internal_revenue_service department of the treasury number release date index number 468a washington dc person to contact telephone number refer reply to cc psi plr-128613-02 date date legend buyer seller1 seller2 seller3 seller4 seller5 seller6 seller7 seller8 plant state committee a b c d e f g h i j plr-128613-02 k l m dear this letter responds to your request dated date and subsequent correspondence on behalf of seller5 taxpayer that we rule on certain tax consequences of the sale of plant and related assets and liabilities from the sellers to buyer specifically taxpayer has requested rulings regarding the tax consequences under sec_468a of the internal_revenue_code to the sellers’ qualified nuclear decommissioning funds and buyer’s qualified nuclear decommissioning funds as well as rulings regarding the proper realization and recognition of gain and loss on the sale of plant and related assets and liabilities the sellers and buyer in a jointly-filed ruling_request have represented the following facts and information relating to the ruling_request the sellers except seller1 and seller2 which are exempt wholesale generators are utilities regulated by various state public_utility commissions and the federal energy regulatory commission ferc as a result of deregulation and under the encouragement of the state public_utility commissions and ferc the sellers are in the process of withdrawing from the electric power generation business except seller1 and seller2 and intend to sell plant and related assets to buyer each seller except seller5 owns as tenant-in-common a fee simple ownership_interest in plant and certain facilities and assets associated with the plant seller5 owns a portion of interest in fee simple and operates the rest of its interest under the terms of a lease seller1 and seller2 are members of the same consolidated_group seller3 and seller4 are members of a different consolidated_group seller1 seller2 seller3 seller4 seller5 seller6 seller7 and seller8 own respectively a b c d e f g and h percent of plant for a total of i percent the remaining ownership_interest in plant is owned by j other entities who are not a part of this ruling letter each of the sellers except seller1 and seller6 maintains qualified nuclear decommissioning funds for plant pursuant to sec_468a and the regulations thereunder all of the qualified nuclear decommissioning funds are trusts under the laws of state in addition each of the sellers maintains nonqualified nuclear decommissioning funds for plant which are trusts under the laws of state and which are considered grantor trusts under sections of the internal_revenue_code all of the qualified and nonqualified nuclear decommissioning funds are held by the sellers solely for the purpose of decommissioning plant plr-128613-02 according to the terms of the purchase and sale agreement for plant between the sellers and buyer dated k the sellers will sell assign convey transfer and deliver to buyer the sellers’ ownership shares of the assets held for use in the operation of plant including the assets comprising both the qualified and nonqualified nuclear decommissioning trust funds maintained by the sellers along with all income_interest and earnings accrued thereon together with all related tax_accounting decommissioning studies and cost estimates and all other books_and_records related thereto buyer will assume certain liabilities associated with plant including decommissioning liabilities certain environmental liabilities and encumbrances of acquired assets buyer will pay l as cash consideration for plant subject_to certain adjustments at closing and will pay sellers m for nuclear fuel attributable to plant the sellers will transfer the assets in each of the qualified nuclear decommissioning funds to a corresponding decommissioning fund that buyer will establish for plant and which buyer intends to qualify as a qualified nuclear decommissioning fund pursuant to sec_468a additionally the sellers will transfer the assets in each of the nonqualified nuclear decommissioning funds to a corresponding nonqualified decommissioning fund that buyer will establish for plant the buyer will hold both the qualified and nonqualified nuclear decommissioning funds solely for the purpose of decommissioning plant the funds will be under the general supervision of committee ferc and the nuclear regulatory commission nrc nrc approval is required to remove the nuclear decommissioning funds from the trusts buyer will not make additional contributions to the qualified nuclear decommissioning funds unless permitted by future legislative changes to sec_468a any funds that exceed the amount necessary to satisfy all decommissioning liabilities will be distributed to buyer or customers in accordance with the purchase and sale agreement moreover the sellers will contribute an additional_amount if needed to buyer’s nonqualified nuclear decommissioning fund so that the total amount in the qualified and nonqualified nuclear decommissioning funds will equal the amount required to be on deposit to fully decommission plant based on the calculation methodology and assumptions formulated by committee requested ruling the sellers’ qualified nuclear decommissioning funds will not be disqualified on the date of closing when the assets in the funds are transferred to buyer’s qualified nuclear decommissioning fund sec_468a provides that a taxpayer may elect to deduct payments made to a nuclear decommissioning reserve fund the qualified_fund sec_468a limits the annual deduction of the electing taxpayer to the lesser_of the ruling_amount or the amount of decommissioning costs included in the electing taxpayer’s cost of service for ratemaking purposes for the taxable_year sec_468a provides that the ruling_amount means the amount determined by the service to be necessary to a fund that portion of the nuclear decommissioning plr-128613-02 cost with respect to the nuclear power plant that bears the same ratio to the total nuclear decommissioning costs with respect to such nuclear power plant as the period for which the fund is in effect bears to the estimated_useful_life of the nuclear power plant and b prevent any excessive funding of such costs or the funding of such costs at a rate more rapid than level_funding sec_468a provides that the rate_of_tax on the income of a qualified nuclear decommissioning fund is percent sec_468a provides in pertinent part that the assets in a qualified nuclear decommissioning fund shall be used exclusively for satisfying the liability of any taxpayer contributing to the qualified_fund sec_1_468a-1 of the federal_income_tax regulations provides that an eligible_taxpayer is a taxpayer that possesses a qualifying interest in a nuclear power plant sec_1_468a-1 provides that a qualifying interest is a direct ownership_interest or a leasehold interest meeting certain additional requirements sec_1_468a-1 provides in part that a nuclear power plant is any nuclear power reactor that is used predominantly in the trade_or_business of the furnishing or sale of electric energy if the rates for such furnishing or sale have been established or approved by a public_utility commission sec_1_468a-5 sets out the qualification requirements for nuclear decommissioning funds it provides in part that a qualified nuclear decommissioning fund must be established and maintained pursuant to an arrangement that qualifies as a_trust under state law an electing taxpayer can establish and maintain only one qualified nuclear decommissioning fund for each nuclear power plant sec_1 468a- c i provides that if at any time during the taxable_year a nuclear decommissioning fund does not satisfy the requirements of sec_1_468a-5 the service may disqualify all or a portion of the fund as of the date that the fund does not satisfy the requirements sec_1_468a-5 provides that if a qualified_fund is disqualified the fair_market_value with certain adjustments of the assets in the fund is deemed to be distributed to the electing taxpayer and included in that taxpayer’s gross_income for the taxable_year sec_1_468a-6 generally provides rules for the transfer of an interest in a nuclear power plant and transfer of the qualified_fund where after the transfer the transferee is an eligible_taxpayer under sec_1_468a-6 the service may treat any disposition of an interest in a nuclear power plant occurring after date as satisfying the requirements of the regulations if the service determines that such treatment is necessary or appropriate to carry out the purposes of sec_468a under the specific facts herein the service will exercise its discretion to treat this sale under sec_1_468a-6 as a disposition qualifying under the general provisions of sec_1_468a-6 this exercise of discretion is specifically based on the continued general supervision of the qualified nuclear decommissioning fund by committee plr-128613-02 ferc and the nrc this exercise of discretion however applies to the provisions of sec_1 except those outlined in sec_1_468a-6 with respect to the calculation of a schedule of ruling amounts subsequent to a sale thus under sec_1_468a-6 the sellers’ qualified nuclear decommissioning funds will not be disqualified upon the sale when the assets are transferred to buyer’s corresponding qualified nuclear decommissioning fund and that fund will be treated as a qualified nuclear decommissioning fund of buyer requested ruling the sellers’ qualified nuclear decommissioning funds will not recognize gain_or_loss upon the transfer of their assets on the date of closing to buyer’s qualified nuclear decommissioning fund requested ruling the sellers will not recognize income attributable to the assets in the qualified nuclear decommissioning funds upon the transfer of the assets on the date of closing to buyer’s qualified nuclear decommissioning fund sec_1_468a-6 provides that neither a transferor nor its fund will recognize gain_or_loss or otherwise take any income_or_deduction into account by reason of the transfer of the assets from a transferor’s qualified nuclear decommissioning fund to a transferee’s qualified nuclear decommissioning fund thus neither the sellers nor the sellers’ qualified nuclear decommissioning funds will recognize gain_or_loss or otherwise take any income into account by reason of the transfer of the sellers’ qualified nuclear decommissioning funds assets to buyer’s qualified nuclear decommissioning funds requested ruling each seller’s gain_or_loss on the sale of plant and its associated assets other than the qualified nuclear decommissioning funds will be the difference between such seller’s basis in such assets and its amount_realized sec_1001 provides that a taxpayer’s gain from the sale of property is the excess of the amount_realized over the taxpayer’s adjusted_basis provided in sec_1011 for determining gain and that the taxpayer’s loss from the sale of property is the excess of the taxpayer’s adjusted_basis provided in sec_1011 for determining loss over the amount_realized sec_1060 provides that in the case of an applicable_asset_acquisition the consideration received shall be allocated among the acquired assets in the same manner as amounts are allocated to assets under sec_338 sec_1 a provides that in the case of an applicable_asset_acquisition the seller and the purchaser each must allocate the consideration paid or received in the transaction under the residual_method as described in sec_1_338-6 and sec_1_338-7 in order to determine respectively the amount_realized from and the basis in each of the transferred assets plr-128613-02 sec_1060 defines the term applicable_asset_acquisition as the transfer of assets constituting a trade_or_business if the acquirer’s basis in the transferred assets is determined wholly by reference to the consideration paid for such assets sec_1_1060-1 defines a purchaser’s consideration as the amount in the aggregate of its cost of purchasing the assets in the applicable_asset_acquisition that is properly taken into account in basis sec_1060 provides no independent basis for determining a taxpayer’s cost of acquired assets cost is determined solely under generally applicable tax_accounting principles sec_1_1060-1 defines a seller’s consideration as the amount in the aggregate realized from selling the assets in the applicable_asset_acquisition under sec_1001 sec_1060 also provides no independent basis for determining the amount a taxpayer realizes on the sale of assets or the time such amount may be taken into account the amount_realized and the time such amount is taken into account are determined solely under generally applicable tax_accounting principles see sec_1001 the residual_method is based on a division of assets into seven classes class i generally consisting of cash and general deposit accounts held in banks savings and loan associations and other depository institutions class ii generally consisting of actively_traded personal_property like u s government securities and publicly traded stock but also including certificates of deposit and foreign_currency even if they are not actively_traded personal_property class iii accounts_receivable mortgages and credit card receivables from customers which arise in the ordinary course of business class iv stock_in_trade of the taxpayer or other_property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable_year or property held by the taxpayer primarily_for_sale_to_customers in the ordinary course of its trade_or_business class v all assets other than class i ii iii iv vi and vii assets class vi all sec_197 intangibles as defined in that section except goodwill and going_concern_value and class vii goodwill and going_concern_value whether or not it qualifies as a sec_197 intangible sec_1_338-6 consideration is first reduced by the amount of class_i_assets transferred by the seller the remaining consideration is then allocated to the class_ii_assets pro_rata to the extent of their fair_market_value then to the class_iii_assets pro_rata to the extent of their fair_market_value then to the class_iv_assets pro_rata to the extent of their fair_market_value then to the class_v_assets pro_rata to the extent of their fair_market_value then to the class_vi_assets pro_rata to the extent of their fair_market_value and finally any remaining consideration is allocated to the class_vii_assets sec_1_338-6 and and c the following examples illustrate the operation of sec_1060 from a seller's and a buyer's perspective respectively plr-128613-02 on date1 an applicable_asset_acquisition is made the consideration consists of dollar_figure cash and an assumed liability of dollar_figure that under applicable tax_accounting principles is taken into account at the time of the applicable_asset_acquisition the assets sold consist of class_i_assets in the amount of dollar_figure class_ii_assets with a fair_market_value of dollar_figure and a basis in the hands of the seller of dollar_figure class_iii_assets with a fair_market_value of dollar_figure and a basis of dollar_figure class_iv_assets with a fair_market_value of dollar_figure and a basis of dollar_figure class_v_assets with fair_market_value of dollar_figure and a basis of dollar_figure and class_vi_assets with a fair_market_value of dollar_figure and a basis of dollar_figure the consideration first will be reduced by dollar_figure the amount of class_i_assets the remaining consideration will be allocated as follows dollar_figure to class_ii_assets pro_rata according to fair_market_value resulting in a dollar_figure gain dollar_figure to the class_iii_assets pro_rata according to fair_market_value resulting in no gain_or_loss dollar_figure to the class_iv_assets pro_rata according to the fair_market_value resulting in a dollar_figure gain dollar_figure to the class_v_assets pro_rata according to the fair_market_value resulting in no gain_or_loss dollar_figure to the class_vi_assets pro_rata according to the fair_market_value resulting in a dollar_figure gain and the remaining dollar_figure to the class_vii_assets pro_rata according to the fair_market_value resulting in a dollar_figure gain the character of the amounts of gain_or_loss recognized by the seller as well as any applicable holding periods is determined by the nature of the underlying assets sec_1_338-6 sec_1_1060-1 and sec_1_1060-1 on date1 an applicable_asset_acquisition is made the consideration consists of dollar_figure cash and an assumed liability for which economic_performance has not occurred the assets acquired consist of class_i_assets in the amount of dollar_figure class_ii_assets with a fair_market_value of dollar_figure class_iii_assets with a fair_market_value of dollar_figure class_iv_assets with a fair_market_value of dollar_figure and class_v_assets with a fair_market_value of dollar_figure there are no class vi or vii assets on date1 the purchaser has provided dollar_figure of consideration that may be allocated as basis it first will be reduced by dollar_figure the amount of class_i_assets the remaining dollar_figure will be allocated to class_ii_assets pro_rata according to fair_market_value nothing is allocated to class iii or below on date2 economic_performance occurs with respect to the liability to the extent of dollar_figure at that time the purchaser has an additional dollar_figure of basis that may be taken into account of that amount dollar_figure is allocated to class_ii_assets which will then have been allocated their full dollar_figure fair_market_value - as determined on the acquisition_date and the remaining dollar_figure is allocated to the class_iii_assets pro_rata according to fair_market_value - as determined on the acquisition_date on date3 economic_performance occurs to the extent of an additional dollar_figure which is then taken into account as basis of that amount dollar_figure will be allocated to the class_iii_assets which will then have been allocated their full dollar_figure fair_market_value - as determined on the acquisition_date dollar_figure will be allocated to the class_iv_assets which will then have been allocated their full dollar_figure fair_market_value - as determined on the acquisition_date dollar_figure will be allocated to plr-128613-02 the class_v_assets which will then have been allocated their full dollar_figure fair_market_value - as determined on the acquisition_date and the remaining dollar_figure will be allocated to the class vii as goodwill the last amount is allocated to goodwill even though goodwill was not identified as a separate asset having value on date1 if on date3 instead of an addition to purchaser’s consideration there is a dollar_figure decrease in consideration the consideration previously allocated to the class_iii_assets dollar_figure would be reduced to zero and the consideration previously allocated to the class_ii_assets would be reduced by the remaining dollar_figure pro_rata according to fair_market_value if under general tax principles there is a subsequent adjustment to the consideration that amount is allocated in a manner that produces the same allocation that would have been made at the time of the acquisition had such amount been paid_or_incurred on the acquisition_date sec_1_338-7 sec_1_1060-1 and sec_1 c the federal tax treatment of the qualified nuclear decommissioning funds is determined exclusively under sec_468a and the regulations thereunder with respect however to the plant including equipment and operating_assets and the assets of the nonqualified nuclear decommissioning funds these assets comprise a trade_or_business in the sellers’ hands and the basis buyer takes in these assets will be determined wholly by reference to buyer’s consideration thus the sellers transfer of plant including equipment and operating_assets and assets of the nonqualified nuclear decommissioning funds to buyer in exchange for cash and the assumption of the decommissioning liability except to the extent funded by the qualified nuclear decommissioning funds is an applicable_asset_acquisition as defined in sec_1060 as such its federal tax treatment is determined under sec_1060 and the regulations thereunder accordingly sellers must allocate the consideration in the applicable assets in accordance with the provisions of sec_1060 and the regulations thereunder specifically sellers will first reduce the consideration received by the amount of class_i_assets it transfers in the transaction including any class_i_assets held in the nonqualified nuclear decommissioning funds to the extent seller’s consideration exceeds the class_i_assets it transfers such excess will be allocated to the class_ii_assets then to the class_iii_assets then to the class_iv_assets then to the class_v_assets then to the class_vi_assets and finally to the class_vii_assets such consideration is allocated to each class of assets pro_rata according to the fair_market_value of those assets up to their total fair_market_value the character and other attributes of the amounts of gain and loss are determined by that of the underlying assets accordingly on the sale of plant and each seller’s interests in the assets in the nuclear decommissioning trust funds other than the assets in the qualified nuclear plr-128613-02 decommissioning funds each seller’s gain_or_loss on each transferred asset is the difference between the basis of the asset and the amount_realized with respect to that asset taking into account the allocation of consideration pursuant to sec_1060 and the corresponding regulations requested ruling each seller’s amount_realized on the sale of plant and its associated assets will include the cash consideration received from buyer and the amount of its liabilities assumed by buyer including its liability to decommission plant but reduced by the amount of such liability to be funded by such seller’s qualified nuclear decommissioning funds sec_1001 provides that a seller’s amount_realized from the sale of property is the sum of any money received plus the fair_market_value of the property other than money received sec_1_1001-2 of the regulations provides that a seller’s amount_realized from the sale of property includes the amount of liabilities from which the seller is discharged as a result of the sale this may include debt and non-debt liabilities see 84_tc_1319 assumption of lessee’s repair liability was part of amount_realized on sale of leasehold as set forth with respect to requested ruling the decommissioning liability from which sellers will be relieved is fixed and determinable as owners and operators of a nuclear plant sellers are required_by_law to provide for eventual decommissioning see cfr sec_50 the amount in the decommissioning funds represents the present_value of that liability as established by decommissioning cost studies and confirmed by regulatory approval and the terms of the sellers’ transaction under which the decommissioning funds will be transferred to buyer in connection with buyer’s assumption of the liability cf 370_us_65 amount_realized as result of relief from liability presumed equal to value of property given up in arm’s-length exchange accordingly each seller's amount_realized on the sale of plant and the assets in the decommissioning trust funds includes the cash received from buyer and the assumed_liabilities to the extent these liabilities are taken into account for federal_income_tax purposes the liabilities taken into account would include the amount of the decommissioning liability assumed by buyer not including the portion of the liability to decommission plant attributable to the qualified nuclear decommissioning fund on the date of closing requested ruling buyer’s qualified nuclear decommissioning fund established to hold the assets transferred from the sellers’ qualified nuclear decommissioning funds will be treated as a qualified nuclear decommissioning fund under sec_468a sec_468a provides that a taxpayer may elect to deduct payments made to a nuclear decommissioning reserve fund the qualified_fund sec_468a limits the plr-128613-02 annual deduction of the electing taxpayer to the lesser_of the ruling_amount or the amount of decommissioning costs included in the electing taxpayer’s cost of service for ratemaking purposes for the taxable_year sec_468a provides that the ruling_amount means the amount determined by the service to be necessary to a fund that portion of the nuclear decommissioning cost with respect to the nuclear power plant that bears the same ratio to the total nuclear decommissioning costs with respect to such nuclear power plant as the period for which the fund is in effect bears to the estimated_useful_life of the nuclear power plant and b prevent any excessive funding of such costs or the funding of such costs at a rate more rapid than level_funding sec_468a provides in pertinent part that the assets in a qualified nuclear decommissioning fund shall be used exclusively for satisfying the liability of any taxpayer contributing to the qualified_fund sec_1_468a-1 provides that an eligible_taxpayer is a taxpayer that possesses a qualifying interest in a nuclear power plant sec_1_468a-1 provides that a qualifying interest is a direct ownership_interest or a leasehold interest meeting certain additional requirements sec_1_468a-1 provides in part that a nuclear power plant is any nuclear power reactor that is used predominantly in the trade_or_business of the furnishing or sale of electric energy if the rates for such furnishing or sale have been established or approved by a public_utility commission sec_1_468a-5 sets out the qualification requirements for nuclear decommissioning funds it provides in part that a qualified nuclear decommissioning fund must be established and maintained pursuant to an arrangement that qualifies as a_trust under state law an electing taxpayer can establish and maintain only one qualified nuclear decommissioning fund for each nuclear power plant sec_1 468a- c i provides that if at any time during the taxable_year a nuclear decommissioning fund does not satisfy the requirements of sec_1_468a-5 the service may disqualify all or a portion of the fund as of the date that the fund does not satisfy the requirements sec_1_468a-5 provides that if a qualified_fund is disqualified the fair_market_value with certain adjustments of the assets in the fund is deemed to be distributed to the electing taxpayer and included in that taxpayer’s gross_income for the taxable_year sec_1_468a-6 generally provides rules for the transfer of an interest in a nuclear power plant and transfer of the qualified_fund where after the transfer the transferee is an eligible_taxpayer under sec_1_468a-6 the service may treat any disposition of an interest in a nuclear power plant occurring after date as satisfying the requirements of the regulations if the service determines that such treatment is necessary or appropriate to carry out the purposes of sec_468a plr-128613-02 as indicated with respect to requested ruling above the service will exercise its discretion to treat the sale under sec_1_468a-6 as a disposition qualifying under the general provisions of sec_1_468a-6 this exercise of discretion applies to the provisions of sec_1 including the requirement under sec_1_468a-6 that the transferee continues to satisfy the requirements of sec_1_468a-5 which permits an electing taxpayer to maintain only one qualified nuclear decommissioning fund for each plant except those outlined in sec_1 468a- e with respect to the calculation of a schedule of ruling amounts subsequent to a sale thus so long as buyer establishes only one qualified nuclear decommissioning fund buyer’s qualified nuclear decommissioning fund established to hold the assets transferred from the sellers’ qualified nuclear decommissioning funds will be treated as a qualified nuclear decommissioning fund of buyer when buyer obtains a qualifying interest upon the transfer of plant to buyer requested ruling neither buyer nor buyer’s qualified nuclear decommissioning fund will recognize gain_or_loss or otherwise take any income_or_deduction into account by reason of the transfer of the assets from the sellers’ qualified nuclear decommissioning funds to buyer’s qualified nuclear decommissioning fund and after the date of closing buyer’s qualified nuclear decommissioning fund will retain the same basis in the assets received as the sellers’ qualified nuclear decommissioning funds had prior to the date of closing sec_1_468a-6 provides that neither a transferee nor its fund will recognize gain_or_loss or otherwise take any income_or_deduction into account by reason of the transfer of the assets from a transferor’s qualified_fund to a transferee’s qualified_fund additionally sec_1_468a-6 provides that transfers of assets of a qualified_fund to which sec_1_468a-6 applies do not affect basis thus buyer will not recognize gain_or_loss or otherwise take any income_or_deduction into account by reason of the transfer of the assets from the sellers’ qualified nuclear decommissioning funds to buyer’s qualified nuclear decommissioning fund also buyer’s qualified nuclear decommissioning fund will have a basis in the assets that is the same as the basis of those assets in the qualified nuclear decommissioning funds of the sellers immediately prior to the transfer requested ruling each seller will be entitled to a deduction equal to the amount of its liability to decommission plant expressly assumed by buyer and included in the seller’s income in the year the liability is assumed reduced by the amount of the liability to be funded by such seller’s qualified nuclear decommissioning funds sec_1_446-1 of the income_tax regulations provides that under an accrual_method of accounting a liability is incurred and generally taken into account for federal_income_tax purposes in the year in which all the events have occurred that plr-128613-02 establish the fact of the liability the amount of the liability can be determined with reasonable accuracy and economic_performance has occurred with respect to the liability sec_461 makes clear that generally the all_events_test is not treated as having been met any earlier than the taxable_year in which economic_performance has occurred with respect to the liability see also sec_1_461-4 sec_461 provides that in the case of a liability that requires the taxpayer to provide services economic_performance occurs as the taxpayer provides the services sec_1_461-4 provides that economic_performance occurs with respect to such service liabilities as the taxpayer incurs costs in connection with the satisfaction of the liability sec_1_461-4 provides an exception to the general economic_performance rule for services where the taxpayer sells a trade_or_business where the purchaser expressly assumes a liability arising out of the taxpayer’s trade_or_business that the taxpayer but for the economic_performance requirement would have been entitled to incur as of the date of the sale economic_performance with respect to the liability occurs as the amount of the liability is properly included in the amount_realized on the sale by the taxpayer the first prong of the all_events_test requires that the fact of the liability be established at the time of the deduction this prong of the test is satisfied in this case here the sellers have the obligation to decommission the plant the fact of the obligation arose many years ago at the time the sellers obtained their license to operate the plant see c f_r sections dollar_figure and requiring the operator of a nuclear power plant to decommission it moreover congress recognized the existence of the decommissioning liability when in it enacted sec_461 and sec_468a noting that g enerally under federal and state laws utilities that operate nuclear power plants are obligated to decommission the plants at the end of their useful lives h_r conf_rep no see also s prt no vol 98th cong 2d sess the second prong of the all_events_test requires the amount of the liability to be determined with reasonable accuracy sec_1_461-1 this prong is also satisfied in this case the amount of the sellers’ decommissioning liability has been determined by experts in the nuclear decommissioning industry their calculations have been reviewed and accepted by both the ferc or the state public_utility having jurisdiction in this case the committee and the nrc which is charged with ensuring that sufficient funds are available to decommission the plant in addition there is also support in the code for finding that the amount of the decommissioning liability is reasonably determinable at the time of sale sec_468a generally permits a current deduction for a ruling_amount based on estimated future decommissioning liabilities plr-128613-02 to the extent decommissioning costs are sufficiently determinable to entitle the utility to a deduction under sec_468a it is reasonable to conclude that the cost must also be sufficiently determinable to satisfy the second prong of the all_events_test given that the first two prongs of the all_events_test are satisfied economic_performance with respect to the decommissioning liability occurs as of the date of the sale to the extent the liability is included in each sellers’ amount_realized at that time each seller will be entitled to a deduction for the amount of its decommissioning liability associated with the plant expressly assumed by the buyers and included in that sellers’ amount_realized requested ruling the buyer will not recognize any gain or otherwise take any income into account by reason of the purchase of plant and its associated assets including without limitation the transfer of the assets of the sellers’ nonqualified nuclear decommissioning funds to buyer’s corresponding nonqualified nuclear decommissioning fund except to the extent that the aggregate amount of cash and other class_i_assets received from all sellers exceeds the aggregate amount of consideration provided by buyer to all sellers with respect to the acquisition of plant including its equipment and operating_assets and the nonqualified nuclear decommissioning funds’ assets buyer will not recognize income except to the extent the class_i_assets as defined in sec_1 b it receives exceed its total cost determined under sec_1012 which will be the sum of its cash consideration and the fair_market_value of any other consideration it provides to the sellers that is under applicable tax principles taken into account on the date of the applicable_asset_acquisition if buyer is thus required to take an amount into account as income then when under general principles of tax law buyer is permitted to take additional consideration into account eg when it satisfies the economic_performance requirement with respect to the decommissioning liability assumed buyer will be entitled to deduct currently and will not be required to capitalize such amount 344_us_6 additionally on the date of closing buyer’s basis in the assets acquired must be determined by allocating its cost ie the consideration provided by buyer on the acquisition_date which includes the cash but not the assumption of the decommissioning liability among the acquired assets in accordance with the provisions of sec_1060 and the regulations thereunder specifically buyer will first reduce its consideration by the amount of the class_i_assets it receives in the transaction including any class_i_assets held in the nqfs to the extent the class_i_assets received exceed the consideration buyer provides buyer will recognize income to the extent buyer’s consideration exceeds the class_i_assets it receives such excess will be allocated in accordance with the provisions of sec_1060 and the regulations thereunder as described above when and to the extent additional_amounts are paid_or_incurred for the assets acquired in the applicable_asset_acquisition eg when and to plr-128613-02 the extent the nonqualified nuclear decommissioning funds pay or incur decommissioning expenses such amounts will be taken into account as increases to buyer’s consideration and allocated in the same manner and subject_to the same conditions as though they were paid_or_incurred on the acquisition_date sec_1_338-6 sec_1_338-7 sec_1_1060-1 and sec_1_1060-1 this letter_ruling is directed only to taxpayer who requested it sec_6110 provides that this ruling may not be used or cited as precedent except as specifically determined above no opinion is expressed or implied concerning the federal_income_tax consequences of the transaction described above in accordance with the powers of attorney the original of this letter is being sent to taxpayer’s authorized representative also in accordance with the powers of attorney a copy is being sent to taxpayer as well as taxpayer’s other authorized representative we are also sending a copy of this letter to the appropriate industry director lmsb sincerely peter c friedman senior technician reviewer branch office of associate chief_counsel passthroughs and special industries


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-155566-09 date date internal_revenue_service number release date index number ------------------------------------ --------------------------------------- ---------------------------- ------------------------------- legend x --------------------------------------- ------------------------------------ state ------ date1 --------------------------- date2 ---------------------- dear ---------------- this responds to a letter dated date and subsequent correspondence submitted on behalf of x requesting relief under sec_1362 of the internal_revenue_code the information submitted states that x was formed on date1 under the laws of state x represents that x intended to be an s_corporation effective date2 however no form_2553 election by a small_business_corporation was timely filed for x sec_1362 provides that a small_business_corporation may elect to be an s_corporation sec_1362 provides the rule on when an s election will be effective sec_1362 provides in relevant part that if an s election is made within the first two and one-half months of a corporation’s taxable_year then the corporation will be treated as an s_corporation for the year in which the election is made under sec_1362 however if an s election is made after the first two and one-half months of a corporation’s taxable_year then that corporation will not be treated as an s_corporation until the taxable_year after the year in which the s election is filed plr-155566-09 sec_1362 provides that if a an election under sec_1362 is made for any taxable_year after the date prescribed by sec_1362 for making such election for such taxable_year or no such election is made for any taxable_year and b the secretary determines that there was reasonable_cause for the failure to timely make such election then the secretary may treat such an election as timely made for such taxable_year based solely on the facts submitted and the representations made we conclude that x has established reasonable_cause for failing to make a timely election to be an s_corporation effective date2 accordingly provided that x makes an election to be an s_corporation by filing a complete form_2553 effective date2 along with a copy of this letter with the appropriate service_center within days from the date of this letter then such election will be treated as timely made for date2 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 was or is a small_business_corporation under sec_1361 of the code 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 sincerely bradford r poston senior counsel branch office of the associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes cc


t c memo united_states tax_court vision information services l l c irene correia tax_matters_partner petitioner v commissioner of internal revenue respondent docket no filed date joseph galasso jr for petitioner greg okwuosah and robert heitmeyer for respondent memorandum findings_of_fact and opinion laro judge petitioner petitioned the court under sec_6226 to readjust partnership items adjusted by respondent following the parties’ concessions we must decide whether vision information services l l c vision sold or instead licensed certain intellectual_property to twentieth century fox foxvideo respondent determined and argues that vision licensed the property to foxvideo and hence that payments which vision received from foxvideo as to the transaction are taxable as ordinary_income petitioner argues that vision sold the property to foxvideo and hence that the payments qualify for capital_gain treatment petitioner concedes that the payments are ordinary_income if the property was licensed rather than sold we agree with respondent unless otherwise noted section references are to the applicable versions of the internal_revenue_code and rule references are to the tax_court rules_of_practice and procedure findings_of_fact some facts were stipulated the stipulated facts and the exhibits submitted therewith are incorporated herein by this reference we find the stipulated facts accordingly vision is a limited_liability_company the headquarters of which was in royal oak michigan when its petition was filed with the court for federal_income_tax purposes it is treated as a partnership and its members are treated as its partners vision was formed on date to provide certain services to users of a base software package software developed by a corporation named nordic information systems inc nordic the software helped track the movement of consumer goods between manufacturers and retailers the certain services to be provided by vision were data processing services referred to as third party service bureau services related to the software also on date vision and nordic entered into a software license agreement license agreement with respect to the software the license agreement stated in relevant part license grant and restrictions license subject_to the terms and conditions of this agreement nordic grants to vision and vision accepts an exclusive perpetual worldwide license to use copy modify and enhance the software source materials and manuals i to provide third- party service bureau services to various third parties and ii to sub-license the software to foxvideo to enable foxvideo to use the software to process its own data and the data of its affiliates ownership confidentiality and protection of software and other trade secrets nordic ownership of software this license is not a sale except as otherwise provided herein title and all proprietary rights patents trade secrets copyrights and trade marks to the software and any copy made by vision are held by nordic the software is copyrighted and is protected by united_states and international copyright laws nordic and vision on the same day also entered into an annual maintenance agreement under which nordic agreed to provide support and maintenance for the software and vision agreed to pay to nordic a fee in exchange for nordic’s on-call benefits and time and material services also on date vision and foxvideo entered into a distribution information services agreement vision agreement the vision agreement entitled vision to provide data processing services to foxvideo in connection with the software and described among other things the services to be performed the territories affected the terms of the agreement the scope of exclusivity and the prices for the services under the agreement the vision agreement stated in relevant part term the term shall commence as of date effective date and unless earlier terminated shall last five years foxvideo shall have an option to extend the term for an additional five-year period initial extension period on the following basis the terms in effect at the outset of the initial extension period including the exclusivity terms shall be the same as the terms in effect at the end of the first five year period except that foxvideo shall not be required to pay any additional license fee for the vision software license with respect to the initial extension period and such terms shall be subject_to adjustment during the initial extension period on the same basis as the initial terms during the first five- year period are subject_to adjustment as provided herein at the end of the initial extension period if any the vision agreement may be extended for successive additional five-year periods by mutual consent provided that a no additional license fee for any such additional extension period shall ever be payable by foxvideo and b vision’s exclusivity commitments for any such extension period shall be subject_to negotiation by the parties each 12-month_period of the term shall be referred to as a contract_year exclusivity a by foxvideo for so long as the vision agreement is in effect foxvideo shall procure information services for use in direct-to-store distribution of videocassettes in the united_states and canada exclusively from vision vision software license fee a vision software license i vision’s license from nordic the continuing existence and validity of vision’s license of the nordic software from nordic including all maintenance and related agreements collectively the nordic agreements shall be of the essence of the vision agreement ii grant of license vision shall grant or cause to be granted to foxvideo a worldwide non- exclusive non-transferable license vision software license to use on its own hardware or otherwise the vision software ie the software as modified by vision and any other software used by vision in providing the information services to foxvideo the vision software license shall have a term coextensive with the term of the vision agreement b license fee i payment of fee except as provided below foxvideo shall pay a license fee to vision in the aggregate amount of dollar_figure million payable as follows a dollar_figure million payable on signature of the vision agreement plus b dollar_figure million payable on each of the first four anniversary dates of the signing of the vision agreement ii reimbursement upon termination in the event that the vision agreement is terminated before the end of the term as a result of a default by vision foxvideo will receive a reimbursement of a portion of the license fee paid to the date of termination based upon an amortization of the license fee at the rate of dollar_figure million per year pursuant to the vision agreement foxvideo paid vision the referenced dollar_figure million payment in and the referenced dollar_figure million payment in on its form_1065 u s partnership return of income vision reported its receipt of the dollar_figure million payment as long-term_capital_gain income from a dollar_figure million installment_payment sale of exclusive rights know how on its form_1065 vision reported its receipt of dollar_figure of the dollar_figure million payment as long-term_capital_gain income and reported the rest dollar_figure as portfolio_interest income on date respondent mailed to petitioner a notice of final_partnership_administrative_adjustment fpaa for and respondent determined in the fpaa that both payments were taxable as ordinary_income because respondent determined they were received by vision as a license fee opinion the parties dispute whether vision sold or licensed to foxvideo the property underlying the dollar_figure million and dollar_figure million payments petitioner argues that vision sold this property to foxvideo in that petitioner asserts vision transferred to foxvideo the exclusive right to use the trade secrets and know-how embodied in the software for their useful_life of less than years respondent argues that vision licensed the software to foxvideo in that respondent asserts vision and foxvideo intended at the time of the pertinent agreements that the property would be licensed in exchange for a set fee and stated as much in those agreements we agree with respondent our decision turns on the intent of the parties to the pertinent agreements as ascertained as of the time that they entered into these agreements 378_f2d_595 5th cir we ascertain this intent primarily by construing the pertinent agreements id see also 303_f2d_567 1st cir affg tcmemo_1961_82 petitioner asserts on brief that respondent bears the burden_of_proof for by virtue of sec_7491 the parties however stipulated that petitioner bears the burden_of_proof as to both years because petitioner has not asked the court to vacate this stipulation and the record does not otherwise give us any reason to qualify change or contradict it we treat the stipulation as a conclusive admission by petitioner that petitioner bears the burden_of_proof for both years see rule e we read the license agreement to provide specifically that nordic was licensing the software to vision and that vision could sublicense the software to foxvideo the agreement for example granted vision an exclusive perpetual worldwide license to use the software and allowed vision to sublicense the software to foxvideo for its use the agreement also stated that the license to vision is not a sale that except as otherwise provided herein title and all proprietary rights patents trade secrets copyrights and trade marks to the software and any copy made by vision are held by nordic and that the software is copyrighted and is protected by united_states and international copyright laws petitioner makes no mention of these quoted statements or the fact that the parties to the license agreement went to great lengths to include them within that agreement nor does petitioner explain how vision could have sold the software to foxvideo when the software was not owned but merely licensed by vision indeed petitioner does not even rebut the fact that nordic licensed the software to vision and specifically acknowledges this fact when petitioner states that the license agreement resulted in vision’s having a license to use the software we also read the vision agreement to provide similarly that vision licensed and did not sell the software to foxvideo this agreement states that vision sublicensed the software to foxvideo and that vision would be receiving the dollar_figure million and dollar_figure million payments in dispute as a license fee this agreement also labeled the transaction underlying the payments a grant of license and referenced the license agreement as an integral part of the vision agreement by stating that the continuing existence and validity of vision’s license of the nordic software from nordic shall be of the essence of the vision agreement and that the vision software license shall have a term coextensive with the term of the vision agreement we conclude that the transaction was a licensing agreement and hence that the disputed payments are taxable as ordinary_income we have considered all arguments made by the parties as to this conclusion and have found those arguments not discussed herein to be irrelevant and or without merit we have not considered the alternative arguments which respondent made in the event that we were to conclude that the subject transaction was not a licensing agreement to reflect concessions decision will be entered under rule we also believe that the reimbursement provision of the vision agreement is more consistent with our finding of a licensing agreement as opposed to a sale whereas petitioner asserts that the useful_life of the subject property was less than years we find that the parties to the vision agreement believed at the time of that agreement that the property’s useful_life wa sec_5 years or more


t c memo united_states tax_court charles kadlec and lesley c kadlec petitioners v commissioner of internal revenue respondent docket no filed date lisa j steele for petitioners melanie m garger for respondent memorandum findings_of_fact and opinion ruwe judge respondent determined a deficiency of dollar_figure in petitioners’ federal_income_tax respondent further determined an addition_to_tax pursuant to sec_6651 in the amount of dollar_figure 1unless otherwise indicated all section references are to the internal_revenue_code in effect for the taxable_year in issue and all rule references are to the tax_court rules_of_practice and procedure after concessions the sole issue remaining for decision is whether petitioners are entitled to a bad_debt deduction of dollar_figure for the taxable_year findings_of_fact some of the facts have been stipulated and are so found the stipulation of facts and attached exhibits are incorporated herein by this reference petitioners resided in acton massachusetts at the time they filed their petition petitioners are the owners of stow laboratories inc sli a closely held massachusetts corporation with its principal_place_of_business in hudson massachusetts sli has been engaged in the manufacturing and sale of electrical equipment since it was incorporated on date mr kadlec is the president and treasurer of sli as well as a director and full-time_employee he own sec_80 percent of sli's stock mrs kadlec is the vice president clerk and a director and she owns the remaining percent of sli's stock from to the date of trial petitioners made capital contributions to sli in the total amount of dollar_figure 2at trial petitioners conceded the addition_to_tax pursuant to sec_6651 for delinquent filing of their federal_income_tax return advances to sli from through yana kadlec mr kadlec's mother made the following advances to sli amount date of note maturity_date interest rate dollar_figure per annum big_number per annum big_number per annum big_number per annum 1petitioners allege that this note is a renewal of the previous three notes from yana kadlec yana kadlec died on date sli never repaid the principal due under any of these notes to yana kadlec or to her heirs or assignees from through sli borrowed various sums from hudson national bank hudson national of hudson massachusetts most of the borrowing was in the form of 90-day demand notes in addition on date sli borrowed dollar_figure from hudson national pursuant to a 3-year collateral note hudson national required mr kadlec to guarantee these notes on date sli’s board_of directors ratified hudson national’s 3-year loan the corporate minutes indicate that hudson national required mr kadlec to personally countersign the borrowing all notes from hudson national were paid in full by date during each of the years through mr kadlec advanced funds to sli to enable it to meet its payroll and current operating_expenses at the end of each year the unpaid balance of the advances was totaled and memorialized in an interest-bearing promissory note between and mr kadlec advanced the following amounts to sli amount date of note maturity_date interest rate dollar_figure per annum dollar_figure per annum dollar_figure per annum dollar_figure per annum dollar_figure per annum the average bank prime rates for the periods at issue were as follows year interest rate per annum per annum per annum per annum per annum mr kadlec's and advances were subordinated to the then-outstanding hudson national 3-year loan executed on date on date at a special meeting of sli’s board_of directors the board ratified mr kadlec’s advance the corporate minutes state that funds needed by sli to continue operations while sli developed new products had become impossible to obtain from banks without mr kadlec’s accompanying personal guarantee in addition at a special meeting on date sli’s board ratified mr kadlec’s advance the corporate minutes indicate that mr kadlec’s advance was necessary because no other sources of funds were available sli has never made any payments of principal or interest to mr kadlec pursuant to these notes from through sli subleased office space to datatrol producing rental income as follows year rental income dollar_figure dollar_figure dollar_figure dollar_figure mr kadlec believed that his advances to sli would be repaid out of profits generated by product sales and from rental income received from datatrol the sublease with datatrol ended in date and sli was unable to find another subtenant until on date at a special meeting of sli’s board_of directors the board declared mr kadlec's promissory notes for through worthless however at the same meeting the board ratified a note dated date to mr kadlec in the amount of dollar_figure for money that sli had borrowed from mr kadlec mr kadlec also made additional advances subsequent to the date meeting these include a dollar_figure advance in an dollar_figure advance in and a dollar_figure advance in sli has made no payments on any of these advances sli was a going concern in and has continued as such through the time of trial petitioners claimed the through advances as short-term_capital_losses on schedule d of their federal_income_tax return sli did not file a u s corporate tax_return form_1120 for the taxable_year and therefore did not report any cancellation_of_indebtedness_income as a result of these alleged canceled debt obligations opinion the only issue for decision is whether petitioners may deduct dollar_figure in as a bad_debt under sec_166 sec_166 allows taxpayers a deduction for any bona_fide debt which becomes worthless in the taxable_year a bona_fide debt is a debt that arises from a debtor-creditor relationship based upon a valid and enforceable obligation to pay a fixed or 3petitioners claimed a short-term_capital_loss deduction on schedule d of their federal_income_tax return alleging that the loans constituted nonbusiness bad_debts sec_166 distinguishes between business and nonbusiness bad_debts if the loss arises from a business debt it may be deducted in full against ordinary_income if the loss arises from a nonbusiness_debt it is treated as a short-term_capital_loss sec_166 d on brief petitioners now argue that the loans were in fact business bad_debts determinable sum of money sec_1_166-1 income_tax regs this is in contrast to a contribution_to_capital or equity_investment which is not considered debt for purposes of sec_166 91_tc_575 sec_1 c income_tax regs respondent determined that mr kadlec’s advances to sli constituted capital contributions as opposed to loans respondent's determination is presumed correct and petitioners bear the burden of proving otherwise rule a 290_us_111 74_tc_476 the characterization of advances to a corporation by a shareholder is a question of fact to be determined from all the facts and circumstances 262_f2d_512 2d cir affg tcmemo_1958_8 63_tc_790 courts have considered the following nonexclusive list of factors in determining whether advances such as those involved in the instant case are loans or equity investments the intent of the parties the identity between creditors and shareholders the extent of participation in management by the holder of the instrument the ability of the corporation to obtain funds from outside sources the thinness of the capital structure in relation to debt the risk involved the formal indicia of the arrangement the relative position of the obligees as to other creditors regarding the payment of interest and principal the voting power of the holder of the instrument the provision of a fixed rate of interest a contingency on the obligation to repay the source of the interest payments the presence or absence of a fixed maturity_date a provision for redemption by the corporation a provision for redemption at the option of the holder and the timing of the advance with reference to the organization of the corporation 398_f2d_694 3d cir fn ref omitted these factors are only aids to be used in determining whether the investment constitutes debt or equity id pincite the touchstone of economic reality is whether an outside lender would have made the payments in the same form and on the same terms 89_tc_816 if the advances were far more speculative than what an outsider would make the payments would be loans in name only id citing fin hay realty co v united_states f 2d pincite in making our determination we recognize that heightened judicial scrutiny is appropriate when shareholders make advances to their closely held corporations as the court_of_appeals for the third circuit noted in fin hay realty co v united_states supra pincite where the corporation is closely held and the same persons occupy both sides of the bargaining table form does not necessarily correspond to the intrinsic economic nature of the transaction for the parties may mold it at their will with no countervailing pull this is particularly so where a shareholder can have the funds he advances to a corporation treated as corporate obligations instead of contributions to capital without affecting his proportionate equity_interest we find that petitioners have failed to carry their burden_of_proof our analysis of the advances at issue under the factors listed above convinces us that these advances were contributions to capital rather than loans formal indicia of the arrangement on brief respondent concedes that mr kadlec's advances possessed the formal indicia of loans the advances were memorialized by promissory notes specifying the payment of a sum certain at a fixed maturity_date with interest and providing mr kadlec with the right to enforce payments however allegedly objective economic indicia of debt such as consistent bookkeeping and consistent financial reporting on balance sheets are little more than additional declarations of intent without accompanying objective economic indicia of debt dixie dairies corp v commissioner t c pincite citing 505_f2d_873 5th cir in the instant case the formal indicia surrounding mr kadlec's advances are overcome by other factors that establish that as a matter of economic reality mr kadlec's advances were capital contributions inability of sli to obtain funds from outside sources in segel v commissioner t c pincite we explained that the focus of this factor is not simply on the ability of a corporation to obtain the funds from outside sources rather the focus is whether an outside lender would have lent the funds on the same or similar terms the record in this case clearly establishes that an independent outside lender would not have made the same advances to sli as did mr kadlec the corporate minutes from a special meeting of sli’s board_of directors on date state that hudson national required mr kadlec to personally countersign the borrowing in addition corporate minutes from meetings of sli’s board_of directors on date and date indicate that advances from mr kadlec were necessary because sli no longer had any outside sources available for borrowing presence of this factor indicates that the advances were contributions to capital the risk involved advances by a shareholder that are placed at the risk of the corporation's business are likely to be considered contributions to capital 308_f2d_39 2d cir remanding 35_tc_268 248_f2d_399 2d cir remanding tcmemo_1956_137 peraino v commissioner tcmemo_1982_ affd without opinion 742_f2d_1437 2d cir petitioners stipulated that mr kadlec anticipated repayment of his advances would come out of the profits from product sales and for the and advances from the rental income generated from the sublease with datatrol thus mr kadlec did not enjoy an expectation of repayment regardless of the success of the business gilbert v commissioner supra pincite this is an additional factor pointing to a finding that the advances constituted contributions to capital rather than loans thin_capitalization a corporation’s debt-to-equity_ratio compares the corporation's total liabilities to its stockholders’ equity development corp of am v commissioner tcmemo_1988_127 examining the debt-to-equity_ratio enables us to determine whether a corporation is so thinly capitalized that a business loss would result in an inability to repay the advance such thin_capitalization would be indicative of a capital_contribution rather than a loan 748_f2d_1365 9th cir revg tcmemo_1983_120 despite numerous judicial opinions on this issue no clear cut set of standards or agreed-upon mathematical formula exists to determine whether or not a corporation is thinly capitalized for federal_income_tax purposes development corp of am v commissioner supra according to petitioners’ expert robert j erickson sli's debt-to-equity ratios for the years ending date through were as follows december debt equity to negative equity negative equity negative equity negative equity we believe that sli’s debt-to-equity ratios for these years coupled with the fact that petitioners’ total capital_contribution since was only dollar_figure indicate that sli was thinly capitalized such thin_capitalization suggests that the advances were equity investments subordination whether the advances have a status equal to or inferior to that of regular corporate creditors is of some importance in determining whether mr kadlec was dealing as a shareholder or as a creditor 375_f2d_36 5th cir nassau lens co v commissioner f 2d pincite in the present case mr kadlec's advances to sli in and were subordinated to the then-outstanding 3-year loan from hudson national that was executed on date this factor indicates that the advances were capital contributions interest payments a bona_fide lender is concerned with interest 336_us_422 ndollar_figure 396_f2d_630 5th cir mr kadlec’s purported debt instruments contained provisions for interest however sli has never paid interest or principal on any of the advances in issue the fact that mr kadlec continued to advance funds despite sli’s failure to make any interest or principal payments due on these advances suggests that mr kadlec made an equity contribution our review of the record convinces us that an outside creditor would not have made the advances in issue to sli 89_tc_816 we conclude that these advances were contributions to capital as opposed to bona_fide debts therefore petitioners are not entitled to a bad_debt deduction for 4we note that even if the advances were loans petitioners would still not be entitled to a bad_debt deduction because they have not proven that the advances became worthless in 60_tc_36 affd in part revd in part and remanded 496_f2d_899 5th cir mr kadlec continued to advance funds to sli which has continued as a going concern where a debtor company continues to operate as a continued accordingly respondent’s determination is sustained decision will be entered for respondent continued going concern courts often have concluded that its debts are not worthless for federal_income_tax purposes 620_f2d_1176 6th cir affg 68_tc_213


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 intl b01 plr-117673-12 date date ty -------------- legend taxpayer -------------------------------------------------------------------- --------------------------- spouse -------------------------------------------------------------------- -------------------------------- rrsp -------------------------------------------------------------------- ----------------------------------------------------------------------------------------- -------------------------- tax years year year year year year year -------------- ------- ------- ------- ------- ------- ------- plr-117673-12 dear ---------------------------------- this is in reply to a letter dated date requesting an extension of time under sec_301_9100-3 for taxpayer and spouse to elect the provisions of revproc_2002_23 2002_1_cb_744 for tax years the ruling contained in this letter is 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 requested rulings it is subject_to verification on examination the information submitted for consideration is substantially as set forth below facts during tax years taxpayer was a canada citizen and u s resident taxpayer moved to the united_states in year and became a lawful permanent resident shortly afterward spouse was born and raised in the united_states taxpayer and spouse married in year in year taxpayer established a canadian registered retirement savings_plan rrsp taxpayer made contributions to rrsp until year taxpayer and spouse filed joint income_tax returns throughout their marriage neither taxpayer nor spouse has tax-related education skills or training in year they engaged a u s accountant to prepare their income_tax returns the u s accountant has prepared their income_tax returns since year each year taxpayer and spouse provided their u s accountant with all the tax and financial information they believed was relevant for tax years the u s accountant did not advise taxpayer and spouse of the requirement to make an election to defer u s taxation on income accruing in rrsp pursuant to article xviii of the united states-canada income_tax convention the treaty taxpayer died in year while settling taxpayer’s affairs spouse discovered that they were not compliant with u s tax law with respect to rrsp as of the date of the ruling_request the internal_revenue_service has not communicated with taxpayer or spouse in any way regarding the rrsp ruling requested taxpayer and spouse request the consent of the commissioner of internal revenue for an extension of time under sec_301_9100-3 to make an election pursuant to revproc_2002_23 to defer u s federal income_taxation on income accrued in rrsp as provided for in article xviii of the treaty for tax years plr-117673-12 law and analysis sec_301_9100-1 provides that the commissioner has discretion to grant a taxpayer a reasonable extension of time under the rules set forth in sec_301_9100-3 to make a regulatory election under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301 -1 b provides that an election includes an application_for relief in respect of tax and defines a regulatory election as an election whose due_date is prescribed by a regulation a revenue_ruling revenue_procedure notice or announcement sec_301_9100-3 provides that requests for relief subject_to this section will be granted when the taxpayer provides the evidence including affidavits described in sec_301_9100-3 to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and the grant of relief will not prejudice the interests of the government in the present situation the election provided in revproc_2002_23 is a regulatory election within the meaning of sec_301_9100-1 therefore the commissioner has discretionary authority under sec_301_9100-1 to grant taxpayer and spouse an extension of time provided that taxpayer and spouse satisfy the standards set forth in sec_301_9100-3 based solely on the information submitted and representations made we conclude that taxpayer and spouse satisfy the standards of sec_301_9100-3 accordingly taxpayer and spouse are granted an extension of time until days from the date of this ruling letter to make an election for tax years under revproc_2002_23 as provided in sec_301_9100-1 the granting of an extension of time is not a determination that taxpayer and spouse are otherwise eligible to make the above- described election pursuant to section dollar_figure of revproc_2002_23 the election once made cannot be revoked except with the consent of the commissioner for tax years amended u s income_tax returns should be filed with a form_8891 u s information_return for beneficiaries of certain canadian registered retirement plans for the rrsp attached to each amended_return for each subsequent tax_year through the tax_year in which a final distribution is made from the rrsp spouse must attach a form_8891 for the rrsp to spouse’s u s income_tax return 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 plr-117673-12 a copy of this letter must be attached to the u s income_tax return for the year in which taxpayer and spouse obtained the ruling and should be associated with the amended returns for tax years this letter_ruling is directed only to the taxpayers who requested it sec_6110 provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file with this office a copy of this letter will be sent to your authorized representative sincerely __________________________________ m grace fleeman senior technical reviewer branch office of associate chief_counsel international enclosure copy for purposes cc


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc psi b01-plr-131537-00 date date x date this responds to a letter dated date and subsequent correspondence submitted on behalf of x requesting relief under sec_1362 of the internal_revenue_code facts x was incorporated on date the shareholders of x desired that x elect s_corporation treatment effective on date but the election to be treated as an s_corporation was not timely filed accordingly x requests a ruling that it will be treated as an s_corporation effective date law and analysis sec_1362 provides that a small_business_corporation may elect to be an s_corporation sec_1362 provides the rule on when an s election will be effective sec_1362 provides in relevant part that if an s election is made within the first two and one-half months of a corporation's taxable_year then the corporation will be treated as an s_corporation for the year in which the election is made under sec_1362 however if an s election is made after the first two and one-half months of a corporation's taxable_year then that corporation will not be treated as an s_corporation until the taxable_year after the year in which the s election is filed sec_1362 provides that if no sec_1362 election is made for any plr-131537-00 taxable_year and the secretary determines that there was reasonable_cause for the failure to timely make such election then the secretary may treat such an election as timely made for such taxable_year and sec_1362 shall not apply x did not file an election to be treated as an s_corporation under sec_1362 x has however established reasonable_cause for not making a timely s election and is entitled to relief under sec_1362 conclusion based solely on the facts submitted and the representations made and provided that x otherwise qualifies as an s_corporation we conclude that x will be treated as an s_corporation effective date within days from the date of this letter x should submit a properly completed form_2553 effective date with a copy of this letter attached to the relevant service_center except as specifically set forth above no opinion is expressed or implied as to the federal_income_tax consequences of the transaction described above under any other provision of the code specifically no opinion is expressed concerning whether x is in fact an s_corporation for federal tax purposes this ruling is directed only to the taxpayer s requesting it sec_6110 of the code provides that it may not be used or cited as precedent s dianna k miosi sincerely chief branch office of the associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes


t c summary opinion united_states tax_court christine l gibbons petitioner v commissioner of internal revenue respondent docket no 5464-05s filed date christine l gibbons pro_se bryan e sladek for respondent couvillion special_trial_judge this case was heard pursuant to sec_7463 in effect at the time the petition was filed the decision to be entered is not reviewable by any other court and this opinion should not be cited as authority respondent determined a deficiency of dollar_figure in petitioner’ sec_2002 federal_income_tax the sole issue for decision is whether 1unless otherwise indicated subsequent section references are to the internal_revenue_code in effect for the year at issue petitioner is liable for the 10-percent additional tax under sec_72 for an early distribution from a qualified_retirement_plan some of the facts were stipulated those facts and the accompanying exhibits are so found and are incorporated herein by reference petitioner’s legal residence at the time the petition was filed was casco township michigan petitioner was employed as a schoolteacher by the fraser public school system the school system the school system maintained a pension_plan for its employees including petitioner which qualified as stipulated by the parties as a sec_403 plan during the year petitioner as an employee and a participant in the pension_plan withdrew dollar_figure from the plan the proceeds of which were to fund her daughter’s higher education expenses on her federal_income_tax return for petitioner reported the entire amount of the pension_plan withdrawal as income however petitioner failed to report a liability for the 10-percent sec_72 additional tax for an early withdrawal from a qualified_pension plan in the administrative review or audit of petitioner’s tax_return the irs agreed that dollar_figure of the dollar_figure withdrawn from the pension_plan was appropriately expended for the qualified_higher_education_expenses of petitioner’s daughter under sec_72 and therefore the sec_72 addition_to_tax was not applicable to that portion of the distribution the remainder of the pension_plan distribution or dollar_figure was determined to be subject_to the sec_72 additional tax for the reason that petitioner did not substantiate that this portion of the distribution was used for higher education expenses at trial respondent’s position was that no portion of the dollar_figure early distribution qualified for higher education expenses for the reason that the pension_plan of the school system was not in the category of qualified_plans as to which the provisions of sec_72 are applicable the parties stipulated as noted above that the school system plan was qualified under sec_403 sec_72 imposes an additional tax on distributions from a qualified_retirement_plan equal to 10-percent of the portion of such amount that is includable in gross_income unless the distribution comes within one of several statutory exceptions for purposes of the 10-percent additional tax a 2even though respondent’s position at trial was that no portion of the dollar_figure early withdrawal was subject_to exclusion from the sec_72 additional tax counsel for respondent stated that respondent would not move to increase the deficiency to apply the sec_72 additional tax to the dollar_figure which was allowed as a higher education expense prior to issuance of the notice_of_deficiency qualified_retirement_plan includes both a sec_401 plan and an individual_retirement_account or individual_retirement_annuity see sec_72 sec_401 k c and the 10-percent additional tax imposed on early distributions from qualified_retirement_plans does not apply to distributions from an individual_retirement_plan used for higher education expenses of the taxpayer for the taxable_year sec_72 the term individual_retirement_plan is defined as an individual_retirement_account or individual_retirement_annuity commonly referred to as iras sec_7701 retirement plans qualified under sec_403 as in this case are not included in the definition of individual_retirement_plan under sec_7701 congress intended the exception of sec_72 to apply only to distributions from individual retirement plans ie iras and not to all qualified_retirement_plans see sec_4974 and and a taxpayer_relief_act_of_1997 publaw_105_34 sec a 111_stat_809 this is evident in the report of the committee on the budget which states penalty free ira withdrawals for education expenses--the bill provides that individuals may make penalty-free withdrawals from their iras to pay for the undergraduate and graduate higher education expenses of themselves their spouses their children and grandchildren or the children or grandchildren of their spouses emphasis added h rept pincite 1997_4_cb_319 the report of the committee on the budget specifically provides that only withdrawals from iras that are used for higher education expenses will qualify as withdrawals excepted from the 10-percent additional tax id no other types of qualified_plans are provided this exemption from the sec_72 additional tax as noted earlier the parties stipulated that the school system plan in which petitioner participated was a sec_403 plan the plan therefore was not an individual_retirement_plan petitioner therefore was not the beneficiary of an individual_retirement_plan under sec_7701 which defines an individual_retirement_plan as an individual_retirement_account under sec_408 or an individual_retirement_annuity under sec_408 the school system plan in which petitioner participated was not a sec_408 or b plan but a sec_403 plan a sec_403 plan such as the school system plan is altogether different from a sec_408 or b plan in short petitioner’s claim that the withdrawal at issue was excluded from the 10-percent additional tax is incorrect the sec_72 exclusion from the additional tax does not apply to sec_403 withdrawals in uscinski v commissioner tcmemo_2005_124 this court stated that the 10-percent additional tax on early distributions from qualified_plans used for higher education purposes applies only as to early distributions from an individual_retirement_account or an individual_retirement_annuity collectively referred to as iras as described in sec_408 or b the school system plan in which petitioner participated was not an ira therefore the early_withdrawals from that plan even if used for higher education expenses are not excluded from the sec_72 additional tax reviewed and adopted as the report of the small_tax_case division decision will be entered for respondent 3because the court holds that the withdrawal by petitioner as a matter of law was not subject_to the exemption from the sec_72 additional tax the court need not decide whether the evidence presented at trial established that the funds withdrawn from the pension_plan were in fact used for higher educational expenses


of f i c e of c h i ef c ou n sel department of the treasury i n t e r n al r e v e n u e s e r v i c e w ashington d c date number info release date genin-116875-09 ---------------------- -------------------------------------- --------------------------------------- uil dear --------------- thank you for your letter of date to commissioner shulman regarding the tax consequences to victims of the investment fraud mr bernard l madoff perpetrated on date we issued guidance revrul_2009_9 and revproc_2009_20 on the tax treatment of losses from so-called ponzi schemes similar to that mr madoff operated i am enclosing copies for your information revrul_2009_9 explains the income_tax law that applies to an investor who loses money in a fraudulent investment arrangement it provides that an investor who was the victim of a fraudulent investment arrangement is entitled to a theft_loss deduction that is not limited by the rules that apply to capital losses investment theft losses are not subject_to limitations that apply to personal casualty and theft losses the theft_loss is deductible in the year the fraud is discovered except to the extent the investor has a reasonable_prospect_of_recovery the amount of the theft_loss includes not only the investor's unrecovered investment but also amounts reported as income from the investment in prior years and reinvested in the fraudulent investment arrangement a theft_loss deduction that creates a net_operating_loss for the investor can be carried back and forward according to the timeframes prescribed by law to generate a refund of taxes paid in other taxable years genin-116875-09 to claim a theft_loss deduction in any taxable_year an investor must prove that the loss was due to theft and that no reasonable prospect exists of recovering the investment investors often cannot make highly factual determinations with certainty in the year the loss is discovered for this reason we published revproc_2009_20 to provide a simplified_method for investors to compute and report their losses from fraudulent investment schemes this revenue_procedure generally allows an investor who was a victim of mr madoff’s fraud to claim a theft_loss in the amount the investor may deduct is up to percent of the loss less the amount of reimbursement he or she expects to receive as an advance for customer claims from the securities investor protection corporation sipc or from private insurance or other contractual arrangements that guarantee the investor against loss i hope this information is helpful please call me at ---------------------if i can further assist you sincerely john p moriarty chief branch office of associate chief_counsel income_tax and accounting enclosures


internal_revenue_service number release date index numbers ----------------------- ---------------------------------------- ------------------------- ---------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ----------------------- telephone number --------------------- refer reply to cc psi b04 plr-111794-11 date september re ----------------------------------------------- ----------------------------------- ------------------------------------ legend donor spouse attorney accountants trust -------------------------------------------------------------- date date year property ---------------------------------------- ------------------------------------------------------------- ------------------------------------------------- ------------------------------ ------------------------------------------------------------ ------------------------------------------------------------------------------------------ ---------------------- ---------------------- ------- ------------------------------------------------------------------------------------------ dear -------------- this letter responds to your authorized representative’s letter of date requesting an extension of time under sec_2642 of the internal_revenue_code and sec_301_9100-3 of the procedure and administration regulations to allocate donor's and spouse’s gst_exemption to a transfer to a_trust the facts and representations submitted are summarized as follows on date donor created trust an irrevocable_trust for the benefit of his descendants on date donor transferred the property to trust on their form sec_709 united_states gift and generation-skipping_transfer_tax returns filed for year donor and spouse treated the transfer as made one-half by each plr-111794-11 under sec_2513 although attorney had advised donor and spouse to allocate their gst_exemption in reporting the transfer accountants omitted the allocation when they prepared the form sec_709 consequently no gst_exemption was allocated to the transfer donor has since died the executor of donor's estate and spouse request an extension of time under sec_2642 and sec_301_9100-3 to allocate gst_exemption to the transfer to trust and rulings that i the allocations will be effective as of the date of the transfer and ii the values of the transfer when made will be used to determine the amount of gst_exemption to be allocated sec_2601 imposes a tax on every generation-skipping_transfer gst sec_2611 defines a generation-skipping_transfer as a taxable_distribution a taxable_termination and a direct_skip sec_2631 as in effect for year provides that every individual shall be allowed a gst_exemption of dollar_figure which may be allocated by such individual or his executor to any property with respect to which such individual is the transferor sec_2632 provides that any allocation by an individual of gst_exemption under sec_2631 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 a direct_skip is made on form_709 sec_2642 provides in part that 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 sec_6075 for such transfer the value of such property for purposes of determining the inclusion_ratio shall be its value as finally determined for purposes of chapter within the meaning of sec_2001 and such allocation shall be effective on and after the date of such transfer sec_2642 provides in part 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 sec_2642 sec_2642 provides in part that in determining whether to grant relief under sec_2513 if both spouses have signified their consent a gift made by one spouse to any person other than his spouse shall be considered as made one-half by him and one-half by his spouse plr-111794-11 under sec_2642 the secretary shall take into account all relevant circumstances including evidence of intent contained in the trust instrument and such other factors as the secretary deems relevant for purposes of determining whether to grant relief the time for making the allocation shall be treated as if not expressly prescribed by statute notice_2001_50 2001_1_cb_189 provides in part that under sec_2642 the time for allocating the gst_exemption to lifetime transfers is 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 sec_2642 under the provisions of sec_301_9100-3 sec_301_9100-1 provides that the commissioner in exercising the commissioner’s discretion may grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make a regulatory election or a statutory election but no more than months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-3 provides in part that requests for extensions of time for regulatory elections that do not meet the requirements of sec_301_9100-2 for automatic extensions must be made under the rules of this section requests for relief subject_to this section 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 the grant of relief will not prejudice the interests of the government under sec_301_9100-3 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 based on the facts submitted and representations made we conclude that the requirements of sec_301_9100-3 are satisfied therefore the executor of donor's estate and spouse are granted an extension of time of days from the date of this letter to allocate gst_exemption to the transfer to trust made on date the allocations will be effective as of the date of transfer and the value of the property on the date of transfer will be used to determine the amount of gst_exemption to be allocated to trust the allocations should be made on form sec_709 for the appropriate calendar_year and filed with the internal_revenue_service cincinnati service center- stop cincinnati ohio a copy of this letter should be attached to the form sec_709 the rulings contained in this letter are based upon information and representations submitted by the taxpayers and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the plr-111794-11 material submitted in support of the request_for_ruling it is subject_to verification on examination except as specifically ruled herein we express no opinion on the federal tax consequences of the transaction under the cited provisions or under any other provisions of the code this ruling is directed only to the taxpayers who requested it sec_6110 provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely associate chief_counsel passthroughs special industries by leslie h finlow senior technician reviewer branch office of associate chief_counsel passthroughs special industries enclosures copy for sec_6110 purposes


internal_revenue_service number release date index number -------------------------------- ------------------------- ------------------------- ----------------------------- - department of the treasury washington dc third party communication none date of communication not applicable_person to contact -------------------- id no ------------- telephone number --------------------- refer reply to cc psi b3 plr-126806-06 date date -------------- ----------------- ----------------- ------------------ -------------------------------- x ----------------------------------------- state d1 a ------------------------------------------- b ------------------------------------------- dear --------------- we received a letter dated date written on behalf of x requesting a ruling under sec_1362 of the internal_revenue_code this responds to that request facts for x to be an s_corporation as of d1 however x’s form_2553 election by a small_business_corporation was not filed timely x was incorporated under state law on d1 a and b x‘s shareholders intended x requests a ruling that it will be recognized as an s_corporation effective d1 sec_1362 provides that except as provided in sec_1362 a small sec_1362 provides that if a an election under sec_1362 is made for plr-126806-06 law and analysis business corporation may elect in accordance with the provisions of sec_1362 to be an s_corporation sec_1362 provides that an election under sec_1362 may be made by a small_business_corporation for any taxable_year at any time during the preceding_taxable_year or at any time during the taxable_year and on or before the 15th day of the 3rd month of the year sec_1362 provides that if a small_business_corporation makes an election under sec_1362 for any taxable_year and the election is made after the 15th day of the 3rd month of the taxable_year and on or before the 15th day of the 3rd month of the following taxable_year then the election shall be treated as made for the following taxable_year any taxable_year determined without regard to sec_1362 after the date prescribed by sec_1362 for making the election for the taxable_year or no such election is made for any taxable_year and b the secretary determines that there was reasonable_cause for the failure to timely make the election the secretary may treat the election as timely made for the taxable_year and sec_1362 shall not apply conclusion established reasonable_cause for failing to make an s_corporation_election in a timely manner thus we conclude that x is eligible for relief under sec_1362 accordingly if x makes an election to be an s_corporation by filing with the appropriate service_center a completed form_2553 within days of this letter containing an effective date of d1 the election shall be treated as timely made a copy of this letter should be attached to the form_2553 filed with the service_center a copy is enclosed for that purpose the federal tax consequences of any aspect of any transaction or item discussed or referenced in this letter specifically we express or imply no opinion concerning whether x is otherwise eligible to be an s_corporation for federal_income_tax purposes is being sent to your authorized representative based on the facts submitted and representations made we conclude that x has in accordance with a power_of_attorney on file with this office a copy of this letter except as expressly provided herein we express or imply no opinion concerning plr-126806-06 the code provides that it may not be used or cited as precedent this ruling is directed only to the taxpayer requesting it sec_6110 of sincerely s christine ellison branch chief branch office of the associate chief_counsel passthroughs special industries enclosures a copy of this letter a copy for sec_6110 purposes