of f i c e of c h i ef c ou n sel department of the treasury i n t e r n al r e v e n u e s e r v i c e w ashington d c date cc ita b02 plr-p-135810-07 number info release date uil ---------------------------- ----------------------------- ------------------------- dear ----------------- this letter responds to a request for information submitted on your behalf by your representative your representative has requested information concerning the circumstances under which a court-ordered criminal restitution payment may be deductible under sec_162 or sec_165 of the internal_revenue_code ordinary and necessary expenses paid_by a taxpayer in carrying on the taxpayer’s trade_or_business generally may be deducted under sec_162 however deductions under sec_162 are disallowed for certain illegal payments for certain payments made in connection with a violation of antitrust laws and for any fine or similar penalty paid to a government for the violation of any law sec_162 f and g a fine or other similar penalty is defined in the regulations to include an amount_paid pursuant to a conviction or a plea of guilty or nolo contendere for a crime felony or misdemeanor in a criminal proceeding sec_1_162-21 however compensatory_damages paid to a government do not constitute a fine or penalty sec_1_162-21 if a payment ultimately serves each of these purposes ie law enforcement nondeductible and compensation deductible deductibility depends upon which purpose the payment was designed to serve 88_tc_1384 aff’d 850_f2d_611 9th cir for example in waldman the court held that a criminal restitution payment was nondeductible under sec_162 because the payments were made in satisfaction of the taxpayer’s criminal liability to the state even where the payments were made directly to victims as compensation_for their injury uncompensated losses sustained by a taxpayer during the taxable_year may be deductible under sec_165 for a loss to be deductible by an individual the loss must be incurred in the taxpayer’s trade_or_business be incurred in a transaction entered into for profit or arise from a casualty or theft sec_165 if a taxpayer illegally obtains funds in one year and repays the funds as restitution in a subsequent year the taxpayer may be entitled to a deduction upon repayment under sec_165 plr-p-135810-07 assuming the taxpayer included the amount in income when received 905_f2d_667 2d cir 67_tc_388 in the case of a taxpayer who illegally obtains funds as a result of a transaction entered into for profit rather than as a result of that taxpayer’s individual trade_or_business activity the deduction would be allowed under sec_165 and c see eg stephens supra yerkie supra o’hagan v commissioner tcmemo_1995_409 such deductions are miscellaneous_itemized_deductions allowed only to the extent that the total of the deductions exceed sec_2 percent of the taxpayer’s adjusted_gross_income sec_67 and b this letter has called your attention to certain general principles of the law and does not apply the law to your particular situation it is intended for informational purposes only and does not constitute a ruling see sec dollar_figure of revproc_2008_1 2008_1_irb_7 if you have any additional questions please contact our office at -------------------- sincerely thomas d moffitt chief branch associate chief_counsel income_tax accounting cc -----------------------------


internal_revenue_service national_office technical_advice_memorandum august number release date third party contact index uil no case-mis no tam-134061-03 cc ita b05 taxpayer's name taxpayer's address taxpayer's identification no years involved date of conference legend taxpayer tax_year state a affiliate affiliate affiliate year year act assets department date date date x percent y percent dollar_figurea dollar_figureb tam-134061-03 dollar_figurec dollar_figured dollar_figuree dollar_figuref buyer spe issue are certain gain proceeds from the sale of assets excludible by taxpayer from gross_income conclusion the taxpayer may exclude the gain proceeds on the sale of assets from gross_income because the funds it received from the sale were subject_to an unequivocal statutory and regulatory obligation to be paid to its customers and thus taxpayer did not have the unrestricted use dominion and control_over the funds facts taxpayer was organized as a state a business_trust and is an exempt public_utility holding_company three of taxpayer‘s wholly owned subsidiaries affiliate affiliate and affiliate collectively the companies operate in the electric utility industry taxpayer through its subsidiaries served electric and gas customers in state a in year state a enacted act which restructured the electric utility industry in state a by segregating the services of generation transmission and distribution of power act was intended to serve ratepayers by moving from a framework with regulated rates to a framework under which competitive producers will supply electric power and customers will gain the right to choose their electric power supplier it was anticipated that lower rates would result from increasing the competition and consumer choice in generation service unbundling of prices and services and separating generation services from transmission and distribution services act required electric utilities in state a to file detailed plans with department for restructuring their operations pursuant to act power generation became a competitive non-regulated industry for suppliers whereas distributors such as affiliate sec_2 and remained subject_to federal and state regulation act required utility distributors to obtain and resell power to customers who chose not to buy energy from competitive energy suppliers utilities thus disposed of generation facilities and therefore act resulted in the vertical disintegration of utility companies in order to facilitate the transition to a competitive market place act permits utilities to recover prudently incurred costs associated with generation-related assets and obligations through a transition charge mechanism transition costs eligible for this tam-134061-03 transition charge mechanism include unrecovered book basis in generation assets costs to terminate or renegotiate power purchase contracts unrecovered book basis in generation-related regulatory assets and certain employee transition costs to be eligible for transition cost_recovery act required department to verify that the electric utility company had i filed on or before date a plan to provide all of its retail customers the ability to purchase electricity from an alternative supplier or generation company as of date ii developed and will implement a plan to divest itself of its portfolio of assets by date and iii developed and will implement a plan for all required necessary and reasonable mitigation methods to reduce potential transition costs the plan formulated pursuant to i above must provide a standard service transition rate and rate reduction as required by act an electric company must mitigate its transition costs if department is to approve a company’s transition charge mechanism under act the mitigation efforts include the divestiture of assets this requirement is met if the electric company divests its assets by selling them in a competitive auction or in a process approved by department or by transferring assets to an affiliated company at a value determined to be reasonable by department if an electric company sells assets the net_proceeds from the sale must be applied as an offset to the company’s transition costs including unrecovered book cost of the company’s assets one provision in act states as follows all proceeds from any such divestiture and sale of generation facilities net of tax effects and less any other adjustments approved by the department that inure to the benefit of ratepayers shall be applied to reduce the amount of the selling electric company’s transition costs act’s requirement that the proceeds from the sale of generating facilities reduce transition costs is consistent with established department case law which provides that gains on the sales or other transfers of utility property must be returned to ratepayers typically by means of rate reductions if the sales proceeds are held by the utility for an extended period of time department may require the utility to reduce rates by any earnings on the proceeds the policy of department thus precludes regulated utilities from benefiting from the gain if any on the sale of regulated property the basis for this policy is that if ratepayers funded the purchase of property the gain associated with the sale of such property should be returned to ratepayers over time boston gas company d p u pincite gave the following rationale for this policy the regulated utility and its shareholders have received a return on the use of these parcels while they have been included in the rate base and are not entitled to any additional return as a result of their sale to hold otherwise would be to find that a regulated utility may speculate in utility property and despite earning a reasonable rate of return from its customers on that property may also tam-134061-03 if instead of selling assets a utility chose to divest by transferring its assets to an affiliated company the market_value in excess of book_value of the assets must be applied as an offset to the utility’s transition costs the transition charge mechanism accords a restructured utility with the opportunity to be reimbursed from its customers for defined transition costs not only is the utility eligible to receive a dollar for dollar reimbursement for its transition costs but it was also eligible to receive a return carrying_charge on its unrecovered transition costs act also stipulated that a utility would be entitled to retain a portion of any mitigation amounts this was intended as an incentive by the department for saving money for ratepayers accordingly pursuant to act and department policy if assets are sold the utility is required to reduce its transition costs to the same extent as the gain proceeds from the sale of assets this reduction or mitigation was accomplished by means of a residual_value credit rvc the rvc is an amortizable credit to the fixed component of the transition charge which equates to a reduced transition charge that would otherwise be billed to customers of the utility in summary when generating facilities are sold the gain proceeds from the sale reduce the company’s transition costs by means of the rvc which triggers a decrease to the transition charge billed to the ratepayers of the company alternatively the net_proceeds could be used to buyout burdensome above market power contracts thereby reducing transition costs to customers companies filed a restructuring plan the plan with department requesting approval from the state and federal energy commissions for companies to divest themselves of assets and power purchase contracts by using a competitive bidding process plan proposed to mitigate to the maximum extent possible the total amount of transition costs of taxpayer which would minimize the impact of the recovery_of transition costs on its ratepayers in compliance with act all proceeds from the divestiture and sale of assets net of tax effects were required to be applied to reducing the amount of the companies’ transition costs plan was approved by regulators companies reduced rates charged to all customers under plan companies were not only authorized by department to recover transition costs from customers but also a rate of return in their unrecovered transition costs of x percent department required affiliate sec_2 and to reduce their transition costs by the unrecovered cost of assets at a x percent rate which is an exact offset to what was previously included in the transition costs retroactive adjustment was made reducing transition costs by any earnings on the unrecovered costs all proceeds in excess of book would be paid to customers at the exact rate earned by those funds held in spe plan included a mitigation incentive for companies of y percent to be applied to that accumulate a windfall through its sale we find this to be an uncharacteristic risk reward situation for a regulated utility to be in with respect to the plant in service tam-134061-03 portion of the mitigation that exceeded a base-case threshold for the fixed component of the transition charge the base-case threshold for an asset was set at the net_book_value of that asset y percent would be applied to the extent that mitigation sales proceeds exceeded book_value of assets on the date of divestiture for the variable component of the transition charge which consisted mainly of above market payments for power contracts the base-case threshold was set at the estimated above market payments provided in the plan thus the mitigation incentive for reductions in the variable component of the transition charge was set at y percent of the amount by which the companies reduce their above market payments the companies have received dollar_figurea in mitigation incentives due to the sale of assets in tax_year companies sold substantially_all of assets to buyer for an amount net of certain adjustments of dollar_figureb buyer assumed all future material liabilities associated with assets assets had a book_value of dollar_figurec in tax_year department approved taxpayer’s proposal to establish spe a special purpose affiliate to administer and invest the above-book net_proceeds from the sale of the assets department required that the proceeds be invested in a portfolio of conservative securities the principal_amount and income earned were to be used to reduce the transition costs that would otherwise be billed to companies’ customers the funds being managed by spe represent the book gain ie the excess of sales proceeds over book basis from the sale of companies’ assets the two main deposits that make up the total amount of funds placed under spe’s management consist of dollar_figured and dollar_figuree any investment_income that spe earns on these funds is used to further mitigate transition costs by means of the rvc taxpayer has taken the position that under state a’s law spe can only deal with its parent company and not with otherwise affiliated companies thus taxpayer acts as a go-between entity where funds flow through taxpayer without any financial impact for instance affiliate paid its net sale proceeds to taxpayer which contributed the funds to spe spe holds and invests the funds when requested spe paid the funds to taxpayer which in turn paid the amounts to affiliate payments were made to affiliate sec_1 when that affiliate made or would make department-approved expenditures to or on behalf of their customers or when the rvc reduced the transition charge as companies use the rvc to reduce the monthly transition charge spe thus disburses an equivalent amount to companies via taxpayer in accordance with the law of state a if one of the companies elects with department approval to buyout a power contract or to buydown a regulatory asset spe transfers an equivalent amount to taxpayer who in turn transfers such monies to that company department reviews the operation and investments of spe spe files financial reports with department on a regular basis taxpayer filed a form_8275 disclosure statement with its tax_year form_1120 for the consolidated_return of taxpayer in the disclosure statement taxpayer asserted that companies have excluded from taxable_income gains related to the sale of assets because they do not have complete dominion over the proceeds from the sale of tam-134061-03 assets that department maintains absolute authority over the disposition of assets and the use of the proceeds that no economic benefit accrues to companies from the sale of assets and that all available proceeds including interest accrue to the benefit of customers companies did report dollar_figuref of depreciation_recapture law and analysis sec_61 of the internal_revenue_code defines gross_income as all income from whatever source derived sec_61 specifically refers to gains derived from dealings in property as an item_of_gross_income see also sec_1_61-1 a taxpayer must recognize the gain from the sale of property unless the gain is otherwise excluded by law sec_1_61-6 however the above definition must be considered in the context of the claim_of_right_doctrine which has evolved from cases such as 286_us_417 where the united_states supreme court held that i f a taxpayer receives earnings under a claim of right and without restrictions as to its disposition he has received income and accordingly must be taxed on it id pincite however where a taxpayer is obligated to dispose_of the money it receives in a certain way accruing no benefit to itself the funds are considered to be excluded from the taxpayer's gross_income see 51_f2d_939 8th cir accordingly for amounts to be included in gross_income the taxpayer must have both a claim of right to such amounts and they must be received without restriction while the supreme court has not directly addressed the precise issue presented by this case it has addressed the income_tax treatment of amounts received by utilities in other circumstances in 493_us_203 an electric utility ipl required certain customers with suspect credit to make deposits to insure prompt payment of future utility bills the customer was entitled to a refund of the deposit after making timely payments for several months or satisfying a credit test the customer could choose to take the refund by cash or check or to apply the refund against future bills the deposits were commingled with other receipts and at all times were subject_to ipl's unfettered use and control the service argued the deposits were advance_payments immediately includable in income while ipl argued they were analogous to loans and as such not taxable the court reasoned that the distinction between advance_payments and loans was one of degree rather than kind id pincite while both bestow economic benefits to the recipient economic benefits qualify as income only if they are undeniable accessions to wealth clearly realized and over which the taxpayers have complete dominion id pincite quoting 348_us_426 the key to determining whether a taxpayer enjoys complete dominion over a given sum is whether the taxpayer has some guarantee that he will be allowed to keep the money indianapolis power and light u s pincite the proper focus is on the rights and obligations of the parties at the time the payment was made id pincite because tam-134061-03 ipl’s customers controlled the ultimate disposition of the deposit and had not committed to purchasing any electricity at the time the deposit was made the court found that ipl had no guarantee that it would be allowed to keep the money and held that the deposit amount was not income a long line of cases have applied the above principles in determining whether amounts received by a taxpayer are includible in gross_income at the time of receipt these cases have consistently held that when a taxpayer receives funds with an unequivocal statutory or regulatory duty to repay the funds and thus the taxpayer receives no economic benefit from the funds the funds are not includible in the gross_income of the taxpayer at the time of receipt see 204_f2d_160 9th cir taxpayer a telephone utility was authorized by its regulatory commission to collect additional funds from customers in and through increased rates in order to curtail demand the commission indicated that the additional funds were not being received as additional revenue or collected for the taxpayer's benefit nor could the amounts collected inure to the benefit of the taxpayer’s shareholders but rather the amounts were paid into a special account over which the commission held ultimate control until the additional_amounts were held excludable from the taxpayer’s gross_income in and but were includible in gross_income when made available to the taxpayer in 792_f2d_683 7th cir rate increases collected by taxpayer a utility from its customers pursuant to state commerce commission's order to discourage consumption were excluded from gross_income in the years received because such increases were not intended to enrich nor be retained by the taxpayer and because the amounts collected were required to be repaid to customers in later years even though the customers obtaining the benefit of the repayments were not the same as the customers who paid the increased rates 125_f3d_1442 fed cir fuel cost overrecoveries received by taxpayer a utility from its customers were held excludable from gross_income because the taxpayer had a statutory obligation to repay such amounts to customers and thus did not have unrestricted dominion and control_over such amounts when received court concluded that it did not matter whether the amounts were refunded by check to customers or offset against customers’ bills since either method had the same effect and since the fuel cost system was designed to benefit the taxpayer’s customers not the taxpayer 114_tc_587 overrecoveries of estimated fuel and energy conservation costs held excludable from gross_income of taxpayer a utility in the tax_year received because utility did not have complete dominion and control_over such amounts upon receipt regulatory authority required taxpayer to return overrecoveries with interest to customers the repayment mechanism afforded taxpayer with no opportunity to benefit from overrecoveries and taxpayer was subject_to a fixed and certain liability to refund overrecoveries that was determinable at the time funds were received see also 210_f2d_367 4th cir cert_denied 347_us_1014 676_fsupp_151 w d mich electric energy inc v united_states cl_ct tam-134061-03 cinergy corp v united_states fed cl 16_tc_988 67_tc_333 taxpayer argues that the gain proceeds from the sale of assets plus the earnings thereon should be excluded from its gross_income in the year of the sale of assets because the statutory and regulatory scheme established by state a requires that such amounts be returned to ratepayers consequently the mechanism set up by taxpayer and approved by department provides that the economic benefits from the sale of assets inure to the benefit of the ratepayers not taxpayer and therefore the gain proceeds and the earnings thereon have been received by it subject_to a substantial restriction accordingly taxpayer’s position is that pursuant to all of the above cases the gain proceeds should be excluded from gross_income in revrul_2003_39 2003_17_irb_811 the service accepted the holdings in houston industries florida progress and cinergy corp and concluded that taxpayers may exclude fuel cost and energy conservation cost overrecoveries from gross_income in cases involving facts substantially_similar to those in these three cases the field however argues that this case does not involve facts substantially_similar to those in houston industries florida progress and cinergy in fact the field contends that this case is distinguishable from all of the cases cited above because the facts here involve amounts received from the sale of property whereas none of the above cases involved a property sale by a taxpayer the field contends that taxpayer sold its generating assets at a gain which is a separate and distinct taxable transaction that must be recognized notwithstanding taxpayer's obligation to reduce transition costs in the future the field cites two cases 841_f2d_1108 fed cir cert_denied 488_us_952 and 48_tc_411 where courts have recognized that income must be reported when a taxpayer sells property or services for compensation notwithstanding a taxpayer's further obligation to refund the money or pay the money out to a third party in 841_f2d_1108 fed cir cert_denied 488_us_952 surcharges paid_by ratepayers to finance the construction of a generating station were held includible in the gross_income of iowa southern a utility the field and the taxpayer agree that the mechanisms set up in the plan do not result in a permanent impairment of the fisc instead through reduced deductions use of the rvc to reduce transition charges or operation of other mechanisms the government will be made whole in subsequent tax years with the result that the timing rather than the amount of taxpayer’s gross_income ultimately is what is in issue here tam-134061-03 upon receipt notwithstanding the utility's unconditional obligation to refund the amounts to customers as a negative surcharge over a year period starting at the time the generating station begins operation the court noted that the tariff sheet which established the utility's authorized rates provided that the charges for electric service be increased to recover the financing charges associated with the generating station’s construction which indicated that the surcharges were compensation_for electric services id pincite the field contends that the gain proceeds received on the sale of taxpayer's assets should be treated no differently that is as income under sec_61 since the proceeds were received in exchange for property rather than as compensation_for electric services furthermore the field contends that the rvc which reduces the transition costs should be treated like the refunds in iowa southern -- as a reduction in future income in iowa southern the court found that the taxpayer did not have an unequivocal contractual statutory or regulatory duty to repay the surcharges so that it really was just the custodian of the money rather than a duty to repay there was only a regulatory policy on the allowable rates for electric service which allowed the rates to be lowered in future years to offset the increase id in the subject case notes the field taxpayer sold assets at a gain act merely formalizes a regulatory policy which requires rates charged to customers to be lowered in future years by the amount of the gain proceeds by means of the rvc the instant case illustrates the distinction between two cases both decided by the court_of_appeals_for_the_federal_circuit iowa southern supra which predated indianapolis power and light and houston industries supra which was decided after indianapolis power and light this distinction was discussed fully by that court in houston industries which noted that the surcharge ie rate increase in iowa southern was taxable_income to the utility because it was for the benefit of the utility - to finance construction of a power plant- and the utility paid no interest on the funds more critically unlike indianapolis power light the court identified no unequivocal contractual statutory or regulatory duty to repay the funds f 2d pincite consequently the federal_circuit found that due to the absence of any independent repayment requirement the iowa southern utilities had exercised dominion and control_over the surcharge and derived benefit from their retention of the money thereby requiring those sums to be included in income houston industries which addressed the taxability of certain fuel cost overrecoveries held that because the taxpayer had an unconditional obligation to repay to its customers all overrecoveries received the overrecoveries could not be characterized as income the court_of_appeals_for_the_federal_circuit noted that the overrecoveries were similar in several respects to the deposits in indianapolis power and light co first the taxpayer in houston industries derived no benefit from the overrecoveries the stated purpose of the regulatory scheme that caused the overrecoveries was to benefit the customers not the taxpayer moreover the taxpayer was required to pay interest on the overrecoveries further the taxpayer had a statutory obligation to repay the tam-134061-03 overrecoveries at the time it collected its customers' payments although an overrecovery could be offset by a later underrecovery this alternative method of repayment did not affect the taxpayer's obligation to repay while the taxpayer could not be certain at the end of the tax years in question of the method of repayment its obligation to repay with interest was set at the time of overpayment consequently under these circumstances the taxpayer acted as a custodian of these funds and thus unlike the utility in iowa southern was found not to be taxable on the amounts in issue in our view the instant case is closer to houston industries than it is to iowa southern first the court in iowa southern specifically found that there was no statutory or regulatory duty to repay the surcharges to the utilities customers in the instant case act established a statutory requirement that utilities cease vertical integration and that all proceeds from any such divestiture and sale of generation facilities shall be applied to reduce the amount of the selling electric company’s transition costs therefore taxpayer had a statutory and regulatory obligation to pay to its customers the amounts received from the sale of the assets in excess of book basis with interest moreover whereas the utility in iowa southern did benefit from the surcharge by being permitted to retain the power generating plant financed by the surcharge even if it did have to refund the surcharge in later years through lower electric charges in this case taxpayer divested itself of assets and also was not permitted by act and the longstanding regulatory policy of department to retain the gain proceeds of the divestiture in other words taxpayer could retain neither its assets nor the full economic benefit of the gain proceeds from the sale of its assets finally in iowa southern the utility paid no interest on the funds raised from the surcharge whereas in the instant case taxpayer must reduce transition charges dollar for dollar by the amount of earnings on the funds held in spe the field also cites artnell in support of its position in artnell the taxpayer the owner of a baseball team sold tickets to its baseball games in advance of the date on which such games were to be played the taxpayer argued that it should be able to exclude the portion of advance ticket sales revenue related to federal admissions tax city amusement tax and the portion that must be paid to the visiting team under league rules the court concluded that because the ticket purchaser was liable for the federal admissions tax the taxpayer was pursuant to a federal statute merely a collector of the tax on behalf of the united_states government and thus the tax was excluded from the taxpayer’s gross_income with regard to the city tax the court concluded that the taxpayer was liable for the tax not the ticket purchaser because no provision of the city’s laws or ordinances which would make the taxpayer the agent or trustee of the city had been brought to the court’s attention accordingly the court found no reason to exclude such receipts from gross_income finally with regard to the portion to be paid to the visiting team the court concluded that the portion was paid to the taxpayer for playing the games and its later liability to the visiting team did not alter the taxpayer’s claim to the income significantly the court found that the games may not be played and therefore the taxpayer would not be liable for the city amusement tax or the visiting team’s portion tam-134061-03 the field argues that taxpayer is in the same position as the baseball club owner in artnell that is it is not a collection agent of the ratepayers with respect to the sale of assets just as the baseball club owner was not collecting amounts as an agent of the city the league or the opposing ball clubs consequently taxpayer should be required to include the full amount of the gain proceeds in income just as the taxpayer in artnell was required to include all amounts in its gross_income other than the federal admissions tax however artnell is distinguishable from the present case because the taxpayer there apart from the federal admissions tax was collecting a ticket price to which it was entitled to the entire amount the taxpayer could charge the customer any amount it wanted for the ticket and could increase the price of the ticket to cover the tax nevertheless it was the taxpayer not the customer who was liable for the tax therefore the taxpayer was not collecting on behalf of the city an amount that the ticket customer owed to the city instead the taxpayer was collecting a fee to which it was entitled for the ticket from that fee the taxpayer later will pay its expenses including taxes we find that artnell is inapposite here primarily because it did not involve a duty to repay an amount of funds nor did it involve a substantial restriction on the taxpayer’s dominion and control of the amounts collected from the sale of tickets in this case unlike the taxpayer in artnell who was entitled to the entire ticket price by statute and regulatory policy taxpayer was not entitled to retain the funds it received from the sale of assets in excess of book basis because it is a regulated utility selling regulated property the gain inherent in that property belonged to its customers in our view the field’s view that this case is somehow different from a long line of case authority due to the fact that the transaction in the instant case involves proceeds from the sale of property rather than fuel cost overrecoveries surcharges or other_amounts received by a taxpayer is a distinction without a substantive difference whether the amounts in issue are received by a taxpayer as gain from dealings in property governed by sec_61 and sec_1001 or as the result of a transaction governed by some other provision in sec_61 the principles enunciated in the above cases determine whether or not such amounts are includible by that taxpayer in gross_income when received in particular the one overriding principle for determining if such amounts are includible in gross_income at the time of receipt is whether the taxpayer has unrestricted dominion and control_over the funds at the time of receipt such that the taxpayer has some guarantee that he will be allowed to keep the money indianapolis power and light u s pincite in the instant case we do not think that taxpayer has the unrestricted dominion and control_over the gain proceeds received from the sale of assets necessary for such amounts to be included in taxpayer’s gross_income in tax_year taxpayer is a regulated utility governed by department in the instant case the state a taxpayer did include a portion of the gain from the sale of assets i its gross_income in tax_year the amount of gain that taxpayer included in gross_income was equal to the difference between adjusted tax basis and book basis of assets an amount to which taxpayer acknowledged it received under a claim of right and without restriction tam-134061-03 legislature believed that the ratepayers of state a would benefit from unbundling the generation of electricity from its transmission and distribution as a result act was designed to encourage utilities to achieve cost savings for customers which was the rationale for the provisions dealing with the disposition of generating assets in a competitive bidding process like the regulations at issue in houston industries supra the purpose of act which resulted in the sale of assets was to benefit ratepayers not taxpayer although taxpayer could select the method by which it returned to the ratepayers the gain proceeds from the sale of assets it nevertheless was required to develop a plan to return such funds with interest to ratepayers and that plan had to be approved and monitored by department consequently in the instant case we agree with taxpayer that it received the funds in excess of assets’ book basis under an unequivocal statutory and regulatory duty to repay the funds to its ratepayers and thus taxpayer received no economic benefit from those funds accordingly under the cases cited above we conclude that taxpayer was not required to include such funds in gross_income in tax_year see eg illinois power co supra pincite a taxpayer is allowed to exclude from his income money received under an unequivocal contractual statutory or regulatory duty to repay it caveat a copy of this technical_advice_memorandum is to be given to the taxpayer s sec_6110 of the code provides that it may not be used or cited as precedent


internal_revenue_service department of the treasury index number washington dc number release date person to contact telephone number refer reply to cc dom p si plr-121133-98 date date legend x a b d1 d2 dear this letter responds to a letter dated date and subsequent correspondence written on behalf of x requesting a ruling under sec_1362 of the internal_revenue_code that x's s_corporation status will be effective as of the taxable_year beginning d2 facts according to the information submitted x was incorporated on d1 subsequently it was decided that x would be an s_corporation a and b the only shareholders of x hired an attorney to file x's form_2553 election by a small_business_corporation with an effective date of d2 the attorney however failed to timely file x's form_2553 x requests a ruling that it will be recognized as an s_corporation effective for the taxable_year beginning d2 under sec_1362 plr-121133-98 law and analysis 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 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 beginning the year in which the election is made 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 be treated as an s_corporation until the taxable_year after the year in which the s election is made sec_1362 provides that if an election under sec_1362 is made for any taxable_year after the date prescribed by sec_1362 for making the election or 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 the election then the secretary may treat the election as timely made for such taxable_year conclusions based solely on the facts submitted and representations made we conclude that x has established reasonable_cause for not making a timely election and is eligible for relief under sec_1362 accordingly if x makes an election to be an s_corporation by filing with the appropriate service_center a completed form_2553 containing an effective date of d2 for the election within days following the date of this letter then such election will be treated as timely made a copy of this letter should be attached to the form_2553 filed with the service_center a copy is enclosed for that purpose except as specifically set forth above no opinion is expressed concerning the federal tax consequences of the facts described above under any other provision of the code specifically no opinion is expressed concerning whether x is an s_corporation for federal tax purposes plr-121133-98 this ruling is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent sincerely yours donna m young senior technician reviewer branch office of the assistant chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes


internal_revenue_service 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 ita b02 plr-116451-16 date date ty -- legend taxpayer ex-spouse ------------------------------------- ------------------------------------- ---------------------- date ---------------------------- date ------- a ----- b ------------ c --------------------- state a ----------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------- 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------------------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------------- plr-116451-16 dear --------------- this is in response to your request for a private_letter_ruling which was received by the service on date you requested a ruling that certain lump sum payments you are required to make to ex-spouse pursuant to a court judgment constitute alimony payments within the meaning of sec_215 and sec_71 facts taxpayer is an individual on date the family court in state entered a divorce decree and a court judgment in proceedings between taxpayer and ex-spouse the court judgment effectuated an agreement between taxpayer and ex-spouse among other provisions the court judgment provided for lump sum and annual payments of alimony paragraph of the court judgment reads as follows a taxpayer represented that there have been no lump sum alimony payments to date law and analysis sec_215 provides in the case of an individual there shall be allowed as a deduction an amount equal to the alimony or separate_maintenance payments paid during such individual’s taxable_year sec_215 provides that the term alimony or separate_maintenance means any alimony_or_separate_maintenance_payment as defined in sec_71 which is includible in the gross_income of the recipient under sec_71 sec_71 provides that gross_income includes amounts received as alimony or separate_maintenance payments sec_71 defines the term alimony_or_separate_maintenance_payment as any payment in cash if-- a such payment is received by or on behalf of a spouse under_a_divorce_or_separation_instrument b the divorce_or_separation_instrument does not designate such payment as a payment which is not includible in gross_income under sec_71 and not allowable as a deduction under sec_215 c in the case of an individual legally_separated from his spouse under a decree of divorce or of separate_maintenance the payee spouse and the payor spouse are not members of the same household at the time such payment is made and d there is no liability to make such payment for any period after the death of the payee spouse and there is no liability to make any payment in cash or property as a substitute for such payment after the death of the payee spouse plr-116451-16 if a payment satisfies all of the factors set forth in sec_71 then it is alimony but if it fails to satisfy any one of the above factors it is not alimony rood v commissioner tcmemo_2012_122 the mere fact that the documents may characterize a payment as alimony has no effect on the consequences of that payment for federal tax purposes 102_f3d_842 6th cir the payment is required pursuant to a court judgment entered as part of the divorce proceeding the first requirement is satisfied taxpayer represented that the parties will not be members of the same household at the time the lump sum payments are made the third requirement is satisfied if the divorce decree or other relevant document does not expressly state that the payment obligation terminates upon the death of the payee spouse the payment will qualify as alimony provided that the termination of the obligation would occur by operation of state law hoover f 3d pincite see also notice_87_9 1987_1_cb_421 divorce_or_separation_instrument executed after date need not expressly state that the payor spouse’s liability ends upon payee’s death if termination would occur by operation of state law the relevant document does not provide that the lump sum payments will terminate upon the death of the payee spouse however state law provides that the payment will terminate upon the death of the payee spouse see cohan v feur n e 2d mass the fourth requirement is satisfied the second requirement is not satisfied in this case the court judgment provides that the lump sum payments are non-taxable to ex-spouse and non-deductible by taxpayer the written instrument does not specifically reference sec_71 and sec_215 however the tax_court has held that the designation in the instrument need not specifically refer to sec_71 and sec_215 the instrument must contain a clear explicit and express direction that the payments are not to be treated as income for the payments not to satisfy this second requirement if there is no express direction that the payments are not to be treated as income the payments are considered alimony for federal_income_tax purposes baker v commissioner tcmemo_2000_164 see also jaffe v commissioner tcmemo_1999_196 there is an express designation in the court judgment that the lump sum payments are not includible in ex-spouse’s income therefore the lump sum payments are not alimony this is especially apparent in this case because the parties agreed the annual alimony payment was taxable to ex-spouse and deductible by taxpayer the annual alimony payments would qualify as alimony for federal_income_tax purposes rulings based solely on the information submitted and the representations set forth above we rule that the b lump sum payments of alimony of dollar_figurec ordered pursuant to the court judgment effectuating taxpayer’s and ex-spouse’s agreement do not constitute alimony payments within the meaning of sec_71 and sec_215 caveats plr-116451-16 except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter no opinion is expressed as to the federal tax treatment of the transaction under any other provisions of the internal_revenue_code and the treasury regulations that may be applicable or under any other general principles of federal income_taxation this letter_ruling is only applicable to matters under our jurisdiction see revproc_2016_1 2016_1_irb_1 sec_1 no opinion is expressed as to the tax treatment of any conditions existing at the time of or effects resulting from the transaction that are not specifically covered by the above ruling this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination enclosed is a copy of this letter_ruling showing the deletions proposed to be made in the letter when it is disclosed under sec_6110 sincerely ______________________________ bridget e tombul branch chief branch office of the associate chief_counsel income_tax accounting ----------------------------------- enc copy for sec_6110 purposes


t c summary opinion united_states tax_court carolee flygare argyle petitioner v commissioner of internal revenue respondent docket no 19534-08s filed date carolee flygare argyle pro_se rebekah a myers for respondent gerber judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect when the petition was filed pursuant to sec_7463 the decision to be entered is not reviewable by any other court 1unless otherwise indicated all section references are to the internal_revenue_code_of_1986 as amended and this opinion shall not be treated as precedent for any other case in a final notice_of_determination respondent denied petitioner’s request for sec_6015 relief from joint_and_several_liability for her unpaid federal_income_tax liability because the liability results from an underpayment_of_tax petitioner does not qualify for relief under sec_6015 or c and we consider her entitlement to equitable relief under sec_6015 background2 petitioner resided in utah when she filed her petition during the year in issue petitioner was married to james newkirk and resided in florida petitioner and mr newkirk were employed by at t and were laid off during date mr newkirk withdrew dollar_figure from his pension during petitioner and mr newkirk sold their home in florida and moved to utah in date by the time petitioner found employment around august or september of the withdrawn pension proceeds had been expended on the purchase of a car approximately dollar_figure closing costs on the sale of their home approximately dollar_figure to dollar_figure moving_expenses approximately dollar_figure and living_expenses for the period petitioner was unemployed 2the parties’ stipulation of facts and the exhibits are incorporated by this reference petitioner and mr newkirk jointly filed a timely form_1040 u s individual_income_tax_return for on the return they reported the pension withdrawal and reported a balance due of dollar_figure neither petitioner nor mr newkirk paid the balance due petitioner and mr newkirk divorced in date the divorce decree stated that should any debts exist from this marriage each debt shall be the responsibility of the party incurring the debt but did not specifically assign the unpaid tax_liability to either petitioner or mr newkirk petitioner has since remarried on date petitioner submitted a form_8857 request for innocent spouse relief on date respondent issued to petitioner a preliminary determination denying her request on date petitioner appealed the preliminary determination by filing a form statement of disagreement on date respondent issued a final notice_of_determination denying relief in a document dated date it was explained that respondent had reconsidered petitioner’s request for innocent spouse relief but again determined that she was not entitled to relief petitioner filed a timely petition with the court for review of respondent’s determination to deny relief discussion in general spouses who elect to file a joint federal_income_tax return for the taxable_year are jointly and severally liable for the entire amount of tax reported on the return even if the income giving rise to the tax_liability is attributable to only one of them sec_6013 see sec_1_6013-4 income_tax regs a taxpayer may be relieved from joint_and_several_liability under sec_6015 if taking into account all the facts and circumstances it would be inequitable to hold the taxpayer liable for any unpaid tax or deficiency the commissioner has issued revenue procedures listing factors normally considered in determining whether sec_6015 relief should be granted see revproc_2003_61 2003_2_cb_296 modifying and superseding revproc_2000_15 2000_1_cb_447 this court has jurisdiction to review the commissioner’s denial of sec_6015 relief using a de novo standard of review see sec_6015 132_tc_203 i threshold conditions for granting relief to be eligible for sec_6015 relief the requesting spouse must satisfy the following threshold conditions i the requesting spouse must have filed a joint_return for the taxable_year for which relief is sought ii relief is not otherwise available to the requesting spouse under sec_6015 or c iii no assets were transferred between the spouses as part of a fraudulent scheme by the spouses iv the nonrequesting spouse did not transfer disqualified assets to the requesting spouse v the requesting spouse did not file or fail to file the tax_return with fraudulent intent and vi absent enumerated exceptions the income_tax_liability from which relief is sought is attributable to an item of the nonrequesting spouse revproc_2003_61 sec_4 c b pincite respondent has conceded that petitioner satisfies the above requirements for sec_6015 relief ii circumstances in which relief is ordinarily granted where the threshold conditions have been met the commissioner will ordinarily grant relief if the requesting spouse meets the elements set forth under revproc_2003_61 sec_4 c b pincite to qualify for relief under the revenue_procedure the requesting spouse must no longer be 3respondent conceded that for purposes of this case the court could proceed with the merits of whether there was an abuse_of_discretion in denying petitioner sec_6015 relief even though her claim for relief was beyond the 2-year period established by the secretary that is so because this court’s precedent at the time of trial did not limit taxpayers to years within which to seek sec_6015 relief in addition respondent had no right to appeal our holding as petitioner had elected to have her case heard under the provisions of sec_7463 it is also noted that there would be no need to address the year limitation because petitioner is unsuccessful on the merits married to be legally_separated from or not have been a member of the same household as the nonrequesting spouse at any time during the 12-month_period ending on the date of the request for relief have had no knowledge or reason to know when she signed the return that the nonrequesting spouse would not pay the tax_liability and suffer economic hardship if relief is not granted marital status petitioner and mr newkirk were divorced at the time she filed her request for relief knowledge or reason to know mr newkirk withdrew dollar_figure from his pension in when petitioner signed the tax_return she knew there was a balance due and was aware that she and her former spouse had already spent all of the withdrawn proceeds of the pension petitioner therefore knew that mr newkirk did not have any money left to pay their income_tax_liability economic hardship a requesting spouse suffers economic hardship if paying the tax_liability would prevent her from paying reasonable basic living_expenses sec_301_6343-1 proced admin regs revproc_2003_61 sec_4 c a ii c b pincite petitioner earns dollar_figure per month and has monthly expenses totaling dollar_figure dollar_figure for utilities dollar_figure for telephone dollar_figure for food dollar_figure for medical_expenses dollar_figure for life_insurance dollar_figure for clothing and dollar_figure for television and internet services on form_8857 petitioner claimed monthly expenses for rent dollar_figure and car expenses dollar_figure but petitioner testified that these expenses are in fact currently paid_by mr argyle at trial petitioner also claimed that she has additional expenses for her son’s car and a dirt bike but assuming arguendo that these expenses constitute reasonable basic living_expenses petitioner gave no indication as to the amounts of these additional expenses because petitioner’s income exceeds her reasonable basic living_expenses by dollar_figure per month she would not meet the economic hardship requirement if relief is denied accordingly petitioner is not entitled to relief under revproc_2003_61 sec_4 iii revproc_2003_61 sec dollar_figure factors where a requesting spouse fails to qualify for relief under revproc_2003_61 sec_4 a determination to grant relief may nevertheless be made under revproc_2003_61 sec_4 c b pincite revproc_2003_61 sec_4 provides a nonexclusive list of factors the internal_revenue_service will consider in making that determination marital status economic hardship knowledge or reason to know nonrequesting spouse’s legal_obligation significant benefit good-faith effort to comply with income_tax laws spousal abuse and mental or physical health no single factor is determinative and all factors are to be considered and weighed appropriately see haigh v commissioner tcmemo_2009_140 marital status petitioner and mr newkirk were divorced in date this factor thus weighs in favor of relief economic hardship as discussed supra petitioner will not suffer economic hardship if relief is denied this factor therefore weighs against relief knowledge or reason to know as discussed supra petitioner knew that her former spouse would not pay the joint tax_liability at the time she signed the return this factor weighs against relief nonrequesting spouse’s legal_obligation the divorce decree did not direct petitioner’s former spouse to pay the joint tax_liability since mr newkirk had no legal_obligation to pay the outstanding income_tax_liability pursuant to a divorce decree or agreement this factor is neutral significant benefit petitioner received a significant benefit from nonpayment of the tax_liability because she and her former spouse used some of the withdrawn pension proceeds to purchase a new car this factor thus weighs against relief good-faith effort to comply with income_tax laws petitioner and her current husband’s tax_return was stamped by respondent as received on date but the return was signed by petitioner and mr argyle on date there is no evidence as to when the return was postmarked respondent stated on brief however that he is not aware of any information that mrs argyle has not made a good-faith effort to comply with income_tax laws in the taxable years following the taxable_year this factor thus favors relief spousal abuse mr newkirk did not abuse petitioner during their marriage this factor is thus neutral mental or physical health there is no evidence or allegation that petitioner was in poor mental or physical health at the time she signed the return or at the time she requested sec_6015 relief this factor is thus neutral iv conclusion of the factors listed in revproc_2003_61 sec_4 three weigh against relief lack of economic hardship knowledge or reason to know and significant benefit two favor relief marital status and good-faith effort to comply with tax laws and three are neutral nonrequesting spouse’s legal_obligation spousal abuse and mental or physical health after considering and weighing all the factors we find that it is equitable to hold petitioner liable for her unpaid tax_liability to reflect the foregoing decision will be entered for respondent


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-112794-00 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 incorporated on a in state company has one shareholder shareholder it is represented that company has intended to be an s_corporation since its incorporation however company discovered that its s election had not been timely filed company requests a ruling that its sec_1362 election will be treated as timely made for its taxable_year that begins on a sec_1362 provides that a small_business_corporation may elect to be an s_corporation sec_1362 explains 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 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 plr-112794-00 applying the relevant law to the facts submitted and representations made we rule that company's sec_1362 election will be treated as timely made for its taxable_year that begins 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 the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination except as specifically set forth above we express no opinion concerning the federal tax consequences of the foregoing facts specifically we express 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 the taxpayer’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 robert honigman acting assistant to the chief branch office of the associate chief_counsel passthroughs and special industries enclosure copy for sec_6110 purposes


internal_revenue_service department of the treasury index no washington dc i person to contact telephone number refer reply to cc dom fi p plr-119125-98 date feb legend company state county year year n i date date date o n i w j u n dear sir or madam this is in response to your request for an extension of as provided for under sec_301_9100-1 of the procedure and time administration regulations to file a carryforward excess volume_cap election pursuant to sec_146 from year to year county represents the following set of facts of the internal_revenue_code facts state's governor is responsible for allocating the state's private_activity_bond volume_cap among the governmental units croats moind anthortpy te tssue private activity ber terre plr-119125-98 q cnb ps crone a c7 a political_subdivision of state authorized to issue revenue company approached county about financing the is bonds construction of a power plant the project that represented will qualify as under sec_142 company in year activity bond volume_cap to county for the project on date the governor allocated w of private the project will be owned and operated by county applied to state for an allocation of volume_cap a solid_waste_disposal_facility it is despite being allocated volume_cap county did not issue however state was not aware bonds for the project in year that the bonds were not issued and no election to carryforward the w of volume_cap was filed failure it agreed to let company take responsibility for filing the late election provided the election was promptly filed and company hired counsel to ensure the allocation was preserved a subsequent written communication from the counsel for company to state acknowledged counsel's responsibility for preparation and filing of the election to carryforward w of year volume_cap when state discovered this company submitted a form_8328 on date and immediately thereafter submitted this private_letter_ruling request and this ruling_request were submitted before the failure to make the regulatory election was discovered by the service however form_8328 was incorrectly completed informed of the incorrect completion of form_8328 during national_office consideration of the private_letter_ruling request was corrected and filed with the internal_revenue_service in ogden utah on date granting an extension of time to file the form_8328 will not result in the taxpayer having a lower tax_liability in year form taking into account the time_value_of_money the taxable_year affected by the amended than if the carryforward election had been timely made counsel was form form law sec_146 f provides that if an issuing authority's volume_cap for any calendar_year after exceeds the aggregate amount of tax-exempt private_activity_bonds issued during the calendar_year by the authority the authority may elect to treat all one or more carryforward purposes or any portion of the excess as a carryforward for the election is made by filing a form_8328 with the internal form_8328 must be filed revenue service_center ogden ut by the earlier of the year in which the excess_amount arises or issue of bonds issued pursuant to the carryforward election of the calendar_year following february the date of sec_301 9100-l c provides in part that the commissioner has discretion to grant a reasonable extension of time to make a requlatory epleerion eb fdefire boas elo vs cums cmen eee oo _ plr-119125-98 published in the internal_revenue_bulletin or a statutory election but no more than months except in the case of a taxpayer who is abroad under all subtitles of the code except subtitles e h and i g sec_301_9100-3 through c i of the regulations sets forth rules that the internal_revenue_service generally will use to determine whether under the facts and circumstances of each situation the commissioner will grant an extension of time for regulatory elections that do not meet the requirements of sec_301_9100-2 sec_301_9100-3 provides that subject_to paragraphs b i through iii taxpayer applies for relief under this section before the failure to make the regulatory election is discovered by the service the taxpayer will be deemed to have acted reasonably and in good_faith sec_301_9100-3 provides that the interests of the government are prejudiced if granting relief would result in the taxpayer having a lower tax_liability in the aggregate for all years to which the regulatory election applies than the taxpayer would have had if the election had been timely made taking into account the time_value_of_money sec_301_9100-3 when a of conclusion while the form_8328 submitted with the request was incorrectly completed this ruling_request was submitted before the service discovered the failure to make the election moreover the government is not prejudiced by the granting of this relief submitted county is granted an extension of time to date file a correctly completed form_8328 for year for a carryforward of volume_cap in the amount of w accordingly based on the facts and representations to this letter is directed only to the taxpayer who requested sec_6110 provides that it may not be used or cited it as precedent office a copy of this letter is being sent to your authorized representative pursuant to a power_of_attorney on file with this sincerely yours ja pfs is a assistant chief_counsel financial institutions products ua enclosure 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 b03 plr-117226-15 date november ------------------------------------------- x --------------------------------------------------- state d1 d2 d3 d4 year ----------- ------------------- ------------------- -------------------------- ---------------------- ------- dear ------ --------------- this responds to a letter dated date and subsequent correspondence submitted on behalf of x by its authorized representative requesting a ruling under sec_1362 of the internal_revenue_code facts the information submitted states that x was incorporated under the laws of state on d1 and elected to be an s_corporation effective d1 on d2 x filed restated articles of incorporation to authorize two classes of stock consisting of one class of voting common_stock voting_stock and a second class of non-voting common_stock non- voting_stock on a number of occasions beginning on d3 x sold shares of non- voting_stock to various individuals the non-voting shareholders each of the non- voting shareholders also entered into an agreement the subscription agreement with x under which x maintained the right to redeem the non-voting shareholders’ shares at a redemption price in excess of the then-current fair_market_value of the non- voting shares the redemption right there was no such redemption right relating to the voting_stock in year x became aware that the redemption right potentially caused the non- voting_stock to be a second class of stock that could terminate x’s s_corporation plr-117226-15 election on d4 each non-voting shareholder agreed to revise his or her subscription agreement to modify the redemption right such that the redemption price would be equal to the fair_market_value of any redeemed shares at the time of redemption x has not redeemed any non-voting stock at any time and therefore has not given effect to the redemption right either before or after its modification x represents that it was not aware that the redemption right possibly created a second class of stock that could terminate its s_corporation_election x further represents that any termination of its s_corporation_election was not motivated by tax_avoidance or retroactive tax planning x and its shareholders have agreed to make any adjustments that the commissioner may require consistent with the treatment of x as an s_corporation x requests a ruling that a termination of x's s_corporation_election due to the issuance of a possible second class of stock was inadvertent within the meaning of sec_1362 furthermore notwithstanding the termination of its s_corporation_election x requests that it will be treated as an s_corporation from d3 and thereafter law and analysis sec_1361 provides that the term s_corporation means with respect to any taxable_year 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 which is not an ineligible_corporation and which does not a have more than shareholders b have as a shareholder a person other than an estate a_trust described in sec_1361 or an organization described in sec_1361 who is not an individual c have a nonresident_alien as a shareholder and d have more than one class of stock sec_1_1361-1 provides in part that a corporation that has more than one class of stock does not qualify as a small_business_corporation except as provided in sec_1_1361-1 relating to instruments obligations or arrangements treated as a second class of stock a corporation is treated as having only one class of stock if all outstanding shares of stock of the corporation confer identical rights to distribution and liquidation proceeds differences in voting rights among shares of stock of a corporation are disregarded in determining whether a corporation has more than one class of stock sec_1_1361-1 provides in part that the determination of whether all outstanding shares of stock confer identical rights to distribution and liquidation proceeds is made based on the corporate charter articles of incorporation bylaws applicable state law and binding agreements relating to distribution and liquidation proceeds collectively the governing provisions plr-117226-15 sec_1_1361-1 provides that buy-sell agreements among shareholders agreements restricting the transferability of stock and redemption agreements are disregarded in determining whether a corporation's outstanding shares of stock confer identical distribution and liquidation rights unless a principal purpose of the agreement is to circumvent the one class of stock requirement of sec_1361 and sec_1_1361-1 and the agreement establishes a purchase_price that at the time the agreement is entered into is significantly in excess of or below the fair_market_value of the stock sec_1_1361-1 further provides that agreements that provide for the purchase or redemption of stock at book_value or at a price between fair_market_value and book_value are not considered to establish a price that is significantly in excess of or below fair_market_value of the stock and thus are disregarded in determining whether the outstanding shares of stock confer identical rights sec_1362 provides that except as provided in sec_1362 a small_business_corporation may elect to be an s_corporation sec_1362 provides that an election under sec_1362 will be terminated whenever at any time on or after the 1st day of the 1st taxable_year for which the corporation is an s_corporation such corporation ceases to be a small_business_corporation sec_1362 provides in part that if an election under sec_1362 by any corporation was terminated under sec_1362 the secretary determines that the circumstances resulting in such termination were inadvertent no later than a reasonable period of time after discovery of the circumstances resulting in such termination steps were taken so that the corporation for which the termination occurred is a small_business_corporation and the corporation for which the termination occurred and each person who was a shareholder in the corporation at any time during the period specified pursuant to sec_1362 agrees to make such adjustments consistent with the treatment of the corporation as an s_corporation as may be required by the secretary with respect to such period then notwithstanding the circumstances resulting in such termination such corporation shall be treated as an s_corporation during the period specified by the secretary conclusion based solely on the facts submitted and representations made we conclude that x's s_corporation_election may have terminated on d3 as a result of x issuing more than one class of stock subsequent issuances of this stock between d3 and d4 could also have caused a termination we further conclude that if x’s s_corporation_election terminated such termination was inadvertent within the meaning of sec_1362 plr-117226-15 x has taken corrective action so that it once again meets the requirements of a small_business_corporation under sec_1361 therefore we determine that pursuant to the provisions of sec_1362 x will be treated as continuing to be an s_corporation from d3 and thereafter provided that x's s_corporation_election was otherwise valid and apart from the inadvertent termination ruling described above has not otherwise terminated under sec_1362 except as specifically set forth above we express or imply no opinion as to the federal tax consequences of the facts described above under any other provision of the code in particular no opinion is expressed as to whether x is otherwise eligible to be an s_corporation this ruling is directed only to the taxpayer that requested it sec_6110 provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file with this office we will send a copy of this letter_ruling to x's authorized representative 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 rulings requested it is subject_to verification on examination sincerely holly porter chief branch office of the associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes