internal_revenue_service department of the treasury index number number release date washington dc person to contact telephone number refer reply to cc dom corp plr-109459-99 date date distributing distributing distributing controlled corp a corp b corp c corp d corp e corp f corp g corp h corp i corp j corp k corp l corp m corp n corp o corp p corp q corp r corp s corp t corp u corp v corp w corp x corp y corp z corp aa corp bb business a business b business c business d group group group group date a state a a b c this letter responds to your date request for rulings on the federal_income_tax consequences of a proposed transaction the rulings contained in this letter are based on the facts and representations submitted by the taxpayer and accompanied by a penalties of perjury statement executed by an appropriate party this office has not verified any of the materials submitted in support of the request for rulings verification of the information representations and other data may be required as part of the audit process summary of facts publicly traded distributing is the holding_company parent of a consolidated_group that manufactures and distributes a broad range of consumer and industrial products the operations of distributing 1’s direct and indirect subsidiaries are conducted through four divisions group group and group collectively the core group and group distributing wholly owns corp a corp b and corp c and owns the common_stock of distributing the preferred_stock of distributing representing approximately ninety-one percent of the voting power of all distributing stock the distributing preferred_stock is owned by corp d a holding_company wholly owned by corp a also a holding_company distributing a holding_company wholly owns distributing and owns corp e corp f corp g and corp h through its ownership of corp i an entity intended to be disregarded for united_states federal_income_tax purposes under sec_301_7701-3 of the procedure and administration regulations distributing also owns one share of the stock of corp j corp e a holding_company wholly owns corp k corp l corp m and corp bb corp e and corp l together own all the stock of corp n corp e corp f corp g corp h corp i corp j corp k corp l corp m corp n and corp bb are all foreign_corporations distributing a holding_company wholly owns corp o and each member of group consisting of controlled corp p corp q corp r corp s corp t corp u corp v corp w and corp x corp o a holding_company wholly owns corp z controlled a holding_company wholly owns corp y corp t wholly owns corp aa corp c is engaged in business a corp l corp m and corp n are engaged in business b corp y is engaged in business c corp z is engaged in business d we have received financial information indicating that each of these businesses had gross_receipts and operating_expenses representing the active_conduct_of_a_trade_or_business for each of the past five years because group and the core group are substantially different in nature and operation their present relationship creates managerial systemic and other problems the managements of each group therefore have decided based on internal and external studies and reports prepared by and for management to separate group from the core group proposed transaction to accomplish this separation distributing has proposed the following transaction i group will use the proceeds from new credit facilities and notes the notes expected to be incurred and issued by controlled to repay some or all existing intercompany notes issued by members of group to distributing and distributing controlled will distribute the balance of the proceeds if any the excess_proceeds to distributing which will use the distribution to repay intercompany debt owed distributing distributing will use the repayment to satisfy third-party obligations repurchase shares of stock of distributing fund acquisitions or do some combination of the foregoing in the event that the proceeds from the new borrowings are insufficient to repay all existing intercompany notes issued by members of group to distributing and distributing the excess intercompany notes will be contributed to the capital of the applicable obligor ii distributing will assume existing intercompany notes issued by certain of its subsidiaries not including controlled to distributing at the time of the assumption the term of each note as well as the term of existing intercompany notes issued to distributing on which distributing corp z or corp o is the obligor will be extended to have a remaining term of ten years and three months in consideration for the assumption by distributing of these notes each former obligor will issue its note to distributing iii corp e will assume an existing intercompany note issued to distributing by corp bb in exchange for a note of corp bb at the time of this assumption the term of the note issued to distributing will be extended to have a remaining term of ten years and three months iv corp t will distribute the stock of corp aa to distributing v corp v will distribute certain of its assets and liabilities to distributing vi distributing will contribute the stock of corps p through x to controlled together with the excess_proceeds distribution in step i the distributing contribution controlled will not issue additional shares of its stock controlled common_stock but will recapitalize so that the number of its outstanding shares equals a of the number of distributing common shares outstanding vii controlled will form a single-member limited_liability_company under state a law controlled llc and corp y will merge into controlled llc the corp y merger it is intended that controlled llc be disregarded for federal_income_tax purposes under sec_301_7701-3 and therefore that controlled be viewed as directly holding the assets and business business c of corp y after the merger viii corp z will merge upstream into corp o the corp z merger ix distributing will form a single-member limited_liability_company under state a law distributing llc and o will merge into distributing llc the corp o merger it is intended that distributing llc be disregarded for federal_income_tax purposes under sec_301_7701-3 and therefore that distributing be viewed as directly holding the assets and business business d of corp o after the merger x distributing will distribute the controlled common_stock and a note for b dollars with a term of ten years and three months the distributing note to distributing the distributing distribution xi corp i a subsidiary of distributing intended to be disregarded for federal_income_tax purposes will contribute the stock of corp f corp g and corp h to corp e xii corp e will cause corp l to amend its charter or otherwise become an entity eligible to be disregarded for federal_income_tax purposes under sec_301_7701-3 corp l then will file a form_8832 entity classification election electing to be disregarded as an entity separate from its owner xiii corp e will cause each of corp m and corp n to amend its charter or otherwise become an entity eligible to be disregarded for federal_income_tax purposes under sec_301_7701-3 each of corp m and corp n then will file a form_8832 entity classification election electing to be disregarded as an entity separate from its owner together with the similar election by corp l in step xii the corp l m and n elections it is intended that these elections will result in corp e being viewed as directly holding the assets and business business b of corp l corp m and corp n xiv corp e will sell the stock of corp k to distributing for fair_market_value in cash and distributing will contribute the corp k stock and its one share of corp j stock to controlled the distributing contribution xv distributing will distribute the controlled common_stock to distributing the distributing distribution it is intended through the transactions described above in steps ix xii and xiii that at the time of the distributing distribution distributing will be viewed for federal_income_tax purposes as conducting business d through distributing and business b through corp e xvi distributing will contribute the stock of corp b to controlled the distributing contribution xvii distributing will distribute the controlled common_stock pro_rata to its stockholders on the basis of one share of controlled common_stock for each c shares of distributing common_stock the distributing distribution no fractional shares of controlled common_stock will be distributed in the distributing distribution instead as soon as practicable after the distributing distribution the distribution agent will aggregate and sell all fractional shares in the open market at then prevailing market prices and distribute the aggregate proceeds net of fees ratably to stockholders entitled to them it is intended that at the time of the distributing distribution distributing will be viewed for federal_income_tax purposes as conducting business a through corp c business b through corp e and business d through distributing distributing and controlled will have no continuing relationship following the proposed transaction except for a corporate transition agreement an indemnification agreement and a tax_sharing_agreement representations corp y merger the taxpayer has submitted the following representations concerning the corp y merger a controlled on the date of the adoption of the plan of merger and at all times until the corp y merger is completed will be the owner of at least percent of the single outstanding class of corp y stock b no shares of corp y stock will have been redeemed during the three years preceding adoption of the merger plan c all transfers from corp y to controlled llc under the merger plan will be made within a single taxable_year of corp y d when the corp y merger occurs the assets and liabilities of corp y will pass by operation of law to controlled llc and corp y will cease to exist e corp y will retain no assets following the corp y merger f corp y will not have acquired assets in any nontaxable_transaction at any time except for acquisitions occurring more than three years before adoption of the merger plan g no assets of corp y have been or will be disposed of by either corp y controlled llc or controlled except for dispositions in the ordinary course of business and dispositions occurring more than three years before adoption of the merger plan h the corp y merger will not be preceded or followed by the reincorporation in or transfer or sale to a recipient corporation recipient of any of the businesses or assets of corp y if persons holding directly or indirectly more than percent in value of the corp y stock also hold directly or indirectly more than percent in value of the stock in recipient for purposes of this representation ownership will be determined by applying the constructive_ownership rules of sec_318 of the internal_revenue_code as modified by sec_304 i before adoption of the merger plan no assets of corp y will have been distributed in_kind transferred or sold to controlled except for i transactions occurring in the normal course of business and ii transactions occurring more than three years before adoption of the merger plan j corp y will report all earned_income represented by assets that will be transferred to controlled llc such as receivables being reported on a cash_basis unfinished construction contracts commissions due etc k the fair_market_value of the assets of corp y will exceed its liabilities both on the date of the adoption of the merger plan and immediately before the time the corp y merger occurs further corp y will be solvent before the cancellation of indebtedness if any from corp y to controlled l controlled is not an organization that is exempt from federal_income_tax under sec_501 or any other provision of the code m all other transactions undertaken contemporaneously with in anticipation of in conjunction with or in any way related to the corp y merger have been fully disclosed n controlled llc is a domestic eligible_entity with a single owner that has not elected to be treated as an entity separate from its owner corp z merger the taxpayer has submitted the following representations concerning the corp z merger o corp o on the date of the adoption of the plan of merger and at all times until the corp z merger is completed will be the owner of at least percent of the single outstanding class of corp z stock p no shares of corp z stock will have been redeemed during the three years preceding adoption of the merger plan q all transfers from corp z to corp o pursuant to the merger plan will be made within a single taxable_year of corp z r when the corp z merger occurs the assets and liabilities of corp z will pass by operation of law to corp o and corp z will cease to exist s corp z will retain no assets following the corp z merger t corp z will not have acquired assets in any nontaxable_transaction at any time except for acquisitions occurring more than three years before adoption of the merger plan u no assets of corp z have been or will be disposed of by either corp z or corp o except for dispositions in the ordinary course of business dispositions occurring more than three years before adoption of the merger plan and transfers to distributing llc pursuant to the corp o merger v the corp z liquidation will not be preceded or followed by the reincorporation in or transfer or sale to a recipient corporation recipient of any of the businesses or assets of corp z if persons holding directly or indirectly more than percent in value of the corp z stock also hold directly or indirectly more than percent in value of the stock in recipient except for transfers to distributing llc pursuant to the corp o merger for purposes of this representation ownership will be determined by applying the constructive_ownership rules of sec_318 as modified by sec_304 w before adoption of the merger plan no assets of corp z will have been distributed in_kind transferred or sold to corp o except for i transactions occurring in the normal course of business and ii transactions occurring more than three years before adoption of the merger plan x corp z will report all earned_income represented by assets that will be distributed to corp o such as receivables being reported on a cash_basis unfinished construction contracts commissions due etc y the fair_market_value of the assets of corp z will exceed its liabilities both on the date of the adoption of the merger plan and immediately before the time the corp z merger occurs z there is no intercorporate debt existing between corp o and corp z and none has been canceled forgiven or discounted except for transactions that occurred more than three years before adoption of the merger plan 2a corp o is not an organization that is exempt from federal_income_tax under sec_501 or any other provision of the code 2b all other transactions undertaken contemporaneously with in anticipation of in conjunction with or in any way related to the corp z merger have been fully disclosed corp o merger the taxpayer has submitted the following representations concerning the corp o merger 2c distributing on the date of the adoption of the plan of merger and at all times until the corp o merger is completed will be the owner of at least percent of the single outstanding class of corp o stock 2d no shares of corp o stock will have been redeemed during the three years preceding adoption of the merger plan 2e all transfers from corp o to distributing llc pursuant to the merger plan will be made within a single taxable_year of corp o 2f when the corp o merger occurs the assets and liabilities of corp o will pass by operation of law to distributing llc and corp o will cease to be a going concern 2g corp o will retain no assets following the corp o merger 2h corp o will not have acquired assets in any nontaxable_transaction at any time except for i acquisitions occurring more than three years before adoption of the merger plan ii assets acquired in the corp z merger and iii the acquisition of corp z stock and certain other assets from an affiliate 2i no assets of corp o have been or will be disposed of by either corp o distributing llc or distributing except for dispositions in the ordinary course of business and dispositions occurring more than three years before adoption of the merger plan 2j the corp o merger will not be preceded or followed by the reincorporation in or transfer or sale to a recipient corporation recipient of any of the businesses or assets of corp o if persons holding directly or indirectly more than percent in value of the corp o stock also hold directly or indirectly more than percent in value of the stock in recipient for purposes of this representation ownership will be determined by applying the constructive_ownership rules of sec_318 as modified by sec_304 2k before adoption of the merger plan no assets of corp o will have been distributed in_kind transferred or sold to distributing except for i transactions occurring in the normal course of business and ii transactions occurring more than three years before adoption of the merger plan 2l corp o will report all earned_income represented by assets that will be transferred to distributing llc such as receivables being reported on a cash_basis unfinished construction contracts commissions due etc 2m the fair_market_value of the assets of corp o will exceed its liabilities both on the date of the adoption of the merger plan and immediately before the time the corp o merger occurs 2n there is no intercorporate debt existing between distributing and corp o and none has been canceled forgiven or discounted except for transactions that occurred more than three years before adoption of the merger plan 2o distributing is not an organization that is exempt from federal_income_tax under sec_501 or any other provision of the code 2p all other transactions undertaken contemporaneously with in anticipation of in conjunction with or in any way related to the corp o merger have been fully disclosed 2q distributing llc is a domestic eligible_entity with a single owner that has not elected to be treated as an entity separate from its owner corp l m and n elections the taxpayer has submitted the following representations for the corp l m and n elections individually an election for purposes of these representations and the rulings that follow corp l corp m and corp n each is referred to as an electing_corporation 2r corp e on the date of the adoption of each plan to file an election and at all times until the effective date of each election will be the sole owner for federal tax law purposes of the single outstanding class of each electing corporation’s stock 2s no shares of an electing corporation’s stock will have been redeemed during the three years preceding adoption of the plan to file an election 2t no electing_corporation will have acquired assets in any nontaxable_transaction at any time except for acquisitions occurring more than three years before adoption of the plan to file an election 2u no assets of an electing_corporation have been or will be disposed of by the electing_corporation or a shareholder of the electing_corporation except for dispositions in the ordinary course of business and dispositions occurring more than three years before adoption of the plan to file an election 2v no election will be preceded or followed by the reincorporation in or transfer or sale to a recipient corporation recipient of any of the businesses or assets of the electing_corporation if persons holding directly or indirectly more than percent in value of the electing_corporation stock also hold directly or indirectly more than percent in value of the stock in recipient for purposes of this representation ownership will be determined by applying the constructive_ownership rules of sec_318 as modified by sec_304 2w before adoption of the plan to file an election no assets of the electing_corporation will have been distributed in_kind transferred or sold to corp e except for i transactions occurring in the normal course of business and ii transactions occurring more than three years before adoption of the plan to file an election 2x each electing_corporation will report all earned_income represented by assets that will be treated as distributed to corp e such as receivables being reported on a cash_basis unfinished construction contracts commissions due etc 2y the fair_market_value of the assets of each electing_corporation will exceed its liabilities both on the date of the adoption of the plan to file an election and immediately before the effective date of the election 2z there is no intercorporate debt existing between an electing_corporation and its shareholder and none has been canceled forgiven or discounted except for transactions that occurred more than three years before adoption of the plan to file an election 3a corp e is not an organization that is exempt from federal_income_tax under sec_501 or any other provision of the code except that corp e is a foreign_corporation not engaged in a trade_or_business in the united_states 3b each electing_corporation will convert into a foreign eligible_entity as defined in sec_301_7701-2 that will file a form_8832 entity classification election and has not elected to change its classification within the months before the date on which it will file such form_8832 3c each electing_corporation will be classified as a corporation under sec_301_7701-2 immediately before the effective date of the electing corporation’s election each electing_corporation will default into corporate status after it converts into an eligible_entity see sec_301_7701-3 3d no election will be filed under sec_301_7701-3 for any electing_corporation to be treated as an association 3e corp e is not and will not be after the distributing distribution a passive foreign investment corporation as defined in sec_1297 but is and will continue to be a controlled_foreign_corporation as defined in sec_957 3f neither corp l corp m nor corp n will distribute any u s real_property interests as defined in sec_1_897-1 of the income_tax regulations when they are deemed liquidated pursuant to their elections to be disregarded entities 3g neither corp l corp m nor corp n will distribute qualified_property as described in sec_1_367_e_-2 that is used in the conduct_of_a_trade_or_business within the united_states at the time of distribution 3h neither corp l corp m nor corp n will distribute property that had ceased to be used in the conduct of a u s trade_or_business within the ten-year period ending on the date of the distribution and that would have been subject_to sec_864 had it been disposed 3i corp e will not dispose_of an interest treated for u s tax purposes as a disposition of assets in the liquidated subsidiaries during the twelve months after the deemed liquidations 3j all other transactions undertaken contemporaneously with in anticipation of in conjunction with or in any way related to the corp l m and n elections have been fully disclosed distributing contribution and distribution the taxpayer has submitted the following representations concerning the distributing contribution and distributing distribution 3k any indebtedness owed by controlled to distributing after the distributing distribution will not constitute stock or except with respect to the notes if any securities 3l none of the controlled common_stock distributed by distributing will be received by distributing as a creditor employee or in any capacity other than that of a shareholder of distributing 3m immediately after the distributing distribution the gross assets of distributing comprising business d held through distributing llc will have a fair_market_value that is equal to or greater than five percent of the total fair_market_value of the gross assets of distributing 3n the five years of financial information submitted for business d represents its present operations and there have been no substantial operational changes since the date of the last financial statements submitted 3o immediately after the distributing distribution the gross assets of controlled comprising business c held through controlled llc will have a fair_market_value that is equal to or greater than five percent of the total fair_market_value of the gross assets of controlled 3p the five years of financial information submitted for business c represents its present operation and there have been no substantial operational changes since the date of the last financial statements submitted 3q following the distributing distribution distributing and controlled will each continue the active_conduct of its business independently and with its separate employees 3r the distributing distribution is to be carried out for the corporate business_purpose of facilitating the distribution the distributing distribution is motivated in whole or substantial part by this corporate business_purpose 3s except in connection with the distributing distribution and the distributing distribution there is no plan or intention on the part of distributing to sell exchange transfer by gift or otherwise dispose_of any stock in or securities of distributing or controlled after the distributing distribution 3t there is no plan or intention by distributing or controlled directly or through any subsidiary_corporation to purchase any of its outstanding_stock after the transaction other than through stock purchases meeting the requirements of sec_4 b of revproc_96_30 1996_1_cb_696 3u there is no plan or intention to liquidate either distributing or controlled to merge either corporation with any other corporation or to sell or otherwise dispose_of the assets of either corporation after the transaction except in the ordinary course of business 3v the total adjusted_basis and the fair_market_value of the assets to be transferred by distributing to controlled in the distributing contribution will in each case equal or exceed the liabilities to be assumed as determined under sec_357 by controlled 3w the liabilities to be assumed as determined under sec_357 by controlled in the distributing contribution were incurred in the ordinary course of business and are associated with the assets to be transferred 3x except with respect to the notes if any acquired by distributing no intercorporate debt will exist between distributing and its subsidiaries on the one hand and controlled and its subsidiaries on the other hand at the time of or after the distributing distribution the notes if any acquired by distributing will be disposed of as soon as a disposition is warranted consistent with the corporate business_purpose for retention but in any event not later than five years after the distributing distribution 3y immediately before the distributing distribution items of income gain loss deduction and credit will be taken into account as required by the applicable intercompany_transaction regulations see sec_1_1502-13 and sec_1 as in effect before the publication of t d 1995_2_cb_147 and as currently in effect sec_1_1502-13 as published by t d 3z payments made in any continuing transactions between distributing and its subsidiaries on the one hand and controlled and its subsidiaries on the other hand will be for fair_market_value based on terms and conditions arrived at by the parties bargaining at arm’s length 4a neither distributing nor controlled is an investment_company as defined in sec_368 and iv 4b the distributing distribution is not part of a plan or series or related transactions within the meaning of sec_355 pursuant to which one or more persons will acquire directly or indirectly stock possessing percent or more of the total combined voting power of all classes of stock of either distributing or controlled entitled to vote or stock possessing percent or more of the total value of all classes of stock of either distributing or controlled distributing contribution and distribution the taxpayer has submitted the following representations concerning the distributing contribution and distributing distribution 4c any indebtedness owed by controlled to distributing after the distributing distribution will not constitute stock or except with respect to the notes if any securities 4d none of the controlled common_stock distributed by distributing will be received by distributing as a creditor employee or in any capacity other than that of a shareholder of distributing 4e immediately after the distributing distribution at least percent of the fair_market_value of the gross assets of distributing will consist of the stock and securities of controlled corporations corp e and distributing that are engaged in the active_conduct_of_a_trade_or_business as defined in sec_355 4f immediately after the distributing distribution the gross assets of the businesses actively conducted as defined in sec_355 by distributing business d held through distributing llc and corp e business b held through corp l corp m and corp n will have a fair_market_value that is equal to or greater than five percent of the total fair_market_value of such corporation’s gross assets 4g the five years of financial information submitted on behalf of business d and business b respectively represents their present operations and there have been no substantial operational changes since the date of the last financial statements submitted 4h immediately after the distributing distribution the gross assets of controlled comprising business c held through controlled llc will have a fair_market_value that is equal to or greater than five percent of the total fair_market_value of the gross assets of controlled 4i the five years of financial information submitted on behalf of business c represents its present operations and there have been no substantial operational changes since the date of the last financial statements submitted 4j following the distributing distribution distributing through distributing and corp e and controlled will each continue the active_conduct of its business es independently and with its separate employees 4k the distributing distribution is to be carried out for the corporate business_purpose of facilitating the distribution the distributing distribution is motivated in whole or substantial part by this corporate business_purpose 4l except in connection with the distributing distribution there is no plan or intention on the part of distributing to sell exchange transfer by gift or otherwise dispose_of any stock in or securities of distributing or controlled after the distributing distribution 4m there is no plan or intention by distributing or controlled directly or through any subsidiary_corporation to purchase any of its outstanding_stock after the transaction other than through stock purchases meeting the requirements of sec_4 b of revproc_96_30 4n there is no plan or intention to liquidate either distributing or controlled to merge either corporation with any other corporation or to sell or otherwise dispose_of the assets of either corporation after the distributing distribution except in the ordinary course of business 4o the total adjusted_basis and the fair_market_value of the assets to be transferred by distributing to controlled in the distributing contribution will in each case equal or exceed the liabilities to be assumed as determined under sec_357 by controlled 4p the liabilities to be assumed as determined under sec_357 by controlled in the distributing contribution were incurred in the ordinary course of business and are associated with the assets to be transferred 4q distributing acquired its one share of corp j stock from corp d as part of a transaction intended to qualify under sec_351 in which corp d contributed all of its assets to distributing in exchange for distributing preferred_stock and the assumption by distributing of the corp d liabilities before that transaction corp d had held such stock since the formation of corp j on date a 4r except with respect to the notes if any acquired by distributing or its subsidiaries no intercorporate debt will exist between distributing and its subsidiaries on the one hand and controlled and its subsidiaries on the other hand at the time of or after the distributing distribution the notes if any acquired by distributing or its subsidiaries will be disposed of as soon as a disposition is warranted consistent with the corporate business_purpose for retention but in any event not later than five years after the distributing distribution 4s immediately before the distributing distribution items of income gain loss deduction and credit will be taken into account as required by the applicable intercompany_transaction regulations see sec_1_1502-13 and sec_1 as in effect before the publication of t d and as currently in effect sec_1_1502-13 as published by t d 4t payments made in connection with any continuing transactions between distributing and its subsidiaries on the one hand and controlled and its subsidiaries on the other hand will be for fair_market_value based on terms and conditions arrived at by the parties bargaining at arm’s length 4u neither distributing nor controlled is an investment_company as defined in sec_368 and iv 4v the distributing distribution is not part of a plan or series or related transactions within the meaning of sec_355 pursuant to which one or more persons will acquire directly or indirectly stock possessing percent or more of the total combined voting power of all classes of stock of either distributing or controlled entitled to vote or stock possessing percent or more of the total value of all classes of stock of either distributing or controlled distributing contribution and distribution the taxpayer has submitted the following representations concerning the distributing contribution and distributing distribution 4w any indebtedness owed by controlled to distributing after the distributing distribution will not constitute stock or except with respect to the notes if any securities 4x no part of the controlled common_stock to be distributed by distributing will be received by a stockholder as a creditor employee or in any capacity other than that of a stockholder of distributing 4y immediately after the distributing distribution i at least percent of the fair_market_value of the gross assets of distributing will consist of corp a and corp c stock ii at least percent of the fair_market_value of the gross assets of corp a will consist of corp d stock and iii at least percent of the fair_market_value of the gross assets of corp d will consist of distributing preferred_stock 4z immediately after the distributing distribution the gross assets of each of corp c distributing and corp e comprising business a business d and business b respectively will have a fair_market_value equal to or greater than five percent of the total fair_market_value of the gross assets of corp c distributing and corp e respectively 5a the five years of financial information submitted on behalf of business a business d and business b represents the present operations of each business and there have been no substantial operational changes since the date of the last financial statements submitted 5b immediately after the distributing distribution the gross assets of controlled comprising business c will have a fair_market_value equal to or greater than five percent of the total fair_market_value of the gross assets of controlled 5c the five years of financial information submitted on behalf of business c represents its present operations and there have been no substantial operational changes since the date of the last financial statements submitted 5d following the distributing distribution distributing through corp a and corp c and controlled will each continue the active_conduct of its business es independently and with its separate employees 5e the distributing distribution will be carried out among other reasons to resolve management systemic and other problems that arise through or are aggravated by the operation of group and the core group within the same affiliated_group the distributing distribution is motivated in whole or substantial part by this corporate business_purpose 5f except for the possible disposition of shares of distributing common_stock and or controlled common_stock pursuant to division of the distributing sec_401 plan the management of distributing to its best knowledge is not aware of any plan or intention on the part of any particular stockholder of distributing to sell exchange transfer by gift or otherwise dispose_of any stock in or securities of either distributing or controlled after the transaction 5g there is no plan or intention by distributing or controlled directly or through any subsidiary_corporation to purchase any of its stock after the transaction other than through stock purchases meeting the requirements of sec_4 b of revproc_96_30 5h there is no plan or intention to liquidate either distributing or controlled to merge either corporation with any other corporation or to sell or otherwise dispose_of the assets of either corporation after the distributing distribution except in the ordinary course of business 5i the total adjusted_basis and the fair_market_value of the assets to be transferred by distributing to controlled in the distributing contribution will in each case equal or exceed the liabilities to be assumed as determined under sec_357 by controlled 5j the liabilities to be assumed as determined under sec_357 by controlled in the distributing contribution were incurred in the ordinary course of business and are associated with the assets to be transferred 5k except with respect to the notes if any acquired by distributing or its subsidiaries no intercorporate debt will exist between distributing and its subsidiaries on the one hand and controlled and its subsidiaries on the other hand at the time of or after the distributing distribution the notes if any acquired by distributing or its subsidiaries will be disposed of as soon as a disposition is warranted consistent with the corporate business_purpose for retention but in any event not later than five years after the distribution 5l none of distributing 1’s directors or officers will serve as directors or officers of controlled 5m immediately before the distributing distribution items of income gain loss deduction and credit will be taken into account as required by the applicable intercompany_transaction regulations see sec_1_1502-13 and sec_1 as in effect before the publication of t d and as currently in effect sec_1_1502-13 as published by t d further any excess_loss_account distributing may have in the controlled common_stock will be included in income immediately before the distributing distribution to the extent required by applicable regulations see sec_1 5n payments made in connection with any continuing transactions between distributing and its subsidiaries on the one hand and controlled and its subsidiaries on the other hand will be for fair_market_value based on terms and conditions arrived at by the parties bargaining at arm’s length 5o neither distributing nor controlled is an investment_company as defined in sec_368 and iv 5p the distributing distribution is not part of a plan or series or related transactions within the meaning of sec_355 pursuant to which one or more persons will acquire directly or indirectly stock possessing percent or more of the total combined voting power of all classes of stock of either distributing or controlled entitled to vote or stock possessing percent or more of the total value of all classes of stock of either distributing or controlled 5q the payment of cash if any to holders of distributing common_stock in lieu of fractional shares of controlled common_stock is solely for the purpose of avoiding the expense and inconvenience to distributing of issuing fractional shares and does not represent separately bargained for consideration the method used for handling fractional share interests is intended to limit the amount of cash received by any one shareholder to less than the value of one whole share of controlled common_stock 5r distributing will not have been a u s real_property holding corporation as defined in sec_897 at any time during the five-year holding_period ending on the date of the distributing distribution and neither distributing nor controlled will be a u s real_property holding corporation immediately after the distributing distribution additional international representation the taxpayer has submitted the following additional representation 5s distributing will enter into a gain_recognition_agreement with respect to the transfer of the corp f corp g and corp h stock to corp e rulings corp y merger based solely on the information submitted and representations set forth above we rule as follows regarding the corp y merger the corp y merger will constitute a complete_liquidation of corp y under sec_332 sec_301_7701-2 -2 c i -3 b ii sec_332 sec_1_332-2 no gain_or_loss will be recognized or realized and deferred by controlled or corp y on the corp y merger sec_337 sec_336 and sec_332 the basis of each asset in the hands of controlled will equal the basis of that asset in the hands of corp y immediately before the corp y merger sec_334 the holding_period of each asset in the hands of controlled will include the period during which that asset was held by corp y sec_1223 controlled will succeed to and take into account the items described in sec_381 subject_to applicable conditions and limitations specified in sec_381 sec_382 and sec_383 sec_381 sec_1_381_a_-1 controlled will succeed to and take into account the earnings_and_profits of corp y as of the date of complete_liquidation sec_381 sec_1_381_c_2_-1 any deficit in earnings_and_profits of corp y or controlled will be used only to offset earnings_and_profits accumulated after the date of complete_liquidation sec_381 corp z merger based solely on the information submitted and representations set forth above we rule as follows on the corp z merger the corp z merger will constitute a complete_liquidation of corp z under sec_332 sec_332 sec_1_332-2 no gain_or_loss will be recognized or realized and deferred by corp o or corp z on the corp z merger sec_337 sec_336 and sec_332 the basis of each asset in the hands of corp o will equal the basis of that asset in the hands of corp z immediately before the corp z merger sec_334 the holding_period of each asset in the hands of corp o will include the period during which that asset was held by corp z sec_1223 corp o will succeed to and take into account the items described in sec_381 subject_to applicable conditions and limitations specified in sec_381 sec_382 and sec_383 sec_381 sec_1_381_a_-1 corp o will succeed to and take into account the earnings_and_profits of corp z as of the date of complete_liquidation sec_381 sec_1_381_c_2_-1 any deficit in earnings_and_profits of corp z or corp o will be used only to offset earnings_and_profits accumulated after the date of complete_liquidation sec_381 corp o merger based solely on the information submitted and the representations set forth above we rule as follows with respect to the corp o merger the corp o merger will constitute a complete_liquidation of corp o under sec_332 sec_301_7701-2 -2 c i -3 b ii sec_332 sec_1_332-2 no gain_or_loss will be recognized or realized and deferred by corp o or distributing on the corp o merger sec_337 sec_336 and sec_332 the basis of each asset in the hands of distributing will equal the basis of that asset in the hands of corp o immediately before the corp o merger sec_334 the holding_period of each asset in the hands of distributing will include the period during which that asset was held by corp o sec_1223 distributing will succeed to and take into account the items described in sec_381 subject_to applicable conditions and limitations specified in sec_381 sec_382 and sec_383 sec_381 sec_1_381_a_-1 distributing will succeed to and take into account the earnings_and_profits of corp o as of the date of complete_liquidation sec_381 sec_1_381_c_2_-1 any deficit in earnings_and_profits of distributing or corp o will be used only to offset earnings_and_profits accumulated after the date of complete_liquidation sec_381 corp l m and n elections based solely on the information submitted and representations set forth above we rule as follows on the corp l m and n elections as in the representations above each of corp l corp m and corp n is referred to as an electing_corporation and each election as an election each election by an electing_corporation will qualify for federal_income_tax purposes as a complete_liquidation of the electing_corporation into corp e under sec_332 sec_301_7701-2 -2 c i -3 b ii sec_332 no gain_or_loss will be recognized or realized and deferred by an electing_corporation or corp e on the electing corporation’s liquidation sec_337 sec_336 and sec_332 the basis of each asset in the hands of corp e will equal the basis of that asset in the hands of the electing_corporation immediately before the electing corporation’s liquidation sec_334 the holding_period of each asset in the hands of corp e will include the period during which that asset was held by the electing_corporation sec_1223 corp e will succeed to and take into account the items described in sec_381 subject_to applicable conditions and limitations specified in sec_381 sec_382 and sec_383 sec_381 sec_1_381_a_-1 corp e will succeed to and take into account the earnings_and_profits of each electing_corporation as of the date of complete_liquidation sec_381 sec_1_381_c_2_-1 any deficit in earnings_and_profits of corp e or an electing_corporation will be used only to offset earnings_and_profits accumulated after the date of complete_liquidation sec_381 distributing contribution and distribution based solely on the information submitted and representations set forth above we rule as follows on the distributing contribution and distributing distribution the distributing contribution followed by the distributing distribution will qualify as a reorganization under sec_368 and distributing and controlled each will be a party to the reorganization under sec_368 no gain_or_loss will be recognized by distributing on the distributing contribution sec_361 b b sec_357 no gain_or_loss will be recognized by controlled on the distributing contribution sec_1032 the basis of the each asset received by controlled will equal the basis of that asset in the hands of distributing immediately before the distributing contribution sec_362 the holding_period of each asset received by controlled will include the holding_period of that asset in the hands of distributing sec_1223 no gain_or_loss will be recognized by distributing on the distributing distribution sec_361 the distribution by distributing to distributing of the distributing note will be treated as a distribution_of_property immediately before the distributing distribution to which sec_301 applies sec_1_1502-13 no gain_or_loss will be recognized by and no amount will otherwise be included in the income of distributing on its receipt of the controlled common_stock in the distributing distribution sec_355 the holding_period of the controlled common_stock received in the distributing distribution will include the holding_period of the distributing stock on which the distributing distribution is made provided that the distributing stock is held as a capital_asset on the date of the distributing distribution sec_1223 earnings_and_profits will be allocated between distributing and controlled in accordance with sec_312 sec_1_312-10 and sec_1_1502-33 distributing contribution and distribution based solely on the information submitted and representations set forth above we rule as follows on the distributing contribution and the distributing distribution the distributing contribution followed by the distributing distribution will qualify as a reorganization under sec_368 and distributing and controlled each will be a party to the reorganization under sec_368 no gain_or_loss will be recognized by distributing on the distributing contribution sec_361 and sec_357 no gain_or_loss will be recognized by controlled on the distributing contribution sec_1032 the basis of the each asset received by controlled will equal the basis of that asset in the hands of distributing immediately before the distributing contribution sec_362 the holding_period of each asset received by controlled will include the holding_period of that asset in the hands of distributing sec_1223 no gain_or_loss will be recognized by distributing on the distributing distribution sec_361 no gain_or_loss will be recognized by and no amount will otherwise be included in the income of distributing on its receipt of the controlled common_stock in the distributing distribution sec_355 the holding_period of the controlled common_stock received in the distributing distribution will include the holding_period of the distributing stock on which the distributing distribution is made provided that the distributing stock is held as a capital_asset on the date of the distributing distribution sec_1223 earnings_and_profits will be allocated between distributing and controlled in accordance with sec_312 sec_1_312-10 and sec_1_1502-33 distributing contribution and distribution based solely on the information submitted and representations set forth above we rule as follows on the distributing contribution and the distributing distribution the distributing contribution followed by the distributing distribution will qualify as a reorganization under sec_368 and distributing and controlled each will be a party to the reorganization under sec_368 no gain_or_loss will be recognized by distributing on the distributing contribution sec_361 and sec_357 no gain_or_loss will be recognized by controlled on the distributing contribution sec_1032 the basis of the each asset received by controlled will equal the basis of that asset in the hands of distributing immediately before the distributing contribution sec_362 the holding_period of each asset received by controlled will include the holding_period of that asset in the hands of distributing sec_1223 no gain_or_loss will be recognized by distributing on the distributing distribution sec_361 no gain_or_loss will be recognized by and no amount will otherwise be included in the income of the distributing shareholders on their receipt of the controlled common_stock in the distributing distribution sec_355 the aggregate basis of the distributing stock and controlled common_stock in the hands of each distributing shareholder immediately after the distributing distribution will equal the shareholder’s basis in its his or her distributing stock immediately before the distributing distribution allocated in proportion to the fair_market_value of each in accordance with sec_1_358-2 sec_358 b and c the holding_period of the controlled common_stock received in the distributing distribution will include the holding_period of the distributing stock on which the distributing distribution is made provided that the distributing stock is held as a capital_asset on the date of the distributing distribution sec_1223 earnings_and_profits will be allocated between distributing and controlled in accordance with sec_312 sec_1_312-10 and sec_1_1502-33 the payment of cash if any in lieu of fractional shares of controlled common_stock will be treated for federal_income_tax purposes as if the fractional shares were distributed as part of the distributing distribution and then sold by the holder accordingly the stockholder will recognize gain_or_loss equal to the difference between the cash received and the portion of the basis of the controlled common_stock that is allocable to the fractional share this gain_or_loss will be capital_gain or loss provided that the fractional share was held by the holder as a capital_asset at the time of the sale international rulings the transfer by distributing of the stock of corp f corp g and corp h will be taxable under sec_367 unless distributing enters into a gain_recognition_agreement with respect to the transferred stock and complies with all the provisions of sec_1_367_a_-8 because corp e is a controlled_foreign_corporation within the meaning of sec_957 gain from the sale by corp e of the corp k stock to distributing will constitute subpart_f_income to distributing under sec_954 and the regulations thereunder unless an exception under subpart_f applies caveats no opinion is expressed about the tax treatment of the proposed transactions under other provisions of the code and regulations or about the tax treatment of any conditions existing at the time of or effects resulting from the proposed transaction that are not specifically covered by the above ruling in particular no opinion is expressed regarding a the contributions to capital assumption of notes term extension of notes and issuance of new notes described above in steps i ii and iii b the distribution of corp aa stock described above in step iv c the distribution by corp v described above in step v d the recapitalization described above in step vi e the contribution by corp i described above in step xi f the validity of any form_8832 election described above in steps xii and xiii g the qualification of controlled llc distributing llc or corp i as a disregarded_entity under sec_301_7701-3 or h the sale of corp k stock described above in step xiv temporary or final regulations pertaining to one or more issues addressed in this ruling letter including regulations under sec_358 have not yet been adopted therefore this ruling letter may be revoked or modified in whole or in part on the issuance of temporary or final regulations or a notice with respect to their future issuance see dollar_figure of revproc_99_1 1999_1_irb_6 which discusses the revocation or modification of ruling letters however when the criteria in dollar_figure of revproc_99_1 are satisfied a ruling will not be revoked or modified retroactively except in rare or unusual circumstances procedural statements this ruling is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent each taxpayer affected by this ruling letter should attach a copy of this letter to its federal_income_tax return for the taxable_year in which the transaction covered by this letter is completed under a power_of_attorney on file in this office a copy of this letter will be sent to your authorized representative sincerely yours assistant chief_counsel corporate by wayne t murray senior technician reviewer branch


office_of_chief_counsel internal_revenue_service memorandum number release date cc ita b01 -------------- posts-109638-07 uilc date date to associate area_counsel small_business self-employed third party communication none date of communication not applicable from thomas a luxner chief branch income_tax accounting ------------------------------- subject this chief_counsel_advice responds to your request for assistance this advice may not be used or cited as precedent legend x ------------------------ y --------------------------------- state a -------------------- year ------- year ------- year ------- year ------- dollar_figurea ---------------- b --- c -- posts-109638-07 facts the taxpayers or investors invested in notes issued by x x has been in business as a lender for many years in state a some time before year x’s business expanded to writing sub-prime mortgage loans in state a x sold unsecured and uninsured notes exclusively to state a residents because the company wished to avoid being subject_to federal securities regulations the notes provided for stated_interest at floating rates which was payable monthly or at maturity the notes are numbered listed by series and issued to named holders the notes typically matured in one to five years the investors could either receive interest payments directly or reinvest the interest in new notes x maintained locations that resembled banks tellers took deposits and promised to return money to investors in minutes if needed though x was not a bank or savings and loan association or credit_union and was not supervised by state or federal banking authorities x offered returns greater than those typically offered to bank depositors but commensurate with returns available from corporate bonds x was a legitimate business and was not formed as a fraud upon the investors nor was it part of a tax_avoidance scheme in year x was acquired by y which was primarily engaged in the business of mortgage lending x continued in existence however its direct lending activities were curtailed most of the proceeds of x’s borrowings were loaned to y the market for high-risk mortgages crashed in year and y suffered significant losses y’s business deteriorated as the losses mounted for the next several years y was only able to stay in business by using the cash x generated from the sale of its notes to the public for operating capital as required by local securities law x distributed annual prospectuses to the investors these prospectuses represented that x continued to conduct substantial business of its own and showed x to be solvent by virtue of its loans to y y’s financial condition was not disclosed officers and directors of x and y made public statements misrepresenting the financial condition of x by year y owed more to x’s investors than the company was worth in year the losses forced y and its subsidiaries to cease operations and file for bankruptcy thousands of investors are affected by the bankruptcy with estimated losses of dollar_figurea the liquidation plan for the company has been approved by the bankruptcy court investors received a payout of b cents on the dollar in late year we understand that another payout for c cents on the dollar is expected to be paid also there are other assets to be sold such as x’s building a letter explaining this to creditors was sent by the trustee in addition to the bankruptcy proceeding several people associated with x have been indicted for securities violations under local law several have been imprisoned for posts-109638-07 these violations the president of x pled guilty to counts of securities fraud in year another insider was tried and found guilty on counts of securities fraud in connection with x at least one officer was indicted on criminal charges including obtaining signature or property by false pretenses and breach of trust with fraudulent intent under ------------------------------------------------------------------------------- discussion the memorandum that you have asked us to comment on concluded that theft losses would generally not be allowed rather the losses resulted from the worthlessness of debt securities treated as capital losses under sec_165 of the internal_revenue_code the memorandum based its assessment on a finding that x and y were engaged in legitimate business and suffered losses in the ordinary course of that business the memorandum states that no evidence was presented indicating that money was obtained from the investors by false pretenses or stolen after possession was lawfully obtained the possibility that such evidence might be presented was mentioned in a footnote citing revrul_71_381 1971_2_cb_126 subsequently additional facts relating to the nature of the insiders fraudulent statements and resolution of their securities violations cases have been developed and an insider has been indicted on criminal charges requiring a misappropriation of property as an element of the crime in addition to various statements by insiders downplaying the financial difficulties at x financial statements presenting x as a solvent enterprise were issued to the investors these statements did not contain y’s balance_sheet which would have shown y’s deep insolvency x’s financial statements treated the loans to y as assets at face value the financial statements also indicate that x was engaged in the mortgage business on its own behalf which was no longer true after x was acquired by y thereafter x existed only to raise capital for y however x was in business for many years before these events occurred although these facts establish that a theft occurred it remains a question of fact whether and when a theft occurred with regard to any particular investor and what losses resulted from theft we will briefly summarize the applicable lines of authority theft sec_165 provides that there will be allowed as a deduction any loss sustained during the taxable_year and not_compensated_for_by_insurance_or_otherwise sec_165 provides that in the case of an individual the deduction under subsection a is limited to losses_incurred in a trade_or_business losses_incurred in any transaction entered into for profit though not connected with a trade_or_business and losses of property not connected with a trade_or_business if such losses arise from fire storm shipwreck or other_casualty or from theft sec_1_165-8 of the income_tax regulations provides that the term theft shall be deemed to include but shall not necessarily be limited to larceny embezzlement and robbery posts-109638-07 whether a loss from theft has occurred depends upon the law of the jurisdiction where it was sustained the exact nature of the crime whether larceny or embezzlement or obtaining money under false pretenses swindling or other wrongful deprivations of the property of another is of little importance so long as it amounts to theft 232_f2d_107 5th cir 34_tc_688 acq c b the service has adopted this broad definition of the term theft for purposes of sec_165 revrul_72_112 1972_1_cb_60 held that extortion of a ransom payment from a parent constitutes theft for the purposes of sec_165 revrul_72_112 stated t o qualify as a theft_loss within the meaning of sec_165 of the code the taxpayer needs only to prove that his loss resulted from a taking of property that is illegal under the law of the state where it occurred and that the taking was done with criminal intent in revrul_71_381 the taxpayer was induced to lend money to a corporation by fraudulent financial statements provided by the corporation’s president that did not reflect large liabilities that made the corporation insolvent as a result the president of the corporation was convicted by a court for violating the state securities law by issuing false and misleading financial documents the ruling held that since the money was obtained by false representations constituting a misdemeanor under state law the taxpayer was entitled to a theft_loss deduction reliance by the taxpayer on the misrepresentations and the specific intent to separate the taxpayer from his money through fraud are critical to the ruling’s reasoning thus a loss that is the direct result of fraud or theft is deductible under sec_165 even though the theft is accomplished through a purported borrowing or offer to sell a security commissioner v 37_tc_504 acq 1962_1_cb_4 fraudulent stock subscription is theft revrul_77_215 1977_1_cb_51 kiting checks is theft from the bank revrul_71_381 however the worthlessness of valid debt is not a theft_loss see 292_us_182 even if the debt is worthless because the debtor was the victim of theft rev_rul 1977_2_cb_66 depositors allowed bad_debt deductions when a bank suffered embezzlement the facts of the reviewed memorandum state that several x and y insiders have been convicted of or plead guilty to securities violations under local law ---------------------- --------------------------------------------- it is unlawful for any person in connection with the offer sale or purchase of any security directly or indirectly to employ any device scheme or artifice to defraud make any untrue statement of a material fact or to omit to state a posts-109638-07 material fact necessary in order to make the statements made in the light of the circumstances under which they are made not misleading or engage in any act practice or course of business which operates or would operate as a fraud or deceit upon any person a theft is a loss of property as recognized in the reviewed memorandum not every securities violation is a theft of property since as in the case of the state a statute a loss or taking of property is generally not a required element of securities fraud see 63_tc_736 aff’d without published opinion 523_f2d_1053 5th cir 61_tc_354 aff’d 540_f2d_448 9th cir thus losses on open market transactions are not theft losses even if the market values of the securities were inflated by insiders’ fraud revrul_77_17 1977_1_cb_44 in this case criminal charges have also been brought against at least one officer of y the law in state a provides that obtaining a signature or property by false pretenses with intent to cheat and defraud a person of that property is a crime ------------------------- --------------------------------- state a law also defines as a crime breach of trust with fraudulent intent -------------------------------------------------------- the elements of the latter crime are not delineated in the statute but it has been described as an extension of common_law larceny to situations where possession of the property was obtained lawfully ------------------------------------------------------------ in -------------------------------------- ---------------------------- the state a supreme court stated ------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------ ------------------------------------------------ a loss that results from a change in business conditions is not a loss from theft in 63_tc_736 the taxpayer claimed losses with respect to publicly traded stock bought and sold on the open market as ordinary theft losses due to securities violations by the corporation’s officers the court held that although the officers’ unlawful conduct diminished the value of the taxpayer’s stock there was no specific intent to defraud the taxpayer or acquire his property the court also found that the taxpayer had not demonstrated what portion of the loss suffered on the sale of the stock resulted from the officer’s fraud and what portion was attributable to poor results from the business a determination must be made whether or at what point loans to x no longer represented bona_fide debt a distinguishing characteristic of bona_fide debt is the intention of each party that the money advanced be repaid 321_f2d_598 3d cir aff'g 36_tc_446 412_f2d_974 5th cir 61_tc_367 acq 1974_2_cb_3 the borrower’s intent must be more than a vague hope of repaying the loan cf 50_tc_478 x conducted substantial business for many years issuing notes and repaying debts as they came due it is a question of fact when a loan to x was no longer bona_fide debt but a theft or when the officers’ conduct with regard to the money entrusted to x by the investors amounted to an arrogation of those funds with the intent to deprive the investors of their enjoyment timing of a loss to the extent that you determine that an investor’s losses are the result of the worthlessness of a security under sec_165 the loss occurs when the security is wholly worthless sec_1_165-5 a security becomes worthless when it has no current liquidating value and no potential value 38_bta_1270 aff'd 112_f2d_320 7th cir the determination of worthlessness is a question of fact and the burden of proving worthlessness is on the taxpayers 326_us_287 reh'g 326_us_811 identifiable events establishing worthlessness in this case might include the closing of the bankruptcy case or notice by the trustee that no further distributions would be made to the extent that you determine an investor’s loss results from theft sec_165 and sec_1_165-8 provide that a loss arising from a theft shall be treated as sustained during the taxable_year in which the taxpayer discovers the loss sec_1_165-8 provides that if in the year the taxpayer discovers the loss arising from a theft there exists a claim for reimbursement with respect to which there is a reasonable_prospect_of_recovery no portion of the loss for which reimbursement may be received is sustained for purposes of sec_165 until the taxable_year in which it can be ascertained with reasonable certainty whether or not such reimbursement will be received see also sec_1_165-1 therefore a theft_loss deduction will be barred to the extent that a reasonable prospect of reimbursement exists if the theft_loss exceeds the claim for recovery the excess would be deductible in the year the theft is discovered 61_tc_795 aff'd 521_f2d_786 4th cir if further distributions of uncertain amounts are forthcoming it cannot be ascertained with reasonable certainty whether or not such reimbursement will be received and the loss deduction must be postponed see 74_fedclaims_360 treatment of income taxpayers using the cash_receipts_and_disbursements_method of accounting must include amounts in gross_income when actually or constructively received section posts-109638-07 a this includes amounts representing interest under sec_1_446-2 as well as other returns on investment see premji v commissioner tcmemo_1996_304 aff’d without published opinion 139_f3d_912 10th cir in certain cases involving fraudulent schemes courts have applied the open_transaction doctrine treating payments to taxpayers as a return_of_capital and not ordinary_income these cases state that the payments were not for the use or forbearance of money and thus were not interest but were used to conceal fraud greenberg v commissioner tcmemo_1996_281 kooyers v commissioner tcmemo_2004_281 you have stated that a number of investors have filed amended returns for open years recharacterizing the taxable interest they reported in those years as in hindsight a nontaxable return of principal this was not the case in either greenberg or kooyers where the fraud was discovered before the taxpayer reported the amounts as income the open_transaction doctrine is applied in rare and extraordinary circumstances when recovery is so uncertain so at to prevent treating the transaction as closed 283_us_404 71_tc_998 we believe this treatment is proper for amounts actually or constructively received after the fraud was discovered thus payments made by x in the year the fraud was discovered-like the recoveries paid_by the trustee-are not income unless the taxpayer’s basis is exceeded returns may be amended if an amount was reported as income but was not in fact actually or constructively received see taylor v united_states aftr 2d ustc big_number e d tenn involving phantom income that the taxpayer was falsely told had been earned however the open_transaction doctrine should not be applied retroactively and must yield to the general_rule that each tax_year stands on its own see 282_us_359 see also parrish v commissioner tcmemo_1997_474 aff’d 168_f3d_1098 8th cir premji v commissioner tcmemo_1996_304 which explains constructive receipt in the context of a fraudulent scheme wright v commissioner tcmemo_1989_557 aff’d without published opinion 931_f2d_61 9th cir the proper remedy for taxpayers who have suffered a loss is a deduction cf 292_us_182 the code provides some relief by allowing theft losses to be carried back under sec_172 for purposes of this memorandum we have assumed that the interest in question is not original_issue_discount subject_to the income inclusion rules under sec_1272 and sec_1_1272-1 based on the facts presented to us however it is unclear whether the interest in all cases is not original_issue_discount for example if the interest is payable at maturity on a particular note the interest most likely is original_issue_discount and if so would be includible in the investor’s income as it accrues regardless of whether a payment was actually or constructively received during the tax_year in the case of a note that provides for monthly interest payments the interest may be original_issue_discount because the interest is not qualified_stated_interest within the meaning of sec_1_1273-1 however the facts are insufficient to determine if the interest is qualified_stated_interest see sec_1_1275-2 in the case of a note that has original_issue_discount posts-109638-07 this writing may contain privileged information any unauthorized disclosure of this writing may undermine our ability to protect the privileged information if disclosure is determined to be necessary please contact this office for our views please call -------------------- if you have any further questions thomas a luxner chief branch associate chief_counsel income_tax accounting


department of the treasury internal_revenue_service washington d c tar exempt ang government entities apa set ep rc t3 uniform issue list legend irax ira y iraz amount a amount b amount c amount d amount e date date company a dear u this is in response to your request dated as supplemented by correspondence dated in which you request a waiver of the 60-day rollover requirement contained in sec_408 d of the internat revenue cade the code the following facts and representations have been submitted under penalty of perjury in support of the ruling requested you are years old ira z with company a iras on date amount a was distributed from ira x amount b was distributed from you maintained individual_retirement_account ira x ra y and you represent that a distribution was made from each of these page ira y and amount c was distributed from ira z amount d represents the total amount of funds distributed from your iras with company a on date amount e represents the amount you intended to roll over to an ira amount e was not re-invested as you intended in an ira before the expiration of the statutorily required 60-day period ‘you assert that your failure to accomplish a rollover of amount e within the 60-day period prescribed by sec_408 d of the code was due to your madical condition which impaired your decision making ability during the 60-day period you seek a ruling waiving the 60-day pericd to roll over amount e you have submitted documentation reflecting that you were diagnosed with terminal cancer on date you have submitted a letter from your oncologist that documents your state of mental and physical health during the 60-day period you have submitted documentation explaining that some of the distributed funds have been used to pay for funeral arrangements of the use of funds accounts for the difference between amount d and amount e your explanation based on the facts and representations stated above you request a ruling that the internal_revenue_service waive the 60-day rollover requirement contained in section a08 d of the code regarding amount e sec_408 d of the code provides that except as otherwise provided in sec_408 any amount_paid or distributed out of an ira shall be included in gross_income by the payee or distributee as the case may be in the manner provided under sec_72 of tha code sec_408 d of the code defines and provides the rules applicable to ira_rollovers sec_408 d a of the code provides that sec_408 d of the code does not apply to any amount_paid or distributed out of an ra to the individual for whose benefit the ira is maintained if- j the entire amount received including money and any other_property is paid into an ra for the benefit of such individual not later than the day after the day on which the individual receives the payment or distribution or i 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 d sec_408 d b of the code provides that sec_408 d does not apply to any amount described in sec_408 d a i 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 a i from an ira which was not includible in gross_income because of the application of sec_408 d page sec_408 d d of the cade provides a similar 60-day rollover period for partial rollovers sec_408 d i of the cade provides that the secretary may waive the 60-day requirement under sec_408 d a and d d 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 only distributions that occurred after date are aligible for the waiver under sec_408 d i of the code revproc_2003_16 i r b date provides that in determining whether to grant a waiver of the 60-day rollover requirement pursuant to sec_408 d i of the code 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 the information presented and documentation you submitted is consistent with your assertion that your failure to accomplish a timely rollover was caused by your medical_condition which impaired your decision making ability during the 60-day period therefore pursuant to sec_408 d i of the code the service hereby waives the 80-day rollover requirement with respect to distributions totaling amount e you are granted a period of days from the issuance of this ruling letter to contribute amount e into a rollover ira provided all other requirements of sec_408 d of the code except the 60-day requirement are met with respect to such contribution contributing amount e into one or more iras described in code sec_408 will be considered a rollover_contribution within the meaning of sec_408 d of the code 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 this latter expresses no opinion as to whather ira x ira y or raz satisfied the requirements of sec_408 of the code this letter is directed only to the taxpayer who requested it sec_6110 k of the code provides that it may not be used or cited as precedent page if you wish to inquire about this ruling please contact id at please address all correspondence toe se t ep ra t3 singerely rancas v sloan manager empioyee plans technical group enclosures delated copy of ruling letter notice of intention to disclose


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 psi b02 plr-110708-10 date date legend x state date dear --------------- ------------------------------- ------------------------ --------- ---------------- this responds to a letter dated date submitted on behalf of x by x’s authorized representative requesting a ruling under sec_1362 of the internal_revenue_code the information submitted states that x was incorporated in state on date it was intended that x elect s_corporation treatment effective date however a form_2553 election by a small_business_corporation was not timely filed for x sec_1362 provides that a small_business_corporation may elect to be an s_corporation sec_1362 provides the rule on when an s election will be effective generally if an s election is made within the first two and one-half months of a corporation's taxable_year then the corporation will be treated as an s_corporation for the year in which the election is made sec_1362 provides that if an s election is made after the first two and one-half months of a corporation's taxable_year then the corporation will not be treated as an s_corporation until the taxable_year after the year in which the s election is made plr-110708-10 sec_1362 provides that if an election under sec_1362 is made for any taxable_year after the date prescribed by sec_1362 for making the election for the taxable_year or no sec_1362 election is made for any taxable_year and the secretary determines that there was reasonable_cause for the failure to timely make the election then the secretary may treat the election as timely made for such taxable_year and sec_1362 shall not apply based solely on the facts and the representations submitted we conclude that x has established reasonable_cause for failing to make a timely election to be an s_corporation effective date accordingly provided that x makes an election to be an s_corporation by filing a completed form_2553 with the appropriate service_center effective date within days following the date of this letter then such election will be treated as timely made for x's taxable_year beginning date a copy of this letter should be attached to the form_2553 except as specifically set forth above no opinion is expressed or implied as to the federal_income_tax consequences of the transaction described above under any other provision of the code specifically no opinion is expressed concerning whether x is in fact an s_corporation for federal tax purposes 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 pursuant to the power_of_attorney on file with this office a copy of this letter is being sent to x’s authorized representative sincerely bradford r poston senior counsel branch passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes