internal_revenue_service department of the treasury index number washington dc number release date person to contact telephone number refer reply to cc dom corp plr-120795 -98 date date parent distributing distributing controlled controlled newco sub sub sub plr-120795-98 sub 1a sub 1b partnership sub sub sub sub sub sub sub sub sub 6a plr-120795-98 sub 8a sub 8b sub 11a sub 11b sub 11c sub 11d sub 11e sub 11f newsub shareholder a financial advisor business a business b business c plr-120795-98 country a a b c this letter responds to your date request for rulings on certain federal_income_tax consequences of a proposed transaction the information submitted in that request and later correspondence is summarized below summary of facts parent is the common parent of an affiliated_group that conducts business a business b and business c parent wholly owns distributing distributing wholly owns sub sub sub distributing and controlled sub wholly owns sub 1a and sub 1a wholly owns sub 1b distributing owns a percent general_partner interest in partnership percent of sub and all of sub sub sub sub sub sub and sub sub wholly owns sub 6a sub wholly owns sub 8a and sub 8a wholly owns sub 8b sub wholly owns sub 11a and sub 11b sub 11a wholly owns sub 11c and sub 11d sub 11b wholly owns sub 11e and sub 11e wholly owns sub 11f parent distributing distributing sub sub sub sub sub sub sub sub sub sub 11a and sub 11b are domestic corporations and join in the filing of a consolidated federal_income_tax return sub 1a sub 1b sub sub sub 6a sub 8a sub 8b sub 11c sub 11d sub 11e and sub 11f are foreign_corporations and do not join in the consolidated_return distributing owes parent a dollars the intercompany receivable parent has two classes of common_stock outstanding type a common_stock and type b common_stock the type a common_stock has one vote per share and is publicly held the type b common_stock has ten votes per share and is convertible at any time into type a common_stock on a share-for-share basis shareholder a and certain trusts of which shareholder a is the settlor the trusts own all of the type b common_stock we have received financial information indicating that business a and business b as conducted by distributing each has had gross_receipts and operating_expenses representing the active_conduct_of_a_trade_or_business for each of the past five years plr-120795-98 to further certain business goals distributing wishes either to raise substantial capital through a stock offering or to use stock in making acquisitions parent’s financial advisor has concluded in a series of reasoned and detailed letters that this stock would have materially greater value for both purposes if distributing with business b and business c were separated from parent with business a proposed transaction to accomplish this separation parent has proposed the following transaction i distributing will contribute the stock of sub sub sub and recently acquired newsub to distributing the first contribution each of these subsidiaries is engaged in business b or business c ii parent will contribute b dollars of the intercompany receivable the contributed receivable to distributing the second contribution iii distributing will contribute the contributed receivable to distributing the third contribution iv distributing will form newco a country a corporation and newco will purchase for cash the business b assets held by sub 8b in a taxable transaction the purchase v distributing will contribute its business a assets to newly formed controlled these assets include the percent interest in partnership the business of managing partnership and all the stock of sub sub sub sub and sub the fourth contribution vi distributing will distribute the stock of controlled to distributing the first distribution vii distributing will contribute to newly formed controlled all the stock of distributing in exchange for type c common_stock and type d common_stock the terms of which are similar to those of type a common_stock and type b common_stock respectively the fifth contribution viii controlled will borrow c dollars under a new bank credit facility and lend the proceeds to distributing distributing will use the proceeds to repay the balance of the intercompany receivable retained by parent ix distributing will distribute all of the controlled stock to parent the second distribution plr-120795-98 x shareholder a and the trusts will convert enough type b common_stock into type a common_stock to insure that more than percent of the value of all shares of controlled will be distributed on the type a common_stock in the third distribution described in step xi the conversion xi parent will distribute the type c common_stock pro_rata to holders of the type a common_stock and the type d common_stock pro_rata to holders of the type b common_stock the third distribution xii within one year following the third distribution controlled will issue a significant amount of its stock in either a public offering or an acquisition representations the first contribution the taxpayer has made the following representations regarding the first contribution a no stock_or_securities will be issued for services rendered to or for the benefit of distributing in connection with the first contribution and no stock_or_securities will be issued for indebtedness of distributing that is not evidenced by a security or for interest on indebtedness of distributing that accrued on or after the beginning of the holding_period of distributing for the debt b the first contribution is not the result of the solicitation by a promoter broker or investment house c distributing will not retain any rights in the property transferred to the distributing in the first contribution d any debt relating to the stock being transferred in the first contribution that is being assumed or to which such stock is subject was incurred to acquire such stock and was incurred when such stock was acquired and distributing is transferring all of the stock for which the acquisition_indebtedness being assumed or to which such stock is subject was incurred e the adjusted_basis and the fair_market_value of the assets transferred by distributing to distributing in the first contribution will in each instance equal or exceed the sum of any liabilities assumed by distributing plus any liabilities to which the transferred assets are subject f any liabilities of distributing to be assumed by distributing in the first plr-120795-98 contribution were incurred in the ordinary course of business and are associated with the assets to be transferred g there is no indebtedness between distributing and distributing and there will be no indebtedness created in favor of distributing as a result of the first contribution h the transfers and exchanges in the first contribution will occur under a plan agreed upon before the first contribution in which the rights of the parties are defined i all exchanges in the first contribution will occur on approximately the same date j there is no plan or intention on the part of distributing to redeem or otherwise reacquire any stock or indebtedness issued in the first contribution k taking into account any issuance of additional shares of distributing stock any issuance of stock for services the exercise of any distributing stock_rights warrants or subscriptions a public offering of distributing stock and the sale exchange transfer by gift or other_disposition of any of the stock of distributing to be received in the exchange distributing will be in control of distributing under sec_368 of the internal_revenue_code until completion of the fifth contribution l distributing will remain in existence and retain and use the property transferred to it in the first contribution in a trade_or_business m there is no plan or intention by distributing to dispose_of the property transferred in the first contribution other than in the normal course of business operations n each of the parties to the first contribution will pay its or his her own expenses if any incurred in connection with the first contribution o distributing will not be an investment_company under sec_351 and sec_1_351-1 of the income_tax regulations p distributing is not under the jurisdiction of a court in a title_11_or_similar_case under sec_368 and the stock_or_securities received in the first contribution will not be used to satisfy the indebtedness of such debtor q distributing will not be a personal_service_corporation under sec_269a the second contribution plr-120795-98 the taxpayer has made the following representations regarding the second contribution r no stock_or_securities will be issued for services rendered to or for the benefit of distributing in connection with the second contribution and no stock_or_securities will be issued for indebtedness of distributing that is not evidenced by a security or for interest on indebtedness of distributing that accrued on or after the beginning of the holding_period of parent for the debt s the second contribution is not the result of the solicitation by a promoter broker or investment house t parent will not retain any rights in the property transferred to distributing in the second contribution u the adjusted_basis and the fair_market_value of the assets transferred by parent to distributing in the second contribution will in each instance equal or exceed the sum of any liabilities assumed by distributing plus any liabilities to which the transferred assets are subject v any liabilities of parent to be assumed by distributing were incurred in the ordinary course of business and are associated with the assets to be transferred w there is no indebtedness between distributing and parent and there will be no indebtedness created in favor of parent as a result of the transaction x the transfers and exchanges in the second contribution will occur under a plan agreed upon before the transaction in which the rights of the parties are defined y all exchanges in the second contribution will occur on approximately the same date z there is no plan or intention on the part of distributing to redeem or otherwise reacquire any stock or indebtedness issued in the second contribution aa taking into account any issuance of additional shares of distributing stock any issuance of stock for services the exercise of any distributing stock_rights warrants or subscriptions a public offering of distributing stock and the sale exchange transfer by gift or other_disposition of any of the stock of distributing to be received in the exchange parent will be in control of distributing under sec_368 bb each of the parties to the second contribution will pay its or his her own expenses if any incurred in connection with the second contribution plr-120795-98 cc distributing will not be an investment_company under sec_351 and sec_1_351-1 dd parent is not under the jurisdiction of a court in a title_11_or_similar_case under sec_368 and the stock_or_securities received in the exchange will not be used to satisfy the indebtedness of such debtor ee distributing will not be a personal_service_corporation under sec_269a the third contribution the taxpayer has made the following representations regarding the third contribution ff no stock_or_securities will be issued for services rendered to or for the benefit of distributing in connection with the third contribution and no stock_or_securities will be issued for indebtedness of distributing that is not evidenced by a security or for interest on indebtedness of distributing that accrued on or after the beginning of the holding_period of distributing for the debt gg the third contribution is not the result of the solicitation by a promoter broker or investment house hh distributing will not retain any rights in the property transferred to distributing in the third contribution ii the adjusted_basis and the fair_market_value of the assets transferred by distributing to distributing in the third contribution will in each instance equal or exceed the sum of any liabilities assumed by distributing plus any liabilities to which the transferred assets are subject jj any liabilities of distributing to be assumed by distributing in the third contribution were incurred in the ordinary course of business and are associated with the assets to be transferred kk there is no indebtedness between distributing and distributing and there will be no indebtedness created in favor of distributing as a result of the third contribution ll the transfers and exchanges in the third contribution will occur under a plan agreed upon before the third contribution in which the rights of the parties are defined mm all exchanges in the third contribution will occur on approximately the same date plr-120795-98 nn there is no plan or intention on the part of distributing to redeem or otherwise reacquire any stock or indebtedness to be issued in the third contribution oo taking into account any issuance of additional shares of distributing stock any issuance of stock for services the exercise of any distributing stock_rights warrants or subscriptions a public offering of distributing stock and the sale exchange transfer by gift or other_disposition of any of the stock of the distributing to be received in the exchange distributing will be in control of distributing under sec_368 until completion of the fifth contribution pp distributing will remain in existence and retain and use the property transferred to it in the third contribution in a trade_or_business qq there is no plan or intention by distributing to dispose_of the property transferred in the third contribution other than in the normal course of business operations rr each of the parties to the third contribution will pay its or his her own expenses if any incurred in connection with the third contribution ss distributing will not be an investment_company under sec_351 and sec_1_351-1 tt distributing is not under the jurisdiction of a court in a title_11_or_similar_case under sec_368 and the stock_or_securities received in the third contribution will not be used to satisfy the indebtedness of such debtor uu distributing will not be a personal_service_corporation under sec_269a vv the basis in the indebtedness transferred in both the second contribution and the third contribution will be equal to its stated face value the fourth contribution and first distribution the taxpayer has made the following representations regarding the fourth contribution and the first distribution ww controlled will not be indebted to distributing after the first distribution xx no part of the consideration distributed by distributing in the first distribution will be received by distributing as a creditor employee or in any capacity other than that of a shareholder of distributing yy the five years of financial information submitted on behalf of distributing plr-120795-98 relative to business a and business b represents the present operations of business a and business b and regarding distributing there have been no substantial operational changes since the date of the last financial statements submitted zz following the first distribution distributing and controlled each will continue the active_conduct of its business independently and with its separate employees aaa the first distribution will be carried out to facilitate i a controlled stock offering for cash or ii the use of controlled stock as acquisition currency the first distribution is motivated in whole or substantial part by this corporate business_purpose bbb there is no plan or intention by distributing to sell exchange transfer by gift or otherwise dispose_of any of its stock in or securities of controlled after the first distribution ccc there is no plan or intention by either distributing or controlled directly or through any subsidiary_corporation to purchase any of its outstanding_stock after the first distribution other than through stock purchases meeting the requirements of sec_4 b of rev_proc 1996_1_cb_696 ddd there is no plan or intention to liquidate distributing or controlled to merge either corporation with any other corporation or to sell or otherwise dispose_of the assets of either corporation after the first distribution except in the ordinary course of business eee the total adjusted_basis and the fair_market_value of the assets transferred in the fourth contribution to controlled by distributing each equals or exceeds the sum of any liabilities assumed by controlled plus any liabilities to which the transferred assets are subject fff any liabilities assumed in the fourth contribution and any liabilities to which the transferred assets are subject were incurred in the ordinary course of business and are associated with the assets being transferred ggg no intercorporate debt will exist between distributing and controlled at the time of or after the first distribution hhh immediately before the first distribution items of income gain loss deduction and credit will be taken into account as required by the applicable intercompany_transaction regulations see sec_1_1502-13 and sec_1 as in effect before the publication of t d 1995_2_cb_147 and as currently in effect sec_1_1502-13 as published by t d further any excess_loss_account distributing plr-120795-98 may have in the controlled stock that is required to be included in income as a result of the first distribution will be included immediately before the first distribution see sec_1_1502-19 iii payments made in any continuing transactions between distributing and controlled will be for fair_market_value based on terms and conditions arrived at by the parties bargaining at arm's length jjj no two parties to the first distribution are investment companies under sec_368 and iv kkk the first distribution is not part of a plan or series of related transactions within the meaning of sec_355 pursuant to which one or more persons will acquire directly or indirectly stock possessing percent or more of the total combined voting power of all classes of stock of either distributing or controlled entitled to vote or stock possessing percent or more of the total value of all classes of stock of either distributing or controlled the fifth contribution and second distribution the taxpayer has made the following representations regarding the fifth contribution and second distribution lll controlled will not be indebted to distributing after the second distribution mmm no part of the consideration distributed by distributing in the second distribution will be received by parent as a creditor employee or in any capacity other than that of a shareholder of distributing nnn the five years of financial information submitted on behalf of distributing relative to business a and business b represents the present operations of business a and business b and regarding distributing there have been no substantial operational changes since the date of the last financial statements submitted ooo immediately after the second distribution at least percent of the fair_market_value of the gross assets of distributing and at least percent of the fair_market_value of the gross assets of controlled will consist of the stock and securities of controlled corporations that are engaged in the active_conduct_of_a_trade_or_business as defined in sec_355 ppp following the second distribution distributing through controlled and controlled through distributing each will continue the active_conduct of its business independently and with its separate employees plr-120795-98 qqq the second distribution will be carried out to facilitate i a controlled stock offering for cash or ii the use of controlled stock as acquisition currency the second distribution is motivated in whole or substantial part by this corporate business_purpose rrr there is no plan or intention by parent to sell exchange transfer by gift or otherwise dispose_of any of its stock in or securities of distributing after the second distribution sss there is no plan or intention by either distributing or controlled directly or through any subsidiary_corporation to purchase any of its outstanding_stock after the second distribution other than through stock purchases meeting the requirements of sec_4 b of rev_proc ttt there is no plan or intention to liquidate distributing or controlled to merge either corporation with any other corporation or to sell or otherwise dispose_of the assets of either corporation after the second distribution except in the ordinary course of business uuu the total adjusted_basis and the fair_market_value of the assets transferred by distributing to controlled in the fifth contribution each equals or exceeds the sum of any liabilities assumed by controlled plus any liabilities to which the transferred assets are subject vvv any liabilities assumed in the fifth contribution and any liabilities to which the transferred assets are subject were incurred in the ordinary course of business www no intercorporate debt will exist between distributing and controlled at the time of or after the second distribution xxx immediately before the second distribution items of income gain loss deduction and credit will be taken into account as required by the applicable intercompany_transaction regulations see sec_1_1502-13 and sec_1 as in effect before the publication of t d and as currently in effect sec_1_1502-13 as published by t d further any excess_loss_account distributing may have in the controlled stock that is required to be included in income as a result of the second distribution will be included immediately before the second distribution see sec_1 yyy payments made in any continuing transactions between distributing and controlled will be for fair_market_value based on terms and conditions arrived at by the parties bargaining at arm's length zzz no two parties to the second distribution are investment companies under plr-120795-98 sec_368 and iv aaaa the second distribution is not part of a plan or series of related transactions within the meaning of sec_355 pursuant to which one or more persons will acquire directly or indirectly stock possessing percent or more of the total combined voting power of all classes of stock of either distributing or controlled entitled to vote or stock possessing percent or more of the total value of all classes of stock of either distributing or controlled the third distribution the taxpayer has made the following representations regarding the third distribution bbbb controlled will not be indebted to parent after the third distribution cccc no part of the consideration distributed by parent will be received by a shareholder as a creditor employee or in any capacity other than that of a shareholder of parent dddd the five years of financial information submitted on behalf of distributing relative to business a and business b represents the present operations of business a and business b and regarding distributing there have been no substantial operational changes since the date of the last financial statements submitted eeee immediately after the third distribution at least percent of the fair_market_value of the gross assets of parent will consist of stock in distributing and at least percent of the fair_market_value of the gross assets of distributing will consist of the stock and securities of controlled corporations that are engaged in the active_conduct_of_a_trade_or_business as defined in sec_355 further at least percent of the fair_market_value of the gross assets of controlled will consist of the stock and securities of controlled corporations that are engaged in the active_conduct_of_a_trade_or_business as defined in sec_355 ffff following the third distribution parent through distributing and controlled and controlled through distributing each will continue the active_conduct of its business independently and with its separate employees gggg the third distribution will be carried out to facilitate i a controlled stock offering for cash or ii the use of controlled stock as acquisition currency the third distribution is motivated in whole or substantial part by this corporate business_purpose hhhh there is no plan or intention by any shareholder who owns five percent plr-120795-98 or more of the stock of parent and the management of parent to its best knowledge is not aware of any plan or intention on the part of any particular remaining shareholder or security holder of parent to sell exchange transfer by gift or otherwise dispose_of any stock in or securities of either parent or controlled after the third distribution iiii there is no plan or intention by either parent or controlled directly or through any subsidiary_corporation to purchase any of its outstanding_stock after the third distribution other than through stock purchases meeting the requirements of sec_4 b of rev_proc jjjj there is no plan or intention to liquidate parent or controlled to merge either corporation with any other corporation or to sell or otherwise dispose_of the assets of either corporation after the third distribution except in the ordinary course of business kkkk no intercorporate debt will exist between parent and controlled at the time of or after the third distribution llll immediately before the third distribution items of income gain loss deduction and credit will be taken into account as required by the applicable intercompany_transaction regulations see sec_1_1502-13 and sec_1 as in effect before the publication of t d and as currently in effect sec_1_1502-13 as published by t d further any excess_loss_account parent may have in the stock of controlled will be included in income immediately before the third distribution see sec_1_1502-19 mmmm payments made in any continuing transactions between parent and controlled will be for fair_market_value based on terms and conditions arrived at by the parties bargaining at arm's length nnnn no two parties to the third distribution are investment companies under sec_368 and iv oooo the third distribution is not part of a plan or series of related transactions within the meaning of sec_355 pursuant to which one or more persons will acquire directly or indirectly stock possessing percent or more of the total combined voting power of all classes of stock of either parent or controlled entitled to vote or stock possessing percent or more of the total value of all classes of stock of either parent or controlled other representations pppp sufficient type b common_stock will be converted into type a common_stock to insure that more than percent of the value of all shares of controlled will plr-120795-98 be distributed with respect to type a common_stock in the third distribution qqqq after the conversion no foreign_person will own a five percent or greater interest in parent rrrr parent will attach to its timely filed federal_income_tax return for the taxable_year in which the third distribution occurs a statement satisfying the requirements of sec_1_367_e_-1t c iii ssss within one year following the third distribution controlled will issue a significant amount of its stock in either a public offering or an acquisition rulings the first contribution based solely on the information submitted and representations made we rule as follows on the first contribution no gain_or_loss will be recognized by distributing on the first contribution sec_351 no gain_or_loss will be recognized by distributing on the first contribution sec_1032 the basis of each asset received by distributing in the first contribution will equal the basis of that asset in the hands of distributing immediately before the first contribution sec_362 the holding_period of each asset received by distributing in the first contribution will include the period during which distributing held that asset sec_1223 the basis distributing has in the stock of distributing will be increased by the basis distributing has in the assets transferred in the first contribution sec_358 the second contribution based solely on the information submitted and representations made we rule as follows on the second contribution no gain_or_loss will be recognized by parent on the second contribution plr-120795-98 sec_351 no gain_or_loss will be recognized by distributing on the second contribution sec_1032 the basis of each asset received by distributing in the second contribution will equal the basis of that asset in the hands of parent immediately before the second contribution sec_362 the holding_period of each asset received by distributing in the second contribution will include the period during which parent held that asset sec_1223 the basis parent has in the stock of distributing will be increased by the basis parent has in the assets transferred in the second contribution sec_358 the third contribution based solely on the information submitted and representations made we rule as follows on the third contribution no gain_or_loss will be recognized by distributing on the third contribution sec_351 no gain_or_loss will be recognized by distributing on either the second contribution or the third contribution sec_1032 sec_108 and sec_108 the basis distributing has in the stock of distributing will be increased by the basis distributing has in the assets transferred in the third contribution sec_358 the fourth contribution and first distribution based solely on the information submitted and representations made we rule as follows on the fourth contribution and the first distribution the fourth contribution followed by the first distribution will be a reorganization under sec_368 distributing and controlled each will be a_party_to_a_reorganization under sec_368 no gain_or_loss will be recognized by distributing on the fourth contribution sec_361 and sec_357 no gain_or_loss will be recognized by controlled on the fourth contribution sec_1032 plr-120795-98 the basis of each asset received by controlled in the fourth contribution will equal the basis of that asset in the hands of distributing immediately before the fourth contribution sec_362 the holding_period of each asset received by controlled in the fourth contribution will include the period during which distributing held that asset before the fourth contribution sec_1223 no gain_or_loss will be recognized by distributing on the first distribution sec_361 no gain_or_loss will be recognized by and no amount will otherwise be included in the income of distributing on receipt of the controlled stock in the first distribution sec_355 the holding_period of the controlled stock received by distributing will include the holding_period of the distributing stock on which the first distribution is made provided the distributing stock is held as a capital_asset on the date of the first distribution sec_1223 the earnings_and_profits of distributing will be allocated as provided in sec_312 sec_1_312-10 and sec_1_1502-33 provided the fourth contribution qualifies under sec_351 distributing need not include the sec_1248 amount with respect to its transfer of sub to controlled in the fourth contribution sec_1_367_b_-4 the fifth contribution and second distribution based solely on the information submitted and representations made we rule as follows on the fifth contribution and the second distribution the fifth contribution followed by the second distribution will be a reorganization under sec_368 distributing and controlled each will be a_party_to_a_reorganization under sec_368 no gain_or_loss will be recognized by distributing on the fifth contribution sec_361 and sec_357 no gain_or_loss will be recognized by controlled on the fifth contribution sec_1032 the basis of each asset received by controlled in the fifth contribution will equal the basis of that asset in the hands of distributing immediately before the plr-120795-98 fifth contribution sec_362 the holding_period of each asset received by controlled in the fifth contribution will include the period during which distributing held that asset before the fifth contribution sec_1223 no gain_or_loss will be recognized by distributing on the second distribution sec_361 no gain_or_loss will be recognized by and no amount will otherwise be included in the income of parent on receipt of the controlled stock in the second distribution sec_355 the holding_period of the controlled stock received by parent will include the holding_period of the distributing stock on which the second distribution is made provided the distributing stock is held as a capital_asset on the date of the second distribution sec_1223 the earnings_and_profits of distributing will be allocated as provided in sec_312 sec_1_312-10 and sec_1_1502-33 the third distribution based solely on the information submitted and representations made we rule as follows on the third distribution no gain_or_loss will be recognized by parent on the third distribution sec_355 no gain_or_loss will be recognized by and no amount will otherwise be included in the income of parent’s shareholders on the third distribution sec_355 the holding_period of the controlled stock received by each parent shareholder will include the period during which the shareholder held the parent stock on which the third distribution is made provided the parent stock is held as a capital_asset on the date of the third distribution sec_1223 the aggregate basis of the type c common_stock and the type a common_stock in the hands of a parent shareholder will equal the aggregate basis of the type a common_stock held immediately before the third distribution by that shareholder allocated between the type c common_stock and the type a common_stock in proportion to the relative fair_market_value of each on the date of the third distribution in accordance with sec_1_358-2 sec_358 plr-120795-98 the aggregate basis of the type d common_stock and the type b common_stock in the hands of a parent shareholder will equal the aggregate basis of the type b common_stock held immediately before the third distribution by that shareholder allocated between the type d common_stock and the type b common_stock in proportion to the relative fair_market_value of each on the date of the third distribution in accordance with sec_1_358-2 sec_358 the earnings_and_profits of parent and controlled will be allocated as provided in sec_312 sec_1_312-10 and sec_1_1502-33 provided that i parent satisfies the requirements of sec_1_367_e_-1t c i of the temporary regulations and the reporting requirement described in sec_1 e - 1t c iii and ii parent does not know or have reason to know that any shareholder of parent who is not a qualified u_s_person as defined in sec_1_367_e_-1t b i is a five_percent_shareholder as described in sec_1_367_e_-1t c ii no gain will be recognized by parent under sec_367 with respect to the third distribution caveats we express no opinion about the tax treatment of the transaction under any other provision of the code or regulations or the tax treatment of any conditions existing at the time of or effects resulting from the transaction not specifically covered by the above rulings in particular no opinion is expressed regarding the tax consequences of the purchase described above in step iv or the conversion described above in step x the rulings in this letter are based on the facts and representations submitted under penalties of perjury in support of the request this office has not verified any of the material submitted in support of the request for a ruling verification of that information may be required as part of the audit process temporary or final regulations pertaining to one or more of the issues addressed in this ruling letter including regulations under sec_358 have not yet been adopted therefore this ruling will be modified or revoked if adopted temporary or final regulations are inconsistent with any conclusions in the ruling see dollar_figure of revproc_99_1 1999_1_irb_6 however when the criteria in dollar_figure of revproc_99_1 are satisfied a ruling is not revoked or modified retroactively except in rare or unusual circumstances procedural matters plr-120795-98 this letter is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent each taxpayer involved in this transaction must attach a copy of this letter to the federal_income_tax return of the taxpayer for the taxable_year in which the transaction is completed pursuant to a power_of_attorney on file in this office we are forwarding a copy of this letter to the taxpayer sincerely yours assistant chief_counsel corporate by wayne t murray senior technical reviewer branch


internal_revenue_service department of the treasury number release date washington dc index number person to contact telephone number refer reply to cc dom corp plr-107629-00 date date in re legend distributing controlled subsidiary subsidiary subsidiary subsidiary llc busine sec_1 busine sec_2 state a state b state c country a o p q r x y z investment banker date a date b date c date d software agreement division fund we respond to your letter dated date in which you requested rulings as to the federal_income_tax consequences of a proposed transaction additional information was provided in letters dated date date and date specifically you requested rulings under sec_355 and other code sections of the internal_revenue_code the information you submitted is summarized below distributing is a publicly_held_corporation organized under the laws of state a distributing is indirectly engaged through its subsidiaries in busine sec_1 and busine sec_2 distributing’s capital structure consists of o shares of common_stock of which p are outstanding to the best of its knowledge distributing has one shareholder fund which holds more than of its stock additionally distributing has five different stock_option plans pursuant to which employees and directors may acquire stock in distributing old options controlled is a corporation that was organized under the laws of state b prior to the transactions described herein distributing owned percent of the stock of controlled controlled is directly engaged in busine sec_2 controlled’s capital structure consists of q shares of common_stock of which r are outstanding subsidiary is a wholly owned subsidiary of distributing organized under the laws of state a that is through subsidiary engaged in busine sec_1 subsidiary is a wholly owned subsidiary of subsidiary organized under the laws of state c that is directly engaged in busine sec_1 until date d subsidiary also operated division on date d prior to contemplating the transaction described herein subsidiary sold division subsidiary is a wholly owned subsidiary of controlled organized under the laws of state a subsidiary is directly engaged in busine sec_2 subsidiary is a wholly owned subsidiary of subsidiary organized under the laws of state a subsidiary is directly engaged in busine sec_1 management of the distributing group has determined that to compete effectively in the busine sec_2 industry it needs to grow and expand busine sec_2 beyond its present status distributing foresees the growth to be achieved through a combination of internal growth joint ventures and acquisitions consequently controlled will need a substantial amount of capital approximately x amount in order to fund its growth initiatives which controlled plans to raise through an equity offering however distributing has been advised by its financial advisor investment banker that controlled could raise significantly more funds per share if distributing and controlled are separated in connection with the public offering consequently distributing and controlled propose to restructure its busine sec_2 subsidiaries into a single entity distributing then proposes to separate controlled from its corporate structure in order to complete the separation the following steps have been or will be completed the transaction subsidiary formed llc all of the interests of which were issued to subsidiary llc will be disregarded as an entity for federal_income_tax purposes under sec_301_7701-3 on or about date a distributing contributed to controlled all of distributing’s equity interests in entities conducting directly or indirectly busine sec_2 including all of distributing’s equity interests in the country a disregarded entities along with certain notes receivable from those entities in actual or constructive exchange for additional shares of controlled stock and for the constructive assumption by controlled of liabilities of the country a disregarded entities the contribution the contribution was made in accordance with the terms provided in the assignment and assumption_agreement entered into between distributing and controlled controlled effected a stock split in order to increase the total number of outstanding shares as is necessary to facilitate the transaction controlled offered less than of its outstanding shares of common_stock for sale to the public in an initial_public_offering the public offering the prospectus for the public offering states that distributing plans to engage in the transactions described in step below subsidiary will be reincorporated in state b the taxpayer has represented that to the best of its knowledge and belief the reincorporation of subsidiary will constitute a reorganization within the meaning of sec_368 subsidiary will subsequently cause subsidiary to merge with and into llc the liquidation distributing will transfer its intercompany receivables and payables relating to busine sec_1 to subsidiary certain intercompany payables and receivables among distributing and entities directly or indirectly conducting busine sec_2 may be canceled and others will be repaid old distributing options will be converted into separately exercisable options to acquire shares of distributing the new distributing options and controlled the controlled options and together with the new distributing options the substituted options the number of new distributing options and controlled options received will be determined based on a conversion formula designed to preserve the option holder’s net economic benefit the substituted options will have the same terms as the old distributing options distributing will consummate an exchange whereby tendering shareholders will exchange shares of distributing common_stock for shares of controlled owned by distributing the exchange any remaining shares of controlled held by distributing after the exchange will be distributed pro_rata to the remaining shareholders of distributing the spin-off and together with the exchange the distribution the exchange will be conducted using a dutch auction format and the exchange will be made at prices determined by the market contemporaneously with the exchange however the exchange may be conducted by a fixed ratio format determined by distributing based on the analysis of market prices to avoid administrative difficulties associated with issuing fractional shares of controlled distributing will instead issue fractional shares to a distribution agent the distribution agent will bundle the fractional shares sell whole shares in the open market and remit the proceeds to the distributing shareholders net of transaction costs in proportion to their ownership of fractional shares currently as part of controlled’s busine sec_2 controlled is performing services for state and local governments under certain long term contracts the contracts which were entered into on date c however due to certain economic conditions the value of the contracts have fallen producing substantial losses investment banker has advised that controlled’s ability to raise capital through the public offering will be impaired if potential investors are not assured that the losses under the contracts will not adversely affect earnings because controlled is not able to assign the contracts controlled has created an offsetting reserve in the amount of y to which controlled charges the losses from the contracts however there is no assurance that the contracts may not be devalued further and produce losses in excess of the reserve and it is feared that this risk may have a negative effect on the price of the controlled stock in the public offering because distributing feels that the success of the public offering is critical to the long term success of controlled it has entered into an indemnification agreement government services agreement with controlled whereby distributing will indemnify controlled if the losses under the contracts exceed the amount in the reserve distributing’s indemnification is subject_to a limit in the amount of z after the distribution various services will be provided by controlled to distributing and by distributing to controlled the services will be provided through four separate agreements the master agreement the software agreement the transitional services agreement and the real_estate agreement under the master agreement controlled’s subsidiary will provide information_technology development services to distributing in connection with busine sec_1 the master agreement has an initial term five of years from the date of the public offering although distributing has the right to terminate the agreement after three years under the software agreement distributing will license the use of software to controlled the software agreement will commence on the date of the public offering and end less than two years later on date b under the transitional services agreement distributing or its subsidiaries and controlled or its subsidiaries have agreed to provide various services to each other for specified time periods under the real_estate agreement distributing or one of its subsidiaries will lease to controlled seven different sites for a period of months subsidiary will lease a building to controlled for a period of months distributing or one of its subsidiaries will transfer an office building to controlled and distributing will assign its rights as tenant under various leases to controlled or one of its subsidiaries the taxpayer has represented that all of the payments under these agreements will be for fair_market_value the following representations have been made in connection with the proposed liquidation a subsidiary on the date of the adoption of the agreement and plan of merger constituting the plan of complete_liquidation and at all times until the final deemed liquidating_distribution is completed will be the owner of at least of the single outstanding class of subsidiary stock b no shares of subsidiary will have been redeemed during the three years preceding the adoption of the agreement and plan of merger constituting the plan of complete_liquidation of subsidiary c all deemed distributions from subsidiary to subsidiary pursuant to the agreement and plan of merger constituting the plan of complete_liquidation will be made within a single taxable_year of subsidiary d as soon as the first deemed liquidating_distribution has been made subsidiary will cease to be a going concern and its activities will be limited to winding up its affairs paying its debts and distributing its remaining assets to its shareholder e subsidiary will not retain any assets following its final deemed liquidating_distribution f subsidiary will not have acquired assets in any non-taxable transaction at any time except for acquisitions occurring more than years prior to the date of adoption of the agreement and plan of merger constituting the plan_of_liquidation of subsidiary g except for the sale of division no assets of subsidiary have been or will be disposed of by either subsidiary or subsidiary except for dispositions in the ordinary course of business and dispositions occurring more than years prior to the adoption of the agreement and plan of merger constituting the plan_of_liquidation h the deemed liquidation of subsidiary will not be preceded or followed by the reincorporation in or transfer or sale to a recipient corporation recipient of any of the businesses or assets of subsidiary if persons holding directly or indirectly more than in value of subsidiary stock also hold directly or indirectly more than in value of the stock of recipient for purposes of this representation ownership will be determined by application of the constructive_ownership rules of sec_318 as modified by sec_304 i prior to the adoption of the agreement and plan of merger constituting the plan_of_liquidation no assets of subsidiary will have been distributed in_kind transferred or sold to subsidiary except for i transactions occurring in the normal course of business and ii transactions occurring more than years prior to the adoption of the agreement and plan of merger constituting the plan_of_liquidation j subsidiary will report all earned_income represented by assets that will be distributed to its shareholders such as receivables being reported on the cash_basis unfinished construction contracts commissions due etc k the fair_market_value of the assets of subsidiary will exceed its liabilities both at the date of the adoption of the agreement and plan of merger constituting the plan of complete_liquidation and immediately prior to the time the first deemed liquidating_distribution is made l subsidiary and all other organizations within its affiliated_group are not organizations that are exempt from u s federal_income_tax under sec_501 or any other provision of the code m all other transactions undertaken contemporaneously with in anticipation of in conjunction with or in any way related to the proposed merger of subsidiary with and into llc have been fully disclosed the following representations have been made in connection with the distribution a the indebtedness owed by controlled to distributing after the distribution will not constitute stock_or_securities b the payment of cash in lieu of fractional shares of controlled stock is solely for the purpose of avoiding the expense and inconvenience of issuing fractional shares and does not represent separately bargained for consideration the method used for handling fractional shares is designed to limit the amount of cash received by any one shareholder to less than the value of one full share of controlled stock the total amount of cash paid in lieu of fractional shares will not exceed of the fair_market_value of controlled stock distributed to distributing’s shareholders in the distribution c the fair_market_value of the controlled stock and other consideration to be received by each shareholder of distributing will be approximately equal to the fair_market_value of the distributing stock surrendered by the shareholder in the exchange d no part of the consideration distributed by distributing will be received by a shareholder as a creditor employee or in any capacity other than that of a shareholder of distributing e immediately after the distribution the gross assets of subsidiary 1's active trade_or_business as defined in sec_355 will have a fair_market_value equal to at least of the total fair_market_value of the gross assets of subsidiary f immediately after the distribution the gross assets of controlled’s active trade_or_business as defined in sec_355 will have a fair_market_value equal to at least of the value of the total fair_market_value of the gross assets of controlled g the five years of financial information submitted on behalf of subsidiary including the former subsidiary 2's business is representative of what such corporation’s operations will be at the time of the distribution and with regard to such corporation there has not been and will not have been any substantial operational changes since the date of the last financial statement submitted h the five years of financial information submitted on behalf of controlled is representative of what controlled’s operations will be at the time of the distribution and with regard to such corporation there has not been and will not have been any substantial operational changes since the date of the last financial statement i immediately after the distribution at least of the fair_market_value of the gross assets of distributing will consist of the stock of subsidiary j following the distribution distributing and controlled will each continue the active_conduct of its business independently and with its separate employees k the distribution is being carried out in whole or substantial part for the following corporate business_purpose to facilitate an offering of controlled stock to raise capital on a more cost effective basis l except for the receipt of cash in lieu of fractional shares there is no plan or intent by any shareholder who own sec_5 or more of the stock of distributing and the management of distributing to the best of its knowledge is not aware of any plan or intention on the part of any particular remaining shareholder of distributing to sell exchange transfer by gift or otherwise dispose_of any stock in either distributing or controlled after the distribution m there is no plan or intention by either distributing or controlled directly or through any subsidiary_corporation to purchase any of its outstanding_stock after the transaction other than through stock purchases meeting the requirements of sec_4 b of revproc_96_30 n there is no plan or intention to liquidate either distributing or controlled to merge either corporation with any other corporation or to sell or otherwise dispose_of their assets after the distribution except in the ordinary course of business o the total adjusted bases and fair_market_value of the assets transferred to controlled by distributing each equals or exceeds the sum of any liabilities assumed within the meaning of sec_357 p the liabilities assumed in the transaction within the meaning of sec_357 were incurred in the ordinary course of business and are associated with the assets being transferred q no property is being transferred between distributing and controlled in connection with the distribution for which any investment_credit determined under sec_46 has been or will be claimed r distributing neither accumulated its receivables nor made extraordinary payment of its payables in anticipation of the transaction s other than obligations incurred in the ordinary course of business no intercorporate debt will exist between distributing or any related_party on the one hand and controlled or any related_party on the other hand at the time of or after the distribution t immediately before the distribution items of income gain loss deduction and credit will be taken into account as required by the applicable intercompany_transaction regulations see sec_1_1502-13 and sec_1 of the income_tax regulations as in effect before the publication of t d 1995_2_cb_147 and as currently in effect section as published in t d further distributing’s excess_loss_account if any with respect to the controlled stock will be included in income immediately before the exchange see sec_1 u for purposes of sec_355 immediately after the distribution no person will hold disqualified_stock under sec_355 in distributing or controlled possessing or more of the total combined voting power of all classes of distributing or controlled stock entitled to vote or or more of the total value of shares of all classes of distributing or controlled stock v the distribution is not part of a plan or series of related transactions within the meaning of sec_355 pursuant to which one or more persons will acquire directly or indirectly stock possessing or more of the total combined voting power of all classes of stock of either distributing or controlled entitled to vote or stock possessing or more of the total value of all classes of stock of either distributing or controlled any stock issued upon the exercise of any stock_option that is or will be an option to acquire stock in a corporation with customary terms and conditions provided to employees or directors in_connection_with_the_performance_of_services for the corporation or a person related to it under sec_355 and that is not excessive by reference to the services performed immediately after the distribution and within six months thereafter are nontransferable within the meaning of sec_1_83-3 other than with respect to certain limited transfers to family members for estate_planning purposes permitted within the non-transferability requirements for eligibility for use of sec registration form s-8 which is designed for compensatory options and does not have a readily_ascertainable_fair_market_value as defined in sec_1_83-7 either before or after the distribution will not be taken into account w no two parties to the proposed transaction are investment companies as defined in sec_368 and iv x except for payments made under a tax_sharing_agreement between distributing and controlled indemnity payments made under the assignment and assumption_agreement governing the contribution any payments made under the government services indemnity agreement and certain payments for services under the transitional services agreement payments made in connection with all continuing transactions between distributing or any other related_party on the one hand and controlled or any related_party on the other hand will be for fair_market_value based on terms and conditions that are consistent with those that would be arrived at by the parties bargaining at arm’s length y the distribution will occur within the later of i the last day of the sixth month beginning after the date of the public offering or ii the last day of the third month beginning after the receipt of a favorable private_letter_ruling based solely on the facts submitted and the representations made above it is held as follows as to the liquidation the liquidation will be treated as a distribution by subsidiary to subsidiary in complete_liquidation of subsidiary no income gain_or_loss will be recognized by subsidiary on the liquidation sec_332 no income gain_or_loss will be recognized by subsidiary on the liquidation sec_337 the basis of each asset of subsidiary received by subsidiary in the liquidation will equal the basis of that asset in the hands of subsidiary immediately before the liquidation sec_334 the holding_period of each asset received by subsidiary from subsidiary in the liquidation will include the period during which subsidiary held such asset provided such asset is a capital_asset as defined in sec_1221 or property described in sec_1231 in the hands of subsidiary sec_1223 based solely on the facts submitted and the representations made above it is held as follows as to the distribution the contribution followed by the distribution will constitute a reorganization within the meaning of sec_368 distributing and controlled will each be a_party_to_a_reorganization within the meaning of sec_368 distributing will recognize no gain_or_loss on the contribution sec_361 and sec_357 controlled will recognize no gain_or_loss on the contribution sec_1032 the basis of each asset received by controlled from distributing in the contribution will be equal to the basis of such asset in the hands of distributing immediately before the contribution sec_362 the holding_period of each asset received by controlled in the contribution will include the holding_period during which such asset was held by distributing sec_1223 no income gain_or_loss will be recognized by distributing upon the exchange of all of its controlled stock for distributing stock pursuant to the exchange or on the distribution of controlled stock to shareholders of distributing in the spin-off sec_361 no gain_or_loss will be recognized by and no amounts will be included in the income of the shareholders of distributing upon their exchange of distributing stock for controlled stock pursuant to the exchange or upon their receipt of controlled stock pursuant to the spin-off sec_355 the basis of the controlled stock received in the exchange will be the same as the basis of the distributing stock surrendered in exchange therefor sec_358 if any controlled stock is received in the spin-off the basis of the distributing stock and the controlled stock in the hands of the shareholders of distributing after the spin-off will collectively be the same as the aggregate basis of the distributing stock held immediately before the spin-off and such basis will be allocated between distributing stock and controlled stock in proportion to their relative fair market values at the time of the spin-off sec_358 and sec_1_358-2 the holding_period of the controlled stock received by the shareholders of distributing in the exchange will include the holding_period of the distributing stock exchanged therefor provided that the distributing stock is held as a capital_asset by the respective shareholders of distributing on the date of the exchange sec_1223 if any controlled stock is received in the spin-off the holding_period of those shares will include the holding_period of the distributing stock retained provided that such distributing stock is held as a capital_asset by the respective shareholder of distributing on the date of the spin-off sec_1223 if cash is received by a distributing shareholder as a result of a sale of a fractional share of controlled stock by the distribution agent the shareholder will have gain_or_loss measured by the difference between the basis of the fractional share as determined in ruling above or allocated thereto as determined in ruling above and the amount of cash received sec_1001 if the controlled stock is held by the shareholder as a capital_asset the gain_or_loss will be capital_gain or loss subject_to the provisions and limitations of subchapter_p of chapter sec_1221 and sec_1222 as provided in sec_312 proper allocation of earnings_and_profits between distributing and controlled will be made in accordance with sec_1_312-10 any payments under the tax_sharing_agreement indemnity payments made under the assignment and assumption_agreement or any government services indemnity payments made by distributing to controlled or by controlled to distributing that i relate to a period ending on or before the date of the distribution and ii will not become fixed and ascertainable until after the distribution will be treated as occurring immediately before the distribution the holders of old distributing options will not recognize any income gain_or_loss upon the receipt of new distributing options and controlled options pursuant to the distribution neither distributing nor any subsidiary thereof will recognize any gain_or_loss upon the transfer of controlled stock to an employee of distributing or any subsidiary thereof who exercises a controlled option neither controlled nor any subsidiary thereof will recognize any gain_or_loss upon the transfer of distributing stock to an employee of controlled or any subsidiary thereof who exercises a new distributing option no opinion is expressed about the tax treatment of the proposed transaction under other provisions of the code and regulations or about the tax treatment of any conditions existing at the time of or effects resulting from the proposed transaction that are not directly covered by the above rulings the rulings in this letter are based on the facts and representations submitted under penalties of perjury in support of the request verification of that information may be required as part of the audit process this ruling is directed only to the taxpayer s requesting it sec_6110 of the code provides that it may not be used or cited as precedent a copy of this letter should be attached to the federal_income_tax returns or the taxpayers involved for the taxable_year in which the transaction covered by this ruling letter is consummated sincerely assistant chief_counsel corporate by christopher schoen assistant to the chief branch


tcmemo_2016_11 united_states tax_court rodney c niemann petitioner v commissioner of internal revenue respondent docket no filed date rodney c niemann pro_se michael w lloyd and pamela j sewell for respondent memorandum findings_of_fact and opinion holmes judge rodney niemann is an engineer from phoenix who drafted property-condition reports and environmental site assessments for wall street lenders--until the crash of the recession hit niemann’s business hard and the demand for his services fell niemann responded by starting a successful second career in real_estate but this new career led him to claim a slew of deductions and engage in complicated transactions that brought him under the commissioner’s eye findings_of_fact niemann is a certified professional civil engineer and has long worked as a real-estate adviser his advice is of a particular kind--he used his engineering knowledge to assess possible environmental problems for large commercial lenders before they would agree to finance real-estate projects the demand for that kind of service depends on the demand for major commercial real-estate projects and the number of such projects in arizona sank after the recession began niemann scrambled to put his talents to use in some other way and began what he called an alternate day job of buying distressed real_estate to hold until he could turn it for a profit he has been doing this and doing it well since but he’s been doing it through a tangle of entities including the three at issue here dependable project services llc real_estate rabbit llc and magic llc dependable project niemann formed dependable project in to prepare property-condition reports but then used it to hold his investments in mineral rights for and 2010--the tax years at issue here--niemann claimed business-expense deductions for dependable project on his personal schedules c among them was dollar_figure that he paid to an attorney to evaluate the collection potential of a large portfolio of distressed student loans that he had been offered by wall street lenders the attorney advised him that the package of student loans was not viable the offer price was about dollar_figure million and their face value was only dollar_figure million the discount was too small and niemann decided that he wouldn’t buy the parties dispute the deductibility of this expense real_estate rabbit llc niemann formed rabbit late in and named himself manager and his ira as sole member rabbit also held mineral rights and personal notes but he intended it mainly to hold distressed real_estate for a while he was very active on the courthouse steps buying houses at auction and then flipping them for a profit niemann had an excellent eye for value and in one of the years at issue resold nine properties all but one at a profit when he filed his amended return he reported dollar_figure in short-term_capital_gain in computing this gain however he included in his basis several home-office expenses that he deemed related to the sale of those properties niemann had large amounts of other home-office expenses they only increased after his office was burglarized and his computers were stolen in date an event that prompted him to begin running rabbit out of his home this also made his taxes more complicated since he rents his home from his girlfriend and he divides the rent he pays her into separate portions one is for_the_use_of the property as his residence and the other is for_the_use_of the property as his office niemann credibly testified that he had throughout these years used a fenced-in area on the property exclusively to store his business equipment the burglary forced niemann to set_aside more space within his home for his business operations and he converted an entire wing of the house into his principal_place_of_business even so excess paperwork along with christmas decorations and other miscellaneous personal items began to clutter the garage though we don’t doubt that niemann had expenses in running rabbit he didn’t report them in the usual way on a separate schedule c for either or despite the fact that rabbit held four of his investment properties instead as we’ve already mentioned he claimed these expenses on his return as an our court sometimes encounters unbelievable explanations for missing records but niemann’s records were on his computers and it was they that were stolen according to his credible testimony--made more credible because it was backed up by a contemporaneous police report of the burglary increase to basis in the properties he also lumped these properties with properties that he held in his own name on his schedule d for the year he sold them magic llc niemann’s tax reporting became even more tangled after he began to look for ways to reduce the tax burden on what was looking like an increasingly profitable business his reporting went most awry after he attended seminars advertising the use of a self-directed checkbook llc he explained that what that meant to him was simply the process of writing checks inside of an llc that is inside of a tax-advantaged ira this information was sold to anyone who attended these seminars magic llc was central to this tax planning in he formed it but forming it in his case meant that he hired a vendor to draft the appropriate documents the vendor filled out a multimember form for the llc but it doesn’t appear that the vendor ever made any representation that the form would actually make the company a multimember llc and we find that niemann was magic’s only member and manager in any event niemann didn’t file a separate schedule or return for magic he did credibly testify that he intended a series of property transfers during the years at issue between himself his ira magic and rabbit not to be prohibited_transactions under sec_4975 simply filling out a form that claims an llc has multiple members doesn’t make it true niemann who we found to be a very smart man though not trained in law realized as trial neared that magic was not actually a multimember llc this led him to then concede that he had engaged in numerous prohibited_transactions with his ira for example niemann arranged for rabbit--the entity that he had tucked into his ira--to transfer one property to himself and another to magic which he wholly owned sec_4975 limits the transactions that qualified_retirement_plans including certain iras can do it defines as a prohibited_transaction any direct or indirect sale_or_exchange or leasing of any property between a plan and a disqualified_person lending of money or other extension of credit between a plan and a disqualified_person furnishing of goods services or facilities between a plan and a disqualified_person transfer to or use by or for the benefit of a disqualified_person of the income or assets of a plan act by a disqualified_person who is a fiduciary whereby he deals with the income or assets of plan in his own interests or for his own account or receipt of any consideration for his personal account by any disqualified_person who is a fiduciary from any party dealing with the plan in connection with a transaction involving the income or assets of the plan a shorthand description is that the section bans self-dealing between a retirement_plan and its beneficiary congress barred this sort of self-dealing to prevent taxpayers from using their retirement plans to engage in transactions that could put plan assets and income at risk before retirement see sec_4975 s rept no c b supp h_r rept no c b supp as usual all section references are to the internal_revenue_code in effect for the years at issue and all rule references are to the tax_court rules_of_practice and procedure this meant that niemann had terminated his ira and this termination is with extreme prejudice--the ira’s assets are deemed distributed see sec_72 sec_408 and what deemed distributed means to niemann is actually added to his taxable_income --about dollar_figure in extra income according to the notice of deficiency--for the tax_year niemann prepared his own return but then hired a cpa to amend that return and file hi sec_2010 return the commissioner issued a notice_of_deficiency that disallowed numerous schedule c expenses and schedule e mortgage-interest deductions for the properties niemann was buying and holding and also increased his income by the amount of the deemed_distribution of his ira the commissioner also asserted accuracy-related_penalties for both years niemann an arizona resident timely filed a petition with this court contesting the entire contents of that notice the parties settled almost all the issues including the prohibited-transaction issue this leaves only the following items in dispute item travel_expenses legal and professional services short-term_capital_gain sec_6662 penalties dollar_figure n a dollar_figure dollar_figure opinion dollar_figure big_number n a dollar_figure a deductibility of travel meals and entertainment niemann claims deductions of about dollar_figure for and dollar_figure for for travel to and from properties in several states sec_274 subjects all travel_expenses to very detailed substantiation requirements while a contemporaneous log isn’t necessary a taxpayer like niemann must still substantiate by adequate_records or other corroborating evidence the amount time place and business_purpose of the expense sec_1_274-5t and temporary income_tax regs fed reg date emphasis added for both years at issue here niemann offers only reconstructed logs that he prepared after receiving the notice_of_deficiency he constructed his log from credit-card receipts bank receipts and copies of cashier’s checks hi sec_2010 log was a cut out of a quicken bookkeeping program but at least it was based on billings and work orders--though he submitted none of these to the commissioner reconstructed logs often fail to properly detail the business_purpose of each expense see hentges v commissioner tcmemo_1998_244 wl at and niemann doesn’t offer any other corroborating evidence aside from his own albeit credible testimony that his business required travel sec_274 simply requires more specificity see eg 122_tc_305 see also eg irwin v commissioner tcmemo_1996_490 wl at aff’d without published opinion 131_f3d_146 9th cir we find for the commissioner on this issue during trial niemann said that he did indeed have things like receipts invoices and other evidence of individual expenses but as he did not turn those over to the commissioner or us they do him no good some of niemann’s computer records were stolen and that normally would mean that he could avail himself of less stringent recordkeeping requirements under sec_1_274-5t and temporary income_tax regs fed reg date but niemann provided no evidence that his recordkeeping was more complete or accurate before the theft see eg hentges v commissioner tcmemo_1998_244 wl at indeed niemann prepared his logs only in response to the notice_of_deficiency and it’s important to note that only his computer records were stolen--not the paper documentation he neglected to turn over to the commissioner b deductibility of legal and professional fees on hi sec_2010 schedule c niemann deducted the dollar_figure in attorney’s fees that he’d paid through dependable project for investigating the package of student loans that he’d been offered a taxpayer can generally deduct any ordinary and necessary expenses paid_or_incurred while carrying out a trade_or_business sec_162 but did the few personal notes niemann held in the past amount to a trade_or_business though the code doesn’t define either trade_or_business caselaw has established that to be engaged in a trade_or_business a taxpayer must be involved in the activity with continuity and regularity and the primary purpose of that activity must be income or profit 480_us_23 we don’t doubt that niemann was holding the distressed notes to make a profit but a taxpayer is continually and regularly involved in a business activity only if he can show extensive business activity over a substantial period jafarpour v commissioner tcmemo_2012_165 citing 399_f2d_326 5th cir aff’g t c memo we note that niemann did not argue that these fees were deductible as an expense of producing income under sec_212 sporadic activities don’t qualify groetzinger u s pincite 86_tc_492 aff’d 864_f2d_1521 10th cir it’s clear from the record before us that niemann’s business was centered on buying and selling real_estate we do find that he also made several loans to realtors though it’s unclear from the record just how many notes documenting such loans he ever held during trial he described only two and there is nothing in the record that shows he ever held more than these two it’s also clear from niemann’s testimony that during 2010--the tax_year at issue for this deduction-- dependable project didn’t hold any notes nor did it redeem or issue any new notes more activity than this would still not be enough especially where the taxpayer--like niemann--didn’t engage in the supposed business activity during the years at issue for example in douglas v commissioner tcmemo_1998_ aff’d 181_f3d_87 4th cir we held that even though a taxpayer bought eleven properties renovated seven and sold two of them in the past his failure to sell any during the years at issue meant that he wasn’t engaged in real- property development on a regular and continuous basis see also ohana v commissioner tcmemo_2014_83 at taxpayer not in business of buying and selling real_estate where he didn’t buy or sell any real_estate during tax years at issue we therefore find dependable project’s moneylending to realtors insufficiently continuous and regular to amount to a business investing in debt or distressed_debt moreover even if niemann intended to get into the business of making and holding loans in the future his activity was at most sporadic in and a business must have already begun for us to allow a deduction under sec_162 see mcmanus v commissioner tcmemo_1987_457 aff’d without published opinion 865_f2d_255 4th cir see also wolfgram v commissioner tcmemo_2010_69 intent to operate property as a bed and breakfast before operation began not regular or continuous activity we decide in favor of the commissioner on this issue c schedule d short-term_capital_gain this confusing issue started with niemann’s schedule d niemann reported dollar_figure in short-term_capital_gain from the sale of several properties that year he included in his basis home-office expenses of dollar_figure on his schedule c niemann entered several similar expenses but didn’t report them specifically as home-office expenses the commissioner added to the confusion by increasing niemann’s short-term_capital_gain by dollar_figure in the notice of deficiency and he asserted in his pretrial memorandum that this adjustment was due in part to dollar_figure in home-office deductions that niemann improperly claimed on his schedule d niemann’s short-term_capital_gain was again from the sale of several flipped homes he calculated his bases in the homes by including not only the purchase_price of each home but also by including various costs attributed to them the reason he attributes these particular costs to the sale of property is that--as he explained during trial--they are representative of various expenses related to rabbit and magic this includes real_estate signs for the properties for sale leasing agreements the mileage to and from the job sites the dollar_figure at issue look more like schedule c expenses for rabbit and magic whereas the deductions niemann actually took on his schedule c are for expenses of dependable project’s business activities we agree with the commissioner that niemann’s home-office expenses aren’t a cost of acquiring the properties and niemann shouldn’t have included them in his bases the basis of a piece of property is what the property cost sec we never did figure out where the dollar_figure came from during trial the commissioner conceded that the only issue that remains as to the dollar_figure is whether or not the dollar_figure should be allowed or not we treat this as a concession of the remaining dollar_figure of the asserted increase in capital_gain a taxpayers can adjust their basis in property for expenditures receipts losses or other items properly chargeable to a capital_account sec_1016 the cost of the improvements not at issue here that niemann made to the properties before he sold them is properly included in his bases because they are part of the cost of the property see sec_1_1016-2 income_tax regs the cost of his home_office is just a cost of doing business see sec_280a he should have reported these expenses on his schedule c the commissioner takes his argument one step further he argues that even if niemann moves the dollar_figure to his schedule c he still can’t take a deduction for them because he hasn’t substantiated them the commissioner raised this issue for the first time during trial so before we can decide the issue on its merits we must decide whether it’s properly before us we’ve often held that we won’t consider issues that haven’t been properly raised in the pleadings or by an amendment to the pleadings 92_tc_376 aff’d 920_f2d_1196 5th cir 64_tc_989 there is of course an exception to the rule rule b treats an issue as if it had been raised in the we also agree that those properties aren’t personally owned by niemann but by rabbit and should have been reported on a separate schedule c the parties’ rule_155_computations should reflect this pleadings if it was tried with the express or implied consent of the parties see eg 103_tc_525 ndollar_figure aff’d 100_f3d_778 10th cir in deciding whether a party gave implied consent this court considers whether that consent would result in unfair prejudice bulas v commissioner tcmemo_2011_201 wl at n see also wb acquisition inc subs v commissioner tcmemo_2011_36 aff’d sub nom 803_f3d_1014 9th cir mcgee v commissioner tcmemo_2000_308 the potential for unfair prejudice here is plain the commissioner maintained in his pretrial memorandum--just one week before trial--that the reason we couldn’t just move the home-office deductions to the schedule c was that they were double-claimed it was only when this proved not to be true that the commissioner raised the question of whether niemann could substantiate these expenses at all niemann asserted--and we believe him--that the irs hadn’t previously asked him for substantiation we therefore find this unfairly prejudiced niemann because it prevented him from presenting documents which he credibly testified he had somewhere in his records see bulas wl at the commissioner did assert that the issue was raised generally in the notice_of_deficiency when he challenged niemann’s schedule c but that isn’t the continued n finding prejudice where the commissioner raised a new issue during trial thereby preventing the taxpayer from being able to conduct an investigation of his records see also 66_tc_861 finding no timely notice where a taxpayer was deprived of any opportunity to present the relevant evidence continued case the commissioner challenged only three items out of claimed deductions on niemann’s schedule c the pleadings contain no mention of substantiation in regard to niemann’s home-office expenses the commissioner’s pretrial memorandum also indicates that he will not be challenging whether niemann had home-office deductions as he assumes they were double counted see 76_tc_708 dismissing commissioner’s claim that statutory notice was broad enough to include a new issue even if we were to find trial by consent we would still find for niemann on the alternative ground that the commissioner failed to meet his burden_of_proof the commissioner had this burden because lack of substantiation is a new theory--an attempt by the commissioner to rely on a basis that is beyond the scope of the original determination evans v commissioner tcmemo_2010_62 quoting 112_tc_183 when a new_theory increases the deficiency or requires the taxpayer to introduce new or different evidence it becomes a new_matter id the commissioner’s lack-of- substantiation theory forced niemann into relying on records that he didn’t have with him at trial because he had no notice he’d need them this means that it was a new_matter and the burden_of_proof was on the commissioner see shea t c pincite because the commissioner presented no evidence and offered no testimony at trial on this new_matter we would still find for niemann on this issue d penalties the commissioner asserts accuracy-related_penalties for each of the years at issue under sec_6662 and accuracy-related_penalties are appropriate where an underpayment_of_tax is attributable to a taxpayer’s negligence or disregard of rules or regulations or any substantial_understatement_of_income_tax whether the commissioner met his burden of production in this case is a simple math problem an understatement_of_tax is substantial if it exceeds the greater of dollar_figure or percent of the tax required to be shown on the return sec_6662 for both the and tax years niemann’s understatement greatly exceeded both dollar_figure and of the tax required to be shown on his return the commissioner has met his burden with respect to the substantial_understatement niemann may rebut the penalty by showing evidence that his mistakes were reasonable and in good_faith see sec_6664 in deciding whether he has proven this defense we examine all the relevant facts and circumstances including his efforts to determine his proper tax_liability and whether he relied in good_faith on professional advice see sec_1_6664-4 income_tax regs we discuss the relevant tax years and issues separately niemann prepared his own return niemann didn’t submit evidence or provide testimony to show reasonable_cause for his failure to keep adequate_records to substantiate his travel_expenses for that year see sec_1_6662-3 income_tax regs flake v commissioner tcmemo_2014_76 diallo v commissioner tcmemo_2011_300 garrison v commissioner tcmemo_2009_32 niemann also didn’t show reasonable_cause for believing that his home- office deductions should be taken as part of the bases in his real-estate investments he was a credible witness but while we have granted relief from accuracy-related_penalties because of an honest mistake of law that relief is limited to situations where the law is unclear 113_tc_440 here niemann even conceded during trial that the expenses he included in his bases for capital_gain were representative of schedule c expenses for rabbit and magic--had he filled out separate schedules c for them thus we sustain the accuracy-related_penalties for the tax_year with the exception of the accuracy-related_penalty for early withdrawal from his ira in the parties haven’t resolved the penalties concerning the settled and issues because niemann didn’t produce any evidence or give any testimony regarding those issues during trial to establish why penalties continued niemann’s tax_return for the tax_year was prepared and signed by a professional tax-return preparer reliance on a preparer excuses a taxpayer from an accuracy-related_penalty only if his reliance was reasonable 115_tc_43 aff’d 299_f3d_221 3d cir niemann’s reliance on his cpa was reasonable if the adviser was a competent professional with sufficient expertise to justify reliance he provided necessary and accurate information to the adviser and he actually relied on the adviser’s judgment in good_faith id competent professional niemann’s adviser was most certainly competent--he was a professional cpa at a reputable firm niemann credibly testified at trial that the firm was a cpa legal thing and that it came highly recommended see zarlengo v commissioner tcmemo_2014_161 at finding that a cpa with years’ experience had sufficient expertise to justify reliance continued shouldn’t apply we sustain the commissioner’s determination that he is liable for the accuracy-related_penalty as to the other settled issues from the tax_year see esrig v commissioner tcmemo_2012_38 provision of necessary and accurate information niemann must establish that he provided necessary and accurate information with respect to the items reported on his returns sec_1 c i income_tax regs also requires that he disclosed all pertinent facts and circumstances that he knew or reasonably should have know to be relevant to the treatment of an item see diaz v commissioner tcmemo_2012_280 niemann proved this with his credible testimony that he gave his cpa any documentation that he asked for including but not limited to the quicken printouts for the year at issue niemann’s cpa also had all of the necessary information to report and did report niemann’s ira transactions actual reliance in good_faith niemann’s reliance on his adviser was in good_faith the mistakes on the return involved complicated tax issues spanning three separate businesses and issues of fact eg the adequacy of the records that he showed his adviser if not us under sec_274 niemann’s reliance on his accountant to prepare hi sec_2010 return suffices for us to find in his favor on the sec_6662 penalty for hi sec_2010 tax_year this means that decision will be entered under rule