internal_revenue_service department of the treasury washington dc person to contact telephone number refer reply to cc intl br5 plr-109685-00 date date number release date index numbers bank country a country b date a date b date c date d date e date f date g state a city a city b dear this is in reply to a letter dated date a requesting rulings under sec_864 and sec_882 of the internal_revenue_code_of_1986 the code the information submitted for consideration is substantially as set forth below the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request_for_ruling it is subject_to verification upon examination bank is a publicly held international banking and trust institution incorporated under the laws of country a bank is a publicly-held corporation bank maintains branches in country a and various other countries and currently has a representative office in the united_states in city a state a previously bank was engaged in the active_conduct_of_a_banking_financing_or_similar_business within the united_states within the meaning of sec_1_864-4 through the activities of a branch office in city a a u s agency in city b and a branch in country b whose activities were materially conducted through bank’s u s branch office in city a collectively bank’s u s branch bank’s country b branch and the city b agency were closed during bank's taxable_year ending date b while the city a branch was closed on date c on date c bank surrendered its cc intl br5 plr-109685-00 state a banking license and established a licensed representative office in city a the next day bank is an accrual basis taxpayer and has filed a u s income_tax return for a foreign_corporation form 1120f with the internal_revenue_service to report income effectively connected with its u s banking trade_or_business for taxable years prior to date b based on its fiscal_year end of date d pursuant to its surrender of its u s branch banking license on date c bank voluntarily withdrew from its regulated u s banking business and currently represents that it conducts trust-related activities in the u s through a wholly owned u s subsidiary prior to terminating its u s banking business certain loans made to u s and non-u s borrowers securities interest rate swaps undrawn loan commitments and letters of credit transferred assets that were booked at bank's u s branch were transferred to and recorded on the books of bank's head office in country a bank represents that the interest rate swaps were acquired and held at all times as hedges of customers loans and that both the loans and hedge swaps were timely identified as held for investment and held in such capacity at all times prior to their transfer and subsequently while booked in bank’s home_office bank also represents that u s personnel actively and materially participated in the acquisition of the transferred assets and that all income with respect to the transferred assets gave rise to effectively_connected_income prior to their transfer accordingly bank has indicated that among the transferred assets the average total portfolio of securities described in sec_1_864-4 does not exceed ten percent of the average total of all the transferred assets in the head office the transferred assets are accounted for as a separate group of transactions that are funded much the same way bank through its former city a branch funded the transferred assets that were formerly booked in bank’s country b branch the transferred assets and related funding is transacted in and accounted for in country a as a u s dollar denominated book which is translated into bank’s functional_currency for country a purposes as transferred assets are sold from the portfolio the proceeds of the sale may not be used immediately to retire short-term funding but rather loaned from the transferred asset book to the home_office book until such time that a liability on the transferred book matures bank has represented that to date it has not and will not fund a transferred asset in contemplation of a sale of that transferred asset bank has further represented that its u s representative office personnel regularly and continuously assist the head office in selling and restructuring the transferred assets and actively and materially participate in the negotiation credit review recommendation and preparation of agreements related to such sales and restructurings the activities performed by the u s representative office also include customer relations market research_credit review loan administration support loan sales support and tax matters bank represents that its regular and continuous performance of these activities through its u s representative office constitutes a u s trade_or_business and that it will continue to file its tax returns on form 1120f to report cc intl br5 plr-109685-00 income effectively connected with the active_conduct_of_a_banking_financing_or_similar_business within the meaning of sec_1_864-4 for years in which such activities continue based on the foregoing representations bank has requested the following five rulings income earned by bank on the transferred assets and subject_to tax as effectively_connected_income under sec_882 will continue to be taxed under sec_882 after the u s branch was closed and the state a banking license was surrendered on date c bank will not be subject_to tax under sec_881 on u s source income earned by the taxpayer with respect to the transferred assets for the entire tax_year ending date e bank may use the percent fixed ratio under sec_1_882-5 to compute its u s connected liabilities for the year ending date g that bank be allowed to continue using the percent fixed ratio or alternatively that bank be allowed to make a new election under sec_1_882-5 to use the worldwide actual ratio that bank be allowed to treat liabilities that fund the transferred assets in the separately maintained book in the home_office as u s booked liabilities under sec_1_882-5 ruling_request bank has requested that income earned with respect to the transferred assets and which was subject_to tax under sec_882 as effectively_connected_income prior to date c continue to be treated as effectively_connected_income subsequent to the closing of the city a branch the income bank earns with respect to the transferred assets includes income from loans and securities income from interest rate swaps used to hedge the transferred loans and fees earned from loan commitments and letters of credit made in favor of u s customers sec_882 provides- a foreign_corporation engaged in trade_or_business_within_the_united_states during the taxable_year shall be taxable as provided in sec_11 sec_55 sec_59a or sec_1201 on its taxable_income which is effectively connected with the conduct_of_a_trade_or_business within the united_states in determining the income effectively connected with the conduct_of_a_trade_or_business within the united_states sec_882 states- cc intl br5 plr-109685-00 in determining taxable_income for purposes of paragraph gross_income includes only gross_income which is effectively connected with the conduct_of_a_trade_or_business within the united_states bank represents that although it has ceased conducting an active regulated banking business in the united_states it never ceased the active_conduct of a u s trade_or_business and that the activities of its u s representative office continue to constitute the active_conduct_of_a_banking_financing_or_similar_business within the united_states within the meaning of sec_1_864-4 a income from securities sec_864 provides- in the case of a nonresident_alien_individual or a foreign_corporation engaged in trade_or_business_within_the_united_states during the taxable_year the rules set forth in paragraphs and shall apply in determining the income gain_or_loss which shall be treated as effectively connected with the conduct_of_a_trade_or_business within the united_states sec_864 provides for the effectively connected treatment of fixed determinable annual or other periodic u s source income described in sec_881 under an asset use or business_activities_test sec_864 provides for the effectively connected treatment of foreign source interest_income only if it is attributable to an office or fixed place of business the taxpayer has in the united_states sec_1_864-4 provides in relevant part that interest from securities or any gain_or_loss from the sale_or_exchange of securities which are capital assets which is from sources within the united_states and derived by a foreign_corporation in the active_conduct_of_a_banking_financing_or_similar_business in the united_states shall be treated as effectively connected for such year with the conduct of that business only if the securities giving rise to such income gain_or_loss are attributable to the u s office through which such business is carried on and the securities were acquired in the manner provided in sec_1_864-4 or the securities have the characteristics alternatively described in sec_1_864-4 sec_1_864-6 applies the principles of sec_1_864-4 in determining whether foreign source interest_income gain_or_loss with respect to securities that are capital assets is attributable to a u s office of a banking_financing_or_similar_business sec_1_864-4 defines securities that give rise to u s source income as any bill note bond debenture or other evidence_of_indebtedness or any evidence of an interest in or right to subscribe to or purchase any of the foregoing items sec_1_864-6 provides the same definition for securities that give rise to foreign_source_income cc intl br5 plr-109685-00 in determining whether a security is attributable to a u s office or fixed place of business sec_1_864-4 provides in relevant part that a security shall be deemed to be attributable to a u s office only if such office actively and materially participated in soliciting negotiating or performing other activities required to arrange the acquisition of the stock or security bank represents that its u s banking branch materially participated in the acquisition of all the securities that are part of the transferred assets and that it remains engaged in the active_conduct_of_a_banking_financing_or_similar_business within the meaning of sec_1_864-4 through the activities of its u s representative office based on the representations made income gains and losses with respect to securities that are transferred assets is subject_to tax in the united_states as follows interest_income and gains or losses with respect to securities that give rise to u s source interest shall be attributable to bank’s u s office or fixed place of business under sec_1_864-4 and shall be effectively connected with bank’s u s trade_or_business under sec_864 sec_864 sec_1_864-4 and subject_to tax under sec_882 interest_income with respect to securities that give rise to foreign source interest shall be attributable to bank’s u s office or fixed place of business under sec_1_864-6 and shall be effectively connected with bank’s u s trade_or_business under sec_864 and sec_864 and subject_to tax under sec_882 gains or losses with respect to securities that give rise to foreign source interest_income shall be attributable to bank’s u s office or fixed place of business under sec_1_864-4 for purposes of sec_864 securities that are transferred assets are not property that ceases to be used or held for use in connection with bank’s banking_financing_or_similar_business within the united_states such gains and losses shall be effectively connected with bank’s u s trade_or_business under sec_864 sec_864 and sec_1_864-4 and subject_to tax under sec_882 a new security acquired by bank in exchange for a security that is a transferred asset in a transaction subject_to recognition under sec_1_1001-3 with the material_participation as defined in sec_1_864-4 of bank’s banking financing or similar trade_or_business conducted through bank’s u s representative office shall constitute a transferred asset the income gains and losses with respect to such newly acquired transferred asset shall be subject_to tax under sec_882 and shall be effectively connected with bank’s banking_financing_or_similar_business within the united_states in accordance with paragraph sec_1 and immediately above cc intl br5 plr-109685-00 a new security acquired by bank in exchange for a security that is a transferred asset in a transaction subject_to recognition under sec_1_1001-3 without the material_participation as defined in sec_1 c iii of bank’s u s trade_or_business shall not constitute a transferred asset income gains and losses with respect to such newly acquired transferred assets shall not be subject_to tax under sec_882 and shall not be effectively connected with bank’s banking_financing_or_similar_business within the united_states b interest rate swaps bank has represented that all notional_principal_contracts were timely identified under the requirements of sec_1_1221-2 as hedges of securities that gave rise to effectively_connected_income prior to their transfer to bank’s home_office in country a in addition bank represents that the securities hedged by the swaps were timely identified as held for investment in accordance with the requirements under sec_475 sec_1_863-7 provides- notional_principal_contract income that under principles similar to those set forth in sec_1_864-4 arises from the conduct of a united_states trade_or_business shall be sourced in the united_states and such income shall be treated as effectively connected to the conduct of a united_states trade_or_business for purposes of sec_871 and sec_882 based on bank’s representations income with respect to bank’s interest rate swaps constitute notional_principal_contract income as defined in sec_1_863-7 which is subject_to the source rule provided in sec_1_863-7 bank has represented that the swaps were entered into with the active and material_participation of the personnel of the u s banking branch and that such swaps were held in the active_conduct of such business as hedges of securities that give rise to effectively_connected_income sec_864 provides- for purposes of this title in the case of any income or gain of a nonresident_alien_individual or a foreign_corporation which- a is taken into account for any taxable_year but b is attributable to a sale_or_exchange of property or the performance of services or any other transaction in any other taxable_year cc intl br5 plr-109685-00 the determination of whether such income or gain is taxable under sec_871 or sec_882 as the case may be shall be made as if such income or gain were taken into account in such other taxable_year and without regard to the requirement that the taxpayer be engaged_in_a_trade_or_business_within_the_united_states during the taxable_year referred to in subparagraph a sec_864 provides that for purposes of this title if- a any property ceases to be used or held for use in connection with the conduct_of_a_trade_or_business within the united_states and b such property is disposed of within years after such cessation the determination of whether any income or gain attributable to such disposition is taxable under sec_871 or sec_882 as the case may be shall be made as if such sale_or_exchange occurred immediately before such cessation and without regard to the requirement that the taxpayer be engaged_in_a_trade_or_business_within_the_united_states during the taxable_year for which such income or gain is taken into account beginning after date c based solely on the facts and representations submitted income expense gains and losses with respect to the notional_principal_contracts shall be subject_to tax in the united_states as follows income with respect to the notional_principal_contracts shall be u s source income and treated as effectively connected with bank’s u s trade_or_business under sec_1_863-7 sec_864 and sec_864 and subject_to tax under sec_882 expense with respect to the notional_principal_contracts shall be directly allocated to bank’s u s source effectively_connected_income under sec_882 and sec_1_861-8 the notional_principal_contracts that are transferred assets and that are properly identified under the requirements of sec_475 and sec_1_1221-2 as hedges of securities that are capital assets that give rise to effectively_connected_income are not assets that cease to be held in connection with bank’s u s trade_or_business gains and losses with respect to the disposition of such notional_principal_contracts shall be effectively connected under sec_864 and sec_864 and subject_to tax under sec_882 notional_principal_contracts that are transferred assets and that hedge securities that do not give rise to effectively_connected_income are property that ceases to be used or held for use in connection with the cc intl br5 plr-109685-00 conduct of bank’s banking financing or similar trade_or_business_within_the_united_states under sec_864 gains on the disposition within years of date c of such notional_principal_contracts shall be treated as effectively connected with bank’s u s trade_or_business under sec_864 and subject_to tax under sec_882 losses on the disposition of such notional_principal_contracts that cease to be held in connection with bank’s u s trade_or_business are treated as not effectively connected with bank’s u s trade_or_business_within_the_united_states under sec_864 and shall not enter into the determination of bank’s gross_income under sec_882 in addition losses with respect to such notional_principal_contracts shall not be allocable under sec_1_861-8 sec_865 or sec_882 as a deduction against bank’s effectively_connected_income c loan commitment_fees bank represents that u s personnel performed the material activities in the u s trade_or_business and entered into the transactions which secure the availability of funds upon the need as agreed to with bank’s u s based resident customers based on bank’s representations the fee income with respect to the loan commitment_fees shall be subject_to tax in the united_states as follows the loan commitment agreements are other transaction s within the meaning of sec_864 income with respect to the loan commitment agreements shall be treated as u s source effectively_connected_income under sec_864 and subject_to tax under sec_882 d letters of credit fees bank represents that its transferred assets include letter_of_credit contracts that were entered into in the united_states with u s resident customers prior to bank’s closing of its u s banking branch on date c and that all income with respect to the letter_of_credit transactions would have been effectively connected if bank had continued to hold the contracts in its u s trade_or_business i acceptance and confirmation fees acceptance and confirmation fees earned from letters of credit are sourced by analogy to interest 680_f2d_142 cl_ct and are generally sourced by the residence of the obligor pursuant to sec_861 under c if the issuance of the confirmation and acceptance commissions would have been effectively_connected_income in the years the letters of credit were issued the commissions will be effectively_connected_income in subsequent years regardless of whether bank maintains a trade_or_business in the u s bank represents that u s cc intl br5 plr-109685-00 personnel materially participated in issuing confirming and advising the letters of credit ii negotiation and advisement fees negotiation commissions charged for letters of credit are charged for the performance of personal services 680_f2d_142 cl_ct advisement fees where the plaintiff informs the beneficiary of the letter_of_credit that a letter has been issued in his favor are also charged for the performance of personal services compensation_for services performed in the u s is sourced in the united_states sec_861 consequently bank’s fee income related to the negotiation and advisement services performed in its u s banking branch is u s source income bank represents that the negotiation and advisement fees would have been effectively_connected_income if earned in the years the letters of credit were issued for taxable years beginning after date b based solely on the facts and representations submitted bank is subject_to tax on the letters of credit that are part of the transferred assets as follows the acceptance and confirmation letters of credit entered into prior to date c by bank’s u s trade_or_business with u s resident customers of bank are other transaction s within the meaning of sec_864 and the income earned with respect to such transactions after date c is u s source income effectively connected with bank’s u s trade_or_business under sec_864 and is subject_to tax under sec_882 the negotiation and advisory letters of credit entered into by bank’s u s trade_or_business prior to date c are transactions from which all income should properly accrue prior to date c the income earned with respect to such transactions is u s source income effectively connected with bank’s u s trade_or_business under sec_864 and is subject_to tax under sec_882 ruling_request bank has requested that no tax be imposed under sec_881 on u s source income earned by bank with respect to the transferred assets based on bank’s representations under requested ruling none of the interest_income with respect to the transferred assets is subject_to allocation under sec_1_864-4 and all income with respect to all of the transferred assets is subject_to tax under sec_882 accordingly no income with respect to the transferred assets is subject_to tax under sec_881 cc intl br5 plr-109685-00 as provided in ruling securities acquired by bank without the material_participation of the u s office or fixed place of business that are received in exchange for transferred assets in a transaction that is subject_to recognition under sec_1_1001-3 do not constitute transferred assets ruling_request bank has requested that it be permitted to use the fixed ratio under sec_1_882-5 to compute its u s connected liabilities for the entire taxable_year ending date e sec_1_882-5 provides rules for determining the amount of interest_expense of a foreign_corporation that is allocable under sec_882 to income that is or is treated as effectively connected with the conduct_of_a_trade_or_business within the united_states under these rules u s connected liabilities must be determined by multiplying such liabilities by the taxpayer’s actual worldwide liability-to-asset ratio sec_1_882-5 provides that a taxpayer that is a bank as defined in sec_585 without regard to the second sentence thereof may elect to use a fixed ratio of percent in lieu of its actual ratio sec_585 treats a foreign bank as a bank with respect to its activities effectively connected with a u s trade_or_business if it would meet the requirements of sec_581 but for the fact it is a foreign bank sec_581 defines a bank in relevant part to be a bank or trust company incorporated and doing business under the laws of the united_states including laws relating to the district of columbia or of any state a substantial part of the business of which consists of receiving deposits and making loans and discounts or of exercising fiduciary powers similar to those permitted to national banks under authority of the comptroller of the currency and which is subject by law to supervision and examination by state or federal authority having supervision over banking institutions bank does not meet the definition of a bank under sec_581 after date c because it represents that after that date it is no longer engaged in the banking business under the laws of the united_states or any state and it does not meet the other requirements of the statute with respect to its activities within the united_states however bank represents that a substantial part of its worldwide business both before and after date c has and will continue to consist of receiving deposits making loans and discounts and exercising fiduciary powers sec_1_882-5 provides in relevant part an elected method must be used for a minimum of five years before the taxpayer may elect a different method to change an election before the end of the cc intl br5 plr-109685-00 requisite five-year period a taxpayer must obtain the consent of the commissioner the commissioner will generally consent to a taxpayer’s request to change its election only in rare and unusual circumstances bank represents that it timely elected under sec_1_882-5 to use the fixed ratio in determining its step-two u s -connected liabilities bank needs to switch to the actual ratio as determined under sec_1_882-5 in order to allocate an appropriate amount of interest_expense associated with the funding of its effectively_connected_income however for the taxable_year ended date e bank requests to continue using the percent fixed ratio for the entire year rather than change to the actual ratio for a portion of the year thus necessitating separate allocations for the year sec_1_882-5 provides determination of total amount of u s -connected liabilities for the taxable_year general_rule the amount of u s -connected liabilities for the taxable_year equals the total value of u_s_assets for the taxable_year as determined under paragraph b of this section multiplied by the actual ratio for the taxable_year as determined under paragraph c of this section or if the taxpayer has made an election in accordance with paragraph c of this section by the fixed ratio sec_1_882-5 provides computation of total value of assets the total value of u_s_assets for the taxable_year is the average of the sums of the values determined under paragraph b of this section of u_s_assets for each u s asset value shall be computed at the most frequent regular intervals for which data are reasonably available in no event shall the value of any u s asset be computed less frequently than monthly beginning of taxable_year and monthly thereafter by a large_bank as defined in sec_585 and semi-annually beginning middle and end of taxable_year by any other taxpayer bank ceased to meet the definition of a bank within the meaning of sec_1_882-5 and by reference sec_585 on date c before the end of its taxable_year ended date e sec_1_882-5 and c do not provide for the determination of the total value of u_s_assets and u s -connected liabilities under split- year or pro-rata methods to arrive at combined total values for the full taxable_year rather a taxpayer’s elected method must be applied to its total value of u_s_assets for the entire taxable_year to determine its u s -connected liabilities no pro-ration of assets is provided for in sec_1_882-5 to determine the u s connected liabilities attributable to the period that bank met the definition of a bank under sec_585 further the regulation requires that the actual ratio for the taxable_year or the fixed ratio be applied accordingly the regulations contemplate that the method cc intl br5 plr-109685-00 used by a taxpayer under a proper election for determining the total value of u s - connected liabilities must be applied for an entire taxable_year bank satisfied the definition of a bank under sec_585 and met the definition since the date of its election through the beginning of its taxable_year ending on date e and during that year until it surrendered its state banking regulatory license on date c however although bank ceased to satisfy the definition of a bank under sec_585 after date c bank represents that it remained engaged in a trade_or_business for the entire twelve month period ending on date e based solely on the submitted facts and representations bank will be permitted to remain on the percent fixed ratio method for the entire tax_year ending on date e since bank satisfied the definition of bank under sec_585 for a substantial part of the tax_year which included the beginning of the tax_year ruling_request bank has requested that if it is not allowed to use the percent fixed ratio for the year ending date g and subsequent years in determining u s -connected liabilities for the taxable_year ending date g that it be permitted to make a new election under sec_1_882-5 to use the actual ratio in determining u s connected liabilities based solely on the facts and representations submitted bank is subject_to the following treatment under sec_1_882-5 for taxable years beginning after date e bank does not satisfy the definition of a bank under sec_585 accordingly the fixed ratio applicable to bank under sec_1_882-5 for tax years beginning after date e i sec_50 percent bank may elect to apply the actual ratio method prescribed in sec_1_882-5 in the manner provided by sec_1_882-5 for the tax_year ending date g if bank so elects it is required under sec_1 a to use the actual ratio for a minimum period of five years before bank may elect the fixed ratio ruling_request bank requests that it be permitted to treat liabilities booked at its head office in country a which are used to fund the transferred assets as u s booked liabilities under sec_1_882-5 under sec_1_882-5 a liability is a u s booked liability if it is properly reflected on the books of a u s trade_or_business sec_1 d i a liability is properly reflected on the books of the u s trade_or_business of a foreign_corporation that is a bank as described in sec_585 without regard to the second sentence thereof if the bank enters the liability on a set of books relating to an activity cc intl br5 plr-109685-00 that produces effectively_connected_income before the close of the day on which the liability is incurred and there is a direct connection or relationship between the liability and that activity sec_1_882-5 however for the reasons stated in ruling after date c bank no longer qualifies as a bank as described in sec_585 without regard to the second sentence thereof because it does not meet the statutory requirements of sec_581 with respect to its trade_or_business operations within the united_states accordingly bank may not determine its eligibility to treat the funding of the transferred assets as u s booked liabilities under sec_1_882-5 instead after date c bank must determine its eligibility to treat the offshore funding of the transferred assets by foreign personnel as u s booked liabilities under the requirements of sec_1_882-5 which is applicable to a foreign_corporation that is not a bank sec_1_882-5 provides in relevant part- a in general a liability whether interest bearing or non-interest bearing is properly reflected on the books of the u s trade_or_business of a foreign_corporation that is not a bank as described in sec_585 without regard to the second sentence thereof if- the liability is secured predominantly by a u s asset of the foreign_corporation the foreign_corporation enters the liability on a set of books relating to an activity that produces eci at a time reasonably contemporaneous with the time at which the liability is incurred or the foreign_corporation maintains a set of books_and_records relating to an activity that produces eci and the district_director or assistant_commissioner international determines that there is a direct connection or relationship between the liability and that activity whether there is a direct connection between the liability and an activity that produces eci depends on the facts and circumstances of each case bank represents that all newly acquired funding that is posted to and accounted for on the separate set of books it maintains in its home_office to account for the transferred assets is entered onto such books before the close of the day on which the liability was incurred bank also represents that the book is fully accounted for through a subsidiary ledger in country a and that no liabilities are acquired to fund transferred assets in contemplation of their sale or disposition based on the facts and representations submitted bank’s liabilities that are acquired to fund the transferred assets held in a separate book in country a are treated under sec_1_882-5 as follows the u s dollar liabilities that are entered onto the same u s dollar denominated book in which the transferred assets are accounted for cc intl br5 plr-109685-00 relate to an activity that produces eci at a time reasonably contemporaneous with the time at which the liability is incurred within the meaning of sec_1_882-5 consequently the liabilities properly acquired to fund the transferred assets shall constitute u s booked liabilities that are properly reflected on the books of bank’s u s trade_or_business under sec_1_882-5 and ii a funding of a transferred asset or group of transferred assets in contemplation of its sale or disposition may be disregarded by the commissioner or_his_delegate and treated as not properly reflected on the books of bank’s u s trade_or_business under sec_1_882-5 and ii summary based on bank’s representations bank is subject_to tax in the united_states in accordance with its ruling requests as follows ruling_request all income with respect to the transferred assets which is not allocated under sec_1_864-4 shall be subject_to tax under sec_882 any securities that are acquired in a sale or disposition without the material_participation of bank’s u s trade_or_business shall not constitute transferred assets however any newly acquired securities that are acquired with the material_participation of bank’s u s trade_or_business office shall constitute transferred assets and be subject_to tax under sec_882 losses on the disposition of notional_principal_contracts that do not properly hedge one or more securities that are transferred assets at the time of disposition shall be treated as losses with respect to property that ceases to be used or held for use in bank’s u s trade_or_business under sec_864 losses with respect to such notional principle contracts shall not be treated as effectively connected with bank’s u s trade_or_business and shall not enter into the determination of bank’s gross effectively_connected_income under sec_882 such losses may not be allocated as a deduction against effectively_connected_income under sec_1_861-8 sec_865 or sec_882 ruling_request all income with respect to the transferred assets which is not allocated under sec_1_864-4 shall not be subject_to tax under sec_881 ruling_request bank may continue to use the percent fixed ratio under sec_1_882-5 for the tax_year ended date e ruling_request cc intl br5 plr-109685-00 for the tax_year ending date g bank may change to the worldwide actual ratio provided by sec_1_882-5 in the manner provided by sec_1_882-5 if bank adopts the worldwide ratio for the year ending date g bank must remain on such method for a minimum of five years ruling_request bank’s funding of the transferred assets that is managed and accounted for in bank’s home_office personnel in country a shall constitute u s booked liabilities under sec_1_882-5 and ii any liability acquired in contemplation of the sale of a transferred asset may be disregarded by the commissioner or_his_delegate except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter including whether at any time bank’s u s representative office has been or will be engaged in a u s trade_or_business whether any of the transferred assets are securities as defined in sec_1_864-4 and sec_1_864-6 whether bank’s securities give rise to effectively_connected_income under sec_1_864-4 and iii in whole or in part whether income with respect to any security that gives rise to u s source income is subject_to tax under sec_1442 whether bank funded one or more transferred assets in contemplation of sale whether any of the liabilities acquired to fund the transferred assets constitute bank_deposits described in sec_871 original_issue_discount described in sec_871 or portfolio_indebtedness described in sec_881 or whether interest with respect to such liabilities is subject_to tax under sec_884 or sec_1442 further bank did not request and no opinion is expressed concerning the u s tax treatment with respect to the transferred assets under an income_tax treaty in force between country a and the united_states cc intl br5 plr-109685-00 a copy of this letter must be attached to any income_tax return to which it is relevant including any previously filed return this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to the taxpayer paul epstein senior technical reviewer branch office of associate chief_counsel international


miylonvgiil hiuga inulmuc department of the treasury internal_revenue_service washington d c mar tax_exempt_and_government_entities_division tep ra al re plan no ein plan taxpayer dear this letter constitutes notice that approval has been granted for your request for a 5-year automatic_extension for amortizing the unfunded liabilities as of for the above-named plan which are described in sec_431 and sec_431 of the internal_revenue_code code and sec_304 and sec_304 of the employee_retirement_income_security_act_of_1974 erisa this extension is effective with the plan_year beginning this extension applies to the eligible amortization charge bases as identified in your application submission established as of the extension of the amortization periods of the unfunded liabilities of the plan was granted in accordance with sec_431 of the code sec_431 of the code requires the secretary to extend the period of time required to amortize any unfunded_liability of a plan for a period of time not in excess of years if the plan submits an application meeting the criteria stated in sec_431 the plan has submitted the required information to meet the criteria in sec_431 including a certification from the plan’s actuary that i absent the extension under subparagraph a the plan would have an accumulated_funding_deficiency in the current plan_year or any of the succeeding plan years ii the plan_sponsor has adopted a plan to improve the plan's funding status iti the plan is projected to have sufficient assets to timely pay expected benefits and anticipated expenditures over the amortization period as extended and iv the notice required under paragraph a has been provided in granting this ruling it is expected that the plan's assumptions and methods will be reviewed and updated as appropriate so that each prescribed assumption was applied in accordance with applicable law and regulations and each other assumption is reasonable taking into account the experience of the plan and reasonable expectations and such other assumptions in combination offer the best estimate of anticipated experience under the plan in addition we are not expressing any opinion as to the accuracy of any material submitted with your request we have sent a copy of this letter to the manager ep classification in - to the manager ep compliance unit in - vand to your authorized representative pursuant to a power_of_attorney on file in this office this ruling is directed only to the taxpayer that requested it sec_6110 of the internal_revenue_code provides that it may not be used or cited by others as precedent if you require further assistance in this matter please contact id at sincerely yours cc david m ziegler manager ep actuarial group


internal_revenue_service department of the treasury washington dc person to contact telephone number refer reply to cc intl br1-plr-124052-01 date date number release date index number ty a country b year l year year year date c dear this is in response to a letter from your authorized representative dated date requesting a ruling that a’s surrender of his u s alien registration card green card did not have for one of its principal purposes the avoidance of u s taxes under subtitle a or subtitle b of the code additional information was submitted in a letter dated date the information submitted for consideration is substantially as set forth below the ruling contained in this letter is based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination a was born in country b in year in year a obtained a green card and in year a arrived in the united_states for employment in year a obtained a green card a returned to country b in year and surrendered his green card expatriated on date c on the date of a’s expatriation his net_worth exceeded the amount set forth in sec_877 sec_877 generally provides that a citizen who loses u s citizenship or a u s plr-124052-01 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 subject_to 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 a 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 a 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 a former u s citizen whose net_worth or average tax_liability exceeds these 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 under notice_98_34 1998_27_irb_30 modifying notice_97_19 1997_1_cb_394 a 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 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 a is eligible to request a ruling pursuant to notice_98_34 because he is a resident of country b and his worldwide income is subject_to country b tax the country in which he was born a submitted all of the information required to be submitted by notice_97_19 as modified by notice_98_34 including additional information requested by the service after review of the submission 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_97_19 as modified by notice_98_34 however because the information submitted does not clearly establish the existence or lack of a principal purpose to avoid taxes under subtitle a or b of the code no opinion is expressed as to whether a’s expatriation had for one of its principal purposes the avoidance of such plr-124052-01 taxes while this ruling rebuts the presumption of tax_avoidance under sec_877 it is not conclusive as to whether a subsequently may be found to have a principal purpose of tax_avoidance under sec_877 sec_2107 and sec_2501 based on all the facts and circumstances see sec_877 except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter in addition no opinion is expressed as to a’s u s tax_liability for the taxable years prior to or after his expatriation under sections of the code other than sec_877 sec_2107 and sec_2501 a copy of this letter must be attached to a’s u s income_tax return for the year in which a obtained the ruling whether or not a is otherwise required to file a return this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely w edward williams senior technical reviewer cc intl br1


internal_revenue_service department of the treasury number release date index number 468a washington dc person to contact telephone number refer reply to cc psi 6-plr-130778-00 date date legend seller buyer seller’s parent buyer’s parent buyer’s subsidiary plant commission location state unit a unit b a b c d e f g h i j dear this letter responds to a letter dated date and subsequent submissions requesting a private_letter_ruling concerning the tax consequences of the sale of a nuclear power plant and associated assets and liabilities including nuclear plr-130778-00 decommissioning liability between seller and buyer specifically you have requested rulings regarding the tax consequences under sec_468a of the internal_revenue_code to seller’s nuclear decommissioning funds and buyer’s nuclear decommissioning funds as well as rulings regarding the proper realization and recognition of gain and loss on the sale of the nuclear power plant and associated assets the seller and buyer in a jointly-filed ruling_request have represented the following facts and information relating to the ruling_request seller a regulated_public_utility company is a subsidiary of seller’s parent a public_utility holding_company seller is a member of seller’s parent’s consolidated_group and joins in filing a consolidated_return on a calendar_year basis using the accrual_method of accounting seller and seller’s parent are under the audit jurisdiction of the industry director natural_resources lm nr buyer an exempt wholesale generator is a third-tier subsidiary of buyer’s parent a public_utility holding_company buyer is a member of buyer’s parent’s consolidated_group and joins in filing a consolidated_return on a calendar_year basis using the accrual_method of accounting buyer owns buyer’s subsidiary which is the legal purchaser of plant and the associated assets and liabilities buyer represents that buyer’s subsidiary is a disregarded_entity for federal_income_tax purposes buyer and buyer’s parent are under the audit jurisdiction of the industry director natural_resources lm nr seller’s retail sales of electric power are subject_to the jurisdiction of commission buyer’s wholesale electric power sales are subject_to the jurisdiction of ferc and its ownership and operation of plant is subject_to the jurisdiction of the nuclear regulatory commission plant is located in location in state and consists of unit a and unit b and associated assets located together on a single property unit a began commercial service in a and was permanently shut down in b it is currently in safestor mode a portion of unit a supports the operation of unit b certain systems and buildings related to unit a are required for the operation of unit b including the back-up electrical supplies house service boilers and associated fuel systems for providing heating system steam and for pulling vacuum in the condensers the two units also share common administrative facilities security features emergency planning programs fire protection fuel oil steam city water condensate and sewage treatment systems with the exception of the fuel-handling building which houses the unit a spent fuel all other major buildings including the unit a containment building contain common facilities that will continue to be used to support unit b operations throughout the life of unit b unit b began commercial operations in c on d buyer entered into an asset purchase agreement with seller to purchase seller’s e interest in the plant the agreement contemplates that buyer through buyer’s subsidiary pay f and assume all decommissioning liabilities associated with the plr-130778-00 plant in addition buyer agreed to purchase through buyer’s subsidiary nuclear fuel for g taxpayers' submission indicates that they will treat the transaction as an asset purchase for tax purposes subject_to sec_1060 with respect to each unit seller maintained a nuclear decommissioning fund qualifying under sec_468a and a nuclear decommissioning fund that did not meet the requirements of sec_468a the assets in the qualified nuclear decommissioning funds are pooled for investment the pooling arrangement is a partnership for federal_income_tax purposes all members have elected under sec_761 to exclude this pooling partnership from the application of subchapter_k of the code the non-qualified nuclear decommissioning funds are also pooled for investment and the pooling arrangement is treated as a grantor_trust for federal_income_tax purposes under sec_671 through however immediately prior to closing each non-qualified nuclear decommissioning fund contributed its assets to the pooling partnership in exchange for an interest in the partnership references in the request regarding the transfer by seller to buyer’s subsidiary of the assets of the qualified nuclear decommissioning funds and the non-qualified nuclear decommissioning funds mean the transfer of the partnership interests held by each fund the asset purchase agreement obligates seller to transfer to buyer’s subsidiary at closing of the transaction all the assets of the qualified nuclear decommissioning funds associated with the plant to the extent that the fair_market_value of the assets in the qualified nuclear decommissioning funds at closing is less than h seller is obligated to transfer to buyer’s subsidiary_assets of the non-qualified nuclear decommissioning funds and if necessary to contribute additional funds to the non-qualified nuclear decommissioning funds such that the aggregate fair_market_value of the assets of the qualified nuclear decommissioning funds and the transferred assets of the non-qualified nuclear decommissioning funds is equal to h the sale of plant closed on i seller transferred to buyer’s subsidiary all of the assets of the plant including the power plant nuclear fuel real_property machinery equipment licenses and other associated property in addition seller contributed j to the nonqualified nuclear decommissioning funds and transferred to buyer’s subsidiary all legal responsibility for decommissioning plant and the assets of both the qualified nuclear decommissioning fund and the non-qualified nuclear decommissioning fund held by seller for each unit of plant as noted above unit a is in safestor mode the current plan is to start final dismantlement of unit a when the decommissioning of unit b begins such that the two units will be decommissioned at the same time once decommissioning begins expenses will be paid directly by the qualified and non-qualified nuclear decommissioning funds units a and b were not offered for sale separately the consideration provided by buyer’s subsidiary is not separately_stated for each unit requested ruling seller’s qualified nuclear decommissioning funds will not be disqualified upon the sale of the plant and the transfer of the assets in the qualified plr-130778-00 nuclear decommissioning funds to buyer’s qualified nuclear decommissioning funds buyer’s qualified nuclear decommissioning funds will be treated as qualified nuclear decommissioning funds upon receipt of the assets of seller’s qualified nuclear decommissioning funds sec_468a provides that a taxpayer may elect to deduct payments made to a nuclear decommissioning reserve fund the qualified_fund sec_468a limits the annual deduction of the electing taxpayer to the lesser_of the ruling_amount or the amount of decommissioning costs included in the electing taxpayer’s cost of service for ratemaking purposes for the taxable_year sec_468a provides that the ruling_amount means the amount determined by the service to be necessary to a fund that portion of the nuclear decommissioning cost with respect to the nuclear power plant that bears the same ratio to the total nuclear decommissioning costs with respect to such nuclear power plant as the period for which the fund is in effect bears to the estimated_useful_life of the nuclear power plant and b prevent any excessive funding of such costs or the funding of such costs at a rate more rapid than level_funding sec_468a provides that the rate_of_tax on the income of a qualified_fund is percent sec_468a provides in pertinent part that the assets in a qualified_fund shall be used exclusively for satisfying the liability of any taxpayer contributing to the qualified_fund sec_1_468a-1 of the federal_income_tax regulations provides that an eligible_taxpayer is a taxpayer that possesses a qualifying interest in a nuclear power plant sec_1_468a-1 provides that a qualifying interest is a direct ownership_interest or a leasehold interest meeting certain additional requirements sec_1_468a-1 provides in part that a nuclear power plant is any nuclear power reactor that is used predominantly in the trade_or_business of the furnishing or sale of electric energy if the rates for such furnishing or sale have been established or approved by a public_utility commission sec_1_468a-5 sets out the qualification requirements for nuclear decommissioning funds it provides in part that a qualified_fund must be established and maintained pursuant to an arrangement that qualifies as a_trust under state law an electing taxpayer can establish and maintain only one qualified_fund for each nuclear power plant sec_1_468a-5 provides that if at any time during the taxable_year a nuclear decommissioning fund does not satisfy the requirements of sec_1_468a-5 the service may disqualify all or a portion of the fund as of the date that the fund does not satisfy the requirements sec_1_468a-5 provides that if a qualified_fund is disqualified the fair_market_value with certain adjustments of the assets in the fund is deemed to be distributed to the electing taxpayer and included in that taxpayer’s gross_income for the taxable_year plr-130778-00 sec_1_468a-6 generally provides rules for the transfer of an interest in a nuclear power plant and transfer of the qualified_fund where after the transfer the transferee is an eligible_taxpayer under sec_1_468a-6 the service may treat any disposition of an interest in a nuclear power plant occurring after date as satisfying the requirements of the regulations if the service determines that such treatment is necessary or appropriate to carry out the purposes of sec_468a under the specific facts herein the service will exercise its discretion to treat this transaction under sec_1_468a-6 as a disposition qualifying under the general provisions of sec_1_468a-6 this exercise of discretion however applies to the provisions of sec_1_468a-6 except those outlined in sec_1_468a-6 with respect to the calculation of a schedule of ruling amounts subsequent to a sale thus under sec_1_468a-6 the qualified nuclear decommissioning funds of seller will not be disqualified upon the transfer when the assets are transferred to the respective qualified nuclear decommissioning funds of buyer’s subsidiary and those funds holding the transferred qualified assets will be treated as qualified nuclear decommissioning funds of buyer’s subsidiary requested rulings and pursuant to the provisions of sec_1_468a-6 seller’s qualified nuclear decommissioning funds will not recognize gain_or_loss upon the transfer of their assets to buyer’s qualified nuclear decommissioning funds as a result of the sale of the plant and neither buyer nor seller will recognize gain_or_loss or otherwise take any income_or_deduction into account by reason of the transfer of the assets of seller’s qualified nuclear decommissioning funds to buyer’s qualified nuclear decommissioning funds as a result of the sale of the plant sec_1_468a-6 provides that neither a transferor nor its fund will recognize gain_or_loss or otherwise take any income_or_deduction into account by reason of the transfer of the assets from a transferor’s qualified_fund to a transferee’s qualified_fund thus neither seller nor the qualified nuclear decommissioning funds maintained by seller for unit a or unit b will recognize gain_or_loss or otherwise take any income_or_deduction into account by reason of the transfer of the qualified nuclear decommissioning funds assets to the qualified nuclear decommissioning funds of buyer’s subsidiary similarly sec_1_468a-6 provides that neither a transferee nor its fund will recognize gain_or_loss or otherwise take any income_or_deduction into account by reason of the transfer of the assets from a transferor’s qualified_fund to a transferee’s qualified_fund thus buyer’s subsidiary will not recognize gain_or_loss or otherwise take any income_or_deduction into account by reason of the transfer of the assets of seller's qualified nuclear decommissioning funds to the qualified nuclear decommissioning funds of buyer’s subsidiary requested ruling seller’s gain_or_loss on the sale of the plant and associated assets will be the difference between the seller’s basis in such assets and its amount_realized plr-130778-00 sec_1001 provides that a taxpayer’s gain from the sale of property is the excess of the amount_realized over the taxpayer’s adjusted_basis provided in sec_1011 for determining gain and that the taxpayer’s loss from the sale of property is the excess of the taxpayer’s adjusted_basis provided in sec_1011 for determining loss over the amount_realized sec_1060 provides that in the case of an applicable_asset_acquisition the consideration received for such assets shall be allocated among the acquired assets in the same manner as amounts are allocated to assets under sec_338 sec_1_1060-1 provides that in the case of an applicable_asset_acquisition sellers and purchasers must allocate the consideration under the residual_method as described in sec_1_338-6 and sec_1_338-7 in order to determine respectively the amount_realized from and the basis in each of the transferred assets sec_1060 defines the term applicable_asset_acquisition as the transfer of assets constituting a trade_or_business if the acquirer’s basis is determined wholly by reference to the consideration paid for such assets sec_1_1060-1 defines a seller’s consideration as the amount in the aggregate realized from selling the assets in the applicable_asset_acquisition under sec_1001 sec_1060 provides no independent basis for determining the amount a taxpayer realizes on the sale of assets or the time such amount may be taken into account the amount_realized and the time such amount is taken into account are determined solely under generally applicable tax_accounting principles see sec_1001 and sec_451 sec_1_1060-1 defines a purchaser’s consideration as the amount in the aggregate of its cost of purchasing the assets in the applicable_asset_acquisition that is properly taken into account in basis sec_1060 provides no independent basis for determining a taxpayer’s cost of acquired assets cost is determined solely under generally applicable rules of tax_accounting see sec_1012 and sec_461 the residual_method is based on a division of assets into seven classes class i generally consisting of cash and general deposit accounts held in banks savings and loan associations and other depository institutions class ii generally consisting of actively_traded personal_property like u s government securities and publicly traded stock but also including certificates of deposit and foreign_currency even if they are not actively_traded personal_property class iii accounts_receivable mortgages and credit card receivables from customers which arise in the ordinary course of business class iv stock_in_trade of the taxpayer or other_property of a kind which would properly be included in the inventory of taxpayer if on hand at the close of the taxable_year or property held by the taxpayer primarily_for_sale_to_customers in the ordinary course of its trade_or_business class v all assets other than class i ii iii iv vi and vii assets class vi all sec_197 intangibles as defined in sec_197 except goodwill and going_concern_value and class vii goodwill and going_concern_value whether or not they qualify as sec_197 intangibles plr-130778-00 consideration is first reduced by the amount of class_i_assets transferred by the seller the remaining consideration is then allocated among the class_ii_assets pro_rata to the extent of their fair_market_value then among the class_iii_assets pro_rata to the extent of their fair_market_value then among the class_iv_assets pro_rata to the extent of their fair_market_value then among the class_v_assets pro_rata to the extent of their fair_market_value then among the class_vi_assets pro_rata to the extent of their fair_market_value and finally any remaining consideration is allocated among the class_vii_assets pro_rata according to their fair_market_value sec_1_1060-1 sec_1_338-6 and sec_1_338-6 if under general tax principles there is a subsequent adjustment to the consideration eg if it is later determined that the actual amount of the liability assumed differs from the value that the parties assigned to such liability on the date of the applicable_asset_acquisition that amount is allocated in a manner that produces the same allocation that would have been made at the time of the acquisition had such amount been paid_or_incurred on the acquisition_date sec_1_1060-1 sec_1_1060-1 and sec_1_338-7 the plant equipment operating_assets and non-qualified nuclear decommissioning fund assets comprise a trade_or_business in seller’s hands and the gain_or_loss recognized by seller with respect to those assets will be determined wholly by reference to seller’s amount_realized thus seller’s transfer of the plant equipment operating_assets and non-qualified nuclear decommissioning fund assets to buyer’s subsidiary in exchange for cash and the assumption of the decommissioning liability except to the extent funded by the qualified nuclear decommissioning funds is an applicable_asset_acquisition as defined in sec_1060 as such its federal tax treatment is determined under sec_1060 and the regulations thereunder the following example illustrates the operation of sec_1060 for a seller on date1 an applicable_asset_acquisition is made the assets sold consist of class_i_assets in the amount of dollar_figure class_ii_assets with a fair_market_value of dollar_figure and a basis in the hands of the seller of dollar_figure class_iii_assets with a fair_market_value of dollar_figure and a basis of dollar_figure class_iv_assets with a fair_market_value of dollar_figure and a basis of dollar_figure class_v_assets half of which are sec_1231 assets with a fair_market_value of dollar_figure and a basis of dollar_figure and the other half of which are not sec_1231 assets with a fair_market_value of dollar_figure and a basis of dollar_figure and class_vi_assets which are sec_1231 assets with a fair_market_value of dollar_figure and a basis of dollar_figure the consideration consists of dollar_figure cash and an assumed liability of dollar_figure that under applicable tax_accounting principles is taken into account at the time of the applicable_asset_acquisition the dollar_figure consideration will be first reduced by dollar_figure the amount of class_i_assets the remaining consideration will be allocated as follows dollar_figure to class_ii_assets pro_rata according to fair_market_value resulting in a dollar_figure gain dollar_figure to the class_iii_assets pro_rata according to fair_market_value resulting in no gain_or_loss dollar_figure to the class_iv_assets pro_rata according to the fair_market_value resulting in a dollar_figure gain dollar_figure to the class_v_assets pro_rata according to the fair_market_value plr-130778-00 resulting in a dollar_figure loss on the sec_1231 assets and a dollar_figure loss on the non sec_1231 assets dollar_figure to the class_vi_assets pro_rata according to the fair_market_value resulting in a dollar_figure gain and the remaining dollar_figure to the class_vii_assets pro_rata according to the fair_market_value resulting in a dollar_figure gain sec_1_1060-1 sec_1_1060-1 and sec_1_338-6 accordingly on the sale of seller’s interests in the plant and assets in its nuclear decommissioning funds other than the assets held by seller’s qualified nuclear decommissioning funds seller’s gain_or_loss on each transferred asset will be the difference between the basis of the asset and the amount_realized with respect to that asset taking into account the allocation of consideration pursuant to sec_1060 and the corresponding regulations requested ruling the amount_realized by seller on the sale of the plant and associated assets will include the cash received from buyer and the amount of liabilities assumed by buyer including the liability to decommission the plant reduced by the amount of such liability to be funded by the qualified nuclear decommissioning funds sec_1001 provides that a seller’s amount_realized from the sale of property is the sum of any money received plus the fair_market_value of the property other than money received sec_1_1001-2 provides that a seller’s amount_realized from the sale of property includes the amount of liabilities from which the seller is discharged as a result of the sale this may include debt and non-debt liabilities see 84_tc_1319 assumption of lessee’s repair liability was part of amount_realized on sale of leasehold as discussed below in connection with ruling_request the decommissioning liability from which seller will be relieved is fixed and determinable as owner and operator of a nuclear plant seller is required_by_law to provide for eventual decommissioning see cfr sec_50 accordingly seller's amount_realized on the sale of its interests in the plant and associated assets not including the assets held by seller's qualified nuclear decommissioning funds will include the cash consideration received by seller and the liabilities from which seller is relieved to the extent those liabilities are taken into account for federal_income_tax purposes the liabilities taken into account would include seller's decommissioning liability not including any portion of the liability attributable to seller's qualified nuclear decommissioning funds requested ruling buyer’s qualified nuclear decommissioning funds will retain the qualified nuclear decommissioning fund’s basis in its investments after the sale of the plant and associated assets and the transfer of the assets in the qualified nuclear decommissioning funds to buyer’s qualified nuclear decommissioning funds sec_1_468a-6 provides that transfers of assets of a qualified_fund to which sec_1_468a-6 applies do not affect basis accordingly under section plr-130778-00 468a-6 c the qualified nuclear decommissioning funds of buyer’s subsidiary will have a basis in the assets received that is the same as the basis of those assets in the qualified nuclear decommissioning funds of seller immediately before the transfer requested ruling pursuant to the provisions of sec_1_461-4 seller will be allowed current ordinary deductions for any amounts treated as realized by seller or otherwise recognized as income to seller as a result of buyer’s assumption of seller’s decommissioning liabilities related to the plant sec_1_446-1 provides that under an accrual_method of accounting a liability is incurred and generally taken into account for federal_income_tax purposes in the year in which all the events have occurred that establish the fact of the liability the amount of the liability can be determined with reasonable accuracy and economic_performance has occurred with respect to the liability sec_461 of the code makes clear that generally the all_events_test is not treated as having been met any earlier than the taxable_year in which economic_performance has occurred with respect to a liability see also sec_1 a sec_461 of the code provides that in the case of a liability that requires the taxpayer to provide services economic_performance occurs as the taxpayer provides the services sec_1_461-4 provides that economic_performance occurs with respect to such service liabilities as the taxpayer incurs costs in connection with the satisfaction of the liability sec_1_461-4 provides an exception to the general economic_performance rule for services where the taxpayer sells a trade_or_business where the purchaser expressly assumes a liability arising out of the taxpayer’s trade_or_business that the taxpayer but for the economic_performance requirement would have been entitled to incur as of the date of the sale economic_performance with respect to the liability occurs as the amount of the liability is properly included in the amount_realized on the sale by the taxpayer the first prong of the all_events_test requires that the fact of the liability be established at the time of the deduction this prong of the all_events_test is satisfied in the instant case here the seller clearly has the obligation to decommission the plant the fact of the obligation arose many years ago at the time the seller obtained its license to operate the plant see c f_r dollar_figure and sec_72 requiring the operator of a nuclear power plant to decommission it moreover congress recognized the existence of the decommissioning liability when in it enacted sec_461 and sec_468a of the code noting that g enerally under federal and state laws utilities that operate nuclear power plants are obligated to decommission the plants at the end of their useful lives h_r conf_rep no see also s prt no vol 98th cong 2d sess plr-130778-00 the second prong of the all_events_test requires the amount of the liability to be reasonably determinable see sec_1_461-1 this prong is also satisfied in the instant case the amount of the seller’s decommissioning liability has been determined by experts in the nuclear decommissioning industry their calculations have been reviewed and accepted by both the nuclear regulatory commission nrc and the federal energy regulatory commission ferc in addition there is also support in the code for finding that the amount of the decommissioning liability is reasonably determinable at the time of sale sec_468a of the code generally permits a current deduction for a ruling_amount based on estimated future decommissioning expenses to the extent the decommissioning costs are sufficiently determinable to entitle the utility to a deduction under sec_468a it is reasonable to conclude that the costs must also be sufficiently determinable to satisfy the second prong of the all_events_test given that the two prongs of the all_events_test are satisfied economic_performance with respect to the decommissioning liability occurs as of the date of the sale to the extent the liability is included in the seller’s amount_realized at that time the seller will be entitled to a deduction for the amount of its decommissioning liability associated with the plant expressly assumed by buyer’s subsidiary and included in the seller’s amount_realized requested ruling buyer will not recognize any income by reason of any transfer of the assets of seller’s non-qualified nuclear decommissioning funds to buyer’s non- qualified nuclear decommissioning funds except to the extent that the amount of cash and other class_i_assets as such term is defined in sec_1_338-6t received by buyer exceeds the amount of consideration paid_by buyer as determined under sec_1060 before specifically making a determination with respect to requested ruling several preliminary determinations must be made the transfer of the assets of the non-qualified nuclear decommissioning funds to the pooling partnership prior to the closing had no substantial business_purpose and was merely a device to attempt to change the allocation of the consideration paid for the plant among the transferred assets under sec_1060 accordingly the transfer of the assets of the non-qualified nuclear decommissioning funds to the pooling partnership prior to the closing will be disregarded for federal_income_tax purposes accordingly for federal_income_tax purposes seller will be treated as selling and buyer’s subsidiary will be treated as buying the underlying assets of the non-qualified nuclear decommissioning funds and the pooling partnership will not be treated as holding such assets at the time of the closing sec_1012 provides in part that the basis_of_property shall be the cost of such property in cases similar to the instant case taxpayers have argued that the cost of acquiring the seller’s interests in the plant and the related assets including the decommissioning funds includes the amount of the assumed decommissioning liability in those similar cases taxpayers have cited 331_us_1 plr-130778-00 and 194_f2d_190 as support for the proposition that for purposes of determining basis the cost of property generally includes assumed_liabilities to which the acquired property is subject_to the extent such liabilities can be accurately valued and are not contingent at the time of purchase since buyer’s subsidiary will pay cash and assume the liabilities and obligations of the seller which includes the decommissioning liabilities in connection with the acquisition of the plant its total cost of the purchased assets excluding the qualified nuclear decommissioning funds will equal the cash paid plus the assumed_liabilities and obligations however the assumed decommissioning liability cannot be treated as incurred for any federal_income_tax purpose -- including basis -- until economic_performance occurs with respect to that liability the legislative_history underlying the enactment of sec_461 makes it clear that congress intended to exclude an item from being taken into account for tax purposes until economic_performance occurs this treatment applies to capital and well as non-capital transactions h_r rep no pt 98th cong 2d sess s prt no vol 98th cong 2d sess despite criticism from some commentators that the service lacks authority to apply the economic_performance rules broadly enough to include the calculation of basis and cost_of_goods_sold the service explicitly stated in the preamble to the final regulations implementing sec_461 that the service and treasury believe the intended scope of the statutory provision is indeed broad enough to apply in this manner preamble to t d fed reg date c b consistent with this position the service amended the regulations under sec_446 to clarify that a liability is incurred and generally is taken into account for federal_income_tax purposes in the taxable_year in which the all_events_test is satisfied and economic_performance has occurred with respect to the item sec_1 c ii a the regulations further clarify that applicable provisions the regulations and other guidance published by the secretary prescribe the manner in which a liability that has been incurred is taken into account and specifically cite to the capitalization provisions of sec_263 as an example of a code provision subordinate to the economic_performance requirement specifically the regulations state for example an amount that a taxpayer expends or will expend for capital improvements to property must be incurred before the taxpayer may take the amount into account in computing its basis in the property sec_1_446-1 thus critical to determining whether buyer’s subsidiary is entitled to treat the future decommissioning liability as a component of its cost_basis in the purchased assets at the time of the closing is deciding whether the liability will be incurred for tax purposes as of the closing it will not economic_performance does not occur with respect to a service liability such as the decommissioning obligation until and to the extent that costs are incurred in satisfaction of that liability sec_1_461-4 because buyer’s subsidiary will not have performed any services relating to the decommissioning liability at the time of the plants' purchase economic_performance will plr-130778-00 not have occurred and the liability will not have been incurred at that time for any purpose under the code including the cost_basis provisions of sec_1012 accordingly at the time of closing buyer’s subsidiary will have a cost_basis in the purchased assets equal to the cash paid to the seller as well as any liabilities that are otherwise incurred for federal_income_tax purposes the purchased assets and the liabilities incurred do not include the assets in the qualified nuclear decommissioning funds or the liability attributable to the qualified nuclear decommissioning funds because the tax effect of the qualified nuclear decommissioning funds is determined under sec_468a buyer’s subsidiary will not be entitled to treat as a component of its cost_basis at the time of the closing any amount attributable to the future decommissioning liability buyer’s subsidiary’s cost_basis in the purchased assets including all assets held in the non-qualified decommissioning funds must be allocated among all such assets in accordance with the residual_method provided in sec_1060 and sec_1_1060-1t d and e sec_1_1060-1 defines a purchaser’s consideration as the amount in the aggregate of its cost of purchasing the assets in the applicable_asset_acquisition that is properly taken into account in basis sec_1060 provides no independent basis for determining a taxpayer’s cost of acquired assets cost is determined solely under generally applicable rules of tax_accounting because the transfer of the plants is an applicable_asset_acquisition on the acquisition_date as discussed above with regard to requested ruling buyer’s subsidiary’s basis in the assets acquired must be determined by allocating its costs ie the consideration provided by buyer’s subsidiary on the acquisition_date which includes cash but not the assumption of the decommissioning liability among the acquired assets in accordance with the provisions of sec_1060 and the regulations thereunder the following example illustrates the operation of sec_1060 for a purchaser on date1 an applicable_asset_acquisition is made the assets acquired consist of class_i_assets in the amount of dollar_figure class_ii_assets with a fair_market_value of dollar_figure class_iii_assets with a fair_market_value of dollar_figure class_iv_assets with a fair_market_value of dollar_figure and class_v_assets with a fair_market_value of dollar_figure there are no class vi or vii assets the consideration paid consists of dollar_figure cash and an assumed liability for which economic_performance has not occurred on date1 the purchaser has provided dollar_figure of consideration that may be allocated as basis it will be first reduced by dollar_figure the amount of class_i_assets the remaining dollar_figure will be allocated to class_ii_assets pro_rata according to fair_market_value nothing is allocated to class iii or below on date2 economic_performance occurs with respect to the liability to the extent of dollar_figure at that time the purchaser has an additional dollar_figure of basis that may be taken into account of that amount dollar_figure is allocated to class_ii_assets which will then have been allocated their full dollar_figure fair market value--as determined on the acquisition_date and the remaining dollar_figure is allocated to the class_iii_assets pro_rata according to fair market value--as determined on the acquisition_date on date3 economic plr-130778-00 performance occurs to the extent of an additional dollar_figure which is then taken into account as basis of that amount dollar_figure will be allocated to the class_iii_assets which will then have been allocated their full dollar_figure fair market value--as determined on the acquisition_date dollar_figure will be allocated to the class_iv_assets which will then have been allocated their full dollar_figure fair market value-as determined on the acquisition_date dollar_figure will be allocated to the class_v_assets which will then have been allocated their full dollar_figure fair market value-as determined on the acquisition_date and the remaining dollar_figure will be allocated to the class_vii_assets as goodwill the last amount is allocated to goodwill even though goodwill was not identified as a separate asset having value on date1 if on date3 instead of an addition to purchaser’s consideration there is a dollar_figure decrease in consideration the consideration previously allocated to the class_iii_assets would be reduced to zero and the consideration previously allocated to the class_ii_assets would be reduced by the remaining dollar_figure pro_rata according to fair_market_value with respect to the qualified nuclear decommissioning funds the federal tax treatment of the transaction is determined exclusively under sec_468a and the regulations thereunder the qualified nuclear decommissioning fund is therefore not addressed herein with respect to sec_1060 with respect to the plant equipment operating_assets nuclear fuel and non- qualified nuclear decommissioning fund assets however these assets comprise a trade_or_business in seller’s hands and the basis buyer’s subsidiary takes in those assets will be determined wholly by reference to buyer’s subsidiary’s consideration thus seller’s transfer of plant equipment nuclear fuel operating_assets and non- qualified nuclear decommissioning fund assets to buyer’s subsidiary in exchange for cash and the assumption of the decommissioning liability except to the extent funded by the qualified nuclear decommissioning funds is an applicable_asset_acquisition as defined in sec_1060 as such its federal tax treatment is determined under sec_1060 and the regulations thereunder accordingly on the acquisition_date buyer’s subsidiary’s basis in the assets acquired must be determined by allocating its cost ie the consideration provided by buyer’s subsidiary on the acquisition_date which includes the cash and the issue_price of its notes but not the assumption of the decommissioning liability among the acquired assets in accordance with the provisions of sec_1060 and the regulations thereunder specifically buyer’s subsidiary will first reduce its consideration by the amount of the class_i_assets it receives in the transaction including any class_i_assets held in the non-qualified nuclear decommissioning funds to the extent the class_i_assets received exceed the consideration buyer’s subsidiary provides buyer’s subsidiary will recognize income to the extent buyer’s subsidiary’s consideration paid exceeds the class_i_assets it receives such excess will be allocated to the class_ii_assets pro_rata according to the fair_market_value of those assets up to their total fair_market_value then among the class_iii_assets it receives from seller pro_rata to the extent of their fair_market_value then among the class_iv_assets it receives pro_rata to the extent of their fair_market_value then among the class_v_assets it receives pro_rata to the extent of their fair_market_value then among the class_vi_assets it receives plr-130778-00 pro_rata to the extent of their fair_market_value and finally any remaining consideration is allocated to the class_vii_assets it receives from seller when and to the extent additional_amounts are paid_or_incurred for the assets acquired in the applicable assets acquisition eg when and to the extent the non-qualified nuclear decommissioning funds pay or incur decommissioning expenses such amounts will be taken into account as increases to buyer’s subsidiary’s consideration paid and allocated in the same manner and subject_to the same conditions as though they were paid_or_incurred on the acquisition_date sec_1_1060-1 sec_1_1060-1 sec_1 and finally a taxpayer does not realize income upon its purchase of a business’ assets even where those assets include cash or marketable_securities and in connection with the purchase the taxpayer assumes liabilities of the seller see 194_f2d_190 2d cir revrul_55_675 1955_2_cb_567 in this case buyer’s subsidiary cannot acquire the plant without assuming the decommissioning liability which is inextricably associated with the ownership and operation of the plant and there is no indication that the transaction is other than a bona_fide purchase of the business and its associated assets and liabilities the exception to the general_rule set forth in revrul_71_450 1971_2_cb_78 does not apply in revrul_71_450 unlike the present situation the purchaser agreed to assume the prepaid subscription liability in return for a separate cash payment and the liability was not reflected in the sales_price of the business as discussed above buyer’s subsidiary’s basis attributable to the decommissioning liability is governed by sec_461 and the consideration furnished by buyer’s subsidiary will be allocated pursuant to the residual_method under sec_1060 and the corresponding regulations accordingly buyer’s subsidiary will not realize income from its acquisition of the plant equipment operating_assets and seller’s interests in the assets in the non- qualified funds except to the extent that under the rules of sec_1060 the amount of cash and other class_i_assets as defined in sec_1_338-6 received by buyer’s subsidiary not including the assets held by seller’s qualified funds exceed its total cost determined under sec_1012 which will be the sum of its cash consideration if any and the fair_market_value of any other consideration buyer’s subsidiary provides to seller that is under applicable tax principles taken into account on the date of the applicable_asset_acquisition if buyer’s subsidiary is thus required to take an amount into account as income then when under general principles of tax law buyer’s subsidiary is permitted to take additional consideration into account eg when buyer’s subsidiary satisfies the economic_performance requirement with respect to the decommissioning liability assumed buyer’s subsidiary will be entitled to deduct and will not be required to capitalize such amount 344_us_6 except as specifically determined above no opinion is expressed or implied concerning the federal_income_tax consequences of the transaction described above plr-130778-00 this ruling is directed only to the taxpayers who requested it sec_6110 of the code provides it may not be used or cited as precedent in accordance with the powers of attorney we are sending copies of this ruling to authorized representatives of buyer and seller we are also sending a copy of this letter_ruling to the industry director natural_resources lm nr sincerely peter c friedman senior technician reviewer branch office of associate chief_counsel passthroughs and special industries cc


number release date id office uilc cca_2011031714543744 ---------------------------- from --------------------- sent thursday date pm to --------------------- cc ------------------ subject a question you asked for our thoughts on asserting the sec_6651 penalty for the taxpayer’s failure_to_file the --------and ------- gift_tax returns sec_6651 imposes a penalty for the failure_to_file a return by the prescribed due_date unless it is shown that the failure is due to reasonable_cause and not due to willful neglect reasonable_cause requires the taxpayer to satisfy the burden of proving that the failure to timely file was in fact due to reasonable_cause and not willful neglect reasonable_cause requires the taxpayer to demonstrate that he exercised ordinary business care and prudence but was nevertheless unable to file pay within the prescribed time willful neglect involves a conscious intentional failure or reckless indifference see 469_us_241 e wind indus inc v united_states 196_f3d_499 3d cir 116_tc_438 one of the factors that may be used in part to evaluate whether the taxpayer exercised ordinary care is whether circumstances beyond the taxpayer’s control contributed to the non-filing of the return here the taxpayer’s illness may have played a role in the non- filing but the facts you have submitted do not make it entirely clear further the taxpayer was competent enough to engage in a real_estate_transaction during ------- and received income from the sale based on the limited facts that you provided it is reasonable to assert the sec_6651 penalty with the respect to the ------- and ------- gift_tax returns because they were not timely filed and the facts submitted do not prove reasonable_cause the estate will be given an additional opportunity to show reasonable_cause at the administrative level