internal_revenue_service number release date index numbers --------------------- --------------------------- ----------------- -------------------------- --------------------------------------- in re ---------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------- id no -------------- telephone number ---------------------- refer reply to cc corp b04 plr-135595-17 date date legend taxpayer ----------------------------------------------------------------------------- ---------------------------------------------------------------------- ----------------------- sub ----------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------- -------------------------------------------- f corp ------------------------------------------------------------------------------------ ----------------------------------------- dre ---------------------------------------------------------------------------------------------- ------------------------------------------------------------------------- --------------------------------- dre ---------------------------------------------------------------------------------------------- ---------------------------------------------------------------------- --------------------------------- dre ---------------------------------------------------------------------------------------------- ---------------------------------------------------------------------- --------------------------------- dre -------------------------------------------------------------------------------------------- ---------------------------------------------------------------------- --------------------------------- plr-135595-17 cfc cfc date date x -------------------------------- ------------------------------------------------------------------------ ------------------------------------------- ------------------------- -------------------------- ------------------------------------------------------------------------ -------------------------------------------------------------- ------------------------------------------------------ -------------------- ------------------------------------- -------------------------- company official ---------------------------------------------------------------------------------------------------- -------------------------- tax professional ---------------------------------------------------------------------------------------------------- -------------------------- dear ----- -------- this letter responds to a letter dated date submitted by your authorized representative requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations to file an election the extension is being requested in order to allow taxpayer as common parent of the consolidated_group including the controlling u s shareholder of cfc to file the election statement described in sec_1_362-4 sec_362 statement with respect to cfc 1’s transfer of certain stock to cfc as described in transfer below additional information was submitted in subsequent letters the material information is summarized below taxpayer is a corporation that is the common parent of a consolidated_group immediately prior to date taxpayer indirectly owned through members of its consolidated_group all of the stock of sub and sub directly owned x of the stock of f corp and through dre dre and dre each of which was an entity disregarded as separate from sub for federal_income_tax purposes all of the stock of cfc in addition cfc owned through dre an entity that was disregarded as separate from cfc for federal_income_tax purposes all of the stock of cfc each of cfc and cfc was a controlled_foreign_corporation within the meaning of sec_957 plr-135595-17 on date sub transferred its x of f corp stock through dre dre and dre to cfc transfer and cfc immediately transferred the x of f corp stock through dre to cfc transfer each of transfer and transfer was represented by taxpayer as qualifying as a tax-free transaction to which sec_351 applies at the time of transfer and transfer the f corp stock had a tax basis exceeding fair_market_value sec_362 generally provides that if property is transferred to a corporation as a capital_contribution or in an exchange to which sec_351 applies and the aggregate adjusted_basis of the transferred property would but for that provision exceed the fair_market_value of such property immediately after the transaction then the transferee corporation's basis in such property shall not exceed the fair_market_value of such property under sec_362 however the transferor and transferee may make a joint election to reduce the transferor's basis in the stock received to its fair_market_value and no reduction of the transferee's basis in the property received will be required sec_362 provides that such election shall be made at such time and in such form and manner as the secretary may prescribe and once made shall be irrevocable sec_362 does not apply and the election under sec_362 is not available to exchanges subject_to sec_362 generally for transactions after date rules for making elections under sec_362 are in sec_1_362-4 date is a date after date in order to make the election under sec_362 sec_1_362-4 requires that prior to the filing of the sec_362 statement the transferor and the acquiring_corporation enter into a written binding agreement to elect to apply sec_362 and sec_1_362-4 requires that the sec_362 statement be filed in accordance with the provisions of sec_1_362-4 sec_1_362-4 provides that if the transferor is required to file a united_states federal_income_tax return the sec_362 statement is filed by the transferor the sec_362 statement was required to be filed on or with taxpayer's timely filed income_tax return for the year ending date for various reasons however taxpayer failed to file the sec_362 statement in a timely manner taxpayer has represented that it does not seek to alter a return position for which an accuracy-related_penalty has been or could be imposed under sec_6662 at the time taxpayer requested relief and the new position requires or permits the election for which relief is requested plr-135595-17 under sec_301_9100-1 the commissioner has discretion to grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six 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_9100-1 defines the term regulatory election as an election whose due_date is prescribed by a regulation revenue_ruling revenue_procedure notice or announcement published in the internal_revenue_bulletin sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make a regulatory election sec_301_9100-1 sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides extensions of time for making regulatory elections that do not meet the requirements of sec_301_9100-2 requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-3 the time for filing the sec_362 statement is fixed by sec_1 d ii therefore the commissioner has discretionary authority under sec_301_9100-3 to grant an extension of time for taxpayer to file the sec_362 statement provided taxpayer acted reasonably and in good_faith the requirements of sec_301_9100-1 and sec_301_9100-3 are satisfied and granting relief will not prejudice the government information affidavits and representations submitted by taxpayer company official and tax professional explain the circumstances surrounding the failure to timely file the sec_362 statement the information establishes that the request for relief was filed before the failure to timely file the sec_362 statement was discovered by the internal_revenue_service see sec_301_9100-3 based on the facts and information submitted including the affidavits submitted and the representations made we conclude that taxpayer acted reasonably and in good_faith the requirements of sec_301_9100-1 and sec_301_9100-3 are satisfied and granting relief will not prejudice the interests of the government accordingly an extension of time is granted under sec_301_9100-3 until days from the date on this letter for taxpayer to file the sec_362 statement regarding transfer in the manner described in sec_1_362-4 this extension of time is conditioned on the federal tax_liability if any of any relevant party not being lower in the aggregate for all years to which the sec_362 election applies than it would have been if the sec_362 statement had been timely filed taking into account the time_value_of_money no opinion is expressed as to plr-135595-17 the tax_liability for the years involved a determination thereof will be made by the director's office upon audit of the federal_income_tax returns involved except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction discussed in this letter specifically no opinion is expressed concerning the basis or fair_market_value of any asset whether transfer or transfer are described in sec_351 or whether taxpayer is substantively entitled to make a sec_362 election in addition no opinion is expressed as to the tax effects or consequences of filing the sec_362 statement late under the provisions of any other section of the code or regulations or as to the tax treatment of any conditions existing at the time of or effects resulting from filing the sec_362 statement late that are not specifically set forth in the above ruling for purposes of granting relief under sec_301_9100-3 we have relied on certain statements and representations that taxpayer company official and tax professional made under penalties of perjury however the director should verify all essential facts moreover notwithstanding that an extension is granted under sec_301_9100-3 to file the sec_362 statement any penalties and interest that would otherwise be applicable still apply the letter_ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent a copy of this letter must be attached to any income_tax return to which it is relevant alternatively taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to the return that provides the date and control number of this letter_ruling in accordance with the power_of_attorney on file with this office copies of this letter are being sent to your authorized representatives sincerely ____________________________________ ken cohen senior technician reviewer branch office of associate chief_counsel corporate


t c summary opinion united_states tax_court commissioner of internal revenue respondent xuye li petitioner v docket no 117-12s filed date xuye li pro_se shannon edelstone for respondent summary opinion haines judge this case was heard pursuant to sec_7463 of the internal_revenue_code in effect when the petition was filed pursuant to sec_1 unless otherwise indicated all section references are to the internal_revenue_code code as amended and in effect for the year at issue and all rule references are to the tax_court rules_of_practice and procedure b the decision to be entered is not reviewable by any other court and this opinion shall not be treated as precedent for any other case respondent determined a deficiency of dollar_figure in petitioner’s federal_income_tax and a penalty under sec_6662 of dollar_figure for there are two issues for decision the first issue is whether petitioner is entitled to the first-time_homebuyer credit under sec_36 we hold he is not the second issue is whether petitioner is liable for the accuracy-related_penalty under sec_6662 we hold he is not background some of the facts have been stipulated and are so found those exhibits attached to the stipulations which were found relevant and admissible are incorporated herein by this reference petitioner resided in california when he filed the petition on date petitioner’s cousin xiao zhang acquired legal_title to a property in salinas california salinas property which was subject_to a purchase_money_mortgage on date xiao zhang transferred the salinas property to the xiao zhang family limited_partnership xiao zhang flp petitioner owned a interest in the xiao zhang flp at the time of the transfer petitioner timely filed a form_1040 u s individual_income_tax_return which showed a tax due of zero but claimed a first-time_homebuyer credit for the salinas property of dollar_figure pursuant to sec_36 respondent issued a notice_of_deficiency to petitioner disallowing the tax_credit petitioner timely filed a petition for redetermination with this court i burden_of_proof discussion the taxpayer generally bears the burden of proving the commissioner’s determinations are erroneous rule a the burden_of_proof may shift to the commissioner if the taxpayer satisfies certain conditions sec_7491 petitioner has neither claimed that the burden shifts to respondent nor shown that he complied with the requirements of sec_7491 the burden_of_proof therefore remains on petitioner see rule a ii first-time_homebuyer credit generally a refundable tax_credit is allowed to a first-time_homebuyer of a principal_residence in the united_states sec_36 a first-time_homebuyer is defined as any individual if such individual and if married such individual’s spouse had no present ownership_interest in a principal_residence during the year period ending on the date of the purchase of the principal_residence sec_36 sec_36 defines a purchase for purposes of the first-time_homebuyer credit as any acquisition but only if the property is not acquired from a person related to the person acquiring such property the exact basis on which petitioner contends he is entitled to the first-time_homebuyer credit is unclear from the record we discern from the record that petitioner contends he is entitled to the first-time_homebuyer credit because he purchased at least in part the salinas property in the date purchase we also discern from the record that petitioner alternatively contends that he is entitled to the credit because of the date transfer of the salinas property to the xiao zhang flp we address each of these alternatives in turn to decide when a transfer is complete for tax purposes we examine all the surrounding facts and circumstances no single one of which is controlling 68_tc_115 the focus of our inquiry however is on when the benefits_and_burdens_of_ownership have shifted id generally a transfer is complete upon the earlier of the transfer of title or the shift of the benefits_and_burdens_of_ownership 66_tc_904 citing 430_f2d_1019 6th cir aff’g 51_tc_290 we first consider whether petitioner purchased the salinas property ie acquired ownership in it the record reflects that sole legal_title to the salinas property was transferred to xiao zhang when it was purchased in date accordingly the purchase resulted in xiao zhang’s and not petitioner’s acquiring legal ownership of the salinas property the record also reflects that xiao zhang was the sole borrower under the loan used to finance at least in part the purchase of the salinas property petitioner did not offer evidence showing that he contributed money or anything else of value toward the purchase_price of the salinas property more generally petitioner failed to provide documentation or other persuasive evidence showing that he assumed the benefits_and_burdens_of_ownership when the salinas property was purchased in date because petitioner failed to show that he acquired any ownership_interest legal or equitable from the date purchase of the salinas property we find that petitioner also failed to show that he purchased the salinas property within the meaning of sec_36 it follows that the date purchase of the salinas property does not entitle petitioner to the first-time_homebuyer credit we now consider whether the transfer of the salinas property to the xiao zhang flp entitles petitioner to the first-time_homebuyer credit as previously mentioned only individuals are eligible for the first-time_homebuyer credit under sec_36 for the reasons explained below the xiao zhang flp is not an individual and hence is not eligible for the first-time_homebuyer credit the court applies the ordinary meaning to undefined terms see 444_us_37 135_tc_1 121_tc_8 the court_of_appeals_for_the_federal_circuit in 634_f3d_604 d c cir aff’d sub nom mohamad v palestinian auth 132_sct_1702 noted that the dictionary act which provides guidance ‘in determining the meaning of any act of congress’ strongly implies that the term individual does not include organizations because it defines person to include ‘corporations companies associations firms partnerships societies as well as individuals ’ id pincite quoting u s c sec_1 similarly sec_7701 provides the term ‘person’ shall be construed to mean and include an individual a_trust estate partnership_association company or corporation indeed throughout the code the term individual is generally used in contrast with corporations partnerships or other entities for instance part i of subchapter_a of the code concerns the taxation of individuals as opposed to part ii which concerns the taxation of corporations additionally the context of the word individual within sec_36 strongly implies that it refers only to a natural_person for instance sec_36 refers to married individuals because only natural persons can be married the term individual in that context must refer only to natural persons ‘ t he normal rule_of statutory construction is that identical words used in different parts of the same act are intended to have the same meaning ’ 516_us_235 quoting 496_us_478 accordingly we conclude that the term individual refers only to natural persons throughout sec_36 further the tax_credit applies only to the purchase of a principal_residence sec_36 we have previously held that principal_residence which is undefined in sec_36 or sec_121 means the chief or primary place where a person lives or the dwelling in which a person resides gates v commissioner t c pincite either definition is incompatible with the notion that a business_entity has a principal_residence rather a partnership has a principal_place_of_business similarly sec_36 discusses an individual’s status as a member of the armed_forces only natural persons can serve in the armed_forces finally we find the issue in this case though involving a partnership no different from the issue in 138_tc_390 in which we held that an s_corporation is not an individual for purposes of the first- time homebuyer credit under sec_36 on the basis of the foregoing we conclude that petitioner has failed to show that he is entitled to the claimed first-time_homebuyer credit iii accuracy-related_penalty respondent also determined that petitioner is liable for the accuracy-related_penalty under sec_6662 for sec_6662 and b imposes a accuracy-related_penalty upon any underpayment attributable to certain causes respondent bears the burden of production with respect to petitioner’s liability for the accuracy-related_penalty and must therefore produce evidence that it is appropriate to impose that penalty see sec_7491 see also 116_tc_438 we find respondent has not met his burden of production because there is no underpayment_of_tax for an underpayment is defined by sec_6664 which provides in relevant part sec_6664 underpayment --for purposes of this part the term underpayment means the amount by which any_tax imposed by this title exceeds the excess of-- the sum of-- a the amount shown as the tax by the taxpayer on his return plus b amounts not so shown previously assessed or collected without assessment over the amount of rebates made the amount shown by petitioner on his return was zero therefore neither sec_6664 nor applies ie both amounts are zero accord snow v commissioner t c ___ date consequently there is an underpayment for only if the disallowed first-time_homebuyer reduces the amount shown on the return below zero we have recently held that refundable credits such as the first-time_homebuyer credit are taken into account in calculating the amount shown as the tax by the taxpayer on his return under sec_6664 but may not reduce the amount shown on the return below zero see rand v commissioner t c ___ ___ slip op pincite date applying rand to the facts of this case we hold the disallowed first-time_homebuyer credit does not reduce the amount shown on the return it follows that there is no underpayment for and that respondent failed to meet his burden of production with respect to imposing the accuracy-related_penalty we therefore hold petitioner is not liable for the accuracy-related_penalty in reaching our holdings herein we have considered all arguments made and to the extent not mentioned above we conclude they are moot irrelevant or without merit to reflect the foregoing decision will be entered for respondent as to the deficiency and for petitioner as to the accuracy- related penalty


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 b02 plr-124160-08 date september ty ------- ty ------- legend taxpayer year year year fc country x country y trust ----------------------- ------------------------ ------- ------- ------- ---------------- ------------------ ----------- ------------------------- trustee o trustee r ---------------------------- ------------------------------ law firm p law firm q ------------------------------------------------------------------------------------------ ---------------------- ---------------------------------------------------------- dear ------------------ this is in response to your letter received by our office on date submitted by your authorized representative requesting the consent of the commissioner of the internal_revenue_service to make a retroactive qualified electing plr-124160-08 fund qef election under sec_1295 of the internal_revenue_code code and sec_1_1295-3 with respect to your investment in fc the rulings contained in this letter are based upon information and representations submitted by taxpayer and accompanied by a penalties of perjury statement executed by the appropriate parties while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination facts taxpayer is a u s citizen and a named beneficiary of the trust established under the laws of country x by taxpayer's grandmother a citizen and resident of country y in year the trust acquired shares in fc a corporation organized under the laws of country y at all times since its formation the trust was administered and managed by various foreign nationals who served as the trustees of the trust trustee o who served as a trustee of the trust at all times since inception is an attorney with substantial experience in transnational tax planning and was a partner at law firm p during all the years at issue trustee o is competent to render international tax_advice trustee o and the other trustees had full access to all the records of the trust and trustee o was aware at all relevant times that taxpayer resided permanently in the united_states taxpayer is not a tax professional and has no experience in international tax matters taxpayer represents that as a beneficiary of the trust taxpayer had no control_over the assets of the trust and relied on the trustees to manage the assets of the trust at all times the trustees and in particular trustee o never informed taxpayer that the trust held shares of fc that fc was a passive_foreign_investment_company pfic under sec_1297 of the code for u s federal_income_tax purposes and of the consequences of such investment and of the possibility of making any elections qef or otherwise with respect to such shareholdings for u s federal_income_tax purposes in year after the death of taxpayer's father taxpayer engaged law firm q and others to determine the extent of the family's assets in year during its evaluation of the trust's assets law firm q determined that fc had been a pfic since year and informed taxpayer of fc's characterization as a pfic at that time taxpayer has submitted an affidavit signed under penalties of perjury describing the events that led to the failure to make the qef election by the election due_date plr-124160-08 including the role of the trustees taxpayer has also submitted affidavits of trustee o and trustee r corroborating the representations made by taxpayer taxpayer represents that as of the date of this request_for_ruling the pfic status of fc has not been raised by the irs on audit for any of the taxable years at issue ruling requested taxpayer requests the consent of the commissioner of the internal_revenue_service to make a retroactive qef election with respect to fc for year under sec_1_1295-3 law sec_1295 of the code provides that any pfic shall be treated as a qef with respect to a taxpayer if an election by the taxpayer under sec_1295 applies to such company for the taxable_year and the company complies with such requirements as the secretary may prescribe for purposes of determining the ordinary_earnings and net capital_gains of such company under sec_1295 a qef election may be made for any taxable_year at any time on or before the due_date determined with regard to extensions for filing the return for such taxable_year to the extent provided in regulations such an election may be made after such due_date if the taxpayer failed to make an election by the due_date because the taxpayer reasonably believed the company was not a pfic under sec_1_1295-3 a taxpayer may request the consent of the commissioner to make a retroactive qef election for a taxable_year if the shareholder reasonably relied on a qualified_tax professional within the meaning of sec_1_1295-3 granting consent will not prejudice the interests of the united state sec_3 government as provided in sec_1_1295-3 the request is made before a representative of the internal_revenue_service raises upon audit the pfic status of the corporation for any taxable_year of the shareholder and the shareholder satisfies the procedural requirements of sec_1 f the procedural requirements include filing a request for consent to make a retroactive election with and submitting a user_fee to the office of the associate chief_counsel international sec_1_1295-3 additionally affidavits signed under penalties of perjury must be submitted that describe plr-124160-08 the events which led to the failure to make a qef election by the election due_date the discovery of such failure the engagement and responsibilities of the qualified_tax professional and the extent to which the shareholder relied on such professional sec_1_1295-3 and iii conclusion based on the information submitted and representations made with taxpayer’s ruling_request we conclude that taxpayer has satisfied sec_1_1295-3 accordingly consent is granted to taxpayer to make a retroactive qef election with respect to fc for year provided that taxpayer complies with the rules under sec_1_1295-3 regarding the time and manner for making the retroactive qef election this private_letter_ruling is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent a copy of this ruling must be attached to any_tax return to which it is relevant in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to taxpayer's authorized representative sincerely ethan a atticks senior technical reviewer branch international


department of the treasury internal_revenue_service washington d c date cc dom fs corp t-n-4117-98 number release date uilc internal_revenue_service national_office field_service_advice memorandum for james e gray senior attorney cc ser ncs gbo from deborah a butler assistant chief_counsel cc dom fs subject this field_service_advice responds to your memorandum dated date field_service_advice is not binding on examination or appeals and is not a final case determination this document is not to be cited as precedent legend p sec_1 x sec_2 sec_3 sec_4 date date date date month month year year dollar_figurea dollar_figureb dollar_figurec dollar_figured dollar_figuree dollar_figuref dollar_figureg dollar_figureh dollar_figurei dollar_figurej dollar_figurek dollar_figurel a b c d e f g h i issue s whether sec_1 properly calculated its basis in the sec_2 stock it received from sec_2 in exchange for the sec_4 note the sec_3 stock and the assumption by sec_2 of the contingent liabilities for purposes of determining the amount of its loss on the subsequent sale of its sec_2 stock to an unrelated party more specifically whether the service can apply sec_357 to reduce sec_1's basis in the sec_2 stock it received in the initial exchange conclusion we do not recommend that the service argue that sec_357 applies to the exchange because even if it does such section would not have any effect on sec_1's basis in its sec_2 stock however for the reasons noted below we recommend that the service argue that the transfer followed by sec_1's sale of its sec_2 stock did not meet the business_purpose requirement of sec_351 in that case sec_1 would realize a loss on the sale of its property to sec_2 which would not be taken into account until either the property or sec_2 left the group sec_1's sale of its sec_2 stock did not cause sec_2 to leave the group moreover the property also stayed within the group as a result of the sale sec_1 would take a basis in the sec_2 stock it received in the exchange equal to the value of such stock we do not know what value sec_1 might assign to such stock because sec_1 and sec_2 are affiliated any value assigned to the sec_2 stock by the parties can not be presumed to reflect the fair_market_value of that stock however several months after this exchange sec_1 sold the sec_2 stock for dollar_figurei if there was no substantial change in the circumstances of sec_2 during this period then the service has a reasonable argument that dollar_figurei also represents the fair_market_value of the sec_2 stock at the time it was issued to sec_1 in the exchange in that case when sec_1 sold its sec_2 stock sec_1 would not recognize any gain_or_loss facts p is the common parent of an affiliated_group_of_corporations filing a consolidated federal_income_tax return p owns all of the stock of sec_1 as of date there were tort claims against sec_1 sec_1's estimated exposure was dollar_figurea before considering insurance coverage and dollar_figureb million after taking into account insurance coverage through year all paid-out claims were paid from insurance x had been a wholly owned subsidiary of p for more than a years but had been dormant for a number of years prior to date on date x changed its name to sec_2 on date sec_2 amended its charter increasing its authorized capital stock to b shares of common_stock and c shares of voting preferred_stock according to the taxpayer this charter amendment was done to facilitate the operation of sec_2 as a litigation management company with equity participation by third-party investors including independent lawyers who defend sec_1 and sec_3 in tort liability actions on date p contributed to sec_2 dollar_figurec in cash in exchange for d shares of sec_2 common_stock p already owned e shares of sec_2 common_stock bringing its total to f shares and dollar_figured in cash in exchange for g shares of voting preferred_stock also on date sec_1 contributed to sec_2 a a note in the amount of dollar_figuree due to sec_1 from a related corporation sec_4 b all of the outstanding shares of sec_3 valued at dollar_figuref and c the beneficial rights to all future insurance recoveries with respect to sec_1’s tort obligations and certain other assets relating to the defense of sec_1’s tort obligations which were valued at h in exchange for the assets contributed to sec_2 pursuant to steps a - c sec_1 received f shares of sec_2 common_stock and sec_2’s assumption of sec_1’s liability for the defense and payment of sec_1’s tort obligations including sec_3’s tort obligations in month of year sec_1 sold i shares of its sec_2 stock to one unrelated party and the remaining i shares to another unrelated party after these sales sec_2 continued to be a member of the p group because of p’s ownership of sec_2's voting preferred_stock in the case of each sale the consideration was dollar_figureg sec_1 reported a total capital_loss of dollar_figureh determined as follows sec_1 received consideration for the sec_2 stock in the amount of dollar_figurei and its basis in the sec_2 stock was dollar_figurej its exchanged_basis determined under sec_358 by reference to the dollar_figuree basis in the note and the dollar_figurek basis in the sec_3 stock in month of year p sold all of the stock of three subsidiaries to an unrelated party and recognized capital_gain of approximately dollar_figurel this gain was fully offset by p’s capital_loss upon the subsequent sale by sec_1 of some of its sec_2 stock in fact you believe that the transfer of assets by p and sec_1 to sec_2 followed by sec_1’s sale of its sec_2 stock appear to have been structured to generate a substantial tax_benefit to the taxpayer with no apparent bona_fide business_purpose you have asked whether sec_1 properly ignored the contingent tort liabilities in computing its basis in its sec_2 stock in considering this issue you note that revrul_95_74 1995_2_cb_36 concludes that certain contingent liabilities assumed by a transferee in an sec_351 exchange are not liabilities for purposes of sec_357 and sec_358 you also note that the holding of revrul_95_74 is limited to transactions that do not have a tax_avoidance motive within the meaning of sec_357 as noted above you believe that the p group undertook the transfer of assets followed by the sale for tax_avoidance motives thus you have also asked whether under these circumstances revrul_95_74 applies to the facts of this case law and analysis sec_351 law and other authorities sec_351 provides that no gain_or_loss shall be recognized if property is transferred to a corporation by a person solely in exchange for stock in such corporation and immediately_after_the_exchange such person is in control of the corporation sec_351 provides that if sec_351 would apply to an exchange but for the fact that there is received in addition to the stock permitted to be received under sec_351 other_property or money then gain if any to such recipient shall be recognized but not in excess of the amount of money received plus the fair_market_value of such other_property received and no loss to such recipient shall be recognized sec_357 provides that except as provided in sec_357 if the taxpayer receives property which would be permitted to be received under sec_351 without the recognition of gain if it were the sole consideration and as part of the consideration another party to the exchange assumes a liability of the taxpayer then such assumption shall not be treated as money or other_property and shall not prevent the exchange from being within the provisions of sec_351 sec_357 provides that if taking into consideration the nature of the liability and the circumstances in the light of which the arrangement for the assumption was made it appears that the principal purpose of the taxpayer with respect to the assumption described in sec_357 was a purpose to avoid federal_income_tax on the exchange or if not such a purpose was not a bona_fide business_purpose then such assumption shall for purposes of sec_351 be considered as money received by the taxpayer on the exchange sec_357 provides that in the case of an exchange a to which sec_351 applies or b to which sec_361 applies by reason of a plan_of_reorganization within the meaning of sec_368 if the sum of the amount of the liabilities assumed plus the amount of the liabilities to which the property is subject exceeds the total of the adjusted_basis of the property transferred pursuant to such exchange then such excess shall be considered as a gain from the sale_or_exchange of a capital_asset or of property which is not a capital_asset as the case may be sec_357 provides that sec_357 shall not apply to any exchange a to which sec_357 applies or b which is pursuant to a plan_of_reorganization within the meaning of sec_368 where no former shareholder of the transferor_corporation receives any consideration for his stock sec_357 provides that if a taxpayer transfers in an exchange to which sec_351 applies a liability the payment of which either i would give rise to a deduction or ii would be described in sec_736 then for purposes of sec_357 the amount of such liability shall be excluded in determining the amount of liabilities assumed or to which the property transferred is subject sec_357 provides that sec_357 shall not apply to any liability to the extent that the incurrence of the liability resulted in the creation of or increase in the basis of any property sec_358 provides that in the case of an exchange to which sec_351 sec_354 sec_355 sec_356 or sec_361 applies the basis_of_property permitted to be received under such section without the recognition of gain_or_loss ie the stock of the transferee corporation shall be the same as that of the property exchanged decreased by the amount of money received by the taxpayer and increased by the amount of gain to the taxpayer which was recognized on such exchange sec_358 provides that where as part of the consideration to the taxpayer another party to the exchange assumed a liability of the taxpayer or acquired from the taxpayer property subject_to a liability such assumption or acquisition in the amount of the liability shall for purposes of sec_358 be treated as money received by the taxpayer on the exchange sec_358 provides that sec_358 shall not apply to the amount of any liability excluded under sec_357 sec_368 provided that for purposes of sec_351 the term control means the ownership of stock possessing at least of the total combined voting power of all classes of stock entitled to vote and at least of the total number of shares of all other classes of stock of the corporation sec_1_1502-34 provides that for purposes of sec_1_1502-1 through in determining the stock ownership of a member of the group in another corporation the issuing_corporation for purposes of determining the application of eg sec_351 in a consolidated_return_year there shall be included stock owned by all other members of the group in the issuing_corporation revrul_95_74 1995_2_cb_36 the relevant facts of revrul_95_74 are that a transferor owns a manufacturing business including the land upon which the business sits since that corporation acquired the land it has become polluted as a result of the manufacturing business for valid business reasons the corporation transfers the manufacturing business including the land to a newly-formed subsidiary in exchange for all of the stock of that subsidiary and the assumption by the subsidiary of the liabilities associated with the transferred assets including the environmental liabilities the transferor has no plan or intention to dispose_of or have the subsidiary issue any subsidiary stock revrul_95_74 noted that the contingent environmental liabilities had not been taken into account within the meaning of sec_357 by the transferor prior to the transfer consequently revrul_95_74 held that these liabilities are not included in determining whether the amount of liabilities assumed by the subsidiary exceeds the adjusted_basis of the property transferred by the transferor within the meaning of sec_357 in addition revrul_95_74 noted that any liabilities that are not included in the determination under sec_357 are also not included in the sec_358 determination of the transferor’s basis in the stock received in the sec_351 exchange therefore revrul_95_74 held that the transferor does not reduce its basis in its subsidiary stock by the amount of such liabilities analysis as a threshold matter we note that this case potentially raises the issue of whether a contingent_liability is the type of liability that is to be taken into account currently under sec_357 and sec_358 however because of the specific language of sec_357 and sec_358 as interpreted by revrul_95_74 c b we do not believe it is necessary to address this broader issue that is we will assume for purposes of the following discussion that such contingent_liability is the type of liability to be taken into account currently under sec_357 and sec_358 sec_351 provides that no gain_or_loss shall be recognized if property ie the cash from p and the sec_4 note and the sec_3 stock from sec_1 is transferred to a corporation ie sec_2 by members of a consolidated_group ie p and sec_1 solely in exchange for voting_stock in sec_2 and immediately_after_the_exchange p and sec_1 are of course if such liability is not taken into account currently then there is no argument that it can reduce basis currently in control of sec_2 as defined in sec_368 and sec_1_1502-34 for purposes of sec_351 sec_368 defines control as the ownership of at least of the outstanding voting_stock of the transferee corporation ie sec_2 for purposes of these two sections sec_1_1502-34 provides that any stock of sec_2 owned by the members of the p group are included in other words it is not necessary for any one member of the p group to meet the control requirement of sec_368 in this case of course p and sec_1 initially own all of the stock of sec_2 immediately_after_the_exchange therefore the p group satisfies the control requirement of sec_351 and sec_368 however p and sec_1 did not transfer property to sec_2 solely in exchange for the sec_2 stock because sec_2 also assumed the contingent tort liability therefore the transfer does not fit the literal terms of sec_351 however sec_357 provides that except as provided in sec_357 and c if the taxpayer ie sec_1 receives property ie the sec_2 stock which it would be permitted to receive under sec_351 without the recognition of gain if such property were the sole consideration and as part of the consideration another party to the transfer ie sec_2 assumes a liability of sec_1 ie the contingent tort liability then such assumption shall not be treated as money or other_property and shall not prevent the transfer from being within the provisions of sec_351 thus except as provided in sec_357 and c sec_1 would not recognize gain_or_loss on the transfer as a result of the assumption of the contingent tort liability by sec_2 if sec_351 and sec_357 applied sec_1's basis in the sec_2 stock would be determined under sec_358 sec_358 provides that a transferor’s basis in the stock received from the transferee in an exchange to which sec_351 applies is the same as the basis of the property surrendered reduced by the amount of any money received sec_358 provides that for purposes of sec_358 an assumption of liability shall be treated as money received by the transferor thus a transferor reduces its basis in the stock received from the transferee by the amount of any liability assumed in revrul_95_74 the service held that certain contingent liabilities had not been taken into account within the meaning of sec_357 by the transferor prior to the transfer thus such liabilities were excluded in determining whether the of course sec_1 subsequently sold all of its sec_2 stock to an unrelated party however even if the facts were to indicate that that sale should be taken into account in determining whether the sec_368 control requirement for the sec_351 exchange was satisfied p’s continuing ownership of its sec_2 common and voting preferred_stock appears to have assured that that requirement was satisfied amount of the liabilities assumed exceeded within the meaning of sec_357 the transferor’s basis in the transferred assets in addition such liabilities did not reduce the transferor’s basis sec_358 thus in this case if the rationale of revrul_95_74 applies sec_1 would not reduce the basis of its sec_2 stock by the amount of the contingent liabilities assumed by sec_2 this would be the case whether or not the contingent liabilities would absent sec_357 and sec_358 otherwise be considered liabilities for purposes of sec_357 and sec_358 however you note that revrul_95_74 does not apply if the transfer has no business_purpose as one line of attack you have suggested that the service apply sec_357 sec_357 provides that if taking into consideration the nature of the liability and the circumstances in the light of which the arrangement for the assumption was made it appears that the principal purpose of the taxpayer with respect to the assumption described in sec_357 was a purpose to avoid federal_income_tax on the exchange or if not such a purpose was not a bona_fide business_purpose then such assumption shall for purposes of sec_351 be considered as money received by the taxpayer on the exchange in this case whether either sec_357 or sec_357 applies is not determinative of whether a liability assumed will reduce the transferor’s basis in the stock of the transferee under sec_358 under sec_358 a transferor does not reduce its basis in the stock it receives by the amount of any liability excluded under sec_357 based on the policy reasons discussed later in this memo we interpret this provision as applying to a liability that could be excluded under sec_357 moreover sec_357 unlike sec_357 and sec_357 by virtue of sec_357 does not contain an exception for sec_357 thus even if sec_357 applied sec_1 would not be required to reduce the basis of its sec_2 stock by the amount of the contingent liabilities assumed consequently we do not believe that the application of sec_357 will cause sec_1 to reduce the basis of its sec_2 stock by any liabilities assumed in addition you have asked whether revrul_95_74 is distinguishable because it relied on an analysis of sec_357 in reaching its conclusion that such liabilities also do not reduce basis under sec_358 as noted above applying sec_357 in the instant case does not cause sec_1 to recognize any portion of such amount therefore you have asked whether sec_358 provides an independent rationale for reducing sec_1's basis in the sec_2 stock it is the position of the service as stated in revrul_95_74 that sec_357 and sec_358 operate on similar principles see also 68_tc_223 s rep no 95th cong 2d sess c b adding sec_357 to the code therefore it is not determinative that in this case sec_357 is not applicable in in adding sec_357 to sec_357 congress in the legislative_history cited above expressly approved of focht focht had held that an obligation should not be treated as a liability under sec_357 and sec_358 to the extent its payment would have been deductible if made by the transferor the tax_court further held that under sec_358 deductible liabilities are excluded in determining the transferor's basis in stock received as part of the exchange more generally the legislative_history of sec_351 indicates that congress viewed incorporation exchanges as merely changes in form and intended to enact sec_351 to eliminate impediments to business readjustments by making incorporations tax free s rep no 68th cong 1st sess h_r rep no 67th cong 1st sess sec_357 and sec_358 now provide that a corporation's assumption of a liability that if paid would give rise to a deduction shall neither be taken into account under sec_357 nor diminish the shareholder's basis under sec_358 the first holding in revrul_95_74 applied the logic of sec_357 and sec_358 to any liability which had not yet given rise to a deduction or to basis--a larger sphere than the liabilities covered by sec_357 nothing in focht or in the legislative_history or in logic suggests that the holding of the revenue_ruling as regards sec_358 is not fully applicable in a case where sec_357 happens not to apply because assumed_liabilities do not exceed basis nothing in logic suggests that a shareholder gets a lower basis in his stock just because liabilities do not exceed basis especially when if he had realized gain it would be insulated anyway from tax by revrul_95_74 also the result dictated by the logic of revrul_95_74 makes technical sense suppose individual a owns a building with a basis and value of dollar_figure but burdened by a contingent environmental liability reasonably valued at dollar_figure in other words a will very likely lose his entire investment if he waited for the liability to become non-contingent he could take a dollar_figure deduction instead he contributes the building to his controlled_corporation which also assumes the contingent_liability thereafter the liability becomes non-contingent sec_357 did not apply because liabilities did not exceed basis the corporation's paying the liability wipe sec_3 for a further discussion of this issue please read the legal memorandum written in support of revrul_95_74 which we have attached to this memorandum out his equity thus he should get a dollar_figure tax_benefit had he continued to owe the liability personally that benefit would have come in the form of a deduction he ultimately gets the appropriate dollar_figure tax_benefit because pursuant to revrul_95_74 sec_358 does not operate to reduce his dollar_figure stock basis instead he ultimately gets a dollar_figure stock loss were his stock basis reduced by the contingent_liability to dollar_figure he would never get the dollar_figure tax_benefit to which he is entitled the taxpayer in the fsa has abused the rules but sec_358 a section that does not inquire into taxpayer intent is not the means of correcting that the legislative_history and revrul_95_74 preclude that alternatively we recommend that you consider arguing that the transfer of property by p and sec_1 to sec_2 followed by sec_1's sale of the sec_2 stock does not satisfy the business_purpose requirement of sec_351 courts have hinted at the concept of a business_purpose requirement in sec_351 repeatedly opinions discussing other sec_351 issues often indicate that the taxpayer had a valid business_purpose for the transaction in question see 490_f2d_1172 3d cir cert_denied 419_us_826 714_f2d_977 9th cir perhaps the most thorough judicial exploration of the business_purpose doctrine in sec_351 is in 688_fsupp_1129 n d tex aff'd 865_f2d_644 5th cir in caruth the court explains that sec_351 is tied very closely to the reorganization provisions and reasons that the doctrines applicable there are equally valid for capital contributions under caruth the business_purpose requirement for sec_351 transactions appears to be the same as the business_purpose requirement for acquisitive reorganizations generally sec_351 will apply to a transaction if the taxpayer has a valid business_purpose for the transaction other than tax savings see 714_f2d_977 9th cir revrul_60_331 1960_2_cb_189 in this case p and sec_1 will probably argue that the business_purpose for the transfer of the cash sec_3 stock and sec_4 note in exchange for sec_2 stock and the assumption of the contingent tort liabilities was to isolate such liabilities in a separate corporation however sec_1 sold the sec_2 stock several months after this transfer the loss that sec_1 recognized offset a capital_gain p recognized several months prior to the transfer in that case sec_1 may not be able to articulate a reason for selling such stock other than to recognize a capital_loss to offset that gain in other words the service may be able to argue that sec_1's sale of its sec_2 stock is inconsistent with the stated business_purpose for the transfer to sec_2 if the transfer does not qualify under sec_351 then it would be treated as a taxable_exchange under sec_1001 in that case but for the application of certain provisions of sec_1_1502-13 sec_1 might be entitled to recognize its loss arising from the transfer in the next section of this letter we explain under what circumstances sec_1 may deduct the loss consolidated_return_regulations law sec_1_1502-13 a in general-- purpose this section provides rules for taking into account items of income gain deduction and loss of members from intercompany_transactions the purpose of this section is to provide rules to clearly reflect the taxable_income and tax_liability of the group as a whole by preventing intercompany_transactions from creating accelerating avoiding or deferring consolidated_taxable_income or consolidated_tax_liability b definitions for purposes of this section- intercompany transactions-- i in general an intercompany_transaction is a transaction between corporations that are members of the same consolidated_group immediately after the transaction s is the member transferring property or providing services and b is the member receiving the property or services intercompany_transactions include a s's sale of property or other transfer such as an exchange or contribution to b whether or not gain_or_loss is recognized intercompany items-- i in general s's income gain deduction and loss from an intercompany_transaction are its intercompany items for example s's gain the field believes that even if the contingent liabilities sec_2 assumed were included in the amount_realized under sec_1001 because sec_351 did not apply sec_1 would have realized a loss on its exchange with sec_2 we assume that is the case but note that i the numbers in the case do not self-evidently support that conclusion and ii the appeals officer has informally indicated that the taxpayer contends that if the assumed contingent liabilities were included in the amount_realized then it would have had a gain if sec_1001 applied however even if the taxpayer realized a nominal amount of gain and even if the service were able to invoke sec_357 that section would trigger recognition of gain only to the extent of that nominal amount from the sale of property to b is intercompany gain an item is an intercompany_item whether it is directly or indirectly from an intercompany_transaction corresponding items-- i in general b's income gain deduction and loss from an intercompany_transaction or from property acquired in an intercompany_transaction are its corresponding items for example if b pays rent to s b's deduction for the rent is a corresponding deduction if b buys property from s and sells it to a nonmember b's gain_or_loss from the sale to the nonmember is a corresponding gain_or_loss emphasis supplied alternatively if b recovers the cost of the property through depreciation b's depreciation_deductions are corresponding deductions an item is a corresponding_item whether it is directly or indirectly from an intercompany_transaction or from property acquired in an intercompany_transaction recomputed corresponding items the recomputed_corresponding_item is the corresponding_item that b would take into account if s and b were divisions of a single corporation and the intercompany_transaction were between those divisions for example if s sells property with a dollar_figure basis to b for dollar_figure and b later sells the property to a nonmember for dollar_figure b's corresponding_item is its dollar_figure loss and the recomputed_corresponding_item is dollar_figure of gain determined by comparing the dollar_figure sales_price with the dollar_figure basis the property would have if s and b were divisions of a single corporation although neither s nor b actually takes the recomputed_corresponding_item into account it is computed as if b did take it into account based on reasonable and consistently applied assumptions including any provision of the internal_revenue_code or regulations that would affect its timing or attributes c matching_rule for each consolidated_return_year b's corresponding items and s's intercompany items are taken into account under the following rules timing- ii s's items s takes its intercompany_item into account to reflect the difference for the year between b's corresponding_item taken into account and the recomputed_corresponding_item d acceleration rule s's intercompany items and b's corresponding items are taken into account under this paragraph d to the extent they cannot be taken into account to produce the effect of treating s and b as divisions of a single corporation for this purpose the following rules apply s's items-- i timing s takes its intercompany items into account to the extent they cannot be taken into account to produce the effect of treating s and b as divisions of a single corporation the items are taken into account immediately before it first becomes impossible to achieve this effect for this purpose the effect cannot be achieved- a to the extent an intercompany_item or corresponding_item will not be taken into account in determining the group's consolidated_taxable_income or consolidated_tax_liability under the matching_rule for example if s or b becomes a nonmember or if s's intercompany_item is no longer reflected in the difference between b's basis or an amount equivalent to basis in property and the basis or equivalent amount the property would have if s and b were divisions of a single corporation or b to the extent a nonmember reflects directly or indirectly any aspect of the intercompany_transaction eg if b's cost_basis in property purchased from s is reflected by a nonmember under sec_362 following a sec_351 transaction analysis if sec_351 does not apply then sec_1 would recognize gain_or_loss under sec_1001 upon the sale of the sec_3 stock and sec_4 note to sec_2 the first sale sec_1 would determine the amount of its gain_or_loss from the first sale by subtracting its basis in the property sold dollar_figurej from the value of the consideration it received the sec_2 stock we do not know what value sec_1 and sec_2 might assign to such stock because sec_1 and sec_2 are affiliated any value they assign to the sec_2 stock can not be presumed to reflect the fair_market_value of that stock however several months after the first sale sec_1 sold the sec_2 stock to unrelated parties for dollar_figurei the second sale if there was no substantial change in the circumstances of sec_2 during this period then the service has a reasonable argument that dollar_figurei also represents the fair_market_value of the sec_2 stock at the time of the first sale in that case dollar_figurei also represents sec_1's basis in the sec_2 stock for purposes of the first sale sec_1_1001-1 consequently sec_1 would recognize a loss on the first sale the first sale would be an intercompany_transaction sec_1 b i sec_1's loss would be an intercompany_item sec_1 b i however as long as the property sold by sec_1 to sec_2 remains in sec_2 and sec_2 remains a member of the group there is no provision in sec_1_1502-13 which would allow s to claim the loss upon the sale of such property sec_1_1502-13 thus the second sale would not allow sec_1 to take into account currently any portion of its intercompany_item attributable to the loss with respect to the second sale as noted above sec_1 has a basis in the sec_2 stock of dollar_figurei which is equal to the amount that the unrelated buyers paid for such stock consequently sec_1 would not recognize any gain_or_loss as a result of this sale case development hazards and other considerations acm partnership v commissioner 3d cir suggests two other possible routes of attack on the group’s claimed loss on sec_1's sale of its sec_2 stock to the unrelated parties first the third circuit noted the supreme court case 364_us_361 in knetsch the taxpayer had purchased annuity savings bonds from an insurance_company borrowed virtually their entire value against them made payments back to the insurance_company and characterized those payments as deductible_interest because the borrowing against the bonds had reduced their value to a mere pittance leaving the taxpayer with nothing of value apart from tax deductions the supreme court concluded that the net effect of the transfers between the taxpayer and the insurance_company amounted only to a payment of a fee for providing the facade of ‘loans’ whereby the taxpayers sought to reduce their taxes and therefore could not be characterized as payment of interest on a debt knetsch pincite we recommend assuming the value of the sec_2 stock is dollar_figurei then substantially_all of that amount also represents sec_2's basis in the sec_4 note because a small portion of that amount would be allocated to the sec_3 stock any payments on the note that constitute repayment of principal as opposed to payment of interest in excess of dollar_figurei would result in income to sec_2 as a corresponding_item under sec_1_1502-13 and an equal offsetting amount of loss to sec_1 however see also sec_1_1502-13 relating to the treatment of intercompany obligations the second route of attack suggested by acm is an alternative argument that the service made at the trial level see footnote of the third circuit acm opinion the service argued that the tax consequences of the transaction must be disregarded because acm’s partnership structure artificially ‘bifurcat ed the tax consequences of the transaction’ by allocating taxable gains to a foreign_partner and offsetting tax losses to a taxpayer in a manner which the relevant statue and regulations did not intend in this case the abuse is that by means of the sec_351 exchange and sec_1's subsequent sale of its sec_2 stock the taxpayer has attempted to turn a liability not currently deductible because it is contingent into a currently deductible loss those steps also abuse a second rule the sec_461 economic_performance requirement under which a deduction generally is not allowed until the liability in question is actually paid the tort liabilities here had not been paid when sec_1 claimed the loss in connection with this argument you may want to request field_service_advice from cc dom fs it a if you have any further questions please call deborah a butler assistant chief_counsel by steven j hankin steven j hankin chief corporate branch cc


internal_revenue_service number release date index number ----------------------- ----------------------------------------------- ----------------------------------------------- ---------------------------- in re ----------------------------------------------- ------------------------------------------------- ----------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact --------------- id no ------------- telephone number --------------------- refer reply to cc psi b06 plr-117224-04 date date taxpayer parent ---------------------------------------------------------------------------------------------- ------------------------ ---------------------------------------------------------------------------------------------- ----------------------- ------------------------------------- --------------------------- plant company a d1 d2 d3 d4 a year year year year year year year year year year year year year year year dear --------------- --------------------- ------------------ --------------------- --------------------- ------ ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- this letter responds to taxpayer’s request dated d1 requesting under taxpayer owns a percent of plant taxpayer is a single integrated electric utility plr-117224-04 sec_301_9100-3 of the procedure and administration regulations an extension of time to elect application of sec_468a of the internal_revenue_code with respect to taxpayer’s interest in plant and the related nuclear decommissioning reserve fund fund and to taxpayer’s supplementary request dated d2 requesting under sec_301_9100-3 of the procedure and administration regulations an extension of time to file a request for a revised schedule of ruling amounts for plant under sec_1_468a-3 of the income_tax regulations for the period beginning d3 engaged in the generation purchase transmission distribution and retail_sale of electricity taxpayer was granted an initial schedule of ruling amounts which was attached to taxpayer’s year federal_income_tax return in year taxpayer requested and was granted a revised schedule of ruling amounts because the public_utility commission having jurisdiction over taxpayer increased the amount of decommissioning costs to be included in taxpayer’s cost of service a copy of the revised schedule of ruling amounts was attached to taxpayer’s year federal_income_tax return during due diligence for the sale of taxpayer by parent to company a company a discovered that taxpayer had failed to attach to the federal_income_tax return for year sec_2 and the election statement for plant and the revised schedule of ruling amounts as required by sec_1 a -7 a of the income_tax regulations taxpayer represents that its failure to attach the election statement was due to taxpayer’s misinterpretation of instructions by outside counsel taxpayer represents it understood the instructions to only require attachment of the election statement and ruling to the federal_income_tax return for year and no further election would be required on subsequent returns once the failure was pointed out taxpayer commenced preparing this ruling_request taxpayer further represents that due to split_tax years for the calendar years and as a result of a merger in year deconsolidation from parent’s consolidated tax_return in year and reconsolidation with parent’s consolidated tax_return in year taxpayer’s 10th taxable_year after its most recent schedule of ruling amounts is year the due_date for this tax_return was d4 thus taxpayer is in violation of sec_1 468a- i i taxpayer represents that its violation of sec_1 468a- i i is inadvertent the regulation was noted during taxpayer’s preparation of the above ruling_request but presumed that the 10-year requirement would need to be met by year the 10th calendar_year after its most recent schedule of ruling amounts only later did taxpayer recognize that the regulation imposed a requirement for the 10th taxable_year at which point taxpayer supplemented the above ruling_request to include a request for extension of time to request a revised schedule of ruling amounts for plant under sec_1 468a- i i sec_468a provides that a taxpayer may pay into a nuclear decommissioning reserve fund if the taxpayer elects application of sec_468a plr-117224-04 sec_1_468a-1 provides that in general an eligible_taxpayer that elects the application of sec_468a pursuant to the rules contained in sec_1_468a-7 is allowed a deduction as determined under sec_1_468a-2 for the taxable_year in which the taxpayer makes a cash payment to a nuclear decommissioning fund sec_1_468a-7 provides that an eligible_taxpayer is allowed a deduction for the taxable_year in which the taxpayer makes a cash payment or is deemed to make a cash payment to a nuclear decommissioning fund only if the taxpayer elects the application of sec_468a a separate election is required for each nuclear decommissioning fund and for each taxable_year with respect to which payments are to be deducted under sec_468a in the case of an affiliated_group_of_corporations that join in the filing of a consolidated_return for a taxable_year the common parent must make a separate election on behalf of each member whose payments to a nuclear decommissioning fund during such taxable_year are to be deducted under sec_468a the election under sec_468a for any taxable_year is irrevocable and must be made by attaching a statement election statement and a copy of the schedule of ruling amounts provided to the taxpayer’s federal_income_tax return or in the case of an affiliated_group_of_corporations that join in the filing of a consolidated_return the consolidated_return for such taxable_year the return to which the election statement and a copy of the schedule of ruling amounts is attached generally must be filed on or before the time prescribed by law including extensions for filing the return for the taxable_year with respect to which payments are to be deducted under sec_468a sec_1_468a-3 provides that any taxpayer that has obtained a schedule of ruling amounts pursuant to sec_1_468a-3 must file a request for a revised schedule of ruling amounts on or before the deemed payment deadline date for the 10th taxable_year that begins after the taxable_year in which the most recent schedule of ruling amounts was received sec_301_9100-1 provides that the commissioner has discretion to 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 sec_301_9100-1 defines a regulatory election as an election whose due_date is prescribed by a regulation published in the federal_register or a revenue_ruling revenue_procedure notice or announcement published in the internal_revenue_bulletin commissioner will use to determine whether to grant an extension of time to make an election sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides extensions of time for making elections that do not meet the requirements of sec_301_9100-2 provides evidence to establish that the taxpayer acted reasonably and in good_faith and requests for relief under sec_301_9100-3 will be granted when the taxpayer sec_301_9100-1 through provide the standards the except as specifically ruled upon above no opinion is expressed or implied based solely on the facts and the representations made the requirements of this ruling is directed only to the taxpayer who requested it sec_6110 plr-117224-04 that granting relief will not prejudice the interests of the government sec_301 a sec_301_9100-1 and sec_301_9100-3 have been met taxpayer has days from the date of this letter_ruling to file a request for a revised schedule of ruling amounts and days from the date of this letter_ruling to file the election statements with taxpayer’s amended federal_income_tax returns concerning the federal_income_tax consequences of the transaction described above provides that it may not be used or cited as precedent and construction lm nrc enclosures heather c maloy associate chief_counsel passthroughs and special industries we are sending a copy of this letter to the industry director natural_resources copy of this letter copy for sec_6110 purposes sincerely yours


department of the treasury internal_revenue_service washington d c date chief_counsel number info release date conex-125674-06 ------------------------------ -------------------------------- ----------------------------------------- ------------------------------ dear ---- -------------- this responds to the letter dated date requesting our views on the tax treatment of insurance payments received by military servicemembers under the traumatic injury protection provision pincite u s c a 1980a which was enacted as part of the emergency supplemental appropriations act for defense the global war on terror and tsunami relief of p l the traumatic injury legislation created a program that provides an insurance benefit to certain servicemembers who incur traumatic injuries under the traumatic injury program military servicemembers covered under the servicemembers’ group_life_insurance sgli program receive automatic insurance if they suffer a traumatic injury sgli is a program of low cost group_life_insurance for military servicemembers on date congress expanded the scope of sgli by adding a traumatic injury protection rider tsgli to sgli that affords servicemembers insured through sgli who suffer certain specified traumatic injuries or their beneficiaries a payment of up to dollar_figure the starting point for determining the tax treatment of military benefits is the internal_revenue_code which is set forth in title_26 of the united_states_code prior to statutory provisions addressing the federal_income_tax treatment of military benefits were scattered throughout the united_states_code under several different titles including for example title in order to better enable taxpayers and the internal_revenue_service to understand and administer the tax rules congress enacted sec_134 of the internal_revenue_code to consolidate and set forth in one statutory provision the tax treatment of military benefits see house conference_report no p l p ii-548 under sec_134 of the internal_revenue_code the code qualified military benefits are excludable from gross_income generally a qualified_military_benefit is any allowance or in- kind benefit other than personal_use of a vehicle which is received by any member or former member of the uniformed_services of the united_states or any dependent of such member by reason of such member’s status or service as a member of such uniformed_services and was excludable from gross_income on date under any provision of law regulation or administrative practice which was in effect on such date benefits are excludable under sec_134 only to the extent of the amount authorized and excludable on date except that adjustments may be made pursuant to a provision of law or regulation in effect on date if the adjustments are determined by reference to fluctuations in cost price currency or other similar index thus any new benefit provided to military personnel or their beneficiaries that was not excludable from income prior to date cannot be excluded from income under sec_134 however congress specifically noted that sec_134 was not intended to limit benefits which are excludable under another section of the internal_revenue_code see house conference_report no p l p ii-548 because the tsgli benefit is not a benefit that was excludable from gross_income prior to date it cannot be excluded from income under code sec_134 however even if a benefit is not excludable as a qualified_military_benefit under sec_134 the benefit may be excludable under another section of the internal_revenue_code code sec_104 states that except in the case of amounts attributable to and not in excess of deductions allowed under sec_213 for any prior taxable_year gross_income does not include amounts received through accident_or_health_insurance or through an arrangement having the effect of accident_or_health_insurance for personal injuries or sickness other than amounts received by an employee to the extent such amounts are attributable to contributions by the employer which were not includible in the gross_income of the employee or are paid_by the employer sec_1_104-1 of the income_tax regulations states that if an individual purchases a policy of accident_or_health_insurance out of his own funds amounts received thereunder for personal injuries or sickness are excludable from his gross_income under sec_104 conversely if an employer is either the sole contributor to such a fund or is the sole purchaser of a policy of accident_or_health_insurance for his employees on either a group or individual basis the exclusion provided under sec_104 does not apply to any amounts received by his employees through such fund or insurance sec_105 provides that except as otherwise provided in sec_105 amounts received by an employee through accident_or_health_insurance for personal injuries or sickness shall be included in gross_income to the extent such amounts are attributable to contributions by the employer which were not includible in the gross_income of the employee or are paid_by the employer therefore we conclude that to the extent that servicemembers purchase tsgli out of their own funds amounts received thereunder for personal injuries or sickness are excludable from gross_income under sec_104 however benefits received by an employee under tsgli are includible in servicemembers’ gross_income under sec_105 of the code to the extent that they are attributable to contributions of his or her employer that were not includable in his or her gross_income or are paid_by the employer this letter has called your attention to certain general principles of the law it is intended for informational purposes only and does not constitute a ruling see revproc_2006_1 sec_2 2006_1_irb_1 date if you have further questions please contact me or ----- ---------------------- id-------------- at ----- ------------- sincerely lynne camillo chief employment_tax branch division counsel associate chief_counsel tax exempt and government entities


department of the treasury internal_revenue_service washington d c t a x e x e m p t a n d g o v e r n m e n t e n t i t i e s d i v i s i o n contact person telephone number identification_number employer_identification_number number release date se t eo ra t date april uniform issue list number legend f b c e_p x y dear ------------------ this is in reference to your representative’s letter of date requesting advance approval of your scholarship grant procedures under sec_4945 of the internal_revenue_code the information submitted shows that you private_foundation p will make grants that will be administered by f a publicly_supported_organization under its b program f selects individual scholarship recipients through its c competition the initial phase of the competition is the x test which is given annually in participating high schools by high school officials after the test f identifies and honors students scoring in a group that represents the top two percent of graduating high school seniors nationwide and designates a number that represents less than one percent of the graduating high school seniors in each state as semifinalists the semifinalists then take a second test y to confirm their earlier performance those who repeat their performance who demonstrate high academic standing in high school and who meet other standard requirements are designated as finalists you have entered into an agreement with f whereby you have agreed to sponsor a specific number of scholarships each year to be awarded to children and or relatives of employees of e under the b program f may award special scholarships to high-scoring students below the finalist level if there are an insufficient number of finalists the selection of individual grant recipients is made by selection committees designated by f the members of the selection committee are totally independent and separate from you f confirms the individual scholarship recipient's enrollment at the educational_institution makes payment of the award through the appropriate financial aid office of the educational_institution and supervises and investigates the use of the grant funds by the recipients in their educational program the scholarships will not be used as a means of inducement to recruit employees nor will a grant be terminated if an employee leaves the company scholarships will only be awarded to students who plan to enroll in an institution that meets the requirements of sec_170 of the code and which may be further limited by f the recipient will not be restricted in his her course of study sec_4945 of the code provides for the imposition of taxes on each taxable_expenditure of a private_foundation sec_4945 of the code provides that the term taxable_expenditure means any amount_paid or incurred by a private_foundation as a grant to an individual for travel study or other similar purposes by such individual unless such grant satisfies the requirements of sec_4945 sec_4945 of the code provides that sec_4945 shall not apply to an individual grant awarded on an objective and nondiscriminatory basis pursuant to a procedure approved in advance by the secretary if it is demonstrated to the satisfaction of the secretary that the grant constitutes a scholarship or fellowship_grant which is subject_to the provisions of sec_117 and is to be used for study at an educational_organization described in sec_170 revproc_76_47 1976_2_cb_670 sets forth guidelines to be used in determining whether a grant made by a private_foundation under an employer-related program to a child of an employee of the particular employer to which the program relates is a scholarship grant subject_to the provisions of sec_117 if a private foundation's program satisfies the seven conditions set forth in sections dollar_figure through dollar_figure of revproc_76_47 and meets the percentage_test described in sec_4 the service will assume the grant will be subject_to the provisions of sec_117 section dollar_figure of revproc_76_47 provides a percentage_test guideline it states that in the case of a program that awards grants to children of employees of a particular employer the program meets the percentage_test if the number of grants awarded under that program in any year to such children does not exceed percent of the number of employees' children who i were eligible ii were applicants for such grants and iii were considered by the selection committee in selecting the recipients of grants in that year or percent of the number of employees' children who can be shown to be eligible for grants whether or not they submitted an application in that year f will supply statistical information on applications received and grants made which will enable you to maintain the records required by revproc_76_47 you have agreed that your scholarship program will meet the requirements of revproc_76_47 and that special scholarship awards will be in compliance with either the or the percent test of section dollar_figure applicable to a program that awards grants to children of employees of a particular employer if you wish to meet the percent test eligible employees' children shall include all employees' children who take the required tests in the applicable_year and otherwise meet the minimum requirements for eligibility established by you in addition if you wish to meet the percent test you must obtain an actual count to show the number of employees' children who are eligible for grants whether or not they submitted an application in the applicable_year accordingly based upon the information presented and assuming the program will be conducted as proposed with a view to providing objectivity and non-discrimination in the awarding of scholarship grants we rule that your grants to f for the awarding of scholarship grants to children and or relatives of employees of e comply with the requirements of sec_4945 of the code thus such expenditures made in accordance with those procedures will not constitute taxable_expenditures within the meaning of sec_4945 of the code the recipient of the scholarship is responsible for determining whether all or part of the scholarship is includible in gross_income under sec_117 of the code we understand that f will advise the recipient that amounts granted are taxable_income if the aggregate scholarship amounts received by the recipient exceed tuition and fees not including room and board required for enrollment or attendance at the educational_institution and fees books supplies and equipment required for courses of instruction this ruling is based on the understanding that there will be no material_change in the facts upon which it is based and that no grants will be awarded to relatives of members of selection committees or for a purpose inconsistent with the purposes described in sec_170 of the code any changes in the procedure must be reported to the ohio te_ge office for exempt_organization matters this ruling will remain in effect as long as the procedures in awarding grants under your program remain in compliance with sections dollar_figure through dollar_figure of revproc_76_47 records should be maintained to show that you meet the applicable_percentage test of section dollar_figure thereof please note that this ruling is only applicable to grants awarded under the b competition before you enter into any other scholarship or educational loan program you should submit a request for advance approval of that program and the requirements of revproc_76_47 must be met in the aggregate your procedures for awarding scholarships to students designated as finalists under c are considered to satisfy the facts_and_circumstances_test of revproc_76_47 and therefore only those scholarships offered to individuals below the finalist level under your b will be counted in determining whether the percentage_test of revproc_76_47 is met with respect to special scholarship awards made under the b competition and any scholarship awards made under any other such program we are informing the ohio te_ge office of this ruling please keep a copy of this ruling with your organization's permanent records this ruling will be made available for public inspection under sec_6110 of the code after certain deletions of identifying information are made for details see enclosed notice notice of intention to disclose a copy of this ruling with deletions that we intend to make available for public inspection is attached to notice if you disagree with our proposed deletions you should follow the instructions in notice this ruling letter is directed only to the organization that requested it sec_6110 of the code provides that it may not be used or cited by others as precedent if you have any questions about this ruling letter please contact the person whose name and telephone number are shown in the heading of this letter because this ruling letter could help to resolve any questions please keep it in your permanent records sincerely debra j kawecki manager exempt_organizations enclosure notice technical group


internal_revenue_service department of the treasury number release date index numbers washington dc person to contact telephone number refer reply to cc psi - plr-129846-00 date date x a state partnerships management properties d1 d2 plr-129846-00 dollar_figurez dollar_figurey dear this responds to a letter dated date and subsequent correspondence submitted on behalf of x requesting a ruling that x’s rental income from the properties is not passive_investment_income within the meaning of sec_1362 and sec_1375 of the internal_revenue_code the information submitted states that x was incorporated under state law on d1 and plans to elect under sec_1362 to be an s_corporation a is the sole shareholder of x x has accumulated_earnings_and_profits x is engaged in the business of owning and operating commercial rental real_estate office and industrial buildings x owns interests in the properties either directly or through the partnerships x has a general_partnership interest and limited_partnership_interest in the partnerships management a corporation partly owned by a manages the properties as well as other rental properties owned by corporations related to x in addition x retains various independent contractors to provide services with respect to the properties through management and contractors the services provided by x include not all services are provided to all properties maintaining exterior areas including policing of grounds window washing painting roofing landscaping parking areas and driveways areas maintaining heating cooling lighting and electrical systems and providing janitorial and scavenger services in addition to the services x provides to tenants x through management performs the usual leasing and administrative activities involved in managing real_estate these activities include collecting rents including taking legal action against delinquent tenants collecting and analyzing rental market information reviewing prospective tenants drafting individual leases reviewing and approving tenantt improvements and providing on call emergency services in the fiscal_year ending d2 x either directly or as part of its distributive_share of the partnerships’ items accrued approximately dollar_figurez in rents and incurred approximately dollar_figurey in relevant expenses sec_1361 defines an s_corporation as a small_business_corporation for which an election under sec_1362 is in effect for the taxable_year sec_1362 provides that an election under sec_1362 shall be terminated whenever the corporation has accumulated_earnings_and_profits at the close plr-129846-00 of each of consecutive taxable years and has gross_receipts for each of such taxable years more than percent of which are passive_investment_income sec_1362 provides that except as otherwise provided the term passive_investment_income means gross_receipts derived from royalties rents dividends interest annuities and sales or exchanges of stock_or_securities sec_1375 provides that if at the close of a taxable_year an s_corporation has subchapter_c_earnings_and_profits and gross_receipts more than percent of which are passive_investment_income a tax is imposed on the excess_net_passive_income of the corporation sec_1375 provides that the terms passive_investment_income and gross_receipts have the same respective meanings as when used in sec_1362 sec_1_1362-2 of the income_tax regulations provides that rents means amounts received for_the_use_of or right to use property whether real or personal of the corporation sec_1_1362-2 provides that rents does not include rents derived in the active trade_or_business of renting property rents received by a corporation are derived in an active trade_or_business of renting property only if based on all the facts and circumstances the corporation provides significant services or incurs substantial costs in the rental business generally significant services are not rendered and substantial costs are not incurred in connection with net leases whether significant services are performed or substantial costs are incurred in the rental business is determined based upon all the facts and circumstances including but not limited to the number of persons employed to provide the services and the types and amounts of costs and expenses_incurred other than depreciation based solely on the facts and the representations submitted we conclude that the rental income that x derives from the properties is income from the active trade_or_business of renting property and is not passive_investment_income as described in sec_1362 and sec_1375 except as specifically set forth above we express no opinion as to the federal tax consequences of the facts of this case under any other provision of the code specifically we express no opinion on whether x is a small_business_corporation eligible to make an s election further the passive_investment_income rules of sec_1362 are completely independent of the passive_activity rules of sec_469 unless an exception under sec_469 applies the rental_activity remains passive for purposes of sec_469 this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent plr-129846-00 in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to x’s authorized representative sincerely yours j thomas hines chief branch associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes