internal_revenue_service number release date index number ---------------------------------------------- ---------------------------------- ------------------------------ -------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ----------------- id no ------------- telephone number --------------------- refer reply to cc psi b01 plr-145462-07 date date ---------- -------------------------- ----------------------------- --------------------------------- legend x --------------------------------------------------- state a b ----------------------------------------------------- trust --------------------------------------------------------------------------------------------------------------- --------------------------------------------------- trust --------------------------------------------------- date date date date date --------------------------------------------------- ---------------------- ------------------ ------------------ ----------------- ----------------- ----------------------------------------------------------------------------------------- -------------- ------------------- plr-145462-07 date 6_month dear ------------------ this responds to a letter dated date and subsequent correspondence submitted on behalf of x requesting a ruling under sec_1362 of the internal_revenue_code facts according to the information submitted x was incorporated on date under the laws of state x elected to be treated as an s_corporation effective date shares of x stock were transferred to trust on or about date trust was treated under subpart e of part i of subchapter_j of chapter of the internal_revenue_code as owned by spouses a and b thus trust was a permitted s_corporation shareholder pursuant to sec_1361 trust consisted in part of the community_property of a and b the x stock held by trust was a’s and b’s community_property a died on date upon a’s death the portion of trust of which b was the grantor owner continued to qualify as a permissible s_corporation shareholder under sec_1361 pursuant to sec_1361 a’s portion of trust continued to be a permitted shareholder for the two-year period beginning on date a’s portion of trust became an ineligible shareholder on date trust 1’s agreement provides that upon the death of either a or b_trust 1’s estate is to be divided into two separate shares the decedent’s share and the survivor’s share or survivor’s trust the survivor’s trust is funded with assets consisting of the community and separate_property of the survivor held in trust on the date of the decedent’s death the decedent’s share is funded with assets consisting of the community and separate_property of the decedent held in trust on the date of the decedent’s death the decedent’s share is further divided into a decedent’s trust trust and a marital trust on date x stock held by trust was distributed to trust and the survivor’s trust the survivor’s trust continued to qualify as a permissible s_corporation shareholder under sec_1361 trust 1’s remaining shares in x were distributed to an individual x represents that trust has at all times qualified to elect to be an electing_small_business_trust esbt within the meaning of sec_1361 that no beneficiaries acquired an interest in trust by purchase and that it was intended that an esbt election be filed for trust in month x’s counsel discovered that no esbt election had been filed for trust plr-145462-07 x represents that the failure to timely transfer trust 1’s stock in x to an eligible shareholder and to timely file an esbt election for trust was inadvertent and not motivated by tax_avoidance or retroactive tax planning x and its shareholders agree to make any adjustments required by the secretary consistent with the treatment of x as an s_corporation law and analysis sec_1361 provides that the term s_corporation means with respect to any taxable_year a small_business_corporation for which an election under sec_1362 is in effect for such year sec_1361 defines a small_business_corporation as a domestic_corporation that is not an ineligible_corporation and that does not a have more than shareholders b have as a shareholder a person other than an estate a_trust described in sec_1361 or an organization described in sec_1361 who is not an individual c have a nonresident_alien as a shareholder and d have more than one class of stock sec_1361 provides that for purposes of sec_1361 a_trust all of which is treated under subpart e of part i of subchapter_j of chapter as owned by an individual who is a citizen or resident_of_the_united_states may be a shareholder sec_1361 and sec_1_1361-1 provide that for purposes of sec_1361 a_trust that is described in sec_1361 immediately before the death of the deemed owner and that continues in existence after such death is a permitted shareholder but only for the two-year period beginning on the day of the deemed owner’s death sec_1_1361-1 provides that if stock is held by a_trust described in sec_1_1361-1 the estate of the deemed owner is generally treated as the shareholder as of the day of the deemed owner’s death sec_1362 provides that an election under sec_1362 shall be terminated whenever the corporation ceases to be a small_business_corporation sec_1361 defines an esbt sec_1361 provides that except as provided in sec_1361 an esbt means any trust if i the trust does not have as a beneficiary any person other than i an individual ii an estate iii an organization described in sec_170 or or iv an organization described in sec_170 that holds a contingent_interest in the trust and is not a potential_current_beneficiary ii no interest in the trust was acquired by purchase and iii an election under sec_1362 applies to the trust sec_1361 provides that an election under sec_1361 shall be made by the trustee plr-145462-07 sec_1_1361-1 provides that the trustee of an esbt must make the esbt election by signing and filing with the service_center where the s_corporation files its income_tax return a statement that meets the requirements of sec_1_1361-1 sec_1_1361-1 provides that the esbt election must be filed within the time requirements prescribed by sec_1_1361-1 for filing a qualified_subchapter_s_trust election sec_1362 provides in relevant part that if an election under sec_1362 by any corporation was terminated under paragraph or of sec_1362 the secretary determines that the circumstances resulting in such termination were inadvertent no later than a reasonable period of time after discovery of the circumstances resulting in termination steps were taken so that the corporation is once more a small_business_corporation and the corporation and each person who was a shareholder of the corporation at any time during the period specified pursuant to sec_1362 agrees to make any adjustments consistent with the treatment of the corporation as an s_corporation as may be required by the secretary with respect to the period then notwithstanding the circumstances resulting in the termination the corporation will be treated as continuing to be an s_corporation during the period specified by the secretary conclusion based solely on the information submitted and the representations made we conclude that x’s s_corporation_election terminated on date when a’s portion of trust became an ineligible s_corporation shareholder and that the termination was inadvertent within the meaning of sec_1362 furthermore if x’s s election had not terminated on date it would have terminated on date when x shares were transferred to trust which was an ineligible shareholder because no esbt election was filed for trust we further conclude that the failure to timely file an esbt election for trust was inadvertent within the meaning of sec_1362 therefore x will be treated as continuing to be an s_corporation from date and thereafter provided that the trustee of trust files an esbt election for trust with the appropriate service_center effective date within days of the date of this letter and provided that x’s s_corporation_election was otherwise valid and was not otherwise terminated under sec_1362 a copy of this letter should be attached to the election accordingly the shareholders of x must include in income their pro_rata share of the separately_stated and nonseparately computed items of x as provided in sec_1366 make any adjustments to basis as provided in sec_1367 and take into account any distributions made by x as provided in sec_1368 this ruling is contingent upon x and each of its shareholders filing any amended returns and making such adjustments that are necessary to properly reflect the reporting of x's items of s_corporation income plr-145462-07 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 specifically no opinion is expressed concerning whether x is otherwise eligible to be treated as an s_corporation or whether trust is eligible to be treated as an esbt this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representatives sincerely s audrey w ellis senior counsel branch office of the associate chief_counsel passthroughs special industries enclosures copy of this letter copy of this letter for sec_6110 purposes


department of the treasury internal_revenue_service washington d c date tl-35638-83 internal_revenue_service national_office field_service_advice memorandum for from subject assistant chief_counsel field service cc dom fs proc internal_revenue_service national_office field_service_advice this field_service_advice responds to your memorandum dated date field_service_advice is not binding on examination or appeals and is not a final case determination this document is not to be cited as precedent legend taxpayers year year year year year year year year year year year year dollar_figurea dollar_figureb dollar_figurec dollar_figured tax_shelter issue whether the taxpayers are the prevailing_party as defined in sec_7430 conclusion that the taxpayers are not the prevailing_party facts taxpayers claimed deductions for tax_year sec_1 and these deductions related to their investment as a limited_partner in a partnership the partnership participated in the tax_shelter in september of year the service issued a notice_of_deficiency to taxpayers disallowing the tax_shelter losses for year sec_1 and the deficiencies were in the amounts of dollar_figurea and dollar_figureb respectively in response to this notice taxpayers filed a petition with the tax_court on december year in year a revenue_agent in the service’s examination_division was assigned to examine taxpayers’ income_tax returns for the tax_year sec_3 and in year the revenue_agent mailed the taxpayers a letter notifying them that their tax returns for tax_year sec_3 and would be examined regarding deductions claimed for the tax_shelter the revenue_agent was not aware of any claimed tax_shelter deductions for tax_year sec_1 and nor of the docketed tax_court case involving those tax years on july year the revenue_agent mailed taxpayers a form letter proposing to settle the tax_shelter issues by allowing cash out-of-pocket expenses cash investment as a deduction in the initial year of investment the letter further stated w e are also making the same cash offer with respect to any other tax_shelter issue involving the initial y ear and prior which is included in the enclosed revenue agent’s report the letter did not state on its face which tax years were included in the proposed settlement but the letter stated that an examination_report and a form_906 closing_agreement on final_determination covering specific matters were enclosed because the revenue_agent incorrectly believed that tax_year was the initial year of investment the examination_report and the closing_agreement allowed taxpayers a deduction of dollar_figured in year on august year the taxpayers mailed to the revenue_agent a cash settlement offer statement purporting to accept the cash out-of-pocket offer and a handwritten notice stating taxpayers had invested dollar_figured in the tax_shelter in january of year the taxpayers and the service signed a form_906 that stated the taxpayers had paid dollar_figured in year on march year an appeals officer mailed a letter to the taxpayers advising them that the tax_court had issued its opinion in the tax_shelter test case she invited them to settle their case for year sec_1 and in accordance with the opinion but received no response the appeals officer mailed another letter to the taxpayers on october year advising them that the court_of_appeals had affirmed the tax court’s decision in the test case and inviting them to settle tax_year sec_1 and taxpayers responded in a letter that they had already settled the matter via the closing_agreement signed in year in year the taxpayers’ attorneys contacted district_counsel about the year and year deficiency case and also requested an abatement of the interest that accrued for these years the district_counsel attorney advised the taxpayers’ attorney that he lacked jurisdiction over the abatement of interest matter and that the taxpayers would instead need to file their request for abatement of interest with the service the taxpayers submitted their request for abatement of interest on february year the request was denied and the taxpayers sought appeals consideration on april year the appeals_office issued a notice of final_determination denying the taxpayers’ request for interest abatement the taxpayers filed a petition for review of failure to abate interest with the tax_court on september year the district_counsel attorney filed a motion to dismiss the interest abatement case for lack of jurisdiction on the grounds that a final_determination should not have been issued the district_counsel attorney argued that the taxpayers’ request for abatement was premature because the interest had not yet been assessed the taxpayers filed an objection to this motion also in september of year the taxpayers filed a motion to enforce the settlement agreement in the deficiency case in the motion they asked the court to enforce a year settlement agreement between taxpayers and the service and thereby preclude the service from assessing back taxes penalties and interest for disallowed deductions taken by taxpayers in year sec_1 and district_counsel filed an objection to this motion at a hearing held on these two cases on april year the judge consolidated the two cases for purposes of trial briefing and opinion the judge indicated that the revenue_agent should have realized that the taxpayers had made investments in the tax_shelter prior to year based on the settlement offer contained in the form letter and the fact that he was auditing the taxpayers for tax_year sec_3 and the court stated that the revenue_agent also should have checked the service’s computer to see whether there was a litigation freeze code on prior years he told the parties that they should settle the case and suggested the terms of the settlement consequently district_counsel agreed to spread the dollar_figured deduction over a period of three years and allow a dollar_figurec deduction in year sec_1 and in return the taxpayers agreed to waive the statute_of_limitations for tax_year in order to permit a reduction of the deduction from dollar_figured to dollar_figurec in light of the resolved deficiency case and under pressure from the court district_counsel also agreed that it would abate interest from april year until days after the parties agreed to the computations of the deficiencies and interest under district_counsel could have moved for summary_judgment on the grounds that the service could not have abused its discretion because it was not authorized to abate unassessed interest see sec_6404 this route was not chosen because of the concern that a judgment could preclude taxpayers from petitioning the tax_court for these tax periods in the future see 112_tc_19 where the court held that because the service had no authority to abate interest on employment_taxes the service could not have committed an abuse_of_discretion in failing to abate it the court also stated that since the commissioner had no authority to abate assessments of interest on employment_taxes under sec_6404 the commissioner could not have committed an abuse_of_discretion for a person with no discretion simply cannot abuse it similarly with this case since sec_6404 does not give the service authority to abate unassessed interest the service could not have abused its discretion in failing to abate the unassesssed interest for the tax_year sec_1 and however this case and woodral are distinguishable on the separate issue of the tax court’s jurisdiction upon the issuance of a notice_of_determination in woodral the notice_of_determination was valid in this case it was not the settlement agreement in exchange the taxpayers agreed to withdraw their objection to the motion to dismiss for lack of jurisdiction the parties agreed to negotiate the attorneys costs and fees issue separately from the underlying tax_deficiency and interest abatement matters the court indicated that it would dismiss the abatement case when the parties provided it with a letter stating the final computations and taxpayers’ date of payment taxpayers also assert that the service through its district_counsel attorney has exposed itself to attorneys fees by engaging in an aggressive motions practice and unreasonably and vexatiously multiplying the proceedings in the two cases law and analysis sec_7430 provides for the award of reasonable administrative and litigation costs to a taxpayer in administrative or court proceedings brought against the united_states involving the determination of any_tax interest or penalty pursuant to the code an award of administrative or litigation cost sec_2 may be made where the taxpayer meets the net_worth requirements is the prevailing_party has exhausted available administrative remedies and did not unreasonably protract the administrative or judicial proceeding this memorandum confines its discussion to whether the taxpayers are the prevailing_party sec_7430 defines the term prevailing_party in pertinent part as any party in a proceeding referred to in sec_7430 who has substantially prevailed with respect to the amount in controversy or has substantially prevailed with respect to the most significant issue or set of issues presented sec_7430 provides generally that a party shall not be treated as the prevailing_party in a proceeding to which this section applies if the united_states establishes that its position in the proceeding was substantially justified sec_7430 as amended by tax equity and fiscal responsibility act of tefra pub_l_no a 96_stat_324 applies to cases instituted after date and before date because taxpayers filed their petition in the deficiency case between those two dates this version of sec_7430 applies to the notice_of_deficiency case under sec_7430 the maximum dollar amount which may be awarded with respect to any prevailing_party in any civil_proceeding shall not exceed dollar_figure tax_reform_act_of_1986 tra amended the definition of a prevailing_party so that to be a prevailing_party the taxpayer must show that the position_of_the_united_states was not substantially justified as opposed to the prior standard of unreasonable tra sec_1551 100_stat_2752 the tax_court has held that consolidation of cases sec_7430 provides that multiple cases that could have been joined or consolidated shall be treated as one proceeding unless the court determines that it would be inappropriate to treat such actions as joined or consolidated for purposes of sec_7430 this provision does not apply to the taxpayers’ cases but even if it did it would have no impact on the attorney fee result first the parties have agreed to and the court will enter an order dismissing the abatement of interest case for lack of jurisdiction as a result of the dismissal there will no longer be two cases to consolidate accordingly it is no longer logical to continue to treat such actions as joined or consolidated for purposes of sec_7430 second even if the court were to consolidate these cases the court’s practice is to adopt an issue-by-issue approach in determining the amount of attorneys fees to be paid under sec_7430 see lozon v commissioner tcmemo_1997_537 citing 51_f3d_34 5th cir 106_tc_76 and sec_301_7430-5 regulations on procedure and administration in this approach the court apportions the requested attorneys fees between those issues for which the commissioner was substantially justified and those for which he was not accordingly even if the court consolidates the deficiency and interest abatement cases it should still analyze each issue separately in order to determine the amount of attorneys fees and costs notice_of_deficiency case the taxpayers may argue they prevailed with respect to the litigation concerning the income_tax case because they prevailed with respect to the most significant issue of the case the taxpayers succeeded in spreading their dollar_figured deduction over three years beginning in year on the other hand the service could argue that the most significant issue in the case was whether the dollar_figured deduction in year should have been reduced these determinations will ultimately be based on how the court views the matter however if the court considers that the taxpayers are the prevailing_party in the deficiency case they are still not considered the prevailing_party for purposes of sec_7430 if the service’s position in the litigation was substantially justified the substantial justification standard is essentially the prior law’s reasonableness standard couched in new language 108_tc_430 under sec_7430 a taxpayer is entitled to an award of costs and attorneys fees only if the united_states fails to establish that its position in the proceedings was substantially justified see 102_tc_391 mere fact that government is unsuccessful at litigation or concedes the case is not determinative of whether its position was substantially justified see also vanderpool v commissioner 91_tc_367 86_tc_962 the service’s administrative and litigation positions are substantially justified if they have a reasonable basis in both law and fact 487_us_552 106_tc_76 a reasonable basis exists if legal precedent substantially supports the service’s position given the facts available 94_tc_685 the fact that the service eventually loses or concedes a case does not by itself establish that the position taken is unreasonable but it is a factor that may be considered swanson t c pincite see also 92_tc_760 the tax_court has considered the reasonableness standard in several cases see 90_tc_1256 taxpayer who was the prevailing_party in court was not entitled to attorneys fees and costs because he did not show that the government’s position was unreasonable 60_f3d_1529 11th cir irs is unreasonable in imposing sec_6672 liability against person who was only investor in restaurant u s v estridge 797_f2d_1454 8th cir litigation costs awarded where irs did not diligently investigate which of several persons was liable for the sec_6672 penalty and 100_tc_457 where irs disallowed all deductions claimed on the return but had not conducted an audit and had made no attempt to obtain information about the case before adopting the position in the notice the irs was not substantially justified merely because the notice_of_deficiency was valid the service’s litigation position in the deficiency case was not unreasonable the taxpayers had already received pursuant to the explicit terms of the closing_agreement a deduction in year of their entire cash investment in the tax_shelter the closing_agreement specifically stated that losses and deductions are not deductible by the taxpayers in any year before year or after year the taxpayers must have been aware that their initial year of investment was year and not year yet the taxpayers sought the benefits of the year settlement notwithstanding that the service settled year sec_1 and its litigation position for year sec_1 and was reasonable abatement of interest case in order for the tax_court to have jurisdiction under sec_6404 the taxpayer must meet the net_worth and size requirements referred to in sec_7430 and bring an action within days after receiving a final_determination not to abate interest from the service the tax court’s jurisdiction is limited to determining whether the secretary’s failure to abate interest was an abuse_of_discretion taxpayers filed a request for abatement of interest with the service the service considered the claim and ultimately issued a final_determination not to abate interest as a result of the service’s denial of their claim taxpayers petitioned the tax_court the service moved to dismiss the case for lack of jurisdiction taking the position that the final_determination sent to taxpayers was invalid specifically the service argued that because the taxpayers’ request for abatement of interest was premature as no interest had yet been assessed the service should have rejected the claim instead of making a determination the taxpayers objected to the motion and a hearing was held on april year as a result of settlement negotiations at the hearing the taxpayers agreed to withdraw their objection to district counsel’s motion to dismiss the interest abatement case for lack of jurisdiction accordingly taxpayers are not the prevailing_party for purposes of sec_7430 even if the court decides that the taxpayers are the prevailing_party sec_7430 provides that a party shall not be treated as a prevailing_party if the united_states establishes that the position of the united state sec_4 in the proceeding was substantially justified what constitutes whether the commissioner’s position is substantially justified or not is discussed in detail in the notice_of_deficiency section of this memorandum see supra p in this case the service was substantially justified when it denied the abatement of interest claim the service did not have the authority under sec_6404 to abate because the service had yet to make an assessment of the interest sec_6404 states that the secretary may abate interest i n the case of any assessment of interest on - a any deficiency attributable in whole or in part to any unreasonable error or delay by an officer_or_employee of the internal_revenue_service in performing a ministerial or managerial act emphasis added since no assessment had been made the service correctly denied the abatement claim pursuant to sec_7430 the position taken by the service is the position taken in the judicial proceeding sec_6673 sanctions and costs the taxpayers in addition to requesting relief under sec_7430 are seeking recovery under sec_6673 as well sec_6673 provides for an award of costs expenses and attorneys fees where an attorney including an attorney appearing on behalf of the commissioner has unreasonably and vexatiously5 multiplied the proceedings in any case sec_6673 is derived from u s c see h rept pincite0 sec_6673 provides in pertinent part whenever it appears to the tax_court that any attorney or other person admitted to practice before the tax_court has multiplied the proceedings in any case unreasonably and vexatiously the tax_court may require b if such attorney is appearing on behalf of the commissioner of internal revenue that the united_states pay such excess costs expenses and attorneys fees in the same manner as such an award by a district_court in 99_tc_533 the tax_court noting the dearth of judicial opinions interpreting and applying sec_6673 relied on case law under u s c for guidance on the level of misconduct justifying sanctions the majority of courts of appeals require a showing of bad faith as a condition of imposing sanctions see also 803_f2d_1265 2nd cir 766_f2d_1342 9th cir sanctions under u s c are appropriate where the conduct causing multiplication of the proceedings was reckless or in bad faith in harper counsel for the taxpayer failed to comply with the court’s order to produce documents requested by the commissioner pursuant to discovery filed a frivolous motion for summary_judgment failed to file a proper trial memorandum failed to prepare for trial as directed by the court and failed to respond to the commissioner’s motion for sanctions the tax_court held that counsel for the taxpayer had unreasonably and vexatiously multiplied the proceedings by displaying a contemptuous disregard for the court’s rules and orders acting in bad faith and knowingly abusing the judicial process throughout 5blacks law dictionary 7th ed defines vexatious as of conduct without reasonable or probable cause or excuse harassing annoying sec_6673 is applicable to positions taken after date in proceedings which are pending on or commenced after such date obra d 103_stat_2106 see 99_tc_533 the course of the proceeding id pincite see also murphy v commissioner tcmemo_1995_76 however the tax_court had not had the occasion to apply sec_6673 to misconduct of a government attorney before the case of dixon v commissioner tcmemo_2000_116 date dixon involved consolidated cases arising from the service’s disallowance of interest deductions claimed by participants in various tax_shelters the merits of the tax_shelter cases were litigated in a consolidated trial of eight petitioners whose cases had been designated as test cases john thompson and john cravens were two of the petitioners in the test cases following the trial the court sustained virtually all of the service’s determinations in each of the test cases it then came to light that prior to trial of the test cases the service’s attorneys entered into contingent settlement agreements with thompson and cravens that had not been disclosed to the court to the other test case petitioners or to their counsel there were a series of motions hearings and appeals to determine the impact of the contingent settlement agreement on the trial but ultimately the court again sustained the service’s determination in dixon the court held that the service’s attorneys intentionally misled the court before during and after the trial of the test cases in fact the service conceded that its two attorneys involved in the settlements engaged in misconduct in the trial of the test cases further the court stated that the misconduct led the court_of_appeals to remand the test cases to the tax_court for an evidentiary hearing and caused substantial continuing delay in the resolution of the tax_shelter cases the court granted petitioners’ motions for attorneys fees and costs nothing close to the outrageous abuses described above occurred in either the deficiency or interest cases taxpayers’ counsel argues that the district_counsel attorney resisted consolidation engaged in an aggressive and costly motions practice requiring the filing of numerous documents see taxpayers’ memorandum to national_office dated date the file indicates that the district_counsel attorney did not file aggressive motions nor engage in costly motions practice he filed an objection to the petitioners’ motion to enforce the settlement agreement a motion to amend answer to assert an estoppel defense to the taxpayers’ claim that they were entitled to a cash-out deduction in any year other than year a motion for partial summary_judgment on the issue of whether the petition was valid in the income_tax case because counsel for petitioners refused to ratify the petition and a motion to dismiss the interest abatement case clearly the pleadings filed by the district 7in dixon the petitioners did not qualify for and therefore were unable to get attorneys fees under sec_7430 because they were not prevailing parties counsel attorney were appropriate and do not in any way indicate reckless or bad faith conduct case development hazards and other considerations deborah a butler assistant chief_counsel field service by _______________________ sara m coe branch chief procedural branch


internal_revenue_service number release date index number --------------------------------------------------------- ----------------------------- ------------------------------------ ---------- ------------------------------------------------------------ -------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------------------------------- telephone number -------------------- refer reply to cc psi b04 plr-127985-16 date date legend decedent date child child attorney date accounting firm date dear ---------------- ------------------------------------------------ ------------------------ ------------------ ----------------------- ------------------------ -------------------------- --------------------------------- -------------------------- this responds to your authorized representative’s letter dated date requesting an extension of time under sec_301_9100-1 and sec_301_9100-3 of the procedure and administration regulations to make an alternate_valuation election under sec_2032 of the internal_revenue_code code the facts and representations submitted are summarized as follows decedent died on date the co-personal representatives of decedent’s estate are child and child the co-personal representatives retained attorney to prepare form_706 united_states estate and generation-skipping_transfer_tax return the co-personal representatives timely filed form_706 on date attorney did not advise the co-personal representatives to make the election for alternate_valuation under sec_2032 on the form_706 accordingly the election for alternate_valuation under sec_2032 was not made co-personal representatives retained accounting firm to advise and prepare decedent’s final income_tax return accounting firm advised the co-personal representatives of the election for alternate_valuation under sec_2032 on or about date which was within one year after the due_date of the form_706 including extensions the co-personal representatives filed a supplemental form_706 making the election under sec_2032 plr-127985-16 sec_2032 provides in part that the value of the gross_estate may be determined if the executor so elects by valuing all the property included in the gross_estate as follows in the case of property distributed sold exchanged or otherwise_disposed_of within months after the decedent’s death such property shall be valued as of the date of distribution sale exchange or other_disposition in the case of property not distributed sold exchanged or otherwise_disposed_of within months after the decedent’s death such property shall be valued as of the date months after the decedent’s death sec_2032 provides that no election may be made under sec_2032 with respect to an estate unless such election will decrease the value of the gross_estate and the sum of the tax imposed under chapter of the code estate_tax and the tax imposed by chapter generation-skipping_transfer_tax with respect to property includible in the decedent’s gross_estate reduced by credits allowable against such taxes sec_2032 provides that an election under sec_2032 shall be made by the executor on the return of tax imposed by sec_2001 such election once made shall be irrevocable under sec_2032 no election may be made under sec_2032 if such return is filed more than one year after the time prescribed by law including extensions for filing such return sec_20_2032-1 of the estate_tax regulations provides that a request for an extension of time pursuant to sec_301_9100-1 and sec_301_9100-3 will not be granted unless the estate_tax_return is filed no later than one year after the due_date of the return including extensions under sec_301_9100-1 the commissioner may grant a reasonable extension of time to make a regulatory election or statutory election but no more than months except in the case of a taxpayer who is abroad under all subtitles of the code except subtitles e g h and i requests for relief under sec_301_9100-3 will be granted when the taxpayer provides the evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-3 provides that a taxpayer is deemed to have acted reasonably and in good_faith if the taxpayer reasonably relied on a qualified_tax professional including a tax professional employed by the taxpayer and the tax professional failed to make or advise the taxpayer to make the election plr-127985-16 based on the facts submitted and the representations made we conclude that the standards of sec_301_9100-1 and sec_301_9100-3 have been satisfied consequently the co-personal representatives are granted an extension of time to date the date the supplemental form_706 was filed to make the alternate_valuation election under sec_2032 a copy of this letter should be forwarded to the cincinnati service_center at the following address internal_revenue_service cincinnati service_center - stop cincinnati oh in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative 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 the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination this ruling is directed only to the taxpayer requesting it sec_6110 of provides that it may not be used or cited as precedent sincerely associate chief_counsel passthroughs special industries by karlene m lesho karlene m lesho senior technician reviewer branch passthroughs special industries enclosure copy of letter for sec_6110 purposes cc


id office uilc cca-624324-08 -------------- number release date from ------------------- sent tue pm to -------------- cc --------------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------- subject re tefra question -------------------------------------------------------------------------------------------------------------------------------------------- -----------------------------------------------------------------------------------------------------generally the tmp is required to forward notice of the day letter and appeals rights to all partners under sec_301_6223_g_-1 any partner can file a protest under sec_301_6224_a_-1 the partners are entitled to participate in any appeals_conference with the tmp making the arrangements


department of the treasury washington dc third party communication date of communication month dd yyyy person to contact --------------------------- id no --------------- ----------------------------------------------------- telephone number --------------------- refer reply to cc ita plr-122408-05 date date internal_revenue_service number release date index number ------------------------------- ----------------- ------------------------------ ----------------------------- - legend taxpayer ------------------------ ----------------------------------------- buyer -------------------------------------------- state ------------ a --------------- b --------------- c --------------- d --------------- e --------------- f ------------- g --------------- h --------------- i ------------- o -- p ----------- k --------- l --------- m ------------- n ------- date ------------------ date ------------------ s ------- t ------- u ------- v ------- w ------ x ------ y ------- plr-122408-05 dear ---------------- this is in reply to your request for a ruling submitted by your authorized representative to allow taxpayer to use an alternative method of basis recovery under ' 15a c of the income_tax regulations to report contingent payments because the normal basis recovery rule method will substantially and inappropriately defer recovery_of basis in accordance with sec_15a_453-1 the ruling_request was filed prior to the due_date for taxpayer’s return including extensions taxpayer is a state limited_liability_company that is treated as a partnership for federal_income_tax purposes it uses an accrual_method of accounting and files its returns on a calendar_year basis on date taxpayer was acquired by buyer under the asset purchase agreement between taxpayer and buyer the purchase_price for taxpayer’s assets consisted of the following a cash purchase_price of dollar_figurea subject_to adjustment buyer’s assumption of certain liabilities of taxpayer at closing and a deferred purchase_price the deferred purchase_price component of the purchase_price consists of an earnout provision under which the buyer is obligated to pay thetaxpayer a defined percentage of earnings before income_tax ebit in excess of dollar_figureb in year u dollar_figurec in year v dollar_figured in year w and dollar_figuree in year x to the extent that any earnout payment is due the buyer will make such payment in the calendar_year following the applicable earnout year thus the buyer must calculate its net sales for taxable years u through x with any required earnout payments being made in taxable years v through y however the taxpayer does not expect to receive any earnout payments because its ebit amounts for prior taxable years have been well below the baseline ebit amounts necessary to trigger an earnout payment the taxpayer’s highest ebit amount was dollar_figuref in year s which was followed by substantial declines in years t and u taxpayer has estimated the aggregate payments_to_be_received during the term of the installment_obligation based on historical data and earning trends and has computed a total sales_price of dollar_figureg as summarized below the taxpayer’s u s federal partnership tax_return for year u has been extended until date the adjustment to the cash purchase_price consists of i holdback funds held in escrow to secure the post-closing obligations of taxpayer and ii a purchase_price_adjustment reflecting a dollar-for-dollar increase or decrease in the price based on certain balance_sheet adjustments l v k p u dollar_figurei dollar_figure dollar_figureh dollar_figureg v - y m total sales_price taxable_year amounts percentage of received plr-122408-05 cash payments at closing including liability relief purchase_price_adjustment earnout payments totals the taxpayer states that under the normal basis recovery rule_of sec_15a_453-1 a pro_rata basis recovery over the five-year installment period would result in only n of the taxpayer’s basis in the assets being recovered in year u this would create a significant mismatch between the percentage of the total sale price received and basis recovery in year u this would result in taxpayer recognizing an overstated capital_gain prematurely and would also defer the ability to recognize a capital_loss until y the final year of the installment period to illustrate the taxpayer received p of the total sales_price dollar_figureh dollar_figureg in year u and does not expect to receive any earnout payment in year v that would change that amount if the taxpayer is permitted to recover p of its basis in the disposed assets in year u this would produce a better match between cash received and basis recovered taxpayer would avoid a disproportionate amount of taxable gain in year u and significant capital_loss in year y taxpayer represents that this alternative method of basis recovery is a reasonable method that will allow taxpayer to recover basis more than twice as fast as the otherwise applicable normal basis recovery method p vs n accordingly the taxpayer requests that under sec_15a_453-1 that it be permitted to allocate the same ratio of basis to each installment_payment as that installment_payment bears to the estimated amount of aggregate payments_to_be_received by the taxpayer during the five-year installment period rather than equally over the five taxable years in which it might receive a payment from buyer sec_453 of the internal_revenue_code defines the term ainstallment sale to mean a disposition of property if at least one payment is to be received after the end of the taxable_year in which the disposition occurs sec_453 defines the term ainstallment method as a method under which the income recognized for any taxable_year from a disposition is that proportion of the plr-122408-05 payments received in that year which the gross_profit realized or to be realized when the payment is completed bears to the total_contract_price sec_15a_453-1 defines a acontingent payment sale as a sale_or_other_disposition of property in which the aggregate selling_price cannot be determined by the close of the taxable_year in which such sale_or_other_disposition occurs unless a taxpayer makes an election under ' 15a d contingent_payment_sales are to be reported on the installment_method sec_15a_453-1 provides that a contingent_payment_sale will be treated as having a stated maximum selling_price if under the terms of the agreement the maximum amount of sale proceeds that may be received by the taxpayer can be determined as of the end of the taxable_year in which the sale_or_other_disposition occurs generally the taxpayer s basis shall be allocated to payments received and to be received by treating the stated maximum selling_price as the selling_price for purposes of ' 15a b if however application of the foregoing rules in a particular case would substantially and inappropriately accelerate or defer recovery_of the taxpayer s basis a special rule will apply sec_15a_453-1 provides that the normal basis recovery rules set forth in ' 15a c may with respect to a particular contingent_payment_sale substantially and inappropriately defer recovery_of the taxpayer s basis sec_15a_453-1 provides that the taxpayer may use an alternative method of basis recovery if the taxpayer is able to demonstrate prior to the due_date of the return including extensions for the taxable_year in which the first payment is received that application of the normal basis recovery rule will substantially and inappropriately defer recovery_of basis to demonstrate that application of the normal basis recovery rule will substantially and inappropriately defer recovery_of basis the taxpayer must show a that the alternative method is a reasonable method of ratably recovering basis and b that under that method it is reasonable to conclude that over time the taxpayer likely will recover basis at a rate twice as fast as the rate at which basis would have been recovered under the otherwise applicable normal basis recovery rule the taxpayer must receive a ruling from the internal_revenue_service before using an alternative method of basis recovery sec_15a_453-1 further provides that the taxpayer must file the request for a ruling prior to the due_date for the return including extensions in demonstrating that application of the normal basis recovery rule would substantially and inappropriately defer recovery_of the taxpayer s basis the taxpayer in appropriate circumstances may rely upon contemporaneous or immediate past relevant sales profit or other factual data that are subject_to verification the taxpayer ordinarily is not permitted to rely upon projections of future productivity receipts profits or the like however in special plr-122408-05 circumstances a reasonable projection may be acceptable based upon a specific event that has already occurred sec_15a_453-1 provides that a contingent_payment_sale may initially and properly have been reported under the normally applicable basis recovery rule and during the term of the agreement circumstances may show that continued reporting on the original method will substantially and inappropriately defer or accelerate recovery_of the unrecovered balance of the taxpayer s basis in this event the special rule provided in this paragraph is applicable based on the information provided and the representations made it is reasonable to conclude that the taxpayer’s use of the proposed alternative method of basis recovery will result in basis recovery at a rate twice as fast as the rate at which basis would be recovered under the normal basis recovery rules the proposed alternative method of basis recovery represents a reasonable method of basis recovery accordingly taxpayer’s use of the proposed alternative method of basis recovery is approved caveats a copy of this letter must be attached to any income_tax return to which it is relevant we enclose a copy of the letter for this purpose also enclosed is a copy of the letter_ruling showing the deletions proposed to be made in the letter when it is disclosed under ' except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any item discussed or referenced in this letter this ruling is directed only to the taxpayer s requesting it sec_6110 provides that it may not be used or cited as precedent sincerely george wright assistant branch chief office of associate chief_counsel income_tax accounting enclosures cc


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 tege eoeg teb presp-144844-06 date date dear -------------------- pursuant to sec_54 of the internal_revenue_code the code and notice_2005_98 2005_52_irb_1211 and after review of your application submitted on date including supplements thereto we have determined that the project described in appendix a attached hereto is qualified for purposes of sec_54 and will be owned by one or more qualified borrowers we allocate authority to ---------------------- ------------------------------- the issuer a qualified issuer under sec_54 to issue up to dollar_figure------------- of clean renewable energy bonds crebs bonds issued pursuant to this allocation must be designated by the issuer as bonds for purposes of sec_54 for the project described in appendix a up to the amount allocated for each project described in appendix a bonds so designated must be issued on or before date please be aware that in order for bonds to be crebs the applicable_requirements of the code including without limitation sec_54 notice_2005_98 and notice_2006_7 2006_10_irb_559 must be met please note that creb proceeds may be used to reimburse capital expenditures paid_by qualified borrowers for qualified projects only if the provisions of sec_54 are met if you have any questions with respect to this allocation please contact --------------------- ------------------------------------------------------------------------------------------------------------------- - ---------or ---------------------------- of the office of division counsel associate chief_counsel tax-exempt and government entities on --------------------- not a toll-free call 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 presp-144844-06 for purposes of the renewable_electricity_production_credit under sec_45 of the code no inference may be drawn from this allocation that any project listed in appendix a is a qualified_facility or that electricity to be produced at such project s is electricity from a qualified_energy resource at a qualified_facility within the meaning of sec_45 this determination is directed only to the applicant named above sec_6110 of the code provides that it may not be used or cited as precedent a copy of this letter must be attached to any form 8038-g information_return for tax- exempt governmental obligations filed for bonds issued pursuant to this allocation the allocation contained in this letter is based upon information and representations submitted by the applicant for the creb allocation and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the application_for an allocation it is subject_to verification on examination sincerely assistant chief_counsel exempt_organizations employment_tax government entities tax exempt government entities by timothy l jones senior counsel tax-exempt_bonds branch presp-144844-06 borrower name appendix a project type project location -------------------------------- wind facility --------------------- -------------------------------- -------------- ---------------------------------- amount allocated dollar_figure------------- ------------------------------------------------ ------------------------------------------------- -------------------------- -------------------------------------------- ---------------------------


internal_revenue_service number release date index number ------------------------- -------------------------------- ----------------------------------------------------- ------------------------------------------------------ ------------------------------- in re --------------------------------------------------- ------ department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------------ id no ------------- telephone number ---------------------- refer reply to cc psi b06 plr-122555-17 date date legend taxpayer corp development company holding_company state a state b state c state d regulator regulator year date date ----------------------------------------------------- ----------------------------------- --------------------------------- ----------------------------------------------- ------------------------- --------------- -------------- --------------- ---------- ------------------------------------------------------- -------------------------------------------------------- ------- ------------------------ -------------------------- plr-122555-17 date ------------------- dear ------------------- this letter responds to a request for a private_letter_ruling dated date and subsequent correspondence submitted on behalf of taxpayer for a ruling concerning the application of the normalization rules under sec_168 of the internal_revenue_code and sec_1_167_l_-1 of the income_tax regulations to internal restructurings of certain of its members the relevant facts as represented in your submissions are set forth below facts taxpayer is an electric transmission utility headquartered in state a which owns and operates electric transmission assets in state a state b state c and state d various investor owned utilities ious municipalities and electric cooperatives own taxpayer in addition corp taxpayer’s corporate manager owns a de_minimis interest in taxpayer regulator regulates taxpayer for tariffed rates determined under formula ratemaking on a rate base rate of return basis taxpayer’s assets are used predominantly in the trade_or_business of furnishing or selling electrical energy and the rates that taxpayer has charged for furnishing or selling electricity have been established or approved by regulator taxpayer is treated as a partnership for federal tax purposes taxpayer uses accelerated methods of depreciation and a normalization method_of_accounting for its public_utility_property and has established deferred tax_reserves for the public_utility_property for ratemaking purposes taxpayer calculates deferred tax expense and accumulated deferred federal_income_tax adfit consistent with the normalization method_of_accounting in accordance with regulator policy for ratemaking purposes deferred tax expense is recovered in taxpayer’s cost of service and adfit is an offset to taxpayer’s rate base in year taxpayer restructured its business taxpayer established entities for its business development activities outside its traditional footprint to separate those activities from its operations within its traditional footprint the business development entities were set up to be a sister structure to that of taxpayer and corp prior to the reorganization all of the operations related to jurisdictions in its traditional footprint were held by taxpayer following the reorganization all business development activities relating to jurisdictions outside taxpayer’s traditional footprint were held by development company the investors in taxpayer that participate in development company own their interest in development company through holding_company plr-122555-17 when seeking approval for the business development restructuring regulator required certain of taxpayer’s iou members to transfer their taxpayer partnership interests to affiliated nonregulated entities to accomplish the regulator directive the affected iou members transferred their respective taxpayer interests from their regulated utility subsidiaries to non-regulated affiliates the transfers were made to affiliated entities in the respective members’ consolidated federal_income_tax groups taxpayer continues its investment in the public_utility_property assets reflected on taxpayer’s books taxpayer represents that no transfer of taxpayer assets took place and no journal entries were recorded in taxpayer’s financial statements for the transfers taxpayer has a sec_754 election in effect the transfers of taxpayer interests by iou members to their non-regulated affiliates were treated as exchanges for sec_743 purposes thus taxpayer made sec_743 basis adjustments to its assets for the benefit of the transferee partners the non-regulated affiliates at the time of the transfers an iou member’s gain resulting from the transfer of the taxpayer interests to the non-regulated affiliates remains deferred for as long as the iou member’s transferred interest remains within its respective consolidated groups in accordance with the matching_rule in sec_1_1502-13 of the consolidated_return_regulations the deferred intercompany gain will be recognized as the taxpayer allocates to the non-regulated affiliates depreciation and amortization deductions attributable to the sec_743 basis adjustments when the iou intercompany transfers of the partnership interests occurred no journal entry was made on taxpayer’s regulated books of account its public_utility_property assets remained within taxpayer at all times before during and after the transaction taxpayer represents that the sec_743 adjustments are not increases in the basis of the property on taxpayer’s regulated books further taxpayer represents that the sec_743 adjustments and the depreciation of those adjustments do not change taxpayer’s public_utility_property for ratemaking purposes and are not associated with taxpayer’s cost of service ratemaking regulator approved taxpayer’s proposed reorganization in its order dated date that order was conditioned on taxpayer’s representations including taxpayer’s commitment to hold customers harmless from any transaction-related costs and taxpayer’s representation that the transaction will not impact their regulator jurisdictional accounts taxpayer’s subsequent filing filed on date contains the same representations and commitments in an order dated date authorizing disposition of the facilities regulator again noted taxpayer’s commitment to hold all of their transmission customers harmless from transaction-related costs taxpayer makes the following additional representations first the members of the consolidated_group will treat the transaction consistent with sec_1_1502-13 second plr-122555-17 the transfers of interests in taxpayer do not result in a disparity between the partners’ basis in their interests in taxpayer and taxpayer’s basis in its assets last the iou intercompany transfers did not result in a termination of taxpayer under sec_708 ruling requested taxpayer requests a ruling that a normalization violation will not occur if taxpayer does not adjust existing adfit balances to account for the consequences of the sec_743 basis_adjustment resulting from taxpayer’s restructuring transaction law and analysis sec_168 provides that the depreciation deduction determined under sec_168 shall not apply to any public_utility_property within the meaning of sec_168 if the taxpayer does not use a normalization method_of_accounting sec_168 defines in part public_utility_property as property used predominantly in the trade_or_business of the furnishing or sale of electrical energy if the rates for such furnishing or sale as the case may be have been established or approved by a state or political_subdivision thereof prior to the revenue reconciliation act of the definition of public_utility_property was contained in sec_167 and sec_168 which defined public_utility_property by means of a cross reference to sec_167 the definition of public_utility_property is unchanged sec_1_167_l_-1 provides that under sec_167 property is public_utility_property during any period in which it is used predominantly in a sec_167 public_utility activity the term sec_167 public_utility activity means in part the trade_or_business of the furnishing or sale of electrical energy if the rates for such furnishing or sale as the case may be are regulated ie have been established or approved by a regulatory body described in sec_167 the term regulatory body described in sec_167 means a state including the district of columbia or political_subdivision thereof any agency_or_instrumentality of the united_states or a public service or public_utility commission or other body of any state or political_subdivision thereof similar to such a commission the term established or approved includes the filing of a schedule of rates with a regulatory body which has the power to approve such rates though such body has taken no action on the filed schedule or generally leaves undisturbed rates filed by the taxpayer the definitions of public_utility_property contained in sec_168 and former sec_46 are essentially identical sec_1_167_l_-1 restates the statutory definition providing that property will be considered public_utility_property if it is used predominantly in a public_utility activity and the rates are regulated sec_1 l - b provides that rates are regulated for such purposes if they are established or approved by a regulatory body the terms established or approved are further defined plr-122555-17 to include the filing of a schedule of rates with the regulatory body that has the power to approve such rates even if the regulatory body has taken no action on the filed schedule or generally leaves undisturbed rates filed the regulations under former sec_46 specifically sec_1_46-3 expand the definition of regulated rates the expanded definition embodies the notion of rates established or approved on a rate of return basis this notion is not specifically provided for in the regulations under former sec_167 nevertheless there is an expressed reference to rate of return in sec_1_167_l_-1 the operative rules for normalizing timing differences relating to use of different methods and periods of depreciation are only logical in the context of rate of return regulation the normalization method which must be used for public_utility_property to be eligible for the depreciation allowance available under sec_168 is defined in terms of the method the taxpayer uses in computing its tax expense for purposes of establishing its cost of service for ratemaking purposes and reflecting operating results in its regulated books of account thus for purposes of applying the normalization rules the definition of public_utility_property is the same for purposes of the investment_tax_credit and depreciation former sec_167 generally provided that public_utilities were entitled to use accelerated methods for depreciation if they used a normalization method_of_accounting a normalization method_of_accounting was defined in former sec_167 in a manner consistent with that found in sec_168 sec_1_167_l_-1 provides that the normalization requirements for public_utility_property pertain only to the deferral of federal_income_tax liability resulting from the use of an accelerated method_of_depreciation for computing the allowance for depreciation under sec_167 and the use of straight-line_depreciation for computing tax expense and depreciation expense for purposes of establishing cost of services and for reflecting operating results in regulated books of account these regulations do not pertain to other book-tax timing differences with respect to state income taxes f i c a taxes construction costs or any other taxes and items in order to use a normalization method_of_accounting sec_168 requires a taxpayer in computing its tax expense for establishing its cost of service for ratemaking purposes and reflecting operating results in its regulated books of account to use a method_of_depreciation for property that is the same as and a depreciation period for such property that is not shorter than the method and period used to compute its depreciation expense for such purposes under sec_168 if the amount allowable as a deduction under sec_168 differs from the amount that would be allowable as a deduction under sec_167 using the method period first and last year convention and salvage_value used to compute regulated tax expense under sec_168 then the taxpayer must make adjustments to a reserve to reflect the deferral of taxes resulting from such difference plr-122555-17 sec_168 provides that one way the requirements of sec_168 will not be satisfied is if the taxpayer for ratemaking purposes uses a procedure or adjustment which is inconsistent with such requirements under sec_168 such inconsistent procedures and adjustments include the use of an estimate or projection of the taxpayer’s tax expense depreciation expense or reserve for deferred taxes under sec_168 unless such estimate or projection is also used for ratemaking purposes with respect to all three of these items and with respect to the rate base hereinafter referred to as the consistency rule in order to satisfy the consistency rule there must be consistency in the treatment of costs for rate base regulated depreciation expense tax expense and deferred tax revenue purposes the normalization rules would be violated if the federal_income_tax component of cost of service reflected depreciation of taxpayer’s costs that are not included in rate base or the depreciation component of cost of service based on the foregoing we conclude that a normalization violation will not occur if taxpayer does not adjust existing adfit balances to account for the consequences of the sec_743 basis_adjustment resulting from taxpayer’s restructuring transaction this ruling is expressly conditioned upon taxpayer’s representation that the restructuring transaction will not impact taxpayer’s public_utility_property for ratemaking purposes and is not associated with taxpayer’s cost of service ratemaking except as specifically set forth above no opinion is expressed or implied concerning the federal_income_tax consequences of the above described facts under any other provision of the code or regulations specifically no opinion was requested and no opinion is expressed or implied concerning the application of any consolidated_return regulation under sec_1502 to the transfers of the partnership interests 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 this ruling is based upon information and representations submitted by taxpayer and accompanied by penalty of perjury statements executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination plr-122555-17 in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representatives sincerely david a selig senior counsel branch office of associate chief_counsel passthroughs special industries


internal_revenue_service national_office technical_advice_memorandum number release date index uil no case mis no tam-117349-98 national director of appeals chief appeals_office taxpayer’s name taxpayer’s address taxpayer’s identification no years involved date of conference date cc dom corp b2 legend p sec_1 sec_2 sec_3 thrift thrift thrift tam-117349-98 date a date b date c date d date e date f date g year year year year year dollar_figurew dollar_figurex dollar_figurey dollar_figurez issues whether for purposes of computing an sec_165 g worthless_stock deduction in year p properly adjusted its basis in the stock of sec_1 pursuant to sec_1_1502-32 of the income_tax regulations to account for the accrued but all references to sections of the internal_revenue_code and the income_tax regulations are references to the code and regulations in effect for the taxable_year in issue tam-117349-98 uncollected interest abui charged to the special reserve_account the sra by sec_1's lower-tier subsidiary sec_3 and subsequently paid to sec_3 by the federal savings and loan insurance corporation fslic and the interest accrued and paid to sec_3 on the overstated portion of the net_worth note the note issued by fslic to sec_3 conclusion p is not required to reduce its basis in the sec_1 stock because sec_3 properly charged the sra for abui and accrued fslic assistance in the same amount in year based on the information available in year year and year interest attributable to the overstatement in the note was properly accrued and entered into sec_3's earnings_and_profits e_p for purposes of determining p’s basis in the sec_1 stock facts the information submitted indicates that during the period in question p was the common parent of an affiliated_group filing consolidated tax returns p group on a calender year basis using the accrual_method of accounting p owned all of the outstanding_stock of sec_1 sec_1 owned all of the outstanding_stock of sec_2 in year sec_2 created a wholly-owned subsidiary sec_3 organized as a federal savings bank to acquire the assets and liabilities of three insolvent financial institutions thrift thrift and thrift or the thrifts that were under fslic supervision on date a fslic entered into an assistance agreement the assistance agreement with sec_1 sec_2 and sec_3 i the fslic assistance agreement pursuant to the assistance agreement on the effective date of the acquisitions effective date fslic agreed to provide sec_3 an interest-bearing promissory note equal to the aggregate negative capital of the thrifts immediately prior to the effective date the note the note was to be calculated based upon information contained in the latest regulatory reports submitted by the thrifts to the federal_home_loan_bank board after the effective date fslic was to conduct an audit of the thrifts using information available prior to the effective date under the assistance agreement fslic also agreed to reimburse sec_3 for losses on certain assets acquired from the thrifts the mechanism for reimbursement was the establishment of a book account the sra if sec_3 with fslic’s concurrence determined that a particular asset was uncollectible a charge debit was made to the sra the sra balance was then submitted by sec_3 to fslic on a quarterly report fslic had the option to pay the net debit balance to sec_3 or to carry over the balance or portion thereof abui which represented interest that had been accrued by the thrifts prior to the effective date but not yet collected was among the assets that could be charged to the sra tam-117349-98 ii the private_letter_ruling a private_letter_ruling dated date b tr-31-3268-88 plr held that each of the acquisitions of the assets and liabilities of each of the thrifts qualified as a reorganization under sec_368 and that sec_3 had a carryover_basis in the assets received under sec_362 the plr further provided that all fslic assistance paid_or_accrued would be excludable from income under sec_597 pursuant to sec_381 sec_3 would succeed to and take into account the e_p of the thrifts as of the effective date payments of interest to sec_3 on the note and all other_payments by fslic pursuant to the assistance agreement would generate e_p to sec_3 after the acquisitions any increase to sec_3's e_p as a result of such interest payments and other assistance payments would cause a positive adjustment with respect to the subsidiary stock owned by sec_2 and sec_1 the plr also provided that the note would be treated as an asset of the thrifts prior to the acquisitions and accordingly the note would be included in the thrifts’ e_p before the acquisitions inclusion of the note in the thrifts’ e_p therefore would not cause a positive adjustment with respect to the subsidiary stock owned by sec_2 and sec_1 iii p’s tax treatment of fslic assistance on date c sec_3 acquired substantially_all the assets and liabilities of thrift and thrift on date d sec_3 acquired substantially_all the assets and liabilities of thrift also on date d fslic determined that dollar_figurew of abui should be written off as uncollectible this write-off lowered the value of the abui receivable transferred to sec_3 causing a corresponding increase in the negative capital of the thrifts because the negative capital of the thrifts immediately prior to the effective date was used to calculate the amount of the note the dollar_figurex note issued by fslic to sec_3 was overstated by dollar_figurew as described below in year sec_3 with the written concurrence of fslic determined that dollar_figurey of abui was uncollectible sec_3 charged off dollar_figurey on its books and claimed a federal_income_tax deduction for this amount sec_3 reduced its e_p causing sec_2 sec_1 and p to make corresponding reductions to their bases in their subsidiary stock under sec_1_1502-32 sec_3 then debited the sra for dollar_figurey and fslic paid this amount in year although this amount was excluded from taxable_income under sec_597 sec_3's accrual of the tax-exempt_income caused an increase in sec_3's e_p causing sec_2 sec_1 and p to make corresponding increases to their bases in their subsidiary stock under sec_1_1502-32 on date e of year the office of thrift supervision placed sec_1 in receivership appointing the resolution trust corporation rtc as receiver on the p group’s year consolidated_return p claimed an ordinary_loss from the worthlessness of the sec_1 stock it has been stipulated that sec_1 and its subsidiaries were disaffiliated from the tam-117349-98 p group on date f fslic’s year write-off of the dollar_figurew of abui was not discovered until a compliance audit report the report prepared by an outside accounting firm for the federal deposit insurance corporation as successor to fslic was issued in year the report noted that the year write-off was inconsistent with the terms of the assistance agreement and stated that the write-off had caused an overstatement in the note of dollar_figurew the report recommended that the overstatement be corrected through a credit to the sra for the same amount the report also concluded that because the abui in retrospect proved uncollectible the taxpayer’s year debit to the sra was proper on date g the dollar_figurew overstatement in the note was recouped by the fdic through a credit to the sra against other_amounts of assistance owed to sec_3 in year an internal rtc memorandum determined that the report had not addressed the issue of related interest on the overstatement the memorandum recommended that interest totalling approximately dollar_figurez attributable to the dollar_figurew overstatement be recovered this interest was recouped by the fdic later in year through a credit to the sra law and analysis issue one whether p properly adjusted its basis in the stock of sec_1 to account for abui charged to the sra by sec_3 and subsequently paid_by fslic sec_165 provides that there shall be allowed as a deduction any loss sustained during the taxable_year and not_compensated_for_by_insurance_or_otherwise the basis for determining the amount of the deduction for any loss shall be the adjusted_basis provided in sec_1011 for determining the loss from the sale_or_other_disposition of property sec_1_312-6 of the income_tax regulations provides in part that among the items entering the computation of corporate earnings_and_profits for a particular period are all income exempted by statute as well as all items includible in gross_income under sec_61 of the code sec_1_1502-32 of the regulations provides in part that as of the end of each consolidated_return_year each member owning stock in a subsidiary shall adjust the basis of such stock in the manner prescribed in this section if a subsidiary owns stock in any other subsidiary the adjustment with respect to the stock of the higher tier the analysis in this technical_advice_memorandum is predicated on the occurrence of a disaffiliation of sec_1 from the p group on date f no opinion is expressed as to the merits of such determination tam-117349-98 subsidiary shall not be made until after the adjustment is made with respect to the stock of the lower tier subsidiary in the case of a disposition of stock of a subsidiary before the end of the taxable_year the adjustment with respect to such stock shall be made as of the date of disposition sec_1_1502-32 further provides that the amount of such adjustment shall be the difference between the positive adjustment and the negative adjustment such difference is referred to as the net_positive_adjustment or the net_negative_adjustment as the case may be sec_1_1502-32 of the regulations provides in part that with respect to a share of stock which is not limited and preferred as to dividends the positive adjustment for such share of stock includes an allocable part of the undistributed_earnings and profits of the subsidiary for the taxable_year and the negative adjustment for such share includes an allocable part of the deficit in the earnings_and_profits of the subsidiary for the taxable_year sec_1_1502-32 of the regulations generally provides that the earnings_and_profits of a member are to be determined by reference to sec_1_1502-33 of the regulations sec_1_1502-33 of the regulations provides in part that there shall be reflected in the e_p of each member for a taxable_year an amount equal to any increase or decrease for such taxable_year pursuant to sec_1_1502-32 and in such member’s basis for its stock in a subsidiary sec_1_1502-32 of the regulations generally provides that a member owning stock in a subsidiary shall apply its net_negative_adjustment to reduce its basis for such stock and sec_1_1502-32 generally provides that a member owning stock in a subsidiary shall apply its net_positive_adjustment to increase its basis for such stock the examining agent contends that for purposes of calculating the year worthless_stock deduction p should be required to reduce its basis in the sec_1 stock by dollar_figurew examination argues that the year payment of fslic assistance through the sra caused an overstatement in p’s basis in the sec_1 stock examination argues that the year assistance payment was erroneous because dollar_figurew of the dollar_figurey in abui charged to the sra as uncollectible previously had been written off by fslic in year and factored into the calculation of the note the taxpayer argues that p properly adjusted its basis in the stock of sec_1 to account for the abui charged to the sra by sec_3 in year taxpayer argues that the year charge to the sra was independent of the determination of the thrifts’ negative capital and the calculation of the note ie regardless of the amount of the note sec_3 would have charged the sra for dollar_figurew because this represented the amount of abui that ultimately proved uncollectible the taxpayer further argues that because the sra charge was proper sec_3 correctly accrued fslic assistance and increased its e_p by tam-117349-98 the same amount resulting in a corresponding increase in p’s basis in the stock of sec_1 discussion the purpose behind the investment_adjustment rules set forth in sec_1_1502-32 is to prevent the duplication of gain_or_loss and the taking of deductions that do not reflect an economic loss within the consolidated_group sec_1_1502-32 accomplishes this goal by requiring annual adjustments by a member owning stock in a subsidiary equal to the net_positive_adjustment or the net_negative_adjustment as applicable the primary positive adjustment is the member’s allocable part of the undistributed e_p of the subsidiary for the taxable_year sec_1_1502-32 the primary negative adjustment is the member’s allocable part of the deficit in e_p of the subsidiary for the taxable_year sec_1_1502-32 under the tiering provision of sec_1_1502-33 if a member increases its basis in the stock of a subsidiary pursuant to sec_1_1502-32 or decreases its basis in the subsidiary stock pursuant to sec_1_1502-32 that member must correspondingly increase or decrease its own e_p this in turn triggers an increase or decrease in the stock basis of a higher-tier member under sec_1 b in the instant case the assistance agreement provided that abui was among the assets acquired by sec_3 from the thrifts for which reimbursement could be claimed from fslic in the event sec_3 was unable to collect thereon in year sec_3 with the written concurrence of fslic determined that dollar_figurey of abui was uncollectible accordingly sec_3 charged off dollar_figurey on its books and claimed a federal_income_tax deduction for this amount also in year sec_3 debited the sra for the same amount and subsequently received a payment of dollar_figurey from fslic the submission indicates that at the time of the year sra charge and the related accrual of fslic assistance sec_3 was unaware that dollar_figurew of the abui had been written off by fslic in year pursuant to the plr sec_3's accrual of assistance from the sra debit was excludable from income under sec_597 also under the plr fslic’s payment generated e_p to sec_3 a result that is consistent with sec_1_312-6 of the regulations the overstatement was not discovered until the year report was prepared for the fdic by an outside accounting firm the report noted that the year write-off was inconsistent with the terms of the assistance agreement and resulted in the note being overstated by dollar_figurew the report recommended that the overstatement be corrected through a credit to the sra for the same amount the report also concluded that because the abui in retrospect proved uncollectible the taxpayer’s year sra debit was proper the plr held that the note was to be treated as an asset of the thrifts prior to the transaction the plr further held that although the note would enter into tam-117349-98 the year federal_income_tax deduction of dollar_figurew based on sec_3's charge-off of the abui as uncollectible had the effect of decreasing sec_3's e_p sec_3's accrual of the fslic assistance increased its e_p by the same amount thus there was neither a net positive nor a net negative impact upon sec_3's e_p for purposes of determining the annual investment_adjustment of p with respect to its sec_1 stock consequently p is not required to reduce its basis in the sec_1 stock issue two whether p properly adjusted its basis in the stock of sec_1 to account for interest accrued and paid to sec_3 on the overstated portion of the note issued by fslic to sec_3 sec_61 provides that interest is included in gross_income sec_451 provides that the amount of any item_of_gross_income shall be included in the gross_income for the taxable_year in which received by the taxpayer unless under the method_of_accounting used in computing taxable_income such amount is to be properly accounted for in a different period sec_1_451-1 of the regulations provides in part that under an accrual_method of accounting_income is includible in gross_income when all the events have occurred that fix the right to receive such income and the amount thereof can be determined with reasonable accuracy sec_1_451-1 further provides that when an amount of income is properly accrued on the basis of a reasonable estimate and the exact amount is subsequently determined the difference if any shall be taken into account for the taxable_year in which such determination is made in general the principles of the accrual_method of accounting apply in the calculation of the earnings_and_profits of taxpayers using the accrual_method of accounting for income see sec_1_461-1 taxpayer asserts that sec_3 received the interest that accrued on the overstated portion of the note under a claim of right relying on the doctrine set forth in 286_us_417 taxpayer further asserts that the interest although tax-exempt under sec_597 caused an increase in sec_3's e_p ultimately increasing p’s basis in its sec_1 stock under sec_1_1502-32 for purposes of calculating the year worthless_stock deduction examination states that the claim_of_right_doctrine does not apply and concludes the thrifts’ e_p before the acquisitions such inclusion in e_p would not cause a positive adjustment with respect to the stock of sec_2 or sec_1 in other words because the note was treated as an asset of the thrifts prior to the transfers to sec_3 any e_p consequences arising from such inclusion would inure to the prior owners of the thrifts and not to sec_3 or the p group tam-117349-98 that the taxpayer should be required to reduce its basis in the sec_1 stock discussion gross_income under sec_61 includes income from whatever source derived unless otherwise excluded by law when a taxpayer receives an amount in one year which receipt is found in a subsequent year to have been mistaken the taxpayer must report the amount as gross_income for the year of receipt 340_us_590 a taxpayer has gross_income when the taxpayer acquires earnings lawfully or unlawfully without the consensual recognition express or implied of an obligation to repay and without restriction as to disposition even though it may still be claimed that the taxpayer is not entitled to retain the money and even though the taxpayer may be required to restore its equivalent 366_us_213 286_us_417 in the instant case sec_3 received a note in the principal_amount of dollar_figurex from fslic in year sec_3 accrued and received interest payments from fslic in year year and year based on the note pursuant to the plr the interest payments were excludable under sec_597 and generated e_p to sec_3 ultimately causing a positive adjustment with respect to p’s basis in its sec_1 stock under sec_1_1502-32 in a subsequent year after the disaffiliation of sec_1 and sec_3 from the p group it was determined that the note had been overstated at issuance in year the rtc recovered the dollar_figurez in interest on the overstated portion of the note through a credit against other assistance owed to sec_3 although subsequent events revealed that a portion of the interest was attributable to a miscalculation in the amount of the note sec_3 received the interest payments in year year and year without a consensual recognition to repay and without restriction under the terms of the note we conclude that but for the application of sec_597 the interest would have been includible in gross_income in the years received therefore p properly accounted for the interest through adjustments to its basis in the sec_1 stock the same conclusion is reached applying the general principles of the accrual_method of accounting sec_1_451-1 provides in part that income is includible in income when all the events have occurred that fix the right to receive the income and the amount thereof can be determined with reasonable accuracy all the events that fix the right to receive income occur when the required performance occurs payment is due or payment is made whichever is earliest revrul_79_266 1979_2_cb_203 under sec_1_451-1 adjustments as to the amount of an otherwise proper income accrual are usually taken into account in the year the amount is finally determined in the instant case fslic overstated the face_amount of the note as a result tam-117349-98 both fslic and sec_3 overstated the interest due on the note to sec_3 each quarter in year year and year absent a determination in year that the note was overstated sec_3 would have kept the amount of interest it had previously accrued thus the all_events_test was satisfied and sec_3 properly took the interest into account in determining its e_p accordingly p is not required to reduce its basis in the sec_1 stock in year caveats this technical_advice_memorandum expresses no opinion about the tax treatment of the above transactions 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 transactions above that are not specifically covered by the above technical_advice_memorandum a copy of this technical_advice_memorandum is to be given to the taxpayer sec_6110 of the code provides that it may not be used or cited as precedent