t c no united_states tax_court republic plaza properties partnership pfi republic limited inc tax_matters_partner petitioner v commissioner of internal revenue respondent docket no filed date company a a sold company b b a 35-percent interest and retained a 65-percent interest in a commercial office building building that was subject_to an existing loan loan made by company c lender a and b contributed their respective interests in the building to partnership p p that was formed by a and b pursuant to a partnership_agreement partnership_agreement and p assumed the loan pursuant to a lease p leased a the building which was approximately percent vacant for a term of years and months except for a small amount of space a was not to occupy the building but instead was to sublease it the lease required a to pay p rent in the amounts and on the dates specified in a schedule contained in the lease rent payment schedule that took into account inter alia the requirements of lender with respect to servicing the loan the lease and the rent payment schedule allocated the rental payments for the entire lease_term providing that the amount of rent to be paid_by a for the first months of the lease_term was zero 5-month period of zero rent and spec- ifying the amounts and due dates of the rent to be paid_by a over the years of the lease_term following that 5-month period the agreement under which a sold b a 35-percent interest in the building required inter alia that p deliver to lender a letter_of_credit naming lender as beneficiary lender letter_of_credit in order to secure p's obligations under the loan and that a deliver to p a letter_of_credit naming p as beneficiary p letter_of_credit in order to secure p's obligations under the lender letter_of_credit in order to service the loan during the 5-month period of zero rent a and b agreed in the partnership agree- ment to make additional capital contributions to p on the first day of each month during the last months of that period respondent concedes that if the court were to find that the 5-month period of zero rent qualifies as a reasonable rent holiday described in sec_467 i r c p would be entitled for to accrue rent under the lease pursuant to the terms of the lease respondent's concession held the 5-month period of zero rent quali- fies as a reasonable rent holiday described in sec_467 accordingly pursuant to respondent's concession p shall accrue rent for in accordance with the lease as provided in sec_467 held further the lease did not allocate rent to the 5-month period of zero rent in an amount equal to the p letter_of_credit and p is not required for to accrue as rent the amount of that letter_of_credit clark reed nichols and cheryl a chevis for petitioner gerald w douglas for respondent all section references are to the internal_revenue_code code in effect for all rule references are to the tax_court rules_of_practice and procedure chiechi judge in the notice of final partnership adminis- trative adjustment fpaa respondent determined adjustments to the form_1065 federal partnership return that republic plaza properties partnership partnership filed for the issues remaining for decision are is the 5-month period of zero rent at the beginning of the lease lease agreement of an office building by partner- ship to bce development properties inc bce a reasonable rent holiday described in sec_467 we hold that it is did the lease agreement provide that the amount of a letter_of_credit viz dollar_figure which at the request of bce was issued in favor of partnership is rent that is allocated to the first months of that agreement so that partnership is required for to accrue as rent the amount of that letter_of_credit we hold that the lease agreement does not so provide and that partnership is not required to accrue that amount as rent for findings_of_fact some of the facts have been stipulated and are so found pfi republic limited inc pfi is the tax_matters_partner for partnership at the time the petition was filed partner- ship's principal_place_of_business was in portland oregon in commercial union capital corporation commercial union an investment banker employed by bce approached pfi concerning pfi's interest in investing in a sale-leaseback trans- action involving a 56-story office building located in the central business district of denver colorado that was known and is herein referred to as republic plaza during all relevant periods pfi and bce were unrelated companies that prior to had no business dealings with each other the investment that commercial union initially proposed to pfi involved a lease of republic plaza to bce for a period of to years which was to include a rent holiday2 of approximately year that was to occur at the beginning of the lease_term during the course of its investigation of the investment proposed by commercial union pfi employed marshall and stevens incorporated marshall and stevens to prepare an appraisal report marshall and stevens appraisal report merle e atkins mr atkins and john h whitcomb mr whitcomb who are quali- fied as experts in the area of real_estate appraisal prepared that report pfi relied on the marshall and stevens appraisal report in evaluating its proposed investment in republic plaza including inter alia the reasonableness of the rent holiday included as part of that investment on date partnership was formed pursuant to a partnership_agreement entered into between bce and pfi partner- as used herein the term rent holiday means a period of zero or reduced rent occurring at the beginning of a lease ship agreement during all relevant periods partnership a general_partnership governed by the laws of colorado maintained its books_and_records and filed its forms on a calendar_year basis using the accrual_method of accounting in connection with the formation of partnership a series of interrelated events occurred contemporaneous with the formation of partnership on date pursuant to a written purchase agreement purchase agreement pfi purchased an undivided percent interest in republic plaza from bce whereupon bce owned a 65-percent undivided_interest therein immediately thereafter also on date pfi and bce contributed their respective interests in republic plaza to partnership partnership took ownership of republic plaza subject_to a promissory note dated date that obli- gated bce to pay dollar_figure million to teachers insurance and annuity association tiaa pursuant to an agreement between tiaa and partnership that was entered into as of date that note was restructured effective date as restructured partnership became the obligor under the promissory note issued to tiaa tiaa term_loan the outstanding principal balance of that note was reduced to dollar_figure the maturity_date of that note was changed to date and that note required monthly payments of varying amounts of principal and interest over the term of the loan until it matured on date pursuant to the lease agreement dated date part- nership leased republic plaza to bce for a fixed term that commenced on date and ends at midnight on date lease_term unless extended at the option of bce the lessee at the time partnership and bce entered into the lease agreement tenants occupied approximately percent of republic plaza pursuant to existing leases and approximately percent of that office building was vacant pursuant to the lease agreement bce became the sublessor with respect to those existing tenants and was given the right to receive rent from them in order to satisfy the requirements of tiaa the mortgagor of republic plaza the lease agreement required monthly payments of rent that were to start on date and terminate on date be at least equal to the amounts required to pay the monthly debt service on the tiaa term_loan and be used first to satisfy partnership's obligations under that loan starting on date after the tiaa term_loan was to have been paid in full the lease agreement required an annual payment of rent for each of the last years of the lease_term in order to service the tiaa term_loan during the initial lease period of approximately months that began on date and ended on date during which the rent to be paid according to the lease agreement was zero 5-month period of zero rent bce and pfi agreed in the partnership_agreement to make total additional capital contributions to partnership on the first day of each month during the period date through date in the amount of approximately dollar_figure the amounts and due dates of rent payable under the lease agreement that were not required by tiaa in order to service the tiaa term_loan were developed through the use of a computer_program that took into consideration certain requirements of the lessor and the lessee those requirements included creating a schedule for the payment of rent that took account of projected increases in rent in the denver market for office space denver office market and that not only provided a certain yield for the lessor and its partner sec_3 but also minimized the cost to the lessee and structuring the total amount of rent to be paid during each of the 24-annual lease periods that start on june and end on may annual lease period following the 5-month period of zero rent including the amount of rent to be paid monthly to service the tiaa term_loan so that such total amount during each such period was always within percent to percent of the average annual amount of the aggregate rent that pfi entered into the sale-leaseback transaction involving re- public plaza in order to make a profit at the time pfi was de- termining the profit that it expected to realize from that trans- action it anticipated that it would pay federal and state income taxes at the highest marginal_rate throughout the lease_term realize dollar_figure million of pretax profit and pay in the aggregate approximately dollar_figure million in income taxes over the lease_term was to be paid over those years of the lease_term taking into account the foregoing considerations involving the requirements of the tiaa term_loan partnership pfi and bce the lease agreement contained the following provisions with respect to the amounts and due dates of the rent to be paid under that agreement it required bce to pay partnership net basic rent basic rent in arrears on each installment date throughout the lease_term in an amount equal to the sum of the basic rent portions for all partners schedule e of the lease agreement set forth a schedule rent payment schedule that allocated the basic rent to be paid_by bce for the entire lease_term providing the amounts of basic rent to be paid and the due dates for the payment of such rent pursuant to the lease agreement and the rent payment schedule for the initial lease period of approximately months that began on date and ended on date the amount of basic rent to be paid_by bce was zero and for each of the 24-annual lease periods thereafter the lease agreement provided that for any installment date the 'basic rent portion' for any partner shall mean the product of i said partner's percentage interest in the lessor as speci- fied on schedule e times ii the percent figure for such part- ner set forth opposite said installment date times iii les- sor's cost as specified on schedule e the lease agreement defined the term installment date for purposes of the payment of the basic rent to mean date and the first day of each month thereafter throughout the lease_term for all other purposes the lease agreement defined that term to mean date and the first day of each month thereafter during the lease_term that start on june and end on may the total amount of basic rent to be paid_by bce was as follows total amount of annual lease period basic rental payments date through date date through date date through date date through date date through date date through date date through date date through date date through date date through date date through date date through date date through date date through date date through date date through date date through date date through date date through date date through date date through date date through date date through date date through date 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 dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure for each of the 22-annual lease periods immediately follow- ing the 5-month period of zero rent the rent payment schedule one of petitioner's exhibits that purported to show that the rent payment schedule complied with the standards established by revproc_75_21 1975_1_cb_715 indicated that the total amount of basic rent to be paid for each of the 24-annual lease periods following the 5-month period of zero rent was slightly greater than the total amount of basic rent to be paid for each such period that we have calculated in accordance with schedule e although it is unclear from the record why these minimal discrepancies exist they do not affect our findings or conclu- sions herein required monthly payments on the first day of each month of the amount of basic rent specified in that schedule for each of those periods the rent payment schedule required a monthly payment on february of the basic rent specified in that sched- ule that was significantly larger than the monthly payments required on the first day of the other months of each such period for each of the last two annual lease periods of the lease_term the rent payment schedule required an annual payment for most of the 22-annual lease periods immediately following the 5-month period of zero rent the rent payment schedule required equal monthly payments of the basic rent specified in that schedule for all months throughout each such period except february to illustrate for the annual lease period that began on date and ended on date the lessee was required to remit the basic rent for that period payable in arrears by paying dollar_figure on date and on the first day of each month thereafter except february and dollar_figure on date however for each of certain of those 22-annual lease periods viz those annual lease periods during which the monthly payments due under the tiaa term_loan were to change pursuant to the terms of that loan the rent payment schedule required for each such lease period equal monthly payments of the basic rent specified therein on july and on the first day of each month thereafter through january a monthly payment of basic rent in a significantly larger amount on february and equal monthly payments of the basic rent specified therein on march and on the first day of each month thereafter through june the monthly payments due under the tiaa term_loan were to change as of date date and date and consequently the monthly payments of the basic rent specified in the rent payment schedule were to change as of those dates to illustrate for the annual lease period that began on date and ended on date the lessee was required to remit the basic rent for that period payable in arrears by paying dollar_figure on date and on the first day of each month thereafter through date dollar_figure on date and dollar_figure on date and on the first day of each month thereafter through date on february of the basic rent specified in that schedule for each such period pursuant to the rent payment schedule in the lease agree- ment the total amount of basic rental payments specified in that schedule remained constant at dollar_figure for each of the 11-annual lease periods immediately following the 5-month period of zero rent increased to dollar_figure for each of the succeeding 12-annual lease periods and returned to dollar_figure for the final annual lease period the total rent to be paid during each of the 24-annual lease periods following the 5-month period of zero rent was not greater than percent above or percent below the average annual amount of the aggregate basic rent that was to be paid over those years of the lease_term on date bce as lessee under the lease agreement began immediate economic use of republic plaza except for a relatively small amount of space used by bce for its operations as sublessor of republic plaza at no time during any relevant period did bce occupy the space it leased in that building under the lease agreement bce as lessee was required to pay the basic rent in the amounts and on the dates specified in the lease agreement and the rent payment schedule bce and not partner- ship assumed the risk of subleasing the approximately percent of republic plaza that was vacant at the time partnership and bce entered in that agreement as well as any space that became vacant when existing leases expired or tenants defaulted under their leases the marshall and stevens appraisal report on which pfi relied in evaluating inter alia the reasonableness of the month period of zero rent provided by the lease agreement con- tained discussions of various matters including the condition of the denver office market at the time the lease agreement was executed the practice in that market of granting rent holidays and other lease concessions in order to attract lessees and specific situations in that market in which the lessors of commercial office buildings had granted periods of free rent and other lease concessions to lessees at the time partnership and bce entered into the lease agreement partnership and its part- ners pfi and bce were aware of inter alia those matters at the time the lease agreement was executed in date the denver office market was suffering the aftereffects of overbuilding that occurred during the late 1970's and early 1980's consequently at that time the denver office market was experiencing high vacancy rates of approximately percent and in order to attract lessees lessors were offering prospective lessees various types of concessions and low rental rates prior to the execution of the lease agreement in date the lessor under the existing leases for space in republic plaza had typi- cally granted periods of free rent as concessions to lessees at the time the lease agreement was executed the inclusion of such rent holidays in commercial leases like the lease agreement involved here was one type of concession offered by lessors that was a reasonable and acceptable practice in the denver office market and throughout the commercial real_estate industry irrespective of whether the lessees under such leases intended to occupy the leased space or to sublease it to others although marshall and stevens expected the practice of including rent holidays in commercial leases to continue for a few years after date it anticipated that the denver office market would tighten during those years with the result that rental rates would increase vacancy rates would decrease and fewer lease concessions would be granted to lessees by lessors at the time partnership and bce entered into the lease agreement it was a reasonable and acceptable practice throughout the commercial real_estate industry including the denver office market to offer rent holidays in long-term commercial leases such as the lease agreement involved here in order to induce the lessee sublessor to agree to assume the risk of subleasing the unleased vacant space to others specifically in date when the lease agreement was executed it was consistent with the typical periods of free rent being offered in the denver office market at the time the lease agreement was executed were months on 5-year leases and months on 10-year leases reasonable and acceptable practice throughout the commercial real_estate industry including the denver office market for the lease agreement to grant an 5-month period of zero rent since under that agreement bce was to sublease rather than occupy virtually all of republic plaza for about years and it thereby assumed the risk of subleasing the approximately percent of unleased unoccupied space in that building in order to secure payment on the tiaa term_loan the purchase agreement contained certain provisions required by tiaa specifically as of the time of its closing on date the purchase agreement obligated partnership the obligor under the tiaa term_loan and the lessor under the lease agreement to deliver to tiaa an irrevocable standby_letter_of_credit initially in the amount of dollar_figure tiaa letter_of_credit that was to be issued by the canadian imperial bank of commerce cibc and that was to name tiaa as beneficiary in order to secure partner- ship's obligations under that loan bce the seller of an undivided 35-percent interest in republic plaza and the lessee under the lease agreement to deliver to partnership an irrevoca- bce's risk under the lease agreement included its incurring expenses in order to attract tenants such as providing improve- ments to the unleased vacant space in republic plaza and grant- ing rent holidays at the inception of subleases the 5-month period of zero rent granted to bce by the lease agreement en- hanced the ability of bce as sublessor to grant rent holidays that were consistent with commercial practice in the denver office market to prospective lessees of space in republic plaza ble standby_letter_of_credit initially in the amount of dollar_figure partnership letter_of_credit that was to be issued by cibc and that was to name partnership as beneficiary in order to secure partnership's obligations under the tiaa letter_of_credit and partnership the obligor under the tiaa term_loan and the lessor under the lease agreement to assign collaterally the partnership letter_of_credit to cibc during the 5-month period of zero rent the tiaa letter_of_credit and the partner- ship letter_of_credit were intended to secure the obligation of bce and or of pfi the partners of partnership to make addi- tional capital contributions to partnership during that period as required by the partnership_agreement in order to service the tiaa term_loan as required by the purchase agreement as of the time of its closing partnership delivered to tiaa the tiaa letter_of_credit that was issued by cibc effective date in an amount not exceeding dollar_figure and that named tiaa as benefi- ciary bce delivered to partnership the partnership letter_of_credit that was issued by cibc effective date in the amount of dollar_figure and that named partnership as benefi- the tiaa letter_of_credit that partnership delivered to tiaa expired on date and was deemed automatically extended without amendment for year from that or any future expiration date until no later than date unless cibc notified tiaa and partnership at least days prior to any such expiration date that it decided not to extend the tiaa letter_of_credit ciary and partnership collaterally assigned the partner- ship letter_of_credit to cibc the lease agreement recited that bce as lessee of republic plaza has delivered the partnership letter_of_credit with an expiry date of date in order to secure bce's obliga- tions under that agreement including its obligation to remit the basic rent in the amounts and on the dates specified in the rent payment scheduledollar_figure the lease agreement further recited that partnership could assign the partnership letter_of_credit to cibc as collateral and that as of date partnership had collaterally assigned its rights in that letter_of_credit to cibc partnership directed bce in the lease agreement to deliver the partnership letter_of_credit and any extension or replacement thereof directly to cibc to be held as collateral on behalf of partnership the partnership letter_of_credit that bce delivered to part- nership expired on date and was deemed automatically extended without amendment for year from that or any future expiration date until no later than date unless cibc notified partnership and bce at least days prior to any such expiration date that it decided not to extend the partnership letter_of_credit pursuant to the lease agreement at least days prior to date date and date respectively bce was required to deliver to partnership an extension or replacement of the partnership letter_of_credit or of any such extension or replacement in an amount prescribed in the lease agreement each such extension or replacement was to have an expiry date that occurred no earlier than days and no later than days after date date date and date respectively in the federal partnership return that partnership filed for it did not accrue any rent under the lease agreement opinion petitioner bears the burden of proving that respondent's determinations in the fpaa are erroneous rule a 290_us_111 on brief the parties agree that the lease agreement is a sec_467 rental agreement as defined in sec_467 and that therefore partnership is subject_to sec_467 sec_467 provides in pertinent part b accrual of rental payments -- allocation follows agreement --except as provided in paragraph the determination of the amount of rent under any sec_467 rental agreement which accrues during any taxable_year shall be made-- a by allocating rents in accordance with the agreement and b by taking into account any rent to be paid after the close of the period in an amount determined under regulations which shall be based on present_value concepts constant rental accrual in case of certain tax_avoidance transactions etc --in the case of any sec_467 rental agreement to which this paragraph applies the portion of the rent which accrues during any taxable_year shall be that portion of the constant_rental_amount with respect to such agreement which is allocable to such taxable_year agreements to which paragraph applies -- paragraph applies to any rental payment agreement if-- a such agreement is a disqualified_leaseback_or_long-term_agreement or b such agreement does not provide for the allocation referred to in paragraph a disqualified_leaseback_or_long-term_agreement --for purposes of this subsection the term disqualified_leaseback_or_long-term_agreement means any sec_467 rental agreement if-- a such agreement is part of a leaseback_transaction or such agreement is for a term in excess of percent of the statutory_recovery_period for the property and b a principal purpose for providing in- creasing rents under the agreement is the avoid- ance of tax imposed by this subtitle exceptions to disqualification in certain cases --the secretary shall prescribe regulations setting forth circumstances under which agreements will not be treated as disqualified leaseback or long-term agreements including circumstances relating to-- a changes in amounts paid determined by reference to price indices b rents based on a fixed percentage of lessee receipts or similar amounts c reasonable rent holidays or d changes in amounts paid to unrelated 3rd parties the parties disagree over whether the lease agreement is a disqualified_leaseback_or_long-term_agreement described in sec_467dollar_figure in advancing their respective position sec_12 respondent's primary position in the fpaa was that for partnership was required to accrue rent under the lease agreement in an amount equal to viz the number of months remaining in after the execution of the lease agreement on date continued regarding that dispute the parties focus on the 5-month period of zero rent provided in the lease agreement petitioner argues that the 5-month period of zero rent is a reasonable rent holiday described in sec_467 and that accordingly the lease agreement is not to be treated as a disqualified_leaseback_or_long-term_agreement respondent concedes in her opening brief that if petitioner can establish that the absence of rental income during this 5-month period of zero rent qualifies as a reasonable rent holiday under the code then the partnership's deferral of this income will not be deemed primarily for tax_avoidance purposes in such a case the partnership would be entitled to report the rental income under the economic accrual_method pursuant to the terms of the lease agreementdollar_figure continued times the average monthly rent payment due over the entire lease_term on brief respondent abandons that position and relies solely on her alternative position in the fpaa that partnership must accrue rent under the lease agreement according to the constant rental accrual_method prescribed in sec_467 because the lease agreement constitutes a disqualified_leaseback_or_long-term_agreement as defined in sec_467 we construe the above-quoted concession of respondent to be a concession by her that increasing rents if any under the lease agreement that are not attributable to the 5-month period of zero rent were not provided for a principal purpose of avoiding tax under sec_467 other statements by respondent that concede this point include the following statement in her answer- ing brief in addition at pages of its opening brief peti- tioner attempts to prove the nonexistence of a tax-avoid- ance motive by emphasizing why the lease was justified in increasing lease payments in year of the lease and petitioner's expected increases in projected cash flows from future subleases when the building was expected to be continued however respondent contends that the 5-month period of zero rent does not qualify as a reasonable rent holiday described in sec_467dollar_figure continued fully occupied the problem with petitioner's arguments is that they attempt to prove a non-tax avoidance motive for periods and events that occur after the first months of the lease petitioner must justify the fact that the nonpayment of rent during the first months of the lease did not have tax_avoidance as its primary motive what happens in year and petitioner's expectations for increases in cash flows from future subleases when the building is occupied have nothing to do with the forgive- ness of rent during the first months of the lease at least petitioner has not established this relationship the key point here is the reasons given by petitioner do not establish a business_purpose or tax-independent motive for the nonpayment of rent during the critical time period in dispute in essence petitioner's explanation of future events is just not focused on the period of time and the issue before the court respondent also makes various assertions in her answering brief about several major distortions or unexplained spikes on february of each of the 22-annual lease periods following the 5-month period of zero rent in the rental payments over the long term of the lease that she alleges are provided in the rental payment schedule and argues from those assertions that schedule e cannot be said to relate to the terms of the lease agreement because of the unexplained distortions described above this is because the lease jt ex 9-i pp basically provides that annual rent is equal to the lower_of fair market rental or of the average basic rent this latter description of rent under the lease agreement in no way covers explains or relates to the several up-and-down increases in rental payment over the term of the lease therefore since each of the rental payments was not allocated according to the actual terms of the lease agreement the rent leveling and present_value principles of sec_467 and sec_467 apply although it is not altogether clear what respondent intends to continued respondent further asserts apparently as an alternative continued suggest in the foregoing excerpt from her answering brief apparently respondent believes that it supports her position that under the facts and circumstances presented here not only does the 5-month period of zero rent not qualify as a reasonable rent holiday described in sec_467 it also was granted for a principal purpose of tax_avoidance although we deal below with those contentions we note that if respondent also is suggesting by the foregoing passage from her answering brief that the lease agreement does not provide for the allocation of rent referred to in sec_467 see sec_467 we find any such suggestion to be contrary to the parties' stipulation that the lease agreement sets forth as schedule e a schedule that allocates the rental payments for the entire lease period providing for the amount of the rental payments and specifying the due_date for each month see piccadilly cafeterias inc v united_states fed cl date we also note that the reasons quoted above that are relied on by respondent for respondent's conclusion that schedule e cannot be said to relate to the terms of the lease agreement cite provisions in the lease agreement that we do not find relevant to that inquiry the provisions in the lease agree- ment on which respondent relies that require the basic rent to be equal to the lower_of fair market rental and percent of the average monthly installment of basic rent paid_by the lessee during the lease_term are to apply only to each of the first six extensions of that lease_term if any and were not prescribed in schedule e schedule e set forth a schedule of basic rental payments only for the lease_term of the lease agreement that started on date and ends on date moreover pursuant to the lease agreement any exten- sions of the lease_term were to occur only at the option of the lessee that is to say only if the lessee elected at the times and on the terms prescribed in the lease agreement to extend the lease_term beyond date in this connec- tion sec_467 provides that except as provided in regulations prescribed by the secretary there shall not be taken into account in computing the term of any agreement for purposes of sec_467 any extension that is solely at the option of the lessee the secretary has promulgated no regulations under sec_467 that apply to the instant case see infra note argument that even if the court were to hold that the 5-month period of zero rent provided in the lease agreement is a reason- able rent holiday described in sec_467 and or was not granted for a principal purpose of tax_avoidance so that partnership shall accrue rent for under the lease agreement by allocating that rent in accordance with that agreement as provided in sec_467 and not pursuant to the con- stant rental accrual_method as provided in sec_467 partnership nonetheless would be required for to accrue rent under sec_467 in an amount at least equal to the amount of the partnership letter_of_credit viz dollar_figure that bce delivered to partnership reasonable rent holiday-- sec_467 the code does not define what is meant by the term reason- able rent holidays in sec_467dollar_figure however the although sec_467 required the secretary to issue regulations prescribing circumstances relating to inter alia reasonable rent holidays under which agreements will not be treated as disqualified leaseback or long-term agreements no regulations were issued under sec_467 until date on that date respondent issued proposed_regulations under sec_467 that do not apply to rental agreements entered into prior to the date on which regulations under that section are published as final regulations in the federal_register and disqualified leaseback and long-term agreements entered into prior to date sec_1_467-8 proposed income_tax regs fed reg date those proposed_regulations which are not in any event binding on the court 89_tc_357 do not apply to the lease agreement in- volved here that was entered into in date and nothing herein is intended to convey and nothing herein should be continued legislative_history of the deficit_reduction_act_of_1984 publaw_98_369 sec a 98_stat_494 which enacted sec_467 into the code provides guidance as to the meaning of that term the conference committee report committee report indicates in pertinent part in addition the conferees intend that the regula- tions will provide a safe_harbor for leases under which no rent is payable or is payable at a reduced_rate for a reasonable period of time after the inception of the lease whether the length of a rent holiday is reasonable will be determined by commercial practice in the locality where the use of the property will occur at the time the lease is entered into the conferees expect that in general this rent holiday will not exceed twelve months and in no event shall exceed twenty-four months h conf rept pincite c b vol pincite respondent contends that because the lease agreement does not label or refer to the 5-month period of zero rent as a rent holiday it can never qualify as a reasonable rent holiday described in sec_467 respondent's contention is baseless as made clear in the committee report the term rent holiday in sec_467 simply means a period after the beginning of a lease during which either no rent is payable or rent is payable at a reduced_rate id see also staff of the joint comm on taxation general explanation of the revenue provisions of the deficit_reduction_act_of_1984 pincite j comm continued construed as conveying the court's views with respect to any portion of those proposed_regulations print the 5-month period of zero rent provided in the lease agreement fits squarely within the definition of a rent holiday in the committee report and it is not necessary for the lease agreement to label it as such respondent also contends that the 5-month period of zero rent cannot qualify as a reasonable rent holiday described in sec_467 because at the time partnership and bce entered into the lease agreement in date the inclusion of rent holidays in commercial leases was a reasonable and accept- able practice in the denver office market only for commercial leases under which the lessees occupied the leased space and the lease agreement was not such a lease rather it was a master lease under which bce albeit the lessee was not to occupy republic plaza except for a small amount of space instead bce was to sublease space in that office building to other persons who were to occupy it to counter respondent's arguments and to support its posi- tion that the 5-month period of zero rent qualifies as a reasonable rent holiday described in sec_467 petitioner relies inter alia on the opinions of two expert witnesses mr atkins and mr whitcomb who are qualified as experts in real_estate appraisal and who prepared the marshall and stevens appraisal report we evaluate the opinions of experts in light of the quali- fications of each expert and all other evidence in the record 480_f2d_171 9th cir affg 54_tc_493 97_tc_496 86_tc_547 we have broad discretion to evaluate 'the overall cogency of each expert's analysis ' 838_f2d_330 9th cir quoting 783_f2d_906 9th cir affg in part and revg in part on another issue tcmemo_1986_318 we are not bound by the formulae and opinions proffered by an expert especially when they are contrary to our own judgment 813_f2d_837 7th cir affg 85_tc_56 538_f2d_927 2d cir affg tcmemo_1974_285 227_f2d_753 6th cir affg tcmemo_1954_139 instead we may reach a decision based on our own analysis of all the evidence in the record silverman v commissioner supra pincite the persuasiveness of an expert's opinion depends largely upon the disclosed facts on which it is based see 337_f2d_432 7th cir affg tcmemo_1963_244 while we may accept the opinion of an expert in its entirety 74_tc_441 we may be selective in the use of any portion of such an opinion parker v commissioner supra pincite furthermore we may reject the opinion of an expert witness in its entirety see 523_f2d_1308 8th cir affg 62_tc_684 parker v commissioner supra pincite we have evaluated the marshall and stevens appraisal report and the letters opinions and analyses of mr atkins and mr whitcomb both of whom we found credible we found that report and those letters opinions and analyses to be cogent and persuasive and we have relied on them in making our findings herein according to mr atkins at the time the lease agreement was signed in date lessors in the denver office market were typically offering months of free rent on 5-year leases and months of free rent on 10-year leases in the opinion of mr atkins the 5-month period of zero rent provided in the lease agreement was consistent with reasonable and acceptable practice in the denver office market at the time that lease agreement was executeddollar_figure according to mr atkins it was a reasonable and although mr atkins did not identify a situation in the denver office market of a rent holiday being offered in a lease under which the lessee did not occupy the leased space he did identify two situations in localities outside that market in which lessees who did not occupy the leased spaced received rent holidays and discussed but did not identify because of con- straints imposed on him regarding their confidentiality certain other situations of which he was aware in which lessees received rent holidays and did not occupy the leased space according to mr atkins those situations about which he testified were continued acceptable practice throughout the commercial real_estate indus- try including in the denver office market for partnership to provide an 5-month period of zero rent in the lease agreement in order to induce the lessee bce to sign the lease agreement which covered approximately years and under which bce and not partnership assumed the risk of subleasing the building at a time when about percent of it was vacantdollar_figure continued illustrative of commercial practice in the denver office market at the time partnership and bce entered into the lease agreement in mr atkins' opinion at the time the lease agreement was executed granting rent holidays like the 5-month period of zero rent provided in the lease agreement to lessees who did not occupy the leased space was a reasonable and acceptable practice in the denver office market according to mr atkins a period of free rent with respect to leased space is equivalent to having a vacancy for that period because no rent is being paid with respect to that space he indicated that the average vacancy rate for leased space over the term of a lease can be calculated by comparing the length of a period of free rent to the total term of the lease thus for example if a 5-year lease were to provide for months of free rent that would be equivalent to having an average vacancy rate of percent over the term of the lease providing the month period of zero rent in the lease agreement which covered approximately years was equivalent to an average vacancy rate of approximately percent over the lease_term in the opinion of mr atkins partnership experienced less risk viz an average vacancy rate of only percent over the lease_term by execut- ing the lease agreement with the 5-month period of zero rent than if it had assumed and retained the risk of leasing republic plaza including the approximately percent that was vacant at the time the lease agreement was executed to one or more lessees who intended to occupy the building bce as sublessor assumed the risk of leasing the approximately percent of republic plaza that was unoccupied when the lease agreement was executed that risk included its incurring expenses in order to attract tenants such as providing improvements to the unleased vacant continued the 5-month period of zero rent granted to bce by the lease agreement enhanced the ability of bce as sublessor to grant rent holidays that were consistent with commercial practice in the denver office market to prospective lessees in republic plaza in fact prior to the execution of the lease agreement the lessor of republic plaza had granted periods of free rent as concessions to lessees and according to the marshall and stevens appraisal report it was expected that that practice in republic plaza and in other office buildings in the denver office market would continue for a few years after the execution of the lease agreement mr whitcomb provided additional support for petitioner's position regarding the 5-month period of zero rent in a letter he prepared with respect to a sale-leaseback transaction involving persons unrelated to partnership he concluded that a 12-month rent holiday at the beginning of a 27-year lease under which the lessee was responsible for paying rent on the entire leased building was a reasonable and acceptable practice for inducing a lessee to enter into such a lease mr whitcomb testified that his conclusion in that letter would not have changed if the lessee had not been planning to occupy the leased premises but had intended to act only as a sublessor continued space in republic plaza and granting rent holidays at the incep- tion of subleases although respondent contends that the 5-month period of zero rent was inconsistent with commercial practice in the denver office market at the time the lease agreement was executed because it was included as part of a master lease she has not established that contention as fact indeed her contention is refuted by the record herein on that record we have found that providing the 5-month of zero rent in the lease agreement was consistent with reasonable and acceptable practice throughout the commercial real_estate industry including the denver office market at the time the lease agreement was executeddollar_figure to counter petitioner's contention that the 5-month period of zero rent qualifies as a reasonable rent holiday described in sec_467 because it was consistent with commercial practice in the denver office market at the time the lease agreement was signed respondent contends that the commit- tee report provides that only the determination of whether the duration of a rent holiday is reasonable is to be determined based on commercial practice in the locality where the property is to be used from that premise respondent asserts that even though the length of the 5-month period of zero rent is in in assisting pfi in evaluating its proposed investment in republic plaza marshall and stevens drew no distinctions between master leases of the type involved in this case and other types of leases with respect to the granting of rent holidays that was obviously because in their opinion there are no such distinctions that should be made fact reasonable based on commercial practice in the denver office market petitioner must nonetheless establish a nontax business_purpose for partnership's granting that rent holiday in order for it to qualify as a reasonable rent holiday described in sec_467 it is not clear to us what respondent means by this assertion if it is respondent's position that petitioner must estab- lish the commercial reasonableness in the denver office market of not only the duration of the rent holiday at issue but also the granting of and the amount of rent reduction during that rent holiday we agree if it is respondent's position that peti- tioner must establish a nontax business_purpose for the granting the duration and the amount of the rent holiday at issue other than to conform to commercial practice in the denver office market at the time the lease agreement was executed we disagree any such position would be contrary to the concept of and the reasons for enacting a safe_harbor provision like sec_467 and is not supported either by the language of the safe-harbor provision in question ie sec_467 or its legislative_history we have found on the record before us that at the time the lease agreement was executed partnership was aware of inter alia the condition of the denver office market and the practice in that market of offering rent holidays and other lease conces- sions to attract lessees we have also found that at the time partnership and bce entered into the lease agreement in date it was a reasonable and acceptable practice throughout the commercial real_estate industry including the denver office market which generally was suffering from high vacancy rates to grant an 5-month period of free rent in commercial leases such as the lease agreement involved here where the lease_term covered about years and the lessee assumed the risk of sub- leasing the approximately percent of unleased vacant space in the building based on our examination of the entire record before us we find that the 5-month period of zero rent provided by the lease agreement qualifies as a reasonable rent holiday described in sec_467 respondent concedes that if the court were to so find partnership would be entitled to report the rental income under the economic accrual_method pursuant to the terms of the lease agreement accordingly pursuant to that concession partnership shall accrue rent for under the lease agreement in accordance with that agreement as provided in sec_467 in light of our finding that the 5-month period of zero rent qualifies as a reasonable rent holiday described in sec_467 and respondent's concession we shall not consider petitioner's additional arguments that the basic rent to be paid_by bce under the lease agreement satisfies the guidelines of revproc_75_21 1975_1_cb_715 and that under the facts and circumstances presented here tax_avoidance was not a principal purpose for providing for increasing rents under the lease agreement partnership letter_of_credit although the parties stipulated that the lease agreement set forth as schedule e a schedule that allocates the rental payments for the entire lease_term specifying the amounts and due dates of such payments respondent nonetheless argues that if the court were to hold that the 5-month period of zero rent is a reason- able rent holiday described in sec_467 partnership would be required for to accrue rent under sec_467 in an amount at least equal to the amount of the partnership letter_of_credit viz dollar_figure that bce delivered to partnership because we have some difficulty in understanding respondent's argument we shall quote it in pertinent part respondent asserts that the lease allocates at least dollar_figure to the first months of the lease by providing for a letter_of_credit the letter_of_credit was delivered by the lessee bce to the petitioner dated date in the amount of dollar_figure stip jt ex 7-g and the lease agreement itself sic jt ex 9-i pursuant to the specific provisions of the lease agreement the lessee is specifically required to deliver a letter_of_credit to secure payment of the basic rent under the lease in the event the lessee de- faults on its lease payments furthermore the time period covered by this letter_of_credit is from date the date the lessee delivered the letter_of_credit to the petitioner until date not coincidentally the time period covered by the letter_of_credit equates to the 5-month rent holiday claimed by the petitioner clearly by its very terms the existence of the letter_of_credit indicates that rent is not forgiven in the first year of the lease in the event the lessee defaults under the lease the letter_of_credit se- cures the payment of rent during the first months of the lease in the amount of dollar_figure it is incongruous for petitioner to argue that zero rent is allocated to the first months of the lease when the letter_of_credit is clearly a provided-for substi- tute in the form of security for any rent that is not paid during this period in the amount of dollar_figure therefore under the terms of the lease agreement at least dollar_figure is allocated to the lease_term and must be accrued by petitioner in the first months of the lease if the court finds that the parties to the lease should have followed the allocations made under the lease under sec_467 in addition to being difficult to comprehend the foregoing argument of respondent regarding the partnership letter_of_credit is premised upon certain allegations of fact that are not estab- lished by the record herein in this regard it will be helpful to quote pertinent portions of the lease agreement that agree- ment recited letter_of_credit as security for the payment of basic rent lessee has delivered a letter_of_credit herein such letter_of_credit and each extension or replacement thereof pursuant to this sec_53 is called the letter_of_credit in the aggregate amount equal to dollar_figure with an expiry date of date issued by canadian imperial bank of commerce cibc and citicorp real_estate inc and with the lessor as beneficiary which letter_of_credit may be assigned for collateral purposes by the lessor to canadian imperial bank of commerce in addition to the foregoing at least forty days prior to the expiration of the first second and third lease years hereinafter defined except to the extent that any prior letter_of_credit shall have been drawn up lessee shall likewise deliver to the benefi- ciary partnership an extension of or replacement for the letter_of_credit in an aggregate amount equal to the following lessor has collaterally assigned its rights in the letter_of_credit under this sec_53 to cana- dian imperial bank of commerce and in accordance with such collateral_assignment lessor hereby directs lessee to deliver the initial letter_of_credit and any extension thereof or replacement therefor directly to canadian imperial bank of commerce to be held as collateral by such bank on lessor's behalf with a copy thereof to lessor respondent alleges that specific provisions of the lease agreement required bce to deliver to partnership the partnership letter_of_credit that was effective on date it is the purchase agreement and not the lease agreement that required bce to deliver that letter_of_credit to partnership although the lease agreement contemplated that such letter_of_credit had been delivereddollar_figure as required by tiaa the purchase agreement required that as of the closing of that agreement partnership deliver to as a further illustration of certain inaccurate factual allegations made by respondent in advancing her position with respect to the partnership letter_of_credit we note that contrary to respondent's assertion that the time period covered by the partnership letter_of_credit equates to the 5-month rent holiday claimed by the petitioner the initial partnership letter_of_credit was issued effective date and had an expiry date of date even if that letter_of_credit had had the expiry date of date that was recited in the lease agreement quoted above the period covered by it would not contrary to respondent's assertion equate to the month rent holiday claimed by the petitioner since that period of zero rent began on date and ended on date we also note that contrary to certain recitations in the lease agreement quoted above the partnership letter_of_credit that was in fact delivered to partnership and assigned to cibc as re- quired by the purchase agreement was issued only by cibc and not by cibc and citicorp real_estate inc tiaa the tiaa letter_of_credit for the benefit of tiaa in order to secure payment of partnership's obligations under the tiaa term_loan bce deliver to partnership the partnership letter_of_credit for the benefit of partnership in order to secure the partnership's obligations under the tiaa letter_of_credit and partnership collaterally assign the partnership letter_of_credit to cibc although the lease agreement recited that the partnership letter_of_credit that bce delivered to partnership as required by the purchase agreement was to serve as security for bce's obligations under the lease agreement including its obligation to pay rent the purchase agreement is the operative document that obligated bce to deliver the partnership letter_of_credit to partnership and that obligated partnership to assign collaterally the partnership letter_of_credit to cibcdollar_figure under the lease agreement bce was required to extend the partnership letter_of_credit periodically through a date not to exceed days after date thus the partnership letter_of_credit related to certain annual lease periods following the 5-month period of zero rent we believe that when the lease agreement recited that the partnership letter_of_credit was delivered as security for the payment of basic rent it was referring to the annual lease periods following the 5-month period of zero rent that ended no later than date during which the lease agreement obligated bce to pay monthly prescribed amounts of basic rent and not to the first months of the lease_term during which bce was not obligated by that agreement to pay any rent we also note that during the 5-month period of zero rent the tiaa letter_of_credit and the partnership letter_of_credit both of which were effective on date were intended to secure the obligation of bce and or of pfi the partners of partnership to make additional capital contributions to partnership during that period as continued on the entire record before us we find that the lease agreement did not allocate rent to the 5-month period of zero rent in an amount equal to the partnership letter_of_credit or in any other amount and that partnership is not required for to accrue as rent the amount of that letter_of_credit to reflect the foregoing and the concessions of the parties decision will be entered under rule continued required by the partnership_agreement in order to service the tiaa term_loan


internal_revenue_service number release date index numbers ------------------------ ------------------------ --------------------------------------- ------------------------------------- ---------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact --------------------------- id no --------------- ----------------- telephone number fax number ---------------------- refer reply to cc ita b7 plr-119898-18 date date legend parent sec_1 sec_2 sec_3 sec_4 sec_5 firm date date date date taxable_year ----------------------------------------------------------------- ------------------------------------------------------ --------------------------------------------------------------------------------- ------------------------------------------------------------- ------------------------------------------------------------- ---------------------------------------------------------- ---------------- -------------------- ------------------------ ------------------------ ------------------------ ------------------------------------------------------ dear ------------------- this letter responds to a letter dated date and subsequent correspondence submitted by your representatives on behalf of parent sec_1 sec_2 sec_3 sec_4 and sec_5 collectively referred to as taxpayer taxpayer is requesting an extension of time pursuant to sec_301_9100-1 and sec_301_9100-3 of the procedure and administration regulations to file originals and the signed duplicate copy of each such original of the forms application_for change in accounting_method for the taxable_year all references in this letter_ruling to sec_168 of the internal_revenue_code are to sec_168 as in effect on the day before the date of the enactment of the tax cuts and jobs_act pub_l_no 131_stat_2054 date plr-119898-18 facts parent represents the facts are as follows parent was the common parent of an affiliated_group_of_corporations which includes sec_1 sec_2 sec_3 sec_4 and sec_5 that files consolidated federal_income_tax returns on a calendar_year basis parent engaged firm to prepare its consolidated federal_income_tax return the form_1120 u s_corporation income_tax return for the taxable_year and to provide technical tax_advice including advice related to taxpayer’s methods_of_accounting after meeting with firm parent decided to change three methods_of_accounting i sec_1’s treatment of computer_software expenditures under section dollar_figure of revproc_2018_31 2018_22_irb_637 designated automatic accounting_method change number dcn ii sec_1’s method of depreciating certain property considered qualified_leasehold_improvement_property described in sec_168 under section dollar_figure of revproc_2018_31 dcn and iii taxpayer’s method_of_accounting for intangibles under section dollar_figure of revproc_2018_31 dcn in accordance with the procedures of revproc_2015_13 2015_5_irb_419 taxpayer should have completed a separate original form_3115 for each of the desired accounting_method changes and attached each of the originals to parent’s timely filed including extensions original consolidated federal_income_tax return form_1120 for the taxable_year further in accordance with the procedures of revproc_2015_13 parent also should have timely filed including extensions a copy of each original form_3115 with an original signature or a photocopy of the original signature with the appropriate office of the internal_revenue_service lastly parent’s form_1120 for the taxable_year should have reflected the three accounting_method changes made by taxpayer parent anticipated that it could not file its consolidated form_1120 for the taxable_year by the due_date without extension date thus as part of firm’s engagement by parent firm was tasked with preparing and submitting a form_7004 application_for automatic_extension of time to file certain business income_tax information and other returns for the taxable_year on or before date a proper and timely filed form_7004 would have provided parent an extension to date however due to an inadvertent error firm did not electronically file the form_7004 by date as a result when parent did file its consolidated form_1120 for the taxable_year on date the return was late parent’s late filing of its return for the taxable_year made the originals of the forms reflecting dcn dcn and dcn which parent also filed on date late in addition the signed duplicate copies of these originals which parent filed on date were also late parent received confirmation from the internal revenue plr-119898-18 service that its form_1120 and original forms were received on date and the signed duplicate copies of the originals were received on date parent represented that the consolidated form_1120 it filed on date for the taxable_year reflects the three accounting_method changes made by sec_1 and taxpayer respectively ruling requested taxpayer requests an extension of time pursuant to sec_301_9100-1 and sec_301_9100-3 to file the originals and the signed duplicate copies of these originals of the forms required by revproc_2015_13 to obtain the consent of the commissioner of internal revenue to make accounting_method changes dcn dcn and dcn for the taxable_year law and analysis revproc_2015_13 provides the procedures by which a taxpayer may obtain automatic consent to change certain accounting methods section of revproc_2015_13 provides that consent of the commissioner to change its accounting_method under sec_446and sec_1_446-1 of the income_tax regulations is granted only if the taxpayer complies with all the applicable provisions of the revenue_procedure and implements the change in method on its federal_income_tax return for the requested year_of_change to which the original form_3115 is attached pursuant to section section a i of revproc_2015_13 provides that a taxpayer changing an accounting_method pursuant to revproc_2015_13 must complete and file a form_3115 in duplicate the original form_3115 must be attached to the taxpayer’s timely filed including any extension original federal_income_tax return for the year_of_change and a copy with signature of the form_3115 must be filed with the appropriate office of the service no earlier than the first day of the year_of_change and no later than when the original is filed with the federal_income_tax return for the year_of_change sec_301_9100-1 provides that the commissioner has discretion to grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make certain regulatory elections sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make an election sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides extensions of time for making elections that do not meet the requirements of sec_301_9100-2 sec_301_9100-1 defines a regulatory election as an election whose due_date is prescribed by a regulation published in the federal_register or a revenue_ruling revenue_procedure notice or announcement published in the internal_revenue_bulletin plr-119898-18 sec_301_9100-3 provides that requests for relief subject_to 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 the granting of relief will not prejudice the interests of the government sec_301_9100-3 imposes special rules for accounting_method regulatory elections this section provides in relevant part that the interests of the government are deemed to be prejudiced except in unusual and compelling circumstances when the accounting_method regulatory election for which relief is requested is subject_to the procedure described in sec_1_446-1 requiring advance written consent of commissioner or the relief requires an adjustment under sec_481 or would require an adjustment under sec_481 if the taxpayer changed to the accounting_method for which relief is requested in a taxable_year subsequent to the taxable_year the election should have been made conclusion based solely on the facts and representations submitted we conclude that the requirements of sec_301_9100-1 and sec_301_9100-3 have been satisfied accordingly an extension of time is hereby granted for parent to file the required originals and signed duplicate copies of the forms for the taxable_year in this regard we will consider the originals and signed duplicate copies of the forms for the accounting_method changes made by parent for itself sec_1 sec_2 sec_3 sec_4 and sec_5 on parent’s consolidated federal_income_tax return for the taxable_year filed on date and date to be timely filed for purposes of section dollar_figure of revproc_2015_13 a copy of this letter should be associated with the originals and signed duplicate copies of the forms filed for the taxable_year this letter_ruling does not grant any extension of time for the filing of parent’s form_7004 or parent’s form_1120 for the taxable_year except as expressly set forth above we express no opinion concerning the tax consequences of the facts described above under any other provision of the code or regulations specifically no opinion is expressed or implied concerning whether any of the accounting_method changes taxpayer and sec_1 have made are eligible to be made under revproc_2018_31 and revproc_2015_13 taxpayer and sec_1 otherwise meet the requirements of revproc_2015_13 to make the requested accounting_method changes using the procedures of revproc_2015_13 taxpayer and sec_1 otherwise meet the requirements of dcn dcn and dcn respectively the ruling contained in this letter_ruling is based upon facts and representations submitted by parent with accompanying penalty of perjury statements executed by appropriate parties while this office has not verified any of the material submitted in plr-119898-18 support of this request for an extension of time to file the required forms pertaining to the accounting_method changes dcn dcn and dcn for the taxable_year all material is subject_to verification on examination this letter_ruling is directed only to parent who requested it sec_6110 provides that it may not be used or cited as precedent in accordance with the power_of_attorney we are sending a copy of this letter to parent’s authorized representatives we are also sending a copy of this letter to the appropriate operating division director sincerely deena m devereux senior technician reviewer branch office of associate chief_counsel income_tax accounting enclosures copy of this letter copy for sec_6110 purposes cc


internal_revenue_service p o box cincinnati oh number release date department of the treasury employer_identification_number contact person - id number date date contact telephone number legend uil t name u geographical region v number w number x number y number b dollars amount c dollars amount dear you asked for advance approval of your educational grant procedures under internal_revenue_code sec_4945 this approval is required because you are a private_foundation that is exempt from federal_income_tax our determination we approved your procedures for awarding educational grants based on the information you submitted and assuming you will conduct your program as proposed we determined that your procedures for awarding educational grants meet the requirements of code sec_4945 as a result expenditures you make under these procedures won't be taxable description of your request your letter indicates that you will operate an educational grant program called t your purpose is to advance health equity and the quality of care in u by providing various forms of support to improve medical education and the health of the populations in u the purpose of t is to advance health equity in u by identifying connecting and preparing a generation of leaders dedicated to advancing health equity through systemic change you have identified strategies to increase health equity that will require the leadership talent and capabilities that t is designed to produce specifically under t you will award one year fellowships to provide multidisciplinary leadership training and support to create a community of health equity leaders and advocates within and across the countries and regions of u your goal is to produce v leaders over the next several years that will advance working together and individually health equity both within and across the countries and regions of u you will publicize information about t in various ways including on your website and in occasional press releases as well as through national nomination committees social media and communications channels you also expect that the community created by t will be a source of publicity among those working to support health equity while you expect the details of t will change as you gain experience you anticipate the cost of providing the fellowship including the cost of faculty transportation other staff training materials and other expenses will be approximately b dollars per fellow furthermore you will award fellowship grants for a one-year period and you may permit grant renewals you may also award grant support in succeeding years for post- fellowship projects if you deem the situation to be appropriate the fellowship year will consist of the following e e acurriculum taught by core faculty and mentors to promote leadership development on health equity shared travel experiences for peer and experiential learning support of pilot projects conducted by the fellows to address major health equity challenges in u and on line engagement curriculum sharing and information dissemination among the fellows and mentors regarding the health equity challenges being addressed eligible individuals must be talented young professionals generally under w years of age who have shown achievements and commitment for health equity and have direct experience working to advance health equity in their communities as well as be passionate about social justice in health they will be residents of u with proficiency in english their participation must receive concurrence from their current employer or home institution where they will remain affiliated throughout the fellowship most fellows will have professional capabilities in a health or related field as well as advanced degrees or skills in health policy medicine economics and health action in the field or clinical settings eligible individuals may apply directly to you in addition they may be nominated by a committee of nominators who are experts in their fields you will require the applicants to describe their current work and interests regarding social justice in health and to provide a resume and at least two reference letters letter catalog number 58222y selection committees for t will consist of national nominating committees and regional selection committees from u the members of these committees will be chosen by the co-directors of t following consultation with experts in relevant fields these committees will be composed of professionals who are considered experts and leaders in their fields and from such areas as public health academia the public sector business and economics and the media selection committee members will ideally consist of individuals who are working on issues of social justice or health eventually the committees may include alumni from t you anticipate that the number of individuals on national committees will not exceed x while the regional selection committees will have in the range of y members relatives of your officers trustees and substantial contributors and any other disqualified persons are not eligible for grant opportunities offered pursuant to t additionally relatives of nominators and selection committee members will also be ineligible for grant opportunities participants in t may not include anyone whose selection would result in a private benefit to any of the aforementioned individuals the selection committee will generally award the fellowships on the basis of demonstrated leadership and commitment to health equity professional capabilities in health and related fields english proficiency capacity to participate fully in the fellowship activities with the support of a current employer home institution and attributes prioritized by the selection committee to achieve a mix and balance of fellows for optimal peer learning your selection committees will make the final selection in accordance with their delegation from your board following the fellowship year the fellows may engage in post-fellowship projects developed during the initial fellowship year post-fellowship activities will vary according to fellows’ backgrounds and in relation to specific project proposals these projects could involve undertaking academic study addressing a practical field or policy issue or initiating other activities such as a technology-based innovation funding for these projects would be granted through a selective process based on presentations of these projects at the annual conference taking place at the end of the fellowship year it is currently expected that the post-fellowship projects chosen for funding will be funded at an average of c dollars per project though this number may change over time your selection committees will report to you regarding the progress of the fellowships and recipients your selection committee will have final approval of the grants which has been delegated approval authority from your board_of trustees the committee will also report to your board_of trustees in addition the national and regional committees from participating countries will play key roles in t beyond providing nominations or selecting fellows these committees will perform other functions including outreach to promising candidates formal nominations vetting of self-applied candidates and some members will participate in the final selection of fellows most importantly the national and regional committee members will join in letter catalog number 58222y mentoring the fellows and participate as faculty policy-makers and researchers in advancing health equity currently fellows will generally not receive funds directly any funds given directly to individual fellows for the fellowship year will be a stipend for any travel needed for participation in the t support of leadership development for individual fellows in the future you may expand t to include more direct financial you along with the national and regional selection committees plus your management and certain programmatic employees will supervise t you will promptly investigate any apparent misuse of grant funds or failure to provide required reports while a matter is being investigated you will withhold further payments to the individual until you have determined that no part of a grant has been misused and until missing reports have been submitted if you discover that funds have been misused you will take all reasonable and appropriate steps to secure the repayment of the diverted funds in addition if such a diversion occurs while you are making installment payments on a grant you will withhold any further payments until you have received assurances from the grant recipient that future diversions will not occur you will also require the grant recipient to take extraordinary precautions to prevent future diversions from occurring to ensure that the foreign expenditure of grants is not diverted to support terrorism or other non-charitable activities you will adopt internal controls and procedures to ensure foreign expenditures and grants are not diverted to support terrorism or other non- charitable activities such policies may include pre-grant review periodic reporting and investigation by independent local experts if necessary you will also comply with all united_states statutes executive orders and regulations that restrict or prohibit u s persons from engaging in transactions and dealings with designated countries entities or individuals or otherwise engaging in activities in violation of economic standards by ofac you will also acquire the ofac appropriate license and registration where necessary in addition you will check the u s department of the treasury’s office of foreign assets ofac list of specially designated nationals and blocked persons for names of individuals and entities with who you are dealing to determine if they are on the list _ you represent that you will maintain the following all records relating to individual grants including information obtained to evaluate grantees identify whether a grantee is a disqualified_person establish the amount and purpose of each grant and establish that you undertook the supervision and investigation of grants described above basis for our determination the law imposes certain excise_taxes on the taxable_expenditures of private_foundations code sec_4945 a taxable_expenditure is any amount a private_foundation pays as a grant to an individual for travel study or other similar purposes however a grant that meets all of the following requirements of code sec_4945 is not a taxable_expenditure letter catalog number 58222y e e e the foundation awards the grant on an objective and nondiscriminatory basis the irs approves in advance the procedure for awarding the grant the grant is - - - ascholarship or fellowship subject_to sec_117 and is to be used for study at an educational_organization described in sec_170 or aprize or award subject_to the provisions of sec_74 if the recipient of the prize or award is selected from the general_public or to achieve a specific objective produce a report or similar product or improve or enhance a literary artistic musical scientific teaching or other similar skill or talent of the recipient to receive approval of its educational grant procedures sec_53_4945-4 requires that a private_foundation show e e e the grant procedure includes an objective and nondiscriminatory selection process the grant procedure results in the recipients performing the activities the grants were intended to finance the foundation plans to obtain reports to determine whether the recipients have performed the activities that the grants were intended to finance other conditions that apply to this determination e e e e e this determination covers only the grant program described above this approval will apply to succeeding grant programs only if their standards and procedures don't differ significantly from those described in your original request this determination applies only to you it may not be cited as precedent you cannot rely on the conclusions in this letter if the facts you provided have changed substantially you must report any significant changes in your program to the cincinnati office of exempt_organizations at internal_revenue_service exempt_organizations determinations p o box cincinnati oh you cannot make grants to your creators officers directors trustees foundation managers or members of selection committees or their relatives all funds distributed to individuals must be made on a charitable basis and must further the purposes of your organization you cannot award grants for a purpose that is inconsistent with code sec_170 letter catalog number 58222y e you should keep adequate_records and case histories so that you can substantiate your grant distributions with the irs if necessary we've sent a copy of this letter to your representatives as indicated in your power_of_attorney please keep a copy of this letter in your records if you have any questions please contact the person listed at the top of this letter sincerely jeffrey cooper director exempt_organizations rulings and agreements letter catalog number 58222y


internal_revenue_service department of the treasury index number washington dc number release date person to contact telephone number refer reply to cc dom corp 1-plr-119699-98 date date legend acquirer target sellers state p date date y z dear we respond to your letter dated date requesting a ruling concerning the federal_income_tax consequences of a proposed transaction additional information was submitted in letters dated date date date date date date date and date the information submitted is summarized as follows acquirer is a state p non-profit corporation that has been classified as a tax- exempt_organization under sec_501 and sec_509 of the code target is a taxable for-profit sub-chapter c_corporation incorporated under the laws of state p sellers are individual shareholders who own all of the stock of target the parties have completed or propose to complete the following steps the transaction on date a date prior to the effective date of the final_regulation under sec_1_337_d_-4 acquirer entered into a stock purchase agreement with sellers the agreement to purchase all of target’s stock for dollar_figurey on date a date prior to the effective date of the final_regulation under d -4 the agreement was amended to provide that following the purchase target would convert from a taxable for-profit corporation to a tax exempt non- profit corporation the conversion upon a favorable irs ruling acquirer will cause target to amend its articles of incorporation target will then apply to the irs for tax exempt status as a charitable_organization described in sec_501 and sec_509 state p will then pay acquirer approximately dollar_figurez in consideration of acquirer limiting the use of target’s assets to that of a charitable_organization under sec_501 no employee of state p is or will be on the board_of directors of acquirer or target nor is any employee of state p entitled to a seat on the board_of directors of acquirer or target the agreement is binding upon the occurrence of several conditions one of which is a favorable tax ruling from the irs stating that the transaction will not be taxable under sec_336 or sec_337 acquirer has represented that its promise under the agreement to effect the conversion is legally binding under applicable law based solely on the information submitted we rule as follows the transaction will not result in the recognition of gain_or_loss under sec_336 or sec_337 no opinion is expressed about the tax treatment of the transaction under other provisions of the code and regulations or about the tax treatment of any conditions existing at the time of or effects resulting from the transaction that are not specifically covered by the above ruling in particular no opinion is expressed as to whether acquirer’s promise under the agreement to effect the conversion is legally binding under applicable law this ruling is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent a copy of this letter should be attached to the federal_income_tax returns of the taxpayers involved for the taxable_year in which the transaction is consummated sincerely assistant chief_counsel corporate by mark s jennings senior technician reviewer branch


internal_revenue_service number release date index number ------------------------------- ------------------------------------------- ----------------------------------------- ---------------------------------------- legend department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------- id no ------------- telephone number --------------------- refer reply to cc psi b01 plr-113805-10 date july x -------------------------------------------------- -------------------------------------------- --------------------------- -------- date1 country dear ------------ this responds to a letter dated date submitted on behalf of x requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations to file an election under sec_301_7701-3 to be treated as a disregarded_entity for federal tax purposes facts according to the information submitted x was formed on date1 under the laws of country x intended to be treated as a disregarded_entity for federal tax purposes effective date1 however x inadvertently failed to timely file form_8832 entity classification election to be treated as a disregarded_entity for federal tax purposes law and analysis sec_301_7701-3 provides in part that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes an eligible_entity with at least two members can elect to be classified as either an association or a partnership and an plr-113805-10 eligible_entity with a single owner can elect to be classified as an association or to be disregarded as an entity separate from its owner sec_301_7701-3 provides guidance on the classification of a foreign eligible_entity for federal tax purposes generally a foreign eligible_entity is treated as an association if all members have limited_liability unless the entity makes an election to be treated otherwise a foreign eligible_entity with a single member having limited_liability may elect to be treated as a disregarded_entity pursuant to the rules of sec_301_7701-3 sec_301_7701-3 provides that an entity classification election must be filed on form_8832 and can be effective up to days prior to the date the form is filed or up to months after the date the form is filed under sec_301_9100-1 the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-1 defines the term regulatory election as including an election whose due_date is prescribed by a regulation published in the federal_register sec_301_9100-1 through provide the standards that the commissioner will use to determine whether to grant an extension of time to make an election sec_301_9100-1 sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides rules for requesting extensions of time for regulatory elections that do not meet the requirements of sec_301_9100-2 requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government conclusion based solely on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-3 have been satisfied as a result x is granted an extension of time of days from the date of this letter to make an election to be treated as a disregarded_entity for federal tax purposes effective date1 x should make the election by filing a properly executed form_8832 with the appropriate service_center a copy of this letter should be attached to the form this ruling is contingent on the owner of x filing within days of this letter all required returns and amended income_tax returns consistent with the requested relief being effective date1 these returns must include all required forms information_return of u s persons with respect to foreign disregarded entities forms plr-113805-10 annual return to report transactions with foreign trusts and receipt of certain foreign gifts and forms 3520-a annual information_return of foreign_trust with a u s owner submitted with forms 1040-x amended u s individual_income_tax_return back to date1 except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely david r haglund david r haglund chief branch office of associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes cc