internal_revenue_service department of the treasury index numbers washington dc person to contact cc dom corp plr-114216-99 date date fcorp fcorp fcorp uscorp fcorp uscorp uscorp uscorp uspship plr-114216-99 uspship fnewco usnewco business a business b business c business d property t i name country e country f dear this letter responds to your date request for rulings on certain federal_income_tax consequences of a proposed transaction the information in that request and in later correspondence is summarized below the rulings contained in this letter are based on facts and representations submitted by the taxpayers under penalties of perjury the internal_revenue_service may require verification of this information as part of the audit process plr-114216-99 summary of facts fcorp wholly owns fcorp indirectly both are country e corporations fcorp wholly owns fcorp a country e corporation and fcorp wholly owns uscorp indirectly fcorp a country f corporation unrelated to the fcorp group wholly owns uscorp uscorp wholly owns uscorp uscorp is owned equally by fcorp and uspship uspship is owned percent each by uspship and uscorp and one percent by uscorp the general_partner fcorp conducts business a and business b and uscorp conducts business c uspship is primarily engaged in business d similar to business b and has entered into a number of management agreements the management agreements that entitle uspship to a percentage of the gross revenue as a base fee and to incentives keyed to revenues in excess of certain specified base amounts most of the management agreements give uspship a right to acquire the underlying property and some of the management agreements include a termination fee payable to uspship in the event the owner of the subject property terminates the management agreement or sells the underlying property proposed transaction to permit fcorp to combine its business b with business d of uspship the parties propose the following transaction i fcorp will through a series of steps some of which are transitory contribute its business b assets to fnewco a newly formed country e corporation for fnewco stock contribution 1a and transfer the fnewco stock to fcorp ina transaction intended to be tax-free under the laws of country e altogether the country e distribution - ii fcorp will transfer it sec_50 percent interest in uscorp to uscorp and uscorp will contribute the percent interest to uscorp iii uscorp will contribute it sec_50 percent interest in uscorp and percent interest in uspship to fnewco contribution 1b in exchange for fnewco class k stock iv uspship will contribute it sec_50 percent interest in uscorp and percent interest in uspship to fnewco contribution 1c and together with contribution 1a and contribution 1b contribution in exchange for fnewco class h stock 3q2 plr-114216-99 v fnewco will contribute the uscorp stock and the percent interest in uspship to newly formed usnewco in exchange for usnewco common_stock contribution 2a vi uscorp will contribute its business c assets to usnewco in exchange for usnewco nonvoting preferred_stock and the assumption by usnewco of related liabilities contribution 2b and together with contribution 2a contribution representations the following representations are made by fcorp and fcorp for contribution 1a by uscorp for contribution 1b by uspship for contribution 1c by fnewco for contribution 2a and by uscorp for contribution 2b collectively the contributions and each a contribution hereinafter the transferee of a contribution is a transferee and the transferor of a contribution is a transferor a no stock_or_securities will be issued for services rendered to or for the benefit of any transferee in connection with the contributions and no stock_or_securities will be issued for indebtedness of any transferee that is not evidenced by a security or for interest on indebtedness of any transferee that accrued on or after the beginning of the holding_period of the transferor s for the debt b any patents or patent applications will qualify as property within the meaning of sec_351 of the internal_revenue_code each transferor will transfer all substantial rights in such patents or patent applications within the meaning of sec_1235 c no transferor will retain any significant_power_right_or_continuing_interest within the meaning of sec_1253 in the franchises trademarks or trade names being transferred - d none of the stock to be transferred in any contribution is sec_306 stock within the meaning of sec_306 e no contribution is the result of the solicitation by a promoter broker or investment house f no transferor will retain any rights in the property transferred to a transferee g the adjusted_basis and the fair_market_value of the assets transferred in contribution and contribution will in each instance equal or exceed the amount of ria plr-114216-99 any liabilities assumed as determined under sec_357 by the transferee h any liabilities of a transferor that will be assumed as determined under sec_357 by its transferee were incurred in the ordinary course of business and are associated with the assets to be transferred i there is no indebtedness between any transferee and its transferor and there will be no indebtedness created in favor of any transferor as a result of any contribution j the transfers and exchanges in contribution and contribution will occur in each case under a plan agreed upon before the transaction in which the rights of the parties are defined k all the transfers contemplated by contribution and contribution will occur in each case on approximately the same date i there is no plan or intention on the part of any transferee to redeem or otherwise reacquire any stock or indebtedness issued in any contribution m taking into account any issuance of additional shares of transferee stock any issuance of stock for services the exercise of any transferee stock_rights warrants or subscriptions a public offering of transferee stock and the sale exchange transfer by gift or other_disposition of any transferee stock received in the contribution the transferors will be in control of the transferee under sec_368 n each transferor will receive stock approximately equal to the fair_market_value of the property transferred by it to the transferee o other than as described above each transferee will remain in existence and retain and use the property transferred to it in a trade_or_business - p there is no plan or intention by any transferee to dispose_of the transferred property other than by i contribution and ii dispositions in the normal course of business operations q each of the parties to contribution or contribution will pay its own expenses if any incurred in connection with the contribution r no transferee will be an investment_company under sec_351 and sec_1 c ii of the income_tax regulations boy plr-114216-99 s no transferor is under the jurisdiction of a court in a title_11_or_similar_case under sec_368 and no stock_or_securities received in any contribution will be used to satisfy the indebtedness of such debtor t no transferee will be a personal_service_corporation under sec_269a u the value of the stock received in exchange for accounts_receivable will be equal to the net value of the accounts transferred ie the face_amount of the accounts_receivable previously included in income less the reserve for bad_debts v fnewco a foreign_corporation within the meaning of sec_7701 and sec_7701 will not be a controlled_foreign_corporation within the meaning of sec_957 cfc at any time from the date of its formation through the date of contribution 2a fnewco investment_company as defined in sec_1297 pfic is not nor will become as a result of the transaction a passive foreign w business b is an active trade_or_business that has been conducted outside the u s by fcorp for more than months before the proposed transfers within the meaning of sec_1_367_a_-3 at the time of the proposed transfers there will be no intention on the part of uscorp uspship or fnewco to dispose_of or discontinue business b x at the time of the proposed transfers taking into account the rules of sec_1_367_a_-3 the fair_market_value of business b owned by fnewco will be greater than the fair_market_value of usnewco y usnewco will satisfy the reporting requirements of sec_1_367_a_-3 z based upon ruling that the management agreements will be u s real_property interests usrpis within the meaning of sec_897 each of usnewco and uscorp will be a u s real_property holding corporation usrphc withinthe meaning of sec_897 and the stock of each of usnewco and uscorp will be a usrpi within the meaning of sec_897 a ii aa based upon ruling the transfer of the partnership interests in uspship by fnewco will be treated as a transfer by fnewco of the usrpi’s held by uspship pursuant to sec_897 bb none of the country e entities affected by the country e distribution including but not limited to fcorp fcorp and fcorp will be a usrphc within the meaning of sec_897 at any time during the five-year period ending on the completion of the country e distribution and will not be a usrphc immediately plr-114216-99 thereafter cc none of the country e entities affected by the country e distribution including but not limited to fcorp fcorp and fcorp will be a cfc within the meaning of sec_957 at any time during the five-year period ending on the completion of the country e distribution and will not be a cfc immediately thereafter none of the country e entities affected by the country e distribution including but not limited to fcorp fcorp and fcorp will be a pfic within the meaning of sec_1297 at any time during the five-year period ending on the completion of the country e distribution and will not be a pfic immediately thereafter dd fifty percent or less of both the total voting power and the total value of the stock of fnewco will be received directly or indirectly in the aggregate by uscorp and uspship of sec_1_367_a_-3 in connection with their contributions to fnewco within the meaning ee fifty percent or less of both the total voting power and the total value of the stock of fnewco will be owned directly or indirectly in the aggregate by u s persons that are either officers or directors of usnewco or that are five-percent target shareholders within the meaning of sec_1_367_a_-3 ff each of uscorp and uspship will be a five-percent transferee shareholder within the meaning of sec_1_367_a_-3 each of uscorp and uspship will enter into a five-year gain_recognition_agreement in the form provided in sec_1_367_a_-8 with respect to the usnewco stock such shareholders are deemed to have exchanged respectively for fnewco stock in connection with the indirect stock transfer rule under sec_1_367_a_-3 and sec_1_367_a_-3 gg in connection with one or more steps of the transactions described in the ruling_request there will be no transfer or other_disposition of tangible or intangible_property directly or indirectly by uspship or uscorp to fnewco - hh any royalty payments on licenses of uspship 2's or uscorp 8's intangible assets to fnewco will be based on fair_market_value consideration and on terms and conditions that are consistent with standards for sec_482 ii immediately before and after the date of contribiution 1c all of the partners of uspship will be united_states persons within the meaning of sec_7701 ij fnewco will meet the filing_requirements of sec_1_897-5t kk uscorp is a usrphc both prior to and after its respective receipt of the plr-114216-99 uscorp stock as a capital_contribution from fcorp uscorp will comply with the filing_requirements of sec_1_897-5t rulings based solely on the information submitted and the representations set forth above we rule as follows contribution rulings contribution 1a contribution 1b and contribution 1c each will be a transfer of property under sec_351 no gain_or_loss will be recognized by fcorp uscorp or uspship in contribution sec_351 and c and a no gain or foss will be recognized by fnewco in contribution sec_1032 the basis of each asset received by fnewco in contribution will equal the basis of that asset in the hands of fcorp uscorp or uspship immediately before contribution sec_362 the holding_period of each asset received by fnewco in contribution will include the period during which fcorp uscorp or uspship held that asset sec_1223 the basis of the fnewco stock received by fcorp uscorp and uspship in exchange therefor sec_358 in contribution will in each case equal the basis of the assets transferred the holding_period of the fnewco stock received by fcorp uscorp and uspship will in each case include the period during which fcorp uscorp or uspship held the transferred assets sec_1223 contribution rulings no gain_or_loss will be recognized by fnewco or uscorp in contribution sec_351 and sec_357 no gain_or_loss will be recognized by usnewco in contribution sec_1032 the basis of each asset received by usnewco in contribution plr-114216-99 will equal the basis of that asset in the hands of fnewco or uscorp immediately before contribution sec_362 the holding_period of each asset received by usnewco in contribution will include the holding_period of that asset in the hands of fnewco or uscorp sec_1223 the basis of the usnewco stock received by fnewco and uscorp in contribution will in each case equal the basis of the assets transferred in exchange therefor sec_358 the holding_period of the usnewco stock received by fnewco and uscorp will in each case include the period during which fnewco or uscorp held the transferred assets sec_1223 sec_367 rulings for purposes of sec_367 the transfer of the interests in uspship and the uscorp stock by uscorp in exchange for fnewco1 stock followed by fnewco 1's transfer of such assets to usnewco will be treated as a transfer by uscorp of its limited_partnership interests in uspship and the uscorp stock to usnewco in exchange for usnewco stock and a subsequent transfer by uscorp of its deemed ownership of usnewco stock to fnewco exchange described in sec_354 sec_1_367_a_-3 vi upon the filing by uscorp of a five-year gain_recognition_agreement pursuant to sec_1_367_a_-8 no gain_or_loss will be recognized by uscorp under sec_367 on the transfer of the usnewco stock sec_1_367_a_-3 ii c in exchange for fnewco stock in an for purposes of sec_367 the transfer of the interests in uspship and the in exchange for fnewco1 stock followed by fnewco 1's uscorp stock by uspship transfer of such assets to usnewco will be treated as a transfer by uspship of its limited_partnership interests in uspship and the uscorp stock to usnewco in exchange for usnewco stock and a subsequent transfer by uspship of its deemed ownership of usnewco stock to fnewco exchange described in sec_354 sec_1_367_a_-3 upon the filing by uspship of a five-year gain_recognition_agreement pursuant to sec_1_367_a_-8 no gain_or_loss will be recognized by uspship under sec_367 on the transfer of the usnewco stock sec_1_367_a_-3 c in exchange for fnewco stock in an for purposes of sec_367 the transfer of intangible assets by uscorp to fnewco will be treated as a transfer by uscorp of intangible assets to usnewco in exchange for usnewco stock and a subsequent transfer by uscorp of its plr-114216-99 deemed ownership of usnewco stock to fnewco in exchange for fnewco stock sec_1_367_d_-1t and sec_1_367_a_-3 ex the application of the foregoing would not trigger the anti-abuse rule under sec_1_367_d_-1 in this instance thus sec_367 does not apply to the transfer of the intangibles for purposes of sec_367 the transfer of intangible assets by uspship to fnewco will be treated as a transfer by uspship of intangible assets to usnewco in exchange for usnewco stock and a subsequent transfer by uspship of its deemed ownership of usnewco stock to fnewco in exchange for fnewco stock sec_1_367_d_-1t and sec_1_367_a_-3 ex the application of the foregoing would not trigger the anti-abuse rule under sec_1_367_d_-1 in this instance thus sec_367 does not apply to the transfer of the intangibles sec_897 analysis and ruling sec_897 taxes the disposition of interests_in_real_property by foreign taxpayers as effectively_connected_income under sec_871 and sec_882 under sec_897 u s real_property interests include certain interests_in_real_property in the united_states sec_1_897-1 generally provides that an interest_in_real_property other than solely as a creditor includes any direct or indirect right to share in the appreciation in the value or in the gross or net_proceeds or profits generated by the real_property further sec_1_897-1 generally provides that an option a contract or a right_of_first_refusal to acquire any interest_in_real_property other than solely as a creditor will itself constitute an interest_in_real_property other than solely as a creditor d ii e generally provides that a right to payment of a commission brokerage fee or similar charge will constitute an interest other than solely as a creditor if the total amount of the payment is contingent upon appreciation proceeds or profits of the real_property occurring or arising after the date of the transaction with respect to which the professional services giving rise to the payment were rendered finally the management agreements owned by uspship are u s real_property interests see sec_897 and sec_1_897-2 provided that fnewco satisfies the filing_requirements of sec_1_897-5t as modified by notice_89_57 1989_1_cb_698 no gain_or_loss shall be recognized under sec_897 upon fnewco 1's transfer of the uspship partnership_interest and the uscorp stock to usnewco see sec_897 and sec_1_897-6t caveats we express no opinion on the tax effects of the transaction under other provisions of the code and regulations or the tax effects of any condition existing at the time of or effects resulting from the transaction that are not specifically covered by the bof plr-114216-99 in particular no opinion is expressed regarding i qualification of the above rulings country e distribution under sec_355 ii whether the name is considered to be property in country e and consequently whether there will be a transfer of property in connection with the use of the name by fnewco to which sec_367 or sec_482 is applicable absent the payment of consideration by fnewco to uspship iii the application of sec_897 e and g on any sec_708 termination resulting from the transfer of the partnership interests in uspship by fnewco to usnewco or iv the application of sec_897 and sec_1_897-6t to the transfer of the uscorp stock by fcorp to uscorp also see sec_1445 and the regulations thereunder for the withholding responsibilities of uscorp and usnewco procedural matters this letter is directed only to the taxpayers who requested it sec_6110 provides that it may not be used or cited as precedent a copy of this letter should be attached to the federal_income_tax return of each affected taxpayer for the year in which the transactions covered by this letter are completed under a power_of_attorney on file in this office a copy of this letter is being sent to your authorized representative sincerely assistant chief_counsel corporate by wayne t murray senior technician reviewer branch


department of the treasury int ernal revenue service washington d c o f f i c e o f c h i e f c o u n s e l date number release date cc psi tl-n-4645-00 uilc internal_revenue_service national_office field_service_advice memorandum for associate area_counsel cc lm rfp chi2 from associate chief_counsel passthroughs special industries cc psi subject lease-in lease-out this field_service_advice responds to your memorandum dated date field_service_advice is not binding on examination or appeals and is not a final case determination this document is not to be used or cited as precedent disclosure statement field_service_advice is chief_counsel_advice and is open to public inspection pursuant to the provisions of sec_6110 the provisions of sec_6110 require the service to remove taxpayer identifying information and provide the taxpayer with notice of intention to disclose before it is made available for public inspection sec_6110 and i sec_6110 also authorizes the service to delete information from field_service_advice that is protected from disclosure under u s c sec_552 b and c before the document is provided to the taxpayer with notice of intention to disclose only the national_office function issuing the field_service_advice is authorized to make such deletions and to make the redacted document available for public inspection accordingly the examination appeals or counsel recipient of this document may not provide a copy of this unredacted document to the taxpayer or their representative the recipient of this document may share this unredacted document only with those persons whose official tax_administration duties with respect to the case and the issues discussed in the document require inspection or disclosure of the field_service_advice legend a tl-n-4645-00 b c d e f g country a country b city a city b date date date date date date date dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure tl-n-4645-00 dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure issue whether the lease-in lease-out lilo_transaction described below has economic_substance conclusion the lilo_transaction described below lacks economic_substance and should not be respected for federal_income_tax purposes fact sec_1 lease terms a a country a stock corporation leased an office building from b which held title to the project under the master lease master lease which went into effect on date a leased the project for a term of years and a renewal option head lease renewal option of years the master lease was modified on date extending the lease another years for a total term including renewal options of years on date a entered into a head lease head lease with c as trustee for d the head lease provided for a year basic term head lease basic term and a year renewal term head lease renewal term for a combined term of years the projected useful_life of the project was estimated to be at least years thus the head lease was not expected to exceed percent of the year useful_life of the project also on date a entered into a lease agreement sublease to lease the project back from c as trustee for d for a term of years for federal tax reporting purposes d treated the assets and obligations held in trust by c for d as though they were held by a grantor_trust owned by d at the end of the this term several options come into play first a can choose to exercise a purchase option purchase option to purchase d’s interest in the project at a set purchase option_price of dollar_figure this is in excess of the estimated tl-n-4645-00 value per the appraisal value set as of the closing date of the head lease closing date appraisal of dollar_figure if a does not elect the purchase option then d has the following three options under the lease agreement d may cause a to renew the lease for a year term sublease renewal term date 4-date at a fixed rent of not more than percent of expected releasing rent levels as determined in the closing date appraisal sublease renewal option d may cause a to return the project to d in which case a is obligated to return the project to d on the lease expiration date in accordance with the return provisions of the lease return option and d may arrange a new lease with a third party unrelated to the lessee new lease option if d elects the sublease renewal option d may elect to cause a to seek bids for a value guarantee in an amount equal to percent of the projected fair_market_value of d’s interest as of the end of the sublease renewal term as determined by an appraiser chosen by d prior to the commencement of the sublease renewal term the value guarantee will be payable in an amount equal to the shortfall between the sales_price obtained by d for its interest should d choose to sell its interest at the expiration of the sublease renewal term and the value guarantee amount based on the closing date appraisal however it is unlikely that d’s interest would be worth less than percent of its estimated future fair_market_value at the end of the lease renewal term and that any net payment would be required from the party providing the value guarantee alternatively under this option a has the right to pay a predetermined sum stipulated loss value and all other_amounts due and payable under the lease to d and to terminate the lease in which case d may in its sole discretion elect not to renew the head lease if d elects the return option and returns and sells its interest in the project the closing date appraisal projects that d will be able to sell its interest in the project for fair_market_value of dollar_figure if d elects the new lease option the closing date appraisal projects rents for the sublease renewal term of dollar_figure taxpayer concludes that since this rental rate exceeds the rent obtainable if d causes a to lease for the sublease renewal term at a rate of not more than percent of expected releasing rent levels as determined in the closing date appraisal projected as rents varying from dollar_figure to dollar_figure it is reasonable that d will choose a new tenant this conclusion also assumes that the purchase option will not be exercised after the end of the sublease renewal term the closing date appraisal projects that d will receive rent for the project for tl-n-4645-00 the period between the end of the sublease renewal term and the end of the head lease date and date shirttail period of dollar_figure per year financing to fund the head lease d made an initial investment initial investment of dollar_figure and c obtained a non-recourse loan from e of dollar_figure the loan has a fixed interest rate of percent and the debt service payments are amortized over the term of the head lease and the head lease renewal term or the term of any new lease entered into whichever is applicable d instructed c to transfer the initial investment to a as a substantial advance_payment of this amount dollar_figure was credited to a’s account with e in country b the dollar_figure equity_investment was credited to a’s account in city a e then debited a’s account in country b in the amount of dollar_figure and credited that amount to e’s account e entered into a agreement payment undertaking agreement with a and c under the terms of the payment undertaking agreement a agreed to pay dollar_figure to e on date e agreed to make payments on behalf of a in fulfillment of a’s obligations under the sublease a may replace e with an acceptable substitute to d so long as a is not in default in the event that other collateral is substituted for the payment undertaking agreement or a makes any payments due under the lease from sources other than the payment undertaking agreement the amounts payable under the payment undertaking agreement are payable to a or as a directs d’s rights under the payment undertaking agreement were assigned to e the lender neither e nor a has a right of set off against any payments for amounts not received e received a fee on the closing date equal to dollar_figure representing the spread between the interest rate on the loan and the implicit rate on the upfront payment additionally under a participation_agreement participation_agreement a was required to purchase united_states treasury obligations treasury obligations from the dollar_figure equity_investment a authorized the transfer of dollar_figure the purchase_price of the treasury obligations from its city a account to a f account a kept the dollar_figure remaining portion of the lease prepayment as its upfront benefit c transferred this amount from a’s city a account to a’s account at g a has title to the treasury obligations the treasury obligations were pledged to c and d to secure a’s obligations to make payments under the sublease this arrangement economically defeases a portion of the transaction under the documents in the event that there is an early termination of the lease a portion of the equity portion of stipulated loss value is not expected to be covered by the treasury obligations e as lender has a security_interest in the head lease the lease and the portion of the initial investment that is subject_to the payment undertaking agreement tl-n-4645-00 if a elects the purchase option then d will have to pay off the loan if d elects the return or new lease option d must refinance or pay off the loan if d elects the lease renewal option a will be required to arrange a refinancing of the loan for the sublease renewal term reported tax consequences d claimed deductions for the allocated rents under the head lease pursuant to sec_178 d claims that dollar_figure was paid for the head lease basic term and is being amortized on a straight-line basis over that term d claimed that dollar_figure was paid to acquire the head lease renewal option and that amount is being capitalized and will be amortized over the head lease renewal term or if the purchase option is exercised will be deducted in the tax_year the option is exercised d claimed deductions for interest_expenses related to the loan between e and c d included in gross_income the rents on the lease with a d claimed net deductions in the early years of the transaction followed by net_income inclusion on or after the conclusion of the basic lease_term law and analysis you have asked whether this lilo_transaction should be respected for federal tax purposes for the reasons discussed below we agree with your conclusion that the transaction lacks economic_substance economic_substance to be respected a transaction must have economic_substance separate and distinct from the economic benefit achieved solely by tax reduction if a taxpayer seeks to claim tax benefits which were not intended by congress by means of transactions that serve no economic purpose other than tax savings the doctrine_of economic_substance is applicable 31_f3d_117 3d cir 861_f2d_494 7th cir aff’g 87_tc_1087 364_f2d_734 2d cir aff’g 44_tc_284 31_tc_33 aff’d 270_f2d_294 3d cir acm partnership v commissioner tcmemo_1997_115 aff’d in part and rev’d in part 157_f3d_231 3d cir whether a transaction has economic_substance is a factual determination 338_us_451 this determination turns on whether the transaction is rationally related to a useful nontax purpose that is plausible in light of the taxpayer’s conduct and useful in light of the taxpayer’s economic situation and intentions the utility of the stated purpose and the rationality of the means chosen to effectuate it must be evaluated tl-n-4645-00 in accordance with commercial practices in the relevant industry 89_tc_986 acm partnership supra a rational relationship between purpose and means ordinarily will not be found unless there was a reasonable expectation that the nontax benefits would be at least commensurate with the transaction costs yosha supra acm partnership supra in determining whether a transaction has economic_substance so as to be respected for tax purposes both the objective economic_substance of the transaction and the subjective business motivation must be determined acm partnership f 3d pincite 968_f2d_1229 d c cir 909_f2d_1360 9th cir the two inquiries are not separate prongs but are interrelated factors used to analyze whether the transaction had sufficient substance apart from its tax consequences to be respected for tax purposes acm partnership f 3d pincite casebeer f 2d pincite courts have recognized that offsetting legal obligations or circular cash flows may effectively eliminate any real economic significance of the transaction 364_us_361 in knetsch the taxpayer repeatedly borrowed against increases in the cash_value of a bond thus the bond and the taxpayer’s borrowings constituted offsetting obligations as a result the taxpayer could never derive any significant benefit from the bond the supreme court found the transaction to be a sham as it produced no significant economic_effect and had been structured only to provide the taxpayer with interest deductions in 94_tc_738 the tax_court denied the taxpayer the tax benefits of a series of treasury bill sale-repurchase transactions because they lacked economic_substance in the transactions the taxpayer bought treasury bills that matured shortly after the end of the tax_year and funded the purchase by borrowing against the treasury bills the taxpayer accrued the majority of its interest_deduction on the borrowings in the first year while deferring the inclusion of its economically offsetting interest_income from the treasury bills until the second year the transactions lacked economic_substance because the economic consequence of holding the treasury bills was largely offset by the economic cost of the borrowings the taxpayer was denied the tax_benefit of the transactions because the real economic impact of the transactions was infinitesimally nominal and vastly insignificant when considered in comparison with the claimed deductions sheldon t c pincite in 157_f3d_231 3d cir the taxpayer entered into a near-simultaneous purchase and sale of debt instruments taken together the purchase and sale had only nominal incidental effects on the taxpayer’s net economic position acm partnership f 3d pincite the taxpayer claimed that despite the minimal net economic_effect the transaction had tl-n-4645-00 economic_substance the court held that transactions that do not appreciably affect a taxpayer’s beneficial_interest except to reduce tax are devoid of substance and are not respected for tax purposes acm partnership f 3d pincite the court denied the taxpayer the purported tax benefits of the transaction because the transaction lacked any significant economic consequences other than the creation of tax benefits in other leasing transactions leases have been respected as valid despite the presence of credit support for their payment such as third-party rent guarantees see 88_tc_702 88_tc_84 87_tc_1471 on the other hand a fully defeased lease arguably is not compelled or encouraged by business and regulatory realities as required by 435_us_561 moreover claims of pre-tax profit are not dispositive there is some precedent that economic_substance for a lease transaction will be satisfied if there is some modicum of economic_substance which may mean some modicum of pre-tax profit see 81_tc_184 ndollar_figure aff’d in part and rev’d in part on other grounds 752_f2d_89 4th cir see 84_tc_412 ndollar_figure in 912_f2d_736 4th cir the fourth circuit found that a leasing transaction was a sham in doing so it described a dollar_figure profit potential as minimal on an eight-year investment of dollar_figure the fourth circuit also found evidence of tax motivation in the offsetting obligations to pay rent and debt service the transaction also involved the use of related parties to avoid sec_465 under these facts the court found that the tax tail began to wag the dog hines f 2d pincite thus small profits on a lease transaction may be overlooked when tax considerations have taken over the transaction see also pacheco v commissioner tcmemo_1989_296 application to lilo_transaction it is the position of the internal_revenue_service that certain lilo transactions lack economic_substance revrul_99_14 1999_13_irb_3 when the form of a transaction lacks economic_substance the form is disregarded and consistent with the substance of the transaction the proper tax treatment is determined acm partnership supra compaq computer v commissioner 113_tc_17 a sale leaseback_transaction is distinct from a lilo_transaction a lilo involves a lease from one entity to another with a generally coextensive lease back to the first entity a sale leaseback involves a disposition for tax purposes revproc_75_21 1975_1_cb_715 provides safe harbors and ruling guidelines for determining whether a transaction is a lease or a sale because a sale leaseback is distinct tl-n-4645-00 from a lilo_transaction revproc_75_21 does not apply to lilo transactions similarly an analysis of the benefits and burdens factors as would be utilized in analyzing a sale leaseback would be inappropriate under the present facts viewed as a whole the objective facts of the above-described lilo_transaction indicate that the transaction lacks the potential for any significant economic consequences other than the creation of tax benefits the transaction lacks economic_substance the payments due during the term of the sublease represent a circular cash_flow d borrows dollar_figure from e which amount is credited to a who in turn deposits that amount with e e then makes payments on behalf of a equal to the a’s obligations under the sublease d’s rights under the payment undertaking agreement are collaterally assigned to e as security for the d’s loan the payment undertaking agreement does not afford e any additional rights in respect of its security for the loan other than in its capacity as lender e also has a security_interest in the head lease and the sublease although neither e nor a has a right of set off against any payments for amounts not received the economic reality is that e pays to itself the amounts due under the loan although a may substitute alternative collateral for the payment undertaking agreement it may only do so with a substitute acceptable to d under sec_12 of the participation_agreement a may substitute collateral which provides for the payment of amounts equal to a’s obligations under the sublease for the benefit of d and subject_to a first priority security_interest in favor of e the applicable_rate of the loan may not be increased without d’s consent which may be withheld in d’s good_faith discretion further a is responsible for any increased costs fees and expenses_incurred by d or e in connection with a’s substitution of collateral therefore there is little real risk if a substitutes alternative collateral it will be as safe as the payment undertaking agreement and d will be at no greater risk as to payment d also provided dollar_figure as its initial investment this amount is partially defeased by the requirement that a purchase treasury obligations in the amount of dollar_figure although a has title to the treasury obligations they are held in a city b office of e and are pledged to d the remaining amount dollar_figure represents a’s upfront benefit or its return on the transaction on the closing date although there is a spread between the rates of interest on the loan and the deposit this spread is paid to the e as a fee it would appear to make no economic difference whether an amount was paid as interest or as a fee in sum the amount of the rent obligation is equal to the amount of the debt service thus all such tl-n-4645-00 funds represent a circular cash_flow as a result the offsetting and circular nature of the obligations eliminate any significant economic consequences of the transaction the economics of the different options at the end of the sublease term must be verified taxpayer asserts that a’s purchase option is set at a price which exceeds estimated fair_market_value set at the closing date a further asserts that this option will not be exercised unless there is a significant deviation in the appraised value taxpayer’s argument assumes two things that taxpayer’s appraisals are correct and that a will not have a significant business incentive to retain possession of the building which it occupies the differential between the purchase option_price and estimated fair_market_value is small relative to the overall value therefore a significant business_purpose on the part of a to retain the building would overcome that impediment under the lease d has the option to allow a to renew the lease at a rent set at percent of expected fair_market_value accordingly taxpayer asserts that this election will probably not be exercised because it is below fair_market_value again this determination depends upon taxpayer’s appraisal under this option the value guarantee is called upon if the project’s fair_market_value falls below percent of expected fair_market_value accordingly d carries the risk that the fair_market_value will be above percent but below expected fair_market_value the appearance of risk however is not real because the value guarantee applies only if d elects to renew a’s lease an option that is not likely to be exercised the remaining options involve re-leasing the project to third parties while d does bear some risk as to these options the risk is limited to the fair_market_value falling below percent of expected fair_market_value because d can elect to cause a to renew its lease at percent of expected fair_market_value moreover this risk does not arise until after the end of the year basic term there is no precedent which establishes what level of risk gives a transaction substance nonetheless for the first years of the lease the payments are circular and there is no real risk we believe we would prevail on the argument that deductions related to those circular payments should not be allowed because the central transaction lacks the potential for any significant economic consequences the lilo lacks economic_substance accordingly the rent payments arising from the transaction are not deductible under sec_162 further if case development reveals that d is found to be the owner of the treasury strips for tax purposes and d’s ownership is separate from the principal tl-n-4645-00 tax_benefit sought in the transaction d should be required to include in income the original_issue_discount oid accruing with respect to the treasury strips under the facts provided it appears that the oid income associated with the treasury strips may be both economically substantive and separable from the sham aspects of the underlying transaction the centerpiece or principal tax_benefit of the lilo_transaction is to create artificial rent and interest deductions that have no economic basis due to the offsetting circular cash flows see acm partnership f 3d pincite compare salina partnership v commissioner tcmemo_2000_352 refusing to classify transitory partnership as a sham but upholding the commissioner’s determination on alternate grounds thus if d is found to be the owner of the treasury strips the oid income that accrued on the strips will have an economically substantive impact on taxpayer’s net financial position under these circumstances recognition of the income attributable to the treasury strips accurately reflects the economic realities of the transaction when a taxpayer acquires funds has control_over the property and derives readily realizable economic value from it the taxpayer is regarded as having received income and is liable for tax on the income 366_us_213 treatment of interest_expense having concluded that the transaction lacks economic_substance the next issue is the proper treatment of the interest_deduction the original loan of dollar_figure million was an integral part of the lilo_transaction in general an interest_deduction that is part of a transaction that lacks economic_substance may be disallowed even if it arises on bona_fide debt see 364_f2d_734 2d cir there are however circumstances where a loan that is part of a transaction that lacks economic_substance is recognized see 752_f2d_89 4th cir the differential between the two scenarios is whether the loans are an integral part of the transaction that lacks economic_substance it is our opinion that the loans under the present facts are an integral part of the transaction in rice's toyota world inc the taxpayer purchased a used computer from a leasing company by issuing a recourse note and two nonrecourse notes to the leasing company the taxpayer claimed accelerated_depreciation deductions based on its ownership of the computer and interest deductions for the payments on the notes the taxpayer paid off the recourse indebtedness which was dollar_figure in three years along with dollar_figure of interest the tax_court found that the transaction lacked economic_substance in conjunction with this determination the court found that because the transaction could be disregarded the taxpayer was not entitled to interest deductions the fourth circuit affirmed the tax court's finding that the transaction lacked economic_substance however the fourth circuit reversed the tax court's finding tl-n-4645-00 that the interest on the recourse indebtedness was not deductible a sham_transaction may contain elements whose form reflects economic_substance and whose normal_tax consequences may not therefore be disregarded rice’s toyota world inc f 2d pincite citing 77_tc_1221 the fourth circuit concludes that both the recourse indebtedness and the interest_paid upon it were genuine rice’s toyota world inc f 2d pincite thus section does not limit the deductibility of interest_expense depending upon the item purchased by the taxpayer id see also 88_tc_386 aff'd 868_f2d_851 6th cir in addition in lieber v commissioner tcmemo_1993_424 the commissioner challenged the taxpayers' deduction of interest on nonrecourse indebtedness incurred to enter a computer sale leaseback_transaction the tax_court found that the taxpayers lacked a profit objective in regard to the transaction and disallowed the other deductions however the court went on to find the indebtedness incurred to purchase the computer was genuine and allowed the interest_paid other cases have recognized the distinction between borrowings that are separable from the sham_transaction and those that are an integral part of the sham_transaction acm partnership f 3d pincite arrowhead mountain getaway ltd v commissioner tcmemo_1995_54 69_tcm_1805 364_f2d_734 2d cir however is the primary precedent that disallows interest deductions in circumstances where there is no question that genuine loans were obtained in goldstein the taxpayer had won the irish sweepstakes to shelter her windfall she borrowed money from banks to purchase treasury securities that would yield a lower rate of interest than she would be paying to the banks the transaction only benefitted her because of the tax savings on prepaid_interest on the loans the second circuit found that the loans were genuine and recourse but affirmed the disallowance of the interest_expense the opinion emphasizes the tax court's finding that the taxpayer's sole purpose for entering into the transaction was to obtain an interest_deduction f 2d pincite goldstein holds that borrowing for such a purpose should not be recognized under sec_163 goldstein supra citing knetsch following goldstein a number of cases have disallowed interest deductions where they are an integral part of a transaction found to lack economic_substance see wexler v 31_f3d_117 3d cir cert_denied 115_sct_1251 affirming the disallowance of an interest_deduction in a repo transaction 94_tc_738 disallowing an interest_deduction in a repo transaction saba partnership v commissioner tcmemo_1999_359 disallowing expenses and losses in a similar transaction to acm tl-n-4645-00 partnership seykota v commissioner tcmemo_1991_541 distinguishing rice’s toyota world and disallowing interest_expense on a transaction which depended upon an up-front interest_deduction for its tax benefits in disallowing the interest_deduction in lee v commissioner tcmemo_1997_172 aff’d 155_f3d_584 2d cir the tax_court asserted that goldstein continues to apply to the narrower situation where a taxpayer enters into a borrowing transaction for no purpose other than to claim the deductions generated by that transaction itself lee t c m cch pincite in affirming the disallowance of the interest_deduction in lee the second circuit reasoned that to adopt petitioners’ reading would be to permit every shelter no matter how transparently sham to qualify for an interest_expense_deduction as long as the money used to finance the not-for-profit transactions involved were borrowed from a lender - any commercial bank would do -- that demanded repayment that result soundly criticized by the third circuit in wexler is contrary to the longstanding jurisprudence of sham shelters from knetsch on down lee f 3d pincite see also 113_tc_254 citing lee in disallowing interest incurred in a leveraged corporate- owned life_insurance coli program which was found to lack economic_substance the rental deductions at issue stem directly from the loans taken out by taxpayer and cannot be separated from them as such the loans were an integral part of the lilo_transaction and a deduction for the interest on the loans is not allowable under sec_163 case development hazards and other considerations tl-n-4645-00 please call if you have any further questions associate chief_counsel passthroughs special industries by matthew lay assistant to the branch chief branch office of the associate chief_counsel passthroughs special industries


internal_revenue_service number release date index number --------------------------------------------- -------------------------------- --------------------------- ------------------------- x x department of the treasury washington dc person to contact ----------------- id no ------------- telephone number --------------------- refer reply to cc psi b01 - plr-121974-04 date date -------------------------------- -------------------------------- ----------------------- --------------------- ----------------------- --------------------------- country a date date dear -------------- requesting a ruling under sec_301_9100-3 of the procedure and administration regulations that x be granted an extension of time to elect to be treated as an association_taxable_as_a_corporation under sec_301_7701-3 facts this letter responds to a letter dated date written on behalf of x according to the information submitted x a country a limited_liability_company was formed on date on date x converted to a country a unlimited liability company x desires to be treated as an association_taxable_as_a_corporation for federal tax purposes as of date due to inadvertence x failed to timely file an election form_8832 entity classification election effective date law and analysis sec_301_7701-3 provides in part that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes as provided in this section an eligible_entity with one owner can elect to be classified as either an association and thus a corporation under sec_301_7701-2 or a disregarded_entity plr-121974-04 sec_301_7701-3 provides in part that an eligible_entity may elect to be classified other than as provided under sec_301_7701-3 by filing form_8832 with the service_center designated on the form sec_301_7701-3 provides in part that an election made under sec_301_7701-3 will be effective on the date specified by the entity on form_8832 or on the date filed if no such date is specified on the election form the effective date specified on form_8832 can not be more than days prior to the date on which the election is filed and can not be more than months after the date on which the election is filed under sec_301_9100-1 the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the code except subtitles e g h and i sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make an election sec_301_9100-2 provides automatic_extension of time for making certain elections sec_301_9100-3 provides extensions of time for making 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 to establish that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government a copy of this letter should be attached to the election a copy is enclosed for conclusions based solely on the facts submitted and the representations made we conclude that x has satisfied the requirements of sec_301_9100-3 as a result x is granted an extension of time of sixty days from the date of this letter to file a properly executed form_8832 with the appropriate service_center electing to be treated as an association effective date that purpose concerning the federal tax consequences of the facts described above under any other provision of the code of the internal_revenue_code provides that it may not be used or cited as precedent this ruling is directed only to the taxpayer who requested it sec_6110 except as specifically set forth above no opinion is expressed or implied plr-121974-04 pursuant to the power_of_attorney on file with this office a copy of this letter is sincerely heather c maloy associate chief_counsel passthroughs and special industries being sent to taxpayer enclosures copy of this letter copy for sec_6110 purposes cc


third party communication date of communication month dd yyyy cca_2014072215170007 id uilc number release date from sent tuesday date pm to cc bcc subject c i understand you have a question about c as it relates to one of your cases i hope this clarifies things for you in your case sec_6501’s period of limitations would have expired in prior to the effective date of the hire_act sec_6501 however prior to the hire_act would have kept the statute open as to the entire return due to the taxpayer’s failure_to_file the form_5471 when the hire_act comes in in amending slightly sec_6501 the effective date provision of the act provides that the hire_act version of c applies to returns filed after the effective date not our case and returns filed before the effective date our case if the sec_6501 statute_of_limitations was still open as of the date of the enactment of hire_act given that the period of limitations was open on the whole return under the pre-hire version of the c at the time of the enactment of hire_act it remains open under hire_act as to the whole return if the taxpayer files the missing however and establishes that it had reasonable_cause for the late filing of the form then the statute_of_limitations under sec_6501 would be open for a period of three years from the date of the filing of the form but the assessment_period would only be open as to the items related to the late- filed information_return pursuant to c b if any other provision of sec_6501 keeps the assessment_period open for a longer period of time such a sec_6501 or c then we would rely on the longest assessment_period possible -------------------------------------------------------------------------------------------------------------------------------------------- ------------------------------ internal_revenue_service office_of_chief_counsel constitution ave nw washington dc --------------------------------------------------------------------------------------------------------------------- --------------------------------------------


t c summary opinion united_states tax_court leon e daniels and margaret i daniels petitioners v commissioner of internal revenue respondent docket no 5828-12s filed date leon e daniels and margaret i daniels pro sese alicia h eyler and julie l payne for respondent summary opinion marvel judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect when the petition was filed unless otherwise indicated all section references are to the internal_revenue_code in effect for the years at issue and all rule references are to the continued pursuant to sec_7463 the decision to be entered is not reviewable by any other court and this opinion shall not be treated as precedent for any other case respondent determined deficiencies in petitioners’ federal_income_tax additions to tax under sec_6651 and accuracy-related_penalties under sec_6662 as follows year deficiency addition_to_tax sec_6651 penalty sec_6662 dollar_figure big_number big_number dollar_figure big_number -0- -0- dollar_figure big_number after concessions the issues for decision are whether petitioners may deduct under sec_162 expenses related to their use of four vehicles in and and whether petitioners are entitled to bases in collectible gold coins they sold in and in excess of the amounts respondent allowed continued tax_court rules_of_practice and procedure all monetary amounts are rounded to the nearest dollar the parties stipulated or conceded the following adjustments to petitioners’ schedules c profit or loss from business respondent properly increased petitioners’ gross_receipts by dollar_figure dollar_figure dollar_figure and dollar_figure for and respectively and properly reduced petitioners’ gross_receipts by dollar_figure for respondent properly disallowed a deduction for cost of goods continued continued sold of dollar_figure for and properly increased petitioners’ expense deductions by dollar_figure for cost_of_goods_sold for petitioners’ deduction for car and truck expenses should be increased by dollar_figure for respondent properly decreased petitioners’ deduction for car and truck expenses by dollar_figure for petitioners are entitled to deduct of their expenses related to the use of their ford pickup truck for and respondent properly disallowed petitioners’ deduction for business use of their home of dollar_figure for and properly increased petitioners’ deductions for business use of their home by dollar_figure and dollar_figure for and respectively respondent properly disallowed deductions for other expenses of dollar_figure dollar_figure and dollar_figure for and respectively respondent properly disallowed petitioners’ deduction for interest_expense of dollar_figure for and properly increased petitioners’ deductions for interest_expense by dollar_figure and dollar_figure for and respectively respondent properly disallowed a deduction for repairs and maintenance of dollar_figure for respondent properly disallowed deductions for depreciation and sec_179 expenses of dollar_figure dollar_figure dollar_figure and dollar_figure for and respectively petitioners’ travel expense deduction for should be allowed and respondent properly disallowed petitioners’ travel expense deduction of dollar_figure for the parties also stipulated that petitioners’ itemized_deductions on schedule a itemized_deductions are properly decreased by dollar_figure for and properly increased by dollar_figure dollar_figure dollar_figure and dollar_figure for and respectively petitioners received dollar_figure of unreported taxable interest in petitioners are liable for self-employment_tax on the increase in their self-employment_income and are entitled to deduct from their gross_income one-half of their self-employment_tax liability for each year petitioners are liable for the additions to tax under sec_6651 for and and petitioners are liable for the accuracy-related_penalty under sec_6662 for the years at issue to the extent of petitioners’ unreported capital_gains from the sale of coins and petitioners’ disallowed deductions on schedule c for car and truck expenses for and background some of the facts have been stipulated and are so found the stipulations of facts are incorporated herein by this reference petitioners resided in the state of washington when they petitioned this court i vehicle expenses during the years at issue petitioners owned and operated a1 carpet cleaning an unincorporated business a1 carpet cleaning performed carpet and upholstery cleaning water damage restoration and fire damage restoration petitioners owned nine vehicles and used these vehicles to varying degrees in connection with a1 carpet cleaning these vehicles were a jeep jeep a cadillac cadillac a chevrolet nova nova a lincoln continental lincoln four vans and a ford pickup truck petitioners used the jeep the cadillac the nova and the lincoln collectively four vehicles for both personal and business purposes during the years at issue they did not however keep mileage logs to document the business use of the four vehicles or keep receipts for vehicle expenses expenses related to the four vans and ford pickup truck are not in dispute ii collectible coin sales petitioners collect and sell coins during and they sold both silver and gold coins but did not maintain a log or registry to document their coin purchases and sales petitioners realized proceeds of dollar_figure and dollar_figure from the sale of coins in and respectively iii petitioners’ tax reporting and the notice_of_deficiency petitioners reported their income and expenses from a1 carpet cleaning on schedules c attached to their form sec_1040 u s individual_income_tax_return for through they reported actual car and truck expenses for_the_use_of the nine vehicles of dollar_figure and dollar_figure in and respectively and they deducted those expenses on the schedules c for those years petitioners did not provide their return preparer with original receipts to4 support the vehicle expenses reported on the schedules c instead they provided their return preparer with a handwritten sheet summarizing their vehicle expenses and the percentage of business use for each vehicle petitioners estimated that they used the four vehicles for business_purpose sec_75 of the time and petitioners’ return preparer testified that the only receipts that petitioners provided were credit card receipts for some of the vehicle expenses reported on petitioners’ returns accordingly claimed deductions for car and truck expenses on schedule c equal to of the total expenses for these vehicles for each year at issue petitioners did not report gains from their coin sales on their form_1040 for or during the examination petitioners provided respondent with records to substantiate their bases in some of the coins sold during these years respondent allowed petitioners a basis of of the sale price for the remainder of the coins sold in and a basis of of the sale price for the remainder of the coins sold in on date respondent issued to petitioners the notice_of_deficiency respondent disallowed deductions for car and truck expenses of dollar_figure and dollar_figure claimed on the and schedules c respectively the disallowed car and truck expense deductions included all of petitioners’ reported expenses relating to the four vehicles respondent also determined that petitioners realized unreported capital_gains of dollar_figure and dollar_figure for and respectively from the sale of collectible coins discussion i burden_of_proof generally the commissioner’s determinations in a notice_of_deficiency are presumed correct and the taxpayer bears the burden of proving that the determinations are erroneous see rule a 290_us_111 the burden_of_proof shifts to the commissioner however if the taxpayer produces credible_evidence to support the deduction or position the taxpayer complied with the substantiation requirements and the taxpayer cooperated with the secretary with regard to all reasonable requests for information sec_7491 see also 116_tc_438 petitioners do not contend that sec_7491 applies and the record does not permit us to conclude that they satisfied the sec_7491 requirements accordingly petitioners bear the burden of proving that respondent’s determinations are erroneous ii vehicle expenses generally a taxpayer is entitled to deduct ordinary and necessary expenses paid_or_incurred in carrying_on_a_trade_or_business see sec_162 am stores co v commissioner 114_tc_458 an expense is ordinary if it is customary or usual within the particular trade business or industry or if it relates to a transaction of common or frequent occurrence in the type of business the term secretary means the secretary_of_the_treasury or_his_delegate sec_7701 involved 308_us_488 an expense is necessary if it is appropriate and helpful for the development of the business see 320_us_467 personal living or family_expenses generally are not deductible see sec_262 a taxpayer must maintain records to substantiate claimed deductions and to establish the taxpayer’s correct_tax liability see sec_6001 503_us_79 higbee v commissioner t c pincite when a taxpayer establishes that he or she paid_or_incurred a deductible expense but does not establish the amount of the expense we may estimate the amount of the deductible expense cohan_rule 39_f2d_540 2d cir there must be sufficient evidence in the record however to permit us to conclude that the taxpayer incurred a deductible expense in at least the amount allowed see 245_f2d_559 5th cir 85_tc_731 for certain kinds of business_expenses sec_274 overrides the cohan_rule see 50_tc_823 aff’d per curiam 412_f2d_201 2d cir under sec_274 a taxpayer must satisfy strict substantiation requirements before a deduction is allowable these requirements apply to any expense related to the use of listed_property as defined in sec_280f including passenger vehicles sec_274 requires a taxpayer to substantiate vehicle expenses by adequate_records or other corroborating evidence establishing the amount of each use ie the mileage for vehicles the time and place of the use and the business_purpose of the use see fessey v commissioner tcmemo_2010_ sec_1_274-5t c temporary income_tax regs fed reg date although a contemporaneous log is not required corroborative evidence created at or near the time of the expenditure to support a taxpayer’s reconstruction of the elements of the expenditure or use must have a high degree of probative value to elevate such statement to the level of credibility of a contemporaneous record sec_1_274-5t temporary income_tax regs supra a taxpayer may deduct vehicle expenses on the basis of actual cost or by using the standard mileage rate provided he or she substantiates the amount of business mileage and the time and purpose of each use see sec_1_274-5 income_tax regs revproc_2004_64 2004_2_cb_898 petitioners testified that of their use of the four vehicles was related to their business with a1 carpet cleaning respondent disallowed all expense deductions related to the four vehicles although we have no doubt that petitioners used these vehicles partially for business purposes we agree with respondent that petitioners’ failure to substantiate the business use of the vehicles forecloses any deduction for expenses related to the four vehicles petitioners did not comply with the strict substantiation requirements of sec_274 they did not maintain a contemporaneous diary calendar or mileage log of their business travel and have failed to prove that they otherwise made a record of the alleged business use of each vehicle at or near the time of the use they did not retain receipts for the expenses reported did not otherwise produce documentary_evidence of the expenses reported and did not establish the at trial petitioner margaret daniels testified that petitioners estimated that they used the four vehicles for business_purpose sec_75 of the time by assuming that if percent of each one of the vehicles was allocated to personal_use that would give a whole of one--equivalent to a whole of percent for personal_use on a vehicle this estimation of business use for the four vehicles falls short of the strict substantiation requirements of sec_274 we indicated at trial a willingness to allow petitioners some percentage of business use with respect to the four vehicles but after reviewing the record we simply could not find any evidence to substantiate petitioners’ business use of the vehicles or expenses related thereto that is sufficient to meet the strict requirements of sec_274 total business miles driven during the years at issue instead petitioners offered general and uncorroborated testimony along with a handwritten summary sheet of expenses and an estimate of the business use of each vehicle such evidence does not have the high degree of probative value necessary to elevate it to the credibility of a contemporaneous log accordingly we conclude that petitioners have failed to substantiate their claimed vehicle expense deductions under sec_274 and we sustain respondent’s adjustments to petitioners’ schedule c car and truck expense deductions for and as modified by the parties’ concessions iii collectible coins gross_income includes gains derived from dealings in property including gains from the sale of collectible coins see sec_61 except under circumstances not present here the entire amount of the gain on the sale of property is recognized sec_1001 sec_1001 defines gain from the sale_or_other_disposition of property as the excess of the amount_realized on the sale of the property over the adjusted_basis of the property sold or exchanged see also sec_1_61-6 income_tax regs sec_1011 further provides that a taxpayer’s adjusted_basis for determining the gain from the sale_or_other_disposition of property is its cost adjusted to the extent provided by sec_1016 the adjusted bases of the coins petitioners sold are their costs to petitioners see sec_1011 sec_1012 unfortunately petitioners did not keep sufficient records to establish their cost_basis in many of the coins sold see sec_1_6001-1 income_tax regs nevertheless respondent allowed petitioners a basis equal to of the sale price for the coins sold in and of the sale price for the coins sold in petitioners contend they are entitled to bases in excess of those allowed by respondent petitioners testified that they purchased gold coins from petitioner leon daniels’ brother lynn daniels for dollar_figure they contend that they are entitled to increased bases related to the purchase of these coins from lynn daniels and the subsequent sale of these coins during the years at issue petitioners introduced into evidence a bill of sale dated date purportedly signed by lynn daniels to document the sale of gold coins by lynn daniels to petitioner leon daniels they did not however introduce corroborating evidence related to this transaction moreover they did not introduce evidence matching the purchase of the gold coins from lynn daniels petitioners did not call lynn daniels to testify at trial or otherwise provide evidence that lynn daniels received dollar_figure from petitioners for the purchase of the gold coins petitioners testified that no records were available in part because the purchase of the gold coins was made in cash and the cash was accumulated by petitioners over time to the sales of those coins during the years at issue indeed petitioner leon daniels testified at trial that he was not sure if he sold the gold coins purportedly purchased from lynn daniels in or but believed it was somewhere in that area dollar_figure in schoch v commissioner tcmemo_1991_547 we held that a taxpayer must prove he or she is entitled to additional basis in collectible coins through competent evidence not mere inference and speculation id citing 22_bta_1182 aff’d 63_f2d_1023 6th cir the taxpayers in schoch argued that they were entitled to higher bases in gold and platinum coins that they claimed were accumulated over a number of petitioners made at least nine sales of gold coins from the date of the purported purchase from lynn daniels through six of these sales occurred during and petitioners provided documentary_evidence other than the receipt from lynn daniels to substantiate their bases in some of the coins sold as part of these six sales and respondent allowed petitioners a basis of or on the remainder of the coins sold we are unable to determine whether the coins that petitioners purportedly purchased from lynn daniels were sold in or and if so whether the purchase of those coins entitles petitioners to bases higher than those respondent allowed on brief petitioners attempt to revise petitioner leon daniels’ testimony regarding the sale of the gold coins purportedly purchased from lynn daniels by stating that after reviewing the record of sales leon daniels now knows these coins were sold in unsupported statements in briefs do not constitute evidence and we will not consider them see rule 99_tc_202 n statements in briefs however do not constitute evidence and cannot be used as such to supplement the record years the taxpayers did not keep organized records of their purchases and sales and instead attempted to reconstruct a sales record we rejected the reconstructed sales records as not being probative evidence noting that it would be a relatively simple matter for the taxpayers to fabricate transactions to limit taxable gain assuming arguendo that the bill of sale from lynn daniels and petitioner leon daniels’ testimony regarding the sale of the coins purportedly purchased from lynn daniels are competent evidence under schoch we still cannot conclude that petitioners are entitled to bases higher than those respondent allowed on the record before us we find that petitioners have failed to produce evidence establishing the dates of the sales of the gold coins purportedly purchased from lynn daniels and the record does not otherwise establish the dates of those sales as a result we cannot conclude that petitioners are entitled to bases higher than those respondent allowed and we sustain respondent’s determination of petitioners’ capital_gains for and we have considered the remaining arguments made by the parties and to the extent not discussed above conclude those arguments are irrelevant moot or without merit to reflect the parties’ concessions and the foregoing decision will be entered under rule


internal_revenue_service number release date index number ------------------- -------------------------------- ---------------------- ------------- ------------- - department of the treasury washington dc person to contact ---------------------- id no ------------- telephone number --------------------- refer reply to cc intl b01 - plr-149205-03 date november ty ------- ------------------- legend a --------------------------------------------------- country b year year date c dear ----------------- ----------- ------- ------- --------------------------- this is in response to a letter dated date requesting a ruling that a’s loss the rulings contained in this letter are based upon information and of lawful permanent resident status expatriation did not have for one of its principal purposes the avoidance of u s taxes under subtitle a or subtitle b of the code 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 the information submitted for consideration is substantially as set forth below a was born in and is a citizen of country b a became a permanent resident_of_the_united_states in year for employment reasons in year a left the united_states and returned with her family to country b where she is subject_to tax on her worldwide income a relinquished her green card expatriated on date c on the date of a's expatriation her net_worth exceeded the applicable_amount set forth in sec_877 sec_877 generally provides that a citizen who loses u s citizenship or a u s plr-149205-03 long-term_resident who ceases to be taxed as a lawful permanent resident individuals who expatriate within the 10-year period immediately preceding the close of the taxable_year will be taxed under sec_877 and the special rules of sec_877 for such taxable_year unless such loss did not have for one of its principal purposes the avoidance of u s taxes sec_2107 and sec_2501 provide special estate and gift_tax regimes respectively for individuals who expatriate with a principal purpose to avoid u s taxes a former u s citizen or former u s long-term_resident will be treated as having expatriated with a principal purpose to avoid u s taxes for purposes of sec_877 sec_2107 and sec_2501 if the individual's average income_tax_liability or the individual's net_worth on the date of expatriation exceed certain thresholds see sec_877 sec_2107 and sec_2501 thresholds however will not be presumed to have a principal purpose of tax_avoidance if that former citizen is described within certain statutory categories and submits a request for a ruling within one year of the date of loss of u s citizenship for the secretary's determination as to whether such loss had for one of its principal purposes the avoidance of u s taxes see sec_877 sec_2107 and sec_2501 former long-term_resident whose net_worth or average tax_liability exceeds the applicable thresholds will not be presumed to have a principal purpose of tax_avoidance if that former resident is described within certain categories and submits a complete and good_faith request for a ruling as to whether such loss had for one of its principal purposes the avoidance of u s taxes under notice_98_34 1998_2_cb_29 modifying notice_97_19 1997_1_cb_394 a a former u s citizen whose net_worth or average tax_liability exceeds these a is eligible to request a ruling pursuant to notice_98_34 because she is a notice_98_34 requires that certain information be submitted with a request for a ruling that an individual’s expatriation did not have for one of its principal purposes the avoidance of u s taxes resident fully liable to income_tax in country b the country in which she was born including additional information requested by the service after review of the submission a submitted all of the information required by notice_97_19 as modified by notice except as expressly provided herein no opinion is expressed or implied plr-149205-03 accordingly based solely on the facts submitted and the representations made we conclude that a has made a complete and good_faith submission in accordance with sec_877 and notice_98_34 therefore a will not be presumed under sec_877 as having had as one of her principal purposes for expatriating the avoidance of u s taxes we further conclude that a will not be treated under sec_877 as having had as one of her principal purposes for expatriating the avoidance of u s taxes because the information submitted clearly establishes the lack of a principal purpose to avoid taxes under subtitle a or b of the code concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter in addition no opinion is expressed as to a’s u s tax_liability for taxable periods prior to her expatriation or for taxable periods after her expatriation under sections of the code other than sec_877 sec_2107 and sec_2501 which a obtained the ruling whether or not a is otherwise required to file a return the code provides that it may not be used or cited as precedent letter is being sent to your authorized representative a copy of this letter must be attached to a’s u s income_tax return for the year in this ruling is directed only to the taxpayer requesting it sec_6110 of in accordance with the power_of_attorney on file with this office a copy of this sincerely elizabeth u karzon chief branch office of associate chief_counsel international cc


internal_revenue_service p o box cincinnati oh number release date date date legend b country name c country name dear department of the treasury employer_identification_number person to contact - id contact telephone number uil you asked for advance approval of your scholarship grant procedures under internal_revenue_code sec_4945 and for advance approval of your educational grant procedures under sec_4945 this is required because you are a private_foundation that is exempt from federal_income_tax our determination we have determined your procedures for awarding scholarships meet the requirements of code sec_4945 we also determined your procedures for awarding educational grants meet the requirements of code sec_4945 as a result expenditures you make under these procedures won't be taxable also awards meeting the requirements of code sec_4945 which are made under these procedures are scholarships or fellowship grants and are not taxable to the recipients if they use them for qualified_tuition_and_related_expenses subject_to the limitations in code sec_117 description of your request your letter indicates you will operate a grant program to help accomplish your charitable and educational_purposes by furthering your program areas of medical_research and health care education conservation and the security development of b under your grant program you are making distributions under both sec_4945 and sec_4945 of the internal_revenue_code your scholarships and fellowships will be awarded to individuals to obtain an advanced degree in an underserved area and specialty or allow individuals to participate in rural residency training for primary care and physician extenders this also includes the development of programs to focus on career advancement and the enrichment of younger professionals who will be the future leaders driving medical_research and clinical care around the world you will award grants to medical students in order to expose them to type i diabetes clinical care and research through participation in scientific conferences internships in diabetes centers visits to letter catalog number 58222y type i diabetes camps and fellowships in adult and pediatric endocrinology you will also provide grants to young investigators early-career scientists to conduct research on type i diabetes attend courses for clinical trials study translational medicine identify novel techniques and pursue other opportunities you determined that mentorship by senior scientists was a key factor in the future research accomplishments of these investigators accordingly your grant program was designed to identify and select early-career scientists working at diabetes research centers inc that have the most efficient mentoring environment for fostering early career investigators and then to award grants to investigators who are paired with a senior scientist in the diabetes field who will act as a mentor the first step involves identifying the most promising diabetes research centers in the country with efficient mentoring environments the second step involves soliciting nominations from those centers of early-stage investigators and the mentors with whom they will be paired the rigorous selection process is intended to identify and support type diabetes research by extremely promising early-career investigators who will have an opportunity to be mentored by senior scientists in the field and be expected to make significant lasting contributions to the field of research in this area in the case of individual grants under sec_4945 you will ensure that the class of potential recipients is large enough to constitute a charitable_class in the case of individual grants under sec_4945 you will impose reasonable restrictions on the group of potential grantees to limit it to persons who have the specific requirements to enable them to carry out the purposes of the grant the number of grants you will award annually and the amount will vary from year to year based on your budget other funding opportunities and the needs of the grant program for which funding is being provided any grants under sec_4945 will be no more than the required amount to cover the costs of tuition and expenses at the educational_institution likely less depending on other sources of funding for all individual grants you will follow an objective and non-discriminatory selection process that is reasonably calculated to result in performance by the grantees of the activities that the grants are intended to finance the eligibility criteria for individual grant programs will be reasonably related to the purposes of the grant program the persons making the selection will not be in a position to derive any benefit if one grantee is selected over another and relatives of disqualified persons will be ineligible for any grants to be eligible_candidates must submit an application you will choose information from the following list to include in your application that is appropriate for the particular grant program in which the candidate is applying biographical summary detail statement of the activity for which the funding is requested letters of reference lists of publications academic records documentation of finances and results of performance on standardized tests you do not have any scholarships that would require a minimum grade point average gpa gpa will be an eligibility requirement only if it is related to the purposes of the scholarship you do not award scholarships to high school graduates you will require candidates to have educational attainment consistent with the purposes of the grant for example for grants in the medical_research area candidates will be required to have an md or a phd you do not intend to fund undergraduate or graduate scholarships based on financial need if so you will take into account the financial resources of the candidate and provide no more funding than required to enable the recipient to achieve the purposes of the scholarship currently you do not have any grants being used outside of c if you grant funds to persons or for the use outside of c you will take steps to ensure that the grant funds are used for appropriate purposes and are not diverted to support terrorism as described below the renewal of a grant for any succeeding period will be contingent upon evidence of adequate performance at the time of review you may also create some additional parameters for renewal of grants after you more fully develop programs for grants to individuals you will publicize each program broadly to solicit grant applications through a variety of means including your website word of mouth and promotional materials that will be distributed at events conferences and meetings with the goal of developing a broad based application pool for each type of grant program that allows you to identify effective projects that support your charitable and educational_purposes although you will establish a formal set of qualifications for candidates and broadly publicize the program for most grants to individuals there may be times when you do not do so this could arise if you become aware of a limited number of individuals who are exceptionally qualified to carry out the charitable or educational_purposes of a grant program or it is otherwise evident that a particular individual will be the best candidate to carry out the charitable purpose of the grant the selection criteria will be reasonably related to the charitable and educational_purposes of the particular grant and will include the merits of the proposal credentials of the potential grantee positive letters of recommendation the relationship of the proposal or the proposed course of study or fellowship to your charitable programs projects or areas of concern and priority in relation to other demands on your funds for grants that are scholarships and fellowships the selection criteria will also include an individual's prior academic performance and results on standardized tests selections will be made by your program staff overseeing the applicable grants program for certain grants you will create an independent selection committee composed of outside individuals with substantial expertise in the relevant field to nominate or select recipients officers trustees selection committee members substantial contributors as well as their family members will not be eligible to receive grants the terms and conditions of each grant to an individual will be set forth in a written gra nt agreement with the recipient who will be required to sign and return the agreement to you terms and conditions will include the specific purpose of the grant the duration of the grant the total amount of the grant and a requirement including due dates to furnish narrative reports at least annually and a final report upon completion of the undertaking for which the grant was made such as the completion of an individual's course of study or research the content required for narrative reports will vary based on the type of grant narrative reports for grants described under sec_4945 of the code must include a description of the grantee's use of funds and the progress toward achieving the purposes of the grant narrative reports for scholarships and fellowships described under sec_4945 of the code that involves coursework must include a description of the courses taken by the grantee and the grades received in each academic period that are verified by the grantee's educational_institution if the educational program does not involve formal coursework but instead involves only the preparation of research papers or projects the report must describe the progress of the paper or project and be approved by a faculty supervisor or another appropriate university official you will review these reports closely and will stay in regular contact with grantees to monitor their implementation of the activities supported by the grant you will pay an award either directly to an individual or to a sec_501 c organization such as a medical_research institution or the recipient's educational_institution which will be an institution that normally maintains a regular faculty and curriculum and normally has a regularly organized body of students in attendance at the place where its educational activities are conducted if you pay a scholarship or fellowship award directly to an educational_institution you will not require the grantee to furnish narrative reports if the institution agrees to use the funds to offset the grantee's expenses or pay the funds or a portion thereof to the grantee only if he or she is enrolled at the institution and his or her standing is consistent with the purposes and conditions of the grant if you pay grants directly to individuals you will require recipients to provide both narrative and financial reports and will retain the right to investigate in the event of any suspected diversion in all cases you will review each required narrative report and determine whether the purposes of the grant are being or have been fulfilled and identify any issues requiring further scrutiny or investigation for your advancement program described above you will obtain annual progress reports including an assessment of the mentor-mentee relationship an assessment of scientific progress and an assessment of career development you intend to track the grant recipients for a period of ten years following receipt of the grant funds to identify the success of the program in identifying and supporting the next generation of type diabetes scientists you will initiate an investigation if a grantee fails to submit a report after a reasonable_time has elapsed from the due_date or if a report or other information indicates that all or any part of your funds are not being used for the purposes of the grant while conducting the investigation if you determine grant funds have been diverted you will take reasonable and appropriate steps to recover the diverted grant funds and or to insure the restoration of diverted funds and the dedication of other grant funds held by the grantee to the purposes being financed by the grant these steps will include legal action unless such action would not result in the satisfaction of execution on a judgment if the grantee has not previously diverted grant funds to any use not in furtherance of a purpose specified in the grant you will withhold further payments until you have received the grantee's assurances that future diversions will not occur any delinquent reports have been submitted and require the grantee to take extraordinary precautions to prevent future diversions from occurring if the grantee has previously diverted funds you will withhold further payment until the three conditions as stated above are met and the funds are restored you will retain records pertaining to all grant payments necessary to satisfy the requirements of sec_53_4945-4 including a all information secured to evaluate the qualifications of applicants b the identification of all grant recipients including any relationship of recipients to make a determination as to whether the recipient is a disqualified_person within the meaning of sec_4946 of the code c specification of the amount and purpose of each payment and d the follow-up information obtained in administering the program if you conduct activities in foreign countries will you check the ofac list of specially designated nationals and blocked persons for names of individuals and entities with whom you are dealing to determine if they are included on the list you will investigate potential grant recipients to ensure that they can be expected to use grant funds appropriately will include prohibitions on the use of funds to support terrorism in the grant letters and will require reports on the progress of the grant and the use of funds in appropriate cases you will make the payment to an intermediary organization in which you have confidence to help oversee the use of grant funds you do not anticipate making payments in cash you will comply with all c statutes executive orders and regulations that restrict or prohibit persons from c from engaging in transactions and dealings with designated countries entities or individuals or otherwise engaging in activities in violation of economic sanctions administered by ofac you will acquire from ofac the appropriate license and registration where necessary basis for our determination the law imposes certain excise_taxes on the taxable_expenditures of private_foundations code sec_4945 a taxable_expenditure is any amount a private_foundation pays as a grant to an individual for travel study or other similar purposes however a grant that meets all of the following requirements of code sec_4945 is not a taxable_expenditure the foundation awards the grant on an objective and nondiscriminatory basis the irs approves in advance the procedure for awarding the grant the grant is - a scholarship or fellowship subject_to sec_117 and is to be used for study at an educational_organization described in sec_170 or - a prize or award subject_to the provisions of sec_74 if the recipient of the prize or award is selected from the general_public or - to achieve a specific objective produce a report or similar product or improve or enhance a literary artistic musical scientific teaching or other similar skill or talent of the recipient to receive approval of its educational grant procedures sec_53_4945-4 requires that a private_foundation show the grant procedure includes an objective and nondiscriminatory selection process the grant procedure results in the recipients performing the activities the grants were intended to finance the foundation plans to obtain reports to determine whether the recipients have performed the activities that the grants were intended to finance other conditions that apply to this determination this determination covers only the grant program described above this approval will apply to succeeding grant programs only if their standards and procedures don't differ significantly from those described in your original request this determination applies only to you it may not be cited as precedent you cannot rely on the conclusions in this letter if the facts you provided have changed substantially you may report any significant changes to your program by completing form_8940 and sending it to the cincinnati office of exempt_organizations at internal_revenue_service exempt_organizations determinations you cannot make grants to your creators officers directors trustees foundation managers or members of selection committees or their relatives all funds distributed to individuals must be made on a charitable basis and must further the purposes of your organization you cannot award grants for a purpose that is inconsistent with code sec_170 b you should keep adequate_records and case histories so that you can substantiate your grant distributions with the irs if necessary please keep a copy of this letter in your records if you have any questions please contact the person listed at the top of this letter sincerely director exempt_organizations