t c summary opinion united_states tax_court shawn colleen and david lee blanchette petitioners v commissioner of internal revenue respondent docket no 9742-09s filed date shawn c and david l blanchette pro sese mark schwarz for respondent laro judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect when the petition was filed pursuant to sec_7463 the decision to be entered is not reviewable by any other court and this opinion shall not be treated as precedent for any other case 1subsequent section references are to the applicable versions of the internal_revenue_code rule references are to the tax_court rules_of_practice and procedure petitioners petitioned the court to redetermine deficiencies of dollar_figure dollar_figure and dollar_figure in their federal income taxes for and respectively we decide whether petitioner shawn colleen blanchette’s ms blanchette activity of selling science fiction memorabilia was an activity_not_engaged_in_for_profit under sec_183 we hold that ms blanchette was not engaged in her activity for profit background some of the facts have been stipulated and are so found the stipulated facts and the exhibits submitted therewith are incorporated by this reference petitioners david lee blanchette mr blanchette and ms blanchette resided in las vegas nevada when their petition was filed mr blanchette was a software engineer who earned dollar_figure dollar_figure and dollar_figure in and respectively ms blanchette became an avid reader of science fiction literature in since that time her passion for science fiction has grown steadily and she has now been a collector of related memorabilia for more than years as early as ms blanchette has bought and sold science fiction memorabilia retail in ms blanchette formed and operated a proprietorship under the name a wrinkle in time awit from through ms blanchette operated awit as a retail store in santa clara california leasing space and obtaining a business license to do so ms blanchette was the primary business owner and was intimately involved with all aspects of the business on average she worked at her store hours per day days a week ms blanchette aggressively promoted awit locally with newspaper advertisements and regionally at science fiction conventions although ms blanchette adopted a business plan in to transform awit into a partnership that could further penetrate the science fiction memorabilia market she never executed that plan despite ms blanchette’s efforts her collectibles activity generated losses from through in ms blanchette relocated to sunnyvale california where she operated awit as a retail store in leased space until during that time ms blanchette developed a web site to sell her collection to online customers although she adopted a second business plan in to rebrand awit’s online image ms blanchette did not bring that plan to fruition she continued to incur losses from through in ms blanchette relocated to las vegas nevada from through ms blanchette sold science fiction memorabilia mostly online and at conventions during that time ms blanchette rented warehouse space to store her collection and although the warehouse was generally not open to the public she would sometimes show that collection to potential customers ms blanchette incurred losses from through in petitioners inherited real_estate second home from mr blanchette’s mother ms blanchette subsequently moved her collection from the warehouse to the second home and used that home exclusively as a storage unit for her collection ms blanchette continued to add to her collection while also selling items online and at conventions with the help of mr blanchette ms blanchette valued the collection in and at dollar_figure dollar_figure and dollar_figure respectively she provided a generalized list of the items making up that collection a sampling of which is as follows description quantity quantity quantity big_number big_number big_number big_number big_number big_number art big_number autographs big_number bumper stickers big_number comic book sec_420 keychain sec_420 magazine sec_468 miniatures needlework patterns big_number photos big_number big_number postcards big_number record albums stickers trading card set sec_405 big_number big_number trading cards t-shirts big_number big_number big_number big_number big_number big_number ms blanchette did not insure her collection and states that some of the comic books and trading cards are worthless during and subject years ms blanchette’s collectibles activity generated gross_receipts of dollar_figure dollar_figure and dollar_figure respectively petitioners claimed losses from the operation of their collectibles activity on the schedules c profit or loss from business attached to their federal_income_tax returns as follows dollar_figure dollar_figure dollar_figure gross_receipts cost_of_goods_sold big_number big_number big_number other income -0- -0- big_number big_number big_number gross_income operating_expenses big_number big_number big_number big_number big_number big_number income loss ms blanchette’s collectibles activity has not yielded a net financial profit during any year from through and total losses are estimated to be between dollar_figure and dollar_figure during the subject years ms blanchette devoted between and hours per day days a week to her collectibles activity on average ms blanchette would spend days per year working out of her home during which time she processed orders responded to customers’ inquiries verified inventory and prepared for conventions on average petitioners attended conventions per year in and petitioners spent and days respectively driving to and selling at various conventions on average they drove miles per day 2in and petitioners reported profits in their collectibles activity of dollar_figure and dollar_figure respectively for hours per day in order to attend these conventions once there petitioners would typically work hours per day taking no breaks for meals petitioners would display the collection on two to five tables and paid approximately dollar_figure per table for the subject years ms blanchette kept spreadsheets of the income and expenses related to her collectibles activity she also maintained a separate checking account and credit card though she did not engage in direct advertising ms blanchette presented various state tax forms and statements which she received between and respondent issued to petitioners a notice_of_deficiency dated date disallowing petitioners’ deductions for schedule c expenses for each of the subject years respondent determined that the expenses reported on schedules c were not allowable as trade_or_business_expenses because petitioners did not establish that awit was a bona_fide business venture entered into for profit petitioners petitioned the court and on date a trial was held in las vegas nevada ms blanchette was the only witness to testify discussion respondent disallowed petitioners’ schedule c expense deductions for the subject years because respondent determined that ms blanchette’s collectibles activity was an activity_not_engaged_in_for_profit within the meaning of sec_183 petitioners argue generally that those expenses were deductible as sec_162 ordinary and necessary business_expenses incurred in connection with ms blanchette’s trade_or_business for the reasons set forth below we hold for respondent the commissioner’s determinations in a notice_of_deficiency are presumed correct and the taxpayer bears the burden of proving that those determinations are in error rule a 290_us_111 pursuant to sec_7491 the burden_of_proof as to factual matters may shift to the commissioner under certain circumstances petitioners have not alleged that sec_7491 applies nor have they established their compliance with the substantiation and recordkeeping requirements of the internal_revenue_code see sec_7491 and b accordingly petitioners bear the burden_of_proof sec_183 which applies to activities engaged in by individuals generally limits deductions for an activity not entered into for profit to the amount of the activity’s gross_income sec_183 sec_183 defines an activity_not_engaged_in_for_profit as any activity other than one with respect to which deductions are allowable for the taxable_year under sec_162 or under paragraph or of sec_212 sec_183 provides for a statutory reversal of the burden_of_proof if petitioners meet certain criteria petitioners do not meet those criteria sec_162 allows as a deduction all the ordinary and necessary expenses paid_or_incurred in carrying on an activity which constitutes a trade_or_business of the taxpayer sec_212 allows as a deduction all the ordinary and necessary expenses paid_or_incurred in carrying on an activity which is for the production_or_collection_of_income or management_conservation_or_maintenance_of_property_held_for_the_production_of_income the court_of_appeals for the ninth circuit to which an appeal in this case would lie but for the provisions of sec_7463 has held that for a taxpayer’s expenses to be deductible under sec_162 or sec_212 and thereby avoid the limitations of sec_183 the taxpayer must demonstrate that his or her predominant primary or principal objective in engaging in the activity was to realize an economic profit independent of tax savings 4_f3d_709 9th cir affg tcmemo_1991_212 the taxpayer’s expectation of profit need not be reasonable but it must be bona_fide see sec_1_183-2 income_tax regs the existence of such a profit objective is a question of fact to be determined based on the surrounding facts and circumstances 72_tc_411 affd without published opinion 647_f2d_170 9th cir see also sec_1_183-2 income_tax regs while such an analysis necessarily requires an inquiry into the subjective intent of the taxpayer we may also look to objective indicia to determine the taxpayer’s true intent see 781_f2d_724 9th cir affg lahr v commissioner tcmemo_1984_472 see also sec_1_183-2 income_tax regs sec_1_183-2 income_tax regs sets forth a nonexclusive list of nine factors to be considered when ascertaining a taxpayer’s intent these factors are the manner in which the taxpayer carries on the activity the expertise of the taxpayer in carrying on the activity the time and effort expended by the taxpayer in carrying on the activity the expectation that assets used in the activity may appreciate in value the success of the taxpayer in carrying on other similar or dissimilar activities the taxpayer’s history of income or loss with respect to the activity the amount of occasional profits if any which are earned by the taxpayer the financial status of the taxpayer and elements of personal pleasure or recreation no single factor is conclusive and we may accord certain factors greater weight than others golanty v commissioner supra pincite 72_tc_28 see also sec_1_183-2 income_tax regs ms blanchette testified that she had an honest objective in making a profit from her collectibles activity she also testified that she has reinvented her business to make the collectibles activity more profitable in determining whether ms blanchette had the requisite profit objective to avoid the limitations of sec_183 we give limited weight to her testimony and greater weight to the objective factors listed above 94_tc_41 78_tc_642 affd without published opinion 702_f2d_1205 d c cir sec_1_183-2 income_tax regs we discuss each of the enumerated factors in turn manner in which the activity is conducted that a taxpayer carries on an activity in a businesslike manner maintains complete and accurate books_and_records and changes operating methods to increase profitability may indicate that an activity is engaged in for profit 72_tc_659 sec_1_183-2 income_tax regs petitioners separated their personal finances from ms blanchette’s collectibles activity and kept records of the income and expenses associated with that activity those records however basically served to substantiate the expenses which petitioners claimed on their federal_income_tax returns the existence of a separate bank account and credit card we believe facilitated the ease of recordkeeping however as we have previously recognized the purpose of maintaining books_and_records is more than to memorialize for tax purposes the existence of the subject transactions it is to facilitate a means of periodically determining profitability and analyzing expenses such that proper cost saving measures might be implemented in a timely and efficient manner burger v commissioner tcmemo_1985_523 affd 809_f2d_355 7th cir ms blanchette undertook no such financial analysis she did not prepare budgets income statements balance sheets forecasts or any other financial statement which would lead us to believe that she used her accounting_records to improve her bottom line the lack of financial analysis weighs against the existence of a trade_or_business during the subject years see filios v commissioner tcmemo_1999_92 affd 224_f3d_16 1st cir sullivan v commissioner tcmemo_1998_367 affd without published opinion 202_f3d_264 5th cir petitioners contend that the online expansion of ms blanchette’s collectibles activity demonstrates that she sought to improve the profitability of her activity during the subject years we disagree the adaptation of ms blanchette’s collectibles activity online occurred some time between and since she moved her collectibles activity online we have found no significant undertakings on the part of ms blanchette to improve her overall profitability to the contrary she continued to add to her inventory without due regard for the losses she repeatedly incurred this factor favors respondent ms blanchette’s expertise a taxpayer’s extensive study of the accepted business and economic practices of an activity as well as the taxpayer’s consultation with experts may indicate a profit objective sec_1_183-2 income_tax regs ms blanchette testified that she consulted with other science fiction memorabilia collectors about her activity however she never consulted with accountants lawyers or business advisers about her activity the failure to procure objective business advice is a negative factor while her consultation with other collectors is a positive consideration this factor is neutral ms blanchette’s time and effort the fact that a taxpayer devotes much personal time and effort to carrying on an activity may indicate a profit objective particularly where that activity does not involve substantial personal or recreational aspects sec_1 b income_tax regs that ms blanchette devoted significant personal time and effort to collecting science fiction memorabilia supports her claim that she entered into the collectibles activity with a profit objective see id however as we discuss below collecting science fiction memorabilia has substantial personal or recreational aspects for ms blanchette see id thus this factor is neutral expectation that assets will appreciate in value a taxpayer’s expectation that assets used in an activity may appreciate in value to create an overall profit may indicate a profit objective as to that activity golanty v commissioner t c pincite sec_1_183-2 income_tax regs our decision in kling v commissioner tcmemo_2001_78 is illustrative therein we decided whether a taxpayer who collected sports memorabilia with the hope that his collection would appreciate in value was engaged in a trade_or_business over the years mr kling sold only a few items from his collection and retained much more than he sold as compared with his purchases the selling of memorabilia was sporadic mr kling amassed items for his collection including thousands of baseball photographs and programs without any plan to sell those items at any date in the foreseeable future and without consideration for the costs of paying to store those items balancing the factors of sec_1_183-2 income_tax regs we held that mr kling’s memorabilia activity did not rise to the level of a trade_or_business similar to mr kling petitioners effectively argue that the losses ms blanchette has sustained over the years do not indicate a lack of profit objective because she intended to earn a profit on the overall appreciation of her collection we disagree first even though a portion of ms blanchette’s collection was worthless she did not liquidate those items and reinvest the proceeds in other collectibles with potential for real appreciation second ms blanchette’s expectation of future appreciation in her collection is vague petitioners presented a generalized list of ms blanchette’s collection but did not include an itemized list of the individual memorabilia making up that collection the failure to introduce such an itemized list or to provide testimony as to the value of specific components of the collection creates a presumption that no such list was kept or that it was not favorable to petitioners’ position see 6_tc_1158 affd 162_f2d_513 10th cir without such a list ms blanchette had no apparent means of tracking appreciation in individual items such that she knew which items to hold and which assets to sell finally we believe that if ms blanchette engaged in the collectibles activity for long-term appreciation she would have insured her collection as she had done in the late 1990s and early 2000s no such insurance_policy was maintained suggesting that ms blanchette was not concerned with protecting her investment such behavior is inconsistent with investment for long-term appreciation this factor favors respondent ms blanchette’s success in similar activities although an activity is unprofitable the fact that a taxpayer has previously converted similar activities from unprofitable to profitable may show a profit objective sec_1_183-2 income_tax regs petitioners offered no evidence regarding the success of ms blanchette in comparable activities thus this factor is neutral activity’s history of income and or losses the fact that a taxpayer incurs a series of losses beyond an activity’s startup stage may indicate the absence of a profit objective as to that activity unless the losses can be blamed on unforeseen or fortuitous circumstances beyond the taxpayer's control 28_f3d_1024 10th cir affg 99_tc_132 sec_1_183-2 income_tax regs petitioners contend that their gradual increase in gross_receipts and profits in recent years evidences a bona_fide profit objective we disagree first while the increase in gross_receipts in isolation may demonstrate growth in a business ms blanchette’s operation of the collectibles activity in a net_loss position and her failure to take any remedial measures to correct those losses evidence a lack of profit objective second the effort and time which ms blanchette has expended on her collectibles activity when weighed against the nominal profits earned do not reflect a predominant primary or principal profit objective ms blanchette worked on the collectibles activity between big_number and big_number hours per year thus even in the most profitable of years she earned between cents and cents per hour for her efforts not to mention the time and effort spent by mr blanchette but for the corresponding tax_benefit to offset mr blanchette’s salary we believe there was no profit objective in ms blanchette’s behavior third petitioners present no forecasts budgets or other financial analyses to support ms blanchette’s blanket assertion that she expects future growth in her collectibles activity sufficient to recoup losses sustained in prior years see 45_tc_261 affd 379_f2d_252 2d cir even assuming arguendo that ms blanchette continued to earn profits commensurate with her highest grossing year it would take ms blanchette approximately years to recoup the losses_incurred between and ms blanchette testified at trial without elaboration that the losses which she sustained in operating awit were attributable to a number of factors beyond her control the record does not 4ms blanchette’s hourly wage is calculated by dividing the profit she reported in by the total hours worked 5the recoupment period is determined by dividing estimated losses of dollar_figure by net_income of dollar_figure support the existence of any such fortuitous circumstances and we decline to infer them this factor favors respondent the amounts of occasional profits the amount of profits earned in relation to the amount of losses_incurred the amount of the investment and the value of the assets in use may indicate a profit objective see sec_1_183-2 income_tax regs between and ms blanchette failed to realize a profit on her collectibles activity even the nominal profits earned in and were substantially disproportionate to the amount of time and effort she expended on her collectibles activity we do not believe that the promise of annual profits of dollar_figure is sufficient to outweigh the absence of profits for years see mckeever v commissioner tcmemo_2000_288 this factor favors respondent taxpayer’s financial status that a taxpayer has substantial income from sources other than the activity may indicate that the activity is not engaged in for profit sec_1_183-2 income_tax regs such is especially so where losses from the activity generate substantial tax benefits or where there are personal or recreational elements involved sec_1_183-2 income_tax regs during the subject years mr blanchette earned a steady salary as a software engineer on which petitioners subsisted mr blanchette’s salary enabled ms blanchette to pursue her longtime passion of collecting science fiction memorabilia while the reported losses from that activity were used to reduce their taxable_income see giles v commissioner tcmemo_2005_28 this factor favors respondent elements of personal pleasure the presence of personal pleasure or recreation from an activity may indicate the absence of a profit objective sec_1_183-2 income_tax regs the mere fact that a taxpayer derives personal pleasure from an activity however does not necessarily mean that the taxpayer lacks a profit objective with respect to that activity a business will not be turned into a hobby merely because the owner finds it pleasurable suffering has never been made a prerequisite to deductibility 59_tc_312 ms blanchette is passionate about science fiction and she derives great pleasure from her collectibles activity this enjoyment however cannot overcome the complete disregard for profit objective with which she has conducted her activity given the small profit potential and significant satisfaction derived from the collectibles activity we are confident that it is ms blanchette’s quest for personal gratification that keeps her going and not any bona_fide profit objective see betts v commissioner tcmemo_2010_164 cf maximoff v commissioner tcmemo_1987_155 relying on the taxpayer’s abandonment of an unprofitable business venture as proof that the taxpayer was engaged in a trade_or_business this factor favors respondent balancing the above factors and the facts and circumstances in this case we conclude that ms blanchette did not pursue her collectibles activity during the subject years with a predominant primary or principal profit objective petitioners are therefore not entitled to a deduction under sec_162 or sec_212 it follows naturally that sec_183 limits the allowable deductions to the amount of gross_income generated from that activity we have considered all arguments made by the parties and to the extent that we have not specifically addressed them we conclude that they are without merit to reflect the foregoing decision will be entered for respondent


id office uilc cca_2010092211222437 ---------- number release date from ------------------- sent wednesday date am to -------------------- cc ----------- subject re adj on 886-a not addressed on sch of adj 4605-a or 886-z the explanation of adjustments is part of the fpaa if it is attached to the schedule of adjustments may contain additional adjustments such as reallocations when a partner signs the form 870-pt he is also agreeing to the adjustments contained in the explanation of adjustments assuming that it is attached if the agreement is not specially designated as a partial agreement it resolves all partnership items for the year - items that are not adjusted remain as reported so you will need to look at the actual signed agreement to see what the partner agreed to including any attachments to the schedule of adjustments if the one year period under section f has already expired you can look to the partners' underlying sec_6501 statute as possibly giving you more time to make any assessments you missed it


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 psi b01 plr-152041-05 date date --------------------- ----------------------- -------------------------- legend legend x -------------------------------------------------- country d dear ------------- correspondence written on behalf of x requesting an extension of time under ' and ' of the procedure and administration regulations to elect to be treated as a partnership for federal tax purposes this letter responds to the letter dated date and related facts the information submitted states that x was incorporated under the laws of country on d x intended to file a form_8832 entity classification election to be treated as a partnership for federal tax purposes effective d however the election was not timely filed law and analysis sec_301_7701-3 provides that a business_entity that is not classified as a corporation under ' b or an eligible_entity can elect its classification for federal tax purposes elections are necessary only when an plr-152041-05 eligible_entity does not want to be classified under the default classification or when an eligible_entity chooses to change its classification sec_301_7701-3 provides that except for certain existing entities described in sec_301_7701-3 unless a foreign eligible_entity elects otherwise the entity is a a partnership if it has two or more members and at least one member does not have limited_liability b an association if all members have limited_liability or c disregarded as an entity separate from its owner if it has a single member that does not have limited_liability sec_301_7701-3 provides that an eligible_entity may elect to be classified other than as provided under ' b by filing form_8832 with the appropriate service_center under ' c iii this election will be effective on the date specified by the entity on form_8832 or on the date filed if no such date is specified the date specified on form_8832 cannot be more than days prior to the date on which the election is filed under sec_301_9100-1 the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the code except e g h and i sec_301_9100-1 defines the term regulatory election as including an election whose deadline is prescribed by a regulation published in the federal_register 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 requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-1 through provide the standards the conclusion based solely on the facts submitted and representations made we conclude that x has satisfied the requirements of and and therefore it is granted an extension of time of sixty days from the date of this letter to file a form_8832 to elect to be treated as a partnership for federal tax purposes effective d a copy of this letter should be attached to the election a copy is enclosed for that purpose plr-152041-05 except as specifically set forth above we express no opinion concerning the federal tax consequences of the facts described above under any other provision of the internal_revenue_code 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 mailed to your authorized representative sincerely heather c maloy associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for ' purposes cc


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 psi b02 plr-135666-06 date date - x y a b n ------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------ ------------------------ ------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------ ------------------------- ---- state -------- d1 d2 d3 d4 --------------------- ---------------------- ------------------------------------------------------------------------------------------------------ ---------------- this responds to a letter dated date and subsequent correspondence dear ------------- submitted on behalf of x by its authorized representative requesting a ruling under sec_1362 of the internal_revenue_code the information submitted states that x was incorporated in state on d1 and elected to be treated as an s_corporation at the time of incorporation a and b were the sole shareholders of x on d2 x converted from a state corporation to a state plr-135666-06 limited_partnership and elected to be treated as an association_taxable_as_a_corporation y was formed to act as the general_partner in the limited_partnership and was also wholly owned by a and b a and b transferred an n general_partnership interest to y immediately after the conversion y was an ineligible s_corporation shareholder and x’s s_corporation status terminated on d2 when y acquired an interest in the limited_partnership and both received an equal share of y’s general_partnership interest in x which they then both contributed to two separate newly formed single member limited_liability companies that were both disregarded entities for federal tax purposes on d3 after learning that y was an ineligible shareholder a and b liquidated y after d3 a and b were advised by their accountant that x's conversion to a state x represents that its motive for the conversion was not avoidance of federal tax limited_partnership may have also terminated its s_corporation_election see generally section dollar_figure of revproc_2006_3 2006_1_irb_122 providing that the internal_revenue_service will not rule on whether a state law limited_partnership electing to be classified as an association for federal tax purposes has more than one class of stock under sec_1361 once advised that the conversion may also have caused x's s election to terminate x reorganized as a state corporation on d4 and that its shareholders were unaware of the consequences when the transfer of interests to y were made moreover x represents that it did not intend to terminate its s_corporation_election and that during the termination period it and its shareholders timely and consistently filed their tax returns consistent with the treatment of x as an s_corporation x and its shareholders have agreed to make any adjustments that the commissioner may require consistent with the treatment of x as an s_corporation law and analysis sec_1361 of the code provides that the term s_corporation means with respect to any taxable_year a small_business_corporation for which an election under sec_1362 is in effect for such year sec_1361 provides that the term small_business_corporation means a domestic_corporation which is not an ineligible_corporation and which does not have as a shareholder a person other than an estate a_trust described in sec_1361 or an organization described in sec_1361 who is not an individual sec_1361 provides that for purposes of subchapter_s the term small_business_corporation means a domestic_corporation that is not an ineligible_corporation and that does not have more than one class of stock plr-135666-06 sec_1362 provides that a in general an election under sec_1362 shall be terminated whenever at any time on or after the first day of the first taxable_year for which the corporation is an s_corporation such corporation ceases to be a small_business_corporation and b any termination under sec_1362 shall be effective on and after the date of cessation sec_1362 provides that if an election under sec_1362 by any corporation a was not effective for the taxable_year for which made determined without regard to sec_1362 by reason of a failure to meet the requirements of sec_1361 or to obtain shareholder consents or b was terminated under sec_1362 or the secretary determines that the circumstances resulting in the ineffectiveness or termination were inadvertent no later than a reasonable period of time after discovery of the circumstances resulting in the ineffectiveness or termination steps were taken a so that the corporation is a small_business_corporation or b to acquire the shareholder consents and the corporation and each person who was a shareholder of the corporation at any time during the period specified pursuant to sec_1362 agrees to make such adjustments consistent with the treatment of the corporation as an s_corporation as may be required by the secretary with respect to such period then notwithstanding the circumstances resulting in the ineffectiveness or termination the corporation will be treated as an s_corporation during the period specified by the secretary the service is studying the issue of whether a state law limited_partnership electing under sec_301_7701-3 to be classified as an association_taxable_as_a_corporation has more than one class of stock for purposes of sec_1361 until the service resolves this issue through published guidance letter rulings will not be issued the service will treat any request for a ruling on whether a state law limited_partnership is eligible to elect s_corporation status as a request for a ruling on whether the partnership complies with sec_1361 revproc_2006_3 sec_5 2006_1_irb_122 based on revproc_99_51 c b based solely on the facts submitted and the representations made we conclude that x’s s_corporation_election terminated on d2 and that the termination was inadvertent within the meaning of sec_1362 in addition we conclude that if x's conversion from a state corporation to a state limited_partnership did create a second class of stock the consequent termination of x's s_corporation_election was inadvertent within the meaning of sec_1362 we further hold that pursuant to the provisions of sec_1362 x will be treated as continuing to be an s_corporation from d2 and thereafter provided x’s s_corporation_election was valid and provided that the election was not otherwise terminated under sec_1361 the shareholders of x must include their pro-rata share of the separately_stated and nonseparately computed items of x as provided in sec_1366 make any adjustments to basis as provided in sec_1367 and take into account any distributions made by x as provided in sec_1368 if x or its shareholders fail to treat themselves as described above this ruling is null and void plr-135666-06 specifically this ruling is conditioned upon a and b being treated as the owners of the x interests held by y effective d2 and thereafter a and b must report their pro- rata shares of the items described above on their individual federal_income_tax returns if they fail to do so this ruling is null and void except as specifically ruled above we express no opinion concerning the federal tax consequences of the transactions described above under any other provisions of the code this ruling is directed only to the taxpayer that requested it sec_6110 provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file a copy of this letter is being sent to x’s plr-135666-06 authorized representative sincerely bradford r poston senior counsel branch office of the associate chief_counsel passthroughs special industries 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 ------------------------ ------------------- telephone number --------------------- refer reply to cc psi b02 plr-128394-09 date date legend x ------------------------------------------------------------------------------------------------------ ----------------------- state ------------ d1 d2 ----------------------- --------------------- dear ----------------- this responds to a letter dated date and subsequent correspondence submitted on behalf of x by x's authorized representative requesting a ruling under sec_1362 of the internal_revenue_code the information submitted states that x was formed in state on d1 it was intended for x to be an s_corporation effective d2 however no form_2553 election by a small_business_corporation was timely filed for x accordingly x requests a ruling that it will be treated as an s_corporation effective d2 sec_1362 provides that a small_business_corporation may elect to be an s_corporation sec_1362 provides the rule on when an s election will be effective generally if an s election is made within the first two and one-half months of a corporation's taxable_year then the corporation will be treated as an s_corporation for the year in which the election is made sec_1362 provides that if an s election is made after the first two and one-half months of a corporation's taxable_year then the plr-128394-09 corporation will not be treated as an s_corporation until the taxable_year after the year in which the s election is made sec_1362 provides that if a an election under sec_1362 is made for any taxable_year after the date prescribed by sec_1362 for making the election for the taxable_year or no sec_1362 election is made for any taxable_year and b the secretary determines that there was reasonable_cause for the failure to timely make the election then the secretary may treat the election as timely made for such taxable_year and sec_1362 shall not apply based solely on the facts and the representations submitted we conclude that x has established reasonable_cause for failing to make a timely election to be an s_corporation effective d2 accordingly provided that x makes an election to be an s_corporation by filing a completed form_2553 with the appropriate service_center effective d2 within days following the date of this letter then such election will be treated as timely made for x's taxable_year beginning d2 a copy of this letter should be attached to the form_2553 except as specifically set forth above no opinion is expressed concerning the federal tax consequences of the facts described above under any other provision of the code including whether x was or is a small_business_corporation under sec_1361 this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file with this office a copy of this letter is being sent to x's authorized representative sincerely bradford r poston senior counsel branch office of the associate chief_counsel passthroughs special industries 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 fip b02 plr-135685-14 date date legend taxpayer -------------------------------------------------------------------- state -------------- x y ---- ---- dear ------------ this responds to your letter dated date submitted on behalf of taxpayer taxpayer requests a ruling that income from certain original and counteracting hedging_transactions described below will not constitute gross_income for purposes of the real_estate_investment_trust reit income tests under sec_856 and of the internal_revenue_code_of_1986 the code facts taxpayer a state corporation is a residential mortgage reit taxpayer invests primarily in instruments classified as mortgages on real_property within the meaning of sec_856 mortgages including mortgage-backed_securities issued by united_states government agencies or government-sponsored entities taxpayer’s mortgages generally are long-term debt instruments that pay a fixed rate of interest taxpayer typically finances its mortgages with short-term borrowings including repurchase agreements repos that are treated as short-term secured borrowings for federal_income_tax purposes under a repo taxpayer nominally sells certain of its mortgages to a counterparty and at the same time agrees to repurchase those plr-135685-14 mortgages at a fixed date in the future for a fixed price a repo typically has a term of between x and y days and requires taxpayer to pay an interest rate based on libor or a similar interest rate index at the time the repo is entered into at maturity taxpayer must either repay the repo with cash on hand or enter into a new repo the proceeds of which are used to repay the old repo because taxpayer may hold a financed mortgage for a long period of time and may want to maintain a constant level of short-term financing on that mortgage taxpayer upon maturity of one repo may replace the maturing repo with a new short- term repo because the interest rate charged by the lender will be newly determined every time one such repo matures and is repaid with the proceeds of a new repo a series of back-to-back short-term repos resembles in economic_substance a long-term_loan bearing a variable or floating interest rate adjusting every x to y days in addition to repos taxpayer may use other types of financing that actually or effectively bear a floating interest rate such as private loans under credit agreements bonds or other debt instruments issued to the public or in private placements and other transactions treated as borrowings for tax purposes under which taxpayer would pay a floating rate of interest collectively with repos the borrowings for the purposes of this ruling_request the term borrowings refers to those borrowings incurred or to be incurred to finance taxpayer’s mortgages including future short-term borrowings the proceeds of which are anticipated to repay other borrowings upon maturity as described previously because taxpayer finances its acquisition and ownership of mortgages with floating rate borrowings or short-term current borrowings that are anticipated to be repaid using the proceeds of short-term future borrowings taxpayer effectively must pay a floating interest rate on its indebtedness as such taxpayer is subject_to the risk of changing interest rates with respect to debt incurred or to be incurred to acquire or carry such real_estate_assets to hedge the risk of such interest rate changes on its borrowings for the period during which it intends to finance its mortgages taxpayer enters into various hedging_transactions including interest rate swaps under which taxpayer pays a fixed rate of interest and receives payments based on a floating rate of interest pay-fixed swaps in addition to pay-fixed swaps taxpayer also hedges its interest rate exposure on the borrowings by entering into pay-fixed swaptions which are options entitling taxpayer to enter into a pay-fixed swap together the pay-fixed swaps and pay-fixed swaptions manage taxpayer’s risk of interest rate changes with respect to the borrowings these transactions along with others that similarly function to hedge taxpayer’s exposure to risk resulting from interest rate fluctuations such as interest rate caps are referred to collectively as original hedges plr-135685-14 taxpayer represents that on the date into which each original hedge to be covered by the requested ruling is entered such original hedge will be a hedging_transaction within the meaning of sec_1221 of the code and sec_1 b of the regulations taxpayer further represents that the identification requirements described in sec_1221 sec_1_1221-2 and sec_856 will be satisfied with respect to such original hedge taxpayer further represents that the original hedges are used to hedge the interest rate risks of the borrowings which are used to finance the mortgages based on its business goals market conditions and other factors taxpayer will have a desired hedging ratio-that is a ratio of i the notional_principal_amount of its outstanding hedges to ii the principal_amount of its borrowings taxpayer may decide to decrease the notional amount of its original hedges due to a change in its desired hedging ratio or a decrease in the amount of its borrowings rather than terminating certain of its original hedges to achieve the desired level of hedging exposure taxpayer may find it commercially or economically desirable to enter into one or more additional hedges that have the effect of counteracting or offsetting all or part of such original hedges for all or part of the remaining term of such original hedges each a counteracting hedge taxpayer represents that counteracting hedges are commercially preferable to actual termination of an original hedge and thus are commonly used by market participants to achieve the economic_effect of terminating an original hedge the counteracting hedges may take the form of swaps requiring taxpayer to pay a floating rate of interest and receive a fixed rate of interest receive-fixed swaps or options to enter into such swaps receive-fixed swaptions depending on prevailing commercial or economic conditions it is possible that the cash flows of a counteracting hedge may not offset on a dollar-for-dollar basis the cash flows of a related original hedge however taxpayer represents that even in such instances the counteracting hedge will serve the purposes of achieving a desirable level of hedging exposure such that together the original hedges and counteracting hedges will constitute a degree of hedging of taxpayer’s borrowings at a level and on financial terms that taxpayer deems appropriate in its business judgment taxpayer represents that on the date into which each counteracting hedge to be covered by the requested ruling is entered such counteracting hedge will be a hedging_transaction within the meaning of sec_1221 and sec_1_1221-2 taxpayer further represents that the identification requirements described in sec_1221 sec_1_1221-2 and sec_856 will be satisfied with respect to such counteracting hedge plr-135685-14 rulings requested taxpayer seeks the following rulings pursuant to the provisions of sec_856 of the code taxpayer’s gross_income from the original hedges will not constitute gross_income for purposes of sec_856 and pursuant to the provisions of sec_856 taxpayer’s gross_income from the counteracting hedges will not constitute gross_income for purposes of sec_856 and law sec_856 of the code provides that a corporation shall not be considered a reit unless it derives at least percent of its gross_income excluding gross_income from prohibited_transactions from dividends interest rents_from_real_property and certain other items listed in sec_856 sec_856 provides that a corporation shall not be considered a reit unless it derives at least percent of its gross_income excluding gross_income from prohibited_transactions from rents_from_real_property and certain other items listed in sec_856 sec_856 provides that income from a hedging_transaction as defined in clause ii or iii of sec_1221 including gain from the sale or disposition of such a transaction shall not constitute gross_income for purposes of the percent or percent gross_income tests to the extent that the transaction hedges any indebtedness incurred or to be incurred by the reit to acquire or carry real_estate_assets provided that such hedging_transaction is properly identified pursuant to sec_1221 sec_856 was amended by the american_jobs_creation_act_of_2004 to provide for the exclusion_from_gross_income of income from hedging_transactions including income from the sale or disposition of such a transaction for purposes of the percent gross_income_test publaw_108_357 date prior_law had provided that such income was treated as qualifying_income as opposed to being excluded for purposes of this test the accompanying legislative_history explains that the rules governing the tax treatment of arrangements engaged in by a reit to reduce certain interest rate risks are prospectively generally conformed to the rules included in sec_1221 h_r rep no pincite sec_1221 requires that for a hedging_transaction to be excluded as a capital_asset a hedging_transaction must be clearly identified as such before the close plr-135685-14 of the day on which it was acquired originated or entered into or such other time as the secretary may by regulations prescribe sec_1221 defines a hedging_transaction as any transaction entered into by the taxpayer in the normal course of the taxpayer’s trade_or_business primarily i to manage risk of price changes or currency fluctuations with respect to ordinary_property which is held or to be held by the taxpayer ii to manage risk of interest rate or price changes or currency fluctuations with respect to borrowings made or to be made or ordinary obligations incurred or to be incurred by the taxpayer or iii to manage such other risks as the secretary may prescribe in regulations sec_1_1221-2 of the income_tax regulations provides that if a transaction is entered into primarily to offset all or any part of the risk management effected by one or more hedging_transactions the transaction is a hedging_transaction sec_856 of the code provides that to the extent necessary to carry out the purposes of this part the secretary is authorized to determine solely for purposes of this part whether any item_of_income or gain which i does not otherwise qualify under sec_856 or c may be considered as not constituting gross_income for purposes of sec_856 or c analysis taxpayer represents that income from the original hedges entered into by taxpayer qualify for the exclusion_from_gross_income provided under sec_856 the requirements of this section are satisfied where as here represented a hedging_transaction entered into by a reit is properly identified under sec_1221 meets the definitional requirements of a hedging_transaction under sec_1221 and in the case of an interest rate hedge is a hedge of indebtedness incurred or to be incurred to acquire or carry real_estate_assets the legislative_history accompanying the amendments to sec_856 makes clear the intent of congress that the reit hedging rules are generally to be conformed to the rules set forth in sec_1221 if properly identified under sec_1221 as represented the counteracting hedges entered into by taxpayer also qualify as hedging_transactions under sec_1_1221-2 of the regulations because as represented by taxpayer they are entered into to offset all or part of the risk management effected by the original hedges pursuant to the provisions of sec_856 of the code income from a counteracting hedge that qualifies as a hedging_transaction under sec_1221 may be excluded from gross_income for purposes of sec_856 or c under the facts of this case excluding the income from these hedging_transactions from gross plr-135685-14 income for purposes of sec_856 and c does not interfere with congressional policy objectives in enacting the income tests under those provisions conclusion based on the information submitted and the representations made we rule that pursuant to sec_856 taxpayer’s gross_income from the original hedges will not constitute gross_income for purposes of sec_856 and c we further rule that pursuant to sec_856 taxpayer’s gross_income from the counteracting hedges will not constitute gross_income for purposes of sec_856 and c 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 particular no opinion is expressed or implied concerning whether the original hedges or counteracting hedges are hedging_transactions within the meaning of sec_1221 and sec_1_1221-2 we also express no opinion whether the identification requirements described in sec_1221 sec_1 and sec_856 have been or will be satisfied with respect to the original hedges or the counteracting hedges additionally no opinion is expressed with regard to whether taxpayer qualifies as a reit under subchapter_m of the code this ruling is directed only to the taxpayer requesting it its application is limited to the facts representations code sections and regulations cited herein 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 each of your authorized representatives sincerely andrea m hoffenson andrea m hoffenson branch chief branch office of associate chief_counsel financial institutions products


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 psi b01 plr-141529-04 date date legend x --------------------------------------------- ----------------------- ------------ --------------------- country d1 dear ------------ correspondence written on behalf of x requesting an extension of time under ' and ' of the procedure and administration regulations to file an entity classification election this letter responds to the letter dated date and related facts the information submitted discloses that x was formed under the laws of country on d1 x failed to timely file a form_8832 entity classification election to be treated as a partnership for federal tax purposes as of d1 law and analysis sec_301_7701-3 provides that a business_entity that is not classified as a corporation under ' b or an eligible_entity can elect its classification for federal tax purposes elections are necessary only when an plr-141529-04 eligible_entity does not want to be classified under the default classification or when an eligible_entity chooses to change its classification sec_301_7701-3 provides that except for certain existing entities described in sec_301_7701-3 unless a foreign eligible_entity elects otherwise the entity is a a partnership if it has two or more members and at least one member does not have limited_liability b an association if all members have limited_liability or c disregarded as an entity separate from its owner if it has a single member that does not have limited_liability sec_301_7701-3 provides that an eligible_entity may elect to be classified other than as provided under ' b by filing form_8832 with the appropriate service_center under ' c iii this election will be effective on the date specified by the entity on form_8832 or on the date filed if no such date is specified the date specified on form_8832 cannot be more than days prior to the date on which the election is filed under sec_301_9100-1 the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the code except e g h and i sec_301_9100-1 defines the term regulatory election as including an election whose deadline is prescribed by a regulation published in the federal_register 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 requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-1 through provide the standards the conclusion based solely on the facts submitted and representations made we conclude that x has satisfied the requirements of and and therefore it is granted an extension of time of sixty days from the date of this letter to file a form_8832 to elect to be treated as a disregarded_entity for federal tax purposes effective d1 a copy of this letter should be attached to the election a copy is enclosed for that purpose plr-141529-04 except as specifically set forth above we express no opinion concerning the federal tax consequences of the facts described above under any other provision of the internal_revenue_code 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 mailed to your authorized representative enclosures copy of this letter copy for ' purposes sincerely heather c maloy associate chief_counsel passthroughs and special industries


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 psi b07 plr-147040-04 date date y -- z ----------------- date date date ------------------a -- date ------------------------b -- legend legend p ------------------------------ date -------------------amount -------------- ------------------------- date ----------------- amount -------------- w ---------------------------- date -------------------------w ---- ------------------------------------date ------------------------x ---- ------------------------------ x ----------------------- y -------------------------------date ------------------------c ---- z -------------------------------date -----------------------d -- u --------------------- date -----------------------e --- ------------------------------------date ----------------- v -------------------------------date ---------------- ------------------------------------date ------------------- ------------------------------------date -------------------- a ---------- date ------------------- b ----------------------------- date ------------------- c ------------------------------location ---------------------------- ------------------------------------state ------------ d ----------------------------- ------------------------------------ e ------------------------------ f --------------------------------------- dear ---- this letter is in response to your letter dated date and subsequent correspondence submitted on behalf of u requesting rulings under sec_29 and sec_702 of the internal_revenue_code plr-147040-04 facts the facts as represented by p and p’s authorized representative are as follows p received plr-100240-98 on date plr-111447-00 on date plr-126688- on date and plr-111615-04 on date prior rulings which ruled on the issues addressed by this letter p seeks a confirmation of those rulings in light of the sales of membership interests in p to u and v p is a delaware limited_liability_company taxable as a partnership p owns and operates the facility for producing a solid synthetic_fuel from coal the product using the process described below the facility was constructed by p the facility is a secondary coal recovery system facility designed by a the facility consists of three production lines each of which consists of a briquetter that is fed by its associated mixer and each of which is capable of being operated independently because each production line is capable of being operated independently and can independently produce synthetic_fuel each independent production line may be treated as a separate facility the facility was constructed pursuant to a construction_contract entered into by a and b on date a assigned to p all of its rights and obligations under the construction_contract with respect to one facility on date b contracted with c to perform the procurement assembly and installation services under the construction_contract p provided an opinion of counsel that the construction_contract constituted a binding written contract under applicable state laws prior to date and at all times thereafter through completion of the contract on date p received a favorable determination from the district_director for the state district that the facility was placed-in-service prior to date on date x purchased an interest in p from d pursuant to a purchase agreement as amended on date y purchased the remaining interest in p from a on date pursuant to a purchase agreement effective date x sold a z interest in p to its subsidiary z pursuant to an agreement for purchase of membership interest in exchange for the z interest in p z paid to x an amount of cash at closing and z is obligated to make certain fixed and variable payments to x for the period from the sale until the closing of the transaction on date described below z owned z of the interests in p and x and y owned an x and y interest respectively in p p relocated the facility to a site in location the site which is owned by e an affiliate of f in connection with the relocation of the facility most major components of the facility directly necessary to produce a qualified_fuel were relocated to the site certain equipment included in the original construction was scrapped or sold and not relocated in connection with the relocation p also installed certain equipment that is not directly necessary for the production of qualified_fuel such as a maintenance building office trailer shower locker trailer and coal and material handling equipment plr-147040-04 following the relocation the fair_market_value of the original property included in the facility is more than of the facility’s total value the cost of the new equipment included in the facility plus the value of the original property p has entered into a synthetic_fuel and coal supply agreement with e under which e agreed to purchase a minimum of amount tons of synthetic_fuel a year and to use commercially reasonable efforts to purchase up to amount tons of synthetic_fuel a year if e does not satisfy its purchase obligation or the production of synthetic_fuel exceeds e’s requirements p can sell synthetic_fuel to third parties p has represented that all sales of synthetic_fuel will be to unrelated persons on date x agreed to sell a w interest in p to w following the closing of the sale on date w owned w x owned a y owned y and z owned z of p in exchange for the w interest in p w paid to x an amount of cash at closing and w is obligated to make certain fixed and variable payments to x p has provided projections based on expected operations that the net present_value of the contingent payments to be made to x under the agreement for purchase of membership interest will be less than fifty percent of the total payments made to x on date z sold a w membership interest in p to u pursuant to an agreement for purchase of membership interest following the closing of the sale w owned w x owned a y owned y z owned b and u owned w of p in exchange for the w membership interest in p u paid to z an amount of cash at closing and u is obligated to make certain fixed and variable payments to z p has provided projections based on expected operations that the net present_value of the contingent payments to be made to z under the agreement for purchase of membership interest will be less than fifty percent of the total payments made to z on date z sold a b membership interest in p to v pursuant to an agreement for purchase of membership interest following the closing of the sale w owns w x owns a y owns y u owns w and v owns b of p z no longer owns a membership interest in p in exchange for the b membership interest in p v paid to z an amount of cash at closing and v is obligated to make certain fixed and variable payments to z p has provided projections based on expected operations that the net present_value of the contingent payments to be made to z under the agreement for purchase of membership interest will be less than fifty percent of the total payments made to z under the agreement for purchase of membership interest on or by date v will purchase a c membership interest in p from x and y following the closing of the sale w will own w y will own d u will own w and v will own e of p if the closing of the sale occurs prior to date a termination of p will occur under sec_708 x will no longer own a membership interest in p in exchange for the c membership interest in p v will pay to x and y an amount of cash at closing and v is obligated to make certain fixed and variable payments to the sellers taxpayer has provided projections based on expected operations that the net present plr-147040-04 value of the contingent payments to be made to x and y under the agreement for purchase of membership interest will be less than fifty percent of the total payments made to the sellers under the agreement for purchase of membership interest w y u and v have made and will continue to make periodic capital contributions to p to enable it to pay its operating costs and other obligations a proforma attached to the ruling_request demonstrates that project expenses are expected to exceed revenues p has supplied a detailed description of the process employed at the facility p also has proposed that from time to time one of four alternative chemical reagents may be used in the process for the production of product as described the facility and the process implemented in the facility including the chemical reagents meet the requirements of revproc_2001_34 2001_22_irb_1293 a recognized expert in coal combustion chemistry has performed numerous tests on the coal used at the facility and the product produced at the facility and has submitted reports in which the expert concludes that significant chemical changes take place with the application of the process to the coal including the alternative chemical reagents p with use of the process expects to maintain a level of chemical change in the production of synthetic_fuel that is determined through similar analysis by experts to be a significant chemical change the rulings issued in prior rulings which you wish to be reconfirmed in this private_letter_ruling are as follows p with use of the enumerated process and the specified chemical reagents will produce a qualified_fuel within the meaning of sec_29 the contract for the construction of the facility constitutes a binding written contract in effect before date within the meaning of sec_29 production from the facility will be attributable solely to p within the meaning of sec_29 and p shall be entitled to the sec_29 credit for qualified_fuel from the facility that is sold to an unrelated_person the sec_29 credit attributable to p may be allocated to the members of p in accordance with the members’ interest in p when the credit arises each such member will take into account its allocated share of the sec_29 credit in computing its tax_liability and for the allocation of the sec_29 credit a member’s interest in p is determined based on a valid allocation of receipts from the sale of the sec_29 qualified_fuel a termination of p under sec_708 will not preclude the reconstituted partnership from claiming the sec_29 credit on the production and sale of synthetic_fuel to unrelated persons plr-147040-04 because the facility was placed-in-service prior to date within the meaning of sec_29 relocation of the facility to a different location after date or replacement of part of the facility after that date will not result in a new placed-in-service date for the facility for purposes of sec_29 provided the fair_market_value of the original property is more than of facility’s total fair_market_value at the time of relocation or replacement because the facility was placed-in-service prior to date within the meaning of sec_29 relocation of one or more of the independent production lines of the facility to a new location after date will not result in a new placed-in- service date for the facility or an independent production line for purposes of sec_29 provided all essential components of the independent production line are retained and the production capacity of the independent production line is not significantly increased at the new location the changes in facts since the issuance of the prior rulings are the sale of an interest in p to u the sales of interests in p to v and the change in chemical reagent used to produce the synthetic_fuel as described in the ruling_request and subsequent correspondence from p’s authorized representative the rulings issued in the prior rulings are not affected by the sale of an interest in p to u the sales of interests in p to v and the change in chemical reagent used to produce the synthetic_fuel as described in the ruling_request and subsequent correspondence from p’s authorized representative ruling_request sec_1 sec_29 allows a credit for qualified_fuels sold by the taxpayer to an unrelated_person during the taxable_year the production of which is attributable to the taxpayer the credit for the taxable_year is an amount equal to dollar_figure adjusted for inflation multiplied by the barrel-of-oil_equivalent of qualified_fuels sold sec_29 defines qualified_fuels to include liquid gaseous or solid synthetic fuels produced from coal including lignite including such fuels when used as feedstocks in revrul_86_100 1986_2_cb_3 the internal_revenue_service ruled that the definition of the term synthetic_fuel under sec_48 and its regulations are relevant to the interpretation of the term under sec_29 former sec_48 provided a credit for the cost of equipment used for converting an alternate_substance into a synthetic liquid gaseous or solid fuel revrul_86_100 notes that both sec_29 and former sec_48 contain almost identical language and have the same overall congressional intent namely to encourage energy conservation and aid development of domestic energy production under sec_1_48-9 of the income_tax regulations a synthetic_fuel differs significantly in chemical composition as opposed to physical composition from plr-147040-04 the alternate_substance used to produce it coal is an alternate_substance under sec_1_48-9 consistent with its private_letter_ruling practice that began in the mid 1990's the service in revproc_2001_30 provided that taxpayers must satisfy certain conditions in order to obtain a letter_ruling that a solid fuel other than coke produced from coal is a qualified_fuel under sec_29 revproc_2001_30 as modified by revproc_2001_34 2001_1_cb_1293 the revenue_procedure requires taxpayers to present evidence that all or substantially_all of the coal used as feedstock undergoes a significant chemical change to meet this requirement and obtain favorable private letter rulings taxpayers provided expert reports asserting that their processes resulted in a significant chemical change in announcement 2003_30_irb_222 the service announced that it was reviewing the scientific validity of test procedures and results presented of significant chemical change in expert reports in announcement 2003_46_irb_1090 the service announced that it had determined that the test procedures and results used by taxpayers were scientifically valid if the procedures were applied in a consistent and unbiased manner however the service concluded that the processes approved under its long standing ruling practice and as set forth in revproc_2001_30 did not produce the level of chemical change required by sec_29 nevertheless the service announced that it recognized that many taxpayers and their investors have relied on its long standing ruling practice to make investments therefore the service announced that it would continue to issue rulings on significant chemical change but only under the guidelines set forth in revproc_2001_30 as modified by revproc_2001_34 this ruling is provided to p consistent with announcement and the service's long standing ruling practice accordingly based on the expert test results submitted by p and its members we conclude that the synthetic_fuel produced at the facility using the described process and specified chemical reagents is a solid synthetic_fuel produced from coal constituting a qualified_fuel within the meaning of sec_29 because p owns the facility and operates and maintains the facility through its agent we conclude that p will be entitled to the sec_29 credit for the production of the qualified_fuel from the facility that is sold to an unrelated_person ruling_request sec_29 and f provide that sec_29 applies with respect to qualified_fuels which are produced in a facility placed-in-service after date and before date and which are sold before date sec_29 modifies sec_29 in the case of a facility producing qualified_fuels described in sec_29 which qualified_fuels include solid synthetic fuels produced from coal or lignite sec_29 provides that for purposes of sec_29 a plr-147040-04 facility shall be treated as placed-in-service before date if the facility is placed-in-service before date pursuant to a binding written contract in effect before date sec_29 provides that if the facility is originally placed-in-service after date sec_29 shall be applied by substituting date for date a contract is binding only if it is enforceable under local law against a taxpayer and does not limit damages to a specified amount eg by use of a liquidated_damages provision a contract provision limiting damages to an amount equal to at least five percent of the total_contract_price for example should be treated as not limiting damages the construction_contract executed prior to date includes such essential features as a description of the facility to be constructed a completion date and a maximum price the contract also provides that damages shall not be less than six percent of the total_contract_price p provided an opinion of counsel that the contract is binding under applicable law therefore we conclude that the construction_contract is a binding written contract in effect before date within the meaning of sec_29 ruling_request sec_29 allows a credit for qualified_fuels sold by the taxpayer to an unrelated_person during the taxable_year the production of which is attributable to the taxpayer sec_7701 provides that taxpayer means any person subject_to any internal revenue tax generally under sec_7701 the term person includes an individual a_trust estate partnership_association company or corporation sec_702 provides that each partner determines the partner's income_tax by taking into account separately the partner's_distributive_share of the partnership's other items of income gain loss deduction or credit to the extent provided by regulations prescribed by the secretary sec_1_702-1 provides that the distributive_share is determined as provided in sec_704 and sec_1_704-1 sec_704 provides that a partner's_distributive_share of income gain loss deduction or credit is except as otherwise provided in chapter of subtitle a of title_26 determined by the partnership_agreement sec_704 provides that a partner's_distributive_share of income gain loss deduction or credit or item thereof is determined in accordance with the partner's_interest_in_the_partnership determined by taking into account all facts and circumstances if the partnership_agreement does not provide as to the partner's_distributive_share of income gain loss deduction or credit or item thereof or the allocation to a partner under the agreement of income gain loss deduction or credit or item thereof does not have substantial economic_effect plr-147040-04 sec_1_704-1 provides that allocations of tax_credits and tax_credit recapture except for sec_38 property are not reflected by adjustments to the partners' capital accounts thus these allocations cannot have economic_effect under sec_1 b ii b and the tax_credits and tax_credit recapture must be allocated in accordance with the partners' interests in the partnership as of the time the tax_credit or credit recapture arises if a partnership expenditure whether or not deductible that gives rise to a tax_credit in a partnership_tax_year also gives rise to valid allocations of partnership loss or deduction or other downward capital_account adjustments for the year then the partners' interests in the partnership with respect to such credit or the cost giving rise to it are in the same proportion as the partners' respective distributive shares of the loss or deduction and adjustments see sec_1_704-1 example identical principles apply in determining the partners' interests in the partnership with respect to tax_credits that arise from receipts of the partnership whether or not taxable based on the information submitted and the representations made we conclude that the credit will be allowed to p and the credit may be passed through to and allocated among the members of p under the principles of sec_702 in accordance with each member’s interest in p as of the time the credit arises for purposes of the sec_29 credit a member's interest in p is determined based on a valid allocation of the receipts from the sale of the sec_29 qualified_fuel ruling_request sec_708 provides that a partnership shall be considered as terminated if within a twelve-month period there is a sale_or_exchange of percent or more of the total interest in partnership capital and profits sec_1_708-1 provides that if a partnership is terminated by a sale_or_exchange of an interest the following is deemed to occur the partnership contributes all of its assets and liabilities to a new partnership in exchange for an interest in the new partnership and immediately thereafter the terminated partnership distributes interests in the new partnership to the purchasing partner and the other remaining partners in proportion to their respective interests in the terminated partnership in liquidation of the terminated partnership either for the continuation of the business by the new partnership or for its dissolution and winding up sec_1_708-1 applies to terminations of partnerships under sec_708 occurring on or after date as discussed above the placed-in-service deadline in sec_29 and sec_29 must be read as applying to when the facility is first placed-in-service within the applicable dates the placed-in-service deadlines contained in sec_29 and sec_29 focus on the facility and not the taxpayer owning the facility accordingly the placed-in-service deadline under sec_29 and sec_29 is determined by reference to when the facility is first placed-in-service therefore because the facility was placed-in-service prior to date within the meaning of sec_29 the sale of the facility after date will not result in a new placed-in-service date for the facility for purposes of sec_29 for the new owner further a termination of p under plr-147040-04 sec_708 will not preclude the reconstituted partnership from claiming the sec_29 credit on the production and sale of synthetic_fuel to unrelated persons ruling_request to qualify for the sec_29 credit the facility must be placed-in-service before date pursuant to a binding written contract in effect before date as discussed above p received a favorable determination from the district_director for the state district that the facility was placed_in_service prior to date revrul_94_31 1994_1_cb_16 concerns sec_45 which provides a credit for electricity produced from certain renewable resources including wind the credit is based on the amount of electricity produced_by_the_taxpayer at a qualified_facility during the 10-year period beginning on the date the facility was originally placed-in-service and sold by the taxpayer to an unrelated_person during the taxable_year revrul_94_31 holds that for purposes of sec_45 a facility qualifies as originally placed-in-service even though it contains some used_property provided the fair_market_value of the used_property is not more than percent of the facility's total value the cost of the new property plus the value of the used_property revrul_94_31 concerns a factual context similar to the present situation consistent with the holding in revrul_94_31 because the facility was placed-in- service prior to date within the meaning of sec_29 relocation of the facility after date or replacement of parts of the facility after that date will not result in a new placed-in-service date for the facility or otherwise prevent the facility from continuing to be treated as originally placed-in-service prior to date if the fair_market_value of the property used at the original facility is more than percent of the facility’s total market_value immediately following the relocation or replacement the cost of the new equipment included in the facility plus the value of the property used at the original facility revrul_94_31 describes a windfarm that consists of an array of wind turbines towers pads transformers roadways fencing on-site power collection systems and monitoring and meteorological equipment notwithstanding that the windfarm consisted of all of these items the ruling concludes that the facility for purposes of sec_45 is confined to the property on the windfarm necessary for the production of electricity from wind_energy emphasis added the present situation is similar to revrul_94_31 thus for purposes of determining the facility's total fair_market_value at the time of relocation or replacement a facility consists of the process equipment directly necessary for the production of the qualified_fuel starting at the immediate input of the coal and chemical reagents to the pug mills or mixers including any coal hoppers and reagent tanks directly feeding the pug mills or mixers through the output from the briquetters or other forming equipment including output hoppers if any hence the facility's total fair_market_value includes the process equipment such as pugmills or mixers the briquetters or other forming equipment the equipment necessary to plr-147040-04 interconnect such equipment the electrical instrumentation control systems and auxiliaries related to such equipment including the structures that house such electrical instrumentation and control systems the foundation platform s for the above- referenced equipment and an appropriate allocation of the engineering project management overhead and other costs assignable to the relocation of such equipment and construction the facility's total fair_market_value does not include costs associated with the purchase and installation of equipment that supports the operation of the facility but is not directly necessary for the production of the qualified_fuel such as coal beneficiation or preparation equipment eg crushers screens dryers or scales other material handling or conveying equipment eg stacking tubes transfer towers storage bunkers mobile equipment or conveyors certain site improvements eg fencing lighting earthwork paving separate office and bathhouse trailers for facility personnel and buildings if a building for purposes of sec_168 of the code and other administrative assets sampling and quality control are necessary for operational control of a production facility however a particular type of sampling equipment generally is not necessary for the production of qualified_fuel thus the costs of sampling equipment are excluded from the facility's total fair_market_value unless the particular sampling equipment is necessary for operational control of the facility consistent with the holding in revrul_94_31 because p’s facility was placed- in-service prior to date within the meaning of sec_29 relocation of the facility to a different location or replacement of part of the facility after date will not result in a new placed-in-service date for the facility for purposes of sec_29 provided the fair_market_value of the original property is more than of the facility's total fair_market_value at the time of relocation or replacement the cost of the new equipment included in the facility plus the value of the used_property ruling_request to qualify the sec_29 credit p’s facility must be placed-in-service before date pursuant to a binding written contract in effect before date p received a favorable determination from the district_director for the state district that the facility was placed-in-service prior to date revproc_2001_30 2001_19_irb_1163 provides that a facility including one of multiple facilities located at the same site may be relocated without affecting the availability of the credit if all essential components of the facility are retained and the production capacity of the relocated facility is not significantly increased at the new location p has represented that the facility is designed with three separate and independent production lines so that each line can be operated as a separate_unit to produce synthetic_fuel p has represented that all of the major components of a plr-147040-04 production line would be relocated if a production line is relocated to a new site p has also represented that relocation of one or more production lines to another site would require the duplication of relatively minor components and site specific items involved in the relocation of any facility such as site preparation paving foundations area lighting and utilities based on the information submitted and the representations made we conclude that p may relocate one or more of the independent production lines provided the major or essential components of the independent production line are retained and the production output of the relocated production line is not significantly increased at the new location the production output is the amount of qualified_fuel including the production of a briquetted fuel product that can reasonably be expected to be actually produced by each facility using the prevailing practices in the industry regarding the performance of maintenance with regard to the various pieces of equipment in the facility reasonable allowances for shutdowns for repairs and or replacement of parts etc conclusions accordingly we conclude as follows p with the use of the enumerated process and the specified chemical the sec_29 credit attributable to p may be allocated to the members of p the contract for the construction of the facility constitutes a binding written reagents will produce a qualified_fuel within the meaning of sec_29 contract in effect before date within the meaning of sec_29 production from the facility will be attributed solely to p within the meaning of sec_29 and p shall be entitled to the sec_29 credit for qualified_fuel from the facility that is sold to an unrelated_person consisting of w u v and y in accordance with the members’ interests in p when the credit arises each such member will take into account its allocated shares of the sec_29 credit in computing its tax_liability and for the allocation of the sec_29 credit a member’s interest in p is determined based on a valid allocation of the receipts from the sale of the sec_29 qualified_fuel partnership from claiming the sec_29 credit on the production and sale of synthetic_fuel to unrelated persons meaning of sec_29 relocation of the facility to a different location after date or replacement of part of the facility after that date will not result in a new because the facility was placed-in-service prior to date within the a termination of p under sec_708 will not preclude the reconstituted plr-147040-04 placed-in-service date for the facility for purpose of sec_29 provided the fair_market_value of the original property is more than of the facility’s total fair_market_value at the time of the relocation or replacement the relocation of a facility and the replacement of parts described in the ruling_request will not result in a new placed_in_service_date for the facility or otherwise prevent the facility from continuing to be treated as placed_in_service prior to date meaning of sec_29 relocation of one or more of the independent production lines of the facility to a new location after date will not result in a new placed-in- service date for the facility or an independent production line for purposes of sec_29 provided all essential components of the independent production line are retained and the production output of the independent production line is not significantly increased at the new location because the facility was placed-in-service prior to date within the the conclusions drawn and rulings given in this letter are subject_to the requirements that the taxpayer i maintain sampling and quality control procedures that conform to astm or other appropriate industry guidelines at the facility that is the subject of this letter ii obtain regular reports from independent laboratories that have analyzed the fuel produced in such facility to verify that the coal used to produce the fuel undergoes a significant chemical change and iii maintain records and data underlying the reports that taxpayer obtains from independent laboratories including raw ftir data and processed ftir data sufficient to document the selection of absorption peaks and integration points except as specifically ruled upon above we express no opinion concerning the federal_income_tax consequences of the transaction described above this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent temporary or final regulations pertaining to one or more of the issues addressed in this ruling have not yet been adopted therefore this ruling may be modified or revoked by the adoption of temporary or final regulations to the extent the regulations are inconsistent with any conclusion in this ruling see dollar_figure of revproc_2004_1 i r b however when the criteria in dollar_figure of revproc_2004_1 are satisfied a ruling is not revoked or modified retroactively except in rare or unusual circumstances plr-147040-04 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 joseph h makurath senior technician reviewer branch office of associate chief_counsel passthroughs special industries cc


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc it a plr-109865-01 date date legend taxpayer partnership dollar_figurex dollar_figurey dear this is in reply to the private_letter_ruling request in which the taxpayer requests an extension of time to make an election under sec_108 of the internal_revenue_code specifically the taxpayer has requested an extension of time to make an election under sec_108 and sec_1 c -1 of the income_tax regulations to reduce the basis of depreciable_property and to exclude income resulting from the discharge of qualified_real_property_business_indebtedness facts partnership is a limited_liability_company that is treated as a partnership for federal_income_tax purposes taxpayer is an s_corporation and is a partner in partnership partnership realized dollar_figurex cancellation_of_indebtedness_income and dollar_figurey was allocated to taxpayer taxpayer filed its form_1120s by the due_date for the year in which the cancellation_of_indebtedness_income should have been reported partnership’s accountant delivered the schedule_k-1 to taxpayer after taxpayer had already filed its income_tax return for the year in which the cancellation_of_indebtedness_income should have been reported therefore taxpayer failed to include the cancellation_of_indebtedness_income and failed to make the election on form_982 however taxpayer filed its return consistent with having made the election if the late election is granted then the only change to taxpayer’s return will be the attachment of form_982 applicable law sec_108 provides that gross_income does not include any amount includible in gross_income by reason of the discharge_of_indebtedness if in the case of a taxpayer other than a c_corporation the indebtedness discharged is qualified_real_property_business_indebtedness sec_108 provides that the taxpayer must make an election in order to take advantage of the exclusion provided by sec_108 plr-109865-01 sec_108 provides that in the case of a partnership sec_108 and sec_108 shall be applied at the partner level sec_1 c -1 b provides that the election available under sec_108 must be made on the timely-filed including extensions federal_income_tax return for the taxable_year in which the taxpayer has discharge_of_indebtedness income that is excludible from gross_income under sec_108 the election is to be made on a completed form_982 sec_301_9100-3 of the procedure and administration regulations provides that requests for extensions of time for regulatory elections other than automatic extensions covered in sec_301_9100-2 will be granted when the taxpayer provides evidence including affidavits to establish that the taxpayer acted reasonably and in good_faith and granting relief will not prejudice the interests of the government sec_301_9100-3 states that a taxpayer will be deemed to have acted reasonably and in good_faith if the taxpayer-- i requests relief before the failure to make the regulatory election is discovered by the service ii failed to make the election because of intervening events beyond the taxpayer's control iii failed to make the election because after exercising due diligence the taxpayer was unaware of the necessity for the election iv reasonably relied on the written advice of the service or v reasonably relied on a qualified_tax professional and the tax professional failed to make or advise the taxpayer to make the election under sec_301_9100-3 a taxpayer will not be considered to have acted reasonably and in good_faith if the taxpayer-- i seeks to alter a return position for which an accuracy-related_penalty could be imposed under sec_6662 at the time the taxpayer requests relief and the new position requires a regulatory election for which relief is requested ii was fully informed of the required election and related tax consequences but chose not to file the election or iii uses hindsight in requesting relief if specific facts have changed since the original deadline that make the election advantageous to a taxpayer the service will not ordinarily grant relief sec_301_9100-3 states that the commissioner will grant a reasonable extension of time only when the interests of the government will not be prejudiced by the granting of relief under paragraph i the interests of the government are prejudiced if granting relief would result in a taxpayer having a lower tax_liability in the aggregate for all taxable years affected by the election than the taxpayer would have had if the election plr-109865-01 had been timely made taking into account the time_value_of_money analysis taxpayer requested relief before the failure to make the election was discovered by the service therefore taxpayer is deemed to have acted reasonably and in good_faith under sec_301_9100-3 in addition based on the facts as represented we have determined that sec_301_9100-3 does not apply furthermore based on the facts as represented we have determined that the interests of the government will not be prejudiced by the granting of relief conclusion based solely on the facts as represented and the applicable law we conclude that the request for relief under sec_301_9100-3 should be granted accordingly taxpayer is granted an extension of time of days from the date of this letter to file an amended_return making the election under sec_108 the election is to be made on form_982 caveats while this office has not verified any of the material submitted or facts assumed in support of the request for rulings it is subject_to verification on examination except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter thus no opinion is expressed or implied on whether the income at issue is cancellation_of_indebtedness_income or whether it is excludable from gross_income under sec_108 a copy of this letter must be attached to any income_tax return to which it is relevant this ruling is directly only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent sincerely robert a berkovsky branch chief office of associate chief_counsel income_tax accounting enclosure copy for sec_6110 purposes