francis j dirico and jennifer dirico petitioners v commissioner of internal revenue respondent docket no filed date p-h leased land and telecommunication towers to s his wholly owned s_corporation in exchange for a percentage of s’s revenues from its leases of tower access to third parties p-h also leased three parcels of land to s that were without towers s also sold and serviced radios and provided special- ized mobile radio smr services to customers for a monthly subscriber fee four of the towers leased to s housed antennas in free unused space for the rent-free use of s’s smr cus- tomers p-h reported the net_income from his leases to s as passive_activity rental income pursuant to sec_469 r alleges that p-h’s rental income from his tower and land rentals to s constituted income from property used in a trade_or_business in which p-h materially partici- pated and therefore constituted non-passive-activity income pursuant to sec_1_469-2 income_tax regs that regulation applies only to p-h’s profitable tower and land leases to s so that p-h’s losses from unprofitable tower and land leases to s remain passive_activity_losses and p-h’s income from the three land-only leases to s constituted non- passive-activity income pursuant to sec_1_469-2t tem- porary income_tax regs fed reg date because less than of the leased property’s unadjusted_basis was subject_to depreciation held s used the towers and associated land leased from p-h in a rental not a trade_or_business activity with the result that p-h’s income from those leases constituted passive_activity income or loss pursuant to sec_469 regardless of p-h’s material_participation in that activity see sec_469 held further the prior holding renders moot ps’ objection to treating p-h’s losses from unprofitable tower and land leases to s as passive_activity_losses held further because the land included in the land-only leases was not provided in connection with any of the towers p-h leased to s those leases may not be grouped with p-h’s tower and land leases to s see sec_1_469-4 income_tax regs and therefore because less than of the property verdate nov jun jkt po frm fmt sfmt v files bound vol without crop marks b v dirico nov jamie dirico v commissioner covered by those leases was depreciable p-h’s income there- from constituted non-passive-activity income pursuant to sec_1_469-2t temporary income_tax regs supra donald-bruce abrams daniel a nelson and lawrence i silverstein for petitioners nina p ching for respondent halpern judge by notice_of_deficiency respondent deter- mined deficiencies in petitioners’ federal_income_tax liabil- ities of dollar_figure and dollar_figure for their and tax- able calendar years years in issue respectively unless otherwise indicated all section references are to the internal_revenue_code in effect for the years in issue all dollar amounts have been rounded to the nearest dollar the issues for decision are whether rental income paid to francis j dirico petitioner or to one of his wholly owned grantor or nominee trusts by his wholly owned subchapter_s_corporation for_the_use_of telecommunication towers and land constituted income from a passive_activity passive_activity income pursuant to sec_469 or income from a nonpassive activity non-passive-activity income pursuant to sec_1_469-2 income_tax regs whether the rental income involved in deciding the first issue is the net_income derived from all of the property leased to petitioner’s wholly owned subchapter_s_corporation or that derived from the profitable rentals only whether in deciding the first issue we should exclude from consideration petitioner’s income from rentals of land without a tower and treat that income as non-passive-activity income pursuant to sec_1_469-2t temporary income_tax regs fed reg date the notice_of_deficiency also reflects reductions in petitioners’ itemized_deductions for the years in issue which derive from the principal adjustment and are not directly disputed by peti- tioners additionally in their petition petitioners argue that they are entitled to treat the por- tion of petitioner’s income from his wholly owned subchapter_s_corporation that was attributable to that corporation’s tower rental income as passive_activity income even though the corporation reported his entire distributive_share of its income for the years in issue as ordinary busi- ness income a characterization that carried over to petitioners’ individual joint returns for those years on brief however petitioners abandon that argument apparently because the record does not include a breakdown between the corporation’s tower rental and other income for the years in issue therefore we do not address that issue verdate nov jun jkt po frm fmt sfmt v files bound vol without crop marks b v dirico nov jamie united_states tax_court reports findings_of_fact residence at the time the petition was filed petitioners resided in key largo florida background petitioner attended high school college and graduate school in massachusetts he earned an undergraduate degree in public health and epidemiology and did graduate-level courses in various technical areas after completing his schooling he worked in boston as a staff engineer in his father’s manufacturing business in the early 1970s he formed what became industrial communications electronics inc ice ice’s business which petitioner initially conducted out of his home in pem- broke massachusetts was electrical contracting servicing two-way radios and later performing specialized services for cellular carriers ice moved first to kingston and then to marshfield massachusetts where at the time of the trial its corporate headquarters had been for the preceding years ice also maintains small offices in miami and naples florida before and during the years in issue ice was engaged in a variety of radio-related activities including construction of and leasing access to telecommunications towers towers sales and servicing of motorola radios and providing special- ized mobile radio services smr for a monthly subscriber fee it constructed towers both for unrelated parties and for its own use the latter for rental to customers including verizon t-mobile at t paging companies and government entities smr was a pre-cellular-telephone-technology push-to-talk radio system with some telephone capabilities before the cel- lular telephone industry matured smr was an attractive technology offering party-line or intercom-like services to such users as security companies plumbers electricians construction companies and tow-truck and rubbish compa- nies by or ice and nextel each owned half of the smr frequencies in boston ice used its frequencies in its smr business but by then nextel’s use of digital technology on verdate nov jun jkt po frm fmt sfmt v files bound vol without crop marks b v dirico nov jamie dirico v commissioner its frequencies resulted in interference that caused ice’s cus- tomers to have difficulty in using their smr radios the fre- quencies involved in the smr business were both and megacycles megs and it was nextel’s use of the former that hurt ice’s customers and led to ice’s loss of some of those customers as a result in or ice disposed to nextel all of its megs frequencies in exchange for cash and nextel’s megs frequencies thereafter ice rebuilt its smr business as a megs business which continued during the years in issue ice mounted the smr antennas on a small number perhaps four of the towers that it leased from petitioner during the years in issue ice placed the smr antennas on what was otherwise free space ie space not already used by lessee antennas during the years in issue ice was an s_corporation within the meaning of sec_1361 and petitioner owned in indirectly through another wholly owned s_corporation and in directly of its stock petitioner’s ownership and leasing of telecommunications towers and land to ice during the years in issue either individually or through grantor or nominee trusts petitioner owned towers and land that he leased to ice in all petitioner leased to ice prop- erties in consisting of both a tower and land owned by a nominee_trust consisting of land owned by a nominee_trust on which was situated a tower owned by ice and con- sisting of land owned by petitioner with no tower and properties in consisting of both a tower and land owned by petitioner consisting of both a tower and land owned by a nominee_trust consisting of land owned by a nominee_trust on which was situated a tower owned by ice and consisting of land owned by petitioner with no tower those properties were in massachusetts rhode island new hampshire and florida during both years petitioner incurred net losses with respect to four of the properties leased to ice each consisting of tower and land under the typical lease from either petitioner or one of the nominee trusts to ice the lessor leased the land towers and other_property at a specified address to ice for a five-year initial term with provision for indefinite five-year renewals in verdate nov jun jkt po frm fmt sfmt v files bound vol without crop marks b v dirico nov jamie united_states tax_court reports consideration of base rent of of the gross tower rent revenue ice was responsible for payment of utilities and for maintenance of the leased property with respect to both the towers it leased from petitioner or a nominee_trust and the towers it owned on land it leased from a nominee_trust ice leased tower access to unrelated third parties including mobile telecommunication service providers such as verizon and nextel ice leased tower access to to tenants per tower and each of those tenants would install up to antennas on a tower under the typ- ical tower access lease entitled license agreement for antenna site the licensee is allowed to install operate and maintain at its sole expense and risk specified items of equipment typically antennas and transmission lines in consideration of a monthly license fee the licensor is liable for repairs except those required because of the fault or negligence of the licensee or its designated mainte- nance company in which event the licensee becomes responsible for the repairs ice as lessor or licensor gen- erally maintained each tower made sure that it was painted and that the lights were working picked up papers and other debris plowed snow etc petitioner’s involvement with ice petitioner was immersed in ice’s business operations working long hour sec_51 to days every week at least until the sale of the megs smr frequencies to nextel in or shortly after that sale he and his family moved from massachusetts to key largo florida thereafter peti- tioner’s involvement with the day-to-day activities of ice less- ened the trial testimony certain of the exhibits and the parties’ briefs address the extent of peti- tioner’s involvement with ice during the years in issue assuming ice used the towers and land leased from petitioner or a nominee_trust in a trade_or_business activity as defined in sec_1_469-4 income_tax regs the question is whether petitioner’s involvement in that activity rose to the level of material_participation therein as defined in sec_1_469-5t tem- porary income_tax regs fed reg date thereby triggering the application of sec_1_469-2 income_tax regs to convert petitioner’s tower and land rental income from passive_activity to non-passive-activity income for the reasons discussed below we find that ice did not use the towers and land leased from petitioner or a nominee_trust in a trade_or_business activity which renders moot the issue of whether petitioner materially participated in ice’s tower access leasing activity during the years in issue therefore we do not address or attempt to resolve the conflicting evidence in the record regarding petitioner’s involvement in the day-to-day operations of ice during those two years verdate nov jun jkt po frm fmt sfmt v files bound vol without crop marks b v dirico nov jamie dirico v commissioner petitioners’ and ice’s tax returns petitioners’ returns for the years in issue reported the income and loss from the leasing of towers and land to ice as passive_activity income and loss for purposes of sec_469 those returns listed each of the individual land and tower rentals as a separate activity ice’s returns for the years in issue did not separately report the income or loss from its various activities rather ice reported its total net_income as ordinary business income moreover on the form_1120s schedule_k-1 share- holder’s share of income deductions credits etc it issued to petitioner for each of the years in issue ice included peti- tioner’s entire distributive_share of its income for the year in box ordinary business income loss consistent with those schedules k-1 petitioner reported his distribu- tive share of ice’s income for the years in issue as ordinary non-passive-activity income on schedule e supplemental income and loss respondent’s adjustments at issue for each of the years in issue respondent recharacterized petitioner’s income from profitable rentals of towers and or land from passive_activity income to non-passive-activity income for purposes of sec_469 he did not however so recharacterize petitioner’s losses from unprofitable tower and land rentals on that basis respondent recharacterized dollar_figure and dollar_figure for and respectively from passive_activity income to non-passive-activity income attrib- utable to profitable rental properties but he did not so re- characterize dollar_figure and dollar_figure for and respectively of losses attributable to unprofitable rental properties as noted supra note for each of the years in issue respondent also made correlative adjustments that are not in dispute i burden_of_proof opinion each party argues that the other should bear the burden_of_proof we have found many facts without the need to verdate nov jun jkt po frm fmt sfmt v files bound vol without crop marks b v dirico nov jamie united_states tax_court reports determine who bears the burden_of_proof with respect to one possible material fact ie whether petitioner materially participated in ice’s tower access leasing activity the parties propose conflicting findings because our disposition of the case makes it unnecessary to find whether petitioner materi- ally so participated see supra note there are no facts left to be found only issues of law as applied to undisputed facts therefore it is unnecessary to assign burden_of_proof ii applicable law a general principles sec_469 disallows the passive_activity_loss of an indi- vidual taxpayer the term passive_activity_loss means the amount if any by which the aggregate losses from all pas- sive activities for the taxable_year exceed the aggregate income from all passive activities for such year sec_469 a passive_activity is any activity involving the conduct_of_a_trade_or_business in which the taxpayer does not materially participate sec_469 in addition with an exception that is inapplicable herein see sec_469 the term passive_activity includes any rental_activity defined in sec_469 as any activity where payments are prin- cipally for_the_use_of tangible_property regardless of the taxpayer’s material_participation therein sec_469 see 123_tc_275 a tax- payer’s activities include those conducted through an s cor- poration sec_1_469-4 income_tax regs sec_1_469-1t temporary income_tax regs fed reg date states that an activity is a rental_activity for the taxable_year if a d uring such year tangible_property held in connection with the activity is used or held for use by customers and b the gross_income attributable to the conduct of the activity during such taxable_year represents or in the case of an activity in which prop- erty is held for use by customers the expected gross_income from the con- duct of the activity will represent amounts paid or to be paid principally for_the_use_of such tangible_property without regard to whether the use of the property by customers is pursuant to a lease or pursuant to a service_contract or other arrangement that is not denominated a lease see sec_469 for the definition of material_participation verdate nov jun jkt po frm fmt sfmt v files bound vol without crop marks b v dirico nov jamie dirico v commissioner sec_1_469-1t a - f temporary income_tax regs fed reg date lists six exceptions or instances in which an activity involving the use of tangible_property is not a rental_activity for the taxable_year none of which is alleged by respondent to be applicable herein b recharacterization of passive_activity rental income sec_469 in relevant part directs the secretary to issue such regulations as may be necessary or appropriate to carry out provisions of sec_469 including regu- lations requiring net_income or gain from a passive_activity to be treated as not from a passive_activity pursuant to that legislative directive the commissioner promulgated sec_1_469-2t temporary income_tax regs supra which incorporates by reference sec_1 f and income_tax regs and is entitled re- characterization of passive_income in certain situations only sec_1_469-2t temporary income_tax regs supra and sec_1_469-2 income_tax regs are alleged by respondent to be applicable herein both apply to rental activities the former provides in relevant part that if less than of the unadjusted_basis of rental property is subject_to the allowance for depreciation under sec_167 the taxpayer’s net passive_activity income from the property shall be treated as non-passive-activity income sometimes the test the latter provides in relevant part as fol- lows property rented to a nonpassive activity -an amount of the taxpayer’s gross rental_activity income for the taxable_year from an item of property equal to the net rental_activity income for the year from that item of prop- erty is treated as not from a passive_activity if the property- i is rented for use in a trade_or_business activity in which the taxpayer materially participates within the meaning of sec_1_469-5t for the taxable_year in general trade_or_business activities constitute activi- ties other than rental activities sec_1_469-4 income_tax regs the conference_report accompanying the enactment of sec_469 cites as an example of pas- sive activity income to be converted into non-passive-activity income income from related_party leases or sub-leases with respect to property used in a business activity that have the effect of reducing active business income and creating passive_income h_r conf rept no vol ii at ii-147 1986_3_cb_1 verdate nov jun jkt po frm fmt sfmt v files bound vol without crop marks b v dirico nov jamie united_states tax_court reports thus application of sec_1_469-2 income_tax regs sometimes the self-rental_rule requires the satisfaction of two conditions property must be rented for use in a trade_or_business and the lessor-taxpayer must materially participate in the trade_or_business the fact that sec_1_469-2 income_tax regs re- characterizes the net rental_activity income from an item of property rather than the net_income from the taxpayer’s entire rental_activity means that the passive losses generated by unprofitable rental properties remain passive_activity_losses therefore those losses do not offset the recharacter- ized from passive_activity to non-passive-activity income from the taxpayer’s profitable rental properties 139_tc_45 carlos v commis- sioner t c pincite c rules for grouping activities sec_1_469-4 income_tax regs entitled general rules for grouping activities provides appropriate eco- nomic unit one or more trade_or_business activities or rental activities may be treated as a single activity if the activities constitute an appropriate economic unit for the measurement of gain_or_loss for purposes of sec_469 sec_1 c income_tax regs applies a facts_and_circumstances_test for determining whether activities constitute an appro- priate economic unit sec_1_469-4 income_tax regs provides limitations on the grouping of activities in that regard sec_1 d i income_tax regs provides that a rental_activity may not be grouped with a trade_or_business activity unless the activities constitute an appropriate economic unit and a the rental_activity is insubstantial in relation to the trade or busi- ness activity rental_activity or b the trade_or_business activity is insubstantial in relation to the c each owner of the trade_or_business activity has the same propor- tionate ownership_interest in the rental_activity in which case the portion although sec_1_469-2 income_tax regs has been challenged as invalid its validity has been upheld repeatedly see eg 279_f3d_547 7th cir aff ’g 114_tc_366 225_f3d_103 1st cir aff ’g tcmemo_1999_301 191_f3d_599 5th cir shaw v commissioner tcmemo_2002_35 verdate nov jun jkt po frm fmt sfmt v files bound vol without crop marks b v dirico nov jamie dirico v commissioner of the rental_activity that involves the rental of items of property for use in the trade_or_business activity may be grouped with the trade_or_business activity pursuant to sec_1_469-4 income_tax regs real and personal_property rental activities other than where one type of property is provided in connection with the other may not be grouped and treated as a single activity a shareholder in a sec_469 entity such as an s corpora- tion may not treat activities grouped together by the s_corporation as separate activities sec_1_469-4 income_tax regs last sentence pursuant to sec_1_469-4 income_tax regs once a taxpayer has grouped activities the taxpayer may not regroup those activities in subsequent taxable years however if it is determined that a taxpayer’s original grouping was clearly inappropriate the taxpayer must regroup the activities sec_1_469-4 income_tax regs iii summary of the parties’ arguments a respondent’s arguments respondent argues that during the years in issue peti- tioner either individually or through a nominee_trust rented to ice for use in its trade_or_business activities tele- communications towers and land and land on which ice- owned towers were situated together tower and land rentals respondent further argues that within the meaning of sec_1_469-5t temporary income_tax regs fed reg date petitioner materially participated in those ice activities therefore respondent concludes peti- tioner’s income from those rentals must be recharacterized from passive_activity income to non-passive-activity income pursuant to the self-rental_rule of sec_1_469-2 income_tax regs the parties appear to agree that petitioner’s tower and land rentals to ice constituted a single activity presumably both parties accept and we agree that those rentals represent the rental of personal_property provided in connection with real_property or vice versa therefore they come within the exception to the general prohibition against grouping real and personal_property rentals see sec_1_469-4 income_tax regs moreover because petitioner’s activi- ties include those he conducted through ice see sec_1_469-4 income_tax regs his rentals of land with ice-owned towers situated thereon are properly includable within that grouping as rentals of real_property provided in connection with personal_property indirectly provided by petitioner through ice verdate nov jun jkt po frm fmt sfmt v files bound vol without crop marks b v dirico nov jamie united_states tax_court reports respondent’s argument that ice’s leasing of tower access to unrelated third parties constituted a trade_or_business is based in part on his view that ice was in the trade_or_business of leasing and managing tower access to unrelated parties and that business and ice’s other business activities complemented one another with the overall result that they should be considered a single trade_or_business respondent also refers to ice’s maintenance of the towers its payment of the electrical bills and its providing of technical specifications to the lessees regarding how they should install their antennas respondent’s argument that ice’s tower access rental_activity must be considered a part of and included within its overall trade_or_business activity is based principally on the fact that ice on its returns and on the schedules k-1 issued to petitioner for the years in issue grouped all of its activities and reported the income there- from as ordinary business income respondent argues that pursuant to sec_1_469-4 last sentence and e income_tax regs petitioners are bound by ice’s grouping of its activities and may not treat any of them as separate activities respondent further argues that ice’s grouping was correct on the ground that its activities constituted an appropriate economic unit and petitioner had the same proportionate interest in both his rental_activity and ice’s trade_or_business activities see sec_1_469-4 income_tax regs respondent also argues that pursuant to sec_1 f income_tax regs he properly recharacterized from passive_activity income to non-passive-activity income only petitioner’s income from profitable tower and land rentals in support of that argument respondent cites 123_tc_275 and in particular our observa- tion in carlos that sec_1_469-2 income_tax regs explicitly recharacterizes net rental_activity income from an ‘item of property’ rather than net_income from the entire rental ‘activity’ id pincite lastly respondent argues that petitioner’s rental income for the years in issue from the three parcels of land without a tower that he leased to ice land-only rentals must be re- characterized as non-passive-activity income pursuant to the test of sec_1_469-2t temporary income_tax regs supra which requires such recharacterization with verdate nov jun jkt po frm fmt sfmt v files bound vol without crop marks b v dirico nov jamie dirico v commissioner respect to income from rental property less than of the unadjusted_basis of which is subject_to the allowance for depreciation under sec_167 b petitioners’ arguments petitioners argue that because ice’s leasing of tower access to third parties was a rental_activity under sec_469 which by definition cannot be a trade_or_business activity see sec_1_469-4 income_tax regs petitioner either individually or through a nominee_trust did not lease any properties to ice for use in a trade_or_business there- fore the self-rental_rule of sec_1_469-2 income_tax regs does not apply to petitioners’ rental income from those leases which remains passive_activity income regardless of whether petitioner materially participated in the rental or other activities of ice petitioner argues alternatively that even if ice’s leasing of tower access were treated as a trade_or_business ie non- passive_activity petitioners’ rental income would still be passive_activity income because petitioner did not within the meaning of the regulations materially participate in the activity petitioner also objects to respondent’s failure to net his profitable and unprofitable property rentals to ice in deter- mining the amount of income subject_to recharacterization as non-passive-activity income under sec_1_469-2 income_tax regs petitioners argue that both the profitable and unprofitable rentals arose out of the same rental_activity so that if the profits are to be treated as nonpassive so must the losses thus petitioners reject as excessive respond- ent’s treatment of the profits from profitable rentals as non- passive while allowing the losses from nonprofitable rentals to remain passive and therefore unavailable to offset the non-passive-activity rental income petitioners make a similar argument in opposition to respondent’s citation of sec_1_469-2t temporary income_tax regs supra as grounds for recharacterizing from passive_activity income to non-passive-activity income his income from land-only rentals petitioners argue that in determining whether less than of the unadjusted_basis of petitioners’ property leased to ice was depreciable respondent should have included in the computation all of verdate nov jun jkt po frm fmt sfmt v files bound vol without crop marks b v dirico nov jamie united_states tax_court reports the property leased to ice not just the real_property included in the land-only rentals petitioner also argues that respond- ent’s position with respect to the land-only rentals was first raised on brief and for that reason should be rejected as untimely iv analysis and conclusions a application of the self-rental_rule sec_1_469-2 income_tax regs introduction application of sec_1_469-2 income_tax regs to petitioner’s tower and land rentals to ice during the years in issue depends upon our finding that two conditions existed with respect to those rentals ice used those properties in a trade_or_business activity which for purposes of sec_469 is an activity other than a rental_activity see sec_1 b income_tax regs and petitioner materially participated in that trade_or_business activity because for the reasons set forth below we find that ice did not use those properties in a trade_or_business activity we do not address the issue of whether petitioner materially partici- pated in ice’s tower access rental activities and we hold that sec_1_469-2 income_tax regs is inapplicable to petitioner’s income from tower and land rentals to ice analysis the fact that the typical tower lease between ice and its tower access customers was denominated a license agree- ment for antenna site is of no consequence if the customer is paying for_the_use_of tangible_property the activity is a rental_activity without regard to whether the use of the property is pursuant to a lease a service_contract or other arrangement that is not denominated a lease sec_1_469-1t temporary income_tax regs fed reg date also the fact that ice’s various activities may have com- plemented one another does not alter the fundamental fact that ice’s leasing of towers and land to unrelated third par- ties was a rental_activity within the meaning of sec_469 and sec_1_469-1t temporary income verdate nov jun jkt po frm fmt sfmt v files bound vol without crop marks b v dirico nov jamie dirico v commissioner tax regs supra the few services that ice provided in connection with its rentals eg painting the towers making sure the lights worked plowing the snow around the towers were equivalent to the services routinely provided by any lessor or landlord in order to make premises habitable by a lessee they were no more than supportive of ice’s rental activities and did not turn those activities into trade or busi- ness activities as defined in sec_1_469-4 income_tax regs more importantly ice’s performance of those services did not bring its tower leasing activities within any of the exceptions to the definition of a rental_activity that are described in sec_1_469-1t a - f temporary income_tax regs supra those exceptions none of which is alleged by respondent to be applicable herein describe cir- cumstances under which an activity involving the use of tangible_property will not be considered a rental_activity for the taxable_year they include rentals of seven days or less subdivision a rentals of days or less accompanied by significant lessor-provided services subdivision b and sec_1_469-1t temporary income_tax regs fed reg date rentals accompanied by extraor- dinary personal services ie the use of the property is incidental to the receipt of the services subdivision c and sec_1_469-1t temporary income_tax regs fed reg date rentals incidental to a non- rental_activity of the taxpayer subdivision d and sec_1_469-1t temporary income_tax regs fed reg date rentals where the property is made available during defined business hours for nonexclu- sive use by various customers subdivision e rentals to a passthrough_entity eg an s_corporation where the tax- payer has made property available to the entity in the tax- payer’s capacity as an owner of an interest in the entity eg by way of capital_contribution for use in a nonrental activity subdivision f and sec_1_469-1t tem- porary income_tax regs fed reg date four of those exceptions sec_1_469-1t b that ice’s activities may have complemented one another is an indication that those activi- ties may have constituted an appropriate economic unit within the meaning of sec_1 c income_tax regs but as discussed infra that fact alone even if proven would not jus- tify the grouping of ice’s rental and nonrental activities see sec_1_469-4 income_tax regs verdate nov jun jkt po frm fmt sfmt v files bound vol without crop marks b v dirico nov jamie united_states tax_court reports e and f temporary income_tax regs supra are inap- plicable by their terms and respondent does not seek to apply the other two exceptions sec_1_469-1t and d temporary income_tax regs supra presumably because the facts herein overwhelmingly demonstrate their inapplicability ie there is no basis for concluding that ice’s peripheral services afforded to tower lessees were extraor- dinary personal services as defined in sec_1 1t e v temporary income_tax regs supra or that ice’s rental_activity was incidental to its nonrental activities within the meaning of sec_1_469-1t temporary income_tax regs supra respondent relies heavily on the fact that for the years in issue ice reported both on its own returns and on the schedules k-1 issued to petitioner all of its income as a single undifferentiated amount denominated as ordinary business income he further notes there is no evidence in the records sic showing what income and expenses are attributable to each of ice’s business operations respondent argues that ice’s grouping of its activities as a single activity producing ordinary business income was proper under sec_1_469-4 and d income_tax regs and that under sec_1_469-4 income_tax regs ice may not regroup those activities and under sec_1 d i income_tax regs last sentence petitioner may not treat those activities as separate activities for the years in issue petitioners respond that even if ice’s tower rental_activity was to be combined with its other activities as part of an appropriate economic unit within the meaning of sec_1_469-4 income_tax regs the actual disconnect between that activity and ice’s other activities save for the limited and rent-free use in the smr business of antennas mounted in ‘free space’ atop some of the towers mandates its treatment as a passive_activity thereby ren- ice’s only trade_or_business activity to which its tower rentals conceivably could have been considered incidental was its smr business for which it provided free space for smr anten- nas atop no more than four of those towers the record indicates that ice received no rent for providing that space under those circumstances it is beyond dispute that the towers in ques- tion were not predominantly_used in the smr business during the taxable_year or dur- ing at least two of the five taxable years immediately preceding the taxable_year as required by sec_1_469-1t temporary income_tax regs fed reg date verdate nov jun jkt po frm fmt sfmt v files bound vol without crop marks b v dirico nov jamie dirico v commissioner dering the self-rental_rule of sec_1_469-2 income_tax regs inapplicable to petitioner’s tower and land rentals to ice during the years in issue we agree with petitioner ice’s grouping of its activities and its reporting of those activities on its returns for the years in issue and on the schedules k-1 issued to petitioner as a single business activity generating ordinary business income was improper sec_1_469-4 income_tax regs prohibits the grouping of a rental_activity and a trade_or_business activity unless those activities constitute an appropriate economic unit as defined in paragraph c of the regulation and one of three additional conditions is satisfied respondent does not argue that either ice’s tower rental_activity or its non- rental activities is insubstantial in relation to the other ie he agrees that neither of the first two conditions applies herein see sec_1_469-4 and b income_tax regs respondent does argue however that the third condition set forth in sec_1_469-4 income_tax regs applies because petitioner had the same proportionate ownership_interest in each of ice’s activities including the rental_activity and that therefore the grouping of ice’s non- rental and rental activities was proper sec_1_469-4 income_tax regs permits the grouping of a taxpayer’s rental and trade_or_business activi- ties which form an appropriate economic unit and e ach owner of the trade_or_business activity has the same propor- tionate ownership_interest in the rental_activity in which case the portion of the rental_activity that involves the rental of items of property for use in the trade_or_business activity may be grouped with the trade_or_business activity emphasis added as petitioner points out respondent’s argument does not take into account the emphasized language pursuant to that language only the portion of ice’s tower rental_activity that involves the rental of petitioner’s towers for use in an ice trade_or_business activity may be grouped with that trade_or_business activity ice’s only use of petitioner’s towers in a trade_or_business activity was its use of perhaps four of peti- tioner’s towers to house antennas used in ice’s smr business but the smr customers’ use of those towers was on a rent- free basis and that use was de_minimis as compared to the use of the towers by ice’s tower rental customers thus no verdate nov jun jkt po frm fmt sfmt v files bound vol without crop marks b v dirico nov jamie united_states tax_court reports portion of the income from ice’s rental_activity involved the rental of petitioner-owned towers for use in ice’s smr busi- ness therefore we conclude that sec_1_469-4 income_tax regs does not support respondent’s application of the self-rental_rule to recharacterize from passive_activity to non-passive-activity income any portion of petitioner’s income from his tower and land rentals to ice the question then is whether ice’s erroneous grouping of its rental and other activities and its treatment of those activities as a single ordinary business activity is by virtue of the last sentence of sec_1_469-4 income_tax regs and sec_1_469-4 income_tax regs binding on petitioner with respect to his tower and land rentals to ice with the result that the self-rental_rule of sec_1 f income_tax regs is applicable to his income there- from assuming that petitioner materially participated in that ordinary business activity pursuant to the last sentence of sec_1_469-4 income_tax regs petitioner in his capacity as ice’s sole shareholder may not treat any of ice’s activities as separate activities a shareholder may not treat activities grouped together by a sec_469 entity as separate activi- ties that provision might serve as the basis for denying to petitioner the right to treat his distributive_share of the income from ice’s tower rentals to third parties as income from a separate activity generating passive_activity income even if he were able to determine the amount of that income it is not however authority for the application of the self-rental_rule to petitioner’s income from his tower and land rentals to ice petitioner derived that income as a lessor of property to ice not as a shareholder because petitioner wore his lessor hat and not his shareholder hat the last respondent does not claim nor is there any evidence to support a conclusion that we should treat a portion of the monthly subscriber fee paid_by ice’s smr customers as payment for_the_use_of tower space ie as a tower rental payment therefore we consider ice’s installation of smr antennas on a few of its towers to be a gratuitous accommodation to its smr customers the consistency_requirement of the last sentence of sec_1_469-4 income_tax regs parallels that of sec_6037 which requires a shareholder of an s_corporation to treat a subchapter_s_item in a manner which is consistent with the treatment of such item on the cor- porate return by reporting his distributive_share of ice’s income as ordinary_income petitioner acted in accordance with both provisions whether such separate activity treatment would be proper is as stated supra note an issue we need not address because petitioner has conceded it verdate nov jun jkt po frm fmt sfmt v files bound vol without crop marks b v dirico nov jamie dirico v commissioner sentence of sec_1_469-4 income_tax regs is inapplicable to him sec_1_469-4 income_tax regs prohibits only the regrouping of activities by the taxpayer in this case ice and therefore constitutes a limitation on the manner in which the taxpayer ie ice reports its income for purposes of sec_469 it does not affect petitioner’s reporting of ice’s rental payments to him conclusion we find that petitioner’s tower and land rentals con- stituted the rental of property to ice for use in a rental_activity which by definition see sec_1_469-4 income_tax regs is not a trade_or_business activity as a result sec_1_469-2 income_tax regs is inapplicable to petitioner’s income from those rentals for the years in issue and respondent may not treat that income as non-passive- activity income pursuant to that regulation we recognize that because ice erroneously reported all of its income as ordinary business non-passive-activity income nonapplication of the self-rental_rule of sec_1_469-2 income_tax regs to ice’s rental payments to petitioner in effect results in the reduction of what was reported as active business income and the offsetting creation of pas- sive income in seeming contravention of the congressional conferees’ directive to issue regulations preventing that result see h_r conf rept no vol ii at ii-147 1986_3_cb_1 we do not believe how- ever that ice’s tax_return mischaracterization of its tower access rental income from third parties should control the application of the self-rental_rule where as here it is by its terms inapplicable ie where petitioner’s towers were not in fact used in a trade_or_business moreover we are not persuaded that the result we reach herein violates the con- ferees’ directive as it does not in fact permit passive_income to offset active business income verdate nov jun jkt po frm fmt sfmt v files bound vol without crop marks b v dirico nov jamie united_states tax_court reports b separate treatment of tower rentals producing net losse sec_1 analysis petitioner objects to what he refers to as the selective re- characterizing of the income from his profitable tower and land rentals to ice but not the losses from the unprofitable rentals on his returns for the years in issue he character- ized all of his property rentals to ice as passive activities generating either passive_activity income or loss in effect petitioner grouped all of his property rentals to ice and treated them as a single activity pursuant to sec_1 c income_tax regs he argues that the losses were generated from the same type of activity as the profits and if the profits from the profitable towers and underlying land are active then the net losses from the unprofitable towers must be treated as active as well in short peti- tioner argues for consistency of treatment therefore we assume that because we reject respondent’s treatment of petitioner’s profitable tower and land rentals to ice as gener- ating non-passive-activity income petitioner would be willing to adhere to his return position whereby he treated all of his property rentals to ice as passive activities generating either passive_activity income or passive_activity_loss moreover that is the treatment required by sec_469 which generally requires any rental_activity to be treated as a passive_activity thus the issue regarding the proper characterization of petitioner’s rentals producing net losses is now moot conclusion there is no change to petitioner’s reporting of his losses from unprofitable tower and land rentals to ice as passive_activity_losses c separate treatment of the land-only rental sec_1 introduction during each of the years in issue petitioner made three land-only rentals to ice each of those leases generated net rental income to petitioner which he reported as passive_activity income on his returns for the years in issue verdate nov jun jkt po frm fmt sfmt v files bound vol without crop marks b v dirico nov jamie dirico v commissioner respondent argues that the rental income from those land- only rentals was properly recharacterized as non-passive- activity income pursuant to sec_1_469-2t tem- porary income_tax regs supra which requires such re- characterization with respect to income from a rental_activity where less than percent of the unadjusted_basis of the property used by customers in that activity during the taxable_year is subject_to the allowance for depreciation under sec_167 petitioners reject respondent’s argument on two grounds respondent improperly separated ungrouped the land- only rentals from petitioners’ other rentals of towers and land to ice in applying the test of sec_1_469-2t temporary income_tax regs supra and respondent’s argument was first raised on brief and for that reason alone should be rejected as untimely analysis and conclusions a timeliness petitioners cite the following language set forth in respond- ent’s pretrial memorandum as demonstrating respondent’s intent to apply the test on an aggregate basis to all of the properties towers and land leased to ice alternatively under sec_1_469-2t the income earned by petitioner from leasing the telecommunications towers and the land upon which they sit is non-passive income since less than percent of the unadjusted_basis of the property is subject_to the allowance for depreciation under sec_167 simply stated income from leased land is nonpassive land has an indefinite useful_life and is not depreciable accordingly under sec_1_469-2t unless petitioner produces documentation that more than of the unadjusted_basis of the property is depreciable then the rental_activity is nonpassive petitioners allege that consistent with that language they presented evidence at trial that ‘more than percent of the unadjusted_basis of all of the leased property’ is depreciable they further allege had the commissioner asserted that there was a further question as to whether the rentals of the underlying land and the rentals of the towers or any of them were separate activities evidence on that point could have been introduced as well thus petitioners claim both surprise and prejudice with respect to respond- verdate nov jun jkt po frm fmt sfmt v files bound vol without crop marks b v dirico nov jamie united_states tax_court reports ent’s application of the test exclusively to the land-only rentals and in support of their argument they cite our deci- sion in 84_tc_191 aff ’d 796_f2d_116 5th cir which involved surprise and prejudice to the taxpayer in regard to the commissioner’s initial assertion in his opening brief of addi- tional bases for his disallowance of specific items under those circumstances we declined to consider the newly raised issues in this case petitioners may have been surprised by respondent’s argument but they were not prejudiced the issue respondent raises application of the test to the land-only rentals presents an issue of law the fact that there were three land-only rentals in each of the years in issue is not in dispute therefore we fail to see what addi- tional evidence petitioners were prevented from introducing in refutation of respondent’s argument ie it is beyond dis- pute that of each of those rentals consisted of non- depreciable land moreover any surprise to petitioners was mitigated by their ability to address the merits of respond- ent’s argument in their reply brief which in fact they did the element of surprise was further mitigated by the above- quoted portion of respondent’s pretrial memorandum which although ambiguous regarding respondent’s intent to sepa- rately apply the test to the land-only rentals at least suggests that possibility by observing that income from leased land is nonpassive under those circumstances we find seligman distinguishable and therefore not controlling rather we are guided in this matter by our analysis in 92_tc_1267 aff ’d 906_f2d_62 2d cir wherein we stated the rule that a party may not raise a new issue on brief is not absolute rather it is founded upon the exercise of judicial discretion in determining whether considerations of surprise and prejudice require that a party be protected from having to face a belated confrontation which precludes or limits that party’s opportunity to present pertinent evidence as discussed above we do not believe that the circumstances herein warrant our rejection of respondent’s argument on the ground that it was not timely raised moreover it is always open to this court to apply the correct law to the facts before it see eg concord consumers hous coop v commis- verdate nov jun jkt po frm fmt sfmt v files bound vol without crop marks b v dirico nov jamie dirico v commissioner sioner 89_tc_105 ko rner j concurring nei- ther party can avoid the application of the correct law to the facts of the case by failing to plead or argue it that is the province of the court we shall consider the issue of whether it is proper to sepa- rately apply the test to petitioners’ land-only rentals b application of sec_1_469-2t temporary income_tax regs to petitioners’ land-only rentals petitioners argue that because all of the property rentals to ice involved the same landlord or grantor trusts owned by the same landlord the same tenant and the same gen- eral types of property used for the same purpose there is no basis for applying the test separately to the land-only rentals thus petitioners make the same argument with respect to the application of the test that they did with respect to the application of the self-rental_rule both should be applied to the aggregate of the properties he leased to ice on the ground that all of those rentals constituted a single activity pursuant to sec_1_469-4 income_tax regs we disagree respondent’s separate application of the test to peti- tioners’ land-only rentals to ice is supported by sec_1_469-4 income_tax regs which provides as follows grouping real_property rentals and personal_property rentals prohib- ited -an activity involving the rental of real_property and an activity involving the rental of personal_property other than personal_property provided in connection with the real_property or real_property provided in connection with the personal_property may not be treated as a single activity the sec_469 regulations do not furnish illustrative examples of the foregoing provision’s parenthetical exception nonetheless we find no basis for concluding that it applies to petitioners’ land-only rentals the land is not provided in connection with any personal_property situated thereon and it is not provided in connection with the towers situated on other parcels of land where petitioner provides both a tower and land one in connection with the other therefore we find that respondent correctly applied the test of sec_1_469-2t temporary income_tax regs supra to the land-only rentals to ice and that pursu- verdate nov jun jkt po frm fmt sfmt v files bound vol without crop marks b v dirico nov jamie united_states tax_court reports ant to that provision petitioners’ income from those leases constituted non-passive-activity income decision will be entered under rule f verdate nov jun jkt po frm fmt sfmt v files bound vol without crop marks b v dirico nov jamie


internal_revenue_service department ofr index number washington dc person to contact telephone number refer reply to cc dom p si plr-109080-99 date re legend taxpayer - father - community - parcel a - dear this is in response to your letter dated and prior correspondence in which you requested rulings concerning the transfer of property to a proposed qualified_personal_residence_trust taxpayer and taxpayer's spouse own a fee simple title to parcel a located in community which they acquired in parcel a is approximately acres and includes a house and barn that occupy approximately acres of the total acres the remaining acreage in parcel a is farmland that is leased to a tenant farmer in exchange for nominal rent and a percentage of the profits the house on parcel a is the permanent residence of taxpayer and taxpayer's spouse and the barn is used for storage of household_items and some farming equipment taxpayer proposes to create an irrevocable_trust that is intended to satisfy the requirements of a qualified_personal_residence_trust qprt under sec_25_2702-5 of the gift_tax regulations prior to creating the trust taxpayer and taxpayer's spouse will sever parcel a into two parcels one parcel will consist of the acre plot subplot a that includes the residence and barn and the other parcel will consist remaining acre plot that is currently leased for farming use the taxpayer's spouse will then transfer by gift her entire_interest in subplot a to taxpayer taxpayer will transfer subplot a to the trust of the under the terms of the proposed trust taxpayer's spouse will serve as trustee the trust will terminate upon the earlier of years or the taxpayer's death during the term of the trust taxpayer will have use of the residence on the property and the trustee will pay taxpayer all of the trust income at least annually distributions of principal during the term of the trust to anyone other than taxpayer will be prohibited taxpayer will pay all expenses of the property in addition the trust will include the following provisions the trust shall not hold any property other than a single residence for use as a personal_residence by taxpayer except for other_property that is permitted under sec_25_2702-5 and c improvements may be made-to the property provided the residence as improved satisfies the requirements of a personal_residence under sec_25_2702-5 any additions of cash will be held in a separate_account and will be subject_to the provisions of sec_25_2702-5 and proceeds from the sale of the residence will be heid in a separate_account as provided by sec_25_2702-5 and insurance policies on the residence and proceeds of insurance for damage to or destruction of the residence and amounts receivable upon an involuntary_conversion as provided in sec_1033 will also be held in a separate_account the trust will cease to be a qualified_personal_residence_trust if the residence ceases to be used or held for use as a personal_residence by taxpayer or as to proceeds of sale or insurance proceeds if such proceeds are held in trust longer than provided under sec_25 c ii - the trust may not be commuted prepaid lf damage or destruction renders the residence not usable as a residence sec_25_2702-5 will apply if the trust ceases to be a qualified_personal_residence_trust as to any property that property shall within days be held in a separate share and the taxpayer's interest shall be converted into a qualified_annuity_interest as defined in sec_25_2702-3 the requirements for a qualified_annuity_interest as described in sec_25_2702-3 are made a part of the trust instrument by incorporation the annuity amount shall be the smallest fixed payment permitted under sec_25_2702-5 for the balance of the term the commencement_date of the qualified_annuity_interest shall be determined in accordance with sec_25_2702-5 the trustee may not sell or otherwise transfer the residence in a manner that conflicts with sec_25_2702-5 if taxpayer dies before the expiration of the year term the trust principal will be distributed to taxpayer's estate if the year term expires before the taxpayer's death the trust assets will be held in a separate trust family_trust during this period taxpayer's spouse may occupy the residence if owned by the family_trust upon the death of taxpayer's spouse or in the event that the spouse no longer wishes to reside in the residence the taxpayer may lease the residence at a fair_market_value under the terms of the proposed trust taxpayer may appoint a successor trustee other than taxpayer or taxpayer's spouse to serve in place of any trustee who may resign or for any other reason may no longer be acting as trustee taxpayer may also remove a trustee of the proposed trust or any trust created under the proposed trust and appoint a successor trustee who is not related or subordinate to the taxpayer or the taxpayer's spouse within the meaning of sec_672 of the internal_revenue_code under the terms of the family_trust the trustee has discretion to apply the income and principal for the benefit of taxpayer's spouse and taxpayer's issue however the proposed trust also provides that any person serving as trustee to whom or for whose benefit a discretionary payment of income or principal may be made may not participate in any decision involving the exercise of the discretionary power in his or her own favor or the exercise of the power in favor of any person the trustee is obligated to support or maintain upon the death of the last to die of taxpayer and taxpayer’s spouse the family_trust assets will be divided equally among the taxpayer's issue per stirpes-and held in separate trusts for their benefit the trustee will have discretion to distribute income and principal to the taxpayer's children and their issue during the term of each trust upon the death of a child of the taxpayer that child’s trust will terminate and be distributed pursuant to the terms of a testamentary nongeneral_power_of_appointment exercised by the respective taxpayer's child you have requested the following rulings the acre portion subplot a of parcel a that includes the current residence and barn which taxpayer will transfer to the proposed trust meets the requirements of a personal_residence as defined in sec_25_2702-5 the proposed trust meets the requirements of a qualified_personal_residence_trust under sec_25_2702-5 and therefore the transfer will qualify for the exception to sec_2702 that is provided in sec_2702 law and analysis sec_2702 provides that solely for purposes of determining whether a transfer of an interest in trust to or for the benefit of a member_of_the_transferor's_family is a gift and the value of such transfer the value of any interest in such trust retained by the transferor or any applicable_family_member as defined in sec_2701 is determined as provided in sec_2702 sec_2702 provides that the value of any retained_interest that is not a qualified_interest is treated as being zero the value of any retained_interest that is a qualified_interest is determined under sec_7520 sec_2702 ii provides an exception to sec_2702 if such transfer involves the transfer of an interest in trust and the property transferred consists of a residence to be used as a personal_residence by persons holding term interests in such trust sec_25_2702-5 provides in part that a transfer in trust meeting the requirements of a qualified_personal_residence_trust as defined in sec_25_2702-5 will be treated as satisfying the requirements of sec_2702 sec_25_2702-5 provides that in order to qualify as a qualified_personal_residence_trust the provisions of the governing instrument must satisfy all the requirements of a qualified_personal_residence_trust throughout the term of the trust sec_25_2702-5 provides that a personal_residence of a term hoider is either the personal_residence of the term holder within the meaning of sec_1034 one other residence of the term holder within the meaning of sec_280a but without regard to sec_280a or an undivided fractional interest in either sec_25_2702-5 provides that a personal_residence may include appurtenant_structures used by the term holder for residential purposes and adjacent land not in excess of that which is reasonably appropriate for residential purposes taking into account the residence's size and location the fact that a residence is subject_to a mortgage does not affect its status as a personal_residence the term personal_residence does not include any personal_property eg household furnishings cf sec_25_2702-5 provides that in general the governing instrument of a qualified_personal_residence_trust must require that any income of the trust be distributed to the term holder not less frequently than annually sec_25_2702-5 provides that the governing instrument must prohibit distributions of corpus to any beneficiary other than the transferor prior to the expiration of the retained term_interest sec_25_2702-5 provides that in general the governing instrument of a qualified_personal_residence_trust must prohibit the trust from holding for the entire term of the trust any asset other than one residence to be used or held for use as a personal_residence of the term holder under sec_25_2702-5 the trust may hold certain assets listed in that section in addition to the personal_residence sec_25_2702-5 provides that the governing instrument must prohibit commutation prepayment of the term holder's interest sec_25_2702-5 i provides that the governing instrument must provide that a_trust ceases to be a qualified_personal_residence_trust if the residence ceases to be used or held for use as a personal_residence of the term holder a residence is held for use as a personal_residence of the term holder so long as the residence is not occupied by any other person other than the spouse or a dependent of the term holder and is available at all times for use by the term holder as a personal_residence sec_25_2702-5 provides that the governing instrument must provide that within days after the date on which the trust ceases to be a qualified_personal_residence_trust with respect to certain assets the assets must be either distributed outright to the term holder or converted to and held for the balance of the term holder's term in a separate share of the trust meeting the requirements of a qualified_annuity_interest if the assets are to be converted to and held as a qualified_annuity_interest the governing instrument must contain all the provisions required by sec_25_2702-3 with respect to a qualified_annuity_interest sec_25_2702-5 provides generally that the governing instrument must prohibit the trust from selling or transferring the residence directly or indirectly to the grantor the grantor’s spouse or an entity controlled by the grantor or the grantor’s spouse during the retained term_interest of the trust or at any time after the retained term_interest during which the trust is a grantor_trust under sec_671 et seq in this case the structures on subplot a of parcel a are used for residential purposes severance of subplot a from the remaining portion of parcel a the acreage rented to the tenant farmer is essential for the qualification of subplot a as a personal dos residence consequently we conclude that subplot a of parcel a the acre plot that includes the current residence and barn as described above constitutes a personal_residence within the meaning of sec_25_2702-5 based on the information submitted and the representations made we conclude that if subplot a is severed from parcel a and then transferred to the proposed trust as proposed the trust will meet the requirements for a qualified_personal_residence_trust under sec_25_2702-5 and therefore the transfer to the trust will qualify for the exception to sec_2702 that is provided in sec_2702 a copy of this letter should be attached to any gift estate or generation-skipping_transfer_tax returns that you may file relating to these matters 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 the appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination except as specifically set forth above no opinion is expressed concerning the federal tax consequences of the facts described above under the cited provisions or any other provision of the code this ruling is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent sincerely assistant chief_counsel passthroughs and special industries enclosure copy for purposes branch


department of the treasury internal_revenue_service tax_exempt_and_government_entities_division washington d c dec uniform issue list ter ra tz legend taxpayer a ira x financial advisor a amount a amount b te financial_institution a financial_institution b dear this is in response to your request dated date as supplemented by correspondence dated july in which your authorized representative on your behalf requested a waiver of the 60-day requirement contained in sec_408 of the internal_revenue_code the code the following facts and representations have been submitted under penalty of perjury in support of the ruling requested taxpayer a represents that he received a distribution on date from ira x of amount a taxpayer a asserts that his failure to accomplish a rollover within the 60-day period prescribed by sec_408 of the code was due to a mistake by financial advisor a taxpayer a further asserts that amount a has not been used for any other purpose in date taxpayer a contacted financial advisor a also an enrolled_agent to discuss the tax consequences of terminating ira x an annuity_contract with financial_institution a incorrectly believing that ira x was a non-ira annuity and that taxpayer a had a basis in the contract financial advisor a told taxpayer a that approximately amount b would be taxable pursuant to financial advisor a’s advice on date the annuity_contract was surrendered and at financial advisor a’s direction amount a less an amount withheld for taxes was deposited into a non-ira account at financial_institution b in march when financial advisor a was preparing taxpayer a’ sec_2014 tax returns and reviewing the form 1099-r for that year he discovered his mistake and realized that the proceeds from the distribution amount a were subject_to tax taxpayer a submitted a letter from financial advisor a supporting the above representations and acknowledging his mistake based on the facts and representations you request a ruling that the internal_revenue_service the service waive the 60-day rollover requirement contained in sec_408 with respect to the distribution of amount a from ira x sec_408 of the code provides that except as otherwise provided in sec_408 any amount_paid or distributed out of an ira shall be included in gross_income by the payee or distributee as the case may be in the manner provided under sec_72 sec_408 of the code defines and provides the rules applicable to ira_rollovers sec_408 of the code provides that sec_408 does not apply to any amount_paid or distributed out of an ira to the individual for whose benefit the ira is maintained if i the entire amount received including money and any other_property is paid into an ira for the benefit of such individual not later than the day after the day on which the individual receives the payment or distribution or ii the entire amount received including money and any other_property is paid into an eligible_retirement_plan other than an ira for the benefit of such individual not later than the day after the date on which the payment or distribution is received except that the maximum amount which may be paid into such plan may not exceed the portion of the amount received which is includible in gross_income determined without regard to sec_408 sec_408 of the code provides that sec_408 does not apply to any amount described in sec_408 received by an individual from an ira if at any time during the 1-year period ending on the day of such receipt such individual received any other amount described in sec_408 from an ira which was not includible in gross_income because of the application of sec_408 sec_408 of the code provides a similar 60-day rollover period for partial rollovers sec_408 of the code provides that the rollover provisions of d do not apply to any amount required to be distributed under sec_401 sec_408 of the code provides that the secretary may waive the day requirement under sec_408 and sec_408 where the failure to waive such requirement would be against equity or good conscience including casualty disaster or other events beyond the reasonable control of the individual subject_to such requirement revproc_2003_16 2003_4_irb_359 date provides that in determining whether to grant a waiver of the 60-day rollover requirement pursuant to sec_408 the service will consider all relevant facts and circumstances including errors committed by a financial_institution inability to complete a rollover due to death disability hospitalization incarceration restrictions imposed by a foreign_country or postal error the use of the amount distributed for example in the case of payment by check whether the check was cashed and the time elapsed since the distribution occurred the information and documentation provided by taxpayer a are consistent with his assertion that the failure to accomplish a rollover of amount a within the 60-day period prescribed by sec_408 of the code was due to financial advisor a's mistaken belief that the distribution from ira x was from a non-ira annuity therefore pursuant to sec_408 of the code the service hereby waives the 60-day rollover requirement with respect to the distribution of amount a from ira x taxpayer a is granted a period of days from the issuance of this ruling letter to contribute amount a into a rollover ira provided all other requirements of sec_408 except the 60-day requirement are met with respect to such contribution the amount transferred up to amount a will be considered a rollover_contribution within the meaning of sec_408 this ruling does not authorize the rollover of amounts that are required to be distributed by sec_401 of the code no opinion is expressed as to the tax treatment of the transaction described herein under the provisions of any other section of either the code or regulations which may be applicable thereto this letter is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file with this office a copy of this ruling is being sent to your authorized representative if you wish to inquire about this ruling please contact at please address all correspondence to se t ep ra t2 sincerely yours sherri m edelman manager employee_plans technical group enclosures deleted copy of ruling letter notice of intention to disclose cc


department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------ id no ------------- telephone number --------------------- refer reply to cc corp b06 plr-112381-08 date date internal_revenue_service number release date index number ----------------------------- -------------------------- ------------------------------------------ ------------------------------ --------------------------------- -------------------------- ------------------------------------------- ------------------------------ ---------------------------------- legend parent ---------------------------------------------------------- -------------------------------------------------- ----------------------- sub ----------------------------------------------------------- -------------------------------------- sub sub firm acquirer year year year year ----------------------------------- ------------------------------- -------------------------- ------------------------ ------- ------- ------- ------- plr-112381-08 year year year year year month date date ------- ------- ------- ------- ------- ------------ ---------------------- ----------------- dear ---------------------- this letter responds to your request for a ruling dated date submitted by your authorized representatives requesting a determination under sec_1_1502-75 that sub sub and sub have each joined in the making of the initial consolidated_return filed by parent for the year taxable_year the information submitted in that request is summarized below summary of facts parent_corporation for years prior to year a calendar_year owned no subsidiaries and as a stand-alone entity filed corporate federal_income_tax returns during year parent acquired all of the stock of sub and formed sub and sub parent for this year taxable_year timely filed a consolidated federal_income_tax return with sub sub and sub hereinafter referred to as the parent group that tax_return included the income and deductions of parent for its entire year taxable_year as well as the income and deductions of sub sub and sub for the period that each was a member of the parent group during that year that tax_return also included the requisite form_851 affiliations schedule that identified sub sub and sub as subsidiaries of the parent group in addition that tax_return included forms authorization and consent of subsidiary_corporation to be included in a consolidated_return for each of sub sub and sub for such parent group parent filed a consolidated federal_income_tax return for each of the group’s subsequent calendar taxable years year year year year year year and year as well as for the short taxable_year beginning on date and ending on date the calendar taxable years year through and including year as well as the short taxable_year beginning on date and ending on date are hereinafter collectively referred to as the relevant taxable years during the relevant taxable years other corporations either joined plr-112381-08 or left the parent group for each of these years the affiliated_group of which parent was the parent will be referred to the parent group on date acquirer through a lower-tier subsidiary acquired all of the stock of parent if the parent group is determined to have properly filed consolidated federal_income_tax returns this acquisition would be treated as terminating the parent group as of that date during month of year which occurred after date firm undertook an analysis of the parent group on behalf of acquirer and discovered that none of the corporations ie sub sub and sub had signed the forms which had been submitted with the consolidated federal_income_tax return filed by the parent with respect to year representations a except for the failure_to_file properly executed forms with the parent group’s year consolidated federal_income_tax return parent would have properly filed a consolidated federal_income_tax return that included all of the parent group’s members starting with their year consolidated_return_year b had the forms filed with the parent group’s year consolidated federal_income_tax return been properly executed the parent group’s members would have validly elected to file a consolidated federal_income_tax return for the year taxable_year c for the relevant taxable years the members of the parent group reported or intend to report in the case of returns not yet required to be filed all of their income and expenses during their period of inclusion in the parent group on a timely filed consolidated federal_income_tax return for the parent group and none of their items for this period were reported or will be reported in the case of returns not yet required to be filed on separate_income tax returns d for the relevant taxable years all of the members of the parent group except for dormant subsidiaries were included or will be included in the case of returns not yet required to be filed on the form_851 attached or to be attached to the consolidated federal_income_tax returns filed by the parent group e had the parent group’s consolidated federal_income_tax return been properly filed for its year taxable_year no change in federal_income_tax liability would have occurred in any parent group consolidated_return_year relative to the liability stated in the consolidated federal_income_tax returns actually filed applicable law plr-112381-08 sec_1_1502-75 provides in part that an affiliated_group_of_corporations which did not file a consolidated_return for the immediately preceding_taxable_year may file a consolidated_return in lieu of separate returns for the taxable_year provided that each corporation which has been a member of the group during any part of the taxable_year for which the consolidated_return is to be filed consents to the regulations under sec_1502 in accordance with sec_1_1502-75 sec_1_1502-75 provides that a group which filed or was required to file a consolidated_return for the immediately preceding_taxable_year is required to file a consolidated_return for the taxable_year unless it has been granted permission by the commissioner to discontinue filing consolidated_returns pursuant to sec_1_1502-75 with regard to the consent of a corporation for a group's first consolidated_year sec_1_1502-75 provides as a general_rule that the consent of a corporation shall be made by such corporation joining in the making of the consolidated_return for such year and that a corporation shall be deemed to have joined in the making of such return for such year if it files a form_1122 in the manner specified in sec_1_1502-75 sec_1_1502-75 provides that if under the provisions of sec_1 a a group wishes to file a consolidated_return for a taxable_year a form_1122 must be executed by each subsidiary this regulation provides rules for properly executing forms and attaching them to a consolidated_return and also provides that form_1122 is not required for a taxable_year if a consolidated_return was filed or was required to be filed by the group for the immediately preceding_taxable_year sec_1_1502-75 provides that if a member of the group fails to file form_1122 the commissioner may under the facts and circumstances determine that such member has nevertheless joined in the making of a consolidated_return by such group factors that the commissioner will take into account in making this determination include the following i whether or not the income and deductions of the member for such taxable_year were included in the consolidated_return ii whether or not a separate_return was filed by the member for that taxable_year and iii whether or not the member was included in the affiliations schedule form_851 for such taxable_year where the commissioner under the facts and circumstances determines that the member has joined in the making of the consolidated_return such member will be treated for purposes of sec_1_1502-75 as if it had filed a form_1122 for such year sec_1_1502-75 flush language ruling based solely on the information submitted and the representations made parent sub sub and sub are treated as having properly joined in the making of a consolidated federal_income_tax return for the year taxable_year and that the parent plr-112381-08 group is required to file a consolidated federal_income_tax return for each of the relevant taxable years sec_1_1502-75 caveats the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination except as 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 as such no opinion is expressed as to the tax treatment of the acquisition of sub or of any other subsidiary acquired during the relevant taxable years this ruling is directed only to the taxpayer s requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative a copy of this letter must be attached to any income_tax return to which it is relevant alternatively taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of the letter_ruling sincerely steven j hankin steven j hankin senior technician reviewer branch corporate cc


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc tege eoeg teb-plr-113128-03 date date legend agency state company a company b company c units a date date date date date plr-113128-03 this responds to your request for a ruling that the acquisition of certain electric power generators by agency will not constitute the acquisition of nongovernmental_output_property under sec_141 of the internal_revenue_code facts and representations agency makes the following factual representations agency is a municipal corporation created under state law and is a political_subdivision of state_agency has an ownership_interest in electric generating plants and was created to provide a means for its members which are all state municipalities to secure a supply of electric power on date company a the business unit of a for-profit electric power producer entered into an agreement the company a agreement with company b to purchase two newly manufactured electric power turbine generator sets the units company a’s intent on date was to install the units at one of the electric power generating facilities its owns the units are mass produced off-the-shelf items that are generally available for sale to both public and private electric power producers company b’s manufacturing process for the units entails the following stages company b accumulates the several hundred component part of each unit the parts allocated to each unit are crated and placed in storage at the time scheduled by the purchaser the approximately crates of component parts are delivered to the purchaser’s designated site the unit is assembled and installed over a period of approximately six to nine months and then made ready for service after six to weeks of testing at least three months prior to the completion date of stage of company b’s manufacturing process as described above company a determined that it would not need the units s a result company a did not assign the units to a generating project however because company b would not allow company a to cancel the company a agreement company a executed a letter of intent to sell its ownership interests in the unit to company c the company a letter of intent company c is an engineering company that constructs electric power systems but does not supply electric power at the time that the company a letter of internet was executed component parts of the units were still being manufactured and received at company b’s facility some of the component parts of the units were not allocated to the units segregated in storage and made ready for shipment until date on date eight days after date agency having identified the need for additional future generation capacity executed a letter of intent to purchase the unit the plr-113128-03 agency letter of intent on date approximately days after date agency entered into an agreement the unit purchase agreement with company a under which for a payment of dollar_figurea agency purchased the units agency had previously on date adopted a resolution stating its intent to issue bonds for the purpose of reimbursing itself for amounts spent acquiring and installing the units law and analysis sec_103 provides generally that gross_income does not include interest on any state_or_local_bond sec_103 provides in part that sec_103 shall not apply to any private_activity_bond that is not a qualified_bond within the meaning of sec_141 sec_141 defines private_activity_bond to include any bond issued as part of an issue that meets the private_business_use_test of sec_141 and the private_security_or_payment_test of sec_141 an issue meets the private_business_use_test of sec_141 if more than percent of the proceeds of the issue are to be used for any private_business_use an issue meets the private_security_or_payment_test of sec_141 if the payment of the principal of or the interest on more than percent of the proceeds of such issue is under the term of such issue or any underlying arrangement directly or indirectly a secured_by any interest in property used or to be used for a private_business_use or in payments in respect of such property or b to be derived from payments whether or not to the issuer in respect of property or borrowed money used or to be used for a private_business_use sec_141 provides that the term private_activity_bond includes any bond issued as part of an issue if the amount of the proceeds of the issue which are to be used directly or indirectly for the acquisition by a governmental_unit of nongovernmental_output_property exceeds the lesser_of five percent of such proceeds pr dollar_figure sec_141 defines nongovernmental_output_property generally as any property or interest therein which before such acquisition was used or held for use by a person other than a governmental_unit in connection with an output_facility within the meaning of sec_141 other than a facility for the furnishing of water under c of the omnibus reconciliation act of the act c b big_number sec_141 applies to bonds issued after date other than bonds issued to refund bonds issued before such date under sec_141 which sets forth lower private_activity_bond limits for certain output facilities does not define output_facility the conference committee report accompanying the act the conference_report h_r conf_rep no plr-113128-03 pincite 1987z 1987_3_cb_28 states that as under present law output property includes eg facilities such as electric and gas generation transmission distribution an other related facilities according to the house report accompanying the act h_r rep no at the house report the term nongovernmental_output_property also includes property which was constructed by or for an investor -owned utility with the expectation that it would be placed_in_service by an investor-owned utility but that is not actually placed_in_service before its acquisition by a governmental_unit the conference_report pincite 1987_3_cb_291 sates that if property is constructed for an investor-owned utility that property is treated as nongovernmental_output_property this determination is made without regards to whether the investor-owned utility actually placed the property in service company a originally intended to install the units as an out facility as that term in defined in sec_141 and the conference_report therefore pursuant to sec_141 the issue is whether the units were used or held for use by company a before agency purchased the units under the unit purchase agreement for a payment of dollar_figurea based on the facts and circumstances of this case we conclude that the units were not used or held for use by company a first the units were mass produced off-the- shelf products that were not customized to company a’s use second units virtually identical if not identical to the units were available for sale by company b to government and nongovernmental electric power producers agency had it not purchased the units from company a could have purchased them from company b third company a executed the company a letter of intent to sell the units three months before company b had assembled the component parts necessary to construct the units indeed at the time of the company a letter of intent was executed some of the component parts of the units had not yet been manufactured thus long before the units actually existed as working units it was clear that company a did not intent to place the units in service this intent was carried through with the actual sale to agency conclusion under the facts and circumstances of this case we conclude that the acquisition of the units by agency will not constitute the acquisition of nongovernmental_output_property under sec_141 the ruling contained in this letter is based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for a ruling it is subject_to verification of examination except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer s requesting it section k provides that it may not be used or cited as precedent sincerely yours assistant chief_counsel exempt_organizations employment task government entities by ______________________ timothy l jones senior counsel tax exempt bonds branch