t c memo united_states tax_court thomas f and therese grojean petitioners v commissioner of internal revenue respondent docket no filed date p organized a to acquire percent of the stock of s to finance the purchase a and s borrowed dollar_figure million from the bank and a and s signed a promissory note in favor of the bank the note p was not a party to the note p contemporaneously borrowed dollar_figure million from the bank and signed a note in favor of the bank p note and p used the funds to purchase a dollar_figure million participation interest in the note the note and the p note had identical terms and the bank automatically credited amounts due under the p note with amounts due p for his participation interest no cash changed hands and all funds were electronically credited at the bank in calculating his allowable distributive_share of s losses for and p included in his basis dollar_figure million for his participation share held in substance p functioned as a guarantor of dollar_figure million of the note and p is not entitled to include in his s basis the dollar_figure million participation interest p did not make the requisite - - cash outlay and there was no direct obligation between p and s held further p’s are liable for the addition_to_tax for filing untimely their returns edward j hannon and arthur m holtzman specially recognized for petitioners william t derick for respondent memorandum findings_of_fact and opinion laro judge respondent determined the following deficiencies in petitioners’ through federal_income_tax and additions thereto additions to tax_year deficiency sec_6651 a dollar_figure dollar_figure big_number big_number - after concessions we decide the following issues whether petitioner’s basis in his s_corporation stock under sec_1366 includes his participation interest ina loan between a bank and his s_corporation we hold it does not whether petitioners are liable for the additions to tax determined by respondent we hold they are rule references are to the tax_court rules_of_practice and procedure and section references are to the internal_revenue_code as applicable to the years in issue singular references to petitioner are to thomas f grojean - - findings_of_fact some of the facts have been stipulated and are so found the stipulation of facts and the exhibits submitted therewith are incorporated herein by this reference petitioner and therese grojean are husband and wife and they resided in anderson indiana when they filed their petition in this case petitioner graduated from the university of notre dame in with a b s in accounting after college he worked at price waterhouse as a certified_public_accountant from through he was employed by flying tigers an all-cargo airline where he was the chief financial officer and later the chief operating officer in he left flying tigers to acquire interests in several trucking companies american national bank and trust company of chicago american financed the acquisitions as of transamerica leasing company transamerica owned all the stock of schanno transportation inc schanno a trucking company sometime prior to date petitioner and transamerica entered negotiations for petitioner’s possible purchase of schanno during these negotiations petitioner contacted american to discuss financing for the purchase in date petitioner formed and became the sole shareholder of schanno acquisition inc schanno acquisition which he formed for the purpose of acquiring schanno the plan was for schanno q4e- acquisition to merge with and into schanno immediately after the purchase american agreed to lend dollar_figure million to schanno acquisition to finance the acquisition of schanno if petitioner would guarantee all loans personally petitioner was unwilling to undertake that risk and the parties continued negotiations on date schanno acquisition executed a stock purchase agreement purchase agreement wherein schanno acquisition agreed to purchase all the stock of schanno from transamerica for dollar_figure million on the same date american schanno acquisition schanno and petitioner entered into a comprehensive loan agreement loan agreement in which american agreed to provide the following three loans to facilitate the purchase an dollar_figure 4-million loan to schanno acquisition and schanno schanno note a dollar_figure 6-million revolving credit loan to schanno acquisition and schanno credit note and a dollar_figure million loan to petitioner grojean note the loan agreement provided b as a condition to american’s obligations to make the initial disbursements under the loans described herein the following conditions shall have occurred and been approved to american’s reasonable satisfaction american and petitioner have - entered into and delivered the participation_agreement and petitioner has purchased or will contemporaneously purchase a portion of american’s interest in the schanno note in the amount of one million two hundred thousand dollar_figure dollars pursuant to the loan agreement american disbursed to schanno acquisition dollar_figure million and dollar_figure million under the schanno note and the credit note respectively both schanno acquisition and schanno signed the schanno note and the credit note and both notes identified schanno acquisition and schanno as the borrowers or makers american was the only party identified as the lender on the schanno note and the credit note and petitioner was not a party to these notes both loans were secured_by all the assets of schanno transamerica financed the remainder of the purchase_price taking back a note from schanno acquisition and schanno for dollar_figure million transamerica loan also on date american advanced dollar_figure million to petitioner under the grojean note by crediting this amount to petitioner’s checking account at american petitioner pledged his stock in schanno and schanno acquisition as security for the loan contemporaneous with execution of the grojean note petitioner and american entered into a participation_agreement wherein petitioner agreed to purchase a dollar_figure 2-million -- - participation interest in the schanno note ’ as pertinent the participation_agreement provided american hereby sells and participant hereby purchases a participation in the schanno note a copy of which is attached hereto and made a part hereof as exhibit a the purchase_price is dollar_figure and shall be paid to american upon the execution of this agreement by participant and american to cover the purchase_price american debited petitioner’s checking account for dollar_figure million the schanno note and the grojean note each had identical interest rates and were both 6-year notes with a due_date of date the schanno note called for monthly payments of principal whereas the grojean note did not require payment of principal until the date due_date both notes called for monthly interest payments the participation_agreement provided that american’s interest in the schanno note was superior to petitioner’s participation interest petitioner became entitled to monthly interest payments only upon payment of the interest by schanno to american under the schanno note when american received a monthly payment on the schanno note american credited petitioner’s participating share to petitioner’s checking account petitioner’s offered rationale for this structure was that he believed this would enable him to attain the same secured status as american whose security_interest was superior to transamerica’s - and contemporaneously debited the account for the interest payments due under the grojean note petitioner was not entitled to participate in any of the principal on the schanno note until american recovered its full share of principal after american recovered its entire principal on the schanno note petitioner became entitled to his share of principal as a credit against the principal due on the grojean note american had sole authority and discretion to exercise its rights under the schanno note without the advice or consent of petitioner including authority to do all of the following alter or modify the schanno note or collateral_agreement release substitute or exchange collateral waive any enforcement of any contractual terms against the borrower or forbear from collection american issued to petitioner a participation_certificate evidencing petitioner’s ownership of a dollar_figure million participation interest in the schanno note after execution of the foregoing transactions on date schanno acquisition merged with and into schanno leaving schanno as the surviving entity and petitioner as the sole shareholder in date petitioner and american restructured the grojean note and the participation_agreement by reducing the grojean note to dollar_figure million and reducing petitioner’s --- - participating interest in the schanno note to dollar_figure million at the same time petitioner signed a dollar_figure revolving credit note grojean credit note keeping the total amount he received in the form of a loan at dollar_figure million petitioner then purchased a dollar_figure-participation interest in the credit note petitioner and american amended the participation_agreement to reflect this purchase the grojean credit note had the same interest rate and other terms as the credit note and petitioner became entitled to payments for his participation interest only when american received payments under the credit note american's share of the credit note was superior to petitioner’s dollar_figure share american and petitioner amended other related documents as well to incorporate these changes including the loan agreement and the stock pledge and security_agreement american had sole and absolute discretion to exercise any rights under the credit note without advice or consent from petitioner american debited and credited interest payments to and from petitioner’s checking account under the credit note and the grojean credit note as schanno paid the amounts due under the schanno note and the credit note for and american credited petitioner’s checking account with interest_income relating to his participation interests in the schanno note and the credit note the record does not indicate whether american issued a participation_certificate to petitioner for his interest in the credit note --- - in the amounts of dollar_figure dollar_figure and dollar_figure respectively for the same years american debited interest payments due from petitioner under the grojean note and the grojean credit note from petitioner’s checking account for identical amounts with the net effect to petitioner for all years being a wash as a condition of receiving their loans schanno schanno acquisition and petitioner were required to give american annual financial statements of schanno that were audited and certified by an independent accounting firm in the certified financial statements that were prepared by the accounting firm for and schanno reported that petitioner’s participation interest was a dollar_figure 2-million guaranty of the corporation's dollar_figure million loan and dollar_figure million revolving credit loan on his and federal_income_tax returns petitioner claimed passthrough ordinary losses from schanno in the amounts of dollar_figure dollar_figure and dollar_figure respectively petitioners also claimed petitioner’s share of a net_operating_loss carryforward from schanno from to in the amount of dollar_figure in applying the basis limitation under sec_1366 he included in his basis dollar_figure million representing his participation interests in the schanno note and the credit note respondent disallowed the inclusion of that amount in petitioner’s basis computation and determined that petitioner did not have sufficient basis in his schanno stock to allow for the - lo - claimed losses respondent disallowed the losses in full and made other computational adjustments resulting from this determination petitioners’ and federal_income_tax returns were due with extensions on date and date respectively petitioners filed those returns on date and date respectively opinion we decide whether petitioner may increase his basis in schanno under sec_1366 by the dollar_figure million purchase_price of his participation interests in the schanno note and the schanno credit note respondent argues that petitioner received no basis on account of his participation interests because the grojean note and the grojean credit note were disguised guaranties and petitioner did not make the requisite economic outlay alternatively respondent argues that the grojean note and the credit note were an integral part of interrelated transactions having no independent economic_substance we agree with respondent that petitioner functioned as if he were a guarantor of schanno’s indebtedness to american and petitioner is not entitled to a basis increase for the guaranty sec_1366 requires a taxpayer to take into account the pro_rata share of income losses and deductions of an sdollar_figure corporation of which the taxpayer is a shareholder the losses and deductions taken into account are limited by sec_1366 d as follows d special rules for losses and deductions ---- cannot exceed shareholder's basis in stock and debt --the aggregate amount of losses and deductions taken into account by a shareholder under subsection a for any taxable_year shall not exceed the sum of- a the adjusted_basis of the shareholder's stock in the s_corporation - and b the shareholder's adjusted_basis of any indebtedness of the s_corporation to the shareholder any s_corporation loss that exceeds a taxpayer's adjusted_basis in his or her stock and debt is carried over indefinitely to the succeeding years see sec_1366 prior cases have established certain principles in respect of the application of the indebtedness limitation under sec_1366 b first a taxpayer must make an actual economic outlay see 535_f2d_309 5th cir affg 63_tc_468 103_tc_711 second the s corporation’s indebtedness must run directly to the shareholder an indebtedness to a passthrough_entity that advanced the funds and is closely related to the taxpayer does not satisfy the statutory requirements see 61_tc_343 affd without published opinion 506_f2d_1051 3d cir 59_tc_172 to make an economic outlay the shareholder must be left poorer in a material sense after the transaction has been fully consummated see 54_tc_1293 affd per order 8th cir date a shareholder does not acquire basis by acting as guarantor surety or accommodation party with respect to his corporation’s borrowing from a third party until the shareholder pays part or all of the obligation see 706_f2d_755 6th cir affg t c memo 90_tc_206 affd 875_f2d_420 4th cir underwood v commissioner t c pincite 50_tc_762 47_tc_159 affd 392_f2d_458 8th cir here the interrelated transactions show petitioner was in substance a guarantor of the indebtedness between schanno and american the effect of all the transactions was that petitioner would not be out-of-pocket unless and until schanno failed to make payments under the schanno note or the credit note the substance of a transaction will control_over its form see 293_us_465 110_tc_62 petitioner acquired the dollar_figure million to purchase the participation interest by virtue of the following circular transaction with american petitioner borrowed dollar_figure million from american and petitioner signed the grojean note petitioner returned the dollar_figure million to american american gave petitioner a participation_certificate evidencing a dollar_figure million participation interest in the schanno note no cash changed hands and american handled the transaction through simultaneous electronic debits and credits when the parties amended the arrangement to include a participation interest in the credit note it was handled similarly with no cash changing hands the schanno note and the credit note were the mirror images of the grojean note and the grojean credit note respectively when american received a monthly payment on the schanno note or the credit note american credited petitioner’s participating share to petitioner’s checking account and contemporaneously debited the account for the interest payments due under the grojean note and the grojean credit note once american recovered its principal on both notes petitioner’s share of principal was to be credited against the principal due on the grojean note and the grojean credit note payments by schanno on the schanno note and the credit note kept petitioner current on the grojean note and the grojean credit note like a guarantor petitioner would not be liable--thus not called upon to make an economic outlay---unless schanno defaulted this conclusion is consistent with the treatment of the participations in schanno’s certified financial statements those statements which were certified as correct by the independent accounting firm and which were reviewed by petitioner disclosed the participations as a guaranty by petitioner of the debt between american and schanno in underwood v commissioner supra we held that the taxpayer’s series of interrelated transactions was tantamount to a disguised guaranty of an s corporation’s indebtedness to a third party in that case the taxpayers were the sole shareholders of two corporations engaged in the retail barbecue business one a profitable c_corporation c-corp the other an unprofitable s_corporation s-corp the c-corp made loans to the s-corp over nearly a 2-year period the s-corp gave the c- corp promissory notes for the loans in an attempt to acquire additional s-corp basis the taxpayers rearranged the notes in three steps the c-corp surrendered the notes of the s-corp one of the taxpayers gave a personal note to the c-corp and the s-corp gave its note to that taxpayer we held that the taxpayer did not make the requisite economic outlay and that the substance of the arrangement was similar to a guaranty of the indebtedness see underwood v commissioner supra pincite see also 90_tc_206 affd 875_f2d_420 4th cir likewise here we find the -- - substance of the transactions to be a shareholder’s guaranty of the indebtedness of an s_corporation petitioner argues that there was bona_fide indebtedness between himself and american and that his relending of the funds to schanno by way of purchasing a participation interest entitles him to adjusted_basis petitioner relies on 50_tc_762 for the proposition that when a shareholder borrows funds from a third party and lends those funds to his or her s_corporation he is entitled to basis petitioner’s reliance is misplaced and the fact that there was bona_fide indebtedness between american and petitioner is not significant because petitioner did not relend the funds directly to schanno the statutory language makes clear the shareholder will get basis only in indebtedness of the s_corporation to the shareholder sec_1366 emphasis added this requires a direct obligation between the shareholder and the s_corporation see hitchins v commissioner supra such is not the case here the participation_agreement makes clear that petitioner did not become a lender to or creditor of schanno there was no note or other contract between petitioner and schanno and petitioner was not a party to the schanno note or the credit note american had sole discretion to enforce all rights under the notes without the advice or consent of petitioner petitioner’s -- - contractual relationship was with american petitioner advanced the funds to american which in turn advanced the funds to schanno if schanno failed to pay petitioner had no direct contractual rights against schanno there was no direct obligation from schanno to petitioner see hitchins v commissioner supra whatever rights petitioner had against schanno if any were derivative through american and such derivative rights are insufficient to give petitioner basis see id we also do not find helpful to petitioner’s cause the testimony of petitioner’s expert witness steven l harris we recognized harris as an expert on bankruptcy and creditor’s rights and petitioner proffered his testimony to establish that petitioner had economic and business reasons for structuring the transaction as a participation as opposed to a direct loan harris opined that petitioner would enjoy a greater status as a participant in the event schanno went bankrupt harris’ testimony however fully supports our conclusion that there was no direct obligation between petitioner and schanno for basis purposes as he testified on cross-examination as to what petitioner’s rights would be if schanno filed bankruptcy q the lead bank would be the holder of the claim a the lead bank typically would be the holder of the claim in the bankruptcy qo and so if a proof_of_claim was filed it would be under the lead bank’s name not the participant’s name right a yes q okay and--i didn’t mean to interrupt go ahead a yes in addition it is the lead bank who is enforcing the obligation in a participation agreement---- qo and is that because the participant has no rights to enforce that obligation a yes petitioner’s reliance on gilday v commissioner tcmemo_1982_242 is also misplaced in gilday the bank held the note of an s_corporation the taxpayer and other shareholders of the s_corporation issued their note to the bank and the bank canceled the s corporation’s note in exchange the s_corporation gave its note in the same amount to the shareholders the result was that the shareholders became the sole obligors to the bank and the s_corporation was directly indebted to the shareholders we held the shareholders had a basis in the debt for purposes of former sec_1374 the predecessor of sec_1366 that was not the case here schanno was not directly indebted to petitioner in any way and petitioner’s rights were against american not schanno because the notes from the corporation to the bank were the mirror image swe recognize that in gilday v commissioner tcmemo_1982_242 the shareholders of the s_corporation did not make an actual outlay of funds however our holding in gilday is that the substitution of the shareholders as the sole unconditional obligors to the bank and of the s_corporation as the sole unconditional debtor to the shareholders constituted a constructive furnishing by the shareholders of the funds previously loaned by the third party bank see also 103_tc_711 -- - of his notes to the bank there was complete circularity of funds and his status was in substance not that of the corporation’s creditor but of guarantor of the corporation’s debt to the bank we hold petitioner is not entitled to basis under sec_1366 d for his participation interests in the schanno note and the credit note totaling dollar_figure million we turn to the additions to tax for failure_to_file timely sec_6651 reads in pertinent part in case of failure_to_file any return on the date prescribed therefor unless it is shown that such failure is due to reasonable_cause and not due to willful neglect there shall be added to the amount_required_to_be_shown_as_tax on such return percent of the amount of such tax if the failure is for not more than month with an additional percent for each additional month or fraction thereof during which such failure continues not exceeding percent in the aggregate to escape the addition_to_tax for filing the and returns untimely petitioners must prove that their failure_to_file timely did not result from willful neglect and this failure was due to reasonable_cause on brief respondent proposed the following finding of fact petitioners failed to file timely income_tax returns for and and their failure was due to willful neglect and not due to reasonable_cause petitioners did not object to this proposed finding of fact nor did they proffer any evidence that would suggest that reasonable_cause existed we hold petitioners are liable for the additions to tax under sec_6651 as determined by respondent we have considered all arguments made by petitioners for holdings contrary to those herein and to the extent not addressed above find them to be irrelevant or without merit due to concessions of the parties decision will be entered under rule


internal_revenue_service department of the treasury number release date index numbers washington dc person to contact telephone number refer reply to cc corp plr-115506-00 date date parent sub1 sub2 purchaser target target_affiliate target_affiliate sellers company official tax professional professional business a business b business c business d date a date b date c this letter responds to your letter dated date requesting an extension of time under sec_301_9100-1 and sec_301_9100-3 of the procedure and administration regulations to file elections the extension is being requested by parent parent is the common parent of the consolidated_group of which purchaser is a member purchaser is the acquiring_corporation of target and the united_states_shareholder of new target and new target is the deemed foreign purchasing_corporation of target_affiliate and target_affiliate to file elections under sec_338 of the internal_revenue_code and sec_1_338-1 and sec_1_338-1 of the income_tax regulations with plr-115506-00 respect to the acquisition and deemed acquisition of the target target_affiliate and target_affiliate stocks sometimes hereinafter referred to collectively as the elections or the election on date a all citations in this letter to regulations under sec_338 are to the regulations as in effect on date a additional information was received in letters dated september and date the material information submitted for consideration is summarized below parent is the common parent of a consolidated_group parent directly owns all the stock of sub1 sub1 directly owns all the stock of sub2 and sub2 directly owns all the stock of purchaser sub1 and sub2 are domestic corporations included in parent's consolidated_return target directly owns all the stock of both target_affiliate and target_affiliate target target_affiliate and target_affiliate are foreign_corporations and sometimes hereinafter they are collectively referred to as the targets prior to the transaction sellers wholly owned target sellers are foreign individuals and not united_states persons within the meaning of sec_7701 parent is engaged in business a purchaser is engaged in business b target is a holding_company target_affiliate is engaged in business c and target_affiliate is engaged in business d prior to the acquisition neither sellers target target_affiliate nor target_affiliate filed a united_states income_tax return was subject_to united_states income_taxation or was required under sec_1_6012-2 to file a united_states income_tax return further prior to the acquisition none of the targets was a i controlled_foreign_corporation within the meaning of sec_957 ii passive_foreign_investment_company or iii foreign_investment_company or a foreign_corporation the stock ownership of which is described in sec_552 on date a purchaser acquired all the stock of target from sellers for cash in a fully taxable transaction it is represented that parent and purchaser were not related to sellers within the meaning of sec_338 and the acquisition of the stock of target qualified as a qualified_stock_purchase within the meaning of sec_338 parent intended to file the elections the elections were due on date b but for various reasons they were not filed on date c which is after date b company official tax professional was informed by outside tax professional that the elections had not been filed subsequently this request was submitted under sec_301_9100-1 for an extension of time to file the elections it is represented that the period of limitations on assessments under sec_6501 has not expired for parent consolidated group’s or targets’ taxable years in which the acquisition occurred their taxable years in which the elections should have been filed or for any taxable years that would have been affected by the elections had they been timely filed sec_338 permits certain stock purchases to be treated as asset purchases if the purchasing_corporation makes or is treated as having made a sec_338 plr-115506-00 election under sec_338 and the acquisition is a qualified_stock_purchase sec_338 defines a qualified_stock_purchase as any transaction or series of transactions in which stock meeting the requirements of sec_1504 of one corporation is acquired by another corporation by purchase during the month acquisition period sec_338 provides that the term purchase means any acquisition of stock but only if i the basis of the stock in the hands of the purchasing_corporation is not determined in whole or in part by reference to the adjusted_basis of such stock in the hands of the person from whom acquired or under sec_1014 relating to property_acquired_from_a_decedent ii the stock is not acquired in an exchange to which sec_351 sec_354 sec_355 or sec_356 applies and is not acquired in any other transaction described in regulations in which the transferor does not recognize the entire amount of the gain_or_loss realized on the transaction and iii the stock is not acquired from a person the ownership of whose stock would under sec_318 be attributed to the person acquiring such stock sec_1_338-1 provides that a purchasing_corporation makes a sec_338 election for target by filing a statement of sec_338 election on form_8023 in accordance with the instructions on the form the sec_338 election must be filed not later than the 15th day of the ninth month beginning after the month in which the acquisition_date occurs a sec_338 election is irrevocable sec_1_338-1 provides that the united_states_shareholders as defined in sec_951 of a foreign purchasing_corporation that is a controlled_foreign_corporation as defined in sec_957 taking into account sec_953 may file a statement of sec_338 election on behalf of the purchasing_corporation if the purchasing_corporation is not required under sec_1_6012-2 other than sec_1_6012-2 to file a united_states income_tax return for its taxable_year that includes the acquisition_date form_8023 must be filed as described in the form and its instructions and also must be attached to form_5471 information_return of u s persons with respect to certain foreign_corporations filed with respect to the purchasing_corporation by each united_states_shareholder for the purchasing_corporation the term target_affiliate has the same meaning as in sec_338 applied without sec_338 thus a corporation described in sec_338 is considered a target_affiliate for all purposes of sec_338 if a target_affiliate is acquired in a qualified_stock_purchase it is also a target see sec_1_338-1 sec_1 b provides that if an election under sec_338 is made for target old target is deemed to sell target’s assets and new target is deemed to acquire those assets under sec_338 new target’s deemed purchase of stock of another corporation is a purchase for purposes of sec_338 on the acquisition_date of target if new target’s deemed purchase causes a qualified_stock_purchase of the other corporation and if a sec_338 election is made for the other corporation the acquisition_date for the other corporation is the same as the acquisition_date of target however the deemed sale and purchase of the other corporation’s assets is considered to take place after the deemed sale and purchase of target’s assets see sec_1_338-2 plr-115506-00 sec_1_1502-77 provides that the common parent for all purposes other than for several purposes not relevant here shall be the sole agent for each subsidiary in the group duly authorized to act in its own name in all matters relating to the tax_liability for the consolidated_return_year see also form_8023 and the instructions thereto under sec_301_9100-1 the commissioner has discretion to grant a reasonable extension of time to make a regulatory election under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-1 defines the term regulatory election as including an election whose due_date is prescribed by a regulation revenue_ruling revenue_procedure notice or announcement sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make a regulatory election sec_301_9100-1 sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides extensions of time for making regulatory elections that do not meet the requirements of sec_301_9100-2 requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-3 in this case the time for filing the elections was fixed by the regulations ie sec_1_338-1 therefore the commissioner has discretionary authority under sec_301_9100-1 to grant an extension of time for parent to file the elections provided parent shows it acted reasonably and in good_faith the requirements of sec_301_9100-1 and sec_301_9100-3 are satisfied and granting relief will not prejudice the interests of the government information affidavits and representations submitted by parent company official tax professional and outside tax professional explain the circumstances that resulted in the failure_to_file the elections the information establishes that a competent tax professional was responsible for the elections and was aware of all relevant facts that parent relied on the tax professional to make the elections and that the interests of the government will not be prejudiced if relief is granted see sec_301_9100-3 based on the facts and information submitted including the representations that have been made we conclude that parent acted reasonably and in good_faith in failing to timely file the elections the requirements of sec_301_9100-1 and sec_301_9100-3 are satisfied and granting relief will not prejudice the interests of the government accordingly we grant an extension of time under sec_301_9100-1 until days from the date_of_issuance of this letter for parent to file the elections with respect to the acquisition of the stock of targets as described above the above extension of time is conditioned on the filing within days of the issuance of this letter of all returns and amended returns if any necessary to report the transaction in accordance with the election and the taxpayers’ parent plr-115506-00 consolidated group’s targets’ and sellers’ tax_liability if any being not lower in the aggregate for all years affected by the elections than it would have been if the elections had been timely made taking into account the time_value_of_money no opinion is expressed as to the taxpayers’ tax_liability for the years involved a determination thereof will be made by the district director’s office upon audit of the federal_income_tax returns involved further no opinion is expressed as to the federal_income_tax effect if any if it is determined that the taxpayers’ liability is lower sec_301_9100-3 parent should file the elections in accordance with sec_1_338-1 and sec_1 g that is elections on form_8023 must be executed on or after the date of this letter which grants an extension and filed in accordance with the instructions on the election form a copy of this letter should be attached to the election form parent must amend its return to attach thereto a copy of this letter and a copy of the election form new targets must be included in parent’s consolidated_return by being listed on form for the first year following the acquisition no opinion is expressed as to whether the acquisition of the stock of targets qualifies as qualified_stock purchases whether the acquisition of the stock of targets qualifies for sec_338 treatment or if the acquisition of the stock of targets qualifies for sec_338 treatment as to the amount of gain_or_loss recognized if any by targets on their deemed asset sales in addition no opinion is expressed as to the tax effects or consequences of filing the elections late under the provisions of any other section of the code and regulations or as to the tax treatment of any conditions existing at the time of or tax effects or consequences resulting from filing the elections late that are not specifically set forth in the above ruling for purposes of granting relief under sec_301_9100-1 we relied on certain statements and representations made by parent and purchaser their employees and representatives however the district_director should verify all essential facts in addition notwithstanding that an extension is granted under sec_301_9100-1 to file the elections penalties and interest that would otherwise be applicable if any continue to apply this letter is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent sincerely yours associate chief_counsel corporate by ken cohen acting chief branch


id office uilc cca-114303-09 ------------- number release date from -------------------- sent wed pm to ------------------- cc --------------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------- subject fw tefra question both the ultimate taxpayer and its sub should sign see sec_1_1502-77 even though a settlement by a pass-thru_partner binds indirect partners i r c c last sentence sec_301_6224_c_-2 a pass-thru_partner cannot bind an indirect_partner as to affected items and partner-level penalty defenses for this reason you may also want to use the form 870-lt rather than a form 870-pt the form 870-lt deals with both partnership items and affected items unlike the form 870-pt which only deals with partnership-level items -------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------------------------------- -----------------------------


internal_revenue_service number release date index number ------------------------------------------------------- --------------------------------- ------------- ---------------------- ------------------------------------------- - dear ------------- dear ------------- department of the treasury washington dc third party communication congressional governor of the state of connecticut dates of communication date date person to contact ----------------------- id no ------------- telephone number --------------------- refer reply to cc tege eoeg teb presp-156572-05 date date after review of the application you submitted on behalf of the ---------------------------- ------ ------------------- project as amended by correspondence dated date and date and after consultation with the environmental protection agency we are designating the ------------------------------------------------project as a qualified_green_building_and_sustainable_design_project under sec_142 and sec_142 of the internal_revenue_code the code further pursuant to sec_142 we allocate authority to issue qualified_green_building_and_sustainable_design_project bonds for the ----------------- -------------------------------------------------------------------------------------------------------------------- --------------------district project in an aggregate face_amount not to exceed ------------------- ---------------------- please note that in order for bonds to be qualified_green_building_and_sustainable_design_project bonds the issuer must meet the applicable_requirements of the code including without limitation sec_142 and notice_2005_48 2005_27_irb_9 including without limitation the requirements described in the following paragraphs of notice - certification of use of tax_benefit - report of compliance - accountability - information reporting and - coordination with other rules governing qualified private_activity_bonds if after reviewing this letter notice_2005_48 and the applicable code provisions you have any questions please contact of the presp-156572-05 office of division counsel associate chief_counsel tax-exempt and government entities on --------------------- not a toll-free call 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 including whether interest on any bonds issued by state or local governments for the above project is tax-exempt under sec_103 of the code this letter is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative a copy of this letter must be attached to any form_8038 information_return for tax- exempt private_activity_bond issues certification of use of tax_benefit and report of compliance under notice_2005_48 filed with the internal_revenue_service 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 sincerely assistant chief_counsel exempt_organizations employment_tax government entities tax exempt government entities by timothy l jones senior counsel tax-exempt_bonds ---------


internal_revenue_service department of the treasury washington dc person to contact telephone number refer reply to cc it a 05-plr-119886-00 date date number release date index number taxpayer buyer state a common parent dear this letter responds to your request for a private_letter_ruling on behalf of taxpayer taxpayer is a regulated_public_utility that owns undivided fee simple interests in several nuclear power plants the plants and certain other facilities and assets associated therewith and ancillary thereto for federal_income_tax purposes taxpayer files a consolidated_return with an affiliated_group which includes common parent the consolidated_group taxpayer maintains decommissioning funds qualified funds that satisfy the requirements necessary to be treated as nuclear decommissioning reserve funds within the meaning of sec_468a a and as nuclear decommissioning funds and as qualified nuclear decommissioning funds within the meaning of sec_1_468a-1 taxpayer also maintains nonqualified decommissioning funds nonqualified funds that are valid trusts under state a law and which are considered grantor trusts under sections taxpayer holds the funds for the purpose of decommissioning the plants unless provided otherwise all section references are to the internal_revenue_code_of_1986 as applicable to the taxable years in question plr-119886-00 taxpayer has contracted to sell its interest in the plants and assets related thereto to buyer specifically taxpayer has contracted to sell assign convey transfer and deliver to buyer its ownership share of the assets held for the use in the operation of the plants which include the following the real_property all spent nuclear fuel machinery and equipment etc leasehold interests and subleases relating to the real_property all permits certain contracts and agreements certain documents correspondence books_and_records personnel records intellectual_property related to a certain name nuclear regulatory commission licenses rights in nuclear fuel and the assets comprising any qualified or nonqualified funds maintained by taxpayer with regard to the plants including all income_interest and earnings thereon together with all related tax_accounting decommissioning studies and cost estimates and all other books_and_records related thereto in conjunction with the sale buyer will make certain payments of cash and will assume certain taxpayer liabilities including decommissioning liabilities with respect to the plants certain environmental liabilities and encumbrances on acquired assets on the sale closing date taxpayer will transfer the assets in its qualified funds to a decommissioning fund buyer will establish and which buyer intends to qualify as a qualified decommissioning fund within the meaning of sec_1_468a-1 and a nuclear decommissioning reserve fund within the meaning of sec_468a on the sale closing date taxpayer will also transfer any funds in its nonqualified funds to a nonqualified decommissioning fund that buyer will establish buyer will hold both its qualified_fund and nonqualified_fund solely for the purpose of decommissioning the plants and any monies or other properties remaining in such funds following the decommissioning of the plants will be distributed to buyer taxpayer requests a ruling that the portion of any net_operating_loss that it incurs as a result of the assumption by buyer of its obligation to decommission the plants will qualify as a specified_liability_loss within the meaning of sec_172 that will be eligible for a 10-year carryback under sec_172 sec_172 allows a net_operating_loss_deduction equal to the aggregate of the net_operating_loss carryovers and net_operating_loss carrybacks to a taxable_year with certain modifications sec_172 defines a net_operating_loss as the excess of deductions permitted by chapter of the internal_revenue_code the code over gross_income sec_172 provides that generally a net_operating_loss is carried back to each of the taxable years preceding the year of the loss and carried forward to each of the taxable years following the year of the loss sec_172 provides that in the case of a specified_liability_loss the loss is carried back to each of the taxable years preceding the loss_year rather than years sec_172 defines a specified_liability_loss in part as any amount taken into account in computing the net_operating_loss for the taxable_year and that is plr-119886-00 allowable as a deduction under chapter of the code other than sec_468 or sec_468a which is in satisfaction of a liability under a federal or state law requiring the decommissioning of a nuclear power plant or any unit thereof we have previously ruled that taxpayer will be entitled to a deduction in the year_of_sale for the amount of its decommissioning liability associated with the plants expressly assumed by buyer and included in taxpayer’s amount_realized to the extent the consolidated_group incurs a net_operating_loss in the taxable_year of the sale that loss may be attributable in whole or in part to taxpayer’s deduction for its decommissioning liability assumed by buyer and included in taxpayer’s amount_realized to generate a sec_172 specified_liability_loss the amount of taxpayer’s deduction for the decommissioning liability assumed by buyer must be in satisfaction of a liability under federal or state law requiring the decommissioning of a nuclear power plant prior to the sale taxpayer has the obligation to decommission the plants this obligation arose years ago when taxpayer obtained its licenses to operate the plants in addition the requirement to decommission the plants is imposed by the nuclear regulatory commission nrc and thus arises under federal_law see c f_r sec_50 as part of the sale of the plants the operating licences for the plants will be transferred to buyer decommissioning funds held by taxpayer will be transferred to buyer and buyer will expressly assume taxpayer’s obligation to decommission the plants the express assumption of the decommissioning liability by buyer as part of the sale of the plants satisfies the economic_performance requirement under sec_1_461-4 thereby entitling taxpayer to a deduction for its decommissioning liability in addition as a result of the sale of the plants and buyer’s assumption of the decommissioning liability taxpayer’s liability under federal_law to decommission the plants will be extinguished taxpayer has represented that after the sale and licence transfers are complete including the transfer of the decommissioning funds the nrc will no longer look to taxpayer to decommission the plants to the extent the decommissioning funds are insufficient to fully decommission the plants buyer will be responsible for funding the shortage thus the transfer of the plants and related assets to buyer and the assumption by buyer of the decommissioning liability results in taxpayer no longer being required under federal_law to decommission the plants further the deduction allowed to taxpayer for buyer’s assumption of the liability to decommission the plants is in satisfaction of taxpayer’s liability under federal_law requiring the decommissioning of nuclear power plants black’s law dictionary seventh edition defines the term satisfaction as among other things the giving of something with the intention express or implied that it is to extinguish some existing legal or moral obligation in this case taxpayer has as part of the sale of the plants transferred the operating licences and decommissioning funds to buyer taxpayer represents that because of this transfer and buyer‘s assumption of the decommissioning liability the nrc the regulatory agency that imposes the legal plr-119886-00 obligation to decommission nuclear power plants will no longer look to taxpayer to decommission the plants thus taxpayer’s liability under federal_law to decommission the plants will be satisfied because it has transferred certain assets to buyer in order to extinguish this legal_obligation the amount of the decommissioning liability assumed by buyer and included in taxpayer’s amount_realized is allowed as a deduction to taxpayer to the extent the deduction generates a net_operating_loss for the taxable_year that portion of the net_operating_loss will be a specified_liability_loss under sec_172 we conclude that the portion of any consolidated_net_operating_loss the consolidated_group incurs in the year the plants are sold attributable to the deduction allowed to taxpayer for buyer’s assumption of taxpayer’s liability to decommission the plants will be a consolidated specified_liability_loss that may be carried to each of the consolidated group’s taxable years preceding the loss_year under sec_172 sec_172 generally provides that the portion of a specified_liability_loss that is attributable to amounts incurred in the decommissioning of a nuclear power plant or any unit thereof may be carried back to each of the taxable years during the period i beginning with the taxable_year in which the plant or unit thereof was placed_in_service and ii ending with the taxable_year preceding the loss_year this case does not involve a request for a ruling under sec_172 therefore we make no determination as to whether any portion of any specified_liability_loss is attributable to amounts incurred in the decommissioning of a nuclear power plant or any unit thereof and thus eligible for the carryback provision set forth in sec_172 this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent cc sincerely yours associate chief_counsel income_tax accounting by william a jackson chief branch


t c memo united_states tax_court lee d and linda olesen petitioners v commissioner of internal revenue respondent docket no 28764-08l filed date steven ray mather for petitioners elaine tamiko fuller for respondent memorandum opinion kroupa judge this matter is before the court on respondent’s motion in limine to exclude evidence challenging the amount or existence of unpaid liabilities petitioners filed the petition in response to a notice_of_determination concerning collection action s under sec_6320 and or determination notice we are asked to decide whether petitioners may contest the amount of the sec_6662 penalty for an underpayment attributable to gross_valuation_misstatements underpayment penalty by introducing evidence of a son of bo sec_2 settlement initiative respondent offered we find that petitioners are not entitled to introduce evidence challenging the amount of the underpayment penalty because they received a deficiency_notice and are precluded from challenging the underlying liability in this collection review proceeding accordingly we shall grant respondent’s motion in limine background the following information is stated for purposes of resolving the pending motion petitioners resided in colorado at the time they filed the petition the settlement initiative petitioners participated in a son of boss transaction involving pasa tiempo investments llc pasa tiempo in the commissioner announced a settlement initiative to provide taxpayers who participated in son of boss transactions with an opportunity to resolve their tax_liabilities and avoid 1all section references are to the internal_revenue_code 2son of boss transactions allow a taxpayer to reduce or eliminate capital_gains by creating artificial losses through the transfer of assets laden with significant liabilities to a partnership litigation see irs announcement 2004_1_cb_964 the settlement initiative reduced underpayment penalties for taxpayers who voluntarily disclosed their involvement in son of boss transactions and conceded all tax benefits before date taxpayers needed to submit a completed election form to the commissioner by date to participate in the settlement initiative the commissioner would determine an individual taxpayer’s eligibility only after receiving the taxpayer’s completed election form the taxpayer would need to provide additional information and documentation within days of the notice of eligibility before the commissioner could issue a form_906 closing_agreement on final_determination covering specific matters closing form to confirm the taxpayer’s participation in the settlement initiative taxpayers who did not elect to participate in the settlement initiative would receive a deficiency_notice disallowing all losses from the son of boss transaction and assessing the maximum underpayment penalties respondent mailed a notice of the settlement initiative and an election form to petitioners on date respondent mailed a followup letter to petitioners at the same address on date respondent stated in the followup letter that he had not received petitioners’ election form and requested additional information from petitioners within days to determine petitioners’ eligibility for the settlement initiative petitioners failed to file an election and to provide respondent with information regarding their son of boss transaction in pasa tiempo within the specified time petitioners did not receive a closing form and were ineligible for the settlement initiative the deficiency_notice and assessment respondent issued a deficiency_notice to petitioners for on date respondent determined in the deficiency_notice that pasa tiempo lacked economic_substance and disallowed all of the pasa tiempo items petitioners claimed resulting in the deficiency for respondent also determined that petitioners were liable for the sec_6662 penalty for an underpayment attributable to gross_valuation_misstatements respondent mailed the deficiency_notice to the address to which respondent sent settlement initiative correspondence this was the same address petitioners provided on their income_tax returns for and respondent prepared a certified mail list recording that the deficiency_notice was sent to petitioners by certified mail the deficiency_notice was not returned to respondent as undeliverable petitioners did not file a petition to contest the determinations in the deficiency_notice respondent thereafter assessed the deficiency and the penalty determined in the deficiency_notice the cdp hearing petitioners failed to pay the assessments and respondent issued two notices of federal_tax_lien to petitioners petitioners timely requested a collection_due_process cdp hearing with respondent for administrative review of the collection action during the hearing petitioners raised only the appropriateness of the underpayment penalty on the ground that they timely elected to participate in the settlement initiative neither petitioners nor their counsel denied during the cdp hearing that they received the deficiency_notice for in fact petitioners’ counsel conceded that a deficiency_notice had been issued for but erroneously stated that it was issued on a date later than the date it was issued respondent’s appeals officer issued the determination notice following the cdp hearing the appeals officer determined that petitioners were precluded from challenging the underlying liability for because they had received the deficiency_notice the appeals officer’s determination was based on the facts that the deficiency_notice had been sent to petitioners’ last_known_address by certified mail and that petitioners did not deny receiving it the appeals officer further determined that petitioners had not timely elected to participate in the settlement initiative and that the underpayment penalty amount was therefore correct petitioners filed a timely petition with this court seeking review of the determinations in the determination notice specifically petitioners seek to abate the underpayment penalty in this collection review matter petitioners also argue in the petition that respondent abused his discretion in filing the federal_tax_lien respondent filed a motion in limine to exclude all evidence both testimony and documentary challenging the underlying liability discussion we are asked to decide in this collection review matter whether petitioners may introduce evidence of a son of boss settlement initiative to challenge the amount of the underpayment penalty for respondent argues that they may not because they received the deficiency_notice for petitioners now argue in objecting to respondent’s motion in limine that they did not receive the deficiency_notice we begin with a brief overview of our jurisdiction in collection review cases a lien in favor of the united_states is placed on all property and rights to property of a taxpayer when demand for payment of that person’s liability for taxes is made and the person fails to pay those taxes sec_6321 the lien arises when the assessment is made sec_6322 the secretary shall furnish the taxpayer described in sec_6321 with written notice that a lien was filed sec_6320 the taxpayer may then request an administrative hearing to be conducted in a manner consistent with the procedures set forth in sec_6330 d and e sec_6320 after the hearing the appeals officer is required to make a determination that addresses issues the taxpayer raised verifies that all requirements of applicable law and administrative procedures have been met and balances the need for the efficient collection_of_taxes with the legitimate concern of the person that any collection action be no more intrusive than necessary sec_6330 the taxpayer may then seek judicial review of the determination notice in this court see sec_6330 115_tc_35 our jurisdiction to review a cdp determination is dependent on the issuance of a valid notice_of_determination and a timely filed petition for review see sec_6330 123_tc_326 a taxpayer may raise at the cdp hearing any relevant issue regarding the commissioner’s collection activities including spousal defenses challenges to the appropriateness of the commissioner’s intended collection action and alternative means of collection see sec_6330 114_tc_604 114_tc_176 a challenge to the amount of an assessed penalty constitutes a challenge to the underlying liability 122_tc_1 a taxpayer cannot challenge the underlying liability in a cdp hearing if the taxpayer received a deficiency_notice sec_6330 kuykendall v commissioner 129_tc_77 generally we will not review an underlying liability when it is challenged for the first time on appeal of a determination notice 129_tc_107 we will review however the appeals officer’s verification of the administrative requirements such as the issuance of a deficiency_notice without regard to whether the taxpayer raised it at the appeals hearing hoyle v commissioner t c __ __ slip op pincite accordingly we have jurisdiction in this collection review proceeding to verify the appeals officer’s determination that petitioners received the deficiency_notice and are therefore precluded from challenging the underlying liability we agree with the appeals officer that the record establishes that petitioners received a deficiency_notice for respondent issued the deficiency_notice to petitioners’ last_known_address as provided on their returns for and see 15_f3d_970 10th cir affg tcmemo_1992_328 furthermore 3we follow the court_of_appeals opinion squarely on point when appeal from our decision would lie in that court absent continued respondent’s production of a certified mail list recording the mailing of the deficiency_notice creates a strong presumption that the notice was mailed and was delivered or offered for delivery at the address to which it was sent see casey v commissioner tcmemo_2009_131 receipt of the deficiency_notice is presumed in the absence of clear evidence to the contrary see sego v commissioner supra pincite petitioners failed to produce evidence to rebut the presumption that they received the deficiency_notice in fact petitioners’ counsel’s concessions during the cdp hearing further support the appeals officer’s determination that petitioners received the deficiency_notice accordingly we find that petitioners received a deficiency_notice for and are therefore precluded from introducing evidence of the son of boss settlement initiative to challenge the underpayment penalty we have considered all of the contentions and arguments of the parties that are not discussed and we find them to be without merit irrelevant or moot continued stipulation by the parties to the contrary 54_tc_742 affd 445_f2d_985 10th cir we agree with respondent that appeal would lie in the court_of_appeals for the tenth circuit on account of petitioners’ legal residence at the time the petition was filed and not the location of petitioners’ last_known_address see sec_7482 to reflect the foregoing an appropriate order will be issued


department of the treasury internal_revenue_service washington d c jul t eo b4 eqend i g t y e e e g f e t e z z l o j v l o l n o w t n o w t i a x dear sir or madam this is in response to a letter dated date from m’s authorized representative who has requested certain rulings on m’s behalf mis a nonprofit corporation located in n and organized under the laws of the state of o mis exempt from federal_income_tax under sec_501 of the internal_revenue_code as an organization described in sec_501 m has been classified as a private non-operating foundation under sec_509 according to m's original charter m is organized and operated exclusively for charitable and educational_purposes including providing grants to colleges or universities exempt from tax under sec_501 of the code providing grants to deserving individuals residing within miles of n for undergraduate and graduate education endowing one or more faculty chairs aiding the poor and distressed residents of n and surrounding areas by making grants to needy and indigent individuals for medical assistance and assistance in daily living and lessening the burdens of government by making grants to n for the maintenance of public recreational and municipal facilities which shall be available to the general_public without regard to race creed color or religion lor until now m has accomplished its exempt_purpose s by making grants such as annual scholarship grants to individuals graduating from the local public high school and attending nearby institutions of higher learning m has also made grants to the loca public high school to assist it in purchasing computers and other equipment hiring additional teachers for the arts and sciences and making repairs and improvements to its physical facitities m recently funded a project whereby n's main street sidewalks were restored to brick and gas light fixtures were installed restoring the historic nature of n's main street funds were also provided to n to maintain a smal municipal picnic park and to make improvements to public recreational facilities utilized for softball baseball and other outdoor recreational activities m's representative stated that m’s operations have heretofore been limited due to limited resources but otherwise are consistent with its exempt charitable purpose however a few years ago m received substantial bequests because of the death of its founder and heirs and the settlement of their estates as a result m is seeking to increase the scope of its charitable activities for example m funded the construction and equipping of a facility in n utilized by a satellite office of a community college for its public educational offerings the community college is a state sponsored higher education institution m now proposes to build and operate a marina the marina project golf course the golf project and certain common facilities the common facilities consistent with its proposed amended and restated charter and by-laws collectively the marina project golf project and common facilities will be referred to as p p will become an integral component of the state of o’s park system and will be operated in compliance with rules and regulations of the state of o’s department of environment and conservation department the department's responsibilities include operating and maintaining all state public recreational areas and facilities the public at no cost to the state of o or the department it is m’s intent that p will be built maintained and operated for the benefit of the state of o operates a number of parks wilderness and recreational areas offering a variety of services to the general_public marinas are offered in some locations where the park is situated on a large lake or navigable waterway while golfing is offered in other locations the golf courses are generally designed with four or five different tee boxes in order to attract and appeal to golfers of any skill level marinas generally have wet slips as well as dry storage marinas and golf sites generally have a marina store and pro shop respectively the state of o passed legislation authorizing the executive branch to issue up to dollar_figurex in general obligation bonds of the state of o bonds to fund a golf and marina public recreational facility in n marina park in n and included such project in the department's strategic planning documents after the legislation was passed however the department completed a feasibility study and concluded that a marina and golf project may not be financially feasible due to current budget constraints and limitations the department has also expressed its intent to have a golf and the department determined that the approved funding authorization of dollar_figurex would not be sufficient to build and then subsequently operate and maintain p should the project not be fully self-supporting from inception budget constraints upon the department would not permit it to operate or maintain a new facility in n while operating and maintaining other parks of the state of o at standards established for ali parks however the department has indicated that such a project would be a welcome addition to o’s state park system and the department has agreed to otherwise assist m in obtaining necessary approvals from various agencies financing of the construction and equipping of p will take place as follows m will contribute land which it currently owns along with any improvements thereon to the state of o the state of o will issue the bonds and make the proceeds of the sale thereof available to m to pay or reimburse m for the costs of constructing and equipping p pursuant to a lease agreement between the state of o as lessor and m as lessee the lease the lease will obligate m to make lease payments to the state of o from time to time in amounts equal to debt service on the bonds any additional needed funding would come from m's assets or from the proceeds of borrowing the bonds will be issued as tax-exempt qualified c bonds within the meaning of sec_145 of the code with the exception of certain taxable bonds that will finance the excluded facilities described below the initial lease_term would be for a period of or years during which time m would be expected to amortize fully any debt obligations issued by the state of o in connection with the funding m would have an option to renew its lease for a period of time not exceeding the length of the initial tease term during any renewal lease_term it is expected that lease rentals would be fixed or some minimum fixed amount plus a percentage of gross revenues derived in connection with the operation of p or simply a percentage of the gross revenue derived in connection with the operation of p at the end of the initial lease_term and renewal thereof if any the property and all improvements thereon will revert to the sole possession of the state of o the golf project will principally consist of an 18-hole course club house pro shop combination several other buildings to house maintenance equipment and repair facilities a golf-cart storage shed and parking facilities the club house pro shop facility will be consistent in size design and use to those at other department courses the pro shop will be utilized as an administrative center for assigning tee times collecting greens and cart fees and other sales items sold will consist of clothing unique to the course such as hats or shirts containing p's logo as well as tees gloves balls and any similar items for the convenience of park visitors the facility will also house a small snack stand where visitors can obtain soft drinks and snacks no alcoholic beverages are permitted on department-owned or operated property m has entered into a management_contract with q providing for the management of the golf project upon completion of construction and its opening to the public the management_contract is designed in form and substance to constitute a qualified management_contract within the meaning of revproc_97_13 1997_1_cb_632 the marina project will consist of wet slips and facilities for a marina store fuel boat repair and a dry storage_facility for smaller boats m intends to enter into a management agreement constituting a qualified management_contract within the meaning of revproc_97_13 supra with an experienced and competent service provider to manage the marina project except for the marina store boat repair facility and fuel facility excluded facilities m intends to sublease the physical properties constituting the excluded facilities at fair_market_value to a qualified and experienced operator the risks and rewards of the operational activities carried on in the excluded facilities would be solely those of the sub-lessee thereof no part of the excluded facilities will be financed with proceeds from the tax-exempt_bonds rather the excluded facilities will be financed from the proceeds of the sale of taxable bonds or other available funds of m the service provider under the contemplated marina qualified management_contract and the sub-lessee operator of the excluded facilities may be the same or related_persons the marina project will also include parking facilities some of which may be shared with the golf project the marina project also includes right-of-way acquisition and construction of a new bridge over a creek that runs through p the bridge is necessary in order to allow boats access to the marina project since the current span over the creek is not high enough to permit any navigable traffic from a local river into the creek or the marina project the marina project will be part of the department's water-based recreational facilities and subject_to its rules and regulations the bridge once completed will be part of the state of o's highway system and maintained by the state m will have no obligations with respect to the bridge other than to make payments to the state of q for its design construction and right-of-way acquisitions similar to other state parks p will include common facilities such as one or more picnic pavilion facilities and parking hiking and or nature traits and walks for those park visitors who do not play golf or enjoy boating activities in addition common to both the golf project and the marina project will be a separate facility to house the office for park rangers common facilities one or more park rangers who will be on duty will be employees of the department and state law enforcement officers this facility will constitute the main park office where park visitors can obtain information specific to p or other state parks and it will have parking facilities some of which may be shared with the golf project or marina project m will make cash contributions to the department in an agreed upon amount to reimburse the department for the costs of rangers and other department overhead incurred by the department for management and oversight of p m will bear the costs of repairs and maintenance as well as utilities of the park rangers’ office rangers will be housed either in a residence s built and maintained by m on site or the department will receive additional funds to reimburse it for housing allowances provided the rangers the golf project is currently under construction and is expected to be ready for the public by the fall of the marina project is in the planning and permit stage most environmental permits have been obtained and all appropriate requests of various state authorities have been made as required_by_law the bridge design is being performed however soil problems have been discovered that may adversely impact the costs of the bridge upon receipt of final cost estimates m must make a determination if the marina project should proceed as planned unless costs are so prohibitive as to render the marina project unfeasible all portions of p will proceed as set forth herein m intends to complete the golf project and common facilities even if bridge costs render the marina project unfeasible as part of the park system of the state of o p will be subject_to the same rules and regulations as other comparable state parks such rules and regulations include for example the prohibition of the sale or use of alcoholic beverages on park property the fees that are charged for park resources and the requirement that park resources be available to the general_public in a nondiscriminatory manner m intends to comply with all required department rules and regulations further m does not contemplate carrying on any activities in any substantial manner which are not carried on by the department at other comparable public parks z 2bé os sec_501 a of the code exempts from federal_income_tax organizations described in sec_501 sec_501 of the code provides in pertinent part for the exemption from federal_income_tax for organizations organized and operated exclusively for charitable purposes no part of the net_earnings of which inures to the benefit of any private_shareholder_or_individual sec_1_501_c_3_-1 of the income_tax regulations requires that an organization be both organized and operated exclusively for one or more exempt purposes in order to be exempt sec_1 c -1 b of the regulations states that an organization is organized exclusively for one or more exempt purposes only if its articles of organization a limit the purposes of such organization to one or more exempt purposes and b do not expressly empower the organization to engage otherwise than as an insubstantial part of its activities in activities which in themselves are not in furtherance of one or more exempt purposes sec_1_501_c_3_-1 of the regulations provides that an organization will be regarded as operated exclusively for one or more exempt purposes only if it engages primarily in activities which accomplish one or more of such exempt purposes specified in sec_501 c sec_1_501_c_3_-1 of the regulations states that an organization is not organized or operated exclusively for exempt purposes unless it serves a public rather than a private interest it requires an organization to establish that it is not organized or operated for the benefit of private interests such as designated individuals the creator or his family shareholders of the organization or persons controlled directly or indirectly by such private interests sec_1_501_c_3_-1 of the regulations defines charitable in its generally accepted legal sense and includes among other things the erection or maintenance of public buildings monuments or works and the lessening of the burdens of government sec_511 of the code provides in part for the imposition of tax on the unrelated_business_taxable_income of organizations described in sec_501 including organizations described in sec_501 sec_512 of the code provides that the term unrelated_business_taxable_income means the gross_income derived by any organization from any unrelated_trade_or_business as defined in sec_513 that it regularly carries on less the allowable deductions which are directly connected with the carrying on of such trade_or_business and computed with the modifications contained in sec_512 sec_512 of the code excludes from the computation of unrelated_business_taxable_income ail rents_from_real_property and all rents from personal_property leased with such real_property if the rents attributable to such personal_property are an incidental amount of the total rents received or accrued under the lease -- sec_512 of the code provides that notwithstanding sec_512 or in the case of debt-financed_property as defined in sec_514 there shall be included as an item_of_gross_income derived from an unrelated_trade_or_business the amount ascertained under sec_514 and there shall be allowed as a deduction the amount ascertained under sec_514 sec_513 of the code defines unrelated_trade_or_business as any trade_or_business the conduct of which is not substantially related aside from the need of such organization for income or funds or the use it makes of the profits derived to the exercise or performance by such organization of its charitable educational or other purpose or function constituting the basis for its exemption under sec_501 sec_513 of the code provides that the term trade or business’ includes any activity that is carried on for the production_of_income from the sale_of_goods or the performance of services this provision also states that an activity does not lose identity as a trade_or_business merely because it is carried on within a larger aggregate of similar activities or within a larger complex of other endeavors which may or may not be related to the exempt purposes of the organization sec_1_513-1 of the regulations provides that gross_income of an exempt_organization subject_to the tax imposed by sec_511 of the code is includable in the computation of unrelated_business_taxable_income if it is income from trade_or_business such trade_or_business is regularly carried on by the organization and the conduct of such trade_or_business is not substantially related to the organization's exempt functions sec_1_513-1 of the regulations states that for purposes of sec_513 of the code the term trade_or_business has the same meaning it has in sec_162 and generally includes any activity carried on for the production_of_income from the sale_of_goods or performance of services sec_1_513-1 of the regulations provides that specific business activities will ordinarily be deemed to be regularly carried on’ if they manifest a frequency and continuity and are pursued in a manner generally similar to comparable commercial activities of nonexempt organizations sec_1_513-1 of the regulations provides that a trade_or_business is related to exempt purposes in the relevant sense only where the conduct of the business activities has causal relationship to the achievement of the exempt purposes other than through the production_of_income and it is substantially related for purposes of sec_513 of the code only if the causal relationship is a substantial one thus for the conduct_of_a_trade_or_business to be substantially related to the purposes for which exemption is granted the production or distribution of the goods or the performance of the services from which the gross_income is derived must contribute importantly to the accomplishment of these purposes whether the income producing activities contribute importantly to the accomplishment of any purpose for -7- which an organization is granted exemption depends in each case upon the facts and circumstances involved sec_514 of the code provides that unrelated_business_taxable_income shall include a percentage of net_income derived from debt-financed_property sec_514 of the code defines the term debt-financed_property as any property that is held to produce income and with respect to which there is acquisition_indebtedness at any time during the taxable_year or during the months preceding disposition in the case of property disposed of during the taxable_year sec_514 of the code defines acquisition_indebtedness with respect to any debt-financed_property as the unpaid amount of a the indebtedness incurred by the organization in acquiring or improving such property b the indebtedness incurred before the acquisition or improvement of such property if such indebtedness would not have been incurred but for such acquisition or improvement and c the indebtedness incurred after the acquisition or improvement of such property if such indebtedness would not have been incurred but for such acquisition or improvement and the incurrence of such indebtedness was reasonably foreseeable at the time of acquisition or improvement sec_1_514_b_-1 of the regulations excludes from the definition of debt-financed_property any property substantially_all the use of which is substantially related aside from the need of the organization for income or funds to the exercise or performance by such organization of its charitable educational or other purpose or function constituting the basis for its exemption the substantially_all test is met if percent or more of the use of such property is devoted to the organization’s exempt_purpose sec_4942 of the code defines an operating_foundation as any organization which makes qualifying distributions directly for the active_conduct of the activities constituting the purpose s or function s for which it is organized qualifying distributions must satisfy the income test of sec_4942 and either the asset endowment or support_test of sec_4942 qualifying distributions are defined by sec_4942 as any amount_paid to accomplish one or more purposes described in sec_170 of the code or any amount_paid to acquire an asset used or held for use directly in carrying out one or more purposes described in sec_170 sec_53_4942_b_-1 of the regulations defines an operating_foundation as any private_foundation which in addition to satisfying the assets_test the endowment_test or the support_test set forth in sec_53_4942_b_-2 b and c makes qualifying distributions directly for the active_conduct of activities constituting its charitable educational or other similar exempt_purpose equal in value to substantially_all of the lesser_of the foundation’s adjusted_net_income or minimum_investment_return sec_53_4942_b_-1 of the regulations provides that amounts paid to acquire or dos maintain assets which are used directly in the conduct of the foundation's exempt_activities such as the operating_assets of a museum public park or historic site are considered direct expenditures_for the active_conduct of the foundation’s exempt_activities sec_53_4942_b_-3 of the regulations provides in part that a foundation may satisfy the income test and either the assets endowment or support_test by satisfying such tests for any three taxable years during a four-year period consisting of the taxable_year in question and the three immediately preceding_taxable_years or on the basis of an aggregation of all pertinent amounts of income or assets held received or distributed during such four-year period sec_4943 of the code imposes a tax on a private_foundation's_excess_business_holdings in a business_enterprise paragraph c of this section defines excess_business_holdings as the amount of stock or other interest in an enterprise which the foundation would have to dispose_of in order for the foundation's remaining holdings in that enterprise to be permitted holdings sec_4943 of the code provides that the term business_enterprise does not include a functionally_related_business as defined in sec_4942 sec_4942 of the code provides that the term functionally_related_business means a trade_or_business which is not an unrelated_trade_or_business as defined in sec_513 or an activity which is carried on within a larger aggregate of similar activities or within a larger complex of other endeavors which is related aside from the need of the organization for income or funds or the use it makes of the profits derived to the exempt purposes of the organization sec_53_4943-10 of the regulations provides that a business_enterprise includes the active_conduct_of_a_trade_or_business including any activity which is regularly carried on for the production_of_income from the sale_of_goods or the performance of services and which constitutes an unrelated_trade_or_business under sec_513 of the code paragraph b of that section provides that the term business_enterprise does not include a functionally_related_business as defined in sec_4942 rev ruls 1985_1_cb_177 and 1985_1_cb_178 set forth criteria for determining whether an organization's activities are lessening the burdens of government first a governmental_unit must consider the organization's activities to be its burden second these activities must actually lessen the burden of the governmental_unit an activity is a burden of government if there is an objective manifestation by the governmental_unit that it considers the activities of the organization to be its burden the interrelationship between the governmental_unit and the organization may provide evidence that the governmental_unit considers the activity to be its burden whether the organization is actually lessening the burdens of government is determined by considering all of the relevant facts and circumstances revrul_74_399 1974_2_cb_172 holds that the operation of a dining room cafeteria and snack bar by a museum for_the_use_of museum staff employees and members of the public visiting the museum does not constitute an unrelated_trade_or_business under sec_513 of the revrul_69_268 1969_1_cb_160 holds that the operation of a cafeteria and coffee shop by a hospital described in sec_501 of the code is substantially related to the hospital's exempt_purpose and does not constitute unrelated_trade_or_business under sec_513 m's representative has inquired as to the tax implications attendant to m’s funding and operation of p ie the golf project marina project and common facilities with respect to its continuing qualification for recognition of exemption under sec_501 of the code m must show that it will be organized and operated exclusively for exempt purposes with regard to the organizational_test m proposes to amend and restate its charter to include references to lessening the burdens of government and promoting the social welfare and the common good of the public these charitable purposes will be in addition to m’s educational_purposes and thus m will continue to meet the organizational_test in accordance with sec_1_501_c_3_-1 of the regulations with regard to the operational_test the question is whether m’s funding and operation of p will be consistent with the requirements under sec_501 of the code in addition to the golf course and the marina p will also contain picnic pavilion facilities parking facilities and hiking and or nature trails and walks as noted above p will be operated and maintained as a state park within the state of o’s park system subject_to the rules and regulations of the department these rules and regulations include being open to all members of the public without regard to race creed color or religion the state of o through two separate legislative acts has not only authorized the construction of p but has also authorized the issuance of bonds for that purpose to regulate it through the department are objective manifestations by the state of o that it considers p its burden the state of o would not be able to operate and maintain the park without m all of the available information establishes that m will further its charitable purpose under sec_501 by operating and maintaining p as a state park under these circumstances m will lessen the burdens of the state of o see rev ruls and supra therefore such activity will not adversely affect m’s status as an organization described in sec_501 the state of o’s authorization of p through legislation and its intention although owning leasing or subleasing the excluded facilities will not be in furtherance of an exempt_purpose under sec_501 of the code leasing these facilities in the manner described will not adversely affect m’s tax-exempt status under sec_501 see sec_1_501_c_3_-1 of the regulations amounts derived from leasing these facilities will be excluded from the computation of unrelated_business_taxable_income under sec_512 as rent from real_property however a portion of such rental payments may constitute unrelated_business_taxable_income under sec_512 and sec_514 to the extent the facilities are debt- financed property under sec_514 in part operating p consists of conducting activities carried on for the production_of_income from the sate of goods or the performance of services these activities manifest a frequency and continuity and are pursued in a manner generally similar to comparable for-profit entities namely golf courses and marinas thus m's operating of p constitutes a regularly carried on trade_or_business under sec_1_513-1 and c of the regulations generally however these activities will contribute importantly to m's charitable purpose of lessening the burdens of government as described above see sec_1_513-1 thus as these of activities have a substantial causal relationship to the achievement of m’s exempt purposes income derived by m from the operation of p will not be subject_to tax under sec_511 of the code applying the fragmentation rule contained in sec_513 to the clubhouse pro shop facility income from the sale of tees gloves and balls to visitors to the golf course will not constitute unrelated_business_taxable_income under sec_512 similarly income derived from the snack stand where visitors can obtain soft drinks and snacks will not constitute unrelated_business_taxable_income see rev ruls and supra however we conclude and you have agreed that income derived from the sale of clothing such as hats or shirts with p’s logo will be unrelated_business_taxable_income under sec_512 such sales of clothing will not be substantially related to m’s exempt_purpose as required by sec_513 with regard to the issues of debt-financed_income under sec_514 of the code and excess_business_holdings under sec_4943 except as noted previously income from the operation and maintenance of p will not constitute unrelated_business_taxable_income because such revenues will be derived from a trade_or_business that is substantially related to m’s exempt_purpose therefore such income will not constitute debt-financed_income within the meaning of sec_514 and accordingly will not be subject_to tax under sec_511 see sec_1_514_b_-1 of the regulations also to the extent m’s operation of p is not an unrelated_trade_or_business under sec_513 it is a functionally_related_business under sec_4942 as such it is not a business_enterprise in accordance with sec_4943 see sec_53_4943-10 and b with regard to the issue of operating_foundation status under sec_4942 of the code the amounts paid_by m to construct operate and maintain p are qualifying distributions under sec_4942 of the code and are directly for the active_conduct of the activities constituting m’s exempt_purpose see sec_53_4942_b_-1 of the regulations for purposes of sec_4942 m will be classified as an operating_foundation for the years in which it meets the relevant tests set forth in sec_4942 and sec_53_4942_b_-1 see section sec_3 b -3 a based on the information you have submitted as presented above we rule that the proposed amendment to m’s charter and by-laws as contained in the restated and amended charter and by-laws will not adversely affect m’s status as an organization described in and exempt from tax under sec_501 of the code except as noted previously operating p as described in this request under the facts and circumstances constitutes with respect to m an activity substantially related to m's exempt_purpose s under sec_501 and sec_509 of the code owning leasing or subleasing the excluded facilities will not adversely affect m’s tax-exempt status under sec_501 except as noted previously p will not constitute an unrelated_trade_or_business under sec_512 or sec_513 of the code and accordingly such income if any derived therefrom will not be subject_to tax under sec_511 amounts derived from owning leasing and subleasing the excluded facilities will constitute rent from real_property under sec_512 however a portion of the rental payments may o27 on constitute unrelated_business_taxable_income under sec_512 and sec_514 to the extent the facilities are debt-financed_property under sec_514 except as noted previously income derived by m from p if any will not constitute debt-financed_income within the meaning of sec_514 of the code and accordingly will not be subject_to tax under sec_511 to the extent the operation of p is not an unrelated_trade_or_business under sec_513 of the code the activities contemplated by m in connection with operating p will not constitute a business_enterprise under sec_4943 amounts paid_by m to acquire or maintain assets which are used in connection with p will be deemed to be qualifying distributions within the meaning of sec_4942 of the code and will also be deemed to be distributions to acquire or maintain assets used directly in the conduct of m's exempt_activities within the meaning of sec_4942 and sec_53_4942_b_-1 of the regulations mvwill be classified as an operating_foundation within the meaning of sec_4942 of the code for m's first taxable_year for which it satisfies the income test as set forth in sec_4942 and one of the alternative tests as set forth in sec_4942 on a stand alone basis for each of m’s three immediately preceding_taxable_years or m will be classified as an operating_foundation in the first taxable_year of m in which it satisfies the tests of sec_4942 and b on an aggregate basis as set forth in sec_53_4942_b_-3 of the regulations for such first taxable_year and m’s immediately preceding three taxable years and once classified as an operating_foundation m will continue to be classified as an operating_foundation with respect to any subsequent tax_year of m in which it satisfies the income test and one of the alternative tests for the taxable_year and the immediately preceding three taxable years on an aggregate basis or in such future taxable_year of m if m has satisfied the income test and one of the alternative tests on a stand alone basis in each of the three immediately preceding_taxable_years of m except as specifically ruled upon above no opinion is expressed concerning the federal_income_tax consequences of the transactions described above under any other provision of the code this ruling is based on the understanding that there will be no material changes in the facts upon which it is based a pursuant to a power_of_attorney on file in this office a copy of this letter is being sent to m's authorized representative a copy of this letter should be kept in m’s permanent records this ruling is directed only to the organization that requested it sec_6110 of the code provides that it may not be used or cited by others as precedent if there are any questions about this ruling please contact the person whose name and telephone number are shown in the heading of this letter sincerely yatoy v see gerald v sack manager exempt_organizations technical group