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 b03 plr-124817-09 date november x --------------------------------------------------------------------------------------------------- ----------------------- legend country ---------------------- date ------------------ dear ------------ this letter responds to a letter dated date submitted on behalf of x by x’s authorized representative requesting a ruling under sec_301_9100-1 and sec_301_9100-3 of the procedure and administration regulations that x be granted an extension of time to file an election to be treated as an association_taxable_as_a_corporation for federal tax purposes under sec_301_7701-3 facts according to the information submitted x was formed under the laws of country on date x represents that it intended to make an election to be an association_taxable_as_a_corporation effective date however x inadvertently failed to timely file a form_8832 entity classification election law and analysis plr-124817-09 sec_301_7701-3 provides in part that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes as provided in sec_301_7701-3 an eligible_entity with at least two members can elect to be classified as either an association and thus a corporation under sec_301_7701-2 or a partnership sec_301_7701-3 provides that except as provided in sec_301 b unless the entity elects otherwise a foreign eligible_entity is a a partnership if it has two or more members and at least one member does not have limited_liability b an association if all members have limited_liability or c disregarded as an entity separate from its owner if it has a single owner that does not have limited_liability sec_301_7701-3 provides that for purposes of sec_301_7701-3 a member of a foreign eligible_entity has limited_liability if the member has no personal liability for the debts of or claims against the entity by reason of being a member sec_301_7701-3 provides that an eligible_entity may elect to be classified other than as provided under sec_301_7701-3 or to change its classification by filing form_8832 with the service_center designated on form_8832 sec_301_7701-3 provides that an election made under sec_301 c i will be effective on the date specified by the entity on form_8832 or on the date filed if no such date is specified on the election form the effective date specified on form_8832 can not be more than days prior to the date on which the election is filed and can not be more than months after the date on which the election is filed if an election specifies an effective date more than days prior to the date on which the election is filed it will be effective days prior to the date it was filed sec_301_9100-1 provides that the commissioner has discretion to grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 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 code except subtitles e g h and i sec_301_9100-1 defines a regulatory election to include an election whose due_date is prescribed by a regulation published in the federal_register sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides extensions of time for making elections that do not meet the requirements of sec_301_9100-2 sec_301_9100-3 provides that requests for relief subject_to sec_301_9100-3 will be granted when the taxpayer provides the evidence including affidavits described in sec_301_9100-3 to establish to the satisfaction of the commissioner that the plr-124817-09 taxpayer acted reasonably and in good_faith and the grant of relief will not prejudice the interests of the government conclusion based solely on the facts submitted and the representations made we conclude that x has satisfied the requirements of sec_301_9100-1 and sec_301_9100-3 accordingly x is granted an extension of time of sixty days from the date of this letter to elect to be treated as an association_taxable_as_a_corporation for federal tax purposes effective date the election should be made by filing a properly executed form_8832 with the appropriate service_center a copy of this letter should be attached to the form_8832 a copy is enclosed for that purpose 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 of the internal_revenue_code provides that it may not be used or cited as precedent in accordance with a power_of_attorney on file with this office we are sending a copy of this letter to your authorized representative the ruling contained in this letter is based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the ruling_request it is subject_to verification on examination sincerely s curtis g wilson associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes cc


tax_exempt_and_government_entities_division release number release date date date uil code department of the treasury internal_revenue_service washington d c contact person identification_number form required to be filed tax years dear this is our final_determination that you do not qualify for exemption from federal_income_tax as an organization described in internal_revenue_code sec_501 recently we sent you a letter in response to your application that proposed an adverse determination the letter explained the facts law and rationale and gave you days to file a protest since we did not receive a protest within the requisite days the proposed adverse determination is now final because you do not qualify for exemption as an organization described in code sec_501 donors may not deduct contributions to you under code sec_170 you must file federal_income_tax returns on the form and for the years listed above within days of this letter unless you request an extension of time to file and do not send them to this office failure_to_file the returns timely may result in a penalty file the returns in accordance with their instructions we will make this letter and our proposed adverse determination_letter available for public inspection under code sec_6110 after deleting certain identifying information please read the enclosed notice notice of intention to disclose and review the two attached letters that show our proposed deletions if you disagree with these deletions follow the instructions in notice if you agree with our deletions you do not need to take any further action if you have any questions about this letter please contact the person whose name and telephone number are shown in the heading of this letter federal_income_tax status and responsibilities please contact irs customer service pincite-829-1040 or the irs customer service number for businesses the irs customer service number for peopie with hearing impairments is if you have any questions about your sincerely robert choi director exempt_organizations rulings agreements enclosures notice redacted proposed adverse determination_letter redacted final adverse determination_letter department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division date date uil code legend date a date c d dear contact person identification_number contact number fax number employer_identification_number we have considered your application_for recognition of exemption from federal_income_tax under internal_revenue_code code sec_501 based on the information provided we have concluded that you do not qualify for exemption under these code sections the basis for our conclusion is set forth below on date a you were incorporated as a nonprofit public benefit corporation under the laws of the state of b on date c you filed form_1023 application_for recognition of exemption under sec_501 of the code your purposes as set forth in your articles of incorporation are to assist public hospital districts and nonprofit_corporations that operate critical access hospitals in the state of b to work collaboratively to improve the effectiveness quality performance safety timeliness and accessibility of their health care services your membership is available to any hospital that is owned or operated by a public hospital district in western b has been designated by the centers for medicaid and medicare services as a critical access hospital and has been approved for membership by your members and board_of directors currently your membership consists of nine public hospital districts each of your members appoints a director to your board_of directors you state that you will allocate your annual net_earnings to each of your members based on the percentage of your services that you perform for each member your activities will consist primarily of providing consulting services to your members you state that you will develop and implement a quality assessment performance improvement plan a corporate compliance plan patient satisfaction surveys information system networks and an electronic medical records network for your members you will provide other consulting services to your members involving risk management cardiac care support capability business best practices economic viability and service capacity and corporate and legal compliance for instance you will coach your members to prepare them for the state of b’s d survey you will also assist your members with staff recruitment training and retention you will provide clinical training and education to your members using telehealth telemedicine videoconferencing services you will also provide this clinical training and education to several non-members including other hospitals and health centers in your state your revenues will be derived primarily from government grants and membership fees which include new member assessments and annual dues law sec_501 of the code provides that an organization shall be treated as organized and operated exclusively for charitable purposes if such organization is organized and operated solely-- a to perform on a centralized basis one or more of the following services which if performed on its own behalf by a c hospital would constitute activities in exercising or performing the purpose or function constituting the basis for its exemption data processing purchasing including the purchasing of insurance on a group basis warehousing billing and collection food clinical industrial engineering laboratory printing communications record center and personnel including selection testing training and education of personnel services and b to perform such services solely for two or more hospitals each of which is- i a 501_c_3_organization ii a constituent part of a 501_c_3_organization and which if organized and operated as a separate_entity would constitute a 501_c_3_organization or iii owned and operated by the united_states a state the district of columbia or a possession_of_the_united_states or a political_subdivision or an agency_or_instrumentality of any of the foregoing such organization is organized and operated on a cooperative basis and allocates or pays within months after the close of its taxable_year all net_earnings to patrons on the basis of services performed for them and if such organization has capital stock all of such stock outstanding is owned by its patrons sec_1_501_e_-1 of the regulations provides that sec_501 of the code is the exclusive and controlling section under which a cooperative hospital_service_organization can qualify as a charitable_organization under sec_501 of the code in order to qualify for tax exempt status a cooperative hospital_service_organization must- be organized and operated on a cooperative basis perform on a centralized basis only one or more specifically enumerated services which if performed directly by a tax exempt hospital would constitute activities in the exercise or performance of the purpose or function constituting the basis for its exemption and perform such service or services solely for two or more patron-hospitals as described in sec_1_501_e_-1 sec_1_501_e_-1 of the regulations provides that an organization does not meet the requirements of sec_501 of the code if in addition to performing services for c patron-hospitals the organization performs any service for any other organization in 450_us_1 the supreme court held that sec_501 of the code was the exclusive and controlling section by which a cooperative hospital_service_organization could obtain federal tax exemption an organization formed to operate a laundry service for member nonprofit hospitals was held not entitled to exemption because laundry service is not a permitted service under sec_501 rationale a cooperative hospital_service_organization that provides services for more than one tax- exempt hospital may qualify for federal tax exemption under sec_501 of the code if it meets the requirements of sec_501 sec_501 is the exclusive means by which a cooperative hospital_service_organization may qualify for tax exemption see sec_1 e - a of the regulations and hcsc-laundry supra the exemption applies only to hospital service organizations that provides the services specifically enumerated in the statute and the regulations and that provides such services exclusively to tax-exempt hospitals see sec_1_501_e_-1 and sec_1_501_e_-1 of the regulations thus a hospital_service_organization that either provides services other than those specifically enumerated in sec_501 of the code or that provides such services to any beneficiary other than a tax-exempt hospital does not qualify for exemption you provide to your tax-exempt hospital members some of the types of services enumerated under sec_501 of the code including communications personnel and clinical services however the consulting services you provide to your members exceed the scope of permissible services enumerated in sec_501 for instance your consulting activities involving risk management corporate and legal compliance business best practices and economic viability and service capacity are not consistent with sec_501 because you provide services other than those specifically enumerated in sec_501 you are not organized and operated exclusively for charitable purposes under sec_501 further sec_1_501_e_-1 of the regulations provides that an organization does not meet the requirements of sec_501 of the code if in addition to performing services for it sec_501 patron-hospitals the organization performs any service for any other organization because you will be providing telehealth telemedicine videoconferencing services to several hospitals and health centers other than your members you are not organized and operated exclusively for charitable purposes under sec_501 accordingly contributions to you are not deductible under sec_170 of the code and you must file federal_income_tax returns you have the right to file a protest if you believe this determination is incorrect to protest you must submit a statement of your views and fully explain your reasoning you must submit the statement signed by one of your officers within days from the date of this letter we will consider your statement and decide if the information affects our determination your protest statement should be accompanied by the following declaration under penalties of perjury declare that have examined this protest statement including accompanying documents and to the best of my knowledge and belief the statement contains all the relevant facts and such facts are true correct and complete you also have a right to request a conference to discuss your protest this request should be made when you file your protest statement an attorney certified_public_accountant or an individual enrolled to practice before the internal_revenue_service may represent you if you want representation during the conference procedures you must file a proper power_of_attorney form_2848 power_of_attorney and declaration of representative if you have not already done so and power_of_attorney ail forms and publications mentioned in this letter can be found at www irs gov forms and publications for more information about representation see publication practice_before_the_irs if you do not file a protest within days you will not be able to file a suit for declaratory_judgment in court because the internal_revenue_service irs will consider the failure to protest as a failure to exhaust available administrative remedies code sec_7428 provides in part that a declaratory_judgment or decree shall not be issued in any proceeding unless the tax_court the united_states court of federal claims or the district_court of the united_states for the district of columbia determines that the organization involved has exhausted all of the administrative remedies available to it within the irs if you do not intend to protest this determination you do not need to take any further action letter that letter will provide information about filing tax returns and other matters if we do not hear from you within days we will issue a final adverse determination please send your protest statement form_2848 and any supporting documents to this address internal_revenue_service te_ge se t eo ra t constitution ave n w pe-3q2 washington dc you may also fax your statement to the person whose name and fax number are shown in the heading of this letter heading of this letter to confirm that he received your fax if you fax your statement please call the person identified in the if you have any questions please contact the person whose name and telephone number are shown in the heading of this letter sincerely robert choi director exempt_organizations rulings agreements


department of the treasury internal_revenue_service washington d c date number release date uilc tl-n-1188-99 cc psi br9 internal_revenue_service national_office field_service_advice memorandum for illinois district_counsel from associate chief_counsel passthroughs special industries cc psi subject sec_708 this field_service_advice responds to your memorandum dated date field_service_advice is not binding on examination or appeals and is not a final case determination this document is not to be cited as precedent disclosure statement field_service_advice is chief_counsel_advice and is open to public inspection pursuant to the provisions of sec_6110 the provisions of sec_6110 require the service to remove taxpayer identifying information and provide the taxpayer with notice of intention to disclose before it is made available for public inspection sec_6110 and i sec_6110 also authorizes the service to delete information from field_service_advice that is protected from disclosure under u s c sec_552 b and c before the document is provided to the taxpayer with notice of intention to disclose only the national_office function issuing the field_service_advice is authorized to make such deletions and to make the redacted document available for public inspection accordingly the examination appeals or counsel recipient of this document may not provide a copy of this unredacted document to the taxpayer or their representative the recipient of this document may share this unredacted document only with those persons whose official tax_administration duties with respect to the case and the issues discussed in the document require inspection or disclosure of the field_service_advice legend t a b c d e f g h j l n p s u v x y z aa bb cc dd ee ff gg hh jj region country region country date date date date date date date date date date date date date date date date date date period period period period publication publication publication dollar_figureamount dollar_figureamount dollar_figureamount amount amount amount amount amount amount dollar_figureamount dollar_figureamount dollar_figureamount dollar_figureamount dollar_figureamount dollar_figureamount dollar_figureamount foreign_currency a foreign_currency b foreign_currency a foreign_currency a foreign_currency a foreign_currency a issues whether t and its related entities may deduct a foreign_currency_loss under sec_988 that does not reflect movements in exchange rates but rather the purchase_price of stock whether t who purchased highly appreciated stock may use sec_708 and sec_732 to generate a significant tax_benefit by engaging in the following tax_avoidance transaction t arranged to have the stock and a cost_basis liquid asset put into a foreign_partnership t purchased the partnership t claimed that the deemed liquidation and basis allocation rules in sec_708 and sec_732 respectively thereby increased the adjusted_basis of the liquid asset significantly above its fair_market_value and t sells the liquid asset and recognizes a large loss conclusion the transaction should be recharacterized in accordance with its economic_substance and t’s loss should be totally disallowed under sec_1_988-2 moreover t should be required to take into account foreign_currency_gain in the aggregate of approximately dollar_figureamount that s realized upon disposition of the foreign_currency a no t cannot increase the adjusted_basis of the liquid asset because the rules in sec_708 and sec_732 do not apply to the transaction the foreign_partnership t purchased is not a partnership for federal tax purposes because it fails the definition of a partnership and because it lacks economic_substance even if the foreign_partnership is a partnership for federal tax purposes t cannot increase the basis of the foreign_currency under sec_732 because the purchase of the foreign_currency by the foreign_partnership is a sham_transaction that has no effect for federal tax purposes and because the foreign_currency is not an asset of the foreign_partnership facts t is a united_states_corporation it is the largest commercial e in region a is a u s subsidiary of t b is a country corporation unrelated to t or any of its subsidiaries owned principally by u a foreign individual b owned c percent of the stock in d d is a country corporation it is the largest commercial e in country f is a country corporation unrelated to t or any of its subsidiaries owned principally by u the remaining stock of d was owned by f in date t intended to expand its operations into region as part of such expansion t sought to acquire a controlling_interest in d from u who indirectly owned d under the initial purchase agreement dated date b was to sell g percent of the voting_stock in d to a subsidiary of t for foreign_currency b equivalent of dollar_figureamount the sale was set to close on date on date t and b entered into an agreement which extended the closing date from date to date the sale date was later extended a second time to date t suggested to u’s counsel that b hold the stock through a partnership n and that t purchase the interests in n rather than t merely having one of its subsidiaries purchase the shares of d directly on date a contributed dollar_figureamount to h a u s_corporation and dollar_figureamount to j a u s_corporation in exchange for all of the stock of each corporation on date h and j formed l a country entity each partner owned percent of l on the same date b and f formed n a country entity b contributed p shares of d voting_stock valued at foreign_currency b amount to n in exchange for a percent interest and f contributed foreign_currency b amount to n in exchange for a interest foreign_currency b is the currency of country f however did not fund its contribution to n until date although the partnership was formed on date after its formation n owned g percent of d also on date the sale of d was restructured t b j l f and n entered into an amendment to the date agreement f was to sell its interest in n to j for foreign_currency b amount and b was to sell its interest in n to l for foreign_currency b amount on date d sold v percent of its stock to the public in connection with the public offering subsequent to the signing of the date agreement d declared a dividend the first portion to be paid on date and the second portion to be paid on date the date agreement allowed b to retain approximately the foreign_currency b equivalent of dollar_figureamount of the dividend ie its portion of the dividend paid on date using this dividend and the cash contributed by f n acquired foreign_currency a on date one date following date for foreign_currency b amount on date foreign_currency a was transferred to the n bank account at country bank corporation on date three days following date f and b sold their respective interests in n to j and l n became s on date approximately months after date s withdrew foreign_currency a from its account and sold them it claimed a foreign exchange loss on the sale in the approximate amount of dollar_figureamount on date approximately months after date s withdrew foreign_currency from its account and sold them it claimed a foreign exchange loss on the sale in the amount of dollar_figureamount the claimed losses were premised on n’s reallocation of inside_basis in fact although the fair_market_value of the foreign_currency a constituted only x percent a minute percent of the fair_market_value of the assets of the partnership as a result of n’s reallocation of inside_basis y percent a very large percent of t’s basis in the partnership was allocated to the foreign_currency a economically s realized a gain of approximately dollar_figureamount on the two sales of the foreign_currency a taxpayer asserts that converting foreign_currency b to a less volatile foreign_currency like foreign_currency a is in accordance with standard business practice in country although the declaration of the dividend occurred subsequent to the date agreement u had previously notified t of its intention to have d pay the dividend generally non-functional currency is treated as property see sec_1_988-2 b f and n do not have eins and have never filed a united_states income_tax return they are foreign entities with no united_states reporting requirements s applied for an ein and filed a partnership return for date and date for purposes of this assistance we assume that during the relevant taxable_year date s constituted a qualified_business_unit qbu under sec_989 of the code and had a foreign_currency b functional_currency under the rules of sec_985 t claims a variety of business purposes for the arrangement of the transaction among them t asserts that the sale of d shares was structured as a sale of a partnership which held the shares n for various reasons relating to its and u’s country situations in regard to t’s tax planning t asserts that a publicly traded country corporation which d was is required to distribute at least z percent of its earnings as dividends each year t claims that it decided to hold the d shares through two country entities to ameliorate the effects of an aa percent withholding_tax on dividends distributed to non-country shareholders by holding the d shares through two country entities and having the higher_tier_entity borrow a part of the purchase_price from country the interest_paid on the loans would be deductible from the dividend for purposes of the withholding_tax t further asserts that the partnership structure also benefitted u d had already declared a dividend of approximately percent of its date15 earnings the second installment of which had not yet been paid in an effort to resolve a controversy over the purchase_price of the d shares t noted that under country law if the dividend is paid to a partnership the partners will receive increased basis in their partnership interests for the dividend as long as the dividend is retained by the partnership accordingly by a partnership holding the g percent of d shares which u intended to sell and the partnership receiving the dividend u or b his wholly owned corporation would reduce its substantial capital_gains on the sale of the d shares t claims that it originally had planned to finance the purchase of the d shares through borrowing from country banks in order to reduce the high withholding_tax burden on the dividends it expected to receive on the d shares in fact t’s upper_tier_partnership l borrowed the foreign_currency b equivalent of dollar_figureamount of the purchase_price from country banks t claims that circumstances changed d was not as profitable as expected and the amount of the dividends was insufficient to require their being sheltered with interest payments on otherwise unattractive debt accordingly in date l retired the foreign_currency b equivalent of dollar_figureamount of the debt the debt was retired in part with the foreign_currency a which were converted to foreign_currency b and distributed by s to l the remainder of the proceeds used to retire the debt dollar_figureamount were contributed by a the domestic parent of h and j through h and j to l the remainder of the foreign_currency a were converted by s to foreign_currency b in date and used for its current operating_expenses law and analysi sec_1 sec_988 sections which were enacted as part of the tax_reform_act_of_1986 set forth a comprehensive set of rules for the treatment of foreign_currency_transactions sec_988 provides that foreign_currency_gain_or_loss attributable to a sec_988 transaction is computed separately and treated as ordinary_income or loss foreign_currency_gain on a sec_988 transaction is generally defined as the gain on the transaction to the extent such gain does not exceed gain realized by reason of changes in exchange rates on or after the booking_date and before the payment_date sec_988 foreign_currency_loss is similarly defined in sec_988 in this manner congress intended that only gain_or_loss to the extent it is realized by reason of a change in exchange rates between the date the asset or liability is taken into account for tax purposes and the date it is paid or otherwise_disposed_of will be treated as foreign_currency_gain_or_loss s rep no 99th cong 2d sess in addition any gain_or_loss from the disposition of nonfunctional_currency is treated as foreign_currency_gain_or_loss under the assumption that any gain_or_loss realized on the disposition of nonfunctional_currency must be attributable to the fluctuation in the foreign exchange rates between the purchase and sale of the currency sec_988 this is confirmed by committee reports describing the principles of sec_988 prior to its amendment by the technical_and_miscellaneous_revenue_act_of_1988 tamra tamra did not change sec_988 with regard to issues implicated in this case thus the house ways_and_means_committee report to the miscellaneous revenue act of stated that i n the case of any disposition of nonfunctional_currency the relevant period for measuring rate changes is the time between acquisition and disposition of the currency h_r rep no 100th cong 2d sess see also s rep no 100th cong 2d sess containing identical language the legislative_history of sec_985 - suggests a consistent concern about tax_motivated_transactions the senate_finance_committee report accompanying the tax_reform_act_of_1986 stated that one of the two reasons sec_985 - were enacted was that prior_law provided opportunities for tax_motivated_transactions s rep no 99th cong 2d sess accordingly in enacting sec_985 - congress granted broad authority for the service to promulgate regulations as may be necessary or appropriate to carry out the purposes of sec_985 - sec_989 the legislative_history to the tamra in discussing the law prior to the enactment of tamra stated that t he secretary has general authority to provide the regulations necessary or appropriate to carry out the purposes of new subpart j for example the secretary may prescribe regulations appropriately recharacterizing transactions to harmonize the general realization and recognition provisions of the code with the policies of sec_988 h_r rep no 100th cong 2d sess s rep no 100th cong 2d sess containing identical language in response to congress’s concern about tax_motivated_transactions the service under the authority of sec_989 promulgated sec_1 f which states that if the substance of a transaction differs from its form the commissioner may recharacterize the timing source and character of gains or losses with respect to the transaction in accordance with the substance of the transaction analysis we believe that the transaction at issue should be recharacterized in accordance with its economic_substance and t’s loss totally disallowed under sec_1_988-2 moreover t should be required to take into account foreign_currency_gain in the aggregate amount of approximately dollar_figureamount that s realized upon disposition of the foreign_currency a as stated previously sec_1 f states that i f the substance of a transaction described in sec_1_988-1 differs from its form the timing source and character of gains or losses with respect to such transaction may be recharacterized by the commissioner in accordance with its substance in this case in form the loss results from the sale of foreign_currency a a transaction described in sec_1_988-1 in which the basis exceeded the amount_realized by approximately dollar_figureamount however in substance t purchased the d stock and in order to generate a large tax loss that was not economically present it induced the seller u to package the d stock in a partnership with a relatively small amount of foreign_currency a instead of t purchasing the d stock outright as t and u had previously agreed t purchased the partnership interests instead in this manner t claims that under sec_1_988-2 further provides for example if a taxpayer enters into a transaction that it designates a currency swap contract that requires the prepayment of all payments to be made or to be received but not both the commissioner may recharacterize the contract as a loan this example indicates that the authority of the service to recharacterize transactions in accordance with their substance is broad sec_708 there was a technical_termination of the partnership and that under sec_732 t’s basis in the partnership property was allocated in a manner so that t’s cost for the d stock was effectively shifted to the foreign_currency a consequently when it sold the foreign_currency a and claimed its loss it prematurely deducted a large portion of the cost of the d shares an artificial shifting of basis to the foreign_currency a so that the computation of foreign_currency_loss does not reflect economic_substance is manifestly contrary to the intent of congress as set forth above which requires that currency gain_or_loss be computed by reference to movements in exchange rates in this case the claimed loss is so vastly removed from the actual economic_effect of exchange rate fluctuations in the foreign_currency a that occurred gain to s when it sold the foreign_currency a that no reasonable person could claim that the reported loss reflects realistically the movements in exchange rates other factors that support our conclusion are as follows n had no business other than holding the d shares and even assuming that n served a legitimate business function had no need for foreign_currency a the currency of n’s business environment again assuming that n served a legitimate business function was foreign_currency b and not foreign_currency a as n did not have country operations t claims that it was standard business practice in country to hedge the foreign_currency b cash accounts and that n was simply following this standard practice however in the context of the facts of this case this argument rings hollow b and f the partners of n had no economic_interest in causing n to incur the costs of hedging its foreign_currency b cash since b and f had contractually locked in the sales_price for n ie the d stock and the foreign_currency b cash in u s dollars thus b and f had no risk of loss if the foreign_currency b depreciated during the three days between the date that the foreign_currency b was received by n in the form of a dividend and a capital_contribution and the date n was sold because the sales_price of all of n’s assets including the foreign_currency b was fixed in u s dollars on the contract date under the terms of the contract even if the contract contained provisions barring n from wasting its assets given the stability of the country economy and the relatively low rates of inflation set forth below we do not believe that there existed a significant risk that the foreign_currency b cash held by n would depreciate significantly for the three days between receipt and sale moreover the foreign_currency b cash held by n was only x percent of the total assets of n a virtually insignificant amount moreover during the period the country economy was growing at an annual rate of bb percent publication and foreign_currency b also had appreciated in real terms in relation to the u s dollar publication furthermore during period the country government generated fiscal surpluses in each of the years publication finally country inflation rates for period were cc percent dd percent and ee percent respectively publication none of these factors suggests that the country economy was so unstable or that inflation was so great that it would be standard business practice to hedge foreign_currency b cash balances into foreign_currency a accordingly we do not believe that n purchased the foreign_currency a to hedge the risk that the small amount of foreign_currency b cash would depreciate against the u s dollar t and u had no reason other than federal_income_tax avoidance for setting up n and transferring u’s interests in n rather than simply selling the d stock outright t claims that n was formed in order that to reduce b’s country capital_gains_tax on the sale of the d shares yet it is undisputed that t suggested to u to set up d in addition b’s tax savings were dwarfed by t’s dollar_figureamount tax_benefit see 94_tc_738 comparing relative tax savings and alleged profit t also claims that it expected that d would pay out a significant amount of dividends and under country tax law t’s withholding_tax on the dividends would be reduced by holding the d stock using two country tiers even if t anticipated that d would have paid a significant amount of dividends t admits that it could just as easily have purchased the d stock and contributed the stock to its lower tier entities accordingly to reflect the economic_substance of the transaction under sec_1_988-2 the dollar_figureamount loss should be disallowed the basis in the foreign_currency a should be adjusted to reflect solely the actual cost of the foreign_currency a any remaining basis attributed by t to the foreign_currency a should be re-attributed to the d stock and currency gain realized by s from the disposition of the foreign_currency a reflecting actual exchange rate movements must be reported as ordinary_income under sec_988 through the transaction being recharacterized according to its substance of t purchasing the d stock valued at approximately dollar_figureamount and a relatively small amount of foreign_currency a t will be able to recover its basis in the d stock at the point at which t would have recovered its basis under the general realization and recognition provisions of the code ie when t or its related entities sells the stock when it receives distributions in excess of earnings_and_profits or when the stock becomes worthless see h_r rep no 100th cong 2d sess the secretary may prescribe regulations appropriately recharacterizing transactions to harmonize the general realization and recognition provisions of the code with the policies of sec_988 s rep no 100th cong 2d sess containing identical language case development hazards and other considerations n was not a valid partnership a partnership exists for federal_income_tax purposes if the parties in good_faith and acting with a business_purpose intended to join together in the present conduct of the enterprise sec_761 a 337_us_733 asa investerings partnership v commissioner tcmemo_1998_305 aff’d 201_f3d_505 d c cir to be considered partners the parties must really and truly intend to join together for the purpose of carrying on business and sharing in the profits or losses or both 327_us_280 courts examine objective factors in ascertaining the parties' true intent culbertson u s pincite 42_tc_1067 an arrangement intended and structured solely for united_states tax benefits between parties with no common business interests and who would not share profits and losses is not a bona_fide partnership culbertson 337_us_733 see 873_f2d_879 5th cir aff'g tcmemo_1988_72 here b and f held a c and bb percent interest in d respectively at the time t agreed to purchase a g percent interest after the initial sale agreement and while bound by the revised sale agreement they transferred a total of g percent of stock in d to a newly-formed partnership n which was owned percent by b and percent by f n existed for only days and during that time its partners could not have intended to carry on a business because they knew when and for how much the partnership was to be sold thus in the absence of a bona_fide partnership l and j must be treated as having bought the stock and foreign_currency a directly from n’s partners and therefore the basis in the foreign_currency a could not exceed the fair_market_value of the foreign_currency a the basis in the foreign_currency a cannot be stepped-up under sec_732 even if n would be considered a partnership for federal tax purposes the basis of the foreign_currency a it purchased should not have been increased under sec_732 as discussed above n purchased the foreign_currency a solely to provide t with a tax advantage the purchase was devoid of economic_substance and any business_purpose therefore the purchase by n is a sham and without effect for federal tax purposes a transaction must have economic_substance separate and distinct from the economic benefit achieved solely by tax reduction if a taxpayer seeks to claim tax benefits which were not intended by congress by means of transactions that serve no economic purpose other than tax savings the doctrine_of economic_substance is applicable 31_f3d_117 3d cir 861_f2d_494 7th cir aff’g 87_tc_1087 364_f2d_734 2d cir aff’g 44_tc_284 31_tc_33 aff’d 270_f2d_294 3d cir acm partnership v commissioner tcmemo_1997_115 aff’d in part and rev’d in part 157_f3d_231 3d cir whether a transaction has economic_substance is a factual determination 338_us_451 this determination turns on whether the transaction is rationally related to a useful nontax purpose that is plausible in light of the taxpayer’s conduct and useful in light of the taxpayer’s economic situation and intentions the utility of the stated purpose and the rationality of the means chosen to effectuate it must be evaluated in accordance with commercial practices in the relevant industry 89_tc_986 acm partnership supra a rational relationship between purpose and means ordinarily will not be found unless there was a reasonable expectation that the nontax benefits would be at least commensurate with the transaction costs 87_tc_1087 acm partnership supra in determining whether a transaction has economic_substance so as to be respected for tax purposes both the objective economic_substance of the transaction and the subjective business motivation should be evaluated acm partnership f 3d pincite 909_f2d_1360 9th cir the two inquiries are not separate prongs but are interrelated factors used to analyze whether the transaction had sufficient substance apart from its tax consequences to be respected for tax purposes acm partnership f 3d pincite casebeer f 2d pincite 868_f2d_851 6th cir 843_f2d_351 9th cir cert_denied 488_us_824 while the profit potential or economic risk relative to the expected tax_benefit necessary to meet the objective economic_substance test has not been quantified a reasonable prospect or possibility for profit is required see 157_f3d_231 364_f2d_734 2nd cir nominal or de_minimis profit potential does not imbue a transaction with economic_substance 103_tc_29 94_tc_738 with respect to allowing an artificial loss the tax_court stated we do not suggest that a taxpayer refrain from using the tax laws to the taxpayer’s advantage in this case however the taxpayer desired to take advantage of a loss that was not economically inherent in the object of the sale but which the taxpayer created artificially through the manipulation and abuse of the tax laws a taxpayer is not entitled to recognize a phantom loss from a transaction that lacks economic_substance acm partnership v commissioner tcmemo_1997_115 t c m cch aff’d in part and rev’d in part 157_f3d_231 3rd cir it appears that n purchased the foreign_currency a with the prearranged purpose of allowing t to allocate the basis to the foreign_currency a from the stock and a loss upon the sale of the foreign_currency a was therefore realized thus we believe that this is a loss created artificially through manipulation and abuse of sec_708 and sec_732 while taxpayers may choose their form of business they may not do so for the sole purpose of creating a non-economic loss the juxtaposition of the purchase of the foreign_currency a immediately prior to the technical_termination strongly suggests that the purpose behind the purchase was to achieve a phantom loss consequently because we believe that there is no legitimate business_purpose for the purchase of the foreign_currency a prior to t’s purchase of the partnership and that purchase lacked economic_substance therefore t is prohibited from increasing its basis in the foreign_currency a under sec_732 foreign_currency a was always an asset of t alternatively foreign_currency a was an asset of t at all times because n purchased them as t’s agent cf asa investerings tcmemo_1998_305 citing 485_us_340 disregarding two nominal partners in the venture because it found that they were actually the agents of the real party in interest after t had already agreed to purchase g percent of d it discovered the elements necessary for an abusive_tax_shelter in the agreement it therefore requested that b place the g percent interest t was purchasing in n and that n purchase the foreign_currency a for t so that t could create an artificially high basis liquid asset to generate a tax loss n has not shown an independent reason for purchasing the assets because it did so only as an accommodation to t moreover the money used to purchase the foreign_currency a indirectly came from t and not n the majority of the funds used to buy the foreign_currency a came from a dividend from d to n funds that would be t’s in gg days the remaining funds came from f’s capital_contribution a sum returned to f gg days later upon the sale of its interest in n thus n should be deemed to have been t’s agent in the purchase of the foreign_currency a therefore the foreign_currency a were not partnership property subject_to the basis rules of sec_732 upon the technical_termination of n under sec_708 case development hazards and other considerations please call if you have any further questions associate chief_counsel passthroughs special industries by __________________________________ patrick putzi special counsel branch passthroughs special industries


tax_exempt_and_government_entities_division department of the treasury internal_revenue_service washington d c aug - uniform issue list tt re sestep rats legend taxpayer a amount a amount b plan x institution x date date date date case x court y state z dear this is in response to your request dated date as supplemented by a letter dated date in which you request a waiver of the 60-day rollover requirement contained in sec_402 of the internal_revenue_code the code’ the following facts and representations have been submitted under penalty of perjury in support of the ruling requested taxpayer a represents that she retired on disability from her employer on date at that time she applied for retirement_funds with the retirement payer this initial application was lost taxpayer a subsequently reapplied for retirement benefits on or about date taxpayer a received a distribution from plan x totaling amount b of which amount a was eligible to be rolled over into an individual_retirement_account ira amount a was directly page deposited into her bank account these funds remained in that account until date when the taxpayer transferred them into an ira account it has been represented on your behalf that plan x is a plan from which a distribution when made is eligible to be rolled over or directly transferred into an individual_retirement_account ira it has also been represented on your behalf that in case x court y of state z ruled that an individual who received a distribution from plan x eligible to be rolled over into an ira had to be given the option of directly rolling over said distribution into an ira however as indicated in a letter dated date sent to you by a representative of institution x you were not provided with the option of directly placing the eligible portion of your plan x distribution into an ira the letter also indicates that you had been led to believe that said direct_rollover would be accomplished taxpayer a asserts that her failure to accomplish a rollover within the 60-day period prescribed by sec_402 was due to incorrect information provided her by personnel administrators of institution x taxpayer a asserts that she was not told that she had the option of rolling over the lump sum payment directly into an ira and she was not given that option at the time of distribution based on the facts and representations you request a ruling that the internal_revenue_service waive the day rollover requirement contained in sec_402of the code with respect to an amount not to exceed amount a with respect to your ruling_request sec_402 of the code provides that if any portion of the balance_to_the_credit of an employee in a qualified_trust is paid to the employee in an eligible_rollover_distribution and the distributee transfers any portion of the property received in such distribution to an eligible_retirement_plan and in the case of a distribution_of_property other than money the amount so transferred consists of the property distributed then such distribution to the extent transferred shall not be includible in gross_income for the taxable_year in which paid sec_402 states that such rollover must be accomplished within days following the day on which the distributee received the property an individual_retirement_account ira constitutes one form of eligible_retirement_plan sec_402 of the code provides in relevant part that the secretary may waive the 60-day requirement under sec_402 where the failure to waive such requirement would be against equity or good conscience including casualty disaster or other events beyond the reasonable control of the individual subject_to such requirement only distributions that occurred after date are eligible for the waiver under sec_402 of the code sec_401 provides the rules for governing direct transfers of eligible rollover distributions sec_1 a of the income_tax regulations question and answer-15 provides in relevant part that an eligible_rollover_distribution that is paid to an eligible_retirement_plan in a direct_rollover is a distribution and rollover and not a transfer of assets and liabilities revproc_2003_16 ilr b date provides that in determining whether to grant a waiver of the 60-day rollover requirement pursuant to sec_402 of the page code the service will consider all relevant facts and circumstances including errors committed by a financial_institution inability to complete a rollover due to death disability hospitalization incarceration restrictions imposed by a foreign_country or postal error the use of the amount distributed for example in the case of payment by check whether the check was cashed and the time elapsed since the distribution occurred the information presented and documentation submitted by taxpayer a is consistent with her assertion that her failure to accomplish a timely rollover was caused by the misleading and incomplete financial information offered by employees of institution x which prevented her from making a timely rollover therefore pursuant to sec_402 of the code the service hereby waives the 60-day rollover requirement with respect to the distribution of amount a from plan x taxpayer - a’s contributing amount a into an ira on or about date is deemed to have constituted a timely rollover within the meaning of sec_402 of the code provided all the other requirements of code sec_402 were met with respect to said contribution no opinion is expressed as to the tax treatment of the transaction described herein under the provisions of any other section of either the code or regulations which may be applicable thereto this 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 a copy of this letter_ruling is being sent to your authorized representative pursuant to a power_of_attorney on file with the internal_revenue_service if you wish to inquire about this ruling please contact please address all correspondence to se t ep ra t3 _ idf sincerely yours vk boc - rances v sloan manager employee_plans technical group enclosures deleted copy of ruling letter notice of intention to disclose


number release date internal_revenue_service index numbers - ---------------------------------------- --------------------------------------- ------------------------- ------------------------- --------------------- department of the treasury washington dc person to contact ----------------------------------------------------- -------- telephone number -------------------- refer reply to cc psi - plr-100328-06 date date legend x --------------------------------------- --------- ----------- ----- ---------- ------------------ d1 country dear -------------------- this letter responds to a letter dated date and subsequent correspondence submitted on behalf of x requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations for x to file an election to be treated as a disregarded_entity under the laws of country was acquired by a single owner with limited_liability on d1 x intended to be treated as a disregarded_entity for federal tax purposes effective d1 however x did not timely file a form_8832 entity classification election according to the information submitted all of the interest in x an entity formed sec_301_7701-3 provides that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes as provided in sec_301_7701-3 sec_301_7701-3 provides guidance on the classification of a foreign eligible_entity for federal tax purposes under sec_301_7701-3 except as provided in sec_301 b unless it elects otherwise a foreign eligible_entity is classified as an association if all members have limited_liability sec_301_7701-3 provides that for purposes of sec_301_7701-3 a sec_301_7701-3 provides that an election under sec_301_7701-3 member of a foreign eligible_entity has limited_liability if the member has no personal liability for the debts of or claims against the entity by reason of being a member will be effective on the date specified on form_8832 or on the date filed if no such date is specified on the form the effective date specified on form_8832 cannot be more than days prior to the date the form is filed and cannot be more than months after the date on which the form is filed sec_301_9100-1 provides that the commissioner has discretion to grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the code except subtitles e g h and i sec_301_9100-1 defines a regulatory election to include an election whose due_date is prescribed by a regulation published in the federal_register sec_301_9100-2 provides the rules governing automatic extensions of time for making certain elections sec_301_9100-3 sets forth the standards the commissioner will use to determine whether to grant an extension of time for regulatory elections that do not meet the requirements of sec_301_9100-2 under sec_301_9100-3 a request for relief will be granted when the taxpayer provides evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and granting relief will not prejudice the interests of the government requirements of sec_301_9100-3 have been satisfied as a result x is granted an extension of time of days from the date of this letter to file form_8832 and elect to be treated as a disregarded_entity for federal tax purposes effective d1 a copy of this letter should be attached to the form_8832 based on the facts submitted and representations made we conclude that the except as specifically set forth above no opinion is expressed or implied as to the federal tax consequences of the transaction described above under any other provision of the code sec_6110 provides that it may not be used or cited as precedent this ruling is directed only to the taxpayer on whose behalf it was requested in accordance with the power_of_attorney on file with this office a copy of this sincerely letter is being sent to x’s authorized representative enclosures copy of this letter copy for sec_6110 purposes heather c maloy associate chief_counsel passthroughs and special industries


t c memo united_states tax_court louelia salomon frias and mervyngil salomon petitioners v commissioner of internal revenue respondent docket no filed date elizabeth ann maresca ralph izzo student and scott weiss student for petitioners steven r gallo and rose e gole for respondent memorandum findings_of_fact and opinion marvel chief_judge in a notice_of_deficiency dated date respondent determined an income_tax deficiency of dollar_figure and a penalty under sec_6662 d of dollar_figure for year at issue petitioners while residing in new york timely filed a petition for redetermination the issues for decision are whether petitioners received a taxable deemed_distribution resulting from a reclassification of a loan from mrs frias’ sec_401 plan account are liable for an additional tax under sec_72 and are liable for an accuracy-related_penalty under sec_6662 findings_of_fact some of the facts have been stipulated and are so found the stipulation of facts and the supplemental stipulation of facts are incorporated herein by this reference in mrs frias was employed as the assistant administrator and compliance officer at glen island center for nursing rehabilitation glen island in new rochelle new york at glen island mrs frias was responsible for assisting the nursing home administrator in the day-to-day operations of the 182-bed facility and for the facility’s compliance with federal state and local standards for long-term care facilities in date mrs frias requested and wa sec_1all section references are to the internal_revenue_code code in effect for the year at issue and all rule references are to the tax_court rules_of_practice and procedure unless otherwise indicated all monetary amounts have been rounded to the nearest dollar unless otherwise indicated granted a leave of absence from work at glen island because petitioners were expecting their third child mrs frias used her accrued sick personal and vacation_leave which covered approximately five weeks of her leave the remainder of the leave was unpaid mrs frias began her leave on date and returned to work on date during glen island maintained a sec_401 profit-sharing_plan plan that mutual of america life_insurance co mutual of america administered the plan allowed participants to borrow from their plan accounts mrs frias participated in the plan and on date mrs frias entered into a loan agreement with mutual of america for a loan of dollar_figure from her plan account on the same day mrs frias entered into a loan repayment payroll deduction agreement which was incorporated into the loan agreement and was signed by both mrs frias and a representative from glen island the payroll deduction agreement required glen island to deduct from mrs frias’ after-tax salary in each payroll_period the amounts necessary to make the loan repayment sec_2as this was not the first loan that mrs frias had taken out of her plan account she had prior experience dealing with plan loans 3the employee name on the payroll deduction agreement was louelia f pedrozo the parties have stipulated that mrs frias has used the surnames pedrozo salomon and frias interchangeably on documents and communications regarding the loan and to remit the payments to mutual of america the anticipated biweekly payment was dollar_figure the loan agreement required biweekly payroll deductions to start on the first billing statement beginning after date in the event that a payment was missed the loan agreement allowed mrs frias to pay the delinquent amounts up to the last day of the calendar month following the calendar month that the delinquent payment was due cure period if mrs frias became delinquent and did not pay the delinquent amounts within the cure period then under the loan agreement the entire loan amount would be in default and considered a distribution and mutual of america would be required to report the outstanding amount of the loan as a distribution to her during mrs frias’ leave of absence she received paychecks from glen island on the following dates in the following amounts date dollar_figure date dollar_figure date dollar_figure and date dollar_figure mrs frias received earnings statements with her paychecks that included information about her pay such as what deductions were taken out of her paycheck mrs frias’ first loan payment was due_date however glen island failed to deduct and to remit the loan payments from the amounts paid to mrs frias mrs frias did not know that glen island had failed to withhold loan payments from her paycheck until she was told by a representative from glen island upon her return from her leave further when mrs frias learned of glen island’s failure she immediately made a dollar_figure payment on date mrs frias then instructed glen island to withhold and remit loan payments in the increased amount of dollar_figure each5 through date after date mrs frias continued to make payments of the original loan payment amounts until the loan had been repaid in full on date during the entire time that mrs frias was making payments on the loan glen island withheld and remitted the loan repayments and mutual of america kept the loan on its books and continued billing mrs frias’ account on date mutual of america sent letters to mrs frias and glen island confirming that the loan was repaid in full mutual of america issued mrs frias a form 1099-r distributions from pensions annuities retirement or profit-sharing_plans iras insurance 4there is no evidence in the record to suggest that mrs frias directed glen island not to deduct the loan payments from the compensation she was paid during her leave 5glen island represented to mrs frias that the dollar_figure amount was the maximum amount that could be withheld contracts etc for showing a taxable_distribution of dollar_figure the form 1099-r was available online although mrs frias had access to the website she did not access or review the form 1099-r but the record does not disclose whether she had notice that the form 1099-r had been issued mrs frias did not report a distribution with respect to the loan on petitioners’ federal tax_return on date respondent issued petitioners a notice_of_deficiency for the year at issue in the notice_of_deficiency respondent determined that mrs frias had received a taxable_distribution from her plan account that petitioners were liable for additional tax under sec_72 with respect to that distribution and that petitioners were liable for the accuracy-related_penalty under sec_6662 petitioners timely petitioned the court for redetermination opinion generally the commissioner’s determination_of_a_deficiency is presumed correct and the taxpayer bears the burden of proving otherwise rule a 290_us_111 if however a taxpayer produces credible_evidence with respect to any factual issue relevant to ascertaining the taxpayer’s liability for any_tax imposed by subtitle a or b of the code and satisfies the requirements of sec_7491 the burden_of_proof on any such factual issue shifts to the commissioner sec_7491 petitioners do not contend that sec_7491 applies and they have not introduced evidence to prove they meet the requirements of sec_7491 the burden_of_proof remains on petitioners i deemed_distribution sec_72 provides that any amount taken as a loan from a qualified_employer_plan will generally be treated as a distribution to the participant under sec_72 however a loan will not be treated as a distribution if the loan is manifested in a legally enforceable agreement does not exceed the lesser_of the amounts set forth in sec_72 or ii by its terms is to be repaid within five years and has substantially level amortization over the term of the loan with payments made at least quarterly substantially level amortization requirement sec_1_72_p_-1 q a-3 income_tax regs sec_7491 requires a taxpayer to demonstrate that he or she complied with the requirements under the code to substantiate any item maintained all records required under the code and cooperated with reasonable requests by the secretary for witnesses information documents meetings and interviews see 116_tc_438 although a loan originally may satisfy the sec_72 requirements a deemed_distribution occurs at the first time that the requirements of this section are not satisfied in form or in operation sec_1_72_p_-1 q a-4 a income_tax regs if payments are not made in accordance with the terms applicable to the loan a deemed_distribution occurs as a result of the failure to make such payments id see duncan v commissioner tcmemo_2005_171 molina v commissioner tcmemo_2004_258 the plan_administrator may provide the participant with an opportunity to cure the failure and a deemed_distribution does not occur unless the participant fails to pay the delinquent payment within the cure period sec_1_72_p_-1 q a-10 a income_tax regs see owusu v commissioner tcmemo_2010_186 the parties agree that mrs frias’ loan was not a distribution at the time the loan was made respondent contends that the amount of mrs frias’ loan became a deemed_distribution for when she failed to make her first loan payment which was due on date and did not correct the failure within the cure period thereby causing the loan to violate the substantially level amortization requirement of sec_72 petitioners contend that mrs frias was on a leave of absence without pay starting date and that the substantially level amortization requirement did not apply while she was on leave we therefore must decide under sec_1_72_p_-1 q a-9 a income_tax regs whether mrs frias violated the terms of the loan agreement and whether the loan failed to satisfy the substantially level amortization requirement a substantially level amortization the substantially level amortization requirement under sec_72 requires that payment of principal and interest be made in substantially level amounts over the term of a loan see molina v commissioner tcmemo_2004_ plotkin v commissioner tcmemo_2001_71 estate of gray v commissioner tcmemo_1995_421 sec_1_72_p_-1 q a-10 a income_tax regs provides that ordinarily the failure to make any installment_payment when due7 violates the substantially level amortization requirement however the substantially level amortization requirement is not violated so long as a payment even if delinquent is made within the designated cure period sec_1_72_p_-1 q a-10 a income_tax regs see ryan v commissioner tcmemo_2011_ slip op pincite mrs frias’ first loan payment was due on date but was not made by the due_date under the terms of the loan agreement the cure period for 7payments must be made at least quarterly to satisfy the substantially level amortization requirement sec_72 this payment expired on date mrs frias who returned to work on date did not make her first payment until date because mrs frias failed to make her initial loan payment by the due_date and failed to make the delinquent payment before the cure period expired she defaulted under the loan agreement as a result the outstanding balance of the loan as well as any accrued interest became a deemed_distribution in that was taxable to petitioners see sec_1_72_p_-1 q a-10 b income_tax regs b exceptions to the deemed_distribution rule petitioners contend that mrs frias qualified for an exception to the substantially level amortization requirement because she was considered to be on leave without pay respondent contends that mrs frias received pay for approximately five weeks of her leave of absence and therefore she did not meet the leave without pay exception respondent also contends that applicable regulations do not relieve mrs frias of the contractual obligation to make payments even during a leave of absence under sec_1_72_p_-1 q a-9 a income_tax regs a participant is exempt from the substantially level amortization requirement when he or she is on a bona_fide leave of absence for no longer than a year either without pay or at a rate of pay less than the required_installment payments glen island paid mrs frias compensation_for her accrued sick personal and vacation time during an approximately five-week period of her approved leave from work during that five-week period mrs frias’ paychecks from glen island were for amounts greater than the required_installment payments we find therefore that mrs frias continued to receive compensation payments during the first five weeks of her leave and was required to make installment payments under the loan agreement in august and september petitioners contend that the paychecks mrs frias received during her leave of absence are not considered pay petitioners rely on maletta v bowen no cv wl e d n y date an unpublished federal district_court memorandum and order that held that vacation pay but not sick or personal leave pay is considered wages8 only when earned for the purpose of calculating social_security_benefits for postretirement months where the accrued vacation pay was actually paid petitioners have failed to explain how the term wages in the specific context of calculating social_security_benefits is congruent to the term pay under the applicable sec_72 regulations in short we do wages in this context is a term of art under the social_security act see u s c sec_409 supp iv not find this case persuasive in deciding whether mrs frias was without pay for the purposes of sec_72 petitioners also contend on brief that mrs frias’ use of accrued sick personal and vacation time was not pay for purposes of sec_1_72_p_-1 q a-9 a income_tax regs because the family_and_medical_leave act of fmla allows an employee who is on unpaid leave to use accrued paid vacation sick or personal days for all or part of the fmla leave c f_r sec a the right of an employee during fmla leave to receive payments for leave earned by the employee does not excuse mrs frias’ failure to make loan payments from compensation she received during the first five weeks of her leave even if we were to accept petitioners’ argument about the fmla which we do not the record is devoid of any evidence that mrs frias was actually on or qualified for fmla leave petitioners have failed to convince us that the fmla excused petitioners from the substantially level amortization requirement of 9the regulations under the fmla explain the term substitute means that the paid leave provided by the employer and accrued pursuant to established policies of the employer will run concurrently with the unpaid fmla leave accordingly the employee receives pay pursuant to the employer’s applicable paid leave policy during the period of otherwise unpaid fmla leave c f_r sec a these regulations distinguish between the paid leave provided by the employer and the unpaid fmla leave and acknowledge that the employee receives pay when the employee is paid for accrued leave sec_72 see rule c providing in part that statements made in briefs do not constitute evidence 77_tc_1169 petitioners also contend that if sec_1_72_p_-1 income_tax regs does not apply there was no distribution because all parties to the loan acted as though they agreed to suspend payments the substance of the repayments should be honored over the form that was required or mrs frias corrected the default in accordance with revproc_2008_50 2008_2_cb_464 dollar_figure petitioners’ arguments are without merit if as petitioners contend all parties agreed to suspend payments on mrs frias’ loan such an agreement should have been evidenced by a writing or a qualifying electronic medium see sec_1_72_p_-1 q a-3 b income_tax regs petitioners did not prove that the loan agreement was ever amended as required by sec_1_72_p_-1 q a-3 b income_tax regs moreover petitioners’ argument that the substance of what happened rather than the form of what happened should control ignores the express requirements of the loan agreement and applicable regulations see sec_1_72_p_-1 income_tax regs 10rev proc 2008_2_cb_464 has been superseded however revproc_2008_50 supra applied at the time of the loan we also reject petitioners’ argument that any default was corrected under revproc_2008_50 supra petitioners rely on revproc_2008_50 sec c b vol pincite which allows a plan_sponsor not a plan participant such as mrs frias to correct loans that do not comply with sec_72 the plan_sponsor must then request relief from the irs the record is devoid of any evidence that glen island requested and received approval from the irs as required by revproc_2008_50 supra we therefore must conclude that revproc_2008_50 supra does not relieve petitioners from the substantially level amortization requirement of sec_72 accordingly respondent’s determination is sustaineddollar_figure ii sec_72 additional tax sec_72 imposes a additional tax on early distributions from qualified_retirement_plans sec_72 however sets forth specific exceptions to the general_rule of sec_72 that the additional tax applies petitioners did not argue on brief or at trial that any of the statutory 11loans are generally considered distributions unless taxpayers strictly comply with the code and applicable regulations sec_72 however because mrs frias paid off a loan that no longer was a loan but rather a deemed_distribution the regulations provide that mrs frias has tax basis in any cash repayments to her plan account sec_1_72_p_-1 q a-21 income_tax regs respondent so concedes exceptions applies to them accordingly we sustain respondent’s determination as to the sec_72 additional tax iii sec_6662 penalty sec_6662 and b authorizes the imposition of a penalty on the portion of an underpayment that is attributable to a substantial_understatement_of_income_tax a substantial_understatement_of_income_tax exists if the understatement exceeds the greater of of the tax required to be shown on the return or dollar_figure sec_6662 the term understatement means the excess of the amount of tax required to be shown on the return for the taxable_year over the amount of tax imposed that is shown on the return reduced by any rebate sec_6662 the commissioner bears the burden of production with respect to the taxpayer’s liability for the sec_6662 penalty and must produce sufficient evidence indicating that it is appropriate to impose the penalty see sec_7491 higbee v commissioner t c pincite once the commissioner meets his burden of production the taxpayer must come forward with persuasive evidence that the commissioner’s determination is incorrect or that the taxpayer had reasonable_cause or substantial_authority for the position see higbee v commissioner t c pincite we assume that respondent satisfied his initial burden of production under sec_7491 and focus on the only issue that petitioners raised with respect to the sec_6662 penalty--whether they had reasonable_cause and acted in good_faith within the meaning of sec_6664 petitioners argue they had reasonable_cause because mrs frias did not receive a physical copy of the form 1099-r from mutual of america and had only electronic access to it petitioners also argue that they had reasonable_cause because mrs frias made loan payments when she returned from her leave of absence which were accepted by glen island and mutual of america the accuracy-related_penalty does not apply with respect to any portion of the underpayment for which the taxpayer shows that there was reasonable_cause and that he or she acted in good_faith sec_6664 the decision as to whether a taxpayer acted with reasonable_cause and in good_faith is made on a case-by-case basis taking into account all of the pertinent facts and circumstances sec_1_6664-4 income_tax regs circumstances that may indicate reasonable_cause and good_faith include an honest misunderstanding of fact or law that is reasonable in light of all of the facts and circumstances including the experience knowledge and education of the taxpayer id the most important factor in determining reasonable_cause and good_faith is the extent of the taxpayer’s effort to assess his or her proper tax_liability id we have held that the nonreceipt of an information_return such as a form 1099-r or form_w-2 wage and tax statement does not excuse a taxpayer from his or her duty to report the income shown on the return ashmore v commissioner tcmemo_2016_36 nonreceipt of a form_w-2 du poux v commissioner tcmemo_1994_448 nonreceipt of forms w-2 and 1099-misc specifically we have held that the nonreceipt of an information_return does not constitute reasonable_cause for purposes of a sec_6662 accuracy-related_penalty see deas v commissioner tcmemo_2000_204 holding that nonreceipt of schedule_k-1 did not constitute reasonable_cause for a taxpayer’s failure to report partnership income the fact that mrs frias did not receive a form 1099-r is not enough to constitute reasonable_cause particularly when an electronic form 1099-r was available to her but she failed to access it the reasonable_cause analysis in this case is more complicated however and is not controlled by the existence or availability of the form 1099-r unlike the cases cited above where the taxpayers knew or should have known they had taxable_income by virtue of the fact of either having a wage-paying job or being a partner in a partnership the record supports a finding that mrs frias did not have reason to know that her loan had been treated as a deemed_distribution for glen island had an obligation to withhold the loan repayment amounts from mrs frias’ paychecks and to transmit the amounts to mutual of america glen island failed to meet this obligation mrs frias was on maternity leave and part of her leave period was without pay she reasonably relied on glen island and mutual of america to withhold required loan payments and properly administer her loan account under the circumstances it is understandable that mrs frias assumed her loan repayments were being made to the extent the loan agreement required and her failure to check her earning statements is not fatal to this analysis upon mrs frias’ return to work a representative of glen island informed her that glen island had failed to withhold loan payments from her paychecks mrs frias immediately took steps to correct the problem and with advice from glen island she authorized a one-time payment of dollar_figure followed by several increased payments of dollar_figure each further mutual of america kept the loan on the books continued to bill mrs frias’ account and sent a letter to her in confirming that the loan was repaid in full glen island continued to withhold and remit payments throughout part of all of and part of although mrs frias was aware that a loan from a sec_401 plan account could have tax consequences she had no reason to know that this particular loan had tax consequences considering the advice she had received from her employer and the obligation of her employer to withhold loan payments under the loan agreement nothing in the conduct of her employer and the plan_administrator during warned mrs frias that the loan payment problem had not been properly cured although this is a close case under all of the facts and circumstances we conclude that petitioners had reasonable_cause and acted in good_faith petitioners honestly misunderstood the status of mrs frias’ loan at the end of reasonably relied on glen island and mutual of america regarding the repayment of her loan and had no reason to question the representations of glen island and mutual of america see sec_1_6664-4 income_tax regs we have considered the parties’ remaining arguments and to the extent not discussed above conclude those arguments are irrelevant moot or without merit to reflect the foregoing decision will be entered for respondent as to the deficiency and for petitioners as to the accuracy-related_penalty under sec_6662


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 b1 plr-148178-06 date date ------------ ----------------------- ---------------------------------------------- legend x -------------------------------------------------- country date dear ---------------- of time pursuant to sec_301_9100-3 of the procedure and administration regulations to file an election to treat x as an entity disregarded as separate from its owner for federal tax purposes under sec_301_7701-3 facts this is in response to a letter dated date requesting an extension according to the information submitted x is an entity organized under the laws of country x intended to make an election to be treated as a disregarded_entity effective date as part of a corporate_reorganization however due to a lack of communication among the members of x’s parent corporation’s tax department form_8832 entity classification election was not timely filed law and analysis sec_301_7701-3 provides guidance on the classification of a foreign eligible_entity for federal tax purposes generally unless the entity makes an election to be treated otherwise a foreign eligible_entity is treated as an association taxable as a plr-148178-06 corporation if all members have limited_liability if a foreign eligible_entity has only one owner it may elect to be treated as a disregarded_entity pursuant to the rules in sec_301_7701-3 if a foreign eligible_entity has more than one owner it may elect to be treated as a partnership pursuant to the rules in sec_301_7701-3 sec_301_7701-3 further provides that an entity classification election must be filed on form_8832 entity classification election and can be effective up to days prior to the date the form is filed or up to months after the date on which the form is filed under sec_301_9100-1 the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the code except subtitles e g h and i sec_301_9100-1 defines the term regulatory election as including an election with a deadline prescribed by a regulation published in the federal_register sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make an election sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides extensions of time for making elections that do not meet the requirements of sec_301_9100-2 requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-3 based solely upon the information submitted we conclude that the requirements conclusion of sec_301_9100-1 and sec_301_9100-3 have been satisfied as a result an extension of days from the date of this letter is granted to elect to treat x as a disregarded as an entity separate from its owner for federal tax purposes effective date the entity classification election should be made by filing form_8832 with the appropriate service_center a copy of this letter should be attached to the form_8832 a copy is enclosed for that purpose 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 plr-148178-06 this ruling is directed only to the taxpayer s requesting it sec_6110 of the internal_revenue_code provides that it may not be used or cited as precedent sincerely william p o’shea associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes


internal_revenue_service number release date index numbers department of the treasury washington dc --------------------------------- ------------------------------------------------------------ ------------------ ---------------------------- ----------------------------- ---------------------------------- person to contact ----------------------- id no ------------------- --------------------------------------------------- telephone number ---------------------- refer reply to cc psi b03 - plr-140008-15 date date legend x ------------------------------------------------------------ ----------------------------------- y ------------------------------------------------------------ ------------------------------------------------------------- country state d1 d2 d3 dear ----------------- ---------------------------- ------------ ----------------------------- ------------------------- --------------------- this letter responds to a letter dated date and subsequent correspondence submitted on behalf of x requesting an extension of time under plr-140008-15 sec_301_9100-3 of the procedure and administration regulations to file an election under sec_301_7701-3 to be classified as a partnership for federal tax purposes facts the information submitted discloses that x was formed on d1 under the laws of country initially owned by several individuals including u s citizens x was acquired on d2 by y a state corporation that had common ownership with x it is represented that x was eligible to elect to be classified as a partnership for federal tax purposes prior to its acquisition by y however x failed to timely file form_8832 entity classification election to be classified as a partnership for federal tax purposes effective d3 law and analysis sec_301_7701-3 provides in part that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes as provided in sec_301_7701-3 an eligible_entity with at least two members can elect to be classified as either an association and thus a corporation under sec_301_7701-2 or a partnership and an eligible_entity with a single owner can elect to be classified as an association or to be disregarded as an entity separate from its owner sec_301_7701-3 provides that except as provided in sec_301 b unless the entity elects otherwise a foreign eligible_entity is a a partnership if it has two or more members and at least one member does not have limited_liability b an association if all members have limited_liability or c disregarded as an entity separate from its owner if it has a single owner that does not have limited_liability sec_301_7701-3 provides in part that for purposes of sec_301_7701-3 a member of a foreign eligible_entity has limited_liability if the member has no personal liability for the debts of or claims against the entity by reason of being a member sec_301_7701-3 provides in part that except as provided in sec_301_7701-3 and v an eligible_entity may elect to be classified other than as provided under sec_301_7701-3 or to change its classification by filing form_8832 with the service_center designated on form_8832 sec_301_7701-3 provides in part that an election made under sec_301_7701-3 will be effective on the date specified by the entity on form_8832 or on the date filed if no such date is specified on the election form the effective date specified on form_8832 can not be more than days prior to the date on which the election is filed and can not be more than months after the date on which the election is filed plr-140008-15 sec_301_7701-3 provides that if an eligible_entity classified as an association elects under sec_301_7701-3 to be classified as a partnership the following is deemed to occur the association distributes all of its assets and liabilities to its shareholders in liquidation of the association and immediately thereafter the shareholders contribute all of the distributed assets and liabilities to a newly formed partnership 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 code except subtitles e g h and i sec_301_9100-1 provides that the term regulatory election includes an election whose due_date is prescribed by a regulation published in the federal_register sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make an election sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides extensions of time for regulatory elections that do not meet the requirements of sec_301_9100-2 sec_301_9100-3 provides that requests for relief under sec_301_9100-3 will be granted when the taxpayer provides the evidence including affidavits described in sec_301_9100-3 to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and the grant of relief will not prejudice the interests of the government conclusion based solely on the facts and representations submitted we conclude that x has satisfied the requirements of sec_301_9100-1 and sec_301_9100-3 consequently x is granted an extension of time of one hundred twenty days from the date of this letter to elect under sec_301_7701-3 to be treated as a partnership effective d3 x must file form_8832 within the extension period with the appropriate service_center with a copy of this letter attached this ruling is contingent on x and its owners filing within days of the date of this letter all required federal_income_tax and information returns including amended returns for all open years consistent with the requested relief including the application of sec_301_7701-3 these returns must include but are not limited to form_8865 return of u s persons with respect to certain foreign_partnerships and form_8858 information_return of u s persons with respect to foreign disregarded entities such that these forms reflect the consequences of the relief granted in this letter a copy of this letter should be attached to any such returns plr-140008-15 we express no opinion concerning the assessment of any interest additions to tax additional_amounts or penalties for failure_to_file a timely income_tax or information_return with respect to any taxable_year that may be affected by this ruling for example we express no opinion as to whether a taxpayer is entitled to relief from any penalty on the basis that the taxpayer had reasonable_cause for failure_to_file timely any income_tax or information returns except for the specific ruling above we express or imply no opinion concerning the federal tax consequences of the facts of this case under any other provision of the code in addition sec_301_9100-1 provides that the granting of an extension of time for making an election is not a determination that the taxpayer is otherwise eligible to make the election this ruling is directed only to the taxpayer requesting it according to sec_6110 of the code this ruling may not be used or cited as precedent under a power_of_attorney on file with this office we are sending a copy of this letter to x’s authorized representatives 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 associate chief_counsel passthroughs special industries by _ s ____________________________ james a quinn senior counsel branch office of the associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes