internal_revenue_service index nos number release date cc ebeo 4-plr-112663-98 date taxpayer company plan a plan b plan c date b date c date d date e date f date g year year plr-112663-98 year h years i years j shares k l v w x this replies to a ruling_request submitted on your behalf by your authorized representative concerning the application of sec_83 and the gift and estate_tax provisions of the internal_revenue_code to the proposed transfer of certain stock_options by gift company has voting common_stock outstanding the stock is publicly traded company has three stock_option plans plan a plan b and plan c taxpayer an employee of company was born on date a and has been employed by company since year as of date b taxpayer owned j shares of company common_stock directly taxpayer was granted k nonqualified_stock_options on date c under plan a and was granted l nonqualified_stock_options on date d under plan b taxpayer and taxpayer’s family members do not own in the aggregate by vote or value fifty percent or more of company’s common_stock plan a and plan b are administered by a committee appointed by company’s board_of directors all of the committee members are non-employee directors appointed annually by the board under the plans option holders may purchase company common_stock at a specified price after various conditions are met the plans provide that the option_price plr-112663-98 per share is determined by the committee however the option_price may not be less than the fair_market_value of a share on the date the option is granted each option is granted for an option period fixed by the committee the option period however may not exceed ten years from the date the option is granted as consideration for an option granted under plan a taxpayer must remain in the continuous employment of company for at least one year from the date the option is granted before the option is exercisable thereafter except as set forth in the plan a agreement the options received under plan a are exercisable in installments of one- quarter per year on each of the first through fourth anniversary dates of the option grant provided that the optionee is at the time of exercise employed by company further subject_to the one-year continuous employment requirement the stock_options received under plan a are exercisable during the first h years of the option period pursuant to the following schedule one quarter of the options are exercisable after the one-year holding_period one quarter of the options are exercisable when the stock price achieves a v increase one quarter of the options are exercisable when the stock price achieves a w increase and one quarter of the options are exercisable when the stock price achieves a x increase in the i years the options are fully exercisable regardless of stock price options received under plan a expire ten years after the date of the option grant as consideration for an option granted under plan b taxpayer must remain in the continuous employment of company for at least one year from the date the option is granted before the option is exercisable thereafter except as set forth in the plan b agreement the options received under plan b are exercisable in installments of one- third per year on each of the first through third anniversary dates of the option grant provided that the optionee is at the time of exercise employed by company further subject_to the one-year continuous employment requirement the stock_options received under plan b are exercisable during the first h years of the option period pursuant to the following schedule one third of the options are exercisable after the one-year holding_period plr-112663-98 one third of the options are exercisable when the stock price achieves a v increase and one third of the options are exercisable when the stock price achieves a w increase in the i years the options are fully exercisable regardless of stock price in addition subject_to the one-year continuous employment rule and price appreciation requirements options received under plan a and plan b are exercisable if the optionee i attains age sixty while employed by company ii dies while employed by company iii retires from company on or after hi sec_65th birthday iv retires from company on or after hi sec_55th birthday after having completed ten years_of_service with company or v retires from company on or after the date the sum of the optionee’s age and years_of_service when rounded up to the next highest number equals at least and the optionee has completed ten years_of_service with company and employment terminates for any reason other than death resignation willful misconduct or activity deemed detrimental to the interest of company the plan a and the plan b agreements have been amended to provide that the options are transferable to members of the optionee’s immediate_family to trusts solely for the benefit of optionees’s immediate_family and to partnerships in which the only partners are the optionee’s immediate_family members and or trusts solely for the benefit of optionees’s immediate_family for this purpose immediate_family members means the optionee’s spouse parents children stepchildren grandchildren and legal dependents the option agreements with respect to taxpayer's stock_options will likewise provide that the stock_options may be transferred to members of the taxpayer's immediate_family to trusts solely for the benefit of such immediate_family members and to partnerships in which such family members and or trusts are the only partners under plan a and plan b if an optionee retires from company the optionee’s stock_options expire at the end of the option period fixed by the committee if an optionee’s employment with company is terminated other than by retirement or death the optionee’s options expire three months after the termination of employment if an optionee dies while employed by company the stock_options expire at the end of the option period fixed by the committee if however the optionee dies within the period after retirement or other termination of employment the stock_options are exercisable until the later of twelve months after death or the date the options expire under the plans plr-112663-98 further if the optionee ceases to be employed by company due to disability the optionee is treated as remaining in the employ of company until the earlier of i cessation of payments under a disability plan of company ii the disabled optionee’s death or iii the disabled optionee’ sec_65th birthday taxpayer intends to make a donative transfer after date e and no later than date f of a portion of his stock_options granted during date g to a member of his immediate_family to a_trust solely for the benefit of such family_member or to a partnership in which such family_member and or trust are the only members after taxpayer transfers the stock_options he will have no power or right to determine when the stock_options are exercised or to otherwise affect the stock_options upon transfer taxpayer will have no beneficial_ownership interest in or control_over the stock_options taxpayer will have no power to require the transferee to exercise or to refrain from exercising the stock_options to revest the beneficial title to the stock_options in himself to name new beneficiaries of the gift or to change the beneficiaries of the gift sec_83 of the code provides that if in_connection_with_the_performance_of_services property is transferred to any person other than the person for whom the services are performed the excess of the fair_market_value of the property determined without regard to any restriction other than a restriction which by its terms will never lapse at the first time the rights of the person having a beneficial_interest in the property are transferable or are not subject_to a substantial_risk_of_forfeiture whichever occurs earlier over the amount if any paid for the property will be included in the gross_income of the person who performed the services in the first taxable_year in which the rights of the person having the beneficial_interest in the property are transferable or are not subject_to a substantial_risk_of_forfeiture whichever is applicable under sec_83 of the code sec_83 does not apply to the transfer of an option without a readily_ascertainable_fair_market_value pursuant to sec_83 of the code there is allowed a deduction under sec_162 of the code to the person for whom were performed the services in connection with which the property was transferred an amount equal to the amount included under sec_83 in the gross_income of the person who performed the services the deduction will be allowed for the taxable_year of such person in which or with which ends the taxable_year in which such amount is included in the gross_income of the person who performed the services sec_1_83-6 of the income_tax regulations provides an exception to the rule_of sec_83 concerning what taxable_year the service_recipient is allowed the deduction there it is provided that if property plr-112663-98 is substantially_vested upon transfer the deduction will be allowed in accordance with the service recipient’s method_of_accounting sec_1_83-7 of the regulations provides in part that if there is granted to an employee or independent_contractor or beneficiary thereof in_connection_with_the_performance_of_services an option to which sec_421 relating generally to certain qualified and other options does not apply sec_83 shall apply to the grant if the option has a readily_ascertainable_fair_market_value at the time the option is granted if sec_83 does not apply to the grant of the option because it does not have a readily_ascertainable_fair_market_value at the time of the grant sec_83 will apply at the time the option is exercised or otherwise_disposed_of even though the fair_market_value of the option may have become readily ascertainable before such time if the option is exercised sec_83 applies to the transfer of property pursuant to the exercise and the employee or independent_contractor realizes compensation upon the transfer at the time and in the amount determined under sec_83 if the option is sold or otherwise_disposed_of in an arm’s length transaction sec_83 applies to the transfer of money or other_property received in the same manner as sec_83 would apply to the transfer of property pursuant to the exercise of an option see sec_1_83-7 of the regulations for the tests to be applied in determining whether an option has a readily_ascertainable_fair_market_value sec_1_83-4 of the regulations provides in part that if property to which sec_83 applies is acquired by any person including a person who acquires such property in a subsequent transfer which is not at arm’s length while such property is still substantially nonvested such person’s basis in the property should reflect any amount_paid for the property and any amount includible in the gross_income of the person who performed the services in this case the options do not have a readily_ascertainable_fair_market_value at the date of grant also because the transfer of them to the family_member or trust will not be pursuant to an arm’s length transaction they will not be considered to be disposed of under sec_1_83-7 of the regulations accordingly sec_83 of the code will apply when the options are exercised and stock is transferred to the family_member or trust sec_2501 of the code imposes a tax for each calendar_year on the transfer of property by gift during the calendar_year by an individual sec_2511 of the code provides that the tax imposed by sec_2501 shall apply whether the transfer is in trust or otherwise whether the gift is direct or indirect and whether the property is real or personal tangible or intangible under sec_2512 of the code if the gift is made in property the value of the property at the date of the gift shall be considered the amount_of_the_gift section plr-112663-98 b provides that where property is transferred for less than adequate_and_full_consideration in money or money’s worth the amount by which the value of the property exceeds the value of the consideration is deemed a gift sec_25_2511-2 of the gift_tax regulations provides that as to any property or part thereof or interest therein of which the donor has so parted with dominion and control as to leave in him no power to change its disposition whether for his own benefit or for the benefit of another the gift is complete but if upon a transfer of property the donor reserves any power over its disposition the gift may be wholly incomplete or may be partially complete and partially incomplete depending upon all the facts in the particular case revrul_98_21 1998_18_irb_7 considers the transfer of a nonstatutory stock_option by the optionee to a family_member for no consideration the revenue_ruling concludes that the transfer of a nonstatutory stock_option by the optionee to a family_member for no consideration is a completed_gift under sec_2511 of the code on the later of i the date of the transfer or ii the time when the donee’s right to exercise the option is no longer conditioned on the performance of services by the transferor in the present case taxpayer has been employed by company for over thirty years further taxpayer attained age sixty while employed by company and continues to work for company taxpayer holds options to purchase company common_stock under both plan a and plan b taxpayer proposes to transfer options to one or more of his children or to a_trust solely for the benefit of one or more of his children taxpayer represents that he will transfer options that are no longer subject_to the one-year continuous employment requirement after taxpayer transfers the options taxpayer will have no power or right to determine when the options are exercised the options owned by taxpayer under plan a are no longer subject_to restrictions on exercise the ability to exercise the options is not conditioned on the continued future employment of taxpayer by company further the stock price appreciation requirements for options issued to taxpayer under plan a have been met although the options owned by taxpayer under plan b are subject_to the price appreciation restrictions on exercise the ability to exercise the options is not conditioned on the continued future employment of taxpayer by company the options will be exercisable after the price appreciation threshold is met regardless of taxpayer's employment status by company sec_2701 of the code provides special valuation rules to determine the amount of a gift when an individual transfers an equity_interest in a corporation or partnership to a member of the individual's family in order for sec_2701 to apply plr-112663-98 the transferor or an applicable_family_member must immediately_after_the_transfer hold an applicable_retained_interest sec_25_2701-1 of the regulations sec_2701 of the code and sec_25_2701-1 of the regulations provide that sec_2701 does not apply if the retained_interest is of the same class of equity as the transferred interest sec_25_2701-2 of the regulations provides that the term applicable_retained_interest means any equity_interest in a corporation or partnership with respect to which there is either an extraordinary_payment_right or in the case of a controlled_entity a distribution_right sec_25_2701-2 provides that with certain exceptions an extraordinary_payment_right is any put call or conversion_right any right to compel liquidation or any similar right the exercise or non-exercise of which affects the value of the transferred interest a call_right includes any warrant option or other right to acquire one or more equity interests sec_2703 of the code provides that for purposes of the estate gift and generation-skipping_transfer taxes the value of any property is determined without regard to any option agreement or other right to acquire or use the property at a price less than fair_market_value of the property without regard to such option agreement or right or any restriction on the right to sell or use such property sec_2703 of the code provides an exception to the application of sec_2703 in the case of a right or restriction where the right or restriction is a bona_fide business arrangement the right or restriction is not a device to transfer the property to the natural objects of the transferor’s bounty for less than adequate_and_full_consideration in money or money’s worth and at the time the right or restriction is created the terms of the right or restriction are comparable to similar arrangements entered into by persons in an arm’s length transaction sec_25_2703-1 of the regulations provides that a right or restriction is considered to meet each of the three requirements described in sec_2703 of the code if more than percent by value of the property subject_to the right or restriction is owned directly or indirectly within the meaning of sec_25_2701-6 of the regulations by individuals who are not members of the transferor’s family in order to meet this exception the property owned by those individuals must be subject_to the right or restriction to the same extent as the property owned by the transferor in the present case taxpayer holds common_stock and options to acquire common_stock under the option agreements the option holder has the right to acquire common_stock taxpayer proposes to transfer stock_options granted to him by his employer to one or more of his children or to a_trust for the benefit of one or more of his children the options must be exercised within a specified term set forth in the plr-112663-98 option agreement until the options are exercised the holder of the options has no right to receive dividends and no right to vote shares of the corporation the holder has only the right to purchase an equity_interest ie shares of stock in purchasing the shares of stock the holder would then obtain an equity_interest in which he would have these rights the holder of the options thus does not hold an equity_interest in the corporation and a transfer of the options is not subject_to sec_2701 of the code sec_2033 of the code provides for the inclusion in the gross_estate of any property_in_which_the_decedent_had_an_interest at the time of his death sec_2035 of the code provides for the inclusion in the gross_estate of property transferred within three years of the decedent’s death if the property would have been included under sec_2036 sec_2037 sec_2038 or sec_2042 if the decedent had retained the transferred property until death other transfers made within three years of death are not includible in the gross_estate sec_2036 sec_2037 and sec_2038 provide for the inclusion in the gross_estate of property of which the decedent has made a transfer and in which the decedent has either retained an interest in the property or a power over the property sec_2042 provides for the inclusion in the gross_estate of the proceeds of life_insurance over which the decedent has retained any incidents_of_ownership sec_2041 of the code provides that the gross_estate shall include any property with respect to which the decedent has at the time of his death a general_power_of_appointment or with respect to which the decedent has at any time released or exercised such power_of_appointment by a disposition which had the property been owned by the decedent such property would be includible in the decedent’s gross_estate under sec_2035 through inclusive a general_power_of_appointment is a power which is exercisable in favor of the decedent his estate his creditors or the creditors of his estate except where the decedent’s power is limited by an ascertainable_standard relating to the health education support or maintenance of the decedent in the present case taxpayer proposes to transfer options that he received as an employee of company to one or more of his children or to a_trust for the benefit of one or more of his children the exercise of the options will not be conditioned on continued future employment of taxpayer at the time of transfer the transferees may exercise the options and purchase the stock at their discretion after the price appreciation thresholds have been met after the transfers to the individuals or the trust taxpayer will retain no interest or reversion in the options or the stock upon exercise and has no right to alter amend or revoke the transfer of the options or stock in addition taxpayer holds no general_power_of_appointment over the options or the stock plr-112663-98 based on the information submitted we rule as follows the transfer of the stock_options to the transferee will not cause the recognition of taxable_income or gain to taxpayer if the transferee subsequently exercises the stock_options taxpayer or if taxpayer is not then living taxpayer’s estate will be deemed to receive taxable compensation under sec_83 of the code and company will receive a corresponding deduction under sec_162 of the code if the transferee exercises the stock_options the transferee’s basis in the stock so acquired will be its fair_market_value on the date of exercise which consists of the consideration paid_by the transferee and income taxed to taxpayer or taxpayer’s estate under sec_83 of the code taxpayer’s transfers of his plan a options and plan b options to one or more of his children or to a_trust for the benefit of one or more of his children will constitute completed gifts on the date of transfer for purposes of sec_2511 of the code provided that under the terms of the trust taxpayer will not retain any power that would render the gift incomplete the proposed transfers of the stock_options granted under plan a and plan b from taxpayer to one or more of his children or to a_trust for the benefit of one or more of his children will not be subject_to sec_2701 and sec_2703 of the code after the transfer of the options by taxpayer to one or more of his children or to a_trust for the benefit of one or more of his children neither the options nor the shares obtained upon the exercise of the options will be includible in taxpayer’s gross_estate no opinion is expressed as to the federal tax consequences of the transaction described above under any other provisions of the code also no opinion is expressed on the value for gift_tax purposes of the options at the date of transfer plr-112663-98 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 sincerely yours enclosure copy for sec_6110 purposes _______________________ robert b misner assistant chief branch office of the associate chief_counsel employee_benefits and exempt_organizations


t c memo united_states tax_court berkshire llp carl f hattler a partner other than the tax_matters_partner et al petitioner v commissioner of internal revenue respondent docket nos filed date lindsey w cooper jr and margarete l allio for petitioner scott lyons and johnny craig young for respondent the court has consolidated the following cases for this opinion berkshire llp carl f hattler a partner other than the tax_matters_partner docket no drilling deep in louisiana water llp carl f hattler a partner other than the tax_matters_partner docket no and gulf coast development llp carl f hattler a partner other than the tax_matters_partner docket no memorandum opinion buch judge carl hattler invested in three partnerships that were subject_to the partnership provisions of the tax equity and fiscal responsibility act of tefra pub_l_no sec_402 stat pincite the commissioner issued notices of final_partnership_administrative_adjustment fpaas for the partnerships determining that the partnerships were not entitled to deduct any of the intangible drilling costs they reported mr hattler a notice_partner other than the tax_matters_partner tmp filed petitions after the 150th day from the date the commissioner mailed fpaas to the tmps the commissioner filed motions to dismiss for lack of jurisdiction alleging the petitions were untimely sec_6226 allows a partner other than the tax_matters_partner to file a petition no later than days from the date the commissioner mails the fpaa to the tmp because mr hattler filed the petitions after this time we lack jurisdiction and will grant the commissioner’s motions to dismiss unless otherwise indicated all section references are to the internal_revenue_code in effect at all relevant times and all rule references are to the tax_court rules_of_practice and procedure background mr hattler invested in three partnerships berkshire llp berkshire drilling deep in louisiana water llp drilling and gulf coast development llp gulf these partnerships were subject_to the tefra partnership audit and litigation procedures of sec_6221 through berkshire resources llc berkshire resources was the general_partner and tmp for all three partnerships in the securities_and_exchange_commission filed fraud complaints against the principals of berkshire resources and the state of wisconsin administratively dissolved berkshire resources on date the commissioner examined the partnership return of each of the three partnerships and issued an fpaa with respect to each of them the berkshire and drilling fpaas were for the partnership taxable_year and the gulf fpaa was for the partnership taxable_year the commissioner determined that the partnerships were not entitled to deduct any of the intangible drilling costs that they reported the commissioner issued each partnership’s fpaa on date and mailed an fpaa addressed to each tax matters partner at each partnership’s address on that date that same day the commissioner also mailed a copy of each partnership’s fpaa to berkshire resources as tmp to three different addresses ie each of three separate fpaas was sent to each of three separate addresses for a total of nine fpaas in addition to the three fpaas sent to tax_matters_partner the commissioner also mailed copies of the fpaas for each of the three partnerships to mr hattler as a notice_partner within days of mailing the fpaas to the respective tmps on date the commissioner mailed the drilling fpaa to mr hattler and on date the commissioner mailed the the berkshire fpaa was addressed to tax_matters_partner berkshire llp west 1st street suite casper wy the drilling fpaa was addressed to tax_matters_partner drilling deep in louisiana water llp west 1st street suite casper wy the gulf fpaa was addressed to tax matters partners gulf coast development llp west 1st street suite casper wy see sec_6223 berkshire and the gulf fpaas to mr hattler these fpaas provided the dates that the fpaas had been sent to the tmp and explained a petition filed by the tmp precludes all other actions if the tmp doesn’t file a petition by the 90th day from the date the fpaa was mailed any partner or any percent group entitled to receive this notice may petition one of these courts the petition must be filed after the 90th day but on or before the 150th day from the date the fpaa was mailed to the tmp the time in which you must file a petition with the court is fixed by law and the court cannot consider your case if your petition is filed late on date mr hattler mailed petitions for all three partnerships using federal express’s priority overnight shipping service the court received the petitions on date at the time the petitions were filed all three partnerships were no longer operating and thus had no principal_place_of_business the court assigned the case docket no after originally treating all three petitions as one case the court ordered the cases severed into three separate cases found at docket nos and when a partnership action is commenced the petition must include the principal_place_of_business of the partnership at the time the petition is filed rule c mr hattler’s petitions did not include this information but in his objections to the commissioner’s motions he informed the court that because the partnerships were defunct before the petitions were filed they have no principal_place_of_business accordingly absent an agreement to the contrary these cases are appealable to the court_of_appeals for the district of columbia circuit see sec_7482 the commissioner filed motions to dismiss for lack of jurisdiction alleging the petitions were untimely mr hattler objected the court consolidated these cases for the purpose of issuing this opinion discussion the sole issue we must decide is whether we have jurisdiction to hear these cases i the commissioner sent valid fpaas to the tmp and to mr hattler to make adjustments in a tefra proceeding the commissioner must send an fpaa to the tmp pursuant to sec_6223 we have previously held that a generic fpaa addressed to the tax_matters_partner satisfies this requirement the last_known_address rules that apply to notices of deficiency do not apply to fpaas instead the commissioner must send the fpaa to the address listed on the partnership return for the year in issue the commissioner is not 91_tc_1069 s ection does not require that a specific tmp be enumerated on the fpaa sec_301_6223_a_-1 proced admin regs see taurus fx partners llc v commissioner tcmemo_2013_168 at relying on utah bioresearch ltd v commissioner t c memo compare sec_6212 with sec_6223 sec_6223 95_tc_610 sec_301_6223_c_-1 proced admin regs required to update the partnership’s address unless someone sends a written_statement on behalf of the partnership to notify the commissioner of the new information this statement generally must be mailed to the internal_revenue_service irs service_center where the partnership return was filed and must contain the partnership’s name a statement that the information provided is furnished to correct or supplement earlier information the corrected or additional information the tax_year to which the information relates the name address taxpayer_identification_number and signature of the person supplying the information and the name of each partner for whom this information is supplieddollar_figure the commissioner satisfied the requirement that he send notice to the tmp by mailing the generic fpaas on date the commissioner mailed a generic fpaa addressed to tax_matters_partner at each partnership’s respective address mr hattler’s only challenge to these fpaas is that because the partnerships were defunct the fpaas did not provide sufficient notice to the sec_6223 triangle investors ltd p’ship v commissioner t c pincite sec_301_6223_c_-1 b f proced admin regs stating that the commissioner is not obligated to search his records for information not expressly furnished under this section sec_301_6223_c_-1 proced admin regs sec_301_6223_c_-1 proced admin regs partnerships mr hattler does not allege that the commissioner was properly notified of a new address or that the fpaas were sent to the wrong address he merely alleges that the commissioner should have known that the address for the partnership was no longer valid however he does not allege that the irs was properly notified of a change_of address in the manner required under sec_6223 accordingly the commissioner satisfied the notice requirement and properly sent the fpaas for each partnership to the tmp mr hattler further argues that the fpaas sent to berkshire resources as tmp for the three partnerships were invalid because berkshire resources was administratively dissolved before the fpaas were issued he is wrong even assuming that berkshire resources was no longer the tmp because it had been administratively dissolved the commissioner satisfied the notice requirement under sec_6223 because the generic fpaas mailed to the tax_matters_partner at the partnerships’ addresses are valid in the same vein mr hattler argues that the commissioner should have designated a new tmp for the partnerships and his failure to appoint a new tmp invalidates the fpaas he is mistaken the commissioner’s authority to select a tmp is very limited first the partnership must not have designated a tmp or the tmp’s authority must have terminated then the tmp is the general_partner with the largest profits interest by operation of law only if that test is impracticable to apply can the commissioner select a tmp and in any event there is simply nothing in sec_6231 that requires the commissioner to select a tmp moreover mr hattler was not prejudiced by the absences of named tmps because he received timely notice the commissioner is required to send a copy of the fpaa to all notice partners no later than the 60th day after mailing the fpaa to the tmp here the commissioner timely sent copies of the fpaas to mr hattler allowing him ample time to file petitions of his own seneca ltd v commissioner is instructive in that case the seneca partnership did not have a tmp at the time the commissioner issued the fpaa the commissioner sent a generic fpaa addressed to tax_matters_partner and see eg sec_301_6231_a_7_-1 proced admin regs setting forth those circumstances in which a tmp’s designation is terminated sec_6231 sec_301_6231_a_7_-1 proced admin regs sec_6231 flush language sec_301_6231_a_7_-1 proced admin regs sec_6223 d a 92_tc_363 aff’d without published opinion 899_f2d_1225 9th cir also sent fpaas to the notice partners the notice partners argued that the fpaa was invalid because the commissioner had not appointed a new tmp and that the generic fpaa did not start the statutory period to file a petition we held that the absence of a tax_matters_partner for seneca had no adverse effect on petitioners’ rights to notice and hearing we explained that the notice partners received the fpaa with adequate time to file a petition and moreover a ny injury that petitioners suffer as a result of filing their petition out of time was caused by their own inaction and was not caused by respondent’s conduct likewise the fpaas that the commissioner sent mr hattler gave him adequate notice of the commissioner’s adjustments for the partnerships and sufficient time to file petitions each fpaa stated that fpaas had been mailed to the tmp on date and that mr hattler had to file a petition by the 150th day from the date the fpaa was mailed to the tmp the fpaas explained the time in which you must file a petition with the court is fixed by law and the court cannot consider your case if your petition is filed late further the fpaas provided mr hattler sufficient time to file petitions and were mailed to him well seneca ltd v commissioner t c pincite seneca ltd v commissioner t c pincite seneca ltd v commissioner t c pincite within days from the day that the commissioner mailed the fpaas to the tmps the commissioner mailed the drilling fpaa to mr hattler on date and mailed both the berkshire and gulf fpaas to mr hattler on date mr hattler had adequate notice and sufficient time to file petitions by the 150th day ii mr hattler did not file the petitions within the statutory timeframe partners who wish to file a petition challenging an fpaa must do so within the statutory timeframes otherwise we lack jurisdiction the tmp ha sec_90 days from the date the commissioner mailed the fpaa to file a petition if the tmp does not petition during that time then any notice_partner can file a petition within days following that 90-day period our court is a court of limited jurisdiction sec_6226 sec_6226 and can exercise only the jurisdiction provided by congress through statute these statutory time limits are jurisdictional and we cannot expand themdollar_figure mr hattler did not file his petitions within the statutory timeframe and therefore we lack jurisdiction to hear the cases mr hattler had to file his petitions within days from when the commissioner mailed the generic fpaas on date because the 150th day fell on sunday date sec_7503 extends the deadline until the next day date mr hattler did not mail his petitions until date the court received the petitions date accordingly we lack jurisdiction mr hattler argues that we have sufficient cause to retain jurisdiction under rule c and that we should extend the time for him to file his petitions he is sec_7442 484_us_3 the tax_court is a court of limited jurisdiction and lacks general equitable powers citing 320_us_418 83_tc_626 this court is a court of limited authority and may exercise jurisdiction only to the extent expressly provided by congress 94_tc_794 see also 140_tc_193 the timely mailing treated as timely filing rule does not help mr hattler either because that rule applies only if the petition is timely mailed in the first instance see sec_7502 mistaken rule c relates to intervention in a case over which we have jurisdiction it does not expand our jurisdiction if the petition to commence the case was untimely mr hattler further argues that the commissioner should have allowed the partnerships to deduct theft losses to offset the adjustments made in the fpaas we do not address the merits of this argument because we lack jurisdiction iii conclusion the law on this issue is clear mr hattler had days from the date of mailing of the generic fpaas to the tmp to petition he did not file his petitions within this time accordingly we lack jurisdiction an appropriate order dismissing the case for lack of jurisdiction will be entered in each docket


internal_revenue_service department ffpqeyy po box ben franklin station washington dc person to contact telephone number refer reply to o 4dom p si 7-plr-103690-99 sep bo index no legend a b d f g h vv ww xx y zz dear ina letter dated you requested rulings regarding your purchase of gas properties you represented that a purchased certain interests in gas producing properties from b production from the interests is gas produced from devonian_shale and tight formations which are qualified_fuels under sec_29 of the internal_revenue_code_of_1986 as amended a will claim the credit only with respect to production from wells which have been determined to produce qualified_fuel by the applicable regulatory authorities in accordance with the natural_gas policy act of a paid cash equal to d a will also be obligated to pay a credit payment note a fixed payment note and a production_payment retained by b the credit payment amount to pay the credit payment note is payable each calendar_quarter and is g multiplied by the dollar amount of the estimated sec_29 credits attributable to sales of qualified_fuels from the subject interests the credit payment note is limited to dollar_figurez the fixed payment note is for dollar_figurex and bears interest at the rate of y the note is paid out of net_proceeds according to a schedule the production_payment is payable solely out of the gross_proceeds from the sale of hydrocarbons from the subject interests the payments required are essentially equal to the gross_proceeds from the subject interests less the operating_expenses and payments on the fixed payment note the production_payment will terminate when the production from the subject interests equals f percent of the current at the time of creation of the production_payment estimate of the economically recoverable reserves in the subject interests when the production_payment was created the estimated present_value of the production from the subject interests after the production_payment terminates was greater than of the present_value of the entire production stream from all the subject interests following termination of the production_payment a will be entitled to of the income from production attributable to the subject interests as part of the agreement b has an interest the contingent_interest in any reserves that might exist after production of of the reserves currently estimated to exist b was granted an option to re-acquire the subject interests for fair_market_value the repurchase option is exercisable effective the earlier of h or certain specified events the option expires on v a has also entered into a management agreement with b’s parent the management agreement is typical of those within the industry the rulings requested are - a has acquired the entire economic_interest in the properties transferred to it the production_payment is properly characterized as a purchase_money_mortgage loan under sec_636 of the code the fixed payment note is not an economic_interest in the properties the credit payment note is not an economic_interest in the properties any sec_29 credit attributable to production from the properties after their sale to a is attributable to a sec_1_611-1 of the income_tax regulations provides that an economic_interest is possessed in every case in which the taxpayer has acquired by investment any interest in mineral in place and secures by any form of legal relationship income derived from the extraction of the mineral to which the taxpayer must look for a return of the taxpayer’s capital sec_1_614-1 provides that the term_interest means an economic_interest in a mineral deposit within the meaning of sec_1_611-1 the term includes working or operating interests royalties overriding royalties net profits interests and to the extent not treated as loans under sec_636 production payments in 310_us_404 the taxpayer received payments which could be satisfied out of any sale of the fee simple title of the land as well as production of the oil because the taxpayer was not looking solely to the oil production for a return on his investment the court found he did not have an economic_interest sec_636 and sec_1_636-1 provide that a production_payment created and retained upon the transfer of the mineral_property burdened by the production_payment is treated as a purchase_money_mortgage loan on the burdened mineral_property sec_1_636-3 defines the term production_payment to mean a right to a specified share of the production from mineral in place if as and when produced or the proceeds from the production the right must be an economic_interest in the mineral in place may burden more than one mineral_property and the burdened mineral_property need not be an operating_mineral_interest the right must have an expected economic life at the time of this creation of shorter duration than the economic life of one or more of the burdened mineral properties a right to mineral in place that can be required to be satisfied by other than-the production of mineral from the burdened mineral_property is not an economic_interest in mineral in place a production_payment must be limited by a dollar amount a quantum of mineral or a period of time a right to mineral in place has an economic life of shorter duration than the economic life of a mineral_property burdened thereby ifthe right may not reasonably be expected to extend in substantial amounts over the entire productive life of the mineral_property it sec_1_636-1 of the regulations states that the payor and payee shall determine their allowable deductions as if the production_payment were a loan and refers to sec_483 of the code sec_483 in turn refers to sec_1272 through for the treatment of original_issue_discount instruments sec_29 provides a credit for qualified_fuel as defined in sec_29 sold by the taxpayer to an unrelated_person during the taxable_year the production of which is attributable to the taxpayer a-transaction will be classified as a sale_or_exchange of a mineral_interest in cases in which the owner of a continuing property interest assigns that interest and retains a non-continuing interest in production economic_interest that is an interest that is not conterminous with the productive life of the transferred property in this case b will retain a production_payment that is limited to a specified number of units of mineral based on a stated percentage of the reserves currently known to exist at the time the transaction is consummated if additional reserves are found to exist after all reserves currently known to exist have been produced b will acquire a contingent_interest which is a specified percentage of any such additional reserves the production_payment is payable solely from production from the burdened properties and has an economic life of shorter duration than the economic life of the burdened properties because the interest b retained in any additional reserves does not come into being unless and until the additional reserves not at present believed to exist are determined to exist it is not a continuing interest accordingly based on the information submitted and the representations made the production_payment meets the requirements of sec_1_636-3 and is treated as a purchase_money_mortgage loan the credit payment amount is to be paid from sources other than the subject properties having an alternate source_of_income the note cannot be an economic_interest following anderson likewise the fixed payment note must be paid off on w if not already paid off from sources other than the subject properties and cannot be an economic_interest based solely on the representations made and the information submitted we conclude that a has acquired the entire economic_interest in the properties transferred to it until and unless b repurchases the property or the contingent_interest arises the production_payment is properly characterized as a purchase_money_mortgage loan under sec_636 of the code the fixed payment note is not an economic_interest in the properties the credit payment note is not an economic_interest in the properties any sec_29 credit attributable to production from the properties after their sale to a is attributable to a until and unless b repurchases the property or the contingent_interest arises no opinion is expressed or implied regarding the determination of the buyer’s basis in the subject interests no opinion is expressed or implied regarding the determination of amounts attributable to interest or principal pursuant to the non-recourse note or the production_payment except as ruled above we express or imply no opinion as to the federal tax consequences of this transaction under any other provision of the code specifically we express or imply no opinion whether any fuel produced from the properties is qualified_fuel within the mean of sec_29 however we do point out that following true oil company v commissioner of internal revenue no cir date production from any well which lacks a determination by a jurisdictional agency or review of such determination by ferc does not qualify for the credit under sec_29 - 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 a copy of this ruling should be attached to your tax_return filed for the year in which the transaction covered by this ruling was consummated a copy is enclosed for this purpose sincerely yours assistant chief_counsel passthroughs and special industries sigieu voseph h makurath by joseph h makurath senior technician reviewer branch fo


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc dom p si -plr-114373-00 date date x a d1 d2 dear this letter responds to a letter dated date and subsequent correspondence submitted on behalf of x by its authorized representative requesting a ruling under sec_1362 of the internal_revenue_code the information submitted states that x issued stock and began doing business on d1 a the sole shareholder of x represents that a intended x to be an s_corporation effective d1 and that a form_2553 election by a small_business_corporation was mailed to a service_center a also represents that x filed its income_tax return as an s_corporation for its first taxable_year and a filed a’s income_tax return consistent with the treatment of x as an s_corporation in a letter dated d2 the service_center advised x that it had no record of the filing of the form_2553 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 that x makes an election to be an s_corporation by filing a completed form_2553 with the appropriate service_center effective d1 within days following the date of this letter then such election will be treated as timely made 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 sent to x sincerely yours branch jeanne sullivan assistant to the chief office of the assistant chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes


office_of_chief_counsel internal_revenue_service memorandum number release date cc corp wwburhop postn-115587-16 uilc date date to thomas d yang general attorney chicago large business international from gerald b fleming acting branch chief branch corporate third party communication none date of communication not applicable subject proper year of deduction for a worthless_stock loss this chief_counsel_advice responds to your request for assistance dated date this advice may not be used or cited as precedent legend foreign parent ------------------------------------------------------------------------------ ------------------------------------------------------------------------- ---------------------------------- historic parent -------------------------------------------------------------------------- ------------------ taxpayer --------------------------------------------------------------------- ------------------------------------------------------------ -------------------------------------------------------------------------------- fsub -------------------------------------------------------------------------- ------------------------- sub ------------------------------------------------------------------------- ---------------------------------------------------------- postn-115587-16 country a date date date date date year year year year year year a b c d e f g h i j ---------- ----------- ------------------- ------------------- ------------------- ------------------- ------- ------- ------- ------- ------- ------- -- -------------- -------------- -------------- -------------- -------------- ---------------- ---------------- ---------------- -------------------- postn-115587-16 issue this memorandum responds to your request for advice relating to the interrelation between section and sec_1_1502-80 c in order to determine the appropriate year of deduction by taxpayer for a loss under sec_165 for the worthlessness of the stock of sub conclusion provided that the taxpayer meets the general requirements under sec_165 to deduct its loss on the worthlessness of the stock of sub during all of the years at issue sec_1_1502-80 defers the taxpayer’s deduction of the loss on the sub stock until the earliest of one of four identifiable events occur the only identifiable_event that occurred during the years at issue occurred when the taxpayer elected in year to change the classification of sub from a corporation to an entity disregarded as separate from the taxpayer the change in classification in year caused sub to cease to be a member of the taxpayer’s consolidated_group and as such permits the taxpayer to recognize its loss on the sub stock in year sec_1 c ii summary of facts the taxpayer is the common parent of a consolidated_group of corporations that join in the filing of a consolidated federal_income_tax return the taxpayer is wholly owned directly and indirectly by foreign parent a country a corporation foreign parent historically was part of the historic parent group and was separated from the historic parent group as part of a restructuring in year foreign parent directly and indirectly owns all of the stock of fsub a country a corporation prior to date year the unless otherwise noted all section references are to the internal_revenue_code_of_1986 as amended that was in effect during the years at issue or the regulations issued thereunder that were in effect during the years at issue during the years at issue sec_1_1502-80 provided f or consolidated_return years beginning on or after date stock of a member is not treated as worthless under sec_165 before the stock is treated as disposed of under the principles of sec_1_1502-19 however current sec_1_1502-80 provides that this paragraph c applies to taxable years for which the original federal_income_tax return is due without extensions after date however taxpayers may apply this paragraph c to taxable years beginning on or after date the taxpayer appears to have applied current sec_1_1502-80 to the transaction at issue and as such this memorandum applies current sec_1_1502-80 we understand that there is controversy over the valuation of sub specifically whether sub was in fact worthless for purposes of sec_165 during the years at issue and at the time the taxpayer elected to change sub’s classification however in order to examine the operation of sec_1_1502-80 we assume for purposes of this memorandum that the sub stock was worthless for sec_165 purposes as of the end of year and at all times during the years at issue postn-115587-16 taxpayer owned all of the stock of sub on date year the taxpayer sold a of the common_stock of sub to fsub for nominal consideration on date year fsub sold the a interest in sub back to the taxpayer for nominal consideration prior to its acquisition sub was publicly traded historic parent purchased sub from its public shareholders on date year as part of the acquisition transaction sub became liable on approximately dollar_figureb of intercompany loans used to finance the acquisition transaction after various assignments of debt most of sub’s intercompany debt was owed to fsub between year and year sub sold various non-core assets to third parties for a total of approximately dollar_figurec of this amount sub used approximately dollar_figured to repay intercompany debt after the various restructurings of sub’s operations and the repayment of debt as of the end of year sub owed approximately dollar_figuree to fsub and a very small amount to the taxpayer according to documentation provided by the taxpayer the taxpayer determined that the value of sub’s assets had declined by approximately dollar_figuref by the end of year because of the decline in the value of sub’s assets and the sales of operating_assets to pay intercompany debt the taxpayer determined that at the end of year sub had a negative net_worth of approximately dollar_figureg additional documentation provided by the taxpayer indicates that the taxpayer determined that sub had a negative net_worth at the end of both year and year because of sub’s reduced scope of operations and because sub’s continued insolvency could trigger a springing guarantee made by fsub to one of the third-party purchasers of sub’s assets foreign parent determined that part of the remaining debt sub owed to fsub should be forgiven thus on date year fsub forgave approximately dollar_figureh of the sub debt then on date year fsub forgave an additional dollar_figurei of the sub debt the taxpayer treated the cancellation of debt as a contribution to the capital of sub under sec_108 on date year the taxpayer filed a form_8832 to elect to treat sub as an entity disregarded as separate from the taxpayer on its federal_income_tax return for year the taxpayer claimed a loss on the stock of sub of dollar_figurej under sec_165 and revrul_2003_125 2003_2_cb_1243 law sec_165 provides that there shall be allowed as a deduction any loss sustained during the taxable_year and not compensated by insurance or otherwise for purposes of this memorandum we assume that all of the intercompany debt is valid debt for federal_income_tax purposes postn-115587-16 sec_1_165-1 and -1 d provide that to be allowable as a deduction under sec_165 a loss must be evidenced by closed and completed transactions fixed by identifiable events and actually sustained during the taxable_year only a bona_fide loss is allowable substance and not mere form shall govern in determining a deductible loss sec_165 provides that if any security which is a capital_asset becomes worthless during the taxable_year the loss resulting therefrom shall be treated as a loss from the sale_or_exchange on the last day of the taxable_year of a capital_asset sec_165 provides that the term security includes a share of stock in a corporation sec_165 provides that for the purposes of sec_165 any security in a corporation affiliated with a taxpayer which is a domestic_corporation shall not be treated as a capital_asset a corporation shall be treated as affiliated with the taxpayer only if the taxpayer owns directly stock in such corporation meeting the requirements of sec_1504 and more than percent of the aggregate of its gross_receipts for all taxable years have been from sources other than royalties certain rents dividends interest annuities and gains from sales or exchanges of stocks and securities whether a loss due to worthlessness actually is sustained during the taxable_year is a factual determination 326_us_287 reh’g 326_us_811 a taxpayer must prove with objective evidence that the stock in question became worthless during the taxable_year id pincite in 38_bta_1270 aff’d 112_f2d_320 7th cir a shareholder claimed a deduction for worthless_stock for the year in which the corporation liquidated the commissioner denied the deduction on the grounds that the stock had become worthless in a prior year the court concluded that stock is worthless when it has neither liquidating value nor potential future value thus the court concluded that the stock became worthless in a prior year and denied the taxpayer’s deduction for the year in which the deduction was claimed in the event of a corporate_liquidation the stock of the corporation is worthless if the shareholders do not receive payment for their stock see 87_tc_689 if a shareholder receives no payment for its stock in a liquidation of the corporation neither sec_331 nor sec_332 applies to the liquidation the fact that a shareholder receives no payment for its stock in a liquidation of the corporation demonstrates that such shareholder’s stock is worthless additionally the liquidation is an identifiable_event that fixes the loss with respect to the stock in revrul_2003_125 an eligible_entity treated as a corporation for u s federal_income_tax purposes elected to change its classification from a corporation to a disregarded_entity revrul_2003_125 held that the shareholders of such entity are allowed a worthless_security deduction under sec_165 if the fair_market_value of the assets postn-115587-16 of the entity including intangibles does not exceed the entity’s liabilities such that on the deemed liquidation of the entity the shareholder receives no payment on its stock sec_1_1502-80 provides that the internal_revenue_code or other law shall be applicable to the group to the extent that the regulations do not exclude its application to the extent not excluded other rules operate in addition and may be modified by these regulations sec_1_1502-80 provides that subsidiary stock is not treated as worthless under sec_165 until immediately before the earlier of the time i the stock is worthless within the meaning of sec_1_1502-19 or ii the subsidiary for any reason ceases to be a member of the group in general sec_1_1502-19 provides rules to determine when a member of a group is treated as disposing of a share of subsidiary stock sec_1 c iii treats a member of disposing of a share of subsidiary stock when the stock of the subsidiary is worthless and provides three different measures to determine worthlessness a substantially_all of s’s assets are treated as disposed of abandoned or destroyed for federal_income_tax purposes eg under sec_165 or sec_1_1502-80 or if s’s asset is stock of a lower-tier member the stock is treated of as disposed of under sec_1_1502-19 an asset of s is not considered to be disposed of or abandoned to the extent the disposition is in complete_liquidation of s or is in exchange for consideration other than relief from indebtedness b an indebtedness of s is discharged if any part of the amount discharged is not included in gross_income and is not treated as tax-exempt_income under sec_1_1502-32 c a member takes into account a deduction or loss for the uncollectability of an indebtedness of s and the deduction or loss is not matched in the same tax_year by s’s taking into account a corresponding amount of income or gain from the indebtedness in determining consolidated_taxable_income sec_1_1502-32 provides that excluded cancellation_of_indebtedness_income is treated as tax-exempt_income only to the extent the discharge is applied to reduce tax_attributes attributable to any member of the group under sec_108 sec_1017 or sec_1_1502-28 however if s is treated as realizing excluded cancellation_of_indebtedness_income pursuant to sec_1_1502-28 relating to certain look-through rules s shall not be treated as realizing excluded cancellation_of_indebtedness_income for purposes of the preceding sentence postn-115587-16 sec_108 provides that except as provided in regulations for purposes of determining the income of the debtor from discharge_of_indebtedness if a debtor_corporation acquires its indebtedness from a shareholder as a contribution_to_capital a sec_118 shall not apply but b such corporation shall be treated as having satisfied the indebtedness with an amount of money equal to the shareholder’s adjusted_basis in the indebtedness sec_1_61-12 provides that an issuer realizes income from the cancellation of indebtedness upon the repurchase of a debt_instrument for an amount less than its adjusted_issue_price within the meaning of sec_1_1275-1 the amount of the discharge_of_indebtedness income is equal to the excess of the adjusted_issue_price over the repurchase price for purposes of sec_1_61-12 the term repurchase includes the retirement of a debt_instrument the conversion of a debt_instrument into the stock of the issuer and the exchange of a newly-issued debt_instrument for an existing debt_instrument sec_1_61-12 analysis as noted above we assume for purposes of this memorandum that the sub stock was worthless for sec_165 purposes as of the end of year and at all times during the years at issue however because sub is a member of the taxpayer’s consolidated_group sec_1_1502-80 defers the deduction of taxpayer’s loss on the worthlessness of the sub stock until one of four identifiable events occurs sec_1_1502-80 and ii the four identifiable events are the three events identified in sec_1_1502-19 or sub’s ceasing to be a member of the taxpayer’s group for any reason in this case none of the identifiable events in sec_1_1502-19 are applicable while sub disposed of subsidiaries and non-core lines of business substantially_all of sub’s assets were not treated as disposed of abandoned or destroyed for federal_income_tax purposes thus sec_1_1502-19 is inapplicable similarly sec_1_1502-19 is inapplicable because no member of the taxpayer’s group has taken a deduction or loss on the uncollectability of the debt of sub sec_1_1502-19 is inapplicable because fsub’s contribution of the sub indebtedness to capital under sec_108 did not produce cancellation_of_indebtedness_income under sec_108 sub is treated as satisfying the debt with cash in the amount of fsub’s basis in the debt from the information provided there is no indication that any event occurred that would cause fsub’s basis in the sub debt to be different from the adjusted_issue_price of the debt because the adjusted_issue_price of the debt and fsub’s basis in the debt are equal sub will not recognize postn-115587-16 any cancellation_of_indebtedness_income upon the contribution of the debt sec_1_61-12 as a result the only identifiable_event that could trigger the taxpayer’s loss on its sub stock is the change in classification of sub in year as noted above we assume that the taxpayer’s loss on its sub stock was realized prior to the end of year when the sub stock became worthless and that sec_1_1502-80 deferred such loss the change in classification of sub from a corporation to an entity disregarded as separate from the taxpayer in year caused sub to cease to be a member of the taxpayer’s consolidated_group and as such sec_1_1502-80 permits the taxpayer to recognize its loss on the sub stock in year see also revrul_2003_125 in conclusion we assume that the sub stock held by the taxpayer is worthless as of the end of year and at all times during the years at issue however sec_1_1502-80 deferred the taxpayer’s deduction of the loss on the sub stock until the earliest of one of four identifiable triggering events occur the only triggering event to occur was the taxpayer’s election to change the classification of sub from a corporation to an entity disregarded as separate from the taxpayer the change in classification in year caused sub to cease to be a member of the taxpayer’s consolidated_group and as such permits the taxpayer to recognize its loss on the sub stock in year sec_1_1502-80 this writing may contain privileged information any unauthorized disclosure of this writing may undermine our ability to protect the privileged information if disclosure is determined to be necessary please contact this office for our views please call if you have any further questions ___________________________ gerald b fleming acting branch chief branch office of associate chief_counsel corporate we note that because sub has tax_attributes were the contribution of debt to capital to have produced cancellation_of_indebtedness_income i such income would have been excluded from sub’s income under sec_108 insolvency ii because the income would have been excluded from sub’s income sub would have been required to reduce attributes under sec_108 and iii because the excluded cancellation_of_indebtedness_income would have reduced sub’s attributes such income would have been treated as tax-exempt_income under sec_1_1502-32