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 br4 plr-135357-04 date date taxpayer holdco llc --------------------------------------------------- ------------------------------- ------------------------ --------- ----------------------------------------------------- ----------------------------- ------------ --------------------------------------------------------------------------------- ----------------------------- ------------------------- -------------------------------- ------------------------------------- -------------------------------------- ------------------------------- sub business a class a shares class b shares a dear ------------ federal_income_tax consequences of a series of proposed transactions collectively the -------------------------------------------------------------------------------- ------------ this letter responds to your date request for rulings regarding certain ------------- plr-135357-04 proposed transaction the information submitted in that request and in later correspondence is summarized below the rulings contained in this letter are based on facts and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by 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 summary of facts taxpayer is a domestic_corporation and common parent of an affiliated_group_of_corporations that files a consolidated_return taxpayer engages in business a and owns all of the stock of sub taxpayer has class a shares and class b shares outstanding hereafter the holders of these shares will be referred to in the singular as a class a shareholder and a class b shareholder and in the plural as the class a shareholders and class b shareholders respectively the class a shares represent the equity interests of taxpayer while the class b shares represent trading rights and privileges the trading rights associated with taxpayer's business a proposed transaction for what are represented to be valid business reasons taxpayer intends to undertake the proposed transaction which will consist of the following steps i an agent of taxpayer will form holdco as a domestic_corporation ii holdco will form a single-member domestic limited_liability_company llc iii taxpayer will merge into llc under applicable state law the merger in the merger class a shares will be converted into the right to receive shares of holdco's sole class of common_stock class b shares will be converted into contract rights of llc the contract rights the contract rights will not constitute an equity_interest in llc or holdco and will have trading rights identical to the trading rights of the class b shares iv following the merger llc will distribute certain assets unrelated to business a and its sub stock to holdco prior to the proposed transaction taxpayer will engage in a limited public offering the ipo prior to the ipo taxpayer will declare and pay a dividend of as much as dollar_figurea to the class a shareholders the pre-ipo dividend plr-135357-04 representations the following representations have been made regarding the proposed transaction a the fair_market_value of the holdco common_stock and other consideration to be received by each class a shareholder in the merger will be approximately equal to the fair_market_value of the class a shares surrendered in exchange therefor b at least fifty percent of the proprietary interest in taxpayer will be exchanged for holdco stock and will be preserved within the meaning of ' e of the income_tax regulations c immediately following the merger the class a shareholders will own all of the outstanding_stock of holdco and will own such stock solely by reason of their ownership of the class a shares immediately prior to the merger d prior to and following the merger holdco will own the sole member interest in llc there is no plan or intention for llc to issue additional_member interests e immediately following the merger holdco will possess the same assets and liabilities except for the pre-ipo dividend paid to the class a shareholders assets distributed to shareholders who receive cash or other_property in the merger assets used to pay dissenters to the merger and assets used to pay expenses_incurred in connection with the merger as those possessed by taxpayer immediately before the merger assets distributed to shareholders who receive cash or other_property in the merger assets used to pay expenses associated with the proposed transaction and assets used to pay dissenters in the merger will in the aggregate constitute less than one percent of the net assets of taxpayer f at the time of the merger all outstanding taxpayer compensatory stock_options to acquire class a shares will be converted into equivalent options to acquire holdco common_stock g holdco has no plan or intention to reacquire directly or through a related_party any of its stock issued in the merger h following the merger holdco will continue the historic_business of taxpayer or use a significant portion of taxpayer's historic_business_assets in a business through its ownership of the single-member interest in llc i holdco llc taxpayer and the shareholders of taxpayer will each pay their own expenses if any incurred in connection with the proposed transaction plr-135357-04 j holdco has no plan or intention to sell or otherwise dispose_of any of the assets of taxpayer acquired in the merger except for dispositions made in the ordinary course of business k the liabilities of taxpayer assumed by holdco plus the liabilities if any to which the transferred assets are subject were incurred by taxpayer in the ordinary course of business and are associated with the assets transferred l taxpayer 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 holdco stock if any would be solely for the purpose of avoiding the expense and inconvenience to holdco of issuing fractional shares and would not represent separately bargained-for consideration the total cash consideration that would be paid in the merger to the class a shareholders instead of issuing fractional shares of holdco stock would not exceed one percent of the total consideration that would be issued in the merger to the class a shareholders in exchange for their class a shares the fractional share interests of each class a shareholder would be aggregated and no class a shareholder would receive cash in an amount equal to or greater than the value of one full share of holdco stock n none of the compensation to be received by any shareholder-employee of taxpayer will be separate consideration for or allocable to any of their shares of taxpayer stock none of the shares of holdco stock received by any shareholder- employee will be separate consideration for or allocable to any employment agreement and the compensation paid to any shareholder-employee will be for services actually rendered and will be commensurate with amounts paid to third parties bargaining at arm's length for similar services rulings based solely on the information submitted and representations set forth above we rule as follows the merger will qualify as a reorganization under sec_368 taxpayer and holdco will each be a_party_to_a_reorganization under sec_368 the pre-ipo dividend will not impact the tax treatment of the merger as a sec_368 reorganization no gain_or_loss will be recognized by the class a shareholders upon their exchange of the class a shares for holdco common_stock sec_354 no gain_or_loss will be recognized by holdco upon the receipt of taxpayer's assets and the assumption of taxpayer’s liabilities in the merger sec_1032 plr-135357-04 the basis of the holdco common_stock received by each class a shareholder will be the same as the basis of the class a shares for which they will be exchanged decreased by the fair_market_value of any other_property and the amount of money received by such shareholder in the merger sec_358 provided the class a shares are held as a capital_asset at the time of the merger the holding_period of the holdco common_stock received in exchange therefore will include the holding_period of the class a shares sec_1223 class a shareholders who receive cash in lieu of fractional share interests in holdco common_stock in the merger will be treated as though such fractional share interests were distributed as part of the merger and then were redeemed the treatment of cash received by such shareholders will be determined under sec_302 sec_1_305-3 revproc_77_41 c b no gain_or_loss will be recognized under sec_1001 by the class b shareholders upon the conversion of the class b shares into the contract rights the basis of the contract rights received by each class b shareholder will be the same as that holder's basis in the class b shares held immediately before the merger if a shareholder owns both class a shares and class b shares at the time of the merger the basis of the holdco common_stock received by such shareholder will be the same as the class a shares exchanged by the shareholder and the basis of the contract rights received by such shareholder will be the same as the class b shares held by the shareholder at the time of the merger the tax_year of taxpayer will not close on the date of the merger and its tax_year will continue in the name of holdco sec_1_381_b_-1 and revrul_57_276 c b the holders of taxpayer's outstanding nonqualified_stock_options will not recognize income gain_or_loss upon the substitution of nonstatutory_options of holdco for such options plr-135357-04 caveats no opinion is expressed about the tax treatment of the proposed transaction under other provisions of the code or regulations or the tax treatment of any conditions existing at the time of or effects resulting from the proposed transaction that are not specifically covered by the above rulings procedural matters this ruling letter is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent each taxpayer involved in the proposed transaction should attach a copy of this ruling letter to the taxpayer's federal_income_tax return for the taxable_year in which the proposed transaction is completed pursuant to a power_of_attorney on file in this office a copy of this letter is being sent to the taxpayer sincerely ____________________________ richard k passales senior counsel branch office of associate chief_counsel corporate cc dd -------------------------------- --------------------------------------------------- --------------------- -----------------------------


t c memo united_states tax_court mabrie l and margaret f gilmer petitioners v commissioner of internal revenue respondent docket no 19981-06l filed date mabrie l gilmer and margaret f gilmer pro sese marshall r jones for respondent memorandum opinion wells judge respondent sent a notice_of_determination concerning collection action s under sec_6320 and or notice_of_determination to petitioners with respect to a notice of lien filed to collect petitioners’ unpaid federal_income_tax liabilities for tax years through in response petitioners timely filed a petition pursuant to sec_6330 d seeking review of respondent’s determination the issues to be decided are whether petitioners may raise issues relating to the underlying tax_liabilities for the taxable years in issue whether in refusing to withdraw the notice_of_federal_tax_lien respondent’s appeals officer abused her discretion and whether petitioners may raise arguments relating to an abatement of interest for the taxable years in issue background some of the facts and certain exhibits have been stipulated the stipulations of fact are incorporated in this opinion and are found accordingly at the time they filed their petition petitioners resided in mississippi as of date petitioners had not filed federal_income_tax returns for tax years through on date respondent filed substitute federal_income_tax returns substitute returns under sec_6020 for tax years through for petitioner mabrie l gilmer mr gilmer 1unless otherwise indicated section references are to the internal_revenue_code as amended 2the parties appear to agree that respondent also filed substitute returns for petitioner margaret f gilmer for those same years but those returns are not in the record on date respondent sent mr gilmer a letter 30-day_letter for tax years through on date petitioners timely informed respondent that they did not agree with the adjustments proposed in respondent’s 30-day_letter on date petitioners filed joint federal_income_tax returns for tax years through on date petitioners signed a form_4549 income_tax examination changes petitioners consented to assessment of the following tax_liabilities for the through tax years form_1040 form_4549 form_4549 year tax_liability tax increase penalty total dollar_figure big_number big_number big_number big_number big_number total big_number dollar_figure big_number big_number big_number big_number big_number big_number dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure on date petitioners filed a joint federal_income_tax return for tax_year and reported a total_tax liability of dollar_figure petitioners’ total agreed tax_liability for tax years through including penalties for tax years through was dollar_figure 3it is not clear whether respondent also sent a 30-day_letter to petitioner margaret f gilmer on date respondent filed in warren county mississippi a notice_of_federal_tax_lien nftl against petitioners for tax years through on date respondent sent to petitioners a notice_of_federal_tax_lien filing and your right to a hearing under sec_6320 nftl notice with respect to petitioners’ tax_liabilities for tax years through the nftl notice listed petitioners’ unpaid tax_liabilities for tax years through as dollar_figure on date petitioners timely submitted a form request for a collection_due_process_hearing in which petitioners disputed the amounts of their tax_liabilities for tax years through on date petitioners and respondent participated in a telephone hearing during the hearing petitioners raised issues concerning the proper amount of their tax_liabilities for tax years through petitioners claimed that the amounts stated in the nftl notice were greater than the amounts of unpaid liabilities set forth in the form_4549 the settlement officer’s notes indicate that for tax years through respondent’s records erroneously reflected the tax_liability attributed to petitioner margaret f gilmer in the sfr prepared by respondent rather than reflecting the joint_return liability shown on the form_4549 the settlement officer subsequently corrected petitioners’ outstanding liabilities including the associated penalties and interest by letter dated date respondent sent petitioners a notice_of_determination upholding the filing of the nftl by letter dated date petitioners requested that respondent waive the penalties and interest charged against us discussion sec_6320 requires the commissioner to give any person liable to pay tax hereinafter referred to as a taxpayer written notice of the filing of a tax_lien upon that taxpayer’s property the notice must inform the taxpayer of the right to request a hearing in the commissioner’s appeals_office sec_6320 and b sec_6330 d and e generally governs the conduct of a hearing requested under sec_6320 sec_6320 at the hearing the taxpayer may raise any relevant issues including appropriate spousal defenses challenges to the appropriateness of collection actions and collection alternatives sec_6330 however the taxpayer may challenge the underlying tax_liability only if the taxpayer did not receive a statutory_notice_of_deficiency for the tax_liability and did not otherwise have an opportunity to dispute the tax_liability sec_6330 in addition to considering issues raised by the taxpayer under sec_6330 the appeals officer must also verify that the requirements of any applicable law or administrative procedure have been met sec_6330 generally this court will not review issues raised under sec_6330 if they were not raised at the appeals hearing 129_tc_107 this court may however consider an issue raised by a taxpayer under sec_6330 even if the issue was not raised at the appeals hearing see hoyle v commissioner t c where the validity of the underlying tax_liability is properly in issue the court will review the matter de novo where the validity of the underlying tax is not properly in issue however the court will review the commissioner’s determination for abuse_of_discretion 114_tc_604 114_tc_176 underlying tax_liability for purposes of sec_6330 a taxpayer who has waived his or her right to challenge the proposed assessments by signing form_4549 is deemed to have had the opportunity to dispute the underlying tax_liability and is precluded by such waiver from challenging the underlying tax_liability in the appeals_office hearing or before this court 117_tc_324 because petitioners signed form_4549 they are deemed to have had the opportunity to dispute the underlying tax_liabilities reported in the form_4549 for their tax years through id accordingly petitioners may not dispute their underlying tax_liabilities as stated on form_4549 for their tax years through petitioners did not raise any issues concerning their federal_income_tax liability for tax_year at the appeals hearing petitioners are thereby precluded from disputing their underlying tax_liability as stated in their federal_income_tax return for tax_year see giamelli v commissioner supra pincite except insofar as the underlying liability deviates from those reflected on the form_4549 see 122_tc_384 determination to sustain notice_of_federal_tax_lien petitioners contend that the nftl should be withdrawn because the amount shown on the nftl is greater than the amount that petitioners’ owe petitioners agreed by signing form sec_1040 u s individual_income_tax_return and that their 4a taxpayer could however challenge a liability that was not reflected on the form_4549 122_tc_384 total_tax liability5 for tax years through was dollar_figure the nftl notice indicated a lien amount of dollar_figure we conclude that the nftl at the time of filing was not significantly greater than petitioners’ outstanding liability for tax years through accordingly we hold that respondent’s settlement officer did not abuse her discretion or err in determining that the nftl was proper petitioners also argue that respondent filed two nftls each totaling dollar_figure against petitioners for the unpaid federal_income_tax liabilities for tax years through petitioners base their assertion on the fact that the lien appears twice on their credit reports petitioners offer no evidence to indicate that respondent actually filed the nftl twice as opposed to there being an error on their credit reports accordingly we hold that petitioners have not shown that respondent filed the nftl twice for the same tax_liability respondent’s settlement officer reviewed computer transcripts of each of the taxable years in issue and concluded that all requirements of applicable law were met petitioner sec_5this includes penalties attributable to the through tax years but does not include any penalties attributable to the tax_year and does not include any accrued interest for any of the years in issue 6it is not clear from the record exactly what petitioners’ balance as decreased by withholdings and other_payments and increased by accrued interest and penalties was at the time the nftl was filed did not challenge in their petition to this court or in their posttrial brief the settlement officer’s verification of compliance with applicable law the settlement officer did not consider a collection alternative for petitioners because petitioners had indicated that they planned to submit an offer-in-compromise in the future the settlement officer concluded that none of the conditions existed that would allow withdrawal of a lien without full payment pursuant to sec_6323 for the foregoing reasons we hold that respondent’s settlement officer did not abuse her discretion in determining that respondent could proceed with collection of petitioners’ outstanding liabilities for tax years through abatement of interest and penalties petitioners have also requested an abatement of interest and penalties sec_6404 authorizes the commissioner to abate interest assessments that are attributable to errors or delays by the internal_revenue_service in performing ministerial or 7petitioners did assert in their posttrial brief that they never received a notice_of_deficiency petitioners’ tax_liabilities were based on federal_income_tax returns they filed and amounts shown on form_4549 which they signed consenting to immediate_assessment and collection of the amounts shown thereon accordingly no notice_of_deficiency was required before the assessment of the liabilities in issue so the mailing of a notice_of_deficiency was not a requirement of applicable law see sec_6201 126_tc_195 n 117_tc_324 managerial acts pursuant to sec_6404 this court has jurisdiction to review the commissioner’s failure to abate interest but not penalties if such an action is brought within days after the mailing of the commissioner’s final_determination not to abate such interest the commissioner’s final_determination is a prerequisite to the court’s jurisdiction and serves as a taxpayer’s ‘ticket’ to the tax_court 110_tc_20 petitioners’ request for abatement was sent to respondent in date more than a year after respondent issued the notice_of_determination that is in issue in the instant proceeding accordingly that notice_of_determination could not possibly have been respondent’s final_determination on an abatement request that respondent had not yet received and therefore the abatement issue is not properly before the court 8the provision for tax_court review of interest abatement determinations was enacted as sec_6404 taxpayer bill of right sec_2 tbor publaw_104_168 110_stat_1457 the provision was then redesignated after some of the years in issue first as sec_6404 by the internal_revenue_service restructuring and reform act of publaw_105_206 sec_3309 112_stat_743 and then as sec_6404 by the victims of terrorism tax relief act of publaw_107_134 115_stat_2435 the provision as enacted and redesignated applies to requests for abatement after date tbor sec_302 110_stat_1458 to avoid confusion references herein will be to the current designation 9because petitioners did not raise the issue of abatement during the appeals hearing the instant case is distinguishable continued 129_tc_107 petitioners point to nothing else in the record that could be construed as a final_determination by respondent on petitioners’ request for abatement moreover respondent’s failure to act on a request for abatement within a reasonable_time does not constitute a final_determination for sec_6404 purposes see ward v commissioner tcmemo_2007_374 cho v commissioner tcmemo_1998_363 accordingly we hold that this court does not have jurisdiction to consider petitioners’ request for abatement of interest and penalties see giamelli v commissioner supra to reflect the foregoing decision will be entered for respondent continued from 571_f3d_215 2d cir revg tcmemo_2006_273 which held that a notice_of_determination issued after a sec_6330 hearing may serve as a final_determination for purposes of sec_6404 where abatement was raised during the hearing see also macdonald v commissioner tcmemo_2009_240


internal_revenue_service number release date index number ------------------- ----------------------------------- ---------------- -------------------------------------------------- ----------------------------------- department of the treasury washington dc person to contact --------------- id no ------------- telephone number --------------------- refer reply to cc fip plr-146522-10 date date legend taxpayer ------------------------------------------------------------------------------------------------- ----------------------- targets ------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------- ----------------------------------- manager ---------------------------------------- state a state b state c date date t u v w x y z ------------ ---------- -------------------- ---------------------- ------------------- ----- ----- --- --- dear ------------- this is in response to your letter dated date and supplemental submission dated date regarding the definition of the term qualified_health_care_property under sec_856 of the internal_revenue_code_of_1986 as amended the code for purposes of sec_856 and the qualification of manager defined below as an eligible_independent_contractor under sec_856 specifically you have requested the following rulings plr-146522-10 the mixed-use communities defined below constitute qualified health care properties within the meaning of sec_856 of the code thus taxpayer may lease the mixed-use communities to a taxable_reit_subsidiary trs pursuant to the rules of sec_856 manager will be deemed to be actively engaged in the trade_or_business of operating qualified health care properties within the meaning of sec_856 and therefore will qualify as an eligible independent contactor under sec_856 with respect to the health care facilities it manages or operates for the trs facts taxpayer is domestic_corporation that elected to be taxed as a real_estate_investment_trust reit beginning on date taxpayer is engaged in the acquisition and ownership of hospital skilled nursing medical office building and senior housing projects taxpayer uses an overall accrual_method of accounting and the calendar_year as its taxable_year taxpayer entered into a merger agreement with targets whereby taxpayer will acquire from targets the ownership or leasehold interests in t senior housing communities targets currently own lease operate and manage the real_estate taxpayer will lease properties meeting the definition of qualified health care properties under sec_856 to a wholly-owned trs in turn the trs will engage an eligible_independent_contractor to operate and manage the health care facilities taxpayer and or its wholly-owned disregarded entities will directly engage an independent_contractor to operate and manage the properties considered to be independent living facilities the eligible_independent_contractor providing services to the trs’s properties and the independent_contractor manager providing services to taxpayer’s properties will be the same company taxpayer will not derive any income from nor will it have any ownership_interest in the eligible_independent_contractor or any of its subsidiaries the properties the majority of the t senior housing communities are comprised of both independent living il and assisted living al residents together mixed-use communities many of the communities also have alzheimer alz residents who reside in separate secure wings within the respective communities as of date the communities to be acquired from targets can be summarized as the following u mixed-use communities comprised mostly of fully-licensed al alz communities including both il residents and al alz residents some partially licensed al alz communities and some unlicensed communities with al alz licenses pending or plr-146522-10 licenses not required and v unlicensed il communities without any al alz residents with plans for some of these communities to be licensed in the future so that they can be operated as mixed-use communities each mixed-use community is and will continue to be operated and marketed as one integrated community with different service options and units available for al alz and il residents generally each property has an executive director community business director activity director maintenance director food service director and numerous other employees that serve the entire community the same activities housekeeping maintenance food service and administrative staff provide services for both il and al alz residents and are trained to handle all residents’ needs there are a significant number of al residents in each mixed-use community and a significant portion of the gross_income is from the al residents in mixed-use communities with alz residents the alz residents are assigned to separate secure wings within each community taxpayer represents that transitioning a resident from il to al within a mixed- use community is generally a simple process with the exception of w partially licensed mixed-use communities and y fully-licensed mixed-use community each property is able to accommodate either an il or an al living situation in every unit a resident previously not receiving assistance with activities_of_daily_living adls or medication management does not need to relocate to another unit in order to begin receiving these services switching the resident from il to al is accomplished by updating the resident’s service plan providing the services outlined in the service plan and adding a monthly care charge despite the transition to al all other aspects of the resident’s life remain the same such as social activities meal plans and the individuals with whom the resident interacts at the community for the w partially licensed mixed-use communities and y fully-licensed mixed- use community properties the il and al residents are in different buildings units or sections of units but they are located on the same real_estate parcel for these communities al residents typically eat in dining areas separate from il residents however consistent with all the other mixed-use communities these il and al communities are operated and marketed as one integrated community il and al residents share common area facilities for front desk reception social activities and fitness activities during social activities and outings the same events are offered for both il and al residents il residents in all mixed-use communities are provided with services that are customarily provided to residents of rental housing units and are provided with additional supportive services including the following three meals a day in a central dining location generally shared with al residents housekeeping and linen services transportation to doctors’ offices banks and retail stores social and recreational plr-146522-10 activities assistance with diet assistance in obtaining prescription medication and assistance with arranging physical therapy services al residents are provided with the same services as il residents as well as assistance with adls such as bathing dressing toileting ambulating eating and continence care depending on specific state regulations caregivers also assist al residents with medical administration al residents receive different levels of care depending on their needs all units have emergency call systems and staff members are available at the facilities on a 24-hour schedule mixed-use communities are generally licensed under the laws of the state in which the community is located targets have x communities with al alz residents in states where a license is not required state a and state b other than these x exceptions each state regulates items such as the scope of services that may be rendered at the community the types of individuals that may be admitted as residents depending on the medical physical condition of the individual resident policies training required of the staff whether nursing staff is required and building and construction standards independent_contractor the following steps will take place prior to taxpayer’s merger with targets the management entities manager and their net assets and at least y unrelated management_contract for a mixed-use community will be distributed to targets’ shareholders in taxable transactions the operations of the health care facilities will be transferred to separate entities disregarded for federal_income_tax purposes opcos these separate entities will then be transferred to a corporation which will be owned by taxpayer immediately after the merger the corporation and taxpayer will jointly elect for the corporation to be treated as a trs of taxpayer opcos will enter into new management contracts with manager taxpayer’s property owning leasing entities propcos will enter into lease or sublease agreements with opcos propcos will be disregarded entities wholly owned by taxpayer immediately after the merger at the time of the merger manager will operate and manage the t communities to be acquired by taxpayer and at least y unrelated mixed-use community through a management_contract with a third party as described below furthermore manager will be operating qualified health care properties either pursuant to x management contracts for x separate qualified health properties or pursuant to y management_contract for an unrelated third party and a self-managed property that manager may lease from an unrelated third party or that manager may own prior to closing and retain the t communities acquired by taxpayer will be operated and managed by manager through new management contracts after the merger plr-146522-10 pursuant to these management contracts manager maintains all licenses and will obtain any additional licenses to be held in the name of the applicable opco entity that are required in connection with the services that manager provides at the communities manager is also required to provide the management services in compliance with federal state county municipal and other statutes laws orders regulations and ordinances affecting communities manager will supervise the assignment of all management and community employees among the communities taxpayer and manager will enter into a management agreement on the merger date for each of the t communities on the merger date and the date of the management contracts with the trs subsidiary opcos manager will be under contract to manage a third-party-owned community manager through its wholly-owned disregarded and regarded subsidiaries is and should continue to be responsible after the proposed transaction for all of the operational and management functions at this third-party-owned community the management agreement with the third party is a contract with respect to a mixed-use community in which manager has an ownership_interest for each of the mixed-use communities eg the t mixed-use communities acquired by taxpayer along with the unrelated third-party leased and managed communities manager provides administrative personnel including the executive director and community business director and supervisors who oversee the staff manager advises and assists in the development of policies and procedures the preparation and submission of applications and other materials necessary to obtain the required approvals the development and implementation of staffing partners and the administration of all billing and collections matters manager recruits key administrative personnel evaluates staffing standards provides staff training screens management staff provides charting conducts routine site visits monitors resident mix and admissions compliance assists residents with insurance filings and ensures compliance with all standards and legal requirements pursuant to agreements between manager and the property owners manager assists owners in establishing policies and responsibilities and ensures compliance with patient rights provides financial oversight maintains and repairs the physical properties of the communities and serves as a liaison between the communities and residents visitors staff and physicians for the third-party leased community manager operates the entire community providing all resident care equipment and supplies maintaining and repairing the community ensuring compliance with regulatory and other requirements admitting patients collecting all resident fees and providing personnel to operate the community manager is in negotiations to finalize the terms of a management_contract with another unrelated party owner to manage a fully-licensed mixed-use community manager intends to successfully close this management_contract before the merger plr-146522-10 date furthermore manager is pursuing consent to continue to lease certain mixed-use communities for its own benefit and is pursuing other unrelated third party contracts and the retention of self-managed properties owned or leased law and analysis sec_856 provides that to qualify as a reit a corporation must derive at least percent of its gross_income excluding gross_income from prohibited_transactions from sources listed in sec_856 which includes dividends interest rents_from_real_property and certain other items and derive at least percent of its gross_income excluding gross_income from prohibited_transactions from sources listed in sec_856 which includes rents_from_real_property and certain other items sec_856 provides that the term rents_from_real_property does not include except as provided in sec_856 any amount received or accrued directly or indirectly from any person if the reit owns directly or indirectly i in the case of any person which is a corporation stock of such person possessing percent or more of the total combined voting power of all classes of stock entitled to vote or percent or more of the total value of shares of all classes of stock of such person or ii in the case of any person which is not a corporation an interest of percent or more in the assets or net profits of such person sec_856 provides that amounts paid to a reit by a trs shall not be excluded from rents_from_real_property by reason of sec_856 when a reit leases a qualified_lodging_facility or a qualified_health_care_property to a trs of the reit and the property is operated on behalf of such trs by a person who is an eligible_independent_contractor sec_856 provides that the term qualified_health_care_property means any real_property including interests therein and any personal_property incident to such real_property which is a health_care_facility or is necessary or incidental to the use of a health_care_facility sec_856 provides that the term health_care_facility means a hospital nursing facility assisted living facility congregate care facility qualified_continuing_care_facility as defined in sec_7872 or other licensed facility which extends medical or nursing or ancillary services to patients and which immediately before the termination expiration default or breach of the lease or of the mortgage secured_by such facility was operated by a provider of such services which was eligible for participation in the medicare program under title xviii of the social_security act with respect to such facility sec_856 provides that the term eligible_independent_contractor with respect to any qualified_lodging_facility or qualified_health_care_property as defined in plr-146522-10 sec_856 means any independent_contractor if at the time such contractor enters into a management agreement or other similar service_contract with the trs to operate such qualified_lodging_facility or qualified_health_care_property such contractor or any related_person is actively engaged in the trade_or_business of operating qualified lodging_facilities or qualified health care properties respectively for any person who is not a related_person with respect to the real_estate_investment_trust or the trs sec_856 provides that the term independent_contractor means any person who does not own directly or indirectly more than percent of the shares or certificates of beneficial_interest in the real_estate_investment_trust and if such person is a corporation not more than percent of the total combined voting power of whose stock or percent of the total shares of all classes of whose stock or if such person is not a corporation not more than percent of the interest in whose assets or net profits is owned directly or indirectly by one or more persons owning percent or more of the shares or certificates of beneficial_interest in the trust in the present case the al alz and il residents are located in the same building or on the same real_estate parcel all the al units are licensed by the state in which they are located to the extent licensing is required when a resident requires adls the resident may transition from an il unit to an al unit depending on availability which may or may not require the resident to physically move units depending on the facility’s licensing while not all of the residents of the mixed-use communities receive al services a significant number of units in each of the mixed-use communities will be occupied as al units manager directly or indirectly through its wholly-owned subsidiaries will be actively engaged in operating these mixed-use communities for the trs manager will be engaged in the operation of at least y health care property for a third party pursuant to a management_contract and will pursue other management contracts additionally manager has a history of operating al and other senior living facilities conclusion on the basis of the facts presented and the representations made we conclude that the mixed-use communities as described above will qualify as qualified health care properties under sec_856 additionally we conclude that manager will be considered to be actively engaged in the trade_or_business of operating health care properties within the meaning of sec_856 and will qualify as an eligible_independent_contractor under sec_856 with respect to the health care facilities it manages or operates for the trs 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 in particular no opinion is expressed whether taxpayer otherwise qualifies as a reit under part ii of subchapter_m of chapter of the code plr-146522-10 furthermore no opinion is expressed regarding the tax treatment of the merger between taxpayer and targets this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representatives sincerely jonathan d silver jonathan d silver assistant to branch chief branch office of associate chief_counsel financial institutions products


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 b01 plr-109035-14 date june legend parent -------------------------------- ----------------------------------------------------------------------------- --------------------------------------------------------------------- purchaser ----------------------------------------------------------------------------- ---------------------------------------- ------------------------ sellers -------------------------------------------------- target ----------------------------------------------------------------------------- --------------------------------------------------------------------- --------------------------------------- date date --------------------------- ---------------------------- company official ---------------------------------------------------------------------------------- --------------------------------------------------------- plr-109035-14 dear ------------------ this letter responds to a letter dated date submitted on behalf of parent and sellers requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations to file an election parent and sellers are requesting an extension to file a sec_338 election under sec_338 of the internal_revenue_code the code and sec_1_338_h_10_-1 of the income_tax regulations the regulations with respect to purchaser’s acquisition of the stock of target an s_corporation on date the election additional information was submitted on may and date the material information submitted for consideration is summarized below parent was the common parent of a consolidated_group of which purchaser was a member on date pursuant to a stock purchase agreement of the same date purchaser acquired all the stock of target from sellers in exchange for cash the purchase target was thereafter merged with and into purchaser on date parent and sellers have represented that the acquisition of target qualified as a qualified_stock_purchase within the meaning of sec_338 parent and sellers have also represented that all relevant returns for all open years were either originally filed or amended to be consistent with making the election parent and sellers intended to file the election the election was due on date but for various reasons a valid election may not have been made after the due_date for the election it was discovered that a valid election may not have been made subsequently this request was submitted under sec_301_9100-3 for an extension of time to file the election parent and sellers have represented that they are not seeking to alter a return position for which an accuracy-related_penalty has been or could be imposed under sec_6662 taking into account any qualified_amended_return filed within the meaning of sec_1_6664-2 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 sec_338 permits the purchasing_corporation and sellers to elect jointly to treat the target_corporation as deemed to sell all of its assets and distribute the proceeds in complete_liquidation a sec_338 election may be made for target only if purchaser acquires stock meeting the requirements of sec_1504 from a selling_consolidated_group a selling affiliate or the s_corporation shareholders in a qualified_stock_purchase sec_1_338_h_10_-1 plr-109035-14 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 code except subtitles e g h and i sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make a regulatory election see 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 see sec_301_9100-3 in this case the time for filing the election is fixed by regulations ie sec_1_338_h_10_-1 therefore the commissioner has discretionary authority under sec_301_9100-3 to grant an extension of time for parent and sellers to file the election provided parent and sellers show they acted reasonably and in good_faith the requirements of sec_301_9100-1 and sec_301_9100-3 are satisfied and granting relief will not prejudice the interests of the government information affidavits and representations submitted by parent sellers and company official explain the circumstances that resulted in the possible failure to timely file a valid election the information establishes that the request for relief was filed before the possible failure to make the election was discovered by the internal_revenue_service see sec_301_9100-3 based on the facts and information submitted including the representations made we conclude that parent and sellers have shown they acted reasonably and in good_faith the requirements of sec_301_9100-1 and sec_301_9100-3 are satisfied and granting relief will not prejudice the interests of the government accordingly an extension of time is granted under sec_301_9100-3 until days from the date on this letter for parent and sellers to file the election with respect to the acquisition of the stock of target within days of the date on this letter parent and sellers must file the election on form_8023 in accordance with sec_1_338-2 and the instructions to the form a copy of this letter must be attached to form_8023 within days of the date on this letter all relevant parties having originally filed or amended their returns for all open years to be consistent with a valid election having been made must amend their returns to attach to the returns a copy of this letter in lieu of attaching a copy of this letter to their returns taxpayers plr-109035-14 filing their returns electronically may satisfy the requirement of attaching a copy of this letter by attaching a statement to their return that provides the date and control number plr-109305-14 of the letter_ruling the above extension of time is conditioned on parent’s consolidated group’s seller’s and target’s tax_liability if any being not lower in the aggregate for all years to which the election applies than it would have been if the election had been timely made taking into account the time_value_of_money we express no opinion as to the taxpayers’ tax_liability for the years involved a determination thereof will be made by the applicable director’s office upon audit of the federal_income_tax returns involved we express no opinion as to whether the acquisition of target stock qualifies as a qualified_stock_purchase under sec_338 whether the acquisition sale of target stock qualifies for sec_338 treatment or any other tax consequences arising from the election in addition we express no opinion as to the tax consequences of filing the election late under the provisions of any other section of the code and regulations or as to the tax treatment of any conditions existing at the time of or resulting from filing the election late that are not specifically set forth in the above rulings for purposes of granting relief under sec_301_9100-3 we relied on certain statements and representations made by the taxpayers however the director should verify all essential facts in addition notwithstanding that an extension is granted under sec_301_9100-3 to file the election penalties and interest that would otherwise be applicable if any continue to apply this letter is directed only to the taxpayers who requested it sec_6110 provides that it may not be used or cited as precedent pursuant to the power_of_attorney on file in this office a copy of this letter is being sent to your authorized representative sincerely _________________________ ken cohen acting chief branch office of associate chief_counsel corporate


t c summary opinion united_states tax_court samuel brach and lillian brach petitioners v commissioner of internal revenue respondent docket no 15460-12s filed date ronald jay cohen for petitioners gennady zilberman for respondent summary opinion armen special_trial_judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect when the petition was filed pursuant to sec_7463 the decision to be entered is not reviewable by any other court and this opinion shall not be treated as precedent for any other case respondent determined a deficiency in petitioners’ federal_income_tax of dollar_figure and an accuracy-related_penalty of dollar_figure under sec_6662 and d for a substantial_understatement of tax after concessions by petitioners the issues remaining for decision are whether petitioners are liable for tax on income of dollar_figure received from the surrender of a life_insurance_contract we hold that they are and unless otherwise indicated all subsequent section references are to the internal_revenue_code code in effect for the year in issue and all rule references are to the tax_court rules_of_practice and procedure petitioners concede that mr brach received benefits of dollar_figure and that mrs brach received benefits of dollar_figure from the social_security administration in petitioners further concede that their social_security_benefits will be includible in gross_income as determined in the notice_of_deficiency if the substantive issue described above in the text is decided in respondent’s favor other adjustments made by respondent in the notice_of_deficiency namely the increase in the child_tax_credit and the disallowance of both the earned_income_tax_credit and the additional_child_tax_credit are mechanical in nature and have not been otherwise contested by petitioners the resolution of these other adjustments also depends on the disposition of the disputed substantive issue although the parties’ stipulation of facts states the distribution was dollar_figure all monetary amounts are rounded to the closest dollar therefore we decide this opinion using dollar_figure for the amount received and dollar_figure for the gross distribution whether petitioners are liable for the accuracy-related_penalty under sec_6662 and d we hold that they are not background some of the facts have been stipulated and they are so found we incorporate by reference the parties’ stipulation of facts and supplemental stipulation of facts and accompanying exhibits petitioners resided in new york at the time that the petition was filed in mrs brach was employed in a bakery mr brach was disabled during and was unable to engage in gainful employment in date mr brach acquired an insurance_policy on his life from guardian life_insurance co guardian the policy had a cash_value portion and a dividends portion the former grew with the age of the policy and the latter grew with investments made through the policy under the terms of the policy mr brach was permitted to borrow against the policy in an amount not in excess of its cash_value also under the terms of the policy mr brach was permitted to terminate the policy and receive as a distribution the cash_value of the policy plus any accrued dividends minus any outstanding debts against the policy in or around mr brach borrowed against the cash_value of the policy interest due on the loan accrued at a specified annual percentage rate pursuant to the terms of the loan agreement petitioners did not pay back the loan in date mr brach was obliged to surrender the policy after petitioners became unable to pay the premium or make loan repayments upon surrender policy proceeds paid the outstanding loan in full and mr brach received a check for dollar_figure which represented the net value of the policy surrender of the policy gave rise to a gross distribution of dollar_figure at the time of surrender mr brach’s investment_in_the_contract was dollar_figure guardian issued a form 1099-r distributions from pensions annuities retirement or profit-sharing_plans iras insurance contracts etc for reflecting a gross distribution of dollar_figure and taxable_income of dollar_figure the latter amount represented the difference between the gross distribution dollar_figure and mr brach’s investment_in_the_contract dollar_figure petitioners retained moses neuman an enrolled_agent who practiced before the internal_revenue_service as a tax professional to prepare their tax_return petitioners provided mr neuman with mrs brach’s form_w-2 wage as applicable for the taxable_year an enrolled_agent is an individual who demonstrates special competence in tax matters by written examination continued and tax statement both of petitioners’ forms 1099-ssa social_security_benefit statement and the form 1099-r in respect of the surrender of the life_insurance_policy on the basis of petitioners’ income and expenses assets and various loan liabilities mr neuman determined that petitioners were insolvent and were not required to report on their return cancellation_of_indebtedness_income in respect of the surrender of the life_insurance_policy further given petitioners’ modest income exclusive of the distribution arising from the surrender of the life_insurance_policy mr neuman determined that no part of petitioners’ social_security_benefits was taxable finally mr neuman determined that it was unnecessary to attach to petitioners’ return a form_982 reduction of tax_attributes due to discharge_of_indebtedness and sec_1082 basis_adjustment the forms 1099-ssa issued by the social_security administration continued administered by or administered under the oversight of the director of practice within the internal_revenue_service and who has not engaged in any conduct that would justify the censure suspension or disbarment of any practitioner c f_r sec a or the form 1099-r issued by guardian after preparing the return mr neuman reviewed it with petitioners who then timely filed it in date respondent issued to petitioners a notice_of_deficiency for determining a deficiency of dollar_figure and an accuracy-related_penalty of dollar_figure under sec_6662 and d petitioners timely filed a petition for redetermination discussion i life_insurance contract6 a the parties’ arguments petitioners invoke sec_108 they argue that the surrender of their life_insurance_policy gave rise to cancellation_of_indebtedness_income and that because form_982 is used to determine the amount of discharged indebtedness that can be excluded from a taxpayer’s gross_income pursuant to sec_108 the taxpayer must list the basis for exclusion_from_gross_income for example insolvency and the amount excluded from gross_income form_982 is required to be filed with the taxpayer’s tax_return the substantive issue presented by this case is essentially legal and not factual we therefore need not address provisions affecting either the burden_of_proof or the burden of production see eg sec_6201 rule a kleber v commissioner tcmemo_2011_233 sanders v commissioner tcmemo_2010_279 they were insolvent at the time no part of the distribution is includible in gross_income by virtue of sec_108 respondent argues that petitioners failed to prove that they were insolvent but more fundamentally respondent argues that because the surrender of the life_insurance_policy resulted in the full satisfaction of an outstanding debt ie guardian was paid in full and did not forgive any part of mr brach’s indebtedness sec_72 is the key code section the court agrees with respondent that sec_108 is not relevant and that sec_72 provides the touchstone for decision accordingly the issue of petitioners’ insolvency vel non need not be decided b taxation of distributions from life_insurance contracts gross_income includes all income from whatever source derived sec_61 sec_61 lists specific forms of gross_income including income from life_insurance contracts sec_61 sec_108 provides that income received from the discharge_of_indebtedness may be excludable from a taxpayer’s gross_income under certain circumstances petitioners argue that sec_108 applies which provides as a general_rule gross_income does not include any amount which but for this subsection would be includible in gross_income by reason of the discharge in whole or in part of indebtedness_of_the_taxpayer if the discharge occurs when the taxpayer is insolvent for federal_income_tax purposes petitioners’ life_insurance_policy loan was a true loan see mcgowen v commissioner tcmemo_2009_285 wl aff’d 438_fedappx_686 10th cir see also atwood v commissioner tcmemo_1999_61 wl the insurance_policy included terms for an interest rate on amounts borrowed against the policy a requirement indicative of bona_fide debt mcgowen v commissioner wl at citing 55_tc_896 aff’d 464_f2d_479 5th cir 44_tc_660 and 35_tc_1083 consequently petitioners would not have had to recognize these loan proceeds as taxable_income when they received them see 493_us_203 461_us_300 rather petitioners were expected to pay back the loans to the insurance_company see commissioner v tufts u s pincite where an insurance_policy is terminated and the proceeds are used to satisfy a loan against the policy the payment against the loan is treated as if the taxpayers received the payment and applied it against the outstanding loan see mcgowen v commissioner tcmemo_2009_285 atwood v commissioner tcmemo_1999_61 see also brown v commissioner tcmemo_2011_83 aff’d 693_f3d_765 7th cir barr v commissioner tcmemo_2009_250 the tax treatment of a distribution from a life_insurance_policy is governed by sec_72 thus an amount received in connection with a life_insurance_contract which is not received as an annuity generally constitutes gross_income to the extent that the amount received exceeds the investment in the insurance_contract sec_72 a c feder v commissioner tcmemo_2012_ wl at the investment_in_the_contract is defined generally as the aggregate amount of premiums or other consideration paid for the contract less aggregate amounts previously received under the contract to the extent such amounts were excludable from gross_income sec_72 feder v commissioner wl at n sec_1_72-6 income_tax regs in the instant case mr brach owned a life_insurance_policy with guardian he took out a loan against the policy after petitioners became financially unable to pay the premium or make loan repayments the policy was surrendered in date the surrender of the policy gave rise to a gross distribution of dollar_figure upon surrender of the policy the distribution proceeds were first used to satisfy mr brach’s outstanding loan against the policy which loan was paid in full net_proceeds of dollar_figure were then paid in cash to mr brach clearly guardian did not forgive or write off cancel or discharge any part of the loan for the simple reason that it was paid in full at the time of surrender mr brach’s investment_in_the_contract was dollar_figure which portion of the gross distribution was nontaxable see sec_72 but the balance of the gross distribution or dollar_figure constitutes taxable_income see atwood v commissioner wl at stating when the taxpayers’ policies terminated their policy_loans including capitalized_interest were charged against the available proceeds at that time this satisfaction of the loans had the effect of a pro tanto payment of the policy proceeds to petitioners and constituted income to them at the time a contrary result would permit policy proceeds including previously untaxed investment returns to escape tax altogether and finds no basis in the law citations omitted petitioners did not receive income from the discharge_of_indebtedness a discharge_of_indebtedness occurs when the debtor is no longer legally required to satisfy his debt either in part or in full caton v commissioner tcmemo_1995_80 wl at citing 499_us_573 n see also mcgowen v commissioner tcmemo_2009_285 in the instant case the loan to mr brach was not discharged rather it was extinguished after guardian applied the distribution proceeds against mr brach’s debt completely satisfying the loan accordingly mr brach’s debt was satisfied and not discharged ii accuracy-related_penalty sec_6662 and b imposes an accuracy-related_penalty equal to of the amount of any underpayment_of_tax that is attributable to a substantial_understatement_of_income_tax by definition an understatement is the excess of the tax required to be shown on the tax_return over the tax actually shown on the return sec_6662 an understatement of income_tax is substantial if it exceeds the greater of dollar_figure or of the tax required to be shown on the return sec_6662 with respect to a taxpayer’s liability for any penalty sec_7491 places on the commissioner the burden of production thereby requiring the commissioner to come forward with sufficient evidence indicating that it is appropriate to impose the penalty 116_tc_438 once the commissioner meets his burden of production the taxpayer must come forward with persuasive evidence that the commissioner’s determination is incorrect see rule a 290_us_111 in the instant case respondent’s notice_of_deficiency determines the accuracy-related_penalty on the basis of a substantial_understatement_of_income_tax see sec_6662 here the understatement of dollar_figure is substantial because it exceeds dollar_figure and is greater than of the tax required to be shown on the return consequently respondent has carried his burden of production as a result petitioners now bear the burden to show that an exception to the penalty applies see higbee v commissioner t c pincite sec_6664 provides an exception to the imposition of the accuracy- related penalty with respect to any portion of an underpayment if the taxpayer establishes that there was reasonable_cause for such portion and the taxpayer acted in good_faith with respect to such portion the decision as to whether the taxpayer acted with reasonable_cause and in good_faith is made on a case-by-case basis taking into account the pertinent facts and circumstances including the taxpayer’s knowledge education and experience as well as the taxpayer’s reliance on professional advice thomas v commissioner tcmemo_2013_60 see also 115_tc_43 providing a three-prong test to establish reasonable reliance on professional advice aff’d 299_f3d_221 3d cir sec_1_6664-4 income_tax regs generally the most important factor is the extent of the taxpayer’s effort to assess his or her proper tax_liability humphrey farrington mcclain p c v commissioner tcmemo_2013_23 sec_1_6664-4 income_tax regs petitioners contend they had reasonable_cause and acted in good_faith in relying on advice from their return preparer mr neuman reliance on a professional tax adviser’s advice may demonstrate reasonable_cause and good_faith if taking into account all the facts and circumstances the reliance was reasonable and the taxpayer acted in good_faith sec_1 b c income_tax regs reliance on a tax adviser may be reasonable and in good_faith if the taxpayer establishes the adviser was a competent professional with sufficient expertise to justify reliance the taxpayer provided necessary and accurate information to the adviser and the taxpayer actually relied in good_faith on the adviser’s judgment neonatology assocs p a v commissioner t c pincite petitioners retained mr neuman an enrolled_agent to prepare their tax_return as an enrolled_agent mr neuman practiced before the internal_revenue_service as a tax professional a fact known to petitioners petitioners provided mr neuman with mrs brach’s form_w-2 both forms 1099-ssas in respect of their social_security_benefits and the form 1099-r in respect of the surrender of the life_insurance_policy mr neuman determined that because petitioners were insolvent they were not required to include any income from the surrender of the life_insurance_policy on their tax_return and that they did not need to attach a form_982 the form 1099-r or the forms 1099-ssa to their tax_return when it was filed mr neuman explained to petitioners why in his judgment income from the surrender of the insurance_policy need not be reported on their tax_return mr neuman also advised petitioners that social_security_benefits are not reportable if a taxpayer’s other income is sufficiently modest the status of enrolled_agent can tend to show competence see mills v commissioner tcmemo_2013_4 see also 440_f3d_375 6th cir much like a taxpayer’s reliance on an attorney or an accountant reliance on an enrolled_agent is a factor we may consider in determining the reasonableness of a taxpayer’s actions aff’g tcmemo_2004_ an enrolled_agent is an individual who has displayed special competence in tax matters c f_r sec a in the instant case the record demonstrates both that petitioners reasonably believed that mr neuman was competent to prepare their return and that they had no reason to question his advice next petitioners provided to mr neuman complete and accurate information specifically including mrs brach’s form_w-2 both forms 1099-ssa regarding petitioners’ social_security_benefits and the form 1099-r regarding the surrender of the life_insurance_policy finally petitioners relied in good_faith on mr neuman’s judgment it is clear from the record that petitioners are not experienced in tax matters mr neuman explained to petitioners that because of their insolvency and otherwise modest income no part of either the distribution from guardian or their social_security_benefits would be taxable and that petitioners need not attach to their return either form_982 or any form_1099 petitioners had no reason not to accept mr neuman’s advice and they filed their tax_return accordingly in sum the court finds that petitioners acted in good_faith and reasonably relied on mr neuman an enrolled_agent to whom they fully disclosed all information necessary to determine their proper tax_liability for see thomas v commissioner tcmemo_2013_60 see also neonatology assocs p a v commissioner t c pincite humphrey farrington mcclain p c v commissioner tcmemo_2013_23 sec_1_6664-4 income_tax regs we therefore hold that petitioners come within the reasonable_cause exception of sec_6664 and are not liable for the accuracy-related_penalty under sec_6662 and d conclusion we have considered all of the arguments advanced by the parties and to the extent not expressly addressed we conclude that those arguments do not support results contrary to those reached herein to give effect to our disposition of the disputed issues decision will be entered for respondent as to the deficiency in tax and for petitioners as to the accuracy-related_penalty


internal_revenue_service department of the treasury number release date index number 468a washington dc person to contact telephone number refer reply to cc psi 6-plr-115677-02 date re revised schedule of ruling amounts taxpayer parent plant location commission a commission b fund dear this letter responds to the request of taxpayer filed date and supplemental information submitted by your authorized representative for a revised schedule of ruling amounts pursuant to sec_1_468a-3 of the income_tax regulations commission a has adjusted taxpayer’s retail rates to account for its ruling concerning the depreciable life of the plant as well as changes in other assumptions related to funding the fund moreover taxpayer has requested review of jurisdictional ruling amounts pursuant to sec_1_468a-3 information was submitted pursuant to sec_1_468a-3 we understand the facts as submitted by taxpayer to be as follows taxpayer owns a percent interest in the plant as a tenant in common the plant is situated in location taxpayer is a wholly-owned subsidiary of parent the plant’s operating license expires in the allocable jurisdictional percentages for commission a is percent and for commission b percent for a total of percent these percentages may fluctuate from time to time the total is approved notwithstanding the fact that it marginally exceeds percent based on plr-115677-02 representation that each commission used different times and methods for determining the jurisdictional percentages the estimated cost for decommissioning the plant is based on an independent study and is premised on the decon method the estimated date on which the plant will no longer be included in taxpayer’s rate base for ratemaking purposes as determined under the ratemaking assumptions that were used to determine the last rates that were established or approved by commission a prior to the filing of the instant request docket no is the estimated date on which the plant will no longer be included in taxpayer’s rate base for ratemaking purposes as determined under the ratemaking assumptions that were used by commission a in establishing or approving rates during the first ratemaking proceeding in which the plant was included in taxpayer’s rate base was commission a did not adjust the life of the plant prior to in docket no commission a authorized taxpayer to include annual decommissioning costs for the plant of dollar_figure for through and dollar_figure for in determining the decommission costs for the plant commission a estimated taxpayer’s share of the total cost of decommissioning the plant to be dollar_figure dollars this estimated cost escalated at percent annually results in a future decommissioning cost of dollar_figure to dollars taxpayer’s portion of this future expense is dollar_figure there are no proceedings pending before either commission that may result in an increase or decrease in the amount of decommissioning costs to be included in taxpayer’s cost of service for ratemaking purposes as of the fair_market_value of the fund was dollar_figure the annual after-tax rate of return earned by the assets of the fund between the date of the initial contribution to the fund and was approximately percent taxpayer’s initial schedule of ruling amounts for commission b was issued pursuant to a ruling letter dated for the years through these ruling amounts were subsequently extended in the ruling letter dated there have been no new ratemaking proceedings by commission b addressing nuclear decommissioning costs since the issuance of the ruling letter dated taxpayer now requests authorization to deduct the same ruling amounts included in the ruling letter and extended in the ruling letter there is no change in the decommissioning costs taxpayer is making this request to eliminate the necessity of an additional request in the near future the funding_period and level_funding limitation period extends from through the estimated_useful_life of the plant is years through and the estimated period for which the fund will be in effect is years through plr-115677-02 therefore the qualifying percent is percent the assumed annual after-tax rate of return expected to earned by commission a jurisdictional assets of the fund ranges from percent to percent depending on the investment mix during the funding and decommissioning period commission a took the tax_rate change and the removal of the investment restrictions as a result of the energy policy act of public law the act into account in determining the after-tax rate of return the amount expected to be earned by the assets of the commission a jurisdictional assets of the fund over the period that begins on the first day of the first taxable_year to which the revised schedule of ruling amounts will apply and the last day of the funding_period is dollar_figure the assumed annual after-tax rate of return for the commission b jurisdictional assets of the fund is percent sec_468a of the internal_revenue_code provides that a taxpayer may elect to deduct the amount of payments made to a qualified nuclear decommissioning fund however sec_468a limits the amount_paid into the fund for any_tax year to the lesser_of the amount of nuclear decommissioning costs allocable to the fund that is included in the taxpayer’s cost of service for ratemaking purposes for the tax_year or the ruling_amount applicable to this year sec_468a of the code provides that no deduction shall be allowed for any payment to the nuclear decommissioning fund unless the taxpayer requests and receives from the secretary a schedule of ruling amounts the ruling_amount for any_tax year is defined under sec_468a as the amount which the secretary determines to be necessary to fund that portion of nuclear decommissioning costs which bears the same ratio to the nuclear power plant as the period for which the fund is in effect bears to the estimated_useful_life of the plant this term is further defined to include the amount necessary to prevent excessive funding of nuclear decommissioning costs or funding of these costs at a rate more rapid than level_funding taking into account such discount rates as the secretary deems appropriate sec_468a of the code provides that a taxpayer shall be deemed to have made a payment to the nuclear decommissioning fund on the last day of the tax_year if the payment is made on account of this tax_year within ½ months after the close of the tax_year sec_1_468a-1 of the regulations provides that an eligible_taxpayer may elect to deduct nuclear decommissioning costs under sec_468a of the code an eligible_taxpayer as defined under sec_1_468a-1 is a taxpayer that has a qualifying interest in a nuclear power plant as defined under sec_1_468a-1 a qualifying interest is among other things a direct ownership_interest including an interest held as a tenant in common or joint tenant sec_1_468a-2 of the regulations provides that the maximum amount of cash payments made or deemed made to a nuclear decommissioning fund during any plr-115677-02 tax_year shall not exceed the lesser_of the cost of service amount applicable to the nuclear decommissioning fund for such tax_year or the ruling_amount applicable to the nuclear decommissioning fund for such tax_year sec_1_468a-3 of the regulations provides that in general a schedule of ruling amounts for a nuclear decommissioning fund is a ruling specifying annual payments that over the tax years remaining in the funding_period as of the date the schedule first applies will result in a projected balance of the nuclear decommissioning fund as of the last day of the funding_period equal to and in no event more than the amount of decommissioning costs allocable to the fund sec_1_468a-3 bases the schedule of ruling amounts on the reasonable assumptions and determinations used by the applicable public_utility commission s in establishing or approving the amount of decommissioning costs to be included in the cost of service for ratemaking purposes taking into account amounts that are otherwise required to be included in the taxpayer’s income under sec_88 of the code and the regulations thereunder each schedule of ruling amounts shall be based on the public_utility commission’s reasonable assumptions concerning i the after-tax rate of return to be earned by the amounts collected for decommissioning ii the total estimated cost of decommissioning the nuclear power plant and iii the frequency of contributions to the nuclear decommissioning fund for a tax_year sec_1_468a-3 of the regulations permits the internal_revenue_service to provide a schedule of ruling amounts identical to the schedule proposed by the taxpayer but no such schedule shall be provided by the service unless the taxpayer’s proposed schedule is consistent with the principles and provisions of this section sec_1_468a-3 of the regulations provides that the amount of decommissioning costs allocable to a nuclear decommissioning fund is the taxpayer’s share of the total estimated cost of decommissioning the nuclear power plant multiplied by the qualifying percentage sec_1_468a-3 of the regulations provides that in general the total estimated cost of decommissioning a nuclear power plant is the reasonably estimated cost of decommissioning used by the applicable public_utility commission in establishing or approving the amount of these costs to be included in cost of service for ratemaking purposes sec_1_468a-3 of the regulations provides that a taxpayer’s share of the plr-115677-02 total estimated cost of decommissioning a nuclear power plant equals the total estimated cost of decommissioning such plant multiplied by the taxpayer’s qualifying interest in the plant sec_1_468a-3 of the regulations provides that if two or more public_utility commissions establish or approve rates for electric energy generated by a single nuclear power plant then the schedule of ruling amounts shall be separately determined pursuant to the rules of sec_1_468a-3 through e for each public_utility commission that has determined the amount of decommissioning costs to be included in the cost of service for ratemaking purposes for this plant under sec_1_468a-3 this separate determination shall be based on the reasonable assumptions and determinations used by the relevant public_utility commission and shall take into account only that portion of the total estimated cost of decommissioning that is properly allocable to the ratepayer whose rates are established or approved by the public_utility commission according to sec_1_468a-3 the ruling amounts for any_tax year is the sum of the ruling amounts for such tax_year determined under the separate schedules of ruling amounts sec_1_468a-3 of the regulations provides that the internal_revenue_service shall not provide a taxpayer with a schedule of ruling amounts for any nuclear decommissioning fund unless the public_utility commission that establishes or approves the rates for electric energy generated by the plant has determined the amount of decommissioning costs to be included in the taxpayer’s cost of service for ratemaking purposes and has disclosed the after-tax rate of return and any other assumptions and determinations used in establishing or approving the amount sec_1_468a-3 of the regulations provides that any taxpayer that has obtained a schedule of ruling amounts must file a request for a revised schedule of ruling amounts on or before the deemed payment deadline for the 10th taxable_year that begins after the taxable_year in which the most recent schedule of ruling amounts was received the first taxable_year to which the revised schedule of ruling applies shall be the 10th taxable_year that begins after the taxable_year in which the most recent schedule of ruling amounts was received sec_1_468a-3 of the regulations provides that a taxpayer is required to request a revised schedule of ruling amounts for a nuclear decommissioning fund if any public_utility commission that establishes or approves rates for the furnishing or sale of electric energy generated by a nuclear power plant to which the nuclear decommissioning fund relates a increases the proposed period over which decommissioning costs of such nuclear power plant will be included in cost of service plr-115677-02 for ratemaking purposes b adjusts the estimated date on which such nuclear power plant will no longer be included in the taxpayer’s rate base for ratemaking purposes or c reduces the amount of decommissioning costs to be included in cost of service for any taxable_year the taxpayer’s most recent request for a schedule of ruling amounts did not provide notice to the service of such action by the public_utility commission and in the case of a taxpayer that determines its schedule or ruling amounts under a formula or method obtained under sec_1_468a-3 the item increased adjusted or reduced is a fixed rather than a variable element of that formula or method sec_1_468a-3 of the regulations provides that any taxpayer that has previously obtained a schedule of ruling amounts can request a revised schedule of ruling amounts such a request must be made in accordance with the rules of sec_1_468a-3 the internal_revenue_service shall not provide a revised schedule of ruling amounts applicable to a tax_year in response to a request for a schedule of ruling amounts that is filed after the deemed deadline date for such tax_year section of the act eliminated for the tax years beginning after date the investment restrictions contained in sec_468a of the code that restriction also revised sec_468a by lowering the tax applicable to a nuclear decommissioning fund we have examined the representations and data submitted by the taxpayer in relation to the requirements set forth in the code and the regulations based solely on these representations of the facts we reach the following conclusions taxpayer has a qualifying interest in the plant and is therefore an eligible_taxpayer under sec_1_468a-1 of the regulations commissions a and b have determined the amount of decommissioning costs to be included in the taxpayer’s cost of service for ratemaking purposes as required by sec_1_468a-3 of the regulations the taxpayer as one the owners of the plant has calculated its share of the decommissioning costs under sec_1_468a-3 of the regulations the taxpayer subject_to the jurisdiction of two public_utility commissions for ratemaking purposes has calculated the total decommissioning costs allocable to commission a and to commission b as required by section plr-115677-02 468a-3 f of the regulations the taxpayer has proposed a schedule of ruling amounts which meets the requirements of sec_1_468a-3 and of the regulations the annual payments specified in the proposed schedule of ruling amounts are based on the reasonable assumptions and determinations used by commissions a and b and will result in a projected fund balance at the end of the funding_period equal to or less than the amount of decommissioning costs allocable to the fund pursuant to sec_1_468a-3 of the regulations taxpayer has determined that percent is the qualifying percentage the maximum amount of cash payments made or deemed made to the fund during any_tax year is restricted to the lesser amount of the decommissioning costs applicable to such fund or the ruling applicable to this fund as set forth under sec_1 468a- b of the regulations based on the above determinations we conclude that the taxpayer’s proposed schedule of ruling amounts satisfies the requirements of sec_468a of the code approved schedule of ruling amounts tax years through commissions a and b year a b total in utilizing the decon method to estimate the cost for decommissioning the plant commission a assumed that the nuclear regulation commission will extend the scheduled expiration date for plant’s amended operating license by an additional years thus although taxpayer represents that the plant’s current amended operating license will expire in the submitted schedule of ruling amounts is premised in part on an expiration date of accordingly we are limiting the approved schedule of ruling amounts for commission a to a five-year period taxpayer must settle this issue with commission a prior to submitting a subsequent request for a revised schedule of ruling amounts plr-115677-02 moreover the approved schedule of ruling amounts for commission b is being limited to a five-year period as a result of the statutory changes made by the act the elimination of the investment restrictions and the reduction of the tax_rate applicable to income earned by the fund may result in a greater after-tax of return than was estimated prior to the enactment of the act by commission b which based its determinations as to the approved after-tax rate of return on restricted investments and a higher tax_rate this increased after-tax rate of return would over the life of the fund result in a balance in the fund on the last day of the funding_period that would exceed the amount of decommissioning costs allocable to the fund in order to prevent the excess accumulation in the fund this schedule of ruling amounts is limited to a five year period for commission b approval of a revised schedule of ruling amounts may be approved after a determination by the applicable public_utility commissions of an after- tax_rate of return that accounts for the reduced_tax_rate and unrestricted investments approval of the schedule of ruling amounts is contingent on there being no change in the facts and circumstances known or assumed at the time the current ruling is issued if any of the events described in sec_1_468a-3 of the regulations occur in future years the taxpayer must request a review and revision of the schedule of ruling amounts generally the taxpayer is required to file such a request on or before the deemed payment deadline date for the first tax_year in which the rates reflecting such action became effective when no such event occurs the taxpayer must file a request for a revised schedule of ruling amounts on or before the deemed payment deadline of the 10th tax_year following the close of the tax_year in which the most recent schedule of ruling amounts was received the approved schedule of ruling amounts is relevant only to those payments made to the fund payments allocable to any funds other than the fund cannot qualify for purposes of the deduction under the provisions of sec_468a of the code as stated earlier payments made to such fund can qualify only to the extent that they do not exceed the lesser_of the decommissioning costs applicable to such fund or the ruling amounts applicable to this fund in the tax_year this ruling is directed only to the taxpayer who requested it sec_6110 of the code provides it may not be used or cited as precedent pursuant to the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative a copy of this letter is also being sent to the industry director natural_resources lm nrc pursuant to sec_1_468a-7 of the regulations a copy of this letter must be attached with the required election plr-115677-02 statement to the taxpayer’s federal_income_tax return for each tax_year in which the taxpayer claims a deduction for payments made to the fund sincerely yours peter friedman senior technician reviewer branch office of associate chief_counsel passthroughs and special industries cc


internal_revenue_service number release date index number ----------------------------------------------- ----------------------------------------- ------------------ ------------------------- department of the treasury washington dc third party communication date of communication month dd yyyy person to contact ----------------------- id no ------------- telephone number --------------------- refer reply to cc psi b06 plr-143340-08 date date legend corp a corp b corp c corp d corp e corp f mine city tribe a b c d e f g h i j k l m n dear -------------- ---------------------------------------- ------------------------------- --------------------------- ------------------------- -------------------------------- ------------- -------------------- ---------------------- --------------- ------- ------- ------------- ------------------- ------------------------- ------------------------- ---- --------------------------- ------------------ --------------------------- -------------------------- ------ ------ ------- this is in response to your letter dated date supplemented by additional letters with regard to a ruling requested relating to the production and sale of coal from plr-143340-08 an indian production coal facility under sec_45 of the internal_revenue_code the code facts corp a a wholly owned subsidiary of corp b and a member of the corp b consolidated_group is engaged in the business of producing and selling coal from mine a single pit surface mine complex located near city on property leased from tribe corp c will produce and sell coal reserves from mine corp d is a special purpose subsidiary of corp a organized to own an interest in corp c corp e an investor is a special purpose company that is a disregarded_entity for federal_income_tax purposes corp e was organized in order to own an interest in corp c corp e is owned by corp f corp f is a s_corporation engaged through subsidiaries almost all of which are disregarded entities in various lines of businesses the tribe is an indian_tribe within the meaning of sec_7871 of the code since a the united_states has held in trust for the tribe the coal reserves underlying the mine located near city in b corp a entered into mining leases with the tribe with respect to reserves at the mine corp a has owned the working_interest in the mine and has produced and sold coal from those reserves continuously since c on d the reserves at the mine were held in trust by the united_states for the tribe corp a currently leases certain of the mine reserves pursuant to a lease dated e as amended between the tribe and corp a under this lease corp a operates the mine to remove exclusively tribal coal from the mine reserves and the tribe retains a royalty based upon specified percentages of revenues from the sale of coal produced from the tribal mine reserves corp a and the tribe executed a second lease dated f which was approved by the u s bureau of indian affairs the bia in a letter dated h the bia approved the second lease conditioned upon compliance with the national environmental policy act this second lease provides corp a with access to coal reserves underlying property that is to the south of and adjacent to the lands on which coal is currently being mined pursuant to the first lease the reserves at the mine subject_to the second lease are part of the same mineral deposit from which corp a extracts coal under the first lease under the second lease as under the first lease corp a will operate the mine to extract exclusively tribal coal from the reserves and the tribe will retain a royalty based upon specified percentages of revenues from coal sales plr-143340-08 corp c was formed on i by corp a at the time of its formation corp c was a disregarded_entity for federal_income_tax purposes on or about j corp a transferred a g interest in corp c to corp d as a result of this contribution corp c had two members corp a and corp d and therefore became a partnership for federal_income_tax purposes corp a will sublease to corp c in a single sublease its leasehold interests in the mine reserves under both the first and second leases under the sublease corp c will assume corp a’s obligation to pay the royalty to the tribe based upon specified percentages of coal sales the sublease has been approved by the bia under the sublease corp c will be entitled to extract and sell a certain amount of coal from the mine reserves pursuant to the sublease corp c will agree to pay corp a a certain dollar amount per year with the final payment made on k corp a sold its l interest in corp c to corp e corp e will generally be entitled to l of distributions from operations paid_by corp c to its members until corp e has achieved an m internal_rate_of_return on the equity payment payout corp e will generally be entitled to n of distributions from operations after payout it is not anticipated that payout will occur during the term of the sublease issue whether corp c will be the sole producer as that term is used in sec_45 of the code of indian_coal from an indian_coal_production_facility as that term is used in sec_45 of the code with respect to all of the production under the sublease from the tribe reserves law and analysis sec_45 of the code provides that in the case of a facility that produces indian_coal the term indian_coal_production_facility means a facility which is placed_in_service before date sec_45of the code provides that the term indian_coal means coal which is produced from coal reserves which on date i were owned by an indian_tribe or ii were held in trust by the united_states for the benefit of an indian_tribe or its members sec_45 of the code provides that for purposes of this paragraph the term indian_tribe has the meaning given such term by sec_7871 sec_45 of the code provides in part in the case of a producer of indian_coal at an indian_coal_production_facility such coal must be sold to an unrelated_person plr-143340-08 certain facilities described in sec_45 of the code must also be owned by the producer of the electricity see for example sec_45 in the case of a wind facility other provisions provide that the producer of electricity at the facility need not be the owner of the facility see for example sec_45 and d b in the case of closed loop and open loop biomass facilities in the instant case sec_45 does not require the producer of indian_coal at the facility to own such facility as well accordingly we conclude that since corp c is the sublessee and is entitled to extract and sell a certain amount of coal from the mine reserves corp c will be the sole producer as that term is used in sec_45 of the code from an indian_coal_production_facility as that term is used in sec_45 of the code with respect to all of the production under the sublease from the tribe reserves except as specifically set forth above no opinion is expressed or implied concerning the federal_income_tax consequences of the above described facts under any other provision of the code or regulations sincerely peter c friedman senior technician reviewer branch passthroughs special industries