internal_revenue_service number release date index number -------------------------- ------------- -------------------------------------------------------- ----------------------- ----------------------------------- ----------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact -------------------- id no ------------- telephone number --------------------- refer reply to cc corp plr-126739-10 date date legend legend taxpayer subisidiary subsidiary date1 date company official tax professional dear -------------- --------------------------------- ----------------------- --- ---------------------------- ----------------------- -------------------------------- ----------------------- --- ----------------------- ------------------------ --------------------------------------------------------------- ------------- -------------------------------------------------------- ------------------------- ---------------- ------------------ plr-126739-10 this letter responds to a letter dated date requesting on behalf of taxpayer an extension of time under sec_301_9100-1 through of the procedure and administration regulations to file an election the extension is being requested for taxpayer to file an election under sec_1_1502-21 of the income_tax regulations to relinquish the entire carryback period for the consolidated_net_operating_loss cnol of the consolidated_group for the tax_year ending date the material information submitted in the date letter and supplemental information provided in correspondence dated date is summarized below taxpayer is the common parent of a consolidated_group consisting of taxpayer subsidiary and subsidiary taxpayer group taxpayer group sustained a cnol in the tax_year ending date taxpayer has represented that taxpayer group has not and will not carry any portion of the cnol to a prior consolidated_return_year of the group taxpayer has also represented that no corporation that was a member of taxpayer group at any time during the tax_year ending date had a separate_return_year within the meaning of sec_1_1502-1 at any time during the carryback period taxpayer group did not submit a timely election to relinquish the entire carryback period for the cnol of the consolidated_group for the tax_year ending date the election was due no later than the last day prescribed by law including extensions of time for the filing of taxpayer's return in this case date however for various reasons a valid election was not made subsequent to date the date the return was timely filed it was discovered that a valid election had not been filed subsequently this request was submitted under sec_301_9100-3 for an extension of time to file the election the period of limitations on assessment under sec_6501 has not expired for taxpayer or any member of taxpayer group for the tax_year ending date or for any subsequent tax years sec_1_1502-21 provides that a group may make an irrevocable election under sec_172 to relinquish the entire carryback period with respect to a cnol for any consolidated_return_year the election is made in a separate statement entitled this is an election under sec_1_1502-21 to waive the entire carryback period pursuant to sec_172 for the insert consolidated_return_year cnols of the consolidated_group of which insert name and employer_identification_number of common parent is the common parent sec_1_1502-21 provides that the statement must be filed with the group’s income_tax return for the consolidated_return_year in which the cnol arises under sec_301_9100-1 the commissioner has discretion to grant a reasonable extension of time to make a regulatory election or a statutory election but no more than plr-126739-10 six months except in the case of a taxpayer who is abroad under all subtitles of the code except subtitles e g h and i sec_301_9100-1 defines the term regulatory election as including an election whose due_date is prescribed by a regulation revenue_ruling revenue_procedure notice or announcement sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make a regulatory election sec_301_9100-1 sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides extensions of time for making regulatory elections that do not meet the requirements of sec_301_9100-2 requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301 a in this case the time for filing the election is fixed by the regulations ie sec_1 b i therefore the commissioner has discretionary authority under sec_301_9100-3 to grant an extension of time for taxpayer to file the election provided taxpayer establishes it acted reasonably and in good_faith the requirements of sec_301_9100-1 and sec_301_9100-3 are satisfied and granting relief will not prejudice the interests of the government information affidavits and representations submitted by taxpayer company official and tax professional explain the circumstances that resulted in the failure to timely file a valid election the information establishes that taxpayer reasonably relied on a qualified_tax professional who failed to make or advise taxpayer to make the election and that the interests of the government will not be prejudiced if relief is granted and that the request for relief was filed before the failure to make the election was discovered by the internal_revenue_service sec_301_9100-3 and v based on the facts and information submitted including the affidavits submitted and the representations that have been made we conclude that taxpayer has established that it acted reasonably and in good_faith in failing to timely file the election the requirements of sec_301_9100-1 and sec_301_9100-3 are satisfied and granting relief will not prejudice the interests of the government accordingly we grant an extension of time under sec_301_9100-3 until forty-five days from the date on this letter for taxpayer group to file the election for the tax_year ending date as described above the above extension of time is conditioned on taxpayer group's tax_liability if any not being lower in the aggregate for all years to which the election applies than it would have been if the election had been made timely taking into account the time_value_of_money no opinion is expressed as to taxpayer group's tax_liability for the years involved a determination thereof will be made upon audit of the federal_income_tax plr-126739-10 returns involved further no opinion is expressed as to the federal_income_tax effect if any if it is determined that taxpayer's group's liability is lower sec_301_9100-3 taxpayer should file the election in accordance with sec_1_1502-21 taxpayer’s return must be amended to attach the election statement required by sec_1 b i a copy of this letter should be attached to the election statement alternatively if taxpayer files its amended_return electronically taxpayer may satisfy this latter requirement by attaching a statement to its return that provides the date and the control number of the letter_ruling no opinion is expressed as to the tax effects or consequences of filing the election late under the provisions of any other section of the code or regulations or as to the tax treatment of any conditions existing at the time of or resulting from filing the election late that are not specifically set forth in the above ruling for purposes of granting relief under sec_301_9100-3 we relied on certain statements and representations made by taxpayer company official and tax professional however all essential facts must be verified in addition notwithstanding that an extension is granted under sec_301 to file the election penalties and interest that would otherwise be applicable if any continue to apply this ruling letter is directed only to the taxpayer who requested it sec_6110 provides that that it may not be used or cited as precedent pursuant to a power_of_attorney on file in this office a copy of this letter is being sent to your authorized representatives sincerely ____________________ ken cohen senior technician reviewer branch office of associate chief_counsel corporate


internal_revenue_service number release date index number -------------------------- -------------------------- ------------------------------- -------------------------------------- ------------------------------ department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------------ id no ------------------ ---------------------------------------------------- telephone number ---------------------- refer reply to cc corp b06 plr-147991-11 date date ty ------- legend parent ------------------------------------------------------------- --------------------------------------------------------------------- -------------------------------- purchaser ---------------------------------------------------------------------- --------------------------------------------------- target ---------------------------------------------------------------------- ------------------------------------------------------------------------ date1 date2 year1 ----------------------- ------------------- ------- company official1 -------------------------------------------------- ------------------------------- company official2 ---------------------------------------------------------------------------- ------------------------------------------------------------------------ tax professional ------------------------------------------------------------------------ plr-147991-11 dear ----------------- this letter responds to a letter dated date submitted on behalf of parent the common parent of a consolidated_group parent group and the u s shareholder of purchaser the foreign purchasing_corporation requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations to file an election parent is requesting an extension to file a sec_338 election under sec_338 of the internal_revenue_code with respect to purchaser’s acquisition of the stock of target on date1 sometimes hereinafter referred to as the election additional information was received in subsequent letters the material information is summarized below purchaser was formed in year1 by parent on date1 purchaser acquired all of the stock of target in what parent represents qualified as a qualified_stock_purchase as defined in sec_338 the election was due on date2 but for various reasons a valid election was not filed after the due_date for the election it was discovered that the election had not been filed subsequently this request was submitted under sec_301_9100-3 for an extension of time to file the election sec_338 permits certain stock purchases to be treated as asset acquisitions if the purchasing_corporation makes or is treated as having made a sec_338 election or a sec_338 election and the acquisition is a qualified_stock_purchase under sec_301_9100-1 the commissioner has discretion to grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-1 through provide the standards the commissioner uses to determine whether to grant an extension of time to make a regulatory election sec_301_9100-1 sec_301_9100-2 provides automatic extensions of time for making certain elections requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-3 sec_301_9100-3 provides in general that except as provided in sec_301 b i through iii a taxpayer is deemed to have acted reasonably and in good_faith if the taxpayer- i requests relief under this sec_301_9100-3 before the failure to make the regulatory election is discovered by the internal_revenue_service irs plr-147991-11 ii failed to make the election because of intervening events beyond the taxpayer's control iii failed to make the election because after exercising reasonable diligence taking into account the taxpayer's experience and the complexity of the return or issue the taxpayer was unaware of the necessity for the election iv reasonably relied on the written advice of the irs or v reasonably relied on a qualified_tax professional including a tax professional employed by the taxpayer and the tax professional failed to make or advise the taxpayer to make the election sec_301_9100-3 provides that for purposes of sec_301_9100-3 a taxpayer is deemed to have not acted reasonably and in good_faith if the taxpayer- i seeks to alter a return position for which an accuracy-related_penalty has been or could be imposed under sec_6662 at the time the taxpayer requests relief taking into account any qualified_amended_return filed within the meaning of sec_1_6664-2 and the new position requires or permits a regulatory election for which relief is requested ii was informed in all material respects of the required election and related tax consequences but chose not to file the election or iii uses hindsight in requesting relief if specific facts have changed since the due_date for making the election that make the election advantageous to a taxpayer the irs will not ordinarily grant relief in such a case the irs will grant relief only when the taxpayer provides strong_proof that the taxpayer's decision to seek relief did not involve hindsight sec_301_9100-3 provides in general that the commissioner will grant a reasonable extension of time to make a regulatory election only when the interests of the government will not be prejudiced by the granting of relief generally the interests of the government are prejudiced if i granting relief would result in a taxpayer having a lower tax_liability in the aggregate for all taxable years affected by the election than the taxpayer would have had if the election had been timely made taking into account the time_value_of_money or ii if the taxable_year in which the regulatory election should have been made or any taxable years that would have been affected by the election had it been timely made are closed by the period of limitations on assessment under sec_6501 before the taxpayer's receipt of a ruling granting relief under this section however the irs may condition a grant of relief on the taxpayer providing the irs with a statement from an independent auditor other than an auditor providing an affidavit pursuant to sec_301_9100-3 certifying that the interests of the government are not prejudiced under the standards set forth in sec_301_9100-3 plr-147991-11 in this case the time for filing the election is fixed by the regulations ie sec_1_338-2 therefore the commissioner has discretionary authority under sec_301_9100-3 to grant an extension of time for parent to file the election provided that parent acted reasonably and in good_faith the requirements of sec_301_9100-1 and sec_301_9100-3 are satisfied and granting relief will not prejudice the interests of the government information affidavits and representations were submitted by parent company official1 company official2 and tax professional explaining the circumstances that resulted in the failure timely to file a valid election the information establishes that the taxable_year in which the election should have been made is closed by the period of limitations on assessment under sec_6501 ordinarily the interests of the government are prejudiced in this circumstance however parent has provided a statement as described in sec_301_9100-3 certifying that the interests of the government are not prejudiced under the standards set forth in sec_301_9100-3 parent relied on a qualified_tax professional employed by parent and the tax professional failed to make the election generally if a taxpayer reasonably relied on a qualified_tax professional who failed to make or advise the taxpayer to make an election the taxpayer is deemed to have acted reasonably and in good_faith however pursuant to sec_301_9100-3 a taxpayer is deemed to have not acted reasonably and in good_faith if it seeks to alter a return position for which an accuracy- related penalty has been or could be imposed under sec_6662 at the time the taxpayer requests relief and the new position requires or permits a regulatory election for which relief is requested at issue remains whether parent is seeking to alter a return position by making the election for which relief is requested the field component of the irs has provided that an accuracy-related_penalty could be imposed on parent group in this case parent group’s return for the year in which the election should have been made and for subsequent years contains inconsistencies in determining its return position only one of these items is consistent with a return position that a sec_338 election was made but even this one item is not necessarily indicative of a return position that an election was made however the remaining inconsistencies are indicative of a return position that no election was made based on the facts and information submitted and the representations made and based on the field component’s position described above we find that parent is seeking to alter a return position within the meaning of sec_301_9100-3 for which an accuracy- related penalty could be imposed accordingly parent is deemed to have not acted reasonably and in good_faith sec_301_9100-3 therefore an extension of time is not granted for parent to file the election with respect to the acquisition of the stock of target plr-147991-11 this ruling is based on the assumption that an accuracy-related_penalty could be imposed on the taxpayer we express no opinion concerning whether an accuracy- related penalty could be imposed except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling letter is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely _ken cohen________________ ken cohen senior technician reviewer branch office of associate chief_counsel corporate cc


internal_revenue_service department of the treasury index number washington dc number release date person to contact telephone number refer reply to cc dom corp 1-plr-111762-99 date date legend purchaser sub sub target company official tax professional date a date b date c date d date e country dear this letter responds to your authorized representative’s letter dated date on behalf of the above taxpayers requesting an extension of time under sec_301_9100-1 through of the procedure and administration regulations to file an election additional information was submitted in letters dated date date and date the extension is being requested for purchaser as common parent of the consolidated_group of which sub the united plr-111762-99 states shareholder of sub the foreign purchasing company is a member to file an election under sec_338 of the internal_revenue_code and sec_1_338-1 and sec_1_338-1 of the income_tax regulations all citations in this letter to regulations under sec_338 are to the regulations as in effect for date a purchaser is the common parent of a consolidated_group that has a calendar taxable_year and uses the accrual_method of accounting purchaser wholly owns sub a u s_corporation which wholly owns sub a country corporation target is a country corporation on date a sub acquired solely for cash in a fully taxable_acquisition of the stock of target from three individual residents of country and a country corporation the stock acquisition of target was made with the intent of electing to characterize the acquisition as an asset acquisition under sec_338 the election it is represented that the acquisition of target constituted a qualified_stock_purchase within the meaning of sec_338 and that neither purchaser sub nor sub were related to the sellers within the meaning of sec_338 the period of limitations on assessments under sec_6501 has not expired for purchaser's or sub 1's taxable_year s in which the acquisition occurred the taxable_year in which the election should have been filed or any taxable years that would have been affected by the election had it been timely filed additionally the purchaser has made the following representations with respect to this transaction a none of the sellers are united_states persons within the meaning of sec_7701 for u s federal_income_tax purposes furthermore it is represented that none of the sellers are subject_to tax on the sale of such stock in target under sec_871 or sec_882 b target is a foreign_corporation within the meaning of sec_7701 and furthermore target does not intend to file an election under sec_301_7701-3 to be treated as either a disregarded_entity or a partnership for u s federal_income_tax purposes c target did not own a u s real_property interest within the meaning of sec_897 immediately prior to sub 2's acquisition of all of the outstanding_stock of target and will not be required under sec_1_6012-2 to file a u s income_tax return for its date e short_year in connection with the deemed sale of all its assets at the close of the acquisition_date under sec_338 d foreign_income_taxes attributable to the foreign taxable_income earned by target during the foreign taxable_year will be allocated to old target and new target in accordance with principles of sec_1_338-5 plr-111762-99 the election was due on date b however for various reasons the election was not made on date c which is shortly after the due_date for the election company official and tax professional discovered that the election had not been filed subsequently this request was submitted under sec_301_9100-1 for an extension of time to file the election sec_338 permits certain stock purchases to be treated as asset purchases if the purchasing_corporation makes or is treated as having made a sec_338 election under sec_338 and the acquisition is a qualified_stock_purchase sec_338 defines a qualified_stock_purchase as any transaction or series of transactions in which stock meeting the requirements of sec_1504 of one corporation is acquired by another corporation by purchase during the month acquisition period sec_1_338-1 and v provide inter alia that a foreign purchasing_corporation or deemed foreign purchasing_corporation is not eligible for the special rule under sec_1_338-1 ie which specifies a filing_date for the election that is later than the filing_date required by sec_338 and sec_1_338-1 if such foreign_corporation is considered subject_to united_states tax eg is a controlled_foreign_corporation cfc or is required to file a united_states income_tax return sec_338 provides that the term purchase means any acquisition of stock but only if i the basis of the stock in the hands of the purchasing_corporation is not determined in whole or in part by reference to the adjusted_basis of such stock in the hands of the person from whom acquired or under sec_1014 relating to property_acquired_from_a_decedent ii the stock is not acquired in an exchange to which sec_351 sec_354 sec_355 or sec_356 applies and is not acquired in any other transaction described in regulations in which the transferor does not recognize the entire amount of the gain_or_loss realized on the transaction and iii the stock is not acquired from a person the ownership of whose stock would under sec_318 be attributed to the person acquiring such stock sec_1_338-1 provides that a purchasing_corporation makes a sec_338 election for target by filing a statement of sec_338 election on form_8023 in accordance with the instructions on the form the sec_338 election must be filed not later than the 15th day of the ninth month beginning after the month in which the acquisition_date occurs a sec_338 election is irrevocable sec_1_338-1 provides that the united_states_shareholders as defined in sec_951 of a foreign purchasing_corporation that is a cfc as defined in sec_957 taking into account sec_953 may file a statement of sec_338 election on behalf of the purchasing_corporation if the purchasing_corporation is not required under sec_1_6012-2 other than sec_1_6012-2 to file a united_states income_tax return for its taxable_year that includes the acquisition_date form_8023 must be filed in plr-111762-99 accordance with the instructions to the form and a copy of the form must be attached to form_5471 information_return with respect to foreign_corporation and filed with respect to the purchasing_corporation by each united_states_shareholder for the purchasing_corporation sec_1_338-2 provides that if an election under sec_338 is made for target old target is deemed to sell target’s assets and new target is deemed to acquire those assets sec_1_1502-77 provides that the common parent for all purposes other than for several purposes not relevant here shall be the sole agent for each subsidiary in the group duly authorized to act in its own name in all matters relating to the tax_liability of the consolidated_return_year see also form_8023 and the instructions thereto under sec_301_9100-1 the commissioner has discretion to grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-1 defines the term regulatory election as including an election whose due_date is prescribed by a regulation revenue_ruling revenue_procedure notice or announcement sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make a regulatory election see sec_301_9100-1 sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides extensions of time for making regulatory elections that do not meet the requirements of sec_301_9100-2 requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government see sec_301_9100-3 in this case the time for filing the election was fixed by the regulations ie sec_1_338-1 therefore the commissioner has discretionary authority under sec_301_9100-1 to grant an extension of time for purchaser as common parent of the consolidated_group of which sub the united_states_shareholder of sub the foreign purchasing company is a member to file the election provided purchaser shows that sub acted reasonably and in good_faith the requirements of sec_301_9100-1 and sec_301_9100-3 are satisfied and granting relief will not prejudice the interests of the government information affidavits and representations submitted by company official and tax professional explain the circumstances that resulted in the failure_to_file the election the information establishes that purchaser reasonably relied on a qualified plr-111762-99 tax professional and that relief was requested before the failure to make the election was discovered by the service see sec_301_9100-3 and v based on the facts and information submitted including the representations that have been made we conclude that purchaser and sub acted reasonably and in good_faith in failing to timely file the election the requirements of sec_301_9100-1 and sec_301_9100-3 are satisfied and granting relief will not prejudice the interests of the government accordingly subject_to the below conditions we grant an extension of time under sec_301_9100-1 until days from the date_of_issuance of this letter for purchaser as common parent of the consolidated_group of which sub the united_states_shareholder of sub the foreign purchasing company is a member to file the election with respect to the acquisition of the stock of target as described above the above extension of time to file the election is conditioned on the taxpayers' purchaser and its subsidiaries and target and the sellers’ to the extent they have any u s tax_liability tax_liability not being lower in the aggregate for all years to which the election applies than it would have been if the election had been timely made taking into account the time_value_of_money no opinion is expressed as to the taxpayers’ tax_liability for the years involved a determination thereof will be made by the district director's office upon audit of the federal_income_tax returns involved further no opinion is expressed as to the federal_income_tax effect if any if it is determined that the taxpayers’ liability is lower sec_301_9100-3 purchaser as common parent of the consolidated_group of which sub the united_states_shareholder of sub the foreign purchasing company is a member should file the election in accordance with sec_1_338-1 and sec_1_338-1 that is a new election on form_8023 must be executed on or after the date of this letter which grants an extension and filed in accordance with the instructions on the election form a copy of this letter should be attached to the election form purchaser must file and amend its return and target must file a final return if and as applicable to report the stock acquisition sale as a sec_338 transaction and attach thereto a copy of this letter and a copy of the election form also see sec_1_338-1 and sec_1_338-5 that is the old target must file a separate final return if and as applicable and the new target must be included in purchaser’s return by being listed on form for the first year following the acquisition see sec_1_338-1 and sec_1_338-1 and announcement 1998_1_cb_282 no opinion is expressed as to whether the acquisition of target’s stock qualifies as a qualified_stock_purchase whether the acquisition of target’s stock qualifies for sec_338 treatment if the acquisition of target’s stock qualifies for sec_338 treatment as to the amount of gain_or_loss recognized if any by target on the deemed asset sale no opinion is expressed about the tax treatment of any conditions existing at the plr-111762-99 time of or effects resulting from the purchase of the stock of target not specifically covered by the above rulings no opinion is expressed as to the tax effects or consequences of filing the election late under the provisions of any other section of the code and regulations or as to the tax treatment of any conditions existing at the time of or resulting from filing the election late that are not specifically set forth in the above ruling for purposes of granting relief under sec_301_9100-1 we relied on certain statements and representations made by the taxpayer its employees and representatives however the district_director should verify all essential facts in addition notwithstanding that an extension is granted under sec_301_9100-1 to file the election penalties and interest that would otherwise be applicable if any continue to apply a copy of this letter is being sent to the authorized representatives designated on your power_of_attorney this letter is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent sincerely yours philip j levine assistant chief_counsel corporate


t c memo united_states tax_court boris putanec and jeana j toney petitioners v commissioner of internal revenue respondent docket nos filed date william f colgin william b clayton and christina k harper for petitioners roy wulf kevin g croke shannon l cohen kaelyn j romey and jon d feldhammer for respondent memorandum findings_of_fact and opinion holmes judge boris putanec achieved great wealth by the time he was thirty but that was during the ‘90s tech boom the wealth was mostly on paper and it did not last on the way up he tried to free some of the gain he was enjoying without actually selling much of his stock and without paying tax on what he did sell sharp promoters offered to help him do so and lured him in with promises of giant paper losses to keep his tax bill down putanec claimed dollar_figure million in capital losses on his and returns these losses were dealt to putanec in a cards--custom adjustable rate debt structure--transaction over dollar_figure million of those losses were carried forward to his and his wife’s return the commissioner disallowed them and issued notices of deficiency for more than dollar_figure million for tax years and we determine what if anything putanec can deduct as losses from the cards deal and whether he is entitled to deduct the costs of the foreign-currency exchange contracts fx contracts their use required jeana toney is a party only because she and her husband filed a joint return because we decided this issue on a preponderance_of_the_evidence we need not decide whether the burden_of_proof shifts to the commissioner under sec_7491 see 131_tc_185 all references to sections are to the internal_revenue_code and regulations in effect for the years at issue all references to rules are to the tax_court rules_of_practice and procedure findings_of_fact i putanec and ariba putanec’s useful genius was noticeable at an early age after he earned bachelor’s and master’s degrees in computer science at brown university he began working for kaleido labs as an engineer and swiftly rose to become a senior executive for internet shopping company his career on the high-tech fast track accelerated even more when he and six business colleagues grabbed lunch at a local cafe in sunnyvale california they shared the same flash of inspiration--that the boring but essential procurement process for businesses--filled with forms to be completed in triplicate interoffice envelopes with red strings and vendors who completed purchase orders on paper and in ink on the backs of their sample cases--was aching for computerization drawing on their placemats with the jar of crayons provided by the cafe they came up with a solution shortly thereafter they incorporated ariba technologies inc they knew that if they got this right every business in the world would be a potential customer the seven founders of ariba set to work quickly putanec’s role was to design and write the software his salary was dollar_figure but he also received big_number shares of ariba stock in less than one year they released their first product called ariba buyer the product saw modest success eventually leading the company to release the ariba supplier network in this network was a hub where suppliers could post electronic catalogs of their products and buyers could send purchase orders through the same network by today’s standards this network might seem dated but it was a big step in business-to- business ecommerce ariba’s first-year sales were around dollar_figure respectable for a company drawn up in crayon the second year they were dollar_figure million by the third year sales reached dollar_figure million it was clear that more investors wanted in and ariba gave them what they wanted in ariba went public the share price rocketed up on its first day of trading which gave the company a value of pj jakovljevic ariba’s 15-year journey into the b2b commerce cloud technology evaluation centers date pm http exchange ariba com servlet jiveservlet previewbody arib a 20years 20journey 20june pdf we note that this short course on ariba’s history is drawn from extrarecord sources the history is for engaging background alone and is immaterial to the contested facts and issues see james kwak the myth of ariba the baseline scenario date http baselinescenario com the-myth-of-ariba dollar_figure billion ariba followed this impressive showing with dollar_figure million in sales in its fourth year its market cap soared to nearly dollar_figure billion general motors’ market cap that year topped out at dollar_figure billion and maybe people should have thought there was something not quite right about the values the market was putting on tech companies but it’s in the nature of bubbles to distort the vision of those inside them and so it was in the late ‘90s through the incredible rise in the value of tech companies had been generated mostly by ideas such as a increase in the stock of books-a-million the day it simply launched a newly enhanced web site some analysts looked back and realized the market was full of irrational exuberance all analysts eventually realized that profitability mattered even for tech companies and that the majority of them had nothing more than ideas from date to date the tech see tomasz tunguz from dollar_figurek to dollar_figurem in years--the story of ariba tomtunguz com date http tomtunguz com ariba-history matt nesto gm’s market_value is only dollar_figure billion--half that of avon cnbc date http www cnbc com id see investors are still online mavens amd looks chipper and newbridge builds gain cnn money date http money cnn com markets hotstox2p bubble’s burst wiped dollar_figure trillion in paper wealth off the nasdaq as the total market_value of the nasdaq fell from dollar_figure trillion to dollar_figure trillion while putanec held ariba stock the stock split for four times bringing his maximum holdings--if he hadn’t sold any of the stock--to just over million shares even though he had sold some of his shares by date putanec still held over million this was certainly a good position to be in when the company was valued at dollar_figure billion alas only in name could ariba be up forever a wall street phrase the dead cat bounce is anathema to ailurophiles but a memorable way to describe the phenomenon that a stock whose price is collapsing usually suffers a decline followed by an illusory rally as investors try to guess where the bottom will be harboring fantasies that the tech bust was limited to companies that focused on consumers the high-tech dead-cat bounce briefly inspired a rally in tech companies that aimed at the business-to-business market ariba was one of these and it rallied to a high of about dollar_figure per share in date the rally didn’t last on date ariba’s shares sank to dollar_figure and on date to dollar_figure three months later in date chris gaither dawn c chmielewski fears of dot-com crash version los angeles times date http articles latimes com jul business fi-overheat16 ariba had fallen to around dollar_figure per share putanec’s paper wealth followed the same trajectory date shares held approximate ipo - million million million million million million million share price dollar_figure0 total value dollar_figure million million million million million million million thus from its high point in date to date putanec’s wealth from the stock went from close to dollar_figure billion to just over dollar_figure million it is easy enough in retrospect for an outsider to this remarkable era to wonder why the fortunate entrepreneurs of the time didn’t all cash_out when they could having so much of one’s wealth in a single asset--there were times when of putanec’s wealth was concentrated in ariba stock--would seem to violate some older wisdom about the benefits of diversification easy enough to say now but when these tech companies were booming they were often like ariba still private and had shareholders who were still working to make their companies successful so when someone like putanec wanted to buy something he would often have to decide if he wanted to sell stock or monetize that stock in some other fashion selling stock could be difficult--the investment banks that handle the ipos traditionally require a lockup period that restricts shareholder-employees from selling ariba shares immediately after a company goes public putanec’s first opportunity to sell post-ipo occurred on date at the end of the first blackout date and he made good use of that chance in october and november of that year putanec sold a total of big_number shares of ariba stock the following year between february and november he sold big_number shares leaving himself with over million shares these restrictions are meant to prevent the insiders who hold stock from flooding the market during the company’s first months as a public corporation insiders’ selling shares of a company soon after an ipo could give the impression that they lack faith in their work possibly leading to a drop in the share price see amy fontinelle what is an ipo lock-up period and how long is it investopedia http www investopedia com ask answer ipo-lockup-period asp blackout dates are distinct from lockup periods lockup periods are usually imposed by underwriters so the market doesn’t flood with stock as soon as the company becomes public blackout dates are used to avoid insider-trading problems the company self-imposes a policy that restricts employees perhaps only key employees from trading their stock when the company is in possession of valuable insider information the blackout date generally ends when the company issues an annual or a quarterly report see eg 622_fsupp2d_814 n d ariz despite these sales putanec wanted to hold onto as many shares as possible he testified that even during the tumult of the dot-com boom he was very bullish concerning ariba’s future he explained ariba was one of the few survivors standing after the march nasdaq crash i was of the opinion that if i was selling substantial amounts of stock i would be hurting my future net_worth believing that the price would rebound then putanec sought other ways to monetize his ariba stock enter mycfo inc in early putanec retained mycfo for tax- preparation services mycfo also began to provide him with wealth-management services and urged him to diversify his holdings in ariba mycfo advised him to liquidate dollar_figure million of his ariba stock holdings to safely diversify he resisted citing technology magnates such as bill gates putanec thought the best long-term strategy would be to ride the wave of price fluctuations and stick with his ariba holdings but to assuage the advisers at mycfo he began to diversify a little by putting a bit of his wealth into real_estate and several limited_partnership investments usually around dollar_figure to dollar_figure million those investments required cash on hand something that was hard to come by when so much of his wealth was in one company’s stock putanec raised this concern with mycfo and that’s how he first learned about cards ii cards transaction cards transactions aren’t new to this court see generally hunter v commissioner tcmemo_2014_132 crispin v commissioner tcmemo_2012_70 aff’d 708_f3d_507 3d cir kerman v commissioner tcmemo_2011_54 aff’d 713_f3d_849 6th cir country pine fin llc v commissioner tcmemo_2009_251 and though the specific facts of each deal invariably differ many of the players and processes are the same there are generally three stages loan origination loan assumption and loan operation see kerman tcmemo_2011_54 wl at a chenery the promoter the cards transaction was developed and marketed by chenery associates inc chenery roy hahn chenery’s founder worked with some new york investment banks to find possible customers though referrals usually came from accounting and law firms hahn worked specifically with r j ruble at the law firm of brown wood to procure an opinion that endorsed the deal’s legality and tax benefits chenery would collect fees for setting up the transaction and then pay ruble out of those fees chenery also paid other costs such as bank llc and legal fees ruble regularly worked with accountants at kpmg who designed and marketed tax_shelters those accountants would find clients and design the shelters and ruble would offer his legal opinion that they were on the up and up thus--they hoped--shading the shelter from irs scrutiny it didn’t work the irs caught on and a jury ultimately convicted mr ruble of tax_evasion see united_states v ruble no sec_1 crim lak wl s d n y date aff’d sub nom 407_fedappx_506 2d cir b basic outline of cards transactions there are some standard steps in a cards transaction first chenery would set up an llc with foreign members and that llc would borrow money from a bank the loan would be in a foreign_currency the llc would agree to repay the loan and in return would receive two instruments a certificate of deposit worth around of the loan value and a promissory note worth the remaining these two instruments became collateral for the loan itself and llc stands for limited_liability_company llcs are creatures of statute and are a form of business ownership that allows one or more people or organizations to invest in an entity that provides them with limited_liability an llc with more than one member is generally taxed as a partnership by default sec_301_7701-3 proced admin regs were typically kept in the bank this essentially meant that the two parties the llc and the bank exchanged promises but no actual money the interest payable on the loan would be higher than the interest receivable from the two instruments this created a spread that the llc would need to meet each year if it hoped to pay the interest charge chenery stepped in and made the interest payments until customers could be found the customer chenery was looking for was a u s individual sitting on a large capital_gain the deal would get under way when the llc would sell the promissory note to the u s individual in exchange for his promise to be jointly and severally liable on the entire loan not just the of the loan represented by the promissory note the promissory note remained as collateral but since the note was designed to be inadequate collateral for the entire loan the customer would have to post additional collateral once he did he would redeem the note and put the money into an account at the bank he could then post even more collateral of his own and if that collateral was satisfactory to the bank could withdraw cash from the account but remember the customer’s promise to be jointly and severally liable on the entirety of the loan chenery told each customer that this promise would make his basis equal to the total value of the loan and not just the value of the note if the deal worked a customer who redeemed the note posted additional collateral and began withdrawing cash could claim a loss because his basis in the note was much higher than the amount of cash withdrawn the customer could get money out and a heaping tax loss to boot c putanec’s cards transaction beginning in date putanec met with bill woodson his account manager at mycfo and the group within mycfo that specialized in tax_shelters hahn had pitched his cards transaction to mycfo as good for its clients mycfo passed the message along to putanec and he was intrigued mycfo then introduced him to a lawyer at leboeuf lamb greene macrae whom he hired to represent him in the cards transaction a short time later putanec signed an engagement letter with chenery in which he agreed to pay chenery dollar_figure million for the cards transaction a month after that he notified brown wood chenery’s counsel and mycfo of his plans mycfo then somewhat belatedly provided putanec with a list of alternatives to cards that might unlock cash from his shares among these were more traditional forms of financing such as loans mycfo identified four alternatives and each was a revolving line of credit the loan rates highlighted by mycfo included loans from northern trust at up to the london_interbank_offered_rate libor plu sec_50 points or mellon at the federal funds rate plu sec_1 or goldman sachs at the broker call rate plu sec_50 points or and salomon smith barney at the interest rates were quoted on date but by date rates had dropped lower eg the libor had declined from to this meant that when putanec entered into the cards transaction the loans from the banks would have carried even lower interest rates these alternatives didn’t include any loans secured_by real_estate though putanec valued his real_estate at some dollar_figure million putanec maintains that the traditional financing alternatives didn’t meet his desire to keep his ariba shares but we don’t find this entirely credible if putanec followed mycfo’s advice to liquidate dollar_figure million of stock then he would’ve had a large capital_gain nearly dollar_figure million because the basis in his ariba stock was negligible the cards transaction was designed to generate a dollar_figure million capital_loss so it seems that he planned to sell some stock anyway also as he admitted he knew that others in silicon valley had used margin loans to hold onto their stock holdings but he was wary he claimed that such alternatives were unattractive to him because margin loans allowed short sellers to get hold of stock and sell it on the market which might depress its value in any event he said that none of the alternatives presented by mycfo were appealing to him a week after telling mycfo of his plans to go forward with the cards transaction putanec retained brown wood as his special u s federal_income_tax counsel on date putanec signed a second engagement letter this time with mycfo putanec would pay mycfo and leboeuf lamb dollar_figure million with dollar_figure going to mycfo to carry out the cards transaction the planners structured the cards transaction to give putanec a potential capital_loss of dollar_figure million to offset any gains from selling ariba stock the fee reflected the tax savings and thus totaled dollar_figure million chenery got a head start on the transaction by creating morden financial trading llc a delaware llc morden entered into a credit agreement with short selling is an investment technique that relies on the hope that a particular stock will fall in value a short seller borrows stock from the stockholder agreeing to return the same number of shares at some point in the future he then sells the stock and takes the cash he must later buy the same amount of stock to make good on his loan if the price of the stock has fallen in the interim he makes a profit see 144_tc_161 ndollar_figure the volatility of technology stocks makes many short sellers wary see kathryn f staley the art of short selling many shorts avoid technology stocks like the plague because the normal trail signs do not usually apply chenery and mycfo had an arrangement where mycfo would receive of any fees generated by referring clients to cards transactions deutsche bank despite not having any members assets or even an llc agreement pelham olive signed the agreement on behalf of morden olive didn’t have any authority to do so deutsche bank’s outside attorney informed the bank that even though this was a clear default event there wasn’t any harm because the bank maintained control of the funds even after it made the loan to morden the next day chenery deposited funds into morden’s trust account with deutsche bank to cover the net interest charges should chenery fail to find someone to assume the loan within a week morden had some members and even a manager mio sylvester as morden’s new manager signed the llc agreement the credit agreement with deutsche bank and other corporate documents the llc agreement restricted morden’s activities to those connected with the cards transaction and protected the bank’s interest in the collateral all of morden’s members were u k citizens and morden’s tax returns bore a u k address loan origination deutsche bank loaned morden big_number with a maturity of years morden received no actual cash from the loan it instead received two instruments a certificate of deposit of big_number cd and a promissory note with a face value of big_number deutsche bank deposited the cd and note into a_trust account for morden in one of deutsche bank’s subsidiaries bankers trust company the trust account was the collateral for the loan the loan broke interest up into annual periods the rate for the first period wa sec_5 and covered the period from november to date the second period was from date to date and was at a rate of computed as euribor libor for deposits in euros plus a spread the credit agreement came with an important side letter--a promise from deutsche bank to renew the loan for each of the next six years thus promising to continue the loan for up to a total of seven years deutsche bank accepted the collateral though the side agreement made no mention of a promise to accept any other collateral in its place because the interest rate on the cd and note wa sec_50 basis points below the rate on the loan morden would always need to pay more interest than it earned the credit agreement was set up in a way that required either additional cash or additional collateral to pay the interest before putanec assumed the loan the situation between deutsche bank and morden looked like this loan assumption in date putanec entered the picture he agreed to assume the entire liability jointly and severally in exchange for the note on date the agreement made morden responsible for the interest payments and morden’s collateral--at this point only the cd--would be used to pay the interest in the event that the interest from the cd wasn’t enough to pay the interest on the entire loan and it never would be putanec was required to post additional collateral to make up the shortfall with each passing year putanec would need to post additional collateral as the cd was drawn down at the end of years--if the loan lasted that long--the cd would have been completely drawn down leaving an outstanding loan balance of nearly million the full loan amount morden and putanec also both signed agreements that neither had a right of contribution from the other though despite this provision deutsche bank transferred funds from morden’s account to putanec when the deal was ending the assumption_agreement also said that if deutsche bank let morden withdraw or sell the cd putanec’s liability would be reduced by the collateral released at first putanec deposited the newly acquired note in an account with bankers trust it was collateral and he could redeem the note only if he posted replacement collateral approved by deutsche bank before putanec redeemed anything the situation between putanec and morden looked like this operational phase putanec wanted some actual cash in his hands he got it by partially redeeming the note on three occasions because the note was denominated in euros putanec had to convert the euros to dollars and that came with a catch deutsche bank required putanec to agree to an fx contract to convert the euros for putanec this had the advantage of securing a price for paying the interest and the note value as both would have to be paid in euros anyway putanec curiously arranged the first redemption before he formally entered into the cards transaction on date putanec asked deutsche bank to redeem part of the note and convert it to dollar_figure putanec entered into an fx contract that required him to pay dollar_figure to convert the dollars back to euros thus the fx contract on the first redemption cost putanec dollar_figure and was set as of the day of the redemption five days later with putanec finally in the ring deutsche bank did as directed the proceeds went into putanec’s account later when he reported this transaction on his return putanec claimed that the partial_redemption generated a more than dollar_figure million loss --which just about offset his gain from his sale of big_number ariba shares that year the second redemption came on date and deutsche bank redeemed dollar_figure of the note and converted it to dollar_figure million at the time of the conversion putanec agreed under a new fx contract to convert the dollars back to euros at a cost of dollar_figure thus the second redemption had a built- in currency exchange cost of dollar_figure putanec redeemed the remainder of the note on date for big_number he didn’t convert the euros to dollars as he testified that the last redemption was done purely from his understanding of what the tax benefits and non-benefits of doing it were but into the bankers trust account those funds went too putanec paid a total of dollar_figure for the fx contracts to convert the euros to dollars and then the dollars to euros this also eliminated his foreign-currency risk to get this cash though putanec had to post new collateral satisfactory to deutsche bank before putanec entered into the transaction deutsche bank had established a collateral limit of million ariba shares putanec first put big_number ariba shares in his account as collateral in date putanec deposited an additional big_number shares at the time worth about dollar_figure million deutsche bank required the additional collateral for putanec to get access to the dollar_figure million from the second note redemption on date putanec deposited an additional big_number shares in the account which meant he had deposited a total of big_number shares in the account remember that the beginning of was also the beginning of the end for the tech boom by february because of the continuing decline in ariba’s share price deutsche bank demanded additional collateral instead of depositing more putanec was admirably honest with this admission at trial he even said the last redemption was done in order to get the loss so that he could take his aggressive tax position stock putanec sold some of his ariba shares--which realized capital_gains nearly equal to the sale price because of putanec’s ultralow basis in his shares-- and bought bonds from the federal farm credit bank and the federal_home_loan_bank these bonds had a total face value of just over dollar_figure million once he deposited them putanec withdrew the million or so ariba shares from the trust account the redemptions by putanec on the note looked something like this these redemptions had a beneficial tax effect they produced a reported loss of more than dollar_figure million which more than offset the gains putanec realized from the almost-forced sale of about million ariba shares throughout plus the gain from call options on ariba stock that he had had the foresight to sell iii the aftermath following the cards transaction putanec had access to about dollar_figure million and had paid over dollar_figure million in fees to get it putanec used most of it dollar_figure million to buy real_estate in new york city and san francisco he used the remaining dollar_figure million to pay a capital call on another investment the real_estate in new york city was a condominium for which putanec had already contracted before he formally entered the cards deal the new york city property was listed as a personal asset and he claimed an itemized_deduction for property taxes on his return putanec later sold the new york city property for a profit putanec also bought a property in san francisco and listed it as his home address on his returns he testified that his parents live in the california property deutsche bank terminated the loan on date this meant that putanec was liable for the first year’s interest on the loan the bank concluded that putanec was liable for just over million which it computed by adding the principal and interest due on the morden loan and then subtracting the value of morden’s cd and the interest owed on it the third note redemption of million took care of much of that and putanec ended up paying an additional dollar_figure million or so after accounting for the remaining funds in morden’s and his bankers trust accounts in total then putanec’s net cost for entering into the cards transaction including the initial dollar_figure million upfront fee amounted to just over dollar_figure million and all this to get just about dollar_figure million in cash putanec took the position that his basis in the note was the full value of the loan and thus when he redeemed it and received a total amount equal to its face value rather than its much higher alleged basis there was a large capital_loss the commissioner examined putanec’s and tax returns and denied the capital losses and fx contract losses associated with the cards transaction we tried the cases in san francisco there are two issues for us to decide first is the big issue whether putanec is entitled to his claimed loss from redemption of the note to the order of dollar_figure million in capital losses the second issue is what to do about the losses putanec and his wife were california residents when they filed their petition which makes these cases appealable to the ninth circuit we therefore follow that court’s precedents see eg 54_tc_742 aff’d 445_f2d_985 10th cir on the fx contracts that were associated with the cards transaction we take them in turn i the note and the loss opinion putanec asks us to go along with his claim that there’s nothing amiss in acquiring a big_number note at a cost of big_number he urges us to fall under the spell of this tax wizardry by citing specific sections of the code and regulations that seem to justify his claimed basis a arguments of the parties as a preliminary matter putanec reiterates several times that the cards transaction was uniquely attractive for three reasons the loan allowed him to take cash_value out of his ariba stock without selling it he didn’t have to pay interest during the course of the loan and the cards deal didn’t give traders access to the ariba shares to sell short he flatly states that he didn’t enter into the cards deal for tax reasons but on to why putanec believes his basis in the note should equal the entire amount of the loan as a general matter the consideration paid usually determines a taxpayer’s basis in a capital_asset such as the note sec_1011 directs us that the basis to be used to determine gain_or_loss from a sale_or_other_disposition of property should be determined under sec_1012 sec_1012 equates basis with the cost of the property a liability that an asset’s buyer assumes is included in the total cost of acquiring property 636_f3d_1207 9th cir putanec’s initial position is that because he assumed liability on the entire loan as a cost of receiving the note his basis in the note must equal the entire amount of the loan one problem is that morden is also liable for the entire amount of the loan so maybe putanec didn’t really assume the liability but putanec has an answer to that--regulation sec_1_1001-2 that regulation tells us that t he sale_or_other_disposition of property that secures a recourse_liability discharges the transferor from the liability if another person agrees to pay the liability whether or not the transferor is in fact released from liability id so under the regulations morden is discharged from the debt for tax purposes and that’s in fact the position morden took on its own return putanec agreed to pay the liability so he should be treated as having the full a simple example of this occurs when someone sells his house and the buyer assumes the mortgage if the property is worth dollar_figure and has a dollar_figure mortgage the buyer could pay dollar_figure and assume the responsibility of paying the mortgage when he does his basis isn’t limited to the cash he paid but equals dollar_figure--the dollar_figure cash plus the dollar_figure liability he took off the seller’s hands liability included in his cost of acquiring the note the regulation putanec argues ensures there isn’t double counting of the entire debt in the bases of both morden and himself the commissioner disagrees he has a number of theories for why putanec’s basis is equal to the note’s face value and not the entire value of the loan putanec’s debt was not genuine his debt was contingent the cd was to be used to pay part of the loan basis should be limited to its fair_market_value under the peculiar circumstances of these cases and basis must be apportioned between the note and the cd b putanec’s basis in the note we’ll start with a question was the loan here real debt for putanec’s reading of sec_1_1001-2 of the regulations to apply here we have to figure out what liability to apply it to we focus on the nature of the loan debt and putanec’s relationship with morden as codebtor while it is true that assumption of debt is taken into account when establishing basis not all debt will go into the cost of acquisition--and consequently it won’t go into the basis of the property acquired as we noted in corbin w ltd p’ship v commissioner tcmemo_1999_7 wl at in deciding whether a recourse note is included in basis the mere fact that the note is recourse on its face however is not determinative when taking economic realities into account if a recourse_debt has no reasonable likelihood of being paid then the recourse note lacks economic_substance and should not be included in basis to determine if a debt is likely to be paid we have to take into account all the facts and circumstances 86_tc_848 aff’d 841_f2d_264 9th cir in waddell we confronted a situation where we found it unlikely that a purchase money note would be paid because the note there was convertible into being nonrecourse and payment of principal was limited to revenues this made payment of the note unlikely there was something analogous here one particular fact stands out to us of the loan amount was secured and adequately collateralized by the cd not the note see 39_tc_1064 aff’d 325_f2d_180 4th cir even where the lender had recourse to go after the debtor there was no reason to believe that the debtor would actually be called upon to pay the bank because the bank was amply secured without any additional payment here the loan can be looked at as a whole or broken up into two parts--one secured_by the cd and gradually decreasing in value and one secured_by the note with putanec needing to gradually post more collateral as the cd is drawn down we also focus our attention on the time putanec entered the deal basis is determined at the time of acquisition see sec_1011 the adjusted_basis of property whenever acquired shall be the basis under sec_1012 emphasis added from putanec’s perspective at the time he acquired the note the only way that he would actually repay the entire loan would be if it remained outstanding for a large portion of the 30-year term we find that thirty years was not the likely term of the loan deutsche bank committed to renewing the loan annually for only seven years not thirty bill boyle vice president in deutsche bank’s structured transactions group explained to colleagues that effectively deutsche bank has the ability to exit the transaction after one year putanec’s own interest in the deal was to realize a paper loss on disposition of the note and there is nothing in the record that shows he had any interest in being on the hook for more than dollar_figure million thirty years later we therefore find that no party to the transaction expected the deal to extend anywhere near that long into the future we therefore also find that when putanec acquired the note he was not likely to repay the portion of the loan secured_by the cd because it was so extremely unlikely that the loan would continue for very long at all if putanec was unlikely to have to repay the loan debt then it’s hard to see how any amount of that debt in excess of the value of the note could be his liability we recognize that extremely unlikely is not the same as never let us assume there is some small probability the loan would last longer than any of the parties expected this still wouldn’t help putanec as we held many years ago in 40_tc_831 aff’d 333_f2d_653 2d cir the general_rule is that a contingent_liability assumed as a part of an acquisition may not be added to the basis of the acquired property id pincite another way of looking at this question is whether the portion of the loan secured_by the cd was contingent from putanec’s perspective at the beginning of the cards deal he signed on to be liable for a loan with a thirty-year maturity_date but morden remained liable morden’s asset the cd held in its banker’s trust account was sufficient in year one to pay off around of the loan amount and morden could do so by prepaying the loan without penalty the only way that putanec would ultimately be liable for the entire loan amount was if the loan had remained outstanding for the full thirty years--something we have found no one expected to happen and he’d be liable for any portion of the loan not secured_by the note only years down the line we find that this makes the portion of the loan secured_by the cd contingent there is good reason for such a rule on contingent liabilities refusing to include contingent liabilities in basis as a general_rule doesn’t prevent liabilities from ever being included in basis in the unlikely event that the loan had gone on for thirty years putanec would have been able to include that amount in his basis-- but only when the contingency occurred see generally 692_f2d_152 1st cir if the contingency does not occur the obligations need never enter basis for they do not represent any obligation to pay if it does occur the extent of the monetary obligation will be reasonably capable of calculation and any change in basis can then be determined vacating 73_tc_491 and as the commissioner correctly notes petitioner’s liability to repay any portion of the morden loan secured_by the cd did not begin to arise until the cd had to be tapped to pay an interest shortfall we are thus satisfied that the portion of the loan secured_by the cd was a contingent_liability to putanec only that part of the loan which was no longer secured_by the cd as a result of drawing down the cd to service the interest after the limited duration of the cards deal is properly included in putanec’s basis when the bank terminated the loan in date putanec was liable for one year’s worth of the interest and this liability was no longer contingent we leave to the parties’ rule_155_computations whether any of this means an increase in his basis beyond the face value of the note ii the fx contracts putanec also wants to deduct dollar_figure--the total amount he paid to enter into the two fx contracts with deutsche bank this requires us to look at sec_988 and sec_1256 under sec_988 if a foreign-currency transaction qualifies as a forward_contract the entire loss may be capital and not ordinary if a taxpayer makes the proper election the problem for putanec is that sec_988 doesn’t apply to personal_transaction s see sec_988 personal transactions are all transactions that don’t fall under sec_162 business transactions and transactions entered into for the production_of_income sec_988 we find against putanec on this question there was no business to speak of and he didn’t enter into the fx contracts for the production_of_income he entered into them only to facilitate the cards transaction and that transaction ended up costing him over dollar_figure million over the course of the deal the price of the contracts was set at the time of their signing with a built-in_loss we can find no profit_motive in these circumstances that puts the contracts in sec_1256 territory under sec_1256 an fx contract is marked to market at the end of every year and the taxpayer recognizes gain_or_loss as if the contract had been sold for its fair_market_value if the contract extends over many years each year the taxpayer recognizes gain_or_loss as the fair_market_value of the contract goes up or down and crucially for putanec sec_1256 does not have any exception to its applicability for anything like personal transactions see generally 134_tc_248 discussing the evolution of sec_1256 and interpreting the phrase foreign_currency_contract see also 809_f3d_877 6th cir rev’g and remanding tcmemo_2014_175 and tcmemo_2011_ the contracts qualify under the definition of foreign_currency_contract in sec_1256 putanec entered into them at arm’s length with deutsche bank a commercial bank and the euro was traded through regulated_futures_contracts during and the years in which the contracts were in effect since the contracts fall under the mark-to-market rules the losses are treated a sec_40 short-term_capital_losses and long-term_capital_losses see sec_1256 iii conclusion boris putanec entered into a complicated and carefully structured cards transaction that he hoped would bring to life more than dollar_figure million in losses we can’t grant him his wish the deal is the stuff of tax wizardry while the code treats us all as mere muggles the loan he assumed wasn’t all genuine debt and any potential obligation he had to repay the entire loan was unlikely or at best contingent as a result we find that only those portions of the loan secured_by the deutsche bank note as well as any amount which corresponded to the drawing- down of the deutsche bank cd for which putanec would have to post more collateral are his real basis in the note thus the claimed losses relating to the cards deal aren’t allowed the small solace to putanec is his deductions for the fx contract costs which are allowed for the full amounts decisions will be entered under rule


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc corp b05 - plr-125576-01 date date in re legend distributing controlled shareholder a shareholder b business a business b business c date a dear this is in response to a letter dated date in which rulings are requested regarding the federal_income_tax consequences of a proposed transaction the information submitted in the request and in subsequent correspondence is summarized below distributing is a domestic_corporation that made a subchapter_s_election on date a shareholder a and shareholder b each own of the outstanding_stock of distributing which has a single class of voting common_stock outstanding distributing is engaged in business a business b and business c plr-125576-01 financial information received indicates that each of business a business b and business c had gross_receipts and operating_expenses representing the active_conduct_of_a_trade_or_business for each of the last five years a separation of distributing is proposed to resolve irreconcilable shareholder disagreements over the management and direction of business a business b and business c parting ways and operating independently of each other will allow distributing and controlled to operate without management strife or conflict and thus more efficiently and effectively it is intended that after the distribution shareholder a will own percent of the outstanding_stock of distributing and shareholder b will own percent of the outstanding_stock of controlled accordingly distributing proposes the following transaction i distributing will form controlled as a wholly owned subsidiary distributing will transfer a portion of the assets of business a and business b to controlled solely in exchange for shares of controlled voting common_stock and the assumption of controlled liabilities ii distributing will retain the assets and operations of business c iii distributing will distribute all of its controlled stock to shareholder b in exchange for all of shareholder b’s distributing stock the taxpayer has made the following representations with respect to the proposed transaction a b c d the fair_market_value of the controlled stock and other consideration to be received by shareholder b will be approximately equal to the fair_market_value of the distributing stock surrendered by shareholder b in the exchange no part of the consideration to be distributed by distributing will be received by a shareholder as a creditor employee or in any capacity other than that of a shareholder of distributing the years of financial information submitted on behalf of distributing is representative of distributing’s present operations and with regard to distributing there have been no substantial operational changes since the date of the last financial statements submitted following the transaction distributing and controlled will each continue independently and with separate employees the active_conduct of its share of all of the integrated activities of the business conducted by distributing prior to the consummation of the transaction plr-125576-01 e f g h i j k l the distribution of the stock of controlled is carried out for the following corporate business_purpose disagreements between the existing shareholders adversely affect the business parting ways and operating independently of each other will allow distributing and controlled to operate without management strife or conflict and thus more efficiently and effectively the distribution of the stock of controlled is motivated in whole or substantial part by these business purposes there is no plan or intention by the shareholders or security holders of distributing to sell exchange transfer by gift or otherwise dispose_of any of their stock in or securities of either distributing or controlled after the transaction there is no plan or intention by either distributing or controlled directly or through any subsidiary 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 there is no plan or intention to liquidate 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 the total adjusted bases and fair market values of the assets transferred to controlled by distributing each equals or exceeds the sum of the liabilities assumed as determined under sec_357 by controlled the liabilities assumed as determined under sec_357 in the transaction were incurred in the ordinary course of business and are associated with the assets being transferred no intercorporate debt will exist between distributing and controlled at the time of or subsequent to the distribution of the stock of controlled payments made in connection with all continuing transactions if any between distributing and controlled will be for fair_market_value based on the terms and conditions arrived at by the parties bargaining at arm’s length m no two parties to the transaction are investment companies as defined in sec_368 and iv n distributing neither accumulated its receivables nor made extraordinary plr-125576-01 payment of its payables in anticipation of the transaction o p q the distribution is not part of a plan or series of 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 distributing or controlled or stock possessing percent or more of the total value of all classes of stock of distributing or controlled distributing controlled and their respective shareholders will each pay their own expenses if any incurred in connection with the proposed transaction distributing is an s_corporation within the meaning of sec_1361 controlled will elect to be an s_corporation pursuant to sec_1362 on the first available date after the distribution and there is no plan or intent to revoke or otherwise terminate the s_corporation_election of either distributing or controlled based solely on the information submitted and on the representations set forth above we hold as follows the transfer by distributing to controlled of a portion of the assets associated with business a and business b solely in exchange for all of the outstanding controlled stock and the assumption_of_liabilities associated with business a and business b followed by the distribution of all of the controlled stock to shareholder b in exchange for the stock in distributing will be a reorganization within the meaning of sec_368 distributing and controlled will each be a_party_to_a_reorganization within the meaning of sec_368 no gain_or_loss will be recognized by distributing upon its transfer of the assets to controlled in exchange for stock and controlled’s assumption_of_liabilities sec_361 and sec_357 no gain_or_loss will be recognized by controlled upon the receipt of the assets of distributing in exchange for the stock of controlled and the assumption_of_liabilities sec_1032 the basis in the assets to be received by controlled will be the same as the basis of such assets in the hands of distributing immediately prior to the transaction b the holding_period of the distributing assets to be received by controlled plr-125576-01 will include the period during which such assets were held by distributing sec_1223 no gain_or_loss will be recognized to and no amount will be included in the income of shareholder b upon the receipt of the stock of controlled in exchange for the distributing stock sec_355 the holding_period of the controlled stock received by shareholder b will include the holding_period of the distributing stock surrendered in the exchange provided that such distributing stock is held as a capital_asset on the date of the distribution sec_1223 as provided in sec_312 proper allocation of earnings_and_profits between distributing and controlled will be made under sec_1_312-10 of the income_tax regulations no gain_or_loss will be recognized to distributing upon the distribution of its stock in controlled to shareholder b sec_361 the basis of the controlled stock in the hands of shareholder b will be the same as the basis of the distributing stock surrendered in exchange therefor sec_358 distributing’s momentary ownership of stock of controlled as a part of a reorganization under sec_368 will not cause controlled to have an ineligible shareholder for any portion of its taxable_year under sec_1361 therefore assuming controlled will otherwise meet the requirements of a small_business_corporation under sec_1361 controlled will be eligible to make an s_corporation_election under sec_1362 for its taxable_year no opinion is expressed about the tax treatment of the transaction under other provisions of the code and the regulations or about the tax treatment of any conditions existing at the time of or effects resulting from the transaction that are not specifically covered by the above rulings specifically no opinion is expressed concerning whether distributing or controlled is otherwise eligible to be an s_corporation this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent a copy of this letter should be attached to the federal_income_tax returns of the taxpayers involved for the taxable_year in which the transaction covered by this ruling letter is consummated plr-125576-01 in accordance with the power_of_attorney on file in this office a copy of this letter is being sent to president of in and to of in sincerely yours john moriarty assistant to the branch chief branch office of the associate chief_counsel corporate


internal_revenue_service number release date index number ----------------------------- ------------------------------------- -------------------- -------------------------- in re ----------------------------------- --- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ----------------------- id no ------------- telephone number --------------------- refer reply to cc corp plr-106151-07 date date -------------------------------------- ------------------------------------------ --------------------------------------------------- ----------------------- --------------- target ---------------------------------------------------------------------------- -------------------------------------------------------------------- sub ---------------------------------------------------------------------------- acquiring ---------------------------------------------------------------------------- -------------------------------------------------------------------- llc --------------------------------------------------------------------------------------------- -------------------------------------------------------------------- asset ------------------------------------------------------------------------------------------------------------- x ------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------- state a b c d ------------------------------------------------------------------------ -------------------------------------------------- ------------- ------ ---- ---- ---- ---- -------- -------- ------------ plr-106151-07 e f g h i m ------------------------- ---------------------------------------------------------------------- n ------------------------ ---------------------------------------------------------------------- o ---------------------------------------------------------------------- family business y business z date date date dear --------------- ----------------------- ---------------------- -------------------------- ------------------ ------------------ ------------------ ------------------------------ we respond to your request dated date for rulings on the federal_income_tax consequences of a proposed transaction additional information was provided on march and date the information submitted for consideration is summarized below target is a state a holding_company that is taxed as a subchapter_s_corporation for federal_income_tax purposes target is owned by b shareholders and target’s largest shareholders m n and o own directly and indirectly f g and h percents of target stock respectively m n and o are members_of_family plr-106151-07 target wholly owns sub a state a corporation engaged in business y target also owns c percent of the class a common_stock of acquiring the stock of acquiring is target’s largest asset target previously owned all of asset target sold asset to x a holding_company that is controlled by family on date in anticipation of the proposed transaction as acquiring refused to engage in the transaction unless target first disposed of asset the sale proceeds were used by target to repay a third-party debt acquiring is a state a publicly_held_corporation that has two classes of common_stock outstanding class a and class b acquiring which is engaged in business z is the common parent of an affiliated_group_of_corporations and other entities the acquiring group including wholly owned llc a limited_liability_company created under state a law llc engaged in business y is disregarded as an entity separate from its owner for federal_income_tax purposes on date acquiring’s board_of directors authorized the repurchase of e shares of class a stock during the period ending on date stock repurchase program an amount that constitutes approximately i percent of the total outstanding common_stock of acquiring pursuant to the stock repurchase program acquiring may repurchase shares either through a broker on the open market or in privately negotiated transactions to date all repurchases have been through a broker who acquires the shares on the open market for the prevailing market price the stock repurchase program was implemented before the parties agreed to engage in the proposed transaction and will not be amended as a result of the proposed transaction for what have been represented as valid business purposes target proposes to merge in a statutory merger pursuant to the laws of state a with and into llc the following will occur as a result of the merger i ii target will transfer all of its assets to llc in exchange for class a voting_stock of acquiring and llc’s assumption of target’s liabilities the stock of target will be converted to the right to receive shares of acquiring class a voting common_stock and cash in lieu of fractional shares and target will cease to exist the following representations have been made with respect to the proposed transaction a the merger will be undertaken for valid corporate business purposes plr-106151-07 b c d e f g h i j the fair_market_value of acquiring stock and other consideration received by each target shareholder will approximately equal the fair_market_value of the target stock surrendered in the exchange acquiring will issue newly issued shares of its stock to the target shareholders in the merger target will not distribute any of its existing shares of acquiring stock in the transaction there is no plan or intention for acquiring or for any party related to acquiring within the meaning of sec_1_368-1 of the income_tax regulations to redeem or acquire any of the outstanding acquiring stock except pursuant to the acquiring stock repurchase program the stock repurchase program was implemented before the parties agreed to implement the proposed transaction the stock repurchase program was not a matter negotiated by the parties in agreeing to the proposed transaction acquiring will typically only make purchases pursuant to the stock repurchase program on the open market in order to maintain the securities and exchange commission’s safe_harbor and in such instances will not have any knowledge whether the repurchased shares were attributable to a sale of such acquiring shares by a former target shareholder the stock repurchase program will not be amended as a result of the proposed transaction neither acquiring nor llc has any plan or intention to sell or otherwise dispose_of any of the assets of target acquired in the transaction except for dispositions made in the ordinary course of business the liabilities of target assumed by llc acquiring for federal_income_tax purposes plus the liabilities if any to which the transferred assets are subject were incurred by target in the ordinary course of its business and are associated with the assets transferred following the transaction llc acquiring for federal_income_tax purposes will continue the historical business of target or use a significant portion of target’s historical business_assets in a business llc target and the shareholders of target will pay their respective expenses if any incurred in connection with the transaction there is no intercorporate indebtedness existing between acquiring llc or target that was issued acquired or will be settled at a discount no two parties to the transaction are investment companies as defined in sec_368 and iv of the internal_revenue_code plr-106151-07 k the fair_market_value of the assets of target transferred to llc acquiring for federal_income_tax purposes will equal or exceed the sum of the liabilities assumed by acquiring through llc plus the amount of liabilities if any to which the transferred assets are subject l target is not under the jurisdiction of a court in a title_11_or_similar_case within the meaning of sec_368 m the payment of cash in lieu of fractional shares of acquiring stock is solely for the purpose of avoiding the expense and inconvenience of issuing fractional shares and does not represent separately bargained-for consideration the total cash consideration that will be paid in the merger to the target shareholders instead of issuing fractional shares of acquiring stock will not exceed one percent of the total consideration that will be issued in the merger to the target shareholders in exchange for their shares of target stock the fractional share interests of each shareholder will be aggregated and no target shareholder will receive cash in an amount equal to or greater than the value of one full share of acquiring stock n o all actions have been undertaken to assure that llc will be treated as a disregarded_entity for purposes of sec_301_7701-3 if for some reason the proposed transaction cannot be consummated x and target will not undo the sale of asset to x based solely on the information submitted and on the representations set forth above we rule as follows with respect to the proposed transaction provided that the merger of target into llc qualifies as a statutory merger in accordance with applicable state law the acquisition by llc acquiring for federal tax law purposes of all of the assets of target in exchange for the common_stock of acquiring and the assumption of target liabilities followed by the distribution of the acquiring stock to the target shareholders in complete_liquidation of target will constitute a reorganization pursuant to sec_368 acquiring and target each will be a party to the reorganization within the meaning of sec_368 target will not recognize any gain_or_loss on the transfer of all of its assets to acquiring in exchange for acquiring stock and the assumption_of_liabilities sec_357 and sec_361 plr-106151-07 acquiring will not recognize any gain_or_loss on its receipt of all of the assets of target in exchange for acquiring stock and its assumption of target liabilities sec_1032 acquiring’s basis in the assets received from target will equal the basis of such assets in the hands of target immediately before the merger sec_362 acquiring’s holding_period in the assets received from target will include the period during which target held the assets sec_1223 target will not recognize any gain_or_loss on its deemed_distribution of the acquiring stock sec_361 target shareholders will not recognize any gain_or_loss and will not include any amount in income except for the cash received in lieu of fractional shares upon their exchange of target shares for shares of acquiring sec_354 a target shareholder’s basis in the acquiring stock received will equal the basis of the target stock that such target shareholder held immediately before the merger sec_358 a target shareholder’s holding_period of the stock of acquiring received will include the holding_period of the stock of target on which the distribution is made provided that the target shareholder held such target stock as a capital_asset on the date of the merger sec_1223 the acquiring group will remain in existence after the merger with acquiring continuing as the common parent of the acquiring group sec_1_1502-75 acquiring will succeed to and take into account the items of target as described in sec_381 these items will be taken into account by acquiring subject_to the applicable conditions and limitations specified in sec_381 sec_382 sec_383 and sec_384 and the regulations thereunder acquiring will succeed to and take into account the earnings_and_profits or deficit in earnings_and_profits of target as of the date of the merger any deficit in earnings_and_profits will be used only to offset earnings_and_profits accumulated after the date of the merger sec_381 sec_1_381_c_2_-1 and sec_1_312-11 plr-106151-07 concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter except as expressly provided herein no opinion is expressed or implied the rulings contained in this letter are based upon information and this letter is directed only to the taxpayer requesting it sec_6110 representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination provides that it may not be used or cited as precedent it is relevant alternatively taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of this letter_ruling a copy of this letter should be attached to any federal_income_tax return to which in accordance with the power_of_attorney on file in this office a copy of this letter is being sent to your authorized representative sincerely filiz serbes chief branch office of associate chief_counsel corporate