t c no united_states tax_court eaton corporation and subsidiaries petitioner v commissioner of internal revenue respondent docket no filed date this case is before us on cross-motions for partial summary_judgment the issue is whether the earnings_and_profits e_p of the upper tier controlled_foreign_corporation cfc partners of eaton worldwide llc ew llc a domestic_partnership must be increased as a result of the partnership’s sec_951 income inclusions p contends that ew llc’s sec_951 inclusions do not affect the e_p of its upper tier cfc partners conversely r contends that the upper tier cfc partners increase their e_p to reflect ew llc’s sec_951 inclusions held the e_p of upper tier cfc partners of a domestic_partnership such as ew llc must be increased as a result of the partnership’s sec_951 income inclusions joel v williamson charles p hurley john t hildy brian w kittle geoffrey m collins christine s hooks rajiv madan royce l tidwell christopher p murphy nathan p wacker kevin r stults and christopher p bowers for petitioner john m altman ronald s collins jr eric p ingala and laurie a nasky for respondent opinion kerrigan judge the internal_revenue_service respondent determined deficiencies in federal_income_tax and penalties for the calendar taxable years years in issue of eaton corp eaton or petitioner this case is before the court on the parties’ cross-motions for partial summary_judgment unless otherwise indicated all section references are to the internal_revenue_code code in effect for the years in issue and all rule references are to the tax_court rules_of_practice and procedure generally speaking a controlled_foreign_corporation cfc that is a partner in a domestic_partnership must include in gross_income its distributive_share of that partnership’s gross_income including income that the partnership included under sec_951 with respect to any lower tier cfcs according to respondent the upper tier cfc partners must also increase their earnings_and_profits e_p by such an amount adopting that approach respondent contends that the correct amounts to be included in petitioner’s gross_income under sec_951 and sec_956 are dollar_figure and dollar_figure for tax years and respectively petitioner by contrast contends that a domestic partnership’s sec_951 inclusions do not affect the e_p of its upper tier cfc partners the primary issue we must decide is whether the e_p of the upper tier cfc partners of eaton worldwide llc ew llc a domestic_partnership must be increased as a result of the partnership’s sec_951 income inclusions background some of the facts are stipulated and are so found eaton was a domestic_corporation with its principal_place_of_business in cleveland ohio when it timely filed its petition 1the parties have stipulated the amounts of the adjustments if the court upholds respondent’s position i corporate structure during the years in issue eaton was the parent of an affiliated_group_of_corporations eaton group that filed consolidated federal_income_tax returns members of the eaton group were shareholders of foreign_corporations that were cfcs within the meaning of sec_957 these cfcs collectively held directly or indirectly of the membership interests in ew llc the cfcs that held membership interests in ew llc during the years in issue were eaton holding iii s a r l eaton finance n v and eaton b v collectively upper tier cfc partners any adjustments to income under sec_951 for the upper tier cfc partners would be made to the consolidated income of the eaton group during the years in issue ew llc owned equity interests in and was the sole u s shareholder of several cfcs within the meaning of sec_957 lower tier cfcs ew llc included in income under sec_951 the subpart_f_income earned by the lower tier cfcs and amounts calculated under sec_956 with respect to the lower tier cfcs because the upper tier cfc partners were not u s persons under sec_957 they were not u s shareholders of the lower tier cfcs the lower tier cfcs did not make any distributions of property to ew llc during and on date ew llc purchased all the issued and outstanding common_stock of at holdings corp at holdings from a third party for dollar_figure at holdings was a delaware corporation and its sole asset was the stock of argo-tech corp also a delaware corporation ew llc thereafter owned of the issued and outstanding common_stock of at holdings or its successor eaton industrial corp for the purposes of applying sec_951 and sec_956 ew llc’s interest in at holdings constituted u s property which was treated as held by the upper tier cfc partners each upper tier cfc partner was thus treated as holding an interest in u s property by virtue of ew llc’s ownership of at holdings ii tax and financial reporting during the years in issue ew llc as the sole u s shareholder of the lower tier cfcs was required under sec_951 to include in gross_income its pro_rata share of the subpart_f_income generated by the lower tier cfcs and sec_956 amounts with respect to the lower tier cfcs the lower tier cfcs treated the 2the parties do not dispute that to the extent the upper tier cfc partners have applicable_earnings the u s shareholders of the upper tier cfc partners must include in income sec_956 amounts based on the upper tier cfc partners’ holdings of at holdings stock amounts thus included by ew llc as previously taxed e_p under sec_959 ew llc timely filed forms u s return of partnership income for the years in issue on which it reported income inclusions under sec_951 with respect to the lower tier cfcs during the years in issue ew llc issued schedules k-1 partner’s share of income deductions credits etc to the upper tier cfc partners reflecting their distributive shares of its income inclusions under sec_951 these distributive shares have since been adjusted slightly following an analysis of ew llc’s capital accounts the upper tier cfc partners excluded these amounts from gross_income and from the calculation of their subpart_f_income none of the upper tier cfc partners made any adjustments to their e_p corresponding to their distributive shares of ew llc’s income inclusions under sec_951 for all other items of income gain loss deduction or credit reflected on the schedules k-1 the upper tier cfc partners did make adjustments to their respective e_p the upper tier cfc partners likewise made no adjustments to their respective bases in their partnership interests in ew llc corresponding to their distributive shares of ew llc’s income inclusions under sec_951 for all other items of income gain loss deduction or credit reflected on the schedules k-1 the upper tier cfc partners did make adjustments to their respective bases in their partnership interests the consolidated financial position of eaton group and the consolidated results of its operations and cashflows were reported in conformity with u s generally_accepted_accounting_principles gaap for the years in issue for financial reporting purposes but not for federal_income_tax purposes eaton’s consolidated financial statements included the results and cashflows of the upper tier cfc partners ew llc and the lower tier cfcs each of the upper tier cfc partners prepared its unconsolidated financial statements and accounting_records in conformity with u s gaap i summary_judgment standard discussion summary_judgment may be granted where the pleadings and other materials show that there is no genuine dispute as to any material fact and that a decision may be rendered as a matter of law rule b 98_tc_518 aff’d 17_f3d_965 7th cir the burden is on the moving party to demonstrate that there is no genuine dispute as to any material fact and that he or she is entitled to judgment as a matter of law 116_tc_73 both parties have moved for partial summary_judgment and they agree that there exist no genuine disputes of material fact regarding the question they have asked us to decide after reviewing the pleadings and the stipulation of facts and attached exhibits we conclude that a decision may be rendered as a matter of law ii background law subpart_f was enacted in response to perceived abuses by u s taxpayers through the use of cfcs see 60_tc_917 in subpart_f congress has singled out a particular class of taxpayers u s shareholders whose degree of control_over their foreign_corporation allows them to treat the corporation’s undistributed_earnings as they see fit fn ref omitted the goal of subpart_f is to tax currently specified earnings_of cfcs that are in the aggregate controlled by u s shareholders 117_tc_67 in the ordinary course foreign_source_income earned by a cfc is not subject_to u s taxation until it is repatriated in the form of a dividend or other distribution to the cfc’s u s shareholders sec_881 and sec_882 59_tc_338 see also s rept no pincite 1962_3_cb_703 however under sec_951 a u s shareholder must include in gross_income for the current taxable_year its pro_rata share of certain items attributable to the cfc regardless of whether any distribution was made sec_951 and sec_956 were intended to prevent the repatriation of income to the united_states in a manner which does not subject it to u s taxation h_r rept no pincite 1962_3_cb_405 the senate_finance_committee report noted that g enerally earnings brought back to the united_states are taxed to the shareholders on the grounds that this is substantially the equivalent of a dividend being paid to them s rept no supra pincite c b pincite a cfc is a foreign_corporation whose stock is more than in terms of voting power or value owned directly indirectly or constructively by u s shareholders on any day during the corporation’s taxable_year sec_957 a u s shareholder is a u_s_person who owns directly indirectly or constructively or more of the total combined voting power of the foreign corporation’s stock sec_951 all of petitioner’s foreign subsidiaries are cfcs and petitioner is a u s shareholder under sec_951 sec_951 requires that a u s shareholder owning cfc stock on the last day of the cfc’s taxable_year include in gross_income for the current taxable_year its pro_rata share of certain items attributable to the cfc regardless of whether any distribution was actually made generally this includes both its subpart_f_income and the amount determined under sec_956 see sec_951 the amount determined under sec_956 is the u s shareholder’s pro_rata share of the lesser_of two amounts the excess of a the average amounts of the cfc’s investments in u s property as of the end of each quarter of the taxable_year over b the cfc’s earnings_and_profits representing previous sec_956 inclusions or the amount of the cfc’s applicable_earnings as defined in sec_956 representing essentially the cfc’s current and accumulated_earnings_and_profits that have not already been included in its u s shareholders’ gross incomes 137_tc_174 n citing boris i bittker lawrence lokken federal taxation of income estates and gifts para pincite through rev 3d ed aff’d 722_f3d_306 5th cir u s property includes among other things stock and debt of u s_corporations see sec_956 and c generally the amount taken into account with respect to any property that is u s property under sec_956 is its adjusted_basis reduced by any liability to which the property is subject when the cfc eventually distributes the amounts previously included in the u s shareholder’s gross_income pursuant to sec_951 the distribution then reduces the cfc’s e_p see sec_959 to avoid double_taxation to the shareholder the actual distribution is excluded from the shareholder’s gross_income see sec_959 iii analysis to determine whether the upper tier cfc partners are required to increase their e_p to reflect their distributive shares of ew llc’s sec_951 inclusions we need to analyze the interaction between sec_312 and sec_964 sec_312 a provision of subchapter_c is captioned effect on earnings_and_profits that section and the regulations interpreting it provide elaborate technical rules governing the calculation of e_p see sec_1_312-6 income_tax regs sec_964 a provision of subpart_f captioned earnings_and_profits concerns the calculation of the earnings_and_profits of any foreign_corporation sec_964 provides that e xcept as provided in sec_312 the earnings_and_profits of any foreign_corporation shall be determined according to rules substantially_similar to those applicable to domestic corporations under regulations prescribed by the secretary the rules applicable to domestic corporations are set forth in sec_312 and the regulations interpreting it sec_312 captioned certain foreign_corporations provides that special depreciation rules apply to computation of a foreign corporation’s e_p if less than percent of its gross_income is derived from sources within the united_states we must first decide the universe of regulations to which the phrase under regulations prescribed by the secretary as used in sec_964 refers that phrase as enacted in is naturally read to refer to any regulations that the secretary might later promulgate under sec_964 but given the statutory text we believe that this phrase also refers to regulations that the secretary had previously promulgated or might in the future promulgate under sec_312 the phrase under regulations prescribed by the secretary immediately follows the phrase rules substantially_similar to those applicable to domestic corporations sec_964 provides that the same general rules apply to e_p computations for domestic and foreign_corporations since those rules are set forth both in sec_312 and in the regulations interpreting it the reference to regulations in sec_964 is reasonably read to include regulations promulgated under sec_312 as well as under sec_964 there is nothing 3the secretary promulgated the initial regulations under sec_312 in date see t d 1955_2_cb_61 in the text of sec_964 that limits the scope of regulations to regulations that might later be promulgated under that specific provision the code does not comprehensively define ‘earnings and profits ’ but p rovisions of the code and regulations relating to earnings_and_profits ordinarily take taxable_income as the point of departure boris i bittker lawrence lokken federal taxation of income estates and gifts para at westlaw among the items entering into the computation of e_p are all items includible in gross_income under sec_61 or corresponding provisions of prior revenue acts sec_1_312-6 income_tax regs thus a corporation’s e_p are calculated by making certain adjustments to its taxable_income see 96_tc_858 aff’d 959_f2d_16 2d cir 52_tc_1 defining e_p as a measure to approximate a corporation’s power to make distributions which are more than just a return of investment quoting arthur r albrecht ‘dividends’ and ‘earnings or profits’ tax l rev aff’d per curiam 433_f2d_309 5th cir 4cf eg sec_964 the secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this subsection emphasis added sec_312 and its accompanying regulations specify how the e_p computation is affected by various corporate transactions and events transactions and events that may require adjustments in computing e_p include distributions of property distributions of appreciated_property distributions of property subject_to indebtedness distributions of stock and securities tax-free distributions redemptions corporate separations and reorganizations discharge_of_indebtedness income depreciation installment_sales and last-in_first-out lifo inventory adjustments see sec_312 the rules applicable to domestic corporations as set forth in sec_312 and its accompanying regulations assume that the corporation will have determined its taxable_income using u s tax_accounting principles because that assumption will often be invalid for a foreign_corporation the regulations under sec_964 require that preliminary adjustments be made to the profit and loss p l statement of a foreign_corporation to enable the rules of sec_312 to be applied correctly sec_1_964-1 income_tax regs provides as follows e xcept as otherwise provided in the code and regulations the earnings_and_profits of a foreign_corporation for its taxable_year shall be computed for all federal_income_tax purposes substantially as if such corporation were a domestic_corporation by-- i preparing a profit and loss statement with respect to such year from the books of account regularly maintained by the corporation for the purpose of accounting to its shareholders ii making the adjustments necessary to conform such statement to the accounting principles described in paragraph b of this section and iii making the further adjustments necessary to conform such statement to the tax_accounting standards described in paragraph c of this section paragraph b of the regulation captioned accounting adjustments states that t he accounting principles to be applied in making the adjustments required by paragraph a ii shall be those accounting principles generally accepted in the united_states for purposes of reflecting in the financial statements of a domestic_corporation the operations of its foreign affiliates id para b these principles include for example clear_reflection_of_income and rules governing translation of foreign_currency amounts into united_states dollars id subdivs i v paragraph c of the regulation captioned tax adjustments specifies various tax_accounting standards to be applied in making the adjustments required by paragraph a iii these include for example adjustments to inventories to conform to the provisions of sec_471 and sec_472 and adjustments required by u s rules governing changes in accounting_method see id para c i and ii see also id para a providing that a foreign corporation’s p l must be adjusted to reflect the nondeductibility of bribe s and kickback s under sec_162 the regulations issued under sec_964 described above do not provide comprehensive guidance for calculating the e_p of a foreign_corporation rather they specify a preliminary process by which a foreign corporation’s p l statement is conformed to or made to resemble that of a domestic_corporation by making a series of tax_accounting adjustments sec_964 then incorporates the rules of section 312--other than the depreciation rule_of sec_312 --by requiring that the foreign corporation’s e_p shall be computed according to rules substantially_similar to those applicable to domestic corporations see sec_1_964-1 income_tax regs providing that the e_p of a foreign_corporation shall be computed substantially as if such corporation were a domestic_corporation in other words the foreign corporation’s e_p are determined according to rules substantially_similar to those applicable to domestic corporations in that its p l statements as adjusted through the regulations prescribed by the secretary are then further adjusted through most of the rules under sec_312 that would apply to a similarly situated domestic corporation’s computation of its e_p see sec_964 sec_1_964-1 income_tax regs this court and the commissioner have consistently applied the principles of sec_312 to compute a foreign corporation’s e_p see h 59_tc_53 concluding sec_312 applies to determine the effect of an earlier distribution aff’d without published opinion 500_f2d_1399 3d cir juha v commissioner tcmemo_2012_68 slip op pincite discussing the application of sec_312 and its regulations in determining a foreign corporation’s e_p in revrul_86_131 1986_2_cb_135 the commissioner analyzed the effect of a distribution_of_property on the e_p of a foreign_corporation for a domestic_corporation sec_312 sets forth the general_rule governing that subject the commissioner concluded that t he rules of sec_312 apply to distributions by a foreign_corporation as well as a domestic_corporation revrul_86_131 c b pincite citing h h robertson co v commissioner t c pincite 5the secretary issued notice_2009_7 2009_3_irb_312 and notice_2010_ 2010_22_irb_715 which address transactions similar to the transaction at issue however neither notice addresses the calculation of the e_p of a foreign_corporation 6we are not bound by revenue rulings and the weight we afford them continued for these reasons and looking at the plain meaning of the relevant provisions we conclude that the rules set forth in sec_312 and its regulations must be applied in determining the e_p of the upper tier cfc partners of ew llc see 83_tc_742 the next step is to determine what should be included in their e_p there is no explicit rule in sec_312 sec_964 or their accompanying regulations specifying how a cfc’s distributive_share of partnership income generally--or its distributive_share of a partnership’s income inclusion under sec_951 specifically--should be treated for purposes of computing its e_p we accordingly consult the general rules set forth in subpart_f and sec_312 subpart_f requires that the upper tier cfc partners compute their gross_income as if they were domestic corporations see sec_1_952-2 c income_tax regs the upper tier cfc partners are partners of a domestic_partnership sec_701 provides that a partnership is not liable for federal_income_tax instead its partners are liable in their individual capacities for the income_tax arising from the partnership’s operations in determining its income continued depends upon their persuasiveness and the consistency of the commissioner’s position over time see 323_us_134 129_tc_131 tax a partner must take into account its distributive_share of each item of partnership income gain loss deduction and credit sec_702 each partner is taxed on its distributive_share of partnership income without regard to whether the income is actually distributed sec_1_702-1 income_tax regs under these rules the upper tier cfc partners must include in their gross_income their distributive shares of ew llc’s income under sec_951 ew llc’s income includes subpart_f_income and sec_956 inclusions from the lower tier cfcs regardless of whether the lower tier cfcs made actual distributions the gross_income of the upper tier cfc partners thus includes their distributive_share of ew llc’s gross_income whether or not distributed pursuant to sec_61 and sec_702 the fact that the upper tier partners are cfcs makes no difference for the purposes of computing gross and taxable_income under subpart_f a foreign_corporation is treated as a domestic_corporation and the principles of sec_61 and sec_63 apply sec_1_952-2 and b income_tax regs since there are no code provisions or regulations that have special rules for e_p with respect to distributive shares of partnership income pursuant to sec_951 the general rules of sec_312 apply sec_1_312-6 income_tax regs explicitly states that e_p shall be determined by taking into account all items includible in gross_income under sec_61 because the upper tier cfc partners’ distributive shares of ew llc’s sec_951 inclusions are includible in their gross_income their e_p must be increased by those amounts therefore each upper tier cfc partner is required to include in gross_income and make a correlative increase to its e_p to reflect its distributive_share of ew llc’s partnership income including ew llc’s sec_951 inclusions with respect to the lower tier cfcs if the upper tier cfc partners did not increase their e_p on this account there is no other mechanism to ensure that their e_p would ever be increased that would produce an irrational result because as noted supra pp the lower tier cfcs treated the amounts included by ew llc as previously taxed e_p under sec_959 the fact that the upper tier cfc partners did not reflect their distributive shares of ew llc’s sec_951 inclusions on their unconsolidated financial statements has no bearing on the requirement that such amounts be included in their e_p the p l statement to which the regulations refer is not produced by copying local financial records but by preparing from such records a financial statement conforming to u s tax standards see sec_1_964-1 income_tax regs the required preparation includes ensuring that the p l statement conforms to u s federal_income_tax principles applicable to the computation of e_p by including all items of income under u s tax principles petitioner cannot follow local accounting or gaap to the exclusion of u s tax principles e_p are increased upon a corporate partner’s inclusion in income of a distributive_share of partnership income even if the partner does not receive a distribution of cash from the partnership see henry c beck co v commissioner t c pincite concluding that a corporation’s e_p are increased even if the profit that resulted in that increase is not taxable sec_1_312-6 income_tax regs revrul_79_20 1979_1_cb_137 iv petitioner’s arguments petitioner’s primary argument reduced to its essentials is that the sec_964 regulations supply a freestanding self-contained and comprehensive system for determining the e_p of a foreign_corporation without any need to refer to or incorporate the rules set forth in sec_312 and the regulations thereunder as discussed earlier sec_1_964-1 income_tax regs states that a foreign corporation’s e_p shall be computed substantially as if such corporation were a domestic_corporation by doing three things taking the foreign corporation’s p l statement and making u s accounting and tax adjustments to it petitioner interprets the preposition by in an extremely narrow sense to mean by doing these three things and nothing else petitioner contends that the upper tier cfc partners did the three required things by making the adjustments specified in paragraphs b and c of the regulation that having been done petitioner says the e_p computation was complete petitioner’s view of sec_1_964-1 income_tax regs forecloses resort to the general rules of sec_312 for determining the e_p of a foreign corporation--in particular to the requirement that e_p shall be determined by taking into account all items includible in gross_income under sec_61 sec_1_312-6 income_tax regs petitioner’s argument is unpersuasive the sec_964 regulations set forth preliminary steps that must be taken to conform a foreign corporation’s p l statement to that of a domestic_corporation by its terms sec_1_964-1 income_tax regs refers only to the profit and loss statement and the adjustments necessary to conform such statement to u s accounting and tax principles the sec_964 regulations do not tell the taxpayer how to compute e_p they simply require that the foreign corporation’s p l statement first be adjusted to u s standards before the e_p rules of sec_312 can be applied sec_964 explicitly incorporates the rules of sec_312 it provides that the e_p of a foreign_corporation shall be determined according to rules substantially_similar to those applicable to domestic corporations e xcept as provided in sec_312 if sec_964 did not incorporate the general rules of sec_312 congress would have had no reason to carve out an exception for the specific depreciation rules of sec_312 sec_1_964-1 income_tax regs reiterates the incorporation of sec_312 by stating that except as otherwise provided in the code and regulations the earnings_and_profits of a foreign_corporation for its taxable_year shall be computed for all federal_income_tax purposes substantially as if such corporation were a domestic_corporation the phrase except as otherwise provided in the code and regulations clarifies that all of the e_p rules applicable to domestic corporations also apply to a foreign_corporation unless there is a provision explicitly prohibiting application_for example sec_312 provides a special rule for taking into account interest_paid on a bearer bond for foreign_corporations other than cfcs if sec_312 did not apply to foreign_corporations there would be no need for sec_312 without reference to the detailed rules of sec_312 and the regulations interpreting it it would be without meaning--employing the sec_964 regulations alone--to perform an e_p computation for a foreign_corporation as noted earlier sec_312 and the regulations thereunder explain how numerous corporate transactions and events affect e_p these include distributions of property distributions of appreciated_property distributions of property subject_to indebtedness distributions of stock and securities tax-free distributions redemptions corporate separations and reorganizations discharge_of_indebtedness income depreciation installment_sales and lifo inventory adjustments see sec_312 the sec_964 regulations do not address or even mention any of these things this makes it clear that the e_p of a foreign_corporation must be determined by applying the general rules of sec_312 that govern e_p computations for a domestic_corporation finally petitioner contends that sec_951 inclusions do not increase the dividend paying capacity of the upper tier cfc partners petitioner refers to a sec_951 inclusion as phantom income and not a transfer of value it argues that e_p increase only where a corporation receives tangible economic value that enhances its dividend paying capacity there are many instances in which e_p are increased when amounts are included in income but no cash is received for example taxpayers that are subject_to the rules governing original_issue_discount oid on a debt_instrument are generally required to include the oid in gross_income and thus e_p even though no cash is received until a later period see sec_1272 sec_1 b income_tax regs another instance in which this occurs is with an accrual_method taxpayer similarly an accrual_method taxpayer may include income before the receipt of cash an accrual_method taxpayer’s e_p increase when the taxpayer accrues income not in a later period when cash is received see sec_1_312-6 income_tax regs sec_882 is irrelevant in determining the gross_income and hence the e_p of the upper tier cfc partners sec_882 provides for direct u s taxation of a foreign corporation’s u s -source income and income effectively connected with a u s trade_or_business sec_881 and sec_882 the sec_951 income inclusions at issue here are not u s source income or income effectively connected with a u s trade_or_business accordingly sec_881 and sec_882 are inapplicable in this case the gross_income of the upper tier cfc partners is calculated pursuant to sec_61 their distributive shares of ew llc’s income are thus included in their gross_income and correspondingly in their e_p v conclusion eaton’s upper tier cfc partners must include their distributive shares of ew llc’s income including their distributive shares of ew llc’s sec_951 income inclusions in their gross_income and their e_p cfcs compute e_p in the same manner as a domestic_corporation except as otherwise provided in the code or the regulations see sec_964 there are no special e_p rules in the code or regulations concerning a cfc partner’s distributive_share of partnership income domestic corporations increase e_p by amounts included in gross_income under sec_61 and a partner’s gross_income includes its distributive_share of all items of the partnership’s income see sec_61 sec_702 see also sec_1_312-6 income_tax regs eaton is thus required to include in its consolidated income under sec_951 and sec_956 dollar_figure and dollar_figure for tax years and respectively accordingly we will grant respondent’s motion for partial summary_judgment and deny petitioner’s cross-motion for partial summary_judgment we have considered all of the arguments made by the parties and to the extent we did not mention them above we conclude that they are moot irrelevant or without merit to reflect the foregoing reviewed by the court an appropriate order will be issued thornton marvel paris buch lauber nega ashford urda and copeland jj agree with this opinion of the court pugh j did not participate in the consideration of this opinion morrison j concurring in my view the opinion of the court is unsatisfactory to the extent it suggests that one of the rules in sec_1_312-6 income_tax regs the rule that e_p shall be determined by taking into account all items includible in gross_income under sec_61 governs the computation of the e_p of a foreign_corporation solely by operation of sec_964 without the intervening operation of sec_1_964-1 income_tax regs it is sec_1_964-1 income_tax regs by requiring the e_p of a foreign_corporation to be computed substantially as if such corporation were a domestic_corporation that incorporates that particular rule for the purpose of computing the e_p of a foreign_corporation foley c j dissenting eschewing a plain language interpretation the opinion of the court imprudently stretches the explicit terms of sec_964 and its accompanying regulation sec_964 provides except as provided in sec_312 for purposes of this subpart the earnings_and_profits of any foreign_corporation and the deficit in earnings_and_profits of any foreign_corporation for any taxable_year shall be determined according to rules substantially_similar to those applicable to domestic corporations under regulations prescribed by the secretary thus the secretary has wide latitude to prescribe these earnings_and_profits e_p calculations but pursuant to sec_312 cannot require a foreign_corporation that earns less than of its gross_income from u s sources to use straight_line depreciation yet the opinion of the court concludes that s ection a incorporates the rules of section 312--other than the depreciation rule_of sec_312 see op ct p to the contrary sec_964 explicitly incorporates sec_312 but makes no other reference to sec_312 undaunted by the plain language the opinion of the court continues misquotes the statute and proceeds to interpret language that congress did not write sec_964 provides that the same general rules apply to e_p computations for domestic and foreign_corporations since those rules are set forth both in sec_312 and in the regulations interpreting it the reference to regulations in sec_964 is reasonably read to include regulations promulgated under sec_312 as well as under sec_964 there is nothing in the text of sec_964 that limits the scope of regulations to regulations that might later be promulgated under that specific provision fn ref omitted see op ct p emphasis added sec_964 does not however provide that the same general rules apply to e_p computations for domestic and foreign_corporations the statute provides that the e_p of a foreign_corporation shall be determined according to rules substantially_similar to those applicable to domestic corporations under regulations prescribed by the secretary see sec_964 emphasis added without citing any precedent the opinion of the court goes on to state that the phrase under regulations prescribed by the secretary also refers to regulations that the secretary had previously promulgated or might in the future promulgate under sec_312 see op ct p emphasis added this analysis sets bad precedent and is a rickety analytical construct sec_964 delegates broad regulatory authority to the secretary and he exercised that authority by promulgating sec_1_964-1 income_tax regs which states e xcept as otherwise provided in the code and regulations the earnings_and_profits of a foreign_corporation for its taxable_year shall be computed for all federal_income_tax purposes substantially as if such corporation were a domestic_corporation by following a specific three-step process the opinion of the court states that p etitioner interprets the preposition ‘by’ in an extremely narrow sense to mean ‘by doing these three things and nothing else ’ see op ct p yet that is precisely what the regulation dictates indeed the prior version of sec_1_964-1 income_tax regs provided that a foreign corporation’s e_p shall be computed according to a five-step process see t d 1964_3_cb_260 the regulation’s first three steps were identical to the three steps in the current regulation the last two steps made obsolete by the enactment of sec_985 provided rules for converting a foreign corporation’s e_p calculation to u s dollars the first three steps of the prior regulation were not preliminary or subject_to additional revision under sec_312 the calculation was complete upon the conversion to u s dollars and like the current version of sec_1_964-1 income_tax regs sec_312 played no part in that calculation see t d 1964_3_cb_260 similarly the e_p calculation process in the current regulation is self-contained and complete the secretary certainly had and still has the authority to promulgate regulations incorporating the rules of or similar to sec_312 he has not 1in the secretary identified transactions similar to the transaction at issue as a transaction_of_interest that had the potential for tax_avoidance see notice_2009_7 2009_3_irb_312 in the secretary stated he would promulgate regulations to address these purported tax_avoidance transactions continued we need not opine on whether the secretary’s inaction is the result of bureaucratic indolence or inertia but we know this the secretary has not promulgated the rule respondent espouses and is now imploring us to do his bidding the opinion of the court acquiesces we should decline our role is to review and construe not adjust and reconstruct the statute and the regulations see 545_us_353 stating that courts are not free to rewrite the statute that congress has enacted the secretary is bound by the terms of the rules he created similarly taxpayers are bound by the applicable rules but they are not required to employ their imagination to divine them petitioner may have found a hole in the dike but the closing of the hole calls for the application of the secretary’s thumb not the court’s 294_f2d_876 1st cir vacating and remanding 34_tc_290 34_tc_456 and 34_tc_303 in short we must interpret not make the law gustafson j agrees with this dissent continued see notice_2010_41 2010_22_irb_715 he has not curiously respondent now asks the court rather than his office of tax policy scriveners to interpret sec_1_964-1 income_tax regs to halt a transaction similar to those he has for a decade deemed problematic


number release date id office uilc cca-927124-11 from -------------------- sent tuesday date pm to -------------- cc subject fw ------------------- not sure what your as of date date below means sec_170 as modified by the ppa in applies to appraisals prepared with respect to returns or submissions filed after notice_2006_96 applies until the effective date of the final regs the final regs have not yet been issued ------------------------------------------ ----------


department of the treasury internal_revenue_service washington d c feb to cr at tax_exempt_and_government_entities_division xxxxxxxxxxkxx xxkxxxkxkkkxkkk xxkxxxkxkxkkkxk uic legend taxpayer a taxpayer b ira u irav ira w ira x ira y iraz company l company m company n dear wk rk ak wek ree kkk kkk kkk eee ke ke this is in response to the letter submitted by your authorized representative as supplemented by correspondence dated and in which you request relief under sec_301_9100-3 of the procedure and administration regulations ‘the regulations the following facts and representations support your ruling_request taxpayer a maintained an ira u an individual_retirement_account described in code sec_408 with company l during calendar_year taxpayer a converted ira u to a roth_ira ira v also with company l taxpayer b taxpayer a’s spouse maintained ira w an individual_retirement_account described in code sec_408 with company m during calendar_year taxpayer b converted ira w to a roth_ira ira x also with company m in addition taxpayer b maintained ira y an individual_retirement_account described in code sec_408 with company n during calendar_year taxpayer b converted ira y to a roth_ira ira z also with company n xxkxxxkkxkxkkkkk page - - filed a joint federal_income_tax return with respect to the taxpayer a and taxpayer b calendar_year taxpayers a and b’s adjusted_gross_income for exceeded the limit found at sec_408a of the internal_revenue_code taxpayers a and b did not use the services of a tax preparer ie accountant or tax attorney in preparing their federal_income_tax return at the time they filed their federal tax_return taxpayers a and b were not aware of the income limitations found at code sec_408a taxpayers a and b were unaware of the time limits found in announcements and for recharacterizing an amount that had been converted from a traditional_ira to a roth_ira taxpayers a and b timely filed their calendar_year federal_income_tax return based on the above you through your authorized representative request the following letter_ruling that pursuant to sec_301_9100-3 of the regulations taxpayers a and b are granted a period not to exceed six months from the date of this ruling letter to recharacterize their roth iras ira v ira x and ira z respectfully to traditional iras with respect to your request for relief under sec_301_9100-3 of the regulations sec_408a of the internal_revenue_code and sec_1_408a-5 of the income_tax regulations i t regulations provide that except as otherwise provided by the secretary a taxpayer may elect to recharacterize an ira contribution made to one type of ira as having been made to another type of ira by making a trustee-to-trustee transfer of the ira contribution plus earnings to the other type of ira ina recharacterization the ira contribution is treated as having been made to the transferee ira and not the transferor ira under sec_408a and sec_1_408a-5 this recharacterization election generally must occur on or before the date prescribed by law including extensions for filing the taxpayer's federal_income_tax returns for the year of contributions sec_1_408a-5 question and answer-6 of the i t regulations describes how a taxpayer makes the election to recharacterize the ira contribution to recharacterize an amount that has been converted from a traditional_ira to a roth_ira the taxpayer must notify the roth_ira trustee of the taxpayer's intent to recharacterize the amount the taxpayer must provide the trustee and the transferee trustee if different from the transferor trustee with specified information that is sufficient to effect the recharacterization and the trustee must make the transfer code sec_408a provides in relevant part that an individual with adjusted_gross_income agi in excess of dollar_figure for a taxable_year is not permitted to make a qualified_rollover_contribution to a roth_ira from an individual_retirement_plan other than a roth_ira during that taxable_year _xxkxxkxkkkxx page-3- sec_1_408a-4 q a-2 of the i t regulations provides in summary that an individual with modified_adjusted_gross_income in excess of dollar_figure for a taxable_year is not permitted to convert an amount to a roth_ira during that taxable_year sec_1_408a-4 q a-2 further provides in summary that an individual and his spouse must file a joint federal tax_return to convert a traditional_ira to a roth_ira and that the modified_adjusted_gross_income subject_to the dollar_figure limit for a taxable_year is the modified agi derived from the joint_return using the couple’s combined income sec_301_9100-1 sec_301_9100-2 and sec_301_9100-3 of the regulations in general provide guidance concerning requests for relief submitted to the service on or after date sec_301_9100-1 of the regulations provides that the commissioner of the internal_revenue_service in his discretion may grant a reasonable extension of the time fixed by a regulation a revenue_ruling a revenue_procedure a notice or an announcement published in the internal_revenue_bulletin for the making of an election or application_for relief in respect of tax under among others subtitle a of the code sec_301_9100-2 of the regulations lists certain elections for which automatic extensions of time to file are granted sec_301_9100-3 of the regulations generally provides guidance with respect to the granting of relief with respect to those elections not referenced in sec_301_9100-2 the relief requested in this case is not referenced in sec_301_9100-2 sec_301_9100-3 of the regulations provides that applications for relief that fall within sec_301_9100-3 will be granted when the taxpayer provides sufficient evidence including affidavits described in sec_301_9100-3 to establish that the taxpayer acted reasonably and in good_faith and granting relief would not prejudice the interests of the government sec_301_9100-3 of the regulations provides that a taxpayer will be deemed to have acted reasonably and in good_faith i if its request for sec_301_9100-1 relief is filed before the failure to make a timely election is discovered by the service ii if the taxpayer inadvertently failed to make the election because of intervening events beyond the taxpayer's control iii if the taxpayer failed to make the election because after exercising reasonable diligence the taxpayer was unaware of the necessity for the election iv the taxpayer reasonably relied upon the written advice of the service or v the taxpayer reasonably relied on a qualified_tax professional including a tax professional employed by the taxpayer and the tax professional failed to make or advise the taxpayer to make the election sec_301_9100-3 of the regulations provides that ordinarily the interests of the government will be treated as prejudiced and that ordinarily the service will not grant relief when tax years that would have been affected by the election had it been timely made are closed by the statue of limitations before the taxpayer's receipt of a ruling granting relief under this section xxxkxxxxxxaxk page - - announcement 1999_24_irb_50 date provided that a taxpayer who timely filed his her federal_income_tax return would have until date to recharacterize an amount that had been converted from a traditional_ira to a roth_ira announcement 1999_44_irb_555 date provided that a taxpayer who timely filed his her federal_income_tax return would have until date to recharacterize an amount that had been converted from a traditional_ira to a roth_ira taxpayers a and b timely filed their federal_income_tax return as a result they were eligible for relief under announcement or announcement however they missed the deadlines found in said announcements therefore it is necessary to determine if they are eligible for relief under the provisions of sec_301_9100-3 of the regulations in this case taxpayers a and b were ineligible to convert their ira u ira w and ira y to roth_ira v roth_ira x and roth_ira z respectively since their adjusted_gross_income exceeded dollar_figure however until they discovered otherwise taxpayers a and b believed that they were eligible to convert their iras u w and y to roth iras taxpayers a and b filed this request for sec_301 relief shortly after discovering that they were ineligible to convert iras u w and y to roth iras calendar_year is not a closed tax_year with respect to your request for relief we believe that based on the information submitted and the representations contained herein the requirements of sec_301_9100-1 and sec_301_9100-3 of the regulations have been met and that you have acted reasonably and in good_faith with respect to making the election to recharacterize your roth iras iras v x and z as traditional iras specifically the service has concluded that you have met the requirements of clause iii of sec_301_9100-3 of the regulations therefore you are granted an extension of six months from the date of the issuance of this letter_ruling to so recharacterize this ruling assumes that the above iras qualify under sec_408 of the code at all relevant times no opinion is expressed as to the tax treatment of the transaction described herein under the provisions of any other section of either the code or regulations which may be applicable thereto this letter 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 pursuant to a power_of_attorney on file with this office a copy of this ruling letter is being sent to your authorized representative xxxxxxxxxxxxx page -5 - if you have any questions concerning this ruling please contact t ep ra t at sincerely yours ‘qagned sotor b yloyd joyce e floyd manager employee_plans technical group tax exempt and governmental entities division enclosures deleted copy of ruling letter notice of intention to disclose


internal_revenue_service number release date index number ------------------------------------ ----------------------------------------------- -------------------------------------- --------------------------- -------------------------------------- --------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ----------- id no ------------- telephone number -------------------- refer reply to cc psi b01 plr-152130-05 date date ------------------ --------------------- ------------------------------------ legend legend x -------------------------------------------------- country d dear -------------- correspondence written on behalf of x requesting an extension of time under ' and ' of the procedure and administration regulations to elect to be treated as a partnership for federal tax purposes this letter responds to the letter dated date and related facts the information submitted states that x was incorporated under the laws of country on d x intended to file a form_8832 entity classification election to be treated as a partnership for federal tax purposes effective d however the election was not timely filed law and analysis sec_301_7701-3 provides that a business_entity that is not classified as a corporation under ' b or an eligible_entity can elect its classification for federal tax purposes elections are necessary only when an plr-152130-05 eligible_entity does not want to be classified under the default classification or when an eligible_entity chooses to change its classification sec_301_7701-3 provides that except for certain existing entities described in sec_301_7701-3 unless a foreign eligible_entity elects otherwise the entity is a a partnership if it has two or more members and at least one member does not have limited_liability b an association if all members have limited_liability or c disregarded as an entity separate from its owner if it has a single member that does not have limited_liability sec_301_7701-3 provides that an eligible_entity may elect to be classified other than as provided under ' b by filing form_8832 with the appropriate service_center under ' c iii this election will be effective on the date specified by the entity on form_8832 or on the date filed if no such date is specified the date specified on form_8832 cannot be more than days prior to the date on which the election is filed under sec_301_9100-1 the commissioner may 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 code except e g h and i sec_301_9100-1 defines the term regulatory election as including an election whose deadline is prescribed by a regulation published in the federal_register 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 requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-1 through provide the standards the conclusion based solely on the facts submitted and representations made we conclude that x has satisfied the requirements of and and therefore it is granted an extension of time of sixty days from the date of this letter to file a form_8832 to elect to be treated as a partnership for federal tax purposes effective d a copy of this letter should be attached to the election a copy is enclosed for that purpose plr-152130-05 except as specifically set forth above we express no opinion concerning the federal tax consequences of the facts described above under any other provision of the internal_revenue_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 in accordance with the power_of_attorney on file with this office a copy of this letter is being mailed to your authorized representative sincerely enclosures heather c maloy associate chief_counsel passthroughs and special industries copy of this letter copy for ' purposes cc


cca_2016102509455541 id uilc number release date from sent tuesday date am to cc bcc subject re ein issuance volume hello -------- you have asked whether accounts management could restrict the issuance of employer identification numbers eins to applicants that have a social_security_number or an individual tax identification_number you have also asked whether it would be legally permissible for accounts management to deny an ein request if the responsible_party has not filed a return it is our view that sec_6011 sec_6109 and sec_6109 and the underlying treasury regulations give the internal_revenue_service service broad authority to deny an ein request if the applicant does not have a social_security_number ssn an individual_taxpayer_identification_number itin or has not filed a return sec_6109 generally provides that any person required to file a return statement or other document shall include such identifying number as may be prescribed for securing proper identification see also sec_301 d ii respect to persons subject_to taxes as is necessary or helpful in securing proper identification of such persons sec_6109 of the code provides that the secretary or_his_delegate is authorized to require such information as may be necessary to assign an identifying number to any person sec_6011 authorizes the service to require such information with the broad language contained in sec_6011 and sec_6109 and sec_6109 taken together indicates that congress has vested in the service broad discretionary authority deemed necessary or helpful for the proper identification of a taxpayer employer employee or other person for purposes of filing returns and documents cf revrul_73_526 1973_2_cb_404 a new ein should be requested by the new corporation in a consolidation and in any reincorporation transaction not qualifying as a sec_368 reorganization adoption of rules that would limit issuance of an ein to a human being that has a ssn or itin and has filed a return reasonably restricts use of eins to its statutory purposes although it is our view that this policy is supportable under the code it is bound to be controversial please consider conducting a risk assessment to determine if it is advisable to implement this proposal please contact this office if we can be of further assistance


internal_revenue_service number release date index number -------------------------------------------------- ------------- ----------------------------------------------- ------------------------ department of the treasury washington dc third party communication none date of communication not applicable_person to contact --------------------- id no ----------------- telephone number -------------------- refer reply to cc psi b02 plr-113329-12 date may x state state n date date date date date date year year year year year legend legend --------------------------- ---------------- ---------- ------------- -- ------------------------ ------------------- ---------------------- ---------------------- --------------------------- ----------------------- ------- ------- ------- ------- ------- plr-113329-12 year ------- dear ---- ---------- this responds to a letter dated date submitted on behalf of x by its authorized representative requesting rulings regarding x’s treatment as an s_corporation spousal consents the information submitted states that x was formed in state on date and made an election to be treated as an s_corporation effective date n of the shareholders who consented to x’s s_corporation_election were residents of state and married at the time the election was made the shares of x held by those shareholders appear to be held as community_property the spouses of these n shareholders failed to sign the form_2553 election by a small_business_corporation on date therefore x's s_corporation_election was ineffective x represents that the failure to provide all of the consents for its s_corporation_election was inadvertent and unintended the spouses have since consented to x’s s_corporation_election and represented that they have filed their federal personal income_tax returns since date consistently with x’s s_corporation status composite returns the information submitted states in year year year year year and year x filed composite state_income_tax returns on behalf of some its shareholders x also paid the composite tax due on those returns on behalf of its shareholders x did not have any written or oral agreement with its shareholders to make these payments x represents the composite tax_payments should have been treated as constructive distributions which caused the distributions x made to its shareholders be disproportionate in year sec_1 and x represents it did not intend to create a second class of stock or to terminate x's s_corporation_election and that the circumstances resulting in the possible termination of the election were not motivated by tax_avoidance or retroactive planning x represents it will make remedial distributions to correct the effect of the potential disproportionate distributions x may have made conversion provision on date x filed an amendment to its articles of incorporation date amended articles the date amended articles included a provision allowing for both voting and nonvoting shares of x’s capital stock article iv of the date amended articles provides that the common_stock shall be identical in all respects except for certain voting rights article iv d provides for a conversion of nonvoting shares into voting shares in the event of an initial_public_offering of x conversion provision the plr-113329-12 date amended articles provided for an adjustment in the conversion price in the event of sales or issuances or deemed sales or issuances of voting_stock below the then applicable conversion price a defined term within the date amended articles the articles of incorporation were once again amended and restated on date the amended articles were substantially_similar to the previous articles there has been no initial_public_offering of x further x represents that the conversion provision whether or not it was triggered did not cause x to make disproportionate distributions to any shareholder on date x’s articles of incorporation were amended and restated to remove the conversion provision x represents that x and each of its shareholders have filed consistently with the treatment of x as an s_corporation since date x and its shareholders have also agreed to make any adjustments that the commissioner may require consistent with the treatment of x as an s_corporation law and analysis sec_1361 of the code provides that the term s_corporation means with respect to any taxable_year a small_business_corporation for which an election under sec_1362 is in effect for such year sec_1361 provides that the term small_business_corporation means a domestic_corporation which is not an ineligible_corporation and which does not have as a shareholder a person other than an estate a_trust described in sec_1361 or an organization described in sec_1361 who is not an individual sec_1_1362-6 of the income_tax regulations provides that a small_business_corporation makes an election under sec_1362 to be an s_corporation by filing a completed form_2553 the election form must be filed with the service_center designated in the instructions applicable to form_2553 the election is not valid unless all shareholders of the corporation at the time of the election consent to the election in the manner provided in sec_1_1362-6 however once a valid election is made new shareholders need not consent to that election sec_1_1362-6 of the income_tax regulations provides that when stock of the corporation is owned by husband and wife as community_property or the income from the stock is community_property or is owned by tenants in common joint_tenants or tenants_by_the_entirety each person having a community interest in the stock or income therefrom and each tenant in common joint tenant and tenant by the entirety must consent to the election sec_1_1361-1 of the income_tax regulations provides that a corporation is generally treated as having only one class of stock if all outstanding shares of stock of the corporation confer identical rights to distribution and liquidation proceeds plr-113329-12 differences in voting rights among shares of stock of the corporation are disregarded for purposes of determining whether a corporation has more than one class of stock sec_1_1361-1 provides that the determination of whether all outstanding shares of stock confer identical rights to distribution and liquidation proceeds is made based on the corporate charter articles of incorporation bylaws applicable state law and binding agreements relating to distribution and liquidation proceeds collectively the governing provisions a commercial contractual agreement such as a lease employment agreement or loan agreement is not a binding agreement relating to distribution and liquidation proceeds and thus is not a governing provision unless a principal purpose of the agreement is to circumvent the one class of stock requirement although a corporation is not treated as having more than one class of stock so long as the governing provisions provide for identical distribution and liquidation rights any distributions including actual constructive or deemed distributions that differ in timing or amount are to be given appropriate tax effect in accordance with the facts and circumstances sec_1362 provides that a in general an election under sec_1362 shall be terminated whenever at any time on or after the first day of the first taxable_year for which the corporation is an s_corporation such corporation ceases to be a small_business_corporation and b any termination under sec_1362 shall be effective on and after the date of cessation sec_1362 provides that if an election under sec_1362 by any corporation a was not effective for the taxable_year for which made determined without regard to sec_1362 by reason of a failure to meet the requirements of sec_1361 or to obtain shareholder consents or b was terminated under sec_1362 or the secretary determines that the circumstances resulting in the ineffectiveness or termination were inadvertent no later than a reasonable period of time after discovery of the circumstances resulting in the ineffectiveness or termination steps were taken a so that the corporation is a small_business_corporation or b to acquire the shareholder consents and the corporation and each person who was a shareholder of the corporation at any time during the period specified pursuant to sec_1362 agrees to make such adjustments consistent with the treatment of the corporation as an s_corporation as may be required by the secretary with respect to such period then notwithstanding the circumstances resulting in the ineffectiveness or termination the corporation will be treated as an s_corporation during the period specified by the secretary conclusion based solely on the facts submitted and the representations made we conclude that x's s_corporation_election was not effective as of date under sec_1362 because n spouses whose consent was required failed to consent to x’s s_corporation_election we further conclude that pursuant to the provisions of sec_1362 x will be treated as being an s_corporation from date and thereafter provided that x is plr-113329-12 otherwise eligible to be an s_corporation and provided that the election was not otherwise terminated under sec_1362 based solely on the facts submitted and the representations made we conclude that because x’s stock has identical distribution and liquidation rights under its governing provisions the composite tax_payments did not cause x to have more than one class of stock for purposes of sec_1361 under these circumstances we conclude that x’s s_corporation_election did not terminate because of the disproportionate distributions however disproportionate and corrective distributions must be given appropriate tax effect finally based solely on the facts submitted and the representations made we conclude that x's s_corporation_election may have terminated because the conversion provision in x’s articles of incorporation may have created more than one class of stock however we conclude that if x's s election was terminated such a termination was inadvertent within the meaning of sec_1362 of the code therefore pursuant to the provisions of sec_1362 x will be treated as an s_corporation from date and thereafter provided x is otherwise eligible to be an s_corporation and provided that the election was not otherwise terminated under sec_1362 except as specifically ruled above we express no opinion concerning the federal tax consequences of the transactions described above under any other provisions of the code in particular we express no opinion regarding the validity of any sec_338 election see sec_1_338_h_10_-1 in accordance with the power_of_attorney on file with this office a copy of this letter_ruling will be sent to the taxpayer’s representatives 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 poston senior counsel branch office of the associate chief_counsel passthroughs special industries cc


internal_revenue_service department of the treasury 04-big_number 03-big_number third party communication date other government agency washington dc p to contact a telephone number o05 refer reply to cc intl br5 plr date date third party communication date other government agency ty taxpayer area y organization x treaty x system x this is in reply to your letter dated date requesting rulings under sec_895 and of the internal_revenue_code additional information and representations were submitted in letters dated date and date 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 request_for_ruling it is subject_to verification upon examination several countries in area y have entered into treaty x which established organization x the objectives of organization x include inter alia the promotion of economic and social progress which is balanced and sustainable implementation of a common foreign and security policy strengthening of the protection of the rights and interests of the nationals of its member countries and development of cooperation on justice and home affairs provides for the establishment of system x a system of central banks composed of taxpayer and the national central banks of the member countries of organization x treaty x also provides for the creation of a common monetary unit and provides taxpayer with the exclusive power to issue currency common to the participating in furtherance of the economic goals of organization x treaty x cc intl br5 plr member countries of organization x taxpayer was established pursuant to treaty x as a separate_entity and possesses full legal rights under the laws of the member countries of organization x taxpayer's shareholders are the central banks of the member countries of organization x taxpayer's shareholders have no personal liability for the debt of or claims against taxpayer by reason of being shareholders of taxpayer taxpayer has the exclusive right to authorize the issue of banknotes for the participating member countries of organization x taxpayer plays an integral role in monetary policy oversees financial institutions and represents organization x in dealings with other sovereigns and third parties taxpayer determines the calculation of minimum credit reserves for banking institutions operating in member countries and ensures the efficient and sound clearing and payment systems within organization x taxpayer has authority to open accounts for market participants and accept assets taxpayer has full authority to hold and manage foreign reserves that are transferred to it and use such funds for purposes set out in treaty x taxpayer may buy and sell marketable instruments and currencies and establish relationships with central banks and financial institutions in other countries in order to achieve the objectives set forth under treaty x taxpayer will be provided with foreign reserve assets by the national central banks of in the course of managing these reserves the member countries of organization x taxpayer may enter into repurchase agreements purchase and sale of securities securities_lending operations foreign exchange transactions foreign exchange swaps interest rate futures interest rate swaps and currency options taxpayer may conduct the above described transactions with counterparties located in the united_states such transactions would be entered into between the u s counterparties and the dealing rooms of the national central banks of participating member countries who will act as the taxpayer's agent for this purpose none of the dealing rooms through which the taxpayer's foreign operations will be conducted are located in the united_states taxpayer will not employ dependent agents in the united_states further taxpayer does not have an office in the u s through which the activities described above are conducted requested ruling sec_895 of the code provides in part that income derived by a foreign_central_bank_of_issue from obligations of the united_states or any other agency_or_instrumentality thereof that are owned by such foreign_central_bank_of_issue or derived from interest on deposits with persons carrying on the banking business shall not be included in gross_income and shal be exempt from taxation however sec_895 provides further that cc intl br5 plr such income will not be exempt from taxation if such obligations or deposits are held for or used in connection with the conduct of commercial banking functions or other commercial activities sec_1_895-1 of the regulations defines a foreign_central_bank_of_issue as a bank which is by law or government sanction the principal authority other than the government itself issuing instruments intended to circulate as currency the regulations indicate that such a bank generally is the custodian of the banking reserves of its country sec_1_895-1 also provides that the exclusion granted by sec_895 applies to an instrumentality separate from a foreign government whether or not wholly owned by a foreign government the regulations further state as an example that foreign banks organized along the lines of and performing functions similar to the federal reserve system qualify as foreign central banks for purposes of sec_895 of the code pursuant to treaty x taxpayer is intended to be the principal authority issuing instruments for circulation as currency for the participating member countries of organization x and is the custodian of the reserves of organization x accordingly taxpayer is considered to be a central bank of issue within the meaning of sec_4 b of the regulations therefore for purposes of sec_895 of the code income derived by taxpayer from obligations of the united_states or of any agency_or_instrumentality thereof which are owned by taxpayer within the meaning of sec_4 c or from interest on deposits with persons carrying on a banking business shall be excluded from gross_income and exempt from taxation provided such obligations or deposits are not held for or used in connection with the conduct of commercial banking functions or other commercial activities no opinion is expressed as to whether taxpayer is engaged in a commercial banking function or other commercial activities as defined in sec_1_895-1 of the regulations requested ruling sec_7701 and of the code define a foreign_corporation as a corporation that is not created or organized in the united_states or under the laws of the united_states or of any state sec_301_7701-2 of the procedure and administration regulations provides that business entities are entities recognized for federal tax purposes that are not properly classified as trusts under sec_301_7701-4 or otherwise subject_to special treatment under the code a business_entity with two or more members is classified for federal tax purposes as either a partnership or a corporation for federal tax purposes the term corporation includes associations as determined under sec_301_7701-3 section cc intl br5 plr b i dollar_figure under sec_301_7701-3 a business that is not classified as a corporation under sec_301_7701-2 or is an eligible_entity that can elect its classification for federal tax purposes a foreign eligible_entity that does not file an election is an association if all of its members have limited_liability taxpayer is a foreign eligible_entity in which all the members have limited_liability that has not filed an election under sec_301_7701-3 to be taxed as a partnership therefore it is a foreign association under sec_301_7701-3 and classified as a foreign_corporation for federal tax purposes under sec_301_7701-2 sec_881 of the code imposes in general a tax of percent of the amount received from sources within the united_states by a foreign_corporation as interest dividends rents salaries wages premiums annuities compensations remunerations emoluments and other fixed_or_determinable_annual_or_periodical_gains_profits_and_income but only to the extent the amount so received is not effectively connected with the conduct_of_a_trade_or_business within the united_states sec_881 of the code provides an exception to tax for payments that qualify as in general portfolio_interest is defined to include interest_paid on an portfolio_interest obligation which is in_registered_form and with respect to which the withholding_agent receives the prescribed statement to the effect that the beneficial_owner of the interest is not a u_s_person and certain obligation not in_registered_form because taxpayer is a foreign_corporation pursuant to sec_881 of the code no tax shall be imposed on taxpayer in the case of portfolio_interest received by taxpayer from sources within the united_states except as otherwise provided in sec_881 requested ruling sec_988 of the code provides that the source of foreign_currency exchange gain_or_loss is generally determined by reference to the residence of the taxpayer or the qualified_business_unit of the taxpayer on whose books the asset liability or item_of_income or expense is properly reflected sec_988 ii provides that for purposes of sourcing exchange gain_or_loss the residence of a foreign_corporation is a country other than the united_states taxpayer has represented that it does not have a unit of a trade_or_business in the united_states that maintains separate books_and_records accordingly any sec_988 gain_or_loss is sourced by reference to taxpayer's residence sec_988 since taxpayer is not a united_states_person any sec_988 gain_or_loss is foreign source gain_or_loss sec_988 cc antl br5 plr requested ruling sec_1_863-7 provides that in general the source of notional_principal_contract income shall be determined by reference to the residence of the taxpayer as determined under sec_988 of the code since taxpayer is resident outside of the united_states under sec_1 a b i ii of the code it is held that to the extent notional_principal_contract income does not arise from the conduct of a u s trade_or_business it shall be foreign_source_income pursuant to sec_1_863-7 requested ruling sec_865 provides that income from the sale of personal_property by a nonresident generally shall be sourced outside the united_states sec_865 g b of the code provides that the term nonresident means any person other than a united_states_resident however sec_865 of the code provides that if a nonresident maintains an office or other fixed place of business in the united_states income from any sale of personal_property including inventory_property attributable to such office or other fixed place of business shall be sourced in the united_states taxpayer is nonresident within the meaning of sec_865 and sec_865 b in addition taxpayer has represented that it has no office or other fixed place of business in the united_states accordingly income from the sale of personal_property shall be sourced outside the united_states in accordance with the provisions of sec_865 of the code except as expressly provided herein no opinion is expressed or implied concerning the _ tax consequences of any aspect of any transaction or item not discussed or referenced in this letter 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 sincerely yours jeffrey dorfman chief branch office of associate chief_counsel international


t c summary opinion united_states tax_court jasper j nzedu and vivian a nzedu petitioners v commissioner of internal revenue respondent docket no 29734-15s filed date jasper j nzedu pro_se ryan z sarazin for respondent summary opinion carluzzo chief special_trial_judge this case was heard pursuant to the provisions of section of the internal_revenue_code in effect when the 1unless otherwise indicated section references are to the internal_revenue_code_of_1986 code as amended and in effect for the relevant period rule references are to the tax_court rules_of_practice and procedure petition was filed pursuant to sec_7463 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 in a notice_of_deficiency dated date notice respondent determined deficiencies in petitioners’ federal_income_tax an addition_to_tax and an accuracy-related_penalty as follows addition_to_tax penalty year deficiency sec_6651 sec_6662 dollar_figure --- dollar_figure big_number dollar_figure --- with the exception of petitioners’ entitlement to a dollar_figure passthrough loss deduction claimed on their federal_income_tax return and the above-listed addition_to_tax and accuracy-related_penalty issues relating to adjustments made in the notice have been resolved by the parties the remaining issues addressed and decided in this opinion arise from deductions claimed on a amended federal_income_tax return and federal_income_tax return petitioners submitted to respondent after the notice was issued after concessions those issues are whether petitioners are entitled to deduct a dollar_figure loss incurred by 2among other concessions petitioners concede that they underreported taxable interest by dollar_figure for washington tax associates inc wta in which depends on whether that corporation properly elected subchapter_s status by filing a proper form_2553 election by a small_business_corporation entitled to various deductions claimed on schedule c profit or loss from business included on a amended_return not processed by respondent amended_return relating to national tax associates llc nta entitled to various schedule c deductions relating to nta shown on petitioners’ late-filed return liable for a sec_6651 addition_to_tax for and liable for a sec_6662 accuracy-related_penalty for background some of the facts have been stipulated and are so found at the time the petition was filed petitioners who are married to each other resided in virginia mrs nzedu is a medical doctor mr nzedu petitioner is an attorney before the years in issue his experience included practicing law with the law firm of dewey ballantine and working in the financial products division of the accounting firm of ernst young during and petitioner owned and operated jasper attorneys associates pllc jasper attorneys petitioner also formed two other businesses around the same time on or around date petitioner incorporated wta a corporation organized under the laws of virginia to the extent that any wta stock had been issued petitioner was the sole owner of it on or around date petitioner formed nta a virginia limited_liability_company although the various enterprises were separate legal entities the functions of the businesses while distinct appear closely integrated as best we can tell wta provided online tax software while nta operated as a tax preparation company throughout the years in issue the offices of jasper attorneys wta and nta were all in a single office suite in alexandria virginia alexandria office petitioner conducted all of his business activities from the alexandria office the businesses all shared the same utilities and office equipment during and wta maintained a business checking account at bank of america and nta maintained a business checking account at virginia commerce bank all of the checks drawn on the nta business checking account were written to wta payments for what appear to be business_expenses related to one or the other of the three business entities were made from wta’s business checking account or from petitioner’s discover credit card the balance of which was generally paid from wta’s business checking account apparently it was petitioner’s business practice to scan financial records and store them digitally on his laptop computer according to a city of alexandria police department report on date petitioner reported that his alexandria office was burglarized on date and that his laptop computer was stolen in the burglary petitioners’ self-prepared joint federal_income_tax return was timely filed on date return that return includes a schedule c for jasper attorneys the return did not include a schedule c for nta petitioners reported their share of wta’s net_loss of dollar_figure as nonpassive loss from schedule_k-1 on a schedule e supplemental income and loss attached to the return on or around date after the petition had been filed petitioners submitted the amended_return the amended_return was not processed by respondent in addition to the schedule c relating to jasper attorneys petitioners attached a schedule c relating to nta to their amended_return on the nta schedule c petitioners reported gross_receipts of dollar_figure and total expenses of dollar_figure resulting in a dollar_figure net_loss petitioners’ return filed on date includes a schedule c for jasper attorneys and a schedule c for nta on the jasper attorneys schedule c petitioners reported gross_receipts of dollar_figure and total expenses of dollar_figure resulting in a dollar_figure net_loss on the nta schedule c petitioners reported gross_receipts of dollar_figure and total expenses of dollar_figure resulting in a dollar_figure net_loss in the notice respondent disallowed the dollar_figure nonpassive flowthrough loss from wta for since it has been determined that wta is a c_corporation and as such the corporations sic profit loss is not allowable as a flow-thru sic item at the individual level respondent further determined that petitioners were liable for an accuracy-related_penalty under sec_6662 on various grounds for and for the addition_to_tax under sec_6651 for other adjustments made in the notice are computational or have been conceded by one or the other of the parties and need not be addressed i wta subchapter_s_election discussion sec_1362 provides that a small_business_corporation may elect to be taxed as a passthrough_entity under subchapter_s of the code a small_business_corporation makes this election s election by filing with the internal_revenue_service irs a completed form_2553 sec_1_1362-6 income_tax regs before an s election is valid all shareholders as of the date the election is made must consent to that election sec_1362 a shareholder consents to an s election by signing and dating the form_2553 submitted by the s_corporation see sec_1_1362-6 income_tax regs or by separately submitting to the irs a signed consent statement which sets forth certain information see id subpara petitioner asserts that he personally prepared a form_2553 in for wta and then gave it to one of his employees with instructions to mail it to the irs according to respondent petitioner did not make a valid s election until respondent’s records do not show that a form_2553 on behalf of wta was received in nor has petitioner provided any persuasive evidence of timely mailing form_2553 on behalf of wta with respect to it sec_2012 tax_year respondent did receive a form_2553 on behalf of wta effective date accordingly we reject petitioners’ claim that a form_2553 was filed with respondent on behalf of wta for wta did not qualify as an s_corporation 3the consent statement must set forth the name address and taxpayer_identification_number of the shareholder the number of shares of stock owned by the shareholder the date or dates on which the stock was acquired the date on which the shareholder’s taxable_year ends the corporation’s name the corporation’s taxpayer_identification_number and the election to which the shareholder consents see sec_1_1362-6 income_tax regs for or and petitioners are not entitled to deduct a dollar_figure passthrough loss incurred by wta in ii schedule c deductions as we have observed in countless opinions deductions are a matter of legislative grace and the taxpayer bears the burden of proving entitlement to any claimed deduction rule a 503_us_79 292_us_435 this burden requires the taxpayer to substantiate expenses underlying deductions claimed by keeping and producing adequate_records that enable the commissioner to determine the taxpayer’s correct_tax liability sec_6001 65_tc_87 aff’d per curiam 540_f2d_821 5th cir 43_tc_824 a taxpayer claiming a deduction on a federal_income_tax return must demonstrate that the deduction is allowable pursuant to some statutory provision and must further substantiate that the expense to which the deduction relates has been paid or 4as best we can determine there was no valid s election made for wta until 5petitioners do not claim and the record does not otherwise demonstrate that the provisions of sec_7491 are applicable here and we proceed as though they are not incurred see sec_6001 hradesky v commissioner t c pincite sec_1_6001-1 income_tax regs taxpayers may deduct ordinary and necessary expenses paid in connection with operating a trade_or_business sec_162 122_tc_305 on the other hand sec_262 generally disallows any deduction for personal living or family_expenses as a general_rule if a taxpayer provides sufficient evidence that the taxpayer has incurred a trade_or_business expense contemplated by sec_162 but is unable to adequately substantiate the amount the court may estimate the amount and allow a deduction to that extent 39_f2d_540 2d cir however in order for the court to estimate the amount of an expense there must be some basis upon which an estimate may be made 85_tc_731 otherwise any allowance would amount to unguided largesse 245_f2d_559 5th cir deductions for expenses attributable to travel including meals_and_lodging while away from home entertainment gifts and the use of listed_property as defined in sec_280f and including passenger automobiles if otherwise allowable are subject_to strict rules of substantiation see sec_274 50_tc_823 aff’d per curiam 412_f2d_201 2d cir sec_1_274-5t temporary income_tax regs fed reg date with respect to deductions for these types of expenses sec_274 requires that the taxpayer substantiate either by adequate_records or by sufficient evidence corroborating the taxpayer’s own statement the amount of the expense the time and place the expense was incurred the business_purpose of the expense and in the case of an entertainment or gift expense the business relationship to the taxpayer of each expense incurred for listed_property expenses the taxpayer must establish the amount of business use and the amount of total use for such property see sec_1_274-5t temporary income_tax regs fed reg date substantiation by adequate_records requires the taxpayer to maintain an account book a diary a log a statement of expense trip sheets or a similar record prepared contemporaneously with the expenditure and documentary_evidence eg receipts or bills of certain expenditures sec_1_274-5 income_tax regs sec_1_274-5t temporary income_tax regs fed reg date substantiation by other_sufficient_evidence requires the production of corroborative evidence in support of the taxpayer’s statement specifically detailing the required elements sec_1_274-5t temporary income_tax regs fed reg date petitioners did not treat nta as a trade_or_business on their return but did treat nta as a trade_or_business on their amended_return and return petitioners’ amended_return and return were submitted to the irs after the notice had been mailed on the basis of the submission of the amended_return and the return petitioners now claim that they are entitled to deductions for business_expenses related to nta for and according to petitioner expenses shared among his business entities were allocated appropriately among those entities for income_tax reporting purposes according to respondent petitioners have failed to adequately substantiate the amount_paid or otherwise establish that the expenses reported on the nta schedules c were not reported on the amended_return or return by one of petitioner’s other business entities respondent further contends that to the extent petitioners substantiated certain payments those payments are not deductible on their joint federal_income_tax returns because they were paid_by wta under the circumstances we expect that petitioners’ position on the point has been prompted at least in part in an attempt to reduce the and deficiencies determined in the notice whether it was or was not for the following reasons we reject their claims of deductions for expenses reported on the nta schedules c for most of the business_expenses petitioners failed to maintain adequate_records to the extent petitioners produced substantiating records such as bank records receipts credit card statements and other documentation they were disorganized and incomplete petitioner’s testimony brings little clarity to the picture petitioners explain that the lack of detailed substantiating records is due to the theft of petitioner’s laptop according to petitioners because they have introduced evidence in the form of petitioner’s testimony and other documents showing the expenses_incurred they are entitled to the deductions as claimed on the returns when a taxpayer’s records have been destroyed or lost because of circumstances beyond the taxpayer’s control the taxpayer may substantiate his expenses by making a reasonable reconstruction of the expenditures or use see sec_1_274-5t temporary income_tax regs fed reg date a taxpayer is required to reconstruct what records he can see eg chong v commissioner tcmemo_2007_12 slip op pincite in this case however the evidence presented discloses a tangled web of shared expenses that is difficult to unravel we are unable to determine whether expenses reported on the nta schedules c were already reported and allowed as deductions by respondent by one or the other of petitioner’s other businesses nor is there sufficient evidence in the record to provide a basis for estimating the expenses see cohan v commissioner f 2d pincite vanicek v commissioner t c pincite moreover petitioners’ records show that payments for purported nta business_expenses were made from wta’s business checking account or from petitioner’s discover credit card the balance of which was generally paid from wta’s business checking account according to petitioner he paid nta expenses from the wta account because it was more convenient to pay expenses from one account and then reimburse wta the record certainly does not allow us to find that wta was reimbursed for the payments nonetheless having elected to conduct the wta business in corporate form petitioners are bound by the federal_income_tax consequences of that election see 308_us_473 wta’s corporate existence cannot be disregarded for federal_income_tax purposes see 319_us_436 and thus petitioners are not entitled to deduct amounts paid_by wta on their nta schedules c for these reasons petitioners are not entitled to the deductions now claimed on their nta schedules c shown on their amended_return and return iii sec_6651 addition_to_tax for petitioners’ return was due to be filed on or before date but it was not filed until date see sec_6072 sec_7503 consequently respondent imposed a sec_6651 addition_to_tax sec_6651 authorizes the imposition of an addition_to_tax for failure_to_file a timely return unless the taxpayer proves that such failure is due to reasonable_cause and is not due to willful neglect see also 469_us_241 harris v commissioner tcmemo_1998_332 sec_6651 imposes an addition_to_tax of of the tax required to be shown on the return for each month or fraction thereof for which there is a failure_to_file not to exceed in the aggregate respondent’s records demonstrate that petitioners’ return was not timely filed and petitioners do not dispute the point respondent’s sec_7491 burden of production has been met with respect to the imposition of the sec_6651 addition_to_tax and because petitioners have failed to demonstrate that their failure_to_file their return timely was due to reasonable_cause respondent’s imposition of a sec_6651 addition_to_tax is sustained iv sec_6662 accuracy-related_penalty for lastly we consider whether petitioners are liable for a sec_6662 accuracy-related_penalty for relying upon various grounds including an underpayment due to a substantial_understatement_of_income_tax respondent argues that they are see sec_6662 a - d sec_6662 and b imposes a penalty of of the portion of an underpayment_of_tax attributable to a substantial_understatement_of_income_tax an understatement of income_tax is substantial within the meaning of sec_6662 if as relevant here the understatement exceeds dollar_figure see sec_6662 sec_1_6662-4 income_tax regs respondent bears the burden of production with respect to the imposition of the penalty imposed in the notice and here in dispute see sec_7491 and that burden has been satisfied because the understatement of income_tax exceeds dollar_figure see sec_6211 sec_6662 sec_6664 sec_6751 provides that subject_to certain exceptions in sec_6751 no penalty shall be assessed unless the initial determination of the assessment is personally approved in writing by the immediate supervisor of the individual making the determination or such higher level official as the commissioner may designate written approval of the initial penalty determination under sec_6751 must be obtained before the proposed penalty is first formally communicated to the taxpayer in a writing that also advises the taxpayer of his rights to appeal the penalty with the irs office of appeals clay v commissioner t c __ __ slip op pincite date compliance with sec_6751 is part of the commissioner’s burden of production in any deficiency case in which a penalty subject_to sec_6751 is asserted 851_f3d_190 2d cir aff’g in part rev’g in part tcmemo_2015_42 the sec_6662 accuracy-related_penalty determined in the notice was properly approved as required by sec_6751 the record includes a civil penalty approval form approving imposition of an accuracy-related_penalty against petitioners for and executed by the irs tax examiner’s immediate supervisor before the date the notice was issued as a result we find that respondent met his burden of production with respect to the negligence_penalty the accuracy-related_penalty does not apply to any part of an underpayment_of_tax if it is shown that the taxpayer acted with reasonable_cause and in good_faith with respect to that portion sec_6664 the determination of whether a taxpayer acted in good_faith is made on a case-by-case basis taking into account all the pertinent facts and circumstances sec_1_6664-4 income_tax regs petitioners bear the burden of proving that they had reasonable_cause and acted in good_faith with respect to the underpayment see 116_tc_438 petitioners conceded that they received but failed to report dollar_figure in interest_income on their return and have not shown reasonable_cause for omitting the interest_income the remaining portion of the understatement results from petitioners’ reporting their share of wta’s net_loss of dollar_figure as nonpassive loss from schedule_k-1 on a schedule e attached to the return considering petitioner’s experience knowledge and education deducting the corporation’s loss on petitioners’ return was not reasonable accordingly they are liable for a sec_6662 accuracy-related_penalty to reflect the foregoing decision will be entered under rule