internal_revenue_service number release date index number ------------------------------ ------------------------------------------------------ -------------------------------- ---------------------------------------- --------------------------------------- in re -------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact -------------------------- id no ---------------- ----------------- telephone number ---------------------- refer reply to cc corp bo1 plr-136912-13 date date distributing --------------------------------- -------------------------------------------------------------------- ------------------------------------------------------------ controlled -------------------------------------------------------------------- ------------------------------------------------------------ ----------------------------- sub ------------------------------------------ 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--------------------------------------- ------------------------ llc ---------------------------------------------------------------------------------- ------------------------------------- ------------------------ llc ----------------------------- plr-136912-13 ---------------------------------------------------------------------------------- ------------------------ llc ---------------------------------------------------------------------------------- ---------------------------------- ------------------------ llc ---------------------------------------------------------------------------------- ----------------------------- ---------------------------------- llc ---------------------------------------------------------------------------------- ----------------------------- ---------------------------------- shareholder a shareholder b shareholder c shareholder d shareholder e shareholder f shareholder g shareholder h shareholder i business a business b business c --------------- -------------------------------- ---------------------------------------- -------------------------------------- --------------------------- ----------------------------- -------------------- --------------------------------- ---------------------------------- --------------------------------------------------------------------------------- ------------------------------------------------------------------------------ --------------------------------------------------------------------------------- -------------------------------------------------------------- --------------------------------------------------------------------------------- -------------------------------------- plr-136912-13 business d -------------------------------------------------------------------------------- --------------------------------------------------------------------------------- ----------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------- state a state b state c -------------- ----------- --------------- business c asset --------------- type a b c d e f g date date date debt debt ------------ ---- -- ---- ---------------- ---- -- -- -------------------------- --------------------------- ----------------- --------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------ ------------------------------------------------- --------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------ -------------------------------------- plr-136912-13 debt debt --------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------ --------------------------------------------- -------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------ ------------------------------------- debt --------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------- period -------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------------- dear ---------------- this letter responds to your letter dated date requesting rulings on certain federal_income_tax consequences of a series of proposed transactions additional information was submitted in letters dated date date and date the material information is summarized below the rulings contained in this letter are based on facts and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by the appropriate party this office has not verified any of the materials submitted in support of the request for rulings verification of the information representations and other data may be required as part of the audit process in particular this office has not reviewed any information pertaining to and has made no determination regarding whether the distribution as defined in the proposed transactions below at step viii i satisfies the business_purpose requirement of sec_1_355-2 of the income_tax regulations ii is used principally as a device for the distribution of the earnings_and_profits of distributing controlled or both see sec_355 of the internal_revenue_code and sec_1_355-2 or iii is part of a plan or series of related transactions pursuant to which one or more persons will acquire directly or indirectly stock representing a 50-percent_or_greater_interest in distributing or controlled see sec_355 and sec_1_355-7 summary of facts plr-136912-13 distributing a state a corporation is the common parent of an affiliated_group whose includible corporations join in filing a consolidated federal_income_tax return distributing’s single outstanding class of stock is common_stock the distributing common_stock which is widely held and publicly traded based on publicly available information filed with the securities_and_exchange_commission each of shareholder a shareholder b and shareholder c beneficially held five percent or more of the distributing common_stock as of date unless otherwise stated each entity described below is a state b entity and is treated as a corporation for federal_income_tax purposes distributing owns all of the stock or interests in each of sub through sub each of which owns one or more business c assets and is referred to as a business c company sub sec_1 through and sub sec_56 through are state b limited_liability companies that have elected under sec_301_7701-3 of the procedure and administration regulations to be treated as corporations for federal_income_tax purposes and sub is a state b corporation distributing also owns all of the stock of each of sub sub and sub which are state b corporations sub owns all of the stock of sub sub owns all of the stock of sub sub owns all of the stock of sub sub sub and sub are state b corporations controlled is a state c_corporation that was recently formed as part of the proposed transactions described in the following part below all of the outstanding common_stock of controlled the controlled common_stock will be owned by distributing at the time of the distribution no other class of controlled stock will be outstanding distributing and the members of its separate_affiliated_group as defined in sec_355 the dsag engage directly in business a and business b financial information has been submitted indicating that business a and business b as conducted by the dsag have had gross_receipts and operating_expenses representing the conduct_of_a_trade_or_business for each of the past five years controlled and the members of its separate_affiliated_group as defined in sec_355 the csag will as a result of the proposed transactions engage directly in business d which is part of business b engaged in by the dsag business d has been acquired in taxable transactions during period financial information has been submitted indicating that business d has had gross_receipts and operating_expenses representing the conduct_of_a_trade_or_business for each of the past five years following the distribution distributing anticipates that there will be one overlapping director between distributing and controlled who will serve for a transitional period of no longer than a months in addition in connection with the proposed transactions distributing and controlled expect to enter into i a separation and distribution agreement ii a tax_sharing_agreement iii an employee matters plr-136912-13 agreement and iv an agreement providing for certain customary transitional services collectively the continuing agreements the continuing agreements will include certain provisions that may require distributing or controlled to make payments under such agreements regarding liabilities indemnities or other obligations that i have arisen or will arise with respect to a taxable_period ending on or before the date of the distribution or for a taxable_period beginning on or before and ending after the date of the distribution and ii will not become fixed or determinable until after the distribution the post-distribution payments as part of the proposed transactions and following the distribution controlled will declare and distribute a combination of cash and controlled common_stock in an amount sufficient to purge all of its earnings_and_profits accumulated in taxable years prior to its first taxable_year as a reit the purging distribution each shareholder of controlled will be permitted to elect to receive the shareholder’s entire entitlement under the purging distribution declaration in either money or controlled common_stock of equivalent value subject_to a limitation on the amount of money to be distributed in the aggregate to all controlled shareholders the cash limitation the cash limitation will in no event be less than percent of the purging distribution declaration without regard to any cash that may be paid in lieu of fractional shares if too many shareholders elect to receive money each such electing shareholder will receive a pro_rata amount of money corresponding to the shareholder’s respective entitlement under the purging distribution declaration but in no event will any such electing shareholder receive in money less than percent of the shareholder’s entire entitlement the calculation of the number of shares to be received by any shareholder will be determined as close as practicable to the payment_date of the purging distribution based upon a formula utilizing market prices that is designed to equate in value the number of shares to be received with the amount of money that could be received instead it is expected that controlled’ s charter after the distribution will have ownership limitations and that the stock distributed to a shareholder pursuant to the purging distribution will be subject_to such ownership limitations proposed transactions for what are represented to be valid business purposes distributing proposes to effect the distribution as defined in step viii the following steps will be undertaken collectively the proposed transactions to implement the distribution i sub sec_1 through and sub sec_56 through will each elect to be treated as an entity that is disregarded as separate from its owner for federal_income_tax purposes under sec_301_7701-3 collectively the business c company liquidations and sub will convert under state b law from a corporation to a limited_liability_company the business c company conversion immediately thereafter all intercompany obligations plr-136912-13 ii iii iv v vi between sub through sub on the one hand and distributing on the other hand will be canceled no election will be made to treat any of the above limited_liability companies as a corporation for federal_income_tax purposes sub sub and sub will each convert under state b law from a corporation to a limited_liability_company llc llc and llc respectively and such conversions collectively the lower-tier conversions no election will be made to treat any of the resulting limited_liability companies as a corporation for federal_income_tax purposes sub sub and sub will each convert under state b law from a corporation to a limited_liability_company llc llc and llc respectively and together with the lower-tier conversions and the business c company conversion the conversions no election will be made to treat any of the resulting limited_liability companies as a corporation for federal_income_tax purposes llc will distribute all of the outstanding membership interests in llc to distributing llc will contribute all of its assets used in business b to newly-formed llc llc will distribute all of the outstanding interests in llc to llc and llc will distribute such interests to distributing and llc will contribute all of its assets used in business b to newly- formed llc llc will distribute all of the outstanding interests in llc to llc and llc will distribute such interests to distributing llc llc and llc are referred to collectively as the business d companies distributing will transfer to controlled all of the outstanding membership interests in the business c companies and the business d companies in exchange for controlled common_stock the assumption of certain liabilities of distributing and a portion of the proceeds from the borrowing described in step vii below collectively the contribution controlled will form a state a limited_liability_company gp and contribute thereto a portion of the business c companies and the business d companies controlled and gp will then form a state a limited_partnership partnership and contribute thereto the business c companies and business d companies in exchange for partnership interests and the assumption of certain liabilities associated with business c gp and controlled will hold a b-percent general_partner interest and a c-percent limited_partner interest respectively in plr-136912-13 partnership to avoid the inconvenience and expense of multiple transfers controlled and gp will cause distributing to transfer directly to partnership the business c companies and the business d companies vii partnership and or one or more of the business c companies will borrow up to dollar_figured through a combination of i an issuance of new senior unsecured notes to unrelated creditors and ii drawing down on a new or existing credit facility and will distribute at least e of the total_proceeds to controlled which will distribute such proceeds to distributing such distributed proceeds the proceeds distributing will use the proceeds to i pay up to f regular quarterly dividends ii satisfy third-party bank debt issued independently of the proposed transactions and iii pay third-party trade payables that have or will have arisen both in the ordinary course of business and before the distribution of controlled described in step viii none of the third-party bank debt or the trade payables will have been incurred as a result of or in connection with the proposed transactions distributing at all times will keep the proceeds in a segregated account viii distributing will distribute all of the issued and outstanding controlled common_stock pro_rata to distributing’s shareholders the distribution no fractional shares will be distributed in the distribution any fractional shares of controlled common_stock otherwise issuable in the distribution will be transferred to a distribution agent aggregated and sold in the open market on behalf of the distributing shareholders that would have received such fractional shares the net_proceeds of such sales will be distributed to such shareholders as soon as practicable following the distribution ix x controlled will declare and make the purging distribution described above following the distribution controlled will elect to be treated as a reit for its taxable_year beginning the day after the distribution which is expected to be its year ending date as a result of the proposed transactions distributing will be a separate publicly- traded company primarily engaged in business a and controlled will be an independent publicly-traded reit primarily engaged in business c and also engaged in business d controlled or one or more of its subsidiaries will lease business c assets pursuant to one or more long-term master lease agreements with distributing or one or more of its subsidiaries each a master lease under each master lease business c assets will be leased on a type basis in general the terms of each master plr-136912-13 lease are intended to reflect customary arm’s length commercial terms and conditions and payments under such lease will be for fair_market_value it is contemplated that the terms of each master lease will include a right-of-first- offer and a landlord-consent provision specifically in the event that distributing desires to finance the acquisition of any new business c asset distributing will give controlled a right-of-first -offer to provide such financing on terms that match in all material respects the best bona_fide offer received by distributing in addition if controlled desires to acquire any new business c asset or a portfolio of g or fewer business c assets within a months of the closing of the distribution with certain exceptions controlled will give distributing a right-of-first-offer to either at distributing’s election purchase and operate or only operate such new business c asset or portfolio of business c assets also subject_to certain conditions and exceptions controlled will have the right to consent to certain major transactions proposed by distributing including but not limited to acquisitions dispositions debt incurrence distributions sale of business and actions affecting controlled’s status as a reit representations the business c company liquidations the following representations have been made regarding each of the business c company liquidations for purposes of this letter with respect to each business c company liquidation transferor shall mean the liquidating corporation a b c d distributing on the date of adoption of the plan_of_liquidation and at all times until the business c company liquidation is effectuated will be the owner of the sole membership interest in transferor no membership interest in transferor will have been redeemed during the three years preceding the adoption of the plan of complete_liquidation of transferor all distributions for federal_income_tax purposes from transferor to distributing pursuant to the plan of complete_liquidation will occur on the effective date of the business c company liquidation as soon as the business c company liquidation is effective transferor will cease to be a going concern or conduct any activity as a corporation for federal_income_tax purposes plr-136912-13 e f g h i j k l transferor will retain no assets for federal_income_tax purposes following the business c company liquidation no transferor will have acquired assets in any nontaxable_transaction at any time except for acquisitions occurring i more than three years prior to the date of adoption of the plan_of_liquidation and ii in connection with the formation of certain transferors no assets of transferor have been or will be disposed of by either transferor or distributing except for i dispositions in the ordinary course of business ii dispositions occurring more than three years prior to adoption of the plan_of_liquidation and iii dispositions occurring as part of the proposed transactions except pursuant to the proposed transactions no business c company liquidation will be preceded or followed by the reincorporation in or transfer or sale to a recipient corporation recipient of any of the businesses or assets of transferor if persons holding directly or indirectly more than percent in value of transferor stock as determined by application of sec_318 as modified by sec_304 also hold directly or indirectly more than percent in value of the stock in recipient prior to adoption of the liquidation plan no assets of transferor will have been distributed in_kind transferred or sold to distributing except for i transactions occurring in the normal course of business and ii transactions occurring more than three years prior to adoption of the liquidation plan transferor will report all earned_income represented by assets that will be distributed to distributing for federal_income_tax purposes such as receivables being reported on a cash_basis unfinished construction contracts commissions due etc the fair_market_value of the assets of transferor will exceed its liabilities both at the date of the adoption of the plan of complete_liquidation and immediately prior to the effectuation of the business c company liquidation there is no intercorporate debt existing between distributing and any transferor and none has been cancelled forgiven or discounted except for i debt and ii transactions that occurred more than three years plr-136912-13 prior to the date of adoption of the liquidation plan m distributing is not an organization that is exempt from federal_income_tax under sec_501 or any other provision of the code the conversions the following representations have been made regarding each of the conversions for purposes of this letter with respect to each conversion i transferor shall mean the liquidating corporation and ii transferee shall mean the corporation receiving the liquidating_distribution n transferee on the date of adoption of the plan_of_liquidation and at all times until the conversion is effectuated will be the owner of all of the issued and outstanding_stock of transferor o no shares of transferor stock will have been redeemed during the three years preceding the adoption of the plan of complete_liquidation of transferor p all distributions for federal_income_tax purposes from transferor to transferee pursuant to the plan of complete_liquidation will occur on the effective date of the conversion q as soon as the conversion is effective transferor will cease to be a going concern or conduct any activity as a corporation for federal_income_tax purposes r transferor will retain no assets for federal_income_tax purposes following the conversion s no transferor will have acquired assets in any nontaxable_transaction at any time except for acquisitions occurring i more than three years prior to the date of adoption of the plan_of_liquidation ii in connection with the formation of certain transferors and iii as a result of the proposed transactions t no assets of any transferor have been or will be disposed of by either the transferor or the applicable transferee except for i dispositions in the ordinary course of business ii dispositions occurring more than three years prior to adoption of the plan_of_liquidation iii the assignment of sub voting_stock on date to sub the assignment and iv dispositions occurring as part of the proposed transactions plr-136912-13 u except pursuant to the proposed transactions the conversion will not be preceded or followed by the reincorporation in or transfer or sale to a recipient corporation recipient of any of the businesses or assets of transferor if persons holding directly or indirectly more than percent in value of transferor stock as determined by application of sec_318 as modified by sec_304 also hold directly or indirectly more than percent in value of the stock in recipient v w prior to adoption of the liquidation plan no assets of any transferor will have been distributed in_kind transferred or sold to the applicable transferee except for i transactions occurring in the normal course of business ii transactions occurring more than three years prior to adoption of the liquidation plan and iii the assignment transferor will report all earned_income represented by assets that will be distributed to transferee for federal_income_tax purposes such as receivables being reported on a cash_basis unfinished construction contracts commissions due etc x the fair_market_value of the assets of transferor will exceed its liabilities both at the date of the adoption of the plan of complete_liquidation and immediately prior to the effectuation of the conversion y there is no intercorporate debt existing between any transferee and the applicable transferor and none has been cancelled forgiven or discounted except for transactions that occurred more than three years prior to the date of adoption of the liquidation plan except i for transactions that occurred more than three years prior to the date of adoption of the liquidation plan ii debt iii debt iv debt and v debt z transferee is not an organization that is exempt from federal_income_tax under sec_501 or any other provision of the code the contribution and the distribution the following representations have been made regarding the contribution and the distribution aa any indebtedness owed by controlled to distributing or any of its affiliates after the distribution will not constitute stock_or_securities plr-136912-13 bb no part of the consideration to be distributed by distributing will be received by a shareholder as a creditor employee or in any capacity other than that of a shareholder of distributing cc the five years of financial information submitted on behalf of the dsag is representative of the present operation of business a and business b and with regard to business a and business b there have been no substantial operational changes since the date of the last financial statements submitted dd the five years of financial information submitted on behalf of the dsag is representative of the present operation of business d and with regard to business d there have been no substantial operational changes since the date of the last financial statements submitted ee the dsag neither acquired_business a or business b nor acquired control of an entity conducting business a or business b during the five- year period ending on the date of the distribution in a transaction in which gain_or_loss was recognized or treated as recognized in whole or in part ff gg following the distribution other than as provided in the continuing agreements the dsag and csag will each continue the active_conduct of its respective business independently and with its separate employees the distribution will be carried out for the following corporate business purposes i to increase the potential geographic scope of business c ii to expand the assets classes acquired in connection with business c iii to diversify the tenant base of business c iv to reduce the legal and regulatory risks associated with business a and business c v to broaden the range of potential non-acquisition transactions engaged in by business c vi to enhance management focus on business d and vii to make the equity of distributing and controlled more attractive acquisition and compensation currency the distribution is motivated in whole or substantial part by one or more of these corporate business purposes hh the distribution is not being used principally as a device for the distribution of the earnings_and_profits of distributing or controlled or both ii the receipt by distributing shareholders of cash in lieu of fractional shares of controlled common_stock is solely for the purpose of avoiding the expense and inconvenience to controlled of issuing fractional shares and does not represent separately bargained-for consideration it is intended that the total cash consideration received by the shareholders of plr-136912-13 distributing will not exceed one percent of the total consideration that will be distributed in the distribution it is also intended that no distributing shareholder will receive cash in an amount equal to or greater than the value of one full share of controlled common_stock the total adjusted_basis and fair_market_value of the assets transferred to controlled by distributing in the contribution will exceed the sum of i the amount of liabilities if any assumed within the meaning of sec_357 by controlled in connection with the exchange ii the amount of any liabilities owed to controlled by distributing that are discharged or extinguished in connection with the exchange and iii the amount of cash and the fair_market_value of any other_property other than stock and securities permitted to be received under sec_361 without the recognition of gain received by distributing in connection with the exchange the fair_market_value of the assets of controlled will exceed the amount of its liabilities immediately after the contribution any liabilities assumed within the meaning of sec_357 by controlled in the contribution were incurred in the ordinary course of business and are associated with the assets transferred to controlled in connection with the contribution other than trade payables between distributing and its affiliates and controlled and its affiliates i incurred in the ordinary course of business or ii created pursuant to the continuing agreements no intercorporate debt will exist between distributing and controlled at the time of or subsequent to the distribution jj kk ll mm payments made in connection with continuing transactions between distributing and controlled will be for fair_market_value based on terms and conditions intended to reflect agreements between parties bargaining at arm’s length nn immediately before the distribution items of income gain loss deduction and credit will be taken into account as required by the applicable intercompany_transaction regulations see sec_1_1502-13 and sec_1 as in effect before the publication of t d 1995_32_irb_6 and as currently in effect sec_1_1502-13 as published by t d further distributing’s excess_loss_account if any with respect to the controlled common_stock will be included in income immediately before the distribution see sec_1_1502-19 plr-136912-13 oo no two parties to the transaction are investment companies as defined in sec_368 and iv pp qq rr ss immediately after the distribution no person determined after applying sec_355 will hold stock possessing percent or more of the total combined voting power of all classes of distributing common_stock entitled to vote or percent or more of the total value of shares of all classes of distributing common_stock that was acquired by purchase as defined in sec_355 and during the five-year period determined after applying sec_355 ending on the date of the distribution immediately after the distribution no person determined after applying sec_355 will hold stock possessing percent or more of the total combined voting power of all classes of controlled common_stock entitled to vote or percent or more of the total value of shares of all classes of controlled common_stock that was either i acquired by purchase as defined in sec_355 and during the five-year period determined after applying sec_355 ending on the date of the distribution or ii attributable to distributions on distributing common_stock that was acquired by purchase as defined in sec_355 and during the five- year period determined after applying sec_355 ending on the date of the distribution the distribution is not part of a plan or series of related transactions within the meaning of sec_1_355-7 pursuant to which one or more persons will acquire directly or indirectly stock representing a 50-percent_or_greater_interest within the meaning of sec_355 in distributing or controlled including any predecessor or successor of any such corporation immediately after the transaction as defined in sec_355 either i no person will hold a 50-percent_or_greater_interest within the meaning of sec_355 in the stock of distributing or controlled who did not hold such an interest immediately before the distribution or ii neither distributing nor controlled will be a disqualified_investment_corporation within the meaning of sec_355 tt distributing and controlled and their respective shareholders will each pay their own expenses if any incurred in connection with the distribution uu the distribution of controlled stock to distributing’s shareholders in the distribution is with respect to their ownership of distributing stock plr-136912-13 vv any money property or stock contributed by distributing to controlled in the contribution will be exchanged solely for controlled common_stock the assumption of certain liabilities of distributing and the proceeds ww the distribution of cash to controlled’ s shareholders in the purging distribution is with respect to their ownership of controlled stock xx yy all of the stock of distributing has been traded on an established_securities_market in the united_states for the past five years to the best of the knowledge of distributing i shareholder a through shareholder i are the only shareholders of distributing that held more than five percent of the stock of distributing at any time during the past five years collectively the five-percent shareholders ii each five-percent shareholder is a united_states_person within the meaning of sec_7701 a u_s_person and iii none of the five-percent shareholders is a partnership or trust having partners or beneficiaries respectively who are not u s persons rulings based solely on the information submitted and the representations set forth above and provided that i the distribution of controlled stock to distributing’s shareholders in the distribution is with respect to their ownership of distributing stock ii any money property or stock contributed by distributing to controlled in the contribution will be exchanged solely for controlled common_stock the assumption of certain liabilities of distributing and the proceeds and iii any other transfer of stock money or property between distributing controlled or any distributing shareholder and any person related to distributing controlled or any distributing shareholder including the business c company liquidations the conversions and the purging distribution is respected as a separate transaction we rule as follows regarding the proposed transactions the business c company liquidations each business c company liquidation will be treated as a distribution by the transferor in liquidation under sec_332 sec_332 and sec_1_332-2 no gain_or_loss will be recognized by distributing on the deemed receipt of the assets and liabilities of the transferor pursuant to the business c company liquidation sec_332 no gain_or_loss will be recognized by the transferor on the deemed plr-136912-13 distribution of its assets and liabilities to distributing in the business c company liquidation sec_337 and sec_1_332-7 the basis in each asset of the transferor deemed received by distributing pursuant to a business c company liquidation will be the same as the basis of that asset in the hands of the transferor immediately before the business c company liquidation sec_334 the holding_period of each asset of the transferor deemed received by distributing in the business c company liquidation will include the period during which that asset was held by the transferor sec_1223 distributing will succeed to and take into account as of the close of the effective date of the business c company liquidation the items of the transferor described in sec_381 subject_to the conditions and limitations specified in sec_381 sec_382 sec_383 and sec_384 and the regulations thereunder sec_381 and sec_1_381_a_-1 except to the extent that the transferor’s earnings_and_profits are reflected in distributing’s earnings_and_profits distributing will succeed to and take into account the earnings_and_profits or deficit in earnings_and_profits of the transferor as of the date of the business c company liquidation sec_381 and sec_1_381_c_2_-1 and sec_1_1502-33 any deficit in the earnings_and_profits of the transferor will be used only to offset earnings_and_profits accumulated after the date of the business c company liquidation sec_381 the excess_loss_account if any of distributing with respect to the stock of the transferor will not be recognized as a result of the business c company liquidation sec_1_1502-19 distributing will not realize income under sec_61 or sec_1_301-1 with respect to the extinguishment of intercompany debt if any in the business c company liquidation see revrul_74_54 c b the conversions each conversion will be treated as a distribution by the transferor in complete_liquidation under sec_332 no gain_or_loss will be recognized by the transferee on the deemed receipt of the transferor’s assets and liabilities pursuant to the conversion sec_332 plr-136912-13 no gain_or_loss will be recognized by the transferor on the deemed_distribution of its assets and liabilities to the transferee in the conversion sec_337 and sec_1_332-7 the basis of each asset of the transferor deemed received by the transferee pursuant to the conversion will be the same as the basis of that asset in the hands of transferor immediately before the conversion sec_334 the holding_period of each asset of the transferor deemed received by the transferee pursuant to the conversion will include the period during which the transferor held such asset sec_1223 the transferee will succeed to and take into account as of the close of the effective date of the conversion the items of the transferor described in sec_381 subject_to the conditions and limitations specified in sec_381 sec_382 sec_383 and sec_384 and the regulations thereunder sec_381 and sec_1_381_a_-1 except to the extent the transferor’s earnings_and_profits are reflected in the transferee’s earnings_and_profits the transferee will succeed to and take into account the earnings_and_profits or deficit in earnings_and_profits of the transferor as of the date of the conversion sec_381 and sec_1_381_c_2_-1 and sec_1_1502-33 any deficit in the earnings_and_profits of the transferor will be used only to offset earnings_and_profits accumulated after the date of the conversion sec_381 the excess_loss_account if any of the transferee with respect to the stock of the transferor will not be recognized as a result of the conversion sec_1_1502-19 the transferee will not realize income under sec_61 or sec_1_301-1 with respect to the extinguishment of intercompany debt if any in the conversion rev_rul c b the contribution and the distribution the contribution and the distribution taken together will qualify as a reorganization described in sec_368 each of distributing and controlled will be a party to the reorganization within the meaning of sec_368 provided that the proceeds of the borrowing are used in the manner described in step vii above no gain_or_loss will be recognized by distributing on its actual or constructive receipt of the controlled stock and plr-136912-13 the proceeds of the borrowing in the contribution sec_357 and sec_361 b no gain_or_loss will be recognized by controlled in the contribution sec_1032 controlled's basis in each asset received in the contribution will be the same as the basis of that asset in the hands of distributing immediately before its transfer sec_362 controlled's holding_period in each asset received in the contribution will include the period during which distributing held the asset sec_1223 no gain_or_loss will be recognized by distributing on the distribution sec_361 no gain_or_loss will be recognized by and no amount will otherwise be included in the income of the shareholders of distributing upon receipt of the controlled common_stock in the distribution sec_355 each distributing shareholder's basis in a share of distributing common_stock as adjusted under sec_1_358-1 will be allocated between the share of distributing common_stock with respect to which the distribution is made and the controlled common_stock or allocable portions thereof received in the distribution with respect to the share of distributing common_stock in proportion to their fair market values in accordance with sec_1_358-2 sec_358 b and c each distributing shareholder's holding_period in the controlled common_stock received will include the holding_period of the distributing common_stock with respect to which the distribution of the controlled common_stock is made provided that the distributing common_stock is held as a capital_asset on the date of the distribution sec_1223 earnings_and_profits if any will be allocated between distributing and controlled in accordance with sec_312 and sec_1_312-10 and sec_1 e a distributing shareholder that receives cash in lieu of a fractional share of controlled common_stock will recognize gain_or_loss measured by the difference between the basis of the fractional share received and the amount of cash received sec_1001 any gain_or_loss will be treated as capital_gain or loss provided the fractional share of stock is held as a plr-136912-13 capital_asset on the date of the distribution sec_1221 and sec_1222 except for purposes of sec_355 any post-distribution payments made by distributing or any of its affiliates to controlled or any of its affiliates or vice versa that i have arisen or will arise with respect to a taxable_period ending on or before the date of the distribution or for a taxable_period beginning on or before and ending after the date of the distribution and ii will not have become fixed and ascertainable until after the distribution will be treated as occurring immediately before the distribution see 344_us_6 revrul_83_73 1983_1_cb_84 the purging distribution any and all of the cash and stock distributed by controlled to its shareholders as part of the purging distribution will be treated as a distribution_of_property with respect to its stock to which sec_301 and sec_305 apply and as a dividend for purposes of sec_301 to the extent of controlled’s current and accumulated_earnings_and_profits the amount of any distribution of stock received by any shareholder of controlled as part of the purging distribution will be considered to equal the amount of money which could have been received instead sec_1 b the distribution of cash and stock by controlled to its shareholders determined at the election of each shareholder subject_to a limitation on the aggregate amount of cash distributed to effect a purge of all its earnings_and_profits accumulated in years prior to its first taxable_year as a reit will be treated as a dividend for purposes of sec_857 caveats no opinion is expressed about the tax treatment of the proposed transactions under other provisions of the code and regulations or the tax treatment of any conditions existing at the time of or effects resulting from the proposed transactions that are not specifically covered by the above rulings in particular no opinion is expressed regarding i whether the distribution satisfies the business_purpose requirement of sec_1_355-2 plr-136912-13 ii whether the distribution is used principally as a device for the distribution of earnings_and_profits of distributing or controlled or both see sec_355 and sec_1_355-2 iii whether the distribution is part of a plan or series of related transactions pursuant to which one or more persons will acquire directly or indirectly stock representing a 50-percent_or_greater_interest in either distributing or controlled under sec_355 iv whether controlled otherwise qualifies as a reit under part ii of subchapter_m of chapter of the code and v the federal_income_tax consequences of the continuing agreements and any other continuing transactions between distributing or any entity controlled directly or indirectly by distributing and controlled or any entity controlled directly or indirectly by controlled in addition distributing has represented that it is a u s real_property holding corporation under sec_897 and sec_1 897-6t a gain is recognized if there is an exchange of stock that is a u s real_property interest for stock that is not a u s real_property interest see sec_1_897-6t no opinion is expressed in regard to the application of sec_897 or the regulations thereunder to the receipt of any of the stock of controlled pursuant to sec_355 procedural statements 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 a copy of this letter must be attached to any income_tax return to which it is relevant alternatively taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of the letter_ruling plr-136912-13 in accordance with the power_of_attorney on file with this office copies of this letter are being sent to your authorized representatives sincerely _____________________ mark j weiss reviewing attorney branch office of associate chief_counsel corporate


t c summary opinion united_states tax_court rodrigo kho and loreta kho petitioners v commissioner of internal revenue respondent docket no 7720-17s filed date rodrigo kho and loreta kho pro sese christiane c sanicola for respondent summary opinion guy special_trial_judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect when the petition was filed pursuant to sec_7463 the decision to be entered is not reviewable by 1unless otherwise indicated all section references are to the internal continued any other court and this opinion shall not be treated as precedent for any other case respondent determined that petitioners are liable for a federal_income_tax deficiency of dollar_figure for the taxable_year year in issue and an accuracy- related penalty of dollar_figure under sec_6662 petitioners husband and wife filed a timely petition for redetermination pursuant to sec_6213 at the time the petition was filed they resided in california the parties agree that petitioners are not entitled to a dependency_exemption deduction for mrs kho’s mother entitled to deduct mortgage interest payments of dollar_figure entitled to deduct real_estate_taxes of dollar_figure entitled to deductions claimed on schedule c for legal and professional expenses of dollar_figure office expenses of dollar_figure taxes and license fees of dollar_figure parking fees of dollar_figure and postage expenses of dollar_figure and not entitled to continued revenue code as amended and in effect for and all rule references are to the tax_court rules_of_practice and procedure monetary amounts are rounded to the nearest dollar 2regarding mortgage interest payments the parties agree that dollar_figure shall be reported on schedule a itemized_deductions and dollar_figure shall be reported on schedule c profit or loss from business 3regarding real_estate_taxes the parties agree that dollar_figure shall be reported on schedule a and dollar_figure shall be reported on schedule c deductions claimed on schedule c for rent or lease expenses and education expenses petitioners offered no evidence that they are entitled to an itemized_deduction for a claimed charitable_contribution of dollar_figure or a deduction for the business use of their home in excess of the dollar_figure allowed in the notice_of_deficiency accordingly those adjustments are deemed conceded the issues remaining for decision are whether petitioners are entitled to a dependency_exemption deduction for mrs kho’s father entitled to deductions for certain expenses related to a foster care activity in excess of amounts allowed by respondent and liable for an accuracy-related_penalty under sec_6662 4some adjustments in the notice_of_deficiency are computational and will flow from the parties’ concessions and the court’s disposition of the issues remaining in dispute background5 i petitioners’ foster care activity petitioners have one child and they reside in a single-family home where they provide foster care for two adult men with developmental disabilities petitioners’ foster care clients have separate bedrooms but share a single bathroom during the year in issue one of petitioners’ clients routinely spent weekends at his parents’ home the other client lived with petitioners year round and required a gluten-free diet this client accompanied petitioners on all family outings including vacations and recreational outings to accommodate his dietary needs petitioners prepared only gluten-free meals in their home and they ordered only gluten-free items when they dined out ii mrs kho’s parents during the year in issue mrs kho’s parents lived in the philippines her father is a u s citizen but her mother is not petitioners provided financial support to mrs kho’s parents in transferring funds to them through electronic channels and sometimes sending cash to them when friends from the united_states traveled to the philippines the 5some of the facts have been stipulated record shows that petitioners transferred about dollar_figure to mrs kho’s parents in mrs kho’s father had been employed for many years in the philippines as an accountant but had retired sometime before mrs kho acknowledged that her father received social_security_benefits from the philippine government in although she was uncertain of the amount she was also uncertain whether her father received any pension payments in iii petitioners’ tax_return petitioners filed a joint form_1040 u s individual_income_tax_return for the tax_return was prepared by an accounting firm that petitioners had relied upon in the past petitioners claimed five dependency_exemption deductions--including exemptions for themselves their son and mrs kho’s parents petitioners attached to their tax_return a schedule c related to the foster care activity described above they reported gross_receipts from the activity of dollar_figure operating_expenses of dollar_figure and expenses attributable to the business use of their home of dollar_figure reported on form_8829 expenses for business use of your home resulting in a net_loss of dollar_figure they reported the latter amount on line of their tax_return as is relevant here petitioners deducted vehicle expenses of dollar_figure computed using the optional standard mileage rate meals and entertainment_expenses of dollar_figure and grocery expenses of dollar_figure discussion as a general_rule the commissioner’s determination of a taxpayer’s liability in a notice_of_deficiency is presumed correct and the taxpayer bears the burden of proving that the determination is incorrect rule a 290_us_111 deductions and credits are a matter of legislative grace and the taxpayer generally bears the burden of proving entitlement to any deduction or credit claimed rule a 503_us_79 292_us_435 i dependency_exemption deduction generally taxpayers may claim dependency_exemption deductions for their dependents as defined in sec_152 sec_151 the term dependent includes a qualifying_relative sec_152 under sec_152 a 6see notice_2013_80 sec_3 2013_52_irb_821 setting the standard mileage rate pincite cents per mile for taxable_year 7petitioners do not contend and the record does not suggest that the burden_of_proof should shift to respondent pursuant to sec_7491 8as a general_rule the term dependent does not include an individual who is not a citizen or national of the united_states unless the individual is a resident continued qualifying_relative is an individual who bears a qualifying relationship to the taxpayer eg the taxpayer’s parent sec_152 whose gross_income for the year is less than the sec_151 exemption_amount dollar_figure for who receives over one-half of his support from the taxpayer for the taxable_year and who is not a qualifying_child of the taxpayer or of any other taxpayer for the taxable_year although petitioners demonstrated that they transferred about dollar_figure to mrs kho’s parents in they were unable to provide objective evidence of mrs kho’s father’s gross_income in or whether he received over one-half of his support from petitioners as required under sec_152 under the circumstances petitioners have failed to show that they are entitled to a dependency_exemption deduction for mrs kho’s father ii schedule c expenses under sec_162 a deduction is allowed for ordinary and necessary expenses paid_or_incurred during the taxable_year in carrying on any trade_or_business a deduction normally is not allowed however for personal living or family_expenses sec_262 whether an expenditure satisfies the requirements continued of the united_states or a country contiguous to the united_states sec_152 for deductibility under sec_162 generally is a question of fact see 320_us_467 as used in sec_162 an ordinary_expense is defined as one which is normal usual or customary in the taxpayer’s trade_or_business see 308_us_488 and necessary has been defined as appropriate and helpful see welch v helvering u s pincite respondent contends that petitioners are not entitled to a deduction for meals and entertainment_expenses and that the amounts petitioners may deduct for vehicle expenses and groceries are limited to dollar_figure and dollar_figure respectively in short respondent maintains that expenses in excess of the amounts allowed do not constitute ordinary and necessary business_expenses within the meaning of sec_162 petitioners assert that because one or both of their clients always accompanied them when they left home all vehicle expenses and all of their expenses for meals and entertainment constitute ordinary and necessary business_expenses petitioners further assert that because they adopted a gluten-free diet to accommodate the needs of one of their clients and gluten-free food products 9respondent does not dispute that petitioners’ foster care activity was a trade_or_business or that they actually paid the expenses in dispute generally are more expensive than similar products that are not gluten-free all of the groceries that they purchased in qualify as ordinary and necessary business_expenses a taxpayer seeking a business_expense deduction for what would ordinarily be considered a personal living expense for one’s self and one’s dependents must demonstrate that the expenditures were different from or in excess of that which would have been made for the taxpayer’s personal purposes 77_tc_911 quoting 21_tc_170 petitioners failed to show that they are entitled to any deduction for meals and entertainment_expenses or that they are entitled to deductions for vehicle expenses or grocery expenses in excess of the amounts allowed by respondent we conclude on this record that petitioners’ expenditures_for meals and entertainment were nondeductible personal expenses under sec_262 moreover any excess cost to petitioners in providing gluten-free meals to their client is accounted for in the amount that respondent allowed as a deductible expense for groceriesdollar_figure in short we sustain respondent’s determination that the 10for the sake of completeness we note that petitioners failed to satisfy sec_274 which prescribes more stringent substantiation requirements to be met continued expenses in dispute were primarily for petitioners’ and their son’s personal benefit and any business_purpose was distinctly secondary and incidental see eg 55_tc_94 iii accuracy-related_penalty sec_6662 and b and imposes an accuracy-related_penalty equal to of the amount of any underpayment_of_tax that is due to the taxpayer’s negligence or disregard of rules or regulations or to any substantial_understatement_of_income_tax negligence is a lack of due care or failure to do what a reasonable and ordinarily prudent person would do under the circumstances 85_tc_934 a taxpayer is negligent if he or she fails to maintain sufficient records to substantiate disputed expenses 116_tc_438 sec_1 b income_tax regs an understatement of income_tax is substantial if the understatement exceeds the greater of of the tax required to be shown on the return or dollar_figure sec_6662 continued before a taxpayer may deduct certain categories of expenses including travel_expenses meals and entertainment expenditures and expenses related to the use of listed_property such as automobiles as defined in sec_280f see 50_tc_823 aff’d 412_f2d_201 2d cir with respect to a taxpayer’s liability for any penalty sec_7491 places on the commissioner the burden of production thereby requiring the commissioner to come forward with sufficient evidence indicating that it is appropriate to impose the penalty higbee v commissioner t c pincite once the commissioner meets his burden of production the taxpayer must come forward with persuasive evidence that the commissioner’s determination is incorrect id pincite see rule a welch v helvering u s at dollar_figure sec_6664 provides however that no penalty shall be imposed with respect to any portion of an underpayment if it is shown that there was reasonable_cause for such portion and that the taxpayer acted in good_faith with respect to such portion swihart v commissioner tcmemo_1998_407 the court must consider all the facts and circumstances in determining whether the taxpayer acted with reasonable_cause and in good_faith sec_1_6664-4 income_tax regs 11respondent has satisfied his burden of production even taking respondent’s concessions into account it is likely that the understatement of income_tax exceeds of the tax required to be shown on petitioners’ return which is greater than dollar_figure moreover petitioners conceded a number of adjustments without explanation and failed to maintain sufficient records finally the record includes a civil penalty approval form executed by the internal_revenue_service examiner’s group manager approving the sec_6662 penalty determined in the notice_of_deficiency see sec_6751 generally the most important factor is the extent of the taxpayer’s effort to assess his or her proper tax_liability id considering all the facts and circumstances including petitioners’ lack of sophistication regarding tax matters and their good-faith reliance on the assistance of an accountant in preparing their tax_return for the year in issue we conclude that petitioners have shown reasonable_cause and that they acted in good_faith in respect of the portions of the underpayments that are attributable to the disallowance of deductions for vehicle expenses meals and entertainment_expenses and grocery expenses no penalty may be imposed under sec_6662 in respect of those portions of the underpayments in contrast we conclude that petitioners are liable for the penalty imposed under sec_6662 with respect to the portions of the underpayments attributable to the remaining adjustments that were sustained in this case to reflect the foregoing decision will be entered under rule