internal_revenue_service department of the treasury number release date index number 468a washington dc person to contact telephone number refer reply to cc psi 6-plr-116484-01 date date legend buyer seller seller seller seller seller seller seller seller seller seller seller seller plant state commission a plr-116484-01 b c d e f g h i j k l m n o p q r s this letter responds to your request dated date and subsequent correspondence on behalf of seller that we rule on certain tax consequences of the sale of the plants from sellers to buyer as set forth below you have requested rulings regarding the tax consequences under sec_468a of the internal_revenue_code to the sellers’ qualified nuclear decommissioning funds as well as rulings regarding the proper realization and recognition of gain and loss on the sale of the plant and the proper allocation_of_basis you have represented the following facts and information relating to the ruling_request the sellers are unregulated tax-exempt municipal utilities and utilities regulated by various state public_utility commissions and the federal energy regulatory commission ferc as a result of deregulation encouraged by the state public_utility commissions and the ferc the sellers are in the process of withdrawing from the electric power generation business and intend to sell the plant and related assets to the buyer each seller owns as tenant-in-common a fee simple ownership_interest in one or more of the plant’s units and facilities and assets associated with the plant seller sec_1 and are members of the same consolidated_group seller owns an a percent interest in each of unit and unit and a c percent interest in unit seller owns a b percent interest in each of unit and unit and a d percent interest in unit seller sec_3 and own respectively f h i l m e g k and j percent of unit seller operates all three units of the plant but does not have an ownership_interest plr-116484-01 in any of the units seller owns some assets associated with the plant that will be sold to the buyer pursuant to several sales agreements seller sec_1 and maintain nuclear decommissioning funds that qualify under sec_468a each of the sellers except seller maintain nonqualified nuclear decommissioning funds for each of the units of the plant which are trusts under the laws of state and which are considered grantor trusts under sections the three units of the plant are generally managed on a site-wide basis they share functions such as chemistry corrective action programs training warehousing contract management communication business services facilities management and engineering plant procedures such as security have been managed collectively for all three units the plant site is surrounded by a single security fence the only significant functions that take place on a unit-by-unit basis are the operational functions that take place in the control rooms this is necessary because of the technical differences between the units in carrying out the sellers’ divestiture plan the commission instructed the auction agent to solicit bids for each unit individually and for the three units on a consolidated basis in order to assure that the maximum value was realized however all bids submitted in the auction including buyer’s bid were bids for all three units together no interested_party bid on any of the units separately seller believed that the sellers interests were best served by including unit with unit sec_2 and in the sale the number of common facilities common service requirements and unit interdependencies would make ownership of unit by an unaffiliated entity undesirable from a management and safety standpoint for example unit sec_1 and share a number of common walls which are mutually dependent for resistance to seismic events therefore the continued structural integrity of unit necessitating a delay in the dismantling of unit until unit sec_2 and are dismantled is essential to unit 2's design and license compliance similarly control_over unit by the owner of unit sec_2 and is important because the spent nuclear fuel stored in unit could present a hazard if mishandled common ownership of the three units also is important for security reasons because there is no practical way to construct an internal barrier within the shared security area to separate_unit from unit sec_2 and finally ownership of all three units would allow a site-wide decommissioning and spent fuel storage strategy that will provide economies of scale and greater assurances of adequacy of decommissioning funding pursuant to several agreements dated n the sellers will transfer to the buyer all the assets of the plant including all the assets in the qualified and nonqualified nuclear decommissioning funds maintained by the various sellers the buyer will hold both the qualified and nonqualified decommissioning funds solely for the purpose of decommissioning the plant the funds will be under the general supervision of the ferc and the nuclear regulatory commission nrc the buyer will not make plr-116484-01 additional contributions to the qualified nuclear decommissioning funds unless permitted by future legislative changes to sec_468a any funds that exceed the amount necessary to satisfy all decommissioning liabilities will be distributed to the buyer the buyer will assume liabilities associated with the plant including decommissioning and other environmental liabilities unit of the plant is currently being decommissioned and is not an operating asset in the hands of the sellers and will not be an operating asset in the hand of the buyer the buyer will pay the sellers o p and q respectively for unit sec_1 and in addition the buyer will pay r and s respectively for nuclear fuel attributable to unit sec_2 and sellers and buyer represent that they will treat the transaction as an asset purchase for tax purposes subject_to sec_1060 apart from the purchase and sale agreements as a result of prior legal actions seller sec_1 and entered into settlement agreements with certain of the other owners of unit to allocate on a non-pro-rata basis the cash consideration received by the other owners at the time of the sale and the amount that the other owners must contribute to their respective decommissioning trust funds at the time of the sale requested ruling the sellers’ qualified nuclear decommissioning funds will not be disqualified on the date of closing when the assets in the funds are transferred to the buyer’s qualified nuclear decommissioning funds requested ruling the sellers’ qualified nuclear decommissioning funds will not recognize gain_or_loss upon the transfer of their assets at closing to the buyer’s qualified nuclear decommissioning funds requested ruling the sellers will not recognize income attributable to the assets in the qualified nuclear decommissioning funds upon the transfer of the assets at closing to the buyer’s qualified nuclear decommissioning funds requested ruling the buyer’s qualified nuclear decommissioning funds established to hold the assets transferred from the sellers’ qualified nuclear decommissioning funds will be treated as a qualified nuclear decommissioning fund under sec_468a requested ruling neither the buyer nor the buyer’s qualified nuclear decommissioning funds will recognize gain_or_loss or otherwise take any income_or_deduction into account by reason of the transfer of the assets from the sellers’ qualified nuclear decommissioning funds to the buyer’s qualified nuclear decommissioning funds and after closing the buyer’s qualified nuclear decommissioning funds will retain the same basis in the assets received as the sellers’ qualified nuclear decommissioning funds had prior to closing sec_468a provides that a taxpayer may elect to deduct payments made to a nuclear decommissioning reserve fund the qualified_fund sec_468a limits the annual deduction of the electing taxpayer to the lesser_of the ruling_amount or the amount of decommissioning costs included in the electing taxpayer’s cost of service for ratemaking purposes for the taxable_year sec_468a provides that the ruling_amount means the amount determined plr-116484-01 by the service to be necessary to a fund that portion of the nuclear decommissioning cost with respect to the nuclear power plant that bears the same ratio to the total nuclear decommissioning costs with respect to such nuclear power plant as the period for which the fund is in effect bears to the estimated_useful_life of the nuclear power plant and b prevent any excessive funding of such costs or the funding of such costs at a rate more rapid than level_funding sec_468a provides that the rate_of_tax on the income of a qualified_fund is percent sec_468a provides in pertinent part that the assets in a qualified_fund shall be used exclusively for satisfying the liability of any taxpayer contributing to the qualified_fund sec_1_468a-1 of the federal_income_tax regulations provides that an eligible_taxpayer is a taxpayer that possesses a qualifying interest in a nuclear power plant sec_1_468a-1 provides that a qualifying interest is a direct ownership_interest or a leasehold interest meeting certain additional requirements sec_1_468a-1 provides in part that a nuclear power plant is any nuclear power reactor that is used predominantly in the trade_or_business of the furnishing or sale of electric energy if the rates for such furnishing or sale have been established or approved by a public_utility commission sec_1_468a-5 sets out the qualification requirements for nuclear decommissioning funds it provides in part that a qualified_fund must be established and maintained pursuant to an arrangement that qualifies as a_trust under state law an electing taxpayer can establish and maintain only one qualified_fund for each nuclear power plant sec_1_468a-5 provides that if at any time during the taxable_year a nuclear decommissioning fund does not satisfy the requirements of sec_1_468a-5 the service may disqualify all or a portion of the fund as of the date that the fund does not satisfy the requirements sec_1_468a-5 provides that if a qualified_fund is disqualified the fair_market_value with certain adjustments of the assets in the fund is deemed to be distributed to the electing taxpayer and included in that taxpayer’s gross_income for the taxable_year sec_1_468a-6 generally provides rules for the transfer of an interest in a nuclear power plant and transfer of the qualified_fund where after the transfer the transferee is an eligible_taxpayer under sec_1_468a-6 the service may treat any disposition of an interest in a nuclear power plant occurring after date as satisfying the requirements of the regulations if the service determines that such treatment is necessary or appropriate to carry out the purposes of sec_468a under the specific facts herein the service will exercise its discretion to treat this sale under sec_1_468a-6 as a disposition qualifying under the general provisions of sec_1_468a-6 this exercise of discretion is specifically based on the continued general supervision of the qualified_fund by the nuclear regulatory agency and the federal energy regulatory commission this exercise of discretion however applies to the provisions of except those outlined in 468a-6 e with respect to the plr-116484-01 calculation of a schedule of ruling amounts subsequent to a sale thus under sec_1_468a-6 the qualified nuclear decommissioning fund of the sellers will not be disqualified upon the sale when the assets are transferred to the buyer’s qualified funds and those funds holding the transferred qualified assets will be treated as qualified funds of the buyer sec_1_468a-6 provides that neither a transferor nor its fund will recognize gain_or_loss or otherwise take any income_or_deduction into account by reason of the transfer of the assets from a transferor’s qualified_fund to a transferee’s qualified_fund thus the sellers will not recognize gain_or_loss or otherwise take any income_or_deduction into account by reason of the transfer of the sellers’ qualified funds assets to the buyer’s qualified funds similarly sec_1_468a-6 provides that neither a transferee nor its fund will recognize gain_or_loss or otherwise take any income_or_deduction into account by reason of the transfer of the assets from a transferor’s qualified_fund to a transferee’s qualified_fund thus the buyer will not recognize gain_or_loss or otherwise take any income_or_deduction into account by reason of the transfer of the sellers’ qualified funds assets to the buyer’s qualified funds finally sec_1_468a-6 provides that transfers of assets of a qualified_fund to which sec_1_468a-6 applies do not affect basis accordingly under sec_1_468a-6 the buyer’s qualified funds will have a basis in their assets that is the same as the basis of those assets in the qualified funds of the sellers immediately before the sale thus the buyer’s qualified funds will after the sale have a carryover_basis in the assets after the sale requested ruling each seller’s gain_or_loss on the sale of the plant and its associated assets other than the qualified nuclear decommissioning funds will be the difference between such seller’s basis in such assets and its amount_realized sec_1001 provides that a taxpayer’s gain from the sale of property is the excess of the amount_realized over the taxpayer’s adjusted_basis provided in sec_1011 for determining gain and that the taxpayer’s loss from the sale of property is the excess of the taxpayer’s adjusted_basis provided in sec_1011 for determining loss over the amount_realized sec_1060 provides that in the case of an applicable_asset_acquisition the consideration received shall be allocated among the acquired assets in the same manner as amounts are allocated to assets under sec_338 sec_1 a provides that in the case of an applicable_asset_acquisition sellers and purchasers must allocate the consideration under the residual_method as described in sec_1_338-6 and sec_1_338-7 in order to determine respectively the amount_realized from and the basis in each of the transferred assets sec_1060 defines the term applicable_asset_acquisition as the transfer of assets constituting a trade_or_business if the acquirer’s basis in the transferred assets is plr-116484-01 determined wholly by reference to the consideration paid for such assets sec_1_1060-1 defines a seller’s consideration as the amount in the aggregate realized from selling the assets in the applicable_asset_acquisition under sec_1001 sec_1060 provides no independent basis for determining the amount a taxpayer realizes on the sale of assets or the time such amount may be taken into account the amount_realized and the time such amount is taken into account are determined solely under generally applicable tax_accounting principles see sec_1001 the residual_method is based on a division of assets into seven classes class i generally consisting of cash and general deposit accounts held in banks savings and loan associations and other depository institutions class ii generally consisting of actively_traded personal_property like u s government securities and publicly traded stock but also including certificates of deposit and foreign_currency even if they are not actively_traded personal_property class iii most debt instruments including receivables and assets that the taxpayer marks to market at least annually for federal tax purposes class iv stock_in_trade of the taxpayer or other_property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable_year or property held by the taxpayer primarily_for_sale_to_customers in the ordinary course of its trade_or_business class v all assets other than class i ii iii iv vi and vii assets class vi all sec_197 intangibles as defined in sec_197 except goodwill and going_concern_value and class vii goodwill and going_concern_value whether or not it qualifies as a sec_197 intangible sec_1_338-6 and sec_1_338-6 consideration is first reduced by the amount of class_i_assets the remaining consideration is then allocated among the class_ii_assets pro_rata to the extent of their fair_market_value then among the class_iii_assets pro_rata to the extent of their fair_market_value then among the class_iv_assets pro_rata to the extent of their fair_market_value then among the class_v_assets pro_rata to the extent of their fair_market_value then among the class_vi_assets pro_rata to the extent of their fair_market_value and finally any remaining consideration is allocated to the class_vii_assets sec_1_1060-1 sec_1_338-6 and sec_1_338-6 the following example illustrates the operation of sec_1060 on date1 an applicable_asset_acquisition is made the assets sold consist of class_i_assets in the amount of dollar_figure class_ii_assets with a fair_market_value of dollar_figure and a basis in the hands of the seller of dollar_figure class_iii_assets with a fair_market_value of dollar_figure and a basis of dollar_figure class_iv_assets with a fair_market_value of dollar_figure and a basis of dollar_figure class_v_assets with fair_market_value of dollar_figure and a basis of dollar_figure and class_vi_assets with a fair_market_value of dollar_figure and a basis of dollar_figure the consideration consists of dollar_figure cash and an assumed liability of dollar_figure that under applicable tax_accounting principles is taken into account at the time of the applicable_asset_acquisition the consideration will be first reduced by dollar_figure the amount of class_i_assets plr-116484-01 the remaining consideration will be allocated as follows dollar_figure to class_ii_assets pro_rata according to fair_market_value resulting in a dollar_figure gain dollar_figure to the class_iii_assets pro_rata according to fair_market_value resulting in no gain_or_loss dollar_figure to the class_iv_assets pro_rata according to the fair_market_value resulting in a dollar_figure gain dollar_figure to the class_v_assets pro_rata according to the fair_market_value resulting in no gain_or_loss dollar_figure to the class_vi_assets pro_rata according to the fair_market_value resulting in a dollar_figure gain and the remaining dollar_figure to the class_vii_assets pro_rata according to the fair_market_value resulting in a dollar_figure gain the character of the amounts of gain_or_loss recognized by the seller as well as any applicable holding periods is determined by the nature of the underlying assets sec_1_1060-1 sec_1_1060-1 and sec_1_338-6 if under general tax principles there is a subsequent adjustment to the consideration that amount is allocated in a manner that produces the same allocation that would have been made at the time of the acquisition had such amount been paid_or_incurred on the acquisition_date sec_1_1060-1 sec_1_1060-1 and sec_1 with respect to the qualified nuclear decommissioning funds relating to the plant the federal tax treatment of the transaction is determined exclusively under sec_468a and the regulations thereunder with respect to the plant equipment operating_assets and assets of the nonqualified nuclear decommissioning funds however these assets comprise a trade_or_business in the sellers’ hands and the basis buyer takes in those assets will be determined wholly by reference to the buyer’s consideration thus each seller’s transfer of its interest in the plant its equipment operating_assets and assets of that seller’s nonqualified funds to buyer or in the case of seller the sale of its assets to buyer in exchange for cash and the assumption of the decommissioning liability except to the extent funded by the qualified nuclear decommissioning funds is a separate applicable_asset_acquisition as defined in sec_1060 as such each seller’s federal tax treatment of the sales is determined under sec_1060 and the regulations thereunder thus each seller must allocate the consideration to the applicable assets in accordance with the provisions of sec_1060 and the regulations thereunder specifically each seller will first reduce the consideration received by the amount of class_i_assets it transfers in the transaction including any class_i_assets held in any nonqualified_fund it transfers to the extent a seller’s consideration exceeds the class_i_assets it transfers such excess will be allocated to the class_ii_assets it transfers then to the class_iii_assets it transfers then to the class_iv_assets it transfers then to the class_v_assets it transfers then to the class_vi_assets it transfers and finally to the class_vii_assets it transfers such consideration is allocated to each class of assets pro_rata according to the fair_market_value of those assets up to their total fair_market_value the character and other attributes of the amounts of gain and loss are determined by that of the underlying assets accordingly on the sale of the plant and each sellers’ interests in the assets in plr-116484-01 their respective decommissioning trust funds other than the assets in the sellers’ qualified nuclear decommissioning funds each sellers’ gain_or_loss on each transferred asset will be the difference between the basis of the asset and the amount_realized with respect to that asset as a result of the sale taking into account the allocation of consideration pursuant to sec_1060 and the corresponding regulations requested ruling each seller’s amount_realized on the sale of the plant and its associated assets will include the cash consideration received from the buyer and the amount of its liabilities assumed by the buyer including its liability to decommission the plant but reduced by the amount of such liability to be funded by such seller’s qualified nuclear decommissioning funds sec_1001 provides that a seller’s amount_realized from the sale of property is the sum of any money received plus the fair_market_value of the property other than money received sec_1_1001-2 provides that a seller’s amount_realized from the sale of property includes the amount of liabilities from which the seller is discharged as a result of the sale this may include debt and non-debt liabilities see 84_tc_1319 assumption of lessee’s repair liability was part of amount_realized on sale of leasehold as set forth with respect to requested ruling the decommissioning liability from which sellers will be relieved is fixed and determinable as owners and operators of a nuclear plant sellers are required_by_law to provide for eventual decommissioning see cfr sec_50 accordingly each seller's amount_realized on the sale of its interests in the plant and associated assets not including the assets in the sellers' qualified nuclear decommissioning fund will include the cash consideration received by the seller as a result of the sale and the liabilities from which the seller is relieved as a result of the sale to the extent these liabilities are taken into account for federal_income_tax purposes the liabilities taken into account would include the appropriate amount of each seller's decommissioning liability not including any portion of the liability attributable to a seller's qualified nuclear decommissioning fund requested ruling each seller will be entitled to a deduction equal to the amount of its liability to decommission the plant expressly assumed by the buyer and included in the seller’s income in the year the liability is assumed reduced by the amount of the liability to be funded by such seller’s qualified nuclear decommissioning funds sec_1_446-1 provides that under an accrual_method of accounting a liability is incurred and generally taken into account for federal_income_tax purposes in the year in which all the events have occurred that establish the fact of the liability the amount of the liability can be determined with reasonable accuracy and economic_performance has occurred with respect to the liability sec_461 makes clear that generally the all_events_test is not treated as plr-116484-01 having been met any earlier than the taxable_year in which economic_performance has occurred with respect to a liability see also sec_1 a sec_461 provides that in the case of a liability that requires the taxpayer to provide services economic_performance occurs as the taxpayer provides the services sec_1_461-4 provides that economic_performance occurs with respect to such service liabilities as the taxpayer incurs costs in connection with the satisfaction of the liability sec_1_461-4 provides an exception to the general economic_performance rule for services where the taxpayer sells a trade_or_business where the purchaser expressly assumes a liability arising out of the taxpayer’s trade_or_business that the taxpayer but for the economic_performance requirement would have been entitled to incur as of the date of the sale economic_performance with respect to the liability occurs as the amount of the liability is properly included in the amount_realized on the sale by the taxpayer the first prong of the all_events_test requires that the fact of the liability be established at the time of the deduction this prong of the all_events_test is satisfied in the instant case here each of the sellers clearly has the obligation to decommission the plant the fact of the obligation arose many years ago at the time the sellers obtained their license to operate the plant see c f_r section dollar_figure and sec_72 requiring the operator of a nuclear power plant to decommission it moreover congress recognized the existence of the decommissioning liability when in it enacted sec_461 and sec_468a noting that g enerally under federal and state laws utilities that operate nuclear power plants are obligated to decommission the plants at the end of their useful lives h_r conf_rep no see also s prt no vol 98th cong 2d sess the second prong of the all_events_test requires the amount of the liability to be reasonably determinable see sec_1_461-1 this prong is also satisfied in the instant case the amount of the sellers’ decommissioning liability has been determined by experts in the nuclear decommissioning industry their calculations have been reviewed and accepted by both the nrc which is charged with ensuring that sufficient funds are available to decommission the plant and in some cases by ferc in addition there is also support in the code for finding that the amount of the decommissioning liability is reasonably determinable at the time of sale sec_468a generally permits a current deduction for a ruling_amount based on estimated future decommissioning expenses to the extent the decommissioning costs are sufficiently determinable to entitle the utility to a deduction under sec_468a it is reasonable to conclude that the costs must also be sufficiently determinable to satisfy the second prong of the all_events_test given that the two prongs of the all_events_test are satisfied economic_performance with respect to the decommissioning liability occurs as of the date of the plr-116484-01 - sale to the extent the liability is included in the sellers’ amount_realized at that time each of the sellers will be entitled to a deduction for the amount of its decommissioning liability associated with the plant expressly assumed by the buyer and included in that seller’s amount_realized requested ruling the buyer will not recognize any gain or otherwise take income into account by reason of the purchase of the plant and its associated assets except to the extent that the aggregate amount of cash and other class_i_assets received from all sellers exceeds the aggregate amount of consideration provided by the buyer to all the sellers generally a taxpayer does not realize income upon its purchase of a business’ assets even where those assets include cash or marketable_securities and in connection with the purchase the taxpayer assumes liabilities of the seller see 194_f2d_190 2d cir revrul_55_675 1955_2_cb_567 in this case buyer cannot acquire the plant without assuming the decommissioning liability which is inextricably associated with the ownership and operation of the plant and there is no indication that the transaction is other than a bona_fide purchase of the business and its associated assets and liabilities the exception to the general_rule set forth in revrul_71_450 1971_2_cb_78 does not apply in revrul_71_450 unlike the present situation the purchaser agreed to assume the prepaid subscription liability in return for a separate cash payment and the liability was not reflected in the sales_price of the business however we have determined that under the circumstances of this case the buyer must perform a separate allocation under sec_1060 for the assets received from each seller therefore we do not agree that the aggregate amount of class_i_assets received from all sellers should be compared to the aggregate consideration provided by the buyer to all sellers in determining whether income is recognized accordingly with respect to the acquisition of interests in the plant and its equipment and operating_assets and the assets in a nonqualified decommissioning fund from a particular seller buyer will not recognize income except to the extent the class_i_assets as defined in sec_1_338-6 it receives from that seller exceed its total cost determined under sec_1012 which will be the sum of its cash consideration and the amount of any other consideration it provides to that seller that is under applicable tax principles taken into account on the date of the applicable_asset_acquisition requested ruling the buyer will have a tax basis in the assets purchased including the assets in the buyer’s nonqualified nuclear decommissioning funds but excluding the assets in the buyer’s qualified nuclear decommissioning funds equal to the sum of the purchase_price and the assumed_liabilities and obligations that will be taken into account as liabilities for federal_income_tax purposes as of the closing date sec_1012 provides in part that the basis_of_property shall be the cost of such property buyer claims that its cost of acquiring the sellers’ interests in the plant and the related assets including the decommissioning funds includes the amount of the plr-116484-01 - assumed decommissioning liability buyer cites 331_us_1 and 194_f2d_190 as support for the proposition that for purposes of determining basis the cost of property generally includes assumed_liabilities to which the acquired property is subject_to the extent such liabilities can be accurately valued and are not contingent at the time of purchase since the buyer will pay cash and assume the liabilities and obligations of the sellers which includes the decommissioning liabilities in connection with the acquisition of the assets purchased its total cost of the assets purchased excluding the qualified nuclear decommissioning fund will equal the cash paid plus the liabilities and obligations assumed consequently its tax basis under sec_1012 equals the sum of the cash paid and the amount of the liabilities and obligations assumed the service however rejects including the amount of the future assumed decommissioning liability in the buyer’s cost_basis as of the closing the assumed decommissioning liability cannot be treated as incurred for any federal_income_tax purpose -- including basis -- until economic_performance occurs with respect to that liability the legislative_history underlying the enactment of sec_461 makes it clear that congress intended to exclude an item from being taken into account for tax purposes until economic_performance occurs this treatment applies to capital and well as non-capital transactions h_r rep no pt 98th cong 2d sess s prt no vol 98th cong 2d sess despite criticism from some commentators that the service lacks authority to apply the economic_performance rules broadly enough to include the calculation of basis and cost_of_goods_sold the service explicitly stated in the preamble to the final regulations implementing sec_461 that the service and treasury believe the intended scope of the statutory provision is indeed broad enough to apply in this manner preamble to t d fed reg date c b consistent with this position the service amended the regulations under sec_446 to clarify that a liability is incurred and generally is taken into account for federal_income_tax purposes in the taxable_year in which the all_events_test is satisfied and economic_performance has occurred with respect to the item sec_1 c ii a the regulations further clarify that applicable provisions of the code the regulations and other guidance published by the secretary prescribe the manner in which a liability that has been incurred is taken into account and specifically cite to the capitalization provisions of sec_263 as an example of a code provision subordinate to the economic_performance requirement specifically the regulations state for example an amount that a taxpayer expends or will expend for capital improvements to property must be incurred before the taxpayer may take the amount into account in computing its basis in the property sec_1_446-1 thus critical to determining whether the buyer is entitled to treat the future decommissioning liability as a component of its cost_basis in the purchased assets at the time of the closing is deciding whether the liability will be incurred for tax purposes as of the closing it will not economic_performance does not occur with respect to a service liability such as the decommissioning obligation until and to the extent that costs plr-116484-01 - are incurred in satisfaction of that liability sec_1_461-4 because the buyer will not have performed any services relating to the decommissioning liability at the time of the plant’s purchase economic_performance will not have occurred and the liability will not have been incurred at that time for any purpose under the internal_revenue_code including the cost_basis provisions of sec_1012 as indicated above a particular seller’s transfer of its interest in the plant its accordingly we rule that on the acquisition_date the buyer’s basis in the assets equipment operating_assets and assets of that seller’s nonqualified decommissioning funds to buyer or in the case of seller the sale of its assets to buyer in exchange for cash and the assumption of the decommissioning liability except to the extent funded by the qualified nuclear decommissioning funds is a separate applicable_asset_acquisition as defined in sec_1060 as such the buyer’s federal tax treatment of these acquisitions is determined under sec_1060 and the regulations thereunder acquired from a particular seller must be determined by allocating its cost ie the consideration provided by buyer on the acquisition_date allocable to that seller which includes the allocable portion of the cash but not the assumption of any future decommissioning liability among the assets acquired from that seller including the assets from that seller’s nonqualified decommissioning fund in accordance with the provisions of sec_1060 and the regulations thereunder specifically buyer will first reduce its consideration by the amount of the class_i_assets it receives in the transaction with that seller to the extent the class_i_assets received exceed the consideration buyer provides buyer will recognize income to the extent buyer’s consideration exceeds the class_i_assets it receives such excess will be allocated to the class_ii_assets it receives from that seller pro_rata according to the fair_market_value of those assets up to their total fair_market_value then among the class_iii_assets it receives from that seller pro_rata to the extent of their fair_market_value then among the class_iv_assets it receives from that seller pro_rata to the extent of their fair_market_value then among the class_v_assets it receives from that seller pro_rata to the extent of their fair_market_value then among the class_vi_assets it receives from that seller pro_rata to the extent of their fair_market_value and finally any remaining consideration is allocated to the class_vii_assets it receives from that seller when and to the extent additional_amounts are paid_or_incurred for the assets acquired in the applicable asset acquisitions eg when and to the extent a nonqualified_fund pays or incurs future decommissioning expenses such amounts will be taken into account as increases to the buyer’s consideration and allocated in the same manner and subject_to the same conditions as though they were paid_or_incurred on the acquisition_date sec_1_1060-1 sec_1_1060-1 sec_1_338-6 and sec_1_338-7 requested ruling the buyer’s nonqualified nuclear decommissioning funds will be treated as grantor trusts under section and the buyer will be treated as the grantor of such funds sec_671 provides that where it is specified in sec_673 through that the grantor or another person shall be treated as the owner of any portion of a_trust there shall be included in computing the taxable_income and credits of that person plr-116484-01 - those items of income deduction and credits against tax of the trust which are attributable to that portion of the trust to the extent that such items would be taken into account in computing taxable_income or credits against the tax of an individual sec_1_671-2 provides that for purposes of part i of subchapter_j chapter of the internal_revenue_code a grantor includes any person to the extent such person either creates a_trust or directly or indirectly makes a gratuitous transfer within the meaning of sec_1_671-2 of property to a_trust for purposes of sec_1_671-2 the term property includes cash sec_1_671-2 provides that a gratuitous transfer is any transfer other than a transfer for fair_market_value sec_1_671-2 provides that for purposes of sec_1_671-2 a transfer is for fair_market_value only to the extent of the value of property received from the trust services rendered by the trust or the right to use property of the trust sec_677 provides that the grantor shall be treated as the owner of any portion of a_trust whether or not he is treated as such under sec_674 whose income without the approval or consent of any adverse_party is or in the discretion of the grantor or a nonadverse_party or both may be distributed to the grantor or held or accumulated for future distribution to the grantor sec_1_677_a_-1 provides that under sec_677 a grantor is in general treated as the owner of a portion of a_trust whose income is or in the discretion of the grantor or a nonadverse_party or both may be applied in discharge of a legal_obligation of the grantor because buyer is treated as purchasing the assets of sellers’ nonqualified funds for federal_income_tax purposes buyer is treated as contributing those assets as grantor to the buyer’s nonqualified decommissioning funds all income as well as principal of the buyer’s nonqualified decommissioning funds is held to satisfy buyer’s legal_obligation to decommission the plant and upon completion of the decommissioning any remaining assets will be distributed to buyer accordingly buyer is treated as the owner of the entire buyer’s nonqualified decommissioning funds under sec_677 and sec_1_677_a_-1 buyer shall include in computing its taxable_income and credits all items of income deduction and credits against tax of the buyer’s nonqualified decommissioning funds to the extent that such items would be taken into account in computing taxable_income or credits against the tax of buyer this letter_ruling is directed only to the taxpayer that requested it seller sec_6110 provides that this ruling may not be used or cited as precedent except as specifically determined above no opinion is expressed or implied concerning the federal_income_tax consequences of the transaction described above in particular no opinion is expressed or implied regarding the effect of the settlement agreements between seller sec_1 and and certain other of the sellers plr-116484-01 - in accordance with the powers of attorney the original of this letter is being sent to the authorized representative of seller4 in accordance with the powers of attorney a copy is being sent to seller and we are sending an additional copy of this ruling letter to your additional authorized representative we are also sending a copy of this letter to the appropriate director of the large_and_mid-size_business_division sincerely charles b ramsey chief branch office of associate chief_counsel passthroughs and special industries


internal_revenue_service department of the treasury number release date index number 1362-dollar_figure washington dc person to contact telephone number refer reply to cc psi b01- plr-161670-01 date dec legend x date state this letter responds to your letter submitted on behalf of x dated date requesting relief under sec_1362 of the internal_revenue_code facts x was incorporated under state law on date the shareholders of x intended that x elect to be treated as an s_corporation effective date however the election to be treated as an s_corporation was not timely filed law and analysis sec_1362 of the code provides that a small_business_corporation can elect to be treated as an s_corporation sec_1362 of the code provides guidance on when the s election becomes effective if an s election is made within the first two and one-half months of a corporation’s taxable_year then that corporation will be treated as an s_corporation for the year in which the election was made if the corporation makes an election after the first two and one-half months of a corporation’s taxable_year then the corporation will generally not be treated as an s_corporation until the following taxable_year sec_1362 of the code provides that if no election is made pursuant to sec_1362 or if the election is made after the date prescribed for making such an election and the secretary determined reasonable_cause existed for the failure to timely make the election then the secretary can treat such an election as being timely made for that taxable_year and effective as of the first day of that taxable_year x did not file a timely election to be treated as a s_corporation under sec_1362 x has however established reasonable_cause for not making a timely s election therefore x is entitled to relief under section b conclusion based solely on the facts submitted and representations made and provided that x otherwise qualifies as a subchapter_s_corporation we conclude that x will be recognized as an s_corporation effective date an original form_2553 along with a copy of this letter much be forwarded to the relevant service_center within sixty days from the date of this letter except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer s requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to the taxpayer respresentative sincerely dianna k miosi branch chief branch office of the associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes


department of the treasury internal_revenue_service tege eo examinations mail stop dal commerce st dallas texas tax_exempt_and_government_entities_division number release date date date tax_year ending taxpayer_identification_number person to contact employee identification_number employee telephone number vil certified mail - return receipt dear this is a final_determination that you do not qualify for exemption from federal_income_tax under internal_revenue_code the code sec_501 as an organization described in code sec_501 effective october 20xx your determination_letter dated august 19xx is revoked the revocation of your exempt status was made for the following reason s organizations described in sec_501 of the internal_revenue_code and exempt from tax under sec_501 must be both organized and operated exclusively for exempt purposes you have failed to establish that you are operated exclusively for exempt purposes substantially_all your activities are directed primarily at the promotion of the thus further the common business purposes of your members profession and contributions to your organization are no longer deductible under sec_170 after october 20xx organizations that are not exempt under sec_501 generally are required to file federal_income_tax returns and pay tax where applicable for further instructions forms and information please visit www irs gov if you decide to contest this determination you may file an action for declaratory_judgment under the provisions of sec_7428 of the code in one of the following three venues united_states tax_court the united_states court of federal claims or the united_states district_court for the district of columbia a petition or complaint in one of these three courts must be filed within days from the date this determination_letter was mailed to you please contact the clerk of the appropriate court for rules and the appropriate forms for filing petitions for declaratory_judgment by referring to the enclosed publication you may write to the courts at the following addresses united_states tax_court second street n w washington d c u s court of federal claims madison place n w washington d c u s district_court for the district of columbia constitution ave n w washington d c processing of income_tax returns and assessments of any taxes due will not be delayed if you file a petition for declaratory_judgment under sec_7428 of the internal_revenue_code the taxpayer_advocate_service tas is an independent organization within the irs that can help protect your taxpayer rights tas can offer you help if your tax problem is causing a hardship or you’ve tried but haven’t been able to resolve your problem with the irs f you qualify for tas assistance which is always free tas will do everything possible to help you visit www taxpayeradvocate irs gov or call if you have any questions about this letter please contact the person whose name and telephone number are shown in the heading of this letter sincerely maria hooke director eo examinations enclosure publication department of the treasury internal_revenue_service irs tax exempt and government entities exempt_organizations examinations date date taxpayer_identification_number form tax_year s ended person to contact employee id telephone fax manager's contact information employee id telephone fax response due_date certified mail - return receipt requested dear why you're receiving this letter we enclosed a copy of our audit report form 886-a explanation of items explaining that we propose to revoke your tax-exempt status as an organization described in intemal revenue code irc sec_501 c if you agree if you haven't already please sign the enclosed form_6018 consent to proposed action and retum it to the contact person shown at the top of this letter we'll issue a final adverse letter determining that you aren't an organization described in sec_501 for the periods above after we issue the final adverse determination_letter we'll announce that your organization is no longer eligible to receive tax deductible contributions under sec_170 if you disagree request a meeting or telephone conference with the manager shown at the top of this letter send any information you want us to consider file a protest with the irs appeals_office if you request a meeting with the manager or send additional information as stated in and above you'll still be able to file a protest with irs appeals_office after the meeting or after we consider the information the irs appeals_office is independent of the exempt_organizations division and resolves most disputes informally if you file a protest the auditing agent may ask you to letter rev catalog number 34809f sign a consent to extend the period of limitations for assessing tax this is to allow the irs appeals_office enough time to consider your case for your protest to be valid it must contain certain specific information including a statement of the facts applicable for specific information needed for a law and arguments in support of your position valid protest refer to publication how to appeal an irs determination on tax- exempt status fast track mediation ftm referred to in publication the examination process generally doesn't apply now that we've issued this letter request technical_advice from the office of associate chief_counsel tax exempt government entities if you feel the issue hasn't been addressed in published precedent or has been treated inconsistently by the irs if you're considering requesting technical_advice contact the person shown at the top of if you disagree with the technical_advice decision you will be able to appeal this letter to the irs appeals_office as explained above a decision made in a technical_advice_memorandum however generally is final and binding on appeals if we don't hear from you if you don't respond to this proposal within calendar days from the date of this letter we'll issue a final adverse determination_letter revproc_80_27 requires that in the event your tax-exempt status is revoked your group exemption will also be revoked if that occurs none of your subordinates will be able to rely on the group ruling for tax-exempt status you should notify each subordinate of this proposed action contacting the taxpayer_advocate office is a taxpayer right the taxpayer_advocate_service tas is an independent organization within the irs that can help protect your taxpayer rights tas can offer you help if your tax problem is causing a hardship or you've tried but haven't been able to resolve your problem with the irs if you qualify for tas assistance which is always free tas will do everything possible to help you visit www taxpayeradvocate irs gov or call for additional information you can get any of the forms and publications mentioned in this letter by visiting our website at www irs gov forms-pubs or by calling 800-tax-form if you have questions you can contact the person shown at the top of this letter enclosures form s 886-a 4621-a pub s sincerely - ee fon maria hooke director exempt_organizations examinations letter rev catalog number 34809f form 886a name of taxpayer department of the treasury internal_revenue_service explanation of items ein schedule no or exhibit year period ended december 20xx issue sec_1 whether continues to qualify for exemption under internal_revenue_code code sec_501 no for the reasons given below does not continue to qualify for exemption under code sec_501 what if is the effect on the group ruling determination the group ruling determination is automatically revoked for the reasons given below does below qualify for relief under code sec_7805 yes for the reasons stated facts you filed articles of incorporation in the state of 20xx you filed certificate with commonwealth of transact business in august 19xx on november state corporation commission to your former name was your current name is you were granted exemption in august 19xx under sec_501 of the internal_revenue_code code you are further described as a public charity under code sec_509 and sec_170 in october 19xx you were issued group exemption number gen recognizing your subordinate organizations referred to as regions under code sec_501 and sec_509 you currently consider yourself having four operating regions in addition to your own annual information_return you file a separate group return on behalf of your operating regions your articles of incorporation indicate you shall be organized exclusively for charitable religious educational and scientific purposes including for such purposes the making of distributions to organizations that qualify as exempt_organizations under sec_501 of the internal_revenue_code of or the corresponding provision of any future united_states internal revenue law your articles indicate no other purposes your constitution by-laws amended march 20xx indicate the purposes of the shall be to promote high standards of business practices and ethical conduct among its members to unite into one organization those persons whose form_886 a rev department of the treasury- internal_revenue_service page -1- form 886a department of the treasury internal_revenue_service name of taxpayer explanation of items ein schedule no or exhibit year period ended december 20xx to the students faculty staff and major responsibility is providing guests of their respective colleges and universities to provide for the collection dissemination and interchange of information among the members to foster a cooperative spirit with other college and university professional organizations to provide opportunities for training career development skill development and other forms of professional growth and to promote educational process to foster cooperation support and growth of the regional state and local associations of college institutions of higher education as members to promote education to foster international goodwill through cooperation and liaison with kindred associations throughout the world to represent the interests of college and university to maintain a high percentage of the as an asset to higher as a valid component of the total undertake any activities permitted by applicable law to local state and federal legislative bodies and agencies and to memberships are a joint national and regional membership the primary membership class is institutional with dues based on the number of full-time enrolled students at the institution the institution must be either a degree granting accredited college university or other type of post- secondary institution member institutions are represented by a designated full-time_employee from the institution or from a wholly-owned subsidiary of the institution member institutions can have more than one participant but each member institution gets only one vote at meetings other membership classes include non-voting business partners retirees and individual members in transit between member institutions the activities of the organization include a establish code of ethics and professional conduct for b aim towards instituting and enforcing industry standards for professionals c d develop through and pass a standardized examination of knowledge in key provide credentials to those professionals that meet eligibility criteria certification which is only available areas publish a quarterly industry magazine event coverage membership information and products and services available to members containing industry news e publish online buyer's guide tool to assist members procuring industry related products and services f sell advertising in magazine website and other publications form 886-a rev department of the treasury internal_revenue_service page -2- form 886a department of the treasury internal_revenue_service explanation of items name of taxpayer ein schedule no or exhibit year period ended december 20xx g offer direct-mail solicitation services in publications h i j k publish several monthly e-newsletters with current events professional development opportunities for members member news commentaries and industry specific articles produce videos and for member professional development maintain a social networking website for members the establish an on-line discounts to members advertising jobs at their institutions jobs internships and provide advocate for equal compensation in equivalent jobs across the industry m provide extensive on-line educational and networking opportunities for members through virtual roundtables on-line forums and webinars n sponsor national conference and provide administrative technical and financial support to four regional conferences compile maintain and provide a membership directory updated annually and only available to members in good standing p provide scholarships for members to attend programs q recognize outstanding achievement by individuals in the industry through national and regional awards program r coordinate withmember institutions and business partners to host seminars for higher learning for example and a s offer members free subscription to magazine an industry publication t contract to provide professional management and administrative services to an independent organization the activities listed in paragraphs a through t constitute substantially_all the organization's activities income is primarily from annual conferences membership dues management fees professional development and certifications journals publications and advertising and investments expenses include administration and personnel conferences program development and certifications board_of directors and leadership and publications form 886-a rev department of the treasury - internal_revenue_service page -3- form 886a department of the treasury internal_revenue_service explanation of items ein name of taxpayer the administrative file shows no indications the organization misrepresented its anticipated activities during the application process from 19xx to present the organization has requested relief under code sec_7805 activities have been consistent across years schedule no or exhibit year period ended december 20xx sec_501 of the code provides in relevant part exemption from federal_income_tax for corporations and any community chest fund or foundation organized and operated exclusively for religious charitable scientific literary or educational_purposes no part of the net_earnings of which inures to the benefit of any private_shareholder_or_individual sec_1_501_c_3_-1 of the income_tax regulations provides that in order to be exempt as an organization described in sec_501 an organization must be both organized and operated exclusively for one or more purposes specified in such section if an organization fails to meet either the organizational_test or the operational_test it is not exempt sec_1_501_c_3_-1 of the income_tax regulations explains that an organization will be regarded as operated exclusively for one or more exempt purposes only if it engages primarily in activities which accomplish one or more of such exempt purposes specified in sec_501 an organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt_purpose sec_1_501_c_3_-1 of the income_tax regulations states that an organization is not organized or operated exclusively for exempt purposes unless it serves a public rather than a private interest it is necessary for an organization to establish that it is not organized or operated for the benefit of private interests such as designated individuals the creator or his family shareholders of the organization or persons controlled directly or indirectly by such private interests sec_509 of the code excludes from the definition of private_foundation organizations described in clause iv of sec_170 of the code sec_170 of the code describes organizations that are organized and operated for the benefit of certain state and municipal colleges and universities and that normally receive a substantial part of their support exclusive of income received in the exercise or performance by such organization of its charitable educational or other purpose or function constituting the basis for its exemption under code sec_509 from the united_states or any state or any political_subdivision thereof or from direct or indirect_contributions from the general_public congress created sec_170 because in many instances state law prevents state-owned colleges or universities from receiving certain gifts or bequests many states require that gifts made directly to a state institution be placed in the general state treasury from which funds are appropriated by the legislature for state institutions therefore in order to encourage gift giving for_the_use_of state colleges and universities the deduction benefit available to donors to private colleges and universities was extended to certain funds organized form 886-a rev department of the treasury - internal_revenue_service page -4- form 886a name of taxpayer department of the treasury internal_revenue_service explanation of items schedule no or exhibit year period ended december 20xx ein and operated for state universities and colleges s rep no 87th cong 1st sess sec_1_170a-9 of the income_tax regulations provides that an organization is described in sec_170 of the code if it normally receives a substantial part of its support from the united_states or any state or political_subdivision thereof or from direct or indirect_contributions from the general_public or from a combination of two or more of these sources sec_501 of the code provides for the exemption from federal_income_tax of business_leagues not organized for profit and no part of the net_earnings of which inures to the benefit of any private_shareholder_or_individual sec_1_501_c_6_-1 of the income_tax regulations defines a business league as an association of persons having a common business_interest the purpose of which is to promote such common interest and not to engage in a regular business of a kind ordinarily carried on for profit revrul_71_504 1971_2_cb_231 date discusses a city medical society exempt under code sec_501 that primarily directs its activities to the promotion of the common business purposes of its members may not be reclassified as an educational or charitable_organization under codes sec_501 revrul_71_506 1971_2_cb_232 date discusses an engineering society formed to engage in scientific research in the areas of heating ventilating and air conditioning for the benefit of the general_public qualifies for exemption under code sec_501 revrul_71_505 1971_2_cb_232 date discusses a city bar association exempt under code sec_501 that primarily directs its activities to the promotion and protection of the practice of law may not be reclassified as an educational or charitable_organization exempt under code sec_501 revrul_73_567 1973_2_cb_178 january discusses a board formed by members of the medical profession to improve the quality of medical_care available to the public and to establish and maintain high standards of excellence in a particular medical specialty by examining and certifying physicians under the circumstances described the board promotes high professional standards although some public benefit may be derived from promoting high professional standards in a particular medical specialty the activities of the board are directed primarily to serving the interest of the medical profession under these circumstances the board is not organized and operated exclusively for charitable purposes see revrul_71_504 1971_2_cb_231 on the other hand since the activities of the board consist of certifying physicians who are thereafter authorized to hold themselves out to the public as specialists its purpose is to promote the common business_interest of the physicians department of the treasury - internal_revenue_service form 886-a rev page -5- schedule no or form 886a department of the treasury internal_revenue_service exhibit explanation of items name of taxpayer ein revrul_80_287 1980_2_cb_185 date discusses a nonprofit lawyer referral service that arranges at the request of any member of the public an initial half-hour appointment for a nominal charge with a lawyer whose name is on an approved list maintained by the organization any further contact between the lawyer and the client is arranged without the involvement of the organization the referral service is not exempt under sec_501 of the code but is exempt as a business league under code sec_501 year period ended december 20xx revproc_80_27 1980_1_cb_677 date sets forth procedures under which recognition of exemption from federal_income_tax under sec_501 of the internal_revenue_code may be obtained on a group basis for subordinate organizations affiliated with and under the general supervision or control of a central organization section of revproc_80_27 states if the central organization does not continue to qualify for exemption under sec_501 of the code the group_exemption_letter will cease to have effect in 326_us_279 ct_d c b the supreme court held that the presence of a single non-exempt purpose if substantial in nature will destroy a claim for exemption regardless of the number or importance of truly exempt purposes in 222_fsupp_151 e d wash the court held that even a small amount of private_inurement is fatal to a sec_501 exemption internal_revenue_code sec_7805 states the secretary may prescribe the extent if any to which any ruling including any judicial decision or any administrative determination other than by regulation relating to the internal revenue laws shall be applied without retroactive effect sec_301_7805-1 states the commissioner with the approval of the secretary may prescribe the extent if any to which any regulation or treasury_decision relating to the internal revenue laws shall be applied without retroactive effect the commissioner may prescribe the extent if any to which any ruling relating to the internal revenue laws issued by or pursuant to authorization from him shall be applied without retroactive effect revproc_2017_5 irb sec_1 provides procedures in relevant part to revocation or modification of determination letters this revenue_procedure provides guidance on the exhaustion of administrative remedies for purposes of declaratory_judgment under sec_7428 section dollar_figure provides that in certain cases an organization may seek relief from retroactive revocation or modification of a determination_letter under sec_7805 page -6- form 886a department of the treasury internal_revenue_service explanation of items name of taxpayer ein schedule no or exhibit year period ended december 20xx taxpayer's position see attached exhibit pages dated 20xx for complete taxpayer's position below is taxpayer's position summary excerpt from pages a summary was incorporated on june 19xx as a was recognized by the service as exempt under code sec_501 and at all times since being established has qualified as a publicly_supported_organization under code sec_509 the service granted under code sec_501 issued on september 19xx at all times since formation it has operated in accordance with the provisions of code sec_501 and corresponding treasury regulations a group exemption for its subordinate organizations not-for-profit corporation has provided educational_services to individuals who are involved in to higher education institutions has prepared and presented since its inception providing seminars and lectures and has hosted conferences all of which are open to the public that primarily focus on improving and developing the capabilities of professionals has also published a quarterly magazine that contains exclusively educational articles including items of interest and assistance to its members substantially_all of furtherance of may have engaged in activities for purposes other than those recognized in code sec_501 eg certification advertising those activities are insubstantial activities were conducted and continue to be conducted in educational_purposes to the extent that the report contends that 20xx based on the argument that substantially_all of exempt purposes set forth in code sec_501 but rather are primarily directed towards the promotion of the exempt status should be revoked effective as of january profession and the common business purposes of activities do not further members as discussed below the facts demonstrate that i recognized as exempt under code sec_501 ii substantially_all of are in furtherance of exempt educational_purposes pursuant to code sec_501 iii has been and continues to be recognized as exempt under code sec_501 for the tax period that ended december 20xx and accordingly iv tax-exempt status should not be revoked effective january 20xx is currently an organization activities kk kk the service's form 886-a p characterize sec_509 and sec_170 a iv having public charity status pursuant to code sec_509 form 886-a at p as having public charity status under code sections ‘ determination_letter and its 20x x form_990 each describe as page -7- form 886a department of the treasury internal_revenue_service explanation of items schedule no or exhibit name of taxpayer year period ended december 20xx ein government's position b a iv organizations described in sec_170 are endowment funds organized and operated in connection with state and municipal colleges and universities among other requirements sec_170 organizations must be organized and operated exclusively to receive hold invest and administer property must make expenditures to or for the benefit of a college or university which is an educational_organization which normally maintains a regular faculty and curriculum and normally has a regularly enrolled body of pupils or students in attendance at the place where its educational activities are carried on and must be an agency_or_instrumentality of a state or political_subdivision thereof or must be owned or operated by a state or political_subdivision thereof or by an agency_or_instrumentality of one or more states or political subdivisions thus the only organizations qualifying under sec_170 of the code are those with narrow powers to make expenditures on behalf of tax-exempt educational organizations and which are controlled by governmental entities neither your organizing document nor your activities qualify you as an organization described in code sec_170 c sec_1_501_c_3_-1 of the income_tax regulations provides that in order to be exempt as an organization described in sec_501 an organization must be both organized and operated exclusively for one or more purposes specified in such section if an organization fails to meet either the organizational_test or the operational_test it is not exempt in construing the meaning of the phrase exclusively for educational_purposes in 326_us_279 ct_d c b the supreme court of the united_states said this plainly means that the presence of a single non-educational purpose if substantial in nature will destroy exemption regardless of the number or importance of truly educational_purposes this rationale applies equally to any category of charitable purpose under sec_501 of the code you pass the organizational_test per you articles of incorporation however you are not operating exclusively for one or more exempt purposes under sec_501 while some of your activities are charitable or educational substantially_all your activities are directed primarily also see 222_fsupp_151 e d wash where the court held that even a small amount of private_inurement is fatal to a sec_501 exemption department of the treasury - internal_revenue_service form 886-a rev page -8- form_886 a department ofthe treasury internal revenue explanation of items service name of taxpayer ein schedule no or ed exhibit year period ended oecember31 20xx at the promotion of the purposes of your members as such you may qualify under code sec_501 profession and thus further the common business you are like the organizations in revenue rulings and which primarily direct their activities at the promotion of the common business interests of their members and are exempt under code sec_501 unlike the organization described in revrul_71_506 that is exempt under code sec_501 you are not engaged in activities for the benefit of the general_public you are like the organization in revrul_73_567 which discusses a board formed by members of the medical profession to improve the quality of medical_care available to the public and to establish and maintain high standards of excellence in a particular medical specialty although some public benefit may be derived from promoting high professional standards in a particular medical specialty the activities of the board are directed primarily to serving the interest of the medical profession the board is not organized and operated exclusively for charitable purposes however since the activities of the board consist of certifying physicians who are thereafter authorized to hold themselves out to the public as specialists its purpose is to promote the common business_interest of the physicians has engaged in activities outside the scope see revproc_80_27 which states that if a central organization no longer qualifies for exemption under code sec_501 the group_exemption_letter will cease to have effect you are also like the organization in revrul_80_287 a nonprofit lawyer referral service that arranges initial appointments with lawyers on an approved list the referral service is not exempt under sec_501 of the code but is exempt as a business league under code sec_501 government's response to taxpayer's position dated 20xx your position is that substantially_all of the organization's activities are conducted in furtherance of educational_purposes and to the extent of sec_501 those activities are insubstantial you say you are similar to the organization in revrul_68_504 1968_2_cb_211 which furnishes classrooms and employs professors to teach courses for university credit you also compare yourself to the organization in revrul_65_298 1965_2_cb_163 which describes a non-membership organization engaged in research investigation analysis and studies related to the human body and develops scientific methods of treatment to share with physicians and the public the service disagrees with this comparison while some of your activities are educational substantially al your activities are directed primarily at the promotion of the business purposes of your members your website copyright 20xx describes you as profession and thus further the common department of the treasury - internal_revenue_service form 886-a rev page -9- i departmentofthe treasury internal_revenue_service form_886 a schedule no or ed exhibit explanation of items name of taxpayer year period ended december 20xx ein ‘ founded in 19xx as the members must abide by a code of ethics you have developed you have a goal of instituting and enforcing industry standards you provide the only industry recognized certification in the field your members have access to networking websites and professional development opportunities on-line you have established an on-line career center for jobs you advocate for equal compensation in equivalent jobs across the industry you establish an online buyer's guide to assist members in procuring products and services you offer direct-mail solicitation services in achievements in the industry through national and regional awards publications you recognize outstanding conclusion qualifies for relief has operated as such would undertake and at all exemption under code sec_501 application_for exemption did not misstate or omit any material information the application accurately described the anticipated activities times since being granted exemption under code sec_7805 you are more similar to the organizations described in revenue rulings 1971_2_cb_231 1971_2_cb_232 1973_2_cb_178 and 1980_2_cb_185 while some public benefit is derived from your activities the organization is directed at primarily serving the promotion of the common business_interest of its members and does not qualify under code sec_501 revocation of b granted for all taxable years up until the issuance of a letter revoking its exempt status under code sec_501 is effective january 20xx with relief under code section group ruling determination ceases to be in effect qualifies for relief under sec_7805 department of the treasury - internal_revenue_service no longer qualifies for form 886-a rev page -10-


t c memo united_states tax_court james awad petitioner v commissioner of internal revenue respondent docket no 3755-14w filed date p provided information to the irs whistleblower office wo regarding individuals th and tw’s alleged failure to disclose their ownership interests in foreign bank accounts wo forwarded p’s information to the large business international division lb_i which declined to examine th and tw’s returns th died while lb_i was considering p’s information thereafter tw and her adult children filed voluntary disclosures with the criminal_investigation_division cid in which they reported income from a previously undisclosed account at the same foreign bank p had identified cid accepted the voluntary disclosures and forwarded them to the small_business self employed division sb_se for examination the sb_se examination resulted in the assessment of over dollar_figure million in income_tax accuracy-related_penalties and interest against th and tw in addition to a title_26 miscellaneous penalty although wo forwarded p’s information to sb_se the revenue_agent who conducted the examination denied using it wo also forwarded p’s information to sb se’s estate and gift_tax group e g which had selected th’s estate’s estate_tax_return for examination the revenue_agent who was conducting the examination asserted that p’s information was not relevant to his investigation thereafter wo issued a determination denying p’s claim for a whistleblower award held we need not decide the standard of review in this case because we would sustain r’s determination under either a de novo or an abuse_of_discretion standard of review held further because the administrative action taken by the irs against the taxpayers was not based on his information p is not entitled to a whistleblower award howard w gordon leticia vega and alyssa l razook wan for petitioner marianna lvovsky patricia p davis and john t arthur for respondent memorandum findings_of_fact and opinion vasquez judge pursuant to sec_7623 petitioner has appealed the internal revenue service’s irs denial of his claim for a nondiscretionary whistleblower award the issue for decision is whether petitioner is entitled to an award under sec_7623 findings_of_fact some of the facts have been stipulated and are so found the stipulation of facts and the attached exhibits are incorporated by this reference petitioner resided in new york when he filed his petition petitioner’s whistleblower claim on date petitioner filed form_211 application_for award for original information with the irs whistleblower office whistleblower office in the form_211 petitioner implicated taxpayer husband taxpayer wife and their three adult children taxpayer children collectively taxpayers as owners of undisclosed foreign bank accounts petitioner alleged that taxpayer husband was likely transferring millions of untaxed dollars to these accounts while petitioner provided the name of the bank he did not list any account numbers or give other identifying information about the alleged accounts the whistleblower office confirmed receipt of the form_211 and informed petitioner that his claim had been assigned to analyst nancy burcham 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 referral of whistleblower information to lb_i in date ms burcham forwarded petitioner’s information to the irs large_business_and_international_division lb_i the matter was assigned to lb_i examiner alan hymes mr hymes reviewed petitioner’s information and in date decided to accept the taxpayers’ returns as filed in a written_statement to the whistleblower office mr hymes wrote at this point there is not enough information to determine that this is a good case for the field petitioner did not provide any documentation to show that the account or accounts exist or that any money was transferred inexplicably lb_i allowed several months to pass before returning the case to the whistleblower office the administrative record indicates that ms burcham may not have received mr hymes’ written_statement until date over a year after lb_i had made its decision the taxpayers’ voluntary disclosure meanwhile taxpayer husband died in date in date the surviving taxpayers filed voluntary disclosures pertaining to a previously in an internal memorandum ms burcham stated the entire casefile sic was received in the whistleblower office a considerable time after the signing of mr hymes’ written_statement undisclosed account at the same foreign bank petitioner had identified to the whistleblower office the taxpayers’ voluntary disclosures included account information and amended returns reporting previously undisclosed income for tax years through cid accepted the taxpayers’ voluntary disclosures and forwarded their case file to the irs small_business_self-employed_division sb_se for examination the matter was assigned to sb_se revenue_agent ra thomas george ra george’s examination of the taxpayers’ voluntary disclosure submission began in date referral of whistleblower information to sb_se after learning that lb_i would not be examining the taxpayers’ returns ms burcham contemplated issuing a rejection letter to petitioner before doing so she performed additional research and discovered that sb_se was examining the irs criminal_investigation_division cid maintains a longstanding practice of voluntary disclosure whereby taxpayers can generally avoid criminal prosecution by disclosing their tax noncompliance to cid timely and completely see offshore_voluntary_disclosure_program frequently asked questions and answer sec_2014 q a-3 in date the irs launched the offshore_voluntary_disclosure_program ovdp a counterpart to this practice under which taxpayers who timely disclosed their ownership of unreported foreign bank accounts were eligible for reduced monetary penalties see id the extended deadline for participating in the ovdp was date id a second ovdp called the offshore_voluntary_disclosure_initiative was initiated on date and ran until date id a third open-ended ovdp began in id q a-1 there was no ovdp in effect during the taxpayers’ returns in connection with their voluntary disclosure consequently in date ms burcham forwarded petitioner’s information to sb_se to determine if any of petitioner’s information was used to assist in the exams being opened on the taxpayers after receiving petitioner’s information sb_se subject matter expert frank stamm contacted petitioner and arranged a telephone interview during the interview petitioner further explained the basis for his allegations against the taxpayers in an internal memorandum recounting the interview mr stamm wrote while he could not provide account numbers he did provide lists of shares owned in various foreign_corporations and properties owned in the us and abroad by the taxpayers mr stamm recommended that petitioner’s submission be sent to the field for association with the taxpayers’ ongoing audits petitioner’s information was forwarded to ra george thereafter ra george provided the whistleblower office with a written_statement indicating that the sole cause of the examination was the taxpayers’ voluntary disclosure he stated there has been no indication in the case files that petitioner’s information initiated the investigation or assisted to gather any offshore accounts in date taxpayer wife and an sb_se group manager signed a form_906 closing_agreement on final_determination covering specific matters closing_agreement the closing_agreement to which taxpayer wife and the estate of taxpayer husband were parties referenced the ovdp4 and stated that the taxpayers’ voluntary disclosure was made pursuant to that program in accordance therewith taxpayer wife and taxpayer husband’s estate agreed to pay a title_26 miscellaneous penalty in lieu of any other penalties that the irs may impose with respect to the offshore financial arrangements that were the subject of the voluntary disclosure additionally the irs adjusted taxpayer husband and taxpayer wife’s tax_liabilities for through assessing taxes penalties and interest in excess of dollar_figure million having reached an agreement with taxpayer wife and taxpayer husband’s estate ra george did not make any adjustments to the returns of the taxpayer children the examination of the taxpayers’ returns was officially closed in date meanwhile petitioner’s whistleblower claim remained open in or ms burcham left the whistleblower office and petitioner’s claim was reassigned to analyst kenneth chatham mr chatham reviewed the claim file and decided to email ra george for clarification regarding whether petitioner’ sec_4 see supra note information had been used during the examination in a subsequent telephone call ra george stated that he had relied exclusively on information provided by the taxpayers and that he had not used petitioner’s information referral of whistleblower information to sb_se estate and gift_tax in date mr chatham learned that sb se’s estate and gift_tax group e g had selected taxpayer husband’s estate’s estate_tax_return for examination mr chatham forwarded petitioner’s information to e g e g examiner james truman did not find petitioner’s information to be helpful mr truman provided the whistleblower office with a written_statement in which he explained the whistleblower claim has nothing to do with the estate_tax_return only income_tax issues this estate_tax_return should never have been classified as a whistleblower case award_determination and appeal on date the whistleblower office issued a determination_letter to petitioner denying his claim for an award petitioner timely filed a petition appealing the whistleblower office’s determination petitioner asserts that he is entitled to to of the total_amounts collected from the assessment of additional income_tax accuracy-related_penalties and interest for through against taxpayer husband and taxpayer wife fbar penalties against taxpayer husband and taxpayer wife and additional estate_tax for which taxpayer wife’s estate is liable on account of the inclusion of the foreign bank account in her gross_estate a trial was held in miami florida thereafter both parties filed opening and answering briefs opinion we decide whether petitioner a whistleblower is entitled to a sec_7623 award after a trial on the merits because petitioner failed to prove that the irs proceeded with administrative or judicial action against the taxpayers on the basis of his information we hold that he is not i statutory framework the irs has long had authority to pay discretionary awards to persons now called whistleblowers who provide information leading to the recovery_of unpaid taxes see sec_7623 in response to concerns about the management of the discretionary award regime congress enacted legislation in to address perceived problems with the whistleblower program tax relief and health care act of pub_l_no div a sec_406 sec_120 stat pincite effective date the legislation added to sec_7623 a new taxpayer wife died in date subsection b which requires the payment of nondiscretionary whistleblower awards in specified circumstances and provides this court jurisdiction to review irs determinations regarding such awards see 135_tc_70 sec_7623 requires payment of an award if the irs proceeds with any administrative or judicial action to collect taxes based on information brought to the secretary’s attention by an individual the award amount must be at least and not more than of the collected_proceeds including penalties interest additions to tax and additional_amounts resulting from the action or settlement thereof id the determination of the amount of the award shall depend upon the extent to which the individual substantially contributed to such action id sec_7623 defines the scope of claims that are subject_to the nondiscretionary award program established in subsection b the irs must pay claims on a nondiscretionary basis only with respect to actions against a taxpayer the irs may determine a lower percentage award if the whistleblower’s information is derived from publicly disclosed allegations unless such information was originally provided by the whistleblower or if the whistleblower planned and initiated the activities leading to the underpayment_of_tax sec_7623 and the irs is directed to deny an award altogether if the whistleblower is convicted criminally for planning and initiating such activities see sec_7623 whose gross_income exceeds dollar_figure for any taxable_year subject_to such action and only if the tax penalties interest additions to tax and additional_amounts in dispute exceed dollar_figure sec_7623 and b the irs must raise a failure to satisfy these monetary thresholds as an affirmative defense see 143_tc_393 ii jurisdiction and standard of review sec_7623 captioned appeal of award_determination governs our jurisdiction over whistleblower claims it provides any determination regarding an award under paragraph or may within days of such determination be appealed to the tax_court and the tax_court shall have jurisdiction with respect to such matter a determination regarding an award means a determination as to the amount of an award or a determination to deny an award cooper v commissioner t c pincite thus this court has jurisdiction under sec_7623 where as here the irs makes a determination denying a claim for award under sec_7623 and a petition invoking our jurisdiction over that matter is timely filed see 137_tc_37 neither the text nor the legislative_history of sec_7623 specifies the standard of review that the court is to apply in reviewing irs determinations petitioner contends that de novo review is appropriate while respondent argues for an abuse_of_discretion standard we need not resolve this question today since we would sustain respondent’s determination under either standard of review see golub v commissioner tcmemo_2013_196 at iii analysis respondent’s determinations are presumptively correct and petitioner bears the burden of proving that those determinations are erroneous see rule a 290_us_111 sec_7623 provides if the secretary proceeds with any administrative or judicial action based on information brought to the secretary’s attention by an individual such individual shall receive as an award at least percent but not more than percent of the collected_proceeds resulting from the action including any related actions or from any settlement in response to such action sec_301_7623-2 proced admin at trial we heard testimony from petitioner and mr chatham neither party argued that we could not consider this testimony because it was outside the administrative record nor did the parties attempt to introduce other evidence outside the administrative record accordingly we need not decide whether our scope of review is limited to the administrative record regs defines terms used in sec_7623 and the regulations interpreting it the irs proceeds based on information provided by a whistleblower when for example the irs initiates a new action expands the scope of an ongoing action or continues to pursue an ongoing action that the irs would not have initiated expanded the scope of or continued to pursue but for the information provided sec_301_7623-2 proced admin regs in sum petitioner’s entitlement to an award turns on two issues first whether there was a collection of proceeds and second whether that collection was attributable to the irs’ proceeding with administrative or judicial action on the basis of petitioner’s information see whistleblower one 10683-13w v commissioner 145_tc_204 a collection of proceeds whether there was a collection of proceeds from the taxpayers is not in serious dispute the parties stipulated that the irs’ adjustment of taxpayer husband and taxpayer wife’s tax_liabilities for through resulted in the pursuant to sec_301_7623-2 proced admin regs the section is effective on date and applies to information submitted on or after that date and to claims for awards that are open on that date respondent concedes that the regulations are not controlling here because the petition was filed before the effective date of the regulations nevertheless we find the above-quoted wording instructive we express no opinion on the validity of other wording in sec_301_7623-2 proced admin regs or its applicability in other contexts assessment of over dollar_figure million in tax penalties and interest furthermore in their closing_agreement taxpayer wife and taxpayer husband’s estate agreed to pay and the irs agreed to accept a title_26 miscellaneous penalty for the tax_year in lieu of any other penalties that the irs may impose with respect to the offshore financial arrangements that were the subject of the voluntary disclosure respondent has not claimed that the taxpayers failed to pay these sums we therefore find that there was a collection of proceeds from the taxpayers b administrative or judicial action next we must decide whether the collection of the above proceeds was attributable to the irs’ proceeding with administrative or judicial action on the basis of petitioner’s information our inquiry here turns on whether petitioner’s information had any effect on the irs’ examination of the taxpayers’ returns the record shows that on three separate occasions the whistleblower office forwarded petitioner’s information to other operating divisions of the irs for further investigation first to lb_i in date then to sb_se in date and finally to e g in date we address each referral in turn lb_i referral date with respect to the lb_i referral a representative of that division reviewed petitioner’s information and decided not to examine the taxpayers’ returns nothing in the record indicates that lb_i later changed course because lb_i did not proceed with administrative or judicial action against the taxpayers petitioner is not entitled to an award on the basis of this referral see 136_tc_597 w histleblower awards are preconditioned on the secretary’s proceeding with an administrative or judicial action sb_se referral date unlike lb_i sb_se opted to examine the taxpayers’ returns the parties disagree about whether petitioner’s information prompted and or facilitated the examination under respondent’s theory of the case the taxpayers’ voluntary disclosure was the sole cause of the examination and resulting adjustments respondent contends that there is no evidence that ra george or anyone else at sb_se used petitioner’s information during the examination conversely petitioner argues that his information prompted the examination of the taxpayers’ returns and the adjustments that followed under petitioner’s theory of the case the irs had received his information about the taxpayers’ undisclosed bank accounts before it accepted their voluntary disclosure by admitting the taxpayers into the ovdp when it was already on notice of the their noncompliance the irs disregarded its own rules and procedures such disregard petitioner argues is evidence that the irs shepherded the taxpayers into the ovdp in order to avoid paying him an awarddollar_figure petitioner cites respondent’s apparent refusal to provide him with documents concerning the taxpayers’ acceptance into the ovdp as evidence of this scheme on the basis of the record before us we disagree with petitioner in a written_statement to the whistleblower office ra george stated that there was no evidence in his case file that petitioner’s information had prompted the examination ra george also confirmed to mr chatham that he did not use petitioner’s information during his examination of the taxpayers’ voluntary disclosure submission there is nothing in the record that shows or even suggests otherwise also absent from the record is any evidence of a causal connection internal_revenue_manual irm pt date states that a voluntary disclosure must be timely a voluntary disclosure is timely if received before the irs has received information from a third party eg informant other governmental agency or the media alerting the irs to the specific taxpayer’s noncompliance id pt b petitioner also argues that the taxpayers were ineligible for the ovdp because they submitted their voluntary disclosure after the extended deadline for the ovdp and before the start of the ovdp between petitioner’s whistleblower submission and the taxpayers’ decision to come forward to the irsdollar_figure furthermore the irs’ purported disregard of its own rules in accepting the taxpayers’ voluntary disclosure does not support the inference that the irs used the ovdp as a cover for denying petitioner an award for one the rule petitioner primarily relies on is found in the internal_revenue_manual irm see supra note it is a well-settled principle that the irm does not have the force of law and is not binding on the irs mcgaughy v commissioner tcmemo_2010_183 slip op pincite see 440_us_741 447_f3d_706 9th cir aff’g tcmemo_2004_13 second congress explicitly authorized the irs to enter into closing agreements like the one it reached with the taxpayers see sec_7121 authorizing the irs to enter into a written closing_agreement with any person relating to the liability of such person in respect of any internal revenue tax for any taxable_period such agreements may be used for procedural economy or to prevent a dispute from arising 75_f3d_1146 7th cir accordingly we need not decide whether the irs proceeds with administrative or judicial action based on a whistleblower’s information when the irs examines a taxpayer’s return in connection with a voluntary disclosure and the disclosure was prompted by the taxpayer’s discovery that an informant had named him or her in a whistleblower submission we cannot conclude that the exercise of this authority absent proof of any actual wrongdoing is evidence of a scheme to deprive petitioner of an award nor can we conclude that respondent’s apparent refusal to provide petitioner with certain documents evidences such a scheme if a party is troubled by another party’s response to a discovery request rule b permits the requesting party to file an appropriate motion with the court see whistleblower one 10683-13w v commissioner t c pincite granting a whistleblower’s motion to compel the production of documents and responses to interrogatories having proceeded to trial without taking this step petitioner cannot cite the failure to produce documents as grounds for requesting a negative inference against respondent accordingly petitioner is not entitled to an award on the basis of the referral to sb_se e g referral date in a written submission to the whistleblower office an e g examiner stated that petitioner’s information has nothing to do with taxpayer husband’s estates’s estate_tax_return only income_tax issues and that t his estate_tax_return should never have been classified as a whistleblower case there is no evidence that e g later changed course because e g did not initiate expand the scope of or continue to pursue its examination of taxpayer husband’s estate’s estate_tax_return on account of petitioner’s information petitioner is not entitled to an award on the basis of this referral iv conclusion because the administrative action taken by the irs against the taxpayers was not based on his information petitioner is not entitled to a whistleblower award accordingly we sustain respondent’s determination the court has considered all of the arguments made by the parties and to the extent they are not addressed herein they are considered irrelevant moot or without merit to reflect the foregoing decision will be entered for respondent