department of the treasury washington oc person to contact telephone number refer reply to cc dom fi p br 3-plr-101695-29 ate jul internal_revenue_service index number legend sponsor initial trust financial_institution investment strategy state a o e o i o l a t i u a submitted on behalf of sponsor by its authorized representatives this letter replies to a letter dated date and other correspondence in general sponsor e4 plr-101636-99 asks for certain rulings relating to a program in which investors in initial trust are given an opportunity on termination of initial trust to contribute their share of initial trust's assets to one or more subsequent trusts collectively the subsequent trusts and each a subsequent trust facts sponsor proposes to create a series of trusts the trusts each trust will hold a fixed portfolio of common stocks selected according to some investment strategy and will issue a single class of units units representing undivided beneficial interests in its assets during the life of the trust sponsor may receive additional units by contributing to the trust additional common_stock the common_stock contributed will be identical with respect to issuer class of stock and number of shares per issuer to the shares represented by that number of units prior to such contribution except to the extent that sponsor cannot contribute fractional shares to the trust each trust will be organized as a domestic_trust under the laws of state a will be created by a separate indenture and will qualify as a unit_investment_trust under sec_4 of the investment_company act of u s c sec_80a-4 a separate registration_statement for each trust will be filed with the securities_and_exchange_commission sec and a separate prospectus will be used to offer its units the trustee the trustee of each trust will be financial_institution an entity unrelated to the sponsor meeting the requirements of sec_26 of the investment_company act initial trust and subsequent trusts are among the trusts created or to be created by sponsor initial trust will hold a fixed portfolio of common stocks selected according to investment strategy and will terminate approximately a months after creation prior to termination a unitholder may redeem units at any time by tendering them to the trustee how the pre-termination redemption redemption is accomplished will depend on whether the sponsor maintains a secondary market for units - if the sponsor maintains a secondary market for units tendered units may be sold to the sponsor for their net asset value and the proceeds distributed to the unitholder if the sponsor does not maintain a secondary market for units or if the unitholder so elects the unitholder may tender its units to the trustee who will make a payment to the redeeming unitholder equal to the net asset value of the units tendered however if the unitholder holds b or more units which will have an initial market_value of approximately dollar_figurec or more the redeeming unitholder may choose to receive its pro_rata share of initial trust securities in-kind and cash in tieu of fractional shares sponsor believes on the basis of historical experience with other unit plr-101636-99 investment trusts that it will be the only unitholder eligible to receive in-kind distributions upon a redemption that would choose to receive in-kind distributions upon termination of initial trust its securities will be distributed or sold a unitholder can elect to receive in-kind its pro_rata share of the securities and cash in lieu of fractional shares or to receive the cash proceeds from the sale of its pro_rata share of the securities instead of redeeming units or holding units until termination a unithoider in initial trust may elect to invest in the units of one or more subsequent trusts by making an in-kind contribution rollover_contribution to the applicable subsequent trusts although the sponsor has no obligation to create any subsequent trusts the sponsor intends to create several subsequent trusts on a day no more than days before the termination of initial trust the effective date of the registration_statement filed with the sec for a subsequent trust will be no more than days before the termination of initial trust if a unitholder elects to make a rollover_contribution securities representing the unitholder's pro_rata share of the securities held by the initial trust will be transferred to a financial_institution the distribution agent on the rollover date the rollover date will be the day the initial trust terminates the distribution agent will make an in-kind contribution to the subsequent trust on behalf of the unitholder within five business days following the rollover date any securities contributed in-kind to the subsequent trust on behalf ofa reinvesting unitholder will have to match in number and type the securities represented by the units of the subsequent trust represents an interest in one share each of the common_stock of company v company w company x company y and company z then an in-kind contribution made to acquire five units of subsequent trust will have to consist of five shares of the common_stock of each of company v company w company x company y and company for example if a unit in subsequent trust like initial trust each subsequent trust will hold a fixed portfolio of securities that will be selected according to an investment strategy which may not be the same as the investment strategy of initial trust however even if a subsequent trust employs the investment strategy of initial trust the portfolio of stocks selected for that subsequent trust will be affected by recent market history the portfolio of stocks to be held by any subsequent trust therefore is expected to differ somewhat from the stocks distributed to the distribution agent on termination of initial trust reason if the distribution agent is to make an in-kind contribution to subsequent trust the distribution agent will have to adjust the portfolio of securities held for the benefit of for this se plr-101636-99 that unitholder before making such contribution this will require the sale of some stocks and the purchase of others units in a subsequent trust will also be offered to persons who were not unitholders in initial trust non-prior participants no limit will be imposed upon the number of non-prior participants that may be admitted to a subsequent trust non- prior participants will be permitted to acquire units in a subsequent trust by purchase or by in-kind contribution any shares a non-prior participant contributes in-kind to the subsequent trust will have to match in number and in type the shares represented by the units of the subsequent trust notwithstanding the foregoing securities received in-kind by sponsor on the termination of a_trust cannot be contributed to another trust similarly securities received in-kind by any party through a redemption cannot be contributed to another trust each decision by a unitholder to invest in subsequent trust will be made separately sponsor will not a formally or informally solicit a unitholder to invest in two or more trusts or b accept any formal or informal direction to do so a decision to invest in the subsequent trust will be solicited by representatives of the sponsor only during the days prior to the rollover notification date which will occur no earlier than days before the rollover date and no later than the rollover date and a unitholder will not receive an incentive to make a decision to reinvest before the final date for such decisions thus for example no unitholder will receive a discount for an early decision and no investor will be charged a penalty for making a later but still timely decision no election to reinvest may be made prior to days before the rollover notification date or after the rollover notification date and such election will be revocable up to three days prior to the rollover date in general there will be no difference between the fees including administrative charges commissions or other charges payable by reinvesting unithoiders and those payable by non-prior participants however reinvesting unitholders may receive a commission discount compared to non-prior participants the commission discount for reinvesting unitholders when compared to the commissions paid_by non-prior participants will not exceed d of the public offering price per unit commissions and fees charged to non-prior participants will not exceed customary commissions and fees charged with respect to units of similar trusts offered by the sponsor the commissions charged upon the acquisition of units in a_trust and any deferred commissions charged over the life of a_trust will be based upon the full fair_market_value of the units sponsor represents that the assets of one trust will not be commingled with the assets of another trust nor will the expenses of one trust be charged against another plr-101636-99 unitholders of a_trust can look only to the assets of that trust for distributions upon redemption liquidation or termination creditors of a_trust are limited to the assets of that trust for recovery_of expenses charges and liabilities matters that affect a_trust and are subject_to a vote by unitholders can only be voted on by the unitholders of that trust sponsor further represents that apart from the reinvestment arrangement described above the initial trust will be classified as a grantor_trust for federal_income_tax purposes law and analysis sec_301_7701-4 of the procedural and administrative regulations states that an investment_trust with a single class of ownership interests representing undivided beneficial interests in the assets of the trust will be classified as a_trust if there is no power under the trust agreement to vary the investment of the certificate holders in revrul_81_238 1981_2_cb_248 a fixed_investment_trust adopted an automatic reinvestment pian under the plan shortly before each semiannual distribution date the sponsor of the trust created a new fixed_investment_trust in which the certificate holders in the existing trusts could invest their distributions of income and principal participation by the certificate holders in the automatic reinvestment plan was voluntary and could be terminated at the option of the certificate holder concludes that this arrangement did not involve reinvestment in the original trust but rather investment of trust proceeds in a new trust since there was no change in the investment in the original trust this arrangement did not result in a power to vary the investment within the meaning of sec_301_7701-4 of the regulations rev_rul revrul_81_238 indicates that the power to reinvest distributions from a_trust does not change the classification of that trust if the power to reinvest distributions is not a power to vary the investment of that trust the power of the unitholders to invest distributions from initial trust in a subsequent trust is a power to vary the investment of initial trust if a subsequent trust is considered a mere continuation of initial trust initial trust and a subsequent trust may be viewed as the same entity for a variety of reasons for example initial trust and a subsequent trust may be viewed as the same entity if the subsequent trust lacks independent economic_substance cf rev similarly initial trust and the subsequent trust may be rul 1990_2_cb_162 treated as the same entity if creation of initial trust involves a binding commitment to create the subsequent trust cf 118_f2d_315 6th cir the reasons stated below we believe that the subsequent trusts are not a mere continuation of initial trust for if plr-101636-99 in the instant case a subsequent trust has independent economic_substance it will be created under a separate indenture and its units will be offered pursuant to a separately registered prospectus other than those who choose to reinvest the unitholders of initial trust will have no rights to the assets of a subsequent trust nor will the creditors of initial trust have any claim to the assets of a subsequent trust further creation of initial trust does not involve either a legal commitment or a de_facto commitment to create or invest in a subsequent trust sponsor is not obligated to create any subsequent trusts and the unitholders of initial trust are not obligated to make in-kind contributions to any subsequent trust the decision by an initial trust unitholder to invest in a subsequent trust is only one of the many choices available besides investing in a subsequent trust the unitholder may liquidate its investment for cash acquire its share of securities in-kind and hold them or acquire its share of securities in-kind and make whatever adjustments it feels are necessary in pursuit of its own investment strategy condition to investing in a subsequent trust non-prior participants are free to invest in a subsequent trust by making in-kind contributions or through cash purchases a unitholder of initial trust who invests in a subsequent trust does enjoy a reduced sales charge compared to non-prior participants this discount however is not sufficient to compel the initial trust unitholder to invest in a subsequent trust nor is it sufficient to entice the initial trust unitholder to chose a subsequent trust over other investment strategies in addition investing in initial trust is not a investors that hold certificates of beneficial_interest in an investment_trust that has a single class of ownership interests representing undivided beneficial interests in the assets of the trust and that is classified as a sec_301_7701-4 are treated as owners of undivided interests in the entire trust rul 1984_1_cb_155 an investor that exchanges certificates of beneficial_interest in such an investment_trust for its aliquot share of the assets of the trust has not materially altered its ownership position revrul_90_7 1990_1_cb_153 trust for the purposes of rev revrul_90_7 considered an investor in such an investment_trust who exchanged certificates of beneficial_interest in return for its aliquot share of the trust's assets a portfolio of common_stock with cash being received in lieu of fractional shares the revenue_ruling concluded that the investor could recognize neither gain nor loss for the purposes of sec_1001 of the internal_revenue_code with respect to the whole shares received since the investor had not materially altered its ownership position in those shares however to the extent that the investor receives cash in exchange for fractional shares the investor had realized and must recognize gain_or_loss measured by the difference between the amount of cash received and the adjusted_basis in the fractional shares as determined under sec_1011 plr-101636-99 revrul_90_7 did not specifically consider the effect of the reverse transaction an investor exchanging a pool of securities that match in number and type the securities represented by a certain number of certificates of beneficial_interest in an investment_trust for that number of certificates of the investment_trust however since an investor exchanging certificates for securities is considered to have not materially altered its ownership position in the securities an investor exchanging securities for certificates should also be considered to have not materially altered its ownership position in the securities therefore such an investor should be considered to recognize neither gain nor loss with respect to the securities for the purposes of sec_1001 of the code as a result of such exchange conclusion based on all the facts and circumstances presented and the representations made we conclude that initial trust will not be classified as a business_entity under sec_301_7701-2 of the regulations solely because on termination of initial trust the unitholders can direct the distribution agent to invest in the units of subsequent trust by making in-kind contributions after adjustments to subsequent trust a unitholder that receives shares of common_stock due to its election to receive an in-kind distribution of its pro_rata portion of initial trust assets upon a redemption or the termination of initial trust will recognize neither gain nor loss as a result of such distribution with respect to the shares for the purposes of sec_1001 of the code a unitholder that receives cash in lieu of fractional shares of common_stock due to its election to receive an in-kind distribution of its pro_rata portion of initial trust assets upon a redemption or the termination of initial trust will recognize gain_or_loss as a result of such distribution measured by the difference between the amount of cash received and the adjusted_basis in the fractional shares as determined under sec_1011 of the code a unitholder that contributes a pool of securities to initial trust that match in number and type the securities represented by a certain number of units of tnitial trust in exchange for that number of units of initial trust will recognize neither gain nor loss as aresult of such contribution for the purposes of sec_1001 of the code the rulings contained in this letter are based upon information and representations submitted by the sponsor and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of plr-101636-99 the material submitted in support of the request for rulings it is subject_to verification on examination 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 a copy of this letter must be attached to any income_tax return to which it is relevant 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 assistant chief_counsel financial institutions and products senior techniciafi branch reviewer enclosures copy of this letter copy for sec_6110 purposes zee


internal_revenue_service number release date index number -------------------------------------------------- ------------------------------ --------------------- ----------------------------------------- ty -------- department of the treasury washington dc third party communication date of communication month dd yyyy person to contact ---------------------- id no ------------------ telephone number ---------------------- refer reply to cc intl b03 plr-109855-18 date date corp x date date ---------------------------------------------------------------------------------------------- ----------------------------------- ----------------------- ----------------------- dear ----------------- this is in response to your letter dated date requesting a ruling that corp x and its subsidiaries be permitted to change from the fair_market_value_method to the tax book method of asset valuation for purposes of apportioning interest_expense additional information was submitted in a letter dated date the rulings contained in this letter are based upon information and representations submitted by corp x and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination corp x a domestic_corporation is a fiscal_year taxpayer that uses the accrual_method as its overall_method_of_accounting corp x is the common parent of a group of affiliated corporations that files a consolidated u s federal_income_tax return corp x has used the fair_market_value_method of asset valuation since the tax_year beginning date corp x wishes to change to the tax_book_value_method because complying with the fair_market_value_method requirements has resulted in corp x incurring undue administrative burden and significant costs both in terms of professional fees and time spent by corp x personnel plr-109855-18 sec_864 provides that all allocations and apportionments of interest_expense shall be made on the basis of assets rather than gross_income sec_1_861-8 through and temp sec_1_861-8t through 861-13t set forth the rules specific to the allocation and apportionment of interest_expense temp sec_1_861-9t provides that a taxpayer may elect to determine the value of its assets on the basis of either tax book_value or the fair_market_value of its assets temp sec_1_861-8t provides that once a taxpayer uses the fair_market_value_method the taxpayer and all related_persons must continue to use such method unless expressly authorized by the commissioner to change methods based solely on the information submitted and the representations made corp x may use the tax_book_value_method of assets valuation for purposes of apportioning interest_expense pursuant to temp sec_1_861-8t and sec_1_861-9t starting from its tax_year beginning on date and for all subsequent taxable years and for all operative sections including sec_199 and sec_904 of the code pursuant to sec_1_861-8 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 corp x and its subsidiaries 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 sent to your authorized representative a copy of this letter must be attached to any income_tax return to which it is relevant alternatively if corp x files it returns electronically it may satisfy this requirement by attaching a statement to their return that provides the date and control number of the letter_ruling sincerely michael i gilman senior technical reviewer branch office of associate chief_counsel international cc


t c no united_states tax_court peabody natural_resources company f k a hanson natural_resources company cavenham forest industries inc a partner other than the tax_matters_partner petitioner v commissioner of internal revenue respondent docket nos filed date a partnership exchanged operating gold mines including realty for operating coal mines the coal mines were subject_to two coal supply contracts that obligated the mine owner to provide electric utilities with coal the benefits and obligations under the contracts were governed by new mexico law the gold mines were not subject_to supply contracts the partnership treated the entire exchange as tax free under sec_1031 i r c r determined that the coal supply contracts were not real_property and or like- kind property and constituted boot so that the value of the supply contracts would be taxable in the year of the exchange held the coal supply contracts were covenants running with and appurtenant to the real_property under new mexico law held further amplifying the holding in 71_tc_54 the coal supply contracts are like-kind_property within the meaning of sec_1031 i r c and are not taxable as part of the exchange martin d ginsburg alan s kaden and richard a wolfe for petitioner alan m jacobson and donald l wells for respondent opinion gerber chief_judge the parties filed motions for summary judgment1 under rule at docket no with respect to the issue of whether coal supply contracts that burdened coal mine property received by a partnership as part of an exchange under sec_1031 are like-kind_property to the gold mining_property transferred by the partnership background on date peabody natural_resources co a partnership then known as hanson natural_resources co peabody 1respondent filed a cross-motion for partial summary_judgment as his position if correct would not have resolved all controversy between the parties however the partnership’s position if correct would be dispositive of all matters in controversy 2all rule references are to the tax_court rules_of_practice and procedure and all section references unless otherwise indicated are to the internal_revenue_code as amended and in effect for the years in issue transferred the assets of its gold mining business to santa fe pacific mining corp santa fe an unrelated corporation in exchange for the assets of santa fe’s coal mining business the parties to the exchange agreed that the mining assets exchanged by each had a total value of approximately dollar_figure million peabody treated the transaction as a like-kind_exchange under sec_1031 the transfer by peabody to santa fe was of gold mines and other gold mining_property including buildings and other improvements machinery and equipment and mine exploration and development rights in exchange among other things peabody received from santa fe the lee ranch coal mine in new mexico which included fee simple land and coal leases to other land giving the leaseholder rights to the coal in place and assumed all obligations of santa fe under two long-term coal supply contracts entered into in the early 1980s by santa fe with tucson electric power co tepco and western fuels wef respectively the lee ranch was in a remote part of new mexico and consisted of big_number acres of fee simple land and big_number acres of leased coal land during the early 1990s the annual coal output of the lee ranch mine was approximately million to million tons at the time of the date exchange the lee ranch mine contained coal reserves of approximately million tons the gold mines received by santa fe were not burdened by gold supply contracts the tepco supply contract began during in connection with tepco’s bankruptcy however the contract was renegotiated resulting in a coal price reduction from the original contract the renegotiated contract was for a period ending date either party however could extend the contract for additional 5-year periods if the parties were able to negotiate a good_faith price that reflected the then-current market price for coal under the contract santa fe was the exclusive supplier of the coal required for the operation of unit sec_1 and of tepco’s springerville station power plant and tepco was obligated to purchase a specified annual minimum amount of coal there was no maximum limit on the amount of coal that santa fe could sell to tepco under the contract the contract however did contain estimates that the combined requirements of springerville station unit sec_1 and would range from million to dollar_figure million tons per year during the term of the contract the quality of the coal was defined in the contract and the type of coal specified in the contract was the type of coal produced in the lee ranch mine under the contract santa fe committed to use its best efforts to mine the lee ranch mine’s coal reserves and to sell tepco the amount of coal needed for operation of the springerville station power plant the per-ton price of coal under the tepco contract was a base price adjusted by santa fe’s actual mining costs the contract was to run through date or until the retirement of the power station but could be reopened for contract_price renegotiation during date and pincite-year intervals after specifically the contract term was to extend until the earlier of either the date when springerville station unit sec_1 and or were retired from commercial operation or sometime after date if the parties were unsuccessful in their good_faith price renegotiations for any contract extension period during the contract term santa fe was not permitted to sell coal to others if such sales would impair its ability to satisfy the supply contract obligations to tepco the tepco supply contract inured to the benefit of and was binding upon the parties and their respective successors and assigns the original contract allowed each party to assign its rights and duties so long as the assignee or delegatee assumes the rights and duties of the assignor and so long as the assignee or delegatee is capable of performing this agreement the contract also required any assumption by an assignee to be accomplished in a written document entered into with the other parties to the contract the wef supply contract also entered into in was between santa fe and wef a nonprofit cooperative comprising a group of relatively small electric utilities wef in turn would sell the coal to another cooperative plains electric generation transmission cooperative inc plains for use in its escalante power plant although the wef supply contract is primarily between santa fe as the seller and wef as the buyer that supply contract identified plains as the guarantor of wef’s performance under that contract that contract contained the recitation that wef and plains desire to secure a reliable and reasonably priced supply of coal of the quality and quantities as set forth herein for use in the generation of electricity in unit i and potentially in an additional unit ii of the escalante station that contract also contained a price renegotiation provision that took effect in under which wef could terminate the contract if a new long-term coal price were not negotiated on account of wef’s deteriorating financial condition it sought to renegotiate its contract during the pricing provisions were modified resulting in coal price reductions and changes in other contract provisions the renegotiated wef contract ran until date and could be extended for up to three 10-year periods by either party each 10-year extension depended on the parties’ ability to renegotiate and agree to a new coal price which in the parties’ views reflected the then market price for coal santa fe was required to maintain coal reserves adequate to supply the quantity of coal called for under the wef contract the wef contract provided that any party subsequently acquiring an interest in the lee ranch mine coal reserves shall take such interest subject_to the dedication and reservation of said reserves the contract also provided that the dedication was not intended to be construed as a transfer to wef of an interest in the coal in place but that it was imposed as and constituted both an equitable servitude binding upon santa fe and its successors and assigns and a covenant running with santa fe’s interest the contract_price was based on a complex formula that to some extent was based on the variable and fixed costs incurred by lee ranch mine in supplying coal under the contract under the wef contract santa fe was the exclusive supplier of the escalante station’s coal needs within minimum quantity and quality standards on an annual basis with no limit on the amount of coal that could be sold to wef the contract however did contain an estimate of the escalante station’s requirements as being million to million tons per year under the wef contract santa fe had the right to supply all of the usage for each year santa fe could not sell coal from the lee ranch mine to others if doing so would impair its ability to satisfy its coal supply contract obligations to wef the wef contract terms were to be interpreted under the laws of new mexico under the wef contract santa fe would be allowed to supply coal from mines other than lee ranch mine if it were unable to remove coal from lee ranch mine on account of a force majeure the wef supply contract provided that it would inure to the benefit of and be binding upon the parties and their respective successors and assigns peabody and santa fe determined that the mining assets each exchanged had a total value of approximately dollar_figure million in accordance with sec_1_1031_j_-1 income_tax regs peabody separated into exchange groups the assets it transferred and received peabody treated the gold mines coal mine reserves and appurtenant supply contracts as real_property it valued the lee ranch mine coal reserves at dollar_figure million on its income_tax returns for the years in issue peabody treated its exchange of the gold mining assets for coal mining assets as a like-kind_exchange under sec_1031 in the notices of final_partnership_administrative_adjustment for peabody’s taxable years ended date through and its short taxable_year ended date respondent determined that the supply contracts were not like- kind property as to which peabody was entitled to nonrecognition treatment under sec_1031 discussion the focus of this case concerns a sec_1031 like-kind_exchange of gold mines for coal mines respondent acknowledges that the coal mines and gold mines are like-kind_property as to which peabody is entitled to nonrecognition treatment under sec_1031 in petitioner’s motion for summary_judgment and respondent’s cross-motion for partial summary_judgment the parties disagree about whether two coal supply contracts are real_property and or like-kind_property within the meaning of sec_1031 ie whether the coal supply contracts are boot initially we must decide whether the coal supply contracts are considered or treated as real_property under new mexico law we must also decide whether those contracts in the setting of this case constitute like-kind_property within the meaning of sec_1031 summary_judgment is intended to expedite litigation and avoid unnecessary and expensive trial fla peach corp v commissioner 90_tc_678 summary_judgment may be granted with respect to a legal issue if there is no genuine issue as to any material fact and a decision may be rendered as a matter of law rule a and b 119_tc_252 98_tc_518 affd 17_f3d_965 7th cir there is no disagreement between the parties as to a material fact and therefore this matter is ripe for summary_judgment i new mexico law are the supply contracts real_property petitioner argues that the supply contracts are real_property under new mexico law whereas respondent argues the contracts are not real_property but some type of intangible right a petitioner’s arguments petitioner contends that the supply contracts are real_property under new mexico law petitioner asserts that each contract established a servitude under which santa fe and successive owners of the lee ranch mine land have the obligation to mine and supply the coal needed pursuant to that contract to operate the utility’s power plant this servitude petitioner maintains is a real_property interest under new mexico law b respondent’s arguments respondent contends that the supply contracts are not real_property under new mexico law relying on the fact that the contracts did not result in a transfer of ownership of the coal to the buyer utility respondent also points out that under neither contract did the utility have the right to go onto the lee ranch land and extract coal instead respondent contends peabody had to mine and supply the coal required by the utility’s power plant accordingly respondent concludes that the supply contracts are not real_property but contracts to sell personal_property see townsend v state ex rel state highway dept p 2d n m observing that though mineral-in-place interests constitute real_property the underlying minerals are transformed into personal_property when the mineral or physical substance is severed from the land c analysis of coal supply contracts under new mexico law we begin our analysis by noting that the supply contracts are contracts for the sale_of_goods under new mexico law in addition each contract created a servitude obligating santa fe and subsequent owners of the lee ranch mine to extract and supply coal to the power plant we conclude that under new mexico law the supply contract servitudes constitute real_property interests for reasons we will discuss status as contracts for the sale_of_goods minerals in place ie minerals lying unworked beneath or on the surface of the land are considered part of that land and an interest in minerals in place is real_property for purposes of new mexico law interests in minerals in place can be separately conveyed to and held by someone other than the owner of the surface estate after the minerals are severed and removed from the land they become personal_property see generally id pincite c j s mines and minerals sec_141 as pertinent to this case new mexico has adopted section of the uniform commercial code which addresses minerals to be severed from realty by the seller in pertinent part n m stat ann section michie provides sec goods to be severed from realty recording a contract for the sale of minerals or the like including oil_and_gas to be removed from realty is a contract for the sale_of_goods within this article if they are to be severed by the seller but until severance a purported present sale thereof which is not effective as a transfer of an interest in land is effective only as a contract to sell the provisions of this section are subject_to any third party rights provided by the law relating to realty records and the contract for sale may be executed and recorded as a document transferring an interest in land and shall then constitute notice to third parties of the buyer’s rights under the contract for sale accordingly the tepco and wef coal supply contracts are contracts for the sale_of_goods under new mexico law 3n m stat ann sec michie and sec of the uniform commercial code each define a contract for sale to include both a present sale_of_goods and a contract to sell goods in the future even though coal supply contracts are contracts for the sale_of_goods covered by article of the uniform commercial code the obligation of santa fe or its successors to sell unsevered coal in the future may also qualify to be treated as the transfer of an interest in land see n m stat ann sec in other words classification of the two supply contracts as contracts for the sale_of_goods in the future by n m stat ann section does not preclude those contracts from also effecting a transfer of an interest_in_real_property under new mexico law see also restatement contract sec_2d sec_127 cmt b c creation of servitudes the tepco and wef coal supply contracts created servitudes under new mexico law the modern view is that servitudes may be created by contract see cafeteria operators l p v coronado- santa fe associates l p p 2d n m ct app restatement property 3d servitudes sec_2_1 reporter’s note although he disputes that the supply contracts created servitudes under new mexico law respondent acknowledges that the servitudes stemming from the seller’s obligation to mine and supply coal from the lee ranch mine property to the buyer utility involve affirmative covenants see restatement property 3d servitudes sec_1 cmt d illus new mexico law recognizes both real covenants and equitable servitudes e g pollock v ramirez p 2d n m ct app in pollock a restrictive covenant was not enforceable because the instrument creating it did not meet the requirements for recordation in real_property records the court in pollock however noted that the restriction could still be enforced as an equitable servitude assuming the requirements for establishing and enforcing such an equitable servitude were met see id pincite under new mexico law there are three requirements for a covenant to be an equitable servitude the covenant must touch and concern the land the original covenanting 4vol restatement property 3d servitudes sec_1 defines a servitude as a legal device that creates a right or an obligation that runs with land or an interest in land running with land means that the right or obligation passes automatically to successive owners or occupiers of the land or the interest in land with which the right or obligation runs id sec_1 a servitudes covered by the restatement include easements profits and covenants id sec_1 as defined by the restatement an easement creates a nonpossessory right to enter and use land in the possession of another and obligates the possessor not to interfere with the uses authorized by the easement whereas a profit is an easement that confers the right to enter and remove timber minerals oil gas game or other substances from land in possession of another id sec_1 5vol restatement supra sec_1 has dropped the terms real covenant and equitable servitude to describe servitudes encompassed within covenants that run with the land parties must intend that covenant to run with the land and any successor against whom enforcement is sought must have actual constructive or inquiry notice of that covenant lex pro corp v snyder enters inc p 2d n m pollock v ramirez supra pincite in lex pro corp v snyder enters inc n m pincite the new mexico supreme court observed that a covenant touches and concerns the land if either the burden of that covenant renders the covenantor’s interest in land less valuable or the benefit of that covenant renders the covenantee’s interest in land more valuable the new mexico courts have also held that a covenant meets the touch and concern requirement if it calls for either doing physical things to the land such as building a wall or refraining from doing physical things to the land cypress gardens ltd v platt p 2d n m ct app the tepco and wef supply contract obligations of santa fe and its successors to mine and supply coal from the lee ranch mine property do touch and concern that land as to the second requirement that the original covenanting parties intend that the covenant run with the land the wef supply contract specifically expresses an intent to effect a 6although restatement supra sec_3_2 now requires neither the benefit nor the burden of a covenant to touch and concern land in order for the covenant to be valid as a servitude we need not here decide whether this requirement has been superseded under new mexico law dedication of the lee ranch mine coal reserves to fulfilling that contract and to establish a servitude upon santa fe and its successors running with the lee ranch mine property although the tepco supply contract contains no specific provision it provides that the agreement is to inure to the benefit of and be binding upon respective successors to and assigns of the original parties to the tepco contract where the original instrument creating a covenant involving land provided that successors should be bound by the covenant and where only successive owners of the land were capable of performing the obligation pertaining to that covenant that covenant has been held to run with the land 5_f2d_908 8th cir bolles v pecos irr co p n m as to the requirement that the successor against whom enforcement of that covenant is sought have actual constructive or inquiry notice peabody had actual notice of the tepco and wef coal supply contract obligations as it assumed those contracts in addition a memorandum of dedication concerning the wef contract was recorded in with the county clerk for mckinley county new mexico the county in which the lee ranch mine is 7see also restatement supra sec_2 cmt i if the contract calls for a performance that can only be rendered by someone who owns or occupies a particular parcel of land and if it would have little value to the other party if it could be terminated by a conveyance of that land the burden was probably intended to run with the land of the promisor located we hold that the tepco and wef coal supply contracts created servitudes obligating santa fe and successive owners of the lee ranch mine to mine and supply coal to the buyer utility and that those servitudes are real_property interests under new mexico law see restatement property 3d servitudes sec_2_1 cmt b illus ii like-kind status of the supply contracts under sec_1031 a petitioner’s arguments petitioner contends that the real_property status of the supply contracts under new mexico law should be determinative of the like-kind issue ie should automatically qualify the contracts as like-kind_property to the gold mining_property under sec_1031 in support of this argument petitioner among other things relies on this court’s holding in or lumber co v commissioner 20_tc_192 petitioner notes that this court held in or lumber co that the rights to harvest standing timber were personal_property under oregon law and therefore were not like-kind_property to land real_property received in exchange if the status of the supply contracts as real_property is held not in and of itself to be dispositive petitioner alternatively argues the supply contracts are like-kind_property to the gold mining_property because the contracts including potential renewals could have a duration or term lasting or more years petitioner’s argument is based on sec_1 a - c income_tax regs which provides a safe_harbor for a year or greater leasehold of a fee to qualify as like_kind to a fee interest_in_real_property finally petitioner places reliance in 71_tc_54 a case which petitioner contends is indistinguishable from the circumstances we consider here in that case this court held that two parcels of fee simple real_property were like_kind under sec_1031 even though one parcel was subject_to 99-year condominium leases in koch it was reasoned that the leases did not constitute boot because they were not separable from the fee simple real_property interest b respondent’s arguments conversely respondent contends that the fact that the supply contracts are treated as real_property interests under new mexico law does not conclusively establish that they are like_kind to the gold mining_property peabody transferred respondent argues that like_kind status of the supply contracts for purposes of sec_1031 is a question of federal tax law respondent also notes that sec_1031 case precedent does not support the axiom that exchanges of real_property are ipso facto like_kind on this point see koch v commissioner supra pincite- citing 24_tc_818 affd in part and revd in part 241_f2d_78 5th cir affd sub nom 356_us_260 respondent contends that the supply contracts constitute property of a different kind and class and are not like-kind_property to the gold mining_property peabody transferred because the contracts are of an intrinsically different nature and character from gold mining_property see sec_1_1031_a_-1 income_tax regs finally respondent argues that koch is distinguishable from and inapplicable to this case because the condominium leases in koch were 99-year long-term land leases whereas the coal supply contracts we consider are only interests in coal to be removed from the ground respondent also attempts to distinguish koch where condominium leaseholders had the primary right directly to use the land from this case where the coal buyers have no direct and substantially_similar right to use the lee ranch mine land c analysis we agree with respondent that exchanges of real_property interests are not ipso facto like-kind_exchanges under sec_1031 koch v commissioner supra pincite see also smalley v 8we note that respondent does not carry this reasoning into the question of whether the lee ranch mine land in fee and coal leases is like-kind_property to the two gold mine properties received in exchange commissioner 116_tc_450 for example carved- out oil payments although characterized as real_property under state law were found not to be like_kind to a fee interest in real_estate fleming v commissioner supra pincite see also 228_fsupp2d_1080 d ariz where 50-year water rights were not like_kind to a fee interest in real_estate and clemente inc v commissioner tcmemo_1985_367 where an 8-acre parcel of land was not like_kind to gravel extraction rights in another parcel of land to decide whether an exchange is like_kind within the meaning of sec_1031 we must compare the exchanged properties to ascertain whether the nature and character of the transferred rights in and to the respective properties are substantially alike koch v commissioner supra pincite sec_1_1031_a_-1 income_tax regs see generally the discussion in smalley v commissioner supra pincite we conclude that the real_property interest status under new mexico law of the tepco and wef supply contracts is not determinative of whether those supply contracts constitute like-kind_property as opposed to boot under sec_1031 see koch v commissioner supra pincite in making this comparison consideration is to be given to the respective interests in the physical properties the nature of the title conveyed the rights of the parties the duration of the interests and any other factor bearing on the nature or character of the properties as distinguished from their grade or quality id sec_1_1031_a_-1 income_tax regs in 122_f2d_181 5th cir affg 42_bta_490 the court_of_appeals for the fifth circuit held that the exchange of an overriding_royalty interest in minerals for a city lot qualified as a like-kind_exchange see also rev_rul 1968_1_cb_352 in which it was ruled that the exchange of an oil producing lease for a fee simple title to a ranch qualified as a like-kind_exchange conversely in fleming v commissioner t c pincite we held that the exchange of an assignment of carved-out_oil_payment rights for a fee interest in real_estate failed to qualify because they were not like-kind properties even though applicable state law characterized the oil_payment rights as an interest in real_estate in koch v commissioner t c pincite we reconciled the difference in the holdings of crichton and fleming as follows the main distinction between the two transactions is the duration of the interests--an overriding_royalty interest continues until the mineral deposit is exhausted whereas a carved-out_oil_payment right terminates usually when a specified quantity of minerals has been produced or a stated amount of proceeds from the sale of minerals has been received petitioner attempts to distinguish the coal supply contracts here from the carved-out_production_payment rights in fleming on the basis that the supply contracts are more extensive in scope and duration petitioner argues that the contracts involve essentially perpetual and unlimited rights and meet the year-leasehold safe_harbor of sec_1_1031_a_-1 income_tax regs because each contract with renewals had or more years to run at the time of the exchange peabody’s right to mine and extract coal from the lee ranch mine land derives solely from its ownership of the land in fee and the coal leases making up that coal mine property not from the tepco and wef contracts as previously discussed the supply contracts created servitudes obligating peabody to mine and supply coal from the lee ranch mine to the utility buyers pursuant to those contracts those contracts themselves however did not give peabody the right to mine coal from the lee ranch land the supply contracts obligate each utility buyer to pay a specified price for lee ranch mine coal in other words the contracts afford peabody specified_payment rights with respect to the coal supplied in that respect peabody’s supply contract payment rights are incident to derive almost exclusively from and cannot be separated from its ownership of the lee ranch mine land it is peabody’s ownership of that mine’s coal reserves that gives peabody the right to mine and extract coal from the lee ranch mine land in addition unlike the overriding_royalty interests in crichton peabody’s supply contract payment rights do not necessarily last until coal on the lee ranch mine land has been exhausted without optional renewals the tepco supply contract lasts until date and the wef supply contract lasts until date see eg clemente v commissioner tcmemo_1985_367 where exchanged properties were held not to be like_kind because the gravel extraction right the taxpayer received did not give that taxpayer the right to an unlimited quantity of gravel by contrast in revrul_55_749 1955_2_cb_295 the exchange of fee land for perpetual water rights was ruled to be qualified as like kinddollar_figure 9in his declaration the lee ranch mine’s controller stated that to the best of his knowledge all coal ever supplied under the tepco and wef supply contracts has come from the lee ranch mine in certain limited and or remote circumstances each contract would permit the seller to furnish substitute coal from a source other than the lee ranch mine for instance the seller under the tepco contract commits to use its best efforts to mine and supply to tepco such coal as is needed for operation of the springerville station from the lee ranch mine’s coal reserves the tepco contract however provides that from time to time the seller may substitute coal from other mines owned by the seller so long as the substituted coal delivered satisfies prescribed quality requirements and does not cost more than coal then being delivered to the springerville station from the lee ranch mine similarly during an event of force majeure the wef supply contract would permit the seller with the buyer’s consent to deliver substitute coal ie coal obtained from a source other than the lee ranch mine to the escalante station 10in revrul_55_749 1955_2_cb_295 the rationale for the ruling included the following continued however peabody seeks to come within the safe_harbor of sec_1_1031_a_-1 income_tax regs by relying on the renewal terms of the supply contract that might cause the contracts to last years or moredollar_figure in 15_tc_581 affd 192_f2d_155 8th cir we indicated that subsequent 10-year periods were added to the initial term of a 25-year lease to meet the requirements of a leasehold for years or more under the treasury regulation safe_harbor see also revrul_78_72 1978_ 1_cb_258 which would allow the addition of optional renewal periods to determine if a leasehold interest was for years or more continued where the water right whatever its size is in perpetuity as distinguished from a right to a specific total amount of water or to a specific amount of water for a limited period the water rights and the land involved are regarded as sufficiently similar to constitute property of a like_kind within the meaning of sec_1031 of the code 11we previously have indicated that a short-term leasehold of real_property is not equivalent to a fee interest for purposes of sec_1031 65_tc_162 16_tc_547 15_tc_41 as we observed in 116_tc_450 ndollar_figure this characterization of short- term leasehold interests derives not from any particular state law characterization but from negative implication of longstanding regulations which provide that an exchange of a year lease for a fee interest qualifies as a like-kind_exchange under sec_1031 contrary to petitioner’s argument the supply contract payment rights are not a leasehold interest in a fee property as previously held peabody’s right to mine and extract coal from that land comes solely from ownership of the coal mine we therefore conclude that the 30-year safe_harbor provisions of sec_1_1031_a_-1 income_tax regs do not apply see wiechens v united_states f_supp 2d pincite where it was held that a taxpayer’s 50-year water rights were not equivalent to a leasehold of a fee for years or more so as to qualify for the regulation safe_harbor the underlying rationale for allowing nonrecognition_of_gain_or_loss under sec_1031 is the concept that a taxpayer’s economic situation following the exchange is essentially the same as it had been before the transaction this is expressed in the following quote from the committee report underlying the predecessor statute to sec_1031 if the taxpayer’s money is still tied up in the same kind of property as that in which it was originally invested he is not allowed to compute and deduct his theoretical loss on the exchange nor is he charged with a tax upon his theoretical profit h rept 73d cong 2d sess c b part see also 69_tc_905 affd 632_f2d_1171 5th cir the underpinning supporting sec_1031 is that the new property is substantially a continuation of the old investment which remains unliquidated commissioner v p g lake inc u s pincite in determining whether the like-kind requirement of sec_1031 had been met we found it significant in koch v commissioner t c pincite that sec_1031 refers to property of a like not an identical kind the required comparison of the old and new exchanged properties we reasoned should be directed to whether the taxpayer in making the exchange has used its property to acquire a new kind of asset or has merely exchanged its property for an asset of like nature or character id examining the exchanged properties in koch with those principles in mind we held the taxpayer’s exchange of fee simple land for other fee simple land subject_to 99-year condominium leases qualified for nonrecognition treatment under sec_1031 because those exchanged properties were property of a like_kind id pincite in koch we rejected the commissioner’s contention that the taxpayer lessor’s interests primarily the right to condominium rental payments could be separated from the taxpayer’s fee simple interest in that land we observed that the taxpayer’s right to rent was not a separate and distinct item of property but part of the bundle of rights incident to ownership of the fee the bundle of rights and its related obligations were inextricably bound up with the fee simple interest the condominium leases contained numerous provisions some of which we briefly summarized in our findings in koch not only securing the payment of rent but also protecting the value of the taxpayer’s reversionary_interest and the right to rent was merely an incident_of_ownership of the fee simple interest id pincite we also acknowledged that the 99-year condominium leases prevented the taxpayer from taking physical possession of the land received and using it for other purposes we viewed that leasehold restriction on the taxpayer’s use of the new land as a distinction in the grade or quality of the exchanged old and new properties as opposed to a difference in their kind or class we observed that sec_1031 ‘was not intended to draw any distinction between parcels of real_property however dissimilar they may be in location in attributes and in capacities for profitable use ’ koch v commissioner t c pincite quoting commissioner v crichton f 2d pincite dollar_figure finally in koch v commissioner supra pincite we held that the value of the taxpayer’s condominium lease interests did not constitute taxable sec_1_1031_a_-1 income_tax regs contains the explanation that the like-kind requirement concerns the nature or character of property and not its grade or quality as we observed in commissioner v 42_bta_490 affd 122_f2d_181 5th cir substantially_similar interpretations of the term like_kind have appeared in all applicable regulations beginning with those issued under the revenue act of other_property or boot under sec_1031 because the lessor’s fee simple interest cannot be so fragmented in return for the gold mining_property peabody among other things received the lee ranch coal mine which was subject_to two coal supply contracts respondent acknowledges that the lee ranch mine consisting of fee simple land and coal leases is like_kind to the gold mining_property and qualifies for nonrecognition treatment under sec_1031dollar_figure respondent however contends this case is distinguishable from koch respondent argues that the coal supply contracts are separable from the lee ranch mine and constitute taxable other_property or boot under sec_1031 in other words respondent argues those two supply contracts can be fragmented and are not inextricably bound up with peabody’s ownership of the lee ranch mine’s coal reserves we disagree although each supply contract is also a contract for the sale_of_goods under new mexico law and does not give the utility buyer a right to extract coal from the lee ranch mine land in the context of this case we do not find those distinctions to be significant nor to sufficiently distinguish this case from koch peabody’s right to mine and extract coal 13apparently respondent does not dispute that the exchange of leasehold for fee interest here is all right in addition peabody’s right to mine and extract coal from the lee ranch mine is obviously substantially alike to the right to mine and extract gold from the two gold mines from the lee ranch mine land and its supply contracts payment rights for the coal cannot be separated from its ownership of the lee ranch mine coal reserves those rights are part of the bundle of rights incident to peabody’s ownership of the lee ranch mine land coal reserves indeed those supply contracts give peabody no right to mine and extract coal from that land instead peabody’s right to mine and extract coal from that land comes solely from its ownership of that land and coal reserves as to the right to payment under the contracts for coal furnished those rights are ancillary to peabody’s ownership of the coal reserves accordingly the question of whether the supply contracts afford an advantageous or detrimental coal price to peabody is immaterial in that setting see koch v commissioner t c pincite because we hold that the right to receive income from the tenant is part of the bundle of rights ancillary to and inherent in the ownership of the realty the question of whether the lease was advantageous or detrimental to the fee owner is immaterial it is true peabody is obligated to mine and supply coal to meet the operating needs of power stations and that peabody is prohibited from impairing the contracted-for supply by selling coal to other buyers in our view those contract obligations and restrictions constitute a distinction in the grade or quality of the old and new mining properties rather than a difference in their kind or class the new coal mine property is of a like nature or character to the gold mining_property peabody exchanged by exchanging the gold mining_property for the coal mining_property subject_to the supply contracts peabody is essentially continuing the original investment which remains fully unliquidated see commissioner v p g lake inc u s pincite respondent contrary to our holding in koch is attempting to fragment and currently tax peabody on the supply contracts before their actual realization we hold that the coal mine subject_to the tepco and wef supply contracts peabody received is like_kind to the gold mining_property transferred and that peabody’s exchange qualifies for nonrecognition treatment under sec_1031 see 71_tc_54 in the light of that holding and because the supply contracts cannot be separated from peabody’s ownership of the lee ranch mine coal reserves it follows that those contracts are not taxable as other_property or boot under sec_1031 see id d conclusion on the basis of the forgoing we conclude as a matter of law that petitioner is entitled to summary_judgment and respondent is not so entitled an appropriate order will be issued at docket nos and reporter’s note this opinion was modified by order dated date


department of the treasury internal_revenue_service washington d c tax exempt and government entities uics feb - legend decedent taxpayer a plan x ira y date date date date date date date date month month company l company m state u t ep a’ cat t page dear this is in response to your request for letter_ruling dated submitted on your behalf by your authorized representative as supplemented by correspondence received by the internal_revenue_service on during in which you ask for a series of letter rulings dealing with -dated the consequences under sec_401 of the internal_revenue_code of the the following facts and representations support below-described transaction your ruling_request and by an e-mail on decedent whose date of birth was date died on date a resident of state u not having attained age decedent was not married at taxpayer a who survived decedent and who was alive as of the his death date of this ruling_request was appointed the sole personal representative of decedent’s estate on or about date during his life decedent was a participant in plan x sponsored by company l company l administers plan x on or about date decedent named taxpayer a the sole primary beneficiary of his interest in plan x on or about date the shareholders and directors of company l resolved to terminate plan x effective date it has been represented that plan x has been terminated and all assets in its related trust other than decedent's interest have been distributed to affected plan x participants said distributions occurred no later than the end of month during month because of plan x’s planned termination decedent decided to roll over his interest in plan x into ira y an individual_retirement_account ira set up and maintained in his name with company m on date decedent named taxpayer a the sole beneficiary of his ira y on date decedent completed a plan x termination distribution form on which he selected the direct_rollover option and named ira y maintained with company m as the eligible_retirement_plan to receive a distribution of his plan x balance decedent's date of death date occurred days after date the direct_rollover of decedent’s plan x account balance into ira y was not accomplished during said day period and has not been accomplished either as of the date of this ruling_request or as of the date of this ruling letter page sections dollar_figure and dollar_figure of plan x contain language intending to comply with the requirements of code sec_401 and the regulations promulgated thereunder in relevant part section dollar_figure of plan x provides that _ information in connection with an eligible_rollover_distribution shall include the right to have the funds transferred directly to another qualified_plan or individual_retirement_account it has been represented that plan x will be amended to comply with section of the pension_protection_act of publaw_109_280 ppa-2006 consistent with the guidance found in notice_2007_7 2007_5_irb_395 and that such plan x amendment will not be given retroactive effect furthermore the above-referenced transfer from plan x to ira y will occur subsequent to the effective date of the plan x amendment said plan x amendment and transfer will occur no later than date it is contemplated that company l as plan x administrator will directly transfer decedent's interest in plan x except for the calendar_year and calendar_year code sec_401 minimum_required_distribution see below into ira y as re-titled said transfer will occur no later than date taxpayer a the named beneficiary of decedent's ira y will then begin to receive minimum required distributions from said ira y with respect to the amounts directly transferred from plan x calculated using her remaining single life expectancy beginning no later than date it is also been represented that taxpayer a began to receive minimum required distributions from said ira y with respect to amounts standing in ira y at decedent’s death no later than date it has been represented that a distribution in an amount sufficient to satisfy the requirements of code sec_401 was made from decedent's plan x interest with respect to the calendar_year it has also been represented that the ira into which decedent's plan x interest will be transferred ira y will be re-titled as follows taxpayer a as beneficiary of decedent deceased ’ based on the above facts and representations you through your authorized representative request the following letter rulings that taxpayer a as the sole named beneficiary of decedent’s interest in plan x and as the sole administratrix of his estate may directly transfer by means of a trustee-to-trustee-transfer decedent's remaining interest in plan x into the above referenced re-titled ira y page with said transfer occurring no later than date said transfer is authorized by section of the pension_protection_act of ppa-2006 that taxpayer a may receive minimum required distributions from said re-titled ira y calculated using her remaining single life expectancy with respect to amounts standing in ira y at decedent's death said required distributions must have begun no later than date with respect to amounts directly rolled over from plan x to ira y re-titled during calendar_year said required distributions must begin no later than date that the re-titling of ira y referenced above is consistent with section of the ppa-2006 and that the re-titled ira y will constitute an inherited ira as that term is used in section of the ppa-2006 furthermore required distributions from the re-titled ira y must be made in accordance with the rules of code sec_401 with respect to your ruling requests sec_401 of the internal_revenue_code provides certain requirements applicable to qualified_retirement_plans code sec_402 provides the rules governing the taxation of distributions received from the tax-qualified trust associated with a plan qualified within the meaning of code sec_401 sec_402 of the code provides that except as otherwise provided in sec_402 any amount actually paid or distributed from a_trust described in sec_401 which is tax exempt under sec_501 shall be taxed to the distributee in the taxable_year of the distributee in which distributed in the manner provided under sec_72 relating to annuities sec_402 of the code provides generally that if any portion of an eligible_rollover_distribution from a sec_401 of the code qualified_retirement_plan is transferred into an eligible_retirement_plan the portion of the distribution so transferred shall not be includible in gross_income in the taxable_year in which paid sec_402 of the code provides that the maximum amount of an eligible_rollover_distribution to which paragraph applies shall not exceed the portion of such distribution which is includible in gross_income determined page without regard to paragraph but states that this maximum limitation does not apply to a distribution transferred to an eligible_retirement_plan described in clause i or ii of sec_402 sec_402 of the code defines eligible_rollover_distribution as any distribution to an employee of all or any portion of the balance_to_the_credit of an employee in a qualified_trust except the following distributions a any distribution which is one of a series of substantially_equal_periodic_payments not less frequently than annually made -- i for the life or life expectancy of the employee or the joint lives or joint life expectancies of the employee and the employee's designated_beneficiary or ii for a period of years or more b any distribution to the extent the distribution is required under sec_401 and - c any distribution which is made upon the hardship of the employee sec_402 of the code defines eligible_retirement_plan as i an individual_retirement_account described in sec_408 ii an individual_retirement_annuity described in sec_408 other than an endowment_contract iii a sec_401 of the code qualified_retirement_plan iv an annuity plan described in sec_403 v an eligible_deferred_compensation_plan described in sec_457 which is maintained by an eligible_employer described in sec_457 a and vi an annuity_contract described in sec_403 sec_402 of the code provides generally that except as provided in subparagraph b sec_402 shall not apply to any transfer of a distribution made after the 60th day following the day on which the distributee received the property distributed section a of the ppa-2006 provides that code sec_402 is amended by adding the following new paragraph distribution to inherited individual_retirement_plan of nonspouse beneficiary- page a in general -lf with respect to any portion of a distribution from an eligible_retirement_plan of a deceased employee a direct trustee-to-trustee transfer is made to an individual_retirement_plan described in clause i or ii of paragraph b established for the purposes of receiving the distribution on behalf of an individual who is a designated_beneficiary as defined by sec_401 of the employee and who is not the surviving_spouse of the employee- i ii iii the transfer shall be treated as an eligible_rollover_distribution for purposes of this subsection the individual_retirement_plan shall be treated as an inherited retirement account or individual_retirement_annuity within the meaning of sec_408 for purposes of this title and sec_401 other than clause iv thereof shall apply to such plan b certain trusts treated as beneficiaries-for purposes of this paragraph to the extent provided in rules prescribed by the secretary a_trust maintained for the benefit of one or more designated beneficiaries shall be treated in the same manner as a_trust designated_beneficiary section b of the ppa-2006 provides that the amendments made by this section shall apply to distributions after date notice_2007_7 released on date in questions and answer sec_41 to provides guidance with respect to section of the ppa-2006 and code sec_402 in this regard q a-15 of notice_2007_7 provides that the direct_rollover of a distribution by a nonspouse beneficiary is an eligible_rollover_distribution only for purposes of code sec_402 accordingly the distribution is not subject_to the direct_rollover requirements of code sec_401 q a-15 also provides that if an amount distributed from a plan is received by a nonspouse beneficiary the distribution is not eligible for rollover q a-19 of notice_2007_7 provides in pertinent part that the rules for determining the required minimum distributions under the plan with respect to the nonspouse beneficiary also apply under the ira if the life_expectancy_rule applied to the nonspouse designated_beneficiary under the plan the required_minimum_distribution under the ira must be determined using the same applicable distribution period as would have been used under the plan if the direct_rollover had not occurred page 2uvu717 sec_408 defines inherited ira as an ira maintained for the benefit of an individual who acquired said ira by reason of the death of another individual in the case where said acquiring individual is not the surviving_spouse of the deceased code sec_401 in general sets down the rules governing minimum required distributions from retirement plans qualified within the meaning of code sec_401 code sec_401 provides in short that distributions to a qualified_plan participant must begin no later than april of the calendar_year following the later of- the calendar_year in which the employee attains age or il the calendar_year in which the employee retires subclause ii of clause i does not apply to a 5-percent_owner as that term is defined in code sec_416 sec_408 of the code provides that under regulations prescribed by the secretary rules similar to the rules of sec_401 and the incidental death_benefit requirements of sec_401 shall apply to the distribution of the entire_interest of an individual for whose benefit the ira trust is maintained code sec_401 provides that with respect to an employee plan participant who dies prior to his required_beginning_date as that term is defined in code sec_401 distributions of that employee’s entire_interest under a plan must be made within years of the employee’s death code sec_401 provides an exception to the 5-year rule above with respect to distributions made to or for the benefit of a designated_beneficiary as long as said distributions begin not later than year after the death of the employee and as long as said distributions are made over the life of the beneficiary or over a period not extending beyond the life expectancy of such beneficiary sec_401 of the code provides that the term designated_beneficiary means any individual designated as a beneficiary by the employee final and temporary income_tax regulations under sec_401 and sec_408 were published in the federal_register pincite federal_register date final regulations also see 2002_19_irb_852 the preamble to the final regulations provides in relevant date part that the regulations apply for purposes of determining required minimum distributions for calendar years beginning on or after date page in addition the final regulations have been modified in part see r b date the modification to the final regulations may also be relied upon with respect to required distributions for the and subsequent calendar years sec_1_401_a_9_-3 of the final regulations q a-3 provides in relevant part that in order to satisfy the exception in code sec_401 to the 5-year rule_of code sec_401 with respect to a non-spouse beneficiary distributions must begin no later than the end of the calendar_year immediately following the calendar_year of the employee’s death sec_1_401_a_9_-4 of the final regulations q8 a-3 provides that only individuals may be designated beneficiaries for purposes of sec_401 a person who is not an individual such as the employee's estate may not be a designated_beneficiary ‘ sec_1_401_a_9_-4 of the final regulations q a-4 a provides that an individual must be a beneficiary as of the date of death of a plan participant in order to be treated as a designated_beneficiary furthermore in general a plan participant's designated_beneficiary will be determined based on the beneficiaries designated as of the date of death who remain beneficiaries as of september of the calendar_year following the calendar_year of the employee's death sec_1_401_a_9_-4 of the final regulations q a-4 c provides in general that for purposes of this a-4 an individual who is a beneficiary as of a plan participant’s death but who dies prior to september of the calendar_year following the calendar_year of the plan participant's death is still to be treated as the designated_beneficiary for purposes of computing minimum required distributions after the employee's plan participant’s death sec_1_401_a_9_-5 of the final regulations q a-5 b provides in general that if an employee dies prior to his required_beginning_date having designated a beneficiary in order to satisfy the requirements of code sec_401 the applicable distribution period for distribution calendar years after the distribution calendar_year containing the employee's date of death is the remaining life expectancy of the employee’s designated_beneficiary determined in accordance with either paragraph c or paragraph c of this a-5 sec_1_401_a_9_-5 of the final regulations q a-5 c provides in general that with respect to a non-spouse beneficiary the applicable distribution period measured by the beneficiary’s remaining life expectancy is determined using the beneficiary's age as of the beneficiary's birthday in the calendar_year page immediately following the calendar_year of the employee’s death subsequent calendar years the applicable distribution period is reduced by one for each calendar_year that has elapsed after the calendar_year immediately following the calendar_year of death in sec_1_401_a_9_-9 of the final regulations q a-1 sets forth the single life table used to compute the life expectancy of an individual with respect to your ruling requests prior to his death decedent signed paperwork with company l the administrator of plan x intended to accomplish a direct_rollover of his plan x interest into ira y a pre-existing ira due to decedent's death company l did not follow decedent's instructions however during calendar_year decedent's plan x account will be transferred by means of a trustee-to-trustee transfer into ira y re-titled to reflect decedent's death and to reflect taxpayer a ‘s status as named beneficiary of said re-titled it has been represented that taxpayer a will timely receive code section ira y a required distributions based on her remaining life expectancy from said ira y additionally we note that if company l does transfer decedent's ira x balance less the calendar_year and the calendar_year minimum required distributions into ira y as represented said ira y will be payable to taxpayer a decedent's named designated_beneficiary taxpayer a was decedent's designated_beneficiary as that term is defined in code sec_401 with respect to his plan x interest and she was named the beneficiary of ira y by decedent prior to his death furthermore taxpayer a survived decedent and was not married to decedent at his death thus with respect to your ruling requests we conclude as follows that taxpayer a as the sole named beneficiary of decedent's interest in plan x may transfer by means of a trustee-to-trustee-transfer decedent’s remaining interest in plan x into the above referenced re- titled ira y with said transfer occurring no later than date said transfer is authorized by section of the ppa-2006 that taxpayer a may receive minimum required distributions from said re-titled ira y calculated using her remaining single life expectancy with respect to amounts standing in ira y at decedent's death said required distributions must have begun no later than date with respect to amounts directly rolled over from page plan x to ira y during calendar_year said required distributions must begin no later than date that the re-titling of ira y referenced above is consistent with section of the ppa-2006 and that the re-titled ira y will constitute an inherited ira as that term is used in section of the ppa-2006 furthermore required distributions from the re-titled ira y must be made in accordance with the rules of code sec_401 this ruling letter assumes that plan x and the re-titled ira y either are or will be as represented qualified within the meaning of code sec_401 and code sec_408 respectively and will remain so qualified at all times relevant thereto additionally it assumes the correctness of all facts and representations contained therein this letter is directed only to the taxpayer that requested it and is based solely on the representations made with respect thereto 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 the service a copy of this letter_ruling is being sent to your authorized representative any questions regarding this letter_ruling should be addressed to esquire id phone-not a toll-free at number or fax employee_plans vechnical group enclosures deleted copy of ruling letter notice of intention to disclose