department of the treasury internal_revenue_service washington d c tax exempt and government entities fer q i uniform issue list set cp fat legend taxpayer a company b amount c date d date e ira x dear this is in response to your ruling_request dated fora waiver of the 60-day rollover requirement in sec_408 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 age represents that she received a distribution from ira x totaling amount c taxpayer a asserts that her failure to accomplish a rollover within the 60-day period prescribed by sec_408 of the code was due to a mistake by company b which led to the distribution of amount c from ira x instead of from taxpayer a’s non-ira regular brokerage account with company b taxpayer a's husband age handled their family financial matters until it became necessary for taxpayer a to take over those duties on date d taxpayer a directed a representative of company b to distribute amount c from taxpayer a’s standard brokerage account with company b company b’s representative and financial adviser did not understand that taxpayer a maintained ira x as well as a non-ira account since company b’s records did not accurately list both accounts company b’s representative mistakenly distributed_amount c from ira x and did not follow taxpayer a’s specific instructions that amount c was to be taken out of her non-ira account taxpayer a did not discover the error until she received form 1099-r on date e taxpayer a has represented that she used amount c for personal expenditures not knowing that the sum had been distributed in error from ira x instead of from her non-ira standard brokerage account as she requested taxpayer a further represented that she has maintained an amount greater than amount c in her non-ira account since the distribution of amount c from ira x based on the above facts and representations you request that the service waive the 60-day rollover requirement with respect to the distribution of amount c from ira x sec_408 of the code provides that except as otherwise provided in sec_408 any amount_paid or distributed out of an ira shall be included in gross_income by the payee or distributee as the case may be in the manner provided under sec_72 of the code sec_408 of the code defines and provides the rules applicable to ira_rollovers i the entire amount received including money or sec_408 of the code provides that sec_408 of the code does not apply to any amount_paid or distributed out of an ira to the individual for whose benefit the ira is maintained if any other_property is paid into an ira for the benefit of such individual not later than the day after the day on which the individual receives the payment or distribution or ii the entire amount received including money and any other_property is paid into an eligible_retirement_plan other than an ira for the benefit of such individual not later than the day after the date on which the payment or distribution is received éxcept that the maximum amount which may be paid into such plan may not exceed the portion of the amount received which is includible in gross_income determined without regard to sec_408 sec_408 of the code provides that sec_408 does not apply to any amount described in sec_408 received by an individual from an ira if at any time during the 1-year period ending on the day of such receipt such individual received any other amount described in sec_408 from an ira which was not includible in gross_income because of the application of sec_408 sec_408 of the code provides a similar 60-day rollover period for partial rollovers sec_408 of the code provides that the rollover provisions of sec_408 do not apply to any amount required to be distributed under sec_408 sec_408 of the code provides that the secretary_of_the_treasury may waive the 60-day requirement under sec_408 and d of the code 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_408 of the code revproc_2003_16 r b provides that in determining whether to grant a waiver of the 60-day rollover requirement pursuant to sec_408 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 by taxpayer a is consistent with her assertion that her failure to accomplish a rollover within the 60-day period prescribed by sec_408 of the code was due to a mistake by a representative of company b who distributed_amount c from ira x instead of from taxpayer a’s non-ira account with company b taxpayer a did not become aware of the mistake until after the 60-day rollover period had expired therefore pursuant to sec_408 of the code the service hereby waives the 60-day rollover requirement with respect to the distribution of amount c from ira x taxpayer a is hereby granted a period of days from the issuance of this ruling letter to contribute amount c into arollover ira provided all other requirements of sec_408 of the code except the 60-day rollover requirement are met with respect to such contribution amount c will be considered a rollover_contribution within the meaning of sec_408 of the code this ruling does not authorize the rollover of amounts that are required to be distributed by sec_401 of the code 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 that may be applicable hereto this ruling is directed solely to the taxpayer who requested it sec_61 k of the code provides that it may not be used or cited as precedent lf you have any questions regarding this ruling you may contac renee reere rar eess hrakik keke re rerre ere eereereerererereaeer sincerely yours tr s oe feeney donzell littlejohn manager employee_plans technical group enclosures notice of intention to disclose deleted copy of this letter


internal_revenue_service number release date index number --------------------- -------------------------------- ---------------------------------------------- --------------------------------------------- ------------------------------ department of the treasury washington dc third party communication none date of communication not applicable_person to contact ----------------- id no ------------- telephone number ------------------- refer reply to cc psi b03 plr-139814-08 date date company ------------------------------------------------------------------------------------------------- ----------------------- legend country ------ date ----------------------- dear --------------- this letter responds to a letter dated date submitted on behalf of company by its authorized representative requesting that the service grant company an extension of time under sec_301_9100-3 of the procedure and administration regulations to elect to be treated as a partnership under sec_301_7701-3 effective date facts company was established under the laws of country on date company represents that it is a foreign_entity eligible to elect to be classified as a partnership for federal tax purposes company intended to be classified as a partnership effective date however form_8832 entity classification election was not timely filed due to inadvertence sec_301_7701-3 provides that a business_entity that is not classified as a corporation under sec_301_7701-2 or is an eligible_entity and law plr-139814-08 may elect its classification for federal tax purposes an eligible_entity with at least two members can elect to be classified as either an association and thus a corporation under sec_301_7701-2 or a partnership sec_301_7701-3 provides in general that 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 an eligible_entity may elect to be classified other than as provided in sec_301_7701-3 or to change its classification by filing form_8832 sec_301_7701-3 provides that a sec_301_7701-3 election will be effective on the date specified by the entity on form_8832 or on the date filed if no date is specified on the election form the effective date specified on form_8832 cannot be more than days prior to the date on which the election is filed and cannot be more than months after the date on which the election is filed sec_301_9100-1 provides that the commissioner may 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 except subtitles e g h and i sec_301_9100-1 defines a regulatory election to include an election with a due_date that 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 provides the standards that 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 sec_301 a 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 taxpayer acted reasonably and in good_faith and the grant of relief will not prejudice the interests of the government conclusion based on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-1 and sec_301_9100-3 have been satisfied as a result company is granted an extension of time of sixty days from the date of this letter to plr-139814-08 elect to be classified as a partnership for federal tax purposes effective date the election should be made by filing form_8832 with the appropriate service_center a copy of this letter should be attached to the election 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 code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your 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 request for a ruling it is subject_to verification on examination sincerely s curtis g wilson deputy associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes cc


department of the treasury int ernal revenue service washington d c o f f i c e o f c h i e f c o u n s e l date number release date cc psi uilc and internal_revenue_service national_office field_service_advice memorandum for associate area_counsel area rfp cc lm rfp from associate chief_counsel cc psi subject in-process research_and_development expenses this chief_counsel_advice responds to your memorandum dated date in accordance with sec_6110 this chief_counsel_advice should not be cited as precedent legend petitioner target target seller software package software package software package software package date date date date date date date date date date date issue what is the appropriate tax treatment of the costs of acquiring assets that petitioner has called in-process research_and_development conclusions the amounts designated as ipr d by petitioner must be capitalized and may not be deducted under sec_162 although petitioner may have used the software packages in research or experimental activities the costs allocated to software packages are not eligible for the election to expense research or experimental expenditures under sec_174 the costs allocable to software packages are not deductible under sec_3 of revproc_69_21 1969_2_cb_303 because software package sec_1 and are amortizable sec_197 intangibles sec_4 of revproc_69_21 does not apply to software package sec_1 and software package sec_2 and are purchased software and as a result fall under sec_4 of revproc_69_21 because the costs for software package sec_2 and are separately_stated they are recoverable using the straight-line method_of_depreciation over a period of five years or such shorter period as can be established by petitioner as appropriate if the useful_life of software package sec_2 and will be less than five years in no case however may software package sec_2 and be depreciated over a period less than months the costs attributable to software packages are not eligible for a loss deduction based on abandonment or worthlessness of the acquired assets under sec_165 facts petitioner provides client server software development tools and application products and services to customers 1rev proc has been superseded by revproc_2000_50 2000_2_cb_601 which among other things reflects the enactment of sec_167 and sec_197 revproc_2000_50 states that for taxable years ending prior to date the service will not disturb the taxpayer’s treatment of costs of computer_software except to the extent that the taxpayer’s treatment is markedly inconsistent with the practices described in revproc_2000_50 petitioner was incorporated and elected to be treated as a subchapter_s_corporation in date on date as part of an initial_public_offering petitioner terminated its subchapter_s_election and filed a final form 1120-s for the short taxable_period beginning date and ending date on its tax returns for the short taxable_period beginning date and ending date and the taxable_year ending date petitioner deducted amounts that petitioner has called in-process research_and_development ipr d the amounts deducted as ipr d are amounts allocated to ipr d that were paid_or_incurred in three separate acquisition transactions acquisition on date petitioner and target entered into an asset purchase agreement under this agreement petitioner agreed to purchase from target and target agreed to sell to petitioner all right title and interest in and to all of target 1’s assets in exchange for a purchase_price of dollar_figure and dollar_figure of net liabilities assumed under the agreement petitioner acquired all of target 1’s real_property leaseholds improvements fixtures and fittings thereon and easements and rights-appurtenant thereto and all of target 1’s tangible_personal_property in addition petitioner acquired all of target 1’s intellectual_property goodwill associated therewith licenses and sublicenses granted and obtained with respect thereto and rights thereunder remedies against infringements thereof and rights to protection of interests therein under the laws of all jurisdictions further petitioner acquired all of target 1’s books records ledgers files documents correspondence lists architectural plans drawings specifications creative materials advertising and promotional materials studies reports and other printed or written materials petitioner allocated the purchase_price among the assets as follows purchase_price dollar_figure cash and shares of petitioner’s stock valued at dollar_figure per share net liabilities assumed net purchase premium ______________________ software technology assembled workforce customer base in-process research_and_development goodwill and other nonidentifiable intangible assets total the amount allocated to ipr d in the target acquisition reflects amounts allocated to petitioner’s acquisition of software package at the time of the acquisition software package was a stand-alone product that target offered for sale software package consisted of general ledger accounts_receivable purchasing accounts_payable and projects accounting modules petitioner represents that at the time of the acquisition software package was not complete for petitioner’s purposes petitioner intended to integrate software package into its existing product line petitioner also represents that prior to the acquisition petitioner invested about one man-week on technical evaluation of software package petitioner has not located any documentation regarding this evaluation petitioner alleges that it spent a large amount of time effort and money to create a common infrastructure for software package and petitioner’s existing product that petitioner planned to integrate with software package software package was integrated into petitioner’s product and the new product was released to the public in date acquisition during date petitioner and seller entered into a distribution marketing and licensing agreement pursuant to this agreement petitioner acquired from seller exclusive marketing and distribution rights for two software products known as software package and software package on date petitioner and seller entered into a software purchase agreement pursuant to this agreement petitioner acquired all copyright trade secret and other ownership rights to software package and software package and seller and its affiliates retained a perpetual non-exclusive world-wide and non-transferable unlimited license to use software package and software package under the agreement the base purchase_price for the systems was reduced by all payments made through the closing date by petitioner pursuant to the distribution marketing and licensing agreement with seller and to reflect the perpetual non-exclusive world-wide and non-transferable unlimited license retained by seller petitioner allocated the final purchase_price among the assets as follows software technology in-process research_and_development total both software package and software package were marketed and sold by seller prior to selling the systems to petitioner further it is believed that petitioner marketed and sold these systems without modification after the acquisition petitioner represents that at the time of the acquisition both systems consisted of approximately one million lines of code each further petitioner represents that neither system was ready to be marketed by petitioner as a stand-alone application or as part of a larger suite of projects petitioner indicates that it needed to rewrite and add functionality to both systems so that they could be integrated into a suite of products acquisition on date petitioner and target entered into an agreement and plan_of_reorganization pursuant to this agreement petitioner agreed to acquire from target and target agreed to transfer to petitioner all right title and interest in and to all of the assets of target in exchange for shares of petitioner’s common_stock petitioner and target agreed that petitioner’s common_stock had a fair_market_value of dollar_figure a share resulting in consideration valued at dollar_figure petitioner and target agreed that they would treat the transaction as a tax-free reorganization under sec_368 report the transaction in a manner consistent with that treatment take all reasonable action required to cause the transaction to be treated as a reorganization under sec_368 and not take any_action that would disqualify the transaction from treatment under sec_368 the assets petitioner acquired pursuant to the agreement included all of target 2’s leaseholds and subleasehold improvements fixtures and fittings thereon and easements and rights-appurtenant thereto and all of target 2’s tangible_personal_property including machinery equipment computer_software but excluding the name target and any derivation thereof and other target trade names trademarks service marks and logos using the target mark in addition petitioner acquired all of target 2’s intellectual_property goodwill associated therewith licenses and sublicenses granted and obtained with respect thereto and rights thereunder remedies against infringements thereof and rights to protection of interests therein under the laws of all jurisdictions further petitioner acquired all of target 2’s books records ledgers files documents correspondence lists plats architectural plans drawings specifications creative materials advertising and promotional materials studies reports and other printed or written materials under the agreement the term intellectual_property is defined to include all inventions whether patentable or unpatentable and whether or not reduced_to_practice all improvements thereto and all patents patent applications and patent disclosures together with all reissuances continuations continuations-in-part revisions extensions and reexaminations thereof all trademarks but specifically excluding the target name service marks trade dress logos trade names together with all translations adaptations derivations and combinations thereof and including all goodwill associated therewith and all applications registrations and renewals in connection therewith all mask works and all applications registrations and renewals in connection therewith all trade secrets and confidential business information including ideas research_and_development know-how formulas compositions manufacturing and production processes and techniques technical data designs drawings specifications customer and supplier lists pricing and cost information and business and marketing plans and proposals all computer_software including data related documentation all other proprietary rights and all copies and tangible embodiments thereof in whatever form or medium petitioner allocated the purchase_price among the assets as follows purchase_price shares of petitioner’s stock valued at dollar_figure per share net assets acquired net purchase premium ______________________ software technology assembled workforce customer base in-process research_and_development other nonidentifiable intangible assets total the amount allocated to ipr d in the target acquisition reflects amounts allocated to petitioner’s acquisition of software package for financial_accounting purposes on its federal_income_tax return for the taxable_year ended date petitioner reclassified dollar_figure of the amount allocated to ipr d as goodwill and expensed dollar_figure as ipr d at the time of the acquisition software package was in the early stages of development after the acquisition petitioner tried to complete the software package program petitioner determined that too much time and effort was required to bring software package to market and still be competitive with other products petitioner maintains that the software package program was abandoned in the year of acquisition according to petitioner’s response to informal_discovery software package provided petitioner with additional standard coding algorithms to expedite program development or it provided a series of methodologies and class libraries that could potentially complement a product of petitioner petitioner completed its application integration during date at that time petitioner looked at the software package know-how and began a plan to integrate the concepts into some of its current products petitioner ultimately decided not to proceed with the integration of the software package know-how into its current products informal_discovery also indicates that software package was not the objective of petitioner’s acquisition of target rather target a holding_company for u s and subsidiary sales offices had a sales distribution system that was attractive to petitioner law and analysis the issues raised by this case involve the interplay of several different provisions of the internal_revenue_code petitioner supports its deduction of amounts allocated to ipr d primarily by reference to the treatment of research_and_experimental_expenditures under sec_174 the similar treatment of software expenses under revproc_69_21 and the treatment of ipr d for financial_accounting purposes capitalization vs business_expense sec_162 of the code allows a deduction for all the ordinary and necessary expenses paid_or_incurred during the taxable_year in carrying on any trade_or_business sec_263 provides that no deduction shall be allowed for any amounts paid out for new buildings or for permanent improvements or betterments made to increase the value of any property in 503_us_79 the supreme court clarified that its earlier decision in 403_us_345 should not be interpreted as holding that capitalization is appropriate only for expenditures that create or enhance a separate and distinct asset although the mere presence of an incidental future benefit -- some future aspect -- may not warrant capitalization a taxpayer's realization of benefits beyond the year in which the expenditure is incurred is undeniably important in determining whether the appropriate tax treatment is immediate deduction or capitalization u s pincite emphasis in original based on the facts provided in this case the costs associated with the software packages identified as ipr d in all three transactions are clearly capital expenditures not deductible under sec_162 petitioner paid specific amounts in order to acquire all the copyright trade secret and other ownership rights title and interests in specific software programs in acquisition and acquisition the software products were being marketed by the sellers target and seller respectively before they were acquired by petitioner in all three acquisitions petitioner asserted that the software products had significant value and either paid or allocated substantial sums of money to what petitioner termed ipr d it is our understanding that in arriving at this value at least for software packages petitioner employed a 2there is an argument that at least in certain circumstances software-related costs are potentially subject_to capitalization under sec_263a especially to the extent they are embodied in or allocable to tangible_property however this issue is generally moot because of the specific provisions dealing with software in sec_167 and sec_197 and the fact that the service has not invoked sec_263a to change the treatment of software-related costs under rev procs and in this discussion we will assume that for our purposes the software rights at issue are intangible assets subject_to sec_263 3we understand that valuation of the software may be an issue and that the field_attorney may retain an expert to advise the service for purposes of this discussion we assume that the taxpayer’s valuation of the software is correct if it turns out that it is not our conclusions still apply pro tanto capitalization of earnings valuation method in which income flows are projected over several years and then discounted to present_value software packages may have been marketed without modification after they were acquired the facts are unclear but in any case all three were integrated by petitioner into a line of software products thus providing long-term benefits that were more than incidental petitioner apparently had similar plans for software package -- although as discussed later in connection with the possibility of a loss deduction it may have abandoned those plans at some point given these and other factors described in the memorandum from the field_attorney it is clear that software packages and probably software package as well were separate and distinct assets that would qualify even under the narrower definition of a capital_expenditure identified with the supreme court's opinion in lincoln savings moreover the expenditures did not merely serve to create or enhance the assets rather they were the direct costs of acquiring the assets from a third party the cost of acquiring property whether tangible or intangible is perhaps the archetype of a capitalized cost this conclusion applies without regard to whether the assets identified by petitioner as ipr d were software -strictly defined or as defined for some particular purpose-or were instead in whole or in part some other form of technical know-how while we believe that the assets qualify under the narrower separate and distinct asset test the significant future_benefits test of indopco would clearly encompass the costs of acquiring such assets from a third party in a series of administrative rulings following the indopco decision the service has ruled that certain costs generally remain deductible despite the fact that they may have an incidental future benefit see eg revrul_92_80 1992_2_cb_57 advertising costs revrul_94_12 1994_1_cb_36 incidental repair costs revrul_94_38 1994_1_cb_35 environmental cleanup costs but not costs of groundwater treatment facilities revrul_94_77 severance costs in connection with business downsizing revrul_95_32 1995_1_cb_8 energy_conservation_expenditures revrul_96_62 1996_2_cb_9 training costs revrul_98_25 1998_1_cb_998 cost of replacing underground waste storage tanks rev_rul 4the regulations under sec_263 specifically address acquisition costs as examples of capital expenditures under sec_1_263_a_-2 for example the cost of acquisition of buildings machinery and equipment furniture and fixtures and similar_property having a useful_life substantially beyond the taxable_year is a capital_expenditure with respect to intangible assets sec_1_263_a_-2 provides that the cost of goodwill in connection with the acquisition of the assets of a going concern is a capital_expenditure see also sec_1012 basis_of_property is generally its cost and purchase_price of trade_or_business allocated as basis of acquired assets 2000_1_cb_331 iso certification costs the present case is distinguishable from the situations described in these rulings unlike the present case most of these situations did not involve the acquisition_cost of an asset and all of them involved expenditures yielding only incidental future_benefits petitioner asserts at least in the context of the sec_174 rev_proc argument that the expenditures could be expensed because the software packages were incomplete or because they were not useful-at least for its purposes-without substantial modification this may have some bearing on the treatment of the software for financial_accounting purposes discussed below however as a matter of general tax law we are aware of no authority to the effect that a taxpayer who purchases an asset can expense the cost of acquisition because the asset is incomplete or because the taxpayer intends to further modify it improve it or incorporate it into some other product although such factors may affect valuation financial_accounting vs tax_accounting petitioner argues that its treatment of its costs is consistent with the treatment of in-process research_and_development costs for financial_accounting purposes this treatment is reflected in several documents issued by the financial_accounting standards board generally under a of fasb statement no accounting for research_and_development costs the costs of tangible materials equipment or facilities that are acquired or constructed for research_and_development activities and that have alternative future uses in research_and_development projects or otherwise must be capitalized as tangible assets only the costs of the materials as they are consumed or the depreciation of the equipment or facilities as they are used are expensed as research_and_development costs paragraph a continues emphasis added however the costs of materials equipment or facilities that are acquired or constructed for a particular research_and_development project and that have no alternative future uses in other research_and_development projects or 5in revrul_98_25 the costs at issue include the acquisition costs of the replacement storage tanks noting that t he useful_life of asset for sec_263 purposes is its useful_life to the taxpayer not its inherent useful_life revrul_98_25 reasons that since the storage tanks are only used once and have no remaining useful_life to the taxpayer once they have been filled with waste and sealed the acquisition costs are deductible in the present case by contrast the software packages with the possible exception of software package provided significant benefits to this taxpayer substantially beyond the year of acquisition otherwise and therefore no separate economic values are research_and_development costs at the time the costs are incurred in c of fasb statement no this treatment is extended to intangibles purchased from others fasb interpretation no applicability of fasb statement no to business combinations accounted for by the purchase_method clarifies that this treatment applies not only when the tangible or intangible assets are purchased separately but also when they are acquired in a business combination in which the overall purchase_price is allocated among the acquired assets finally fasb statement no accounting for the costs of computer_software to be sold leased or otherwise marketed applies this no alternative use standard to purchased software as a general matter it is true that consistency with generally_accepted_accounting_principles and conformity between a taxpayer's tax and financial_accounting methods is one factor in determining whether the treatment of an item for tax purposes is appropriate see sec_1_446-1 for several reasons however we do not believe that in the present case petitioner's treatment of the acquisition costs for tax purposes is supported by this financial_accounting practice first there is some question whether the taxpayer's treatment is entirely correct even as a matter of financial_accounting under fasb statement no and 6presumably the costs of self-created r d intangibles are expensed for financial_accounting purposes whether they have an alternative future use or not 7appendix b to fasb statement no explains the underlying reasoning behind the no alternative future use rule consideration was given to the alternative that the costs of materials equipment or facilities that are acquired or constructed for a particular research_and_development project and that have no alternative future uses in other research_and_development project or otherwise be apportioned over the life of the project rather than treated as research_and_development costs when incurred the board reasons however that if materials equipment or facilities are of such a specialized nature that they have no alternative future uses even in another research_and_development project those materials equipment or facilities have no separate economic values to distinguish them from other types of costs such as salaries and wages incurred in a particular project accordingly all costs of these materials equipment and facilities should be treated as research_and_development costs when incurred see also same treatment for purchased intangibles fasb interpretation no functioning software products are arguably assets resulting from the research_and_development activities of the acquired enterprise rather than assets to be used in research_and_development activities of the combined enterprise moreover to the extent the assets were intended to be used by petitioner in creating its own software products that is instead of continuing projects begun by the acquired companies that would appear to be an alternative future use second the treatment of purchased ipr d has come under increasing criticism even in the context of financial_accounting where the general concern is to prevent the overstatement of income in two letters to the american institute of certified public accountants the chief accountant’s office of the securities_and_exchange_commission expressed concern over the treatment of purchased ipr d while the sec did not challenge the practice itself it noted that the treatment of ipr d is unique among purchased assets and described a number of abuses of the rule including overvaluation of ipr d in general and the bifurcation of purchase_price into the immediate value of a presently completed product which is capitalized and the future value of the right to enhance or embellish that product which is expensed with respect to the latter practice for example the sec observed the sec staff believes that the value of the right to enhance or embellish an existing product or the right to enhance or embellish an existing technology that has alternative future uses is not separable from the value of ownership of the intellectual rights to the technology itself if the technology itself meets the criteria for capitalization the fair value of that asset necessarily includes the value of the right to enhance or embellish the asset third-and most important for present purposes-regardless of the correctness of petitioner’s accounting treatment for financial purposes and regardless of the general status of the ipr d exception in that context it is well settled that for purposes of federal_income_tax accounting financial_accounting practices are neither controlling nor even presumptively correct first of course 8this comment may have specific relevance to the present case - for example in petitioner’s treatment of software package sec_2 and where the acquisition costs of apparently completed products were bifurcated between software and ipr d while a reevaluation of the treatment of purchased ipr d has been considered by the fasb it appears that any such reevaluation has been postponed perhaps until it can be addressed in the context of an overall reassessment of the treatment of research_and_development costs see exposure draft proposed statement of financial_accounting standards business combinations and intangible assets when the tax treatment is established by provisions of the code those provisions take precedence second however the correctness of any_tax accounting_method is subject_to the overall requirement that it clearly reflect income pursuant to sec_446 as the supreme court stated in 439_us_522 t he code and regulations give the commissioner broad discretion to set_aside the taxpayer’s method if in his opinion it does not reflect income clearly the regulations embody no presumption they say merely that in most cases generally accepted accounting practices will pass muster for tax purposes and in most cases they will but if the commissioner in the exercise of his discretion determines that they do not he may prescribe a different practice without having to revive any presumption running against the treasury in support of this principle the thor power opinion cited a long line of judicial precedent as well as the vastly different objectives that financial and tax_accounting have consistently with its goals and responsibilities financial_accounting has as its foundation the principle of conservatism with its corollary that possible errors and measurement should be in the direction of understatement rather than overstatement of net_income and net assets in view of the treasury’s markedly different goals and responsibilities understatement of income is not destined to be its guiding light u s pincite thus no accounting_method is acceptable for tax purposes to the extent it conflicts with statutory principles or with the clear_reflection_of_income as expressed in the service’s regulations or otherwise viewed in this light the anomalous practice of expensing purchased ipr d-still sanctioned for financial_accounting purposes by fasb statement no and interpretation no but increasingly suspect even in that context-is clearly unacceptable for tax purposes capitalization of expenditures that provide future_benefits that are more than incidental so that those expenditures may be more accurately matched with the income to which they relate is a cardinal principle of the clear reflection standard required for accrual-basis and cash-basis taxpayers alike clearly this is true when those expenditures represent the direct_acquisition costs of an asset for financial_accounting purposes the treatment of purchased ipr d hinges on a distinction between assets that are acquired only for their original_use and assets that are acquired or also acquired for an alternative use regardless of the function this original_use alternative use project-by-project standard may serve in the financial_accounting context it is clear that neither sec_263 or sec_263a nor any of the related regulations administrative pronouncements or case law make any such distinction under sec_263 an expenditure must be capitalized if it has any significant future use or benefit in fact it is probably safe to say that the vast majority of capitalized expenditures are capitalized precisely because they are useful for their original purpose not for an alternative use assume two scenarios in both s has been developing software program x which it intends to use in creating a marketable product product x in both scenarios b acquires program x for dollar_figurex for purposes of this example it does not matter whether program x is acquired separately or as part of a business acquisition in scenario b intends to and does in fact continue to develop and use program x for several years to create product x after which program x is no longer useful to b in scenario the facts are the same except that in addition to using program x in the product x project b also intends to use program x in a future project intended to develop product y for purposes of accounting for research_and_development costs under fasb statement no and interpretation no b expenses the dollar_figurex acquisition_cost immediately in scenario because for b program x is only suitable for its original_use the project to develop product x in scenario b would capitalize the dollar_figurex since b also has an alternative use for program x for federal_income_tax purposes however under sec_263 b must capitalize the dollar_figurex in both scenarios whether the program is useful for its original purpose or for an alternative use is irrelevant finally please note that for financial_accounting purposes ipr d costs that may be expensed because they have no alternative future use are not limited to materials_and_supplies which are items that might be expensed at least in some circumstances in any case items that may be expensed as ipr d also include the costs of for example equipment and facilities costs that would generally be capitalized in any other context petitioner’s attempt to characterize its acquired software as a form of intangible supplies thus tends to soften the full force of petitioner's argument if we were to accept the proposition that the financial treatment of purchased ipr d dictates its treatment for income_tax purposes then taxpayers could deduct not just the acquisition costs of supplies but also of equipment buildings and similar assets-so long as those assets had no alternative future use accordingly we conclude that the amounts designated as ipr d by petitioner must be capitalized and may not be deducted under sec_162 it follows that the acquired software and software-related assets are property with a basis under sec_1012 and or sec_1060 with whatever consequences flow from that determination under sec_167 sec_174 and sec_197 sec_174 and or revproc_69_21 petitioner argues that the amounts allocated to ipr d are deductible for federal_income_tax purposes under sec_174 and or revproc_69_21 under sec_174 taxpayers may elect one of two methods to account for research or experimental expenditures paid_or_incurred in connection with the taxpayer’s trade_or_business taxpayers may deduct under sec_174 their research or experimental expenditures in the tax_year in which they are paid_or_incurred or they may elect under sec_174 to amortize such expenditures over a period of not less than months taxpayers not electing to treat research_and_experimental_expenditures under sec_174 may continue to capitalize research_and_experimental_expenditures and will continue to receive the same treatment as under pre-1954 law the extent to which a taxpayer pays or incurs research or experimental expenditures is a factual question expenditures represent research_and_development costs in the experimental or laboratory sense if the expenditures are for activities intended to discover information that would eliminate uncertainty concerning the development or improvement of a product uncertainty exists if the information available to the taxpayer does not establish the capability or method for developing or improving the product or the appropriate design of the product whether expenditures qualify as research or experimental expenditures depends on the nature of the activity to which the expenditures relate not the nature of the product or improvement being developed or the level of technological advancement the product or improvement represents sec_1_174-2 9this conclusion clearly applies to software packages with respect to software package while our discussion of financial_accounting practices and the no alternative use rule still applies there is some evidence that within the year of acquisition petitioner attempted to complete or integrate software package into its product line and abandoned the project although this fact if true would not appear to support the deduction for the cost of software package under sec_162 a case might be made for a loss deduction under sec_165 however if sec_197 applies a loss deduction could be barred by sec_197 alternatively if in fact software package was not the primary focus of acquisition the value assigned to software package may have been overstated pending additional factual and legal development regarding software package specifically and acquisition in general the treatment of software package is uncertain sec_1_174-2 provides that the term product includes any pilot_model process formula invention technique patent or similar_property and includes products to be used by the taxpayer in its trade_or_business as well as products to be held_for_sale lease or license however sec_1_174-2 provides that the term research or experimental expenditures does not include expenditures_for the acquisition of another’s patent model production or process sec_1_174-2 provides that the provisions of sec_1_174-2 apply not only to costs paid_or_incurred by the taxpayer for research or experimentation undertaken directly by the taxpayer but also to expenditures paid_or_incurred for research or experimentation carried on in the taxpayer's behalf by another person or organization however any expenditures_for research or experimentation carried on in the taxpayer's behalf by another person are not expenditures to which sec_174 relates to the extent that they represent expenditures_for the acquisition or improvement of land or depreciable_property used in connection with the research or experimentation to which the taxpayer acquires rights of ownership sec_1_174-2 contains rules relating to certain expenditures with respect to land and other_property under sec_1_174-2 expenditures_for the acquisition or improvement of land or for the acquisition or improvement of other_property which is subject_to the allowances for depreciation or depletion are not eligible for treatment under sec_174 the annual allowances for depreciation or depletion however may be considered research_and_experimental_expenditures eligible for sec_174 treatment sec_1_174-2 provides in relevant part that expenditures_for research or experimentation which result as an end product of the research or experimentation in depreciable_property to be used in the taxpayer's trade_or_business may subject_to the limitations of sec_1_174-2 be allowable as a current_expense deduction under sec_174 under sec_1_174-2 expenditures_for research_and_experimentation that are incurred in connection with the construction or manufacture of depreciable_property by another are deductible under sec_174 only if made upon the taxpayer's order and at his risk no deduction is allowed if the taxpayer purchases another's product under a performance guarantee whether express implied or imposed by local law unless the guarantee is limited to engineering specifications or otherwise in such a way that economic utility is not taken into account finally sec_1_174-2 provides that the deductions referred to in sec_1_174-2 and for expenditures in connection with the acquisition or production of depreciable_property to be used in the taxpayer's trade_or_business are limited to amounts expended for research or experimentation thus amounts expended for research or experimentation do not include the costs of the component materials of the depreciable_property the costs of labor or other elements involved in its construction and installation or costs attributable to the acquisition or improvement of the property in each of the transactions petitioner acquired assets that included software and know-how the purchase_price attributable to the acquisition of another’s patent model production or process is ineligible for the expense election under sec_174 similarly sec_174 does not apply to any expenditure for the acquisition of depreciable or amortizable property to be used in connection with research or experimentation sec_174 f and sec_1 - b although petitioner may have used the acquired assets in research or experimental activities the costs allocated to these acquired assets are not eligible for the election to expense research or experimental expenditures under sec_174 instead under sec_174 and revproc_69_21 such property is depreciated or amortized under sec_167 or sec_197 to the extent that these assets are used in research or experimental activities the annual depreciation_deductions attributable to these assets may be deductible as research or experimental expenditures under sec_174 in revproc_69_21 the service provides guidelines on the treatment of the costs of computer_software the revenue_procedure addresses the tax_accounting treatment of the costs of developing software the costs of acquired software and the costs of leased software although the revenue_procedure specifies that the development costs refer to self-developed costs incurred by the taxpayer the revenue_procedure does not enumerate these software development activities the extent to which a taxpayer incurs software development costs is also a factual question subject_to rules similar to the rules of sec_174 in the case of developed software the revenue_procedure provides that the costs of developing computer_software whether or not the particular software is patented or copyrighted in many respects so closely resembles the kind of research_and_experimental_expenditures that fall within the purview of sec_174 as to warrant accounting treatment similar to the accounting treatment accorded research or experimental expenditures under sec_174 revproc_69_21 provides two alternative methods that taxpayers may use to account for computer_software self-development costs a taxpayer may either deduct the expenditures in the year in which they are paid_or_incurred or treat the expenditures as capital expenditures if the taxpayer treats its costs of developing software as capital expenditures the taxpayer may recover the software development costs through deductions for ratable amortization in accordance with rules similar to those provided by sec_174 and the regulations thereunder over a period of months from the date of completion of the development in the case of purchased software the revenue_procedure provides that the costs that are included without being separately_stated in the cost of the computer hardware may be treated as part of the cost of the hardware that is capitalized and depreciated otherwise the software is treated as an intangible asset and the cost is recovered by amortization deductions ratably over a period of five years or such shorter period as can be established by the taxpayer as appropriate if the useful_life of the software will be less than five years petitioner contends that the costs allocated to ipr d are deductible under revproc_69_21 however software costs are only deductible under revproc_69_21 if they are self-development costs pursuant to sec_3 of that revenue_procedure in the present case acquired software package sec_1 - are purchased software instead of self-developed software thus sec_3 of revproc_69_21 does not apply to these software packages further since software package sec_1 and constitute amortizable sec_197 intangibles revproc_69_21 does not apply to software package sec_1 and with respect to acquired software package sec_2 and these software packages are as previously stated purchased software and as a result fall under sec_4 of revproc_69_21 since the costs for software package sec_2 and are separately_stated they are recoverable using the straight-line method_of_depreciation over a period of years or such shorter period as can be established by petitioner as appropriate if the useful_life of software package sec_2 and will be less than five years in no case however may software package sec_2 and be depreciated over a period less than months see sec_167 amortization under sec_197 sec_197 provides for an amortization deduction with respect to any amortizable sec_197 intangible ratably over the fifteen year period beginning with the month of acquisition of the intangible sec_197 provides in general that the term amortizable sec_197 intangible means any sec_197 intangible a which is acquired after date and b which is held in connection with the conduct_of_a_trade_or_business sec_197 provides in general that the term sec_197 intangible means a goodwill b going_concern_value c any of the following intangible items i workforce in place including its composition and terms and conditions contractual or otherwise of its employment ii business books_and_records operating systems or any other information base including lists or other information with respect to current or prospective customers iii any patent copyright formula process design pattern know-how format or other similar item iv any customer-based_intangible v any supplier-based_intangible and vi any other similar item d any license permit or other right granted by a governmental_unit or an agency_or_instrumentality thereof e any covenant_not_to_compete or other arrangement to the extent such arrangement has substantially the same effect as a covenant_not_to_compete entered into in connection with an acquisition of an interest in a trade_or_business or substantial portion thereof and f any franchise trademark or trade_name sec_197 provides that a sec_197 intangible does not include i any computer_software which is readily available for purchase by the general_public is subject_to a nonexclusive license and has not been substantially_modified and ii other computer_software which is not acquired in a transaction involving the acquisition of assets constituting a trade_or_business sec_197 provides that the term computer_software means any program designed to cause a computer to perform a desired function but does not include any data base or similar item unless the data base or item is in the public domain and is incidental to the operation of otherwise qualifying computer_software sec_167 provides that if a depreciation deduction is allowable under the general_rule of sec_167 with respect to any computer_software such deduction shall be computed by using the straight_line method and a useful_life of months for purposes of sec_167 computer_software has the same meaning as in sec_197 but does not include any such software which is an amortizable sec_197 intangible sec_197 provides that if there is a disposition of any amortizable sec_197 intangible acquired in a transaction or series of related transactions or any such intangible becomes worthless and one or more other amortizable sec_197 intangibles acquired in such transaction or series of related transactions are retained- i no loss shall be recognized by reason of such disposition or such worthlessness and ii appropriate adjustments to the adjusted bases of such retained intangibles shall be made for any loss not recognized under sec_197 in the present case in each of the transactions petitioner allocated part of the cost of an acquired software package to ipr d the acquired software package sec_1 - are included in the term sec_197 intangible as know-how under sec_197 the legislative_history includes an expanded definition of know-how and provides that the term ‘ sec_197 intangible’ includes any patent copyright formula process design pattern know-how format or other similar item for this purpose the term ‘ sec_197 intangible’ is to include package designs computer_software and any interest in a film sound_recording video tape book or other similar_property except as specifically provided otherwise in the bill h_r conf_rep no there is no requirement that the software be complete other items listed in the definition of know-how ie process design pattern format do not describe finished products rather they constitute works in progress sec_197 provides two exceptions where computer_software is not a sec_197 intangible the first exception involves any computer_software which is readily available for purchase by the general_public is subject_to a nonexclusive license and has not been substantially_modified this exception does not apply in the present case to any of the acquired software package sec_1 - in acquisition sec_1 and petitioner purchased all right title and interest in and to all of the respective target’s assets including software package sec_1 and later characterized as ipr d consequently petitioner acquired all rights and exclusive license to software package sec_1 and such that they fail to meet the exception in acquisition petitioner purchased all copyright trade secret and other ownership rights to software package sec_2 and petitioner did not acquire a nonexclusive license to use software package sec_2 and as was sold by seller to the general_public instead petitioner acquired all rights and exclusive use of the software and gave back to seller a nonexclusive license to use the software petitioner then made software package sec_2 and again available for purchase by the general_public such that each purchaser would be subject_to a nonexclusive license thus software package sec_2 and also fail to meet the first exception the second exception to sec_197 involves computer_software which is not acquired in a transaction involving the acquisition of assets constituting a trade_or_business it is clear that software package sec_1 and purchased pursuant to acquisition sec_1 and respectively do not meet this exception because petitioner purchased all of the assets of target sec_1 and respectively in acquisition petitioner purchased all copyright trade secret and other ownership rights to software package sec_2 and the legislative_history indicates that computer_software includes any incidental and ancillary rights with respect to computer_software that are necessary to effect the legal acquisition of the title to and ownership of the computer_software h_r conf_rep no since petitioner did not acquire software package sec_2 and in a transaction involving the acquisition of assets constituting a trade_or_business ie workforce business books_and_records etc this software meets the exception of the definition of a sec_197 intangible found in sec_197 therefore software package sec_2 and would not be considered sec_197 intangibles software package sec_2 and since they do not constitute sec_197 intangibles are depreciated pursuant to sec_167 consequently they are depreciated using the straight_line method_of_depreciation and a useful_life of months software package sec_1 and including the portion allocated to ipr d do not qualify for exclusion from sec_197 thus they constitute amortizable sec_197 intangibles and are amortized over a period of years loss deduction under sec_165 although petitioner’s primary argument rests on sec_174 and revproc_69_21 and petitioner may raise the issue of whether it can claim a loss under sec_165 on the worthlessness of the acquired software assets the memorandum from the field alludes to this possibility as the field memorandum discusses sec_197 would prevent any loss deduction to the extent that the ipr d assets are characterized as sec_197 intangibles sec_165 provides that there shall be allowed as a deduction any loss sustained during the taxable_year and not_compensated_for_by_insurance_or_otherwise sec_1_165-2 of the regulations provides that for the allowance under sec_165 of losses from the permanent withdrawal of depreciable_property from use in the trade_or_business or in the production_of_income see sec_1_167_a_-8 sec_1_167_a_-8 provides in part that in order to qualify for the recognition of loss from physical abandonment the intent of the taxpayer must be irrevocably to discard the asset so that it will neither be used again by him nor retrieved by him for sale exchange or other_disposition even if or to the extent that sec_197 does not apply it would seem that the factual predicate for a sec_165 deduction or similar treatment such as an obsolescence deduction under the sec_167 regulations does not exist at least with respect to software packages these were items with a substantial value as reflected in the taxpayer’s basis allocation and attempted deduction which were either sold separately or integrated into the petitioner’s product linedollar_figure it would clearly be inconsistent for petitioner to claim that these products were abandoned or worthless in dollar_figure in this connection it is worth noting that the purchased ipr d exception under fasb statement no and interpretation no is not based on a finding that the acquired assets are worthless or abandoned at least not as the exception is interpreted by the fasb as discussed earlier when the purchaser of ipr d writes off the costs because it is determined that the acquired assets have no alternative future use this does not mean that the assets have no use it simply means that the assets have no use outside the particular research_and_development project with respect to which they were originally created or acquired see n above in the context of that project the assets may have considerable value as reflected in the buyer’s purchase_price or purchase_price allocation the rationale for the purchased ipr d exception is not that the acquired assets have no value-either in general or for the particular purchaser instead the exception appears to be based on the idea that a company that acquires a research_and_development project in midstream should be placed in the same position to the extent possible as though it had initiated the project to begin with and had been required for financial_accounting purposes to expense the costs of materials supplies equipment and facilities with no alternative future use as they were incurred accordingly just as petitioner's use of the purchased ipr d exception for financial purposes does not indicate that the acquired assets have no useful_life beyond the tax_year for purposes of sec_162 and sec_263 so too the use of the exception for financial purposes would not support a loss deduction based on abandonment or worthlessness of the acquired assets under sec_165 case development hazards and other considerations petitioner’s form 10k for example refers to three components of its integrated software product line as formerly software packages as discussed above different treatment might be appropriate for software package depending on further factual and legal development this writing may contain privileged information any unauthorized disclosure of this writing may have an adverse effect on privileges such as the attorney client privilege if disclosure becomes necessary please contact this office for our views please call if you have any further questions by associate chief_counsel leslie h finlow branch chief associate chief_counsel passthroughs and special industries


t c memo united_states tax_court donna j hendley petitioner v commissioner of internal revenue respondent docket no filed date jeffrey g williams for petitioner ronald l buch jr and brin k huss for respondent memorandum opinion armen special_trial_judge this matter is before the court on respondent's motion to dismiss for lack of jurisdiction filed date as discussed in detail below we shall grant respondent's motion to dismiss all section references are to the internal_revenue_code as amended and all rule references are to the tax_court rules_of_practice and procedure background on date respondent mailed a notice_of_deficiency to donna j hendley petitioner determining a deficiency of dollar_figure in her federal_income_tax for there is no dispute that respondent mailed the notice to petitioner at her last_known_address on date the court received and filed a petition submitted on petitioner’s behalf by her counsel jeffrey g williams mr williams the petition is dated date the petition arrived at the court in an envelope bearing sufficient postage a priority mail sticker and multiple u s postal service postmarks all dated date the legend around the perimeter of the postmarks states usps mesa az sta no at the time that the petition was filed petitioner resided in flagstaff arizona respondent filed a motion to dismiss for lack of jurisdiction on the ground that the petition was not filed within the 90-day period prescribed in sec_6213 petitioner filed an objection to respondent's motion to dismiss accompanied by an affidavit executed by mr williams asserting that the petition was timely mailed to the court on date mr williams’ affidavit states in pertinent part that on date at approximately p m he delivered the petition to a so-called contract postal unit maintained at a small retail store known as impressive greetings located pincite south alma school road mesa arizona mr williams further states that at the time he mailed the petition he saw the clerk affix a postmark on the envelope this matter was called for hearing at the court's motions session in washington d c counsel for respondent appeared at the hearing and offered argument in support of respondent's motion to dismiss although no appearance was entered by or on behalf of petitioner at the hearing petitioner did file a written_statement with the court pursuant to rule c following the hearing the court directed the parties to file responses providing additional details regarding the postal services provided at impressive greetings both parties filed responses as directed by the court respondent’s response was accompanied by a declaration executed by michael j noggle mr noggle identified as a co-owner of impressive greetings mr noggle’s declaration states that the services provided by impressive greetings as a contract postal unit are the equivalent of services provided by the u s postal service the declaration further states that the contract postal unit at impressive greetings processes regular priority and express mail as well as registered and certified mail with regard to the practices and procedures employed by the contract postal unit at impressive greetings the declaration states the main post office branch in mesa arizona picks up mail from our contract postal unit twice a day once pincite p m and again pincite p m the p m pick-up is the last mail pick-up of the day there is a visible sign on the wall in the back of the contract postal unit telling customers that the pick-up times are pincite p m and p m impressive greetings is open for business until p m monday through friday our policy is to turn our hand-stamp postmark date to the next day pincite p m this way any mail that goes out with the p m mail has the current day’s postmark on it the mail that arrives after the main post office has done their pickup should have the following day’s postmark on it the changing of the postmark date stamp at this time is in conformity with the direction of the mesa arizona united_states post office we are not supposed to predate or postdate mail the postmark should reflect the date that the mail will be picked up from our establishment by the mesa arizona united_states post office mr noggle’s declaration includes a sample of the postmark used by the postal contract unit at impressive greetings the sample postmark matches the postmark on the envelope bearing the petition in this case this matter was called for a second hearing at the court's motions session in washington d c counsel for respondent again appeared and offered argument in support of respondent’s motion to dismiss although no appearance was entered by or on behalf of petitioner at the hearing petitioner again filed a written_statement with the court pursuant to rule c discussion this court's jurisdiction to redetermine a deficiency depends upon the issuance of a valid notice_of_deficiency and a timely filed petition see rule a c 93_tc_22 90_tc_142 sec_6212 expressly authorizes the commissioner after determining a deficiency to send a notice_of_deficiency to the taxpayer by certified or registered mail it is sufficient for jurisdictional purposes if the commissioner mails the notice_of_deficiency to the taxpayer at the taxpayer's last_known_address sec_6212 81_tc_42 the taxpayer in turn generally ha sec_90 days from the date the notice_of_deficiency is mailed to file a petition in this court for a redetermination of the deficiency see sec_6213 there is no dispute that respondent mailed the notice_of_deficiency to petitioner at her last_known_address on date accordingly the 90-day period for filing a timely petition with the court expired on wednesday date see sec_6213 the petition in this case was not filed until date although the petition was not timely filed petitioner maintains that the petition was mailed to the court on date--the 90th day after the mailing of the notice petitioner offered circumstantial evidence that mr williams delivered the petition to the contract postal unit at impressive greetings late in the afternoon on date sec_7502 provides that under certain circumstances a timely-mailed petition will be treated as though it were timely filed sec_7502 states in pertinent part sec_7502 general_rule -- date of delivery --if any return claim statement or other document required to be filed within a prescribed period or on or before a prescribed date under authority of any provision of the internal revenue laws is after such period or such date delivered by united_states mail to the agency officer or office with which such return claim statement or other document is required to be filed x the date of the united_states postmark stamped on the cover in which such return claim statement or other document or payment is mailed shall be deemed to be the date of delivery or the date of payment as the case may be in sum sec_7502 provides that if a petition is delivered to the court by the u s postal service then the date of the postmark stamped on the envelope bearing the petition shall be deemed the date of delivery see sec_301_7502-1 iii a proceed admin regs which provides in part that if the postmark does not bear a date on or before the last date or the last day of the period prescribed for filing the document the sec_7502 provides an additional safeharbor where a taxpayer mails his petition to court using certified or registered mail because mr williams concedes that he did not use certified or registered mail in this case we need not consider sec_7502 document will be considered not to be filed timely regardless of when the document is deposited in the mail emphasis added based upon the record presented we conclude that the petition was not timely filed pursuant to sec_7502 simply put the u s postal service postmark date of date affixed to the envelope bearing the petition is conclusive proof that the petition was not timely filed under sec_7502 a petitioner offers extrinsic evidence that the petition was timely mailed on date although we allow extrinsic evidence to prove the date of mailing where an envelope lacks a postmark or the postmark is illegible see 65_tc_548 such evidence is irrelevant in this case inasmuch as the envelope bears legible u s postal service postmarks dated after the 90th day prescribed for filing a timely petition see 572_f2d_212 9th cir 554_f2d_736 cir 88_tc_1063 70_tc_712 hamilton v commissioner tcmemo_1982_201 in conjunction with the foregoing we note that the date postmark date a date day before the petition was delivered to the court is not overtly erroneous on its face see harrison v commissioner tcmemo_1990_458 private postage meter postmark on envelope bearing a petition was treated as a nullity where the petition was delivered to the court more than a week before the date of the postmark petitioner cites 966_f2d_487 9th cir for the proposition that she has offered sufficient evidence to invoke the common-law mailbox rule petitioner’s reliance on anderson v commissioner supra and the mailbox rule is misplaced the question presented in anderson v commissioner supra was whether the taxpayer would be permitted to present extrinsic evidence of the date of mailing of a tax_return where the commissioner had no record of having received the return under the facts presented in that case the court_of_appeals for the ninth circuit rejected the commissioner’s argument that sec_7502 presented the sole means for the taxpayer to prove the date of mailing of the missing tax_return and allowed the taxpayer’s extrinsic evidence after sustaining the district court’s holding that the taxpayer had established the date of mailing the court_of_appeals went on to sustain the district court’s holding that the taxpayer could rely on the rebuttable_presumption under the common_law mailbox rule that a document properly and timely mailed is received by the addressee contrary to petitioner’s position anderson v commissioner supra does not stand for the broader proposition that a taxpayer may offer extrinsic evidence to rebut the date of a postmark affixed to an envelope bearing a petition filed with the court indeed in the course of its analysis the court_of_appeals in anderson v commissioner supra acknowledged its earlier holding in shipley v commissioner supra that in the absence of a receipt for certified mail the taxpayer was precluded under sec_7502 from introducing extrinsic evidence to prove that the postmark date affixed to the envelope bearing a petition filed with the court was incorrect although the circumstances leading to the late filed petition in this case are unfortunate we note that the mailing of the petition on the 90th day raised the spectre of possible timeliness problems requiring a heightened degree of care in the mailing process see drake v commissioner supra pincite moreover although we lack jurisdiction in this case petitioner is not without a remedy in short petitioner may pay the tax file a claim_for_refund with the internal_revenue_service and if the claim is denied sue for a refund in the federal district_court or the court of federal claims see id pincite 55_tc_138 consistent with the preceding discussion we shall grant respondent's motion to dismiss for lack of jurisdiction -- - to give effect to the foregoing an order of dismissal for lack of jurisdiction will be entered


office_of_chief_counsel internal_revenue_service memorandum number release date cc ita b07 rnasrallah postn-114336-10 uilc date date to nicholas j singer attorney cc lm ctm sf large mid-size business from branch chief branch cc ita income_tax accounting third party communication none date of communication not applicable subject treatment of american viticultural area designation under sec_197 this chief_counsel_advice responds to your request for assistance this advice may not be used or cited as precedent legend taxpayer date location a location b x y issue ---------------------------------------------------- ---------------------- ---------------- -------------- ------ -------- when taxpayer purchased a vineyard that is located in an american viticultural area ava is the amount of the purchase_price allocated by taxpayer to the right to use the ava designation an amortizable sec_197 intangible postn-114336-10 conclusion for sec_197 purposes the right to use an ava designation is a license permit or other right granted by a governmental_unit and is not an interest in land therefore the right to use an ava designation is a sec_197 intangible and the amount of the vineyard’s purchase_price allocated by taxpayer to the right to use the ava designation is an amortizable sec_197 intangible facts on date taxpayer purchased a vineyard in the location a viticultural area and the location b viticultural area the alcohol and tobacco_tax and trade bureau ttb of the united_states department of the treasury has approved the location a viticultural area and the location b viticultural area as avas taxpayer allocated a portion of the purchase_price to the right to use the ava designation and treats such allocated amount as an amortizable sec_197 intangible law and analysis sec_197 of the internal_revenue_code provides that a taxpayer shall be entitled to an amortization deduction with respect to any amortizable sec_197 intangible sec_197 provides that in general the term amortizable sec_197 intangible means any sec_197 intangible which is acquired after date and which is held in connection with the conduct_of_a_trade_or_business or an activity described in sec_212 sec_197 provides that the term sec_197 intangible means among other things any license permit or other right granted by a governmental_unit or an agency_or_instrumentality thereof sec_1_197-2 of the income_tax regulations provides that sec_197 intangibles include any license permit or other right granted by a governmental_unit including for purposes of sec_197 an agency_or_instrumentality thereof even if the right is granted for an indefinite period or is reasonably expected to be renewed for an indefinite period these rights include for example a liquor license a taxi-cab medallion or license an airport landing or takeoff right sometimes referred to as a slot a regulated airline route or a television or radio broadcasting license sec_197 provides that the term sec_197 intangibles does not include among other things any interest in land sec_1 c provides for this purpose an interest in land includes a fee interest life_estate remainder easement mineral right timber right grazing right riparian right air right zoning variance and any other similar right such as a farm allotment quota for farm commodities or crop acreage base however an interest in land does not include an airport landing or takeoff right a regulated airline route or a franchise to provide cable television service the ttb has promulgated regulations relating to avas in cfr part cfr sec_9_3 provides the procedures for submitting a petition including the information to be postn-114336-10 included in such petition to the administrator to establish an american viticultural area the administrator is defined in cfr dollar_figure as the administrator of the ttb pursuant to cfr a viticultural area is defined as a delimited grape growing region distinguishable by geographical features the boundaries of which have been delineated in subpart c of cfr part approved american viticultural areas cfr dollar_figure provides that the viticultural areas listed in subpart c of cfr part are approved for use as appellation of origin in accordance with cfr part two of these approved american viticultural areas are the location a viticultural area as described in cfr x and the location b viticultural area as described in cfr y in addition the ttb has promulgated regulations relating to avas in cfr part with respect to the labeling and advertising of wine under cfr sec_4 a the names of one or more grape varieties may be used as the type designation of a grape wine only if the wine is also labeled with an appellation of origin as defined in cfr sec_4 a cfr sec_4 a provides that for american wine an american appellation of origin is i the united_states ii a state iii two or no more than three states which are all contiguous iv a county which must be identified with the word county in the same size of type and in letters as conspicuous as the name of the county v two or no more than three counties in the same states or vi a viticultural area as defined in cfr sec_4 e cfr sec_4 b provides in pertinent part that an appellation of origin disclosing the true place of origin of the wine shall appear in direct conjunction with and in lettering substantially as conspicuous as the class and type designation if a varietal grape type designation is used on the label for purposes of cfr part a viticultural area for american wine is defined in cfr sec_4 e i as a delimited grape growing region distinguishable by geographical features the boundaries of which have been recognized in cfr part cfr sec_4 e i ii and iv provide that in the case of american wine a wine may be labeled with a viticultural area appellation only if the appellation has been approved under cfr part not less than percent of the wine is derived from grapes grown within the boundaries of the viticultural area and it has been fully finished within the state or one of the states within which the labeled viticultural area is located cfr sec_4 e provides that petitions for establishment of american viticultural areas may be made to the administrator by any interested_party the ttb approves the areas established as avas any winemaker regardless of whether they have petitioned to establish an ava may use an ava designation on its wine bottle label if that winemaker meets the requirements set forth by the ttb these requirements are that the vitcultural area appellation has been approved by the ttb under cfr part not less than percent of the wine is derived from grapes grown within the boundaries of the viticultural area and it has been fully finished within the state or one of the states within which the labeled viticultural area is located accordingly the right to use an ava designation is a right granted by a governmental postn-114336-10 unit and is a sec_197 intangible within the meaning of sec_197 however an interest in land is not a sec_197 intangible sec_1_197-2 provides a nonexclusive list of examples of interests in land for this purpose an interest in land includes a fee interest life_estate remainder easement mineral right timber right grazing right riparian right air right zoning variance and any other similar right such as a farm allotment quota for farm commodities or crop acreage base arguably the ava designation is an interest in land because the grapes producing the wine are harvested from the vineyard and the vineyard is land however the ava designation applies to one of the uses of a particular crop from any land within the designated viticultural area which is further processed into a finished product it is not the right to or a limitation on the uses or product of a particular piece of land within the designated viticultural area consequently the ava designation is not similar to any of the enumerated examples of interests in land as stated in sec_1 c and thus is not an interest in land under sec_197 and sec_1_197-2 case development hazards and other considerations we have concerns about how a taxpayer would value the right to use an ava designation it is unclear whether the value of the right to use an ava designation attaches to an acquisition of a particular vineyard within an ava the benefit in value from the right to use an ava designation accrues to all land whose highest_and_best_use is as a vineyard within such designated viticultural area consequently all of the closest comparable vineyards share the same intangible benefit thereby making an appraiser’s determination of the increment of value assigned to the intangible benefit and finding comparable vineyards outside of the particular ava factually difficult in addition sec_197 provides that sec_197 shall not apply to any increment of value if without regard to sec_197 such increment is properly taken into account in determining the cost of property the land and tangible improvements that is not a sec_197 intangible without sec_197 the benefit of an ava designation to a vineyard would be subsumed into the value of the land and improvements only if there was a factual showing of some clear premium such as a recognized and marketable tradename to a taxpayer's vineyard would an intangible asset be recognized this writing may contain privileged information any unauthorized disclosure of this writing may undermine our ability to protect the privileged information if disclosure is determined to be necessary please contact this office for our views postn-114336-10 please call if you have any further questions george blaine associate chief_counsel income_tax accounting by ___kathleen reed_______ kathleen reed branch chief branch income_tax accounting