office_of_chief_counsel internal_revenue_service memorandum number release date cc corp -------------- postf-144103-06 uilc date date to ------------------------- senior attorney large mid-size business from ----------------------- branch chief corporate third party communication date of communication month dd yyyy subject ----------------------------------------------------- this chief_counsel_advice responds to your request for assistance this advice may not be used or cited as precedent legend acquiring ---------------------------------------------------------- ---------------------------------------------------------- target ----------------------------------- ------------------------------------------------------------------------ principal creditor ------------------------------------------------------ target llc ---------------------------------------------------------- ----------------------------------------------------------------- firm taxpayer’s representative --------------------------------------------- --------------------------------- postf-144103-06 service representative --------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------- date date date date date date date date date date date date dates date shareholder shareholder shareholder aa a dollar_figureb c ------------------------- ---------------------- ---------------------------- --------------------- --------------------------- -------------------------- -------------------------- -------------------- ----------------- -------------------------- -------------------------- -------------------------- ------------------------------------------------- -------------------------- ----------------------------------------------- ----------------------- ------------------------------------- ----------- ------ ------------------------------------------------------------- ---- postf-144103-06 d e f g h j k l m n o p q r s t u state v state vv w x y z ------ ------ -------- -------------- -------------- ------ -------------- ------ -------------- ---- ------------- -------------- -------- ------ ------ ------ -------- -------- ---------------- -------------- ---------------- ------------- ------ postf-144103-06 --------------- ----------- ---------------------- ----------------- --------- ------- ------- ww xx z transactions zz facility year year year issues whether acquiring’s acquisition of target on date the date target emerged from bankruptcy qualifies for treatment under sec_382 of the code conclusions acquiring’s acquisition of target on date does not qualify for treatment under sec_382 facts on date acquiring entered into formal discussions regarding possible acquisition of target on date acquiring and target entered into a confidentiality agreement on date acquiring purchased aa shares of target’s stock representing a less than of target’s stock then outstanding for dollar_figureb per share on date acquiring target and target’s principal creditor principal creditor entered into a stock purchase agreement under which acquiring was to purchase newly issued target shares and target would solicit acceptances from its shareholders for a prepackaged plan of bankruptcy reorganization on date target filed a disclosure and proxy statement with the bankruptcy court the court soliciting approval from its shareholders for a prepackaged bankruptcy plan the stock purchase agreement as submitted to the court was amended and restated on date the agreement shortly thereafter on date the court approved target’s bankruptcy plan of which the agreement was a part the plan throughout the period of the discussed in this document target had only one class of stock outstanding immediately prior to date target had approximately g shares of its stock outstanding and target’s stock was owned by three 5-percent shareholders and a public_group in the following percentages shareholder - c shareholder - d shareholder - e and public - f acquiring’s date purchase of a was postf-144103-06 made from public pursuant to the plan’s becoming effective on date the following transactions occurred on date all of the shares of target stock held by shareholder and the public except for a deminimis number of shares held by public shareholders h shares altogether were redeemed for dollar_figurej per share and acquiring purchased k shares of newly issued target stock from target representing l of target’s stock then outstanding after taking into account the approximately h shares redeemed from shareholder and the public for dollar_figurem which would be about dollar_figuren per share on date immediately after the redemptions and the issuance of new shares the stock of target was held by the following shareholders in the following percentages shareholder - q shareholder - r acquiring - s t as a result of the aa shares acquired on date and l as a result of the k shares acquired on date also pursuant to the plan acquiring paid dollar_figureo to principal creditor-s ---------------------- on date for which consideration principal creditor agreed to reduce target’s debt outstanding to principle creditor by dollar_figureo1 the following month on date target paid off the remaining principal and interest dollar_figurep on its debt owed to principle creditor under the plan all of target’s creditors except principle creditor were paid in full further the dollar_figureo paid ---------------------------------------- to principle creditor-s ------------------ ------- pursuant to the plan represented more than of the debt owed by target to principle creditor and the remaining portion of the debt owing was paid off by target the following month all of which occurred within months of target’s emerging from bankruptcy on date and respectively target redeemed all of shareholder 2’s target stock and all of shareholder 1’s target stock for dollar_figureu per share shareholder 1’s redemption as well as that of the deminimis number of shares held by public shareholders not redeemed on date was effectuated by means of a short-form cash-out merger which acquiring as the majority shareholder of target could implement without the approval of other target shareholders under the terms of its restated articles of incorporation as permitted under state v law dates and fell within weeks after date on date target was converted into target llc which was a single member limited_liability_company and a disregarded_entity for federal_income_tax purposes date sec_2 and all fall within calendar_year as of the end of calendar_year the preceding year target had net_operating_loss carryovers of approximately dollar_figurew as of the end of calendar_year target had net_operating_loss carryovers of approximately dollar_figurex the acquiring group used all of these net_operating_loss carryovers to offset taxable_income in its first two taxable years ending after it sec_1 between date sec_4 and principle creditor had itself filed a chapter bankruptcy petition in state vv taxpayer has stated that in form the payment to principle creditor was treated as a loan of dollar_figureo by acquiring to target documented through intercompany note receivable and payable entries on the companies’ books followed by target’s payment of dollar_figureo to principle creditor-s ----------------------- taxpayer further indicates that this loan was retired by means of a capital_contribution from acquiring to target in year postf-144103-06 acquisition of target except for a relatively small portion of the carryovers approximately dollar_figurey that expired unused after the first of those two taxable years law and analysis sec_382 provides that after an ownership_change the amount of a loss corporation’s taxable_income for any post-change_year that may be offset by pre-change losses which include net_operating_loss carryovers shall not exceed the sec_382 limitation for that year an ownership_change occurs with respect to a corporation if it is a loss_corporation on a testing_date and immediately after the close of the testing_date the percentage of stock of the corporation owned by one or more 5-percent shareholders has increased by more than percentage points over the lowest percentage of stock of such corporation owned by such shareholders at any time during the testing_period see sec_1_382-2t of the income_tax regulations the testing_period is generally a 3-year period ending on a testing_date sec_1 2t d sec_382 provides an exception under which a loss corporation’s pre-change losses shall not be limited after an ownership_change if the loss_corporation is immediately before such ownership_change under the jurisdiction of the court in a title_11_or_similar_case and the shareholders and creditors of the loss_corporation determined immediately before such ownership_change own after such ownership_change and as a result of being shareholders or creditors immediately before such change stock of the loss_corporation which meets the requirements of sec_1504 determined by substituting percent for percent each place it appears for purposes of sec_382 sec_382 provides that stock transferred to a creditor shall be taken into account only to the extent such stock is transferred in satisfaction of indebtedness and only if such indebtedness was held by the creditor at least months before the date of the filing of the title_11_or_similar_case or arose in the ordinary course of the trade_or_business of the loss_corporation and is held by the person who at all times held the beneficial_interest in such indebtedness thus sec_382 provides an exception to the general_rule of sec_382 in recognition of the fact that by the time a corporation is in bankruptcy ie under the jurisdiction of the court in a title_11_or_similar_case it is often the corporation’s creditors and not its shareholders who are effectively its economic owners it is not uncommon in such cases for the court to approve a plan under which- i shares of stock held by the historic shareholders are cancelled without consideration and ii and the company’s creditors are issued new shares of stock thus becoming the company’s new shareholders were it not for the sec_382 exception such a corporation’s pre- change losses would be limited under sec_382 by virtue of the fact that creditors who formerly owned none of the loss corporation’s stock before the effective date of the plan now own more than the percent sec_382 provides that pre-change losses will not be limited if pre-change qualified creditors as a result of their creditor’s interest and historic shareholders hold percent or more of the stock of the loss_corporation on its emergence from bankruptcy postf-144103-06 prior to date in year acquiring had no interest either as a stockholder or a creditor in target by the end of that year acquiring owned all of the stock of target in filing its tax returns for its taxable years ending after date acquiring took the position that target’s pre-change losses could be used without limitation against acquiring’s post-change income notwithstanding the ownership_change that occurred on target’s emergence from bankruptcy on date on grounds that the acquisition of target qualified for application of sec_382 we believe the ownership_change of target occurring on date does not qualify under sec_382 acquiring structured its acquisition of target in a way that superficially might appear to meet the requirements of sec_382 that is on date the day that target emerged from bankruptcy shareholder and shareholder held q and r of the stock of target respectively furthermore acquiring as a result of its acquisition of aa shares of target on date held t of target’s stock on date q r t z just over percent we believe however that the transaction as structured does not reflect economic reality especially as regards- i the number of shares of target stock received by acquiring on date in exchange for acquiring’s contribution to target’s capital on that date and ii the amount of consideration paid to shareholder sec_1 and in redemption of their target stock on dates and there are several approaches or analyses that arguably reveal the economic unreality of the transaction analysi sec_1 consider the prices paid for the issuance redemptions of shares occurring on dates and on date the shares held by shareholder and public were redeemed for dollar_figurej per share on dates and the shares held by shareholder and shareholder were redeemed for dollar_figureu per share the difference between dollar_figurej and dollar_figureu is a less than percentage_point difference the redemption amounts paid for these shares are in line with the amount_paid dollar_figureb by acquiring in purchasing aa shares from public on date yet on date when acquiring contributed dollar_figurem to target in exchange for k newly issued shares the amount contributed per share received dollar_figuren was about times the amount_paid in redemption of the shares redeemed on the same day considering the amount_paid in by acquiring acquiring arguably should have received times as many target shares as were actually issued had those shares been issued the number of target shares outstanding would have been approximately ww and the percentage of target stock held by the ‘historic shareholders’ on date would have been just over percent clearly the requirements of sec_382 would not have been met taxpayer argues that both the amounts paid out by target on date in redemption of shareholder and public and the amount_paid in by acquiring for the newly issued shares reflect the reality of the transaction first target got a fairness opinion from firm to the effect that the consideration received by the shareholders redeemed on date was fair from a financial point of view second taxpayer stated arguably good business reasons for wanting to acquire target and by extension for paying the amount of consideration that it did we need not contest these points but we do assert that had acquiring received an economically reasonable percentage of target’s stock postf-144103-06 in exchange for the amount of consideration paid it would have received a much larger percentage than l this aspect of the transaction does not reflect economic reality it appears that acquiring’s failure to take a greater number of shares was not of any economic detriment to acquiring2 but merely served as a device for claiming the tax benefits of sec_382 third taxpayer argues that the bankruptcy court’s approval of the plan supports the values attributed under the plan to the target shares issued redeemed on date we disagree-we do not think the court would be concerned with what number or percentage of target shares was issued to acquiring in exchange for its capital infusion into target the court’s primary focus we believe would be on the fairness of the plan to the various creditors whose interests might be cut back in the bankruptcy action if all parties to a pre-packaged plan of bankruptcy are happy with the proposed resolution the court is likely to approve it thus we believe acquiring could have taken a greater or lesser number of target shares in the proposed resolution without the court’s taking notice analysi sec_2 arguably shareholder sec_1 and should not be considered to be continuing shareholders after date but rather should be considered to have been redeemed in substance as part of a predetermined plan it should be noted that when redeemed shareholder sec_1 and received only the same amount of consideration per share as was received by the shareholders who were redeemed as part of the plan actually a deminimis lesser amount per share said to be fair because of the lack of marketability of the shares this does not appear to square with the fact that acquiring made a large contribution to target’s capital on date taking back only a relatively few target shares in exchange therefor as a result one might have expected the value per share of target stock would have substantially increased on date stated another way the fair value per share of the target shares redeemed on date was determined by firm taking into account all of target’s debt outstanding before any discharge or repayment under the plan3 with the reduction in the amount of target’s debt outstanding on date one could reasonably expect target’s value per share to have increased yet shareholder sec_1 and received no more per share than those who were redeemed under the plan on date this arguably suggests that the amount_paid for their shares was fixed by side agreement as of the time the plan became effective arguably the only reason shareholder sec_1 and were not in form redeemed out with the other outside shareholders on date was acquiring’s desire to construct a that is shareholder sec_1 and were redeemed out of target a few weeks after date for essentially the same amount per share as was paid to redeem out other shareholders on date leaving acquiring as target’s sole shareholder seen in this light it would not have made any economic difference to acquiring whether it was issued a greater or lesser number shares of target stock on date given that acquiring was destined to become target’s 100-percent owner see analysi sec_2 under which we suggest that the redemption of shareholder sec_1 and on dates and was already planned as of date see the answer to question b provided by taxpayer’s representative in its letter to service representative dated date postf-144103-06 transaction that in form would appear to meet the requirements of sec_382 given the inferred side agreement fixing the amount to be received by shareholder sec_1 and it would not have mattered to shareholder sec_1 and whether a greater or lesser number of target shares had been issued to acquiring on date analysi sec_3 under analysi sec_3 we step back to take a look at the bigger picture as we said earlier it is often the case that a company in bankruptcy is effectively owned in an economic sense by its creditors notwithstanding the fact that the company’s stock remains outstanding often trading for negligible amounts in light of the reality that it may soon be cancelled if such a company is to be acquired by an outsider it is primarily the company’s creditors not its shareholders who must be satisfied by the fairness of the deal acquiring wanted to acquire target in a pre-packaged bankruptcy the bankruptcy proceeding was critical to acquiring’s execution of the agreement acquiring was willing to pursue a stock acquisition of target only if target’s bankruptcy would relieve target of all of its unknown liabilities thus for acquiring to accomplish its objectives it would have to satisfy target’s creditors it may further be noted that the amount of cash infused by acquiring into target as part of the plan was significantly greater than the dollar_figurem contributed to target on date in addition to the dollar_figurem acquiring loaned target as part of the plan dollar_figureo which amount was more than three times greater than dollar_figurem while such amounts were not fully sufficient to satisfy all the claims of target’s creditors all creditors other than principle creditor were made whole under the plan and about percent of the amount owing to principle creditor was essentially paid off under the plan creditors agreed to the plan which was then approved by the court the market arguably would have valued all the stock of target at about dollar_figurexx prior to the adoption of the plan ie as determined by multiplying the number of shares outstanding by about dollar_figurej per share the amount contributed to target dollar_figurem was nearly times this amount the amounts contributed and loaned to target dollar_figurem dollar_figureo were more than times this amount6 acquiring had to put these amounts into target if it were to get creditor approval for the plan when all was said and done acquiring had gone from a 0-percent interest in target at the beginning of year having neither a shareholder’s nor a creditor’s interest in target to having a 100-percent interest as a taxpayer’s representative in answer to question c in its letter to service representative on date stated that the price at which shareholder was redeemed out of target was negotiated between target and shareholder in an arm’s length transaction this may be true what is not stated is the date on which these negotiations took place the redemption price received by shareholder sec_1 and would seem to be perfectly reasonable if we view the negotiations with shareholder sec_1 and as having taken place in conjunction with the formulation of the date plan this valuation dollar_figurexx arguably is on the high side that is were it not for acquiring’s interest in acquiring target and in securing target shareholder cooperation in approving the plan the value of target’s stock might have been considerably less the amount owing acquiring under the loan was retired by means of a capital_contribution from acquiring to target in year postf-144103-06 shareholder in the financially restructured company by the end of the year this looks very much like a 100-percent shift that does not qualify under sec_382 since acquiring was neither a historic shareholder nor a historic creditor of target caselaw authorities courts have developed a number of judicial doctrines that can negate the intended effect of transactions structured solely or primarily to avoid taxation these doctrines are often overlapping and have been used interchangeably by courts to address abusive transactions economic_substance_doctrine the courts generally will deny claimed tax benefits where the transaction giving rise to those benefits lacks economic_substance independent of tax considerations - notwithstanding that the purported activity did actually occur the tax_court recently described the doctrine as follows- the tax law requires that the intended transactions have economic_substance separate and distinct from economic benefit achieved solely by tax reduction the doctrine_of economic_substance becomes applicable and a judicial remedy is warranted where a taxpayer seeks to claim tax benefits unintended by congress by means of transactions that serve no economic purpose other than tax savings acm partnership v commissioner tcmemo_1997_115 73_tcm_2189 pincite aff’d in part and rev’d in part by 157_f3d_231 3d cir the seminal authority most often credited for laying the foundation of the economic_substance_doctrine is the supreme court and second circuit decisions in 293_us_465 aff’g 69_f2d_809 2nd cir in gregory a transitory subsidiary was established to effectuate utilizing the corporate_reorganization provisions of the code a tax advantaged distribution from a corporation to its shareholder of appreciated corporate securities that the corporation and its shareholder intended to sell although the court found that the transaction satisfied the literal definition of a tax-free reorganization the second circuit held and the supreme court affirmed that satisfying the literal definition was not enough- t he underlying presupposition is plain that the readjustment shall be undertaken for reasons germane to the conduct of the venture in hand not as an ephemeral incident egregious to its prosecution to dodge the shareholder's taxes is not one of the transactions contemplated as corporate_reorganizations gregory v helvering f 2d pincite postf-144103-06 in the present case two aspects of the structuring of the transaction would seem to lack economic_substance apart from tax considerations- acquiring’s receipt of only k shares of target stock rather than a much larger number for its date contribution of dollar_figurem to target’s capital and target’s redemption of shareholder sec_1 and in form on dates and rather than on date business_purpose doctrine another doctrine that overlays and is often considered together with if not part and parcel of the economic_substance_doctrine is the business_purpose doctrine although numerous authorities apply this doctrine in the context of individuals or partnerships the doctrine equally applies in the corporate context additionally the doctrine is not limited to cases where the relevant statutory provisions by their terms require a business_purpose or profit potential supra acm partnership pincite the business_purpose test is a subjective inquiry into the motives of the taxpayer - that is whether the taxpayer intended the transaction to serve some useful nontax purpose 752_f2d_89 4th cir pincite in its common application the courts use business_purpose in combination with economic_substance as discussed above as part of a two-prong test for determining whether a transaction should be disregarded for tax purposes i the taxpayer was motivated by no business_purpose other than obtaining tax benefits in entering the transaction and ii the transaction lacks economic_substance id pincite in essence a transaction will only be respected for tax purposes if it has economic_substance which is compelled or encouraged by business or regulatory realities is imbued with tax- independent considerations and is not shaped solely by tax-avoidance features that have meaningless labels attached 435_us_561 finally where appropriate the court may bifurcate a transaction in which independent activities with non-tax objectives have been combined with an unrelated transaction having only tax-avoidance objectives in order to establish a business_purpose for the overall transaction supra acm partnership pincite n thus a taxpayer cannot utilize an unrelated business objective to hide the lack of business_purpose with respect target’s redemption of shareholder sec_1 and for dollar_figureu per share on date sec_11 and respectively seems not to comport with economic reality for reasons explained under the discussion of analysi sec_2 above dollar_figureu per share was practically speaking the same amount received by the other departing shareholders all of whom were redeemed out on date given the relatively large amount of money contributed to target on date and the discharge of target indebtedness at least as to its unknown liabilities on that same date one would expect the value of target shares to have been greater when redeemed a couple of weeks later in the absence of evidence of a dramatic change in target’s fortunes between the date discharge and the redemptions of dates and acquiring arguably wanted to structure the redemptions of shareholder sec_1 and as occurring after date in order to qualify for tax relief under sec_382 but at the same time did not want to pay out more to shareholder sec_1 and than was paid out to the other redeemed shareholders thus we might infer that the redemption of shareholder sec_1 and for dollar_figureu per share was pre-arranged as of date if it were not for the fact that the evidence for an unreported side-agreement between shareholder sec_1 and and acquiring is circumstantial in nature the service could in our view reasonably consider asserting the fraud_penalty postf-144103-06 to the particular tax-motivated activities while acquiring has enumerated a number of business reasons for its acquiring of target8 these should not serve to protect superfluous aspects of the transaction unrelated to any business_purpose engaged in for purposes of tax_avoidance substance-over-form doctrine the concept of the substance-over-form doctrine is that the tax results of an arrangement are better determined based on the underlying substance rather than an evaluation of the mere formal steps by which the arrangement was undertaken the substance-over-form doctrine originated in gregory v helvering supra it is the most general of the judicial doctrines discussed in this document and the source from which the other doctrines are considered to have emanated step-transaction doctrine a given result at the end of a straight path is not made a different result because reached by following a devious path 302_us_609 a business transaction often does not have a sharply defined beginning or ending one step in a transactional sequence often bears a strong relationship to that which came before it and that which follows it for analytical purposes however it is often necessary to examine a transaction as an organic whole to that end the irs and courts often fuse formally separate transactional steps to determine the tax consequences of the overall transaction this approach may be viewed as a strand of the substance_over_form_doctrine in that it ignores the multiple steps ie the form of a transaction and instead focuses on the whole ie the substance this step_transaction_doctrine is pervasive in corporate tax law and has been articulated using three alternative threshold tests ie the binding_commitment_test the end result test and the mutual_interdependence_test more than one threshold test may be appropriately applied to a single set of circumstances however the satisfaction of only one of the tests is sufficient for a court to disregard transitory or unnecessary steps in the present case the step-transaction doctrine may serve as a formal means to collapse the date and the dates and steps into a single step for tax purposes i e the dates and redemptions would be combined with the date restructuring treating the whole as occurring as part of a single transaction assertion of penalties we note that the agent in this case proposed asserting the penalty for substantial_understatement under sec_6662 with respect to acquiring’s use of target’s net_operating_loss carryovers to reduce its taxable_income for its taxable among them acquiring listed- i increasing its volume of z transactions ii obtaining the services of talented experienced target employees iii expanding markets and iv cutting costs by integrating redundant functions and by effectively utilizing acquiring’s state-of-the-art zz facility to increase z transactions and to further client development etc for the various iterations of the test see 88_tc_1415 418_f2d_511 ct_cl 391_us_83 and 688_f2d_520 7th cir postf-144103-06 years ending on dates dollar_figure we strongly support the proposed assertion of this penalty summary we believe that acquiring’s acquisition of target on date does not qualify for treatment under sec_382 we believe that aspects of the transaction that in form might serve to support application of sec_382 do not reflect economic reality we have set forth three analyses ways of viewing the structuring of the transaction in support of the lack of economic reality attending aspects of the transaction that would be critical for qualifying under sec_382 further we have discussed four case law doctrines economic_substance business_purpose substance- over-form and step-transaction one or more of which could be used in support of viewing relevant aspects of the transaction in accord with their economic reality although we inferred the existence of a side-agreement in analysi sec_2 we want to emphasize that analysi sec_1 stands on its own irrespective of the existence of any side- agreement simply stated acquiring took far fewer shares in target under the plan on date than would appear to be economically justified conveniently the number of shares taken just happened to be the maximum amount within a tenth of a percentage_point or so that could have been taken while still constructing a transaction that in form could qualify under sec_382 under the facts and law discussed above taxpayer is not permitted the benefit of sec_382 we believe the case for denying application of sec_382 is a strong one that is we believe that target’s pre-change losses should be subject_to the sec_382 limitation given that sec_382 does not apply the service if it has not already done so should look into the possible application of sec_382 for purposes of determining the taxpayer’s sec_382 limitation for the years at issuedollar_figure please call if you have further questions see form 886-a issue no sec_382 provides if paragraph does not apply to any reorganization described in subparagraph g of sec_368 or any exchange of debt for stock in a title_11_or_similar_case as defined in sec_368 the value under subsection e shall reflect the increase if any in value of the old_loss_corporation resulting from any surrender or cancellation of creditors' claims in the transaction see also sec_1_382-9 - l of the income_tax regulations


internal_revenue_service department of the treasury number release date index no washington dc person to contact telephone number refer reply to cc ita - plr-161026-02 date date legend trust decedent state date date date date statute statute dear this letter responds to your letter dated date requesting a ruling on behalf of the trust and its beneficiaries that the terminating distributions from the trust will not result in gain_or_loss to the trust or its beneficiaries facts decedent died on date under the terms of decedent’s will the trust was established to administer decedent’s assets decedent’s will provides that the trust shall terminate years after the death of decedent’s last surviving child the last surviving child died on date and under the terms of the will the trust must terminate on date decedent’s will states that at the time of termination the trustees shall partition or have judicially partitioned the estate among and between the lawful issue of decedent’s children as shall then be in being the trustees and the beneficiaries have established a plan of termination in order to facilitate the upcoming termination of the trust the trust has many diverse real_estate holdings and the trustees and many of the beneficiaries have expressed an interest in plr-161026-02 having the holdings of the trust continue as an on-going business venture the majority of the holdings of the trust would be contributed to a limited_liability_company in which the trust would be the controlling member until the trust termination the plan of termination allows for the beneficiaries to request the type of assets cash interest in limited_liability_company or in-kind property that will be distributed to them upon the trust termination the trustees will have the power to reject all or accept all of the distribution requests of the beneficiaries the distributions received by the beneficiaries will not be pro_rata statute states that a trustee may effect distribution of money and property that may be made in_kind on a pro_rata or non-pro rata basis in divided or undivided interests and to adjust resulting differences in valuation statute provides that unless specifically provided in a_trust statute applies to any trust with a situs in whenever established the trustees have filed in the court a petition for approval of the termination plan the trustees have asked the court to determine whether the termination plan meets the terms of statute sec_1 and and the terms of the decedent’s will the court approved the trustee’s petition for approval of the termination plan on date law and analysis sec_61 of the internal_revenue_code provides that gross_income includes gains derived from dealings in property and under sec_61 from an interest in a_trust sec_1001 provides that the gain from the sale_or_other_disposition of property shall be the excess of the amount_realized therefrom over the adjusted_basis provided in sec_1011 for determining gain and the loss shall be the excess of the adjusted_basis provided in sec_1011 for determining loss over the amount_realized sec_1001 states that the amount_realized from the sale_or_other_disposition of property shall be the sum of any money received plus the fair_market_value of the property other than money received under sec_1001 except as otherwise provided in subtitle a the entire amount of gain_or_loss determined under sec_1001 on the sale_or_exchange of property shall be recognized sec_1_1001-1 of the income_tax regulations provides that the gain_or_loss realized from the conversion of property into cash or from the exchange of property for other_property differing materially either in_kind or in extent is treated as income or loss sustained revrul_69_486 1969_2_cb_159 deals with the consequences of a non-pro rata distribution of trust property made in_kind by the trustee neither the trust instrument nor local law authorized the trustee to make a non-pro rata distribution_of_property in_kind because the trustee was not authorized to make a non-pro rata distribution the distribution was equivalent to a pro_rata distribution followed by an exchange between the beneficiaries and was subject_to the provisions of sec_1001 and sec_1002 while the terms of decedent’s will allow for partitioning of the trust at the trust’s termination there is no express language prohibiting or allowing non-pro rata distributions however unlike the circumstances in revrul_69_486 non-pro rata distributions from the trust are permitted in accordance with statute therefore the transaction will not be equivalent to a pro_rata distribution followed by an exchange between the beneficiaries accordingly we conclude that neither the beneficiaries nor the trust will realize gain_or_loss as a result of distributions by the trust under the plan of termination caveats a copy of this letter must be attached to any income_tax return to which it is relevant we enclose a copy of the letter for this purpose also enclosed is a copy of the letter_ruling showing the deletions proposed to be made in the letter when it is disclosed under sec_6110 except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any item discussed or referenced in this letter this ruling is directed only to the taxpayer s requesting it sec_6110 provides that it may not be used or cited as precedent sincerely robert a berkovsky branch chief office of associate chief_counsel income_tax accounting enclosures cc


department of the treasury internal_revenue_service washington d c date number release date cc ebeo uilc internal_revenue_service national_office field_service_advice memorandum for assistant district_counsel virginia-west virginia district richmond from assistant chief exempt_organizations branch office of division counsel associate chief_counsel te_ge subject 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 taxpayer issue sec_1 is the transfer of property by an organization described in sec_501 of the code to a liquidating_trust a taxable transaction is a proposed plan_of_reorganization provision that the organization shall retain its status as a tax-exempt_entity after the reorganization without any further action on its part objectionable facts we understand the facts to be as follows the taxpayer operates a hospital that is exempt from federal_income_tax as an organization described in sec_501 of the code the taxpayer is in bankruptcy because of actions by its former president and ceo who diverted hospital revenues to nonexempt purposes has wta-d-106632-00 been indicted for various federal offenses relating to his diversion and mishandling of hospital funds the taxpayer has proposed a plan_of_reorganization under chapter that provides for a liquidating_trust to pay holders of general unsecured claims the proposed liquidating_trust will be funded in part with proceeds from the sale of commercial real_estate unrelated to the operation of the hospital in addition the proposed liquidating_trust will receive a portion of the proceeds from the taxpayer’s claims against two related corporations which are also in chapter reorganization proceedings the taxpayer intends to affiliate with a nonprofit corporation whose members include three other hospitals the affiliation will guarantee an dollar_figure loan to the taxpayer that will be used in part to satisfy the federal tax claims the taxpayer currently owes fica and withholding taxes totaling approximately dollar_figure law and analysis issue the taxpayer is transferring commercial real_estate and other_property unrelated to hospital operations to the liquidating_trust sec_501 of the code provides in part that an organization described in sec_501 is exempt from federal_income_tax sec_511 imposes a tax on the unrelated_business_taxable_income ubti of those organizations sec_512 defines ubti as the gross_income derived by any organization from any unrelated_trade_or_business as defined in sec_513 regularly carried on by it less certain deductions computed with modifications provided in sec_512 sec_512 excludes from the computation of ubti all gains or losses from the sale exchange or other_disposition of property other than stock_in_trade or property_held_primarily_for_sale to customers however sec_512 provides in part that income from debt-financed_property as defined in sec_514 is not excluded under sec_512 debt- financed property is property held to produce income and with respect to which there is an acquisition_indebtedness sec_514 debt-financed_property does not include any property substantially_all the use of which is substantially related aside from the need of the organization for income or funds to the exercise or performance by the organization of its charitable or other purpose constituting the basis for its exemption under sec_501 sec_514 debt-financed_property also does not include property used in unrelated_trade_or_business sec_514 wta-d-106632-00 issue the proposed plan_of_reorganization provides that the taxpayer will retain its exemption after the reorganization without the necessity of reapplying for recognition of tax-exempt status generally when the exempt_purpose of an organization remains the same after a reorganization and no new legal entity is created its tax-exempt status is not adversely affected see revrul_67_390 c b however the creation of a new legal entity can occur even though there are no material changes in the organization’s purpose or method of operation when for example the organization changes its state of incorporation after the reorganization or changes its classification from unincorporated to incorporated see id sec_7428 of the code provides that only the u s tax_court the u s claims_court or the u s district_court d c cir may make a declaration with respect to the initial qualification or continuing qualification as an organization described in sec_501 case development hazards and other considerations you have indicated that some of the property held by the taxpayer and transferred to the liquidating_trust is commercial real_estate unrelated to the operation of the hospital from the information provided it appears that the taxpayer’s use of the property at issue may not be substantially related to its exempt purposes in general property is not substantially related to exempt purposes if less than of the use of the property is devoted to the organization’s exempt_purpose the extent to which the property is used for a particular purpose is determined based on the facts and circumstances sec_1_514_b_-1 sec_514 unrelated_debt-financed_income is a portion of the gross_income derived from use of the debt-financed_property during the taxable_year this debt-basis percentage is the average amount of outstanding principal indebtedness on the property over the average basis of the property during the portion of the taxable_year it is held by the organization sec_1_514_a_-1 i r c wta-d-106632-00 issue the taxpayer contends that it should retain its exemption after the reorganization without the need for reapplying for tax-exempt status it is unclear whether that taxpayer remains the same or a new legal entity is created after the reorganization see revrul_67_390 c b regina l oldak


t c memo united_states tax_court james f moore petitioner v commissioner of internal revenue respondent docket no filed date keith wolak for petitioner k elizabeth kelly and mayer y silber for respondent supplemental memorandum opinion vasquez judge on date pursuant to rule petitioner timely filed a motion for reconsideration of this opinion supplements our prior opinion moore v commissioner tcmemo_2011_200 unless otherwise indicated all section references are to the internal_revenue_code in effect for the year in issue and continued this court’s memorandum findings_of_fact and opinion in moore v commissioner tcmemo_2011_200 moore i in moore i we held that petitioner was not entitled to deduct payments that he made to his former spouse during as alimony under sec_215 background we adopt the findings_of_fact in our prior memorandum findings_of_fact and opinion moore i for convenience and clarity we repeat below the facts necessary for the disposition of this motion in petitioner made payments to his former spouse of dollar_figure and deducted these amounts as alimony on his form_1040 u s individual_income_tax_return for respondent subsequently determined that petitioner’s payments were not deductible as alimony the divorce decree is silent as to whether petitioner’s maintenance obligation to his former spouse terminates on her death discussion reconsideration under rule is intended to correct substantial errors of fact or law and allow the introduction of newly discovered evidence that the moving party could not have introduced by the exercise of due diligence in the prior proceeding 110_tc_440 continued all rule references are to the tax_court rules_of_practice and procedure this court has discretion to grant a motion for reconsideration and will not do so unless the moving party shows unusual circumstances or substantial error id see also 87_tc_164 reconsideration is not the appropriate forum for rehashing previously rejected legal arguments or tendering new legal theories to reach the end result desired by the moving party estate of quick v commissioner supra pincite in moore i we concluded that petitioner was not entitled to deduct payments he made to his former wife as alimony under sec_215 sec_215 permits a deduction for the payment of alimony during a taxable_year sec_215 defines alimony as alimony which is includable in the gross_income of the recipient under sec_71 sec_71 defines alimony as any cash payment meeting the four criteria provided in subparagraphs a through d of that section accordingly if sec_71 provides sec_71 alimony or separate_maintenance payments defined --for purposes of this section-- in general --the term alimony_or_separate_maintenance_payment means any payment in cash if-- a such payment is received by or on behalf of a spouse under_a_divorce_or_separation_instrument b the divorce_or_separation_instrument does not designate such payment as a payment which is continued any portion of the payments petitioner made fails to meet any one of the four enumerated criteria that portion is not alimony for purposes of sec_71 and petitioner cannot deduct it respondent agreed that the requirements of subparagraphs a and c had been satisfied he argued however that petitioner’s payments to his former wife did not satisfy subparagraphs b and d we agreed with respondent that the payments did not satisfy the requirements of sec_71 we also noted that b ecause petitioner fails to show that the payments comply with subpar d we need not determine whether they satisfied subpar b petitioner argues that we should grant his motion for reconsideration because this court when deciding whether alimony payments automatically terminate upon the death of the payee spouse under indiana law overlooked deel v deel continued not includible in gross_income under this section and not allowable as a deduction under sec_215 c in the case of an individual legally_separated from his spouse under a decree of divorce or of separate_maintenance the payee spouse and the payor spouse are not members of the same household at the time such payment is made and d there is no liability to make any such payment for any period after the death of the payee spouse and there is no liability to make any payment in cash or property as a substitute for such payments after the death of the payee spouse n e 2d ind ct app and we failed to address whether petitioner satisfied his evidentiary obligation with respect to sec_71 in response respondent contends that petitioner’s allegations of error are not based on new evidence and merely restate arguments petitioner made in moore i in deciding whether petitioner’s maintenance obligation would terminate upon the death of his former spouse the court considered deel and determined that it did not warrant discussion petitioner cited deel for the proposition that under indiana law unless the terms of the divorce decree specify that the payments survive the death of the payee spouse maintenance payments automatically terminate on the death of the payee spouse after reviewing deel we determined that it did not stand for the proposition for which petitioner cited it in deel the indiana court_of_appeals decided whether the payments mr deel made to his former wife were maintenance payments or part of a property settlement not whether under indiana law a maintenance obligation terminates on the death of the payee spouse deel v deel supra pincite after concluding the divorcee decree was ambiguous the court_of_appeals stated to resolve the ambiguity we consider various factors to determine whether the clause is one for maintenance or part of a property settlement mackey v estate of mackey n e 2d ind ct app citing in re marriage of buntin n e 2d ind ct app the factors indicating that a payment was maintenance are the designation as maintenance provision terminating the payments upon death of either party payments made from future income provisions for termination upon remarriage provisions calling for the modification based upon future events and payments for an indefinite period of time id on the other hand property_settlements are indicated when the payments are for a sum certain payable over a definite period of time there are no provisions for modification based on future events the obligation to make payments survives the death of the parties the provisions call for interest and the award does not exceed the value of the marital assets at the time of dissolution id see also brinkmann v brinkmann n e 2d ind ct app id pincite the court_of_appeals concluded that for a number of reasons the payments constituted spousal maintenance id in evaluating the factors the court_of_appeals stated that the sum and duration of the payments were uncertain because the decree does not include an obligation for husband to continue payments if wife died prior to attaining the age of sixty-five id pincite this is the statement on which petitioner relies the court_of_appeals did not explain why it concluded the payments terminate on the payee’s death it is unclear whether this determination was based on the facts of the case and the court_of_appeals did not cite any indiana law for support furthermore the court_of_appeals stated that it was resolving the ambiguity against the wife because her attorney drafted the divorce decree id citing time warner entmt co v whiteman the divorce decree provided that the payments terminated when wife reached n e 2d ind we construe any contract ambiguity against the party who drafted it we do not read deel as expressly stating that indiana law inserts into all indiana divorce decrees a default provision that automatically terminates maintenance obligations upon the death of the payee spouse petitioner did not cite an opinion or statute and we have found none that expressly states that absent a provision in the divorce decree to the contrary by operation of indiana law maintenance payments automatically terminate on the death of the payee spouse in addition petitioner questions our decision to not discuss whether he satisfied his evidentiary obligation with respect to sec_71 the four requirements of sec_71 are conjunctive a payment is deductible as alimony only if all four requirements of sec_71 are met johnson v commissioner tcmemo_2006_116 because the payments petitioner made to his former spouse do not meet the requirements of sec_71 the question of whether the payments meet the requirements of sec_71 did not need to be decided petitioner has failed to demonstrate unusual circumstances or substantial errors of fact or law accordingly we will deny petitioner’s motion for reconsideration to reflect the foregoing an appropriate order will be issued


department of the treasury internal_revenue_service washington d c ‘tax exempt and boer oe oct uics - legend decedent spouse employee attorney trust t ira x ira y date amount amount account z company m date date date date behalf requests several letter rulings under sec_408 of the internal_revenue_code code the following facts and representations support your ruling_request this is in response to the in ‘which your authorized representative on your letter as supplemented by correspondence dated and decedent whose date of birth was date died on date a resident of state w not having attained age decedent was survived by his wife spouse spouse was alive as of the date of this ruling_request spouse wa sec_71 years of age as of the date of this ruling_request at his death decedent maintained an individual_retirement_account ira x with company m the value of ira x at the death of decedent was approximately amount last will and testament names spouse as the sole executrix of his last will and testament decedent’s will has been admitted to probate by court county state w on date decedent named his estate as the beneficiary of his ira x on date decedent signed his last will and testament article ii of decedent’s article iv of decedent’s last will and testament created trust t article vi of decedent’s last will and testament names spouse as the sole residuary beneficiary of his estate it has been represented on your behalf that the laws of state w give a personal representative or executrix of an estate the authority to allocate estate assets under the terms of a decedent’s will as she sees fit consistent with that authority spouse as executrix of decedent’s will allocated assets other than ira x to trust t created under article iv of decedent's will thus ira x was allocated as part of decedent’s residuary_estate under article vi of his will in this regard subsequent to the death of decedent spouse discussed with employee as employee of company m the transfer of at least part of ira x into ira y as a result of these it has been represented that spouse has maintained ira y in her name with company m page 200703ug5 discussions spouse understood that such a transfer would require initially transferring ira x_ into account z a non-ira account maintained with company m and then transferring the ira x proceeds from account z into ira y on or about date spouse signed a company m ira sep distribution request pursuant to which amount slightly less than of ira x in signing the form spouse believed that the amounts in would be transferred into account z account z would later be transferred into ira y and that the transfer into ira y would be completed within days of the date on which amounts had been distributed from decedent’s ira x the service notes that an affidavit signed by employee accompanied this ruling_request in his affidavit in relevant part employee notes he discussed with spouse the two-step process pursuant to which amount would initially be transferred into account z and subsequently transferred into spouse’s ira y employee also avers that he-attempted to accomplish the transfer from account z into ira y but contrary to what he had advised spouse company m would not complete the transfer without either a letter_ruling from the service or a court order in either month or month spouse received a form 1099-r distributions from pensions annuities retirement or profit-sharing_plans iras insurance contracts etc which showed a taxable_distribution in the amount of amount from ira x in calendar_year spouse immediately sought legal advice from attorney this request for letter_ruling followed soon thereafter it has been represented that the amounts transferred into account z during calendar_year remain in said account based on the facts and representations you request the following rulings that ira x does not constitute an inherited ira within the meaning of code sec_408 that spouse was eligible to either roll over or transfer by means of a trustee-to- trustee transfer the ira x account balance which includes amount distributed from ira x during calendar_year into either ira y or another ira set up and maintained in her name and that the internal_revenue_service waive the 60-day rollover requirement with respect to the distribution from ira x of amount because the failure to waive such requirement would be against equity or good conscience with respect to your ruling requests sec_408 of the code provides that except as otherwise provided in sec_408 any amount_paid or distributed out of an ira shall be ' page included in gross_income by the payee or distributee as the case may be in the manner provided under sec_72 of the code a sec_408 of the code defines and provides the rules applicable to ira_rollovers sec_408 of the code provides that sec_408 of the code does not apply to any amount_paid or distributed out of an ira to the individual for whose benefit the ira is maintained if i the entire amount received including money and any other_property is paid into an ira for the benefit of such individual not later than the day after the day on which the individual receives the payment or distribution or ii the entire amount received including money and any other_property is paid into an eligible_retirement_plan other than an ira for the benefit of such individual not later than the day after the date on which the payment or distribution is received except that the maximum amount which may be paid into such plan may not exceed the portion of the amount received which is includible in gross_income determined without regard to sec_408 sec_408 of the code provides that sec_408 does not apply to any amount described in sec_408 received by an individual from an ira if at any time during the 1-year period ending on the day of such receipt such individual received any other amount described in sec_408 from an ira which was not includible in gross_income because of the application of sec_408 sec_408 of the code provides a similar 60-day rollover period for partial rollovers sec_408 of the code provides that paragraph d shall not apply to any amount to the extent such amount is required to be distributed under subsection a or b sec_408 of the code provides in summary that the rollover rules of code sec_408 do not apply to inherited iras sec_408 of the code provides that the term inherited ira means an ira obtained by an individual other than the ira owner’s spouse as a result of the death of the ira owner thus in short under circumstances that conform with the requirements of code sec_408 a surviving_spouse who acquires a decedent’s ira after and as a result of the death of an ira owner will be able to roll over the decedent’s ira into an ira set up and maintained in the name of the surviving_spouse sec_408 of the code provides that the secretary may waive the 60-day requirement under sec_408 and sec_408 of the code where the failure to waive such requirement would be against equity or good conscience including casualty disaster or other events beyond the reasonable control of the individual subject_to such requirement - page only distributions that occurred after date are eligible for the waiver under sec_408 of the code se revproc_2003_16 lr b date provides that in determining whether to grant a waiver of the 60-day rollover requirement pursuant to sec_408 the service will consider all relevant facts and circumstances including errors committed by a financial_institution inability to complete a rollover due to death disability hospitalization incarceration restrictions imposed by a foreign_country or postal error the use of the amount distributed for example in the case of payment by check whether the check was cashed and the time elapsed since the distribution occurred with specific respect to your first two ruling requests on date final income_tax regulations publications were published in the federal_register with respect to code sec_401 and sec_408 see also ilr b date sec_1_408-8 of the regulations question and answer provides that a surviving_spouse of an ira owner may elect to treat the spouse's entire_interest as a beneficiary in an individual's ira asthe spouse's own ira in order to make this election the spouse must be the sole beneficiary of the ira and have an unlimited right to withdraw amounts from the ira ifa trust is named as beneficiary of the ira this requirement is not satisfied even if the spouse is the sole beneficiary of the trust the preamble to the regulations provides in relevant part that a surviving_spouse who ' _ actually receives a distribution from an ira is permitted to roll that distribution over into his her own ira even if the spouse is not the sole beneficiary of the deceased's ira as long as the rollover is accomplished within the requisite day period a rollover may be accomplished even if ira assets pass through either a_trust or an estate in this case as noted above the ira x account balance remaining at decedent a's death was payable to decedent’s estate and passed under article vi of decedent’s last will and testament absolutely and free of trust to spouse as the sole residuary beneficiary under said will with respect to the first and second ruling requests generally if either a decedent's plan or however in the present case decedent’s interest in ira x passed under his will directly to spouse as sole residuary beneficiary under said will the authority to allocate said ira x to decedent’s residuary_estate lay with spouse could have prevented spouse from receiving said ira x and from rolling over or transferring ira proceeds pass through a third party eg an estate_or_trust and then are distributed to the decedent's surviving_spouse said spouse will be treated as acquiring them from the third party and not from the decedent thus generally said surviving_spouse will not be eligible to roll over either the qualified_plan or the ira proceeds into his her ira under this set of circumstances no third party page by means of a trustee-to-trustee transfer the full or any portion of the amount standing in ira x into either ira y or another ira set up and mairtained in spouse’s name under this set of circumstances we will not apply the general_rule set forth above therefore we conclude as follows with respect to your first two ruling requests that ira x does not constitute an inherited ira within the meaning of code sec_408 and that spouse was eligible to either roll over or transfer by means of a trustee-to- trustee transfer the ira x balance remaining at decedent’s death which includes amount distributed from ira x during calendar_year into either ira y or another ira set up and maintained in her name with respect to your third ruling_request as noted above amount was not rolled into or transferred as a trustee-to-trustee transfer into another ira within days of the date it was - distributed from ira x however the facts in this case indicate that spouse requested the distribution of amount from ira x relying on the advice of employee of company m that it would initially be placed into account z an account authorized to receive said amount on behalf of decedent’s estate and then transferred into ira y an ira set up and maintained in the name of spouse amount was placed into account w but contrary to what spouse believed would transpire company m failed to complete the second step of the process and failed to transfer said amount into ira y as spouse intended ' therefore based on the above facts pursuant to sec_408 of the code the service hereby waives the 60-day rollover requirement with respect to the distribution of amount from ira x thus you are granted a period of days from the issuance ofthis ruling letter-to accomplish the rollover of amount into either ira y or another ira set up and maintained in the name of spouse provided all other requirements of sec_408 of the code except the 60-day requirement are met with respect to such contributions the amounts deposited into said ira will be considered rollover_contributions within the meaning of sec_408 of the code - as noted above spouse had attained age as of the date of this ruling_request in this regard this ruling does not authorize the rollover of amounts that are required to be distributed by sec_401 and sec_408 of the code with respect to calendar_year no opinion is expressed as to the tax treatment of the transaction described herein under the provisions of any other section of either the code or regulations which may be applicable thereto