t c no united_states tax_court federal_home_loan_mortgage_corporation petitioner v commissioner of internal revenue respondent docket nos filed date p was originally exempt from federal income_taxation however on date p became subject_to taxation under the deficit_reduction_act_of_1984 defra publaw_98_369 98_stat_709 p adopted the accrual_method of accounting for its first taxable_year commencing date before that date p acquired certain mortgages that were in default interest accrued on each of those mortgages from the date_of_acquisition up to date at various points after date p foreclosed the mortgages on the underlying real_estate in computing its gain_or_loss from the foreclosures p increased its regular adjusted cost_basis in the mortgages for unpaid interest that had accrued before date r argues that p is not entitled to increase its regular adjusted cost_basis on account of interest which accrued before date held sec_166 i r c provides a deduction for bad_debts sec_1_166-6 income_tax regs provides accrued interest may be included as part of the deduction allowable under this paragraph but only if it has previously been returned as income p’s accrued interest which was accrued when p was tax exempt and not required to file income_tax returns was not returned as income within the meaning of sec_1_166-6 income_tax regs and p is not entitled to increase its regular adjusted cost_basis for these amounts robert a rudnick stephen j marzen james f warren and neil h koslowe for petitioner gary d kallevang for respondent opinion ruwe judge respondent determined deficiencies in petitioner’s federal income taxes in docket no for and as follows year deficiency dollar_figure big_number petitioner claims overpayments of dollar_figure for and dollar_figure for respondent determined deficiencies in petitioner’s federal income taxes in docket no for and as follows year deficiency dollar_figure big_number big_number big_number petitioner claims overpayments of dollar_figure for dollar_figure for dollar_figure for and dollar_figure for petitioner and respondent filed cross-motions for partial summary_judgment under rule on the issue of whether for purposes of claiming a bad_debt deduction under sec_166 petitioner is entitled to increase its regular adjusted cost_basis in certain mortgages acquired before date for unpaid interest which accrued during the period that petitioner was tax exempt background the facts have been stipulated and are so found the stipulation of facts and the attached exhibits are incorporated herein by this reference at the time of filing the petition petitioner’s principal office was located in mclean virginia at all relevant times petitioner was a corporation managed by a board_of directors 1all rule references are to the tax_court rules_of_practice and procedure and all section references are to the internal_revenue_code in effect for the taxable years in issue petitioner was chartered by congress on date by the emergency home financing act of publaw_91_351 title iii federal_home_loan_mortgage_corporation act 84_stat_450 petitioner was originally exempt from federal income_taxation however congress repealed petitioner’s federal_income_tax exemption status in the deficit_reduction_act_of_1984 defra publaw_98_369 98_stat_709 pursuant to this act petitioner became subject_to federal income_taxation effective date petitioner held mortgages in its retained mortgage portfolio or as collateral for issuances of collateralized mortgage obligations cmos in other cases petitioner as guarantor of participation certificates pcs it issued would reacquire mortgages placed in a pc pool that became delinquent petitioner routinely acquired real_estate by foreclosure when mortgages that it owned became delinquent in some cases mortgages that petitioner held and had never sold became delinquent in a number of cases the ownership of mortgages which were in default was transferred to petitioner before date 2pcs are securities representing beneficial_ownership of the principal and interest payments on a pool of mortgages 3regardless of the manner in which petitioner acquired the delinquent mortgages all real_estate that petitioner acquired through foreclosure of delinquent mortgages is known as real_estate owned at various points in the taxable years and petitioner foreclosed on these mortgages and obtained freehold title to the underlying real_estate petitioner was required to demonstrate its gain_or_loss on the foreclosures for the taxable years through petitioner consistently accrued into income stated_interest on all single- family mortgages that it owned whether or not that interest was received if such a mortgage was or became delinquent petitioner nonetheless continued to accrue the interest through the date of foreclosure petitioner accrued into income_interest from the date_of_acquisition through the date of foreclosure in respect of all mortgages acquired before date that were subject_to foreclosure after that date as part of the legislation in which petitioner became subject_to federal income_taxation congress enacted transition_rules for determining petitioner’s adjusted_basis in assets that it held on date those rules are contained in defra sec_177 98_stat_711 which provides adjusted_basis of assets -- a in general --except as otherwise provided in subparagraph b the adjusted_basis of any asset of the federal_home_loan_mortgage_corporation held on date shall-- 4petitioner’s treatment of interest accrued after date is not in dispute i for purposes of determining any loss be equal to the lesser_of the adjusted_basis of such asset or the fair_market_value of such asset as of such date and ii for purposes of determining any gain be equal to the higher of the adjusted_basis of such asset or the fair_market_value of such asset as of such date adjusted_basis --for purposes of this subsection the adjusted_basis of any asset shall be determined under part ii of subchapter_o of the internal_revenue_code of in computing the gain_or_loss from its foreclosure sales petitioner determined its adjusted_basis pursuant to defra sec_177 for mortgages acquired before and held on date in determining its adjusted_basis under these transition_rules petitioner included in its regular adjusted cost_basis the amounts of unpaid interest which it had accrued from the date_of_acquisition of each mortgage to the date of foreclosure on the underlying real_estate these amounts of accrued interest included certain interest which had accrued before date petitioner used its regular adjusted cost_basis in determining the amount of any gain realized or loss incurred on the foreclosure of real_estate securing mortgages that petitioner owned on date during the taxable_year petitioner foreclosed on big_number mortgages which it had held on date and petitioner included in its adjusted cost_basis dollar_figure of unpaid interest accrued as of date during the taxable_year petitioner foreclosed on mortgages held on date and it included in its adjusted cost_basis dollar_figure of unpaid interest accrued as of date discussion the parties filed cross-motions for partial summary_judgment on the question of whether for purposes of claiming a bad_debt deduction under sec_166 petitioner is entitled to increase its regular adjusted cost_basis in certain mortgages acquired before date for unpaid interest which accrued before date when it was tax exempt summary_judgment is intended to expedite litigation and avoid unnecessary and expensive trials 116_tc_73 either party may move for summary_judgment upon all or any part of the legal issues in controversy rule a fpl group inc v commissioner supra pincite a decision will be rendered on a motion for partial summary_judgment if the pleadings answers to interrogatories depositions admissions and other acceptable materials together with the affidavits if any show that there is no genuine issue as to any material fact and that a decision may be rendered as a matter of law rule b 118_tc_226 the moving party has the burden of proving that no genuine issue of material fact exists and the moving party is entitled to judgment as a matter of law 119_tc_157 sec_166 allows a deduction for bad_debts the basis for determining the amount of the deduction for any bad_debt is the adjusted_basis provided in sec_1011 for determining the loss from the sale_or_other_disposition of property sec_166 sec_1_166-6 income_tax regs provides specific rules for bad_debts which are attributable to mortgaged or pledged property sec_1_166-6 income_tax regs provides a deficiency deductible as bad debts-- principal_amount if mortgaged or pledged property is lawfully sold whether to the creditor or another purchaser for less than the amount of the debt and the portion of the indebtedness remaining unsatisfied sec_166 provides sec_166 general_rule -- wholly worthless debts --there shall be allowed as a deduction any debt which becomes worthless within the taxable_year partially worthless debts --when satisfied that a debt is recoverable only in part the secretary may allow such debt in an amount not in excess of the part charged off within the taxable_year as a deduction sec_166 then provides sec_166 amount of deduction --for purposes of subsection a the basis for determining the amount of the deduction for any bad_debt shall be the adjusted_basis provided in sec_1011 for determining the loss from the sale_or_other_disposition of property after the sale is wholly or partially uncollectible the mortgagee or pledgee may deduct such amount under sec_166 to the extent that it constitutes capital or represents an item the income from which has been returned by him as a bad_debt for the taxable_year in which it becomes wholly worthless or is charged off as partially worthless see sec_1_166-3 accrued interest accrued interest may be included as part of the deduction allowable under this paragraph but only if it has previously been returned as income b realization of gain or loss-- determination of amount if in the case of a sale described in paragraph a of this section the creditor buys in the mortgaged or pledged property loss or gain is also realized measured by the difference between the amount of those obligations of the debtor which are applied to the purchase or bid price of the property to the extent that such obligations constitute capital or represent an item the income from which has been returned by the creditor and the fair_market_value of the property fair_market_value defined the fair_market_value of the property for this purpose shall in the absence of clear_and_convincing proof to the contrary be presumed to be the amount for which it is bid in by the taxpayer petitioner argues that it is entitled to increase its regular adjusted cost_basis in its mortgages to account for unpaid interest which accrued during the period in which it was tax exempt respondent argues that sec_1_166-6 income_tax regs requires as a condition_precedent to such a basis increase that petitioner returned as income ie reported as taxable_income its accrued interest since petitioner was tax exempt when the interest at issue accrued respondent contends that petitioner has not met the requirements for deductibility under sec_1_166-6 income_tax regs we agree with respondent sec_1_166-6 income_tax regs allows a bad_debt deduction on account of accrued interest only if that accrued interest has previously been returned as income we construe this language to require the accrued but unpaid interest to have previously been reported by the taxpayer as taxable_income on a federal_income_tax return this is in our view consistent with the purpose of providing a bad_debt deduction which is to account for the taxpayer’s unrecovered cost or capital_investment and amounts reported as income but ultimately not collected because they became worthless 462_f2d_751 3d cir we 7see also 39_bta_739 affd in part on this issue revd in part on different grounds 113_f2d_347 9th cir a case involving a claimed bad_debt deduction for accrued tax-exempt_interest wherein the board_of_tax_appeals observed petitioner insists that the deduction should be allowed in the instant case notwithstanding the rule above referred to for the reason that the amount in controversy was accrued by petitioner on its books and it is argued thus passed through the tax mill we can not agree with this argument so far as concerns tax_liability a taxpayer on an accrual basis who accrues an income item on his books but does not include the amount in taxable_income is in no different position than the taxpayer on a cash_basis who does not include a similar item in income because it has not been received to allow the deduction in either of such events would result in reducing the amount of the taxable_income received or accrued from other sources by an amount representing not a loss of capital or of cannot construe the language in the regulation to include interest which the taxpayer has accrued for financial purposes but has not taken into account for tax purposes in cases interpreting the statutory requirements for allowance of a bad_debt deduction for accrued but unpaid interest the board_of_tax_appeals construed the provision of a deduction for debts ascertained to be worthless and charged off within the taxable_year which appeared in prior versions of sec_166 to include a requirement that the item be previously charged on see eg collin v commissioner 1_bta_305 the board_of_tax_appeals determined that for interest to be charged on for purposes of a bad_debt deduction it must have been accrued as income it must have been returned as income for taxation and a tax must have been paid thereon see eg id pincite thus interest which had accrued but which remained unpaid could not be the subject of a bad_debt deduction since the taxpayer was on the cash_receipts_and_disbursements_method of accounting see id further an accrual basis taxpayer that had accrued tax-exempt_bond interest on its books but did not report actual income but merely a loss of anticipated earnings see also 17_bta_643 8the statute under construction in collin v commissioner 1_bta_305 was sec_214 of the revenue act of ch 40_stat_1067 such interest for tax purposes could not claim a bad_debt deduction for the accrued interest see 39_bta_739 affd in part on this issue revd in part on different grounds 113_f2d_347 9th cir we believe these same principles apply for purposes of applying sec_1_166-6 income_tax regs indeed sec_1_166-6 income_tax regs appears to have incorporated the principles articulated in this prior caselaw accordingly we hold that the language returned as income as used in sec_1_166-6 income_tax regs refers to interest that has been properly accrued for tax purposes and has been reported as taxable_income on a return it follows from our interpretation of sec_1_166-6 income_tax regs and the precedents cited above that petitioner cannot claim a bad_debt deduction for interest which accrued during a period in which petitioner was tax exempt which it did not report as taxable_income and on which it was not subject_to tax petitioner argues that the regulation is inapplicable to its situation because it adopted the accrual_method of accounting for 9petitioner does not allege that it filed a return in which it reported its accrued interest as taxable_income for the periods before date the argument that petitioner makes is that consistency in accounting requires it to increase its regular adjusted cost_basis in its mortgages for the interest that accrued on those mortgages before date its first taxable_year commencing date and that thereafter it consistently accounted for its accrued interest from the date of the acquisition of the mortgages until the foreclosures on the underlying real_estate petitioner argues it is long established law that when an entity becomes taxable for the first time its adjusted cost_basis in its assets as of the date on which it becomes subject_to federal_income_tax must be determined by reference to events that occurred during the pre- taxable_period using consistently the tax_accounting method adopted by the taxpayer we might agree that petitioner’s argument is correct in certain specific circumstances however we cannot agree that petitioner’s supposition merits recognition as a rule_of general application in the instant cases we are dealing with a regulatory provision which requires that accrued but unpaid interest be returned as income as a condition_precedent to the inclusion of that interest amount in the taxpayer’s regular adjusted cost_basis petitioner has not returned its accrued interest as income for taxable years before date it does not meet the requirement stated in sec_1_166-6 10see eg sec_1016 providing an adjustment for previously tax-exempt individuals or organizations for exhaustion wear_and_tear obsolescence amortization and depletion to the extent sustained for any period in which such individuals or organizations were not subject_to taxation fed home loan mortgage corp v commissioner 121_tc_128 date sec_1_166-6 income_tax regs provides no comparable adjustment to regular adjusted cost_basis for interest which accrued during a period in which a taxpayer was tax exempt_income tax regs and any general theory of consistent accountancy does not assist petitioner petitioner’s position disregards the fact that it was tax exempt for periods before date and any interest which might have been accrued on its books_and_records did not accrue as taxable_income petitioner was not required to file an income_tax return for years before see sec_6011 sec_6012 sec_6072 thus petitioner’s interest accruals for the periods before date could not have been returned as income petitioner cites no authority which supports its contention that previously tax-exempt taxpayers which become taxable must as a general_rule adjust their regular adjusted cost_basis upward to account for items of interest that would have been accrued as taxable_income if those taxpayers had previously been taxable nothing in sec_166 the regulations interpreting that section or more specifically the transition_rules of defra sec_177 supports petitioner’s position petitioner relies upon revrul_55_437 1955_2_cb_548 and argues that under this ruling adjustments to basis must be made as if the taxpayer in fact had been subject_to tax and that these adjustments must be made according to the accounting_method that the taxpayer adopts in its first taxable_year we do not read revrul_55_437 supra this broadly in revrul_55_437 supra a building and loan association became subject_to federal income_taxation on date having been previously tax exempt for its first taxable_year beginning after date the association adopted the accrual_method of accounting as of date the association had outstanding balances of installment accounts_receivable of 500x dollars of which 200x dollars represented unrealized profit with respect to such contracts revrul_55_ c b pincite states the only election of accounting_method binding upon the association is that made in the return filed by it for its first taxable_year beginning after date accordingly if the association selects the accrual_method of accounting in the return for its first taxable_year beginning after date the 200x dollars of unrealized profit received in such and subsequent taxable years under the installment contracts which were entered into in taxable years beginning prior to date would not constitute taxable_income insofar as the right to receive such installment payments accrued during a taxable_year in which the association was exempt from federal income_taxation however if the taxpayer selects the cash or installment_method of accounting in such return the payments received to the extent of the previously unrealized profits included therein would constitute taxable_income in the year received revrul_55_437 supra does not support petitioner’s position with respect to its pre-1985 interest accruals revrul_55_437 supra deals with the timing of income_recognition the revenue_ruling has nothing to do with the determination of basis for purposes of a foreclosure-related bad_debt deduction and clearly does not purport to replace the long standing rules concerning bad_debt deductionsdollar_figure petitioner also relies on certain statements that the court_of_appeals for the fifth circuit made in 143_f2d_712 5th cir affg 2_tc_347 in w l moody cotton co the taxpayer kept its books and filed its federal_income_tax returns on a cash receipt and disbursements basis however from through it accrued and reported as gross_income in its returns for those years interest on certain collateralized accounts and notes receivable in it charged off on its books of account and deducted in its income_tax return the interest that it previously accrued and reported this court upheld the commissioner’s disallowance of the taxpayer’s deduction for its accrued but unpaid interest the court_of_appeals for the fifth circuit affirmed stating 11petitioner also relies upon revrul_55_434 1955_2_cb_538 which it claims further confirms the importance of consistent application of code sec_166 to transactions straddling an entity’s change in tax status revrul_55_434 supra did not involve how to determine gain_or_loss upon foreclosure of a mortgage rather it involved how to determine basis in real_property previously acquired in a foreclosure that occurred when the taxpayer was tax exempt the revenue_ruling applied sec_39 k -3 regs which provided that the unadjusted_basis of property acquired upon foreclosure is the fair_market_value of the property at the date of the acquisition of the property see sec_1_166-6 income_tax regs which provides a similar rule the facts and legal question involved in that revenue_ruling are distinguishable and petitioner’s reliance on that revenue_ruling is misplaced a taxpayer on the cash_basis is on that basis uniformly as to both receipts and deductions and he cannot be permitted any irregular and sporadic variation from that basis the accruing and returning as income of the interest therefore in the earlier years before it was actually received was not in accordance with petitioner’s system of accounting a charging of it on interest is charged on under the regulations and the decisions when the taxpayer is on a cash_basis only when it is actually received it is charged on when the taxpayer is on an accrual basis only when it is properly accrued the conditions for a bad_debt charge-off not being met here the claim for it was properly disallowed id pincite petitioner relies on these statements and contends that the court’s decision in w l moody cotton co explicitly holds that a taxpayer’s method of tax_accounting must be consistently applied for basis purposes we might agree with petitioner’s contention that w l moody cotton co requires consistency in accounting for items of income and deduction however we cannot agree that w l moody cotton co supports increasing petitioner’s regular adjusted cost_basis for interest accrued when petitioner was tax exempt nothing in w l moody cotton co supports that position indeed the statements petitioner relies on were made in the context of a broader discussion by the court_of_appeals of the requirement that interest be properly charged on before it be allowed as a bad_debt deduction as to the first question the deduction for loss of interest as a bad_debt_loss art k of regulation provides in part worthless debts arising from unpaid wages salaries rents and similar items of taxable_income will not be allowed as a deduction unless the income such items represent has been included in the return of income for the year for which the deduction as a bad_debt is sought to be made or for a previous year and it is settled law that interest cannot be charged off as a bad_debt unless it has first been charged on petitioner concedes that this is so but argues that since it did in earlier years accrue the interest and return it as income this fully satisfied the regulation and the decisions it insists that the view of the commissioner and the tax_court that since taxpayer was not on the accrual but on the cash_basis there was no improper accruing of interest adds to the law a provision which it does not contain in effect that for an interest item to be charged off as a bad_debt it must have been properly charged on agreement with petitioner’s contention would be to throw out of the window petitioner’s entire system of tax_accounting leaving to the varying caprices and whims of the taxpayer whether or not particular items should be deferred advanced or returned id we cannot agree that w l moody cotton co supports petitioner’s position and indeed it is contrary to that position to the extent it holds that interest must first be properly included in a return for tax purposes before it can be deductible as a bad_debt accounting methods are determinative of when an item_of_income or deduction must be recognized but are not determinative of whether the item meets the substantive requirements for being an item_of_income or deduction petitioner properly accounted for its interest_income using the accrual_method of accounting under this method_of_accounting unpaid interest which accrued before date was properly assigned to that period however since petitioner was tax exempt during this period it realized no tax consequences from its accrued interest petitioner’s accrued interest was not taxable_income it was not returned as income and petitioner was not subject_to tax on account of the accrued interest it follows that under sec_1_166-6 income_tax regs petitioner may not increase its regular adjusted cost_basis on account of interest which accrued when it was tax exempt an appropriate order will be issued


department of the treasury employer_identification_number contact person - id number contact telephone number uil internal_revenue_service p o box cincinnati oh release number release date date date legend r scholarship s company v dollars salary w foundation x individual y individual z number dear you asked for advance approval of your employer-related scholarship grant procedures under internal_revenue_code sec_4945 this approval is required because you are a private_foundation that is exempt from federal_income_tax you requested approval of your scholarship program to fund the education of certain qualifying students our determination we approved your procedures for awarding employer-related scholarships based on the information you submitted and assuming you will conduct your program as proposed we determined that your procedures for awarding employer-related scholarships meet the requirements of code sec_4945 as a result expenditures you make under these procedures won't be taxable also awards made under these procedures are scholarship or fellowship grants and are not taxable to the recipients if they use them for qualified_tuition_and_related_expenses subject_to the limitations provided in code sec_117 description of your request you will operate an employer-related scholarship program called r to support the pursuit of undergraduate degrees by children of employees of s each year your selection committee will award between and scholarships depending on the availability of funds all scholarships will be for the same amount established from year to year based on the availability of funds r is publicized via notifications and materials that are distributed and made available to all s employees letter catalog number 58264e to be eligible to receive a scholarship an applicant must be the child step-child or adopted_child of a qualified_employee of s an individual is a qualified_employee of s if s has employed them for at least two years and their annual income from s does not exceed v dollars applicants must be full-time students with a minimum cumulative grade point average of applicants must demonstrate in an age appropriate manner qualities of good citizenship leadership and community service applicants also must provide a short personal essay other factors that considered by the committee include the applicant's prior academic honors financial need extracurricular activities and written recommendations from teachers administrators and or community leaders selections made are based on demonstrated past academic achievement and the promise of future academic success your committee will weigh all of the information and data submitted by each applicant you evaluate and select applicants based on the quality of their responses to and or the satisfaction of the eligibility criteria stated above all committee determinations of scholarship recipients are recorded in writing there is no requirement that scholarship recipients pursue any particular areas of study nor is there any requirement or expectation that scholarship recipients commit to work for or render services to or for the benefit of s the terms and conditions of the scholarship will be contained in a grant letter sent to each recipient the recipient will be required to communicate his or her acceptance of the scholarship as well as agreement to the attendant terms and conditions by way of a written acceptance letter to the committee the terms and conditions of each scholarship will include the amount of the award the name of the school to be attended by the scholarship recipient the requirement to maintain a grade point average of at least and your right to revoke the scholarship at any time upon the occurrence of various disciplinary measures vis-a-vis the recipient as part of the written acceptance of the scholarship the recipient is required to acknowledge that you may request school-issued information regarding a recipient's academic progress such as a transcript or progress report and that the school shall be authorized to disclose such information to you if at any time the committee deems it appropriate to terminate a scholarship due to a violation of the grant terms the committee will issue a written notification to the scholarship recipient of its decision the recipient may request an in-person meeting with the committee to request reconsideration of the revocation decision and the response to such request shall be determined in the sole discretion of your committee additionally if your committee determines that any portion of a scholarship award has been misused they retain the right to require the recipient to repay such misused funds letter catalog number 58264e your committee will receive and review grantee reports annually to monitor compliance with the scholarship terms investigate any possible diversion of funds from their intended purposes and take all reasonable and appropriate steps to recover diverted funds they will ensure scholarship funds are used for their intended purposes and withhold further payments to recipients who are deemed likely to divert funds all scholarships shall be for one academic year individuals who have previously received a scholarship may reapply for an additional scholarship for any year during which such individuals maintain eligibility under the general eligibility criteria the committee is composed of individuals appointed by you and the w you will appoint one or two independent individuals to serve on the committee and the w will likewise appoint one or two independent individuals to serve on the committee at all times the number of individuals appointed by you and w will be equal an individual is deemed to be independent if such individual has no present or past employment or business relationship with s no present or past role as a director officer_or_employee of you or w as the case may be and no family relationship with the family of x or y in selecting individuals to serve on the committee each of the boards will give strong preference to individuals knowledgeable about education committee members appointed by you serve for a period of three years unless removed by your board_of directors or no longer able or willing to serve likewise committee members appointed by w serve for a period of three years unless removed by the board_of directors of w or no longer able or willing to serve a committee member may serve an unlimited number of consecutive three year terms the scholarship is designed to support the educational studies of promising youth who are the children of qualified employees of s as described above qualified employees’ are those individuals who have worked for s for at least two years and earn no more than v dollars there are currently close to z qualified employees working for s the policies and procedures adopted to govern the scholarship are designed to ensure that the scholarship functions exclusively in furtherance of charitable and educational_purposes employees of s are not entitled to receive other forms of compensation in lieu of the scholarship nor are employees guaranteed that their children will be selected to receive a scholarship there is no additional employment requirement imposed on any employee whose child receives a scholarship nor is there any employment requirement imposed on the recipient himself or herself employment with s as a qualified employee’ is used exclusively as a factor to determine initial eligibility and the definition of qualified_employee is structured to ensure that highly-compensated employees of s are not eligible in addition to providing scholarships to children of employees of s the foundations may also elect to award scholarship to children of employees of other companies that are partially owned by x and y and their respective families all of the policies and letter catalog number 58264e procedures set forth herein with regard to scholarship awarded to children of employees of s will likewise be applied to all scholarship awarded by you basis for our determination the law imposes certain excise_taxes on the taxable_expenditures of private_foundations code sec_4945 a taxable_expenditure is any amount a private_foundation pays as a grant to an individual for travel study or other similar purposes however a grant that meets all of the following requirements of code sec_4945 is not a taxable_expenditure the foundation awards the grant on an objective and nondiscriminatory basis the irs approves in advance the procedure for awarding the grant the grant is a scholarship or fellowship subject_to code sec_117 the grant is to be used for study at an educational_organization described in code sec_170 revproc_76_47 1976_2_cb_670 provides guidelines to determine whether grants a private_foundation makes under an employer-related program to employees or children of employees are scholarship or fellowship grants subject_to the provisions of code sec_117 if the program satisfies the seven conditions in sections dollar_figure through dollar_figure of revproc_76_47 and meets the applicable_percentage tests described in section dollar_figure of revproc_76_47 we will assume the grants are subject_to the provisions of code sec_117 you represented that your grant program will meet the requirements of either the percent or percent percentage_test in revproc_76_47 these tests require that e e e the number of grants awarded to employees’ children in any year won't exceed percent of the number of employees’ children who were eligible for grants were applicants for grants and were considered by the selection committee for grants or the number of grants awarded to employees’ children in any year won't exceed percent of the number of employees’ children who were eligible for grants whether or not they submitted an application or the number of grants awarded to employees in any year won't exceed percent of the number of employees who were eligible for grants were applicants for grants and were considered by the selection committee for grants you further represented that you will include only children who meet the eligibility standards described in revproc_85_51 1985_2_cb_717 when applying the percent test applicable to employees’ children in determining how many employee children are eligible for a scholarship under the percent test a private_foundation may include only those children who submit a written letter catalog number 58264e statement or who meet the foundation's eligibility requirements they must also satisfy certain enrollment conditions you represented that your procedures for awarding grants under this program will meet the requirements of revproc_76_47 in particular e e e an independent selection committee whose members are separate from you your creator and the employer will select individual grant recipients you will not use grants to recruit employees nor will you end a grant if the employee leaves the employer you will not limit the recipient to a course of study that would particularly benefit you or the employer other conditions that apply to this determination e e e e e e e this determination only covers the grant program described above this approval will apply to succeeding grant programs only if their standards and procedures don't differ significantly from those described in your original request this determination is in effect as long as your procedures comply with sections dollar_figure through dollar_figure of revproc_76_47 and with either of the percentage tests of sec_4 if you establish another program covering the same individuals that program must also meet the percentage_test this determination applies only to you it may not be cited as a precedent you cannot rely on the conclusions in this letter if the facts you provided have changed substantially you must report any significant changes to your program to the cincinnati office of exempt_organizations at internal_revenue_service exempt_organizations determinations p o box cincinnati oh you cannot award grants to your creators officers directors trustees foundation managers or members of selection committees or their relatives all funds distributed to individuals must be made on a charitable basis and further the purposes of your organization you cannot award grants for a purpose that is inconsistent with code sec_170 you should keep adequate_records and case histories so that you can substantiate your grant distributions with the irs if necessary we've sent a copy of this letter to your representative as indicated in your power_of_attorney letter catalog number 58264e please keep a copy of this letter in your records if you have questions please contact the person listed at the top of this letter sincerely jeffrey cooper director exempt_organizations rulings and agreements letter catalog number 58264e


t c memo united_states tax_court nicholas e eustace et al petitioners v commissioner of internal revenue respondent docket nos filed date gary j fernandez and mark a camasta for petitioners william t derick and catherine m thayer for respondent memorandum findings_of_fact and opinion ‘cases of the following petitioners are consolidated herewith estate of thomas a eustace deceased vicky eustace executor docket nos and estate of thomas a bustace deceased vicky eustace independent administrator and vicky eustace docket no michael t eustace docket no steven a and michelle l dye docket no and robert r and elsa m eustace docket no foley judge by notices dated date respondent determined deficiencies and additions to petitioners’ federal income taxes as follows nicholas eustace docket no year deficiency dollar_figure estate of thomas a eustace deceased vicky eustace executor docket nos and year deficiency sec_6662 addition dollar_figure dollar_figure -- estate of thomas a kustace deceased vicky eustace independent administrator and vicky eustace docket no year deficiency dollar_figure michael t bustace docket no year deficiency dollar_figure steven a and michelle l dye docket no year deficiency sec_6651 addition dollar_figure dollar_figure robert r and elsa m bustace docket no year deficiency sec_6662 addition dollar_figure dollar_figure big_number big_number big_number big_number - - unless otherwise indicated all section references are to the internal_revenue_code for the years in issue and all rule references are to the tax_court rules_of_practice and procedure after concessions the issue is whether petitioners are entitled to the sec_41 research_credit findings_of_fact when the petitions were filed each petitioner or petitioner’s representative resided in illinois or indiana petitioners were the shareholders of applied systems inc applied systems an s_corporation founded in to produce computer_software for independent insurance agencies applied systems had five departments programming ée product development customer services sales marketing and operations the programming department had four groups each headed by a vice president the agency manager tam forms interface module fim rating module and advanced engineering of applied systems’ employees worked on the tam module on fim and on the rating module petitioners claim that applied systems paid its employees dollar_figure dollar_figure and dollar_figure of wages relating to the research_credit during and respectively applied systems produced software for processing client and insurance_policy information invoices insurance claims standard insurance forms word processing marketing and q4e- accounting some of the software calculated premiums ée rated policies and transmitted data between independent agencies and insurance_companies e carriers i tam in applied systems released the first version of tam a program designed to automate the day-to-day functions of independent agencies applied systems sold tam directly to such agencies tam consisted of three modules the tam module fim and first rate e rating module during the years in issue applied systems sold the tam and fim modules together as one product and sold first rate separately the software ran on ibm- compatible personal computers pc’s and local area networks lan’ ss a tam module applied systems released the first version e series of the tam module in and the second and third series by the tam module enabled an agency to search for prospective clients whose data matched certain criteria draft personalized sales letters generate followup reports dial telephone numbers track appointments access first rate ie to calculate premiums access fim ie to fill out forms process insurance applications track policy issuance enter changes and claims run marketing analysis reports and process renewals - - in date applied systems released tam for a beta-test 1ie during which agencies used the software ina working environment to identify problems not discovered during in-house testing in date applied systems began to develop tam a series for large agencies in applied systems beta-tested tam throughout applied systems debugged tam and worked on tam in date applied systems decided to make tam its main product and adjust it for small agencies by deactivating certain features applied systems made modifications to the tam module in converting serie sec_4 to during the years in issue the modifications to the tam module included the following rounding numbers applied systems’ clients identified rounding errors in the calculation of money amounts programmers traced the errors to extra decimal places in the compiler program locking transactions applied systems programmed the tam module for locking e allowing more than one user at a time to conduct transactions with a particular file expanding representation programmers expanded the representation on each byte of memory from to objects eg agencies branches or -- - departments increasing the software’s ability to satisfy the needs of larger client agencies managing memory programmers using software purchased from a third-party vendor increased the memory available to run the tam module by transferring some memory contents to disk multitasking programmers using software purchased from a third-party vendor implemented a function called big interrupt that allowed users to perform multiple tasks at one time indexing programmers using software purchased from a third-party vendor developed indexes to locate data in data bases b fim module in applied systems released the first series of fim fim used agency company organization for research_and_development acord an insurance industry association standards to print forms and transmit data to carriers fim automatically inserted into a form any relevant data from existing client and policy data bases fim enabled an agency to send e upload forms and the data thereon to carriers through an electronic interface fim supported single-entry multicompany interface semci which allowed an agency to enter data only once and send it to multiple carriers by fim could also receive ée - download data such as insurance policies during the years in issue applied systems integrated fim with the tam module by structuring data bases configuring data and formatting data and characters for printing applied systems made modifications to fim in converting serie sec_4 to cc first rate module prior to the years in issue the rating module enabled agents to rate personal insurance policies in a dozen states in late applied systems purchased alpha touch a rating vendor based in bloomington minnesota alpha touch had software that could calculate premiums relating to personal insurance written in the midwestern states applied systems used the alpha touch software to expand first rate enabling the module to calculate premiums relating to more carriers all states and commercial as well as personal insurance during the years in issue applied systems’ employees created programs applicable to carriers not already included in first rate the employees referred to state regulations and carrier manuals to determine the required data elements and the rating formulas at the end of applied systems began work on rating programs applicable to commercial insurance commercial insurance rating involved more types of insurance coverage than personal insurance from through applied systems created approximately big_number programs applied --- - systems regularly updated each program to reflect rating formula modifications each carrier made at least once a year d other projects during the years in issue applied systems also worked on data conversion independence wintam diamond and evaluations r d data conversion from through applied systems offered an electronic data conversion service to agencies switching from another automation system to the tam module this service allowed agencies to use the data from their old systems without manually reentering the data into the tam module in a typical data conversion applied systems would take the data off the old system put it on a pc create a program to transfer the data to data base files needed for the tam module and run the program to transfer the data in an average week applied systems was converting in four systems in seven systems and in nine systems independence in applied systems purchased liberty and leader systems 1ie automation vendors that were subsidiaries of carriers and began the independence project to integrate the software of these systems with fim as a result of the acquisition applied systems added to its user base the customers - - of liberty and leader based in georgia and indiana respectively these new customers could convert to the tam module or retain their existing software which required integration with fim the computer language of liberty and leader ie cobol was different from that of fim ie c independence involved figuring out how to run fim with and pass data to and from the acquired systems wintam in one of applied systems’ competitors announced that it would release a microsoft windows version of its software by the year’s end in response applied systems formed a group_of_employees to develop a version of the tam module for use in the windows environment e wintam applied systems decided to keep the tam module in the old disk operating system dos environment but put it in a windows format this decision allowed applied systems to bring a windows version to market before completing the product development in date applied systems demonstrated an early version of wintam at an annual insurance industry convention diamond in the latter part of applied systems started to design an automation system called diamond to serve large carriers ie while the tam module served independent -- - agencies diamond would manage and update policies to reflect customer transactions evaluations r d applied systems’ evaluations r d work consisted of evaluating and developing by the creation of short routines compatibility between tam and third-party hardware and software products il credit claimed on its and tax returns ie forms 1120s u s income_tax returns for an s_corporation applied systems did not claim any research_credit on date applied systems hired a new tax manager who determined that applied systems should claim research credits relating to the years in issue the tax manager interviewed employees and delineated the employees and activities that he believed qualified for the research_credit on date and date applied systems submitted amended returns relating to the years in issue to claim the respective research_credit that was erroneously omitted from the original filing of the form_1120s on the amended returns applied systems claimed research credits of dollar_figure dollar_figure and dollar_figure relating to the wages of employees in and respectively petitioners pursuant to amended pleadings filed in date added the wages of employees ie dollar_figure to their claim - li - opinion it definition of qualified_research pursuant to sec_41 qualified_research must meet in pertinent part the discovery and process_of_experimentation tests a the discovery test qualified_research must be undertaken for the purpose of discovering information which is technological in nature sec_4a1 d b in this case qualified_research is research that is undertaken to discover information that goes beyond the current state of knowledge in the computer science field sec_41 b 163_f3d_440 7th cir 110_tc_454 in the context of sec_41 b discovery demands something more than mere superficial newness it connotes innovation in underlying principle united stationers inc v united_states supra pincite b the process_of_experimentation test substantially_all of the activities of qualified_research must constitute elements of a process_of_experimentation for a purpose that relates to a new or improved function performance reliability or quality sec_41 d a in sec_41 c substantially_all means at least percent of the activities that constitute a process_of_experimentation norwest corp v commissioner supra pincite sec_1_41-2 income_tax regs a process_of_experimentation involves something more than simply debugging a computer_program united stationers inc v united_states supra pincite in this case qualified_research consists of activities at least percent of which constitute a process_of_experimentation aimed at eliminating uncertainty about the technical ability to develop software see sec_41 norwest corp v commissioner supra pincite- sec_1_41-2 income_tax regs il parties’ contentions respondent contends that applied systems did not conduct qualified_research because its employees did not undertake research to discover information that is technological in nature and substantially_all of the employees’ research activities did not constitute elements of a process_of_experimentation petitioners contend that the sec_41 definition of qualified_research requires only that there be significant programming changes to software petitioners further contend that applied systems’ work meets the requirements of the discovery test because all computer programming relies on computer science principals sic and the process_of_experimentation test because employees did consider alternatives when adding additional functionality to the petitioner’s sic computer programs til analysis we note at the outset that petitioners’ reconstruction of qualifying expenses was unreliable inaccurate incomplete and wholly insufficient to establish what various workers did and whether such expenses qualify for the research_credit in addition petitioners failed to have their computer expert address technical issues relevant to the case and as noted below the testimony of petitioners’ witnesses further supports our conclusion that work performed by applied systems’ employees during the years in issue does not qualify for the research_credit a tam most of the product development of the tam module occurred during through in describing a sophisticated approach that applied systems had invented and used in the tam module petitioners’ programmer testified this would have been in the ‘80s during the years in issue employees merely updated the tam module solutions to problems of rounding numbers locking transactions and expanding representation were commonly known in the computer science field and did not present significant programming challenges applied systems’ purchase and use of third-party software to facilitate managing memory multitasking and indexing tasks indicates that these techniques were also known in the computer science field petitioners’ programmer testified that he could immediately know whether something could be made to work or whether it just wouldn’t work applied systems’ employees performed the following tasks relating to fim establishing the capability to display business forms enter data into their blank fields integrate the data with a data base and print standard forms all these tasks were feasible before similarly employees working on first rate converted state regulations and carrier formulas into programs this task is part of the normal skilled practice of software development and does not advance or refine any principles of computer science petitioners’ computer expert testified relating to the expansion of the rating module it’s hard for me to think about writing each of those programs as constituting research applied systems’ vice president in charge of first rate testified really from to there were minor enhancements modifications to make things easier there weren’t a lot of major changes in essence these tasks did not go beyond the current state of knowledge in the computer science field and did not involve a process_of_experimentation b other projects petitioners contend that work on data conversion independence wintam and diamond gualifies for the research -- - credit we disagree data conversion 1s commonly provided by software vendors there was no technical uncertainty for example that a cobol program could be rewritten in c and by the principles for converting software from dos to windows had been published petitioners’ programmer testified that during the years in issue applied systems did not fundamentally convert the tam module from dos but as a simple_plan we could do fast merely put the tam module in a windows format so we could start demonstrating something under windows more quickly applied systems’ vice president testified relating to diamond that employees were trying to figure out what the product was supposed to do but weren’t doing any coding i1 e programming during the years in issue petitioners presented insufficient evidence relating to evaluations r d and failed to address this issue on brief iv conclusion petitioners fell woefully short of presenting sufficient evidence to establish as required by sec_41 that applied systems’ activities met the requirements for the research_credit applied systems did not undertake research to discover information beyond the current state of knowledge in the computer science field nor did applied systems conduct a process_of_experimentation aimed at eliminating uncertainty about the technical ability to develop the software -- - although the tam module fim first rate diamond etc do not meet the requirements of sec_41 the research_credit may nevertheless be applicable to the most significant set of elements of these products in relation to which all the requirements are met see h conf rept vol ii at ti-72 to ii-73 1986_3_cb_1 petitioners acknowledge that they do not have the substantiation necessary to tie salaries to activities at the subcomponent level however the cohen sic rule would apply in this circumstance and the court would be required to make a reasonable allocation of salaries to functionality the rule_of 39_f2d_540 2d cir does not reguire the court in this case to make such an allocation and we decline to do so accordingly respondent’s determinations are sustained contentions we have not addressed are moot irrelevant or meritless to reflect the foregoing decisions will be entered under rule


internal_revenue_service number release date index number ------------------------------------------------------ -------------------------- ------------------------------------------- ---------------------- ------------------------------------ --------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact --------------------------- id no ----------------- telephone number --------------------- refer reply to cc corp plr-130250-11 date date legend parent date date x -------------------------------------------------------------------- ------------------------ ------------------- ------------------- -- company official ------------------------------------------------------------------- --------------------------------------------------------------------- ------------ tax professional ------------------------------------------- ----------------------------- dear -------------- plr-130250-11 this letter responds to a letter dated date submitted on behalf of parent requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations to file an election in particular parent is requesting an extension of time for the consolidated_group of which parent was the common parent to elect an extended carryback period the election for a consolidated_net_operating_loss cnol additional information was submitted in letters dated date and date the material information submitted for consideration is summarized below parent was the common parent of a consolidated_group the parent group that terminated on date parent group incurred a cnol in the taxable_year ending date the year cnol parent seeks to carry back the year cnol x years under sec_172 parent was required to file the election in order to carry back the year cnol x years and to obtain the benefit of sec_56 the election was due on date but for various reasons a valid election was not filed subsequently this request was submitted under sec_301_9100-3 for an extension of time to file the election the period of limitations on assessment under sec_6501 has not expired for the parent group’s consolidated_income_tax_return for the taxable_year in which the year cnol was incurred or any subsequent taxable_year parent has represented that it is not seeking to alter a return position for which an accuracy related penalty has been or could be imposed under sec_6662 at the time the taxpayer requested relief taking into account any qualified_amended_return filed within the meaning of sec_1_6664-2 sec_172 of the internal_revenue_code generally permits a taxpayer to carry back a net_operating_loss to each of the taxable years preceding the taxable_year of the nol sec_172 of the internal_revenue_code permits a taxpayer to elect to carry back an applicable net_operating_loss to each of the or taxable years preceding the taxable_year of the applicable nol in lieu of the 2-year period provided by sec_172 sec_172 provides that the term applicable net_operating_loss applicable nol means the taxpayer’s net_operating_loss for a taxable_year ending after date and beginning before date sec_172 provides that the election under sec_172 shall be made by the due_date including extension of time for filing the return for the taxpayer’s last taxable_year beginning in the election is irrevocable and in general may be made only with respect to one taxable_year sec_1502 provides that the secretary shall prescribe such regulations as he may deem necessary in order that the tax_liability of any affiliated_group_of_corporations making a consolidated_return and of each corporation in the group both during and after plr-130250-11 the period of affiliation may be returned determined computed assessed collected and adjusted in such manner as clearly to reflect the income_tax_liability and the various factors necessary for the determination of such liability and in order to prevent avoidance of such tax_liability in carrying out the preceding sentence the secretary may prescribe rules that are different from the provisions of chapter that would apply if such corporations filed separate returns sec_1_1502-21 provides that losses taken into account in determining a cnol may be carried to other taxable years whether consolidated or separate only under paragraph b of sec_1_1502-21 sec_1_1502-21 provides that net_operating_loss_carryovers_and_carrybacks to a taxable_year are determined under the principles of sec_172 and sec_1 sec_1_1502-21t provides that a consolidated_group can elect an extended carryback period pursuant to sec_172 with regard to a cnol arising in a taxable_year ending after date and beginning before date revproc_2009_52 2009_2_cb_744 provides when and how a taxpayer may make an election under sec_172 sec_4 of revproc_2009_52 provides that the common parent of a consolidated_group makes the election for the group sec_4 and of revproc_2009_52 permit the election to be made for consolidated taxpayers by attaching a statement to the original or amended consolidated_return for the taxable_year of the applicable cnol by attaching a statement to the taxpayer’s amended consolidated_return applying the applicable cnol to the carryback_year or by attaching a statement to a claim for a tentative_carryback_adjustment on form_1139 sec_4 b and b of revproc_2009_52 require the election regardless of the manner in which made to be filed no later than the due_date including extensions for filing the return for the taxpayer’s last taxable_year beginning in notice_2010_58 2010_37_irb_325 q a provides that if a taxpayer goes out of existence the due_date for making the election under sec_172 is determined as if the taxpayer remained in existence under sec_301_9100-1 the commissioner has discretion to grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make a plr-130250-11 regulatory election sec_301_9100-1 requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-3 the election by a consolidated_group to extend the carryback period under sec_172 for a cnol is a regulatory election therefore the commissioner has discretionary authority under sec_301_9100-3 to grant an extension of time for parent to file the election provided parent establishes to the satisfaction of the commissioner that it acted reasonably and in good_faith the requirements of sec_301_9100-1 and sec_301_9100-3 are satisfied and granting relief will not prejudice the interests of the government information affidavits and representations submitted by parent company official and tax professional explain the circumstances that resulted in the failure to timely file a valid election the information establishes that parent reasonably relied on a qualified_tax professional who failed to make or advise parent to make the election and that the request for relief was filed before the failure to make the election was discovered by the internal_revenue_service see sec_301_9100-3 and v based on the facts and information submitted including the affidavits submitted and the representations made we conclude that parent has shown it acted reasonably and in good_faith the requirements of sec_301_9100-1 and sec_301_9100-3 are satisfied and granting relief will not prejudice the interests of the government accordingly provided the parent group qualifies substantively to file the election we grant an extension of time under sec_301_9100-3 until sixty days from the date on this letter for parent to file the election parent may file the election under sec_172 to carry back the year cnol x years on form 1120x amended u s_corporation income_tax return for either the year to which it wants to apply the cnol or to the year in which the cnol arose according to the procedures set forth in revproc_2009_52 a copy of this letter must be attached to the form 1120x if parent files form 1120x electronically parent may satisfy the requirement of attaching a copy of this letter by attaching a statement to the parent group’s amended_return that provides the date and control number plr- of this letter_ruling the above extension of time is conditioned on the parent group’s and its members’ tax_liability if any not being lower in the aggregate for all years to which the election applies than it would have been if the election had been timely made taking into account the time_value_of_money we express no opinion as to the tax_liability for the years involved a determination thereof will be made by the director’s office upon audit of the income_tax returns involved plr-130250-11 except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any item discussed or referenced in this letter in particular we express no opinion with respect to whether parent qualifies substantively to make the election in addition we express no opinion as to the tax effects or consequences of filing the election late under the provisions of any other section of the internal_revenue_code or regulations or as to the tax treatment of any conditions existing at the time of or resulting from filing the election late that are not specifically set forth in this letter for purposes of granting relief under sec_301_9100-3 we relied on certain statements and representations made under penalty of perjury by parent company official and tax professional the director however should verify all essential facts in addition notwithstanding that an extension is granted under sec_301_9100-3 to file the election any penalties and interest that would otherwise be applicable continue to apply this letter_ruling is directed only to the taxpayer s who requested it sec_6110 provides that it may not be used or cited as precedent pursuant to the power_of_attorney on file in this office a copy of this letter is being sent to your authorized representative sincerely _____________________ ken cohen senior technician reviewer branch office of associate chief_counsel corporate cc


internal_revenue_service number release date index numbers ---------------------------------- -------------------------------------- ------------------------ --------------------------------- ------------------------------------- --------------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ----------------- id no ------------- telephone number --------------------- refer reply to cc psi plr-122174-09 date date legend x --------------------------------------------------- ---------------------------------------- d1 d2 country ---------------------- ---------------- --------------- dear -------------- this is in response to a letter dated date submitted on behalf of x requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations to file an election under sec_301_7701-3 to be treated as a disregarded_entity for federal tax purposes facts according to the information submitted x was formed on d1 under the laws of country x intended to be treated as a disregarded_entity for federal tax purposes effective d2 however x inadvertently failed to timely file form_8832 entity classification election to be treated as a disregarded_entity for federal tax purposes effective d2 plr-122174-09 law and analysis sec_301_7701-3 provides that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes an eligible_entity with a single owner can elect to be classified as an association or to be disregarded as an entity separate from its owner sec_301_7701-3 provides guidance on the classification of a foreign eligible_entity for federal tax purposes generally a foreign eligible_entity is treated as an association if all members have limited_liability unless the entity makes an election to be treated otherwise a foreign eligible_entity with a single owner having limited_liability may elect to be treated as a disregarded_entity pursuant to the rules of sec_301_7701-3 sec_301_7701-3 and iii provides that an entity classification election must be filed on form_8832 and can be effective up to days prior to the date the form is filed or up to months after the date the form is filed sec_301_7701-3 provides that an election under sec_301_7701-3 must be signed by - a each member of the electing entity who is an owner at the time the election is filed or b any officer manager or member of the electing entity who is authorized under local law or the entity’s organizational documents to make the election and who represents to having such authorization under penalties of perjury sec_301_7701-3 provides that if a purchasing_corporation makes an election under sec_338 regarding an acquired subsidiary an election under sec_301 c i for the acquired subsidiary can be effective no earlier than the day after the acquisition_date within the meaning of sec_338 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 internal_revenue_code except subtitles e g h and i section b defines the term regulatory election as including an election whose due_date is prescribed by a regulation published in the federal_register sec_301_9100-1 through provide the standards that the commissioner will use to determine whether to grant an extension of time to make an election sec_301_9100-1 sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides rules for requesting extensions of time for regulatory elections that do not meet the requirements of sec_301_9100-2 plr-122174-09 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 conclusion based solely on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-3 have been satisfied as a result x is granted an extension of time of days from the date of this letter to file a properly executed form_8832 effective d2 with the appropriate service_center to elect to be classified as a disregarded_entity a copy of this letter should be attached to the form_8832 except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely curt g wilson curt g wilson associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes


internal_revenue_service number release date ---------------------------------- ----------------------------- --------------------------------------------- ---------------------------------- in re --------------------------------------------- ----------------------------- -------------------------- ------------------------ - department of the treasury washington dc person to contact ---------------- id no ------------- cc ita telephone number --------------------- refer reply to plr-120249-05 date date legend a ----------------------------------------------------------------- ------------------------------------------------- dates -------------------------- -------------------------- ----------------------------- groups taxpayers and on attachment taxpayers and on attachment all other taxpayers on attachment dear -------------------- this letter responds to your letter and submissions of date supplementing a previous submission of march in which you requested on behalf of a above and forty other related parties the taxpayers - see attachment certain private letter rulings relating to the late-filing of forms election to have a tax_year other than a required tax_year specifically you requested that the taxpayers’ late-filed forms be considered timely filed under the authority contained in sec_301_9100-3 of the procedure and administration regulations we are pleased to address your concerns the information submitted indicates that each of the forty-one taxpayers on whose behalf rulings are requested is a partnership employing an overall accrual_method of accounting taxpayers are members of a tiered_structure as defined in sec_1_444-2t of the temporary income_tax regulations under sec_706 of the internal_revenue_code a partnership’s taxable_year must be its required_taxable_year unless among other exceptions not relevant here the partnership elects under sec_444 of the code to use a taxable_year other than its required_taxable_year sec_444 and permit an eligible_partnership to elect or change to a taxable_year only if the deferral_period of the taxable_year elected is not longer than the shorter of three months or the deferral_period of the taxable_year being changed the term deferral_period generally refers to the number of months between the beginning of the entity’s taxable_year and the close of the first required_taxable_year ending within such taxable_year in the instant circumstances taxpayers desired to elect a taxable_year ending november for their initial taxable_year which is a permitted taxable_year under sec_444 sec_444 of the code and sec_1_444-2t of the regulations provide in relevant part that entities that are part of a tiered_structure that consists only of partnerships all of which have the same taxable_year may make or continue an election under sec_444 of the code sec_1_444-3t of the regulations provides among other requirements that form_8716 must be filed by the earlier of i the 15th day of the fifth month following the month that includes the first day of the tax_year for which the election will first be effective or ii the due_date without regard to extensions of the income_tax return resulting from the sec_444 election sec_301_9100-1 of the regulations set forth rules respecting the granting of extensions of time for making certain elections under these rules the commissioner in his discretion may grant a reasonable extension of time to make a regulatory election under subtitle a provided the taxpayer acted reasonably and in good_faith and that the granting of relief will not prejudice the interests of the government sec_301_9100-2 sets forth rules governing automatic extensions for regulatory elections including elections to use other than the required tax_year under sec_444 if the provisions of section' do not apply to the taxpayer's situation as in the instant case the provisions of sec_301_9100-3 other extensions may apply sec_301_9100-3 sets forth standards that the commissioner will employ in determining whether to grant discretionary relief in situations that do not meet the requirements of sec_301_9100-2 the standards applied are whether the taxpayer acted reasonably and in good_faith in the matter and whether the granting of relief will prejudice the interests of the government generally a taxpayer will be deemed to have acted reasonably and in good_faith where for example the taxpayer reasonably relied on a qualified_tax professional and that professional failed to make or advise the taxpayer to make the election at issue in the instant circumstances group taxpayers’ forms electing to use a taxable_year ending november were due on or before date group taxpayers’ forms electing to use a taxable_year ending november were due on or before date and group taxpayers’ forms electing to use a taxable_year ending november were due on or before date due to an error or misunderstanding none of the forms was timely filed however the error was not due to any lack of due diligence or prompt action on the part of any taxpayer the information submitted and representations furnished by the taxpayers and their tax professionals establish that taxpayers acted reasonably and in good_faith in respect of this matter furthermore we have determined that the granting of relief in this case will not prejudice the interests of the government within the intendment of sec_301_9100-3 accordingly the requirements of sec_301_9100-3 for the granting of relief have been satisfied within days of the date of this ruling each taxpayer should file with the irs cincinnati service_center attn entity control a form_8716 electing to use a tax_year ending november effective for its first taxable_year ending either date date or date as appropriate a copy of this letter_ruling should accompany such submission and each taxpayer should type or print at the top of the form filed under sec_301_9100-3 of the regulations this ruling is further conditioned on taxpayers complying with sec_1 1t a which provides in relevant part that for each taxable_year that a partnership has an election under sec_444 in effect the partnership must i file a return as provided in sec_1_7519-2t and ii make any required_payment as provided in sec_1_7519-2t except for the specific ruling above which is restricted to the filing of forms we express or imply no opinion concerning the federal_income_tax consequences of the facts of this case under any other provision of the code or regulations that may be applicable thereto this letter_ruling is based on facts and representations provided by the taxpayers and their authorized representatives and is limited to the matters specifically addressed no opinion is expressed as to the tax treatment of the transactions considered herein under the provisions of any other sections of the code or regulations which may be applicable thereto or the tax treatment of any conditions existing at the time of or effects resulting from such transactions which are not specifically addressed herein because it could help resolve federal tax issues a copy of this letter should be maintained with the taxpayers’ permanent records pursuant to a power_of_attorney currently on file with this office the original of this letter_ruling is being sent to the taxpayers’ authorized representative and copies are being furnished to the taxpayers and their second-designated authorized representatives a copy of this letter is also being sent to the taxpayers’ appropriate irs industry director this ruling is directed only to the taxpayers who requested it sec_6110 of the internal_revenue_code provides that it may not be used or cited as precedent associate chief_counsel income_tax accounting s william a jackson by _________________________ william a jackson chief branch attachment enclosures copy of this letter copy for sec_6110 purposes attachment plr-119941-05 -------------------------------------------------------------------- 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internal_revenue_service number info release date uilc cc psi 1-genin-124378-02 date uilc we are responding to your correspondence sent via facsimile requesting automatic late s_corporation relief under revproc_98_55 for an effective date of date based on the information provided and data furnished by the internal_revenue_service you are eligible for relief under this revenue_procedure we have intervened on your behalf and no further action is needed on your part you should receive a notice of s_corporation acceptance from the irs within days in addition the irs has developed two new cd-roms to help educate small_business owners on their tax responsibilities introduction to federal taxes for small_business self-employed and a virtual small_business workshop these two items are free and can be ordered by calling the irs also provides a website www irs gov smallbiz dedicated to small_business taxpayers please keep this letter with your tax records and feel free to provide a copy of it to your authorized representative we hope that the above information proves helpful sincerely yours s dianna k miosi chief branch associate chief_counsel passthroughs and special industries