t c summary opinion united_states tax_court stanislav antoniev dimitrov petitioner v commissioner of internal revenue respondent docket no 27478-16s filed date stanislav antoniev dimitrov pro_se victoria e cvek and nancy m gilmore for respondent summary opinion armen special_trial_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 respondent determined deficiencies in and accuracy-related_penalties on petitioner’s federal_income_tax for and as follows year deficiency sec_6662 dollar_figure dollar_figure big_number penalty after concessions by respondent and without regard to computational adjustments the issues for decision are whether petitioner is entitled to deduct schedule c car expenses of dollar_figure and dollar_figure for and respectively and unless otherwise indicated all subsequent section references are to the internal_revenue_code as amended and in effect for the taxable years in issue all rule references are to the tax_court rules_of_practice and procedure all monetary amounts have been rounded to the nearest dollar respondent concedes that petitioner is entitled to deductions claimed on his schedules c profit or loss from business for repairs and maintenance_expenses of dollar_figure and dollar_figure for and respectively whether petitioner is liable for accuracy-related_penalties for negligence or disregard of rules or regulations under sec_6662 and b for and background some of the facts have been stipulated and they are so found the court incorporates by reference the parties’ stipulation of facts and accompanying exhibits petitioner resided in the state of maryland at the time that the petition was filed with the court in and the taxable years in issue petitioner was employed and reported wages of dollar_figure and dollar_figure respectively on his income_tax returns for those years petitioner’s wages were received in part from whole foods market group inc and in part from euler hermes collections a commercial debt collection company for petitioner itemized his deductions on a schedule a itemized_deductions and he claimed inter alia a deduction for unreimbursed employee business_expenses based principally on big_number business miles for petitioner did not itemize his deductions in petitioner began what he described as a commercial services and leasing business which he also operated in this business consisted of purchasing and renovating real_property for lease or sale thus in date petitioner purchased a mixed-use commercial and residential property in hagerstown maryland and in date he purchased a triplex residential property also in hagerstown collectively hagerstown properties petitioner operated his business from his home in montgomery village maryland montgomery village address and later after he had moved he operated his business from his home in owings mills maryland owings mills address after the purchase of the hagerstown properties petitioner engaged third- party contractors to renovate them petitioner also performed some of the low- petitioner supported that deduction on form 2106-ez unreimbursed employee business_expenses even though he responded to the question on the form do you have evidence to support your deduction by marking the box no the deduction was not disallowed by respondent in the notice_of_deficiency and is not at issue in the present case the record does not disclose when petitioner moved from montgomery village to owings mills but presumably it was sometime in as he deducted moving_expenses on hi sec_2013 income_tax return and attached thereto form_3903 moving_expenses skill work himself purchased various building supplies and collected rent from tenants petitioner timely filed a federal_income_tax return for each of the years in issue petitioner attached to each of hi sec_2013 and sec_2014 tax returns a schedule c for his commercial services and leasing business as relevant petitioner claimed deductions of dollar_figure and dollar_figure for car expenses for and respectively the internal_revenue_service irs subsequently commenced an examination of petitioner’ sec_2013 and sec_2014 income_tax returns in date respondent sent petitioner a notice_of_deficiency as relevant respondent disallowed for lack of substantiation petitioner’s claimed deductions for schedule c car expenses for and in addition respondent determined that petitioner was liable for the accuracy-related_penalty under sec_6662 based on negligence or disregard of rules or regulations prior to the issuance of the notice_of_deficiency the accuracy-related_penalty was approved in writing by the irs examiner’s group manager as documented by a civil penalty approval form in response to the notice_of_deficiency petitioner filed a timely petition for redetermination with the court subsequently and in anticipation of trial petitioner prepared and provided respondent with a document entitled mileage explanation and summary mileage summary at trial petitioner testified that the data in his mileage summary was based on a different log at the time i was keeping on paper in my car petitioner did not offer the different log at trial nor does it appear that it was ever provided to respondent insofar as the mileage summary is concerned petitioner recorded that it was miles round trip from his montgomery village address to the hagerstown properties and miles round trip from his owings mills address to the hagerstown properties thereafter the entries purport to list the dates that petitioner drove between these locations and the number of round-trip miles for each trip according to the mileage summary petitioner made trips in between may and december specifically including consecutive trips on every single day from june through december for a total which the summary denominates big_number estimated mileage claimed petitioner visited his parents in the boston massachusetts area for a number of days in mid to late date also according to the mileage summary petitioner made trips in for a total which the summary denominates big_number estimated mileage claimed these trips are generally recorded in blocks of consecutive days thus for example the mileage summary list sec_34 back-to-back daily trips from march continued notably of the trips in are recorded in the mileage summary pincite miles despite the fact that petitioner had previously moved from the montgomery village address to the owings mills address see supra note as previously indicated and according to the mileage summary petitioner drove big_number estimated miles in and big_number estimated miles in applying the irs standard mileage rate to these numbers petitioner argues that he is entitled to the deductions for car expenses reported on his schedules c for and a general principles discussion deductions are a matter of legislative grace and the taxpayer bears the burden of proving that he or she is entitled to any deduction claimed rule a 308_us_488 292_us_435 see 503_us_79 continued through may and back-to-back daily trips from may through july the commissioner generally updates the optional standard mileage rate annually see sec_1_274-5 income_tax regs notice_2012_72 sec_2 2012_50_irb_673 established the standard mileage rate of cents per mile for notice_2013_80 sec_3 2013_52_irb_821 established the standard mileage rate of cents per mile for 290_us_111 this includes the burden of substantiation 65_tc_87 aff’d per curiam 540_f2d_821 5th cir cf sec_7491 which section does not serve to effect any burden-shifting in the instant case given petitioner’s failure to raise the matter and to comply with all of the requirements of sec_7491 further sec_6001 and the regulations promulgated thereunder require taxpayers to maintain records sufficient to permit verification of income and expenses see sec_1_6001-1 income_tax regs in the absence of adequate_records if a taxpayer provides sufficient evidence of having incurred a deductible expense but is unable to adequately substantiate the amount of the deduction to which he or she is otherwise entitled the court may estimate the amount of the expense and allow the deduction to that extent 39_f2d_540 2d cir however in order for the court to estimate the amount of an expense the court must have some basis upon which an estimate may be made 85_tc_731 without such a basis any allowance would amount to unguided largesse 245_f2d_559 5th cir b car expenses in the case of certain expenses sec_274 overrides the so-called cohan doctrine 50_tc_823 aff’d per curiam 412_f2d_201 2d cir sec_1_274-5t temporary income_tax regs fed reg date specifically and as relevant herein sec_274 provides that no deduction is allowable with respect to listed_property as defined in sec_280f unless the deduction is substantiated in accordance with the strict substantiation requirements of sec_274 and the regulations promulgated thereunder included in the definition of listed_property in sec_280f is any passenger_automobile thus under sec_274 no deduction is allowable for expenses_incurred in respect of listed_property such as a passenger_automobile on the basis of any approximation or the unsupported testimony of the taxpayer e g golden v commissioner tcmemo_1993_602 in other words in the absence of adequate_records or sufficient evidence corroborating the taxpayer’s own statement any deduction that is subject_to the stringent substantiation requirements of sec_274 is proscribed these stringent substantiation requirements are designed to encourage taxpayers to maintain records and other documentary_evidence substantiating each element of the expense to be deducted sec_1_274-5t temporary income_tax regs fed reg date petitioner claimed deductions for car expenses on his schedules c for and related to his commercial services and leasing business petitioner contends that he is entitled to these deductions based on applying the irs standard mileage rate to the estimated mileage shown in his mileage summary for a variety of reasons the court does not find petitioner’s mileage summary sufficiently reliable or petitioner’s testimony fully credible to satisfy the strict substantiation requirements of sec_274 first the mileage summary was prepared in anticipation of trial and not contemporaneously with petitioner’s trips to and from the hagerstown properties t he probative value of written evidence is greater the closer in time it relates to the expenditure or use sec_1_274-5t temporary income_tax regs fed reg date at trial petitioner testified that the data in his mileage summary was based on a different log at the time i was keeping on paper in my car however petitioner did not offer the different log at trial nor does it appear that any such log was ever provided to respondent with respect to the deduction based on mileage claimed by petitioner for unreimbursed employee business_expenses in see supra note and continued in addition the mileage summary contains far too many other irregularities errors and questionable and improbable entries to be considered reliable first the mileage summary indicates that petitioner was unrealistically busy for example petitioner claims that he made trips to the hagerstown properties between may and date specifically including consecutive trips from june through december and yet in petitioner was employed earned wages of dollar_figure and reportedly incurred unreimbursed employee business_expenses consisting principally of business mileage of big_number petitioner was also employed in and earned wages of dollar_figure yet he claims to have made trips to the hagerstown properties throughout the year generally on consecutive days in blocks of time as long a sec_57 days furthermore for of the trips that petitioner allegedly made in he recorded miles in the mileage summary despite the fact that he had previously moved to the owings mills address which was according to the mileage summary a round trip of miles the court regards petitioner’s trial testimony of shortchanging himself to be too dubious to be convincing it is well continued associated text petitioner indicated on his form 2106-ez that he did not have evidence to support the deduction the court finds it odd that petitioner now claims to have kept a log for mileage pertaining to his schedule c but admits that he did not do so for mileage pertaining to his employment established that the court is not required to accept the self-serving testimony of petitioner as gospel 87_tc_74 indeed in 58_tc_560 we observed that the process of distilling truth from the testimony of witnesses whose demeanor we observe and whose credibility we evaluate is the daily grist of judicial life finally documentary_evidence in the record establishes that petitioner was in the boston massachusetts area for a number of days in mid to late date a fact that petitioner candidly admitted at trial testifying that he was there visiting his parents yet on a number of days in date when petitioner was in massachusetts he recorded mileage in his summary for daily trips from his home in maryland to the hagerstown properties although the court does not doubt that petitioner incurred expense in driving to the hagerstown properties in and the law does not permit the court to estimate his mileage but rather demands strict substantiation sec_274 because petitioner failed to maintain and present adequate_records and further because petitioner’s after-the-fact mileage summary and his testimony at trial are an insufficient substitute for such records the court is obliged to sustain respondent’s disallowance of the deductions in issue see sec_274 c accuracy-related_penalty as relevant herein sec_6662 and b imposes a penalty equal to of the amount of any underpayment attributable to negligence or disregard of rules or regulations the term negligence includes any failure to make a reasonable attempt to comply with tax laws and disregard includes any careless reckless or intentional disregard of rules or regulations sec_6662 negligence also includes any failure to keep adequate books_and_records or to substantiate items properly sec_1_6662-3 income_tax regs with respect to a taxpayer’s liability for the penalty sec_7491 places on the commissioner the burden of production thereby requiring the commissioner to produce sufficient evidence indicating that it is appropriate to impose the penalty 116_tc_438 once the commissioner satisfies the burden of production the taxpayer must at trial petitioner testified without objection by respondent that he had received a settlement offer based on an estimate of business miles petitioner testified further again without objection by respondent that he had rejected the offer as insufficiently generous and he essentially importuned the court to do better however as has been made plain in the text sec_274 prohibits the court from estimating the amount of a mileage deduction and mandates instead strict substantiation produce persuasive evidence that the commissioner’s determination is incorrect see rule a 290_us_111 higbee v commissioner t c pincite respondent has satisfied his burden of production because he established that petitioner failed to maintain adequate substantiating records for his car expenses and presented a civil penalty approval form that provides that the penalties were personally approved in writing by the immediate supervisor of the individual making such determination see sec_6751 851_f3d_190 2d cir aff’g in part and rev’g in part tcmemo_2015_42 graev v commissioner t c __ __ slip op pincite date supplementing t c __ date sec_6664 provides an exception to the imposition of the accuracy- related penalty if the taxpayer establishes that there was reasonable_cause for and the taxpayer acted in good_faith with respect to the underpayment sec_1_6664-4 income_tax regs the decision whether a taxpayer acted with reasonable_cause and in good_faith is made on a case-by-case basis taking into account all pertinent facts and circumstances sec_1_6664-4 income_tax regs generally the most important factor in so deciding is the extent of the taxpayer’s effort to assess the proper tax_liability id petitioner did not satisfy his burden of persuasion with respect to reasonable_cause and good_faith the mileage summary that he offered was not prepared contemporaneously but rather in anticipation of trial and the entries were at best inconsistent and improbable thus on the record before us the court is unable to conclude that petitioner acted with reasonable_cause and in good_faith within the meaning of sec_6664 accordingly petitioner is liable for the accuracy-related_penalty under sec_6662 for each of the years in issue in order to give effect to the court’s disposition of the disputed issues as well as respondent’s concession see supra note decision will be entered under rule


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 b06 plr-136651-05 date date internal_revenue_service number release date index number --------------------------------- ---------------------------------- -------------------- -------------------------- ---------------------------------- -------------------- -------------------------- dear company --------------------------------- a --- b --- c --- v ------------- x ----------------------------- y ------------------------------------- z ------ state ------------- date --------------- date ---------------- date --------------- date ---------- year ------- year ------- year ------- year ------- year ------- plr-136651-05 dear ------------------ this is in reply to a letter dated date requesting rulings under sec_382 of the internal_revenue_code additional information was submitted in letters dated date date and date the information submitted for consideration is summarized below company a state corporation is the common parent of a consolidated_group prior to date year company was a publicly_held_corporation its stock traded on the v stock exchange company has a fiscal and tax_year ending on september 30th company is in the business of producing x and y during year sec_1 and market conditions for the z industry were poor which resulted in company and its subsidiaries filing for bankruptcy on date year a plan_of_reorganization the reorganization was consummated on date year due to its poor financial condition in the years prior to year company incurred significant net operating losses which have not been absorbed or eliminated under sec_108 of the internal_revenue_code the plan_of_reorganization required company to issue its stock to a class of its former creditors in exchange for certain senior secured notes the bonds and cancel all of its previously outstanding_stock as a result of this reorganization company had a change_of_ownership within the meaning of sec_382 of the internal_revenue_code prior to the reorganization of company’s outstanding bonds were held in street_name and one result of the reorganization is that of its stock is now held in street_name company’s stock is now traded over the counter in pink sheet format company’s new post-bankruptcy common shares are not registered with the securities_and_exchange_commission sec and are not traded on an established securities exchange company obtained a roster of the unofficial bondholders’ committee1 to determine the identity of its post-reorganization shareholders for purposes of determining whether it qualified under the l or l exceptions to sec_382 company mailed a letter to each member listed on the pre-reorganization roster requesting information as to whether the member owned on date year an amount of bonds entitling the member pursuant to the plan_of_reorganization to receive or more of the company’s stock it also asked each bondholder to identify when the bonds were acquired follow-up phone calls were made to those bondholders who did not reply to the letter and messages were left some bondholders failed to respond many of the brokerage firms which held company-issued bonds for their own account and or for the committee consisted of only those creditors of the taxpayer who held bonds the roster was current as of a date in the fall of year and included the names and principal amounts of the bonds held by creditors owning over two-thirds of the aggregate principal_amount of the bonds plr-136651-05 their clients either failed to respond or they notified company that they would not respond in addition to directly surveying known bondholders company used online research tools and search engines to obtain updated contact information for those bondholders who could not be reached using existing contact information as a result of these efforts company received written responses from the majority of the bondholders it solicited company has concluded that it qualifies under the l exception to sec_382 after the reorganization company experienced difficulty in identifying many of its percent shareholders while trying to determine whether existing shareholders acquired or disposed of its stock subsequent to date year the record holders of company’s stock are stock brokers and banks who hold the stock in street_name the difficulty the company is experiencing is due to the data not being readily available because all of its outstanding_stock is held in street_name company notes that the presumptions regarding stock ownership described in sec_1_382-2t and ii are inapplicable to it because its stock has been delisted from the stock exchanges despite this difficulty company has been able to identify some owner shifts through alternative means company has been able to identify owner shifts from conversations with its board_of directors some of whom own shares of company’s common_stock company has identified those few shareholders who have contacted the company directly company has also identified some shareholders who have inadvertently filed sec schedules 13d and 13g company obtained a nobo non-objecting beneficial_owner list in connection with its proxy solicitation relating to its charter amendment see below which listing only identified one shareholder and this shareholder had already been separately identified through one of the above mentioned methods additionally company requested information regarding the beneficial_ownership of the stockholdings of investors who filed sec forms 13f but received only one response the response was from an institutional investment manager representing beneficial owners of company’s stock none of whom were shareholders based on the information gathered through these informal means company has determined that it experienced an owner shift in the approximate amount of a to b subsequent to date year company was concerned that its sec_382 limitation would be zero if it had another ownership_change within years of date year in order to lessen the risk of a sec rules prohibit companies from communicating directly with beneficial owners who object to providing their name and address to their issuing companies according to company because its stock ceased to be registered for purposes of the securities and exchange act of its shareholders are not required to file sec schedules 13d and 113g plr-136651-05 second ownership_change the company adopted an amendment to its charter the charter amendment on date year which imposes certain restrictions on the transfer of stock to any shareholder the charter amendment provides that any sale transfer assignment pledge or other_disposition of stock to a shareholder who owns or who would own as a result of the disposition or more of the company’s common_stock shall be null and void ab initio unless certain requirements are met if the transferee obtains the waiver of the board_of directors and provides the company with an opinion that the transfer shall not result in a limitation on the company’s use of its net operating losses or other tax_attributes then such transfer would not be precluded to date no waivers have been granted and the company is not aware of any transfers of its stock being made in contravention of the charter amendment if a shareholder acquires stock in violation of the charter amendment company is authorized to institute legal proceedings to set_aside the transfer and enforce the provisions of the charter amendment company sought the approval of its shareholders for the charter amendment via a proxy solicitation the charter amendment was approved by shareholders representing just over c of the outstanding shares company believes that there was one shareholder owning at least of the company’s stock that did not vote in the proxy solicitation based on applicable state law company believes that the charter amendment may not be binding against any nonvoting shareholder company makes the following representations with respect to its requested rulings a company is a loss_corporation as defined in sec_382 b as a result of the consummation of the bankruptcy reorganization on date year company had an ownership_change within the meaning of sec_382 c company’s only class of outstanding_stock is its common_stock d following the consummation of the bankruptcy reorganization on date year company’s stock ceased to be registered for purposes of the securities and exchange act of e following the consummation of the bankruptcy reorganization on date year all of company’s outstanding_stock was held in street_name f other than actual knowledge company obtained through the shareholder inquiries made for purposes of sec_382 inadvertent 13d and 13g filings information gleaned from its board_of directors and new shareholders informally making themselves known to company company has no actual knowledge regarding any significant change in its stock ownership plr-136651-05 g company is currently in the process of requesting information from all shareholders of whom it has actual knowledge and from the brokers who are the record holders of company’s stock to the extent company does not receive responses to its information request it intends to follow-up its initial request through phone calls and additional correspondences company intends to follow similar procedures for any subsequent requests for information pursuant to its duty_of inquiry under sec_1_382-2t h to the best of company’s knowledge the requirements of sec_382 are met with respect to the ownership_change occurring on date year i the limits on transferability that apply to the shares of company’s common_stock as a result of the charter amendment are or will be legal valid binding and enforceable against present and future holders of shares under applicable state law except as such enforceability may be limited by bankruptcy equitable principles or exceptions under state law the company intends to vigorously challenge and pursue by all available means any attempts to violate the charter amendment j the company understands that with respect to any nonvoting shareholder who is not bound by the charter amendment it has a duty_of inquiry which it will satisfy by periodically requesting information pursuant to the same procedures described in ruling based solely on the information submitted and the representations made and the unique facts of this case we have concluded that for purposes of determining whether a testing_date or an ownership_change has occurred within the meaning of sec_382 and the underlying regulations for all days during the period from and including date to and including date taxpayer may rely on its actual knowledge gained from the acquisition of shareholder information during the period of date to the present regarding the existence and identity of it sec_5 shareholders and their percentage ownership interests for these purposes actual knowledge includes knowledge of shareholders and their percentage ownership of taxpayer which knowledge taxpayer obtained by acquiring the unofficial bondholders list and directly surveying bondholders listed thereon board members who are shareholders who taxpayer identified by directly surveying its board_of directors shareholders who contacted taxpayer directly and shareholders who inadvertently filed sec schedules 13d and 13g taxpayer acquired knowledge of these shareholders by acquiring and or perusing among other documents a the unofficial bondholders list b its own stock transfer records and other records it keeps in the ordinary course of business c a nobo list d sec form 13f and e sec schedules 13d and 13g plr-136651-05 for purposes of determining whether a testing_date or an ownership_change has occurred within the meaning of sec_382 and the underlying regulations for all days on or after date provided and to the extent that the transfer restrictions in the charter amendment are enforceable and are enforced according to their terms a purported transferee of taxpayer’s stock in contravention thereof will not be considered as acquiring ownership of such stock with respect to any disposition of shares by a shareholder during this period which disposition would create a testing_date pursuant to sec_1_382-2t taxpayer may rely on its actual knowledge as to the absence or existence of any such disposition in satisfying its duty_of inquiry and may satisfy its duty_of inquiry under sec_1_382-2t by periodically requesting information pursuant to the same procedures described in ruling above the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination 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 specifically we express no opinion concerning whether or not the company qualifies under the l exception to sec_382 or whether the company has had a second ownership_change under sec_382 within the 2-year-period following date year 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 temporary or final regulations pertaining to one or more of the issues addressed in this ruling have not yet been adopted therefore this ruling will be modified or revoked by the adoption of temporary or final regulations to the extent the regulations are inconsistent with any conclusion in the letter_ruling see section dollar_figure of revproc_04_1 2004_1_irb_7 however when the criteria in section dollar_figure of revproc_04_1 are satisfied a ruling is not revoked or modified retroactively except in rare or unusual circumstances in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative a copy of this letter must be attached to any income_tax return to which it is relevant plr-136651-05 alternatively taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of the letter_ruling - alfred c bishop jr _______________________ alfred c bishop jr branch chief branch office of associate chief_counsel corporate sincerely


internal_revenue_service national_office technical_advice_memorandum date third party communication none date of communication not applicable tam-146459-04 cc lm rfph jax number release date index uil no case-mis no -------------------------- ----------------------------------------------- ----------------------------------- ------------------------------- taxpayer's name taxpayer's address taxpayer's identification no year s involved date of conference ----------------------- --------------------------------------------------------------- --------- ---------------- ------------------------ ------------------ legend taxpayer partnership sub corporation sub partnership a ----------------------- --------------------------- ------------------------------------------------- ---------------------------------------------- issue whether the land sale contracts between taxpayer and partnership a are home construction contracts as described in sec_460 of the code conclusion s the land sale contracts are not home construction contracts as described in sec_460 because the taxpayer is not performing construction_contract activities under sec_460 with respect to dwelling units as required by sec_460 tam-146459-04 facts taxpayer is a land development_corporation in the years ------- ------- and ------- taxpayer developed six very extensive planned communities taxpayer developed these communities through corporation sub and partnership sub taxpayer’s wholly owned subsidiaries corporation sub and partnership sub are the partners in partnership a in six separate contracts taxpayer contracted to sell residential building lots in the six communities to partnership a each of the six contracts provided in addition to the sale of the real_estate that taxpayer would provide paved roads curbs gutters and utilities up to the perimeter of the lots to service the lots in addition three of the contracts provided that taxpayer would provide common amenities and recreational facilities for_the_use_of the community homeowners pursuant to the development contracts taxpayer also graded cleared and installed utilities on the lots taxpayer does not build houses or dwelling units in the communities partnership a and its subcontractors build the dwelling units in the communities examination concedes that taxpayer’s contracts are long-term construction contracts eligible for the percentage_of_completion_method pcm of accounting under sec_460 however the taxpayer reported its income from its land sale contracts under the more favorable completed_contract_method ccm on the theory that its construction contracts qualify for the home_construction_contract exception to the pcm under sec_460 law and analysis statutory provisions sec_460 generally requires the use of the pcm of accounting for long-term_contracts sec_460 excepts any home_construction_contract from the general_rule requiring use of the pcm of accounting a taxpayer performing construction services pursuant to a home_construction_contract defined in sec_460 may report income from that construction activity under the ccm of accounting sec_460 defines construction_contract as any contract for the building construction reconstruction or rehabilitation of or the installation of any integral component to or improvements of real_property sec_460 defines home_construction_contract as any construction_contract if percent or more of the estimated total contract costs as of the close of the taxable_year in which the contract was entered into are reasonably expected to be attributable to activities referred to in paragraph with respect to- i dwelling units as defined in sec_168 contained in buildings containing or fewer dwelling units and tam-146459-04 ii improvements to real_property directly related to such dwelling units and located on the site of such dwelling units for purposes of sec_460 a dwelling_unit is defined at sec_168 as a house or apartment used to provide living accommodations in a building or structure sec_1_48-1 of the income_tax regulations defines a building as any structure or edifice enclosing a space within its walls and usually covered by a roof we think that the statutory language is clear the plain intent of the statute is to provide the more favorable ccm of accounting to only taxpayers actually building homes hence the term home_construction_contract sec_460 limits home to certain types of dwelling units that limitation is thoroughly consistent with reading congressional intent to limit the exception to taxpayers building houses for home buyers or consumers who dwell in the houses sec_460 similarly limits the ccm of accounting to improvements related to such dwelling units and located on the site of such dwelling units the statutory language does not contain a specific exception to pcm treatment for land sales absent a specific exception or liberalization a developer’s construction contracts related to general land sales are defined in sec_460 and are subject_to the general_rule pcm treatment of sec_460 we think that congress clearly limited the favorable ccm treatment to taxpayers actually producing homes ie houses used as consumer dwellings it would be anomalous to allow the exception that taxpayer urges taxpayer seeks to defer reporting all its income from land sales and development activities until partnership a and its subcontractors complete the last house in very large communities some of the communities contain several hundred houses dwelling units and could take a decade or more to complete that deferral is far longer than the ccm deferral permitted for individual home builders congress did not specifically except taxpayer’s sales and development activities nor do we think congress intended to except those activities without saying so as the taxpayer contends in the absence of clearer congressional direction we interpret the statute literally and the tax_benefit narrowly published guidance the service first issued a notice then regulations interpreting home_construction_contract under sec_460 the notice covers part of the period at issue in this case and the regulations cover the rest of the period the notice and the regulations are consistent on the issue and compel the same adverse conclusion tam-146459-04 notice_89_15 contracts entered into before date notice_89_15 1989_1_cb_634 elaborates on home construction contracts defined in sec_460 at page the notice states q-43 what is a ‘home construction contract’ for purposes of sec_460 a-43 for purposes of sec_460 the term ‘home construction contract’ means any construction_contract if percent or more of the estimated total contract costs as of the close of the taxable_year in which the contract was entered into are reasonably expected to be attributable to the building construction reconstruction or rehabilitation of i dwelling units within the meaning of sec_167 now sec_168 contained in buildings with each townhouse or rowhouse treated as a separate building containing four or fewer units and ii improvements to real_property directly related to such dwelling units and located at the site of such dwelling units all costs attributable to the building construction reconstruction or rehabilitation under the contract of such dwelling units and improvements and allocable to the contract including costs of materials and land are taken into account towards meeting the percent test q-44 for purposes of the 80-percent tests of q a and q a can costs that a developer expects to incur to construct build or install roads sewers and other common features not located on the sites of dwelling units ‘off-site work’ be treated as attributable to dwelling units that the developer is constructing under contract a-44 yes assume for example that a developer enters into a contract for the construction and sale of a house the costs of off-site work properly allocable to this contract are treated as attributable to the construction of the house for purposes of the 80-percent test the answer to question indicates assumes that one type of a developer’s off-site costs for community improvements qualify for ccm treatment only the costs of off-site work properly allocable to a contract for the construction and sale of a house the notice does not treat general sales and development costs not incurred under a contract for the construction and sale of a house as attributable to a home_construction_contract for purposes of the percent test of sec_460 regulations contracts entered into on or after date regulations under sec_460 superseded notice_89_15 for contracts entered into on or after date the regulations provide tam-146459-04 sec_1_460-3 long-term construction contracts a in general sec_460 generally requires a taxpayer to determine the income from a long-term construction_contract using the percentage-of-completion method described in sec_1_460-4 pcm a contract not completed in the contracting year is a long-term construction_contract if it involves the building construction reconstruction or rehabilitation of real_property the installation of an integral component to real_property or the improvement of real_property collectively referred to as construction real_property means land buildings and inherently permanent structures as defined in sec_1_263a-8 such as roadways dams and bridges real_property does not include vessels offshore drilling platforms or unsevered natural products of land an integral component to real_property includes property not produced at the site of the real_property but intended to be permanently affixed to the real_property such as elevators and central heating and cooling systems thus for example a contract to install an elevator in a building is a construction_contract because a building is real_property but a contract to install an elevator in a ship is not a construction_contract because a ship is not real_property b exempt construction contracts-- in general the general requirement to use the pcm and the cost allocation rules described in sec_1_460-5 or c does not apply to any long-term construction_contract described in this paragraph b exempt construction_contract exempt construction_contract means any- i home_construction_contract and ii other construction_contract that a taxpayer estimates when entering into the contract will be completed within years of the contract_commencement_date provided the taxpayer satisfies the dollar_figure gross_receipts_test described in paragraph b of this section home construction contract-- i in general a long-term construction_contract is a home_construction_contract if a taxpayer including a subcontractor working for a general contractor reasonably expects to attribute percent or more of the estimated total allocable contract costs including the cost of land materials and services determined as of the close of the contracting year to the construction of- a dwelling units as defined in sec_168 contained in buildings containing or fewer dwelling units including buildings with or fewer dwelling units that also have commercial units and b improvements to real_property directly related to and located at the site of the dwelling units tam-146459-04 ii townhouses and rowhouses each townhouse or rowhouse is a separate building iii common improvements a taxpayer includes in the cost of the dwelling units their allocable share of the cost that the taxpayer reasonably expects to incur for any common improvements eg sewers roads clubhouses that benefit the dwelling units and that the taxpayer is contractually obligated or required_by_law to construct within the tract or tracts of land that contain the dwelling units these regulations clearly contemplate that only the party building or producing the house has an eligible home_construction_contract sec_1_460-3 characterizes the allocable contract costs as including the cost of land materials and services that is in a home_construction_contract the builder accounts for the cost of the land in calculating the builder’s income under the ccm of accounting the selling developer derives income from the builder’s payments for land and development services builder’s costs the selling developer realizes this income pursuant to its sale contract with the builder not from the builder’s home_construction_contract with the consumer the developer should use pcm to account for its land sales income under the general_rule of sec_460 because the taxpayer is not performing construction_contract activities with respect to dwelling units the taxpayer’s contracts are not home construction contracts defined in sec_460 eligible for the ccm of accounting rather the taxpayer’s contracts are construction contracts within the meaning of sec_460 the exception to pcm accounting provided by sec_460 does not apply to taxpayer’s contracts caveat s a copy of this technical_advice_memorandum is to be given to the taxpayer s sec_6110 of the code provides that it may not be used or cited as precedent


internal_revenue_service number release date index number ----------------------------------------------- -------------------------- -------------------------------------- ---------------------------- - department of the treasury washington dc person to contact --------------- id no ------------- telephone number --------------------- refer reply to cc psi b07 - plr-104861-04 date date taxpayer a b x c y d ----------------------- ----------------------------------------------- ----------------------- ------------------------ ----------------------- ------------------------------------ --- ---------------------------------------- ----------------------- -- --------------------------------------------------------------- legend --------------------------------------------------------------------------------------------------------------- ----------------------- ---------------- ------- --------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------- ---------------- ------------------------------------ ----------------------- --------------- ----------------------- ---------------------- ------------------------------ ----------------------- -------------------------- -------------------------------------------------- ----------------------------------- ------------------------------- ------------------- f date date date site date date g h site date e year site -- ------------------------ ------------------- ----------------------- -------------------- ------------------ ----------------- ------------------ ---------------------------------------------------- ------------------------------ date date ------------------------------------------- date date date date j k ----------------------- z plr-104861-04 dear ------------ this letter is in response to a letter received from your authorized representative on date requesting rulings under sec_29 and sec_708 of the internal_revenue_code the facts as represented by taxpayer and taxpayer’s authorized representative are as follows taxpayer is a limited_liability_company that is classified as a partnership for tax purposes taxpayer is an accrual_method taxpayer with a calendar taxable_year a and b are the members of taxpayer a which owns x percent of taxpayer is a limited_liability_company that for tax purposes is disregarded as an entity separate from its single owner c b owns the remaining y percent of taxpayer the sole asset of taxpayer is its ownership_interest in d a limited_liability_company which for federal tax purposes is disregarded as an entity separate from taxpayer d’s sole asset is the facility at issue in this request the facility at issue in this request was constructed in year for e to serve as a demonstration plant the facility began production in year at site e made some improvements to the facility in year at the end of year production from the facility was stopped due to e’s financial difficulties at the end of year f approached e about purchasing the facility in date e filed for bankruptcy and one of its creditors foreclosed on the facility in date b the general_partner of f purchased the facility from e’s creditor directly and then began production on date the b contributed the facility to f which then moved the facility to site on date b and f received plr-119659-97 which concluded that the fuel produced by the facility was a solid synthetic_fuel produced from coal constituting a qualified_fuel within the meaning of sec_29 plr-119659-97 also concluded that the facility was placed_in_service after date and that because f would own operate and maintain the facility f was entitled to the sec_29 credit for the qualified_fuel produced plr-104861-04 by the facility that would be sold to unrelated persons at site f expected to sell the entire output of the facility to a specific customer however due to an inability to produce a fuel suitable to this customer f decided to sell the facility on date g purchased the facility from f and contributed it to its subsidiary h pursuant to the purchase and sales agreement the facility was moved to site after being tested to ensure that it had been properly reassembled at site the facility began production in date on date h received plr-149317-01 which ruled on the issues addressed by this letter because of h’s severe financial difficulty production from the facility was ceased in date i negotiated with g and h to purchase the facility but the parties were unable to agree to terms for a sale in date because h was unable to meet its payment obligations to f h surrendered possession of the facility to f f contributed the facility to taxpayer in exchange for an x percent interest in taxpayer and the issuance of a y percent interest in taxpayer for its general_partner b i began negotiations with f to purchase the facility on date a was formed to acquire f’s interest in taxpayer in anticipation of the transaction taxpayer contributed the facility to d in exchange for a total equity_interest in d on date the sale of f’s interest in taxpayer to a was completed and the facility recommenced production on date the sale of f’s interest in taxpayer to a requires a to make certain fixed and contingent cash payments taxpayer represents that the net present_value of the fixed payments exceed fifty percent of the total purchase_price of the interest in taxpayer the facility is currently located at site pursuant to a lease agreement with j a party unrelated to d certain improvements and modifications to the facility have been made by the prior owners however the facility continues to utilize all of its original major components taxpayer has represented that the fair_market_value of the original property comprising the facility is more than percent of the facility's total fair_market_value the cost of the new property plus the value of the original property the facility is operated and maintained on d’s behalf by k pursuant to an operating_agreement under the operating_agreement k is paid dollar_figurez per ton of synthetic_fuel produced and reimbursed for all budgeted or permitted costs incurred j supplies the coal feedstock to d under a synfuel purchase agreement d sells the synthetic_fuel produced by the facility to j j must purchase a minimum quantity of synthetic_fuel d may also meet its obligation to j by delivering coal or synthetic_fuel from another source taxpayer has supplied a detailed description of the process employed at the facility as described the facility and the process implemented in the facility including the chemical reagent meet the requirements of revproc_2001_34 2001_22_irb_1293 a recognized expert in combustion coal and chemical analysis has performed numerous tests on the coal used at the facility and the synthetic_fuel 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 taxpayer with use of the process expects to maintain a level of plr-104861-04 chemical change in the production of synthetic_fuel that is determined through similar analysis by experts to be a significant chemical change you request the following rulings the synthetic_fuel produced at the facility is a qualified_fuel within the meaning of sec_29 neither the relocation of the facility to site modifications made to the facility after date nor replacement of any part of the facility after that date will 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 any such relocation modification or replacement of any part of the facility taxpayer is entitled to all of the sec_29 credits on fuel produced at the facility and sold to unrelated persons the sec_29 credits to which taxpayer is entitled will pass through and be allocated among the members of taxpayer under the principles of sec_702 and in accordance with each members’ interest in the profits and losses of taxpayer as provided in the taxpayer llc agreement assuming that all other requirements of sec_29 are satisfied the fact that a taxpayer terminates and is reconstituted under sec_708 will not prevent taxpayer from continuing to claim the sec_29 credit assuming that d is a disregarded_entity b taxpayer terminates as a partnership because all of its equity is owned by one member will not prevent the single member of taxpayer from claiming the sec_29 credit assuming that d is a disregarded_entity or c d has two or more members will not prevent d from claiming the credit ruling requests and 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 plr-104861-04 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 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 taxpayer 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 i r b 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 taxpayer consistent with announcement and the service’s long standing ruling practice accordingly based on the expert test results submitted by taxpayer 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 d disregarded as an entity separate from taxpayer will own the facility and operate and maintain the facility through its agent we conclude that taxpayer 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 plr-104861-04 to qualify for the sec_29 credit taxpayer's facility must be placed_in_service before date pursuant to a binding written contract in effect before 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 included in the facility 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 the 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 sec_29 provided the fair_market_value of the property used at the original facility is more than percent 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 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 the 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 pellet mills 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 pellet mills or other forming equipment the equipment necessary to 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 plr-104861-04 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 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 provided taxpayer'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 percent 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 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-104861-04 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_704-1 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 sec_29 credit attributable to taxpayer may be allocated to the members of taxpayer in accordance with the members' interests in taxpayer when the credit arises for the allocation of the sec_29 credit a member's interest in taxpayer 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 determination of whether a facility has satisfied the placed-in-service deadline under sec_29 and sec_29 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 taxpayer under sec_708 will plr-104861-04 not preclude the reconstituted partnership from claiming the sec_29 credit on the production and sale of synthetic_fuel to unrelated persons a similar rule would apply if taxpayer terminated and became a disregarded_entity or if d ceased to be disregarded for tax purposes due to the addition of a second member conclusions accordingly we conclude as follows the synthetic_fuel produced at the facility using the described process and the specified reagent is a solid synthetic_fuel produced from coal constituting a qualified_fuel within the meaning of sec_29 because the facility was placed_in_service prior to date within the meaning of sec_29 the 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 sec_29 provided the fair_market_value of the property used at the original facility is more than percent 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 property used at the original facility production from the facility will be attributable solely to taxpayer within the meaning of sec_29 and taxpayer 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 taxpayer may be allocated to the partners of taxpayer in accordance with the partners’ interests in taxpayer when the credit arises for the sec_29 credit a partner’s interest in taxpayer is determined based on a valid allocation of the receipts from the sale of the sec_29 qualified_fuel neither a termination of taxpayer under sec_708 a termination of taxpayer which results in taxpayer being a disregarded_entity or d ceasing to be a disregarded_entity will preclude the succeeding entity from claiming the sec_29 credit on the production and sale of synthetic_fuel to unrelated persons 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 plr-104861-04 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 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 s joseph h makurath senior technician reviewer office of associate chief_counsel passthroughs special industries


internal_revenue_service national_office technical_advice_memorandum date number release date index uil no case mis no tam-112652-99 cc dom p si b5 taxpayer’s name taxpayer’s address taxpayer’s identification no years involved date of conference legend taxpayer city a b c d e f g h k m n tam-112652-99 issue in determining taxpayer’s adjusted_ordinary_gross_income for purposes of determining whether taxpayer is a personal_holding_company under sec_542 of the internal_revenue_code are the costs of farm production subtracted from taxpayer’s gross_receipts from farming conclusion in determining taxpayer’s adjusted_ordinary_gross_income for purposes of determining whether taxpayer is a personal_holding_company under sec_542 of the internal_revenue_code taxpayer’s gross_receipts must be reduced by its farm production_costs facts taxpayer is a c_corporation engaged in the farming_business in city in years b and c taxpayer was solely owned by a on its forms u s_corporation income_tax return for b and c taxpayer reported interest_income of dollar_figured and dividend income of dollar_figuree and interest_income of dollar_figuref and dividend income of dollar_figureg respectively taxpayer reported it’s total gross_receipts from farming as dollar_figureh and dollar_figurek respectively taxpayer deducted its costs for fuel fertilizer and chemicals seed supplies utilities insurance and certain other costs to arrive at its taxable_income figures for each year taxpayer reported dollar_figurem of taxable_income for b and for dollar_figuren for c the examining agent responsible for reviewing taxpayer’ tax returns determined that taxpayer was a personal_holding_company in years b and c because more than percent of taxpayer’s adjusted_ordinary_gross_income was personal_holding_company_income dividend and interest_income taxpayer has not paid a dividend to its shareholder for b or c taxpayer disagrees with the examining agent’s conclusion in determining the adjusted_ordinary_gross_income taxpayer maintains that taxpayer’s gross_receipts from farming are not required under sec_61 to be reduced by farm related expenses in arriving at gross_income under this interpretation taxpayer’s personal_holding_company_income would be less than percent of the adjusted_ordinary_gross_income in each year law and analysis sec_541 imposes for each taxable_year on the undistributed_personal_holding_company_income as defined in sec_545 of every personal_holding_company as defined in sec_542 a personal_holding_company_tax equal to percent of the undistributed tam-112652-99 personal_holding_company_income sec_542 defines a personal_holding_company as any corporation other than a corporation described in sec_542 if at least percent of its adjusted_ordinary_gross_income as defined in sec_543 for the taxable_year is personal_holding_company_income as defined in sec_543 and at any time during the last half of the taxable_year more than percent in value of its outstanding_stock is owned directly or indirectly by or for not more than individuals under sec_543 personal_holding_company_income means the portion of the adjusted_ordinary_gross_income consisting of dividends interest royalties other than mineral oil or gas royalties or copyright_royalties and annuities sec_543 defines ordinary_gross_income as the gross_income determined by excluding all gains from the sale_or_other_disposition of capital assets all gains other than those referred to in subparagraph a from the sale_or_other_disposition of property described in sec_1231 and sec_3 in the case of a foreign_corporation all the outstanding_stock of which during the last half of the taxable_year is owned by nonresident_alien individuals whether directly or indirectly through foreign estates foreign trusts foreign_partnerships or other foreign_corporations all items of income which would but for sec_543 constitute personal_holding_company_income under any paragraph of sec_543 other than sec_543 sec_543 defines adjusted_ordinary_gross_income as the ordinary_gross_income reduced by the amounts determined under sec_543 b c and d relating to rents mineral oil_and_gas royalties and interest the question of how to determine gross_income_from_farming for personal_holding_company purposes has been addressed by the courts in 134_f2d_793 aff’g 46_bta_1124 and 9_tc_1029 acq 1948_1_cb_2 the taxpayers used an accrual_method and the cash_method respectively although neither taxpayer used inventories the courts held that they were required to subtract the costs of production from gross_receipts from farming in arriving at gross_income in supporting its holding the court in woodside acres said that the gross_income so computed is the amount of gross_income that the taxpayer would have taken into account for personal_holding_company purposes had the taxpayer been in a business other than farming the court acknowledged that in the taxpayer’s case the computation of gross_income_from_farming for personal_holding_company purposes is different from the computation of gross_income_from_farming for purposes of sec_61 accordingly in determining taxpayer’s adjusted_ordinary_gross_income for purposes of determining whether taxpayer is a personal_holding_company under sec_542 the costs of farm production are subtracted from taxpayer’s gross_receipts from farming tam-112652-99 caveat s a copy of this technical_advice_memorandum is to be given to the taxpayer sec_6110 of the code provides that it may not be used or cited as precedent


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 b04 plr-127082-16 date date x z adviser fund portfolio ----------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------- ------------------------------------------ -------------------------------------- ------------------------------------------ --------------------------- ----------------------------------------------------------------------------------------------- ---------------------------------- -------------- -------------- state a state b number f number g ---- number h ---- ---- number i number j ---- dear ------------------------ this letter is in response z’s request for a ruling that z rather than the variable_contract holder is the owner of portfolio entities facts x is the parent of a consolidated_group that includes z and other subsidiaries z is a life_insurance_company within the meaning of sec_816 of the internal_revenue_code plr-127082-16 fund fund is a state a business_trust it is an open-end management investment_company registered under the investment_company act of and the securities act of as amended portfolio portfolio is a newly formed series of fund portfolio has elected to be classified as a partnership ownership of portfolio shares of portfolio are offered to certain x group_life_insurance company segregated_asset accounts to serve as an investment vehicle for variable_contracts shares of portfolio except as otherwise permitted by sec_1_817-5 of the income_tax regulations are held by segregated_asset accounts underlying variable_contracts of one or more life_insurance_companies the variable_contracts are variable_contracts within the meaning of sec_817 of the code public access to shares of portfolio is available exclusively through the purchase of a variable_contract except as otherwise permitted by sec_1_817-5 of the income_tax regulations although the terms of each variable_contract may vary the insurance_company will generally hold the premiums_paid by a variable_contract holder net of any fees or commissions and any income earned on the net_premiums in a segregated_asset_account the variable_contract holder generally will be able to allocate amounts held in the segregated_asset_account among several different investment options or subaccounts at least one subaccount will correspond to an investment in portfolio the life_insurance_companies whose segregated_asset accounts hold shares of portfolio are life_insurance_companies within the meaning of sec_816 of the code portfolio’s investment objectives under normal circumstances substantially_all of portfolio’s assets will be invested in a variety of eligible third-party mutual funds other third-party variable insurance investment options or both collectively underlying funds the underlying funds will in turn invest in u s and foreign equity and debt instruments under normal market conditions portfolio’s exposure to the two broad assets classes of debt and equity are expected to be as follows debt will be number g to number h percent equity will be number i to number j percent the portion of portfolio’s assets allocated to an underlying fund will change over time and there can be no expectation that current or past positions in an underlying fund will be maintained in the future plr-127082-16 adviser of portfolio fund has entered into an investment advisory agreement with adviser adviser is a corporation organization under the laws of state a and is an indirectly wholly-owned subsidiary of x adviser is a registered investment adviser under the investment advisers act of as amended pursuant to the investment advisory agreement adviser is responsible for managing the investment and reinvestment of portfolio’s assets and continuously reviewing supervising and administering portfolio’s investment programs adviser has discretion over the percentage of portfolio's assets allocated to each underlying fund the investment advisory agreement between the fund and adviser shall continue in effect until terminated provided however in accordance with the requirements of sec_15 of the investment_company act of that if the agreement is to continue in effect for a period of more than number f years from the date of its execution it may only continue if it is specifically approved at least annually by the board_of fund or by a vote of the outstanding voting_securities of portfolio variable_contract holders all investment decisions concerning fund and portfolio will be made by adviser in its sole and absolute discretion a variable_contract holder will only be able to allocate premiums and transfer amounts in the insurance_company segregated_asset_account to and from the insurance_company subaccount corresponding to a fund a variable_contract holder will not be able to direct portfolio’s investment in any particular asset or recommend a particular investment or investment strategy and there will be no agreement or plan between adviser and a variable_contract holder regarding a particular investment a variable_contract holder will have no current knowledge of portfolio’s specific assets portfolio’s holdings however will be available as permitted by the sec including in quarterly filings with the sec and annual and semi-annual reports to shareholders a variable_contract holder will have no legal equitable direct or indirect interest in any of the assets of portfolio rather a variable_contract holder will have only a contractual claim against the insurance_company offering the contract to receive cash from the insurance_company pursuant to the terms of the specific variable_contract portfolio’s diversification portfolio will comply with the diversification requirements of sec_817 and sec_1_817-5 of the income_tax regulations plr-127082-16 ruling requested for federal_income_tax purposes z rather that the variable_contract holder is the owner of portfolio investor_control rules law if the separate_account assets underlying the variable_contract are considered the assets of the life_insurance_company that issues the contract and not the property of the contract holder sec_817 governs the tax treatment of the contract if the separate_account assets underlying the contract are considered the assets of the contract holder the contract holder is taxed on the income derived from the investment_assets under sec_61 in general the holder of legal_title is the owner of the property and is taxed on the income derived from the property however if a person other than the holder of legal_title possesses the benefits_and_burdens_of_ownership that person is attributed ownership of property for tax purposes see eg 435_us_561 309_us_331 the supreme court summarized this principle in corliss v bowers 381_us_376 stating that taxation is not so much concerned with the refinements of title as it is with actual command over the property taxed - the actual benefit for which the tax is paid the service applied these general tax_ownership principles in a series of investor_control rulings revrul_77_85 1977_1_cb_12 revrul_80_274 1980_2_cb_27 revrul_81_225 1981_2_cb_12 revrul_82_54 1982_1_cb_11 revrul_2003_91 2003_2_cb_347 and revrul_2003_92 2003_2_cb_350 the rulings stand for the proposition that contract holders possessing control_over the investment of the separate_account assets in addition to the other_benefits and burdens of contract ownership are the owners of separate_account assets for federal_income_tax purposes even if the insurance_company retains possession of and legal_title to those assets in revrul_77_85 the service concluded that if the contract holder of an investment annuity_contract may select and control the investment_assets in the separate_account of the life_insurance_company then the contract holder is treated as the owner of those assets for federal_income_tax purposes and is taxed on the income derived from the investment_assets in the ruling the individual_contract holder of a variable_annuity contract retained the right to direct the custodian of the account supporting that variable_annuity to sell purchase and exchange securities or other assets held in the custodial_account the contract holder also was able to exercise an owner's right to vote account securities either through the custodian or individually the service found that the contract holder possessed significant incidents_of_ownership over the assets held in the custodial_account and thus concluded that the policyholder was the owner of those assets for federal_income_tax purposes plr-127082-16 in revrul_80_274 the contract holder transferred existing investments to an insurance_company in return for an annuity_contract and could withdraw all or a portion of the cash_surrender_value of the contract at any time prior to the annuity_starting_date the service applying revrul_77_85 concluded that the contract holder’s position was substantially identical to what it would have been had the investment been directly maintained or established and thus the contract holder was the owner of the investment for federal_income_tax purposes in revrul_81_225 the service described four situations in which the contract holder is considered the owner of mutual_fund shares held by insurance_companies in connection with annuity_contracts and one situation in which the insurance_company is the owner of the mutual_fund shares for federal_income_tax purposes in the four situations in which the contract holder is considered the owner of the mutual_fund shares the shares are available for purchase other than through the purchase of an annuity_contract in those situations the service concluded that the contract holder had investment control_over the mutual_fund shares and that the contract holder’s position in each situation was substantially identical to what it would have been had the mutual_fund shares been purchased directly by the contract holders conversely in the situation in which the mutual_fund shares were only available through the purchase of an annuity_contract the insurance_company was the owner for federal_income_tax purposes in revrul_82_54 the contract holder of certain annuity_contracts could allocate premium payments among three funds and had an unlimited right to change those allocations prior to the maturity_date of the annuity_contract interests in the funds were not available for purchase by the general_public but were instead only available through the purchase of an annuity_contract the service concluded that the purchaser's ability to choose among general investment strategies for example between stock bonds or money market instruments either at the time of the initial purchase or subsequent thereto did not constitute control sufficient to cause the contract holders to be treated as the owners of the mutual_fund shares for federal_income_tax purposes in the eighth circuit addressed the tax_ownership issue in the context of a variable_annuity contract 749_f2d_513 8th cir the taxpayers upon purchasing the contract could allocate premiums among mutual funds and could change the allocation at any time the taxpayers bore the full investment risk and could withdraw any or all of the investment upon seven days’ notice in addition the taxpayer was not required to exercise the annuity feature of the contract the eighth circuit concluded that the taxpayers surrendered few of the rights of ownership or control_over assets of the sub-account id pincite the court held that for federal_income_tax purposes the taxpayers not the issuing insurance_company owned the mutual_fund shares that funded the variable_annuity and thus the taxpayers were required to include in gross_income any gains dividends or other income derived from the mutual_fund shares in revrul_2003_91 the service concluded that the variable_contract holder did not plr-127082-16 have sufficient control_over segregated account assets to be deemed the owner of the assets the variable_contract was funded by a separate_account that was divided into twelve subaccounts each subaccount offered a different investment strategy interests in the subaccounts were available solely through the purchase of a variable life or variable_annuity contract that qualified as a variable_contract under sec_817 the investment activities of each subaccount were managed by an independent investment adviser there was no arrangement plan contract or agreement between the contract holder and the issuing insurance_company or between the contract holder and the independent investment adviser regarding the availability of a particular subaccount the investment strategy of any subaccount or the assets to be held by a particular subaccount other than a contract holder's right to allocate premiums and transfer funds among the available subaccounts all investment decisions concerning the subaccounts were made by the issuing insurance_company or the independent investment adviser in their sole and absolute discretion a contract holder had no legal equitable direct or indirect interest in any of the assets held by a subaccount but had only a contractual claim against the issuing insurance_company to collect cash in the form of death_benefits or cash surrender values under the contract the service concluded that based on all the facts and circumstances the contract holder did not have direct or indirect control_over the separate_account or any subaccount asset and therefore the contract holder did not possess sufficient incidents_of_ownership over the assets supporting the variable_contracts to be deemed the owner of the assets for federal_income_tax purposes in revrul_2003_92 the purchasers of variable_annuity and variable life_insurance contracts were able to allocate their premiums among ten different sub-accounts each sub-account invested in a partnership in the factual scenario in which the partnership interests were available other than through the purchase of a variable_annuity or life_insurance_contract the service concluded that the contract holders were the owners of the interests in the partnerships in contrast if the partnership interests were only available through the purchase of a variable_annuity or life_insurance_contract the service concluded that the insurance_company was the owner of the interests in the partnerships analysis in the revenue rulings discussed above the service took the position that if the holder of a variable life_insurance_policy or variable_annuity contract possesses sufficient incidents_of_ownership over the assets supporting the policy or contract the contract holder is viewed for federal_income_tax purposes as the owner of the underlying assets and as a result is currently taxed on any income and gains attributable to the underlying assets the determination of whether the holder of a variable life_insurance_policy or variable_annuity contract possesses sufficient incidents_of_ownership over the assets of the separate_account underlying the variable life_insurance_contract or variable_annuity contract depends on all the relevant facts and circumstances see revrul_2003_91 plr-127082-16 in the present case the variable_contract holders do not have any control_over portfolio’s investments including portfolio’s investments in the underlying funds the investment decisions of portfolio are made by adviser in its sole and absolute discretion and are subject_to change without notice to or approval by the variable_contract holders the variable_contract holders in this case do not have any more control_over the assets held under their contract than was the case in revrul_82_54 or revrul_2003_91 portfolio is not an indirect means of allowing a variable_contract holder to invest in an underlying fund conclusion based on the representations and facts presented for federal_income_tax purposes z rather than the variable_contract holder is the owner of portfolio and its underlying investment_assets except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling letter is directed only to the taxpayer who requested it sec_6110 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 this office has not verified any of the material submitted in support of the request for rulings and it is subject_to verification on examination sincerely alexis a macivor branch chief branch financial institutions products