george h tempel and georgetta tempel petitioners v commissioner of internal revenue respondent docket no filed date in ps donated a qualified_conservation_easement to a qualified charitable_organization as a result ps received con- servation easement income_tax credits from the state of colo- rado these credits were transferable to other taxpayers that same year ps sold a portion of those credits ps reported short-term_capital_gains from the sales of the state credits ps claimed an allocated portion of the professional fees they incurred to complete the conservation_easement donation as adjusted_basis in the state tax_credits they sold r determined the state_income_tax credits that ps sold were not capital assets and that ps had no adjusted_basis in the credits r filed a motion for partial summary_judgment and ps filed a cross-motion in their cross-motion ps also claim that pro- ceeds from their sales of state tax_credits should have been reported as long-term_capital_gains held the state tax_credits ps sold are capital assets held further ps do not have any basis in their state tax_credits held further ps’ holding_period in their state tax_credits is insufficient to qualify for long-term_capital_gains treatment james r walker and christopher d freeman for peti- tioners tamara l kotzker and sara j barkley for respondent opinion wherry judge this case involves a petition for redeter- tax deficiencies determined by mination of income verdate 0ct date jkt po frm fmt sfmt v files tempel sheila united_states tax_court reports for partial summary respondent for petitioners’ and tax years it is before the court on respondent’s date motion for partial summary_judgment and petitioners’ date cross-motion judgment see rule a respondent argues that petitioners’ gains from sales of their transferable colorado income_tax credits state tax_credits are not capital_gains and instead should be taxed as ordinary_income respondent also argues in the alternative that petitioners do not have any basis in their state tax_credits petitioners filed a cross-motion for partial summary judg- ment in which they agree that summary_judgment is appro- priate petitioners claim that their gains from the sales of their state tax_credits reported as short-term_capital_gains should have been reported as long-term_capital_gains they also assert they are entitled to reduce those gains by their allocable basis in the credits they sold for the reasons dis- cussed below we agree with petitioners that the transferable state tax_credits at issue are capital assets and we agree with respondent that petitioners had neither basis nor a long-term_holding_period in their state tax_credits background on date petitioners george and georgetta tempel husband and wife donated a qualified_conservation_easement to the greenlands reserve a qualified organiza- tion on approximately acres of petitioners’ land in colo- rado petitioners claimed the fair_market_value of their dona- tion was dollar_figure they incurred dollar_figure of expenses in connection with the donation that primarily consisted of var- ious professional fees as a result of the donation petitioners received dollar_figure of conservation_easement income_tax credits from the state of colorado throughout colorado granted its eligible residents income_tax credits for donating perpetual conservation ease- ments colo rev stat sec for the state granted an income_tax_credit equal to percent of the value of such a donation up to dollar_figure id sec rule references are to the tax_court rules_of_practice and procedure unless otherwise noted section references are to the internal_revenue_code_of_1986 code as amended and in effect for the tax years at issue verdate 0ct date jkt po frm fmt sfmt v files tempel sheila tempel v commissioner a i to the extent a donation’s value exceeded dollar_figure additional credit was limited to percent of the value in excess of dollar_figure id the maximum allowable credit was dollar_figure for each donation id colorado allowed conservation_easement credit recipients to use their credits to receive a limited refund provided that the state had exceeded constitutional tax collection limits commonly known as amendment or the douglas bruce amendment establishing taxpayer_bill_of_rights tabor id sec b the refund in certain cir- cumstances could reach a maximum of dollar_figure id unused credits could be carried forward for up to tax years or transferred to certain eligible taxpayers id sec a transferees may use their credits only to offset a tax_liability id sec transferees are ineli- gible for a refund and may not transfer their credits id the on date with the assistance of brokers petitioners sold dollar_figure of their state tax_credits to an unre- lated third party for net_proceeds of dollar_figure on date with the assistance of brokers petitioners sold an additional dollar_figure of their credits to another unrelated third party for net_proceeds of dollar_figure on date petitioners gave away dollar_figure of their credits on their form_1040 u s individual_income_tax_return petitioners reported dollar_figure of short-term_capital_gains from the sale of their state tax_credits schedule d capital_gains_and_losses of their tax_return reflects total_proceeds from the sales of the state tax_credits of dollar_figure and a basis of dollar_figure in those credits petitioners reported their basis in the state tax_credits by allocating the dollar_figure of expenses they incurred to make the donation to the portion of the credits they sold ie dollar_figure of credits sold dollar_figure of total credits dollar_figure dollar_figure on date respondent issued a notice_of_deficiency to petitioners for their and tax years respondent determined petitioners owed additional tax and penalties partially arising from respondent’s adjustments to peti- tioners’ reported gains from the sales of the state tax_credits respondent concluded that petitioners did not have any basi sec_2 the proceeds are net of dollar_figure paid to the brokers the proceeds are net of dollar_figure paid to the brokers verdate 0ct date jkt po frm fmt sfmt v files tempel sheila united_states tax_court reports in their state tax_credits and that the gains were ordinary rather than capital petitioners timely petitioned this court at the time the petition was in colorado respondent moved for partial summary_judgment peti- tioners also moved for partial summary_judgment filed petitioners resided discussion respondent’s motion for partial summary_judgment and petitioners’ cross-motion dispute i whether petitioners’ state tax_credits were capital assets ii whether the sales resulted in long-term or short-term_capital_gains and iii the amount of basis if any petitioners had in those credits respondent contends and petitioners do not contend other- wise that petitioners’ receipt of state tax_credits as a result of their conservation_easement contribution was neither a sale_or_exchange of the easement nor a quid pro quo trans- action for our discussion we accept those deemed conces- sions a summary_judgment rule a allows a party to move for a summary adju- dication in the moving party’s favor upon all or any part of the legal issues in controversy summary_judgment is appro- priate if the pleadings answers to interrogatories deposi- tions admissions and any other acceptable materials together with the affidavits if any show that there is no genuine issue as to any material fact and that a decision may be rendered as a matter of law rule b facts are viewed in the light most favorable to the nonmoving party 85_tc_812 the moving party bears the burden of demonstrating that no genuine issue of material fact exists and that the moving party is entitled to judgment as a matter of law 98_tc_518 affd 17_f3d_965 7th cir the court has considered the pleadings and other materials of record and concludes that as to the points of law at issue here there is no genuine issue of mate- rial fact whether petitioners’ transferable state tax_credits are capital assets and what basis if any and the holding_period petitioners have in their state tax_credits are novel verdate 0ct date jkt po frm fmt sfmt v files tempel sheila tempel v commissioner legal questions appropriate for decision by summary judg- ment b character of gain capital_gains are derived from the sale_or_exchange of cap- ital assets sec_1222 sec_1221 defines capital_asset as property held by a taxpayer except for eight categories of property specifically excluded from the definition none of the excluded categories is applicable to the state tax_credits at issue the purpose of capital_gains treatment is to provide some relief to taxpayers from the excessive burdens of taxation of an entire gain in year in those instances typically involving the realization of appreciation in value accrued over a substantial period of time commissioner v gillette respondent does not challenge that the state tax_credits at issue here are property see also va historic tax_credit fund lp v commissioner 639_f3d_129 4th cir concluding that nontransferable state tax_credits were property revg and remanding tcmemo_2009_295 sec_1221 provides in part as follows sec_1221 capital_asset defined a in general -for purposes of this subtitle the term capital_asset means property held by the taxpayer whether or not connected with his trade_or_business but does not include- stock_in_trade of the taxpayer or other_property of a kind which would properly be in- cluded in the inventory of the taxpayer if on hand at the close of the taxable_year or property held by the taxpayer primarily_for_sale_to_customers in the ordinary_course_of_his_trade_or_business property used in his trade_or_business of a character which is subject_to the allowance for depreciation provided in sec_167 or real_property used in his trade_or_business a copyright a literary musical or artistic composition a letter or memorandum or simi- lar property held by- accounts or notes receivable acquired in the ordinary course of trade_or_business for serv- ices rendered or from the sale of property described in paragraph a publication of the united_states government including the congressional record which is received from the united_states government or any agency thereof other than by purchase at the price at which it is offered for sale to the public and which is held by- any commodities_derivative_financial_instrument held by a commodities derivatives deal- er unless- any hedging_transaction which is clearly identified as such before the close of the day on which it was acquired originated or entered into or such other time as the secretary may by regulations prescribe or supplies of a type regularly used or consumed by the taxpayer in the ordinary course of a trade_or_business of the taxpayer respondent concedes that none of the eight categories delineated in sec_1221 is applicable to the state tax_credits neither party asserts the state tax_credits petitioners sold properly come within any other internal_revenue_code section determining the character of assets eg sec_1253 specifying the character of franchises trademarks and trade names verdate 0ct date jkt po frm fmt sfmt v files tempel sheila united_states tax_court reports motor transp inc 364_us_130 capital_gains treatment also alleviates the pernicious effects of inflation which creates phantom profits and mitigates the deterrent effect taxation may have on a taxpayer’s decision to convert assets that have appreciated 287_us_103 123_f3d_190 4th cir however it has also been acknowledged that sec_1221 makes no mention of these judicially perceived motivations for capital_asset treatment 304_f2d_125 2d cir revg and remanding 35_tc_617 there is no single definitive definition of a capital_asset 112_tc_209 revd on a different issue 262_f3d_851 9th cir instead it is a very broad term as the supreme court observed the body of sec_1221 establishes a general definition of the term capital_asset and the phrase does not include takes out of that broad definition only the classes of property that are specifically mentioned ark best corp v commissioner 485_us_212 while congress created a definition of capital_asset under sec_1221 that is inherently expansive many courts including the supreme court have recognized that the term is not without limits beyond those imposed by statute commissioner v gillette motor transp inc supra pincite 510_f3d_1295 11th cir affg tcmemo_2006_240 447_f3d_1269 10th cir affg tcmemo_2004_244 gladden v commissioner supra pincite faced with determining the character of assets that do not fit any of the sec_1221 exceptions to the definition of a capital_asset yet do not appear to properly fit that of a cap- ital asset courts use the substitute_for_ordinary_income doc- trine to exclude certain property see 437_f3d_399 3d cir affg tcmemo_2004_216 under this doctrine capital_asset does not include mere rights to receive ordinary_income commis- sioner v p g lake inc 356_us_260 the practical effect of the substitute_for_ordinary_income doctrine is that the supreme court has consistently con- strued ‘capital asset’ to exclude property representing income items or accretions to the value of a capital_asset themselves verdate 0ct date jkt po frm fmt sfmt v files tempel sheila tempel v commissioner properly attributable to income 381_us_54 the doctrine has been applied by courts directly and indirectly to exclude a variety of assets from the breadth of sec_1221 as we explained in 84_tc_50 the substitute_for_ordinary_income doctrine is an important court-imposed limitation on the types of property that will qualify as a cap- ital asset it is now clear that the substitute_for_ordinary_income doctrine is the only recognized judicial limit to the broad terms of sec_1221 see ark best corp v commis- sioner supra pincite n consequently when determining whether property is a capital_asset under sec_1221 unless one of the eight exceptions or the substitute for ordi- nary income doctrine applies it is a capital_asset see eg 447_f3d_1269 10th cir treating the trans- fer of rights to lottery payments as ordinary_income affg tcmemo_2004_244 765_f2d_643 7th cir holding that the sale of a gold option did not result in capital_gains when the option represented a right_of_first_refusal to net profits from mining affg 80_tc_955 455_f2d_1146 10th cir determining that a settlement payment was a substitute for the taxpayer’s services as an employee 336_f2d_701 9th cir finding sale of water refund agreements resulted in ordinary_income affg 40_tc_199 320_f2d_929 5th cir treating consideration for mort- gage servicing contracts as a substitute for commissions 294_f2d_123 10th cir finding sale of fractional interests in mineral leaseholds was a substitute for future income affg 34_tc_513 forrer v commissioner tcmemo_1981_418 con- cluding that assignment of rights to book royalties was a transfer of an ordinary_income asset in 84_tc_50 the court acknowledged that there were two court-imposed limitations on what type of property qualifies for capital_asset treatment the first being for assets that were held as an integral part of a taxpayer’s business as explained by the supreme court in 350_us_46 and the second being assets that were substitutes for ordinary_income since our decision in foy the supreme court has clarified that there is no separate rule for assets that are an integral part of a taxpayer’s business 485_us_212 accordingly there remains only one court-imposed limitation on what type of property qualifies for capital_asset treatment see fnma v commissioner 100_tc_541 we further acknowledged in foy that after the ordinary_income limitation was squarely estab- lished by the supreme court in 356_us_260 subse- quent decisions have attempted to clarify this limitation foy v commissioner supra pincite we then reviewed the cases subsequent to p g lake that have analyzed whether a transfer of a contractual right constituted more than a mere right to receive income these cases applied the substitute_for_ordinary_income doctrine to the transfer of contractual rights by analyzing the entire economics of a transaction id pincite we noted there are typically six factors courts will consider to determine whether the substitute_for_ordinary_income doctrine applies there- fore the six-factor test originated and has been used as a means of determining the character of gain_or_loss on the transfer of contractual rights that possess an element of income where those rights may represent more than a mere right to income accordingly there must be con- tractual rights at issue that convey rights to income in order for the factors specified in 112_tc_209 revd on a different issue 262_f3d_851 9th cir to become the appropriate analysis to apply verdate 0ct date jkt po frm fmt sfmt v files tempel sheila united_states tax_court reports inapplicability of gladden v commissioner respondent asserts that the appropriate framework for determining the character of petitioners’ gains is the analysis the court employed in gladden v commissioner supra the taxpayers in gladden agreed to relinquish intangible water rights in exchange for cash the court applied contract analysis specifically a six-factor test gladden factors to determine the character of the taxpayers’ gain on the relin- quishment of those rights id pincite respondent argues the gladden factors point to ordinary_income treatment for the proceeds of the state tax_credit sales we find that respondent’s argument extends the gladden analysis beyond its historical use and the purpose it serves the gladden factors arose from a judicial need to analyze the underlying nature of contract rights this court cannot con- clude that a government-granted tax_credit is a contract right there is nothing in the colorado statutes granting the tax_credits that could be understood to create a contract as the supreme court stated in 470_us_451 for many decades this court has maintained that absent some clear indication that the legislature intends to bind itself contractually the presumption is that a law is not intended to create private contractual or vested rights but merely declares a policy to be pursued until the legisla- ture shall ordain otherwise this well-established presumption is grounded in the elementary proposition that the principal function of a legislature is not to make contracts but to make laws that establish the policy of the state policies unlike contracts are inherently subject_to revi- sion and repeal and to construe laws as contracts when the obligation is not clearly and unequivocally expressed would be to limit drastically the essential powers of a legislative body indeed ‘ t he continued existence of a government would be of no great value if by implications and presumptions it was disarmed of the powers necessary to accomplish the ends of its creation ’ thus the party asserting the creation of a contract must overcome this well-founded presumption and we proceed cautiously both in identifying a contract within the language of a regulatory statute and in defining the contours of any contractual obligation citations omitted the analysis was first discussed and applied by the court in foy v commissioner supra pincite despite the factors’ origination in foy v commissioner supra for convenience to the parties we refer to the analysis as the gladden factors verdate 0ct date jkt po frm fmt sfmt v files tempel sheila tempel v commissioner here there is no clear indication that the colorado legisla- ture intended to bind itself contractually the presumption that colorado’s state tax_credit has not created any private contractual rights has not been overcome state tax_credits as respondent concedes are not contract rights respondent has asserted no reason nor can we think of one to expand the applicability of the gladden analysis to the state tax_credits at issue inapplicability of the substitute_for_ordinary_income doctrine respondent also asserts that petitioners’ gains from the sales of their state tax_credits are ordinary because they are merely a substitute_for_ordinary_income first respondent asserts that petitioners’ proceeds from selling the state tax_credits are merely a substitute for a refund from colorado that would have been ordinary_income respondent’s argu- ment assumes that a refundable_credit would not be excluded from income consequently respondent’s position is that the proceeds petitioners received from the sales of their credits are a substitute for the up to dollar_figure tax_refund that a colorado taxpayer could receive in a year the state incurs a budget surplus yet respondent also concedes that there was no opportunity for a refund from the state either during the year petitioners sold their credits or in through petitioners sold dollar_figure and gave away dollar_figure of their dollar_figure of state tax_credits leaving them with dollar_figure of state tax_credits to use there is no evidence and respondent does not assert that petitioners sold credits they could have respondent’s motion for summary_judgment states that generally a payment from a state attributable to the portion of a refundable_credit that exceeds a taxpayer’s liability would be ordinary_income as support respondent cites revrul_85_39 1985_1_cb_21 amplified by revrul_90_56 1990_2_cb_102 neither revenue_ruling addresses the federal_income_tax im- plications of a state tax_refund attributable to state tax_credits instead the revenue rulings analyze whether distributions from the state of alaska’s annual resident dividend program are income or gifts to the state’s residents respondent does not provide any reason colorado’s re- fundable tax_credit program should be treated similarly for federal tax purposes to alaska’s div- idend program rather than to the tax and deemed refund programs implemented by the states of iowa and california see revrul_79_315 1979_2_cb_27 and revrul_70_86 1970_1_cb_23 respectively a transferee of the state tax_credits is never eligible for a refund colo rev stat sec c colorado taxpayers have been able to receive a refund for their conservation_easement cred- its only in verdate 0ct date jkt po frm fmt sfmt v files tempel sheila united_states tax_court reports otherwise used to receive a refund therefore petitioners’ proceeds from the sale of their credits are not a substitute for a tax_refund second respondent maintains that to the extent a tax- payer could use a credit to reduce a state tax_liability but instead sells that credit that taxpayer has the economic equivalent of ordinary_income respondent appears to reason that if an individual taxpayer who sells credits itemizes deductions ignoring phase-outs that taxpayer’s sec_164 federal_income_tax deduction is greater than it would have been had that taxpayer retained and used the credits there- fore the taxpayer who sells credits has more federal_income_tax deductions and owes less federal_income_tax assuming arguendo that petitioners sold credits that they could some day have used to offset a state tax_liability and that they could have deducted that liability for federal tax purposes were it not offset respondent’s argument still fails a reduc- tion in a tax_liability is not an accession to wealth con- sequently a taxpayer who has more sec_164 deductions has not received any income having addressed respondent’s arguments and finding them unpersuasive we turn to whether there is any reason the substitute_for_ordinary_income doctrine is applicable to the sales of petitioners’ state tax_credits the parties and this court agree that the receipt of a state tax_credit is not an accession to wealth that results in income under sec_61 see 109_tc_303 revrul_79_315 1979_2_cb_27 we know of no authority and respondent has not cited any for the propo- sition that a state_income_tax credit results in ordinary_income upon its later sale on the contrary courts and the commissioner’s rulings frequently treat government-granted rights as capital assets even respondent recognizes that a reduction in taxes does not create income the end re- sult of the act is the issuance by the state of cash payments to all individual income taxpayers thus the act is merely a means of effecting a statutory decrease in the tax_liability of each individual taxpayer see revrul_79_315 c b pincite carrying this proposition through to its logical conclusion would mean that inherited and gifted property also typically received tax free should receive ordinary_income treatment when sold see 437_f3d_399 3d cir discussing a similarly illogi- cal result where a taxpayer has not made any underlying investment in an asset affg tcmemo_2004_216 see caboara v commissioner tcmemo_1977_355 deciding a liquor license is a capital_asset curtis v united_states ustc par aftr 2d w d wash accepting the parties’ characterization of government-allotted milk base rights as capital assets verdate 0ct date jkt po frm fmt sfmt v files tempel sheila tempel v commissioner it is also apparent that the transferred state tax_credits never represented a right to receive income from the state instead they merely represented the right to reduce a tax- payer’s state tax_liability it is without question that a government’s decision to tax one taxpayer at a lower rate than another taxpayer is not income to the taxpayer who pays lower taxes a lesser tax detriment to a taxpayer is not an accession to wealth and therefore does not give rise to income it follows that the taxpayer who is able to claim a deduc- tion or credit has no more income by virtue of having that right than the taxpayer who is unable to make such a claim had petitioners used all of their credits to offset their state tax_liability rather than selling them it appears that respondent would agree there would have been no income to petitioners using a tax_credit to offset a tax_liability is not an accession to wealth petitioners never possessed a right to income from the receipt of the credits they did not sell a right either to and deciding whether those rights were long-term or short-term capital assets revrul_70_644 1970_2_cb_167 treating milk allocation rights as capital assets revrul_70_248 1970_1_cb_172 treating liquor business license as a capital_asset revrul_66_58 1966_1_cb_186 treating a cotton acreage allotments as capital assets sec_197 as contended by regulations may have the effect of characterizing certain intangibles used in a trade_or_business as sec_1231 assets sec_197 sec_1_197-2 income_tax regs all accessions to wealth clearly realized and over which the taxpayers have complete do- minion are income 348_us_426 some commentators have suggested a state’s grant of state_income_tax credits to taxpayers who make charitable donations of qualified conservation easements should be treated as a trans- action that is in part a sale and in part a gift the commissioner has eschewed this approach and neither party has advocated it here see chief_counsel_advice date see also 109_tc_303 we discern no reason to disturb this practice credits do not increase a donor’s wealth as long as they are used to offset or reduce the donor’s own state tax responsibility a reduced tax is not an accession to wealth it is only as occurred in the instant case when the donor sells or exchanges a state tax_credit to a third party for consideration that an accession to wealth has occurred a lower tax is not the same as or comparable with the state of alaska’s distribution of oil revenues derived from third parties to its residents which was treated as income to them in revrul_85_39 supra in a revenue_ruling the commissioner reasoned that a tax rebate applied in the form of a state_income_tax credit was not income because it was merely a means of effecting a statu- tory decrease in the tax_liability of those taxpayers revrul_79_315 c b pincite the commissioner’s longstanding administrative position has been that the receipt and use of a state tax_credit is not income revrul_79_315 supra revrul_70_86 supra chief coun- sel advice date the general exception is that a refund of a tax claimed as a federal_income_tax deduction in a prior year is income sec_111 respondent does not assert and there is no evidence that petitioners sold credits that they could have claimed against a state_income_tax liability therefore whether a taxpayer who sells credits at a discount that he could have used pays his state tax_liability and deducts that li- ability for federal tax purposes may receive capital_gains treatment on the sale of those credits is not at issue here verdate 0ct date jkt po frm fmt sfmt v files tempel sheila united_states tax_court reports earned_income or to earn income consequently the sale pro- ceeds are not a substitute for rights to ordinary_income conclusion the state tax_credits petitioners sold do not represent a right to income therefore the substitute_for_ordinary_income doctrine is inapplicable none of the categories of property in sec_1221 that congress specifically excepted from the term capital_asset is applicable to the state tax_credits accordingly we hold the state tax_credits petitioners sold are capital assets c basis sec_1012 sets forth the foundational principle that the basis_of_property for tax purposes shall be the cost of the property cost in turn is defined by regulation as the amount_paid for the property in cash or other_property sec_1_1012-1 income_tax regs petitioners argue that they have a cost_basis in their state tax_credits on their tax_return they claimed a cost_basis in the credits based upon an allocation of dollar_figure of profes- sional fees they incurred in connection with establishing and donating the conservation_easement in their cross-motion for partial summary_judgment petitioners appear also to argue some portion of their basis in their land should be allo- cable to the state tax_credits we find neither position ten- able the first position assumes the expenses petitioners incurred to donate the conservation_easement are properly allocable in their entirety to petitioners’ state tax_credits however individual taxpayers may deduct ordinary and nec- essary expenses_incurred in connection with the determina- tion collection_or_refund_of_any_tax as an itemized deduc- tion sec_211 and sec_212 appraisal fees and other ordinary and necessary expenses to determine a taxpayer’s tax_liability as the result of a charitable_contribution may be respondent’s reliance upon the gladden factors is misplaced we previously determined the state tax_credits do not represent contractual rights we have also determined these credits do not represent a right to income therefore it is inappropriate to apply the gladden factors to the state tax_credits the fees consisted of accounting appraisal surveying and other professional services while petitioners did not raise their position in their pleadings raising it in their motion has not prejudiced respondent verdate 0ct date jkt po frm fmt sfmt v files tempel sheila tempel v commissioner deductible under sec_212 see 85_tc_934 robson v commissioner tcmemo_1997_176 affd without published opinion 172_f3d_876 9th cir biagiotti v commissioner tcmemo_1986_460 expenses_incurred to determine any state tax including state_income_tax credits are also expenses that may fall within the ambit of sec_212 sec_1_212-1 income_tax regs sec_212 aside petitioners’ argument also glosses over sec_1012 under sec_1012 cost_basis generally is what a taxpayer paid to acquire an asset see 80_tc_1 affd without published opinion 744_f2d_95 11th cir peti- tioners paid transaction fees to establish a conservation ease- ment that they donated to an unrelated third party peti- tioners did not acquire the state tax_credits by purchase it was the state’s unilateral decision to grant petitioners the state tax_credits as a consequence of their compliance with certain state statutes accordingly petitioners easement costs are not allocable as cost_basis to their state tax_credits petitioners appear to take a second position in their motion without fully articulating that position petitioners cite 71_tc_650 for the propo- sition that where a taxpayer sells a portion of property any gain_or_loss is calculated separately for each part sold and the adjusted_basis of the entire property is allocated to the portion sold in fasken the court decided whether the consideration the taxpayers received for easement grants should be applied against their basis in all their land or applied to the portion of the basis allocable to the acreage upon which the easements were granted id pincite unlike the taxpayers in fasken petitioners did not sell an easement they made a charitable_contribution petitioners assert that the rationale of fasken should apply to their state tax_credits they appear to contend like the taxpayers in fasken that their state tax_credits are a portion of their land and that the basis in their land is allocable to their credits this court also notes that it has previously declined to adopt the unusual concept that cost_basis can be allocated to property other than property purchased 80_tc_1 affd without published opinion 744_f2d_95 11th cir verdate 0ct date jkt po frm fmt sfmt v files tempel sheila united_states tax_court reports colorado’s grant of state tax_credits creates cognizable property rights in those credits for the recipients of those credits cf 324_f3d_330 5th cir 246_f3d_1 1st cir finding a developer did not have a cognizable property interest in fed- eral income_tax credits for purposes of a substantive due process claim where the developer had no entitlement to credits and held only a unilateral expectation and desire for the credits upon petitioners’ receipt of the credits their expectation matured and they then possessed ownership rights in their state tax_credits however these credits are not a right petitioners possessed in their land instead their rights in the credits although achieved because of the prop- erty arose on account of the grant from the state unlike the easement granted in fasken v commissioner supra the state tax_credits are not a property right in land that would necessitate the allocation_of_basis in the land to the credits therefore fasken does not control the tax treatment of peti- tioners’ charitable_contribution moreover there are rules for determining a donor’s basis in the context of a conservation_easement the donor’s entire basis in the property is allocated to the conservation ease- ment according to the ratio that the fair_market_value of the easement bears to the total pre-easement fair_market_value of the property sec_170 hughes v commissioner tcmemo_2009_94 sec_1_170a-14 income_tax regs the donor reduces its basis in the retained property by the amount of basis allocated to the conservation_easement sec_170 hughes v commissioner supra sec_1 170a- h iii income_tax regs these rules do not permit an allocation based upon the value of a state tax_credit only on the value of the easement therefore it would be incon- sistent with these rules to allocate the donor’s land basis to the value of a state tax_credit there is nothing in the code or the commissioner’s regula- tions that justifies allocating petitioners’ basis in their land to the state tax_credits therefore we conclude petitioners do not have any basis in their state tax_credits verdate 0ct date jkt po frm fmt sfmt v files tempel sheila tempel v commissioner d holding_period on their tax_return petitioners reported a short-term cap- ital gain from the sale of their state tax_credits in their cross-motion for partial summary_judgment petitioners claim the sale of their state tax_credits resulted in long-term cap- ital gain the sale of capital assets held for more than year will result in long-term_capital_gain or loss sec_1222 petitioners assert that they held the land upon which they donated the charitable conservation_easement for more than year and that their holding_period in the land is attrib- utable to their holding_period in the state tax_credits assuming without deciding that petitioners have a holding_period in their land that was greater than year their argument still fails petitioners’ reasoning citing fasken v commissioner supra appears to be that their holding_period in their land and state tax_credits are one and the same because they are both part of the bundle of their real_property rights as we explained supra p a colorado taxpayer had no property rights in a conservation_easement contribution state tax_credit until the donation was complete and the credits were granted the credits never were nor did they become part of petitioners’ real_property rights instead petitioners’ holding_period in their credits began at the time the credits were granted and ended when peti- tioners sold them since petitioners sold their state tax_credits in the same month in which they received them the capital_gains from the sale of the credits are short term e conclusion the state tax_credits that petitioners sold are capital assets petitioners have no basis in their state tax_credits additionally petitioners held their credits for less than year therefore the gains arising from their disposition are short-term_capital_gains respondent filed a response to petitioners’ assertion therefore petitioners’ raising this issue in their motion has not prejudiced respondent verdate 0ct date jkt po frm fmt sfmt v files tempel sheila united_states tax_court reports to reflect the foregoing in part and denying an appropriate order will be issued in part granting respondent’s motion for partial summary_judgment and petitioners’ cross-motion for partial summary_judgment f verdate 0ct date jkt po frm fmt sfmt v files tempel sheila


internal_revenue_service department of the treasury index number washington dc number release date person to contact telephone number refer reply to cc dom p si 6--plr-111202-99 date date a b c d e f g h i j k p date date date date state x a b c dear this letter responds to a letter dated date and subsequent correspondence submitted on behalf of p by its authorized representative requesting rulings under sec_29 and sec_702 of the internal_revenue_code facts the facts as represented by p and p’s authorized representative are as follows p is a delaware limited_liability_company formed in for the purpose of constructing and operating facilities for the production of a solid synthetic_fuel from coal p is and will continue to be classified as a partnership for federal_income_tax purposes the initial members of p were a and b collectively the sellers currently the members of p are c and d collectively the new members c is a single member limited_liability_company that is wholly owned by e as such c will be disregarded for federal_income_tax purposes d is a single member limited_liability_company that is wholly owned by f as such d will be disregarded for federal_income_tax purposes both e and f join in the consolidated federal_income_tax return filed by g g is the common parent of an affiliated_group of numerous subsidiaries engaged in a variety of businesses g will guarantee certain of the financial obligations of the new members the sellers capitalized p with a certain amount of capital contributions and provided additional funds through loans for the construction of the facility and its operations the loans are evidenced by promissory notes from p to the sellers the new members acquired the sellers’ membership interests in p pursuant to the purchase and sale agreement dated date this agreement requires the new members to make payments to the sellers directly and to make capital contributions to p that should permit p to repay the loans made by the sellers on date the new members made payments to the sellers as well as capital contributions to p the new members also made available to p new financing from an affiliate of g the new members have agreed to contribute to p an amount sufficient to allow p to repay in full the notes payable to the sellers including accrued interest through the date of the payment this contribution is due within days following the later of i the date on which p has achieved a monthly average production of a certain quantity of mmbtu of qualified_fuel within certain specified periods and ii the earlier of date or the date on which all of the following requirements are satisfied a receipt of a favorable private_letter_ruling b receipt of a pre-filing determination from the relevant district_office that the facility was placed_in_service for purposes of sec_29 on or before date or the satisfactory completion of an audit of p’s federal_income_tax return and c unless waived by the new members j or its parent_corporation has contracted for used and approved for use in their electrical generating plants in state x solid synthetic_fuel made with petroleum-based binders and has not issued requirements that make p’s production ineligible for sale to their plants j and its affiliates generate more than percent of the electricity generated within the immediate vicinity of p’s facility and thus represent unusually important customers to p it is currently expected that these payments and contributions by the new members collectively the down payment will exceed the amounts paid to construct the facility in addition to the down payment the new members are required to make additional quarterly payments to the sellers the installment payments the installment payments are payable quarterly in arrears based on the energy content of synthetic_fuel produced and sold to unrelated parties during the preceding calendar_quarter adjusted to remove the energy content of the binder material the amount thus payable will be based on a schedule of rates subject_to a maximum weighted average price per mmbtu depending on the total energy content of synthetic_fuel produced and sold during the quarter these rates were based on the credit rates as announced in notice_98_28 and will be adjusted for inflation the installment payments are reduced by amounts designed to permit funding of operating and reclamation reserves for p by pre-closing obligations of p by any payments to r for use of its technology by payments on the assignments of the construction contracts and by certain specified yearly amounts not adjusted for inflation per ton of synthetic_fuel produced the installment payments are subordinated to the extent there is any cash operating deficit or required addition to reserves with respect to the synthetic_fuel facility in excess of the per ton amounts specified in the last sentence any installment_payment thus subordinated would be payable out of operating cash_flow of p in later periods thus each installment_payment will become fixed in amount in the quarter that synthetic_fuel is produced and sold but may be paid over time amounts subordinated will be represented by a promissory note and are unconditionally payable in date regardless of cash availability according to p’s authorized representative when measured on a present_value basis using an a percent discount rate the down payment amounts to approximately b percent of the purchase_price and the installment payments amount to approximately c percent of the purchase_price the sellers have an option to reacquire their interests in p at a fair_market_value price in certain limited circumstances p has entered into a number of auxiliary agreements p has entered into a site lease agreement with i for the site of the facility and land used for coal storage for an initial term equal to five years and five days p has the right to extend the term of this lease for two consecutive five year periods the lease also includes various licenses and rights of access necessary for p to carry on its business p also has entered into an agreement with e for the marketing of its production as compensation_for its marketing efforts e will receive a commission on all sales based on a percentage of net sales proceeds subject_to a minimum based on the tonnage of synthetic_fuel sold plus a bonus based on a percentage of the amount by which the sales_price exceeds an index adjusted based on changes in coal prices at three local power plants in its capacity as the exclusive sales representative for p’s output e may also arrange for transportation of the output e also has a right_of_first_refusal for it or f to broker coal-based feedstock to p p also has entered into an asphalt binder supply agreement with h a wholly- owned subsidiary of g under this agreement h will be the exclusive provider to p of the needed petroleum-based binder material consisting of asphalt cement chemicals and other additives the price for the asphalt cement component of the binder is adjusted monthly to reflect changes in the average posted price for asphalt cement at an appropriate location with agreed quality factors as reported in an industry weekly p and a have entered into a facilities operating_agreement under which a will serve as contract operator and provide manpower for the facility as contract operator a will be subject_to the direction and control of p which will have sole authority to set overall production levels and to make other strategic decisions this agreement has an initial term ending on date or if earlier the last date on which solid synthetic_fuel qualifying for tax_credits may be produced at the facility a’s compensation_for serving as contract operator will be limited to recovery_of costs plus a fixed fee adjusted for inflation following the purchase the new members own all of the membership interests in p and the sellers have no voting rights with respect to p c serves as the managing member of p and is responsible for all major operational decisions of p under the limited_liability_company agreement of p all items of income gain loss and deduction will be shared and all cash distributions made in proportion to the members’ ownership percentages in connection with the purchase the new members determined that the future operations of p could involve using feedstock from a wide variety of sources and using varying concentrations of binder adjusted over time in accordance with the demands of the marketplace for synthetic_fuel as well as the costs of the feedstock and binder p commissioned studies on various feedstock sources and binder concentrations experts have conducted numerous tests on synthetic_fuel samples produced from such types of feedstock and such binder concentrations these tests are described in detail in p’s letter_ruling request by the preponderance of the test results the experts have concluded that there was a measurable significant change in the chemical composition of the resulting fuel compared to the corresponding coal-based feedstock ruling requests and sec_29 allows a credit for qualified_fuels sold by the taxpayer to an unrelated_person during the taxable_year the production of which is attributable to the taxpayer the credit for the taxable_year is an amount equal to dollar_figure adjusted for inflation multiplied by the barrel-of-oil_equivalent of qualified_fuels sold sec_29 defines qualified_fuels to include liquid gaseous or solid synthetic fuels produced from coal including lignite including such fuels when used as feedstocks in revrul_86_100 1986_2_cb_3 the internal_revenue_service ruled that the definition of the term synthetic_fuel under sec_48 and its regulations are relevant to the interpretation of the term under sec_29 former sec_48 provided a credit for the cost of equipment used for converting an alternate_substance into a synthetic liquid gaseous or solid fuel revrul_86_100 notes that both sec_29 and former sec_48 contain almost identical language and have the same overall congressional intent namely to encourage energy conservation and aid development of domestic energy production under sec_1_48-9 of the income_tax regulations a synthetic_fuel differs significantly in chemical composition as opposed to physical composition from the alternate_substance used to produce it coal is an alternate_substance under sec_1_48-9 based on the representations of p and p’s authorized representative including the preponderance of p’s test results we agree that the fuel to be produced in p’s facilities using the process on the coal feedstock will result from a significant chemical change in coal transforming the coal feedstock into a solid synthetic_fuel from coal because p will own the facilities and because a on behalf of p will operate and maintain the facilities we conclude that p will be entitled to the sec_29 credit for the production of the qualified_fuel from the facilities that is sold to an unrelated_person ruling_request sec_29 allows a credit for qualified_fuels sold by the taxpayer to an unrelated_person during the taxable_year the production of which is attributable to the taxpayer sec_7701 provides that taxpayer means any person subject_to any internal revenue tax generally under sec_7701 the term person includes an individual a_trust estate partnership_association company or corporation sec_702 provides that each partner determines the partner’s income_tax by taking into account separately the partner’s distributive_share of the partnership’s other items of income gain loss deduction or credit to the extent provided by regulations prescribed by the secretary sec_1_702-1 provides that the distributive_share is determined as provided in sec_704 and sec_1_704-1 sec_704 provides that a partner’s distributive_share of income gain loss deduction or credit is except as otherwise provided in chapter of subtitle a of title_26 determined by the partnership_agreement sec_704 provides that a partner’s distributive_share of income gain loss deduction or credit or item thereof is determined in accordance with the partner’s interest in the partnership determined by taking into account all facts and circumstances if the partnership_agreement does not provide as to the partner’s distributive_share of income gain loss deduction or credit or item thereof or the allocation to a partner under the agreement of income gain loss deduction or credit or item thereof does not have substantial economic_effect sec_1_704-1 provides that allocations of tax_credits and tax_credit recapture are not reflected by adjustments to the partners’ capital accounts except to the extent that adjustments to the adjusted tax basis of partnership sec_38 property in respect of tax_credits and tax_credit recapture give rise to capital_account adjustments under sec_1_704-1 thus these allocations cannot have economic_effect under sec_1_704-1 and the tax_credits and tax_credit recapture must be allocated in accordance with the partners’ interests in the partnership as of the time the tax_credit or credit recapture arises if a partnership expenditure whether or not deductible that gives rise to a tax_credit in a partnership_tax_year also gives rise to valid allocations of partnership loss or deduction or other downward capital_account adjustments for the year then the partners’ interests in the partnership with respect to such credit or the cost giving rise to it are in the same proportion as the partners’ respective distributive shares of the loss or deduction and adjustments see sec_1_704-1 example identical principles apply in determining the partners’ interests in the partnership with respect to tax_credits that arise from receipts of the partnership whether or not taxable based on the information submitted and the representations made we conclude that assuming the solid synthetic_fuel produced qualifies for the sec_29 credit the credit will be allowed to p and the credit may be passed through to and allocated to the partners of p under the principles of sec_702 in accordance with each partner’s interest in p as of the time the tax_credit arises we express no opinion however regarding how the partners’ interests in p are determined ruling_request sec_708 provides that a partnership shall be considered as terminated if within a twelve-month period there is a sale_or_exchange of percent or more of the total interest in partnership capital and profits sec_1_708-1 provides that if a partnership is terminated by a sale_or_exchange of an interest the following is deemed to occur the partnership contributes all of its assets and liabilities to a new partnership in exchange for an interest in the new partnership and immediately thereafter the terminated partnership distributes interests in the new partnership to the purchasing partner and the other remaining partners in proportion to their respective interests in the terminated partnership in liquidation of the terminated partnership either for the continuation of the business by the new partnership or for its dissolution and winding up the placed-in-service deadline in sec_29 and sec_29 must be read as applying to when the facility is first placed_in_service within the applicable dates the placed-in-service deadlines contained in sec_29 and sec_29 focus on the facility and not the taxpayer owning the facility sec_29 demonstrates that congress knows how to preclude transferees of facilities from claiming the sec_29 credit that provision provides that extension of the period for placing facilities in service after does not apply to any facility that produces coke or coke gas unless the original_use of the facility commences with the taxpayer accordingly the determination of whether a facility has satisfied the placed-in- service deadline under sec_29 and sec_29 is made by reference to when the facility is first placed_in_service not when the facility is placed_in_service by a transferee taxpayer ruling_request to qualify for the sec_29 credit p’s facilities must be placed_in_service before date pursuant to a binding written contract in effect before date while sec_29 does not define placed_in_service the term has been defined for purposes of the deduction for depreciation and the investment_tax_credit property is placed_in_service in the taxable_year the property is placed in a condition or state of readiness and availability for a specifically assigned function sec_1_167_a_-11 and sec_1_46-3 of the income_tax regulations placed_in_service has consistently been construed as having the same meaning for purposes of the deduction for depreciation and the investment_tax_credit see revrul_76_256 1976_2_cb_46 when property is placed_in_service is a factual determination and we express no opinion on when p’s facilities were placed_in_service revrul_94_31 1994_1_cb_16 concerns sec_45 which provides a credit for electricity produced from certain renewable resources including wind the credit is based on the amount of electricity produced_by_the_taxpayer at a qualified_facility during the 10-year period beginning on the date the facility was originally placed_in_service and sold by the taxpayer to an unrelated_person during the taxable_year revrul_94_31 holds that for purposes of sec_45 a facility qualifies as originally placed_in_service even though it contains some used_property provided the fair_market_value of the used_property is not more than percent of the facility’s total value the cost of the new property plus the value of the used_property revrul_94_31 concerns a factual context similar to the present situation consistent with the holding in revrul_94_31 the relocation of any of p’s facilities after date will not prevent the relocated facility from continuing to be treated as originally placed_in_service prior to date for purposes of sec_29 provided the fair_market_value of the used_property is more than percent of the relocated facility’s total fair_market_value at the time of the relocation conclusions accordingly based on the representations of p and p’s authorized representative we conclude as follows p with use of the process will produce a qualified_fuel within the meaning of sec_29 p will be entitled to the sec_29 credit for the production of the qualified_fuel from the facilities that is sold to an unrelated_person the credit allowed under sec_29 may be passed through to and allocated among the partners in p in accordance with the principles of sec_702 any termination of p under sec_708 arising from prior sales or exchanges of interests in p will not preclude p from taking the sec_29 credit for the production of the qualified_fuel from the facilities that is sold to an unrelated_person and if a facility was placed_in_service prior to date within the meaning of sec_29 relocation of the facility after date will not result in a new placed_in_service_date for the facility for purposes of sec_29 provided the fair_market_value of the used_property is more than percent of the relocated facility’s total fair_market_value at the time of the relocation except as specifically ruled upon above we express no opinion concerning the federal_income_tax consequences of the transaction described above specifically we express no opinion on when p’s facilities were placed_in_service or how the partners' interests in p are determined this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent temporary or final regulations pertaining to one or more of the issues addressed in this ruling have not yet been adopted therefore this ruling may be modified or revoked by the adoption of temporary or final regulations to the extent the regulations are inconsistent with any conclusion in this ruling see section dollar_figure of revproc_2000_1 2000_1_irb_4 however when the criteria in section dollar_figure of revproc_2000_1 are satisfied a ruling is not revoked or modified retroactively except in rare or unusual circumstances in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to p’s authorized representative sincerely yours charles b ramsey branch chief branch office of assistant chief_counsel passthroughs and special industries enclosure copy for sec_6110 purposes


internal_revenue_service number release date index number ---------------------- -------------------------- ------------------------ ---------- ------------- --------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ----------------------- id no ------------- telephone number ------------------- refer reply to cc corp b05 plr-133055-11 date february legend parent ------------------------ ----------------------------------------------------------- -------------------------------------------------------------------- dsub ----------------------- ----------------------------------------------------------- -------------------------------------------------------------------- fsub -------------------------------------------------------------------------------------------------------- -------------------------- fco ------------------------------------------------------------------------ ----------------------------- fco ------------------------------------------------------------------------ ----------------------------- topco ------------------------------------------------------------------------------------------------------------------- -------------------------------------- trust management --------------------------------------------------------------------------------- ------------------------------------------------------- ------------------------------------------------------------------- plr-133055-11 business a country x country y stock market -------------------------------------------------------------------------------- ------------------------------------------------------------------------ -------------------------- ------------ ---------------------------------------- class b voting ----------------------------------------------------------------------------------------------------------- stock --------------------------------------------------------------------------------- class b ----------------------------------------------------------------------------------------------------------------- non-voting stock --------------------------------------------------------------------------------- class c stock class e stock a b c d e f g h i j k --------------------------------------------------------------- --------------------------------------------------------------------------------- --------------------------------------------------------------------------------- --------------------------- --------------- --------------- --------------- ------------ ------------ ---------- --- -------------- -------------- --------- ---------------- plr-133055-11 l m n o p q ------------------------ ---------------------- ---- -- -- -- dear ---------------------- this letter responds to your date request for rulings and subsequent correspondence as to the federal_income_tax consequences of a proposed transaction the information submitted in that request and in later correspondence is summarized below the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination facts parent is a widely-held domestic_corporation that is the common parent of an affiliated_group whose includible corporations join the filing of a u s consolidated_return parent indirectly owns all the outstanding_stock of dsub and dsub is a direct shareholder of fsub a foreign_corporation fsub is a country x entity treated as an association under sec_301_7701-3 fsub through its wholly owned subsidiaries engages in business a both within the united_states and internationally fsub has three types of shares outstanding the class b voting class b non-voting and class c stock there are a shares of class b voting and non-voting stock issued and outstanding of which dsub owns b fco and fco own in the aggregate c shares of class b voting_stock and d shares of class b non-voting stock the remaining class b non-voting stock is owned by management e shares and trust f shares dsub has g and fco and fco in the aggregate have g of the total voting power in fsub fsub has h plr-133055-11 shares of class c stock issued and outstanding the class c stock is non-voting and is owned by management fsub also has an employee share option plan in place with approximately i outstanding options proposed transaction for what are presented to be valid business reasons taxpayer intends to complete the following steps steps comprise the proposed transaction and steps and comprise the post-reorganizational steps dsub fco and fco the incorporators form topco a country y entity with a nominal amount of cash dollar_figurej to facilitate its organization topco elects to be taxed as an association for federal_income_tax purposes pursuant to sec_301_7701-3 the incorporators contribute all their shares of fsub class b voting and non-voting stock to topco in exchange for approximately k additional shares of topco common_stock topco recapitalizes with a l for one reverse_stock_split in accordance with fsub’s articles of association upon the occurrence of an exit or partial exit event as defined in the fsub’s articles of association the class c stock will be redesignated as partly class b non-voting stock and partly class e stock the setting of a listing price for topco’s shares on the stock market is an exit or partial exit event as defined in the fsub’s articles of association as such immediately after setting a listing price for topco’s share on the stock market a portion of management’s shares of class c stock will be redesignated as class b non-voting stock and the remaining portion of class c stock will be redesignated as class e stock the class e stock will be purchased and cancelled by fsub management and trust will transfer all their class b non-voting stock to topco and will receive m shares of topco common_stock for each share of class b non-voting stock transferred in the exchange the outstanding employee share option plan in fsub and its obligations will be assumed by topco with each former fsub stock_option being exercisable into shares of topco stock the employee share option plan in topco will have the identical terms and vesting periods in topco as exist under the fsub option plan plr-133055-11 fsub will elect to be treated as a disregarded_entity for federal_income_tax purposes under sec_301_7701-2 and sec_301_7701-3 effective at least two days after topco acquires the shares of fsub in a secondary offering dsub fco fco management and trust will each sell a portion of their topco common_stock to the public that in the aggregate will amount to approximately n of the outstanding topco common_stock topco will issue a yet to be determined number of topco shares to the public in an initial_public_offering representations taxpayer has made the following representations in connection with the proposed transaction and the post-reorganizational steps a shareholders of fsub will receive solely topco stock in the proposed transaction b the fair_market_value of the stock of topco received by each fco fco dsub management and trust will be approximately equal to the fair_market_value of the fsub stock deemed to be surrendered by each in the exchange c d immediately following consummation of the proposed transaction fco fco dsub management and trust will own all of the outstanding topco stock and except for topco stock issued to the incorporators for a nominal amount will own such stock solely by reason of their ownership of fsub stock immediately prior to the proposed transaction immediately following consummation of the proposed transaction topco will possess the same assets and liabilities as those possessed by fsub immediately prior to the proposed transaction e the liabilities of fsub to be assumed within the meaning of sec_357 by the topco plus the liabilities if any to which the transferred assets are subject were incurred by fsub in the ordinary course of its business and are associated with assets to be transferred f fsub will be eligible to elect to be treated as a disregarded_entity under sec_301_7701-2 and and will make such election effective at least two days after topco acquires its shares plr-133055-11 g except for the employee options at the time of the proposed transaction fsub will not have any outstanding warrants options convertible securities or any other type of right pursuant to which any person could acquire shares of fsub after step of the proposed transaction is executed any such fsub employee options will become the equivalent amount of employee options in topco h i j immediately after the proposed transaction the proportionate interest of each of fco fco dsub management and trust in topco will be the same as the proportionate interest each held in fsub immediately before the proposed transaction the class e stock will have a fair_market_value of dollar_figureo a basis of dollar_figurep and will be repurchased by fsub for dollar_figureq and subsequently cancelled by fsub at the time of the restructuring fsub will not be under the jurisdiction of a court in a title_11_or_similar_case within the meaning of sec_368 k fsub will not be a controlled_foreign_corporation within the meaning of sec_957 or a passive_foreign_investment_company within the meaning of sec_1297 immediately before the proposed transaction l immediately before and after the proposed transaction topco will not be a passive_foreign_investment_company within the meaning of sec_1297 m fsub will not hold any united_states real_property interests as defined in sec_897 immediately before the proposed transaction and topco will not hold any such interests immediately after the proposed transaction n at all times prior to acquiring the assets of fsub in the proposed transaction i topco will have been engaged in no business activity ii topco will have had no federal_income_tax attributes attributes described in sec_381 and iii topco will have held no assets except for a nominal amount of cash transferred by the incorporators o immediately after the proposed transaction topco will hold directly and through fsub as a disregarded_entity all the assets held by fsub immediately prior to the proposed transaction except for assets used to pay expenses in connection with the proposed transaction the assets used to pay expenses will be less than one percent of the fair_market_value of the net assets of fsub immediately prior to the proposed transaction no assets will be distributed and there will be no dissenting shareholders plr-133055-11 p none of the compensation received by any member of management was separate consideration for or allocable to any of his or her shares of fsub stock except with respect to shares of topco common_stock received in respect of shares of class b non-voting stock none of the shares of fsub stock received by any member of management was separate consideration for or allocable to any employment agreement and the compensation paid to any member of management was for services actually rendered and was commensurate with amounts paid to third parties bargaining at arm’s length for similar services q each party will pay its own expenses if any incurred in connection with the proposed transaction except that fsub will pay all legal and registration fees related to the proposed transaction expenses paid for by fsub on behalf of management if any in aggregate will constitute less than one percent of the net assets of fsub r dollar_figurej is less than of the net fair_market_value of fsub rulings based solely on the information and representations set forth herein we rule as follows the proposed transaction qualifies as a reorganization within the meaning of sec_368 topco and fsub will each be a party to the reorganization within the meaning of sec_368 after completing the proposed transaction the sale of a portion of topco common_stock to the public by dsub fco fco management and trust that in the aggregate will amount to approximately n of the outstanding topco common_stock will not preclude the proposed transaction from qualifying as a sec_368 reorganization revrul_96_29 1996_1_cb_50 no gain_or_loss will be recognized by fsub upon the deemed transfer of all of its assets to topco in exchange for topco stock and the assumption_of_liabilities sec_361 and sec_357 no gain_or_loss will be recognized by topco upon its receipt of the fsub assets in exchange for the topco stock sec_1032 topco’s basis in the assets acquired from fsub will be the same as fsub’s basis in such assets immediately before the proposed transaction sec_362 plr-133055-11 topco’s holding_period for the assets acquired from fsub will include the period during which such assets were held by fsub sec_1223 no gain_or_loss will be recognize by fsub on the distribution of topco stock to its shareholders sec_361 no gain_or_loss will be recognized by fsub’s shareholders upon the receipt of the topco stock in exchange for the fsub stock sec_354 fsub shareholders’ basis in each share of topco stock received in the exchange for fsub stock will be equal to the basis of each share of fsub stock treated as exchanged therefore sec_358 and sec_1_358-2 the holding_period for the topco stock in the hands of the fsub shareholders will include the holding_period during which the fsub shareholders held the fsub stock exchanged therefore provided that the fsub stock is held as a capital_asset in the hands of the fsub shareholders on the date of the exchange sec_1223 subject_to the conditions and limitations of sec_381 sec_382 sec_383 and sec_384 and treasury regulations thereunder topco will succeed to and take into account the tax_attributes of fsub described in sec_381 under sec_381 and sec_1_381_a_-1 after the proposed transaction topco shareholders will recognize any gain_or_loss realized from the sale of topco shares in an amount equal to the difference between the amount_realized and the basis in the topco shares sold sec_1001 caveats except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative plr-133055-11 a copy of this letter must be attached to any income_tax return to which it is relevant alternatively taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of the letter_ruling sincerely isaac w zimbalist isaac w zimbalist senior technical reviewer branch office of associate chief_counsel corporate cc