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 b2 plr-141256-11 date date legend distributing distributing distributing controlled controlled sub -------------------- ------------ --------------------------------------------------------------------------------- --------------------------------------------------------------------------------- -------------------------------------------------------- ---------------------------------------- ------------------------ -------------------------------- ----- ----------------------- -------------------------------- 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--------------------------------------- ------------ --------------------------------------------------------------------------------- --------------------------------------------------------------------------------- --------------------------------------------- --------------------------------------------------------------------------- ------------ --------------------------------------------------------------------------------- --------------------------------------------------------------------------------- --------------------------------------------- plr-141256-11 dre dre dre dre dre dre country a country b country c country d country e country f country g ---------------------------- ------------------------ ------------------------------------------------ --------------------------- ------------ --------------------------------------------------------------------------------- ----------------------------------------------------------- --------------------------- ------------ 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--------------------------------------------------------------------------------- --------------------------------------------- --------------------------------------------------------------------------------- --------------------------------------------------------------------------------- --------------------------------------------------------------------------------- --------------------------------------------------------------------------------- --------------------------------------------------------------------------------- --------------------------------------------------------------------------------- --------------- directors --------------------------------------------------------- dear ---------------- this letter responds to a date letter requesting rulings on certain federal_income_tax consequences of the proposed transactions defined below the information provided in that letter 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 penalties of perjury statement executed by an appropriate party while this office has not verified any of the material plr-141256-11 submitted in support of the request for rulings it is subject_to verification on examination in particular this office has not reviewed any information pertaining to and has made no determination regarding whether distribution distribution or distribution each defined below i satisfies the business_purpose requirement of sec_1 b ii is used principally as a device for the distribution of the earnings_and_profits of distributing distributing distributing controlled or controlled or any combination thereof see sec_355 of the internal_revenue_code code and sec_1_355-2 or iii is part of a plan or series of related transactions pursuant to which one or more persons will acquire directly or indirectly stock representing a 50-percent_or_greater_interest in distributing distributing distributing controlled or controlled see sec_355 and sec_1_355-7 summary of facts distributing a privately held state a corporation is the common parent of an affiliated_group_of_corporations that files a consolidated federal_income_tax return distributing group distributing has one class of common_stock and multiple series of convertible preferred_stock outstanding the shareholders of all such stock together d3 shareholders each share of such preferred_stock is convertible into one share of distributing common_stock upon the occurrence of certain events including at the option of its holder and is entitled to distributing distributions on an as converted basis pro_rata with the distributing common_stock distributing owns all of the outstanding_stock of controlled and distributing each a state a corporation distributing owns all of the outstanding common_stock of distributing d1 common_stock a country b entity classified as a corporation for u s federal_income_tax purposes distributing owns a of the only class of outstanding_stock of sub a country a entity classified as a corporation for u s federal_income_tax purposes with the remaining b owned by directors sub owns all of the outstanding_stock of dre a state a limited_liability_company disregarded as separate from its owner for u s federal_income_tax purposes under sec_301_7701-3 dre owns all of the outstanding preferred equity certificates d1 pecs issued by distributing distributing will form controlled a wholly owned foreign_entity classified as a corporation for u s federal_income_tax purposes and a controlled_foreign_corporation within the meaning of sec_957 for the purpose of facilitating the proposed transactions defined below distributing owns all of the outstanding interests of dre a country c entity disregarded as separate from its owner for u s federal_income_tax purposes under sec_301_7701-3 dre owns all of the plr-141256-11 outstanding interests of dre which in turn owns all of the outstanding interests of dre dre and dre are each a country d entity disregarded as separate from its owner for u s federal_income_tax purposes under sec_301_7701-3 dre also owns all of the outstanding interests of dre a country c entity disregarded as separate from its owner for u s federal_income_tax purposes under sec_301_7701-3 all of the outstanding interests of dre a country e entity disregarded as separate from its owner for u s federal_income_tax purposes under sec_301_7701-3 and all of the outstanding_stock of sub a country f entity classified as a corporation for u s federal_income_tax purposes sub wholly owns sub a country f entity classified as a corporation for u s federal_income_tax purposes sub wholly owns sub a country f entity classified as a corporation for u s federal_income_tax purposes sub wholly owns sub a country f entity classified as a corporation for u s federal_income_tax purposes which in turn wholly owns sub a country g entity classified as a corporation for u s federal_income_tax purposes sub also wholly owns sub a country f entity classified as a corporation for u s federal_income_tax purposes which in turn wholly owns sub a country e entity classified as a corporation for u s federal_income_tax purposes each of distributing sub sub sub sub sub sub sub and sub is a controlled_foreign_corporation within the meaning of sec_957 distributing distributing and distributing and the members of each of their respective separate affiliated groups as defined in sec_355 sag directly engage in various businesses including business a business b and business c following the proposed transactions defined below each of the distributing distributing and distributing sags will continue to directly engage in business a following the first contribution the controlled sag will directly engage in business b and business c following the second contribution the controlled and controlled sags will directly engage in business b and business c financial information has been submitted indicating that each of business a and business c has had gross_receipts and operating_expenses representing the active_conduct_of_a_trade_or_business for each of the past five years the proposed transactions are intended to separate business a from business b and business c which will operate as a segment of business b the purposes of the proposed transactions are i to simplify and clarify the operational structure of business b streamline management reporting and administration and achieve strategic coherence ii to develop financing strategies and capital structures that are designed to better meet the underlying fundamentals of their respective businesses iii to improve business b’s ability to attract and retain qualified management using equity- based compensation and to align more closely the performance of business b’s managers with the equity compensation they receive thus increasing the effectiveness of their equity compensation plans and iv to create a pure play acquisition currency to simplify potential acquisitions by business a or business b with less relative dilution to existing equity holders together corporate business purposes plr-141256-11 proposed transactions to achieve the business purposes described above the taxpayer has proposed the following transactions some of which have already been completed proposed transactions i ii iii iv v vi vii sub transferred certain non-business b assets to dre in exchange for an amount of cash equal to the fair_market_value of such assets an election will be made to classify sub as a disregarded_entity under sec_301_7701-3 first election sub will transfer all of the interests of sub to distributing in exchange for an amount of cash equal to the fair_market_value of such interests an election will be made to classify sub as a disregarded_entity under sec_301_7701-3 second election an election will be made to classify sub as a disregarded_entity under sec_301_7701-3 third election an election will be made to classify sub as a disregarded_entity under sec_301_7701-3 fourth election sub will transfer all of the stock of sub to distributing in exchange for an amount of cash equal to fair_market_value of such stock in a transaction intended to be disregarded for u s federal_income_tax purposes viii dre will transfer all of the interests of dre to distributing in exchange for an amount of cash equal to the fair_market_value of such interests in a transaction intended to be disregarded for u s federal_income_tax purposes ix x dre will distribute all of the interests of dre to distributing in exchange for no consideration in a transaction intended to be disregarded for u s federal_income_tax purposes distributing will transfer all of the interests of dre and sub and all of the stock of sub to controlled along with other business b assets and cash to be used to satisfy any remaining intercorporate indebtedness of controlled or sub to the other members of the distributing group in plr-141256-11 exchange for all of the outstanding_stock of controlled and the assumption_of_liabilities xi distributing will transfer all of its interests in dre to controlled along with other business b assets in exchange for no consideration other than the assumption_of_liabilities steps x and xi together first contribution xii distributing will distribute all of the stock of controlled to distributing solely with respect to the distributing common_stock distribution xiii distributing will distribute all of the stock of controlled pro_rata to distributing distribution xiv distributing will transfer all of the stock of controlled to controlled along with other business b assets and cash to be used to satisfy any remaining intercorporate indebtedness of controlled to the other members of the distributing group in exchange for stock of controlled and the assumption_of_liabilities second contribution xv distributing will distribute all of the stock of controlled to d3 shareholders pro_rata on an as converted basis distribution and together with distribution and distribution distributions in connection with the proposed transactions distributing and its affiliates after distribution on the one hand and controlled and its affiliates after distribution on the other hand will enter into i transitional services agreements transitional services agreements ii certain continuing agreements continuing agreements and iii various indemnification agreements any indemnification payments under any such indemnification agreement indemnity payments the services under the transitional services agreements may be compensated on a cost_basis for a period not to exceed two years following the effective date of distribution to the extent that the transitional services agreements continue beyond such two year period the underlying services will be compensated on an arm's-length basis also following the proposed transactions distributing expects that a majority and potentially all of the members of distributing 3’s board_of directors will also serve as members of controlled 2’s board_of directors and that certain officers of distributing may serve as officers of controlled overlapping directors and officers distributing expects that each of distributing and controlled will have its own chief_executive_officer who will not be an officer of the other corporation and that each of distributing and controlled will have one or more officers that will not serve concurrently as officers of the other corporation plr-141256-11 there have been discussions between distributing and unrelated third parties concerning acquisitions of the stock of controlled subsequent to distribution discussions however distributing is not aware of any potential or planned acquisitions by third parties of the stock of controlled or distributing from any shareholders of distributing representations the following representations have been made with respect to the first contribution and distribution a b c d e f distributing and controlled will each treat all members of its sag as one corporation in determining whether it meets the requirements of sec_355 regarding the active_conduct_of_a_trade_or_business distribution is not part of a plan or series of related transactions within the meaning of sec_1_355-7 pursuant to which one or more persons will acquire directly or indirectly stock representing a 50-percent_or_greater_interest within the meaning of sec_355 in distributing or controlled including any predecessor or successor of any such corporation no part of the consideration to be distributed by distributing in distribution will be received by distributing as a creditor employee or in any capacity other than that of a shareholder of distributing the five years of financial information submitted on behalf of business a conducted by the distributing sag is representative of the present business operations of business a and with regard to such business there have been no substantial operational changes since the date of the last financial statements submitted the five years of financial information submitted on behalf of business c to be conducted by the controlled sag is representative of the present business operations of business c and with regard to such business there have been no substantial operational changes since the date of the last financial statements submitted following distribution the distributing sag will continue the active_conduct of business a independently and with its separate employees and the controlled sag will continue the active_conduct of business c independently and with its separate employees plr-141256-11 g h i j k l the distributing sag neither acquired_business c nor acquired control of an entity conducting business c during the five-year period ending on the date of distribution in a transaction in which gain_or_loss was recognized or treated as recognized under prop sec_1_355-3 in whole or in part except for transactions that have expanded business c the distributing sag neither acquired_business a nor acquired control of an entity conducting business a during the five-year period ending on the date of distribution in a transaction in which gain_or_loss was recognized or treated as recognized under prop sec_1_355-3 in whole or in part except for transactions that have expanded business a distribution will not be used principally as a device for the distribution of the earnings_and_profits of distributing or controlled or both for purposes of sec_355 immediately after distribution no person determined after applying sec_355 will hold stock possessing or more of the total combined voting power of all classes of distributing stock entitled to vote or or more of the total value of shares of all classes of distributing stock that was acquired by purchase as defined in sec_355 and during the five-year period determined after applying sec_355 ending on the date of distribution for purposes of sec_355 immediately after distribution no person determined after applying sec_355 will hold stock possessing or more of the total combined voting power of all classes of controlled stock entitled to vote or or more of the total value of shares of all classes of controlled stock that was either i acquired by purchase as defined in sec_355 and during the five-year period determined after applying sec_355 ending on the date of distribution or ii attributable to distributions on distributing stock_or_securities that were acquired by purchase as defined in sec_355 and during the five- year period determined after applying sec_355 ending on the date of distribution the total fair_market_value of the assets transferred to controlled by distributing will exceed the sum of i the amount of liabilities assumed within the meaning of sec_357 by controlled in connection with the exchange ii the amount of any liabilities owed to controlled by distributing that are discharged or extinguished in connection with the exchange and iii the amount of cash and the fair_market_value of any other_property other than stock permitted to be received under sec_361 without the recognition of gain received by distributing in connection with the plr-141256-11 exchange the fair_market_value of the assets of controlled will exceed the amount of its liabilities immediately_after_the_exchange the total adjusted bases of the assets transferred to controlled by distributing will equal or exceed the sum of i the total liabilities assumed within the meaning of sec_357 by controlled and ii the total amount of money and the fair_market_value of other_property within the meaning of sec_361 received by distributing and transferred by it to its creditors and shareholders in connection with the reorganization any liabilities assumed within the meaning of sec_357 by controlled in the first contribution were incurred in the ordinary course of business and are associated with the assets transferred to controlled in connection with the first contribution no property is being transferred between distributing and controlled with respect to which any investment_credit determined under sec_46 has been or will be claimed distributing neither accumulated its receivables nor made extraordinary payment of its payables in anticipation of distribution no income items including accounts_receivable or any item resulting from a sale exchange or disposition of property that would have resulted in income to distributing and no items of expense will be transferred to controlled if distributing has earned the right to receive the income or could claim a deduction for the expense under the accrual or similar method_of_accounting except with respect to indebtedness satisfied in connection with the proposed transactions no intercorporate debt will exist between distributing and its subsidiaries and controlled and its subsidiaries at the time of or subsequent to distribution except for the transitional services agreements payments made in all 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 neither distributing nor controlled is an investment_company as defined in sec_368 and iv distributing controlled and distributing each will pay their own expenses if any incurred in connection with distribution m n o p q r s t u plr-141256-11 v w x y z aa bb cc dd ee ff gg immediately after the transaction as defined in sec_355 neither distributing nor controlled will be a disqualified_investment_corporation within the meaning of sec_355 distribution is motivated in whole or substantial part by the business purposes of i simplifying and clarifying the operational structure of business b streamlining management reporting and administration and achieving strategic coherence and ii facilitating distribution the notice requirements of sec_1_367_b_-1 will be met with respect to the transaction distributing and controlled will be controlled_foreign_corporations within the meaning of sec_957 immediately before and after distribution distributing will be a sec_1248 shareholder within the meaning of sec_1_367_b_-2 with respect to each of distributing and controlled immediately before and after distribution distributing and controlled will not be passive foreign investment companies within the meaning of sec_1297 immediately before or after distribution distributing will not hold any united_states real_property interests as defined in sec_897 immediately before or after distribution controlled will not hold any united_states real_property interests as defined in sec_897 immediately before or after distribution distribution will not include the transfer of stock in any corporation that has been a u s transferor the transferee foreign_corporation or the transferred corporation with respect to any unexpired gain_recognition_agreement within the meaning of sec_1_367_a_-3 sec_1_367_a_-8 and sec_1_367_a_-8t no classes of controlled stock other than the controlled stock that will be issued to distributing pursuant to the first contribution will be outstanding prior to distribution the first contribution is not an exchange described in sec_1_367_b_-4 sec_1_367_b_-4 or sec_1_367_b_-4 the pecs issued by distributing to dre are treated as equity for u s federal_income_tax purposes the pecs have no rights with respect to distribution under relevant local law plr-141256-11 the following representations have been made with respect to distribution hh ii jj kk ll mm nn oo distributing and controlled will each treat all members of its sag as one corporation in determining whether it meets the requirements of sec_355 regarding the active_conduct_of_a_trade_or_business distribution is not part of a plan or series of related transactions within the meaning of sec_1_355-7 pursuant to which one or more persons will acquire directly or indirectly stock representing a 50-percent_or_greater_interest within the meaning of sec_355 in distributing or controlled including any predecessor or successor of any such corporation no part of the consideration to be distributed by distributing in distribution will be received by distributing as a creditor employee or in any capacity other than that of a shareholder of distributing the five years of financial information submitted on behalf of business a conducted by the distributing sag is representative of the present business operations of business a and with regard to such business there have been no substantial operational changes since the date of the last financial statements submitted the five years of financial information submitted on behalf of business c to be conducted by the controlled sag is representative of the present business operations of business c and with regard to such business there have been no substantial operational changes since the date of the last financial statements submitted following distribution the distributing sag will continue the active_conduct of business a independently and with its separate employees and the controlled sag will continue the active_conduct of business c independently and with its separate employees the distributing sag neither acquired_business c nor acquired control of an entity conducting business c during the five-year period ending on the date of distribution in a transaction in which gain_or_loss was recognized or treated as recognized under prop sec_1_355-3 in whole or in part except for transactions that have expanded business c the distributing sag neither acquired_business a nor acquired control of an entity conducting business a during the five-year period ending on the date of distribution in a transaction in which gain_or_loss was recognized or plr-141256-11 pp qq rr ss tt uu vv treated as recognized under prop sec_1_355-3 in whole or in part except for transactions that have expanded business a distribution will not be used principally as a device for the distribution of the earnings_and_profits of distributing or controlled or both for purposes of sec_355 immediately after distribution no person determined after applying sec_355 will hold stock possessing or more of the total combined voting power of all classes of distributing stock entitled to vote or or more of the total value of shares of all classes of distributing stock that was acquired by purchase as defined in sec_355 and during the five-year period determined after applying sec_355 ending on the date of distribution for purposes of sec_355 immediately after distribution no person determined after applying sec_355 will hold stock possessing or more of the total combined voting power of all classes of controlled stock entitled to vote or or more of the total value of shares of all classes of controlled stock that was either i acquired by purchase as defined in sec_355 and during the five-year period determined after applying sec_355 ending on the date of distribution or ii attributable to distributions on distributing stock_or_securities that were acquired by purchase as defined in sec_355 and during the five- year period determined after applying sec_355 ending on the date of distribution no property is being transferred between distributing and controlled with respect to which any investment_credit determined under sec_46 has been or will be claimed distributing neither accumulated its receivables nor made extraordinary payment of its payables in anticipation of distribution no income items including accounts_receivable or any item resulting from a sale exchange or disposition of property that would have resulted in income to distributing and no items of expense will be transferred to controlled if distributing has earned the right to receive the income or could claim a deduction for the expense under the accrual or similar method_of_accounting except with respect to indebtedness satisfied in connection with the proposed transactions no intercorporate debt will exist between distributing and its subsidiaries and controlled and its subsidiaries at the time of or subsequent to distribution plr-141256-11 ww xx yy zz aaa bbb ccc ddd eee fff ggg hhh except for the transitional services agreements payments made in all 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 neither distributing nor controlled is an investment_company as defined in sec_368 and iv distributing controlled and distributing each will pay their own expenses if any incurred in connection with distribution immediately after the transaction as defined in sec_355 neither distributing nor controlled will be a disqualified_investment_corporation within the meaning of sec_355 distribution is motivated in whole or substantial part by the business purposes of i simplifying and clarifying the operational structure of business b streamlining management reporting and administration and achieving strategic coherence and ii facilitating distribution the notice requirements of sec_1_367_b_-1 will be met with respect to the transaction controlled will be a controlled_foreign_corporation within the meaning of sec_957 immediately before and after distribution distributing will be a sec_1248 shareholder within the meaning of sec_1_367_b_-2 with respect to controlled immediately before and after distribution controlled will not be a passive_foreign_investment_company within the meaning of sec_1297 immediately before or after distribution distributing will not be a united_states_real_property_holding_corporation within the meaning of sec_897 at any time during the five-year period ending on the date of distribution and will not be a united_states_real_property_holding_corporation immediately after distribution controlled will not hold any united_states real_property interests as defined in sec_897 immediately before or after distribution distribution will not include the transfer of stock in any corporation that as been a u s transferor the transferee foreign_corporation or the transferred plr-141256-11 corporation with respect to any unexpired gain_recognition_agreement within the meaning of sec_1_367_a_-3 sec_1_367_a_-8 and sec_1_367_a_-8t the following representations have been made with respect to the second contribution and distribution iii jjj kkk lll mmm nnn distributing and controlled will each treat all members of its sag as one corporation in determining whether it meets the requirements of sec_355 regarding the active_conduct_of_a_trade_or_business distribution is not part of a plan or series of related transactions within the meaning of sec_1_355-7 pursuant to which one or more persons will acquire directly or indirectly stock representing a 50-percent_or_greater_interest within the meaning of sec_355 in distributing or controlled including any predecessor or successor of any such corporation 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 as in effect before the publication of t d 1995_32_irb_6 and as currently in effect sec_1_1502-13 as published by t d further distributing 3’s excess_loss_account with respect to controlled stock if any will be included in income immediately before the distribution no part of the consideration to be distributed by distributing in distribution will be received by any shareholder of distributing as a creditor employee or in any capacity other than that of a shareholder of distributing the five years of financial information submitted on behalf of business a conducted by the distributing sag is representative of the present business operations of business a and with regard to such business there have been no substantial operational changes since the date of the last financial statements submitted the five years of financial information submitted on behalf of business c to be conducted by the controlled sag is representative of the present business operations of business c and with regard to such business there have been no substantial operational changes since the date of the last financial statements submitted ooo following distribution except with respect to i services to be provided under the transitional services agreements and the continuing agreements plr-141256-11 ppp qqq rrr sss ttt and ii the overlapping directors and officers the distributing sag will continue the active_conduct of business a independently and with its separate employees and the controlled sag will continue the active_conduct of business c independently and with its separate employees the distributing sag neither acquired_business c nor acquired control of an entity conducting business c during the five-year period ending on the date of distribution in a transaction in which gain_or_loss was recognized or treated as recognized under prop sec_1_355-3 in whole or in part except for transactions that have expanded business c the distributing sag neither acquired_business a nor acquired control of an entity conducting business a during the five-year period ending on the date of distribution in a transaction in which gain_or_loss was recognized or treated as recognized under prop sec_1_355-3 in whole or in part except for transactions that have expanded business a distribution will not be used principally as a device for the distribution of the earnings_and_profits of distributing or controlled or both for purposes of sec_355 immediately after distribution no person determined after applying sec_355 will hold stock possessing or more of the total combined voting power of all classes of distributing stock entitled to vote or or more of the total value of shares of all classes of distributing stock that was acquired by purchase as defined in sec_355 and during the five-year period determined after applying sec_355 ending on the date of distribution for purposes of sec_355 immediately after distribution no person determined after applying sec_355 will hold stock possessing or more of the total combined voting power of all classes of controlled stock entitled to vote or or more of the total value of shares of all classes of controlled stock that was either i acquired by purchase as defined in sec_355 and during the five-year period determined after applying sec_355 ending on the date of distribution or ii attributable to distributions on distributing stock_or_securities that were acquired by purchase as defined in sec_355 and during the five- year period determined after applying sec_355 ending on the date of distribution uuu the total fair_market_value of the assets transferred to controlled by distributing will exceed the sum of i the amount of liabilities assumed within the meaning of sec_357 by controlled in connection with the exchange ii the amount of any liabilities owed to controlled by distributing plr-141256-11 that are discharged or extinguished in connection with the exchange and iii the amount of cash and the fair_market_value of any other_property other than stock permitted to be received under sec_361 without the recognition of gain received by distributing in connection with the exchange the fair_market_value of the assets of controlled will exceed the amount of its liabilities immediately_after_the_exchange vvv the total adjusted bases of the assets transferred to controlled by distributing will equal or exceed the sum of i the total liabilities assumed within the meaning of sec_357 by controlled and ii the total amount of money and the fair_market_value of other_property within the meaning of sec_361 received by distributing and transferred by it to its creditors and shareholders in connection with the reorganization www any liabilities assumed within the meaning of sec_357 by controlled in the second contribution were incurred in the ordinary course of business and are associated with the assets transferred to controlled in connection with the second contribution xxx yyy zzz aaaa bbbb no property is being transferred between distributing and controlled with respect to which any investment_credit determined under sec_46 has been or will be claimed distributing neither accumulated its receivables nor made extraordinary payment of its payables in anticipation of distribution no income items including accounts_receivable or any item resulting from a sale exchange or disposition of property that would have resulted in income to distributing and no items of expense will be transferred to controlled if distributing has earned the right to receive the income or could claim a deduction for the expense under the accrual or similar method_of_accounting except with respect to indebtedness satisfied in connection with the proposed transactions no intercorporate debt will exist between distributing and its subsidiaries and controlled and its subsidiaries at the time of or subsequent to distribution except for the transitional services agreements all payments made in all 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 cccc neither controlled nor distributing is an investment_company as defined in sec_368 and iv plr-141256-11 dddd eeee ffff gggg hhhh iiii jjjj distributing controlled and the distributing shareholders each will pay its own expenses if any incurred in connection with distribution immediately after the transaction as defined in sec_355 neither distributing nor controlled will be a disqualified_investment_corporation within the meaning of sec_355 distribution is motivated in whole or substantial part by the corporate business purposes neither distributing nor controlled will be a united_states_real_property_holding_corporation within the meaning of sec_897 at any time during the five-year period ending on the date of distribution nor will be a united_states_real_property_holding_corporation immediately after distribution the second contribution will not include the transfer of stock in any corporation that has been a u s transferor the transferee foreign_corporation or the transferred corporation with respect to any unexpired gain_recognition_agreement within the meaning of sec_1_367_a_-3 sec_1_367_a_-8 and sec_1_367_a_-8t the second contribution is not an exchange described in sec_1_367_b_-4 sec_1_367_b_-4 or sec_1_367_b_-4 the stock of controlled will be distributed to distributing 3’s shareholders pro_rata on an as converted basis distribution will neither dilute nor proportionally increase any distributing shareholder’s investment in the combined earnings_and_profits and assets of distributing and controlled as of immediately before distribution rulings based solely on the information submitted and the representations set forth above we rule as follows regarding the proposed transactions the first contribution and distribution the first contribution and distribution taken together will qualify as a reorganization under sec_368 distributing and controlled each will be a party to the reorganization within the meaning of section plr-141256-11 b no gain_or_loss will be recognized by distributing as a result of the first contribution sec_357 and sec_361 no gain_or_loss will be recognized by controlled as a result of the first contribution sec_1032 controlled 1’s basis in each asset received in the first contribution will be the same as the basis of that asset in the hands of distributing immediately before its transfer sec_362 controlled 1’s holding_period in each asset received in the first contribution will include the period during which distributing held the asset sec_1223 no gain_or_loss will be recognized by distributing in distribution sec_361 no gain_or_loss will be recognized by and no amount will otherwise be included in the income of distributing upon its receipt of the controlled stock in distribution sec_355 the basis of the stock of distributing and controlled in the hands of distributing after distribution will be the same as the basis of the distributing stock held by distributing immediately before distribution allocated in proportion to the fair_market_value of distributing and controlled in accordance with sec_358 and sec_1_358-2 sec_358 and c distributing 2’s holding_period in the controlled stock received by distributing will include the holding_period of the distributing stock with respect to which the controlled stock will be distributed provided that such distributing stock is held as a capital_asset on the date of distribution sec_1223 as provided in sec_312 proper allocation of earnings_and_profits between distributing and controlled will be made under sec_1_312-10 the distribution of controlled stock by distributing to distributing will be an exchange to which sec_1_367_b_-1 sec_1_367_b_-5 and sec_1_367_b_-5 apply if distributing 2’s postdistribution amount as defined in sec_1_367_b_-5 with respect to controlled or distributing is plr-141256-11 less than its predistribution amount with respect to such corporation then distributing 2's basis in such stock immediately after the distribution must be reduced by the amount of the difference however distributing 2’s basis in such stock must not be reduced below zero and to the extent the foregoing reduction would reduce its basis below zero distributing must instead include such amount in income as a deemed_dividend from such corporation if distributing reduces the basis in the stock of controlled or distributing or has an inclusion with respect to such stock distributing must increase its basis in the stock of the other corporation to the extent provided in sec_1_367_b_-5 distribution no gain_or_loss will be recognized by distributing in distribution sec_355 no gain_or_loss will be recognized by and no amount will be included in the income of distributing on its receipt of controlled stock in distribution sec_355 the basis of the stock of distributing and controlled in the hands of distributing after distribution will be the same as the basis of the distributing stock held by distributing immediately before distribution allocated in proportion to the fair_market_value of distributing and controlled in accordance with sec_358 and sec_1_358-2 sec_358 and c distributing 3’s holding_period in the controlled stock received by distributing will include the holding_period of the distributing stock with respect to which the controlled stock will be distributed provided that such distributing stock is held as a capital_asset on the date of distribution sec_1223 as provided in sec_312 proper allocation of earnings_and_profits between distributing and controlled will be made under sec_1_312-10 the second contribution distribution the second contribution and distribution taken together will qualify as a reorganization under sec_368 each of distributing and controlled will be a party to the reorganization within the meaning of sec_368 plr-141256-11 no gain_or_loss will be recognized by distributing as a result of the second contribution sec_357 and sec_361 no gain_or_loss will be recognized by controlled as a result of the second contribution sec_1032 controlled 2’s basis in each asset received in the second contribution will be the same as the basis of that asset in the hands of distributing immediately before its transfer sec_362 controlled 2’s holding_period in each asset received in the second contribution will include the period during which distributing held the asset sec_1223 no gain_or_loss will be recognized by distributing in distribution sec_361 no gain_or_loss will be recognized by and no amount will otherwise be included in the income of the shareholders of distributing upon receipt of the controlled stock in distribution sec_355 the basis of the stock of controlled and distributing in the hands of each distributing shareholder will be the same as the basis of the distributing stock held by such shareholder immediately before distribution allocated in proportion to the fair_market_value of distributing and controlled in accordance with sec_358 and sec_1_358-2 sec_358 and c each distributing shareholder’s holding_period in the controlled stock received by the shareholder in distribution will include the holding_period of the distributing stock with respect to which the controlled stock will be distributed provided that such distributing stock is held as a capital_asset on the date of distribution sec_1223 as provided in sec_312 proper allocation of earnings_and_profits between distributing and controlled will be made under sec_1_312-10 and sec_1_1502-33 a distributing shareholder that receives cash in lieu of a fractional share of controlled stock will recognize gain_or_loss measured by the difference between the basis of the fractional share received as determined above in the preceding ruling and the amount of cash received sec_1001 any gain_or_loss will be treated as capital_gain or loss provided the fractional share of stock is held as a capital_asset on the date of distribution sections plr-141256-11 and except insofar as it may be relevant to sec_355 any indemnity payments that i have arisen or will arise for a taxable_period ending on or before distribution or for a taxable_period beginning on or before and ending after distribution and ii will not have become fixed and ascertainable until after distribution will be treated as occurring immediately before distribution see 344_us_6 revrul_83_73 c b the earnings_and_profits of controlled to the extent attributable to distributing under sec_1_1248-2 or sec_1_1248-3 whichever is applicable that were accumulated in tax years of such foreign_corporation beginning after date and during the period in which such corporation was a cfc will be attributable to such stock held by controlled sec_1_1248-1 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 except as expressly provided herein in particular no opinion is expressed regarding i ii whether any of the distributions satisfy the business_purpose requirement of sec_1_355-2 whether any of the distributions is being used principally as a device for the distribution of the earnings_and_profits of one or more of distributing distributing distributing controlled or controlled see sec_355 and sec_1_355-2 iii whether any of the distributions and any acquisition or acquisitions are part of a plan or series of related transactions under sec_355 and sec_1_355-7 iv to the extent not otherwise specifically ruled upon above the adjustments to earnings_and_profits or deficits in earnings_and_profits if any in any of the transactions to which sec_367 or b apply plr-141256-11 v to the extent not otherwise specifically ruled upon above any other consequences under sec_367 on any transaction in this ruling letter vi whether any or all of the above-referenced foreign_corporations are pfics within the meaning of sec_1297 if it is determined that any such corporations are pfics no opinion is expressed with respect to the application of sec_1291 through to the proposed transactions in particular in a transaction in which gain is not otherwise recognized regulations under sec_1291 may require gain recognition notwithstanding any other provisions of the code vii the u s federal_income_tax treatment of steps i though ix of the proposed transactions and viii the potential application of sec_482 to any payments made in connection with continuing transactions between distributing and its subsidiaries and controlled and its subsidiaries that are not made for fair_market_value based on terms and conditions arrived at by the parties bargaining at arm’s length procedural statements 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 temporary or final regulations pertaining to one or more of the issues addressed in this ruling have not yet been adopted therefore this ruling will be modified or revoked by the adoption of temporary or final regulations to the extent the regulations are inconsistent with any conclusion in the letter_ruling see section dollar_figure of revproc_2012_1 2012_1_irb_1 however when the criteria in section dollar_figure of revproc_2012_1 2012_1_irb_1 are satisfied a ruling is not revoked or modified retroactively except in rare or unusual circumstances plr-141256-11 in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative 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 gerald b fleming senior technician reviewer branch office of associate chief_counsel corporate


t c memo united_states tax_court thomas louis mitchell petitioner v commissioner of internal revenue respondent docket no filed date thomas louis mitchell pro_se thomas l fenner for respondent memorandum findings_of_fact and opinion gale judge respondent determined the following deficiencies in and additions to petitioner's federal income taxes additions to tax_year deficiency sec_6651 sec_6654 dollar_figure big_number big_number dollar_figure big_number big_number dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number unless otherwise noted all section references are to the internal_revenue_code in effect for the years in issue and all rule references are to the tax_court rules_of_practice and procedure the parties filed a stipulation of settled issues which was amended by agreement of the parties at trial the sole issue remaining after concessions is the amount and character of losses sustained by petitioner on the foreclosure of various partnership interests in findings_of_fact some of the facts have been stipulated and are so found we incorporate by this reference the stipulation of facts the supplemental stipulation of facts and the attached exhibits at the time of filing the petition petitioner resided in round rock texas ownership and foreclosure in petitioner acquired limited_partnership interests in a partnership named farmout both individually and under the name m a interest in petitioner acquired limited_partnership interests in three partnerships dime box no ii dime box no iii and cag farmout petitioner owned interests in dime box no iii individually and under the name m a interest we will refer to farmout dime box no ii dime box no iii and cag farmout collectively as the partnerships the partnerships were engaged in the activity of drilling oil_and_gas wells prior to the year in issue petitioner used portions of his interests in the partnerships as collateral for loans petitioner used his interests in farmout as collateral for one loan in an amount not in the record1 and used his interests in the remaining partnerships as collateral for another loan in the amount of dollar_figure petitioner owned the partnerships and used the partnership interests as collateral in the following percentage amounts in his trial memorandum petitioner asserts that the loan for which the farmout interests served as collateral was equal to dollar_figure we have no sworn testimony or other evidence to support this claim and in any event the amount of the loan is unimportant to the resolution of the issue in this case partnership pet m a owned used as collateral db ii db iii pet db iii m a cag respondent has conceded that petitioner used as collateral his entire_interest in farmout both the interest held in his name and the interest held in the name of m a interest and percent of his interest in dime box no iii held in the name of m a interest see infra note thus petitioner pledged percent of farmout held in petitioner's name percent of farmout held in the name of m a interest percent of dime box no ii dollar_figure percent of dime box no iii held in petitioner's name percent of dime box no iii held in the name of m a interest and percent of cag farmout in the holders of the loans foreclosed on the portions of petitioner's interests in the partnerships that secured the loans at the time of foreclosure the fair_market_value of petitioner's foreclosed interests in the dime box no ii dime box no iii and cag farmout partnerships collectively was dollar_figure basis and capital_account prior to the foreclosures the only property petitioner contributed to the partnerships was cash similarly the only property the partnerships distributed to petitioner was cash the following table shows adjustments to petitioner's capital accounts in the partnerships during the year in issue as reflected on the schedules k-1 name pet m a db ii db iii pet db iii m a cag cap acct beginning dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure ord income dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure distributions dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure cap acct ending cap ownership beginning cap ownership ending dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure the schedules k-1 are inconsistent with the findings as to the amount pledged as collateral and foreclosed on as shown in the previous table see infra note for each partnership_interest the beginning capital_account balance reflects the intangible drilling costs idc incurred and deducted by the partnership opinion amount of loss we must first decide the amount of the loss that petitioner incurred as a result of the foreclosure of his partnership interests in the notice_of_deficiency respondent took the respondent concedes that petitioner had a loss equal to his basis rather than a gain even though respondent also concedes that the fair_market_value of petitioner's interests in dime box no ii dime box no iii and cag farmout exceeded his bases in those interests cf correra v commissioner tcmemo_1997_356 the finding of fact as to the fair_market_value of petitioner's foreclosed interests in the dime box no ii dime box no iii and cag farmout partnerships collectively is based continued position that petitioner's loss deduction was limited to his basis in the partnership interests which respondent computed using the schedules k-1 we accept the approach taken by respondent sec_165 permits a deduction for any loss sustained during the taxable_year and not_compensated_for_by_insurance_or_otherwise sec_165 the amount of the deduction is limited to the amount of the basis of the property prescribed by sec_1011 for determining the loss from the sale_or_other_disposition of the property sec_1_165-1 income_tax regs thus the key question concerns the bases of the properties involved petitioner agrees that his loss deduction is limited to basis but disputes respondent's method for computing basis petitioner first argues that for each partnership_interest he is entitled to a basis equal to the fair_market_value of that partnership_interest petitioner argues that when he pledged the partnership interests as collateral he relinquished total control_over those interests for the duration of the loan this in petitioner's view caused the basis to be equal to fair_market_value since the fair_market_value of the partnership interests was equal to dollar_figure at the time of the foreclosure petitioner continued on a stipulation of the parties the parties did not stipulate or present any other evidence as to the fair_market_value of petitioner's interests in the farmout partnership believes he is entitled to a dollar_figure loss deduction all of the properties with respect to which petitioner sustained losses were partnership interests in general the adjusted_basis of a partner's interest in a partnership equals the amount of money and the adjusted_basis of property contributed by the partner to the partnership increased by the partner's_distributive_share of partnership income and certain other_amounts and decreased by distributions and the sum of the partner's_distributive_share of partnership losses and certain other expenditures sec_705 petitioner's contentions notwithstanding there is no provision in the code allowing a partner a stepped-up_basis in his partnership_interest as a result of its being pledged as collateral thus we reject petitioner's argument that the basis of each partnership_interest was equal to its fair_market_value petitioner next argues in the alternative that respondent's computation of basis is wrong in any event first petitioner argues that respondent improperly relied on the schedules k-1 in computing basis second petitioner argues that respondent double counted idc in making that computation at trial petitioner also argued that he was entitled to a loss deduction of dollar_figure -- the difference between the dollar_figure loan secured_by the dime box no ii dime box no iii and cag farmout partnership interests and the dollar_figure fair_market_value of those interests at foreclosure on brief petitioner merely maintains that the loss is equal to dollar_figure for the same reason we reject petitioner's argument at trial identified supra note that his loss was equal to dollar_figure petitioner argues that it was arbitrary for respondent to rely on the schedules k-1 to compute basis especially in light of the instructions to form_1065 which indicate that the capital_account information provided on the schedule_k-1 may not be determinative of basis the instructions to form_1065 merely reflect that basis and capital_account are frequently not equal as for example where property as distinguished from cash is contributed to or distributed from a partnership in such circumstances taxpayers may not rely on capital_account as a substitute for basis however these instructions do not foreclose the use of schedules k-1 in appropriate circumstances to compute basis most importantly for petitioner if we did not rely on the schedules k-1 there would be insufficient evidence of basis on this record and petitioner would not be entitled to any loss deduction see blocker v commissioner tcmemo_1992_725 affd without published opinion 25_f3d_1043 5th cir in the circumstances of this case the schedules k-1 provide an accurate measure of basis although contributions and distributions of property as distinguished from cash can cause the capital_account and basis in a partnership_interest to diverge no such divergence occurred in this case because in general to determine a partner's capital_account balance the fair_market_value of property that is contributed by or distributed to the partner is added to or subtracted from his existing capital_account balance see eg sec_1 a b iv b income_tax regs by contrast to continued petitioner contributed only cash to the partnerships and received only cash as distributions moreover petitioner agrees that the schedules k-1 accurately reflect the amount of the beginning capital_account balances income distributions and ending capital_account balances for the year in issue therefore each capital_account balance accurately reflects petitioner's basis in the respective partnership petitioner also argues that his adjusted_basis should not be reduced by his distributive_share of idc petitioner agrees that all of the partnerships took deductions for idc and that the capital_account balances on the schedules k-1 reflect a downward adjustment due to idc the following table sets out the beginning capital_account balances for the year in issue for each of the partnership interests with and without the effects of idc cap acct with idc cap acct w out idc name dime box ii dollar_figure dime box iii pet big_number dime box iii m a cag farmout big_number farmout pet dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure farmout m a not available in petitioner's view however because idc is counted in calculating each partnership's income it is not proper to count continued determine a partner's adjusted_basis in the partnership_interest the adjusted_basis of contributed or distributed property is added to or subtracted from his adjusted_basis in the partnership_interest see eg sec_722 sec_733 idc in calculating petitioner's basis in each partnership thus petitioner argues that respondent's reliance on the schedules k-1 results in a double counting of idc improperly reducing petitioner's basis this view is incorrect in general deductible items reduce both the partnership's taxable_income and each partner's basis in the partnership pursuant to sec_703 a partnership computes its taxable_income in the same manner as an individual except that certain items must be stated separately and certain deductions are not allowed idc is an item that must be stated separately sec_1_702-1 income_tax regs thus in determining his income_tax petitioner must take into account his distributive_share of loss due to idc sec_702 pursuant to sec_705 a partner's adjusted_basis in his partnership_interest is increased by the partner's_distributive_share of taxable_income of the partnership and decreased by the partner's_distributive_share of losses of the partnership thus petitioner's adjusted_basis in each partnership_interest was properly increased by petitioner's distributive_share of taxable_income of the partnership net of petitioner's distributive_share of idc the deduction for idc affects both petitioner's ultimate distributive_share of partnership income and petitioner's basis in the partnership_interest thus reliance on the schedules k-1 does not result in an improper double counting on brief respondent relied on the schedules k-1 in computing petitioner's basis by taking the capital_account balance at the beginning of the year and adding partnership income received during the year respondent's computation represents a concession of sorts because it produces the largest possible basis to which petitioner may be entitled since it does not account for any distributions that may have occurred during the year we will accept respondent's computation of basis in this case petitioner's challenges are unavailing and petitioner has offered no other evidence from which we might compute basis thus we accept respondent's approach and petitioner's basis in each of the partnership interests is set out in the following table name basis beginning cap acct income dime box no ii dollar_figure dime box no iii petitioner dollar_figure dime box no iii m a dollar_figure cag farmout dollar_figure farmout petitioner dollar_figure farmout m a dollar_figure further in some cases only portions of petitioner's interests were actually pledged as collateral and foreclosed on so that petitioner's loss deduction is limited to the following amounts respondent uses the schedules k-1 stipulated into evidence to compute basis and petitioner agrees as to the accuracy of the schedules k-1 however in three instances the schedules k-1 fail to reflect the effect of the foreclosures upon petitioner's ownership of certain partnership interests namely the farmout interest held in petitioner's name the farmout continued name basis of p's interest foreclosed on loss dime box no ii dollar_figure dime box no iii pet dollar_figure dollar_figure dime box no iii m a dollar_figure cag farmout dollar_figure farmout pet dollar_figure farmout m a dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure character of loss finally we must decide the character of the loss gain_or_loss on the sale_or_exchange of a partnership_interest is capital_gain except in certain circumstances involving unrealized_receivables and inventory sec_741 sec_751 respondent concedes that the foreclosure of each partnership_interest was a sale_or_exchange under which loss was realized and hence recognized continued interest held in the name of m a interest and the dime box no iii interest held in the name of m a interest according to the schedules k-1 petitioner owned the same percentage of each of these three partnerships at the end of as he did at the beginning which suggests that no foreclosures occurred with respect to these partnership interests during the year however the parties agree and we have found that foreclosures occurred during with respect to these interests the schedules k-1 are in this respect inconsistent the schedules k-1 notwithstanding respondent clearly concedes and we have found that petitioner suffered losses premised on the foreclosure of the following his entire_interest in farmout held in his name his entire_interest in farmout held in the name of m a interest and half of his interest in dime box no iii held in the name of m a interest sec_1001 a - c 311_us_504 petitioner argues that the irs regulations and publications state that the sale_or_exchange of an interest in oil or gas produces ordinary not capital_gain or loss however the interests foreclosed herein were not interests in oil or gas but partnership interests petitioner has presented no evidence of unrealized_receivables or inventory held by the partnerships and thus the losses in issue in this case are capital losses to reflect the foregoing decision will be entered under rule