expressed concerning whether x is a valid s_corporation or whether y is a valid qsub this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being mailed to x sincerely heather c maloy associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes


internal_revenue_service national_office technical_advice_memorandum date number release date third party contact index uil no case-mis no --------------------- ----------------------------------------- tam-160192-03 cc tege eoeg teb taxpayer's name taxpayer's address taxpayer's identification no ----------------------------- ---------------------- ----------------------------------------- ---------------- - date of conference ------------------ legend issuer state series a bonds series b bonds prior bonds year year year ----------------------------- ------------------ -------------------------------------------------------------------------------- ------------------------------------ -------------------------------------------------------------------------------- --------------------- ----------------------------------------------------------------------------- ------- ------- ------- tam-160192-03 year date date date date a b c d e f g q r w x y z ------- ------------------ ------------------ ------------------ ------------- --------------- --------------- --------------- ------------- ------------- --------------- --------------- ------------------ --- --------- --------- --------- --------- issue s whether the series a and b bonds are a single issue under sec_1_150-1 of the income_tax regulations tam-160192-03 whether the series a and b bonds are arbitrage_bonds under sec_148 of the internal_revenue_code_of_1986 the 1986_code and sec_1_148-10 conclusion s the series a and b bonds should be treated as a single issue under sec_1 c to clearly reflect the economic_substance of the transaction and to prevent avoidance of sec_148 alternatively the series a bonds are arbitrage_bonds under sec_1_148-10 while sec_1_148-10 also applies to the series b bonds we do not have enough facts to conclude whether the series b bonds are arbitrage_bonds we further conclude that the series a and b bonds are taxable advance refunding bonds under sec_149 facts the issuer is a political_subdivision of state on date the issuer issued the series a and b bonds collectively referred to as the refunding bonds totaling approximately dollar_figurea dollar_figureb of which was used to advance refund the prior bonds the issuer states that the purpose for the advance refunding was to restructure its debt service payment schedule to more closely align the schedule with its revenue cycle in particular with its tax revenues no significant covenant in the prior bonds' documents was removed when the refunding bonds were issued in addition as further explained below no debt service savings was realized from the refunding and the annual debt service payment on the prior bonds is approximately equal to the annual debt service payment on the refunding bonds the prior bonds projects of the issuer the prior bonds are capital appreciation bonds the last of which matures in year the prior bonds are not subject_to voluntary or mandatory redemption prior to maturity the prior bonds are general obligation bonds payable from the general revenues of the issuer including taxes collected by the issuer and receipts from the state the yield on the prior bonds is w which is materially higher within the meaning of sec_1_148-3 than the yield on the series a or b bonds principal outstanding the annual debt service on the prior bonds is approximately dollar_figured paid in april and october with the larger of the two payments due in october the prior bonds were issued in year to fund renovation and construction on the date the refunding bonds were issued the prior bonds had dollar_figurec in the offering documents for the series a bonds provide that those bonds are the series a and b bonds were sold at substantially the same time and pursuant tam-160192-03 the refunding bonds to the same plan of financing within the meaning of sec_1_150-1 limited obligation revenue bonds paid from and secured_by only funds received from state in the form of reimbursements and educational subsidies the state revenues the documents further provide that the issuer has not pledged its full faith credit and taxing power to pay the series a bonds the series a bonds pay interest currently and will fully mature in year the debt service on the series a bonds is paid from a sinking_fund the series a bonds sinking_fund which must be funded four times a year pursuant to the following schedule scheduled funding date august october december february deposits into the series a bonds sinking_fund are made from monies in the issuer's general fund the proceeds of the series a bonds will pay debt service on the prior bonds from date through final maturity of the prior bonds in year thus the series a funding requirement of interest due next october of principal and interest due next april of principal and interest due next april of principal and interest due next april sec_1_148-11 provides that except as otherwise provided in sec_1_148-11 sec_1_148-1 through apply to bonds sold on or after date a date that is after the sale date of the refunding bonds however sec_1_148-11 generally provides that except as otherwise provided in sec_1_148-11 and subject_to the effective dates for the corresponding statutory provisions an issuer may apply the provisions of sec_1_148-1 through in whole but not in part to any issue that is outstanding on date and is subject_to sec_148 of the 1986_code or to sec_103 or sec_103a of the internal_revenue_code of the code in lieu of otherwise applicable regulations under those sections the agent and the issuer make specific reference in their submissions to sec_1 c which could not have applied to the refunding bonds without the issuer making the election under sec_1_148-11 accordingly we apply the relevant current regulations under sec_148 and sec_150 in our analysis the series b bonds are general obligations of the issuer payable from the a small amount of the series b bonds dollar_figuree pay interest currently and will mature tam-160192-03 bonds will be completely redeemed before the proceeds of those bonds begin paying debt service on the prior bonds until the time that those proceeds are needed to pay debt service on the prior bonds they along with a payment the issuer received under a forward supply agreement are irrevocably deposited in an escrow invested in treasury securities initially the yield on the escrow was not materially higher than the yield on the series a bonds which is x however as the series a bonds were redeemed the issuer applying the universal cap rule_of sec_1_148-6 invested proceeds that it treated as deallocated from the series a bonds at a yield that while not materially higher than the yield on the prior bonds was materially higher than the yield on the series a or series b bonds issuer's tax and other general revenues including state revenues the issuer has pledged its full faith credit and taxing power for the repayment of the series b bonds by year the series b current pay bonds the rest of the series b bonds dollar_figuref require no current interest payments but are capital appreciation bonds that mature between year and year the series b capital appreciation bonds accordingly the series b bonds require minimal debt service payments for the first six years following issuance the annual debt service on the series b current pay bonds is paid in april and october with the october payment generally being substantially larger than the april payment the entire annual debt service on the series b capital appreciation bonds is paid each october no payment is required in april the debt service payments on all the series b bonds are made from monies in the issuer's general fund service on the prior bonds from date through date a period that ends approximately eight years before the series b capital appreciation bonds fully mature the remainder of the series b bond proceeds dollar_figureg was used for capital improvements and for cost of issuance treasury securities the yield on the series b bonds is y while the yield on the escrow funded with the proceeds of the b bonds is z this escrow yield is not materially higher than the yield on the series b bonds but is materially higher than the yield on the series a bonds issuer revenues most of the series b bond proceeds were deposited into an escrow to pay debt the escrow funded by the proceeds of the series b bonds is invested in the issuer receives state revenues every two months in approximately equal the offering documents for the refunding bonds provide that state revenues for tam-160192-03 amounts these funds once received are deposited into the issuer's general fund along with tax and other revenues the deposits to the series a bonds sinking_fund are due within the same month that state revenues are received the ten years preceding the issuance of the refunding bonds have comprised approximately q to r of the total issuer’s revenues assuming that the issuer’s past funding levels continue during the term of the refunding bonds the state revenues will exceed the required_payments to the series a bonds sinking_fund before april as noted above the issuer asserts that the purpose for the refunding bonds was to permit debt service payments on the refunding bonds to better match its tax revenues the issuer states that prior to issuing the refunding bonds it needed to issue revenue anticipation notes rans to cover its cash_flow deficits in the months preceding the october payment on the prior bonds the issuer notes that since the refunding bonds were issued it has not needed to issue rans the issuer generally receives its tax revenues each year after october and law and analysis general provisions sec_103 provides that except as provided in sec_103 gross_income does not include interest on any state_or_local_bond sec_103 provides in part that the exclusion in sec_103 does not apply to an arbitrage_bond under sec_148 sec_148 defines the term arbitrage_bond to mean 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 further sec_148 provides a bond shall be treated as 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 sec_148 or sec_148 generally defines an arbitrage_bond as a bond that fails to meet the requirements of sec_148 and relating to rebate to the united_states of certain investment earnings sec_148 generally defines higher yielding investment as any investment_property which produces a yield over the term of the issue that is materially higher than the yield on the issue the regulations define materially higher as a yield on the investments over the term of the issue that exceeds the yield on the issue by an amount tam-160192-03 in excess of the applicable definition of materially higher set forth in sec_1_148-2 materially higher for refunding escrows or for investments allocable to replacement_proceeds means one-thousandth of one percentage_point sec_1_148-2 law and analysis on issue the first issue is whether the series a and b bonds are a single issue the agent states that if the series a and b bonds are a single issue they are arbitrage_bonds because the yield on the combined escrows is materially higher than the yield on the refunding bonds in sec_1_150-1 apply for all purposes of sec_103 and sec_141 through sec_1 c provides that except as otherwise provided in sec_1_150-1 the term issue means two or more bonds that meet all of the following requirements sec_1_150-1 provides that except as otherwise provided the definitions i the bonds are sold at substantially the same time ii the bonds are sold pursuant to the same plan of financing iii the bonds are reasonably expected to be paid from substantially the same source of funds determined without regard to guarantees from parties unrelated to the obligor the agent and issuer appear to agree that the series a and b bonds were sold sec_1_150-1 provides that in order to prevent the avoidance of sec_103 and sec_141 through and the general purposes thereof the commissioner may treat bonds as part of the same issue or as part of separate issues to clearly reflect the economic_substance of a transaction on the same date pursuant to the same plan of financing thus the series a and b bonds are one issue if they were reasonably expected to be paid from substantially the same source of funds however because we conclude that based on the economic_substance of the transaction under sec_1_150-1 the series a and b bonds should be treated as a single issue we do not address whether the series a and b bonds are reasonably expected to be paid from substantially the same source of funds under sec_1_150-1 our rationale for applying sec_1_150-1 in this case overlaps considerably with our rationale for applying sec_1_148-10 and is combined with our discussion of sec_1_148-10 law and analysis on issue sec_1_148-10 we also discuss whether sec_149 applies to the refunding bonds the second issue is whether the refunding bonds are arbitrage_bonds under sec_1_148-0 provides that sec_148 was enacted to minimize the arbitrage sec_1_148-10 provides that if an issuer enters into a transaction for a tam-160192-03 principal purpose of obtaining a material financial advantage based on the difference between tax-exempt and taxable interest rates in a manner that is inconsistent with the purposes of sec_148 the commissioner may exercise the commissioner's discretion to depart from the rules of sec_1_148-1 through as necessary to clearly reflect the economic_substance of the transaction for this purpose the commissioner may recompute yield on an issue or on investments reallocate payments and receipts on investments recompute the rebate amount on an issue treat a hedge as either a qualified hedge or not a qualified hedge or otherwise adjust any item whatsoever bearing upon the investments and expenditures of gross_proceeds of an issue for example if the amount_paid for a hedge is specifically based on the amount of arbitrage earned or expected to be earned on the hedged bonds a principal purpose of entering into the contract is to obtain a material financial advantage based on the difference between tax-exempt and taxable interest rates in a manner that is inconsistent with the purposes of sec_148 benefits from investing gross_proceeds of tax-exempt_bonds in higher_yielding_investments and to remove the arbitrage incentives to issue more bonds to issue bonds earlier or to leave bonds outstanding longer than is otherwise reasonably necessary to accomplish the governmental purposes for which the bonds were issued a fortiori if an issuer does not have a governmental purpose for issuing bonds apart from earning arbitrage the issuance of the bonds is inconsistent with the purpose of sec_148 where the transaction involves refunding of noncallable bonds in authority issues an advance refunding_issue the refunding_issue to refund a prior issue the prior issue under current market conditions authority will have to invest the refunding escrow at a yield significantly below the yield on the refunding_issue authority will also refund other long-term non-callable bonds in the same refunding_issue there are no savings attributable to the refunding of the non-callable bonds authority invests the portion of the proceeds of the refunding_issue allocable to the refunding of the non-callable bonds in the refunding escrow at a yield that is higher than the yield on the refunding_issue based on the relatively long escrow period for this portion of the refunding the authority invests the other portion of the proceeds of the refunding_issue in the refunding escrow at a yield lower than the yield on the refunding_issue the blended yield on all the investments in the refunding escrow for the prior issues does not exceed the yield on the refunding_issue the portion of the refunding_issue used to refund the noncallable bonds however was not otherwise necessary and was issued primarily to exploit the difference between taxable and tax-exempt rates for that long portion of the refunding escrow to minimize the effect of lower yielding sec_1_148-10 example ii and iii illustrates the application of sec_1 sec_149 was enacted as part of sec_1301 of the tax_reform_act_of_1986 tam-160192-03 investments in the other portion of the escrow the refunding_issue uses an abusive arbitrage device and the bonds of the issue are arbitrage_bonds the existence of a governmental purpose would not change the conclusions unless authority clearly established that the primary purpose for_the_use_of the particular structure was a bona_fide governmental purpose the fact that the financing structure had the effect of eliminating significant amounts of negative arbitrage is strong evidence of a primary purpose that is not a bona_fide governmental purpose sec_149 provides that nothing in sec_103 or any other provision of law will be construed to provide an exemption from federal_income_tax for interest on any bond issued as part of an issue described in sec_149 or sec_149 provides that an issue is described in that section if any bond issued as part of the issue is issued to advance refund another bond and a device is employed in connection with the issuance of such issue to obtain a material financial advantage based on arbitrage apart from savings attributable to lower interest rates vol c b the senate report to that act describes sec_149 and provides examples of the types of transactions that are treated as devices for sec_149 in example pursuant to a series of transactions a prior issue is refunded by issuing long-term advance refunding bonds intended to be tax-exempt to pay debt service on the prior issue in the early years and short-term advance refunding bonds not intended to be tax-exempt to pay debt service on the prior issue in the later years proceeds of the short-term advance refunding_issue are invested at a yield materially higher than the yield on both the short-term and the long-term advance refunding issues by separating the two issues the issuer has attempted to exploit the difference between the taxable rate at which proceeds of the short-term advance refunding_issue are invested and the tax-exempt rate of the long-term advance refunding_issue if a material financing advantage has been obtained by separating the two issues the issuer has employed a device in connection with the issuance of the long-term advance refunding bonds to obtain a material financial advantage apart from savings attributable to lower interest rates s rep no pincite vol c b with the purposes of sec_148 the issuer asserts that it issued the refunding bonds to better match its debt service payments to its tax revenues in particular the issuer the conference_report h_r conf_rep no at ii-758 vol c b follows the senate's prohibition on advance refunding transactions that involve a device to obtain a material financial advantage based on arbitrage other than savings from a reduction in interest rates we first consider whether the issuance of the refunding bonds was inconsistent we cannot accept the issuer's argument because it is not supported by the facts tam-160192-03 points out that while the october debt service payment on the prior bonds is substantially larger than the april debt service payment on the prior bonds its tax revenues are generally not received until after the october and before the april debt service payment dates the issuer supports its assertions by stating that while in years preceding the issuance of the refunding bonds it had to issue rans to cover its cash shortfall it has not had to issue similar rans since the year the refunding bonds were issued the offering documents state that the series a bonds are supposed to be paid from state revenues not tax revenues the series a bonds require sinking_fund payments to be made in the same months that the issuer receives state revenues and state revenues are anticipated to far exceed the debt service on the series a bonds if there were a revenue matching problem with the prior bonds it should have been cured with the series b bonds because those bonds are payable from tax and other general revenues to cure the revenue matching problem the larger debt service payments on the series b bonds should have been scheduled in april after the majority of the tax revenues are received the series b current pay bonds however generally continue to require the larger debt service payment to be made in october moreover beginning in year when the series b capital appreciation bonds begin to mature the entire annual debt service on the series b bonds is paid in october it is not surprising that the issuer has not needed to issue rans since it issued the refunding bonds because the series b bonds pay only minimal debt service payments until year thus based on the information provided by the issuer the issuer could not have achieved a better matching of debt service payments to tax revenues with the refunding bonds none is apparent from the facts provided thus we agree with the agent that the issuer did not have a governmental purpose for the refunding bonds the issuer also obtained a material financial advantage based on the difference between the taxable and tax-exempt rates by structuring the refinancing transaction to treat the series a and b bonds as separate issues redeem the series a bonds early by creating a window in the debt service requirements on the series b bonds thereby allowing almost all of the revenues that would have been used to pay the prior bonds to pay interest and principal on the series a bonds and delay the time when the proceeds of the series a bonds would be used to pay the debt service on the prior bonds thereby allowing the issuer to increase the time that series a bond proceeds are invested at a materially higher yield using this combined structure and applying the universal cap rule_of sec_1_148-6 the issuer reallocated proceeds from the series a the issuer has not given any other reason for issuing the refunding bonds and we conclude that the economic_substance of this transaction is represented by tam-160192-03 bonds to the prior bonds and invested those reallocated proceeds at a yield that was materially higher than the yield on the series a and b bonds thus it is appropriate to recharacterize the transaction to reflect the economic_substance of the transaction even if we need to depart from the rules of sec_1_148-1 through allocating the longer term investments to the longer term bonds and the shorter term investments to the shorter term bonds in reallocating the investments the investments in the escrow created with the series b bond proceeds are properly allocated to the series a bonds to the extent that escrow does not exceed the outstanding principal of the series a bonds the yield on the series b bond escrow is materially higher than the yield on the series a bonds the investments in the escrow created with the proceeds of the series a bonds are properly allocated to the series b bonds because the series b bonds were not redeemed in the same manner as the series a bonds it appears that there is no deallocation of the series b bonds under the universal cap rule and the investments purchased with proceeds of the series a bonds remain allocated to the series b bonds while the yield on the escrow created with the series a bonds originally was not materially higher than the yield on the series a and series b bonds eventually those proceeds were invested at a yield that was materially higher than the yield on the series a and series b bonds the facts submitted do not provide a computation from which we can conclusively determine whether the yield on the escrow created with proceeds of the series a bonds and the portion of the escrow created with proceeds of the series b bonds that remains allocated to the series b bonds ie the portion of the series b bond escrow that is not allocated to the series a bonds is materially higher than the yield on the series b bonds sec_148 and the purposes for sec_148 the series a and b bonds should be treated as a single issue under sec_1_150-1 the only reason for separating what was a single refinancing transaction into two issues was to avoid the investment limitations in sec_148 to obtain a material financial advantage based on the difference in taxable and tax- exempt_interest rates in a manner that is inconsistent with sec_148 the separation did not reflect the economic_substance of the refunding because the short term bonds the series a bonds which mature by year were used to pay debt service on the prior bonds in the later years from date through year and the longer term bonds the series b bonds which do not fully mature until year were used to pay debt service on the prior bonds in the early years from date through date finally we conclude that the refunding bonds are taxable advance refunding bonds described in sec_149 the issuer in connection with an advance refunding_issue has employed a device similar to the device described in the example in the senate report describing sec_149 to obtain a material financial advantage apart from alternatively but for similar reasons we conclude that to prevent avoidance of tam-160192-03 savings attributable to lower interest rates as indicated above because the prior bonds are not subject_to redemption prior to maturity the issuer cannot obtain any savings attributable to lower interest rates the issuer by separating a single refinancing issue into two issues and applying the universal cap rule to the series a bonds was able to invest proceeds of the series a bonds at a materially higher yield than the yield on the series a and b bonds caveat s a copy of this technical_advice_memorandum is to be given to the taxpayer s sec_6110 of the code provides that it may not be used or cited as precedent


t c memo united_states tax_court philip l firetag petitioner v commissioner of internal revenue respondent docket no filed date irvin j slotchiver for petitioner james gray for respondent memorandum findings_of_fact and opinion gale judge respondent determined the following deficiencies in petitioner’s federal_income_tax year deficiency dollar_figure big_number - - after concessions we must decide the following whether petitioner is required to recognize as income in the years in issue amounts deposited into certain accounts as described below we hold that he is whether recognition of the deposited amounts in the year of deposit constitutes a change in accounting_method requiring an adjustment to petitioner’s income under sec_481 we hold a sec_481 adjustment is reguired findings_of_fact some of the facts have been stipulated and are so found we incorporate by this reference the stipulation of facts the supplemental stipulation of facts and the attached exhibits at the time of filing the petition petitioner resided in charleston south carolina petitioner was a licensed professional bail bondsman and before trial he had been in the bonding business for more than years petitioner conducted his bonding business as a sole_proprietorship the proprietorship income was reported using the accrual_method of accounting petitioner wrote bonds for criminal defendants to ensure their future appearance in court the bonds varied in amount and were set by the court the defendants or someone on their behalf collectively unless otherwise noted all section references are to the internal_revenue_code in effect for the years in issue and all rule references are to the tax_court rules_of_practice and procedure petitioner’s clients would pay petitioner a fee usually equal to percent of the amount of the bond sometimes less and in exchange petitioner would assume liability under the bond guaranteeing the defendant’s appearance at court proceedings under the standard bonding agreement used by petitioner the fee was due from a client when the agreement was signed in addition the bonding agreement provided that the fee was earned upon execution of the agreement if petitioner was unable to perform on his guaranty ie if the defendant failed to make the court appearance petitioner was liable to the court for the full amount of the bond as a professional bail bondsman petitioner was required to comply with chapter of title of the code of laws of south carolina pursuant to these provisions petitioner was required to maintain with the clerk of court of the relevant south carolina jurisdiction passbook savings accounts or certificates of deposit in an amount equal to percent of all outstanding bonds on which he was liable in that jurisdiction ’ the amount required to be maintained was recomputed as of the first day of petitioner’s practice generally was to obtain a co- guarantor on the bond such as a family_member or friend of the defendant in addition no single bond written by petitioner could be in an amount greater than percent of the amount maintained with the clerk of court see s c code ann sec law co-op - each month on the basis of the bonds outstanding on that date and petitioner had until the 16th of the month to make any additions required to ensure that the amounts maintained with the clerk were equal to at least percent of the face_amount of bonds outstanding on the first of the month see s c code ann sec law co-op the savings accounts or certificates of deposit were held in trust in the name of the clerk of court for the sole protection and benefit of the holder of bail bonds and functioned as security for petitioner’s potential liability on outstanding bonds s c code ann sec law co-op in the event of a forfeiture ie the failure of a defendant to appear for trial making petitioner liable for the bond amount petitioner had the option of meeting his liability using funds maintained with the clerk of court or from some other source under south carolina law petitioner was entitled to a return of the excess whenever the amounts maintained with the clerk exceeded percent of petitioner’s bonds outstanding and was entitled to the return of all such amounts when his bond obligations in the jurisdiction were completely satisfied see id pursuant to the foregoing provisions of south carolina law petitioner maintained various savings accounts and certificates of deposit with the clerk of court for charleston county south - - carolina prior to and during the years in issue in connection with his activities as a professional bail bondsman we shall hereinafter refer to these savings accounts and certificates of deposit held by the charleston county clerk of court as the charleston county court account at no point during the years in issue or in any year prior thereto were funds from the charleston county court account used to satisfy a forfeiture petitioner received any interest earned on the funds in the charleston county court account petitioner also kept two other accounts one with respect to the u s district_court and another which the parties refer to as the in-house account the record does not establish what provisions of law or contract terms governed the u s district_court account in particular the record does not disclose under what schedule petitioner was required to deposit or was entitled to return of amounts in the u s district_court account as for the in-house account it was not required by any law or contract it was established at the suggestion of petitioner’s father a bookkeeper who kept petitioner’s books and prepared his tax returns all fees collected by petitioner in his opening statement at trial petitioner’s counsel indicated that no statute governed the u s district_court account and that an amount equal to the entire face value of the bond was required to be deposited therein however no evidence was adduced regarding the foregoing -- - for bonding services were deposited into the in-house account the moneys from the in-house account were then disbursed for four purposes to satisfy petitioner’s liability in the event of forfeitures to satisfy required increases in the amounts in the charleston county court and u s district_court accounts to pay petitioner’s business_expenses and to pay petitioner a salary petitioner reported gross_receipts from his bonding business of dollar_figure in and dollar_figure in however for taxable years prior to and including and petitioner did not report as income the amounts that were deposited into the three accounts the balances in the accounts were as follows on the dates indicated charleston county dollar_figure dollar_figure dollar_figure court account u s district_court big_number big_number big_number account in-house account big_number big_number big_number total big_number big_number in the notice_of_deficiency respondent determined that petitioner’s method of reporting bail bond fees did not clearly reflect income and that a change in method_of_accounting was petitioner’s testimony regarding his salary is limited and vague on the basis of his testimony the amount of the salary appears to have been either a percentage of the fees he collected or a percentage of the amount in the in-house account - necessary respondent determined that sec_481 applied and that petitioner was required to include in income in the combined balance of the three accounts as of date namely dollar_figure in addition respondent determined that petitioner was required to include in income the net increases in the combined balances of the charleston county court and u s district_court accounts in the amount of dollar_figure in and dollar_figure in opinion sec_446 provides as follows if no method_of_accounting has been regularly used by the taxpayer or if the method used does not clearly reflect income the computation of taxable_income shall be made under such method as in the opinion of the secretary does clearly reflect income for an accrual_method taxpayer it is the right to receive accrual basis income not its actual receipt that determines the time of its inclusion as gross_income 843_f2d_163 4th cir citing 360_us_446 see 108_tc_448 affd in part revd in part and remanded on another ground 184_f3d_786 8th cir sec_1_446-1 a income_tax regs generally all the events that fix the right to receive income have occurred when the earliest of the following occurs the income is actually or --- - constructively received due or earned by performance see johnson v commissioner supra pincite in the instant case all three of these occurred when petitioner received a fee from a client it was actually received it was due under the terms of the bonding agreement and it was earned by the execution of the bond agreement thus the fees were income when received charleston county court and u s district_court accounts in stendig v united_states supra the court_of_appeals held that rental receipts received by an accrual basis partnership from its housing project but regquired by the lender to be deposited into reserve accounts securing repayment to the lender were nevertheless income to the partnership in the year deposited the partners had argued that the amounts were not income until a later year when they obtained unrestricted access to them the key question for the court_of_appeals was whether x the partnership acquired the ‘fixed right to receive the funds deposited in the reserves ’ id pincite quoting commissioner v hansen supra the court_of_appeals held that the partnership had acquired the fixed_right and hence must accrue the amounts as income in the years of their deposit rather than at the time of actual receipt id pincite the reason was that any use of the funds would inure to the benefit of the partnership see id pincite --- - petitioner as an accrual_method taxpayer with respect to his business was required to include in gross_income of the business amounts deposited into the charleston county court account when he acquired the fixed_right to receive those amounts as in stendig v united_states supra this occurred when the amounts were received from his clients even though some of the proceeds may have been required to be deposited with a third party the situation is virtually identical with the facts in stendig like the partnership in stendig petitioner collected receipts and was required to deposit a portion of them as a necessary condition of doing business like the partnership in stendig petitioner did not have access to the funds while they were on deposit except for interest earned but the funds would ultimately be his ie the deposits would inure to petitioner’s benefit the amounts on deposit either would be returned to him because the level of outstanding bonds had been reduced or would be used by the clerk toward satisfaction of petitioner’s obligation under a bond see commissioner v hansen supra pincite therefore we find that petitioner was required to include in gross_income the amounts deposited into the charleston county court account in the year received from clients petitioner argues that in his case the deposits were required_by_law rather than by contract this is irrelevant in either case the deposits were necessary to do business -- - with respect to the u s district_court account petitioner has not adduced evidence regarding the terms under which amounts were required to be deposited for bonds written for defendants in u s district_court in his opening statement petitioner’s counsel indicated that deposits equal to percent of the face_amount of the bond were required presumably these amounts were either returned to petitioner when the defendant satisfactorily appeared or forfeited if he did not in either case the deposited amounts would inure to petitioner’s benefit because petitioner has not come forward with the terms of the u s district_court bonding arrangements he has failed to carry his burden of proving respondent’s determination erroneous in-house account the in-house account appears in part to be an effort by petitioner to set up a reserve for paying potential bond forfeitures in other words it acts in part as a reserve against contingent_liability the funds in the in-house account were ultimately disbursed solely for petitioner’s benefit to satisfy his obligations by paying bond forfeitures or increasing the amounts on deposit in the charleston county court or the u s district_court accounts to pay his business_expenses or to pay himself a salary as with the charleston county court account and presumably with the u s district_court account only two things could happen to the funds in the in-house account they could be paid to petitioner in cash or they could be used to pay an obligation of petitioner see commissioner v hansen u s pincite in either case they would inure to his benefit thus following commissioner v hansen supra and 843_f2d_163 4th cir the amounts deposited in the in-house account are income in the year received from clients notwithstanding their deposit for the foregoing reasons we sustain respondent’s determination that petitioner must include in gross_income the net increase in the combined balances of the charleston county court and the u s district_court accounts in the amount of dollar_figure in and dollar_figure in ’ sec_481 adjustment in the notice_of_deficiency respondent determined that sec_481 applied and that under sec_481 petitioner was required to include in income the amounts on deposit in the three accounts as of the beginning of we agree sec_481 provides as follows sec_481 general_rule --in computing the taxpayer’s taxable_income for any taxable_year referred to in this section as the year_of_the_change --- if such computation is under a method_of_accounting different from the method under which the taxpayer’s taxable_income for the preceding_taxable_year was computed then ’ see infra note there shall be taken into account those adjustments which are determined to be necessary solely by reason of the change in order to prevent amounts from being duplicated or omitted except there shall not be taken into account any adjustment in respect of any taxable_year to which this section does not apply unless the adjustment is attributable to a change in the method_of_accounting initiated by the taxpayer by its terms sec_481 applies only when there is a change in method_of_accounting sec_1_446-1 a income_tax regs describes a change in method_of_accounting as follows a change in the method_of_accounting includes a change in the treatment of any material_item a material_item is any item which involves the proper time for the inclusion of the item in income or the taking of a deduction in other words a change in method_of_accounting does not involve whether or not an item_of_income is included but when see 743_f2d_781 11th cir however the regulations provide several specific limitations a change in method_of_accounting does not include correction of mathematical or posting errors or errors in the computation of tax_liability also a change in method_of_accounting does not include adjustment of any item_of_income or deduction which does not involve the proper time for the inclusion of the item_of_income or the taking of a deduction a change in the method_of_accounting also does not include a change in treatment resulting from a change in underlying facts sec_1_446-1 b income_tax regs respondent relies principally on rankin v commissioner tcmemo_1996_350 affd 138_f3d_1286 9th cir to support his determination applying sec_481 in rankin the taxpayer who used the cash_receipts_and_disbursements_method of accounting was a bail bondsman associated with an insurance_company surety the bonds were contracts between the criminal defendant the state and the insurance_company the insurance_company was principally liable to the state if the defendant failed to appear at trial and the bond was forfeited or a late fee was charged however the taxpayer had a contract with the insurance_company under which the taxpayer would indemnify the insurance_company for the amount of any forfeited bonds or late fees the taxpayer collected percent of the face_amount of the bond as a fee paid a portion of the fee to the insurance_company deposited a portion of the fee into a specific account known as the build up fund or buf account and kept the remainder the buf account served as security for the taxpayer’s promise to indemnify the insurance_company the amount accumulated in the buf account was a percentage of the amount of the outstanding bonds the insurance_company functioned as trustee of the buf account and had the sole power to withdraw funds from the buf account but could use any withdrawn funds only to satisfy the taxpayer’s indemnity obligations the insurance_company gave the taxpayer the option of indemnifying from the buf account or from independent funds when the taxpayer terminated his agreement and all outstanding bonds were satisfied the taxpayer would be entitled to the funds in the buf account the taxpayer deducted deposits into the buf account as a portion of cost_of_goods_sold see rankin v commissioner supra the parties in rankin agreed that the taxpayer was not permitted to deduct deposits into the buf account the parties disagreed over the treatment of the amounts accumulated in the buf account prior to the years in issue in an attempt to avoid the application of sec_481 the taxpayer argued that the change in treatment of the deposits into the buf account that the commissioner was requiring was not a change in method_of_accounting we held that it was because the change affected only the timing of inclusion not the ultimate fact of inclusion see id see also 66_tc_588 affd without published opinion 562_f2d_39 2d cir sec_1_446-1 6b income_tax regs a change in method_of_accounting does not include adjustment of any item_of_income or deduction which does not the parties relied on 93_tc_220 an earlier case with virtually identical facts the issue in sebring was whether a cash_basis bail bondsman could properly deduct deposits into a buf account at the time of deposit we held that he could not deduct amounts when they were deposited even though the deposits were mandatory see id pincite -- - involve the proper time for the inclusion of the item_of_income or the taking of a deduction we consider first the charleston county court and u s district_court accounts here the instant case is indistinguishable from rankin as in rankin respondent’s change_of petitioner’s treatment of the amounts deposited into the accounts was a change in method_of_accounting because it affected only the timing of inclusion not the ultimate fact of inclusion under petitioner’s method he would have been required to include in income the funds in the accounts in the year they ultimately became available to him ’ any amounts actually paid to satisfy forfeited bonds would not be included under respondent’s method petitioner would be reguired to include in income the funds in the accounts in the year of deposit but he would be entitled to deductions for amounts actually paid to satisfy forfeited bonds so the total amount required to be included in income would be the same thus respondent’s method alters only the timing of inclusion not the the evidence establishes that petitioner was entitled to receive all of the amounts in the charleston county court account when his bond obligations were completely satisfied the same appears to be true of the u s district_court account at the least there is no evidence or suggestion to the contrary as we have found no funds from the charleston county court account were used to satisfy a forfeiture before or during the years in issue -- - fact of inclusion it is therefore a change in method_of_accounting and sec_481 applies we next consider the in-house account under petitioner’s method he would have been reguired to include in income in the year of disbursement any funds disbursed from the in-house account for his benefit ' he would be entitled to take deductions for all allowable business_expenses further petitioner would ultimately receive any funds remaining in the in-house account ’ under respondent’s method petitioner would be reguired to include in income the funds in the account in the year of deposit but he would be entitled to take deductions for amounts used to pay all allowable business_expenses so the total amount required to be included in income would be the same once again respondent’s method alters only the timing of inclusion not the fact of inclusion it is therefore a change in method_of_accounting and sec_481 applies sec_481 authorizes those adjustments which are determined to be necessary solely by reason of the change in method_of_accounting in order to prevent amounts from being ‘ that is any funds used to satisfy a liability in the event of forfeiture to satisfy required increases in the amounts in the charleston county court and u s district_court accounts to pay business_expenses or to pay petitioner’s salary ‘2 the precise nature of the in-house account is not clear in testimony petitioner refers to it as an escrow account however there is no evidence or suggestion that petitioner would not receive any funds remaining in the account - x omitted further it is well established that sec_481 supersedes the statute_of_limitations see 343_f2d_568 5th cir 80_tc_895 if petitioner merely changed starting in to an accounting_method under which amounts are included in income when received from clients this method would not result in the inclusion in income of amounts previously excluded because deposited into the court and in-house accounts without sec_481 such amounts would generally escape taxation sec_481 allows respondent to prevent such omissions by requiring petitioner to include in income in the amounts previously accumulated in the three accounts petitioner argues that sec_481 does not apply because there has been no change in method_of_accounting it is true that a change in method_of_accounting is necessary to trigger sec_481 but petitioner’s attempts to show that there was no change in method are unavailing petitioner first argues that there was no change in method_of_accounting relying on sec_1_446-1 6b income_tax regs which provides that a change in the method_of_accounting does not include a change in treatment resulting from a change in underlying facts however although petitioner argues in general that there was a change in underlying facts he points to no such change and we have found none -- - petitioner next relies on another provision of the same regulation which states a change in method_of_accounting does not include correction of mathematical or posting errors or errors in the computation of tax_liability sec_1 e bo income_tax regs petitioner argues that the accounting treatment of the deposits was not a method_of_accounting but mere error relying on 532_f2d_1352 in korn indus the taxpayer manufactured furniture the taxpayer used separate inventories for raw materials work-in-process supplies and finished goods there were kinds of material in the finished furniture eg lumber mirrors glue nails during the years in issue of the materials costs had not been included in the finished goods inventory although they were included in the other three inventories when the taxpayer later took account of the three materials costs the government claimed there was a change in accounting_method but the court found that the taxpayer had merely corrected an error in the instant case petitioner’s mistakes are much more egregious and of a different nature in petitioner reported gross_receipts from his business as a bail bondsman of dollar_figure and increased the balances in his three accounts by a combined total of dollar_figure in petitioner reported gross_receipts from his business as a bail bondsman of dollar_figure and increased the balances in his three accounts by a combined total of dollar_figure in other words in each year the bonding fees that petitioner deferred reporting exceeded the amount reported the instant case involves the systematic consistent treatment of a significant item not a posting or computational error see sec_1_446-1 6b income_tax regs petitioner’s treatment of the deposits was not error within the meaning of this regulation petitioner’s additional arguments petitioner presents numerous additional arguments none of which are persuasive petitioner directs his first argument to the charleston county court account only and argues that because the receipt of fees and the subsequent deposit of moneys into the account were interrelated the receipt of amounts deposited was of no moment and petitioner was not required to include it in income petitioner is wrong on the facts petitioner was required to maintain deposits with the clerk of court of charleston county in the amount of percent of outstanding bonds he collected as a fee percent sometimes less of each bond he wrote there was no relationship between the deposits and the fees there was no requirement that petitioner pay a percentage of the fees he collected into the charleston county court account unlike the taxpayers in 93_tc_220 and rankin v commissioner t c memo - - who paid a percentage of each fee into the buf accounts in the instant case the amounts on deposit could come from anywhere thus the receipts and deposits were not interrelated petitioner’s second argument is again directed only to the charleston county court account petitioner argues that the deposits with the charleston county court were held in trust and therefore were not income to him when received petitioner cites 47_tc_391 affd a407 f 2d 9th cir and 72_tc_284 in angelus funeral home the taxpayer which computed its income on the accrual basis operated a funeral home and collected pre-need deposits from clients e payments for future funeral services the deposits were held in trust for the sole purpose of providing the funeral services and the taxpayer was obligated to use the entire amount on deposit for that purpose see angelus funeral home v commissioner supra pincite- the court held that the amounts on deposit were held in trust for the client’s benefit and were not income to the taxpayer until the funeral services were performed see id pincite in miele the taxpayer which computed its income on the cash receipts and disbursements basis was a law partnership that collected prepaid legal fees the fees were maintained ina --- - separate_account until actually earned ie when the legal services were performed and could not be used by the partnership while they were in the separate_account see miele v commissioner supra pincite the court held that the prepaid fees were not includable in income being neither actually nor constructively received until actually earned see id pincite- petitioner’s argument for the existence of a_trust is that he is collecting and holding moneys in trust for the benefit of the clerk of court for charleston county petitioner points to the fact that the accounts or certificates of deposit were held in trust in the name of the clerk of court for charleston county for the sole protection and benefit of the holder of bail bonds however the key question is whether petitioner acquired a beneficial_interest in the funds at the time of their deposit see johnson v commissioner t c pincite he clearly did the deposits would ultimately inure to his benefit first petitioner chose whether funds from the charleston county court account or some other funds were used to pay any bond forfeiture owed to the county second even if payments were made from the account they would be to petitioner’s benefit because they would satisfy an obligation of petitioner finally petitioner ultimately would receive the amounts remaining on deposit in the account on the other hand in angelus funeral -- - home and miele the beneficial_interest in the funds on deposit was retained by the taxpayer’s clients thus these cases are distinguishable petitioner directs his next argument to both the charleston county court account and the u s district_court account he argues that sec_461 applies authorizing deductions for the amounts on deposit sec_461 provides as follows sec_461 contested_liabilities ---if-- the taxpayer contests an asserted_liability the taxpayer transfers money or other_property to provide for the satisfaction of the asserted_liability the contest with respect to the asserted_liability exists after the time of the transfer and but for the fact that the asserted_liability is contested a deduction would be allowed for the taxable_year of the transfer or for an earlier taxable_year determined after application of subsection h then the deduction shall be allowed for the taxable_year of the transfer this subsection shall not apply in respect of the deduction for income_war_profits_and_excess_profits_taxes imposed by the authority of any foreign_country or possession_of_the_united_states the fundamental problem with petitioner’s argument is that sec_461 does not by itself create a deduction it only affects timing that is it applies only to a deduction otherwise allowed see sec_461 but here because of - - 843_f2d_163 4th cir no deduction is allowed thus sec_461 does not apply finally petitioner argues that the fees he received from clients were excludable because there was a chance that the court would order the fee refunded to the client there is some evidence in the record relating to petitioner’s argument namely petitioner’s testimony and the testimony of an employee at the clerk of court for charleston county indicating that the judge in a case has discretion to order fees returned on the other hand there is no evidence in the record establishing the circumstances including for instance the frequency of returned fees but there is a more basic defect with petitioner’s argument namely exclusion of fees until resolution of any contingencies regarding their return was not the method_of_accounting that petitioner employed rather the method he actually used was entirely different under his method he excluded all amounts deposited into the accounts regardless of whether any fees so deposited were subject_to return or not thus this argument must fail we have considered petitioner’s remaining arguments and find them to be without merit we accordingly sustain respondent’s determination that petitioner was required to include in income in the combined balances in the charleston county u s -- - district_court and in-house accounts as of date namely dollar_figure to reflect the foregoing decision will be entered under rule because we sustain respondent’s determination that the balance in the in-house account as of date must be included in gross_income we believe the possibility exists that certain amounts in the in-house account could be subject_to double_taxation although the record is not entirely clear on this point it would appear to the court that the possibility of double_taxation exists because the balance in the in-house account decreased between jan and date the record establishes that one possible disbursement from the in-house account was to fund required increases in the charleston county court or u s district_court account the charleston county court account in fact increased between jan and date and we have sustained respondent’s determination that that increase must be included in petitioner’s gross_income however if any portion of the increase in the charleston county court account was funded with a disbursement from the in- house account then the possibility appears to exist that this disbursement was taxed both as a part of the existing date balance in the in-house account and as an increase in the charleston county court account between jan and date we expect the parties to address this problem as part of their rule_155_computations


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 corp plr-120940-07 date september legend parent ------------------------------------------------------------------------------------------ ----------------------- ------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------ ----------------------- ------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------ ----------------------- ------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------ ----------------------- ------------------------------------------------------------------------------------------ ----------------------- ------- ----------------- subsidiary subsidiary subsidiary subsidiary year date plr-120940-07 company official tax professionals ------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------ ---------------------- ------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------ -------------------------------------------- dear ---- ---------- this letter responds to a letter dated date requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations additional information was submitted in letters dated july august and date the extension is being requested in order to allow parent as common parent of the consolidated_group that includes subsidiary subsidiary and subsidiary to file elections elections under sec_362 the material information is summarized below in year and at all times since parent was the common parent of an affiliated_group that filed a consolidated federal_income_tax return parent owned of subsidiary subsidiary owned of subsidiary and subsidiary owned of subsidiary subsidiary owned stock of subsidiary but subsidiary was not a member of the affiliated_group and filed a separate_return on date subsidiary transferred assets to subsidiary in a tax-free transfer described in sec_351 in the aggregate the assets transferred had tax bases exceeding fair_market_value also on date but subsequent to the above transfer subsidiary transferred assets to subsidiary in a tax-free transfer described in sec_351 in the aggregate the assets transferred had tax bases exceeding fair_market_value also on date but subsequent to the transfer by subsidiary to subsidiary subsidiary transferred assets to subsidiary in a tax-free transfer described in sec_351 in the aggregate the assets transferred had tax bases exceeding their fair_market_value sec_362 provides that if property is transferred by a transferor in any transaction which is described in sec_362 and which is not described in sec_362 and the transferee’s aggregate adjusted bases of property so transferred exceeds the fair_market_value of such property immediately_after_the_transfer then the transferee’s plr-120940-07 aggregate adjusted bases of the property transferred shall not exceed the fair_market_value of such property immediately after the transaction sec_362 provides an election under which sec_362 will not apply but instead applies the limitation to transferor’s basis in stock received in the transaction if the transferor and transferee agree to make this election the transferor’s basis in the stock received shall not exceed its fair_market_value immediately_after_the_transfer sec_362 delegates authority to the secretary to promulgate regulations that prescribe the time and manner in which the transferor and transferee make the election in notice_2005_70 2005_2_cb_694 the irs provided guidance on how to make an election under sec_362 pending the issuance of additional guidance the notice stated that if the transferor is not a controlled_foreign_corporation under sec_957 the election is made by the transferor including a certification on or with its tax_return filed by the due_date including extensions for filing its original return for the taxable_year in which the transaction occurred briefly the certification provides that the transferor and transferee make an election under sec_362 with respect to a transfer of property described in sec_362 the common parent of a consolidated_group makes the election on behalf of its group members the elections were required to be filed with parent’s consolidated_income_tax_return for year for various reasons however parent failed to file the election in a timely manner the period of limitations on assessment under sec_6501 has not expired for parent’s consolidated group’s or subsidiary 4’s taxable years for which the election should have been made or for any subsequent taxable_year under sec_301_9100-1 the commissioner has discretion to 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 revenue_ruling revenue_procedure notice or announcement sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make a regulatory election sec_301_9100-1 sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides extensions of time for making regulatory elections that do not meet the requirements of sec_301_9100-2 the commissioner will grant requests for relief under sec_301_9100-3 when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government in this case the time for filing the elections is fixed by notice_2005_70 therefore the commissioner has discretionary authority under sec_301_9100-3 to grant an plr-120940-07 extension of time for parent to file the elections provided parent shows that it acted reasonably and in good_faith that the requirements of sec_301_9100-1 and sec_301_9100-3 are satisfied and that granting relief will not prejudice the government information affidavits and representations submitted by parent company official and tax professionals explain the circumstances that resulted in the failure to timely file the elections the information establishes that parent reasonably relied on a qualified_tax professional who failed to make or advise parent to make the elections that the request for relief was filed before the irs discovered the failure to make the elections and that the granting of the relief will not prejudice the government see sec_301_9100-3 and v based on the facts and information submitted including the representations made we conclude that parent has shown that it acted reasonably and in good_faith that the requirements of sec_301_9100-1 and sec_301_9100-3 are satisfied and that granting relief will not prejudice the interests of the government accordingly an extension of time is granted under sec_301_9100-3 until days from the date on this letter for parent to file the elections with respect to the sec_351 transfers described above this extension of time is conditioned on parent’s consolidated group’s and subsidiary 4’s tax_liability if any being not lower in the aggregate for all years to which the elections apply than it would have been if the elections had been timely made taking into account the time_value_of_money no opinion is expressed as to the tax_liability for the years involved no opinion is expressed as to the federal_income_tax effect if any if it is determined that the tax_liability is lower except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction discussed in this letter specifically no opinion is expressed as to whether the transactions are described in sec_351 nor is any opinion expressed concerning the basis or fair_market_value of any asset we express no opinion as to the tax effects or consequences of filing the elections late under the provisions of any other section of the code or regulations or as to the tax treatment of any conditions existing at the time of or effects resulting from filing the elections late that are not specifically set forth in the above ruling for purposes of granting relief under sec_301_9100-3 we have relied on certain statements and representations that parent company official and tax professionals made under penalties of perjury however the director should verify all essential facts moreover notwithstanding that the extension is granted under sec_301_9100-3 to file the elections any penalties and interest that would otherwise be applicable still apply plr-120940-07 the ruling is directed only to the taxpayer requesting it under sec_6110 this ruling may not be cited or used as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative a copy of this letter must be attached to any income_tax return to which it is relevant alternatively taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to the return that provides the date and control number of the letter_ruling sincerely ___________________________________________ ken cohen senior technician reviewer branch office of associate chief_counsel corporate


t c memo united_states tax_court john edward and linda hall petitioners v commissioner of internal revenue respondent docket no date john edward hall pro_se dennis r onnen for respondent memorandum opinion körner judge respondent determined a deficiency in petitioners' federal_income_tax in the amount of dollar_figure and a penalty under sec_6662 in the amount of dollar_figure for all statutory references are to the internal_revenue_code in effect for the year in issue and all rule references are to the tax_court rules_of_practice and procedure except as otherwise noted petitioners john edward and linda hall were residents of kansas at the time the petition was filed herein hereinafter all references to petitioner refer to john edward hall in the year a corporation known as hall mccollum laboratories inc was formed in the state of nevada one million shares of this corporation were issued to petitioner in petitioner sold back to the corporation big_number of these shares for which he received dollar_figure thereafter a dispute arose between petitioner and the corporation and after the corporation had changed its name to hml medical inc petitioner brought suit against it in the dispute was settled and the lawsuit was dismissed as part of the settlement petitioner surrendered his remaining big_number shares of the corporation to it in return for the payment to him of dollar_figure upon audit respondent determined that petitioner's remaining cost_basis in his stock in the corporation was only dollar_figure as compared to a basis of dollar_figure which petitioner had claimed in his return respondent also disallowed a claimed net_capital_loss carryforward of dollar_figure contained in petitioner's return finally respondent having initially allowed a net_operating_loss_carryback to petitioner from to in the amount of dollar_figure has now conceded that such net_operating_loss_carryback should be increased by dollar_figure as part of the statutory_notice_of_deficiency herein for the year respondent also determined a penalty under sec_6662 against petitioner so far as the deficiency in tax is concerned we think it is clear in this court that the burden_of_proof is upon petitioner to show error in respondent's determination rule a 290_us_111 this record provides absolutely no evidence upon which we can determine that respondent's determination was in error to any extent there is no evidence to show petitioner's cost_basis in his original one million shares in the corporation other than the dollar_figure determined by respondent and there is no evidence to indicate that respondent's allocation of percent of such original cost_basis or dollar_figure to petitioner's remaining big_number shares that he sold in was an unreasonable action at trial petitioner claimed that his stock basis in the big_number shares was over dollar_figure million and proffered a written receipt indicating such amount upon cross-examination however it developed that this so-called receipt was prepared by petitioner himself showing money as coming from himself to himself and was in fact prepared just before trial of this case it was admitted solely as a summary of his testimony and is entitled to no evidentiary weight whatever respondent also determined a penalty against petitioner under sec_6662 in the amount of dollar_figure for the year that section provides for the imposition of a penalty equal to percent of the portion of the underpayment if such underpayment arises either from negligence disregard of rules or regulations or is attributable to a substantial_understatement_of_income_tax sec_6662 in turn defines a substantial_understatement_of_income_tax as being either percent of the tax required to be shown on the return for the taxable_year or dollar_figure whichever is greater the determined deficiency here was of dollar_figure as reported as compared to a reported tax_liability of zero and was above dollar_figure as in the case of the predecessor section covering cases of this type sec_6653 the burden_of_proof to show error on the part of respondent is clearly placed upon petitioner 85_tc_934 arcadia plumbing trust v commissioner tcmemo_1994_ the matter was not mentioned by petitioner in pleading in trial or on brief we cannot be sure if he intended to abandon it but in any case respondent's determination of the applicable penalty must be sustained the net_capital_loss carryforward that was disallowed by respondent was not mentioned in the pleadings at trial or on brief and we deem it to be abandoned to give effect to respondent's concession herein with regard to the amount of allowable net_operating_loss_carryback decision will be entered under rule


department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division uniform issue code xxxxxxxxxxkxxkx xxxxxxxxkxxkxkxx xxxxxkxxxkkxxxxxx se t ep rai ty xxxxxxxxkxkxxkxkxkxxxxkxkxkx xxxxxxxxxkxxkxxxkxxkxxkxkxkk xxxxxxxxxxxkxxkxkxkxkxxkxkxkk xxxxxxxkxxkxxkxxkxkxxkxxkkxkx xxxxxxxxxkxkxxkxxxkxkxxkxkkx xxxxxxxkxxxxkxxkkxxkxkxkkx xxxxxxxkxxkxxxkkxxkxkxkxkxkxkx xxxxxxxxxxxxxxxxxxxxxkx xxxxxxkkxxkxxkxkxxkxkxkxkkxkkn xxxxxxxkxkxxkxkxxxkkxkxkxkkxkkk legend taxpayer a ira x account f dear xxxxxxxxxxxxx financial_institution f date date amount c this is in response to your ruling_request dated date as supplemented by correspondence dated date in which you request a waiver of the 60-day rollover requirement contained in sec_408 of the internal_revenue_code code the following facts and representations have been submitted under penalty of perjury in support of the ruling requested xkxkxkkxkxkxkkkkkxkkkkk page taxpayer a age represents that on date he received a distribution of amount c from ira x maintained by financial_institution f taxpayer a asserts that his failure to accomplish a rollover within the 60-day period prescribed by sec_408 of the code was due to the failure of financial_institution f to follow taxpayer a’s instructions which led to the placement of amount c in a non-ira account taxpayer a further represents that amount c has not been used for any other purpose taxpayer a owns an individual_retirement_arrangement ira which is maintained at financial_institution f taxpayer a asserts that he has been taking his required minimum distributions on an annual basis for many years and this is the first time he has encountered a problem on date taxpayer a requested a distribution of amount c and thought that he had cancelled the automatic distribution however a second distribution of the same amount was automatically distributed on date upon learning of the error taxpayer a contacted financial_institution f within the 60-day rollover period and informed them that his instructions had been misunderstood and asked that the transfer be reversed financial_institution f placed amount c that was distributed on date as a required_minimum_distribution in account f on date financial_institution f also placed the second distribution of amount c that was made in error into account f a non-ira account based on the facts and representations a ruling is requested that the internal_revenue_service waive the 60-day rollover requirement with respect to the distribution of amount c from ira x sec_408 of the code provides that except as otherwise provided in sec_408 any amount_paid or distributed out of an ira shall be included in gross_income by the payee or distributee as the case may be in the manner provided under sec_72 of the code sec_408 of the code defines and provides the rules applicable to ira_rollovers sec_408 of the code provides that sec_408 of the code does not apply to any amount_paid or distributed out of an ira to the individual for whose benefit the account is maintained if the entire amount received including money and any other_property i is paid into an ira for the benefit of such individual not later than the day after the day on which he receives the payment or distribution or the entire amount received including money and other_property is paid into an eligible_retirement_plan other than an ira for the benefit of such individual not later than the day after the date on which the payment or distribution is received except that the maximum amount which may be paid into such plan xxxxxkxkxxkxxkxkxkxkkkk page may not exceed the portion of the amount received which is includible in gross_income determined without regard to sec_408 sec_408 of the code provides that sec_408 does not apply to any amount described in sec_408 received by an individual from an ira if at any time during the one-year period ending on the day of such receipt such individual received any other amount described in sec_408 from an ira which was not includible in gross_income because of the application of sec_408 sec_408 of the code provides a similar 60-day rollover period for partial rollovers sec_408 of the code provides that the rollover provisions of sec_408 do not apply to any amount required to be distributed under sec_408 sec_408 of the code provides that the secretary may waive the 60-day requirement under sec_408 and sec_408 of the code where the failure to waive such requirement would be against equity or good conscience including casualty disaster or other events beyond the reasonable control of the individual subject_to such requirement only distributions that occurred after date are eligible for the waiver under sec_408 i of the code revproc_2003_16 r b date provides that in determining whether to grant a waiver of the 60-day rollover requirement pursuant to sec_408 of the code the service will consider all relevant facts and circumstances including errors committed by a financial_institution inability to complete a rollover due to death disability hospitalization incarceration restrictions imposed by a foreign_country or postal error the use of the amount distributed for example in the case of payment by check whether the check was cashed and the time elapsed since the distribution occurred the information presented and documentation submitted on behalf of taxpayer a is consistent with his assertion that his failure to accomplish a timely rollover within the day rollover period prescribed by sec_408 of the code was due to an error committed by financial_institution f therefore pursuant to sec_408 of the code the service hereby waives the 60-day rollover requirement with respect to the distribution of amount c from ira x taxpayer a is granted a period of days from the issuance of this ruling letter to redeposit amount c into a rollover ira provided all other requirements of sec_408 of the code except the 60-day requirement are met with respect to such contributions amount c will be considered a valid rollover_contribution within the meaning of sec_408 of the code xxxxxxxxkkxkxkkkkkk page this ruling does not authorize the rollover of any amounts that are required to be distributed by sec_401 of the code no opinion is expressed as to the tax treatment of the transaction described herein under the provisions of any other section of either the code or regulations which may be applicable thereto this ruling is directed solely to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited by others as precedent if you wish to inquire about this ruling please contact xxxxxxxx id number xxxxxxxx at xxkxkxkxxxxxx please address all correspondence to se t ep ra t4 sincerely yours a hak perry fe laura b warshawsky manager employee_plans technical group enclosures deleted copy of ruling letter notice of intention to disclose