internal_revenue_service number release date index number ------------------------- ------------------------ ----------------------------------- --------------------------------- ------------- ----------------------------------------------- - department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------------ id no ------------- telephone number --------------------- refer reply to cc ita b04 plr-102155-04 date date ---------------------------------------------------- legend taxpayer ----------------------------------- state ------------- act --------------------------------------------------------------------- a dear ------------------- this letter is in response to your request for a ruling that stipends vouchers or reimbursements for transportation or respite care made pursuant to the act are not includible in the income of the beneficiaries of these services and that the taxpayer is not required by sec_6041 of the internal_revenue_code to file information returns as a result of providing the payments to the beneficiaries the taxpayer is a nonprofit corporation organized under the act to provide services to developmentally disabled persons the taxpayer is exempt from federal_income_tax as an organization described in sec_501 of the internal_revenue_code the act is intended to prevent or minimize the institutionalization of developmentally disabled persons and their dislocation from family and community its goal is to enable such persons to lead more independent and productive lives within the community the act defines developmental disability to include mental retardation cerebral palsy epilepsy autism and disabling conditions that require similar treatment a is the agency of state that has general jurisdiction over the execution of the laws relating to the care custody and treatment of developmentally disabled persons plr-102155-04 however the duty_of providing such persons with access to the facilities and services best suited to them throughout their lifetime is delegated to regional centers operated by private nonprofit agencies under contract with a the taxpayer a regional center provides these services to qualified individuals within a specific region of state these services include locating persons with developmental disabilities assessing their needs and providing individual services to meet those needs among the services the taxpayer provides are transportation services to developmentally disabled persons and other qualified individuals such as family members of the disabled person when transportation is required for treatment or habilitation the taxpayer also pays for respite care services to relieve the persons normally responsible for providing the disabled person’s care the taxpayer receives the funds to pay for these services through governmental appropriations distributed by state the taxpayer provides these services in one of three ways by reimbursing qualified individuals for the cost of their actual and necessary transportation and respite care not to exceed specified limits by providing qualified individuals with a fixed stipend in an amount estimated to be required for necessary transportation and respite care services actually rendered or by distributing vouchers to qualified individuals that may be given to participating service providers in lieu of payment for all or part of the cost of necessary transportation and respite care sec_61 provides that generally gross_income includes all income from whatever source derived the internal_revenue_service has ruled that certain payments made under legislation for the promotion of the general welfare are not includible in the gross_income of the recipients see for example revrul_57_102 1957_1_cb_26 which holds that benefits to blind persons paid under the public assistance law of pennsylvania are not includible in the gross_income of the recipients sec_6041 provides that generally all persons engaged in a trade_or_business who pay another person dollar_figure or more of fixed or determinable income in the course of that trade_or_business must file an information_return setting forth the amount of the payment and the recipient of the payment sec_1_6041-1 of the income_tax regulations states that the term all persons engaged in a trade_or_business includes nonprofit_organizations based on the facts submitted we conclude that the taxpayer’s payments for transportation or respite care are for the promotion of the general welfare and are not includible in the gross_income of the qualified individuals who receive the payments accordingly the taxpayer is not required by sec_6041 to file information returns reporting the payments to the qualified individuals plr-102155-04 except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent enclosed is a copy of the letter showing proposed deletions before disclosure of the letter under sec_6110 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 robert a berkovsky branch chief office of associate chief_counsel income_tax accounting enclosure


internal_revenue_service number release date index number ------------------- ------------------------------ ----------------------------------------- --------------------------------------- in re -------------------------------------------- ----------------------------------- ----------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ---------------------- id no --------------- telephone number --------------------- refer reply to cc psi b07 plr-101755-04 date date -------------------------- legend taxpayer -------------------------------------------- ----------------------- x dear ------------------ we received your letter requesting rulings concerning the treatment of taxpayer’s commission expenses under sec_173 of the internal_revenue_code this letter responds to your request the information submitted and the representations made are summarized as follows taxpayer is the publisher of various magazines taxpayer sells monthly subscriptions to its magazines that typically run for a period of months the subscriptions are sold through third-party sales agents that are paid a commission for each subscription sold the subscription proceeds are collected by the sales agents prior to the start of the subscription term the sales agents retain an agreed-upon portion of the proceeds as compensation_for their services and remit the remaining amount to taxpayer taxpayer processes both new and renewal subscriptions upon receipt of payment and supporting documentation from the sales agents taxpayer does not significantly vary the number of sales agents that it maintains agreements with from year to year for both financial statement and federal_income_tax purposes taxpayer capitalizes the amount of commissions relating to the sale of each new and renewal magazine subscription and amortizes the commissions on a monthly basis over the term of the subscription period plr-101755-04 sec_173 provides that notwithstanding sec_263 all expenditures other than expenditures_for the purchase of land or depreciable_property or for the acquisition of circulation through the purchase of any part of the business of another publisher of a newspaper magazine or other periodical to establish maintain or increase the circulation of a newspaper magazine or other periodical shall be allowed as a deduction except that the deduction shall not be allowed with respect to the portion of such expenditures as under regulations prescribed by the secretary is chargeable to capital_account if the taxpayer elects in accordance with such regulations to treat such portion as so chargeable such election if made must be for the total amount of such portion of the expenditures which is so chargeable to capital_account and shall be binding for all subsequent taxable years unless upon application by the taxpayer the secretary permits a revocation of such election subject_to such conditions as he deems necessary sec_1_173-1 states that sec_173 provides for the deduction from gross_income of all expenditures to establish maintain or increase the circulation of a newspaper magazine or other periodical subject_to the following limitations the deduction shall be allowed only for the taxable_year in which such no deduction shall be allowed for expenditures_for the purchase of land or the deduction shall be allowed only to the publisher making the circulation depreciable_property or for the acquisition of circulation through the purchase of any part of the business of another publisher of a newspaper magazine or other periodical expenditures and expenditures are paid_or_incurred subject_to the provisions of sec_1_173-1 the deduction permitted under sec_173 and sec_1_173-1 shall be allowed without regard to the method_of_accounting used by the taxpayer and notwithstanding the provisions of sec_263 and the regulations thereunder relating to capital expenditures sec_1_173-1 provides that a taxpayer entitled to the deduction for circulation_expenditures provided in sec_173 and sec_1_173-1 may in lieu of taking such deduction elect to capitalize the portion of such circulation_expenditures which is properly chargeable to capital_account as a general_rule expenditures normally made from year to year in an effort to maintain circulation are not properly chargeable to capital_account conversely expenditures made in an effort to establish or to increase circulation are properly chargeable to capital_account for example if a newspaper normally employs five persons to obtain renewals of subscriptions by telephone the expenditures in connection therewith would not be properly chargeable to capital_account however if such newspaper in a special effort to increase its circulation hires for a limited period additional employees to obtain new subscriptions by means of telephone calls to the general_public the expenditures in connection therewith would be plr-101755-04 properly chargeable to capital_account if an election is made by a taxpayer to treat any portion of the taxpayer’s circulation_expenditures as chargeable to capital_account the election must apply to all such expenditures which are properly so chargeable in such case no deduction shall be allowed under sec_173 for any such expenditures in particular cases the extent to which any deductions attributable to the amortization of capital expenditures are allowed may be determined under sec_162 sec_263 and sec_461 sec_1_173-1 provides that a taxpayer may make the election referred to in sec_1_173-1 by attaching a statement to the taxpayer’s return for the first taxable_year to which the election is applicable once an election is made the taxpayer must continue in subsequent taxable years to charge to capital_account all circulation_expenditures properly so chargeable unless the commissioner on application made to the commissioner in writing by the taxpayer permits a revocation of such election for any subsequent taxable_year or years permission to revoke such election may be granted subject_to such conditions as the commissioner deems necessary based on the information submitted and the representations made we conclude that taxpayer’s commission expenses are circulation expenses we further conclude that taxpayer may deduct its circulation expenses for the taxable_year ending on x and all subsequent taxable years provided that taxpayer does not elect in a later year to capitalize circulation expenses that are properly chargeable to capital_account except as expressly provided herein we express or imply no opinion concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter in particular we express or imply no opinion whether taxpayer’s circulation_expenditures are properly chargeable to capital_account this ruling is directed only to the taxpayer s requesting it sec_6110 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 a copy of this letter must be attached to any income_tax return to which it is relevant 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 plr-101755-04 by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination sincerely s brenda m stewart senior counsel branch passthroughs special industries cc


t c memo united_states tax_court nancy j vincent petitioner v commissioner of internal revenue respondent docket no filed date john f sherwood sr for petitioner jean song for respondent memorandum findings_of_fact and opinion laro judge respondent determined a dollar_figure deficiency in petitioner’s income_tax following trial of this matter we must decide as to whether dollar_figure received by petitioner in settlement of an employment discrimination lawsuit lawsuit is excludable from her income under sec_104 we hold that it is not and whether respondent properly determined that dollar_figure received by petitioner’s attorney was income to petitioner we hold that he did findings_of_fact some facts were stipulated we incorporate herein by this reference the parties’ stipulation of facts and the exhibits submitted therewith we find the stipulated facts accordingly petitioner resided in laughlin nevada when this petition was filed petitioner began working for whittier trust co whittier as vice president and director of client administration in date after developing symptoms in petitioner was diagnosed with active peptic ulcer disease on date petitioner was advised that high stress would exacerbate her condition and she therefore requested a 4-day workweek at or around the end of michael casey casey the president of whittier changed her work schedule to a 4-day workweek as a reasonable accommodation of her disability reasonable accommodation casey circulated a company-wide memorandum to this effect on date unless otherwise noted section references are to the applicable versions of the internal_revenue_code rule references are to the tax_court rules_of_practice and procedure subsequently relations deteriorated between petitioner and whittier on date casey acting on behalf of whittier sent her a notice of disciplinary action which questioned her honesty because it alleged she had inappropriately accepted gifts from clients on date she received an unfavorable performance appraisal repeating in relevant part many of the allegations set forth in the previous notice of disciplinary action on date she was placed on probation for months on the following day date she was returned to her previous 5-day work schedule on date petitioner was instructed by her doctor sylvia preciado m d preciado to remain off work for weeks because of increased symptomatic complaints related to her gastric ulcer a second doctor ronald p olah m d instructed petitioner on date that she should not return to work at that time by date her condition was improving and preciado advised whittier that she could return to work on date on date whittier terminated petitioner citing as cause her disability leave petitioner filed the lawsuit against whittier casey and other defendants in the los angeles california superior court alleging causes of action under various state and federal laws including one for intentional infliction of emotional distress petitioner voluntarily dismissed with prejudice some of those causes of action including the one for intentional infliction of emotional distress and the court dismissed others pursuant to a motion by whittier for summary adjudication one cause of action remained for trial namely petitioner’s claim against whittier under california’s fair employment and housing act feha cal govt code sec et seq she alleged that prior to and at the time of her termination she had a disability ie ulcers within the meaning of feha that whittier knew of this condition and that whittier wrongfully terminated her as a direct and proximate result of whittier’s actions petitioner alleged she suffered lost wages and emotional distress she did not allege in the feha cause of action that whittier caused or exacerbated her ulcer condition and she voluntarily dismissed with prejudice any such claims in her other causes of action at trial of her lawsuit against whittier petitioner presented facts to support the allegations in her complaint she presented the testimony of economist peter formuzis ph d who testified that as a result of whittier’s actions petitioner had lost dollar_figure in wages and benefits as of the time of trial and that she would lose a net present_value of up to dollar_figure in future wages as a result of the discrimination for a total economic loss of up to dollar_figure at the conclusion of the trial the jury was given a special verdict form with the following nine questions did plaintiff’s ulcer condition substantially limit a major life activity in date did defendant know as of date that plaintiff was physically disabled due to an ulcer condition did plaintiff in date request a reasonable accommodation for physical disability based on an ulcer condition did defendant reduce plaintiff’s workweek from days a week to days a week in date because of a physical disability due to an ulcer condition did plaintiff’s ulcer condition substantially limit a major life activity in date did defendant know or should it have known as of date that plaintiff was physically disabled due to an ulcer condition did defendant remove plaintiff’s reasonable accommodation if any for a physical disability based on an ulcer condition when it reinstated her to a 5-day workweek in date what amount of damages if any is plaintiff entitled to recover did plaintiff prove by clear_and_convincing evidence that defendant acted in a malicious or oppressive manner toward her the jury answered the first seven questions in the affirmative and awarded petitioner dollar_figure in damages without specifying the special and or general damage s to which they related the jury thus found as facts that whittier was aware of petitioner’s ulcer condition knew that she was physically disabled by this condition and nonetheless removed her reasonable accommodation when it reinstated her 5-day workweek in date the jury answered the ninth question in the negative upon motion by petitioner’s attorney the court awarded him dollar_figure in attorney’s fees and costs pursuant to cal govt code sec b petitioner’s total recovery inclusive of attorney’s fees and costs was dollar_figure both parties to the lawsuit ascribed error to the judgment and appealed the case was settled in or around date while the appeal was pending for a lump sum of dollar_figure pursuant to this settlement agreement petitioner received dollar_figure in for back wages and fringe_benefits dollar_figure in for back wages and fringe_benefits dollar_figure in for attorney’s fees dollar_figure in for attorney’s fees and dollar_figure in for personal injuries and emotional distress arising from the ulcer petitioner reported the dollar_figure she received in on her income_tax return and paid the taxes due petitioner did not report on her income_tax return the dollar_figure received for her attorney’s fees and costs nor did she report the dollar_figure received under the settlement agreement for personal injuries and emotional distress as part of this settlement whittier insisted that the agreement contain a paragraph disclaiming any liability for its actions and another paragraph requiring petitioner to indemnify whittier in the event her tax treatment of the settlement proceeds was challenged by the commissioner petitioner had a contingent_fee agreement with her attorney whereby she agreed to pay a percentage of any recovery to him as compensation_for his services in the event attorney’s fees were awarded by a court however that award would constitute her attorney’s sole right to recovery pursuant to the agreement on date respondent issued a notice_of_deficiency to petitioner determining that petitioner should have included as ordinary_income for her dollar_figure of damages as it was not excluded from gross_income by sec_104 opinion petitioner bears the burden of proving by the introduction of probative evidence that the amount set forth in the notice of petitioner’s taxable_year is not before us and we do not consider it deficiency is wrong see rule a 290_us_111 i settlement was not made on account of physical injuries we must decide whether the dollar_figure petitioner received in was properly excluded from her gross_income as damages received on account of personal physical injuries or physical sickness sec_104 sec_61 which mandates that gross_income includes all income from whatever source derived absent a specific statutory exclusion is to be broadly construed commissioner v glenshaw sec_7491 was added to the internal_revenue_code by the internal_revenue_service restructuring and reform act of publaw_105_206 sec 112_stat_726 effective for court proceedings arising from examinations commencing after date sec_7491 provides that the burden_of_proof shifts to the commissioner in specified circumstances petitioner makes no argument that sec_7491 applies to this case and we conclude that it does not see eg sec_7491 as relevant herein sec_7491 provides that sec_7491 shall apply with respect to an issue only if the taxpayer has complied with the requirements under this title to substantiate any item and the taxpayer has maintained all records required under this title and has cooperated with reasonable requests by the secretary for witnesses information documents meetings and interviews petitioner has not produced evidence to establish that any of these requirements are met we apply sec_104 as amended in by the small_business job protection act of publaw_104_188 sec a 110_stat_1838 effective generally for amounts received after date that amendment in relevant part added the modifier physical after personal and before injuries to clarify that amounts received on account of personal injuries must be received for physical injuries and not solely for emotional distress glass co 348_us_426 statutory exclusions from gross_income are construed narrowly see eg 519_us_79 515_us_323 under sec_104 settlement proceeds are excludable from gross_income to the extent the underlying cause of action is based upon tort or tort-type rights and the proceeds were received on account of personal physical injuries or physical sickness see commissioner v schleier supra pincite analyzing sec_104 before its amendment in which added the restrictive modifier physical to limit the scope of personal injuries 102_tc_116 affd in part and revd in part on an issue not relevant herein 70_f3d_34 5th cir shaltz v commissioner tcmemo_2003_173 henderson v commissioner tcmemo_2003_168 respondent concedes petitioner has satisfied the first part of the test and argues only that she has not satisfied the second we therefore decide whether any part of petitioner’s settlement was received on account of personal physical injuries or physical sickness petitioner argues the dollar_figure attributed in the settlement to personal injuries and emotional distress was so received we are not bound by a settlement agreement’s characterization or division of settlement amounts particularly where it appears that one party may not have had a strong motivation to negotiate at arm’s length as to the characterization and or division of the settlement amounts 122_f3d_204 4th cir 87_f3d_682 5th cir robinson v commissioner supra pincite 87_tc_1294 affd 848_f2d_81 6th cir 79_tc_680 affd without published opinion 749_f2d_37 9th cir see also mitchell v commissioner tcmemo_1990_617 affd without published opinion 992_f2d_1219 9th cir our ultimate inquiry as to the character of a payment rests on the payor’s intent or dominant reason for making the payment 349_f2d_610 10th cir affg tcmemo_1964_33 290_f2d_283 2d cir affg per curiam tcmemo_1960_21 88_tc_834 affd without published opinion 845_f2d_1013 3d cir for a payment to be excluded from gross_income under sec_104 the payor must have intended to recompense the payee for a claim arising out of personal physical injuries or physical sickness we may rely on the jury’s verdict as the best evidence in determining a payor’s intent for purposes of sec_104 see 504_us_229 miller v commissioner tcmemo_1993_49 we do so here noting the parties could have entered into a settlement only as to causes of action which were before the trial_court we find two facts determinative of the issue before us first after review of the special verdict form returned by the jury in the lawsuit we do not find that the jury considered any claim by petitioner for personal physical injuries as a basis for the damage award specifically the jury was asked whether whittier knew in and of petitioner’s physical disability due to her ulcer condition whether that condition substantially limited her activity in those years whether she requested and received a shortened workweek as a reasonable accommodation for her injury before date and whether whittier removed that accommodation in date nowhere in this special verdict was the jury asked whether whittier’s actions caused or exacerbated petitioner’s ulcer disease while petitioner’s medical_condition was discussed at length in the lawsuit including the introduction into evidence of photographs of her ulcers this evidence merely established that she was disabled within the meaning of feha and therefore entitled to recover under that statute the jury was never asked we note that the settlement document itself failed to state that the damages were being apportioned to physical personal injuries ab initio depriving the settlement of sec_104 treatment under the amendment to and did not conclude whittier’s actions caused or exacerbated her ulcers and thereby inflicted upon her a physical injury we find that the jury did not conclude whittier’s actions caused her any physical injury and it awarded damages solely on the basis of whittier’s discriminatory actions which caused her lost wages and emotional distress neither of which provide a basis for exclusion_from_gross_income thus the jury verdict underlying the settlement does not support any apportionment of the settlement to personal physical injury damages excludable from gross_income under sec_104 petitioner invites the court to look solely at the settlement agreement to determine the characterization of the dollar_figure we decline to do so in robinson v commissioner supra the taxpayers sued a state bank for failing to release a lien on their property after the jury returned a verdict in their favor for approximately dollar_figure million including dollar_figure million for lost profits dollar_figure million for mental anguish and dollar_figure million in punitive_damages the parties settled the final judgment prepared by the parties allocated percent of the settlement to mental anguish and percent to lost profits we any damages received on account of emotional distress are excludable under sec_104 only to the extent that petitioner paid for medical_care as to the emotional distress see flush language of sec_104 the record shows that petitioner’s insurance paid her medical bills her emotional distress claims therefore do not give rise to excludable income under sec_104 held that this allocation did not control the taxability of the settlement proceeds noting that the settlement was uncontested nonadversarial and entirely tax motivated robinson v commissioner t c pincite we find this language equally applicable to the present case while the underlying litigation was adversarial once whittier agreed to a settlement amount and negotiated the inclusion of the indemnification and release of liability clauses the negotiation as to the characterization of the settlement proceeds ceased to be adversarial petitioner wanted a large portion of the recovery connected to a tortlike personal injury so that she could avoid taxes under sec_104 whittier conversely had no adversarial interest in the classification of the settlement proceeds as it was indemnified from any adverse tax consequences arising from the settlement we also find 102_tc_116 affd in part and revd in part on an issue not relevant herein 70_f3d_34 5th cir inapt given the fact that it was decided under sec_104 as it read before the amendment before amendment that section arguably included mental anguish as a personal injury the section as amended explicitly limits its application to physical injuries thereby excluding purely emotional distress we note that the total amount of the court judgment was dollar_figure including court-awarded attorney’s fees and costs the matter was settled for dollar_figure this dollar_figure reduction is almost exactly percent of dollar_figure approximating petitioner’s expected tax_benefit from the settlement as structured whittier’s only interest in the settlement was resolving the matter and avoiding any future tax consequences from doing so once these concerns were met whittier ceased to be an active_participant in the negotiations and in effect gave petitioner a green light to classify the settlement proceeds in whatever manner she desired that petitioner did so is evident from the disparity between her damages as argued at trial and the ultimate settlement she documented actual lost wages of dollar_figure and argued that she was entitled to up to dollar_figure for total past and future lost wages and benefits as well as emotional distress on account of whittier’s removal of her accommodation the jury awarded her dollar_figure in the settlement she allocated only dollar_figure for past and future lost wages this large reduction in the amount allocable to her lost wages over dollar_figure less than her documented loss of past wages and dollar_figure less than the total of her lost past and future wages was further tax advantaged to her by splitting the receipt of it between years such tax planning from which whittier was insulated by the indemnification clause is not the product of arm’s-length negotiations between adversarial parties see eg robinson v commissioner supra pincite we are not persuaded by such agreements and look beyond the stated form of the settlement to its economic realities id here the non-arm’s-length pretense reflected in the settlement agreement does not reflect the reality of the underlying lawsuit which was submitted to the jury as a discrimination action rather than as one arising from personal physical injuries to petitioner we hold that none of the proceeds received under the settlement agreement fall within the reach of sec_104 ii portion of settlement proceeds paid to petitioner’s attorney we decide whether sums paid to petitioner’s attorney in lieu of a contingent_fee and pursuant to a court award authorized by statute are includable within her gross_income under sec_61 this case was submitted and briefed before the united_states supreme court’s decision in commissioner v banks u s ___ 125_sct_826 in banks the court held that as a general_rule when a litigant’s recovery constitutes income the litigant’s income includes any portion of the recovery paid to an attorney as a contingent_fee in so doing the court explicitly declined to reach the issue of whether sums awarded to an attorney under a fee shifting statute are includable in the client’s gross_income even were we persuaded which we are not by petitioner’s argument that some of her dollar_figure was attributable to emotional distress she would still not prevail as we pointed out supra note petitioner’s situation does not fall within the flush language of sec_104 that would allow her to exclude from her gross_income any damages received for emotional distress petitioner’s contingent_fee agreement with her attorney stated that the attorney would be entitled to a defined percentage of any recovery unless as occurred the attorney received his fees and costs pursuant to a fee shifting statute we are thus presented with the issue which the court in banks did not reachdollar_figure we are not without guidance however the court_of_appeals for the ninth circuit the court to which an appeal of this matter most likely lies has held that a defendant’s payment of a plaintiff taxpayer’s attorney’s fees and costs pursuant to a fee shifting statute constitutes income to the taxpayer 268_f3d_756 9th cir affg tcmemo_1998_364 in sinyard the taxpayers signed with their attorney a contingent_fee agreement similar to the one here the settlement agreement apportioned some of the settlement so as to pay in full the attorney’s fees and costs pursuant to the fee shifting provisions of u s c sec_216 and b the court held that the apportioned funds were attributable to the taxpayers who in the court’s words bound themselves to pay their attorneys one-third of what they received when the defendant satisfied this obligation the sinyards were so much if the attorney’s fees were received under the contingent_fee agreement as opposed to the statute commissioner v banks u s ___ 125_sct_826 would control and the result would be the same the richer that they never laid hands on the money paid to the lawyers does not obliterate their constructive receipt id pincite we agree and hold likewisedollar_figure we therefore sustain respondent’s determination that the dollar_figure paid to petitioner’s attorney in should have been reported by her as income in dollar_figure ______________________________________ we have considered all of the parties’ arguments and rejected those not discussed herein as meritless accordingly decision will be entered under rule petitioner’s reliance on flannery v prentice cal 4th is misplaced we are not bound by state law classifications as to the ownership of income 287_us_103 any contingent attorney’s fees paid_by petitioner on account of her taxable civil settlement would properly be income under commissioner v banks supra and she may not escape this outcome by arguing that because her attorney’s fees and costs were awarded by a civil court pursuant to a statutory fee shifting provision the income is properly attributable to her attorney see 268_f3d_756 9th cir affg tcmemo_1998_364 we are not presented with and do not decide whether petitioner would have been taxed on the attorney’s fees paid to her attorney had she been represented by a nonprofit legal foundation we note with approval respondent’s concession that any sums payable to petitioner’s attorney in are deductible by her in that year as a miscellaneous itemized_deduction subject_to any applicable limitations


internal_revenue_service number release date index number ------------------------------------------------ ------------------------------------ -------------------------------------------------- ------------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------ id no ------------------ telephone number ---------------------- refer reply to cc ita plr-152001-12 date date re request for extension of time to make the election not to deduct the additional first year depreciation taxpayer ------------------------------------------------------------- a b c d e state date1 date2 date3 date4 ------------------------------------------ ----- ----- ------------------- ----------------------------------------- -------------- -------------------- ---------------------- --------------------------- ----------------------- dear ------------- this letter responds to a letter dated date and subsequent correspondence submitted by taxpayer requesting an extension of time pursuant to sec_301_9100-3 of the procedure and administration regulations to make the election not to deduct the 100-percent additional first year depreciation under sec_168 of the internal_revenue_code for 5-year 7-year and 15-year classes of qualified_property placed_in_service in the taxable_year ended date3 facts taxpayer represents that the facts are as follows taxpayer is a corporation organized under the laws of state and is a taxable_reit_subsidiary of a prior to date1 taxpayer was a stand-alone corporation beginning date1 taxpayer became the parent of a consolidated_group with b subsidiaries the subsidiaries were liquidated in date2 taxpayer presently owns plr-152001-12 various subsidiaries that are single member limited_liability companies llcs and disregarded entities for federal tax purposes taxpayer also owns c controlled_foreign_corporations taxpayer is engaged in the business of owning and operating assisted living facilities throughout the d taxpayer’s federal tax_return for the taxable_year ended date3 was timely filed in date4 taxpayer prepared the return and taxpayer’s outside accountant e reviewed it on this return taxpayer did not deduct the additional first year depreciation for all eligible classes of qualified_property placed_in_service by taxpayer in the taxable_year ended date3 taxpayer however inadvertently failed to attach to the return the required election statement not to claim the additional first year depreciation deduction for all eligible classes of qualified_property placed_in_service for the taxable_year ended date3 subsequent to filing its federal tax_return for the taxable_year ended date3 taxpayer discovered that it had failed to attach the election statement to the return for the taxable_year ended date3 with respect to all eligible classes of qualified_property placed_in_service in that taxable_year thereafter taxpayer consulted with e for advice to correct this mistake ruling requested taxpayer requests an extension of time pursuant to sec_301_9100-3 of the procedure and administration regulations to make the election not to deduct the percent additional first year depreciation under sec_168 for 5-year 7-year and year classes of qualified_property placed_in_service in the taxable_year ended date3 law and analysis sec_168 provides a 100-percent additional first year depreciation deduction for the taxable_year in which qualified_property qualifying for the 100-percent additional first year depreciation is placed_in_service by a taxpayer sec_168 provides that a taxpayer may elect not to deduct the additional first year depreciation for any class of property placed_in_service during the taxable_year the term class of property is defined in sec_1_168_k_-1 of the income_tax regulations as meaning in general each class of property described in sec_168 for example 5-year_property see section dollar_figure of revproc_2011_26 2011_16_irb_664 rules similar to the rules in sec_1_168_k_-1 for qualified_property or for 30-percent additional first year depreciation deduction apply for purposes of sec_168 as currently in effect sec_1_168_k_-1 provides that the election not to deduct additional first year depreciation for a class of property applies to all qualified_property that is in that class of property and placed_in_service in the same taxable_year see section dollar_figure of revproc_2011_26 plr-152001-12 sec_1_168_k_-1 provides that the election not to deduct additional first year depreciation must be made by the due_date including extensions of the federal tax_return for the taxable_year in which the property is placed_in_service by the taxpayer sec_1_168_k_-1 provides that the election not to deduct additional first year depreciation must be made in the manner prescribed on form_4562 depreciation and amortization and its instructions the instructions to form_4562 for the taxable_year ended date1 provided that the election not to deduct the additional first year depreciation is made by attaching a statement to the taxpayer’s timely filed tax_return indicating that the taxpayer is electing not to deduct the additional first year depreciation and the class of property for which the taxpayer is making the election under sec_301_9100-1 the commissioner has discretion to grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make a regulatory election 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 extensions 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 sec_301_9100-3 provides that requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and the grant of relief will not prejudice the interests of the government conclusions based solely on the facts and representations submitted we conclude that the requirements of sec_301_9100-1 and sec_301_9100-3 have been satisfied accordingly taxpayer is granted calendar days from the date of this letter to make the election not to deduct the 100-percent additional first year depreciation under sec_168 for year 7-year and 15-year classes of property placed_in_service by taxpayer during the taxable_year ended date3 that qualify for the additional first year depreciation this election must be made by taxpayer filing an amended federal tax_return for that taxable_year with a statement indicating that taxpayer is electing not to deduct the additional first year depreciation for 5-year 7-year and 15-year classes of property placed_in_service by taxpayer during that taxable_year except as specifically set forth above we express no opinion concerning the federal_income_tax consequences of the facts described above under any other provisions of the code including other subsections of sec_168 specifically no opinion is plr-152001-12 expressed or implied on whether any item of depreciable_property placed_in_service by taxpayer during the taxable_year ended date3 is eligible for the additional first year depreciation deduction in accordance with the power_of_attorney we are sending a copy of this letter to taxpayer’s authorized representative we are also sending a copy of this letter to the appropriate industry director large business international division lb_i this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent sincerely willie e armstrong jr willie e armstrong jr senior technician reviewer branch office of associate chief_counsel income_tax and accounting enclosures copy of this letter copy for sec_6110 purposes


internal_revenue_service number release date index number -------------------------------------------- ------------------------------------------------ ---------------------------- --------------------------- - department of the treasury washington dc third party communication none date of communication not applicable_person to contact --------------------- id no ----------- telephone number --------------------- refer reply to cc pa apjp b01 plr-146081-04 date date ------------------------ legend company -------------------------------------------- dollar_figurex --- dear ---------------- this is in response to your request dated date submitted on behalf of company requesting a letter_ruling under sec_6041 of the internal_revenue_code code specifically company has requested a ruling that based on the facts and assumptions set forth herein company will not be required to make a return of information pursuant to sec_6041 as a result of volume rebate points having been awarded to its members or upon a member’s use of those points to reduce the cost of future purchases through the company facts company is a business venture designed to reduce the cost of obtaining medical_care health insurance and or health related products to its members this benefit will be provided to members in the form of volume purchase rebate points that will be used to offset the cost of future purchases by members under the program each rebate point awarded to a member represents a future purchase_price reduction of dollar_figurex the amount of rebate points granted to a member will be limited by the amount of actual purchases made by such member the computation of the amount of volume rebate points granted to a member is based on several factors including the type and quantity of the goods or services purchased the vendor of those goods or services the amount of company purchases made by the member receiving the points and the member's participation in community purchasing groups in order to receive the benefit of volume purchase rebate points earned the plr-146081-04 member must purchase additional products or services through the company the methodology used to calculate the number of points awarded any particular member is applied automatically by a computer_program and each member is not identified by the source methodology used to determine the points the rebate points based on credit card transactions are placed in member buckets for future redemption are fungible and retain no identifying association with their origins company knows the total rebate points a member is entitled during the year and whether that member has made sufficient purchases to receive those points company will not however track the origin of rebate points or attempt to tie the redemption back to the original transactions that generated the points and does not know whether the redeemed points originated from the member's own purchases the purchases of a community member or a combination thereof for purposes of this ruling_request we assume that the use of volume rebate points by a member to reduce the cost of purchasing goods or services through the company constitutes gross_income to that member under sec_61 of the code to the extent that the points used were calculated with reference to that member's participation in community purchasing groups because volume rebate points are essentially fungible and are not identified by source there is no reasonable way of knowing the source of the points awarded or the source of the points as to direct member versus community volume at the time the points are used to reduce the cost of future purchases through the company law information reporting sec_6041 of the code requires reporting of payments of dollar_figure or more made by all persons engaged in a trade_or_business and making payments in the course of such trade_or_business to another person of fixed or determinable gains profits and income sec_1_6041-1 of the income_tax regulations states that payments are fixed when they are paid in amounts definitely predetermined payments are determinable whenever a basis of calculation by which the amount to be paid may be ascertained purchase_price_adjustment a purchase_price_adjustment reduces a specific gross purchase_price of property to an agreed net price the adjustment is excluded from the purchaser's gross_income but reduces the purchaser's cost of the property acquired see revrul_76_96 1976_1_cb_23 see also 69_tc_477 acq 1982_2_cb_2 aff'd 630_f2d_670 9th cir and 26_tc_707 acq 1982_2_cb_2 plr-146081-04 the tax_benefit_rule under sec_111 of the code gross_income does not include income attributable to the recovery during the taxable_year of any amount deducted in any prior taxable_year to the extent such amount did not reduce the amount of tax imposed under the judicially-developed tax_benefit_rule gross_income will result upon the occurrence of a later event that is fundamentally inconsistent with the premise on which the earlier deduction was based 460_us_370 analysis sec_6041 of the code requires that a payor make fixed or determinable payments of dollar_figure or more in a taxable_year in order to require the making of an information_return company is unable to satisfy this statutory requirement of sec_6041 because it is unable to determine whether a member has benefited from community rebate points valued at dollar_figure or more neither company nor the members know the value of the rebate points attributable to community purchases versus the value of rebate points attributable to individual purchases furthermore because the volume rebate points are not convertible into cash and must be used by the member to offset the cost of future purchases no benefit is received by the member unless and until points are used to offset the cost of future purchases therefore in a given taxable_year company will not know whether the amount of a member's rebate points calculated with reference to the member's purchasing community and used to make purchases meets or exceeds the dollar_figure requirement in sec_6041 moreover purchases made by members may be eligible to be claimed as a medical expense deductible as an itemized_deduction or as self-employed medical insurance costs factors that are unknown and unknowable to company a member who receives a discount will receive gross_income under the tax_benefit_rule to the extent the members’ prior deduction for the cost of medical_expenses results in a tax_benefit company lacks the ability to determine a member's tax treatment of the rebate points as it cannot determine how each member will treat the community rebate points for his or her own tax purposes thus company has no obligation to make information returns for its members because it is unable to determine which members if any have used community rebate points that satisfy the dollar_figure requirement or how each member will treat the community rebate points for his or her own tax purposes for a tax_benefit analysis plr-146081-04 conclusion company cannot determine whether the benefits provided result in gross_income to the recipients therefore the extent to which the company's program is income to members is not fixed and determinable accordingly company will not be required to make a return of information pursuant to sec_6041 as a result of volume rebate points having been awarded to its members or upon a member’s use of those points to reduce the cost of future purchases through the company except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer 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’s representative the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination sincerely tiffany p smith assistant to the branch chief administrative provisions judicial practice procedure administration copy of this letter copy for sec_6110 purposes enclosures cc


number release date internal_revenue_service index numbers - ---------------------------------------- ------------------------------------------------ ------------------------- ------------------------- --------------------- department of the treasury washington dc person to contact ----------------------------------------------------- -------- telephone number -------------------- refer reply to cc psi - plr-100370-06 date date legend x ------------------------------------------------ --------- ------------- --- ---------- ------------------ d1 country dear -------------------- this letter responds to a letter dated date and subsequent correspondence submitted on behalf of x requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations for x to file an election to be treated as a disregarded_entity under the laws of country was acquired by a single owner with limited_liability on d1 x intended to be treated as a disregarded_entity for federal tax purposes effective d1 however x did not timely file a form_8832 entity classification election according to the information submitted all of the interest in x an entity formed sec_301_7701-3 provides 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 sec_301_7701-3 sec_301_7701-3 provides guidance on the classification of a foreign eligible_entity for federal tax purposes under sec_301_7701-3 except as provided in sec_301 b unless it elects otherwise a foreign eligible_entity is classified as an association if all members have limited_liability sec_301_7701-3 provides that for purposes of sec_301_7701-3 a sec_301_7701-3 provides that an election under sec_301_7701-3 member of a foreign eligible_entity has limited_liability if the member has no personal liability for the debts of or claims against the entity by reason of being a member will be effective on the date specified on form_8832 or on the date filed if no such date is specified on the form the effective date specified on form_8832 cannot be more than days prior to the date the form is filed and cannot be more than months after the date on which the form is filed sec_301_9100-1 provides that the commissioner has discretion to grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 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 defines a regulatory election to include an election whose due_date is prescribed by a regulation published in the federal_register sec_301_9100-2 provides the rules governing automatic extensions of time for making certain elections sec_301_9100-3 sets forth the standards the commissioner will use to determine whether to grant an extension of time for regulatory elections that do not meet the requirements of sec_301_9100-2 under sec_301_9100-3 a request for relief will be granted when the taxpayer provides evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and granting relief will not prejudice the interests of the government requirements of sec_301_9100-3 have been satisfied as a result x is granted an extension of time of days from the date of this letter to file form_8832 and elect to be treated as a disregarded_entity for federal tax purposes effective d1 a copy of this letter should be attached to the form_8832 based on the facts submitted and representations made we conclude that the except as specifically set forth above no opinion is expressed or implied as to the federal tax consequences of the transaction described above under any other provision of the code sec_6110 provides that it may not be used or cited as precedent this ruling is directed only to the taxpayer on whose behalf it was requested in accordance with the power_of_attorney on file with this office a copy of this sincerely letter is being sent to x’s authorized representative enclosures copy of this letter copy for sec_6110 purposes heather c maloy associate chief_counsel passthroughs and special industries


internal_revenue_service number info release date cc psi 1-genin-161940-02 dec uilc dear we are responding to correspondence submitted on your behalf by requesting relief in order to establish s_corporation status effective as of the taxable_year the information submitted asserts that your form_2553 was mailed in date but not received timely by the internal_revenue_service you are ineligible for automatic late s_corporation relief because your first form_1120s tax_return was received past the extension period although we are unable to respond to your request as submitted this letter provides information relating to your request announcement copy enclosed provides guidance on seeking relief for late s_corporation elections generally to request relief for a late s_corporation_election you must request a private_letter_ruling from the national_office the procedures for requesting a private_letter_ruling are set out in revproc_2002_1 copy enclosed in addition revproc_2002_1 requires taxpayers to submit a user_fee along with their ruling_request the standard user_fee for a private_letter_ruling is dollar_figure however taxpayers with gross_income of less than dollar_figure million on their tax_return for the most recent 12-month taxable_year qualify for a reduced user_fee in the amount of dollar_figure if you qualify for the reduced fee you must include a statement certifying your gross_income for the last 12-month taxable_year otherwise the higher fee will apply if you decide to submit a formal request for a private_letter_ruling please review appendix b of revproc_2002_1 and be certain to include all required procedural statements also include the proper user_fee and any documents that substantiate your intent to be an s_corporation from inception please refer your request to our office by adding the following to the address attn cc pa t p o box ben franklin station washington dc direct to cc psi room in addition the irs has developed two new cd-roms to help educate small_business owners on their tax responsibilities introduction to federal taxes for small_business self-employed and a virtual small_business workshop these two cd- roms are free and can be ordered by calling the irs also provides a special website www irs gov smallbiz which is dedicated to providing information to small_business taxpayers please keep this letter with your tax records and feel free to provide a copy of it to your authorized representative we hope that the above information proves helpful sincerely yours s dianna k miosi dianna k miosi chief branch associate chief_counsel passthroughs and special industries enclosures announcement revproc_2002_1 copy of submission


internal_revenue_service number release date index number ----------------------- -------------- ------------------------------------------- --------------------------- ------------------------------ in re ------------------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact --------------------- id no -------------- telephone number ---------------------- refer reply to cc intl br6 plr-111640-13 date september legend taxpayer individual corporation accounting firm attorney date date date date dear ------------- -------------------------------------------------------------------- ----------------------- ------------------------------------------ ----------------------------------- ------------------------- ------------- ---------------------------- ----------------------- -------------------------- this responds to a letter dated date submitted on behalf of taxpayer requesting that the internal_revenue_service service grant taxpayer an extension of time under sec_301_9100-1 and sec_301_9100-3 to file form 4876-a election to be treated as an interest_charge_disc for taxpayer’s first taxable_year the rulings given in this letter are based on facts and representations submitted by taxpayer accounting firm and attorney and accompanied by penalty of perjury statements executed by appropriate parties this office has not verified any of the materials submitted in support of the request for a ruling verification of the factual information representations and other data may be required as part of the audit process plr-111640-13 facts taxpayer is a domestic_corporation wholly owned by individual that acts as a commission agent with respect to corporation's sales of export_property individual is president and treasurer of taxpayer as well as ceo of corporation corporation is owned by six individuals including individual and a_trust individual and his wife together own more than half of the voting shares of corporation accounting firm is an accounting auditing and business consulting firm in date accounting firm advised corporation and individual of the benefits associated with interest charge domestic international sales corporations ic-discs subsequent to these discussions corporation contacted attorney to request preparation of the necessary documents to form the entity that was intended to be treated as an ic-disc taxpayer was incorporated on date and was intended to be treated as an ic-disc as of date the first day of taxpayer’s first taxable_year due to a misunderstanding between accounting firm and attorney accounting firm believed attorney had had filed form 4876-a on behalf of taxpayer and attorney believed that accounting firm had filed the form believing all the requirements to conduct business and to be treated as an ic- disc were satisfied taxpayer began operating as an ic-disc as of date even though taxpayer had assumed that all the necessary requirements to conduct business as an ic-disc were satisfied it did not qualify as an ic-disc for federal_income_tax purposes because it did not timely file a form 4876-a with the service within days of date taxpayer represents that it did not realize this error until date when accounting firm discovered that taxpayer’s form 4876-a had not been filed upon discovery that the form had not been filed taxpayer requested a ruling granting an extension of time to file form 4876-a for its first taxable_year law and analysis sec_992 of the internal_revenue_code code provides that an election by a corporation to be treated as a disc2 shall be made by such corporation for a taxable_year at any time during the 90-day period immediately preceding the beginning of the taxable_year except that the secretary may give his consent to the making of an election at such other times as he may designate sec_992 of the code provides that such election shall be made in such manner as the secretary shall prescribe and shall be valid only if all persons who are taxpayer obtained a letter from the service stating that based on a letter from taxpayer dated date the service had updated its records to show that taxpayer’s business began operations on date taxpayer asserts that as a result its first taxable_year began on date not date which was two weeks earlier as used in this letter the terms ic-disc and disc have the same meaning plr-111640-13 shareholders in such corporation on such first day of the first taxable_year for which such election is effective consent to such election temp sec_1_921-1t provides in part that a corporation electing ic-disc status must file form 4876-a a corporation electing to be treated as an ic-disc for its first taxable_year must make the election within days after the beginning of that year sec_301_9100-1 provides in part that the commissioner in exercising the commissioner’s discretion may grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make a regulatory election under all subtitles of the code except subtitles e g h and i sec_301_9100-1 provides that a regulatory election is an election whose due_date is prescribed by a regulation published in the federal_register or a revenue_ruling revenue_procedure notice or announcement published in the internal_revenue_bulletin for this purpose an election includes an application_for relief in respect of tax sec_301_9100-3 provides that requests for extensions of time for regulatory elections that do not meet the requirements of sec_301_9100-2 automatic extensions must be made under the rules of sec_301_9100-3 requests for relief subject_to sec_301_9100-3 will be granted when the taxpayer provides the evidence including affidavits described in sec_301_9100-3 to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and the grant of relief will not prejudice the interests of the government the election described in the third sentence of temp sec_1_921-1t is a regulatory election as defined in sec_301_9100-1 therefore the commissioner has discretionary authority under sec_301_9100-1 to grant taxpayer an extension of time provided that taxpayer satisfies the standards for relief set forth in sec_301_9100-3 based on the facts and representations submitted we conclude that taxpayer satisfies sec_301_9100-3 accordingly taxpayer is granted an extension of time of days from the date of this ruling letter to file form 4876-a such filing will be treated as a timely election to be treated as an ic-disc for taxpayer's first taxable_year the granting of an extension in this ruling letter is not a determination that taxpayer is otherwise eligible to make the election or to claim ic-disc status or benefits see sec_301_9100-1 in addition we express no opinion as to whether the payment of purchase prices or commissions or portions thereof to taxpayer by company may constitute taxable_gifts see eg revrul_81_54 1981_1_cb_476 a copy of this letter_ruling should be filed with the form 4876-a plr-111640-13 this ruling is directed only to the taxpayer that requested it sec_6110 of the code provides that written determinations may not be used or cited as precedent 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 accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely christopher j bello chief branch office of associate chief_counsel international enclosures copy of this letter copy for sec_6110 purposes


internal_revenue_service number release date index number ------------------------------------------- ----------------------------------------------------------- ----------------------------------- ----------- ------------------------------------ department of the treasury washington dc third party communication none date of communication not applicable_person to contact --------------------------- id no ------------- telephone number --------------------- refer reply to cc ita br4 plr-157409-06 date february taxpayer taxpayer ------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------ ----------------------------------------------------------------------------------------------------- --------------------------------------------------- ---------------------------- ------------------ ------------------------------------------------------------------------------------------ ------------------------- ------------------------------------ --------------------------------------- ---------------------- ----------------------- -------------------------- -------------------------- -------------------------- -------------------------- ----------------- ------------------------------------------------- business x property a city b property c ------------------------------------------------------------------------------------------------------------ city d eat qi date date date date date date date buyer dear -------------- this responds to your request for a private_letter_ruling dated date specifically you have asked us to rule that taxpayer has complied with the requirements for identifying relinquished_property set forth in sec_4 of revproc_2000_37 2000_2_cb_308 facts taxpayer engages in business x taxpayer uses the accrual_method of accounting and its taxable_year is the calendar_year prior to the transactions described below taxpayer owned property a which is improved real_property located in city b plr-157409-06 on date taxpayer and an exchange accommodation titleholder eat entered into a qualified exchange accommodation arrangement qeaa to set up an exchange pursuant to revproc_2000_37 also on date taxpayer assigned to eat its rights as purchaser under a pre-existing purchase agreement for property c which is improved real_property located in city d and gave notice of the assignment to the sellers also on date eat acquired property c pursuant to the qeaa on date taxpayer entered into a sale contract agreeing to sell property a to buyer on date taxpayer entered into an exchange_agreement with qi as a qualified_intermediary for a sec_1031 exchange with respect to property a also on date taxpayer assigned to qi its rights as seller under the property a sales contract and gave notice of the assignment to buyer on date the sale of property a closed date which was two days later and which happened to be a sunday was the 45th day following date the date on which eat acquired property c on the day following date taxpayer sent eat a signed document formally identifying property a and other_property as the possible relinquished properties in the exchange on or before date the date which i sec_180 days after date qi will use exchange_funds from the sale of property a to acquire property c from eat as its replacement_property applicable law sec_1031 of the internal_revenue_code provides that no gain_or_loss shall be recognized on the exchange of property held for productive use in a trade_or_business or for investment if such property is exchanged solely for property of like_kind which is to be held either for productive use in a trade_or_business or for investment sec_1031 provides in part that for purposes of sec_1031 any property received by the taxpayer is treated as property which is not like-kind_property if the property is not identified as property to be received in the exchange on or before the day which i sec_45 days after the date on which the taxpayer transfers the property relinquished in the exchange revproc_2000_37 provides a safe_harbor under which the internal_revenue_service will not challenge a the qualification of property as either replacement_property or relinquished_property as defined in sec_1_1031_k_-1 of the income_tax regulations for purposes of sec_1031 and the regulations thereunder or b the treatment of the eat as the beneficial_owner of such property for federal_income_tax purposes if the property is held in a qeaa as defined in section dollar_figure of that revenue_procedure plr-157409-06 one of the requirements set forth in revproc_2000_37 which is stated at sec_4 is that no later than days after the transfer of qualified indicia of ownership of the replacement_property to the eat the relinquished_property must be properly identified identification must be made in a manner consistent with the principles described in sec_1_1031_k_-1 sec_1_1031_k_-1 provides in part that replacement_property is identified before the end of the identification period only if the requirements in sec_1_1031_k_-1 are satisfied with respect to the replacement_property however any replacement_property that is received by the taxpayer before the end of the identification period will in all events be treated as identified before the end of the identification period legal analysis and conclusion for property to be eligible for use as relinquished_property in an exchange within the safe_harbor rules of revproc_2000_37 it must be identified within days after the eat acquires replacement_property pursuant to a qeaa sec_1_1031_k_-1 establishes the requirements for identifying replacement_property in a deferred_exchange under that regulation any replacement_property received within the 45-day identification period is treated as identified within the identification period applying that principle to a safe-harbor parking transaction under revproc_2000_37 relinquishing property through a qualified_intermediary before the expiration of days from the date that replacement_property is parked satisfies this identification requirement in the present case taxpayer disposed of property a through qi less than days following eat’s acquisition of property c the net_proceeds from the sale of property a were transferred to qi in its exchange accommodator role assuming qi is a qualified_intermediary as defined in sec_1_1031_k_-1 qi may be used in the capacity of a qualified_intermediary in a safe_harbor parking transaction under the revenue_procedure accordingly provided qi is a qualified_intermediary described sec_1 k - g taxpayer satisfied the identification requirements with respect to its exchange of property a for property c in accordance with sec_4 of revproc_2000_37 by disposing of property a through qi within the 45-day identification period caveat s 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 a copy of this letter must be attached to any income_tax return to which it is relevant we enclose a copy of the letter for this purpose also enclosed is a copy of the letter showing the deletions proposed to be made when it is disclosed under sec_6110 see revproc_2000_37 sec_4 which anticipates use of qualified intermediaries along with exchange accommodation titleholders in parking transactions plr-157409-06 this ruling letter is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent sincerely michael j montemurro chief branch office of associate chief_counsel income_tax accounting


internal_revenue_service national_office technical_advice_memorandum date number release date index uil nos case-mis no director of field operations manhattan --------------- tam-160892-03 cc fip b01 taxpayer's name taxpayer's address taxpayer's identification no year involved date of conference --------------------------------------------------------------- ------------------------------- ----------------------------- ---------------- ------- ---------------------- legend taxpayer bank subsidiary state a state b year year year ------------------------------------------- ----------------------------- ------------------------------------ -------------- ---------- ------- ------- ------- tam-160892-03 issue if a bank creates a wholly-owned subsidiary to manage invest and reinvest the bank’s investment_assets should the assets including tax-exempt obligations and interest_expense of the subsidiary be treated as those of the bank for purposes of applying sec_265 and sec_291 and e b of the internal_revenue_code conclusion a bank that creates a wholly-owned subsidiary to manage invest and reinvest the bank’s investment_assets must treat the subsidiary’s assets including tax-exempt obligations and interest_expense as those of the bank for purposes of applying sec_265 and sec_291 and e b facts taxpayer is a one-bank holding_company incorporated in state a that files a consolidated federal_income_tax return taxpayer owns all of the common_stock of bank a commercial bank formed in year and located in state a bank owns all of the stock of subsidiary which is incorporated in state b subsidiary operates in state a and does not have offices or employees in state b in year when bank formed subsidiary bank obtained a private_letter_ruling subsidiary was formed in year with the exchange of securities owned by bank from ---- state a -------------------------------- on the tax treatment of subsidiary under the law of state a that letter_ruling provides in effect that -------------------------------------- ------------------------------------------------------------------------------- subsidiary’s income is not subject_to the corporate_income_tax of state a and dividends received by bank from subsidiary are free of the state a corporate_income_tax ------------------------------------------- -------------------------------------------------- state b does not have a state corporate_income_tax thus subsidiary’s income is not subject_to any state_income_tax for the stock of subsidiary bank later transferred cash to subsidiary as additional capital bank transferred no liabilities or debts to subsidiary all income received by subsidiary is investment_income on assets held by subsidiary subsidiary’s assets and liabilities are consolidated with those of bank for financial_accounting book purposes and also for bank regulatory purposes managing investment_assets that bank did not expect to need for its immediate day-to-day operations bank’s year letter to the comptroller of the currency notifying the comptroller of bank’s intent to create subsidiary the notice states the establishment of the subsidiary is intended to improve the efficiency of the according to taxpayer bank created subsidiary to improve the efficiency of another member of subsidiary’s board_of directors is subsidiary’s tam-160892-03 management safekeeping and operations for the securities investment portfolio of the bank the notice also states that subsidiary will manage invest and reinvest the cash u s government obligations and other investment securities contributed to it from time to time by its parent bank within overall investment guidelines established by its parent in addition the notice states all of the business of the subsidiary will be transacted solely for the ultimate benefit of the bank with investment returns provided to the bank through periodic dividends from its subsidiary subsidiary’s board_of directors has ------- members one member is subsidiary’s chairman of the board chief_executive_officer and president individual a individual a also holds the same three positions for taxpayer in addition individual a is chairman of the board and chief_executive_officer of bank during the taxable_year involved in this technical_advice_memorandum year individual a received substantial total compensation from taxpayer and bank and nominal wages of about --- --------- from subsidiary individual a makes all of the investment decisions for both bank and subsidiary secretary treasurer individual b individual b also is a senior vice president and the secretary of taxpayer in addition individual b is an executive vice president and the secretary of bank during year individual b received substantial total compensation from taxpayer and bank and nominal wages of about --------- from subsidiary individuals a and b who reside and work in state a are subsidiary’s ------ employees president individual c individual c also is the executive vice president of taxpayer and the president and chief operating officer of bank bank and subsidiary according to this written investment policy all of bank’s and subsidiary’s securities transactions are subject_to monthly review by bank’s board_of directors and must be executed through securities dealers approved by the board the investment policy designates bank’s chief_executive_officer individual a and bank’s president individual c as responsible for the day-to-day formulation and implementation of investment strategies the investment policy also designates individuals a b and c by name as investment personnel responsible for implementing the investment policy and authorized to act on behalf of the bank without trading limit the investment policy generally does not distinguish between the investment portfolios of bank and subsidiary but rather treats them as a single portfolio for example the investment policy provides as follows the investment policy established by bank’s board_of directors applies to both the third member of subsidiary’s board_of directors is subsidiary’s vice tam-160892-03 total investment in municipal issues will be limited to ---------------- of the total portfolio the mix between tax exempt and taxable investment securities will be determined by the chief operating officer in conjunction with recommendations from the bank’s tax advisors this will be done to minimize taxes and increase net_income at the end of year subsidiary’s investment portfolio consisted of tax-exempt italics in original in year subsidiary paid substantial dividends to bank in year subsidiary also borrowed funds from bank on which subsidiary paid interest to bank and used the borrowed funds to acquire investment securities subsidiary leased office space in bank’s headquarters building in state a bonds qualified tax-exempt obligations under sec_265 issued primarily by municipalities in state a and u s government obligations virtually all of the tax-exempt_bonds that bank had transferred to subsidiary in year matured before year thus the tax-exempt_bonds held by subsidiary at the end of year had been purchased either from cash that subsidiary received from bank or from earnings and proceeds of assets that subsidiary received from bank at the end of year bank held u s government obligations mortgage and real_estate loans and no tax-exempt_bonds during year bank incurred considerable interest_expense while subsidiary incurred a negligible amount for purposes of applying sec_265 and sec_291 and e b in year bank did not take into account the tax-exempt_bonds held by subsidiary bank did take into account the value of its stock in subsidiary which was nearly equal to the average adjusted bases of all of subsidiary’s assets law and analysis sec_291 reduces by percent the amount allowable as a deduction with respect to any financial_institution_preference_item pursuant to sec_291 a financial_institution_preference_item is the portion of a financial institution’s interest_expense that is allocable to tax-exempt obligations acquired after date and before date this portion is the amount that bears the same ratio to the taxpayer’s interest_expense as the taxpayer’s average adjusted bases of these tax-exempt obligations bears to the taxpayer’s average adjusted bases of all its assets sec_291 applies to any financial_institution that is a bank as defined in sec_585 sec_265 disallows entirely the portion of a financial institution’s interest_expense that is allocable to tax-exempt_interest pursuant to sec_265 this portion is the amount that bears the same ratio to the taxpayer’s interest_expense as the taxpayer’s average adjusted bases of tax-exempt obligations acquired after august congress enacted sec_291 and e b in and sec_265 in sec_265 provides a special rule for qualified tax-exempt obligations as tam-160892-03 bears to the taxpayer’s average adjusted bases of all its assets sec_265 defines the term financial_institution to mean any person that a accepts deposits from the public in the ordinary course of that person’s trade_or_business and is subject_to federal or state supervision as a financial_institution or b is a corporation described in sec_585 defined in sec_265 any qualified_tax-exempt_obligation that is acquired after date is treated for purposes of sec_265 and sec_291 as if it were acquired on date thus qualified tax-exempt obligations result in the disallowance of interest_expense deductions under sec_291 and e b rather than sec_265 legislative purpose of sec_291 and e b and sec_265 before the enactment of these sections a financial institution’s investment in tax-exempt obligations generally did not result in any disallowance of interest_expense deductions although sec_265 formerly sec_265 disallows deductions for interest on indebtedness incurred to purchase or carry tax-exempt obligations this section requires evidence of a direct connection between the borrowing and the tax-exempt investment in effect this requirement virtually exempts financial institutions from disallowance of interest deductions under sec_265 restricts the interest_expense deductions of financial institutions without requiring evidence of connection between borrowing and tax-exempt investment unlike sec_265 sec_291 and e b applies to all of a financial institution’s otherwise deductible_interest expense and provides for a pro_rata disallowance of interest_expense deductions on the basis of the institution’s holdings in tax-exempt obligations sec_265 strengthens the disallowance rule_of sec_291 and e b by increasing from percent to percent the disallowance of interest_expense deductions allocable to tax-exempt obligations acquired after date the purpose and structure of sec_265 are essentially the same as those of sec_291 and e b and sec_265 applies to any financial_institution to which sec_291 and e b applies proposal to enact sec_265 is as follows to correct this problem congress first enacted sec_291 and e b which the basic policy underlying these provisions as explained in the president’s basic measurement of income principles require that income be matched with the costs of its production in line with these principles the costs of producing tax-exempt_income including interest_expense incurred tam-160892-03 to carry tax-exempt_bonds are properly nondeductible since the income to which such costs are attributable is exempt from tax disallowance of a deduction is necessary to prevent the taxpayer from offsetting other nonexempt_income the exception from the above principles for interest_paid or incurred by commercial banks and thrifts has enabled these institutions to hold a substantial portion of their investment portfolios in tax-exempt obligations substantially reducing their federal tax_liability the full allowance of interest deductions to banks holding tax-exempt obligations contributes to the relatively low effective tax_rates of banks in addition the special nondisallowance rule for commercial banks and thrifts provides them with a competitive advantage over other financial institutions that are disallowed interest deductions for carrying tax-exempt obligations the president’s tax proposals to the congress for fairness growth and simplicity date like the administration congress was concerned about the unfairness and the revenue effects of allowing financial institutions to deduct interest_expense allocable to tax-exempt obligations the ways_and_means_committee report accompanying the enactment of sec_265 explains the change as follows the committee believes that the present law treatment of financial institutions for purposes of the interest disallowance rule should be changed for two reasons first the present law rules by allowing financial institutions to deduct interest payments regardless of tax-exempt holdings discriminate in favor of financial institutions at the expense of other taxpayers second the committee was concerned that financial institutions may drastically reduce their tax_liability as a result of the present law rules for example under present conditions a bank may totally eliminate its tax_liabilities by investing one-third or less of its assets in tax-exempt obligations to correct these problems the committee bill denies financial institutions an interest_deduction in direct proportion to their tax-exempt holdings the committee believes that this proportional disallowance rule is appropriate because of the difficulty of tracing funds within a financial_institution and the near impossibility of assessing a financial institution’s purpose in accepting particular deposits the committee believes that the proportional disallowance rule will place financial institutions on approximately an equal footing with other taxpayers in short congress enacted these provisions to prevent financial institutions from tam-160892-03 h_r rep no 99th cong 1st sess vol c b in the finance_committee expressed similar reasons for approving sec_291 and e b s rep no vol 97th cong 2d sess receiving deductions for interest_expense attributable to tax-exempt investment because of the difficulty of tracing funds within a financial_institution and the near impossibility of assessing a financial institution’s ‘purpose’ in accepting particular deposits congress found these proportional disallowance rules necessary otherwise deductions for interest_expense attributable to tax-exempt investment would continue to shelter nonexempt_income of financial institutions allowing them to substantially reduce their federal_income_tax liability and giving them an unfair advantage over other taxpayers treatment of related_taxpayers disallowance provisions these guidelines include the following statement on the treatment of related_taxpayers revrul_90_44 1990_1_cb_54 sets forth guidelines for applying the if one or more financial institutions are members of an affiliated_group_of_corporations as defined in sec_1504 of the code then even if the group files a consolidated_return each such institution must make a separate determination of interest_expense allocable to tax-exempt_interest rather than a combined determination with the other members of the group however in situations involving taxpayers which are under common_control and one or more of which is a financial_institution in order to fulfill the congressional purpose underlying sec_265 of the code the district_director may require another determination of interest_expense allocable to tax-exempt_interest to clearly reflect the income of the financial_institution or to prevent the evasion or avoidance of taxes under the general approach the disallowance provisions apply separately to thus revrul_90_44 provides a general approach to applying the disallowance provisions to related_taxpayers and it also provides an exception each financial_institution rather than on a combined basis to an affiliated_group that is each financial_institution must make a separate determination of interest_expense allocable to tax-exempt_interest rather than a combined determination with the other members of the group this general approach reflects the references to a financial_institution in sec_265 and sec_291 similarly under sec_1_1502-11 of the under revrul_90_44 the exception to the general approach applies in tam-160892-03 consolidated_return_regulations taxable_income is first computed separately for each member_of_an_affiliated_group before determining the group’s consolidated_taxable_income situations involving taxpayers which are under common_control and one or more of which is a financial_institution in these situations more flexibility is needed in order to fulfill the congressional purpose underlying the disallowance provisions therefore the service may require another determination of interest_expense allocable to tax-exempt_interest to clearly reflect the income of the financial_institution or to prevent the evasion or avoidance of taxes directly address their application_for purposes of sec_291 and e b as explained above however the history purpose structure operation and effects of sec_291 and e b are inextricably intertwined with those of sec_265 moreover the legislative_history of sec_265 states that the amount of interest_expense allocable to tax-exempt obligations is to be determined in the same manner for purposes of sec_265 as for purposes of sec_291 and e b h_r conf_rep no 99th cong 2d sess ii-332 to ii-333 vol c b and h_r rep no 99th cong 1st sess vol c b for these reasons the service has consistently applied the guidelines set forth in revrul_90_44 on the treatment of related_taxpayers not only for purposes of sec_265 but also for purposes sec_291 and e b revrul_90_44 provides its guidelines for purposes of sec_265 and does not ltr date involves a corporation that has numerous bank subsidiaries each of which forms a wholly-owned investment subsidiary to manage and reinvest investment_assets transferred to it by its respective bank ltr holds that the assets including tax-exempt obligations and interest_expense of each investment subsidiary will be treated as those of its respective bank for purposes of applying sec_265 and sec_291 and e b ltr date reaches the same conclusion for another affiliated_group of banks with wholly-owned investment subsidiaries neither letter_ruling provides that these sections apply differently to assets transferred by the bank than to assets purchased from earnings and proceeds of assets transferred by the bank in the present case bank owns all of the stock of subsidiary and subsidiary the present case manages invests and reinvests assets received from bank since subsidiary’s income is not subject_to any state_income_tax subsidiary’s existence has the effect of reducing the overall state_income_tax liability of the affiliated_group according to taxpayer bank as explained above under both sec_265 and sec_291 and e b the tam-160892-03 created subsidiary to improve the efficiency of managing investment_assets that bank did not expect to need for its immediate day-to-day operations bank’s notice of intent to create subsidiary states that all of subsidiary’s business will be transacted solely for the ultimate benefit of the bank with investment returns provided to the bank through periodic dividends from its subsidiary the investment policy established by bank’s board_of directors applies to both bank and subsidiary and bank’s board_of directors oversees the implementation of that policy each member of subsidiary’s board_of directors is also an officer of subsidiary an officer and or director of taxpayer and an officer and or director of bank subsidiary’s ----------- employees are members of subsidiary’s board_of directors who receive substantial compensation from taxpayer and bank and nominal compensation from subsidiary one of those employees makes all of the investment decisions for both bank and subsidiary ------ of those employees are authorized to make investments on behalf of both bank and subsidiary subsidiary’s assets and liabilities are consolidated with those of bank for financial_accounting purposes and also for bank regulatory purposes in year subsidiary paid substantial dividends to bank and subsidiary used funds borrowed from bank to acquire securities in short the assets of subsidiary are controlled by bank and held for the benefit of bank portion of a financial institution’s interest_expense that is allocable to tax-exempt_interest is determined by reference to the ratio that the taxpayer’s average adjusted bases of tax-exempt obligations bears to the taxpayer’s average adjusted bases of all its assets in determining the average adjusted bases of all its assets in year bank properly took into account the value of its stock in subsidiary which was nearly equal to the average adjusted bases of all of subsidiary’s assets in determining the average adjusted bases of its tax-exempt obligations however bank did not take into account the tax-exempt obligations held by subsidiary thus bank received the benefit of including virtually all of subsidiary’s assets in the denominator of the ratio but not the detriment of including subsidiary’s tax-exempt obligations in the numerator approving this approach to applying sec_265 and sec_291 and e b would have the effect of nullifying those provisions for bank congress enacted sec_265 and sec_291 and e b to prevent financial institutions from receiving deductions for interest_expense attributable to tax-exempt investment without these proportional disallowance rules deductions for interest_expense attributable to tax-exempt investment would shelter nonexempt_income of financial institutions allowing them to substantially reduce their federal_income_tax liability and giving them an unfair advantage over other taxpayers generally sec_265 and sec_291 and e b apply separately to each financial_institution rather than on a combined basis to an affiliated_group that is each financial_institution must make a separate determination of interest_expense allocable to tax-exempt_interest rather tam-160892-03 than a combined determination with the other members of the group however in situations involving taxpayers that are under common_control and one or more of which is a financial_institution more flexibility is needed in order to fulfill the congressional purpose underlying the disallowance provisions therefore the service may require another determination of interest_expense allocable to tax-exempt_interest to clearly reflect the income of the financial_institution or to prevent the evasion or avoidance of taxes tax-exempt obligations and interest_expense as those of bank for purposes of applying sec_265and sec_291 and e b accordingly we conclude that bank must treat subsidiary’s assets including