t c summary opinion united_states tax_court john charles geyer and christin teresa wildfeuer petitioners v commissioner of internal revenue respondent docket no 21974-11s filed date derek w kaczmarek and kacie dillon for petitioners brandon a keim for respondent summary opinion 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 in a notice_of_deficiency respondent determined a deficiency of dollar_figure in petitioners’ federal_income_tax for petitioners resided in arizona when they filed their petition the only issue for us to decide is whether petitioners’ travel guide and video sales activities were activit ies not engaged in for profit under sec_183 we hold that petitioners did not engage in those activities for profit background petitioners are avid travelers before petitioners traveled in their first recreational vehicle rv throughout america and mexico for personal pleasure on an average of three months every year all in all petitioners traveled over big_number miles on these trips in petitioners purchased a second rv also for personal pleasure which they used to continue their yearly trips throughout america and mexico currently petitioners travel around two months per year in their rv while traveling in mexico in petitioners learned about adventure caravans an rv tour company for each trip adventure caravans contracts with independent contractors to serve as the wagon master or the tailgunner the wagon master has primary responsibility for running the trip responsibilities unless otherwise indicated section references are to the internal_revenue_code in effect for the year at issue and rule references are to the tax_court rules_of_practice and procedure include interfacing with customers holding introductory meetings and making arrangements for rv parks meals attractions and tour guides the tailgunner is an assistant who follows the rvs and helps resolve any problems that arise wagon masters are paid twice as much as tailgunners to be eligible to be a wagon master for a particular trip an individual must have served as the tailgunner for that same trip on a prior occasion finally wagon masters tailgunners and customers travel in their own rvs for each trip adventure caravans gives the wagon master a budget wagon masters are strongly advised to stay within this budget and must personally pay for unjustified cost overruns adventure caravans pays wagon masters half of their contract_price before the trip and the other half when the trip is complete in addition wagon masters and tailgunners receive tips from customers adventure caravans sells the trips to customers and mandates certain attractions and social gatherings for each trip in addition adventure caravans provides wagon masters and tailgunners with the materials they need including log books finance books and field staff manuals beyond that wagon masters are free to plan additional attractions and social gatherings adventure caravans assigns trips to wagon masters and tailgunners on the basis of their preferences customer evaluations from past trips and their ability to stay within budget every year wagon masters and tailgunners complete a tour preference form in which they indicate their interest in and preferences for trips scheduled one or two years in advance after learning of adventure caravans petitioners submitted an application went to training classes and were assigned to a trip adventure caravans’ training classes covered topics such as bookkeeping couples counseling foreign languages marketing and changing tires in addition to attending adventure caravans’ classes throughout the years mr geyer attended seminars and conventions on caravanning and mechanical work travel guide activity petitioners went on their first trip with adventure caravans in for each year thereafter petitioners led tours for adventure caravans until their last trip in petitioners testified that they stopped touring with adventure caravans after because it was not profitable and because adventure caravans did not offer them any more trips to lead in their schedules c profit or loss from business for their travel guide activity for to petitioners reported their income and expenses as follows year gross_income total expenses net_profit_or_loss dollar_figure big_number big_number big_number big_number dollar_figure big_number big_number big_number big_number big_number dollar_figure big_number big_number big_number big_number petitioners kept two sets of books for their travel guide activity in one set of books petitioners kept track of money advanced by adventure caravans to pay for tour expenses such as rv parks customer meals and tour guides in the other set of books petitioners kept track of expenses that were not covered by adventure caravans petitioners also maintained a mileage log in addition petitioners sought and followed general business advice from their accountant mr pliska including specifically the handling of expenses however petitioners did not have a business bank account for their travel guide activity nor did they operate through a business name although adventure caravans provides wagon masters with planning materials for each trip petitioners found the materials inadequate and began keeping travel notes which they referred to as their encyclopedia in the encyclopedia petitioners kept notes about each trip including where to go what activities to do how long activities take who to contact what customers liked etc petitioners testified that they used the encyclopedia to improve their customers’ experiences so that they would receive higher tips and better customer reviews petitioners decided which trips to lead on the basis of their qualifications and the trip’s profitability using these criteria petitioners frequently led trips to mexico according to petitioners they were more qualified to lead trips to mexico because of their personal travels there petitioners further testified that trips to mexico were more profitable because mexico was close to their home in arizona and because those trips lasted longer mrs wildfeuer further testified that although she had always wanted to lead a trip to alaska she decided against it because alaska was too far away from them for such a trip to be profitable video sales activity in addition to guiding rv tours petitioners also created videos of the trips which they sold as tour memorabilia to learn about filmmaking petitioners attended seminars about creating successful videos and sought advice from screen play the company from which they purchased their video equipment petitioners edited narrated and added music to the video footage of customers engaging in tour activities in addition to selling the videos petitioners used them for marketing purposes petitioners showed customers videos of other tours to encourage them to sign up for additional tours footage from the videos was also shown during a television interview of petitioners in their schedules c for their video sales activity for to petitioners reported their income and expenses as follows year gross_income total expenses net_profit_or_loss dollar_figure big_number -0- dollar_figure big_number big_number big_number big_number big_number big_number dollar_figure big_number big_number big_number big_number big_number big_number panama trip petitioners served as the wagon master for adventure caravans’ panama trip the panama trip took place between january and march for a total of days as wagon masters petitioners spent at least a month planning the trip destinations included the mayan ruins in belize the messiah volcano in nicaragua the rain forest aerial tram in costa rica the church of the black christ in nicaragua and the panama canal in panama as well as mexico el salvador guatemala and honduras the tour also featured margarita parties rum parties and potlucks typical days for petitioners started pincite a m and lasted until p m petitioners created a video for the panama trip with footage of the customers and their activities petitioners reported sales income for the video on their and returns polar bear trip petitioners served as tailgunners for adventure caravans’ polar bear trip as tailgunners petitioners’ primary responsibility was to ensure that their customers’ vehicles were mechanically fit for the tour the polar bear trip took place between september and october for a total of days destinations included various towns in canada the sam waller museum and the royal canadian mint the tour also featured polar bear sightings and a wine and cheese party as with the panama tour petitioners’ typical day started pincite a m and lasted until p m petitioners shot footage of the tour but because of low customer interest did not make it into a video petitioners’ explanation for losses petitioners cited a number of reasons for their losses for first petitioners explained that because they used the cash_method_of_accounting they reported half of their fee for the panama trip on their return second petitioners explained that their rv’s radiator broke during the panama trip which cost them over dollar_figure to repair third petitioners explained that traveling to mexico was more dangerous than usual in which resulted in fewer customers than expected for their panama tour finally petitioners explained that gas price increases in resulted in an unanticipated increase in their gas expense other assets and sources of income mr geyer is an entrepreneur whose business endeavors include operating a paint store and painting business flipping real_estate and running a ministorage business in mr geyer owned an interest in a real_estate partnership which had an ownership_interest in two apartment buildings glen garden and glen garden and a strip center sunridge the partnership had business bank accounts for each of the three buildings mr geyer’s partnership responsibilities included supervising employees and the property management company in mr geyer further owned and operated a mini-storage business which also had its own business bank account on their return petitioners reported income of dollar_figure from mr geyer’s real_estate activities discussion respondent disallowed certain expense deductions on petitioners’ schedules c for on the basis of his determinations that petitioners’ travel guide and video sales activities were not engaged in for profit within the meaning of sec_183 petitioners argue that their expenses are deductible under sec_162 as ordinary and necessary expenses_incurred in connection with petitioners’ trade_or_business for the reasons set forth below we sustain respondent’s determinations i legal standard 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 sec_183 generally limits an individual’s deductions for an activity not entered into for profit to the amount of the activity’s gross_income 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_162 allows a deduction for all the ordinary and necessary expenses paid_or_incurred in carrying on an activity which constitutes a trade_or_business of the taxpayer sec_183 provides a presumption that an activity is engaged in for profit if certain criteria are met petitioners do not meet those criteria 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 fact that it is a small_tax_case see sec_7482 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 aff’g tcmemo_1991_212 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 aff’d 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 aff’g 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 although a small_tax_case is not appealable the court will nonetheless look to the law of the otherwise appropriate appellate circuit 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 t c pincite 72_tc_28 ii travel guide and video sales activities while we believe that petitioners honestly hoped to generate a profit from their travel guide and video sales activities petitioners have failed to show that their activities were engaged in primarily for the purpose of making a profit a manner in which the taxpayer carries on the activity the fact that the taxpayer carries on the activity in a businesslike manner may indicate that the activity is engaged in for profit sec_1_183-2 income_tax regs three common inquiries are considered in this context whether the taxpayer maintained complete and accurate books_and_records for the activity whether the taxpayer conducted the activity in a manner substantially_similar to those of other comparable activities that were profitable and whether the taxpayer changed operating procedures adopted new techniques or abandoned unprofitable methods in a manner consistent with an intent to improve profitability giles v commissioner tcmemo_2005_28 89_tcm_770 sec_1_183-2 income_tax regs with regard to the first subfactor petitioners kept detailed records of their operations in accordance with advice from their accountant including two separate books for expenses and a mileage log however there is no evidence that these records were kept for the purposes of cutting expenses increasing profits or evaluating the overall performance of the operation see golanty v commissioner t c pincite furthermore petitioners did not operate under a business name maintain a separate bank account introduce evidence of a business plan or prepare profit or loss statements balance sheets or financial break-even analyses for their travel guide and video sales activities see lowe v commissioner tcmemo_2010_129 99_tcm_1535 holding that lack of separate bank account business plan profit or loss tellingly mr geyer and his partnership did maintain separate business bank accounts and operate under business names for his real_estate activities statements balance sheets and financial break-even analysis militates against finding that complete and accurate books_and_records were maintained hilliard v commissioner tcmemo_1995_473 70_tcm_898 holding that taxpayer did not conduct his activities in a businesslike manner where he did not prepare a business plan or maintain a separate bank account heppe v commissioner tcmemo_1995_314 70_tcm_63 holding that taxpayers did not operate their sailboat chartering activity in a businesslike manner where they did not formulate a business plan or make substantive financial projections before starting the activity cf hellings v commissioner tcmemo_1994_24 67_tcm_1988 holding that taxpayers operated their activities in a businesslike manner where among other things they made five-year projections sought innovative techniques to promote their operation and continually looked for ways to cut costs with regard to the second subfactor the record does not contain credible_evidence as to how others in the industry conducted their activities with regard to the third subfactor petitioners continually strove to improve their customers’ experiences in hopes of receiving higher tips by keeping detailed notes of each activity in their encyclopedia and using it to inform their future tour plans petitioners also sought to increase profitability by requesting trips which were of longer duration or shorter distances from their home in addition petitioners ceased guiding tours after because of the lack of profitability although mrs wildfeuer also testified that adventure caravans did not offer them additional tours in the light of the foregoing we conclude that petitioners conducted their travel guide and video sales activities in a manner that was businesslike in some respects but not others consequently this factor is neutral b expertise of the taxpayer or his advisers preparation for the activity by extensive study of its accepted business economic and scientific practices or consultation with those who are expert therein may indicate that the taxpayer has a profit_motive where the taxpayer carries on the activity in accordance with such practices sec_1_183-2 income_tax regs with respect to their travel guide activity petitioners completed training through adventure caravans in the fields of bookkeeping couples counseling marketing and foreign languages furthermore mr geyer attended seminars and conventions on caravanning and mechanical work with respect to their video sales activity petitioners attended seminars regarding the production of profitable videos and sought extensive advice from the owner of screen play the company from which petitioners purchased their video equipment this factor favors petitioners c time and effort expended by the taxpayer in carrying on the activity the fact that the taxpayer devotes much of his personal time and effort to carrying on an activity particularly if the activity does not have substantial personal or recreational aspects may indicate an intention to derive a profit sec_1_183-2 income_tax regs petitioners clearly devoted a substantial amount of time and effort in carrying out their travel guide activity where petitioners served as wagon masters they began planning the tour at least one month before the tour’s start date where petitioners served as either wagon masters or tailgunners petitioners worked long days while on tour often for hours a day in addition petitioners also devoted much time and effort to filming editing and producing their travel videos this factor favors petitioners d expectation that assets used in the activity may appreciate in value the term ‘profit’ encompasses appreciation in the value of assets used in the activity sec_1_183-2 income_tax regs with regard to their travel guide activity petitioners’ primary asset is the rv which they purchased in for personal pleasure consequently this factor favors respondent with respect to their video sales activity the record is silent as to petitioners’ expectations as to whether their video equipment would appreciate consequently this factor is neutral e success of the taxpayer in carrying on other similar or dissimilar activities the fact that the taxpayer has engaged in similar activities in the past and converted them from unprofitable to profitable enterprises may indicate that he is engaged in the present activity for profit even though the activity is presently unprofitable sec_1_183-2 income_tax regs mr geyer is a self- proclaimed entrepreneur who has operated a number of businesses in his career including a paint store and painting business a real_estate business and a mini- storage business although we have held that a taxpayer’s success in unrelated activities may indicate a profit objective see eg storey v commissioner tcmemo_2012_115 103_tcm_1631 all of mr geyer’s prior enterprises bear some relationship to real_estate a business unlike petitioners’ travel guide and video sales activities accordingly this factor is neutral see eg strode v commissioner tcmemo_2012_59 103_tcm_1276 f taxpayer’s history of income or losses with respect to the activity and the amount of occasional profits if any from the activity a record of substantial losses over many years coupled with limited potential for profit are important factors bearing on the taxpayer’s intention golanty v commissioner t c pincite losses sustained because of unforeseen circumstances beyond the control of the taxpayer however would not be an indication that the activity is not engaged in for profit sec_1_183-2 income_tax regs petitioners have a history of substantial losses and minimal if any profits for their travel guide and video sales activities for their travel guide activity petitioners reported a tax loss for every year between and with the exception of a minimal profit for we note however that in the light of the limitation on deductions for meal and entertainment_expenses see sec_274 petitioners suffered economic losses for all seven years even if petitioners did realize an economic profit in the minimal amount of this profit has little weight in establishing a primary profit_motive see sec_1 b income_tax regs an occasional small profit from an activity generating large losses or from an activity in which the taxpayer has made a large investment would not generally be determinative that the activity is engaged in for profit for their video sales activity petitioners reported losses substantially in excess of income for all years between and petitioners argue that a number of special or unforeseen circumstances resulted in their losses first petitioners claim that they reported part of their income on their return because they used the cash_method_of_accounting however despite having allegedly included income on their return petitioners still reported substantial losses for their travel guide activity second petitioners explain that their radiator repair expenses increased gas prices and safety concerns associated with traveling to mexico decreased their profitability for while we credit this part of petitioners’ testimony none of these reasons account for petitioners’ lack of profitability for every other year this factor strongly favors respondent g financial status of the taxpayer substantial income from sources other than the activity particularly if the losses from the activity generate substantial tax benefits may indicate that the activity is not engaged in for profit especially if there are personal or recreational elements involved sec_1_183-2 income_tax regs for petitioners reported substantial income of dollar_figure from mr geyer’s real_estate activities and substantial losses of dollar_figure and dollar_figure respectively from their tour guide and video sale activities we further note that petitioners clearly enjoyed rv traveling and in the light of their annual practice of traveling several months in their rv petitioners would likely have incurred significant traveling costs for personal pleasure with or without any_tax benefit from their claimed business activity see lowe v commissioner t c m cch pincite finding taxpayer husband would likely have incurred significant fishing costs for personal pleasure had he not started a competitive sport fishing_business where the taxpayer wife made significant income and taxpayer husband fished recreationally long before he started fishing competitively this factor favors respondent h elements of personal pleasure or recreation6 the presence of personal motives in carrying on of an activity may indicate that the activity is not engaged in for profit especially where there are recreational or personal elements involved sec_1_183-2 income_tax regs however w e also note that a business will not be turned into a hobby merely because the normally our analysis of the recreational aspect of petitioners’ video sales activity would be independent of the recreational aspect of petitioners’ travel guide activity however petitioners claimed significant travel_expenses with respect to their video sales activity including dollar_figure in car and truck expenses dollar_figure in meals and entertainment_expenses and dollar_figure in depreciation expenses consequently we hold petitioners to their position that traveling is an ordinary and necessary aspect of their video sales activity owner finds it pleasurable suffering has never been made a prerequisite to deductibility 59_tc_312 the personal pleasure or recreational aspect of petitioners’ activities is undeniable petitioners traveled in their rv for personal pleasure annually for several months a year before their association with adventure caravans moreover petitioners continue to travel in their rv for personal pleasure annually for several months a year after their association with adventure caravans ended finally petitioners admit that they enjoy traveling see also hilliard v commissioner t c m cch pincite finding recreational element existed where taxpayers used the sailboat in their charter activities one weekend a month during the summer warden v commissioner tcmemo_1995_176 69_tcm_2432 finding recreational element existed where taxpayers enjoyed sailing and sailed recreationally for at least years before purchasing their yacht for charter aff’d without published opinion 111_f3d_139 9th cir finally our cases routinely hold that no primary profit_motive exists where international travel is involved see eg 31_tc_1264 holding taxpayers not entitled to deduct the costs of a trip around the world as ordinary and necessary expenses of writing a book about such travels for publication since taxpayers had multiple purposes for making the trip including their personal_interest and enjoyment aff’d 274_f2d_883 6th cir bentley v commissioner tcmemo_1988_444 t c m cch holding taxpayer not entitled to deduct costs of travel to europe as ordinary and necessary business_expenses of selling photographs from his trip aff’d without published opinion 908_f2d_976 9th cir lesher v commissioner tcmemo_1987_345 53_tcm_1333 holding taxpayer not entitled to deduct costs of travel to africa as ordinary and necessary business_expenses of contributing articles to a travel guide in hopes of publication aff’d without published opinion 862_f2d_304 2d cir mcgowan v commissioner tcmemo_1964_241 23_tcm_1439 holding taxpayer not entitled to deduct costs of a six-month hunting safari tour of africa india and the far east as ordinary and necessary business_expenses of making hunting films aff’d 347_f2d_728 7th cir iii conclusion in the light of our foregoing analysis we conclude that while petitioners sincerely hoped to profit from their travel guide and video sales activities it was not their primary motive for engaging in those activities in reaching our holdings we have considered all arguments made and to the extent not mentioned above we conclude they are moot irrelevant or without merit to reflect the foregoing decision will be entered for respondent


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-129239-05 date date ------------------------------------------- -------------------------------- llc1 ein ---------------- llc2 ein ------------------ llc3 ein------------------- llc4 ---------------------- -------------------------------------- ein ---------------- corpa corpb corpc corpd a b d1 state ------------------ ---------------------------------------------------- -------------------------------------------------------------- -------------------------------------------- ----------------- -------------- ------------------- ------------ plr-129239-05 dear -------------- this letter responds to your letter dated date and subsequent correspondence submitted on behalf of llc1 llc2 llc3 and llc4 requesting rulings regarding the classification of llc1 llc2 llc3 and llc4 the federal tax consequences of a state law merger of corpa corpb and corpc into llc3 and the federal tax consequences of a state law merger of corpd into llc4 on d1 llc1 a state limited_liability_company equally owned by a and b acquired all the stock of corpa corpb corpc and corpd prior to the acquisition of corpa corpb corpc and corpd a and b each contributed cash to llc2 a state limited_liability_company in exchange for interests in llc2 llc1 and llc2 each contributed cash to llc3 a state limited_liability_company and to llc4 a state limited_liability_company in exchange for membership interests in llc3 and llc4 following the acquisition by llc1 of corpa corpb and corpc pursuant to state law corpa corpb and corpc each merged into llc3 with llc3 surviving llc1 received an interest in llc3 for the shares of stock it owned in each of corpa corpb and corpc following the acquisition by llc1 of corpd pursuant to state law corpd merged into llc4 with llc4 surviving llc1 received an interest in llc4 for the shares of stock it owned in corpd llc1 llc2 llc3 and llc4 have not made and do not intend to make any elections to be taxed as associations under sec_301_7701-3 of the procedure and administration regulations sec_301_7701-3 provides that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes an eligible_entity with at least two members can elect to be classified as either an association and thus a corporation under sec_301_7701-2 or a partnership sec_301_7701-3 provides that unless a domestic eligible_entity elects otherwise it is a partnership if it has two or more members sec_721 of the internal_revenue_code provides that no gain_or_loss shall be recognized to a partnership or to any of its partners in the case of a contribution of property to the partnership in exchange for an interest in the partnership sec_721 provides that sec_721 shall not apply to gain realized on a transfer of property to a partnership that would be treated as an investment_company within the meaning of sec_351 if the partnership were incorporated plr-129239-05 sec_722 provides that the basis of an interest in a partnership acquired by a contribution of property including money to the partnership shall be the amount of such money and the adjusted_basis of such property to the contributing_partner at the time of the contribution increased by the amount if any of gain recognized under sec_721 to the contributing_partner at such time sec_723 provides that the basis_of_property contributed to a partnership by a partner shall be the adjusted_basis of such property to the contributing_partner at the time of the contribution increased by the amount if any of gain recognized under sec_721 to the contributing_partner at such time sec_708 provides that for the purposes of subchapter_k an existing partnership shall be considered as continuing if it is not terminated sec_708 provides that an existing partnership shall be terminated if within a 12-month_period there is a sale_or_exchange of percent or more of the total interest in partnership capital and profits sec_761 provides that for purposes of sec_708 any distribution of an interest in a partnership not otherwise treated as an exchange shall be treated as an exchange sec_1_708-1 of the income_tax regulations 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 provides that the sale_or_exchange of the same partnership_interest more than once in a 12-month_period is counted only once based solely on the information submitted we conclude that each of llc1 llc2 llc3 and llc4 is a domestic eligible_entity classified as a partnership unless it elects otherwise under sec_301_7701-3 furthermore we conclude that for federal_income_tax purposes the mergers of corpa corpb and corpc into llc3 will be treated as i a transfer by corpa corpb and corpc of all their respective assets to llc3 in exchange for interests in llc3 and the assumption by llc3 of the liabilities of corpa corpb and corpc followed by ii the distributions of the interests of llc3 to llc1 in complete_liquidation of llc1’s stock interests in corpa corpb and corpc within the meaning of sec_331 see revrul_69_6 c b provided that llc3 is not an investment_company under sec_721 no gain_or_loss will result to corpa corpb corpc or llc3 upon the contribution of assets to llc3 by each of corpa corpb and corpc llc3 plr-129239-05 will take a carryover_basis in the assets under sec_723 pursuant to sec_722 each of corpa’s corpb’s and corpc’s basis in the membership interests received pursuant to the merger shall equal the adjusted_basis of their respective assets at the time of the contribution additionally we rule that gain_or_loss will be recognized by each of corpa corpb and corpc on their distribution of the interests in llc3 to llc1 in complete_liquidation sec_336 we conclude that the units of llc3 distributed by each of corpa corpb and corpc to llc1 in complete_liquidation of corpa corpb and corpc will be treated as received in full payment in exchange for llc1’s stock in corpa corpb and corpc respectively sec_331 corpa corpb and corpc’s distribution of their interests in llc3 will be treated as a transfer that will cause a technical_termination of llc3 under sec_708 however corpa corpb and corpc and llc3 will not recognize gain_or_loss under sec_721 as a result of the deemed termination under sec_1 b iv under sec_1_708-1 the sale_or_exchange of the same partnership_interest more than once in a 12-month_period is counted only once additionally we conclude that for federal_income_tax purposes the merger of corpd into llc4 will be treated as i a transfer by corpd of all its assets to llc4 for units of llc4 and the assumption by llc4 of the liabilities of corpd followed by ii the distribution of the interests in llc4 to llc1 in complete_liquidation of llc1’s stock interest in corpd within the meaning of sec_331 see revrul_69_6 c b provided that llc4 is not an investment_company under sec_721 no gain_or_loss will result to corpd or llc4 upon the contribution of assets to llc4 by corpd llc4 will take a carryover_basis in the assets under sec_723 pursuant to sec_722 corpd’s basis in the membership interests received pursuant to the merger shall equal the adjusted_basis of its respective assets at the time of the contribution gain_or_loss will be recognized by corpd on its distribution of the interests of llc4 to llc1 in complete_liquidation sec_336 the interests in llc4 distributed by corpd to llc1 in complete_liquidation of corpd will be treated as received in full payment in exchange for llc1’s stock in corpd sec_331 corpd’s distribution of its interest in llc4 will be treated as a transfer that will cause a technical_termination of llc4 under sec_708 however corpd and llc4 will not recognize gain_or_loss under sec_721 as a result of the deemed termination under sec_1_708-1 under sec_1_708-1 the sale_or_exchange of the same partnership_interest more than once in a 12-month_period is counted only once federal tax consequences of the facts described above under any other provision of the code provides that it may not be used or cited as precedent except as specifically set forth above no opinion is expressed concerning the this ruling is directed only to the taxpayer requesting it sec_6110 pursuant to a power_of_attorney on file with this office a copy of this letter is sincerely j thomas hines chief branch associate chief_counsel passthroughs special industries plr-129239-05 being sent to llc1 enclosures 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 corp b04 plr-116121-04 date date - legend parent target target target target sub sub sub sub ---------------------- ------------------------------- ------------------------ ------------------------------------ ------------------------------- ----------------------------------------- ---------------------------- ---------------------- ---------------------------- ---------------------------------- ---------------------------- ------------------------------------ ------------------------------- -------------------------------------------- -------------------------------------- --------------------------- ---------------------------- ----------------------- plr-116121-04 asset group date a date b buyer business x ------------------------------- ------------------------ -------------------------- -------------------------- --------------- ------------------------------- ---- ------- -------- ------------------------ ------------------------------------------------------------------------ ---------------------------------------------------------------------- -------------------------------------------------------- ----------------------------------- business y ------------------------------------------------------------------------ --------------------------------------------------------------------------------------------------------------------- country a x y z w a b a b c d e date c agreement ------------------------------------------------------------ ---------------------- --------------------- --------------- --------------- -------------- -------- ----- ----- ---- plr-116121-04 dear ---------------- ----------------------------------------------------------------- -------------------------- this letter responds to your date request for rulings regarding the federal_income_tax consequences of the transaction described below the information submitted in that letter and in subsequent correspondence is summarized below summary of facts parent is a widely held domestic_corporation and the parent of an affiliated_group_of_corporations that files a federal consolidated_income_tax_return parent directly and through subsidiaries engages in business x parent directly owns the stock of a number of subsidiaries including all of the outstanding_stock of target sub and sub all domestic corporations target owns all of the outstanding_stock of target a foreign_corporation target owns all of the outstanding_stock of target a foreign_corporation target owns x percent of the outstanding_stock of target a foreign_corporation target and target respectively own y percent and z percent of the outstanding_stock of target ie all of the target stock not owned by target sub owns all of the outstanding_stock of sub a foreign_corporation sub owns all of the outstanding preferred_stock and w percent of the outstanding common_stock of sub a foreign_corporation sub owns the remaining sub common_stock target target and target are primarily holding_companies that own the stock of several subsidiaries as well as some miscellaneous assets target is an operating company with employees and operating_assets directly engaged in business y target also owns most of asset group target and target own the portion of asset group not owned by target sub and sub are holding_companies that directly and indirectly own interests in numerous foreign and domestic entities sub engages in research_and_development activities in country a the transaction for what have been represented to be valid business purposes parent has undertaken the following steps the transaction prior to date a i ii target changed its name to a target changed its name to b plr-116121-04 on date a iii iv v vi in exchange for dollar_figurea cash target transferred to target its rights title and interest in its portion of the assets of asset group target distributed approximately dollar_figureb cash to target in exchange for dollar_figurec cash target transferred to target its rights title and interest in its portion of the assets of asset group target licensed to target certain of the assets included in asset group vii target licensed to parent the asset group assets that were not licensed to target in step vi above viii target target and target each sold all of their target stock to sub in exchange for collectively dollar_figured cash on date b ix x effective date b with deemed transactions occurring at the end of date a target made a check the box election under sec_301_7701-3 of the federal_income_tax regulations to be treated as a disregarded_entity for federal_income_tax purposes to ensure that target neither held any non-asset group assets nor had any liabilities target deeded all non-asset group assets to target and target assumed all of the liabilities of target no assets were in fact transferred and no liabilities were assumed target distributed all of its assets to target except for dollar_figuree cash xi xii target sold all of the outstanding_stock of target to sub for dollar_figuree cash xiii target distributed all of its assets to target xiv target distributed all of its assets except the assets of asset group to parent the distribution in addition parent assumed certain liabilities of target xv parent sold all of its stock of target to buyer for dollar_figurea cash the sale plr-116121-04 representations the taxpayer has made the following representations regarding the transaction a b c d e f g h i j buyer neither directly nor indirectly funded the distribution potential buyers were not involved in the decision to make the distribution and parent marketed target as a corporation the assets of which consisted of asset group except for the asset group assets as described above target owns and is expected to continue to own its business_assets associated with business y buyer is unrelated to parent and acquired the shares of target at an arm’s length price following a bidding process the distribution was unrelated to the negotiation of the sales_price for the target shares no entity related to parent reimbursed buyer for any portion of the purchase_price of the target shares moreover no entity related to parent loaned to buyer any of the funds necessary to acquire the target shares and no entity related to parent guaranteed any indebtedness created in connection with the acquisition of such shares parent did not make a sec_338 election for the sale pursuant to an agreement between buyer and parent buyer will not dispose_of any of the target shares through an actual or deemed liquidation or otherwise and target will not dispose_of asset group except in the very limited instance in which target transfers asset group to a wholly owned entity for at least two years following the sale pursuant to an agreement between buyer and parent target or target will operate a business with respect to asset group for at least two years following the sale the adjusted_basis of the target stock in the hands of parent immediately before the sale exceeded the amount of cash that parent received from buyer in the sale plr-116121-04 rulings based solely on the information and representations submitted we rule as follows the distribution will be respected as a distribution that is subject_to sec_301 of the internal_revenue_code_of_1986 the code as amended and will not be treated as additional sales consideration for the target shares any gain_or_loss recognized by target and income to parent with respect to the distribution will be taken into account as provided by sec_1_1502-13 and sec_1_1502-32 the sale will be respected as a sale of stock under sec_1001 of the code and any loss recognized by parent will be subject_to the limitations if any of sec_1_337_d_-2t c and 1502-35t caveats we express no opinion about the tax treatment of the transaction under other provisions of the code and regulations or about the tax treatment of any conditions existing at the time of or effects resulting from the transaction that are not specifically covered by the above rulings in particular no opinion is expressed and none is requested as to whether the date c agreement constituted part of the consideration for the target shares procedural statements this ruling is directed only to the taxpayer that requested it sec_6110 of the code provides that it may not be used or cited as precedent the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalties of perjury statement executed by an appropriate party this office has not verified any of the materials submitted in support of this ruling_request verification of the information representations and other data may be required as part of the audit process in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative plr-116121-04 a copy of this letter must be attached to any income_tax return to which it is relevant cc sincerely _________________ sean p duffley assistant to the chief branch corporate


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 b03 plr-134713-12 date february legend company ------------------------------------------------------------------------------------------------------------------------ trust ------------------------------------------------------------------------------------------------------------------------ trust trust -------------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------ -------------------------------------------------------------------------------------------------------------------------- trust -------------------------------------------------------------------------------------------------------------------------- state date date date -------- --------------------- ----------------- ----------------- dear -------------- this letter responds to a letter dated date and subsequent correspondence submitted on behalf of company by its authorized representative requesting a ruling under sec_1362 of the internal_revenue_code code facts plr-134713-12 company was incorporated under state law on date company elected to be an s_corporation as of date on date trust trust trust and trust collectively the trusts received shares of company the beneficiaries of the trusts failed to make timely elections for the trusts to be treated as qualified subchapter_s trusts qssts as a result company’s s_corporation_election terminated as of date company represents that the termination was inadvertent and not motivated by tax_avoidance or retroactive tax planning for all relevant taxable years company and company’s shareholders filed their federal_income_tax returns consistent with company qualifying as an s_corporation and the trusts have filed consistent with the trusts having valid qsst elections in effect as of date in addition company and company’s shareholders agree to make any adjustments consistent with the treatment of company as an s_corporation as may be required by the secretary with respect to the period specified by sec_1362 law and analysis sec_1361 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 defines a small_business_corporation as a domestic_corporation which is not an ineligible_corporation and which does not a have more than shareholders b 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 c have a nonresident_alien as a shareholder and d have more than class of stock sec_1361 provides that for purposes of sec_1361 a_trust all of which is treated under subpart e of part i of subchapter_j of chapter of the internal_revenue_code as owned by an individual who is a citizen or resident_of_the_united_states may be a shareholder sec_1361 provides in pertinent part that in the case of a qsst with respect to which a beneficiary makes an election under sec_1361 a the trust is treated as a_trust described in sec_1361 and b for purposes of sec_678 the beneficiary of the trust is treated as the owner of that portion of the trust which consists of stock in an s_corporation with respect to which the election under sec_1361 is made sec_1361 provides that a beneficiary of a qsst or his legal_representative may elect to have sec_1361 apply plr-134713-12 sec_1_1361-1 of the income_tax regulations provides that the current income_beneficiary of the trust must make the election under sec_1361 by signing and filing with the service_center with which the corporation files its income_tax return the applicable form or statement including the information listed in sec_1_1361-1 sec_1362 provides that except as provided in sec_1362 a small_business_corporation may elect in accordance with the provisions of sec_1362 to be an s_corporation sec_1362 provides that 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 sec_1362 provides in pertinent part that if an election under a by any corporation was terminated under sec_1362 or the secretary determines that the circumstances resulting in such termination were inadvertent no later than a reasonable period of time after discovery of the circumstances resulting in such termination steps were taken so that the corporation for which the termination occurred is a small_business_corporation and the corporation for which the termination occurred and each person who was a shareholder in such corporation at any time during the period specified pursuant to sec_1362 agrees to make such adjustments consistent with the treatment of such corporation as an s_corporation as may be required by the secretary with respect to such period then notwithstanding the circumstances resulting in such termination such corporation shall be treated as an s_corporation during the period specified by the secretary conclusion based solely on the facts submitted and representations made we conclude that company’s s_corporation_election terminated on date because the beneficiaries of the trusts failed to make elections under sec_1361 for the trusts we also conclude that the termination of company’s s_corporation_election was inadvertent within the meaning of sec_1362 accordingly under sec_1362 company will be treated as continuing to be an s_corporation from date and thereafter provided that company’s s_corporation_election was valid and was not otherwise terminated under sec_1362 and provided that the beneficiaries of the trusts file an election under sec_1361 for their respective trust with an effective date of date with the appropriate service_center within days from the date of this letter a copy of this letter should be attached to the elections under sec_1361 plr-134713-12 except as expressly provided herein we express or imply no opinion concerning the federal tax consequences of any aspect of any transaction or item discussed or referenced in this letter specifically we express or imply no opinion concerning whether the trusts are otherwise eligible to be qssts or whether company is otherwise eligible to be an s_corporation for federal tax purposes in accordance with a power_of_attorney on file with this office we are sending a copy of this letter to company’s authorized representatives 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 the ruling contained in this letter is based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the ruling_request it is subject_to verification on examination sincerely s stacy l short senior technician reviewer branch office of the associate chief_counsel passthroughs special industries enclosures copy of this letter letter for sec_6110 purposes cc


internal_revenue_service number release date index number 45k -------------------------- ------------------------------- --------------------------------- ------------------------------------ - department of the treasury washington dc third party communication date of communication month dd yyyy person to contact ------------------------------ id no ------------ ---------- telephone number --------------------- refer reply to cc psi b07 plr-128348-06 date date legend p a b c d e f g h j k l m n q date date date date date date date date year year ------------------------------- --------------------------- --------------------------------- ------------------------------------- ----------------------------------------- ---------------------------------------------- ----------------------------------------- --------------------- ---------------------------- -------------------------------- ----------------- --------------------------------------- ------------------------------------ --------------- ----------------------------------- ------------------------ -------------------------- ------------------ -------------------------- ----------------- ----------------------- -------------------------- ------------------------- ------- ------- -------- ------------ ------------ --------- -------------------- ------------- plr-128348-06 state v state w state x state y state z dollar_figurex a b c d e f g h i j k m n p q dear -------------- this letter responds to a letter dated date and subsequent correspondence submitted on behalf of p by its authorized representative requesting rulings under sec_45k and sec_702 of the internal_revenue_code ------ ------ -------- ------- ------ ------ -------- -------- -------- -------- -------- -------- ------ ------- ------ facts the facts as represented by p and p’s authorized representative are as follows on date p received plr which rules on issues similar to those addressed by this letter p seeks confirmation of the prior rulings received in light of certain changes in the facts including the potential use of two alternative chemical reagents the transfers of indirect membership interests in p and amendments to certain agreements relating to the operation of the facilities p is a limited_liability_company organized under the laws of state v and is classified as a partnership for federal_income_tax purposes a a limited_liability_company organized plr-128348-06 under the laws of state w owns a a membership interest in p b a limited_liability_company organized under the laws of state w owns the remaining b membership interest in p c a limited_partnership organized under the laws of state w is the sole member of a d a corporation organized under the laws of state x is the sole member of b a and b are treated as disregarded entities for federal_income_tax purposes as a result c is treated as owning a’s membership interest in p and d is treated as owning b’s membership interest in p the members of p have made and are expected to continue to make periodic cash contributions to p to fund its operating losses in accordance with their respective membership interests e a limited_liability_company organized under the laws of state w owns a c limited_partnership_interest in c f a corporation organized under the laws of state y owns the remaining d general_partnership interest in c as of date l a general_partnership organized under the laws of state z owned a e membership interest in e and g a corporation organized under the laws of state w owned the remaining f membership interest in e the facilities were constructed pursuant to a construction_contract dated date which was partially assigned to h by j effective date the construction_contract provides for liquidated_damages of at least five percent of the total_contract_price it also includes a description of the facilities to be constructed a completion date and a price the construction_contract is valid under state law p represents that the facilities were placed_in_service within the meaning of sec_45k before date the facilities consist of two lines for the production of a solid synthetic_fuel from coal using the process described below for each production line the feedstock coal is thoroughly mixed with a heated chemical reagent in a pugmill after leaving the pugmill the mixture is carried by conveyor belt to a briquetter each briquetter is equipped with a short conveyor belt running under it that receives the resulting solid synthetic_fuel product and carries it to a common collection belt and then out of the facilities to a storage area in p’s production process the combination of the chemically reactive agent the mixing process and the compression pressure in the roll briquetter process results in a solid synthetic_fuel product in the form of an agglomeration the facilities utilize coal feedstock and chemical reagents that meet the requirements of revproc_2001_34 2001_1_cb_1293 p entered into a facilities operating_agreement with b for the operation and maintenance of the facilities under the facilities operating_agreement b provides workers and certain services and equipment to p for a fixed fee of dollar_figurex per ton of synthetic_fuel produced subject_to an annual inflation adjustment and the temporary reduction pursuant to an amendment described below b is subject_to the direction and control of p which has the sole authority to set production levels and make other plr-128348-06 strategic decisions p pays for all operating costs other than the cost of workers and equipment provided by b and certain liability insurance in addition b provides a working_capital loan to p the amended and restated operating_agreement of p allocates profits and losses from the sale of synthetic_fuel among its members in accordance with their membership interests p has proposed that on occasion one of two specified alternative chemical reagents may be used in the process for the production of synthetic_fuel p has had recognized experts in coal and chemical analysis conduct tests on synthetic_fuel samples produced by p using each alternative chemical reagent identified in the request for rulings these tests are described in p’s letter_ruling request based on this testing of the alternative chemical reagents the experts have concluded that there was a measurable significant change in the chemical composition of the resulting synthetic_fuel compared to the unreacted coal feedstocks and each of the alternative chemical reagents since plr there have been five separate transfers of membership interests in e first on date k purchased a g membership interest from l thereby reducing l’s ownership_interest from e to h second on date m purchased a i membership interest from g which reduced g’s ownership from f to j third on date n purchased a k membership interest from l which reduced l’s ownership_interest from h to m fourth on date g repurchased the i membership interest from m increasing its ownership_interest from j to f and eliminating m’s ownership_interest finally on date g purchased a n membership interest from l which reduced l’s ownership_interest from m to p and increased g’s ownership_interest from f to q k n and g are indirect subsidiaries of q and are included in q’s consolidated federal_income_tax return pursuant to sec_45k the amount of the sec_45k credit is subject_to phaseout when the reference_price for oil exceeds dollar_figure adjusted for inflation with the phaseout for a calendar_year being determined based on the reference_price for such calendar_year due to the recent increases in the price of oil there is a substantial risk of a phaseout of the sec_45k credit for calendar_year in order to protect itself against this uncertainty an affiliate of q purchased call spread options of crude_oil futures contracts that are traded on the new york mercantile exchange in a quantity and at strike prices sufficient to compensate the affiliate in the event of a phaseout of sec_45k credits for because the purchase of these options increased the economic cost of q’s indirect investment in p k n and g demanded a partial offset of these costs through a reduction in their capital_contribution requirements to e in an effort to satisfy k n and g’s demands three key modifications were implemented first pursuant to a first amendment to the facilities operating_agreement b agreed to a temporary reduction in the operating fee payable to it by p plr-128348-06 which reduces the expenses_incurred by p in producing the synthetic_fuel and thereby reduces p’s operating losses that must be funded through capital contributions from a second pursuant to a fourth_amendment to the purchase and sale and contribution agreement the prior owners of p agreed to reduce the calculated amount that is used to determine the contingent_amounts payable under the purchase_price note furthermore pursuant to a fifth_amendment to the purchase and sale and contribution agreement the prior owners of p agreed to reduce any amounts payable due in year to a recalculation of certain amounts for year including the amount of the sec_45k credit the reduction in a’s obligation under the purchase_price note coupled with a’s reduced obligation to make capital contributions to p reduce the amount of capital contributions required to be made by c to a which in turn reduce the amount of capital contributions to be made by e to c third pursuant to an amendment to agreement of limited_partnership of c f agreed to a temporary reduction in its quarterly management fee in order to reduce the capital contributions required to be made to c this fee reduction further reduces the amount of capital_contribution required to be made by e to c the aggregate reduction in capital contributions required to be made to e in turn reduces the capital_contribution requirements of e’s members including k n and g the rulings requested by p are as follows p by using the process and reagents described in the ruling_request and the facilities produces a solid synthetic_fuel from coal that constitutes a qualified_fuel within the meaning of sec_45k the contract for construction of the facilities constitutes a binding written contract in effect before date within the meaning of sec_45k the facilities are placed_in_service for purposes of sec_45k on the date that the facilities are first placed in a condition or state of readiness and availability to produce a solid synthetic_fuel from coal as provided in sec_1_46-3 and sec_1_167_a_-11 of the income_tax regulations provided the facilities were placed_in_service prior to date within the meaning of sec_45k relocation of the facilities to a different location after date or replacement of parts of the facilities after that date will not result in a new placed_in_service_date for the facilities for purposes of sec_45k if the fair_market_value of the original property is more than percent of the facilities’ total fair_market_value immediately following the relocation or replacement production of qualified_fuel from the facilities will be attributable solely to p within the meaning of sec_45k and p will be entitled to the sec_45k plr-128348-06 credit for the production of qualified_fuel from the facilities that is sold to unrelated persons the credits allowed under sec_45k may be passed through to and allocated among the members consisting of c and b 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_45k credit a member’s interest in p is determined based upon a valid allocation of the taxpayer’s gross_income or loss that arises from receipts from the sales of the sec_45k qualified_fuel provided the facilities were placed_in_service prior to date within the meaning of sec_45k the facilities will continue to be treated as placed_in_service before date if sold to a new owner after such date a termination of p under sec_708 will not preclude the reconstituted partnership from claiming the sec_45k credit for the production and sale of synthetic_fuel to unrelated persons ruling_request sec_45k 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_45k 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 is relevant to the interpretation of the term under sec_29 redesignated as sec_45k 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 redesignated as sec_45k 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 the alternate_substance used to produce it coal is an alternate_substance under sec_1_48-9 of the income_tax regulations plr-128348-06 in revproc_2001_30 2001_1_cb_1163 the service announced that it will resume issuance of rulings under sec_45k for processes that do not go beyond the processes approved in the rulings issued prior to sec_3 of revproc_2001_34 provides that the service will issue rulings that a solid fuel other than coke produced from coal is a qualified_fuel under sec_29 redesignated as sec_45k if the conditions set forth below are satisfied and evidence is presented that all or substantially_all of the coal used as feedstock undergoes a significant chemical change the conditions are that the feedstock coal consists of coal fines or crushed coal comprised of particles the majority of which by weight are no larger than inch the feedstock is thoroughly mixed in a mixer a with styrene or other monomers b with quinoline c9h7n or other organic resin and left to cure for several days c with ultra heavy hydrocarbons or d with an aluminum and or magnesium silicate binder following heating to a minimum temperature of degrees fahrenheit and the treated feedstock is subjected to elevated temperature and pressure that results in briquettes pellets or an extruded fuel product or the taxpayer represents that the omission of this procedure will not significantly increase the production of the facility over the remainder of the period during which the sec_45k credit is allowable based on the representations of p and p’s authorized representative including the test results submitted by p we conclude that the conditions of revproc_2001_34 are met and that the process and reagents used in the facilities as described in p’s ruling_request produce a significant chemical change to the coal transforming the coal feedstock into a solid synthetic_fuel from coal therefore we further conclude that p by using the process and reagents described in the request for rulings and the facilities produces a solid synthetic_fuel from coal that constitutes a qualified_fuel within the meaning of sec_45k ruling_request sec_45k and e provides that sec_45k 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_45k modifies sec_45k in the case of a facility producing qualified_fuels described in sec_45k which qualified_fuels include solid synthetic fuels produced from coal or lignite sec_45k provides that for purposes of sec_45k a facility shall be treated as placed_in_service before date if plr-128348-06 the facility is placed_in_service before date pursuant to a binding written contract in effect before date sec_45k provides that if the facility is originally placed_in_service after date sec_45k 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 provides for liquidated_damages of at least five percent of the total_contract_price and includes such essential features as a description of the facility to be constructed a completion date and a price therefore we conclude that the construction_contract is a binding written contract in effect before date within the meaning of sec_45k ruling requests and sec_45k and e provides that sec_45k 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_45k modifies sec_45k in the case of a facility producing qualified_fuels described in sec_45k which qualified_fuels include solid synthetic fuels produced from coal or lignite sec_45k provides that for purposes of sec_45k a 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_45k provides that if the facility is originally placed_in_service after date sec_45k shall be applied by substituting date for date to qualify for the sec_45k credit the facility must be placed_in_service before date pursuant to a binding written contract in effect before date while sec_45k does not define placed_in_service the term has been defined for purposes of the deduction for depreciation and the investment_tax_credit property is placed_in_service in the taxable_year the property is placed in a condition or state of readiness and availability for a specifically assigned function sec_1_167_a_-11 and sec_1_46-3 of the income_tax regulations placed_in_service has consistently been construed as having the same meaning for purposes of the deduction for depreciation and the investment_tax_credit see revrul_76_256 1976_2_cb_46 when property is placed_in_service is a factual determination and we express no opinion on when the facilities were placed_in_service 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 plr-128348-06 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 provided the facilities were placed_in_service prior to date within the meaning of sec_45k relocation of the facilities after date or replacement of parts of the facilities after that date will not result in a new placed_in_service_date for the facilities or otherwise prevent the facilities from continuing to be treated as originally placed_in_service prior to date if the fair_market_value of the original property is more than percent of the facilities’ total fair_market_value immediately following the relocation or replacement ruling_request sec_45k 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 under sec_7701 taxpayer means any person subject_to any internal revenue tax furthermore sec_7701 provides that when used in title_26 where not otherwise distinctly expressed or manifestly incompatible with the intent thereof person will be construed to mean and include an individual trust estate partnership_association company or corporation p is the taxpayer for purposes of sec_45k of the code because a limited_liability_company such as p may be treated for tax purposes as either a partnership or a corporation either of which is a taxpayer under sec_7701 p will own the facilities and through an agent p will operate and maintain the facilities and sell the resulting qualified_fuel therefore all production of qualified_fuel from the facilities will be attributable solely to p within the meaning of sec_45k and p will be entitled to the sec_45k credit for the production of qualified_fuel from the facilities that is sold to unrelated persons ruling_request sec_45k allows a credit for qualified_fuels solid by the taxpayer to an unrelated_person during the taxable_year the production of which is attributable to the taxpayer under sec_7701 taxpayer means any person subject_to any internal revenue tax furthermore sec_7701 provides that when used in title_26 plr-128348-06 where not otherwise distinctly expressed or manifestly incompatible with the intent thereof person will be construed to mean and include an individual 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 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 principals 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 assuming the solid synthetic_fuel produced and sold qualifies for the sec_45k credit the credit will be allowed to p and the credit may be passed through to and allocated among the members of p consisting of c and d 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_45k credit a member’s interest in p is determined under sec_1_704-1 and is proportionate to valid allocations of the receipts from the sale of the sec_45k credit qualified_fuel plr-128348-06 ruling_request the sec_45k credit has always been a time sensitive credit in that eligibility for the credit is determined when facilities or wells producing qualified_fuels are placed_in_service and when the qualifying fuels are produced and sold to unrelated persons for example the 44d credit as originally enacted in the crude_oil windfall profit tax act of was generally available for the production and sale of alternative fuels after date and before date on property that first began production after date congress has extended the sec_45k credit four times the placed-in-service deadline and the period for claiming the sec_45k credit were extended in the technical_and_miscellaneous_revenue_act_of_1988 for placed_in_service omnibus budget reconciliation act of for placed_in_service and for the end of the credit_period energy policy act of for placed_in_service and for the end of the credit_period and small_business job protection act of date for placed_in_service if sec_45k were read as requiring facilities producing qualified_fuels to be placed_in_service by the taxpayer facilities placed_in_service before that are sold or transferred to a new taxpayer after would entitle the purchaser transferee to claim the sec_45k credit it is clear from the legislative_history of sec_44d that congress intended the credit to apply to facilities placed_in_service after and that the placed-in-service deadline in sec_45k 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_45k and sec_45k focus on the facility and not the owner of the facility the legislative_history of sec_44d clearly shows that congress wanted to encourage the production of new alternative fuels from facilities first placed_in_service after and not provide a tax incentive for production capacity in service before sec_45k demonstrates that congress knows how to preclude transferees of facilities from claiming the sec_45k credit that provision provides that the extension of the period for placing facilities in service after does not apply to any facility that produces coke or coke gas unless the original_use of the facility commences with the taxpayer accordingly the determination of whether a facility has satisfied the placed-in-service deadline under either sec_45k or sec_45k is made by reference to when the facility is first placed_in_service not when the facility is transferred or sold to a different taxpayer therefore provided the facilities were placed_in_service prior to date within the meaning of sec_45k the sale of the facilities after date will not result in a new placed_in_service_date for the facilities for purposes of sec_45k for the new owner plr-128348-06 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 interests 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_45k and sec_45k 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_45k and sec_45k focus on the facility and not the taxpayer owning the facility accordingly the determination of whether a facility has satisfied the placed-in-service deadline under sec_45k and sec_45k is made by reference to when the facility is first placed_in_service not when the facility is placed_in_service by a transferee taxpayer therefore we conclude that a termination of p under sec_708 will not preclude the reconstituted partnership from claiming the sec_45k credit for the production and sale of synthetic_fuel to unrelated persons conclusions accordingly based on the representations of p and p’s authorized representative we conclude as follows p by using the process and reagents described in the ruling_request and the facilities produces a solid synthetic_fuel from coal that constitutes a qualified_fuel within the meaning of sec_45k the contract for construction of the facilities constitutes a binding written contract in effect before date within the meaning of sec_45k plr-128348-06 the facilities are placed_in_service for purposes of sec_45k on the date that the facilities are first placed in a condition or state of readiness and availability to produce a solid synthetic_fuel from coal as provided in sec_1_46-3 and sec_1_167_a_-11 of the income_tax regulations we express no opinion on when the facilities were placed_in_service provided the facilities were placed_in_service prior to date within the meaning of sec_45k relocation of the facilities to a different location after date or replacement of parts of the facilities after that date will not result in a new placed_in_service_date for the facilities for purposes of sec_45k if the fair_market_value of the original property is more than percent of the facilities’ total fair_market_value immediately following the relocation or replacement production of qualified_fuel from the facilities will be attributable solely to p within the meaning of sec_45k and p will be entitled to the sec_45k credit for the production of qualified_fuel from the facilities that is sold to unrelated persons the credits allowed under sec_45k may be passed through to and allocated among all the members of p consisting of c and d 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_45k credit a member’s interest in p is determined is determined under sec_1_704-1 and is proportionate to valid allocations of the receipts from the sale of qualified_fuel provided the facilities were placed_in_service prior to date within the meaning of sec_45k the facilities will continue to be treated as placed_in_service before date if sold to a new owner after such date a termination of p under sec_708 will not preclude the reconstituted partnership from claiming the sec_45k credit for the production and sale of synthetic_fuel to unrelated persons plr-128348-06 except as specifically ruled upon above we express no opinion concerning the federal_income_tax consequences of the transaction described above specifically we express no opinion on when the facilities were placed_in_service for purposes of sec_45k in addition we express no opinion regarding the validity of the allocations under sec_704 or under any other partnership provision sincerely s joseph h makurath acting branch chief branch passthroughs and special industries