internal_revenue_service national_office technical_advice_memorandum december third party communication none date of communication not applicable number release date ndex uil no case-mis no director ctm field operations west taxpayer's name taxpayer's address tam-161900-04 taxpayer's identification no year s involved date of conference legend ------------------------------------------------------- ------------------------------------------------------------ ------------------------- ---------------- ------------------------ ----------------------- taxpayer ------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------- --------------------------------------------------------------- corporation b agency -------------------------------------------------------------- ------------------------------------------------------------------------------------------ ------------------------------------------------------------ --------------------------------------------------------- year a year b year c year d year e date date date ------- ------- ------- ------- ------- -------------------------- ------------------------ ---------------------- tam-161900-04 ------------------------------------------------------------------------------------------------------------------ ----------------- ----------------------- ----------------- ----------------- ----------------- --------------------------------------------------------------- date date dollar_figurex dollar_figurey dollar_figurez corporation x subsidiary -------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------ --- --------------------------------------------------------------- --------------- failed thrift subsidiary ------------------------------------------------------------------------------------------------------------ -------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- -------- --------------------------------------------------------------- ------------------ acquiring --------------------------------------------------------------- --------------------------------------------------------------- ------------------ acquisition agreement ----------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------- ----------------- ----------------------------------------------------- --------------------------------------------------------------- ----------------- assistance agreement ----------------------------------------------------- ------------------------------------------------------------------------ tax ruling ---------------------------------------------------------------------------------------------------------- ---------------------- --------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------------ --------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- ------------------------------------ transfer agreement ------- ---------------------------------------------------------- tam-161900-04 -------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- - merger agreement --------------------------------------------------------------- -------------------------- -------------------------------------------------------------- ----------------------------------------------------------------------- --------------------------------------------- ------------------------------------------------------------- ------------------------------------ tax settlement agreement -------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------ - --------------------------------------------------------------- ---------------------------------------------------- ------ ------ --------------------------------------------------------------- a b intercompany note -------------------------------------------------------------------------------------------------------- ----------------------------------------------------------- -------------------------------------------------------------------------------------------------------- binding clause ----------------------------------- -------------------------------------------------------------- --------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------- --------------------------------------------------------------- ------------------------------------------------------------ -------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- ---- modifications clause liquidity account ---------------------------------------------------------- --------------------------------------------------------------- --------------------------------------------------------------- ---------------- -------------------------------------------------------------- --------------------------------------------------------------------------------- ----- ------------------------------------------------------------- --------------------------- -------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- -------- sr accounts sra i ------------------------------------------------ ---------------------------------------------------------- tam-161900-04 sra ii ------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------- -------------------------------------------------- sra i debit s ---------------------------------- -- --------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------- sra i credit s --------------- --------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------- --------------------------------------------------------- sra ii debit s --------------- --------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------- --------------------------------------------------------- sra ii credit s --------------- --------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------- tax benefits --------------- --------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------- agency payments --------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------------- ---------------------------------------------------- issue whether the tax_benefit sharing amounts remitted to agency in years c d and e are deductible under sec_162 of the internal_revenue_code as ordinary and necessary business_expenses conclusion the tax_benefit sharing amounts remitted to agency in years c d and e are not deductible under sec_162 as ordinary and necessary business_expenses tam-161900-04 facts acquisition of failed thrift agency an instrumentality of the united_states government was appointed as receiver for failed thrift prior to date on or about date substantially_all of the assets and liabilities of failed thrift were acquired by acquiring in a transaction approved by agency that pursuant to the tax ruling was treated as a reorganization within the meaning of sec_368 and sec_368 reorganization acquiring included corporation x which was the common parent of an affiliated_group_of_corporations that filed a consolidated_return acquiring succeeded to and took into account items described in sec_381 upon completion of reorganization subsidiary was treated as the successor to failed thrift the specific federal_income_tax effects of reorganization are detailed in the tax ruling and will not be repeated here as part of the acquisition of failed thrift corporation x subsidiary subsidiary as well as other members of the corporation x consolidated_group entered into a number of agreements with agency including the assistance agreement the assistance agreement set forth the financial and non-financial assistance obligations of agency as well as certain accounting mechanisms for keeping track of the parties’ cross- obligations and benefits arising under the various agreements as required under the acquisition agreement subsidiary issued the intercompany note to subsidiary which was guaranteed by agency pursuant to the assistance agreement the financial assistance obligations of agency were to be performed in stages as part of its contractual obligations agency was required to provide liquidity for subsidiary agency’s liquidity obligation was primarily handled through deposits made to the liquidity account additionally under the agreements with agency including the assistance agreement acquiring was required to establish and maintain a number of memorandum accounts including the sr accounts the sr accounts ie sra i and sra ii were used to track the debits sra i debits and sra ii debits and credits sra i credits and sra ii credits as specified in the assistance agreement the assistance agreement identified specific items that were to be treated as debits and credits to the sr accounts one all references to the internal_revenue_code and federal_income_tax regulations are to the provisions in force at the time of the relevant event or taxable_year being discussed ------------------------------------------------------------------------------------------------------------------------------------------ -------------------------------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------- agency payments took into account the debits and credits reflected in the sr accounts in determining the amount of agency’s contributions to the liquidity account and or corporation x under the assistance agreement tam-161900-04 item specifically identified as an sra i credit under the assistance agreement was tax benefits the sra i credit entries for any_tax benefits generally reflected the parties’ tax_benefit sharing tbs allocation of a of the federal net tax_benefit as provided under section of the assistance agreement belonging to agency that is as part of the acquisition of failed thrift from agency acquiring agreed to and contracted with agency to allocate a of the federal net tax_benefit as provided under section of the assistance agreement thus prior to reorganization acquiring and agency agreed that acquiring would obtain only b of the federal net tax_benefit as provided under section of the assistance agreement as a result of acquiring’s acquisition of failed thrift certain federal_income_tax savings attributable to acquiring’s use of any loss_carryovers of failed thrift and any_tax losses or net operating losses nols of subsidiary factored into the tbs computation as acquiring benefited from the tax benefits section of the assistance agreement required that corporation x make a payment equal to a of such tax benefits to the liquidity account as provided in that assistance agreement after termination of the assistance agreement the sr accounts were to terminate and any subsequently determined tax benefits as computed under section of the assistance agreement were to be remitted directly by corporation x to agency acquiring obtained the tax ruling which addressed in part certain federal_income_tax consequences flowing from the tbs arrangement the tax ruling provided that as long as subsidiary continued to qualify as a domestic_building_and_loan_association as defined in the code any assistance received or accrued by acquiring directly or indirectly through subsidiary from agency would be excludible from gross_income pursuant to sec_597 the tax ruling also provided that should certain conditions occur any subsequent that is future losses generated by subsidiary would no longer be available for use by subsidiary prior to year b the intercompany note was paid in full and the conditions set forth in the tax ruling occurred reorganization on date corporation b the common parent of taxpayer and corporation x entered into the merger agreement the terms of that agreement provided that corporation x section also subjected certain other tax benefits to this arrangement for purposes of this memorandum our analysis of the parties’ tbs arrangement applies both to the federal net tax_benefit and to such other tax benefits as provided in section of the assistance agreement the assistance agreement’s modification clause provides that no amendment or modification of the agreement shall be binding unless executed in writing by the parties or their successors the assistance agreement’s binding clause provided that the terms and provisions of the agreement were binding upon and inure to the benefit of the parties their respective transferees successors and assigns ------------------------------------------------------------------------------------------------------------------------------------------ -------------------------------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------- tam-161900-04 would merge into corporation b and that all outstanding_stock of corporation x would be converted into the right to receive stock in corporation b the merger of corporation x with and into corporation b reorganization occurred late in year b and constituted a reorganization within the meaning of sec_368 section of the merger agreement required corporation x to use its best efforts to obtain any necessary consents and modifications so that the agency agreements shall be assumed by a subsidiary or subsidiaries as designated by corporation b further section required corporation x to use its best efforts to resolve all material outstanding differences between corporation x and agency and to facilitate renegotiation of the agency agreements to simplify the remaining effective provisions of the agreements the agency agreements are defined in section dollar_figure of the merger agreement as all of the currently applicable agreements between corporation x and agency arising from the year a acquisition corporation x and agency entered into the tax settlement agreement page of which expressly states that corporation x is currently in negotiations with corporation b with respect to reorganization the tax settlement agreement expresses the parties’ intent to clarify and resolve certain interpretative disputes that have arisen with respect to certain provisions of section of the assistance agreement sec_4 of the tax settlement agreement recites the parties’ agreement to negotiate in good_faith to achieve a simplification of section of the assistance agreement that would take effect for taxable years ending after reorganization the modification clause of the tax settlement agreement provides that only those portions of section of the assistance agreement specifically addressed in the agreement are modified by the tax settlement agreement and that the remainder of section remains unmodified in full force and effect further the modification clause states that the agreement may not be modified or supplemented in any or all respects except in written_agreement of all the parties the binding clause of the tax settlement agreement provides that the agreement is intended to bind each of the parties and their successors and assigns in anticipation of reorganization corporation x subsidiary subsidiary and other affiliates of corporation x entered into the transfer agreement with agency that agreement provided among other things for the transfer to agency of the stock of subsidiary and certain assets of subsidiary the transfer agreement also clarified that subsidiary 1’s remaining assets and liabilities along with the tax_attributes of subsidiary eg nol carryovers carried over with subsidiary after reorganization additionally article of the transfer agreement further modified section and certain other tbs provisions of the assistance agreement following execution of the transfer agreement any debits or credits to the sr accounts for tbs amounts were to be handled between the parties as payments in immediately available funds after reorganization the tax losses or nols which triggered the tbs payments were tam-161900-04 located in subsidiary which survived reorganization as a subsidiary of corporation b in anticipation of the presubmission conference taxpayer stated that corporation x remained responsible for performing the section tbs payment obligation up to the date of the merger and that such obligation was assumed by corporation b in reorganization see the presubmission memorandum dated date at page of however section dollar_figure of the transfer agreement states that f rom and after the closing date of reorganization such definitions in section of the assistance agreement shall be further amended to replace the phrase corporation x with subsidiary in each place in which it appears the modification clause in the transfer agreement states that no modification or waiver of the provisions of the agreement nor any consent to any departure from the agreement shall be effective unless it is in writing signed by all the parties the binding clause in the transfer agreement provides that the agreement shall be binding upon and shall inure to the benefit of the parties and their respective successors and assigns the tax settlement agreement and the transfer agreement modified the assistance agreement by requiring among other things a simplification of the tbs calculation and elimination of the sr accounts which were replaced by direct payments with respect to the section items however other provisions of section concerning the calculation of tbs amounts and the obligation to make the section payments remained in full force and effect at the time of reorganization consequently to the extent that taxpayer received certain federal_income_tax savings attributable to the tax benefits resulting from reorganization attributable to the original acquisition of failed thrift the obligation under section of the assistance agreement continued in force after reorganization however pursuant to the transfer agreement it was subsidiary that was required to perform the tbs payment obligation called for under the agreements that is following reorganization subsidiary was obligated to remit a of the federal net tax_benefit as determined under section of the assistance agreement as modified by the parties to agency further following reorganization the tbs allocation between agency and subsidiary remained respectively a and b corporation b remitted a tbs payment to agency in the amount of dollar_figurex in year c in connection with the use of subsidiary 1’s nol carryforward similarly in each of year d and year e corporation b remitted a tbs payment to agency in the amount of dollar_figurey and dollar_figurez respectively these tbs payments were attributable to subsidiary 1’s nol carryforwards utilized in taxable years immediately preceding year c and d respectively following the merger on date subsidiary changed its name the facts before us suggest that no events took place other than a mere name change thus our analysis treats this event as a mere name change following reorganization no tbs payment was due to agency prior to year c tam-161900-04 corporation b initially claimed that it succeeded to the assistance agreement and the obligation to pay agency for subsidiary 1’s nols see the memorandum dated date at page of from taxpayer submitted in connection with the presubmission conference however taxpayer now maintains that following reorganization corporation b entered into an oral contract with agency that replaces in the entirety all prior contracts and agreements between agency and corporation x and certain other affiliates of corporation x dealing with the section tbs payments taxpayer claims that under the terms of this new agreement corporation b was responsible to make any tbs payments to agency and that the manner for the tbs payment calculations changed from the manner specified in the earlier agreements between agency and acquiring the sole evidence taxpayer provides of the existence of the oral contract is agency’s acceptance of those tbs payments from corporation b taxpayer has not proffered specific details regarding this oral agreement with agency for example taxpayer has not stated the effective date of this agreement nor who represented agency in connection with this oral modification of those earlier written agreements taxpayer also has not offered any evidence that all of the prior written tbs-related agreements were extinguished taxpayer asserts that corporation b initially capitalized the tbs payments when those payments were made in years c d and e however pursuant to affirmative claims filed with the examining agent taxpayer now seeks to treat those tbs payments as its currently deductible ordinary and necessary business_expenses under sec_162 law and analysis sec_162 and ' a generally allow a deduction for all the ordinary and necessary expenses paid_or_incurred during the taxable_year in carrying on any trade_or_business courts generally have construed ' as containing five conditions that an expenditure must meet to qualify for deduction the expenditure must be an expense ordinary necessary paid_or_incurred during the taxable_year and made to carry on a trade_or_business see 403_us_345 it is well-established that deductions are a matter of legislative grace and that the taxpayer bears the burden of proving entitlement to the deduction sought 292_us_435 503_us_79 the key issue in this case is whether the tbs payment obligations were an expense deductible under sec_162 for corporation x as well as for subsidiary or any other member of the corporation b group they were not for corporation x and its successors the treatment of tbs payments for federal_income_tax purposes flows from the doctrine_of claim of right as expressed with respect to items of income if items are received and held without being taken into income a corollary to claim of right provides taxpayer’s position as discussed below is inconsistent with section dollar_figure of the transfer agreement tam-161900-04 that disposal of these items would not arguably reduce income for example as a deduction under sec_162 generally for purposes of income_recognition i f a taxpayer receives earnings under a claim of right and without restriction as to its disposition he has received income even though it may still be claimed that he is not entitled to retain the money and even though he may still be adjudged liable to restore its equivalent 286_us_417 however if a taxpayer receives funds as an agent or trustee for a designated purpose such funds are not taxable to such taxpayer illinois power company v commissioner 82_tc_842 aff’d in part rev’d in part 792_f2d_683 7th cir see also 55_tc_761 aff’d per curiam 456_f2d_255 5th cir 54_tc_1325 47_tc_391 aff’d 407_f2d_210 9th cir whether amounts constitute income when received depends upon the parties' rights and obligations at the time the payments are made 493_us_203 the underlying principle is that the taxpayer is allowed to exclude from his income money received under an unequivocal contractual statutory or regulatory duty to repay it so that he really is just the custodian of the money illinois power company f 2d pincite as a corollary to these income rules if a taxpayer would not have dominion over amounts received by it such that income is reportable upon receipt the taxpayer may not deduct any later disbursements of such funds see generally commissioner v indianapolis power light u s pincite security deposits and the determination of whether the deposits are income upon receipt and thus whether later disbursements of the deposits are deductible turn on the intentions and acts of the parties as ascertained from the agreements and related circumstances revrul_72_519 1972_2_cb_32 see also o’meara v commissi8_tc_622 a taxpayer may not take a loss in connection with an income item unless it has been previously taken up as income in the appropriate tax_return thus whether amounts are permitted as a deduction depends upon the parties’ rights and obligations in connection with the acquisition of failed thrift agency and corporation x entered into cross obligations to facilitate the acquisition under the assistance agreement which spelled out certain rights and obligations of the parties agency was required to perform on its financial for example with respect to the promissory notes and non- financial for example with respect to certain regulatory forbearance promises obligations concomitantly corporation x was required to perform on its financial for example tbs payments and non-financial for example with respect to certain management duties obligations as part of the negotiated terms and conditions for the acquisition of failed thrift by corporation x the parties agreed to a tax sharing arrangement with respect to the tam-161900-04 federal net tax_benefit derived by corporation x as provided in section of the assistance agreement that is corporation x was not entitled to a of the federal net tax_benefit within the meaning of section of the assistance agreement originally the parties treated the tbs obligation as entries to the sr accounts the total amount of financial assistance to be provided to corporation x was not established as a sum certain when the assistance agreement was executed in year a rather it was expressed by the formulas used in maintaining the sr accounts because of the netting of the sra i debits and the sra i credits the tbs amounts that were credited to sra i had the effect of reducing the amount of financial assistance that agency was otherwise required to pay corporation x as provided in section of the assistance agreement corporation x was obligated to convey a of the federal net tax benefits to agency to the extent corporation x used such tax benefits thus pursuant to its agreement with agency and as given effect in the tax ruling corporation x did not acquire more than the right to retain b of the federal net tax benefits as a matter of contract it had bargained away a of such tax benefits as a condition of acquiring failed thrift from agency under the assistance agreement corporation x never had the right to agency’s a of the federal net tax benefits rather all corporation x ever owned with respect to the federal net tax benefits as provided in section of the assistance agreement was b of such benefits taxpayer argues that it is entitled to deduct the federal net tax benefits paid to agency after the merger because taxpayer has maintained inconsistent arguments with respect to the tbs payment obligation we will set each argument separately and then address them in order taxpayer’s argument in its presubmission statement taxpayer states that corporation b made section tbs payments to agency because it assumed such obligation as a successor_in_interest to corporation x more specifically taxpayer states that in connection with reorganization corporation x and others negotiated and entered into the transfer agreement taxpayer states that the transfer agreement set out the parties’ agreement to modify and replace section of the assistance agreement taxpayer further states that corporation b succeeded to this agreement and the obligation to pay agency for subsidiary 1’s nols when corporation b acquired the corporation x group taxpayer states that corporation b’s payments to agency were appropriate and helpful to corporation b’s business because solely as a result of making these payments corporation b was permitted to utilize subsidiary 1’s nols to offset taxable_income on its consolidated federal_income_tax return see the presubmission memorandum dated date from taxpayer taxpayer’s argument tam-161900-04 taxpayer now states that its section tbs payments to agency arise not in corporation b’s capacity as a successor_in_interest to corporation x’s with respect to the transfer agreement obligations but out of a separate agreement between corporation b and agency in this discussion taxpayer states that corporation b did not and could not as a matter of law assume corporation x’s or subsidiary 1’s obligations under section of the assistance agreement as modified by the transfer agreement taxpayer states that because of the changes in the structure of the corporation x group that resulted from the merger section provisions as amended were rendered virtually meaningless thus corporation b entered into a new and oral agreement with agency and that all prior tbs contracts were extinguished see taxpayer’s response to audit team’s request for technical_advice dated date response to argument reorganization was a state law merger whereby corporation x merged into corporation b reorganization qualified as a reorganization described in sec_368 as a state law merger all of corporation x’s assets liabilities and contractual obligations as of the effective time of the merger became corporation b’s assets liabilities and contractual obligationsdollar_figure but for the transfer agreement corporation b would have succeeded to corporation x’s obligation to make the section tbs payments to agency under state lawdollar_figure however with respect to section tbs payments the transfer agreement specifically requires subsidiary to perform in place of corporation x from and after the time of the merger we interpret from and after the acquiring_corporation in a state law merger becomes answerable for all the acquired corporation’s obligations existing at the date of the merger without enlargement diminution or modification regardless of whether such obligation is imposed by statute by the charter by contract or otherwise see c j s_corporations sec_810 had corporation b succeeded to corporation x’s contractual obligation as a result of the merger then sec_381 would apply to determine corporation b’s tax treatment of such obligations sec_381 states that the acquiring_corporation shall succeed to and take into account as of the close of the day of the transfer the items described in sec_381 including items in c of the transferor since the section payment obligation under the assistance agreement was in full force and effect at the time of the merger and was held by corporation x such obligation would have become an obligation of corporation b under sec_381 sec_381 provides that if the acquiring_corporation corporation b in a sec_368 reorganization assumes an obligation of the target_corporation corporation x and such obligation if paid_or_accrued by the target_corporation would have been deductible to the target_corporation the acquiring_corporation may deduct such item when it is paid_or_accrued by the acquiring_corporation this provision applies to an obligation that gives rise to a liability after the time of the merger under sec_381 upon payment of the obligation to agency corporation b would be entitled to a deduction only if corporation x would have been entitled to such deduction because corporation x never held more than a right to retain b of the federal net tax benefits corporation x would not have been entitled to deduct any tbs payments to agency had it ever been required to remit such amounts directly to agency thus corporation b would also not be able to deduct such tbs payments to agency had it acquired that obligation from corporation x tam-161900-04 to mean that subsidiary replaces corporation x as the party to the agreement with the responsibility of performance under section as a contractual matter and thus corporation b did not succeed to such corporation x performance requirements by operation of merger we also do not find language in the transfer agreement that supports taxpayer’s statement that the parties agreed to replace section of the assistance agreement the transfer agreement does not say that rather section dollar_figure of the transfer agreement sets out certain modifications and clarifications with respect to the assistance agreement further article of the transfer agreement states that p rior to the closing date of the merger the term credited as defined in section a of the assistance agreement shall be amended to mean paid to agency by parent company in immediately available funds emphasis added the term parent company is not defined in the transfer agreement but it is the term denoting corporation x in the assistance agreement in addition article states that from and after the closing date of the merger such definitions shall be further amended to replace the phrase ‘parent company’ with subsidiary in each place in which that phrase appears emphasis added we find that the language of the transfer agreement does not show an intent to replace section of the assistance agreement rather the term replace as used in the transfer agreement merely shifts to subsidiary a contract responsibility delegated to corporation x under the assistance agreement as amended replacing a party’s name with another party’s name in the relevant documents does not equate to an intention to replace the assistance agreement as amended itself this is especially so where as here the obligation to be performed remains unchanged we also disagree with taxpayer that corporation b’s payments to agency compensate agency for subsidiary 1’s nols subsidiary 1’s nols survived reorganization as limited by the code and regulations corporation b could not purchase nols from agency rather corporation b’s payments to agency were in satisfaction of subsidiary 1’s own obligation under section of the assistance agreement as amended moreover the ability of subsidiary 1’s nols to offset taxable_income of the taxpayer consolidated_group would not differ whether subsidiary made the tbs payment to agency directly or whether corporation b undertook this obligation taxpayer has argued that its ability to use subsidiary 1’s nols resulted solely from corporation b making these payments however taxpayer’s ability to utilize subsidiary 1’s nols to offset taxable_income on its consolidated federal_income_tax return is determined by reference to the code and regulations not corporation b’s performance with respect to the tbs payments due agency we also understand taxpayer to say that the tax laws as in effect at the time of reorganization applied without regard to the special tax rules applicable to the acquisition of failed thrift reorganization resulted in a change_of_ownership within tam-161900-04 the meaning of sec_382 reorganization also resulted in the termination of the corporation x consolidated_group accordingly subsidiary 1’s nols were subject_to the srly regulation sec_12 as in effect at the time of reorganization here again it is the application of the code and the regulations that determine to what extent subsidiary 1’s losses can be utilized to offset income taxpayer does not explain why solely as a result of corporation b making subsidiary 1’s tbs payments corporation b is permitted to utilize subsidiary 1’s nols to offset taxable_income of taxpayer response to taxpayer’s second argument we conclude that the transfer agreement shifts the performance of corporation x’s section contractual obligation from corporation x to subsidiary however corporation b is a successor under state merger law to all other provisions of the assistance agreement and all other contractual obligations of corporation x at the time of the merger taxpayer seems to argue that corporation b ultimately is not a successor to the assistance agreement and that its payment of a of the federal net tax benefits to agency does not have its origins in the assistance agreement taxpayer further argue sec_12 generally the income of a consolidated_group is determined by aggregating the income of all of the members and offsetting it against the losses of the members however in the instant case where subsidiary incurred its losses in a taxable_year in which it was not a member of corporation b’s consolidated_group the srly separate_return_limitation_year rules may limit the use of such losses by the corporation b group the srly regulations changed a number of times prior to the promulgation of final regulations which were adopted in date t d t d t d fed reg proposed_regulations were published in date co-078-90 fed reg temporary and reproposed regulations were adopted in date co-24-96 fed reg a full discussion of the srly rules is beyond the scope of this advice however we note that the final regulations provide an overlap rule where an acquisition would have been subject_to both the sec_382 limitation and the srly limitation prior to the regulations it would only be subject_to sec_382 as of the effective date of the regulations the regulations however cannot be applied retroactively thus for example where p acquires s in in a transaction subject_to srly and sec_382 and s has no income to utilize its loss carryforwards such losses continue to carryforward as of the effective time of the regulations s’s losses that were formerly subject_to srly are no longer subject_to this limitation thus in s may have an accumulation of losses subject_to sec_382 that can be used to offset the income of the members of the p group sec_172 factors into the order in which losses are used thus losses are generally absorbed in the order of the taxable years in which they arose losses carried from taxable years ending on the same date and similarly available to offset consolidated_taxable_income for the year are generally absorbed on a pro_rata basis thus it is possible that if taxpayer has cnol carryforwards and subsidiary has srlyed carryforwards that arose in the same year taxpayer’s and subsidiary 1’s loss carryforwards are both potentially available to offset subsidiary 1’s attributable portion of taxpayer’s consolidated income in addition other rules may factor into the order of the use of losses for example sec_382 applies such that if losses are carried from the same taxable_year those losses subject_to a sec_382 limitation are absorbed before losses that are not subject_to such limitation tam-161900-04 that corporation b’s tbs payments should be viewed for federal tax purposes as unrelated to the assistance agreement or other agreements relating to that assistance agreement this position however simply cannot be reconciled with the fact that corporation b made tbs payments to agency if corporation b were truly operating independently of the assistance agreement it never would have made such payments rather taxpayer would have kept the entire amount of the federal net tax benefits resulting from the use of subsidiary 1’s nols taxpayer states that the changes resulting from reorganization with respect the corporation x group rendered meaningless the section calculations of the tbs payments as reflected in the prior agreements with agency taxpayer asserts that because corporation b entered into an oral agreement with agency and that corporation b’s payments to agency arise out of this oral contract rather than the assistance agreement as amended the tbs payments qualify as ordinary and necessary deductions under sec_162 we understand that taxpayer’s argument in effect is that the complexity of its own structure renders unworkable the tbs payment calculations as set out in the written agreements in effect at the time of reorganization our own review of the relevant agreements identified herein did nor disclose any provision that specifically provides for the calculation of the tbs payments required under those agreements if there was a termination of the corporation x group or if subsidiary 1’s nols became subject_to limitation under sec_382 and or the srly provisions nor did our review disclose whether in such case subsidiary 1’s losses must be used in preference to another corporation’s losses so as to maximize the amount of the tbs payments to agency however the fact that additional clarification may have been necessary for subsidiary to calculate its section tbs payments after reorganization occurred does not negate the continuing application of the assistance agreement as modified rather the need to clarify the section calculations in itself evidences the continuing validity of that obligation if neither subsidiary nor corporation b acting on subsidiary 1’s behalf continued to make the section payments to agency following reorganization agency would have had the right to enforce the assistance agreement as modified against subsidiary further the specific terms of the assistance agreement as modified are contrary to taxpayer’s assertion that the agreement can be extinguished by an oral contract indeed under the binding clauses and the modification clauses in the relevant agreements it is patently clear that the parties to those agreements intended that successors including assignees would be bound and that any modifications of these agreements would be made in writing taxpayer has failed to show documentation that the assistance agreement as amended was extinguished taxpayer has also not furnished any evidence that agency agrees with taxpayer’s characterizations the fact that the agency accepted the tbs payments in the amounts determined by corporation b is not inconsistent with the stated intentions of the parties to the transfer agreement tam-161900-04 to simplify the section computations thus the fact that corporation b made the tbs payments to agency does not extinguish the written agreements nothing in the assistance agreement as amended prohibited subsidiary from having someone act on its behalf with respect to its obligation to remit tbs payments in fact corporation b’s capitalization13 of its payments to agency shows that corporation b treated the payments at issue as made on behalf of subsidiary while not absolutely clear corporation b could have reached this result by in effect treating each payment as a deemed contribution to the capital of subsidiary followed by a deemed payment by subsidiary to agency accordingly corporation b would increase its basis in the subsidiary stock by the amount of the deemed payment to subsidiary alternatively corporation b could have reached this same result if it treated subsidiary as obligated to reimburse corporation b for making these tbs payments on subsidiary 1’s behalf and subsidiary does not reimburse corporation b although this memorandum expresses no opinion as to whether the tbs payments can be properly capitalized such treatment evidences the continuing validity of subsidiary 1’s contractual obligation to perform under the assistance agreement as modified by the transfer agreement taxpayer has also argued that corporation b entered into a new contract with agency because after reorganization the amount of the tbs payments to agency depended upon taxpayer’s utilization of subsidiary 1’s nols further taxpayer states that this utilization now depends on factors germane to taxpayer’s own income and losses which were never a factor in the original agreements however this is not a meaningful distinction between taxpayer’s situation after reorganization and that of the corporation x group prior to reorganization each year the amount of the section obligation was always subject_to change because it was dependent on the amount of income against which the losses could be used because the right to retain b of the net federal tax_benefit was all that was acquired by corporation x there would have been no deduction under sec_162 available to corporation x with respect to any performance of the section tbs payment obligation when the performance obligation under the assistance agreement with respect to the tbs payments shifted to subsidiary from and after reorganization there was no material_change in the proportional ownership interests of the federal net tax benefits as between agency and subsidiary the fact that corporation b made the payments to agency does not convert the character of those payments from nondeductible to deductible the use of subsidiary 1’s losses under the code or regulations does not depend on whether corporation b or subsidiary makes the payments to agency taxpayer we understand that taxpayer originally capitalized these payments subsidiary is an indirect subsidiary of taxpayer the factual record does not state how taxpayer capitalized these payments for the purposes of this discussion we presume taxpayer capitalized its tbs payments in its indirect ownership of the stock of subsidiary tam-161900-04 implies that the shifting of the payment obligation from subsidiary to corporation b increased taxpayer’s ability to use the losses thereby providing a direct benefit to corporation b’s business operations however any additional benefit derived by corporation b was incidental at best for the reasons set forth above we conclude that in making tbs payments to agency corporation b fulfilled an obligation of its subsidiary subsidiary that was formerly the obligation of corporation x under the assistance agreement as modified by the parties in writing further for the same reasons that the tbs payments were not deductible by corporation x prior reorganization these payments would not be deductible by subsidiary or any other member of the corporation b group therefore the tbs payments made to agency in years c d and e are not deductible under sec_162 caveat s no opinion is expressed as to the proper treatment of the tbs payments by taxpayer including corporation b and subsidiary under any other provision of the code a copy of this technical_advice_memorandum is to be given to the taxpayer s sec_6110 of the code provides that it may not be used or cited as precedent


t c memo united_states tax_court christopher m teske petitioner v commissioner of internal revenue respondent docket no filed date larry d harvey for petitioner randall l preheim for respondent memorandum opinion vasquez judge this case is before the court on respondent’s motion for summary_judgment pursuant to rule unless otherwise indicated all rule references are to the tax_court rules_of_practice and procedure and all section references are to the internal_revenue_code in effect for the years in issue after a concession the sole issue for decision is whether petitioner can exclude from income wages earned during and from working in antarctica background at the time he filed the petition petitioner resided in bellingham washington during and petitioner performed services at mcmurdo station in ross island antarctica on his and federal_income_tax returns petitioner excluded wage income earned and received during and for services performed in antarctica discussion i summary_judgment rule a provides that either party may move for summary_judgment upon all or any part of the legal issues in controversy full or partial summary_judgment may be granted only if it is demonstrated that no genuine issue exists as to any material fact and that the legal issues presented by the motion may be decided as a matter of law see rule b 98_tc_518 affd 17_f3d_965 7th cir we conclude that there is no genuine issue as to any material fact and that a decision may be rendered as a matter of law respondent concedes that no penalty pursuant to sec_6662 is due from petitioner for and ii in general sec_61 provides that gross_income means all income from whatever source derived accordingly citizens of the united_states generally are taxed on income earned outside the geographical boundaries of the united_states unless the income is specifically excluded from gross_income 117_tc_95 affd sub nom 68_fedappx_44 9th cir affd sub nom 357_f3d_1108 10th cir exclusions from income are construed narrowly and taxpayers must bring themselves within the clear scope of the exclusion id iii sec_911 in 126_tc_89 473_f3d_790 7th cir arnett ii we addressed the arguments made by the parties herein regarding sec_911 the u s court_of_appeals for the seventh circuit agreed with our analysis of sec_911 and affirmed our conclusion that antarctica is not a foreign_country pursuant to sec_911 and the regulations thereunder arnett v commissioner f 3d pincite we shall not repeat our analysis from arnett i herein we follow our analysis and holding in arnett i and the analysis and holding of the court_of_appeals in arnett ii in 126_tc_89 affd 473_f3d_790 7th cir we concluded our opinion with a continued iv conclusion accordingly for the reasons stated in arnett i arnett ii and herein we conclude that petitioner cannot exclude from gross_income wages earned during and from working in antarctica to reflect the foregoing an appropriate order and decision will be entered continued citation of sec_863 suggesting that sec_863 provided an additional reason to rule against the taxpayer id pincite see also sec_863 providing that income earned in antarctica by a u_s_person is sourced in the united_states in arnett v commissioner f 3d pincite the u s court_of_appeals for the seventh circuit addressed sec_863 in greater detail stating at the outset we think that it is important to note that considering antarctica not to be a foreign_country is compatible with the general statutory scheme notably sec_911 is found under subtitle a chapter subchapter_n of the irc which is designated tax based on income from sources within or without the united_states part i of this subchapter entitled source_rules and other general rules relating to foreign_income deems any activity in antarctica to be space_or_ocean_activity in turn the united_states is designated the source country of income from such activity when earned by a citizen_of_the_united_states sec_863 although this provision does not provide a definitive answer as to whether antarctica is a foreign_country it supports the conclusion that sec_911 is not intended to apply to income earned for services provided in antarctica we take this opportunity to state our agreement with the court of appeals’ conclusion set forth above see also 450_us_1


department of the treasury washington dc contact person telephone number in reference to op e eo t date internal_revenue_service uil legend i u w_i w dear sir or madam this is in response to a ruling_request dated date submitted on your behalf by your authorized representative a the and donors trust exempt b establishing a organization sec_501 of education charitable_contributions from the donors during donors’ from donors’ estates upon the donors’ deaths agreement to income_tax section the advancement of receive trust lives and revenue code science and corpus under to distribute trust and health internal executed federal for the medical income trust from will have the a that the principal reason for creating the trust is to provide an entity donors’ estates and distribute the trust’s assets according to_ donors’ intention principally for the furtherance of education medical and health science receive charitable_bequests from will the article third section a the trust charitable relevant part exclusively science and educational_purposes that for of the trust agreement provides in is being established and operated health scientific medical and article third section b of the trust agreement one on such termination of for c section of any future more or of the internal_revenue_code tax code or the trust provides that assets shall be distributed section the corresponding the be distributed to to or shall exempt purposes within the meaning of ee federal government or to a state_or_local_government for a public purpose sec_4947 of the code provides that of subchapter_f of chapter for purposes of part ii other than sec_508 b and c and for purposes of this chapter a_trust that is not the unexpired exempt from taxation under sec_501 interests in which are devoted to the purposes and for which a deduction was described in sec_170 b allowed under sec_170 sec_2055 sec_2106 a or the corresponding provisions of prior_law shall be treated as an organization described in sec_501 all or more b b or c one of of of trust sec_53_4947-1 in b the foundation and similar excise_taxes regulations generally provides that sec_4947 subjects trusts which are not exempt from taxation under sec_501 all or part of the unexpired interests in which are devoted to one or more of the purposes described in sec_170 b and which for which a deduction was allowed under have amounts sec_170 or to the same requirements and restrictions as are imposed on private_foundations to prevent these trusts from being used to avoid the requirements and restrictions applicable to private_foundations for purposes of this section a_trust shall be presumed in the absence of proof to the contrary to have amounts in trust for which a deduction was allowed under sec_170 sec_2055 sec_2106 a deduction would have been allowable under or if one of these sections the basic purpose of sec_4947 a b b sec_56 c c is of sections sec_1_508-1 purposes d of the regulations states that solely and a_trust described in section have to file the notice described in section however a_trust described in sec_501 which was be exempt under section it for d e and chapter a a organized after october a by reason of being described in sec_501 only if files such notice d a d does not shall sec_1_508-2 viii since a charitable_trust described in sec_4947 a required to d b gifts or bequests do not apply to such a_trust the regulations states that not sections i b which disallow deductions for and b sec_508 notice under file of is a the trust in this case is not exempt under sec_501 of the code because the trust agreement contains provisions which bo to or the one purposes more trust restrictions the trust’s unexpired interests are clearly indicate that all of the section devoted of c organization will b described in sec_501 and subject_to the same requirements and in addition gifts or bequests made to the trust will be allowable as deductions under sec_170 sec_545 b c a the trust is presumed in the absence of proof to the contrary to have amounts in trust for which a deduction was allowed those sections been allowable under a deduction would foundations described or private imposed treated have are on in as if an be as based on the information submitted and the representations made therein we rule as follows the trust is a non-exempt charitable_trust within the meaning of sec_4947 the code and sec_53_4947-1 of the regulations because all the unexpired interests of the trust are devoted to one or more of the purposes a c b deduction is allowable for contributions made such trust under sec_170 and sec_2055 described section and of in to contribution any individual donor contributing to the trust shall be allowed to deduct for the taxable_year during which the their contributions as a charitable_contribution to the extent of sec_170 b whichever shall apply because such trust is a private_foundation other than one that is described within the meaning of sec_170 b e ii or sec_170 d permissible limitations maximum trust made the the of is to any taxable_estate providing bequests legacies devises or transfers to the trust shall be allowed to deduct from the value of the gross_estate the amount of such charitable_contribution as provided for in sec_2055 of the code these rulings are directed only requested them sec_6110 may not be used or cited by others as precedent to the organization that of the code provides that they because this ruling may help resolve any questions regarding your exempt status you should keep a copy of this ruling letter in your permanent files if you have any questions please call the person whose name and telephone number appear in the heading of this letter sincerely robert c uerpor fr robert c harper jr chief exempt_organizations technical branch