internal_revenue_service number release date index number --------------------------- --------------------- ----------------------------------- ------------------------------ department of the treasury washington dc third party communication none date of communication not applicable_person to contact --------------------------- id no ---------------- ----------------- telephone number --------------------- refer reply to cc corp plr-152511-10 date date ty ------- ty ------- legend parent ---------------------- -------------------------------------------------------- purchaser ----------------------- -------------------------------------------------------- target sellers ------------------------------- ----------------------------------------------- country a ---------- date a date b date c ------------------- ------------------ ------------------- company official ------------------------------------------- dear ------------ this letter responds to a letter dated date submitted on behalf of parent requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations to file an election parent is requesting an extension to file a sec_338 election under sec_338 with respect to purchaser’s acquisition of the stock of target sometimes hereinafter referred to as the election on date b additional information was received in letters dated date and date the material information is summarized below plr-152511-10 purchaser is a wholly owned subsidiary of parent purchaser is disregarded as an entity separate from parent for federal tax purposes on date a purchaser and sellers entered into a purchase agreement for purchaser to acquire all of the target stock from the sellers in exchange for cash it is represented that purchaser’s acquisition of the stock of target qualified as a qualified_stock_purchase as defined in sec_338 target is country a corporation target is a controlled_foreign_corporation sellers are country a individuals the sec_338 election was due on date c but for various reasons a valid election was not filed after the due_date for the election it discovered that the election had not been filed subsequently this request was submitted under sec_301_9100-3 for an extension of time to file the election sec_338 permits certain stock purchases to be treated as asset acquisitions if the purchasing_corporation makes or is treated as having made a sec_338 election or a sec_338 election and the acquisition is a qualified_stock_purchase under sec_301_9100-1 the commissioner has discretion to grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make a regulatory election sec_301_9100-1 sec_301_9100-2 provides automatic extensions of time for making certain elections requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-3 in this case the time for filing the election is fixed by the regulations ie sec_1_338-2 therefore the commissioner has discretionary authority under sec_301_9100-3 to grant an extension of time for parent to file the election provided parent acted reasonably and in good_faith the requirements of sec_301_9100-1 and sec_301_9100-3 are satisfied and granting relief will not prejudice the interests of the government information affidavits and representations submitted by parent and company official explain the circumstances that resulted in the failure to timely file a valid election the information establishes that parent reasonably relied on a qualified_tax plr-152511-10 professional who failed to make or advise parent to make the election and that the request for relief was filed before the failure to make the election was discovered by the internal_revenue_service see sec_301_9100-3 and v based on the facts and information submitted including the representations made we conclude that parent has shown it acted reasonably and in good_faith the requirements of sec_301_9100-1 and sec_301_9100-3 are satisfied and granting relief will not prejudice the interests of the government accordingly an extension of time is granted under sec_301_9100-3 until days from the date of this letter for parent to file the election with respect to the acquisition of the stock of target within days of the date on this letter parent must file the election of form_8023 in accordance with sec_1_338-2 and the instructions to the form a copy of this letter must be attached to form_8023 within days of the date on this letter all relevant parties must file or amend as applicable all returns and amended returns if any necessary to report the transaction as a sec_338 transaction for the taxable_year in which the transaction was consummated and for any other affected taxable years a copy of this letter and a copy of form_8883 must be attached to any_tax return to which it is relevant alternatively taxpayers filing their returns electronically may satisfy the requirement of attaching a copy of this letter by attaching a statement to their return that provides the date and control number of the letter_ruling the above extension of time is conditioned on the parent’s tax_liability being not lower in the aggregate for all years to which the election applies than it would have been if the election had been timely made taking into account the time_value_of_money no opinion is expressed as to the taxpayer’s tax_liability for the years involved a determination thereof will be made by the applicable director’s office upon audit of the federal_income_tax returns involved further no opinion is expressed as to the federal_income_tax effect if any if it is determined that the taxpayers’ tax_liability is lower sec_301_9100-3 we express no opinion as to whether the acquisition of the target stock qualifies as a qualified_stock_purchase under sec_338 or any other tax consequences arising from the election in addition we express no opinion as to the tax consequences of filing the election late under the provisions of any other section of the code and regulations or as to the tax treatment of any conditions existing at the time of or resulting from filing the election late that are not specifically set forth in the above rulings for purposes of granting relief under sec_301_9100-3 we relied on certain statements and representations plr-152511-10 made by the taxpayers however the director should verify all essential facts in addition notwithstanding that an extension is granted under sec_301_9100-3 to file the election penalties and interest that would otherwise be applicable if any continue to apply this letter is directed only to the taxpayer who requested it sec_6110 provided that it may not be used or cited as precedent pursuant to the power_of_attorney on file in this office a copy of this letter is being sent to your authorized representatives sincerely __________________ ken cohen senior technician reviewer branch office of associate chief_counsel corporate cc


internal_revenue_service number release date index number ------------------------------------------ --------------- ------------------------------------------ ------------------------------ department of the treasury washington dc third party communication none date of communication not applicable_person to contact -------------------- id no ------------- telephone number --------------------- refer reply to cc ita b04 plr-129164-08 date date legend year ------- corporation --------------- dear -------------------- this letter_ruling refers to a request that corporation’s form_1128 application to adopt change or retain a tax_year be considered timely filed under the authority in sec_301_9100-3 of the regulations on procedure and administration corporation filed a late form_1128 to change its accounting_period for federal_income_tax purposes from a taxable_year ending june to a taxable_year ending december effective december year revproc_2006_45 2006_2_cb_851 provides procedures for certain corporations to obtain automatic approval to change their annual_accounting_period to a calendar_year under sec_442 of the internal_revenue_code a corporation complying with all the applicable provisions of this revenue_procedure has obtained the approval of the commissioner of the internal_revenue_service to change its annual_accounting_period section of revproc_2006_45 provides that a form_1128 filed pursuant to the revenue_procedure will be considered timely filed for purposes of sec_1_442-1 of the income_tax regulations only if it is filed on or before the due_date including extensions for filing the federal_income_tax return for the first effective year the information furnished indicates that corporation did not file its form_1128 by the due_date of the return for the short_period required to effectuate the change however corporation filed its form_1128 under sec_301_9100-3 soon thereafter sec_301_9100-3 provides that requests for extensions of time for regulatory elections that do not meet the requirements of sec_301_9100-2 automatic extensions plr-129164-08 such as the instant case must be made under the rules of sec_301_9100-3 requests for relief subject_to sec_301_9100-3 will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good_faith and that the granting of relief will not prejudice the interests of the government based on the facts and information submitted and the representations made we conclude that corporation has acted reasonably and in good_faith and that the granting of relief will not prejudice the interests of the government accordingly corporation has satisfied the requirements of the regulations for the granting of relief and its late filed form_1128 requesting to change to december effective december year is considered timely filed because a change in accounting_period under revproc_2006_45 is under the jurisdiction of the director internal_revenue_service center where corporation’s returns are filed we have forwarded the application to the director ogden utah service_center any further communication regarding this matter should be directed to the service_center this ruling is based upon facts and representations that corporation submitted accompanied by a penalties of perjury statement executed by an appropriate party this office has not verified any of the material submitted in support of the request for a ruling however as part of an examination process the service may verify the factual information representations and other data submitted this ruling addresses the granting of sec_301_9100-3 relief only we express no opinion regarding the tax treatment of the instant transaction under the provisions of any other sections of the code or regulations that may be applicable or regarding the tax treatment of any conditions existing at the time of or effects resulting from the instant transaction specifically we express no opinion as to whether corporation is permitted under the code and applicable regulations to change to the tax_year requested in the form_1128 or whether the change may be effected under revproc_2006_45 a copy of this letter must be attached to any income_tax return to which it is relevant 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 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 enclosed is a copy of the letter_ruling showing the deletions proposed to be made when it is disclosed under sec_6110 plr-129164-08 in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely michael j montemurro branch chief office of associate chief_counsel income_tax accounting enclosure


t c summary opinion united_states tax_court michael s tocher and tracy a tocher petitioners v commissioner of internal revenue respondent docket no 19718-12s filed date michael s tocher and tracy a tocher pro sese thomas r mackinson and timothy berry for respondent summary opinion dean 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 any other court and this opinion shall not be treated as precedent for any other case unless otherwise indicated subsequent section references are to the internal_revenue_code in effect for the year at issue and rule references are to the tax_court rules_of_practice and procedure respondent issued a statutory_notice_of_deficiency to petitioners for in which he determined a deficiency in income_tax of dollar_figure and an accuracy-related_penalty under sec_6662 of dollar_figure the issues for decision are first whether petitioners are entitled to deduct on schedule a itemized_deductions unreimbursed employee business_expenses in excess of those respondent allowed and on schedule c profit or loss from business car and truck expenses and second whether petitioners are liable for the accuracy-related_penalty under sec_6662 some of the facts have been stipulated and are so found the stipulation of facts and the exhibits received in evidence are incorporated herein by reference petitioners resided in california when the petition was filed respondent’s adjustment to the child_tax_credit is computational and will be resolved by the court’s determinations on the other issues petitioners did not contest in the petition or at trial respondent’s disallowance of their deduction of tax preparation fees and a hobby loss or the assertion of the additional tax on early distributions from qualified_retirement_plans and those issues are deemed conceded see rule b 87_tc_56 background petitioner michael tocher is an engineer who was employed by winzler kelly in on petitioners’ federal_income_tax return for they deducted on schedule a dollar_figure of employee business_expenses and certain miscellaneous deductions respondent disallowed dollar_figure of the deduction petitioner tracy tocher worked in the real_estate business in mrs tocher reported wages from two sources pacific cities management and robert winger and petitioners filed a schedule c for her on which she reported gross_income of dollar_figure petitioners deducted on schedule c car and truck expenses of dollar_figure all of which respondent disallowed discussion generally the commissioner’s determinations in a notice_of_deficiency are presumed correct and the taxpayer has the burden of proving that those determinations are erroneous see rule a 290_us_111 in some cases the burden_of_proof with respect to relevant factual issues may shift to the commissioner under sec_7491 the court finds that the dollar_figure was the amount deducted after the sec_67 reduction of miscellaneous itemized expense deduction by of adjusted_gross_income petitioners have not argued or shown that they have met the requirements of sec_7491 and the burden_of_proof does not shift to respondent sec_162 generally allows a deduction for ordinary and necessary expenses paid_or_incurred during the taxable_year in carrying_on_a_trade_or_business generally no deduction is allowed for personal living or family_expenses see sec_262 the taxpayer must show that any deducted business_expenses were incurred primarily for business rather than personal living or family reasons see rule a 72_tc_433 to show that the expense was not personal the taxpayer must show that the expense was incurred primarily to benefit his business and that there was a proximate relationship between the expense and the business see walliser v commissioner t c pincite unreimbursed employee business_expenses as evidence of his employee business_expenses mr tocher provided the court with a document titled silverado mileage log and assorted receipts for expenditures including those for food car rentals electronics hotels an employee’s performance of services is a trade_or_business e g 54_tc_374 parking and airfare the mileage log shows miles driven to various client event s between july and date said to be non-reimbursed if a particular expense is related to employment it might be deductible as an employee_business_expense on schedule a the taxpayer would have to show however that the expense was not subject_to reimbursement from his employer an expense is not deductible as ordinary and necessary to the extent that it was subject_to reimbursement by the employer 24_tc_21 the parties stipulated two pages from a winzler kelly document that pertain to employee expense reimbursements according to those pages preapproved travel_expenses that are reasonable and documented will be reimbursed mr tocher testified that he did not seek reimbursement from winzler kelly for the expenses deducted on the return because he elected not to when an employee has a right to reimbursement for expenditures related to his status as an employee but fails to claim such reimbursement the expenses are not deductible because they are not necessary within the meaning of sec_162 ie it is not necessary for an employee to remain unreimbursed for expenses to the extent he could have been reimbursed see 788_f2d_1406 9th cir aff’g tcmemo_1984_533 79_tc_1 56_tc_936 aff’d without published opinion 456_f2d_1335 2d cir the employee has the burden of establishing that the employer would not reimburse the expense had the employee requested reimbursement see podems v commissioner t c pincite because petitioner has failed to demonstrate that winzler kelly would not have reimbursed his expenses had he made a proper request respondent’s determination on this issue is sustained schedule c car and truck expenses where a taxpayer has established that he has incurred a trade_or_business expense failure to prove the exact amount of the otherwise deductible item may not always be fatal generally unless prevented by sec_274 the court may estimate the amount of such an expense and allow the deduction to that extent see 255_f2d_128 10th cir aff’g 27_tc_413 39_f2d_540 2d cir certain business deductions described in sec_274 however are subject_to strict rules of substantiation that supersede the doctrine in cohan see sec_1_274-5t c temporary income_tax regs fed reg date sec_274 provides that no deduction shall be allowed with respect to a any traveling expense including meals_and_lodging away from home b any item related to an activity of a type considered to be entertainment amusement or recreation or c the use of any listed_property as defined in sec_280f unless the taxpayer substantiates certain elements listed_property includes any passenger_automobile sec_280f for an expense described in one of the above categories the taxpayer must substantiate by adequate_records or sufficient evidence to corroborate the taxpayer’s own statement the amount of the expenditure or use using the appropriate measure mileage may be used in the case of automobiles the time and place of the expenditure or use the business_purpose of the expenditure or use and in the case of entertainment the business relationship to the taxpayer of the persons entertained see sec_274 sec_1_274-5t temporary income_tax regs fed reg date to meet the adequate_records requirements of sec_274 a taxpayer must maintain some form of records and documentary_evidence that in combination are sufficient to establish each element of an expenditure or use see sec_1 5t c temporary income_tax regs supra a contemporaneous log is not required but corroborative evidence to support a taxpayer’s reconstruction of the elements of expenditure or use must have a high degree of probative value to elevate such statement to the level of credibility of a contemporaneous record sec_1_274-5t temporary income_tax regs supra mrs tocher testified that she used the automobile to show properties and to preview properties she testified that she used one vehicle to show and the other to preview properties mrs tocher provided copies of two one-page printouts one entitled pontiac mileage log and the other pt cruiser mileage log as evidence of her automobile use the logs aggregate mileage by the week and every weekly entry describes the mileage as tracy-real estate-viewing properties there is no further identifying information in the logs the logs do not reveal which property was being viewed the date and time the location or distance of the property viewed or the client if any related to the viewing mrs tocher supplemented her logs with copies of auto-prospecting e-mail reports that were sent to her listing properties for sale in date in addition she offered copies of a listing summary for properties sold on unstated dates by unnamed agents mrs tocher failed to connect the supplementing documents with the log except to testify that she went to view approximately of the properties in the auto-prospecting email reports petitioners’ documentation for car and truck expenses does not meet the standard of substantiation required by sec_274 the court sustains respondent’s determination on this issue accuracy-related_penalty sec_7491 imposes on the commissioner the burden of production in any court_proceeding with respect to the liability of any individual for penalties and additions to tax 116_tc_438 trowbridge v commissioner tcmemo_2003_164 aff’d 378_f3d_432 5th cir in order to meet the burden of production under sec_7491 the commissioner need only make a prima facie case that imposition of the penalty or addition_to_tax is appropriate higbee v commissioner t c pincite respondent determined that for petitioners underpaid a portion of their income_tax because of negligence or intentional_disregard_of_rules_and_regulations and a substantial_understatement_of_income_tax sec_6662 and b and imposes a penalty equal to of the portion of the underpayment attributable to negligence or disregard of rules or regulations or to a substantial_understatement_of_income_tax negligence is defined as any failure to make a reasonable attempt to comply with the provisions of the internal_revenue_code and the term disregard includes any careless reckless or intentional disregard see sec_6662 negligence also includes any failure by the taxpayer to keep adequate books_and_records or to substantiate items properly sec_1_6662-3 income_tax regs a substantial_understatement_of_income_tax is an understatement that exceeds the greater of of the tax required to be shown on the return or dollar_figure sec_6662 sec_1_6662-4 income_tax regs petitioners reported a tax_liability of dollar_figure for petitioners’ actual tax_liability for was dollar_figure there was a substantial_understatement of petitioners’ individual income_tax for since the understatement amount exceed dollar_figure which is greater than of the tax required to be shown on the return because there is a substantial_understatement_of_income_tax for the court need not decide whether the underpayment is due to negligence see sec_1_6662-2 income_tax regs the court concludes that respondent has produced sufficient evidence to show that the imposition of the accuracy-related_penalty under sec_6662 and b is appropriate for the accuracy-related_penalty will apply unless a taxpayer demonstrates that there was reasonable_cause for the underpayment and that he acted in good_faith with respect to the underpayment see sec_6664 sec_1_6664-4 income_tax regs specifically provides circumstances that may indicate reasonable_cause and good_faith include an honest misunderstanding of fact or law that is reasonable in light of the experience knowledge and education of the taxpayer the most important factor is the extent of the taxpayer’s effort to assess his proper tax_liability for the year id petitioners’ underpayment was due to their substantially understating their income_tax petitioners did not show that there was reasonable_cause for and that they acted in good_faith with respect to the underpayment for therefore respondent’s determination of the accuracy-related_penalty under sec_6662 and b for is sustained to reflect the foregoing decision will be entered for respondent


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc corp b05 - plr-118330-00 date date legend parent purchaser seller target date a date b date c date d y business x company official outside tax professional plr-118330-00 this responds to your letter dated date requesting on behalf of the taxpayers identified above an extension of time under sec_301_9100-1 through of the procedure and administration regulations to file an election parent as the common parent of the consolidated_group of which purchaser is a member and seller are requesting an extension to file a sec_338 election under sec_338 and sec_338 of the internal_revenue_code and sec_1_338_h_10_-1 of the income_tax regulations with respect to purchaser’s acquisition of the stock of target sometimes hereinafter referred to as the election on date b all citations in this letter to regulations under sec_338 are to the regulations as in effect for date b additional information was submitted in letters dated may september and date the material information is summarized below parent is the common parent of a consolidated_group that has a calendar taxable_year and uses an accrual_method of accounting purchaser is a wholly owned subsidiary of parent and is included in parent’s group parent’s group includes approximately y subsidiaries and the group is engaged in business x prior to the acquisitions target was an s_corporation within the meaning of sec_1361 that was wholly owned by seller on date a parent and seller entered into a stock purchase agreement for parent to acquire all of seller’s stock of target for cash on date b parent assigned to purchaser and purchaser assumed all of parent’s rights and obligations under the stock purchase agreement seller consented to the assignment but parent remained obligated to seller under the stock purchase agreement also on date b purchaser acquired all of the stock of target from seller pursuant to the stock purchase agreement in a fully taxable_acquisition it is represented that parent is not and was not at all times relevant related to seller within the meaning of sec_338 purchaser’s acquisition of all of the outstanding_stock of target qualified as a qualified_stock_purchase as defined in sec_338 and seller will not report gain on the transaction under the installment_method of sec_453 following the acquisition new target was included in parent’s consolidated_return parent and seller intended to file the election the election was due on date c but for various reasons it was not filed on date d which is after the due_date for the election company official and outside tax professional discovered that the election was not filed the period of limitations on assessment under sec_6501 has not expired for parent’s seller’s or target’s taxable_year in which the acquisition sale was consummated the taxable_year in which the election should have been filed or for any taxable_year s that would have been affected by the election had it been timely filed plr-118330-00 sec_338 permits certain stock purchases to be treated as asset acquisitions if the purchasing_corporation makes or is treated as having made a sec_338 election under sec_338 and the acquisition is a qualified_stock_purchase sec_1_338-1 provides that a sec_338 election is an election to apply sec_338 to target sec_338 specifies the requirements for making a sec_338 election sec_338 defines a qualified_stock_purchase as any transaction or series of transactions in which stock meeting the requirements of sec_1504 of corporation is acquired by another corporation by purchase during the 12-month_acquisition_period sec_338 provides that the term purchase means any acquisition of stock but only if i the basis of the stock in the hands of the purchasing_corporation is not determined i in whole or in part by reference to the adjusted_basis of such stock in the hands of the person from whom acquired or ii under sec_1014 relating to property_acquired_from_a_decedent ii the stock is not acquired in an exchange to which sec_351 sec_354 sec_355 or sec_356 applies and is not acquired in any other transaction described in regulations in which the transferor does not recognize the entire amount of the gain_or_loss realized on the transaction and iii the stock is not acquired from a person the ownership of whose stock would under sec_318 other than paragraph thereof be attributed to the person acquiring such stock sec_338 permits the purchasing and selling corporations to elect jointly to treat the target_corporation as deemed to sell all of its assets and distribute the proceeds in complete_liquidation the sale of stock included in the qualified_stock_purchase generally is ignored a sec_338 election may be made for target only if it is a member of a selling_consolidated_group a member of a selling affiliated_group filing separate returns or an s_corporation sec_1_338_h_10_-1 gain_or_loss on the deemed sale is included in the consolidated_return of the selling group unless the target_corporation is a member of a selling affiliated_group filing separate returns or an s_corporation sec_1_338_h_10_-1 provides that a sec_338 election may be made for the target_corporation if the purchasing_corporation makes a qualified_stock_purchase of the target_corporation stock sec_1_338_h_10_-1 provides that if a sec_338 election is made for the target_corporation it is irrevocable sec_1_338_h_10_-1 provides that a sec_338 election is jointly made by a purchaser and the selling_consolidated_group or the selling affiliate or the s_corporation shareholders on form_8023 in accordance with the instructions to the form the regulations further provide that the election must be made not later than the 15th day of the ninth month beginning after the month in which the acquisition_date occurs the instructions to form_8023 provide that a sec_338 election must be made jointly by the purchasing_corporation and the common parent of the selling_consolidated_group or selling affiliate or s_corporation shareholders the instructions provide that the form must be signed by a person authorized to act on behalf of each corporation and if made for an s_corporation it must be signed by each s_corporation shareholder who sells target stock in the qualified_stock_purchase the instructions further provide that plr-118330-00 the signatures dates and titles if applicable of those persons must be provided in a signature attachment and they provide specific details as to the preparation of the signature attachment and its attachment to form_8023 sec_1_1502-77 provides that the common parent for all purposes other than for several purposes not relevant here shall be the sole agent for each subsidiary in the group duly authorized to act in its own name in all matters relating to the tax_liability for the consolidated_return_year see also form_8023 and the instructions thereto under sec_301_9100-1 the commissioner has discretion to grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-1 defines the term regulatory election as including an election whose due_date is prescribed by a regulation revenue_ruling revenue_procedure notice or announcement sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make a regulatory election sec_301_9100-1 sec_301_9100-2 provides automatic extensions of time for making certain elections requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-3 in this case the time for filing the election is fixed by the regulations ie sec_1_338_h_10_-1 therefore the commissioner has discretionary authority under sec_301_9100-1 to grant an extension of time for parent and seller to file the election provided parent and seller show they acted reasonably and in good_faith the requirements of sec_301_9100-1 and sec_301_9100-3 are satisfied and granting relief will not prejudice the interests of the government information affidavits and representations submitted by parent seller company official and outside tax professional explain the circumstances that resulted in the failure to timely file the valid election the information also establishes that tax professionals were responsible for the election that parent and seller relied on the tax professionals to timely make the election and that the government will not be prejudiced if relief is granted see sec_301_9100-3 based on the facts and information submitted including the representations made we conclude that parent and seller have shown they acted reasonably and in good_faith the requirements of sec_301_9100-1 and sec_301_9100-3 are satisfied and granting relief will not prejudice the interests of the government accordingly an extension of time is granted under sec_301_9100-1 until days from the date of plr-118330-00 issuance of this letter for parent and seller to file the election with respect to the acquisition of target as described above the above extension of time is conditioned on the filing within days of the issuance of this letter of all returns and amended returns if any necessary to report the transaction in accordance with the election and the taxpayers' parent’s purchaser’s seller’s and target’s tax_liability if any being not lower in the aggregate for all years to which the election applies than it would have been if the election had been timely made taking into account the time_value_of_money no opinion is expressed as to the taxpayers' tax_liability for the years involved a determination thereof will be made by the district director's office upon audit of the federal_income_tax returns involved further no opinion is expressed as to the federal_income_tax effect if any if it is determined that the taxpayers' liability is lower sec_301_9100-3 the above extension is also conditioned on i parent and seller signing the election and ii parent and seller treating the acquisition sale of the stock of target as a sec_338 transaction parent and seller must file the election in accordance with sec_1_338_h_10_-1 that is a new election on form_8023 must be executed on or after the date of this letter which grants an extension and filed in accordance with the instructions to the form a copy of this letter should be attached to the election form parent and seller must file or amend their returns as applicable for the year in which the transaction was consummated to report the acquisition sale as a sec_338 transaction and to attach thereto a copy of this letter and a copy of the election form however if parent and or seller have already reported the transaction as a sec_338 transaction then they must merely amend their returns to attach thereto a copy of the election and a copy of this letter pursuant to sec_1_338_h_10_-1 target’s s election is not terminated accordingly target is not required to file an s_short_year return ie a year that ended the day before the acquisition nor a one day short return as a non-affiliated c_corporation we express no opinion as to whether the acquisition sale of target’s stock qualifies as a qualified_stock_purchase under sec_338 whether the acquisition sale of target’s stock qualifies for sec_338 treatment or if sec_338 is applicable as to the amount and character of gain_or_loss if any recognized by target and thus by seller on target’s deemed asset sale and deemed liquidation in addition we express no opinion as to the tax consequences of filing the election late under the provisions of any other section of the code and regulations or as to the tax treatment of any conditions existing at the time of or resulting from filing the election late that are not specifically set forth in the above ruling for purposes of granting relief under sec_301_9100-1 we relied on certain statements and representations made by the taxpayers however the district_director s should verify all essential plr-118330-00 facts in addition notwithstanding that an extension is granted under sec_301_9100-1 to file the election penalties and interest that would otherwise be applicable if any continue to apply this letter is directed only to the taxpayer s who requested it sec_6110 provides that it may not be used or cited as precedent a copy of this letter is being sent to company official and parent’s authorized representative pursuant to the power_of_attorney on file in this office sincerely yours associate chief_counsel corporate by ken cohen acting chief branch


internal_revenue_service department of the treasury index number washington dc number release date legend person to contact telephone number refer reply to cc dom p si plr-107835-98 date date x fund transferors dear this letter responds to a letter dated date as amended by a letter dated date and other supplemental correspondence submitted by your authorized representative requesting rulings concerning the federal_income_tax consequences of proposed contributions of property to a partnership plr-107835-98 the information submitted indicates that x is an investment adviser registered with the securities_and_exchange_commission under of the investment advisers act of x currently manages the investment accounts of certain individuals trusts partnerships corporations and foundations under an investment advisory agreement the agreement under the agreement x acts with discretionary investment authority over the assets held in an investment account x proposes to arrange for the transferors to transfer the assets of their investment accounts to fund a securities investment_trust managed by x in exchange for units of fund and fund's assumption of the transferors’ liabilities if any the following representations have been made regarding this transaction a fund is classified as a partnership for federal_income_tax purposes and fund is not a publicly_traded_partnership under sec_7704 of the internal_revenue_code b the adjusted_basis and the fair_market_value of the assets of each transferor to be exchanged for units of fund will in each instance equal or exceed the sum of the liabilities to be assumed by fund plus any liabilities to which the transferred assets are subject c each transferor will receive units approximately equal to the fair_market_value of the assets transferred by the transferor to fund d each transferor will contribute solely cash and or a diversified portfolio of stocks and securities to fund e there is no plan or intention for any transferor to transfer assets other than cash and or a diversified portfolio of stocks and securities to fund and f any other transferor who has contributed or will contribute assets to fund has contributed or will contribute solely cash and or a diversified portfolio of stocks and securities to fund for purposes of these representations a portfolio of stocks and securities is diversified if it satisfies the and 50-percent tests of sec_368 applying the relevant provisions of sec_368 except that in applying sec_368 government securities are included in determining total assets unless the governments securities are acquired to meet the requirements of sec_368 the service has been requested to rule that plr-107835-98 each transferor and fund will recognize no gain_or_loss on the transfer of the assets in the transferor’s investment account to fund solely in exchange for units in fund and fund's assumption of the transferor's liabilities if any each transferor's basis in the units received in the transaction will equal the basis of the assets transferred in exchange therefor reduced by the sum of the transferor's liabilities assumed by fund or to which assets transferred are taken subject each transferor's holding_period in units received in the transaction will include the period during which the property exchanged were held by the transferor provided that such property were capital assets or property described in sec_1221 or sec_1231 on the date of the exchange fund's basis in the assets received from the transferor will equal the basis of such property in the hands of the transferor before the exchange and fund's holding_period in the assets received from a transferor will in each instance include the period during which the transferor held such assets sec_721 provides that no gain_or_loss shall be recognized to a partnership or to any of its partners in the case of a contribution of property to the partnership in exchange for an interest in the partnership sec_721 provides that sec_721 shall not apply to gain realized on a transfer of property to a partnership that would be treated as an investment_company within the meaning of sec_351 if the partnership were incorporated sec_722 provides that the basis of an interest in a partnership acquired by a contribution of property including money to the partnership shall be the amount of such money and the adjusted_basis of such property to the contributing_partner at the time of contribution increased by the amount if any of gain recognized under sec_721 to the contributing_partner sec_1223 provides that where property received in an exchange acquires the same basis in whole or in part as the property surrendered in the exchange the holding_period of the property received includes the holding_period of the property surrendered to the extent such surrendered property was a capital_asset as defined in sec_1221 or property described in sec_1231 sec_723 provides that the basis_of_property contributed to a partnership by a partner shall be the adjusted_basis of such property to the contributing_partner at the time of the contribution increased by the amount if any of gain recognized under sec_721 to the contributing_partner at such time plr-107835-98 sec_1_723-1 of the income_tax regulations provides that because property contributed to a partner has the same basis in the hands of the partnership as it had in the hands of the contributing_partner the holding_period of such property for the partnership includes the period during which it was held by the partner see sec_1223 sec_1_351-1 provides that a transfer to an investment_company will occur when i the transfer results directly or indirectly in diversification of the transferors’ interests and ii the transferee is a regulated_investment_company ric real_estate_investment_trust reit or a corporation more than percent of the value of whose assets excluding cash and non-convertible debt obligations from consideration are held for investment and are readily marketable stocks or securities or interests in rics or reits sec_1002 of the taxpayer_relief_act_of_1997 pub_l_no 111_stat_788 the act amends sec_351 for transfers after date in taxable years ending after such date subject_to certain transitional relief provisions sec_1002 of the act is intended to expand the types of assets considered in determining whether a transfer is to a transferee described in sec_1_351-1 to include certain assets in addition to readily marketable stocks or securities and interests in rics or reits however the act is not in intended to alter the requirement of sec_1_351-1 that a transfer of property will be considered to be a transfer to an investment_company under sec_351 only if the transfer results directly or indirectly in diversification of the transferors’ interests see s rep no 105th cong 1st sess h_r rep no 105th cong 1st sess h_r rep no 105th cong 1st sess sec_1_351-1 provides that a transfer ordinarily results in diversification of the transferors’ interests if two or more persons transfer nonidentical assets to a corporation in the exchange it further provides that if a transfer is part of a plan to achieve diversification without recognition of gain such as a plan which contemplates a subsequent transfer however delayed of the corporate assets or of the stock_or_securities received in the earlier exchange to an investment_company in a transaction purporting to qualify for nonrecognition treatment the original transfer will be treated as resulting in diversification sec_1_351-1 provides that a transfer of stocks and securities will not be treated as resulting in a diversification of the transferors’ interests if each transferor transfers a diversified portfolio of stocks and securities and a portfolio of stocks and securities is considered to be diversified if it satisfies the and 50-percent tests of sec_368 applying the relevant provisions of sec_368 except that government securities are included in total assets for purposes of the denominator of plr-107835-98 the and 50-percent tests unless acquired to meet the and 50-percent tests but are not treated as securities of an issuer for purpose of the numerator of the and 50-percent tests an investment_company is diversified within the meaning of sec_368 if not more than percent of the value of its assets is invested in the stock and securities of any one issuer and not more than percent of the value of its total assets is invested in the stock and securities of five or fewer issuers after applying the law to the facts submitted and representations made we conclude that the transfers of property to fund by the transferors would not be transfers to an investment_company within the meaning of sec_351 if fund were incorporated provided that these are the only transfers to fund except for transfers solely of cash and or a diversified portfolio of stocks and securities therefore we conclude that fund and each transferor will recognize no gain_or_loss under sec_721 on the transfer of the assets in the transferor's investment account currently managed by x to fund in exchange for units of fund and fund’s assumption of the transferor’s liabilities if any each transferor's basis in the units of fund received in the transaction will equal the basis of the assets exchanged by the transferor for those units reduced by the sum of the transferor’s liabilities assumed by fund or to which the assets transferred were taken subject each transferor's holding_period in the units of fund received in the transaction will include the period during which the property exchanged was held by the transferor provided that such property was a capital_asset or property described in sec_1221 or sec_1231 on the date of the exchange fund’s basis in the assets received from a transferor will equal the basis of such property in the hands of the transferor before the exchange and fund's holding_period in assets received from a transferor will in each instance include the period during which the transferor held such property except as otherwise provided we express no opinion regarding the federal_income_tax treatment of the proposed transaction under any other provision of the code or regulations or the tax treatment of any conditions existing at the time of or effects resulting from the proposed transaction in particular we express no opinion as to i the consequences of other transfers to fund either as to whether such other transfers would be transfers to an investment_company or would except for transfers solely of cash and or a diversified portfolio of stocks and securities when taken plr-107835-98 together with the transfers by the transferors cause those transfers to be considered transfers to an investment_company or ii whether the transfers are part of a plan to achieve diversification without recognition of gain under sec_1_351-1 temporary or final regulations pertaining to one or more of the issues addressed in this ruling have not yet been adopted therefore this ruling will be modified or revoked if adopted temporary or final regulations are inconsistent with any conclusions in the ruling see dollar_figure of revproc_99_1 1999_1_irb_6 however when the criteria in dollar_figure of revproc_99_1 are satisfied a ruling is not revoked or modified retroactively except in rare or unusual circumstances this letter is directed only to the taxpayers who requested it sec_6110 provides that it may not be used or cited as precedent under the power_of_attorney on file in this office a copy of this letter is being sent to x's authorized representative sincerely yours jeff erickson assistant to the branch chief branch office of assistant chief_counsel passthroughs special industries enclosure copy for sec_6110 purposes


department of the treasury internal_revenue_service washington d c date number release date uilc internal_revenue_service national_office field_service_advice memorandum for from subject deborah a butler assistant chief_counsel field service cc dom fs proposed closing_agreement concerning a tefra partnership and the correlative adjustments following an sec_482 adjustment this field_service_advice responds to your memorandum dated date field_service_advice is not binding on examination or appeals and is not a final case determination this document is not to be cited as precedent legend p1 p2 x y z r s t year year year dollar_figurea dollar_figureb dollar_figurec dollar_figured dollar_figuree issues whether the proposed closing_agreement correctly implements the proposed settlement offer of x and does the proposed closing_agreement adequately protect the service’s interests as to any other entity conclusions the proposed closing_agreement does correctly calculate the amount of the correlative adjustments that follow from the application of sec_482 and correctly implements the proposed settlement offer of x however the proposed closing_agreement may not be able to adequately protect the service’s interest as to other entities because the service cannot limit the sec_482 adjustments to apply only to x facts p1 is a tefra partnership with two equal corporate partners x and y p1 owns all of the stock of r corporations collectively called z z are the partners of the p2 partnership the fpaa issued to p1 for year determined that p1 had earned dollar_figurea in additional income pursuant to an sec_482 adjustment as a result of a contract between p1 and p2 x is not interested in establishing an account receivable under revrul_65_17 as a way to conform p1's accounts because p1 would not be able to collect anything approaching dollar_figureb from p2 therefore x has proposed to settle its case by deeming p1 to have recognized approximately dollar_figureb of the proposed sec_482 adjustment in year however x also proposes that the service agree to the correlative adjustments that follow from the application of sec_482 the proposed correlative adjustments are as follows p1's income is increased by dollar_figureb for year therefore x’s income and its basis in its partnership_interest in p1 is increased by dollar_figured for year p1 is deemed to have contributed the dollar_figureb collectively to the r corporations which collectively form z in proportion to each corporation’s interest in p2 thereby increasing p1's aggregate basis in the stock of z by dollar_figureb z are deemed to collectively contributed the dollar_figureb to p2 thereby increasing z’s aggregate basis in p2 by dollar_figureb in year p1 sells all of the stock of s of p1’s corporations which collectively form z to unrelated parties p1’s aggregate basis in the stock of these corporations had been increased as a result of the sec_482 adjustment by dollar_figurec therefore p1 realizes a capital_loss of dollar_figurec of which dollar_figuree flowed through to x to protect the government’s interest as to other entities besides x the proposed settlement agreement contains the following language this agreement is between x and the commissioner p1 is not a party to this agreement any statement herein concerning p1 shall affect the federal_income_tax liability of x only and shall not apply to y the other partner of p1 furthermore any statement herein concerning z shall affect the federal_income_tax liability of x only and shall not apply to y or to any other present or future shareholder of z y does not agree with x’s settlement proposal the reason the two partners of p1 disagree on the settlement proposal is because the two partners of p1 are in different tax situations in year p1 sold all of the stock of several of the remaining corporations which collectively form z under the proposed correlative adjustments p1 would have a dollar_figureb increased basis in z therefore p1 would have large capital losses in year on the sale of the stock instead of the small gains that were reported x had large capital_gains in a previous year which could be offset by carrying back theses large capital losses from the correlative adjustments thus greatly diminishing the tax impact of x’s share of p1's increase of income in the amount of dollar_figureb for year y however does not have any capital_gains to be offset and does not receive any benefit from the settlement proposal law and analysis tefra p1 is subject_to the audit and litigation procedures of the tax equity fiscal responsibility act of tefra publaw_97_248 96_stat_324 pursuant to i r c c a settlement agreement between the secretary and one or more partners in a tefra partnership with respect to the determination of partnership items for any partnership taxable_year shall be binding on all parties to such agreement with respect to the determination of partnership items for such partnership taxable_year i r c c further states that if the secretary enters into a settlement agreement with any partner with respect to partnership items for any partnership taxable_year the secretary shall offer to any other partner who so requests settlement terms for the partnership taxable_year which are consistent with those contained in such settlement agreement any settlement agreement that would otherwise qualify for consistent settlement that is entered into in a docketed_case automatically gives all parties to the action the right to consistent treatment if they so request within days of the date the agreement was entered into temp sec_301_6224_c_-3t c ii sec_6231 defines partner as a partner in the partnership and any other person whose income_tax_liability under subtitle a is determined in whole or in part by taking into account directly or indirectly partnership items of the partnership sec_6231 defines a partnership_item as any item required to be taken into account for the partnership’s taxable_year under any provision of subtitle a to the extent regulations prescribed by the secretary provide that for purposes of this subtitle such item is more appropriately determined at the partnership level than at the partner level in the case at issue x has proposed a settlement agreement with the service in accordance with i r c c if the service enters into the settlement agreement with x the service may be required pursuant to i r c c to allow settlement terms to y which are consistent with the settlement agreement entered into by x and the service as your request for field_service_advice stated that your office is prepared to offer to y the identical settlement terms as the terms in the proposed agreement at issue this field_service_advice will not go into further detail of the requirements of a consistent settlement correlative adjustments sec_482 provides in part that in any case of two or more organizations trades_or_businesses whether or not incorporated whether or not organized in the united_states and whether or not affiliated owned or controlled directly or indirectly by the same interests the secretary may distribute apportion or allocate gross_income deductions credits or allowances between or among such organizations trades_or_businesses if he determines that such distribution apportionment or allocation is necessary in order to prevent evasion of taxes or clearly to reflect the income of any of such organizations trades_or_businesses sec_1_482-1a provides in part that whenever the district_director makes adjustments to the income of one member of a group of controlled taxpayers such adjustments being referred to in this paragraph as primary adjustments he shall also make appropriate correlative adjustments to the income of any other member of the group involved in the allocation the correlative_adjustment shall actually be made if the u s income_tax_liability of the other member would be affected for any pending taxable_year thus if the district_director makes an allocation of income he shall not only increase the income of one member of the group but shall decrease the income of the other member if such adjustment would have an effect on the u s income_tax_liability of the other member for any pending taxable_year as noted above the service has alleged that p1 should have recognized an additional dollar_figurea of income as a result of a transaction between p1 and p2 x has agreed to settle its portion of this adjustment by deeming p1 to have recognized an additional dollar_figureb of income in addition the service will apply the correlative adjustments that follow from the application of sec_482 in other words p1 is deemed to have received additional income from p2 however to explain the fact that p1 did not actually receive such additional income and that it in fact never left p2 it is necessary to deem p1 to have re-transferred that amount back to p2 the simplest mechanism is to deem p1 to have contributed that amount collectively to the capital of z in proportion to each corporation’s interest in p2 and then to deem z to have contributed that amount to p2 see eg revrul_69_630 1969_2_cb_112 and revrul_78_83 1978_1_cb_79 see also sec_1_482-1a therefore the proposed settlement agreement does correctly calculate the amount of the correlative adjustments that follows from the application of sec_482 the proposed correlative adjustments increase x’s basis in its interest in p1 p1's basis in the stock of z and the basis of the interest of z in p2 see sec_1016 sec_705 and sec_722 because x included such amount in its income you are willing to recognize these increases in basis as long as x owns directly or indirectly an interest in p1 z and p2 however you wish to prevent a party other than x from claiming the benefits of such increases in basis because you believe that otherwise the same loss would be claimed by multiple parties consequently the proposed closing_agreement would provide that the correlative adjustments would not apply in determining the federal_income_tax liability of y further if x were to sell some or all of its interest in p1 or if p1 were to sell the stock of some or all of z the closing_agreement would provide that any basis_adjustment as a result of the correlative adjustments by p1 in the stock of z or by z in their partnership_interest in p2 would not apply to any acquiring party you have asked whether it is appropriate for the closing_agreement so to provide with respect to y there is an argument that since y did not include dollar_figured in income as x did following the sec_482 adjustment it would not be entitled to the benefits of the correlative adjustments if y does not want to enter into a consistent settlement agreement with the service however we question whether there is any authority for not recognizing the correlative adjustments ie the basis increases that p1 would have in z and that z would have in p2 if for example a third party were to acquire an interest in p1 or z generally the role of basis in the tax law is to identify the portion of a taxpayer’s wealth that is exempt from future income_taxation kohl the identification theory of basis tax law review in other words if a taxpayer buys property eg stock in a corporation or an interest in a partnership its basis in that property is what it paid for such property sec_1012 thus when the taxpayer sells such property it is only taxed on the difference between the value of the property it receives and its basis in such property sec_1001 see also 126_fsupp_184 ct_cl in other words it is not taxed on the entire amount of the proceeds since to the extent of basis such amount is presumed to have been previously taken into account in this case x increased its basis in p1 p1 increased its basis in z and z increased their basis in p2 by the amount of income recognized to x in each case the shareholder or partner is treated as having contributed such amount to the capital of its corporation or partnership such contribution results in an increase in the shareholder’s or partner’s basis in the corporation or partnership see sec_722 and sec_1016 75_fsupp_340 n d ohio that is the case even though such amount is subsequently contributed down the chain this is because p1 and z continue to own indirectly such amount thus once the amount is contributed to p1 and to z and to p2 the effect of the contribution cannot be taken away simply because someone else x p1 or z sold or transferred an interest in a corporation or partnership this point is also illustrated by the following hypothetical x transfers its interest in p1 to a corporation newco in exchange for some of the stock of newco simultaneously other transferors transfer property to newco in exchange for stock because the transferors including x collectively receive all of the stock of newco the exchanges qualify as tax-free under sec_351 consequently newco would take the same basis including the correlative adjustments in p1 as x had sec_362 this result would apparently be allowed under the proposed closing_agreement since x would continue to indirectly own p1 subsequently x sells its newco stock under the proposed closing_agreement newco’s basis in p1 would be decreased by the amount of the correlative_adjustment thus if newco later sells its interest in p1 newco’s gain_or_loss is higher or lower respectively than if the correlative adjustments were taken into account however newco would argue that it was not a party to the closing_agreement and is therefore not required to reduce its basis by the amount of the correlative_adjustment we are not aware of any authority that would require newco to reduce its basis by the amount of the correlative_adjustment finally if a shareholder sells its stock in a corporation that sale has no effect on the basis of any asset including stock in a corporation or an interest in a partnership owned by that corporation in other words the sale only affects the basis of the stock in the corporation the one exception is if the parties elect to apply sec_338 in that case the corporation being sold is treated as selling its assets to a new subsidiary of the acquiring_corporation the consequence is that the purchaser may allocate the purchase_price for the stock among the assets including stock in a corporation or an interest in a partnership of the target_corporation sec_338 absent that provision we are not aware of any authority for adjusting the basis of an asset in which the corporation holding such asset is sold thus we do not recommend including in the closing_agreement a provision which ignores the correlative_adjustment upon a sale or transfer by x of its interest in p1 or by p1 of its interest in z we also do not believe that there are any revisions that could be made to the proposed closing_agreement to prevent third parties from claiming the benefits of an increase in the basis if x were to sell some or all of its interest in p1 or if p1 were to sell the stock of some or all of z case development hazards and other considerations please call if you have any further questions