internal_revenue_service number release date index number ---------------------- ---------------------- ---------------------------- - department of the treasury washington dc person to contact ------------------ id no ------------- telephone number --------------------- refer reply to cc psi b04 - plr-101057-04 date august re ---------------------- re ---------------------- legend husband ---------------------- --------------------------------- wife ------------------------- --------------------------- child a ------------------------- child b ---------------------------------- trust -------------------------------- trust a -------------------------------- ------------------------------- trust b ------------------------------------------ ------------------------------ date ---------------------- year ------- year ------- x --------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------- amount ------------- law firm ------------------------------ accounting firm -------- dear --------------- this is in response to a letter from your authorized representative dated date requesting an extension of time under sec_301 of the procedure and administration regulations to make an allocation of generation-skipping_transfer gst_exemption the facts and representations submitted are summarized as follows husband established an irrevocable_trust trust under a_trust agreement dated date in year during year husband transferred certain assets to trust under article iv of trust the trust corpus was divided into two separate trusts trust a with respect to which child a was the primary beneficiary and trust b with respect to which child b was the primary beneficiary trust a and trust b were each funded with x assets article vi of the trust instrument generally provides that until a primary beneficiary reaches the age of the trustee shall distribute income and principal to such beneficiary as in the trustee’s discretion is deemed necessary for the health support education and maintenance of the beneficiary any income not distributed is added to principal once a primary beneficiary reaches age the trustee is to distribute income to the beneficiary and make discretionary distributions of principal according to the above-referenced standard in addition the trustee may make discretionary distributions of principal to a primary beneficiary’s spouse or descendants provided trust does not terminate as a result of such discretionary distributions trust a and trust b will continue until the death of the respective primary beneficiary on termination each primary beneficiary has a limited_power_of_appointment over of the trust the remaining principal including any unappointed property is to be distributed to such primary beneficiary’s then living descendants per stirpes or if there are none to the then living descendants of husband per stirpes pursuant to trust’s terms whenever a contribution is made to trust certain beneficiaries are granted a right to withdraw the contribution husband retained law firm in connection with the creation of trust and law firm assisted in the planning and preparation of the trust instrument for the year calendar_year accounting firm prepared and husband and wife timely filed separate form sec_709 united_states gift and generation-skipping_transfer_tax return husband and wife treated the gift by husband as made one-half by husband and one- half by wife under sec_2513 in preparing the gift_tax returns accounting firm inadvertently failed to allocate husband’s or wife’s available gst_exemption to trust in year law firm discovered the failure by accounting firm to make the allocations to date income has been distributed from trust a to child a and from trust b to child b however no taxable_distributions taxable terminations or any other events have occurred with respect to trust a and trust b that would give rise to a gst liability on the part of either trust or any of the beneficiaries husband and wife had and still have sufficient gst tax exemption remaining and available to allocate sufficient gst tax exemption to trust a and trust b in order for each trust to have an inclusion_ratio of zero resident or nonresident sec_2513 provides generally that for gift_tax purposes if the parties consent a gift made by one spouse to any person other than his or her sec_2501 imposes a tax on the transfer of property by gift by an individual spouse shall be considered as made one-half by donor spouse and one-half by his or her spouse sec_2601 imposes a tax on every generation-skipping_transfer made by a transferor to a skip_person under sec_2652 and sec_26_2652-1 generally the transferor for purposes of the gst tax is the individual with respect to whom the property was last subject_to federal estate or gift_tax sec_2652 and sec_26_2652-1 provide that if under sec_2513 one-half of a gift is treated as made by an individual and one-half is treated as made by the spouse of the individual then for purposes of the gst tax each spouse is treated as the transferor of one-half of the entire value of the property transferred by the donor spouse regardless of the interest the electing spouse is actually deemed to have transferred under sec_2513 sec_2602 provides that the amount of the tax is the taxable_amount multiplied by the applicable_rate sec_2641 defines aapplicable rate as the product of the maximum_federal_estate_tax_rate and the inclusion_ratio with respect to the transfer under ' a the inclusion_ratio with respect to any property transferred in a generation-skipping_transfer is generally defined as the excess of over the aapplicable fraction the applicable_fraction as defined in ' a is a fraction the numerator of which is the amount of the gst_exemption allocated to the trust or to property transferred in a direct_skip and the denominator is the value of the property transferred to the trust or involved in the direct_skip sec_2631 as in effect for the tax years at issue provided that for purposes of determining the inclusion_ratio every individual shall be allowed a gst_exemption of dollar_figure adjusted for inflation under ' c which may be allocated by such individual or his executor to any property with respect to which such individual is the transferor sec_2631 provides that any allocation under ' a once made shall be irrevocable sec_2632 provides that any allocation by an individual of his or her gst_exemption under ' a may be made at any time on or before the date prescribed for filing the estate_tax_return for such individual s estate determined with regard to extensions regardless of whether such a return is required to be filed sec_26_2632-1 of the generation-skipping_transfer_tax regulations provides that an allocation of gst_exemption to property transferred during the transferor s lifetime other than in a direct_skip is made on form_709 sec_2642 provides that except as provided in ' f if the allocation of the gst_exemption to any transfers of property is made on a gift_tax_return filed on or before the date prescribed by ' b for such transfer or is deemed to be made under ' b or c the value of such property for purposes of ' a shall be its value as finally determined for purposes of chapter within the meaning of ' f or in the case of an allocation deemed to have been made at the close of an estate_tax_inclusion_period its value at the time of the close of the estate_tax_inclusion_period and such allocation shall be effective on and after the date of such transfer or in the case of an allocation deemed to have been made at the close of an estate_tax_inclusion_period on and after the close of such estate_tax_inclusion_period sec_2642 provides that the secretary shall by regulation prescribe such circumstances and procedures under which extensions of time will be granted to make an allocation of gst_exemption described in ' b or and an election under ' b or c such regulations shall include procedures for requesting comparable relief with respect to transfers made before the date of the enactment of this paragraph sec_2642 provides that in determining whether to grant relief under this paragraph the secretary shall take into account all relevant circumstances including evidence of intent contained in the trust instrument or instrument of transfer and such other factors as the secretary deems relevant for purposes of determining whether to grant relief under this paragraph the time for making the allocation or election shall be treated as if not expressly prescribed by statute notice_2001_50 2001_2_cb_189 provides that under ' g b the time for allocating the gst_exemption to lifetime transfers and transfers at death the time for electing out of the automatic allocation rules and the time for electing to treat any trust as a generation-skipping_transfer_trust are to be treated as if not expressly prescribed by statute the notice further provides that taxpayers may seek an extension of time to make an allocation described in ' b or b or an election described in ' b or c under the provisions of ' requests for relief under ' 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 sec_301_9100-3 provides the standards used to determine whether to grant an extension of time to make an election whose date is prescribed by a regulation and not expressly provided by statute in accordance with ' g b and notice_2001_50 taxpayers may seek an extension of time to make an allocation described in ' b or b or an election described in ' b or c under the provisions of ' based on the facts submitted and the representations made we conclude that the requirements of ' have been satisfied therefore husband is granted an extension of time of days from the date of this letter to make an allocation of husband’s available gst_exemption with respect to one-half of the assets husband transferred to trust in year treated as attributable to husband in accordance with sec_2513 the allocation will be effective as of the respective date of the transfer to trust and the inclusion ratios of trust a and trust b will be determined based on the value of the transfer to trust as determined for federal gift_tax purposes and the amount of exemption allocated to trust the allocation should be made on a supplemental form_709 and filed with the cincinnati service_center at the following address internal_revenue_service cincinnati service_center - stop cincinnati oh a copy of this letter should be attached to the supplemental form_709 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 tax consequences of the transaction under the cited provisions or under any other provisions of the code except as specifically ruled herein we express or imply no opinion on the federal this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent enclosures copy for sec_6110 purposes copy of this letter sincerely heather c maloy associate chief_counsel passthroughs and special industries


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 b02 plr-126512-08 date november x ------------------------------------------------------------------------------------------------------ ----------------------- state -------- -------------------- a b llc1 llc2 llc3 d1 d2 d3 d4 year ------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------ 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------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------ ------- dear --------------------------------- plr-126512-08 this responds to a letter dated date submitted on behalf of x by its authorized representative requesting a ruling under sec_1362 of the internal_revenue_code x incorporated under the laws of state on d1 and elected to be an s_corporation effective d1 at the time of incorporation x’s shareholders were individuals a and b on d2 llc1 was created and x converted to a state limited_partnership upon the conversion x’s limited partners were a and b x’s general_partner was llc1 which was owned by a and b and treated as a partnership after its conversion x continued to be treated as an s_corporation except for the filing of a form_1065 for year a form_1120s was subsequently filed for year in d3 x first became aware that as a result of the conversion x terminated its s_corporation_election to remedy the terminating event a series of transactions were effectuated such that a and b became the limited partners of x and llc2 and llc3 with b and a as single members respectively became the general partners of x to further remedy the terminating event x represents that it will convert to a corporation under the laws of state by d4 x represents that neither a nor b realized that x’s conversion to a state limited_partnership could result in the termination of x’s s_corporation_election in addition x represents that the terminating event was not motivated by tax_avoidance or retroactive tax planning x and its shareholders have agreed to make any adjustments that the commissioner may require consistent with the treatment of x as an s_corporation sec_1362 provides that if an election under sec_1362 by any corporation a was not effective for the taxable_year for which made determined without regard to sec_1362 by reason of a failure to meet the requirements of sec_1362 or to obtain shareholder consents or b was terminated under sec_1362 or the secretary determines that the circumstances resulting in the ineffectiveness or termination were inadvertent no later than a reasonable period of time after discovery of the circumstances resulting in the ineffectiveness or termination steps were taken a so that the corporation is a small_business_corporation or b to acquire the shareholder consents 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 such adjustments consistent with the treatment of the corporation as an s_corporation as may be required by the secretary with respect to such period then notwithstanding the circumstances resulting in the ineffectiveness or termination the corporation will be treated as an s_corporation during the period specified by the secretary based solely on the facts submitted and the representations made we conclude that the termination of x’s s_corporation_election terminated on d2 when llc1 became the general_partner of x and that it may have terminated on d2 if the conversion of x to a state limited_partnership created a second class of stock however we conclude that the termination was inadvertent within the meaning of sec_1362 consequently we rule plr-126512-08 that x will be treated as continuing to be an s_corporation from d2 and thereafter provided x’s s_corporation was valid and provided that the election was not otherwise terminated under sec_1362 this ruling is contingent upon x’s conversion to a state corporation by d4 except as expressly provided herein no opinion is expressed or implied concerning the federal_income_tax consequences of the facts described above under any other provision of the code including whether x is in fact an s_corporation for federal tax purposes this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file a copy of this letter is being sent to x’s authorized representative sincerely bradford r poston senior counsel branch passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes


analog devices inc subsidiaries petitioner v commissioner of internal revenue respondent docket no filed date p is a corporation that is a u s shareholder of controlled_foreign_corporation cfc p repatriated cash dividends from cfc and claimed an sec_965 dividends received deduction drd for p reported no related_party indebt- edness during its testing_period pursuant to sec_965 when it claimed the drd r determined and p agreed that the annual royalty from cfc to p should be increased to for to reflect arm’s-length pricing see sec_482 in p and r executed a closing agree- ment pursuant to revproc_99_32 1999_2_cb_296 to effect the secondary adjustments required after a primary sec_482 allocation the closing_agreement established accounts_receivable as described in revproc_99_32 sec_4 c b pincite for and deemed them created as of the last day of the taxable_year to which they relate r sub- sequently determined that the accounts_receivable constituted an increase in related_party indebtedness under sec_965 during p’s testing_period which r determined decreased p’s sec_965 drd held the parties did not reach an agreement in the closing_agreement with respect to the treatment of the accounts_receivable under sec_965 held further sec_965 does not provide that the accounts_receivable constituted related_party indebtedness arising during p’s testing_period held further the accounts_receivable did not increase cfc’s related_party indebtedness during the testing_period held further p is entitled to the full amount of its claimed drd kenneth b clark james p fuller jennifer l fuller andrew j kim and larissa b neumann for petitioner michele j gormley and curt m rubin for respondent united_states tax_court reports opinion marvel chief_judge respondent determined deficiencies income_tax of dollar_figure and in petitioner’s federal dollar_figure for taxable years and respectively the issue for decision is whether the accounts_receivable that the parties established in a closing_agreement pursuant to revproc_99_32 1999_2_cb_296 created retroactive indebtedness between petitioner and its controlled_foreign_corporation cfc under sec_965 if so the amount of petitioner’s sec_965 dividends received deduction drd for would be reduced background the parties submitted this case fully stipulated under rule the stipulated facts and facts drawn from the stipulated exhibits are incorporatedherein by this reference petitioner is a u s_corporation with its principal_place_of_business in norwood massachusetts analog devices inc petitioner was founded in it is the common parent of a group of subsidiaries that joined in the timely filing of consolidated federal_income_tax returns for the and tax years it is also the parent of nonconsolidated foreign affiliates petitioner its subsidiaries and its affiliates design develop manufacture and sell high-performance analog mixed-signal and digital signal processing integrated cir- cuits in petitioner incorporated analog devices b v unless otherwise indicated all section references are to the internal_revenue_code code as amended and in effect for the years at issue and all rule references are to the tax_court rules_of_practice and procedure although petitioner claimed the drd for its taxable_year only the and taxable years are before us because of credit carryovers the court may consider facts relating to tax years that are not otherwise within the court’s jurisdiction where necessary to correctly redetermine the amounts of the tax deficiencies for the years at issue see sec_6214 petitioner’s and tax years ended on date date and date respectively respondent reserved relevancy objections with respect to certain stipu- lated facts to the extent that we include a stipulated fact subject_to a rel- evancy objection in the background section we will discuss respondent’s objection stipulated facts not included in the background section do not inform our holding and objections to them are denied as moot analog devices inc subs v commissioner adbv which then built a fabrication facility of complemen- tary metal oxide semiconductor technology adbv is orga- nized under the laws of the netherlands with its principal place of management and business in limerick ireland for all relevant times petitioner owned of the issued and outstanding shares of adbv which was a cfc pursuant to sec_957 i the intercompany royalty in in connection with a sec_482 adjustment peti- tioner entered into a closing_agreement with the internal_revenue_service irs appeals_office establishing an annual royalty from adbv to petitioner equal to of adbv’s net sales adbv paid the royalty to petitioner every year through the end of petitioner’s taxable_year at which time petitioner and adbv concluded that the royalty was no longer necessary after the irs had conducted an audit and determined to reinstate the royalty petitioner and adbv entered into a cross-license agreement in license agreement again reflecting a royalty from adbv to peti- tioner effective date by its terms the license agreement was valid for years the irs regularly conducted examinations for petitioner’s tax years following the license agreement in the irs conducted an examination for petitioner’s tax years as a result of that examination the irs proposed under its authority pursuant to sec_482 to increase the intercompany royalty to beginning with the tax_year petitioner’s chief financial officer agreed to the pro- posed increase for by executing form_4549 income_tax examination changes on date petitioner filed an amended federal_income_tax return on date to reflect the increased royalty rate petitioner timely filed its federal_income_tax return on date and reported a royalty from adbv for respondent objects to facts regarding the and transfer_pricing adjustments and the license agreement infra although we do not base our holding on these transfer_pricing adjustments these facts provide context and useful background information respondent’s objec- tions with respect to this background information are overruled petitioner applied the rate for and before the irs had continued united_states tax_court reports the total increase in petitioner’s royalty income due to the application of a royalty as opposed to a royalty was dollar_figure additional royalty amount the transfer_pricing adjustments giving rise to the additional royalty amount did not create indebtedness for federal_income_tax purposes in date adbv and petitioner credited and debited their respective intercompany accounts by the royalty adjust- ment amount adbv paid the additional royalty amount in a series of payments to petitioner between july and date petitioner did not make an election under revproc_99_32 supra in with respect to the pay- ments ii petitioner’s repatriation and sec_965 election in petitioner’s and adbv’s boards of directors approved a domestic reinvestment plan to repatriate a cash dividend to take advantage of a limited drd under sec_965 see infra p petitioner’s representatives at this time were aware of guidance that the irs had issued in the form of three irs notices with respect to sec_965 see infra p describing the irs notices adbv declared the dividend and paid it to petitioner on date at the time of the payment of the divi- dend adbv’s cash balance including marketable_securities and short-term investments was approximately dollar_figure billion its cash balance at the end of its taxable_year after it paid the dividend was dollar_figure petitioner attached a form_8895 one-time dividends received deduction for certain cash dividends from con- trolled foreign_corporations to its timely filed federal concluded its examinations with respect to those years however adjust- ments for those years were pending before the irs at that time revproc_99_32 1999_2_cb_296 permits qualifying u s taxpayers to make the secondary adjustments required by sec_1_482-1 in- come tax regs after a sec_482 adjustment by establishing an interest- bearing account receivable from or payable to a related_person in the amount of the transfer_pricing primary_adjustment in lieu of treating the allocated amount as a deemed_dividend or a capital_contribution revproc_99_32 sec_1 c b pincite see infra pp after consideration of the sec_965 base_period limitation the total to petitioner equaled that adbv distributed qualifying_dividend dollar_figure analog devices inc subs v commissioner income_tax return for on the form_8895 petitioner claimed a sec_965 drd of dollar_figure form_8895 requires the taxpayer claiming a sec_965 drd to report the related_party indebtedness of its cfcs as of the begin- ning and end of the testing_period generally an increase in the related_party indebtedness of its cfcs during the testing_period decreases the amount of the dividends eligible for the drd see sec_965 petitioner’s testing_period was between date and date petitioner reported zero related_party indebtedness for both the begin- ning and the end of the testing_period iii the irs’ examination for petitioner’s and taxable years petitioner’s revproc_99_32 election and the notice_of_deficiency the irs commenced an examination for petitioner’s and taxable years in date the irs commenced an examination for petitioner’s and taxable years around date and date respectively on date the irs faxed to petitioner an issue reso- lution agreement stating that adbv’s payments of the addi- tional royalty amount resulted in a constructive_dividend to petitioner in a letter to the irs dated date peti- tioner’s chief financial officer requested relief under revproc_99_32 supra with respect to the additional royalty amount rev_proc election the election would permit petitioner to establish interest-bearing accounts_receivable from adbv instead of treating the transfer_pricing pursuant to notice_2005_38 sec b vi 2005_1_cb_1100 a taxpayer may choose an alternative initial measurement date nothing in the record suggests that petitioner chose one of the alternative dates the examinations were conducted with petitioner’s participation in the irs compliance assurance process cap beginning for taxable_year under the irs cap_program the irs and the participating taxpayer work to achieve federal tax compliance before the taxpayer files a return for the year petitioner’s and taxable years were considered transition years and the examinations for and were simultaneous with the cap examination for to the extent that respondent objects to these statements on relevancy grounds the objection is overruled absent a revproc_99_32 election the conforming adjustments re- quired by sec_1_482-1 income_tax regs are made by treating the allocated amounts as a dividend or a capital_contribution as appropriate united_states tax_court reports adjustments as a constructive_dividend to petitioner see infra pp petitioner’s treasurer william martin also attached a statement pursuant to revenue_procedure to peti- tioner’s timely filed tax_return to ensure that the irs would not treat adbv’s payment of the additional royalty amount as a dividend the statement reiterated petitioner’s revproc_99_32 election and stated that petitioner was per- mitted to establish interest-bearing accounts_receivable from adbv in date during the course of the examinations the irs raised sec_965 as an issue on or around date respondent issued a notice of proposed_adjustment nopa asserting that the revproc_99_32 elec- tion resulted in an increase in related_party indebtedness of dollar_figure during petitioner’s testing_period which required a reduction of the amount of the drd that peti- tioner had claimed of dollar_figure in date petitioner and the irs signed a form_906 closing_agreement on final_determination covering specific matters finalizing petitioner’s revproc_99_32 election petitioner’s chief financial officer signed the closing agree- ment on petitioner’s behalf he did not have signatory authority for adbv and no one with signatory authority for adbv signed the agreement the parties’ closing_agreement is titled closing_agreement on final_determination covering specific matters some- times revproc_99_32 closing_agreement the first section of that agreement includes the recitals which are introduc- tory explanatory clauses beginning with the word whereas some recitals in the closing_agreement are specifically nego- tiated while others borrow standard terms from the irs’ revproc_99_32 pattern agreement see internal_revenue_manual irm pt date one of the specifically negotiated recitals states the parties desire to enter into this closing_agreement to resolve with finality cer- tain issues identified below that the irs reviewed during cap which impact the taxpayer’s tax_year ended october a copy of the nopa is not in the record but it apparently did not mention any closing_agreement under revproc_99_32 supra analog devices inc subs v commissioner the recitals with standard terms address the pri- mary adjustments under sec_482 ie the royalty petitioner’s revproc_99_32 election and respondent’s deci- sion that the provisions of revproc_99_32 supra should apply after the recitals is a caption that states now it is hereby determined and agreed for all federal_income_tax purposes that this is standard wording from the irs revproc_99_32 pattern agreement see irm pt see also revproc_68_16 sec 1968_1_cb_770 stating that the caption emphasizes the transition from the recitals to matters upon which the parties have agreed the determined clauses-those to which the parties agreed to be bound-follow the caption and include both standard and specifically negotiated terms one of the deter- mined clauses establishes five accounts_receivable between petitioner and adbv reflecting the difference between the and royalty rates for each account was deemed to have been created as of the last day of petitioner’s taxable_year to which it relates the determined clause establishing the accounts_receivable states taxpayer has established intercompany accounts_receivable set forth below which were recorded on taxpayer’s books and treated as term loans to controlled_entity adbv reflecting the fol- lowing balances each such account receivable being deemed to have been created as of the last day of the taxable_year to which it relates these deemed accounts_receivable did not come into existence until the execution of the closing_agreement other determined clauses discuss inter alia payment of the accounts_receivable the tax implications of the pay- two other specifically negotiated recitals state that the parties identi- fied certain issues for irs review and that the parties agreed to work diligently and in good_faith to arrive at a resolution of all issues identified for review certain distributions that petitioner received from adbv in were treated as prepayments of the accounts_receivable at the time of the execution of the closing_agreement the accounts had been fully paid the closing_agreement also states that p ayment of the accounts_receivable and interest thereon will be free of the federal_income_tax con- continued united_states tax_court reports ments and the calculation of interest on the accounts the closing_agreement does not mention sec_965 and we infer from this that the parties did not reach an agreement with respect to sec_965 in the closing_agreement the irs subsequently issued a notice_of_deficiency dated date determining that the accounts_receivable established under revproc_99_32 supra constituted an increase in related_party indebtedness during petitioner’s testing_period under sec_965 the irs therefore determined to decrease the amount of the dividend eligible for the sec_965 drd respondent would not have determined that sec_965 applies to the accounts_receivable absent petitioner’s revproc_99_32 election and the closing_agreement petitioner timely filed a petition in this court for redetermination i applicable law and irs guidance discussion a sec_965 sec_965 was enacted in date by the american_jobs_creation_act_of_2004 pub_l_no sec_422 sec_118 stat pincite5 it was subsequently amended by the gulf_opportunity_zone act of pub_l_no sec_403 sec_119 stat pincite sec_965 provides that a corporation that is a u s shareholder of a cfc may elect a one-time drd for eligible cash dividends received from the cfc generally a taxpayer makes a sec_965 elec- tion by filing a form_8895 with its timely filed federal_income_tax return for the year see notice_2005_10 sec 2005_1_cb_474 sequences of the secondary adjustments that would result from the pri- mary adjustments had taxpayer and the commissioner not entered into this agreement the closing_agreement states that the payments and prepayments of the accounts shall not be treated as dividends under sec_316 or for any other federal_income_tax purpose and are therefore not eligible for a for- eign tax_credit under sec_901 and sec_902 or a drd under secs the drd was available only for a limited time and is now expired see sec_965 f providing the years for which a taxpayer could have made the election analog devices inc subs v commissioner although sec_965 imposes several limitations on the availability and the amount of the drd this case concerns only the limitation provided by sec_965 sec_965 reduces the amount of the eligible_dividend by any increase in the amount of indebtedness of the cfc to any related_party during the testing_period related_party indebt- edness the testing_period is generally the period between date and the close of the taxable_year for which the taxpayer makes the election sec_965 and b the commissioner has carved out an exception to the related_party indebtedness rule for intercompany trade payables indebtedness arising in the ordinary course of busi- ness from sales leases licenses or the rendition of services that a related_person provides to or for a cfc is not related_party indebtedness under sec_965 provided that the indebtedness is actually paid within days see notice_2005_64 sec 2005_2_cb_471 notice_2005_38 sec b 2005_1_cb_1100 b secondary adjustments under sec_482 sec_482 authorizes the secretary to adjust the items of entities owned or controlled by the same interests when the secretary makes an allocation under sec_482 the adjustment of the controlled taxpayer’s income is known as a primary allocation see sec_1_482-1 income_tax regs the regulations require corresponding adjustments with respect to the income of members of the group that were affected by the primary allocation see id these cor- responding adjustments are known as correlative allocations see id for example if a primary allocation increases a u s parent corporation’s income the correlative allocation would decrease the income of its cfc by the same amount see id because the primary and correlative allocations shift tax- able income from one related_party to the other the entities must make so-called secondary or conforming adjustments to reconcile the entities’ cash accounts with their adjusted tax positions see id subpara i the regulations under sec_482 provide two methods of making the secondary adjustments see id where as here a u s parent corpora- the term secretary means the secretary_of_the_treasury or his dele- gate sec_7701 see sec_1_482-1 income_tax regs united_states tax_court reports tion’s income has been increased and its cfc’s income has been decreased as a result of a transfer_pricing adjustment the methods include treating the allocated amount as a deemed_dividend from the cfc to the u s parent or in appropriate cases pursuant to such applicable revenue proce- dures as may be provided by the commissioner repay- ment of the allocated amount without further income_tax consequences id the commissioner promulgated revproc_99_32 supra pursuant to the above-quoted regulation revproc_99_32 supra permits qualifying u s taxpayers to make secondary adjustments by establishing an interest-bearing account receivable from or payable to its cfc in the amount of the primary transfer_pricing adjustment in lieu of treating the adjustment as a deemed_dividend or a capital_contribution revproc_99_32 sec_1 c b pincite for cases pending before the irs a taxpayer may elect treatment under revproc_99_32 supra by requesting the election in writing signed by a person with authority to sign the u s taxpayer’s federal_income_tax returns and submit- ting the request before closing action is taken on the pri- mary adjustment id sec_5 c b pincite if the taxpayer qualifies the irs and the u s taxpayer will enter into a closing_agreement under sec_7121 of the code id sec_5 and revproc_99_32 sec_4 describes the features of an account established under these procedures the account may be established and paid without the federal_income_tax consequences of the secondary adjustments that would other- wise result from the primary_adjustment the account is deemed to have been created as of the last day of the taxable_year for which the primary_adjustment was made it bears interest computed pursuant to sec_1_482-2 income_tax regs from the day after the deemed establishment date for purposes of sec_1_482-2 income_tax revproc_99_32 supra superseded revproc_65_17 1965_1_cb_833 for taxpayer-initiated adjustments under sec_1_482-1 income_tax regs a u s taxpayer may elect revproc_99_32 supra treatment by filing a statement with the federal_income_tax return that reports the primary_adjustment revproc_99_32 sec_5 c b pincite petitioner’s taxable years were pending before the irs analog devices inc subs v commissioner regs dealing with safe haven interest rates the account shall be considered to be a loan or advance having a term extending from the day after the date the account is deemed to have been created through the expiration of days after execution of the closing_agreement on behalf of the commis- sioner revproc_99_32 sec_4 e revproc_99_32 sec_4 clarifies that electing treatment under that revenue_procedure does not affect the primary_adjustment but affects the taxpayer’s taxable_income and credits to the extent indicated in revproc_99_32 sec_4 revproc_99_32 sec_4 further states that the election eliminates the collateral effects of secondary adjust- ments such as those described in sec_2 regarding deemed_dividend treatment c irs guidance on the intersection of sec_965 and revproc_99_32 no statutory or regulatory authority addresses the inter- section of sec_965 and revproc_99_32 closing agree- ments however in the irs issued three notices relating to sec_965 see notice_2005_64 supra notice_2005_38 supra notice_2005_10 supra notice_2005_64 sec includes one sentence stating that a ccounts payable established under revproc_99_32 supra are treated as related_party indebtedness for purposes of sec_965 the notice does not include any analysis of this statement in date the irs associate chief_counsel inter- national released advice memorandum am advice memorandum the advice memorandum stated that an account receivable established under revproc_99_32 supra is treated as debt for purposes of sec_965 it recommended that all closing agreements under revproc_99_32 covering a taxable_year in which the taxpayer elected the benefit of section include language con- firming that the account receivable established in the closing revproc_99_32 sec_4 discusses the federal tax consequences of payment of the account the account must be paid or treated as prepaid by offset within a 90-day period and such payment shall be treated as a payment of the account for all federal_income_tax purposes regardless of its characterization under foreign law id for example payment by an offset that would otherwise constitute a dividend will not qualify as a divi- dend for any federal_income_tax purpose see id united_states tax_court reports agreement constitutes related_party indebtedness for pur- poses of section b however the advice memorandum asserted that a failure to include such wording in a closing_agreement did not preclude related_party indebt- edness treatment of an account receivable see id ii bmc software inc v commissioner we first addressed the intersection of sec_965 and revproc_99_32 closing agreements in bmc software inc v commissioner 141_tc_224 rev’d 780_f3d_669 5th cir bmc software inc bmc a u s_corporation had claimed a sec_965 drd for its taxable_year id pincite unrelated to the drd bmc had paid royalties to its cfc for with respect to software that the entities had collaboratively developed id pincite in bmc and the commissioner entered into a transfer_pricing closing_agreement for reflecting the commissioner’s determination that the roy- alty amount should be reduced to reflect arm’s-length pricing see id also in bmc and the commissioner entered into a closing_agreement under revproc_99_32 supra to conform the entities’ cash accounts with the pri- mary adjustment see id pincite the revproc_99_32 closing_agreement created two accounts_receivable from the cfc to bmc for federal_income_tax purposes which were deemed established as of the close of bmc’s and taxable years see id the cfc paid the accounts_receivable in full within days of the closing_agreement id the commissioner subsequently issued bmc a notice of defi- ciency for determining that the accounts_receivable con- stituted a retroactive increase in related_party indebtedness under sec_965 that reduced bmc’s claimed sec_965 drd see id pincite a our holding in bmc software i we began our analysis in bmc software i with sec_965 after determining that sec_965 does not include an intent requirement we referred to dictionary definitions of the word indebtedness and concluded that for purposes of sec_965 indebtedness means the condition of owing money or being indebted see bmc software i t c pincite we next determined that an account receivable analog devices inc subs v commissioner indebtedness because an account receivable established under revproc_99_32 supra meets the defini- tion of is defined as ‘ a n account reflecting a balance owed by the debtor ’ see id pincite quoting black’s law dictionary 8th ed we then analyzed the effect of the parties’ revproc_99_32 closing_agreement on our analysis of sec_965 see id pincite relying on 69_tc_579 we stated that revproc_99_32 supra does not preclude all collateral federal_income_tax consequences we held that the revproc_99_32 closing_agreement relieved the taxpayer of the consequences that would have resulted absent the election but that the accounts_receivable are deemed established for all federal tax purposes see bmc software i t c pincite because the closing_agreement provided that the accounts_receivable were deemed to have been established during bmc’s sec_965 testing_period we held that the accounts_receivable qualified as a retroactive increase in related_party indebtedness during the testing_period we therefore sustained the commissioner’s determination see id pincite b the u s court_of_appeals for the fifth circuit’s holding in bmc software ii bmc appealed our decision to the u s court_of_appeals for the fifth circuit the court_of_appeals first considered sec_965 see bmc software inc v commissioner bmc software ii f 3d pincite the court con- cluded that because sec_965 provides that the final calculation of the amount of related_party indebtedness is to be made as of the close of the taxable_year for which the election is in effect and because bmc’s accounts_receivable did not exist until the parties executed the closing_agreement in the accounts_receivable were not related_party indebtedness under sec_965 see id pincite moreover the court_of_appeals stated that t he fact that the accounts_receivable were backdated does nothing to alter the reality that they did not exist during the we also held that the accounts_receivable did not qualify for the trade payables exception under notice_2005_38 sec b and notice_2005_64 sec 2005_2_cb_471 united_states tax_court reports testing_period because the accounts were secondary adjust- ments to correct cash account imbalances and not a correc- tion of a prior year’s accounts see id the court_of_appeals then considered whether the parties contractually agreed in the revproc_99_32 closing agree- ment to treat the accounts_receivable as related_party indebt- edness despite the plain language of sec_965 see id pincite noting that the closing_agreement did not mention sec_965 the court_of_appeals concluded that the standard closing_agreement phrase for federal_income_tax purposes did not expand the scope of the contract to include sec_965 otherwise the court_of_appeals reasoned the provisions in the closing_agreement regarding foreign tax_credits and the tax implications of interest payments would be surplusage see id additionally the court_of_appeals applied the canon expressio unius est exclusio alterius which means that the specificity and apparent comprehensiveness of an agreement’s enumeration of a category of things here tax implications implies that things not enumerated are excluded id because the closing_agreement listed several tax implications with specificity but did not mention others such as sec_965 the court held that the closing agree- ment excluded those tax consequences which it failed to enumerate id pincite the court_of_appeals also distinguished schering the court stated that schering involved a collateral tax con- sequence that flowed from an action that the taxpayer had taken on the basis of a closing_agreement ie the payment of accounts_receivable established under the predecessor of revproc_99_32 supra however the issue in bmc soft- ware inc was the tax consequences of the establishment of the accounts_receivable themselves not any_action that bmc had taken as a result of the closing_agreement see bmc software ii f 3d pincite therefore the court_of_appeals reversed our holding in bmc software i absent a stipulation to the contrary this case is appealable to the u s court_of_appeals for the first circuit which ha sec_21 although the court_of_appeals did not find the closing_agreement to be ambiguous it found that the extrinsic evidence proved that the parties did not intend for the closing_agreement to alter the plain meaning of sec_965 see 780_f3d_669 5th cir rev’g 141_tc_224 analog devices inc subs v commissioner not yet considered the issue see sec_7482 bmc software ii is therefore not binding on us in the instant case see 54_tc_742 aff ’d 445_f2d_985 10th cir however given the reversal and the parties’ arguments the instant case requires us to revisit our analysis in bmc software i iii stare_decisis the doctrine_of stare_decisis is important to this court and we are mindful of its role in this case in 474_us_254 the supreme court stated t he important doctrine_of stare_decisis is the means by which we ensure that the law will not merely change erratically but will develop in a principled and intelligible fashion while stare_decisis is not an inexorable command the careful observer will discern that any detours from the straight path of stare_decisis in our past have occurred for articulable reasons and only when the court has felt obliged to bring its opinions into agreement with experience and with facts newly ascertained 285_us_393 brandeis j dissenting our history does not impose any rigid formula to constrain the court in the disposition of cases rather its lesson is that every successful pro- ponent of overruling precedent has borne the heavy burden of per- suading the court that changes in society or in the law dictate that the values served by stare_decisis yield in favor of a greater objective this case presents issues on which a court_of_appeals has reversed our prior decision in such a scenario c learly we must throughly reconsider the problem in the light of the reasoning of the reversing appellate court and if convinced thereby the obvious procedure is to follow the higher court 98_tc_19 quoting 27_tc_713 rev’d on other grounds 258_f2d_562 9th cir see also 131_tc_239 n but nothing in golsen or in lawrence precludes us from revisiting an issue as we do here when the issue on which there has been an intervening reversal arises anew by revisiting the issues in bmc software i we are not capri- ciously disregarding our prior analysis but rather examining we apply this reasoning only when the current case is not appealable to the reversing court see 54_tc_742 aff ’d 445_f2d_985 10th cir united_states tax_court reports the issues in the light of a court of appeals’ opinion which deserves careful attention and reflection moreover the principles in bmc software i are not entrenched precedent the issues in this case have come before us only once before and no other opinions rely on or cite our previous holding see 1_tc_518 holding that stare_decisis was not an impediment to overruling a prior opinion when only two other cases relied on it aff ’d 140_f2d_87 2d cir cf 97_tc_94 stating that the application of stare_decisis was particularly apropos because there were numerous and consistent court opinions interpreting and or applying the previous holding to our knowledge no other court_of_appeals has spoken on the issues we consider today therefore the important goals of stare_decisis to ensure the evenhanded predictable and consistent development of legal principles and to foster reliance on judicial decisions see 501_us_808 are not served by our continued adher- ence to our previous opinion there has been no predictable or consistent development of the legal principles affecting this case see 50_tc_963 stating that stare_decisis which arose from a neces- sity to preserve the harmony and stability of the law requires adherence by courts to a principle of law original emphasis settled by a series of decisions last emphasis added cf 127_tc_109 overturning a prior tax_court opinion when a court_of_appeals had reversed our earlier opinion and we had examined the issue only once before 117_tc_159 overruling a case that the court had decided in the early stages of its sec_6320 jurisprudence generally stare_decisis is of particular importance in cases involving contract rights because reliance interests are involved payne u s pincite and cases involving statu- tory construction because of the possibility of legislative intervention 552_us_130 although contract rights are at issue here we find it unlikely that the commissioner would have relied to his detriment on our opinion in bmc software i by deciding to leave a sec_965 provision out of future analog devices inc subs v commissioner revproc_99_32 closing agreements especially given the advice memorandum and bmc’s appeal we also find the possibility of congressional action on this issue to be low because the sec_965 election has expired on balance we conclude that the importance of reaching the right result in this case outweighs the importance of fol- lowing our precedent but cf burnet v coronado oil gas co u s pincite brandeis j dissenting i n most matters it is more important that the applicable rule_of law be settled than that it be settled right we therefore con- clude that stare_decisis does not prevent us from reconsid- ering bmc software i and we do so below iv petitioner’s revproc_99_32 closing_agreement we first examine petitioner’s revproc_99_32 closing_agreement to determine whether the parties contractually agreed to treat the accounts_receivable as related_party indebtedness for purposes of the drd a closing agreements generally the secretary is authorized to enter into closing agree- ments with taxpayers pursuant to sec_7121 although certain closing agreements settle the taxpayer’s total_tax liability for a particular period a form_906 closing agree- ment which is the type at issue here is used to settle spe- cific matters affecting tax_liability see 126_tc_195 97_tc_1 a closing_agreement is final and conclusive and it is binding on the parties as to the matters agreed upon see sec_7121 estate of magarian v commissioner t c pincite under sec_7121 a court may not include as part of the agreement matters other than the matters specifically agreed upon and mentioned in the closing_agreement 90_tc_753 the scope of a closing_agreement is therefore strictly construed to encompass only the issues enumerated in the closing agree- we limit our analysis to whether the parties agreed to treat the ac- counts receivable as related_party indebtedness for purposes of the drd we do not opine on whether the accounts_receivable constituted debt for any other purpose united_states tax_court reports ment itself any recitals in a closing_agreement are not binding on the parties see id pincite however recitals are explanatory and can give insight into the intent of the par- ties see estate of magarian v commissioner t c pincite see also revproc_68_16 sec it is important to distinguish between matters which are merely informative and explanatory and matters which are being agreed upon the former should be segregated from the latter and should ordinarily be reflected in the introductory recitals contained in the whereas clauses closing agreements are contracts and they are subject_to the rules of federal common_law contract interpretation see 93_tc_5 citing 303_f2d_1 5th cir aff ’d without published opinion 916_f2d_721 11th cir contracts are construed according to the intent of the parties as of the time of entering into the agreement id intent is inferred from the four corners of the agreement where the contract is unambiguous extrinsic evidence may be used to discern intent where the contract has ambiguities 100_tc_319 aff ’d 47_f3d_168 6th cir the starting point for ascertaining the parties’ intent is the contract itself see 517_f3d_2 1st cir quoting 275_f3d_131 1st cir the contract must be read as a whole and the contract must be interpreted in con- text see 738_f3d_432 1st cir and cases cited thereat this is because t he meaning of words commonly depends on their context when the parties have adopted a writing as a final expression of their agreement interpreta- tion is directed to the meaning of that writing in the light of the circumstances restatement contract sec_2d sec cmt b b analysis of petitioner’s revproc_99_32 closing agree- ment the four corners of the agreement in bmc software i we held that a closing_agreement that established similar accounts_receivable for federal_income_tax purposes created related_party indebtedness under sec- analog devices inc subs v commissioner tion b we acknowledge that in this case the closing_agreement states that the accounts_receivable were established and that petitioner treated them as term loans for all federal_income_tax purposes however in bmc software i we did not consider the context in which the parties used the caption which the rules of federal common_law contract interpretation require us to do we therefore interpret the closing_agreement by giving proper weight to the sec_7121 jurisprudence and the closing_agreement as a whole the parties entered into the closing_agreement against the backdrop of longstanding caselaw holding that a court may not include as part of the agreement matters other than the matters specifically agreed upon and mentioned in the closing_agreement see zaentz v commissioner t c pincite comments in the irm accompanying the irs pattern agreement from which much of the closing agreement’s wording is derived recognize and incorporate this principle irm pt e para states matters expressly determined in closing agreements are accorded finality under sec_7121 of the code though certain inferences and substantially automatic consequences may appear to logically flow from such determinations these results cannot be considered to be matters determined with finality unless expressly provided for in the closing_agreement addition- ally the closing_agreement is self-limiting one of the sepa- rately negotiated recitals while not binding on the parties expressly conveys the parties’ intent to limit the scope of the closing_agreement to certain issues identified below therefore both the recitals in the closing_agreement itself like the commissioner in bmc software i respondent does not con- tend that petitioner intended to directly or indirectly finance the sec_965 dividend by electing revproc_99_32 treatment or entering into the revproc_99_32 closing_agreement the internal_revenue_manual irm pt e date gives this explanation for why the irs pattern agreement includes an ap- pended table that reports the effect on earnings_and_profits directly result- ing from the sec_482 allocations we note that the closing_agreement in bmc software inc did not in- clude such a recital however we are not convinced that this distinction alone or the parties’ contentions regarding differences between the two closing agreements distinguish the closing agreements in this context united_states tax_court reports and the relevant jurisprudence restrict the closing_agreement to matters specifically enumerated a caption taken verbatim from the irs pattern agreement is not a matter to which the parties specifically agreed it is not a determined clause that binds the parties but rather an introductory phrase that signals the transition from the recitals to the determined clauses see revproc_68_16 sec therefore our giving the phrase for all federal_income_tax purposes a literal application would be to ignore our mandate to interpret a contract in context and would broaden the scope of the closing_agreement beyond what the parties intended see 17a c j s contracts sec cf williston on contracts sec_32 4th ed even absent a true conflict specific words will limit the meaning of general words if it appears from the whole agree- ment that the parties’ purpose was directed solely toward the matter to which the specific words or clause relate see also new seabury co ltd p’ship v new seabury props llc in revproc_68_16 sec 1968_1_cb_770 states that e ach such clause should ordinarily be drafted with the view that it is a continu- ation of the caption however it also states that the matters being deter- mined and agreed upon are preceded by the caption and that the caption emphasizes the transition from the recitals this implies that the caption is not part of the matters to which the parties agreed but rather suggests that the caption informs the syntax of the determined clauses and not the substance we do not take revproc_68_16 supra to support the view that the caption transforms a narrow closing_agreement to a broad sweep- ing one to the extent that the recital limiting the closing_agreement to cer- tain issues identified below and the caption for all federal_income_tax purposes are inconsistent we give greater weight to the recital both of the clauses are introductory coming before the determined clauses of the closing_agreement however the recital is a separately negotiated contract term while the phrase for all federal_income_tax purposes is part of the standard wording of the irs pattern agreement see restatement con- tract sec_2d sec d s eparately negotiated or added terms are given greater weight than standardized terms or other terms not sepa- rately negotiated but cf 239_f3d_385 1st cir stating that boilerplate contract provisions are not ipso facto invalid additionally the recital is a specific clause that defines the scope of the contract the phrase for all federal_income_tax purposes is general wording specific terms are more likely to express the intent of the parties than general terms and are given greater weight see re- statement supra sec c and cmt e williston on contracts sec_32 4th ed analog devices inc subs v commissioner re 450_f3d_24 1st cir courts will not read language into a contract where it does not appear estate of magarian v commissioner t c pincite holding that the taxpayer and the commissioner did not agree to additions to tax when the closing_agreement did not specifically mention them the determined clauses-in which the parties specifically stated to what they agreed-established the accounts receiv- able as described in revproc_99_32 sec_4 provided for the rates and amounts of interest and described the methods by which adbv paid the accounts including the tax implica- tions of the payments certain matters with respect to the accounts such as the tax consequences of adbv’s payment of the account were specifically enumerated any_tax implication of the establishment of the accounts themselves was not and the closing_agreement does not mention sec_965 see bmc software ii f 3d pincite finding that the closing_agreement in that case did not extend to sec_965 because that agreement enumerated other specific tax consequences because the parties enumerated in considerable detail the tax consequences of the closing_agreement we find that these specific clauses must be interpreted to limit the phrase for all federal_income_tax purposes we therefore hold that when the parties signed the closing_agreement they did not manifest an intent with respect to sec_965 instead we find that the parties’ intent was to reconcile the cash accounts of petitioner and adbv with their adjusted tax positions as a result of the sec_482 primary_adjustment this was completely unrelated to the sec_965 drd the dissent would have us give the phrase for all federal_income_tax purposes a literal interpretation and ignore the intent of the parties the parties signed a closing_agreement that enumerated specific tax consequences and sec_965 was not specifically enumerated although this phrase i sec_29 the dissent contends that specifically enumerating all tax con- sequences was unnecessary because the closing_agreement is for all fed- eral income_tax purposes in addition to not referencing sec_965 the dis- sent notes that the closing_agreement did not reference sec_11 tax im- posed and sec_6601 interest on underpayment see dissenting op p however those provisions are still applicable to the closing_agreement but continued united_states tax_court reports conspicuously presented and both parties could read it a lit- eral interpretation of the boilerplate phrase for all federal_income_tax purposes would render surplusage the provisions of the closing_agreement that lists the transaction’s tax implications in considerable detail see bmc software ii f 3d pincite if the parties agreed in the boilerplate provision to treat the accounts_receivable as retroactive indebtedness for all federal tax purposes then these addi- tional provisions would be surplusage we focus our anal- ysis on specific tax implications enumerated in the closing_agreement as evidence of the parties’ intent rather than a general provision that is intended as a transition from the recitals to the determined clauses we also read the holding in 69_tc_579 to be consistent with our holding in schering a u s_corporation entered into a revproc_65_17 closing_agreement that established accounts_receivable to effect secondary adjustments between the corporation and its swiss cfc the taxing authority in switzerland considered the cfc’s payment of the account receivable to be a taxable dividend and the cfc paid the tax as a withholding_agent for the u s_corporation although the u s taxpayer’s closing_agreement stated that the repatriation would be free of federal_income_tax con- sequences we allowed the taxpayer a sec_901 foreign_tax_credit with respect to the entire swiss dividend tax in so doing we looked to the closing_agreement as a whole and held that the phrase free of further federal_income_tax con- sequences showed only the parties’ intent that the taxpayer would not have gross_income upon receipt of the cfc’s pay- ment of the account and that it was not intended to deter- specific references were not necessary the closing_agreement created the accounts_receivable under revproc_99_32 supra which states that the interest by the obligee is taxable_income therefore a reference to sec_11 would be redundant additionally sec_301_7121-1 proced admin regs provides that a ny tax or deficiency in tax determined pursuant to a closing_agreement shall be assessed and collected in accordance with the applicable provisions of law irm pt dollar_figure date and revproc_68_16 sec c b pincite state that a closing_agreement should not determine interest liability unless there is an issue with respect to interest liability but that the interest will be assessed and collected in this case there is no issue with the underpayment interest analog devices inc subs v commissioner mine any collateral tax consequences disadvantageous to the taxpayer which might ensue upon the payment of that sum id pincite in other words we read the disputed phrase in context rather than applying a literal interpreta- tion that would expand the closing_agreement past its intended scope this is also the approach we take with peti- tioner’s closing_agreement in bmc software i t c pincite we interpreted sche- ring to hold that t he closing_agreement did not preclude all tax consequences and therefore used it as support for our holding that bmc’s closing_agreement established accounts_receivable for all federal_income_tax purposes including under sec_965 schering however requires a more nuanced reading the court in schering looked to the struc- ture and context of the closing_agreement as a whole to determine what the parties intended the scope of the con- tract to be which is what we do today we also held in schering that revproc_65_17 1965_1_cb_833 which we construed to mean only that the united_states parent is not required to recognize gross_income under sec_301 upon receipt of payment of the account receiv- able did not preclude the taxpayer’s ability to take a foreign_tax_credit id pincite similarly we do not read revproc_99_32 supra to engender a particular result under sec_965 revproc_99_32 sec_4 states that it allows a u s taxpayer to establish and pay an account receivable to repatriate the cash attributable to a primary_adjustment without the federal_income_tax consequences of the sec- ondary adjustments that would otherwise result from the pri- mary adjustment this phrase refers only to the revenue procedure’s purpose of allowing a taxpayer to avoid deemed_dividend treatment although the revenue_procedure treats payment of the account receivable as a payment of the account for all federal_income_tax purposes see id sec_4 it does not address any_tax implications of estab- lishing an account extrinsic evidence of the parties’ intent assuming arguendo that the parties’ revproc_99_32 closing_agreement is ambiguous we examine extrinsic evi- dence of the parties’ intent and apply principles of contract interpretation to that evidence see elrod v commissioner united_states tax_court reports 87_tc_1046 explaining that we consider extrinsic evidence to interpret contract terms or to explain the purpose and intention of contracting parties when the contract is ambiguous under the rules of federal common_law contract interpretation when contracting parties have attached different meanings to a contract or a contract term the ambiguous term is interpreted in accordance with the meaning attached by one of them if at the time the agree- ment was made that party did not know or had no reason to know of any different meaning attached by the other and the other knew or had reason to know the meaning attached by the first party restatement con- tract sec_2d sec see rink v commissioner t c pincite respondent contends that if the closing_agreement is ambiguous petitioner had reason to know of respondent’s intent to treat the accounts_receivable as related_party indebtedness because he stated that position in notice_2005_64 sec dollar_figure and to petitioner orally and in the nopa in respondent therefore asserts that petitioner should be bound to respondent’s understanding of the closing_agreement assuming arguendo that petitioner knew or had reason to know of respondent’s position-despite the advice memoran- dum’s recommendation that all closing agreements under revproc_99_32 supra include a provision addressing sec_965 sec_30 and despite the fact that the nopa was issued two years before the closing_agreement and appar- ently did not mention what respondent’s position would be if the parties entered into a closing agreement-we disagree with respondent that petitioner should be bound to respond- ent’s interpretation of the closing_agreement by definition nopas are not final determinations but rather explain pro- posed changes to a taxpayer’s return see irm pt d date under the irm unless the taxpayer’s agreement to an issue is fully documented by the signing of form_870 the issue will be treated as unagreed id petitioner did not agree to the adjustments which put respondent on notice that petitioner did not agree with his position regarding sec_965 the advice memorandum was issued after the execution of bmc’s clos- ing agreement but before the execution of petitioner’s analog devices inc subs v commissioner under federal common_law one party is bound to the other party’s understanding of an ambiguous term only if the other party did not know or have reason to know of the first party’s understanding of that term even assuming that peti- tioner knew of respondent’s interpretation of the closing_agreement respondent had reason to know of petitioner’s understanding as well both parties were aware before the execution of the closing_agreement that sec_965 was an issue yet the closing_agreement did not include any provi- sion addressing it the extrinsic evidence shows that the par- ties did not reach an agreement with respect to sec_965 and we will not read a term into the closing agree- ment to which the parties did not agree v applicable federal_law closing agreements do not preclude the imposition of otherwise applicable law unless the parties explicitly agree on that point 84_fedclaims_90 citing estate of magarian v commissioner t c pincite the revproc_99_32 closing_agreement does not pro- vide for a particular result under sec_965 we there- fore consider whether sec_965 itself requires that the par- ties treat the accounts_receivable as retroactive related_party indebtedness that reduces the amount of petitioner’s claimed drd sec_965 is titled reduction of benefit if increase in related_party indebtedness and provides inter alia the amount of dividends which would but for this paragraph be taken into account under subsection a shall be reduced by the excess if any of- a the amount of indebtedness of the controlled_foreign_corporation to any related_person as defined in sec_954 as of the close of the taxable_year for which the election under this section is in effect over b the amount of indebtedness of the controlled_foreign_corporation to any related_person as so defined as of the close of date in bmc software i t c pincite we determined that a revproc_99_32 account receivable was indebtedness under sec_965 by reference to black’s law dic- tionary which defines indebtedness as the condition of owing money or being indebted and an account receivable as an account reflecting a balance owed by a debtor because united_states tax_court reports we held that the closing_agreement for all federal_income_tax purposes created accounts_receivable that were deemed established within bmc’s testing_period we held that the establishment of the accounts constituted an increase in related_party indebtedness under sec_965 see id pincite the u s court_of_appeals for the fifth circuit holding that the closing_agreement did not alter the application of sec_965 focused on the timing requirement in subsection b it stated that t he text of section b specifically requires that the determination of the final amount of indebtedness be made ‘as of the close of the tax- able year for which the sec_965 election is in effect ’ bmc software ii f 3d pincite bmc’s elec- tion year was a s of the accounts_receivable did not exist and indeed could not have existed until the signing of the closing_agreement in which was after the testing_period had closed id pincite even though the closing_agreement deemed the accounts established in it did not change the reality that the accounts did not actually exist in that year therefore the court held that the accounts did not constitute an increase in related_party indebtedness during bmc’s testing_period id pincite upon consideration we agree with the court of appeals’ analysis that under the plain meaning of sec_965 a cfc has an increase in related_party indebtedness only if the indebtedness existed as of the close of the election_year petitioner’s testing_period closed long before the execution of its revproc_99_32 closing_agreement and the accounts_receivable did not exist before the closing_agreement respondent concedes that adbv would not have an increase in related_party indebtedness if petitioner did not make an election under revproc_99_32 supra and did not execute the closing_agreement therefore the only way in which the accounts_receivable could have been established as of the close of petitioner’s election_year is if the closing agreement’s deemed established dates applied to the application of sec_965 we held supra that the parties did not reach an agreement in their revproc_99_32 closing_agreement with respect to sec_965 and we do not take the deemed establishment dates of the accounts to alter subsection b analog devices inc subs v commissioner we also find as the court_of_appeals did that notice_2005_64 sec in which the irs states that accounts_payable are treated as debt under sec_965 is wholly unpersuasive because it lacks any analysis and runs counter to the plain meaning of subsection b see bmc software ii f 3d pincite it also conflicts with notice_2005_38 sec b c b pincite which comports with the statute stating a u s shareholder determines the amount of the related_party indebtedness of its cfc on the last measurement date accordingly we hold under sec_965 the accounts_receivable did not constitute an increase in related_party indebtedness of adbv during the testing_period vi conclusion we hold that the accounts_receivable did not constitute indebtedness under sec_965 petitioner is therefore entitled to the entire amount of its claimed drd under sub- section a bmc software i is overruled we have considered the parties’ remaining arguments and to the extent not discussed above conclude those arguments are irrelevant moot or without merit to reflect the foregoing decision will be entered for petitioner moreover a representative from adbv did not sign the revproc_99_32 closing_agreement and adbv was not a party to that agreement par- ties are not contractually bound until they mutually assent to bind them- selves to an agreement 829_f2d_278 1st cir citing williston on contracts sec pincite 3d ed sec_965 ad- dresses only related_party indebtedness of the controlled foreign corpora- tion emphasis added because the revproc_99_32 closing_agreement established the accounts_receivable and adbv was not a party to that agreement the accounts cannot be indebtedness of the controlled_foreign_corporation adbv cf 470_f3d_1325 11th cir holding that a closing_agreement between one cor- poration and the irs stating that certain transfers were bona_fide debts did not affect the characterization of the transfers with respect to other related corporations we do not reach the parties’ arguments with respect to the trade payables exception united_states tax_court reports reviewed by the court foley vasquez gale thornton holmes paris kerrigan buch lauber nega pugh and ashford jj agree with this opinion of the court lauber j concurring i join the opinion of the court without reservation and write briefly in response to the dis- sent the dissent is based on the presence of the word all in the introduction to the analog devices closing_agreement a word that does not appear in the introduction to the bmc software closing_agreement although i am a strong advocate of paying close attention to texts i think the dissent points to a distinction without a difference first as emphasized by the court_of_appeals for the fifth circuit in 780_f3d_669 5th cir rev’g 141_tc_224 and by the court here see op ct p the introductory reference to federal_income_tax purposes is part of the boilerplate that appears in all closing agreements it simply recites that the parties are entering into the closing_agreement to resolve a federal tax dispute as opposed to a corporate or an antitrust dis- pute and that the agreements within the body of the docu- ment are made for federal_income_tax purposes this is truly boilerplate in part because the point it makes is obvious this introduction does not itself constitute an agreement but simply tells us the purpose for which the parties are entering into the specific itemized agreements that follow the pre- cise form this boilerplate takes should not be outcome deter- minative as the dissent would make it second i do not believe that the presence or absence of the word all changes the meaning suppose taxpayer x reaches an agreement with the internal_revenue_service that for purposes of computing x’s federal_income_tax liability for her itemized_deductions shall be dollar_figure would the meaning change if the agreement read for all purposes of computing x’s federal_income_tax liability for i do not think so when we say for purposes without any conditions we mean for all purposes in short i see no meaningful distinction between these two forms of boilerplate analog devices inc subs v commissioner it would be different i think if the parties had agreed in the body of the closing_agreement that the accounts receiv- able in question shall be regarded as bona_fide indebtedness for all federal_income_tax purposes but they did not agree to that they agreed only that accounts_receivable would be established and would be deemed to have been created as of the last day of the taxable_year to which they relate under revproc_99_32 1999_2_cb_296 this treatment is elective with the taxpayer the parties entered into the closing_agreement in order to square the accounts between the u s parent and the foreign_affiliate and get the cash in the right place without payment of a taxable dividend it makes little sense to treat the deemed retroactive creation of accounts_receivable to which the parties agreed for a very limited purpose in as actual debt that existed in in an effort to justify giving the word all outcome-deter- minative force the dissent quotes a portion of a sentence from the court of appeals’ bmc software opinion the dis- sent implies that the court_of_appeals noted the absence of the word all from the closing_agreement and suggested that it might have decided the case differently if the word all had been included see dissenting op p that is not at all what the court_of_appeals said or implied and this selec- tive quotation is taken out of context the court_of_appeals rejected the commissioner’s submis- sion that the parties had agreed to backdate the accounts_receivable for all federal tax purposes concluding instead that the parties had agreed to backdate the accounts receiv- able only for those tax consequences that the closing_agreement expressly enumerates bmc software inc f 3d pincite the court_of_appeals based this conclusion on two canons of construction expressio unius est exclusio alterius and the antisurplusage canon the sentence from which the dissent’s squib is excerpted was part of this analysis and reads in full as follows if the parties agreed in the boilerplate provision to treat the accounts_receivable as retroactive indebtedness for all federal tax purposes then these additional provisions would be surplusage id pincite the court_of_appeals in this sen- tence was not saying that it might have reached a different outcome if the boilerplate phrase had included the word all it was saying that the boilerplate phrase however drafted united_states tax_court reports could not have the all-encompassing meaning the commis- sioner had ascribed to it because that would render surplus- age the provisions of the closing_agreement that list the transaction’s tax implications in considerable detail ibid the same logic applies to the closing_agreement before us today and i thus concur fully in the opinion of the court marvel gale holmes buch nega and ashford jj agree with this concurring opinion gustafson j dissenting the taxpayer executed an agreement with the internal_revenue_service that provides with boldface added here now it is hereby determined and agreed for all fed- eral income_tax purposes that accounts_receivable established by taxpayer a taxpayer has established intercompany accounts_receivable set forth below which were recorded on taxpayer’s books and treated as term loans to controlled_entity reflecting the following balances each such account receivable being deemed to have been created as of the last day of the taxable_year to which it relates today the tax_court effectively edits this provision to delete all and to provide instead that the agreement is only for some federal_income_tax purposes excluding the dividends received deduction of sec_965 i would not do so the agreement is on form_906 closing_agreement on final_determination covering specific matters the specific matters it addresses are the royalties deemed paid to the taxpayer by its subsidiary the resulting increase in the tax- payer’s income and the resulting accounts_receivable and payable on the books of the taxpayer and the subsidiary the agreement does not specifically mention sec_965 or the dividends received deduction likewise it does not mention sec_6601 or the underpayment interest yielded by the agreement nor even sec_11 or the income_tax_liability yielded by the agreement such specific mentions were not necessary the agreement is for all federal_income_tax pur- poses emphasis added and that would include sec_11 sec_6601 and sec_965 analog devices inc subs v commissioner we reconsider sec_965 f because of the reversal by the u s court_of_appeals for the fifth circuit of our decision in 141_tc_224 rev’d 780_f3d_669 5th cir however the closing_agreement at issue in bmc software lacked the word all providing instead that it was agreed for federal_income_tax purposes and bmc software was therefore expressly not an instance in which the parties agreed in the boilerplate provision to treat the accounts_receivable as retroactive indebtedness for all federal tax purposes f 3d pincite emphasis in original we do not know how that court might decide this issue where as here the parties did agree as to all federal_income_tax purposes emphasis added in bmc software the court_of_appeals invoked the anti- surplusage canon and the majority attempts to do the same here see op ct p but for materially different language that canon tells us to prefer an interpretation that gives meaning to all the contractual provisions and renders none surplus the canon is not properly consulted to save one contractual provision from redundancy by giving no effect to another contractual provision but that is what the tax_court does today it gives no meaning whatsoever to all but decides instead that all is simply to be ignored and it vio- lates the canon by rendering that word itself to be surplus- age as to the expressio unius est exclusio alterius canon invoked in bmc software by the court_of_appeals and in the concurring opinion the doctrine properly applies only when the unius the thing specified can reasonably be thought to be an expression of all that shares in the grant involved a scalia b garner reading law the interpretation of legal text sec_107 particular con- sequences enumerated in a closing_agreement cannot reason- ably be thought to implicitly exclude other consequences where the opening words of the agreement explicitly provide for all consequences the majority asserts see op ct p that this phrase is not a matter to which the parties specifically agreed the word specifically saves this statement from being an out- right error since evidently the parties did not bargain over the wording of this phrase however the parties did agree to this wording when they signed the agreement this wording united_states tax_court reports was not foisted on an unrepresented or unsuspecting tax- payer or rendered in fine print or hidden in a footnote or even inserted in the midst of other terms of the agreement it is conspicuously presented as the first words that follow agreed the concurring opinion states this introduction does not itself constitute an agreement but simply tells us the purpose for which the parties are entering into the spe- cific itemized agreements that follow see concurring op p on the contrary the term it is hereby deter- mined and agreed for all federal_income_tax purposes that is not a mere introduction or preface to the agreement but rather is the operative language that makes the docu- ment an agreement the majority see op ct pp explicitly decides not to giv e the phrase ‘for all federal_income_tax purposes’ a literal application but i would do so colvin goeke and morrison jj agree with this dis- sent f rather as respondent correctly notes the material terms of the con- tract were first detailed in a letter written by petitioner six days after re- spondent confirmed that petitioner was eligible for revproc_99_32 treatment ex 43-j in that letter petitioner wrote regarding the ac- counts receivable that ‘payment within the 90-day period and any prepay- ment will be treated as a payment of the intercompany account for all fed- eral income_tax purposes ’ emphasis added


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 plr-106078-19 date date legend distributing controlled foreign parent foreign sub business a business b state country --------------------------------------- ------------------------ ----------------------------- ------------------------ ------------------------ ------------------ --------------------------------------------------------------------------------- -------------------------- --------------------------------------------------------------------------------- --------------------------------------- --------------- --------- plr-106078-19 dear -------------------- this letter responds to your letter dated date requesting rulings on certain federal_income_tax consequences of the proposed transaction defined below the information submitted in that letter is summarized below this letter is issued pursuant to revproc_2017_52 2017_41_irb_283 regarding one or more covered transactions as defined in sec_2 a of revproc_2017_52 this office expresses no opinion as to any issue not specifically addressed by the rulings below the rulings contained in this letter are based on facts and representations submitted by the taxpayer and accompanied by a penalties of perjury statement executed by an appropriate party this office has not verified any of the materials submitted in support of the request for rulings verification of the information representations and other data may be required as part of the audit process this office has made no determination regarding whether the distribution as defined below i satisfies the business_purpose requirement of sec_1_355-2 ii is used principally as a device for the distribution of the earnings_and_profits of the distributing_corporation or the controlled_corporation or both see sec_355 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 the distributing_corporation or the controlled_corporation or any predecessor or successor of the distributing_corporation or the controlled_corporation within the meaning of sec_1_355-8t see sec_355 and sec_1_355-7 summary of facts foreign parent is a country corporation and the parent of a worldwide group of corporations foreign parent wholly owns distributing a state corporation and foreign sub a country corporation distributing is a u s holding_company and the common parent of an affiliated_group of includible corporations that file a consolidated federal_income_tax return within the meaning of sec_1_1502-1 the distributing group among other entities distributing wholly owns controlled a state corporation the distributing group is engaged in two separate business lines business a and business b business a is conducted by various direct and indirect subsidiaries of distributing and business b is conducted by controlled and foreign sub and other plr-106078-19 subsidiaries of foreign parent controlled is the only subsidiary of distributing that is engaged in business b for purposes of satisfying the active trade_or_business requirements of sec_355 with respect to the distribution as defined below distributing and the members of its separate_affiliated_group as defined in sec_355 will rely on business a and controlled will rely on business b financial information has been submitted in accordance with revproc_2017_52 indicating that each of business a and business b has had gross_receipts and operating_expenses representing the active_conduct_of_a_trade_or_business for each of the past five years proposed transaction the following transactions will occur to separate business b from business a the proposed transaction i distributing will distribute all of the outstanding_stock of controlled to foreign parent the distribution ii immediately following the distribution foreign parent will contribute all of the stock of controlled to foreign sub the contribution representations with respect to the distribution except as set forth below distributing has made all of the representations set forth in sec_3 of the appendix to revproc_2017_52 distributing has made the following alternative representations set forth in sec_3 of the appendix to rev_proc a a a a a a and a distributing has not made the following representations which do not apply to the proposed transaction and rulings based solely on the information submitted and representations made we rule as follows with respect to the distribution no gain_or_loss will be recognized by and no amount will be included in the income of foreign parent on the receipt of controlled stock in the distribution sec_355 no gain_or_loss will be recognized by distributing on the distribution of the controlled stock in the distribution sec_355 the aggregate basis of the distributing stock and the controlled stock in the hands of foreign parent immediately after the distribution will be the same as foreign parent’s basis in the distributing stock immediately before the plr-106078-19 distribution allocated between the distributing stock and the controlled stock in proportion to the fair_market_value of each immediately following the distribution in accordance with sec_1_358-2 sec_358 and c the holding_period of the controlled stock received by foreign parent in the distribution will include the holding_period of the distributing stock held by foreign parent with respect to which the distribution will be made provided that such distributing stock is held as a capital_asset on the date of the distribution sec_1223 earnings_and_profits if any will be allocated between distributing and controlled in accordance with sec_312 sec_1_312-10 and sec_1_1502-33 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 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 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 in accordance with the power_of_attorney on file with this office copies of this letter are being sent to your authorized representatives sincerely robert rhyne assistant to branch chief branch office_of_chief_counsel corporate cc


internal_revenue_service number info release date dec cc psi 1-cor-137333-01 uilc we are responding to your correspondence requesting assistance in order to revoke your s_corporation_election the information submitted indicates that you attempted to elect s_corporation status for but filed your form_2553 late subsequently your election was accepted instead for date after you had satisfied consent signatures however for all taxable years since inception you have filed your returns using forms c_corporation return when you should have used form_1120s s_corporation return the internal_revenue_code currently does not have a provision for taxpayers who wish to retroactively revoke their s_corporation status therefore please amend your and returns as requested by the cincinnati service_center your s_corporation status can be terminated by affirmatively revoking it pursuant to sec_1_1362-2 of the income_tax regulations a revocation made during the taxable_year and before the 16th day of the third month of the taxable_year is effective on the first day of the taxable_year and a revocation made after the 15th day of the third month of the taxable_year is effective for the following taxable_year the manner of revoking an election is discussed in sec_1_1362-6 and requires the corporation to file a statement that the corporation revokes the election made under sec_1362 the statement must be filed with the service_center where the election was properly filed the revocation statement must include the number of shares of stock issued and outstanding at the time the revocation is made a revocation may be made only with the consent of shareholders who at the time the revocation is made hold more than one-half of the number of issued and outstanding shares of stock of the corporation each shareholder who consents to the revocation must consent in the manner described in sec_1_1362-6 which requires the taxpayer to set forth the name address and taxpayer_identification_number of the shareholder the number of shares of stock owned by the shareholder the date on which the stock was acquired the date on which the shareholder’s taxable_year ends the name of the s_corporation the corporation’s taxpayer_identification_number and the revocation to which the shareholder consents the statement must be signed by the shareholder under penalties of perjury if you choose to revoke your s_corporation_election we recommend that you send your revocation statement information via certified mail please keep this letter with your tax records and provide a copy of it to your authorized representative we hope that the above information proves helpful sincerely yours s dianna k miosi dianna k miosi chief branch associate chief_counsel passthroughs and special industries