department of the treasury int ernal revenue service washington d c date of f i c e of c h i e f c ou n s e l number release date cc fip br tl-n-5924-00 uilc internal_revenue_service national_office field_service_advice memorandum for david r smith associate area_counsel miami cc lm rfp mia lon smith acting associate chief_counsel financial institutions and products cc fip from subject this chief_counsel_advice responds to your memorandum dated date in accordance with sec_6110 this chief_counsel_advice should not be cited as precedent legend bank calendar_year class a instruments class b instrument cla sec_1 notes cla sec_2 notes cla sec_3 notes cla sec_4 notes co-owner trustee tl-n-5924-00 date date date date distribution date holding owner trustee page a page b page c page d rating agency section a section b section c section d state a_trust dollar_figurea b dollar_figurec dollar_figured tl-n-5924-00 e dollar_figuref dollar_figureg dollar_figureh dollar_figurei dollar_figurej dollar_figurek l m n o p q dollar_figurer dollar_figures dollar_figuret u v w x y issues tl-n-5924-00 did bank’s transfer to trust of a pool of subordinated mortgage loans and the trust’s subsequent issuance of the cla sec_1 notes the cla sec_2 notes the cla sec_3 notes the cla sec_4 notes the class a instruments and the class b instrument the transactions constitute a bank’s sale of all or a part of its interest in the pool of subordinated mortgage loans or b a pledge of the mortgage loans as security for a loan to bank1 assuming the transactions constituted a sale of the mortgage loans did bank’s retention of certain servicing rights in the mortgage loans transferred to trust constitute bank’s retention of an ownership_interest in the mortgage loans if so how would sec_1286 apply in analyzing the consequences of the retention of such ownership_interest conclusions the transactions constituted a sale of part of bank’s interest in the pool of subordinated mortgage loans the issue of whether bank’s retention of servicing rights constituted retention of an ownership_interest in the mortgage loans is partly a factual issue the facts presented are insufficient to determine whether bank’s retention of servicing rights was also a retention of an ownership_interest facts bank is a commercial bank chartered under the laws of state a and uses the overall accrual_method of accounting bank is a member of a consolidated_group of which holding is the parent during calendar_year bank originated or purchased certain loans secured_by second mortgages on residential real_estate as a general matter the value of the mortgagors’ equity in the real_estate after giving effect to the senior mortgage was relatively small but the mortgagors had good credit histories these loans were not guaranteed or insured by a government agency by date bank had accumulated a pool of these subordinated mortgage loans with an outstanding principal balance of dollar_figurea the weighted average interest rate for these loans was approximately b this memorandum will not address the issue of whether trust would be a taxable_mortgage_pool for the purposes of sec_7701 however we note that in section a of the servicing agreement as such term is defined below bank represented that a significant proportion of the subordinated mortgage loans did not constitute real_estate mortgages for the purposes of sec_301_7701_i_-1 therefore this memorandum assumes without holding that trust is not a taxable_mortgage_pool tl-n-5924-00 trust was formed pursuant to a_trust agreement dated as of date among bank owner trustee and co-owner trustee the trust agreement provides among other things for the issuance of two types of financial instruments class a instruments and the class b instrument the class a instruments could be issued as multiple certificates with a minimum denomination of dollar_figurec and in integral multiples of dollar_figured in excess thereof the class a instruments bear interest at a rate of e per annum and had an aggregate stated principal_amount at issuance of dollar_figuref only a single class b instrument was issued and it has neither a principal_amount nor an interest rate the class b instrument represents the right to trust assets after satisfaction of the trust’s obligations under the class a instruments and the cla sec_1 cla sec_2 cla sec_3 and cla sec_4 notes further described below also as of date bank and co-owner trustee entered into a_trust indenture agreement the indenture and with the trust as an additional party a sales and servicing agreement the servicing agreement the servicing agreement contemplates the transfer of a pool of subordinated mortgage loans to trust and the delivery of various mortgage loan documents including the original mortgage loans and an assignment of mortgage endorsed in blank by bank to a custodial agent of co-owner trustee if a mortgage loan fails to conform to certain representations and warranties of bank in a manner that materially affects the mortgage loan’s value a non-conforming mortgage loan bank must repurchase the non-conforming mortgage loan by paying its outstanding principal balance plus any accrued but unpaid interest or by providing a replacement mortgage loan with comparable terms that conforms to the applicable representations and warranties the servicing agreement and indenture also contemplate trust’s issuance of four classes of promissory notes cla sec_1 notes cla sec_2 notes cla sec_3 notes and cla sec_4 notes the notes the aggregate stated principal_amount at issuance of the four classes of notes was dollar_figureg cla sec_1 dollar_figureh cla sec_2 dollar_figurei cla sec_3 and dollar_figurej cla sec_4 thus the aggregate stated principal_amount of all classes of notes and the class a instruments at issuance was dollar_figurek stated annual interest rates on the four classes of notes are l m n and o respectively the servicing agreement also provides that bank will service the pool of subordinated mortgage loans held by trust in return for a monthly servicing fee equal to p of the outstanding aggregate outstanding principal balance of the loans divided by on or about date bank transferred to trust a pool of q subordinated mortgage loans with an outstanding principal balance of dollar_figurea the initial loans in addition trust had the right to acquire additional subordinated mortgage loans from bank the additional loans with an aggregate outstanding principal balance of up to dollar_figurer by date using the proceeds of the sale of the notes in excess of the amount needed to reimburse bank for the transfer of the initial loans in the event that the total amount of the excess was not used to purchase the additional loans the amount remaining would be distributed as a principal payment to either holders of tl-n-5924-00 the cla sec_1 notes or in certain circumstances pro_rata to all holders of all classes of notes thus the outstanding principal balance of all subordinated mortgage loans to be held by the trust plus any excess cash not used to purchase the additional loans dollar_figurea dollar_figurer dollar_figures would exceed the principal balance of the notes and the class a instruments dollar_figurek by dollar_figuret therefore the notes and class a instruments were overcollateralized in addition the stated_interest on the subordinated mortgage loans typically exceeded the stated_interest on the notes and the class a instruments thus assuming no defaults the subordinated mortgage loans held by trust would create cash_flow in excess of the amounts needed to pay principal and interest on the notes and the class a instruments the notes and the class a instruments paid interest and in the circumstances further described below principal on the distribution date of each calendar month the total amount available for distribution on the notes and instruments would be the amount collected on the mortgage loans during the previous calendar month plus any interest earned on the collection account in which the collections on the mortgage notes were held the portion of this amount used to make principal distributions depended on whether overcollateralization equaled or exceeded a set percentage of the aggregate outstanding principal balance of the notes and the class a instruments the percentage varying over time and dependent on the occurrence of various events in all events the amount distributable as principal payments on each distribution date would at least equal the amount of principal collected on the subordinated mortgage loans including collections from foreclosure during the previous calendar month however since the stated_interest on the mortgage loans exceeded the stated_interest on the notes and the class a instruments and the notes and class a instruments were overcollateralized the total amount available for distribution would typically exceed the stated_interest on the notes and class a instruments plus the amount of principal collected on the mortgage loans if the overcollateralization target were met such excess cash would be paid to the holder of the class b instrument on the distribution date if the overcollateralization target was not met such excess cash would instead be distributed as a payment of principal on the distribution date in the order listed below thus the aggregate outstanding principal balance of the notes and the class a instruments would be reduced until the overcollateralization target was met as a general matter collections on the pool of subordinated mortgage loans would be used first to pay trust fees and expenses including the servicing fee due to bank in its role as servicer then interest due including interest previously due and not yet paid from the most senior to the most junior tranche that is the cla sec_1 notes and the cla sec_2 notes then the cla sec_3 notes the cla sec_4 notes and the class a instruments in that order additional collections would then be used to pay down the principal balance of the cla sec_1 notes then the cla sec_2 notes the class tl-n-5924-00 notes the cla sec_4 notes and the class a instruments in that order no principal payments would be made on a tranche until the principal balance of the more senior tranches had been first reduced to zero for example principal payments would not be made on the cla sec_2 notes until the cla sec_1 notes had been paid off in their entirety the holder of the class b instrument has the option of repurchasing all remaining mortgage loans on a clean-up call that is when the aggregate outstanding principal balance of the notes and the class a instruments have declined to u or less of the original aggregate balance thus the risk of there being insufficient cash_flow to service the various obligations of the trust are shared sequentially from the most junior to the most senior tranche the holder of the class b instrument is the first to suffer from inadequate cash_flow followed by the holders of the class a instruments the cla sec_4 notes the cla sec_3 notes the cla sec_2 notes and the cla sec_1 notes this is reflected in the ratings assigned to these securities prior to sale the notes and the class a instruments had each been rated by rating agency specifically the cla sec_1 and cla sec_2 notes had been rated as v the cla sec_3 notes had been rated as w the cla sec_4 notes had been rated as x and the class a instruments had been rated as y the class b instrument is unrated on or about date the bank distributed to certain institutional investors a private_placement memorandum that offered for sale both the notes and the class a instruments however although the notes and the class a instruments were distributed to underwriters only the cla sec_1 cla sec_2 and cla sec_3 notes were sold to institutional investors the cla sec_4 notes and the class a instruments were sold to the bank during the relevant period the bank was also the owner of the class b instrument holding initially reported the transactions as a sale of the pool of subordinated mortgage loans for tax purposes on the consolidated federal_income_tax return filed for calendar_year however holding subsequently filed an amended_return reclassifying the transactions as a financing trust did not elect to be treated as a real_estate_mortgage_investment_conduit remic pursuant to sec_860d law and analysi sec_1 did the transactions constitute a sale or a pledge of the pool of subordinated mortgage loans in general federal_income_tax consequences are governed by the substance of a transaction determined by the intentions of the parties to the transaction the underlying economics and all other relevant facts and circumstances 293_us_465 xiv-1 c b the label the parties affix to a transaction does not determine its character 308_us_252 1939_2_cb_208 556_f2d_1107 ct_cl the term sale is given its ordinary meaning and is generally defined as a transfer of the ownership of property for money or for a promise to pay money 380_us_563 1965_2_cb_282 whether a transaction is a sale or a financing_arrangement is a question of fact which must be ascertained from the intent of the parties as evidenced by the written agreements read in light of the surrounding facts and circumstances 24_tc_1124 aff'd 241_f2d_288 9th cir but see 279_f2d_701 2d cir t he parties' bona_fide intentions may be ignored if the relationship the parties have created does not coincide with their intentions a transaction is a sale if the benefits_and_burdens_of_ownership have passed to the purported purchaser 106_tc_237 77_tc_1221 in cases involving transfers of debt instruments such as mortgage loans the courts have considered the following factors to be relevant in determining whether the benefits_and_burdens_of_ownership passed whether the transaction was treated as a sale see 54_tc_1215 acq 1971_2_cb_3 whether the obligors on the debt instruments were notified of the transfer of the debt instruments id which party serviced the debt instruments id 51_tc_1049 acq c b xxv whether payments to the transferee corresponded to collections on the debt instruments united surgical steel co t c pincite town country food co t c pincite whether the transferee imposed restrictions on the operations of the transferor that are consistent with a lender-borrower relationship united surgical steel co t c pincite 319_fsupp_441 n d ga which party had the power of disposition 421_f2d_442 5th cir cert_denied 400_us_819 revrul_82_144 1982_2_cb_34 which party bore the risk 426_f2d_115 6th cir cert_denied 400_us_827 65_f2d_568 2d cir aff'g 22_bta_224 revrul_82_144 and which party had the potential for gain united surgical steel co t c pincite town country food co t c pincite revrul_82_144 no one factor is dispositive of the issue of whether a sale has taken place the facts and circumstances determine the importance of each factor thus a factor- by-factor analysis is necessary to determine whether bank sold the mortgage loans tl-n-5924-00 were the transactions treated as sales the form of the transactions was a sale of the subordinated mortgage loans to the trust section b of the servicing agreement states that bank does hereby sell transfer assign set over and otherwise convey to the trust without_recourse but subject_to the other terms and provisions of this agreement all of its right title and interest in and to the pool of subordinated mortgage loans emphasis added section c specifically states that it is the intention of the parties hereto that the transfers and assignments contemplated by this agreement shall constitute a sale of the pool of subordinated mortgage loans page a of the private_placement memorandum states on date the trust will purchase from the bank a pool of home loans emphasis added page b of the private_placement memorandum similarly describes the mortgage loans as having been conveyed to the trust holding also treated the transaction as a sale of the pool of subordinated mortgage loans when the consolidated federal_income_tax return for calendar_year was first filed notwithstanding the foregoing the documents may evince an intent that the transactions be financings for tax purposes even though they are sales for state law purposes page c of the private_placement memorandum advises that the notes are debt and that holders of the notes must agree to treat the notes as such for federal_income_tax purposes section d of the indenture also provides that the notes be treated as indebtedness page d of the private_placement memorandum advises that the class a instruments are partnership interests and that holders of the class a instruments must agree to treat the instruments as such for federal_income_tax pupose sec_2 since the class a and b instruments are retained by the bank this implies that the trust is a partnership with a single partner the private_placement memorandum therefore may imply an intention that the trust should be disregarded and the notes treated as the bank’s indebtedness for tax purposes see sec_301_7701-3 -4 b a business_entity with a single owner that is not classified as a corporation can elect to be classified as a corporation or be disregarded as an entity separate from its owner if so the parties may also have intended that the mortgage loans not be considered sold for tax purposes since they continue to be owned by the bank through the trust but rather as pledged as collateral for the notes however as noted previously holding did treat the transactions as sales in the tax_return initially filed for calendar_year 2the private_placement memorandum does not discuss the class b instrument since it was not offered for sale however the class b instrument is more equity-like than the class a instruments since it is merely the right to the assets of the trust when all other obligations of the trust have been satisfied if the class a instruments are partnership instruments then a fortiori the class b instrument must be a partnership_interest tl-n-5924-00 were bank's customers notified of the transactions the facts provided do not state of whether the mortgagors were made aware of the transfer of the mortgage loans to trust which party handled collections and serviced the subordinated mortgage loans as discussed in the facts section the servicing agreement provides that the bank will continue to service the subordinated mortgage loans in return for the payment of a monthly fee did payments to the holders of the notes the class a instruments and the class b instrument the holders correspond to collections on the pool of subordinated mortgage loans the holders received payments generally only from amounts collected on the subordinated mortgage loans the bank had no obligation to make payments to the holders the holders received payments only if and when bank as servicer collected amounts on the customer notes compare united surgical steel co t c pincite and town country food co t c pincite lenders looked to taxpayers rather than payments on pledged installment notes for repayment with 51_tc_175 taxpayer's payments to purported lender were exactly the same in amount and timing as payments on underlying installment notes in addition assuming that the overcollateralization target was met the holders would receive payments of principal only as principal payments were collected on the subordinated mortgage loans additional_amounts could be earned from reinvestment of collections during the period between receipt and payments being made to the holders however the amount that could be earned by reinvestment was relatively small since collections on the mortgage loans in any calendar month were paid to the holders on the distribution date in the next calendar month the holders other than the bank did not receive all the amounts received on the subordinated mortgage loans as discussed in the facts section the bank was the holder of the cla sec_4 notes the class a instruments and the class b instrument therefore a significant part of the collections on the subordinated mortgage loans would be paid to the bank in its capacity of holder of such financial instruments in addition fees were paid from the collections on the pool of subordinated mortgage loans to various parties including the bank in its role as servicer were there restrictions on the operations of the bank that are consistent with a lender-borrower relationship tl-n-5924-00 the relationship between bank and trust or the holders lacked the restrictive covenants often imposed by lenders on borrowers no restrictions were imposed on the operations of bank as a result of entering into the transactions for example bank was not required to maintain a specified ratio of assets to liabilities or current_assets to current liabilities neither trust nor the holders received the right to review bank’s books_and_records since no restrictions were imposed on bank's operations bank is less like a borrower and more like a seller of the pool of subordinated mortgage loans see eg united surgical steel co t c pincite bank's imposition of restrictions on operations of putative borrower was a factor showing lender-borrower relationship this conclusion is further supported by the fact that bank was not required to post any additional collateral in the event that high losses on the pool resulted in trust failing to have sufficient assets to make required_payments on the notes or the class a instruments see eg union planters nat'l bank of memphis f 2d pincite purported seller required to make margin_account payments yancey bros co f_supp pincite taxpayer obligated to maintain ratio of collateral to debt of not less than percent which party had the power of disposition bank no longer had title to the mortgage loans and so could not transfer the mortgage loans in particular the original mortgage loan documents were transferred to a custodial agent of the co-owner trustee a mortgage loan would not be returned to bank except in those cases in which bank was required to repurchase or replace a non-conforming mortgage loan only trust could dispose_of mortgage loans however the applicable documents contemplate that the mortgage loans would generally be held by trust until maturity subject_to the duty_of bank to repurchase or replace non-conforming mortgage loans and the ability of the holder of the class b instrument to repurchase the remaining mortgage loans on a clean-up call which party bore the risk on the mortgage notes by transferring the pool of subordinated mortgage loans to trust bank seemingly eliminated its exposure to credit risk on the pool however bank also became the owner of the cla sec_4 notes the class a instruments and the class b instrument as developed previously the risks of there being inadequate cash_flow on the mortgage loans is shared sequentially with the holder of the class b instrument being the first to suffer from inadequate cash_flow followed by the holders of the class a instruments the cla sec_4 notes the cla sec_3 notes the cla sec_2 notes and the cla sec_1 notes this is reflected in the ratings given the various tranches by rating agency therefore bank as holder of the three most junior tranches has retained most of the credit risk associated with the mortgage loans tl-n-5924-00 however mortgage loans carry not only credit risk but also prepayment risk that is prepayments on mortgage loans typically vary directly with declines in interest rates when interest rates go down mortgagors are likely to refinance thus depriving the mortgage holder of the benefit of holding a mortgage loan with greater than market interest similarly when interest rates go up mortgagors are less likely to refinance forcing the mortgage holder to hold an obligation with a below-market yield lore and cowan mortgage-backed_securities developments and trends in the secondary mortgage market pp ed because principal amounts received on the pool of subordinated mortgage loans are passed through as received to sequentially pay off the various tranches of notes and instruments the prepayment risk associated with the mortgage loans is also passed through to the holders of those tranches although bank retains the three most junior tranches and so the prepayment risk associated with those tranches other investors hold the three most senior tranches and the prepayment risk associated with those tranches therefore bank has transferred a large part of the prepayment risk associated with the mortgage loans the potential for gain on the mortgage loans in this particular instance the opportunity for gain is largely the obverse of the risk carried as developed previously much of the credit risk is associated with the junior tranches retained by bank similarly a lower than expected default rate on the mortgage loans will significantly increase the cash_flow on the junior tranches including particularly the class b instrument which is the first tranche that must absorb the costs of any default thus bank will benefit significantly from a lower default rate however as also developed previously bank has passed through a significant part of the prepayment risk to the holders of the three most senior tranches thus these holders will benefit to the extent that prepayments are less than would be expected in a falling-interest-rate environment or higher than expected in an increasing-interest-rate environment bank’s right as the holder of the class b instrument to initiate a clean-up call does create an opportunity for bank to keep some of the gains in the value of the mortgages in a falling interest rate environment however since bank may only call the bonds when the aggregate outstanding principal balance of the notes and the class a instruments have declined to u or less of the original aggregate balance the portion of the gains that the bank can sequester by calling the bonds at a time of falling interest rates is very limited the above analysis establishes that the transactions constitute a sale of interests in the mortgage loans tl-n-5924-00 certain factors do suggest that the transactions should be characterized as a financing rather than a sale bank did retain the servicing rights on the mortgage loans and much of the credit risk associated with the mortgage loans further there is some ambiguous evidence in the documents indicating that bank believed that the mortgage loans should be considered to have been pledged as collateral rather than sold for tax purposes although this belief was not reflected in the consolidated tax_return for tax_year initially filed by holding however other factors strongly suggest that the transactions constitute a sale of the mortgage loans the transactions were on their face sales and treated as such in the initial consolidated tax_return filed for tax_year restrictions that would normally be associated with a borrowing were not placed on bank payments to the holders closely corresponded to collections on the pool of subordinated mortgage loans holders also bore much of the prepayment risk associated with the mortgage loans and stood to benefit if prepayments were less than expected at a time of falling interest rates or greater than expected at a time of rising interest rates thus in this particular transaction it is clear that the holders other than the bank i e the holders of the cla sec_1 cla sec_2 and cla sec_3 notes have obtained many of the economic benefits_and_burdens_of_ownership of the pool of the subordinate mortgage loans the transfer of a substantial portion of the benefits_and_burdens_of_ownership of property is not characteristic of a financing thus the transactions constitute the sale of a part of the bank’s interest in the mortgage loans cf sec_301_7701-4 example state law trust that holds mortgage loans and issues senior and subordinated tranche is an association or partnership rather than grantor_trust for tax purposes thus tranches represent equity_interest in entity did the bank’s retention of servicing rights in the mortgage loans constitute the bank’s retention of an ownership_interest in the mortgage loans sec_1286 provides rules to deal with a taxpayer that sells a portion of the future payments on a debt_instrument a stripped_bond while retaining the right to other_payments a taxpayer that simultaneously sells mortgages and enters into a contract to service the mortgages in return for amounts received from interest payments on the mortgages may be treated as having retained a portion of the future_interest payments the taxpayer’s rights to receive amounts under the contract are stripped coupons under sec_1286 to the extent they are rights to receive mortgage interest other than as reasonable_compensation for the services to be performed revrul_91_46 1991_2_cb_358 revproc_91_50 1991_2_cb_78 provides an elective safe_harbor that determines the extent to which fees for servicing residential mortgages represent tl-n-5924-00 reasonable_compensation for the services provided in the instant case bank’s servicing fee of p of the outstanding principal balances of the mortgage loans exceeded the safe_harbor rates of revproc_91_50 however the facts presented are not sufficient to determine if bank’s servicing fee exceeds reasonable_compensation for the services it performs assuming arguendo that the bank’s servicing fee is in excess of reasonable_compensation then the portion of the fees that constitutes reasonable_compensation should be treated as received by bank as compensation_for services the excess is treated as received by bank directly from the mortgagors bank’s ownership of the right to this excess is treated as the ownership of a stripped_coupon rather than as the ownership of an interest in the trust revrul_91_46 bank’s basis in the stripped coupons is calculated by multiplying the bank’s aggregate basis in all the assets transferred to the trust on or about date by a fraction that is equal to the fraction of the fair_market_value of these assets that was represented by the stripped coupons sec_1286 case development hazards and other consideration sec_1 treating the transactions as a sale of the pool of subordinated mortgage loans the information provided is sufficient to establish that the transactions constituted a sale rather than a pledge of the mortgage loans the only authority we have found that deals with a factually similar transaction is example in sec_301_7701-4 this example involved the transfer of a portfolio of mortgage loans to a_trust that issues two tranches of certificates as in the instant case the principle amount of the senior tranche must be paid before payments are made on the junior tranche the example concludes that since a large part of the prepayment risk on the mortgage loans has been passed through to the senior tranche neither the senior tranche nor the junior tranche represent merely a direct ownership interests in the mortgage loans the trust therefore cannot be a grantor_trust for tax law purposes but must be characterized as either an association ie a corporation or as a partnership the implication of the example is that the transferror of the mortgages had transferred an ownership_interest in the mortgages to the holders of the two tranches applied in this context tl-n-5924-00 this example suggests that the transactions constitute a carving up of the ownership interests in the subordinated mortgage loans ownership in the subordinated mortgage loans has been divided in a complex manner between the holders of the notes and instruments ie the bank and the other investors another implication of the example is that in order to represent properly the complex ownership structure the putative trust should be treated as a partnership or corporation for tax purposes although you have not asked we believe a similar analysis may apply here furthermore under current law trust may elect to be treated as a partnership rather than a corporation for tax purposes and will probably do so in order to avoid the corporate_income_tax sec_301_7701-3 the bank’s retention of servicing rights in the mortgage loans bank’s servicing fee significantly exceeds the safe_harbor rates of revproc_91_50 this alone suggests that the servicing fees are not limited to reasonable_compensation but instead include an equity_interest in the mortgage loans in addition the amount bank is considered to receive for servicing the mortgage loans is not limited to amounts that are explicitly identified as servicing fees certain other_amounts that bank may receive as a result of acting as servicer eg fees for late payments may also be considered as received for servicing and further increase the amount by which the bank’s receipts are in excess of the safe_harbor rates revproc_91_50 1991_2_cb_778 sec_2 tl-n-5924-00 this writing may contain privileged information any unauthorized disclosure of this writing may have an adverse affect on privileges such as the attorney client privilege if disclosure becomes necessary please contact this office for our views please call if you have any further questions lon smith acting associate chief_counsel financial institutions and products robert williams assistant to chief cc fip br3 by


t c summary opinion united_states tax_court tiffany paramore petitioner v commissioner of internal revenue respondent docket no 2041-00s filed date tiffany paramore pro_se monica j miller for respondent panuthos chief special_trial_judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect at the time the petition was filed the decision to be entered is not reviewable by any other court and this opinion should not be cited as authority unless otherwise indicated subsequent section references are to the internal - - revenue code in effect for the year in issue and all rule references are to the tax_court rules_of_practice and procedure respondent determined a deficiency in petitioner’s federal_income_tax of dollar_figure for tax_year the issues for decision are whether petitioner is entitled to a dependency_exemption deduction for her son whether petitioner gualifies for head- of-household filing_status and whether petitioner is entitled to the earned_income_credit under sec_32 background some of the facts have been stipulated and they are so found the stipulation of facts and the attached exhibits are incorporated herein by this reference at the time of filing her petition petitioner resided in orlando florida during petitioner had four minor children the second oldest child simeon gemaele thomas jr simeon was born in during the first part of petitioner and her children lived in an apartment and petitioner worked as a telemarketer in either april or date petitioner lost her job when the account she worked on ended in date petitioner and her three youngest children moved to miami florida where they lived with johnny fortune mr fortune mr fortune is the father of the two youngest children the eldest child dequane lived with petitioner’s mother in orlando florida while petitioner lived with mr fortune mr fortune was employed during but petitioner did not secure employment at the end of date petitioner and simeon moved in with petitioner’s mother while the youngest two children remained with mr fortune petitioner simeon and dequane lived with petitioner’s mother through the end of the year petitioner secured employment by the end of date and her mother worked during the period at issue simeon lived with petitioner for all of petitioner earned wages of dollar_figure in petitioner also received dollar_figure in housing subsidies from hud for herself and her four children in addition petitioner and her four children received dollar_figure from afdc and dollar_figure in food stamps further simeon’s father simeon gemaele thomas paid dollar_figure of child_support in on her federal_income_tax return petitioner claimed a dependency_exemption deduction for simeon and an earned_income_credit with simeon listed as a qualifying_child petitioner also filed her return claiming head-of--household filing_status in the notice_of_deficiency to petitioner respondent disallowed the dependency_exemption deduction and earned_income_tax_credit respondent alleges that petitioner failed to meet the requirements for the dependency_exemption deduction and did q4e- not have a qualifying_child for the earned_income_tax_credit respondent also changed petitioner’s filing_status to single discussion dependency_exemption deduction a taxpayer 1s permitted to claim as a deduction an exemption for certain dependents see sec_15l1 a c a taxpayer’s son qualifies as a dependent so long as the taxpayer provided more than half of the support to the dependent see sec_152 a sec_1_152-1 income_tax regs the level of support is determined by the support_test in which the total amount of support from all sources is compared with the amount of support actually provided by a taxpayer the taxpayer must establish by competent evidence the total amount of the support furnished by all sources for the taxable_year at issue see turay v commissioner tcmemo_1999_315 keegan v commissioner tcmemo_1997_511 sec_1_152-1 income_tax regs if the total amount of support is not established then it is generally not possible to conclude that the taxpayer provided more than half of the support to the claimed dependent see 56_tc_512 batson v commissioner tcmemo_2000_172 butler v commissioner tcmemo_1998_355 smith v commissioner tcmemo_1997_544 support includes such items as food shelter medical_expenses and clothing see sec_1_152-1 income_tax - - regs support also includes public assistance such as welfare and food stamps received by the individual these items are calculated as part of the total amount of support received by the individual and are not attributed to the taxpayer see 644_f2d_2 5th cir affg tcmemo_1980_111 smith v commissioner supra petitioner failed to establish that she provided more than one-half of simeon’s support we are unsure as to the total amount of support simeon received from all sources the record is also silent as to the amount of support simeon received from petitioner therefore we sustain respondent’s determination filing_status in order to qualify for head-of-household filing_status a taxpayer must satisfy the requirements of sec_2 pursuant to that section and as relevant herein an individual qualifies as a head_of_household if the individual is not married at the close of the taxable_year and maintains as her home a household that constitutes for more than one-half of the taxable_year the principal_place_of_abode of a son or daughter of the taxpayer sec_2 a a taxpayer is considered as maintaining a household only if more than half of the cost of maintaining the household during the taxable_year is furnished by the taxpayer petitioner was not married at the close of simeon lived with petitioner for the entire year at issue however - - petitioner failed to demonstrate that she furnished more than half of the cost of maintaining the requisite household for simeon our conclusion is based on the analysis that parallels our previous analysis regarding the dependency_exemption issue we hold that petitioner does not qualify as a head_of_household for barned income credit on her federal_income_tax return petitioner claimed an earned_income_credit based on simeon as a qualifying_child in the case of an eligible_individual sec_32 allows an earned_income_credit against the individual’s income_tax_liability as relevant herein an eligible_individual is defined as an individual who has a qualifying_child for the taxable_year sec_32 a the record reflects that simeon is a qualifying_child pursuant to the requirements set forth in sec_32 a i through iv in this regard simeon satisfies the relationship_test see sec_32 a b the residency test see sec_32 a and the age_test see sec_32 c a c finally simeon is a child with respect to whom petitioner satisfied the identification requirement under sec_32 c a iv d by setting forth his name age and applicable_taxpayer identification_number on schedule eic karned income credit - therefore we hold that petitioner is entitled to the earned_income_tax_credit for reviewed and adopted as the report of the small_tax_case division to reflect the foregoing 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 ita b05 plr-150069-12 date date internal_revenue_service number release date index number ------------------------ --------------------- --------------------------- ---------------- ----------------------------------- taxpayer ------------------------------- ---------------------------------------- year ------- year ------- dear ---------------- this ruling is in reference to the taxpayer’s request that a certain form_8716 election to have a tax_year other than a required tax_year be considered timely filed under the authority in sec_301_9100-3 of the procedures and administration regulations taxpayer’s form_8716 electing a taxable_year ending september ----was due on or before march ---- year but was not filed by that date taxpayer had engaged a qualified_tax professional in order to assure a proper filing the error was not due to any lack of due diligence or prompt action on the part of the taxpayer although the form_8716 was not filed by the due_date taxpayer filed an income_tax return for the taxable_year ending september ---- year sec_1_444-3t of the temporary income_tax regulations provides among other requirements that form_8716 must be filed by the earlier of i the 15th day of the fifth month following the month that includes the first day of the tax_year for which the election will first be effective or ii the due_date without regard to extensions of the income_tax return resulting from the sec_444 election sec_301_9100-1 set forth rules respecting the granting of extensions of time for making certain elections under these rules the commissioner in his discretion may grant a reasonable extension of time to make a regulatory election under subtitle a provided the taxpayer acted reasonably and in good_faith and that the granting of relief will not prejudice the interest of the government plr-150069-12 sec_301_9100-2 sets forth rules governing automatic extensions for regulatory elections including elections to use other than the required tax_year under sec_444 sec_301_9100-3 sets forth standards that the commissioner will employ in determining whether to grant discretionary relief in situations that do not meet the requirements of sec_301_9100-2 the standards applied are whether the taxpayer acted reasonably and in good_faith in the matter and whether the granting of relief will prejudice the interest of the government generally a taxpayer will be deemed to have acted reasonably and in good_faith where for example the taxpayer reasonably relied on a qualified_tax professional and that professional failed to make or advise the taxpayer to make the election at issue the information submitted and representations furnished by taxpayer and its tax professionals establish that taxpayer acted reasonably and in good_faith in respect of this matter furthermore we have determined that the granting of relief in this case will not prejudice the interest of the government within the intendment of c accordingly the requirements of sec_301_9100-3 for the granting of relief have been satisfied a copy of this letter and taxpayer’s form_8716 filed in connection with this ruling_request are being forwarded to the service_center where the taxpayer files its income_tax returns with instructions that the form be considered timely filed and processed so as to affect a taxable_year ending september ---- effective for taxpayer’s taxable_year ending september ---- year this ruling is based upon facts and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party this ruling is also conditioned on taxpayer complying with sec_1_7519-1t which provides in relevant part that for each tax_year a partnership or an s_corporation has an election under sec_444 in effect the corporation must i file a return as provided in sec_1_7519-2t and ii make any required_payment as provided in sec_1_7519-2t except for the specific request above which is restricted to the filing of form_8716 we express or imply no opinion concerning the federal_income_tax consequences of the facts of this case under any other provision of the code or regulations that may be applicable thereto in accordance with the provisions of a power_of_attorney currently on file with this office a copy of this letter_ruling is being sent to the taxpayer’s authorized representative plr-150069-12 this ruling is directed only to the taxpayer that requested it sec_6110 of the internal_revenue_code provides that it may not be used or cited as precedent enclosed is a copy of the letter_ruling showing the deletions proposed to be made when it is disclosed under sec_6110 sincerely yours william a jackson branch chief branch income_tax accounting office_of_chief_counsel


internal_revenue_service number release date index number ------------------------------------ --------------------------- ------------------------------- -------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ----------- id no ----------------- telephone number --------------------- refer reply to cc psi plr-129905-11 date november legend company --------------------------------------------------------------------------------------------- ----------------------- shareholder --------------------------------------------------------------------------------------------- ------------------------- state date date ------ ----------------------- ---------------------- dear ----------------- this letter responds to a letter dated date written on behalf of company requesting a ruling under sec_1362 of the internal_revenue_code code facts company was incorporated in state on date company’s shareholder intended for company to be an s_corporation effective date however company’s form_2553 election by a small_business_corporation was not timely filed company requests a ruling that it will be recognized as an s_corporation effective date plr-129905-11 law and analysis sec_1362 provides that except as provided in sec_1362 a small_business_corporation may elect in accordance with the provisions of sec_1362 to be an s_corporation sec_1362 provides that an election under sec_1362 may be made by a small_business_corporation for any taxable year- a at any time during the preceding_taxable_year or b at any time during the taxable_year and on or before the 15th day of the third month of the taxable_year sec_1362 provides that if- a a small_business_corporation makes an election under sec_1362 for any taxable_year and b the election is made after the 15th day of the third month of the taxable_year and on or before the 15th day of the third month of the following taxable_year then the election is treated as made for the following taxable_year sec_1362 provides that if- a an election under sec_1362 is made for any taxable_year determined without regard to sec_1362 after the date prescribed by sec_1362 for making the election for the taxable_year or no election is made for any taxable_year and b the secretary determines that there was reasonable_cause for the failure to timely make the election the secretary may treat such an election as timely made for such taxable_year and sec_1362 shall not apply conclusion based solely on the facts submitted and the representations made we conclude that company has established reasonable_cause for failing to make an s_corporation_election in a timely manner thus we conclude that company is eligible for relief under sec_1362 accordingly if company makes an election to be an s_corporation effective date by filing a completed form_2553 with the appropriate service_center within days from the date of this letter then such election will be treated as timely made a copy of this letter should be attached to the form_2553 filed with the service_center except as expressly provided herein we express or imply no opinion concerning the federal tax consequences of any aspect of any transaction or item discussed or referenced in this letter specifically we express or imply no opinion concerning whether company is otherwise eligible to be an s_corporation for federal tax purposes in accordance with a power_of_attorney on file with this office we are sending a copy of this letter to company’s authorized representative plr-129905-11 this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent the ruling contained in this letter is based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the ruling_request it is subject_to verification on examination sincerely mary beth carchia senior technician reviewer branch office of the associate chief_counsel passthroughs special industries enclosures a copy of this letter a copy for sec_6110 purposes cc


internal_revenue_service number release date index number -------------------- -------------------------- -------------------- ---------------------------- ---------------------------------- - department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------- id no ------------- telephone number --------------------- refer reply to cc corp b03 plr-138042-05 date date --------------------- --------------------------------------- purchasing_corporation ---------------------------------------------------------------------------- --------------------------------------------------------------------- parent ---------------------------------------------------------------------------- --------------------------------------------------------------------- sub ------------------------------ ---------------------------------------------------------------------------- --------------------------------------------------------------------- sub ---------------------------------------------------------------------------- --------------------------------------------------------------------- sub ---------------------------------------------------------------------------- --------------------------------------------------------------------- sub ------------------------------------------------------------------------------------------------------------------ ---------------------------------------------------------------------------- --------------------------------------------------------------------- sub ---------------------------------------------------------------------------- --------------------------------------------------------------------- date ----------------------------------------- -------------------------------- --------------------------- ------------------------- ----------------------------------------------------------------------- ----------------------- plr-138042-05 date company official ---------------------------------------------------------------- tax professional -------------------------------------------------------------------------------------- dear ----------------- ----------------------------------------------- -------------------------------------------------- this letter responds to a letter submitted on behalf of parent and electing subs dated date requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations to file an election the extension is being requested in order to allow parent and electing subs to file an election to restore value under sec_1_382-8 of the income_tax regulations hereinafter referred to as the election the material information submitted is summarized below prior to date parent owned all of the stock of sub and parent and sub filed a consolidated federal_income_tax return the parent group parent also owned percent of the stock of sub sub owned all the stock of sub sub and sub hereinafter sub sub sub and sub may be referred to collectively as the electing subs the electing subs filed a consolidated federal_income_tax return the electing subs group on date purchasing_corporation purchased all of the stock of parent causing parent to experience an ownership_change within the meaning of sec_382 and terminating both the parent group and the electing subs group the parent group constitutes a loss subgroup within the meaning of sec_1_1502-91 however the electing subs group does not constitute a loss subgroup sec_382 provides that the amount of the taxable_income of any loss_corporation for any post-change_year which may be offset by pre-change losses shall not exceed the sec_382 limitation for such year under sec_382 the sec_382 limitation is determined by multiplying the value of the old_loss_corporation by the applicable long term tax- exempt rate a special rule designed to prevent double counting by controlled groups is set forth in sec_1_382-8 sec_1_382-8 requires the value of the stock of each component_member of the controlled_group be reduced by the value of the stock owned by that component_member in any other component_member component members of a controlled_group can elect under sec_1_382-8 to restore some or all of the value to the member whose value is reduced under sec_1_382-8 the election to restore value is made by following the procedures set forth in sec_1_382-8 sec_1_382-8 provides that solely for purposes of applying sec_1_382-8 a consolidated_group loss group or loss subgroup is treated as a single corporation plr-138042-05 the parent group and electing subs group are component members of a controlled_group within the meaning of sec_1_382-8 an election to restore the value of the electing subs was due on date however for various reasons parent and the electing subs failed to make the election in a timely manner the sec_382 limitation has been utilized by purchasing_corporation parent and sub - sub consistent with the election having been made under sec_301_9100-1 the commissioner has discretion to grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make a regulatory election sec_301_9100-1 sec_301_9100-2 provides automatic extensions of time for making certain elections requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-3 in this case the time for filing the election is fixed by the regulations ie sec_1_382-8 therefore the commissioner has discretionary authority under sec_301_9100-3 to grant an extension of time for parent and the electing subs to file the election provided they show that they acted reasonably and in good_faith the requirements of sec_301_9100-1 and sec_301_9100-3 are satisfied and granting relief will not prejudice the government information affidavits and representations submitted by parent company official and tax professional explain the circumstances that resulted in the failure to timely file the election the information establishes that parent reasonably relied on a qualified_tax professional who failed to make or advise parent to make the election and that the interests of the government will not be prejudiced if relief is granted see sec_301 b v based on the facts and information submitted including the representations made we conclude that parent and the electing subs have shown that they acted reasonably and in good_faith the requirements of sec_301_9100-1 and sec_301_9100-3 are satisfied and granting relief will not prejudice the interests of the government accordingly an extension of time is granted under sec_301_9100-3 until days from the date on this letter for parent and the electing subs to file the election the above extension of time is conditioned on the taxpayers' purchasing corporation's parent’s and sub - sub 5’s tax_liability if any being not lower in the aggregate for all years to which the election applies than it would have been if the election had been timely made taking into account the time_value_of_money no opinion is expressed as to the taxpayers' tax_liability for the years involved a determination thereof will be made by the director's office upon audit of the federal_income_tax returns involved further plr-138042-05 no opinion is expressed as to the federal_income_tax effect if any if it is determined that the taxpayers' liability is lower sec_301_9100-3 except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter in particular we express no opinion with respect to whether an ownership_change occurred whether parent and the electing subs are component members of a controlled_group the amount of value if any that may be restored or as to values or amounts of nols in addition we express no opinion as to the tax effects or consequences of filing the election late under the provisions of any other section of the code or regulations or as to the tax treatment of any conditions existing at the time of or effects resulting from filing the election late that are not specifically set forth in the above ruling for purposes of granting relief under sec_301_9100-3 we relied on certain statements and representations made by parent company official and tax professional under penalties of perjury however the director should verify all essential facts moreover notwithstanding that the extension is granted under sec_301_9100-3 to file the election any penalties and interest that would otherwise be applicable still apply this ruling is directed only to the taxpayers requesting it sec_6110 of the code provides that it may not be used or cited as precedent a copy of this letter must be attached to any income_tax return to which it is relevant in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to both of your authorized representatives cc sincerely _ken cohen__________________ ken cohen senior technician reviewer branch office of associate chief_counsel corporate


internal_revenue_service department of the treasury index number washington dc number release date person to contact telephone number refer reply to cc dom p si - plr-118743-99 date date x y z q a b c d e f g h i j k l m n p d1 d2 d3 d4 d5 d6 d7 d8 d9 d10 d11 d12 ira ira ira partnership partnership partnership trust trust trust llc llc law firm dear this letter responds to a letter dated date and subsequent correspondence submitted on behalf of x by its authorized representative requesting relief under sec_1362 of the internal_revenue_code the information submitted states that x was incorporated d1 and its election to be an s_corporation was accepted effective d1 c as x’s chairman and secretary represents that due to the manner in which x maintained control_over share issuances a number of shares in x were issued to ineligible s_corporation shareholders on d2 big_number shares were issued to ira an individual_retirement_account for the benefit of a on d10 the big_number shares issued to ira were transferred to a on d3 big_number shares of x were issued to partnership a family_partnership on d7 partnership purchased an additional big_number newly issued shares of x on d10 partnership transferred all of its big_number shares of x to trust which is owned by and for the benefit of b c represents that trust is a grantor_trust a permitted s_corporation shareholder under sec_1361 on d3 shares of x were issued to partnership a family_partnership on d10 partnership transferred all of its big_number shares of taxpayer to trust which is owned by and for the benefit of d c represents that trust is a grantor_trust a permitted s_corporation shareholder under sec_1361 on d3 y an s_corporation was issued big_number shares of x stock these shares were issued to y in two separate share certificates number sec_66 and sec_67 each representing big_number shares subsequently for reasons not known the big_number shares represented by certificate number have been treated as canceled and as treasury_stock c represents that these shares are not outstanding shares of y the big_number represented by certificate number were shown on x’s records as transferred to c an eligible shareholder on d9 on d4 llc a limited_liability_company purchased big_number shares of x of these shares big_number shares were transferred to e an eligible shareholder and the remaining big_number shares transferred to f an eligible shareholder on d4 z a corporation acquired big_number newly issued shares of x z’s shares of x were transferred to g an eligible shareholder on d10 on d4 partnership a limited_partnership purchased big_number shares of x stock the big_number shares were transferred to h an eligible shareholder on d10 on d4 q a corporation purchased big_number newly issued shares of x these big_number shares were transferred to i an eligible shareholder on d10 on d5 big_number shares of x were issued to ira the shares were transferred from ira to j an eligible shareholder on d12 on d6 ira purchased big_number shares of x these shares were purchased directly from x on d10 the big_number shares issued to ira were transferred to k an eligible shareholder on d7 llc purchased big_number shares of x stock of these shares big_number were transferred to trust big_number were transferred to l big_number were transferred to m and big_number were transferred to trust on d10 on d7 trust purchased big_number shares of x stock from x this transaction was unwound through the purchase for cash by c of big_number shares from trust this purchase occurred on d10 on d11 x increased its number of shareholders to exceed and therefore ceased to be an s_corporation on d8 n purchased big_number shares of x from p n is a nonresident_alien following d11 when x ceased to be an s corporaration p an eligible shareholder repurchased the big_number shares from n c represents that x relied on its advisors to monitor the eligibility of its s shareholders x was not aware that its advisors were not adequately reviewing the eligibility of x’s shareholders as a result a number of ineligible shareholders were issued shares of x prior to approximately march of x maintained its stock book at its offices according to c’s representations the incorrect issuances during this period resulted from inadequate staffing and incomplete oversight over share issuances from and after approximately march of x’s lawyers law firm maintained the stock book c represents that the issuances to ineligible shareholders during this period resulted from insufficient oversight and coordination between and x and law firm of share issuances c represents that the circumstances resulting in the termination of x’s s_corporation_election on d3 and in the subsequent potential terminations of the s_corporation_election were inadvertent c represents also that x and its shareholders did not intend to engage in tax_avoidance or retroactive tax planning x and each person who was or is a shareholder of x agree to make such adjustments consistent with the treatment of x as an s_corporation as may be required by the secretary with respect to such period sec_1362 provides that except as provided in sec_1362 a small_business_corporation may elect in accordance with the provisions of sec_1362 to be an s_corporation sec_1361 provides that the term s_corporation means with respect to any taxable_year a small_business_corporation for which an election under sec_1362 is in effect for such year sec_1361 as in effect for taxable years beginning on or before date provided that a small_business_corporation cannot have as a shareholder a person other than an estate and other than a_trust described in sec_1361 who is not an individual sec_1361 provides that for purposes of sec_1361 a_trust all of which is treated under subpart e of part i of subchapter_j of chapter as owned by an individual who is a citizen or resident_of_the_united_states may be a shareholder sec_1361 provides that for purposes of sec_1361 in the case of a_trust described in sec_1361 the deemed owner shall be treated as the shareholder sec_1361 provides that the term small_business_corporation means a domestic_corporation which is not an ineligible_corporation and which does not have a nonresident_alien as a shareholder revrul_92_73 1992_2_cb_224 holds that a_trust that qualifies as an individual_retirement_account under sec_408 of the code is not a permitted shareholder of an s_corporation under sec_1361 sec_1362 provides that an election under sec_1362 will be terminated whenever at any time on or after the 1st day of the 1st taxable_year for which the corporation is an s_corporation such corporation ceases to be a small_business_corporation sec_1362 provides that the termination shall be effective on and after the date of cessation sec_1362 provides that if an election under sec_1362 by any corporation a was not effective for the taxable_year for which made determined without regard to sec_1362 by reason of a failure to meet the requirements of sec_1361 or to obtain shareholder consents or b was terminated under sec_1362 or the secretary determines that the circumstances resulting in such ineffectiveness or termination were inadvertent no later than a reasonable period of time after discovery of the circumstances resulting in such ineffectiveness or termination steps were taken a so that the corporation is a small_business_corporation or b to acquire the required shareholder consents and the corporation and each person who was a shareholder in the corporation at any time during the period specified pursuant to sec_1362 agrees to make such adjustments consistent with the treatment of the corporation as an s_corporation as may be required by the secretary with respect to such period then notwithstanding the circumstances resulting in such ineffectiveness or termination such corporation shall be treated as an s_corporation during the period specified by the secretary based solely on the facts submitted and the representations made we hold that x’s election was terminated on d3 because an ineligible shareholder held shares of x we hold also that the termination of x’s s_corporation_election was inadvertent within the meaning of sec_1362 in addition other circumstances described above would have resulted in the termination of x’s s_corporation_election if the s_corporation_election had not been otherwise terminated when these events occurred and these potential terminations would have been inadvertent within the meaning of sec_1362 we further hold that under the provisions of sec_1362 x will be treated as an s_corporation effective d3 to d11 provided x’s election to be an s_corporation was not otherwise invalid and provided that the election was not otherwise terminated under sec_1362 accordingly x’s shareholders in determining their federal tax_liability must include their pro_rata share of the separately and nonseparately computed items of x under sec_1366 make any adjustments to stock basis under sec_1367 and take into account any distributions made by x to shareholders under sec_1368 if x or its shareholders fail to treat x as described above this ruling shall be null and void except as specifically ruled above we express no opinion concerning the federal tax consequences of the transactions described above under any other provision of the code specifically no opinion is expressed on whether the original election made by x to be an s_corporation was a valid election under sec_1362 this ruling letter is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file with this office a copy of this letter is being sent to x’s authorized representative sincerely yours j thomas hines acting branch chief branch office of the assistant chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes


internal_revenue_service department of the treasury index number washington dc number release date person to contact telephone number refer reply to cc dom corp - plr-119739-99 date date legend parent target sub x sub y sub z state a country b date a date b date c date d date e date f x percent y percent outside cpa authorized representative plr-119739-99 other authorized representative parent officials entity x entity y dear this responds to authorized representative’s also outside cpa letter dated date submitted on your behalf requesting an extension of time under sec_301_9100-1 through of the procedure and administration regulations to file an election parent as common parent of the consolidated_group of which sub x is a member is requesting an extension to file an election under sec_338 of the internal_revenue_code with respect to the acquisition of target and target's subs hereinafter such election is referred to as the election all citations in this letter to regulations under sec_338 are to the regulations as in effect for date c the material information submitted for consideration is summarized below sub x a state a corporation is a first-tier wholly owned subsidiary of parent a state a corporation parent was and is the common parent of a consolidated_group parent has a taxable_year ending june and uses the accrual_method of accounting sub x owns percent of sub y a corporation incorporated under the laws of country b sub x also owns one share of sub z a corporation incorporated under the laws of country b sub y owns the remaining shares of sub z target is a corporation formed under the laws of country b prior to its acquisition by sub z the stock of target was widely held by the public of country b target has numerous wholly owned non-united states subsidiary corporations hereinafter collectively referred to as target's subs and one united_states subsidiary_corporation u s sub target and target's subs were not controlled_foreign_corporations within the meaning of sec_957 passive foreign investment companies for which an election was made under sec_1295 foreign investment companies the ownership of which is described in sec_552 or required under sec_1_6012-2 to file a united_states income_tax return this request for an extension of time to make the sec_338 election is made with respect to target and target's subs no request for an extension of time to make a sec_338 election is being requested for u s sub plr-119739-99 on date a sub z began to purchase shares of target on the open market of country b pursuant to a public_tender_offer the public_tender_offer was contingent on the tendering of at least percent of the outstanding target shares by the target shareholders within approximately days by date b sub z had purchased approximately x percent of the outstanding shares of target on date c sub z purchased a block of shares constituting y percent of the shares of target this y percent block of shares was acquired in two separate transactions occurring on the same date thus by date c sub z had acquired more than percent of the outstanding shares of target by date f sub z acquired the balance of the outstanding shares of target prior to making the public_tender_offer for the stock of target parent determined that it would file an election pursuant to the provisions of sec_338 to treat the acquisition of the stock of target and target's subs as the purchase of the assets of target and target's subs parent also determined that it would not file a sec_338 election for u s sub it has been represented that all of the acquisitions of target stock made by sub z were acquired for cash in fully taxable transactions collectively referred to as the purchase neither parent nor any members of the parent affiliated_group was related to the target shareholders within the meaning of sec_338 and the acquisition of the stock of target was a qualified_stock_purchase within the meaning of sec_338 shortly after the acquisition of target parent caused sub z and target to be converted from entity x to entity y under country b law for united_states income_tax purposes it has been represented that these conversions qualified under sec_368 subsequently parent caused the appropriate shareholders to make check the box elections for sub y sub z target and certain of target’s subs resulting in their treatment as disregarded entities it has been represented that such elections resulted in such corporations being treated as having liquidated into their respective shareholder corporations under sec_332 the election was due for target and target's subs on date d however for various reasons the election was not filed on the applicable due_date on date e which is after date d and thus after the due_date for the election for target and target's subs outside cpa discovered that the election was not timely filed subsequently this request was submitted under sec_301_9100-1 for an extension of time to file the election the statute_of_limitations under sec_6501 has not run for the tax_year in which the acquisitions occurred the taxable years in which the election should have been filed or for any taxable years that would have been affected by the election had it been timely filed sec_338 permits certain stock purchases to be treated as asset acquisitions if the purchasing_corporation makes or is treated as having made a sec_338 election under sec_338 and the acquisition is a qualified_stock_purchase sec_1 plr-119739-99 c provides that a sec_338 election is an election to apply sec_338 to target sec_338 specifies the requirements for making a sec_338 election sec_338 defines a qualified_stock_purchase as any transaction or series of transactions in which stock meeting the requirements of sec_1504 of corporation is acquired by another corporation by purchase during the 12-month_acquisition_period sec_1_338-1 and v provide that for purposes of sec_1_338-1 ie qualifying for the special rule which provides a later filing_date for an election under sec_338 than ordinarily required a foreign_corporation is considered subject_to united_states tax ie is not eligible for the special rule if it is a controlled_foreign_corporation sec_338 provides that the term purchase means any acquisition of stock but only if i the basis of the stock in the hands of the purchasing_corporation is not determined i in whole or in part by reference to the adjusted_basis of such stock in the hands of the person from whom acquired or ii under sec_1014 relating to property_acquired_from_a_decedent ii the stock is not acquired in an exchange to which sec_351 sec_354 sec_355 or sec_356 applies and is not acquired in any other transaction described in regulations in which the transferor does not recognize the entire amount of the gain_or_loss realized on the transaction and iii the stock is not acquired from a person the ownership of whose stock would under sec_318 other than paragraph thereof be attributed to the person acquiring such stock sec_1_338-1 provides that a purchasing_corporation makes a sec_338 election for target by filing a statement of sec_338 election on form_8023 in accordance with the instructions on the form the sec_338 election must be filed not later than the 15th day of the ninth month beginning after the month in which the acquisition_date occurs a sec_338 election is irrevocable sec_1_338-2 provides that if an election under sec_338 is made for target old target is deemed to sell target’s assets and new target is deemed to acquire those assets sec_1_338-2 provides that the purchasing_corporation may make an election under sec_338 for target even though target is liquidated on or after the acquisition_date sec_1_338-2 provides that an election may be made for target after the acquisition of assets of the purchasing_corporation by another corporation in a transaction described in sec_381 provided that the purchasing_corporation is considered for tax purposes as the purchaser of the target stock the acquiring_corporation in the sec_381 transaction may make an election under sec_338 for target the term target_affiliate has the same meaning as in sec_338 applied without sec_338 thus a corporation described in sec_338 is considered a plr-119739-99 target_affiliate for all purposes of sec_338 if a target_affiliate is acquired in a qualified_stock_purchase it is also a target see sec_1_338-1 if an election under sec_338 is made for target old target is deemed to sell target’s assets and new target is deemed to acquire those assets under sec_338 new target’s deemed purchase of stock of another corporation is a purchase for purposes of sec_338 on the acquisition_date of target if new target’s deemed purchase causes a qualified_stock_purchase of the other corporation and if a sec_338 election is made for the other corporation the acquisition_date for the other corporation is the same as the acquisition_date of target however the deemed sale and purchase of the other corporation’s assets is considered to take place after the deemed sale and purchase of target’s assets see sec_1_338-2 sec_1_1502-77 provides that the common parent for all purposes other than for several purposes not relevant here shall be the sole agent for each subsidiary in the group duly authorized to act in its own name in all matters relating to the tax_liability for the consolidated_return_year see also form_8023 and the instructions thereto under sec_301_9100-1 the commissioner has discretion to grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-1 defines the term regulatory election as including an election whose due_date is prescribed by a regulation revenue_ruling revenue_procedure notice or announcement sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make a regulatory election sec_301_9100-1 sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides extensions of time for making regulatory elections that do not meet the requirements of sec_301_9100-2 requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-3 in this case the time for filing the election is fixed by the regulations ie sec_1 d therefore the commissioner has discretionary authority under sec_301_9100-1 to grant an extension of time for parent as the common parent of the consolidated_group that includes sub x to file the election provided parent shows that sub x acted reasonably and in good_faith the requirements of sec_301_9100-1 and sec_301_9100-3 are satisfied and granting relief will not prejudice the interests of the government information affidavits and representations submitted by parent parent officials outside cpa and authorized representative and other authorized representative explain the circumstances that resulted in the failure to timely file the valid election plr-119739-99 the information establishes that the request for relief was initiated before the failure to make the regulatory election was discovered by the internal_revenue_service that parent reasonably relied on a qualified_tax professional and that the interests of the government will not be prejudiced if relief is granted see sec_301_9100-3 and v based on the facts and information submitted including the representations made we conclude that parent and sub x acted reasonably and in good_faith the requirements of sec_301_9100-1 and sec_301_9100-3 are satisfied and granting relief will not prejudice the interests of the government accordingly an extension of time is granted under sec_301_9100-1 until days from the date_of_issuance of this letter for parent as the common parent of the consolidated_group that includes sub x to file the election with respect to the acquisition of target and target’s subs the above extension of time is conditioned on the taxpayers' tax_liability if any being not lower in the aggregate for all years to which the election applies than it would have been if the election had been timely made talking into account the time_value_of_money no opinion is expressed as to the taxpayers' tax_liability for the years involved a determination thereof will be made by the district director's office upon audit of the federal_income_tax returns involved further no opinion is expressed as to the federal_income_tax effect if any if it is determined that the taxpayers' liability is lower sec_301_9100-3 parent as common parent of the consolidated_group that includes sub x should file the election in accordance with sec_1_338-1 that is a new election on form_8023 must be executed on or after the date of this letter which grants an extension and filed in accordance with the instructions on the election form together with any information that is required to be attached to the election form a copy of this letter should be attached to the election form parent must amend its consolidated_return for its first taxable_year following the acquisitions to attach a copy of this letter and the election form and any information required therewith and to show that the acquisitions were reported as sec_338 transactions also parent must file final returns for target and target’s subs if and as applicable reporting the acquisitions as sec_338 transactions and attach thereto a copy of this letter and the election form see sec_1_338-1 and g and announcement 1998_1_cb_282 no opinion is expressed as to whether the acquisition of the stock of target or target’s subs qualifies as a qualified_stock_purchase whether the acquisition of the stock of target or target’s subs qualifies for sec_338 treatment or if the acquisition of the stock of target and or target’s subs qualifies for sec_338 treatment as to the amount of gain_or_loss recognized if any by any of target or target’s subs on the deemed asset sales further no opinion is expressed as to the validity of any elections to be treated as disregarded entities for united_states income_tax purposes plr-119739-99 in addition no opinion is expressed as to the tax effects or consequences of filing the election late under the provisions of any other section of the code and regulations or as to the tax treatment of any conditions existing at the time of or tax effects or consequences resulting from filing the election late that are not specifically set forth in the above ruling for purposes of granting relief under sec_301_9100-1 we relied on certain statements and representations made by the taxpayer its employees and representatives however the district_director should verify all essential facts in addition notwithstanding that an extension is granted under sec_301_9100-1 to file the election penalties and interest that would otherwise be applicable if any continue to apply this letter is directed only to the taxpayer s who requested it sec_6110 provides that it may not be used or cited as precedent a copy of this letter is being sent to parent pursuant to the power_of_attorney on file in this office sincerely yours by philip j levine assistant chief_counsel corporate


internal_revenue_service number release date index numbers ------------------------------------------------- ------------------------ ----------------- ------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ----------------- id no ---------------- telephone number -------------------- refer reply to cc psi b01 plr-150061-13 date date legend x ----------------------- --------------------------------------------------- a -------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------- ----------------------------------------------------- -------- date1 year state ----------------------- ------ ------------ dear ------------- this is in response to a letter dated date submitted on behalf of x requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations to file an election under sec_754 of the internal_revenue_code facts according to the information submitted x was formed as a general_partnership under the laws of state on date1 a a partner of x died x is treated as a partnership for plr-150061-13 federal tax purposes x relied on its tax advisor to make a timely sec_754 election for year however the tax advisor inadvertently failed to timely make an election under sec_754 with x’s return for its taxable_year ending in year x represents that it relied on its tax advisor for tax_advice x further represents that it has acted reasonably and in good_faith that granting relief will not prejudice the interests of the government and that it is not using hindsight in making the election x further represents that is has filed returns for year and all subsequent years consistent with the election law and analysis sec_754 provides that a partnership may elect to adjust the basis of partnership property when there is a distribution_of_property or a transfer of a partnership_interest an election under sec_754 applies with respect to all distributions of property by the partnership and to all transfers of interests in the partnership during the taxable_year with respect to which the election was filed and all subsequent taxable years sec_1_754-1 of the income_tax regulations provides that an election under sec_754 to adjust the basis of partnership property under sec_734 and sec_743 with respect to a distribution_of_property to a partner or a transfer of an interest in a partnership must be made in a written_statement filed with the partnership return for the taxable_year during which the distribution or transfer occurs for the election to be valid the return must be filed not later than the time prescribed by sec_1 e including extensions for filing the return for such taxable_year under sec_301_9100-1 the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i section b defines the term regulatory election as including an election whose due_date is prescribed by a regulation published in the federal_register sec_301_9100-1 through provide the standards that the commissioner will use to determine whether to grant an extension of time to make an election sec_301_9100-1 sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides rules for requesting extensions of time for regulatory elections that do not meet the requirements of sec_301_9100-2 requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government section a conclusion plr-150061-13 based solely on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-1 and sec_301_9100-3 have been satisfied as a result x is granted an extension of time of one hundred-twenty days from the date of this letter to make a sec_754 election for year the election should be made in a written_statement filed with the applicable service_center for association with x’s tax_return a copy of this letter should be attached to the statement filed except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent pursuant to the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely laura c fields laura c fields senior technician reviewer branch office of the associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes cc


internal_revenue_service number release date index number ------------------------------------------------- --------------------------------------------- ------------------------------------------------------------ ------- ------------------------------------------------- -------------------------------- - department of the treasury washington dc third party communication none date of communication not applicable_person to contact -------------------------- id no ------------- telephone number --------------------- refer reply to cc psi b02 plr-124579-05 date january trust ----------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------- a b ------------------------ -------------------------- -------------------------- state ------------- court --------------------------------------------------------------------------------------------- d1 d2 d3 ---------------------- ---------------- -------------------------- ---- ------- year x dear ----------------- by its authorized representative requesting certain rulings under sec_643 of the internal_revenue_code b created a revocable_trust the terms of which provide that upon b’s death certain the information submitted states that b died on d1 survived by b’s spouse a this letter responds to a letter dated date submitted on behalf of trust plr-124579-05 assets shall be transferred to a marital trust trust and a survivor’s trust the terms of trust provide that all of the net_income of trust is distributable to or for the benefit of a in monthly or other convenient installments but no less often than annually during a’s lifetime the special trustee of trust has a power subject_to certain limitations set forth in trust to direct distributions of principal to or for the benefit of a as deemed necessary for a’s support health and comfort with respect to tax elections trust provides that the trustee shall have the power to take any_action and to make any election to minimize the tax_liabilities of trust and trust’s beneficiaries and except as otherwise expressly provided shall allocate the benefits among the various beneficiaries make adjustments in the rights of any beneficiaries or between the income and principal accounts to compensate for the consequences of any_tax election or any investment or administrative decision that the trustee shall determine has had the effect of directly or indirectly preferring one beneficiary or group of beneficiaries over another with respect to principal and income trust provides that matters relating to the rights of beneficiaries among themselves as to principal and income shall be governed by the provisions of the revised principal and income act from time to time existing in the event the revised principal and income act shall contain no provision concerning a particular item the trustee shall have the power to determine what is principal or income and apportion and allocate in its reasonable discretion receipts and expenses as between these accounts trust provides that state law shall govern the validity and construction of trust and all rights thereunder except as to rights title and interest_in_real_property held in trust state’s principal and income act does not define income by reference to a unitrust or similar amount the act does allow a trustee to make adjustments between principal and income under certain conditions court issued an order effective d2 in conjunction with an agreement among a the trustee of trust and the special trustee of trust which in relevant part directs the trustee and special trustee collectively the trustees to pay a an amount equal to a x annual return on all of the combined equity investments of trust and the survivor’s trust or the actual net_income derived from those equity investments whichever is greater together with the net_income derived from all other assets of trust and the survivor’s trust as used in the order the term equity investments means publicly traded stocks and other equity securities in all taxable years since the effective date of the court order the x annual return amount the percentage amount of the equity investments of trust and the survivor’s trust has exceeded the actual net_income derived from the equity investments therefore in each year the trustees have been required to distribute an amount equal to the actual net_income of the equity investments and other assets of trust and the survivor’s trust and an amount the additional_amount necessary to a and the trustees have reached a settlement of the issues raised in a’s petition the trustees have not included any portion of the net capital_gains realized on on d3 a filed a petition with court seeking to compel the trustees to distribute plr-124579-05 comply with the court order in order to pay the additional_amount the trustees have sold some of trust’s equity investments realizing net capital_gains the sale of the equity investments in trust’s distributable_net_income dni for any taxable_year all net capital_gains have been reported on trust’s federal_income_tax returns in each taxable_year the trustees reduced the additional_amount actually paid to a by a sum estimated by the trustees as equal to the amount of additional income_tax payable by trust because of the sale of the equity investments necessary to obtain the cash to pay the additional_amount in its books_and_records trust allocated to principal all net capital_gains attributable to the sales of the equity investments the additional_amount without reduction for capital_gains taxes paid or payable by trust and to recover all amounts previously withheld from the additional_amounts payable to a to account for capital_gains taxes paid_by trust under the settlement beginning in year the trustees would a cease from withholding from the additional_amount distributions to a any sums to account for capital_gains taxes paid_by trust b make a one-time lump-sum_distribution to a of a portion of those amounts previously withheld from distribution to reflect capital_gains taxes paid_by trust and c exclude all net capital_gains from dni of trust on trust’s federal_income_tax returns in the year of the lump-sum_distribution and all later taxable years of trust the sale_or_exchange of capital assets shall be excluded from dni to the extent that such gains are allocated to corpus and are not a paid credited or required to be distributed to any beneficiary during the taxable_year or b paid permanently set_aside or to be used for the purposes specified in sec_642 losses from the sale_or_exchange of capital assets shall be excluded except to the extent such losses are taken into account in determining the amount of gains from the sale_or_exchange of capital assets which are paid credited or required to be distributed to any beneficiary during the taxable_year the exclusion under sec_1202 shall not be taken into account except as provided in sec_1_643_a_-6 and sec_1_643_a_-3 gains from the sale_or_exchange of capital assets are ordinarily excluded from dni and are not ordinarily considered as paid credited or required to be distributed to any beneficiary assets are included in dni to the extent they are pursuant to the terms of the governing instrument and applicable local law or pursuant to a reasonable and impartial exercise of discretion by the fiduciary in accordance with a power granted to the fiduciary by sec_643 provides that for purposes of part i of subchapter_j gains from sec_1_643_a_-3 provides that gains from the sale_or_exchange of capital sec_1_643_a_-3 of the income_tax regulations provides that in general plr-124579-05 applicable local law or by the governing instrument if not prohibited by applicable local law allocated to income but if income under the state statute is defined as or consists of a unitrust_amount a discretionary power to allocate gains to income must also be exercised consistently and the amount so allocated may not be greater than the excess of the unitrust_amount over the amount of dni determined without regard to sec_1_643_a_-3 allocated to corpus but treated consistently by the fiduciary on the trust’s books records and tax returns as part of a distribution to a beneficiary or allocated to corpus but actually distributed to the beneficiary or utilized by the fiduciary in determining the amount that is distributed or required to be distributed to a beneficiary exclusion of all of trust’s capital_gains from dni in the year for which the lump-sum_distribution is made will be considered a reasonable allocation under sec_643 and sec_1_643_a_-3 in future taxable years of trust the exclusion of capital_gains from dni will also be considered a reasonable allocation under sec_643 and sec_1 a - b trustees must consistently follow the practice of excluding all of trust’s capital_gains from dni based solely on the facts and representations submitted we conclude that the except as specifically ruled above we express no opinion concerning the federal tax consequences of the transactions described above under any other provisions of the code this ruling is directed only to the taxpayer that requested it sec_6110 provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file a copy of this letter is being sent to trust’s authorized representative sincerely j thomas hines chief branch enclosures copy of this letter copy for sec_6110 office of the associate chief_counsel passthroughs special industries