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 number release date date cc pa cbs b2 gl-128023-00 uilc memorandum for associate area_counsel sbse sacramento cc sbse sac from subject joseph w clark senior technician reviewer branch collection bankruptcy and summonses request for chief_counsel_advice offers in compromise-release of co-obligor under california law this chief_counsel_advice responds to your memorandum received on date in accordance with sec_6110 this chief_counsel_advice should not be cited as precedent issues whether pattern_letter p-229 at irm exhibit the common_law co-obligor agreement or pattern_letter p-230 at irm exhibit the non-common law co- obligor agreement should be used in the state of california conclusion selection of either pattern_letter p-229 or pattern_letter p-230 will depend on whether california is a common_law or non-common state with regard to the liability of a co-obligor where an offer_in_compromise is submitted by only one of the obligors of a joint assessment facts and legal analysis in a situation involving a joint assessment the liability for the outstanding federal taxes among the obligors is joint_and_several sec_6013 the service may collect the we note that your memorandum requesting advice did not specify what type of joint liability is at issue for purposes of discussion we are assuming that the joint liability arose as a result of a joint assessment against husband and wife who filed a gl-128023-00 entire debt from either obligor or may choose to reach a compromise with one obligor or the other where an offer_in_compromise is submitted by an obligor and more than one individual is obligated to pay the outstanding tax debt the internal_revenue_manual instructs offer specialists to take the steps necessary where appropriate to preserve the government’s right to collect from individual s other than the offer proponent who is are liable for the tax that is the subject of a compromise_agreement irm provides as follows to preserve the ability to collect from the other parties to a joint assessment husband and wife or other joint obligors a co-obligor agreement should be secured from the maker of the offer to determine what effect compromise with one obligor will have on the liability of the other obligor s the manual relies on the law of the state in which the offer proponent resides irm provides in relevant part as follows if the taxpayer lives in a jurisdiction where acceptance of an offer_in_compromise from one of the taxpayers will release not only that taxpayer from further liability for the remaining tax but will also release the other taxpayer from liability as well then pattern_letter p-229 should be used the common_law co-obligor agreement if on the other hand the taxpayer lives in a jurisdiction where the express reservation of the right to proceed against the taxpayer who is not a party to the offer agreement will protect against the release of the noncompromising taxpayer then pattern_letter p-230 should be used the non-common law co-obligor agreement you advise that in california the offer specialists in sacramento have been using pattern_letter p-229 for co-obligor agreements evidently the sacramento office is of the view that california follows the common_law rule and that the offer_in_compromise operates as a release of the tax debt for all the obligors governed by the provisions of california civil code through you indicate that your office advised the offer specialists in sacramento by memorandum dated date that joint_return the law of the state with the most significant relationship to the compromise_agreement will govern for purposes of interpreting the agreement typically this will be the taxpayer’s state of residence however the service should continue to refer to the law of the state with the most significant relationship to the contract gl-128023-00 california in fact does not follow the common_law rule your memorandum states that california civil code provides that a release of one of two or more joint debtors does not extinguish the obligations of any of the others your office then concluded that pattern_letter p-230 the non-common law co-obligor agreement should be used subsequently you were provided with a copy of a memorandum dated date from district_counsel san francisco addressed to special procedures that memorandum advised that california does follow the common_law rule you indicate that the reasoning of the date memorandum was that an offer_in_compromise is not a release which is governed by the provisions of california civil code through but instead an accord and satisfaction which is governed by california civil code through in light of the san francisco district_counsel memorandum you indicate that your office is reviewing the advice contained in your date memorandum although the service has maintained its position that an offer_in_compromise is not a contract in common_law when interpreting agreements to compromise federal tax_liabilities under sec_7122 courts have applied generally accepted contract principles see 372_f2d_352 3d cir 303_f2d_1 5th cir however compromise agreements are also governed by sec_7122 and the treasury regulations thereunder the secretary’s authority to compromise tax cases is contained in sec_7122 the secretary is empowered to set the threshold requirements for consideration of a proposed compromise all offers to compromise must be submitted in accordance with the procedures prescribed by the secretary see sec_301_7122-1t c the treasury regulations limit the scope of a compromise_agreement as follows acceptance of an offer to compromise will conclusively settle the liability of the taxpayer specified in the offer sec_301_7122-1t d emphasis added thus the regulations limit the effect of a compromise to the release of only the party named in the offer where the internal_revenue_code establishes that taxpayers are jointly and severally liable for the tax the government’s ability to collect from one taxpayer is not prejudiced by compromise with a different taxpayer under the common_law rule the release of one of two or more joint_and_several debtors could extinguish the obligations of all the debtors it appears that prior to the date memorandum from your office both sacramento and san francisco were of the view that california follows the common_law rule with regard to a co-obligor’s liability gl-128023-00 however some courts have relied upon state law contract principles for the rule_of decision when faced with a dispute between the service and a taxpayer regarding the interpretation or effect of a compromise see eg 176_fsupp_932 d neb therefore as discussed above the service should take the steps necessary to protect its ability to collect from a non-compromising spouse whenever a compromise with one spouse is recommended for acceptance see irm and irm the decision whether pattern letters p-229 or p-230 should be used in co-obligor situations is based on analysis of state law in your request for advice you indicate that your analysis of california law reveals a possible conflict between california civil code through referring to accord and satisfaction and through referring to release and that it is unclear which provisions an offer_in_compromise may fit under you conclude that if an offer is an accord and satisfaction then common_law applies and pattern_letter p-229 should be used on the other hand if an offer is akin to a release then california could be considered a non-common law state and pattern_letter p-230 should be used in general terms accord and satisfaction is defined as a new contract which is substituted for an old contract whereby one party agrees to give and the other party agrees to accept something with the view of settlement of a claim black’s law dictionary 7th ed a n accord is an agreement for the settlement of some previously existing claim by a substituted performance it will be found that this definition of accord also includes all compromises they are agreements for the settlement of a previously existing claim by a substituted performance t he previous claim may be one that is in doubt or in dispute or one that is certain liquidated and undisputed corbin on contracts pincite the two parties may first make an accord executory that is a contract for the future discharge of the existing claim by a substituted performance still to be rendered when this executory_contract is fully performed as agreed there is said to be accord and satisfaction and the previously exiting claim is discharged see corbin on contracts pincite a release is defined as the actual discharge of the obligation it may take the form of a writing or an oral statement manifesting an intention to discharge another from an existing or asserted duty a release may be secured gratuitously or for consideration a review of california case law however reveals that an essential element for an accord and satisfaction is the existence of a legitimate dispute as to the amount due rued v cooper cal p clejan v reisman cal app 3d cal rptr 2d dist an offer_in_compromise submitted under sec_7122 may be accepted on the basis of doubt as to collectibility or to promote effective tax_administration as well as doubt as to liability so that there is not always a dispute as to the amount actually owed by the proponent of the offer gl-128023-00 black’s law dictionary 7th ed a release is a writing manifesting an intention to discharge another from an existing or an asserted duty 5a corbin on contracts pincite although it may be argued that an offer_in_compromise is more akin to an accord and satisfaction in that the parties have entered into a new arrangement to pay the outstanding taxes which amount is different from the original amount owed once the terms of the compromise are satisfied the debt is discharged and the proponent of the offer is released from further liability for those taxes acceptance by the service of an offer_in_compromise and the taxpayer’s satisfaction of the conditions of the offer ie payment of the offer amount and compliance with the tax laws result in release of the taxpayer from the tax_liability that is the subject of the compromise an offer_in_compromise also fits the definition of accord and satisfaction in that when a taxpayer submits an offer he is agreeing to pay an amount less than what he owes and the service agrees to accept that lessor amount in exchange for discharge of the taxpayer’s liability provided certain conditions are satisfied ie the amount offered is paid and the taxpayer remains current for a specified number of years a release under section california civil code is given to a debtor by a creditor in order to extinguish an obligation hawber v raley cal app p execution of release by one party sufficient see also sec_6325 certificate of release of federal_tax_lien the notes of decisions under california civil code cite the case of schwartz v california cal app 2d p 2d and provide as follows a judgment debtor should not be forced to go into bankruptcy to rid himself of a judgment where he and his creditor are ready willing and able to adjust and settle the debt these are some of the considerations which the legislature undoubtedly had in mind in the enactment of this section further it should not be the policy of the law to discourage sensible arrangements under which a creditor can satisfy a judgment for what he thinks it is worth and a debtor for what he can afford to pay you cite the case of mccall v four star music company cal app 4th cal rptr 2d 2d dist in your memorandum and indicate that the court_of_appeals of california in its opinion did not make any distinction between the concepts of accord and satisfaction and release the facts in the mccall case indicate that the parties had entered into an accord and satisfaction of an outstanding obligation the court’s opinion stated broadly that it is the rule_of california that where fewer than all joint tortfeasors satisfy less than the entire judgment such satisfaction will not relieve the remaining joint tortfeasors of their obligation under the judgment citing california civil code gl-128023-00 it appears that the provisions of california civil code through and through may be read concurrently rather than as conflicting provisions california civil code through discuss the necessary elements for an effective accord and satisfaction ie proper subject matter competent parties mutual consent and consideration while through discuss the effects of a release once an obligation is deemed to be satisfied under california civil code acceptance of the consideration by a creditor extinguishes the obligation once the obligation is extinguished with respect to the debtor who is the party to the contract agreement that debtor may be considered released from any further obligation pursuant to california civil code however provides that no other co-obligors are released from the obligation or debt since selection of either pattern_letter p-229 or letter p-230 depends on state law we recommend that you coordinate this matter with the associate area counsels that are affected within areas and a thorough analysis of california state law should be performed it is suggested that those individuals involved with writing or updating your local law supplement participate in resolving this issue once it is determined by state law analysis whether california is a common_law or non-common law state with respect to this issue then the choice of the appropriate form letter will be clear if you have any questions please contact the attorney assigned to this case at california civil code is silent with respect to the liability of co-obligors the provisions in through discussing accord and satisfaction appear to refer to specific parties to a specific contract requiring the elements of a contract proper subject matter competent parties meeting of the minds and consideration on the other hand the provisions relating to release specifically provides that a release of one or more joint debtors does not extinguish the obligation of any of the others see california civil code


t c memo united_states tax_court andrew dean shelton petitioner v commissioner of internal revenue respondent docket no filed date andrew dean shelton pro_se james a kutten for respondent memorandum opinion foley judge the issues for decision relating to petitioner’s federal_income_tax return are whether petitioner is entitled to an alimony deduction and whether petitioner is liable for a sec_6662 a accuracy-related_penalty the parties submitted this case fully stipulated pursuant to rule background petitioner married valerie r shelton in on date petitioner and ms shelton entered into a marital settlement agreement settlement agreement which provided mutually agreed-upon terms for their divorce the settlement agreement required petitioner to pay ms shelton dollar_figure representing her share of his separation pay from the military in addition to any interest she claims in the real_estate and furniture still in the marital home the settlement agreement further stated that the payment constitutes full and final settlement of any additional claims to a share of assets and that each party waived any claim for maintenance from the other party on date the circuit_court for the twentieth judicial circuit in st clair county illinois entered a judgment of dissolution of marriage divorce decree terminating petitioner’s and ms shelton’s marriage the divorce decree 1unless otherwise indicated all section references are to the internal_revenue_code in effect for the year in issue and all rule references are to the tax_court rules_of_practice and procedure stated that each party was barred from asserting any claim for maintenance formerly known as alimony and it incorporated by reference the terms of the settlement agreement in date petitioner paid ms shelton dollar_figure the payment in date petitioner filed a federal_income_tax return relating to and deducted as alimony dollar_figure in a statutory_notice_of_deficiency dated date and relating to respondent determined petitioner was not entitled to the alimony deduction and was liable for a sec_6662 accuracy- related penalty on date petitioner while residing in illinois filed his petition with the court discussion petitioner contends that the payment is alimony and is therefore deductible respondent contends that none of the payment is deductible because it does not qualify as alimony and is instead a division of marital property an individual may generally deduct payments made during the taxable_year to the extent that those payments are alimony or separate_maintenance includable in the recipient’s gross_income see sec_215 and b sec_71 requires amounts received as alimony to be included in gross_income 2petitioner paid ms shelton dollar_figure by wire transfer on date and dollar_figure by check dated date in order to qualify as alimony the payment must meet the requirements of sec_71 through d because the payment does not meet the requirements of sec_71 we need not address whether it meets the other requirements sec_71 requires that the divorce instrument not designate such payment as a payment which is not includible in gross_income under this section and not allowable as a deduction under sec_215 the divorce decree provides clear explicit and express direction that neither party shall receive alimony or a separate_maintenance payment see 112_tc_317 affd without published opinion sub nom schutter v commissioner 242_f3d_390 10th cir accordingly the payment does not meet the requirements of sec_71 and thus petitioner is not entitled to a deduction pursuant to sec_215 respondent further determined that petitioner is liable for a sec_6662 accuracy-related_penalty relating to sec_6662 and b imposes a 20-percent penalty on the amount of any underpayment_of_tax attributable to negligence or 3pursuant to sec_7491 petitioner has the burden_of_proof unless he introduces credible_evidence relating to the issue that would shift the burden to respondent see rule a our conclusions however are based on a preponderance_of_the_evidence and thus the allocation of the burden_of_proof is immaterial see 110_tc_189 ndollar_figure disregard of rules or regulations respondent bears and has met the burden of production relating to this penalty see sec_7491 116_tc_438 moreover petitioner did not act with reasonable_cause and in good_faith the divorce decree explicitly stated that neither party was entitled to alimony yet petitioner proceeded to claim an alimony deduction accordingly we sustain respondent’s determination contentions we have not addressed are irrelevant moot or meritless to reflect the foregoing decision will be entered for respondent


tcmemo_2009_169 united_states tax_court john b rice petitioner v commissioner of internal revenue respondent docket no 21567-07l filed date john b rice pro_se steven m webster for respondent memorandum opinion jacobs judge the dispute between the parties concerns respondent’s proposed use of a levy to collect frivolous income_tax return penalties against petitioner pursuant to sec_6702 the issue is whether to sustain respondent’s determination to proceed with the proposed collection activity unless otherwise indicated all section references are to the internal_revenue_code at the time he filed his petition petitioner resided in georgia background petitioner is an adherent of the principles espoused by robert clarkson clarkson founder of the patriot network a national organization that advocates tax_avoidance activities as well as the frustration and delay of collection efforts by the internal_revenue_service irs petitioner is no stranger to this court he has appeared before us on two prior occasions losing both times rice v commissioner an oral opinion of this court dated date rice v commissioner an oral opinion of this court dated date during petitioner received a distribution from the employees’ retirement_system of georgia pension_plan of which dollar_figure was reported to respondent by the payor as taxable_income he reported dollar_figure as taxable interest during petitioner received a distribution from the employees’ retirement_system of georgia pension_plan of which 1clarkson had previously been found to have engaged in activities that interfere with the enforcement of internal revenue laws including but not limited to instructing others to purposely frustrate and delay collection efforts and was permanently enjoined from participating in those and other activities see united_states v clarkson aftr 2d ustc par big_number d s c dollar_figure was reported to respondent by the payor as the taxable_amount he also reported dollar_figure as taxable interest petitioner submitted undated federal_income_tax returns for and reporting as taxable_income for each year only the dollar_figure of interest and reporting no tax_liability form 2555-ez foreign_earned_income_exclusion and form 1099-r distributions from pensions annuities retirement or profit-sharing_plans iras insurance contracts etc reflecting petitioner’s pension income were attached to each return for each year petitioner claimed he qualified for the foreign_earned_income_exclusion stating he resided in the american republic of georgia and as a retired georgia state employee his employer was the american republic of georgia neither return was signed using information from third-party payors the irs computed petitioner’ sec_2001 tax to be dollar_figure and hi sec_2002 tax to be dollar_figure a notice_of_deficiency for year was mailed to petitioner on date that notice in addition to the aforementioned dollar_figure deficiency in income_tax included additions to tax under sec_6651 failure_to_file a return and sec_6654 failure to pay estimated_tax a notice_of_deficiency for year was mailed to petitioner on date that notice in addition to the aforementioned dollar_figure deficiency in income_tax included additions to tax under sec_6651 and sec_6654 on date petitioner filed a petition at docket no contesting respondent’s determinations with respect to year on date petitioner filed a petition at docket no contesting respondent’s determinations with respect to year pursuant to an order dated date on date petitioner filed an amended petition with respect to year by order dated date the cases in docket nos and were consolidated for trial briefing and opinion a trial with respect to docket nos and was held in atlanta georgia on date as stated supra p a bench opinion was rendered on date and decisions were entered in accordance therewith on date on a date not specified in the record respondent assessed a frivolous income_tax return penalty pursuant to sec_6702 for both and on date respondent mailed petitioner a final notice_of_intent_to_levy and notice of your right to a hearing regarding the sec_6702 frivolous_return penalty for on date respondent mailed petitioner a final levy notice regarding the sec_6702 penalty for petitioner timely submitted a form request for a collection_due_process or equivalent_hearing sec_6330 hearing challenging each notice_of_levy and requesting a face-to-face hearing by letter dated date respondent informed petitioner that his request for a hearing had been received and that his case had been assigned to a settlement officer in respondent’s appeals_office in atlanta the letter stated that the issues petitioner raised are those that courts have determined are frivolous or appeals does not consider the letter advised petitioner that because the only issues he raised were frivolous he was not entitled to a face-to-face hearing instead petitioner was offered a telephone hearing to be held on date petitioner was advised that he would be allowed a face-to-face conference with respect to any nonfrivolous issue however before doing so respondent had to be informed of the nonfrivolous issue in writing or by telephone call to respondent’s appeals settlement officer by date by letter dated date petitioner stated he did not want a telephone hearing and he again asked for a face-to-face meeting petitioner denied raising frivolous issues petitioner appeared unexpectedly in person at respondent’s appeals_office in atlanta along with clarkson and one or two other witnesses respondent’s appeals settlement officer refused to see them respondent issued a notice_of_determination concerning collection action s under sec_6320 and or on date in that notice respondent sustained the proposed levy respondent noted in the determination notice that no notice_of_deficiency was necessary with respect to the imposition of a frivolous_return penalty under sec_6702 petitioner timely contested respondent’s levy determination by filing a petition in this court a trial was held on date at trial petitioner was given the opportunity to explain why the sec_6702 frivolous_return penalty should not be applied with respect to his submissions of hi sec_2001 and sec_2002 federal_income_tax returns petitioner gave no adequate explanation collection of the deficiencies in income_tax for and and additions to tax under sec_6651 and sec_6654 is not before us discussion a sec_6702 frivolous income_tax return penalty pursuant to sec_6702 a frivolous_return penalty may be sec_6702 as in effect during the relevant period provides in relevant part sec_6702 frivolous income_tax return a civil penalty --if-- any individual files what purports to be a return of the tax imposed by subtitle a but which-- a does not contain information on which the substantial correctness of the self-assessment may be judged or b contains information that on its face indicates that the self-assessment is substantially incorrect and continued assessed against a taxpayer if three requirements are met first under sec_6702 the taxpayer must file a document that purports to be an income_tax return second under sec_6702 the purported return must lack the information needed to judge the substantial correctness of the self-assessment or under sec_6702 must contain information indicating the self-assessment on the purported return is substantially incorrect third under sec_6702 the taxpayer’s position must be frivolous or demonstrate a desire which appears on the purported return to delay or impede the administration of federal_income_tax law see 130_tc_44 we generally look to the face of the documents to determine whether a taxpayer is liable for a frivolous_return penalty as a matter of law id see 290_fsupp2d_1220 d nev continued due to-- the conduct referred to in paragraph is a a position which is frivolous or b a desire which appears on the purported return to delay or impede the administration of federal_income_tax laws then such individual shall pay a penalty of dollar_figure b jurisdiction the sec_6702 frivolous_return penalty is governed by the procedural rules of sec_6703 which generally removes sec_6702 penalty assessments from the deficiency jurisdiction of this court however sec_6330 provides this court with jurisdiction to review an appeal from the commissioner’s determination to proceed with collection activity regardless of the type of underlying tax involved we have held that our jurisdiction includes the right to review the commissioner’s levy collection activity regarding the sec_6702 frivolous_return penalty callahan v commissioner supra thus we have jurisdiction to review respondent’s notice_of_determination of date issued to petitioner under sec_6330 c standard of review this case involves a review of respondent’s determination to proceed with collection of petitioner’s frivolous_return penalties for and via levy sec_6330 provides that no levy may be made on any property or right to property of any person unless the secretary has notified that person in sec_6703 provides that subch b of ch of the internal_revenue_code relating to deficiency procedures does not apply with respect to the assessment or collection of the penalties provided by sec_6700 sec_6701 and sec_6702 4as amended by the pension_protection_act of publaw_109_280 120_stat_1019 effective for determinations made after date writing of the right to a hearing before the levy is made the sec_6330 hearing sec_6330 hearings concerning levies are conducted in accordance with sec_6330 after the commissioner issues his notice_of_determination following an administrative hearing a taxpayer has the right to petition this court for judicial review of the commissioner’s determination sec_6330 a taxpayer is precluded from contesting the existence or amount of the underlying liability if he she received a notice_of_deficiency for the tax_year in question or otherwise had an opportunity to dispute the underlying tax_liability sec_6330 if the taxpayer did not receive a notice_of_deficiency or did not have an opportunity to dispute the underlying tax_liability we review the matter de novo 115_tc_35 because no notice_of_deficiency was sent with respect to the sec_6702 frivolous_return penalty petitioner was entitled to contest the penalty at his sec_6330 hearing respondent conceded that no actual meeting or telephone conference between petitioner and respondent’s appeals settlement officer took place accordingly we review the and frivolous_return penalties de novo d application with regard to the first element of the sec_6702 frivolous_return penalty the documents petitioner filed purported to be income_tax returns for and each return included a form 1099-r that was provided by the employees’ retirement_system of georgia pension_plan reporting petitioner’s pension income a relatively insignificant amount of interest_income was also reported on each return finally petitioner attached a form 2555-ez to each return purporting to show that he was entitled to the foreign_earned_income_exclusion and as a consequence he reported zero on the line for total_tax on form_1040 u s individual_income_tax_return for each year thus the first element of the sec_6702 frivolous_return penalty is met with regard to the second element of the sec_6702 frivolous_return penalty the returns petitioner filed for and are substantially incorrect in that he claimed on each return a foreign_earned_income_exclusion on form 2555-ez even though he provided a domestic address and acknowledged that he lived there throughout each taxable_year accordingly the second element of the sec_6702 frivolous_return penalty is met finally with regard to the third element of the sec_6702 frivolous_return penalty petitioner’s position that he qualifies as a nonresident nontaxpayer is frivolous on its face petitioner claims on form 2555-ez to be a citizen of the american republic of georgia and not a resident_of_the_united_states we have imposed the sec_6673 penalty for taking a frivolous position upon taxpayers who have claimed that they are not subject_to federal income_taxation because they are not citizens of the united_states but instead are citizens of a state republic eg the republic of colorado the republic of california see eg fisher v commissioner tcmemo_1996_ fox v commissioner tcmemo_1996_79 applying the sec_6673 penalty for instituting procedures primarily for delay based on raising frivolous arguments the third and final element of the sec_6702 frivolous_return penalty is thus met e petitioner’s position petitioner contends that he was entitled to a face-to-face hearing and that because he was denied one respondent abused his discretion in determining to proceed with the collection of the frivolous income_tax return penalties for year sec_2001 and sec_2002 by levy we disagree petitioner’s arguments disputing the sec_6702 frivolous_return penalties as set forth in his communications with respondent themselves were frivolous petitioner was given an opportunity to present nonfrivolous arguments but did not do so we are satisfied that a face-to-face conference would not have been productive see moline v commissioner tcmemo_2009_ summers v commissioner tcmemo_2006_219 ho v commissioner tcmemo_2006_41 f conclusion respondent’s appeals settlement officer verified that the requirements of all applicable law and administrative procedures were met and that the proposed levy action appropriately balanced the need for efficient collection_of_taxes with the petitioner’s concerns that the levy be no more intrusive than necessary we hold that respondent did not abuse his discretion in determining to proceed with the collection by levy of the frivolous income_tax return penalties owed by petitioner for year sec_2001 and sec_2002 to reflect the foregoing decision will be entered for respondent


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc corp b03 - plr-112264-02 date date re legend purchaser target target subs sellers state m state n date a plr-112264-02 date b date c company officials dear this letter responds to a letter dated date requesting an extension of time under sec_301_9100-1 through of the procedure and administration regulations for purchaser and sellers to file a sec_338 election under sec_338 and sec_338 of the internal_revenue_code and sec_1_338_h_10_-1t c of the income_tax regulations with respect to purchaser’s acquisition of the stock of target sometimes hereinafter referred to as the election on date a all citations in this letter to regulations under sec_338 are regulations in effect on date a additional information was received in and with letters dated april and date the material information is summarized below purchaser is a c_corporation incorporated in state m purchaser is the common parent of a consolidated_group target has three subsidiaries target subs target was incorporated in state n and had elected to be treated as an s_corporation for federal_income_tax purposes target subs are qualified subchapter_s subsidiaries and thus are not treated as separate entities from target sellers one of which is an llc owned solely by an individual and is disregarded as an entity separate from its single owner owned all of the target stock on date a pursuant to a stock purchase agreement of date b and later amended purchaser acquired all of the target stock from sellers in exchange for cash and stock of purchaser in a fully taxable transaction it is represented that purchaser’s acquisition of the stock of target qualified as a qualified_stock_purchase as defined in sec_338 purchaser and sellers intended to file the election the election was due on date c but for various reasons the election was not made subsequently this request was submitted under sec_301_9100-1 for an extension of time to file the election the period of limitations on assessment under sec_6501 has not expired for purchaser’s target’s or sellers’ taxable years in which the acquisition occurred the taxable years in plr-112264-02 which the election should have been filed or any taxable years affected by the election had it been timely filed sec_338 permits certain stock purchases to be treated as asset acquisitions if the purchasing_corporation makes or is treated as having made a sec_338 election or a sec_338 election and the acquisition is a qualified_stock_purchase sec_338 permits the purchasing and selling corporations to elect jointly to treat the target_corporation as deemed to sell all of its assets and distribute the proceeds in complete_liquidation a sec_338 election may be made for target only if purchaser acquires stock meeting the requirements of sec_1504 from a selling_consolidated_group a selling affiliate or the s_corporation shareholders in a qualified_stock_purchase sec_1 h -it c under sec_301_9100-1 the commissioner has discretion to grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make a regulatory election sec_301_9100-1 sec_301_9100-2 provides automatic extensions of time for making certain elections requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-3 in this case the time for filing the election is fixed by the regulations ie sec_1_338_h_10_-1t c therefore the commissioner has discretionary authority under sec_301_9100-1 to grant an extension of time for purchaser and sellers to file the election provided purchaser and sellers show they acted reasonably and in good_faith the requirements of sec_301_9100-1 and sec_301_9100-3 are satisfied and granting relief will not prejudice the interests of the government information affidavits and representations submitted by purchaser sellers and company officials explain the circumstances that resulted in the failure to timely file a valid election the information establishes that purchaser and sellers reasonably relied on a qualified_tax professional who failed to make or advise purchaser to make the election the request for relief was filed before the failure to make the election was discovered by the internal_revenue_service and that the government will not be prejudiced if relief is granted see sec_301_9100-3 and v based on the facts and information submitted including the representations plr-112264-02 made we conclude that purchaser and sellers have shown they acted reasonably and in good_faith the requirements of sec_301_9100-1 and sec_301_9100-3 are satisfied and granting relief will not prejudice the interests of the government accordingly an extension of time is granted under sec_301_9100-1 until days from the date on this letter for purchaser and sellers to file the election with respect to the acquisition of the stock of target as described above the above extension of time is conditioned on the filing within days of the date on this letter of all returns and amended returns if any necessary to report the transaction in accordance with the election and the taxpayers’ purchaser’s consolidated group’s sellers’ and target’s tax_liability if any being not lower in the aggregate for all years to which the election applies than it would have been if the election had been timely made taking into account the time_value_of_money no opinion is expressed as to the taxpayers’ tax_liability for the years involved a determination thereof will be made by the applicable director’s office upon audit of the federal_income_tax returns involved further no opinion is expressed as to the federal_income_tax effect if any if it is determined that the taxpayers’ tax_liability is lower sec_301_9100-3 purchaser and sellers must file the election in accordance with sec_1 h - 1t c that is a new election on form_8023 must be executed on or after the date on this letter which grants an extension and filed in accordance with the instructions to the form a copy of this letter must be attached to the election form purchaser and sellers must file or amend as applicable their returns to report the transaction as a sec_338 transaction for the taxable_year in which the transaction was consummated and for any other affected_taxable_year and to attach to the returns a copy of this letter and a copy of the election we express no opinion as to whether the acquisition sale of the target stock qualifies as a qualified_stock_purchase under sec_338 whether the acquisition sale of target stock qualifies for sec_338 treatment whether the llc referred to herein is disregarded as an entity separate from its owner whether target qualifies as an s_corporation whether target subs qualify as qsubs or any other tax consequences arising from the election in addition we express no opinion as to the tax consequences of filing the election late under the provisions of any other section of the code and regulations or as to the tax treatment of any conditions existing at the time of or resulting from filing the election late that are not specifically set forth in the above ruling for purposes of granting relief under sec_301_9100-1 we relied on certain statements and representations made by the taxpayers however the director should verify all essential facts in addition notwithstanding that an extension is granted under sec_301_9100-1 to file the election penalties and interest that would otherwise be applicable if any continue to apply plr-112264-02 purchaser must provide sellers with a copy of this letter this letter is directed only to the taxpayer s who requested it sec_6110 provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file in this office a copy of this letter has been sent to the taxpayer sincerely yours ken cohen senior technician reviewer branch office of associate chief_counsel corporate cc


internal_revenue_service p o box cincinnati oh number release date date date dear department of the treasury employer_identification_number contact person - id number contact telephone number uil 4945-dollar_figure you asked for advance approval of your educational grant procedures under internal_revenue_code sec_4945 this approval is required because you are a private_foundation that is exempt from federal_income_tax our determination we approved your procedures for awarding educational grants based on the information you submitted and assuming you will conduct your program as proposed we determined that your procedures for awarding educational grants meet the requirements of code sec_4945 as a result expenditures you make under these procedures won't be taxable description of your request you will operate a grant program to provide educational fellowships to professionals who will work with a congressional subcommittee on a variety of major policy issues by working directly with the subcommittee the fellows will gain a unique insight into the formation and execution of policy this experience will enable the fellows to work more effectively in the world of international affairs whether in academia non-governmental organizations or government you expect to sponsor two fellows for the program each year the fellow's compensation will vary depending on experience and current salary all fellows must agree and be able to participate for the duration of the program eligibility a prospective fellow must demonstrate a working knowledge and strong understanding of current issues have substantial experience in the committee issues or a graduate degree with a strong academic background be familiar with the legislative process reside in the local metropolitan area or be able to relocate to the area for the fellowship and be a us citizen selection process applicants will be selection based on academic achievements superior writing skills previous professional experience familiarity with legislative process and the quality of the application and interview preference is given to individuals with expertise in the subcommittee's area of responsibility finalists are selected by you in conjunction with the congressional offices where the fellow will work oversight you will i arrange to receive and review grantee reports annually and upon completion of the purpose for which the grant was awarded investigate diversions of funds from their intended purposes and take all reasonable and appropriate steps to recover diverted funds ensure grant funds held by a grantee are used for their intended purposes and withhold further payments to grantees until you obtain grantees assurances that future diversions will not occur and that grantees will take extraordinary precautions to prevent future diversions from occurring you will maintain all records relating to individual grants including information obtained to evaluate grantees identify whether a grantee is a disqualified_person establish the amount and purpose of each grant and establish that you undertook the supervision and investigation of grants basis for our determination the law imposes certain excise_taxes on the taxable_expenditures of private_foundations code sec_4945 a taxable_expenditure is any amount a private_foundation pays as a grant to an individual for travel study or other similar purposes however a grant that meets all of the following requirements of code sec_4945 is not a taxable_expenditure the foundation awards the grant on an objective and nondiscriminatory basis the irs approves in advance the procedure for awarding the grant the grant is - a scholarship or fellowship subject_to sec_117 and is to be used for study at an educational_organization described in sec_170 or - a prize or award subject_to the provisions of sec_74 if the recipient of the prize or award is selected from the general_public or letter catalog number 58222y - to achieve a specific objective produce a report or similar product or improve or enhance a literary artistic musical scientific teaching or other similar skill or talent of the recipient to receive approval of its educational grant procedures sec_53_4945-4 requires that a private_foundation show the grant procedure includes an objective and nondiscriminatory selection process the grant procedure results in the recipients performing the activities the grants were intended to finance the foundation plans to obtain reports to determine whether the recipients have performed the activities that the grants were intended to finance other conditions that apply to this determination this determination covers only the grant program described above this approval will apply to succeeding grant programs only if their standards and procedures don't differ significantly from those described in your original request this determination applies only to you it may not be cited as precedent you cannot rely on the conclusions in this letter if the facts you provided have changed substantially you must report any significant changes in your program to the cincinnati office of exempt_organizations at internal_revenue_service exempt_organizations determinations p o box cincinnati oh you cannot make grants to your creators officers directors trustees foundation managers or members of selection committees or their relatives all funds distributed to individuals must be made on a charitable basis and must further the purposes of your organization you cannot award grants for a purpose that is inconsistent with code sec_170 b you should keep adequate_records and case histories so that you can substantiate your grant distributions with the irs if necessary letter catalog number 58222y please keep a copy of this letter in your records if you have any questions please contact the person listed at the top of this letter sincerely tamera ripperda director exempt_organizations letter catalog number 58222y


department of the treasury internal_revenue_service washington d c date of f i c e of c h i e f c ou n s e l number release date cc psi br6 tl-n-6386-00 uilc internal_revenue_service national_office field_service_advice memorandum for associate area_counsel lmsb area cc lm fsh bos from kathleen reed senior technician reviewer cc psi br6 subject depreciation of media rights 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 taxpayer party a franchise b league c year m dollars n dollars issue sec_1 whether media rights acquired in connection with the acquisition of taxpayer a professional sports franchise in year are an asset separate and distinct from goodwill tl-n-6386-00 if the media rights are a separate asset are they or any part of them subject_to depreciation or amortization conclusion sec_1 as the taxpayer has utilized a valuation approach similar to the methodology allowed in 507_us_546 the identified media rights likely have an ascertainable value separate and distinct from goodwill of the acquired enterprise we make no conclusion as to the specific values a factual question determined by taxpayer with the purchase of franchise b taxpayer acquired certain media rights as evidenced by various broadcast contracts while the individual contracts at issue cover certain distinct ascertainable periods as well as later renewal periods the assets represented by these contracts are the franchise’s right to national and local broadcast revenue these rights to broadcast revenues or media rights do not have a limited useful_life and are not wasting_assets the contracts themselves are merely links in a continuous indefinite chain of media-related income while the term of a particular contract will expire it will be either renewed with the current broadcaster or replaced with a contract with a competing broadcaster the revenue flow will continue and taxpayer’s right to share in or receive that revenue will continue unaffected by changes in the contract or parties to the contract the asset the right to broadcast revenue are inherent in the franchise acquired and have no determinable expiration therefore these rights are not depreciable under sec_167 of the internal_revenue_code further the intangible media rights were acquired with the acquisition of a professional sports franchise and are specifically excluded from amortization under sec_197 facts taxpayer a limited_partnership acquired a professional sports franchise of the league c in year from a third party specifically the current partners of taxpayer acquired the entire partnership_interest of the prior partners of party a which held franchise b the change in ownership of over of the partnership interests resulted in an sec_708 termination of party a following the termination party a contributed all of its assets and liabilities to the new partnership taxpayer and the terminated partnership distributed interests in the new partnership to the purchasing partners since a sec_754 election was in place the basis of partnership assets was adjusted pursuant to sec_743 and sec_755 taxpayer allocated the purchase_price to the individual assets using the provisions of sec_1060 pursuant to sec_755 tl-n-6386-00 based on the consideration paid_by taxpayer for the of the partnership interests of party a and the liabilities assumed from the prior partners the adjusted_basis of the partnership assets was m dollars an accounting firm was retained by taxpayer to value the acquired assets the fair_market_value of the assets was estimated to be n dollars among the assets identified valued and determined to have a useful_life are both the national television rights and local media television and radio rights the acquisition of a league c sports franchise admits the purchaser into membership of the league c in which the sports team competes membership in the league c carries with it substantial and valuable rights one of the rights of a franchisee is to share in league c-wide revenue sources including national television contracts this sharing is a perpetual right that exists for as long as the franchise exists individual franchises do not have the right to separately negotiate a national broadcast contract the league c shares the national broadcast revenues among its franchise members the home team retains local broadcast rights and the away team retains the right to broadcast the game back to its home territory except during playoff or championship matches the national media contracts have renewal provisions providing for exclusive negotiation rights with respect to any further contract and if no agreement can be reached league c may negotiate with others the franchisee has the right to negotiate local television and radio broadcast contracts the current contracts have one year remaining and have renewal language similar to the national television broadcast contracts these media rights were valued using a discounted cash_flow analysis ie the present_value of annual net cash flows these annual net cash flows were computed by determining the net receipts from the identified media source less the allocated operating_expenses net receipts were determined by taking into consideration the media contracts in place at the time of the acquisition net receipts for all years beyond the current media contracts without a determinable end were based on a percentage increase in revenues reflecting inflationary rates the operating_expenses allocated to the media sources were based on a percentage of the relative amount of revenues from all applicable sources the fair market values of the media rights so determined were divided between the initial contractually determinable periods years and year for the national and local contracts respectively the first renewal of the contract period additional years for both national and local rights and the remainder or all future time periods the useful lives of the first two categories were based on the time frame of the contractually determined periods and the expected contractual time frame of the first renewals the latter was determined to have an indefinite life the tax basis of tl-n-6386-00 the first two categories of media rights were amortized over the same contractually determined periods the remainder media rights were not amortized law and analysis sec_167 and sec_197 provide the rules for depreciation or amortization of intangible assets sec_197 provides for a 15-year amortization period and generally applies to a broad range of purchased intangible assets sec_197 is effective for intangibles acquired after date sec_167 provides for depreciation of intangible assets not covered by or specifically excluded from sec_197 sec_197 provides that the term sec_197 intangible shall not include a franchise to engage in professional sports and any item acquired in connection with such a franchise thus the broadcast contracts and other media rights acquired in taxpayer’s acquisition of franchise b in year are excluded from amortization under sec_197 sec_167 allows as a depreciation deduction a reasonable allowance for the exhaustion wear_and_tear and obsolescence of property used in a trade_or_business the property must be an intrinsically wasting asset 400_f2d_427 5th cir however its useful_life is not necessarily the useful_life inherent in the asset but it is the period over which the asset may reasonably be expected to be useful in the taxpayer’s trade_or_business see sec_1_167_b_-1 of the income_tax regulations the term property includes intangible assets and sec_1_167_a_-3 provides that where an intangible asset is known from experience or other factors to be of use in the business for only a limited time the length of which can be estimated with reasonable accuracy such an intangible asset may be the subject of a depreciation deduction an intangible asset the useful_life of which is not limited is not subject_to the allowance for depreciation no allowance will be permitted merely because in the unsupported opinion of the taxpayer the intangible asset has a limited useful_life in order to qualify for the depreciation deduction the taxpayer must establish that the intangible asset has an ascertainable value separate and distinct from goodwill and has a limited useful_life the duration of which can be ascertained with reasonable accuracy 481_f2d_1240 5th cir cert_denied 414_us_1129 in 507_us_546 the court held an intangible asset that would otherwise fall within the concept of goodwill is depreciable provided it has an ascertainable value and a limited useful_life that can be determined with reasonable accuracy in order to determine whether the intangible assets at issue herein tl-n-6386-00 satisfy this test one must determine whether these properly identified intangibles have an ascertainable value and a limited useful_life in contrast with other types of customer-based or supplier-based contracts the contracts and underlying rights given to taxpayer as the owner of the franchise b are dependent only upon membership in the league c the only qualification of taxpayer’s right to share in the income from the national broadcast contracts was its continued membership in league c this membership could cease only upon the elimination of franchise b as a member club or alternatively the demise of league c as an organization under the terms of the television broadcast contracts at issue the contracts are not automatically renewable however past practice within the industry shows these media contracts are always renewed whether with the then current contracting network or with a competitor see generally 842_f2d_1335 2nd cir the life of an asset can not be limited by the remote speculative possibility that renewal of a contract might not occur 354_f2d_410 4th cir rather than merely acquiring existing contracts taxpayer acquired certain media rights as evidenced by the various television broadcast contracts while the contracts at issue cover certain distinct ascertainable periods and later renewal periods the asset represented by these contracts the franchise b’s right to national and local broadcast revenue does not have a limited useful_life and can not be considered a wasting asset both the national broadcast rights and the right to contract for the local broadcast of games is a right inherent in the franchise acquired therefore these rights have an indeterminate useful_life coextensive with the life of the franchise itself national media rights valuation and amortization were addressed in e cody 556_f2d_1224 5th cir cert_denied 434_us_1014 the court found that the taxpayer’s television rights were to last as long as the atlanta falcons remained a member of the nfl while the existing contract provided a measure of the taxpayer’s television rights over a specific period of time those rights were to continue indefinitely accordingly the television rights were found to have an indeterminate useful_life and could not be amortized in 70_tc_817 rev’d and remanded on other grds 649_f2d_707 9th cir the court addressed a national basketball association team’s right to share in revenues from national television broadcast of nba games the court held there was reasonable expectation that the nba would continue to have a favorable national television contract and since such rights tl-n-6386-00 could continue indefinitely they were not amortizable the court found that the rights under the then current television contract were only a link in a continuing chain of national television income these rights would last as long as the team held an nba franchise and the source of the rights was the nba membership the contract only provided a measure of value for the acquired rights to the nba television revenue such rights continued indefinitely and therefore could not be amortized the case of 807_f2d_1306 6th cir aff’g in part and vacated in part remanded 622_fsupp_595 n d ohio also dealt with the amortization of broadcast rights acquired in the purchase of a sports franchise a professional baseball team both national and local broadcast contracts were acquired and the taxpayer attempted to characterize the broadcast rights acquired as is the case herein as being comprised of two components the current broadcasting contracts existing at the time of the purchase and the future broadcasting rights inherent in the franchise which had yet to be contracted for the taxpayer argued that the current rights had a limited useful_life represented by the unexpired term of the existing contracts and had ascertainable values and thus met the test of houston chronicle supra and was subject_to amortization the court reached the opposite conclusion it found the rights did not have a limited useful_life which could be ascertained with reasonable accuracy and therefore could not be amortized as wasting_assets both national and local broadcast contracts were found to be links in a perpetual chain of broadcasting revenues as long as the team remained a major league baseball franchise the club would have the rights to share in the revenues produced by the national contract upon expiration of each contract a new contract providing for further revenues would be executed although the then current contract broadcast contract covered a distinct ascertainable period the asset represented by the contract each franchise’s national broadcasting rights did not have a limited useful_life and therefore could not be considered a wasting asset the same was found to hold true for local broadcast contracts the team’s right to contract for local broadcast of games was a right inherent in the franchise and had a indeterminate useful_life coextensive with the life of the franchise the right to broadcast games locally and nationally was still extremely valuable to the franchise at the expiration of the current contracts while the franchise will certainly become a party to a new broadcasting contract at the expiration of each preceding contract it does not do so in order to reacquire an asset rather it does so in order to obtain revenues from an existing asset applying the mccarthy court’s analysis to the facts of this case the outcome is the same the current national and local broadcast contracts as well as their first renewals are links in a continuing chain of broadcast revenues of tl-n-6386-00 indeterminate duration that taxpayer is entitled to share in revenues as long as they are a member of league c the term of a particular contract will expire and a new contract entered into with either the same broadcaster or a competitor the revenues flowing from the contracts would continue the asset the media rights never expires in newark morning ledger co supra the supreme court dealt with the identification valuation and depreciability of intangible assets the court held that an intangible asset that would otherwise fall within the concept of goodwill is still depreciable provided it has an ascertainable value and a limited useful_life that can be determined with reasonable accuracy however this holding does not alter our determination that the assets acquired by taxpayer are not individual contracts but are the media rights which do not have a limited useful_life and therefore are not depreciable in newark the taxpayer acquired groupings of paid subscribers to its various newspapers valuing the subscribers based on the estimate of future profit to be derived from the continuation of subscriptions into the future and depreciating this value over the expected remaining life of current subscriptions the government argued that the valuation of the subscriptions represented the continuation of customer patronage a core definition of non-depreciable goodwill the court held that an allowance for depreciation is permissible where the intangible has an ascertainable value separate and distinct from goodwill and has a measurable limited useful_life the significant question for the purposes of depreciation is not whether the asset falls ‘within the core of the concept of goodwill’ but whether it is capable of being valued and whether that value diminishes over time u s pincite here a clear distinction can be drawn between the customer-based intangibles in newark morning ledger the subscriptions and the intangible here the media rights the at-will subscribers in newark were of a finite number that would waste and not self-regenerate one customer might be replaced with another but the replacement would not self-regenerate and would be a different customer unrelated to the subscriber list in the situation at issue here a new contract would replace the current contract for the same media right but for a subsequent time period and the user of this media right the broadcaster is not the source of the asset being valued the source is the right to share in or receive the broadcast revenue from whatever broadcaster and this right is based upon membership in league c the individual_contract might end but the right to broadcast and its derivative revenue inherent in the franchise would continue to exist and would still be valuable the assets are singular in nature and the contracts are replaced one for one as they expire the media rights are thus self-regenerative therefore the media rights are intangible assets with indefinite lives and not subject_to depreciation under sec_167 tl-n-6386-00 case development hazards and other considerations the case requires a complete review of all underlying franchise documents agreements and contracts to confirm they are consistent with such material addressed in the court cases that underpin the analysis herein if the court accepts taxpayer’s expected position that their defined intangible assets current broadcast contracts are the intangible assets at issue and not the greater media rights then taxpayer would be able to show an ascertainable value and a useful_life determinable with reasonable accuracy for such contracts this position is stronger for the local broadcast contracts where taxpayer is one of the parties to such contracts however since league c is the party to the national television broadcast contract and not taxpayer taxpayer does not have the contract but rather the right to share in media revenues from the contract held by league c this national contract is the bulk of the valuation at issue 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 office of associate chief_counsel passthroughs special industries kathleen reed senior technician reviewer branch


internal_revenue_service number release date index number -------------------------- -------------------------- ----------------------------------- -------------------------------------- ----------------------------------------- ------------------------------------------------ department of the treasury washington dc third party communication none date of communication not applicable_person to contact -------------------- id no -------------- telephone number --------------------- refer reply to cc psi plr-142104-08 date date legend ------------------------------------------------------------------------------ --------------------------------------------------- ------------------------------------ --------------------------- taxpayer ----------------------------------------------------------------------------------------------------------- operating company affiliate a affiliate b historic building -------------------------------------------------------------- government_entity government_entity government_entity building building site state state city station date date date x governmental lease government parking area ------------------------------------- construction company zone a zone b university a square feet b square feet ---------------------------------- -------------------------------------- ---------------------------------------------------- ------------------ ------------------------ ------------ ------------------ ------------- ----------------- ------------------------------------------------- ------------------ -------------------------- ---------------------- ---------- ------------------------------------------------------------- ------------------------------------------ ---------------------------------------------------- ------------------------------------------------------- ----------------------------------- --------------------------- -------------------------- plr-142104-08 c square feet d square feet year a year b year c year d year e year f z percent dear ------------------ --------------------------- ----------------------------- ------- ------- ------- ------- ------- ------- ------------------- this is in response to your ruling_request dated on date and subsequent correspondence requesting rulings under sec_47 and sec_168 of the internal_revenue_code on behalf of taxpayer regarding a transaction that includes rehabilitation of historic building facts taxpayer is a state limited_partnership treated as a partnership for federal_income_tax purposes all of its partners are wholly owned indirectly by operating company through two taxable reit subsidiaries taxpayer acquired historic building listed on the national register of historic places on date and is in the process of rehabilitating it before historic building is placed_in_service at least one more limited_partner may be admitted to taxpayer taxpayer may enter into a master lease structure and elect to pass through federal rehabilitation credits available with respect to the rehabilitation of historic building to the new limited_partner or its affiliate as master tenant of historic building master tenant affiliate a a state limited_partnership and affiliate b also a state limited_partnership are wholly owned directly or indirectly by operating company and are treated as disregarded entities for federal_income_tax purposes taxpayer affiliate a and affiliate b are involved in the rehabilitation of historic building and the construction of building and building located on site which is in zone a building is an office building owned by affiliate b located across the street from station which is owned by x historic building is located across the street from station and building will be built on the annex site located across the street from historic building and currently leased to affiliate a affiliates of construction company have significant involvement in the planning and construction of historic building as construction and development manager and of the garage as construction manager until the fifth anniversary of the date that rehabilitated historic building is placed_in_service operating company or its successors or assigns will directly or indirectly i own at least twenty percent of all profits interests and capital interests in each of the entities owning the buildings or condominiums comprising its site project excluding plr-142104-08 any condominiums that are sold to parties unrelated to operating company and excluding any tower planned for building construction of which is not commenced within nine months following commencement of construction of the garage in building and ii serve as a general_partner or in a similar capacity such as manager of a limited_liability_company in each of such ownership entities engaging in active and substantial management functions with respect to the entities’ respective businesses which may include property management and leasing services in year a government_entity chose construction company as its developer to find appropriate uses for historic building the annex site a surface lot and a vehicle maintenance facility all of which are located in zone a a preliminary report prepared by construction company showed plans for towers at the sites where towers are currently planned for the annex site and suggested initiating discussions with x regarding land acquisition and infrastructure development in year b a working group that included representatives of operating company and construction company depicted towers at the sites currently planned for the annex as well as another tower at the site currently occupied by building in year b university signed a letter of intent to acquire historic building the annex site a surface lot and a vehicle maintenance facility from government_entity university then approached construction company about assuming university's obligation to purchase historic building the annex site or the vehicle maintenance facility in late year b construction company began discussions with government_entity regarding a potential relocation of government_entity 1's offices in city to historic building subsequently construction company presented preliminary concept plans for the rehabilitation of historic building the demolition of the annex and the construction of a new_building on the annex site for use and occupancy by government_entity the governmental lease and current plans for the rehabilitation of historic building and construction of building are the products of those discussions in order to promote redevelopment of economically distressed communities state enacted legislation permitting designation of certain zones ie zone b in city throughout state qualified businesses that operate in such zones are allowed certain tax exemptions deductions abatements and credits historic building building and building are all located in zone b in city through affiliate b operating company began planning to construct and lease building while investigating other development opportunities in zone b building is located across the street from station and was constructed on land owned by x but leased to affiliate b under a 99-year lease building is connected to station by an above street-level public bridge construction of most of the tenant finish for building was completed in year c and a certificate of occupancy for the core and shell was issued on date building contains a square feet of net rentable floor space historic building and the annex site on which building will be constructed were owned by government_entity until date on that date taxpayer acquired historic plr-142104-08 building and university acquired the annex site affiliate a then executed three 90-year ground leases with university for the annex site on which operating company plans to cause affiliate a or one or more other affiliates to construct building which will include a garage and two towers taxpayer agreed to lease the rehabilitated historic building to government_entity and affiliate a agreed to lease the government parking area to government_entity on or about date government_entity as sublessor and government_entity as sublessee executed governmental lease under which government_entity agreed to sublease the rehabilitated historic building and the government parking area government_entity will assign governmental lease to taxpayer or to the master tenant and the taxpayer or the master tenant will become the lessor under the governmental lease historic building is listed on the national register of historic places beginning in year d taxpayer began to substantially rehabilitate historic building and demolish the annex except for the annex tunnel after the annex site is cleared utilities and infrastructure will be installed and piles will be driven to provide the foundation for building operating company anticipates that by the end of year e construction of the garage in building will commence taxpayer may commence construction of one or possibly two towers planned for building within months following commencement of construction of the garage whichever of such towers if any is under construction within such nine-month period are referred to as the included towers if construction does not commence on either of these towers within nine months following commencement of construction of the garage such towers will not be treated as part of the site project for purposes of this private_letter_ruling and each reference below to the included towers should be ignored because there will be no included towers due to construction complexity and other delays the included towers will likely be placed_in_service after the tax_year in which historic building and the garage are placed_in_service the included towers may include space for office hotel retail and residential use the hotel space may be sold to an unrelated third party as a separate condominium and the residential space may be sold to unrelated third parties as separate residential condominiums any spaces in the included towers which are sold to unrelated third parties are not included in the computation of net rentable floor space in the site project under the governmental lease government_entity will lease the renovated historic building and the government parking area in the garage the government parking area will be available exclusively for possession use and occupancy by the tenant under the governmental lease government parking area will not be available for vehicular access by the general_public or by anyone other than government_entity and or government_entity and their employees and guests government parking area will be separated from other parking areas by a security gate restricting vehicular access elevator access to government parking area will be limited to such employees and other personnel government parking area will include at least parking spaces but may increase up to additional parking spaces if certain options under the governmental lease are exercised plr-142104-08 the rehabilitated historic building will comprise approximately b square feet of net rentable floor space the initial occupancy date of historic building and government parking area under governmental lease is anticipated for the summer of year f there may be changes in the precise mix and configuration of space but not less than c square feet of net rentable floor space will be constructed on the annex site as part of building in the form of some combination of i office residential hotel and or retail_space in the included towers excluding any condominiums sold to parties unrelated to operating company and ii retail_space government parking area and other parking areas in the garage dedicated to single-tenant use operating company will create a fully supported business center rather than a single building benefits to operating company from the development of site including the renovation of historic building and the construction of building and building include i the ability to solidify and strengthen the overall design integrity and economic viability of the entire site ii economies of scale in marketing and managing the overall site iii the ability to offer existing and prospective tenants a broad range of leasing options within the site and iv the ability to utilize a single maintenance operation to work on the entire site allowing for economic sharing of equipment and personnel to effectively manage the site operating company will have a single maintenance operation and a centralized managerial structure which will be responsible for delivering property management and maintenance services to the entire site tenants located in any building of the site will access the same property management organization to address operational requirements a series of walkways tunnels and pedestrian bridges will connect the buildings in the site a bus service will transport tenants and visitors among the various site buildings moreover a single architect has been retained as the master_plan executive architect for the operating company's overall site this architect served as building architect for building and will serve as building design architect for the garage in building the architect may serve as the building design architect for the included towers taxpayer makes the following representations the economic_substance of the governmental lease is that of a true lease such that taxpayer will be treated as the owner of historic building and affiliate a or another affiliate of operating company will be treated as the owner of government parking area in building for federal_income_tax purposes the rehabilitation of historic building and the construction of building and building are all part of one plan or scheme to redevelop part of a zone b as described above governmental lease does not include any renewal option the initial term of the governmental lease plus any service_contract or similar arrangement involving the property leased under the governmental lease will plr-142104-08 not exceed twenty years as measured from the first day any part of the leased premises is delivered by the landlord and accepted as substantially complete by the tenant under the governmental lease excluding pre-substantial completion access allowed to the tenant and its contractors to complete tenant improvements or to prepare for occupancy no lease of space in building by affiliate b or any other affiliate of operating company to a tax-exempt_entity as defined in sec_168 that is executed before the fifth anniversary of the first day the rehabilitated historic building is placed_in_service the fifth anniversary will have a lease_term including any fixed rate renewal option and any service_contract or similar arrangement involving the leased space which exceeds twenty years for purposes of this private_letter_ruling an option to renew a lease at a rental rate equal to a fair_market_value determined at the time of renewal is not treated as a fixed rate renewal option no lease of space in the included towers or in the garage in building by affiliate a or any other affiliate of operating company to a tax-exempt_entity that is executed before the fifth anniversary will have a lease_term including any fixed rate renewal option and any service_contract or similar arrangement involving the leased space which exceeds twenty years there is not now and will not be any up-front understanding informal arrangement or similar agreement between affiliate a or any other affiliate of operating company and any tax-exempt_entity lessee that any fair_market_value renewal option which may be granted under a lease of space in the included towers or in the garage in building executed before the fifth anniversary will be applied by the parties without regard to the actual fair_market_value rental of the premises at the time of renewal there is not now and will not be any up-front understanding informal arrangement or similar agreement between affiliate b and any other affiliate of operating company and any tax-exempt_entity lessee that any fair_market_value renewal option which may be granted under a lease of space in building executed before the fifth anniversary will be applied by the parties without regard to the actual fair_market_value rental of the premises at the time of renewal no portion of building historic building the included towers or the garage in building will be financed directly or indirectly by an obligation the interest on which is exempt from tax under sec_103 the governmental lease does not include and neither government_entity nor a related_entity under sec_168 holds a fixed or determinable price purchase or sale option or its equivalent with respect to all or any part of the premises leased under the governmental lease no lease executed between affiliate a or any other affiliate of operating company and any tax-exempt_entity lessee before the fifth anniversary will include plr-142104-08 and no such tax-exempt lessee or a related_entity will hold a fixed or determinable price purchase or sale option or its equivalent with respect to the included towers or the garage in building or any part thereof no lease executed between affiliate b or any other affiliate of operating company and any tax-exempt_entity lessee before the fifth anniversary will include and no such tax-exempt lessee or a related_entity will hold a fixed or determinable price purchase or sale option or its equivalent with respect to building or any part thereof and upon completion the buildings on the site will contain approximately the number of square feet of net rentable floor space set forth below building building historic building building total net rentable floor space the following rulings are requested net rentable floor space a square feet b square feet c square feet d square feet the 50-percent exception to the definition of tax-exempt_use_property which was added to sec_47 by section a of the housing assistance tax act of p l the act will apply to the qualified_rehabilitation_expenditures with respect to the rehabilitated historic building for purposes of the rehabilitation_credit neither historic building nor any part thereof nor any of the improvements to be made in rehabilitating historic building will be treated as tax-exempt_use_property under sec_47 and by reference sec_168 as modified by sec_47 for purposes of the rehabilitation_credit and applying sec_47 and sec_168 to taxpayer's rehabilitation and leasing of historic building the property will include all of the net rentable floor space in historic building building the garage in building including the retail_space the government parking area and any single-tenant designated parking area and the included towers including any office hotel residential and retail_space but excluding any condominiums sold to parties unrelated to operating company law and analysis sec_47 provides that for purposes of sec_46 the rehabilitation_credit for any taxable_year is percent of the qualified_rehabilitation_expenditures with respect to any certified_historic_structure sec_47 defines the term plr-142104-08 certified_historic_structure as any building and its structural_components which is listed in the national register sec_47 provides that qualified_rehabilitation_expenditures with respect to any qualified_rehabilitated_building shall be taken into account for the taxable_year in which such qualified_rehabilitated_building is placed_in_service sec_47 as amended by section a of the act provides that the term qualified_rehabilitation_expenditure does not include any expenditure in connection with the rehabilitation of a building which is allocable to the portion of the property which is or may reasonably be expected to be tax-exempt_use_property within the meaning of sec_168 except that percent shall be substituted for percent in sec_168 section b of the act provides that the amendment made by section shall apply to expenditures properly taken into account for periods after date sec_47 allows certain progress expenditures to be taken into account for a tax_year earlier than the tax_year in which the qualified_rehabilitated_building is placed_in_service but only if the taxpayer qualifies for and makes the election pursuant to sec_47 under sec_47 qualified_rehabilitation_expenditures for any qualified_rehabilitated_building are taken into account for the taxable_year in which the qualified_rehabilitated_building is placed_in_service taxpayer represents that the rehabilitated historic building was not placed_in_service prior to date taxpayer further represents that no election was made or will be made under sec_47 to take into account for a period prior to date any qualified_rehabilitation_expenditures with respect to the rehabilitated historic building the amendment to sec_47 by section a of the act applies to expenditures properly taken into account for periods after date therefore for purposes of the rehabilitation_credit the 50-percent exception enacted by section a applies to the taxpayer’s rehabilitation_expenditures with respect to the rehabilitated historic building rather than the 35-percent exception in sec_168 sec_168 states that in the case of non-residential real_property the term tax-exempt_use_property means that portion of the property leased to a tax- exempt entity in a disqualified_lease under sec_168 the term disqualified_lease means any lease of the property to a tax-exempt_entity but only if i part or all of the property was financed directly or indirectly by an obligation the interest on which is exempt from tax under sec_103 and such entity or a related_entity participated in such financing ii under such lease there is a fixed or determinable price purchase or sale option which involves such entity or a related plr-142104-08 entity or there is the equivalent of such an option iii such lease has a lease_term in excess of years or iv such lease occurs after a sale or other transfer of the property by or lease of the property from such entity or a related_entity and such property has been used by such entity or a related_entity before such sale or other transfer or lease under sec_168 property will be considered tax-exempt_use_property only if the portion of the property leased to tax-exempt entities in disqualified leases is more_than_35_percent_of_the_property the 35-percent exception sec_168 provides that improvements to a property other than land will not be treated as a separate_property sec_1_168_j_-1t q a-6 of the temporary income_tax regulations provides that the phrase more_than_35_percent_of_the_property means more than percent of the net rentable floor space of the property the net rentable floor space in a building does not include the common areas of the building regardless of the terms of the lease for purposes of the more_than_35_percent_of_the_property rule two or more buildings will be treated as separate properties unless they are part of the same project in which case they will be treated as one property two or more buildings will be treated as part of the same project if the buildings are constructed under a common plan within a reasonable_time of each other on the same site and will be used in an integrated manner for purposes of sec_168 taxpayer represents that historic building building the garage in building and included towers will not be financed with tax-exempt debt for purposes of sec_168 taxpayer represents that there is no fixed or determinable price purchase or sale option or the equivalent of such an option for the benefit of any government_entity or any other tax-exempt lessee or any related_entity with respect to any of the buildings for purposes of sec_168 taxpayer represents that the term of the governmental lease and any other leases with tax-exempt_entity lessees at the site including any fixed price renewal option and any service_contract or similar arrangement with respect to the leased space will be no greater than years any renewal option terms will be at a fair_market_value rental rate determined at the time of renewal and therefore should not be taken into account therefore neither the governmental lease nor any other lease of historic building building the garage in building or the included towers would presently be a disqualified_lease under these provisions the governmental lease and the lease by taxpayer to government_entity as they relate to historic building would each be a disqualified_lease under sec_168 the use after transfer rule because historic building has been used by government_entity a -------------------governmental entity and will after the acquisition of such property by operating company be leased to x for use by government_entity both of which are related entities to government_entity under plr-142104-08 sec_168 and sec_168 however sec_168 provides that property will not be treated as tax-exempt_use_property if the portion of the property leased to tax-exempt entities in disqualified leases is no more_than_35_percent_of_the_property under sec_47 percent is substituted for percent in sec_168 but only for purposes of the rehabilitation_credit and only for expenditures properly taken into account for periods after date although taxpayer acknowledges that historic building will be subject_to a disqualified_lease under the use after transfer rule taxpayer states that the 50-percent threshold will not be crossed because historic building building the garage in building and included towers are parts of a single project ie one property for purposes of sec_168 under sec_1_168_j_-1t q a-6 and thu sec_50 percent or less of the total net rentable floor space of that project ie the net rentable floor space of only the historic building will be subject_to a disqualified_lease therefore according to taxpayer no portion of the property will be tax-exempt_use_property within the meaning of sec_168 as modified for purposes of the rehabilitation_credit by sec_47 for purposes of determining if the buildings in this case should be considered part of a single project for purposes of sec_1_168_j_-1t q a-6 and sec_168 taxpayer argues that the buildings here are constructed under a common plan within a reasonable_time of each other located on the same site and will be used in an integrated manner taxpayer represents that the rehabilitation of historic building and the construction of building the garage in building and included towers are all part of one plan or scheme to redevelop part of the same zone b see representation we have no facts or reason to doubt or challenge this representation for instance early plans done by architects envision this area as a single development further a single architect will serve as the site plan architect for the site there will be a consistent architectural theme and design throughout the site the submission also indicates that the construction of building the renovation of historic building and the construction of the garage in building and the included towers will all be completed within a reasonable_time of each other according to the submission construction work on historic building and the garage in building and included towers was to begin shortly after completion of construction of building however commencement of this construction will be delayed due to the complexities of the negotiations between the parties nevertheless planning for renovation of historic building and construction of the garage in building and included towers began before completion of construction of building thus construction of building was completed in year c demolition work on the annex site began in year d construction work on historic building and the garage in building was scheduled to commence by the end of year e and if there will be any included towers construction on the included towers will commence within months after commencement of construction of the plr-142104-08 garage in building the submission provides that if construction does not commence on the included towers within nine months following commencement of construction of the garage in building there will be no included towers and all references to the included towers should be ignored and thus neither tower will be treated as part of the site project for purposes of this private_letter_ruling the facts show that these buildings will be constructed on the same site ie the site separated only by public streets and the station which will serve as the focal point of this development all of the buildings will be interconnected through a sky bridge walkways bus service transportation tunnel etc these buildings are all located within the same zone b lastly the facts in the submission indicate that operating company will operate the various components of the site in an integrated manner for instance the operating company will market and manage the site as a single development seeking economies of scale and the benefits of a significant amount of diverse space available for lease at one site taxpayer's facts and representations support the treatment of the development as one project being constructed pursuant to a common plan that will be completed within a reasonable_time on the same site and used in an integrated manner based upon these facts and representations concerning whether the development is one property within the meaning of that term in sec_1_168_j_-1t q a-6 we conclude that the historic building building the garage in building and included towers constitute one property for purposes of the 35-percent rule in sec_168 we also note that building the garage in building and included towers will be newly-constructed improvements to land and will be separate properties from the original no longer existing structures as a result of the application of the separate improvements rule in sec_168 the use after transfer rule_of sec_168 will not apply to building the garage in building and included towers which will not be used or occupied by the government_entity or a related_party prior to transfer to operating company see report of the senate_finance_committee s rpt no to the deficit_reduction_act_of_1984 at pages we therefore conclude that for purposes of applying sec_168 to taxpayer’s rehabilitation and leasing of historic building the property will include all of the net rentable floor space in historic building building the garage in building and included towers taxpayer has represented that the percentage of net rentable floor space of the property subject_to a disqualified_lease is approximately z percent b square feet d square fee this amount exceeds the percent exception in sec_168 therefore the property would be tax-exempt_use_property under sec_168 however because sec_47 applies to the plr-142104-08 qualified_rehabilitation_expenditures with respect to the rehabilitated historic building percent is substituted for percent in sec_168 therefore the property is not tax-exempt_use_property under sec_168 but only for purposes of the rehabilitation_credit based on the facts and representations submitted and the relevant law and analysis as set forth above we conclude the 50-percent exception to the definition of tax-exempt_use_property which was added to sec_47 by section a of act applies to the qualified_rehabilitation_expenditures with respect to the rehabilitated historic building for purposes of the rehabilitation_credit neither historic building nor any part thereof nor any of the improvements to be made in rehabilitating historic building are treated as tax-exempt_use_property under sec_47 and by reference sec_168 as modified by sec_47 for purposes of the rehabilitation_credit and applying sec_47 and sec_168 to taxpayer's rehabilitation and leasing of historic building the property includes all of the net rentable floor space in historic building building the garage in building including the retail_space the government parking area and any single-tenant designated parking area and the included towers including any office hotel residential and retail_space but excluding any condominiums sold to parties unrelated to operating company no opinion is expressed or implied regarding the application of any other provision in the code or regulations specifically no opinion is expressed or implied regarding whether the rehabilitation of historic building is a substantial rehabilitation or certified_rehabilitation or whether expenditures incurred to rehabilitate historic building are qualified_rehabilitation_expenditures under sec_47 this ruling is directed only to the taxpayer that requested it under sec_6110 it may not be used or cited as precedent in accordance with a power_of_attorney filed with the request a copy of this letter is being sent to your authorized representatives we are sending a copy of this letter to the appropriate sbse office sincerely yours paul f handleman chief branch office of the associate chief_counsel passthroughs special industries