t c no united_states tax_court turner broadcasting system inc and subsidiaries petitioner v commissioner of internal revenue respondent tracinda corporation petitioner v commissioner of internal revenue respondent docket nos filed date ps tbs and tracinda and others engaged in a series of complex commercial transactions that closed simultaneously tbs acquired a publicly held and traded company mgm by way of a reverse triangular subsidiary merger at the same time as the acquisition by merger mgm transferred all the shares in its wholly owned subsidiary ua to one of its former shareholders tracinda tracinda then sold some of the ua shares to former shareholders of mgm pursuant to a prospectus and subscription agreement which was contemplated in the initial agreement the consideration received by mgm for the ua shares was less than mgm's basis in those shares ua loss both ps claim a tax consequence from the sale of the ua shares tbs claims the loss was recognized by mgm and is available to the tbs group immediately prior to the transactions tracinda and mgm were part of a controlled_group for the purposes of sec_267 i r c tracinda claims the ua loss is deferred and transferred to its basis in the ua shares by virtue of the operation of sec_267 i r c and sec_1_267_f_-1t c temporary income_tax regs fed reg date sec_267 issue tracinda subsequently sold the ua shares to third parties r claims the benefit of the ua loss should be denied to both parties because the form adopted by ps does not reflect the substance of the transaction r seeks to have the ua transaction recharacterized into a part sale part redemption transaction if recharacterized as a redemption r contends that sec_311 i r c operates to deny the benefit of the ua loss to both parties sec_311 issue r has denied ps any_tax benefit from the ua loss r has filed a motion for summary_judgment on the sec_311 issue both ps have filed cross-motions for partial summary judgments on the sec_311 and sec_267 issues these cases have been consolidated to clarify the tax consequences of the transactions common to all the parties held the form chosen by ps was not a fiction that failed to reflect the substance of the transaction 90_tc_171 affd 886_f2d_1318 7th cir followed consequently sec_311 i r c has no application to this transaction held further where a corporation that is a member of a controlled_group is acquired by an unrelated third party thereby terminating the controlled_group relationship and that corporation simultaneously sells an asset at a loss to a member of the former controlled_group sec_267 i r c and sec_1_267_f_-1t temporary income_tax regs fed reg date do not defer or deny the loss of the selling member or increase the purchasing member's basis in the asset by the amount of the loss william f nelson and suzanne celeste feese for petitioner in docket no richard e timbie and trevor washington swett iii for petitioner in docket no robert j shilliday jr for respondent opinion ruwe judge respondent determined a deficiency in tracinda corp 's tracinda federal_income_tax for the taxable_year ending date in the amount of dollar_figure and an accuracy- related penalty under sec_6662 d in the amount of dollar_figure respondent determined deficiencies in turner broadcasting system inc 's tbs federal_income_tax for the taxable_year ending date in the amount of dollar_figure and for the taxable_year ending date in the amount of dollar_figure tracinda's deficiency results from disallowance of a basis_adjustment arising out of its acquisition of united artists corp ua from mgm ua entertainment co mgm in tbs acquired mgm simultaneously with the sale of ua to tracinda the tbs deficiencies result in part from disallowance of net_capital_loss carryforward deductions originating from the sale of ua and carried forward into subsequent years mgm's basis in ua was greater than the consideration received for all the ua shares sold the 1unless otherwise indicated all section references are to the internal_revenue_code in effect for the years in issue and all rule references are to the tax_court rules_of_practice and procedure difference between mgm's basis in ua and the amount received from tracinda for all the ua stock is hereafter called the ua loss tbs and respondent jointly moved to sever from the rest of the tbs case what will hereafter be described as the sec_311 and sec_267 issues the parties also filed a joint motion for consolidation of docket no tracinda and docket no tbs on date the parties' joint motions for issue severance and consolidation were granted this matter is before the court on petitioner tbs' and petitioner tracinda's motions for partial summary_judgment and respondent's motion for summary_judgment under rule the first and second stipulations of fact and attached exhibits are incorporated herein the parties have asked this court to decide the following issues as a matter of law whether the transaction by which mgm sold stock of ua to tracinda the ua sale is properly characterized for tax purposes in accordance with its form as a sale rather than as a constructive redemption of mgm stock subject_to sec_311 the sec_311 issue and if the transaction is properly characterized as a sale whether sec_267 and sec_1_267_f_-1t c and temporary income_tax regs fed reg date apply to a disallow the ua loss claimed by mgm on the ua sale and b increase tracinda's basis in the ua stock by the amount of the ua loss the sec_267 issue background when the respective petitions were filed tbs was a georgia corporation having its principal_place_of_business in atlanta georgia and tracinda was a nevada corporation having offices in las vegas nevada in july and early date tbs and tracinda and their respective owners entered into negotiations and subsequently contracts that changed the ownership of mgm and ua at the time of the initial negotiations tracinda was an investment and holding_company wholly owned by kirk kerkorian kerkorian kerkorian directly owned percent of mgm and indirectly owned percent of mgm through tracinda mgm was a publicly_held_corporation that traded on both the new york and pacific stock exchanges ua was a wholly owned subsidiary of mgm tbs at all material times was more than percent beneficially owned by r e ted turner as a result of the negotiations the following documents were executed on date agreement and plan of merger between tbs merger sub mgm and ua dated date merger agreement purchase and sale agreement between tracinda and mgm purchase and sale agreement company option agreement between tbs and mgm c-option and option agreement between kerkorian 2merger sub was a company incorporated as a transitory merger subsidiary tbs acquisition corp that merged into mgm mgm was the corporation that survived the merger tracinda and tbs option collectively the transaction documents the transaction documents provided for tbs' acquisition of mgm mgm purchase mgm's sale of all the shares in ua to tracinda and tracinda's sale of shares in ua to some of mgm's former public shareholders subscribing public and to certain ua executives the agreed price for ua was equal to dollar_figure cash per share and the agreed price of mgm was dollar_figure cash per share the consideration for the mgm shares was altered in date and again in date at the conclusion of the transaction on date the consideration for the mgm shares was dollar_figure cash and one share of tbs series a preferred_stock tbs preferred_stock for each mgm share prior to the negotiations mgm had approximately dollar_figure million of public debt outstanding in the form of 10-percent senior subordinated notes due_date mgm notes the conditions of issue of the mgm notes are contained in an indenture dated date the mgm indenture on august 3the mechanism that accomplished the reverse triangular subsidiary merger is not in issue in this case 4pursuant to a prospectus and subscription agreement percent of the ua shares acquired by tracinda were sold to the subscribing public for dollar_figure per share a total of dollar_figure percent of the said ua shares was sold to ua executives 5under the transaction documents the capital of ua was to be recapitalized so that it mirrored the number of shares issued by mgm mgm's bank debt stood at dollar_figure million consisting of dollar_figure million in borrowings under a dollar_figure million revolving credit facility and dollar_figure million under an agreement providing for bank borrowings of up to dollar_figure million to cover daily operating requirements in anticipation of the merger tbs offered to exchange dollar_figure of its subordinated notes for each dollar_figure principal_amount of the mgm notes provided the exchanging mgm note holder consented to certain modifications of the mgm indenture the merger agreement did not require tbs to make the exchange_offer for the mgm notes and tbs' obligation to close its acquisition of mgm was not contingent upon the successful consummation of the exchange_offer however the exchange_offer was conditioned upon consummation of the merger the exchange_offer remained open through date the original merger agreement and other transaction documents were first executed on date at that time mgm believed that its tax basis in ua was not materially different from the dollar_figure per share value of ua set forth in the merger agreement accordingly mgm believed and informed tbs that a sale of ua would not produce any material gain_or_loss this information was incorrect mgm's tax basis in the ua shares exceeded the consideration received by mgm the parties disagree as to the extent of the excess however none of the parties have contended that mgm's basis did not exceed the consideration received tracinda argues that the excess is dollar_figure in the revenue_agent's_report issued to tbs respondent stated that the ua loss was dollar_figure a loss on the disposition of ua in the amount of dollar_figure was claimed on tbs' consolidated_return tbs now claims the ua loss is in excess of dollar_figure million the excess of basis is hereinafter referred to as the ua loss after ascertaining that mgm's basis in the ua stock substantially exceeded the agreed sale price to tracinda the parties entered into an amended and restated agreement and plan of merger dated date between mgm ua tbs and others which provided for the possibility of the ua loss in clause c if however the sale of new ua ua results in a federal and or state tax loss the company mgm shall benefit therefrom provided however that to the extent the purchaser tbs receives an actual tax_benefit on any of its post merger consolidated tax returns as a result of such loss the company mgm shall pay to new ua ua the first dollar_figure million of federal and or state tax benefits from the realization of such loss the ua loss was reported on the tbs group's7 consolidated tax_return in date tracinda filed an amended income_tax return for the taxable_year ending january 6for purposes of these proceedings respondent does not agree to any specific amount 7unless otherwise specified a reference to tbs group is to tbs and its consolidated subsidiaries on which it claimed dollar_figure additional basis in the ua shares sold during that year this addition to basis is not in issue in these proceedings on date tracinda sold its remaining big_number shares of ua stock to an unrelated purchaser for dollar_figure its cost_basis in that stock was dollar_figure dollar_figure per share tracinda claimed an increase in basis of dollar_figure when reporting its taxable gain from the sale on its income_tax return for the taxable_year ending date that amount reflected a pro_rata allocation to tracinda's basis in its ua shares of a dollar_figure loss incurred by mgm on its date sale of ua only tracinda's tax_year ending date is at issue in this case tbs and the successor_corporation to mgm have filed a civil_action against tracinda that action seeks inter alia damages and a declaratory_judgment that tracinda pay any and all benefits attributable to the ua loss to tbs the status of the various parties on date prior to the closing of tbs' acquisition of mgm and mgm's transfer of ua was as follows 8it appears that respondent is barred from denying the benefit of the basis_adjustment in previous years because the time allowed by the statutory period of limitations for the assessment of tax on such adjustments has expired 9in that suit tbs alleges and tracinda denies that as part of a post merger settlement agreement ua waived its right to receive any part of the tax_benefit resulting from the capital_loss realized on the sale of ua pursuant to clause c of the merger agreement a mgm owed the banks dollar_figure and owed the holders of the mgm notes approximately dollar_figure million b public shareholders ie shareholders other than kerkorian and tracinda owned big_number shares percent of the big_number outstanding shares of stock of mgm c tracinda owned big_number shares percent of the stock of mgm d kerkorian owned big_number shares percent of the stock of mgm e mgm owned all the ua stock which had been recapitalized to have the same number of outstanding shares as mgm f tbs had raised dollar_figure cash and had arranged to issue big_number shares of tbs preferred_stock g tracinda had received in escrow dollar_figure from the subscribing public on or prior to date as the subscription price for big_number shares of ua stock they had subscribed to purchase from tracinda for dollar_figure per sharedollar_figure h the ua executive stock purchase agreements pertaining to the sale of big_number shares of ua stock to ua executives had been executed 10tracinda bore the expenses of its offering of ua shares to the subscribing public shareholders that were estimated to be dollar_figure dollar_figure per share in the ua prospectus i tbs had incorporated the mirror subsidiaries which together with tbs would become the shareholders of mgm as the result of the merger of merger sub into mgm on date j a disbursing agent had been appointed for the merger consideration a closing occurred on date pursuant to the final transaction documents and was memorialized by a closing memorandum and a funds transfer memorandum the parties have stipulated that each of the events memorialized occurred those events were deemed to be simultaneous and included a tbs and tbs' merger sub transferred dollar_figure and big_number shares of tbs preferred_stock to the mgm shareholders account established at the disbursing agent b tracinda delivered its big_number mgm shares to the disbursing agent c tracinda acknowledged receipt of dollar_figure cash and big_number shares of tbs preferred_stock from the disbursing agent d at the direction of tracinda the disbursing agent transferred dollar_figure from the mgm shareholders account to mgm in payment of the purchase_price for the ua stock this payment was funded from the cash portion of the consideration received by tracinda for its mgm shares ie tracinda paid for the ua stock using cash it received from tbs in the mgm purchase e mgm delivered to the disbursing agent as transfer agent for ua share certificates representing big_number ua shares which constituted all the issued and outstanding shares of ua mgm also instructed the disbursing agent as transfer agent for ua shares to cancel the ua stock certificates held in the name of mgm duly endorsed for transfer to tracinda and to issue to tracinda ua stock certificates for an aggregate big_number ua shares the disbursing agent delivered to tracinda five certificates of ua common_stock representing in aggregate big_number shares f mgm transferred dollar_figure to its banks in satisfaction of its bank borrowings g mgm transferred to ua dollar_figure which represented the amount payable by mgm to ua under clause of the merger agreementdollar_figure after the transfers described above the balance of mgm's account at the disbursing agent was approximately dollar_figure with mgm having the right to instruct the disbursing agent with respect to the investment or transfer of such funds 11clause provided for the transfer of assets between mgm and ua to give effect to the terms of the merger agreement and in particular to reflect the agreement that there would be adjustments made to reflect the position of ua as if ua had operated as an independent company since date until the transaction closed on date immediately following the closing pursuant to mgm's prior irrevocable instructions the disbursing agent transferred dollar_figure from mgm's account to ua's account in partial payment of amounts due from mgm to ua under clause of the merger agreementdollar_figure on or shortly after date mgm made a net intercompany loan of approximately dollar_figure million cash to tbs in accordance with tbs' customary cash management procedures this intercompany loan was reflected on mgm's books as an intercompany receivable ie as an asset of mgm the status of the parties on date after the completion of the transactions contemplated in the transaction documents was as follows a tbs directly and through wholly owned subsidiaries owned percent of mgm b tbs had disbursed dollar_figure cash and big_number shares of tbs preferred_stock and received dollar_figure million cash in an intercompany loan from mgm c mgm had disposed of ua d mgm had received dollar_figure cash which it had used in part to prepay its dollar_figure debt to the banks and to satisfy a dollar_figure million obligation to ua 12clause of the merger agreement provided for post closing adjustment s these adjustments related to the allocation of the economic financial and legal consequences of transactions occurring during the period from date to date as reflected in the intercompany accounts between mgm and ua e tracinda owned big_number shares of ua dollar_figure percent big_number shares of tbs preferred_stock dollar_figure percent and dollar_figure cash which includes dollar_figure dollar_figure per share cash paid in escrow by the subscribing public pursuant to tracinda's offering of ua shares f kerkorian owned big_number shares dollar_figure percent of tbs preferred_stock and dollar_figure cash g the mgm public shareholders owned big_number shares dollar_figure percent of tbs preferred_stock and dollar_figure cash h the subscribing public owned big_number shares dollar_figure percent of ua for which they had paid dollar_figure dollar_figure per share i ua executives owned big_number shares of ua dollar_figure percent for which they subsequently paid dollar_figure to tracinda discussion a whether summary_judgment is appropriate summary_judgment is intended to expedite litigation and avoid unnecessary and expensive trials 101_tc_294 90_tc_678 61_tc_861 summary_judgment is appropriate where there is no genuine issue as to any material fact and a decision may be rendered as a matter of law rule b 98_tc_518 affd 17_f3d_965 7th cir 79_tc_340 in deciding whether to grant summary_judgment the court must consider the factual materials and inferences drawn from them in the light most favorable to the nonmoving party 100_tc_32 85_tc_527 if the conditions of summary_judgment are otherwise satisfied with respect to a single issue or less than all the issues in a case then partial summary_judgment may be granted even though all the issues in the case are not disposed of rule b naftel v commissioner supra the parties agree that no issues of material fact are in dispute in relation to the sec_311 issue or the sec_267 issue and that we may render judgment regarding those issues under rule b b sec_311 issue the form adopted by the parties to the transaction consists of mutually dependent simultaneous sales of all the issued shares in mgm to tbs and mgm's sale of all the issued shares in ua to tracinda respondent views this series of transactions as integrated mutually dependent steps in an overall plan we agree indeed petitioners do not characterize it differently respondent however seeks to have the transactions recharacterized for tax purposes using either the step transaction or the substance-over-form doctrine respondent urges us to reject the form adopted by the parties that form reflects events that actually happened in favor of what respondent characterizes as the substance of the transaction respondent summarizes his position as follows the substance of this transaction should be determined by applying the terms of the f inal merger agreement and the purchase and sale agreement in tandem since the agreements were completely interdependent and the steps of the transaction occurred simultaneously viewing this transaction as a whole tbs should be treated as making a capital_contribution to mgm equivalent to the value of ua further in a transaction which is in substance a bootstrap acquisition the portion of tracinda's mgm stock equal in value to the ua stock was redeemed by mgm in exchange for the ua stock in respondent's recharacterization of the substance of the transaction mgm is deemed to have distributed its ua stock to tracinda and the subscribing public in exchange for a portion of the shareholders' mgm stock if we were to agree with respondent's recharacterization as a redemption sec_311 would provide that no loss would be recognized on mgm's distribution of ua shares in redemption of its own shares respondent justifies the proposed recharacterization on the ground that the form adopted by the parties does not comport with economic reality respondent's argument in its purest terms is that sale of all the issued shares in mgm to the tbs group and mgm's sale of all the issued shares in ua to tracinda cannot be viewed as occurring simultaneously for tax purposes respondent contends the transactions must be assigned a sequential order for tax purposes respondent further argues that since simultaneous sale transactions cannot be recognized for tax purposes it is necessary to recharacterize the transaction to reflect its true substance we find respondent's argument that the sales could not occur simultaneously for tax purposes to be no more than superficially appealing unsupported by authority and without merit in view of the stipulated facts on brief respondent cites no authority for the proposition that some kind of sequential ordering of the steps of the transaction is necessary for tax purposes to determine the tax consequences transactions that occur simultaneously or are deemed by law to have occurred concurrently or simultaneously are commonplacedollar_figure in g m trading corp v 13the regulations speak of simultaneous events in at least places for instance sec_1_351-1 income_tax regs provides immediately_after_the_exchange does not necessarily require simultaneous exchan106_tc_257 revd on other 121_f3d_977 5th cir we examined some of the tax consequences of a simultaneous transaction stating the simultaneous nature of a number of steps does not require all but the first and the last or the start and finish to be ignored for federal_income_tax purposes the regulations under sec_267 discussed infra p would also seem to impliedly acknowledge simultaneous transactions see sec_1_267_f_-1t c temporary income_tax regs fed reg date sec_1 a i income_tax regs discussed infra pp these regulations dealing with intercompany_transactions address a situation involving the purchase and sale of an asset between corporations that are members of the same group after the sale transaction but are not necessarily members of the same group before the transaction this seems by logical implication to contemplate a sale of an asset and the simultaneous association or disassociation of group members we are dealing exactly with continued but comprehends a situation where the rights of the parties have been previously defined and the execution of the agreement proceeds with an expedition consistent with orderly procedure emphasis added in the regulations we have not been able to locate reference to sequential ordering for tax purposes being required when simultaneous transactions are mentioned see also sec_1 f example treatment of simultaneous transfers as a sale income_tax regs this type of situation ie the sale of an asset between members of a controlled_group and the simultaneous disassociation of the buyer and the seller petitioners seek to have the above-described transactions taxed in accordance with the form adopted by them petitioners argue that both substance and form are aligned and that the form adopted should determine the tax consequences petitioners cite this court's reasoning in 90_tc_171 affd without published opinion 886_f2d_1318 7th cir as authority for that proposition in 308_us_473 the supreme court stated the government may not be required to acquiesce in the taxpayer's election of that form for doing business which is most advantageous to him the government may look at actualities and upon determination that the form employed for doing business or carrying out the challenged tax event is unreal or a sham may sustain or disregard the effect of the fiction as best serves the purposes of the tax statute however in order to apply either the substance-over-form doctrine or the step-transaction doctrine we must determine that the substance of the transaction differs from its form if substance follows form then this court will respect the form chosen by the taxpayer esmark inc affiliated cos v commissioner supra even if alternative explanations are available to account for the results of a transaction this court will not disregard the form of the transaction if it accounts for the transaction at least as well as alternative recharacterizationsdollar_figure this is particularly true in cases that deal with public companies as we stated in esmark inc affiliated cos v commissioner supra pincite congress enacted a statute under which tax consequences are dictated by form to avoid those consequences respondent must demonstrate that the form chosen by petitioner was a fiction that failed to reflect the substance of the transaction emphasis added in all the cases cited to us where this court adopted a substance-over-form argument a desire to gain a tax_benefit through the use of meaningless steps or some other tax fiction was present respondent can point to no such tax fiction or 14see 490_f2d_241 2d cir affg tcmemo_1972_98 476_f2d_704 5th cir affg tcmemo_1971_222 15for an example of a transaction that was considered to be a tax fiction by the supreme court see 364_us_361 that case is authority for the proposition that the commissioner may disregard transactions which are designed to manipulate the tax code so as to create artificial tax deductions benefits they do not allow the commissioner to disregard economic transactions which result in actual non tax- related changes in economic position 115_f3d_506 7th cir affg 105_tc_341 meaningless stepdollar_figure as we stated in esmark inc affiliated cos v commissioner t c pincite the existence of an overall plan does not alone however justify application of the step-transaction doctrine whether invoked as a result of the binding commitment interdependence or end result tests the doctrine combines a series of individually meaningless steps into a single transaction at the time the original transaction documents which establish the form of the transactions were executed the parties were unaware of the tax_benefit in issue the absence of a tax motive lends credence to petitioners' position that the transaction is what it purports to be ie that the structure of the transaction was dictated by a business_purpose and that substance and form are aligned in order to recharacterize the transaction respondent must have a logically plausible alternative explanation that accounts for all the results of the transaction the explanation may 16respondent cites 88_tc_906 affd 855_f2d_435 7th cir for the proposition that the step-transaction doctrine need not solely be employed to eliminate meaningless steps we do not read that case to stand for that proposition that case explicitly adopts the elimination of meaningless steps analysis contained in 302_us_609 additionally the case itself cites the existence of meaningless steps issue of preendorsed checks to employees for purported stock purchase as the reason for the application of the step- transaction doctrine the court_of_appeals for the seventh circuit affirmed this court's recharacterization however it chose to arrive at the same conclusion using a substance-over- form analysis parties' rights different from form used combine steps but if it invents new ones courts have refused to apply the step-transaction doctrine in this manner esmark inc affiliated cos v commissioner supra pincite 'useful as the step_transaction_doctrine may be it cannot generate events which never took place just so an additional tax_liability might be asserted ' 490_f2d_241 2d cir affg tcmemo_1972_98 quoting 361_f2d_972 respondent's proposed recharacterization does not adequately account for among other things why tbs would make a capital_contribution to mgm17 and then immediately make an intercompany loan of dollar_figure million back to itself while it is understandable that a parent_corporation would transfer excess cash received from the sale of assets by a subsidiary to itself it is hard to imagine a company making a capital_contribution to a subsidiary in order to lend itself money as respondent postulates is in part the substance of this transaction the fact that the amount of the capitalization postulated by respondent corresponds to the value of the asset purported to be sold is also suggestive of the fact that the asset was in fact sold 17in respondent's proposed recast of the substance of the transaction it is necessary to include a capitalization step to account for the fact that mgm's net_worth did not decrease as would be expected had a redemption actually taken place the hypothetical or constructive redemptions of shares by mgm in exchange for ua shares proposed by respondent would differ in price and form of consideration from shareholder to shareholder in the instant case the subscribing public paid tracinda dollar_figure per ua share in date those shareholders received the full merger consideration when they tendered their shares in mgm in march dollar_figure tracinda and certain ua executives paid dollar_figure per ua share such a non pro_rata redemption would appear at a variance with the normal rules for the governance of public companiesdollar_figure additionally it leaves unexplained the dollar_figure payment made to tracinda by the subscribing publicdollar_figure finally respondent's argument adds a step that did not occur the addition of the capitalization step proposed by respondent is the type of tax fiction that the step-transaction doctrine applies to it is an impermissible attempt to turn 18the subscribing public's payment of the additional dollar_figure per share in date is described by respondent as reimbursing tracinda a fellow shareholder for its costs in arranging the subscription offering respondent's deemed redemption of mgm shares for ua shares 19respondent takes the position that such corporate formalities are irrelevant to the tax substance of the transaction 20respondent takes the position in substance this payment was a nullity it was part of a circular cash_flow that should be disregarded each subscribing public shareholder was reimbursed in merger consideration simultaneous sale transactions into a transaction dressed as a redemption in order to deny a legitimate tax consequence in summary respondent fails to demonstrate a tax fiction a misalignment of the parties' rights and the form adopted by them a meaningless step or a nonbusiness purpose to support invocation of the step transaction or other substance-over-form doctrine we hold that the transactions in issue should be taxed in accordance with the form actually adopted and carried out by petitioners consequently there was no deemed redemption of mgm shares and sec_311 has no application to this transaction c sec_267 issue having determined that the proper characterization of the transaction is the form adopted by petitioners it is necessary to determine the applicability of sec_267 and sec_1_267_f_-1t temporary income_tax regs fed reg date the temporary_regulation the temporary_regulation was in force until superseded by the final_regulation sec_1_267_f_-1 income_tax regs date this final_regulation is prospective only and applies with respect to transactions occurring in years beginning on or after date t d 1995_2_cb_147 respondent now argues and tracinda agrees that the transaction by which mgm sold stock in ua to tracinda the ua sale should be treated as a related_party sale covered by sec_267 respondent and tracinda argue that tracinda and kerkorian had control of mgm when the ua sale occurred respondent concedes mgm was not part of the tracinda and kerkorian controlled_group immediately after the sale respondent considers control prior to the sale as sufficient to establish that the ua sale was a sale between members of the same controlled_group respondent and tracinda further argue that this interpretation is consistent with the temporary_regulation as a consequence of this view respondent's present position is that the ua loss should be denied in part to mgm22 and should be instead transferred to the basis of tracinda's ua stockdollar_figure respondent's proposed reallocation of the loss is made pursuant to respondent's interpretation of paragraph c and of the temporary_regulation 21respondent's argument is based on the application of the binding_commitment_test enunciated in a line of cases discussed infra pp 22respondent would disallow that part of the ua loss that is proportionate to the number of shares purchased by tracinda on its own behalf and on behalf of the ua executives to the total number of ua shares purchased respondent believes that tracinda should be viewed as an agent for the subscribing public and that the basis shift rules should not apply to the percent of ua stock acquired by the subscribing public 23respondent's notice_of_deficiency to tracinda dated date however states that sec_267 and sec_267 do not apply to allow a basis_adjustment in the subsequent sale of mgm ua communications co ua common_stock tbs argues that sec_267 has no application to the ua sale alternatively even if sec_267 does apply tbs takes the position that paragraph c and of the temporary_regulation do not prevent mgm's deduction of the ua loss because mgm and tracinda were not members of the same controlled_group immediately after the ua sale tbs takes the position that the requirement for there to be a controlled_group relationship immediately after the sale is a consequence of the temporary regulation's adoption of substantial portions of the consolidated_return regulationsdollar_figure in order properly to understand the parties' arguments it is useful to give an overview of the operation of sec_267 sec_267 provides in part no deduction shall be allowed in respect of any loss from the sale_or_exchange of property directly or indirectly between persons specified in any of the paragraphs of subsection b tbs additionally argues that if the temporary_regulation produces the result respondent advocates it is invalid tbs argues that par c and of the temporary_regulation if applicable in this case are invalid because they disallow rather than defer a sec_267 loss to the seller mgm reincarnate the disallowed loss into its prerecognition state as basis and relocate that basis to somebody else tracinda thereby permanently denying the taxpayer mgm the benefit of the ua loss in view of our interpretation of the scope of the temporary_regulation it is not necessary for us to consider the invalidity argument we note that tbs' invalidity argument was made moot for taxable years beginning after date by the removal of the loss relocation provisions in the commissioner's final regulations see infra note sec_267 enumerates certain relationships most of the relationships enumerated are intrafamily or equivalent relationships where there is a unity of economic_interest the section also provides that members of a controlled_group as defined in subsection f are among the enumerated relationships sec_267 provides in general terms that if a loss has been disallowed under sec_267 only so much of the gain on the subsequent resale of the property as exceeds the loss is recognized by the related_party purchaser however sec_267 requires different treatment for sales between members of a controlled_group sec_267 provides in relevant part f controlled_group defined special rules applicable to controlled groups -- controlled_group defined --for purposes of this section the term controlled_group has the meaning given to such term by sec_1563 except that-- a more than percent shall be substituted for at least percent each place it appears in sec_1563 and b the determination shall be made without regard to subsections a and e c of sec_1563 deferral rather than denial of loss from sale_or_exchange between members --in the case of any loss from the sale_or_exchange of property which is between members of the same controlled_group and to which subsection a applies determined without regard to this paragraph but with regard to paragraph -- a subsections a and d shall not apply to such loss but b such loss shall be deferred until the property is transferred outside such controlled_group and there would be recognition of loss under consolidated_return principles or until such other time as may be prescribed in regulations emphasis added the parties have stipulated that prior to the ua sale tracinda mgm and ua were members of a sec_267 controlled_group the tracinda group after the completion of the ua sale on date mgm was no longer part of the tracinda group sec_267 is silent on what constitutes a sale between members of the same controlled_group or whether deferral ends when the selling member leaves the controlled_group this raises the question of whether deferral under sec_267 requires that the relevant parties be members of the same controlled_group before and after the sale because there is an ambiguity in the statute in this regard we look to the legislative_history to see whether congress manifested an intent that would resolve the issue the relevant part of the senate report states the bill extends the loss disallowance and accrual provisions of sec_267 as well as other provisions of the code applicable to related parties defined under sec_267 to transactions between certain controlled corporations for purposes of these loss disallowance and accrual provisions corporations will be treated as related_persons under the controlled_corporation rules of sec_1563 except that a 50-percent control test will be substituted for the 80-percent test these rules are not intended to overrule the consolidated_return regulation rules where the controlled corporations file a consolidated_return in the case of controlled corporations losses will be deferred until the property is disposed of or collection of a receivable is made by the affiliate to an unrelated third party in a transaction which results in a recognition of gain_or_loss to the transferee or the parties are no longer related in a transaction where no gain_or_loss is recognized by the transferee the loss is deferred until the substitute basis property is disposed of s prt vol pincite fn ref omitted emphasis added the conference committee report provides the provision generally follows the senate amendment with the following modifications the operation of the loss_deferral_rule is clarified to provide that any loss sustained shall be deferred until the property is transferred outside the group or until such other time as is provided by regulations these rules will apply to taxpayers who have elected not to apply the deferral intercompany_transactions rules except to the extent regulations provide otherwise h conf rept pincite 1984_3_cb_287 emphasis added the legislative_history regarding sec_267 indicates that it was intended to extend the related_party provisions of sec_267 even though subsection f a makes subsections a and d inapplicabledollar_figure nevertheless there is a general theme that runs through the gain recognition limitation in sec_267 and the loss_deferral provisions of subsection f in that they both prevent an immediate loss deduction to the seller and accrue the loss either in terms of a limited gain recognition to the purchaser pursuant to sec_267 or as a deferral of the tax_benefit of the loss pursuant to sec_25sec f a provides subsections a and d shall not apply to such loss f we think what congress intended to extend was the class of transaction in which there would be a delay of some kind in the recognition of a loss until there was an economically genuine realization of the loss see 331_us_694 599_f2d_305 9th cir affg 63_tc_175 it is clear from the legislative_history that the consolidated_return rules were to be applied where controlled corporations filed consolidated_returns the tracinda group did not file consolidated_returns that included mgm during the relevant periods the statute itself provides that a deferred loss of a member of a controlled_group would be deferred until the property is transferred outside such controlled_group and there would be recognition of loss under consolidated_return principles or until such other time as may be prescribed in regulations sec_267 the property ua stock was not transferred out of the tracinda group as a result of the date transactions rather mgm the selling member left the controlled_group on that date we therefore turn to the temporary_regulation in effect for the years in issue which was applicable to controlled groups' not filing a consolidated returndollar_figure 26a separate temporary_regulation was promulgated for companies in a controlled_group that filed consolidated_returns see sec_1 f -2t temporary income_tax regs fed reg continued the temporary_regulation provides in relevant part c deferral and restoration of loss under consolidated_returns principles-- general_rule except as otherwise provided in this section the rules for deferred intercompany_transactions in sec_1_1502-13 of the consolidated_return_regulations apply under sec_267 to the deferral and restoration of loss on the sale of property directly or indirectly between m1 and m2 as if-- i the taxable_year in which the sale occurred were a consolidated_return_year as defined in sec_1_1502-1 and ii all references to a group or an affiliated_group were to a controlled_group exception to restoration rule for selling member that ceases to be a member if a selling member of property sic for which loss has been deferred ceases to be a member when the property is still owned by another member then for purposes of this section sec_1_1502-13 continued date sec_1_1502-13 income_tax regs fed reg date at the relevant time provided f restoration of deferred gain_or_loss on dispositions etc -- general_rule the remaining balance after taking into account any prior reductions under paragraphs d and e of this section of the deferred gain_or_loss attributable to property services or other expenditure shall be taken into account by the selling member as of the earliest of the following dates iii immediately preceding the time continued shall not apply to restore that deferred loss and that loss shall never be restored to the selling member basis_adjustment and holding_period if paragraph c of this section precludes a restoration for property then the following rules apply i on the date the selling member ceases to be a member the owning member's basis in the property shall be increased by the amount of the selling member's unrestored deferred loss at the time it ceased to be a member increase amount emphasis added the temporary_regulation does not explicitly contain a definition of what constitutes a sale between members of a controlled_group however it does generally incorporate sec_1_1502-13 income_tax regs of the consolidated_return_regulations that deal with deferred intercompany_transactions these regulations are said to apply except as otherwise provided in the temporary_regulation no express provision can be found in the temporary_regulation that defines the scope of transactions covered other than the reference to deferred intercompany_transactions the term intercompany_transactions is not itself defined in the temporary_regulation however sec_1_1502-13 income_tax regs which is referred to and made applicable by the temporary continued when either the selling member or the member which owns the property ceases to be a member of the group regulation defines intercompany_transactions and deferred_intercompany_transaction as follows a definitions --for purposes of sec_1_1502-1 through intercompany_transaction i except as provided in subdivision ii of this subparagraph the term intercompany_transaction means a transaction during a consolidated_return_year taxable_year in which the sale occurred between corporations which are members of the same controlled_group immediately after such transaction deferred_intercompany_transaction the term deferred_intercompany_transaction means-- i the sale_or_exchange of property in an intercompany_transaction the temporary_regulation provides that except as otherwise provided the rules for deferred intercompany_transactions in sec_1_1502-13 of the consolidated_return_regulations apply under sec_267 fed reg date these words are intended to govern the application of sec_267 by this temporary_regulation respondent has clarified and limited the operation of sec_267 to what are defined to be intercompany_transactions when the temporary_regulation is read in light of the definition of intercompany_transactions in the consolidated_return_regulations the ua sale would not be covered because immediately after the completion of the sale the parties were not members of the same controlled_group respondent argues that paragraph c and of the temporary_regulation constitutes exceptions to the application of sec_1_1502-13 income_tax regs of the consolidated_return_regulations this is partly true however the exception is to the restoration of loss rule in sec_1_1502-13 income_tax regs sec_1_1502-13 income_tax regs deals with the situation of a selling member that leaves the controlled_group after having engaged in a deferred_intercompany_transaction but when there has been no deferred_intercompany_transaction as defined in sec_1_1502-13 income_tax regs paragraph f iii has no application and it follows that the exception to paragraph f iii contained in paragraph c and of the temporary_regulation also has no application after considering the overall regulatory context and the specific language used in paragraph c and of the temporary_regulation we conclude that paragraph c and does not apply to the ua sale which was part of the overall transaction that simultaneously ended the controlled_group relationship and transferred the ua shares to tracinda the fact pattern that is dealt with in paragraph c and of the temporary_regulation assumes that an intercompany_transaction has occurred before the selling member leaves the controlled_group the paragraph talks of a loss that has been deferred it also refers to property still owned when the selling member departs the group and of an unrestored deferred loss we give effect to the use of the past tense in the temporary_regulation in other words before paragraph c and of the temporary_regulation become operative the loss must have been deferred as an intercompany_transaction prior to the dissociation of the seller from the controlled groupdollar_figure the preamble to the temporary_regulation adds additional weight to this interpretation it states in relevant part accordingly the temporary regulations provide that if a member m1 sells property to another member m2 and thereafter while m2 still holds the property m1 ceases to be a member of the group then m1's unrestored deferred loss for property at the time m1 ceases to be a member will never be restored to m1 t d 1985_1_cb_71 emphasis added the mgm purchase and ua sale occurred simultaneously immediately after the transaction mgm was not a member of the controlled_group that included tracinda as a consequence there 28we note this is the same view as is expressed by the authors of dubroff et al federal income_taxation of corporations filing consolidated_returns sec_31 pincite- 2d ed stating the fact pattern addressed by the prior regulations the temporary_regulation involved an intercompany sale at a loss followed by seller leaving the group emphasis added was no deferred_intercompany_transaction loss that has been deferred or unrestored deferred loss at the time it mgm ceased to be a member of the controlled groupdollar_figure none of the parties have directed us to any case law interpreting the scope of sec_267dollar_figure we have however been directed to a series of cases which interpret what is now sec_267 and b 40_tc_1028 affd 338_f2d_691 7th cir we note that the exception to restoration rule contained in paragraph c and of the temporary_regulation was eliminated by a final_regulation published in when the commissioner proposed this regulation in the preamble to the proposed sec_1_267_f_-1 income_tax regs 1994_1_cb_724 stated the current regulations applicable to controlled groups sec_1_267_f_-1t generally conform to the basic intercompany_transaction rules applicable to consolidated groups the current regulations also provide that if s sells property to b at a loss and the property is still owned by b when s ceases to be a member of the same controlled_group s never takes the loss into account instead b's basis in the property is increased by an amount equal to s's unrestored loss the proposed_regulations eliminate the rule that transforms s's loss into additional basis in the transferred property when s ceases to be a member of the controlled_group instead the proposed_regulations generally allow s's loss immediately before it ceases to be a member of the controlled_group sec_267 operates on transactions between parties defined in subsec b which provides two corporations which are members of the same controlled_group as defined in subsection f 17_tc_1030 affd 202_f2d_45 5th cir 3_tc_33 affd 145_f2d_365 10th cir these cases are cited for the proposition that the proper time to test for control is when there is a binding commitment to sell however these cases do not deal with sec_267 and the aforementioned regulations additionally the treatment afforded a loss from a transaction between members of a controlled_group is not the same as the treatment afforded to a loss between parties otherwise specified in sec_267 we do not think it likely that congress would specify a different treatment if there were no relevant distinction to be drawndollar_figure we must be cautious in applying judicial glosses developed by the courts to prevent technical avoidance of the purpose of a statute loss disallowance on intrafamily transactions to a new situation the controlled_group provisions this caution is intensified when to do so would conflict with our reading of the regulations 31the controlled_group provisions of sec_267 do not share a common ancestry with the other relationships dealt with in sec_267 the current subsecs b and f of sec_267 were first inserted into the code in by the deficit_reduction_act_of_1984 publaw_98_369 to 98_stat_705 they had no counterpart in the or the codes in contrast the provisions now embodied in sec_267 and can be traced back to sec_24 and b of the code 40_tc_1028 affd 338_f2d_691 7th cir 17_tc_1030 affd 202_f2d_45 5th cir 3_tc_33 affd 145_f2d_365 10th cir all interpret sec_24 of the code the words of the temporary_regulation which make the rules for deferred_intercompany_transaction of sec_1 income_tax regs applicable to deferral under sec_267 militate against use of the binding_commitment_test in the controlled_group situation pursuant to that regulation the controlled_group relationship is tested immediately after the transaction not when the binding commitment is entered into application of the binding_commitment_test depends on the controlled_group relationship before the transaction and therefore would conflict with the temporary_regulation finally incorporation of the binding_commitment_test into sec_267 jurisprudence would also be contrary to the current regulations the final regulations sec_1_267_f_-1 income_tax regs adopt the immediately after test of the consolidated_return_regulations that respondent contends were not part of the temporary_regulation at issue in this case sec_1_267_f_-1 and sec_1_1502-13 income_tax regs provide sec_1_267_f_-1 controlled groups -- b definitions and operating rules the definitions in sec_1_1502-13 and the operating rules of sec_1_1502-13 apply under this section with appropriate adjustments including the following intercompany sale an intercompany sale is a sale exchange or other transfer of property between members of a controlled_group if it would be an intercompany_transaction under the principles of sec_1_1502-13 determined by treating the references to a consolidated_group as references to a controlled_group and by disregarding whether any of the members join in filing consolidated_returns emphasis added sec_1_1502-13 intercompany_transactions -- b definitions for purposes of this section-- intercompany transactions-- i in general an intercompany_transaction is a transaction between corporations that are members of the same consolidated_group immediately after the transaction s is the member transferring property or providing services and b is the member receiving the property or services intercompany_transactions include-- a s's sale of property or other transfer such as an exchange or contribution to b whether or not gain_or_loss is recognized emphasis added our reading of the temporary_regulation and the nonapplicability of the binding commitment cases is consistent with the position finally taken by respondent in sec_1_267_f_-1 income_tax regsdollar_figure for the foregoing reasons we hold that mgm is not prohibited from deducting the loss realized on its date sale of ua stock to tracinda by virtue of the application 32respondent argues that sec_1_267_f_-1 income_tax regs would apply if this case were governed by the final regulations that section is an anti-avoidance rule intended to apply only to transactions structured with a principal purpose of avoiding the purpose of sec_267 however respondent has stipulated that petitioners were unaware of the loss when they decided on the form of the transaction of sec_267 it follows for the same reasons that tracinda is not entitled to increase its basis in the ua shares by the amount of the ua lossdollar_figure an appropriate order will be issued granting tbs' motion for partial summary_judgment granting tracinda's motion for partial summary_judgment as to the sec_311 issue and denying it as to the sec_267 issue and denying respondent's motion for summary_judgment 33in regard to tbs respondent's notice_of_deficiency provides further grounds for the disallowance of the ua loss respondent contends that the capital_loss_carryover which in part is made up of the ua loss is not permitted under sec_269 sec_382 and sec_383 neither the parties' motions nor this opinion addresses these issues


internal_revenue_service number release date index numbers ---------------------------------------------- ---------------------------- -------------------------------------- ------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact --------------------- id ------------------------ -------------------------------------------------- telephone number -------------------- refer reply to cc psi b03 plr-114118-18 date date legend x ----------------------------------------- ---------------------------------------------- state --------- y ----------------------------------------- ---------------------------------------------- d1 ------ dear --------------- this letter responds to a letter dated date submitted on behalf of x requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations to file an election under sec_754 of the internal_revenue_code code facts according to the information submitted x is a state limited_liability_company classified as a partnership for federal tax purposes in d1 one of x’s members transferred part of its interest in x to another member y x’s return for the d1 taxable_year was filed timely but a sec_754 election to adjust the basis of partnership property plr-114118-18 was not filed with the return x represents that it has acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government law and analysis sec_754 provides that a partnership may elect to adjust the basis of partnership property when there is a distribution_of_property or a transfer of a partnership_interest an election under sec_754 applies with respect to all distributions of property by the partnership and to all transfers of interests in the partnership during the taxable_year with respect to which the election was filed and all subsequent taxable years sec_1_754-1 of the income_tax regulations provides that an election under sec_754 to adjust the basis of partnership property under sec_734 and sec_743 with respect to a distribution_of_property to a partner or a transfer of an interest in a partnership must be made in a written_statement filed with the partnership return for the taxable_year during which the distribution or transfer occurs for the election to be valid the return must be filed not later than the time prescribed by sec_1_6031_a_-1 including extensions for filing the return for such taxable_year under sec_301_9100-1 the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the code except subtitles e g h and i sec_301_9100-1 provides that the term regulatory election includes an election whose due_date is prescribed by a regulation published in the federal_register sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make an election sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides extensions of time for regulatory elections that do not meet the requirements of sec_301_9100-2 sec_301_9100-3 provides that requests for relief under sec_301_9100-3 will be granted when the taxpayer provides the evidence including affidavits described in sec_301_9100-3 to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and the grant of relief will not prejudice the interests of the government conclusion based solely upon the facts submitted and the representations made we conclude that the requirements of sec_301_9100-1 and sec_301_9100-3 have been satisfied as a result x is granted an extension of time of days from the date of this letter to plr-114118-18 make a sec_754 election for its d1 taxable_year and thereafter the election should be made in a written_statement filed with the applicable service_center for association with x's return for its d1 taxable_year a copy of this letter should be attached to the statement filed this ruling is contingent on x adjusting the basis of its properties to reflect any sec_734 or sec_743 adjustments that would have been made had the sec_754 election been timely made these basis adjustments must reflect any additional_depreciation that would have been allowable had the sec_754 election been timely made regardless of whether the statutory period of limitation on assessment or filing a claim_for_refund has expired for any year subject_to this grant of late election relief any depreciation deduction allowable for an open_year is to be computed based upon the remaining useful_life and using property basis adjusted by the greater of any depreciation allowed_or_allowable in any prior year had the sec_754 election been timely made additionally x’s partners must adjust the basis of their interests in x to reflect what that basis would be had the sec_754 election been timely made regardless of whether the statutory period of limitation on assessment or filing a claim_for_refund has expired for any year subject_to this grant of late election relief specifically x’s partners must reduce the basis of their interests in x in the amount of any additional_depreciation that would have been allowable had the sec_754 election been timely made except for the specific ruling above we express or imply no opinion concerning the federal tax consequences of the facts of this case under any other provision of the code in addition sec_301_9100-1 provides that the granting of an extension of time for making an election is not a determination that the taxpayer is otherwise eligible to make the election this ruling is directed only to the taxpayer requesting it according to sec_6110 this ruling may not be used or cited as precedent under a power_of_attorney on file with this office we are sending a copy of this letter to x’s authorized representative plr-114118-18 the ruling contained in this letter is based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the ruling_request it is subject_to verification on examination sincerely associate chief_counsel passthroughs special industries by __ s ___________________________ mary beth carchia senior technician reviewer branch office of the associate chief_counsel passthroughs special industries enclosures copy of this letter copy of this letter for sec_6110 purposes


internal_revenue_service department of the treasury number release date index number u i l no washington dc person to contact telephone number refer reply to cc psi plr-150682-02 date date legend company state shareholder a dear this letter responds to a letter dated date and subsequent correspondence requesting a ruling on behalf of company under sec_1362 of the internal_revenue_code the information submitted discloses that company was formed on a under the laws of state company has one shareholder shareholder it is represented that company has intended to be an s_corporation since a however company discovered that its s election had not been timely filed company requests a ruling under sec_1362 that its sec_1362 election will be treated as timely made for its taxable_year that began on a sec_1362 provides that a small_business_corporation may elect to be an s_corporation sec_1362 provides when an s election will be effective generally 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 is made sec_1362 provides that if an s election is made after the first two and one half months of a corporation's taxable_year then that corporation will not plr-150682-02 be treated as an s_corporation until the taxable_year following the year in which the s election is made sec_1362 provides that if no sec_1362 election is made for any taxable_year and the secretary determines that there was reasonable_cause for the failure to timely make such election then the secretary may treat such an election as timely made for such taxable_year and sec_1362 shall not apply based on the facts submitted and representations made we conclude that company has established reasonable_cause for failing to make a timely s election for its taxable_year that began on a and is eligible for relief under sec_1362 accordingly we conclude that company's sec_1362 election will be treated as timely made for its taxable_year that began on a however this ruling is contingent on company filing form_2553 election by a small_business_corporation with an effective date of a with the appropriate service_center within days from the date of this ruling a copy of this letter should be attached to the form_2553 except as specifically set forth above we express or imply no opinion concerning the federal tax consequences of the foregoing facts specifically we express or imply no opinion on whether company otherwise qualifies as an s_corporation pursuant to a power_of_attorney on file with this office a copy of this letter is being sent to company’s authorized representative this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent sincerely yours s mary beth collins senior technician reviewer branch office of the associate chief_counsel passthroughs and special industries enclosure copy for sec_6110 purposes


id office uilc cca_2010072616072938 number release date from ---------------------- sent monday date pm to ------------------------ cc ------------------ subject re request for advice -- ------------------------ federal_tax_lien ftl pursuant to u s c sec_6321 ------- the right of joint possession of property occupied as a principal matrimonial residence under n j s a sec_3b is property or a right to property to which a federal_tax_lien attaches under sec_6321 we find the facts of 261_br_136 d n j to be instructive ------------------------------------- -------------------------------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------------------------------- ------------------------------------------------please do not hesitate to contact me if you have additional questions sincerely -------------------------------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------------------------------- -------------------


internal_revenue_service te_ge technical_advice_memorandum number release date no third party contact index uil no area manager - gulf coast taxpayer's name taxpayer’s address taxpayer's identification_number year involved conference held legend s e z o v y w w o n issues a does m meet the gross_receipts and premium requirements of sec_501 of the internal_revenue_code b is m an insurance_company as described sec_501 of the code c can m continue to rely on its initial determination_letter which recognized the organization’s exempt status under sec_501 of the code for the year at issue if the organization did not operate as an insurance company’ as that term is used in sec_501 d e f if m cannot continue to rely upon its initial determination_letter does m qualify for relief under sec_7805 of the code in the circumstances presented if the commissioner exercises discretion to grant relief under sec_7805 of the code what is the effective date of revocation in the alternate if m is held to continue to rely upon its initial determination_letter dated date recognizing it as exempt under sec_501 of the code will m be subject_to tax on unrelated_business_income with respect to rental income received from m property facts m was incorporated in the in year and received an exemption_letter on date recognizing it as exempt from federal_income_tax as an organization described in sec_501 of the internal_revenue_code effective date m has elected under sec_953 of the code to be treated as a u s_corporation for u s tax purposes m is owned by n the policies written cover n inc o and p and partnership_interest in o and n and his wife each have a n ltd ownsa interest in o and p nand his wife eachown ofn related entities p inc stock m's stated insurance activities are to write policies covering third party environmental liability on storage tanks leased to customers automobile damage to automobiles resulting from car wash facilities and car wash equipment and tank damage covering damage resulting from acts of god and unintentional misuse destruction or mutilation specifically in m wrote three insurance policies as described below m’s third party environmental liability contract covers storage tanks located on third party properties that are leased to n inc customers for monthly lease payments the monthly lease payments include the premium payment over tanks coverage is limited to dollar_figure small above-ground tanks and below-ground storage tanks storage tanks are covered that include million per occurrence large above-ground customers leasing tanks from n inc are required to obtain tank damage coverage for tanks gauges and fittings m’s tank damage coverage covers tanks and is limited to dollar_figure per tank m’s automobile damage coverage is provided to customers of n inc and related entities for automobile damage resulting from customers’ unintentional misuse of wash equipment the price charged to customers includes the premium automobile damage coverage is limited to dollar_figure per occurrence m filed form_990 for and reported dollar_figurex million in assets and dollar_figurey thousand in claims the q trust m is the sole beneficiary of q trust m also reported rental income of dollar_figurez thousand received from law and analysis a does m meet the gross_receipts and premium requirements of sec_501 of the internal_revenue_code for taxable years beginning after date sec_501 a i provides in relevant part for exemption for insurance_companies other than life including interinsurers and reciprocal underwriters if i i the gross_receipts for the taxable_year do not exceed dollar_figure and ii more than percent of such gross_receipts consist of premiums for purposes of determining gross_receipts the gross_receipts of all members of a controlled_group of which the company is part are taken into account because the gross_receipts and premium requirements are based on the new law effective after date and m has conceded it will not meet the new law m will not be exempt for years beginning date b is m aninsurance company as described sec_501 of the code under sec_501 of the code organizations described in sub sec_501 are exempt from federal_income_tax unless such exemption is denied under sec_502 or sec_503 for tax years beginning before date sec_501 of the code provided an exemption from federal_income_tax for insurance_companies or associations other than life including interinsurers and reciprocal underwriters if the net written premiums or if greater direct written premiums for the taxable_year did not exceed dollar_figure sec_501 of the code provided that when an entity was part of a controlled_group all net written premiums or direct written premiums or net written premiums of the members of the group were aggregated to determine whether the insurance_company met the requirements of sec_501 neither sec_501 of the code nor the regulations under that section define an insurance_company accordingly the term_insurance company has the same meaning under sec_501 as it does in subchapter_l see h conf_rep no cong sess vol ii reprinted in vol c b the business of an insurance_company necessarily includes substantial investment activities both life and nonlife insurance_companies routinely invest their capital and the amounts they receive as premiums the investment earnings are then used to pay claims support writing more business or to fund distributions to the company’s owners the presence of investment earnings does not in itself suggest that an entity does not qualify as an insurance_company for the years involved an insurance_company for federal_income_tax purposes is a company whose primary and predominant business activity during the year was the issuing of insurance or annuity_contracts or the reinsuring of risks underwritten by insurance_companies tax regulations sec_816 of the code company treated as an insurance_company for purposes of definition of a life_insurance_company only if more than half of the business of that company is the issuing of insurance or annuity_contracts or the reinsuring of risks underwritten by insurance_companies sec_1_801-3 of the income sec_1_801-3 of the regulations defines the term_insurance company to mean a company whose primary and predominant business activity during the taxable_year is the issuance of insurance or annuity_contracts or the reinsurance of insurance underwritten by insurance_companies thus though its name charter powers and subjection to state insurance laws are significant in determining the business which a company is authorized and intends to carry on it is the character of the business actually done in the taxable_year which determines whether a company is taxable as an insurance_company under the internal_revenue_code in revrul_2002_89 2002_2_cb_984 the service provided guidance on whether arrangements between a parent and a subsidiary insurance_company qualified as an insurance arrangement and whether premiums_paid were deductible under sec_162 of the code specifically situation described a domestic_corporation that entered into an annual arrangement with its wholly- owned insurance subsidiary in doing so the subsidiary either insures or reinsures the liability risks of the parent_corporation all business is maintained separately and the parent does not guarantee the subsidiary’s risks also percent of the total premiums are received from the parent_corporation on both a gross and net_basis the service pointed out that when the total risk and liability coverage is more than percent for the subsidiary there is no risk shifting and risk_distribution accordingly the service held that there was no insurance arrangement and that amounts paid_by the parent to the subsidiary were not deductible under sec_162 revrul_2002_90 i r b date held that a subsidiary's arrangement to provide liability insurance coverage to of its parent company's subsidiaries constituted insurance contracts for federal tax purposes and thus the amounts paid as premiums by each subsidiary were deductible as business_expenses under the arrangement the subsidiaries were charged arm's length premiums according to customary industry ratings and none had liability coverage for less than percent or more than percent of the total risk insured by the subsidiary as a result the professional liability risks of the subsidiaries were shifted to the insurer subsidiary as required to constitute an insurance_contract for federal tax purposes the common ownership of the subsidiaries including the insurer by the parent did not affect the determination that the arrangements constituted insurance contracts neither the code nor the regulations define the terms insurance or insurance_contract the united_states supreme court however has explained that for an arrangement to constitute insurance for federal_income_tax purposes both risk shifting and risk_distribution must be present 312_us_531 the risk shifted and distributed must be an insurance risk see eg 572_f2d_1190 cert_denied 439_us_835 revrul_89_96 1989_2_cb_114 cir risk shifting occurs if a person facing the possibility of an economic loss resulting from the occurrence of an insurance risk transfers some or all of the financial consequences of the potential loss to the insurer the effect of such a transfer is that a loss by the insured will not affect the insured because the loss is offset by the insurance payment risk_distribution incorporates the law of large numbers’ to allow the insurer to reduce the possibility that a single costly claim will exceed the amount available to the insurer for the payment of such a claim 811_f2d_1297 cir risk_distribution necessarily entails a pooling of premiums so that a potential insured is not in significant part paying for its own risks see 881_f2d_247 cir while a taxpayer's name charter powers and state regulation help to indicate the activities in which it may properly engage whether the taxpayer qualifies as an insurance_company for tax purposes depends on its actual activities during the year 56_tc_497 affd per curiam 469_f2d_697 cir taxpayer whose predominant source_of_income was from investments did not qualify as an insurance_company see also 285_us_182 to qualify as an insurance_company a taxpayer must use its capital and efforts primarily in earning income from the issuance of contracts of insurance 344_fsupp_870 d s c aff'd per curiam 481_f2d_609 cir all of the relevant facts will be considered including but not limited to the size and activities of any staff whether the company engages in other trades_or_businesses and its sources of income see generally 285_us_191 where insurance and charges incident thereto were more than of company’s income u ndeniably insurance was its principal business lawyers mortgage co pincite indus life ins co pincite 300_fsupp_387 n d tex rev'd on other grounds 425_f2d_1328 cir 189_fsupp_282 d neb aff'd on other grounds 293_f2d_72 cir inter-american life ins co pincite nat'l capital ins co of the dist of columbia v commissioner 28_bta_1079 however a company engaged solely in reinsurance may have a very sparse operation see alinco life ins co v united_states ct_cl that reinsurance company had extremely simple operation with very little general operating expense did not preclude conclusion that it was a life_insurance_company under sec_801 of the code in lawyers mortgage co supra the court concluded the taxpayer was not an insurance_company based on the character of the business actually done the taxpayer was chartered as lawyers mortgage_insurance co to examine titles and to guarantee or insure bonds and mortgages later the company dropped insurance from its name and amended its charter to allow the purchase and sale of mortgage loans it remained under the supervision of the state insurance department however lawyers mortgage never insured titles rather it made mortgage loans which it sold with a guarantee of payment for this insurance lawyers mortgage charged a premium of one-half of one percent of the interest stated on the mortgage the company also guaranteed the payment of some loans which it did not make or sell under state law companies chartered as banks were also authorized to conduct this type of business the court concluded that though the guarantees were in legal effect insurance this element of lawyers mortgage’s activities was only incidental to the mortgage business the premium covered non-insurance services and the oremiums were only one-third of lawyers mortgage’s income the character of the business actually done was not insurance therefore the company was not an insurance_company similarly in industrial life ins co supra the taxpayer was not an insurance_company for federal_income_tax purposes because it was not using its capital and efforts primarily to earn income from insurance industrial life was chartered as an insurance_company but did not maintain a sales staff was located in the home of its president during the three years at issue the company’s insurance activity consisted of covering small credit risks under a group policy issued to a consumer lender covering the lives of certain of its officers the company paid the premiums and was the beneficiary and covering the lives of members of the stockholding family the company also engaged in its office leasing and selling real_estate and managing its investment portfolio life’s premium income from insurance issued to parties unrelated to its owners officers ie the group credit risk policy accounted for approximately its income during the years at issue the company accumulated substantial earnings without showing a reasonable need the district_court concluded that industrial life was not an insurance_company during the years at issue although it was involved in direct underwriting it issued only one policy and its premium income was small compared with its income from its real_estate activity industrial inter-american life ins co supra likewise involved a taxpayer that did not qualify as an insurance_company due to its minimal volume of insurance_business two individuals formed investment life_insurance_company to directly underwrite coverage which could be ceded to inter-american although inter- american was authorized to use several policy forms it did not solicit or sell any directly written coverage during the years at issue rather it accepted a small amount of business ceded to it by investment life and an unrelated insurer inter-american also held the family’s lumber business as loaned surplus because of its minimal insurance activity the state insurance commissioner became concerned about its continued participation in the insurance market as a result rather than surrender its certificate of authority to write insurance inter- american retroceded a major portion of its coverage to an unrelated company meanwhile inter-american realized income from various capital assets although inter-american had as many a sec_448 policies in force during the five years at issue with an aggregate coverage of dollar_figure million premiums accounted for or less of inter-american’s income during four of the five years the court concluded that inter-american was not an insurance_company for any of the years at issue because it did not use its efforts in the insurance_business it did not actively solicit to issue coverage its directly underwritten coverage was issued to the owner’s family or their tax advisor and its reinsurance was from the related company investment life minimis earned premiums its investment_income far exceeded its de in contrast the taxpayer in service life ins co supra was held to be an during the years at issue service life_insurance_company under different facts issued life health and accident policies and also solicited and arranged mortgage loans with money borrowed from the federal_home_loan_bank between big_number and big_number policies were in force during the years at issue representing life coverage of over dollar_figure at the same time only about big_number mortgages were outstanding service life’s premium income accounted for between and of its total income under these facts the character of the business actually done by service life during the years at issue was insurance hence it was an insurance_company no single factor determines whether a company’s primary and predominant business activity for a taxable_year was the issuing of insurance or annuity_contracts or the reinsuring of risks underwritten by insurance_companies thus in some cases a start-up company or a company winding down operations may qualify as an insurance_company even if premiums represent less than half the receipts of the company provided the company’s capital and efforts is devoted primarily to its insurance_business m’s policy contracts do not constitute insurance because they do not involve both risk-shifting and risk-distribution as established in 312_us_531 in making this determination the terms risk- shifting and risk-distribution as defined within revrul_2002_90 were applied on the element of risk_distribution the additional insureds - the customers suppliers etc - are not legally recognizable insureds because the contracts do not appear to be a result of the bargain between m and these entities these additional insureds - particularly the customers of the carwashes - were apparently unaware of the existence of these policies m argues that the contracts fulfill the service agreements and provide protection for the users of the carwashes however these service agreements require coverage for risks of types other than that provided by the contracts though m asserts that the consideration either for the service agreements or for_the_use_of the car wash supported the contracts nothing in the agreements or the terms of use of the carwash substantiates this assertion because these practices are seemingly at odds with those commonly associated with insurance arrangements these additional insureds arguably should not be recognized as such in this respect the contracts do not constitute insurance for federal_income_tax purposes in addition since m’s tank damage auto-damage and environmental liability policies each involve only one insured party they do not involve risk_distribution which requires the statistical phenomenon known as the law of large numbers distributing risk allows the insurer to reduce the possibility that a single costly claim will exceed the amount taken in as premiums and set_aside for the payment of such a claim by assuming numerous relatively small independent risks that occur randomly over time the insurer smooths out losses to match more closely its receipt of premiums 811_f2d_1297 cir risk_distribution necessarily entails a pooling of premiums so that a potential insured is not in significant part paying for its own risks see 881_f2d_247 cir m’s policies’ lack of risk_distribution is further evident by comparing them with the liability insurance coverage provided by the captive insurer discussed within revrul_2002_90 in revrul_2002_90 twelve subsidiaries comprising the insured parties and the insurer had common ownership by a parent company none of the insured parties had less than percent or more than percent of the total risk insured by their affiliated meaning that the parent company’s common ownership of the insured subsidiaries and the insurer did not impact the determination that the arrangements constituted insurance contracts in contrast the insured parties under m’s tank damage and auto-damage policies had of the total risk because they were the sole insured under these policies also see humana inc v commissioner supra c can m continue to rely on its initial determination_letter which recognized the organization’s exempt status under sec_501 of the code for the year at issue if the organization did not operate as an insurance_company as that term is used in sec_501 as discussed above m did not qualify for exemption under sec_501 of the code for only one insured party thus lacking risk_distribution m’s insurance policies written in since the policies were not considered insurance for would not be considered insurance for subsequent years were the same insurance policies written for subsequent years because the each insurance policies involved the same policies conclusions a b m does not meet the gross_receipts and premium requirements of sec_501 of the internal_revenue_code after date mis not an insurance_company as described sec_501 of the code for the year at issue c mcan not continue to rely on its initial determination_letter which recognized the organization’s exempt status under sec_501 of the code for the year at issue since the organization did not operate as an insurance_company as that term is used in sec_501 d m does not qualify for relief under sec_7805 of the code under the circumstances presented e the commissioner exercises discretion to deny relief under sec_7805 of the code the effective date of revocation of exemption is january sec_501 of the code the year in which m was recognized as exempt under - end -


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc psi br 1-plr-133383-01 date oct x a a year year year year date date date date date this responds to a letter dated date and subsequent correspondence submitted on behalf of a requesting a ruling that the partners of x will not recognize pre-contribution gain under sec_704 or sec_737 as a result of the in-kind distribution of a assets on or after date that were contributed to the partnership on date because the assets were contributed pursuant to a written binding contract for the contribution of a fixed amount of property that was in effect on date and at all times thereafter before such contribution and thus qualified for transitional relief under section b of the taxpayer_relief_act_of_1997 facts the taxpayer represents the following facts plr-133382-01 in year trustor established trusts one for his wife and one for primary benefit of each of his four children there currently are eight year trusts remaining with trustor’s grandchildren as the sole current income beneficiaries each trust owns undivided_interest in a assets and substantial portfolio of investment securities and will terminate upon the earlier of the death of the grandchild or years after the death of the last child during the early year the corporate trustee became increasingly concerned that the orderly control of the a assets might be seriously disrupted if undivided interests passed out of the common_control upon the death of a third generation income_beneficiary and the resulting trust terminated in year the trustee decided to contribute all of the a assets to a partnership the partnership’s original limited_partnership agreement lpa was executed on date and obligated each of the partners to contribute their a assets to the partnership in exchange for limited_partnership interests due to the trustee’s concern that certain beneficiaries of the trusts would oppose the limited_partnership agreement the agreement was made contingent upon obtaining court approval it was also made contingent upon obtaining a ruling from the internal_revenue_service that the partnership was a partnership for federal tax purposes this requirement was subsequently eliminated as unnecessary after the promulgation of the regulations under sec_301_7701-1 through the state court litigation took several years to resolve ultimately on date the court entered an order requiring the trustee to execute a lpa substantially_similar to the amended and restated lpa previously submitted to the court although the amended and restated lpa contained numerous changes from the original lpa no change was made to the partners’ obligation_to_contribute their a assets to the partnership the court authorized the trustee to make further changes to the amended and restated lpa prior to the formation of the partnership subject_to the right of an interested_party to object and hearing by the court the final lpa which contained minor changes to the amended and restated lpa was executed by all parties on date the partnership was formed and the a assets were contributed to the partnership on date although the execution of the final lpa could have occurred any time after date date was chosen because that was the date on which interested trust beneficiaries the trustee and persons involved in managing the a assets have traditionally met in addition the trustee wanted to utilize the interim period to make sure that all administrative details were given proper attention including necessary changes to computer systems and accounting procedures date is prior to date and date is subsequent to it law and analysis section of the taxpayer_relief_act_of_1997 extended from to years the period plr-133382-01 during which precontribution gain is recognized if property contributed to a partnership is distributed in-kind the amendment applies to property contributed to a partnership after its date effective date it does not apply however to any property contributed pursuant to a written binding contract in effect on date and at all times thereafter before such contribution if such contract provides for the contribution of a fixed amount of property conclusion based solely on the facts submitted and the representations made we conclude that the partners of x had a binding contract in effect on date to contribute a assets to x accordingly we conclude that section of the taxpayer_relief_act_of_1997 does not apply and that a will not recognize pre-contribution gain under sec_704 or sec_737 as a result of the in-kind distribution of a assets on or after date except as specifically set forth above no opinion is expressed or implied as to the federal_income_tax consequences of the transaction described above under any other provision of the code this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent sincerely david r haglund senior technician chief branch office of the associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes


internal_revenue_service number release date index number ------------------------------------------------------- ---------------------------------------------------------- ------------------------------------ ------------------------------ ------------------------------------------------ ------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact -------------------- id no ----------------- telephone number -------------------- refer reply to cc psi b01 plr-103947-11 date date legend x ------------------------------------------------------------------------------------- --------------------------------------------------- ------------------------------------------------------- y --------------------------------------------------- --------------------------- holding ------------------------------------------------------------------------------------------------------------------ ----------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------- ------------------------------------------------------- state ------------- dear ----------------- this responds to a letter dated date together with subsequent correspondence requesting a ruling as to the federal_income_tax consequences of a proposed transaction facts plr-103947-11 the information submitted states that x is a state corporation that is treated as a c_corporation for federal tax purposes x currently has seven shareholders x is the sole shareholder of y a state corporation x wants to restructure by undertaking the following transaction first six of x’s shareholders which are business entities treated as either a corporation a partnership or a disregarded_entity for federal_income_tax purposes will distribute their shares of x to each shareholder’s individual owners in a taxable transaction then those individual owners none of whom are nonresident_aliens together with the seventh shareholder of x which x represents is eligible to hold stock in an s_corporation will contribute their shares of x to holding a newly-formed business_entity holding will then own all of the issued and outstanding shares of x x will continue to own all the issued and outstanding shares of y x represents that holding will elect on or before the 15th day of the third month after its formation to be treated as an s_corporation for federal tax purposes in addition x represents that holding will elect to treat x as a qualified_subchapter_s_subsidiary qsub x represents that holding will have fewer than owners none of which would be ineligible to hold stock in an s_corporation x represents that after the proposed transaction holding will not have more than one class of stock law and analysis sec_1361 of the internal_revenue_code defines an s_corporation as a small_business_corporation for which an election under sec_1362 is in effect for such year sec_1361 provides that the term small_business_corporation means a domestic_corporation that is not an ineligible_corporation and that does not a have more than shareholders b have as a shareholder a person other than an estate a_trust described in subsection c or an organization described in subsection c who is not an individual c have a nonresident_alien as a shareholder and d have more than one class of stock sec_1361 identifies an ineligible_corporation as any corporation which is a a financial_institution which uses the reserve_method of accounting for bad_debts described in sec_585 b an insurance_company subject_to tax under subchapter_l c a corporation to which an election under sec_936 applies or d a disc or former_disc sec_1362 provides that except as provided in sec_1362 a small_business_corporation may elect in accordance with the provisions of sec_1362 to be an s_corporation plr-103947-11 conclusion based solely on the facts and representations submitted we conclude that holding will be eligible to be treated as an s_corporation the ruling contained in this letter is based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination except as specifically set forth above we express or imply no opinion concerning the federal tax consequences of the facts described above under any other provision of the code this ruling is directed only to the taxpayer s requesting it sec_6110 provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to x's authorized representative sincerely laura c fields laura c fields acting senior technician reviewer branch office of the associate chief_counsel passthroughs special industries enclosures a copy of this letter a copy for sec_6110 purposes cc