internal_revenue_service national_office technical_advice_memorandum date number release date third party communication none date of communication not applicable index uil no case-mis no tam-117370-08 district_director lmsb ctm taxpayer's name taxpayer's address taxpayer's identification no year s involved date of conference ----------------------------- ---------------------------------- ---------------------------------------- ---------------- ------- ------------------ legend legend accounting firm x --------- accounting firm y ---------------------- corporation aa corporation x corporation y corporation z date date date date date date date date date employee a employee b employee c foreign region law firm ------------ ------------------------------ ---------------------------------------------- ------------------------------------ --------------------------- ------------------------- ------------------------- ------------------------- ------------------------- ------------------- --------------------- ------------------ ------------------ --------------------- ------------------------ --------------------- ---------------- ------------------- tam-117370-08 ---------------------------- ----------------------------------------------------------------- ---------------------- llc m shares n shares representative d ------------------- --------------- representative e representative f ----------------- representative g --------------- taxpayer year year h j k l ----------------------------- ------- ------- ---- ----- ---- ---- issue sec_1 whether a domestic corporation’s transfer in connection with an exchange described in sec_354 of the stock of a foreign_corporation to another foreign_corporation in exchange for stock of a domestic_corporation that controls the foreign acquiring_corporation in a reorganization described in sec_368 is subject_to sec_367 as provided under sec_1_367_a_-3 if the answer to issue is yes whether taxpayer qualifies for the reasonable_cause exception under sec_1_367_a_-8 such that it is eligible to file a gain_recognition_agreement pursuant to sec_1_367_a_-3 if the answer to issue is yes and the answer to issue is no whether the application of sec_367 to the stock transfer causes the transfer to be characterized as an acquisition to which sec_304 applies conclusion sec_1 a domestic corporation’s transfer in connection with an exchange described in sec_354 of the stock of a foreign_corporation to another foreign_corporation in exchange for stock of a domestic_corporation that controls the foreign acquiring_corporation in a reorganization described in sec_368 is subject_to sec_367 as provided under sec_1_367_a_-3 taxpayer’s failure_to_file a gain_recognition_agreement was not due to reasonable_cause and taxpayer did not file a gain_recognition_agreement when it became aware of the failure_to_file and as a result it cannot file a gain_recognition_agreement pursuant to sec_1_367_a_-3 unless otherwise noted all citations to regulations are to those effective as of date tam-117370-08 the application of sec_367 to the stock transfer does not cause the transfer to be characterized as an acquisition to which sec_304 applies facts i background taxpayer a publicly traded domestic_corporation engaged in various business lines in both the united_states and abroad taxpayer conducted manufacturing operations in h countries and sold its products in over j countries ii structure and transaction before the transaction described below taxpayer the common parent of a consolidated_group owned percent of the stock of corporation x corporation x is a domestic_corporation and is a member of the taxpayer consolidated_group taxpayer also owned percent of the stock of corporation y a foreign_corporation corporation x owned percent of the interests in llc a limited_liability_company llc was disregarded as an entity separate from its owner for federal tax purposes llc owned m shares of the stock of corporation z a foreign_corporation taxpayer owned the remaining n shares of corporation z stock because llc is disregarded as an entity separate from its owner for purposes of this memorandum the m shares of corporation z stock held by llc are treated as if they are held by the owner of llc corporation x or corporation y as applicable consequently for purposes of this memorandum a transfer of the interests in llc by corporation x is treated as a transfer by corporation x of the m shares of corporation z stock that are held by llc corporation x’s ownership of the m shares of corporation z stock constituted control within the meaning of sec_368 of corporation z prior to date corporation y purchased taxpayer stock from taxpayer shareholders on the open market on date corporation y acquired in exchange for the taxpayer stock that it had purchased on the open market the m shares of corporation z stock from corporation x for purposes of this memorandum corporation y’s purchase of taxpayer stock on the open market and the exchange of such stock for the m shares of corporation z stock held by corporation x together will be referred to as the transaction and corporation x’s transfer of the m shares of corporation z stock to corporation y will be referred to as the outbound stock transfer tam-117370-08 taxpayer took the position that the acquisition by corporation y of the m shares of corporation z stock held by corporation x in exchange for taxpayer’s stock qualified as a reorganization described in sec_368 corporation x included an amount in its gross_income as a deemed_dividend under sec_1_367_b_-4 as a result of the outbound stock transfer even though taxpayer did not file a gain_recognition_agreement under sec_1_367_a_-8 with respect to the outbound stock transfer taxpayer took the position that the outbound stock transfer was not subject_to sec_367 the form of the transaction was highly-structured and tax-motivated taxpayer’s treatment of the transaction had the effect of repatriating current or future deferred earnings_of corporation y without a corresponding dividend that would be subject_to u s tax iii structuring implementing and reporting the transaction a overview taxpayer engaged accounting firm x and law firm to advise taxpayer on tax matters related to the transaction over a period of several months employee a and employee b both employees of taxpayer worked with representative d and representative e from accounting firm x and representative f and representative g from law firm together the working group the members of the working group communicated frequently regarding various tax issues arising in connection with the structuring implementing and reporting of the transaction b individuals involved employee a was the tax manager foreign region employee a a certified_public_accountant was employed by accounting firm x as a senior tax manager before becoming a taxpayer employee employee a earned a masters in accounting degree and had k years of federal tax experience employee a was the primary international tax planner and tax technical research source within the tax department in addition to responsibilities involving foreign region employee a was responsible for tax planning compliance and reporting for a number of taxpayer’s u s and international operations for example employee a had the responsibility for determining and reviewing the required international tax filings and disclosures for taxpayer employee a was the the internal_revenue_service and treasury_department believe that taxpayer’s characterization of these types of transactions raises significant policy concerns and in response to such transactions issued notice_2006_85 2006_2_cb_677 notice_2007_48 2007_1_cb_1428 and sec_1 b - 14t subject_to certain exceptions sec_1 b -14t applies to transactions described in notice_2007_48 such as the transaction that occur on or after date sec_1 b -14t e accordingly sec_1 b -14t does not apply to the transaction tam-117370-08 person within taxpayer’s tax department most involved with the transaction from both a factual and tax technical and research perspective employee a reported to and made recommendations to employee b employee b was vice president - tax and supervised employee a employee b a certified_public_accountant was an international tax partner at accounting firm y before becoming a taxpayer employee employee b had over l years of federal tax experience and had significant international tax experience particularly in the area of cross-border mergers and acquisitions employee b had extensive involvement in various international tax matters of taxpayer including the transaction employee b reviewed all elections agreements and required information statements prepared by employee a in addition employee b met annually with employee a to review this element of the tax_return preparation process employee a and employee b were the primary members of the taxpayer tax department responsible for the transaction employee c was the director of tax analysis and compliance employee c was generally responsible for the preparation of taxpayer’s tax_return but was not in charge of disclosures or agreements that must be included with the tax_return such as gain recognition agreements required under sec_1_367_a_-8 representative d was a tax principal in accounting firm x representative e was a tax partner in accounting firm x representative f and representative g were tax partners in law firm c communications and documentation over a period of at least six months prior to date the date of the transaction employee a and employee b communicated with each other and other members of the working group regarding the transaction these communications included the discussion and consideration of certain issues related to the transaction the opinions that accounting firm x was willing to provide on the transaction and the representations required by accounting firm x to render such opinions in addition various documents and e-mail correspondence were circulated among members of the working group several of these documents were prepared by accounting firm x some of these documents described in further detail below discussed and analyzed the application of sec_367 to the transaction and contained representations relating thereto on date approximately six months prior to date the first document prepared by accounting firm x that addressed the application of sec_367 was a memorandum that representative e sent to employee a this memorandum analyzed among other tam-117370-08 issues the application of sec_367 to a proposed transaction involving taxpayer that was substantially_similar to the transaction the memorandum described the tax consequences that arise when a u_s_person transfers stock of a foreign_corporation to a foreign acquiring_corporation in exchange for stock of a domestic_corporation that controls the foreign acquiring_corporation in a reorganization described in sec_368 the sec_354 exchange by corporation x a us person in which corporation x transfers property corporation z stock to corporation aa a foreign_corporation is also an exchange described in sec_367 sec_1_367_a_-3 addresses exchanges where the property transferred is stock of a foreign_corporation to provide for concurrent application of sec_367 and b footnote citing sec_1_367_a_-3 and b the regulation permits nonrecognition except for the dividend required to be reported under sec_367 if taxpayer executes and files with its income_tax return for the year of transfer a year gain_recognition_agreement described in sec_1_367_a_-8 and makes the annual certifications also required under sec_1_367_a_-8 on date representative e circulated to the other members of the working group a draft of representations and related opinions with respect to the transaction the opinions provided by accounting firm x would be contingent on the representations provided to accounting firm x by taxpayer one of the representations stated taxpayer will execute and file with its income_tax return for the year of the transfer a 5-year gain_recognition_agreement described in sec_1_367_a_-8 and makes the annual certifications also required under sec_1_367_a_-8 following the representations that accounting firm x required to render its opinions regarding the transaction this document also stated taxpayer acknowledges that an opinion of accounting firm x will be based on the facts assumptions and representations set forth in this letter it generally represents that it has provided accounting firm x with all facts and circumstances that it knows or has reason to know are pertinent to the transaction if any of the facts assumptions or representations set forth above is not entirely complete or accurate the proposed transaction differed from the transaction in that the foreign_corporation that acquires the stock of the_domestic_corporation would purchase the stock of a member of the taxpayer consolidated_group directly from the member rather than purchasing taxpayer stock from taxpayer’s shareholders as was the case in the transaction like the transaction the transaction discussed in the memorandum was later addressed by the published guidance discussed in footnote of this memorandum tam-117370-08 taxpayer understands that it will be imperative that accounting firm x be informed immediately in writing because the incompleteness or inaccuracy could cause a change in the accounting firm x opinions several e-mails were circulated among members of the working group including employee a and employee b that analyzed the draft representations required by accounting firm x to render its opinions on the transaction each draft of the representations circulated included a representation substantially_similar to that quoted above that a gain_recognition_agreement would be filed in connection with the outbound stock transfer in addition each draft of the representations included language substantially_similar to that quoted above regarding the facts assumptions and representations set forth in the letter on date employee a circulated a redlined version of the representations that reflected comments from employee a employee b and another taxpayer employee the comments and changes in this redlined draft involved several of the representations including modifications to the representation that immediately followed the representation quoted above that a gain_recognition_agreement would be filed in connection with the outbound stock transfer on date employee b re-circulated the redlined representations to the working group asking individuals to focus on modifications to certain representations employee a and employee b were also involved in analysis and correspondence intended to ensure that certain aspects of the transaction were structured to be consistent with the representations for example on date employee a sent an e- mail to representative g indicating that taxpayer must represent to accounting firm x that a certain amount of shares must be received as of a particular date the e-mail also noted that employee b had suggested including a clause in the reorganization agreement as a means of ensuring that the transaction would be consistent with this representation on date a page draft opinion letter from accounting firm x opinion letter dated date was circulated to the working group accounting firm x did not circulate a subsequent draft of the opinion letter nor was the opinion letter including representations contained therein ever finalized taxpayer stated that while it intended to have the opinion letter finalized taxpayer was comfortable with the advice received as well as the structure of the transaction as of the date of the transaction the opinion letter included the representation that taxpayer would file a gain_recognition_agreement with respect to the outbound stock transfer specifically the opinion letter required taxpayer to represent to accounting firm x that taxpayer will execute and file with its income_tax return for the year of transfer a 5-year gain_recognition_agreement described in treas reg tam-117370-08 a -8 with respect to corporation x’s transfer of corporation z shares to corporation y and will make the annual certifications also required under sec_1_367_a_-8 the parties will comply with all other filing notice record keeping and similar requirements under sec_367 and its regulations for purposes of this memorandum this representation along with similar representations referred to above will collectively be referred to as the gra representation at the beginning of the opinion letter accounting firm x informed taxpayer if any of these facts assumptions or representations is not entirely complete or accurate it is imperative that we be informed immediately in writing because the incompleteness or inaccuracy could cause us to change our opinions in the discussion section of the opinion letter accounting firm x analyzed the application of sec_367 to the outbound stock transfer an exchange which ordinarily would be afforded nonrecognition treatment under sec_354 may be treated as a taxable_exchange under sec_367 and b sec_1_367_a_-3 among the several exchanges subject_to this possible treatment is a triangular b reorganization generally sec_367 denies the status as a corporation to certain foreign_corporations which effectively precludes the operation of the nonrecognition rules of sec_354 and sec_361 among other sections thus for example an exchanging shareholder in a triangular b reorganization may recognize gain if any and after the application of sec_367 under sec_367 but sec_367 does not apply if a us shareholder who transfers shares of stock of a foreign target_corporation to a foreign acquiring_corporation enters into a five-year gain_recognition_agreement with respect to the target shares sec_1_367_a_-3 sec_1_367_a_-8 contains the rules and requirements governing the gain_recognition_agreement including the requirement for annual certifications finally in applying sec_367 to the outbound stock transfer the opinion concluded the status as corporations of corporation z and corporation y both foreign_corporations will be relevant to determining the us federal tax consequences of a triangular b reorganization the circumstances that make sec_367 applicable should also exist your tam-117370-08 representation kk indicates that a proper gain_recognition_agreement and annual certifications will be made for this reason sec_367 should not apply to require corporation x to recognize further gain_or_loss from the transaction the opinion letter discussed at length certain issues related to the transaction the outcome of which accounting firm x believed to be uncertain it analyzed arguments and authorities supporting both sides of these issues and concluded what accounting firm x believed should be the result the opinion letter did not however note any uncertainty with respect to the application of sec_367 to the outbound stock transfer or the requirement to file a gain_recognition_agreement in connection with the outbound stock transfer to avoid the application of sec_367 in an affidavit dated date after the request for this memorandum had been submitted representative e asserts that accounting firm x did not focus on sec_367 as a critical aspect of the transaction because accounting firm x believed a gain_recognition_agreement was required for nonrecognition treatment for the outbound stock transfer the affidavit further states that there were a substantial number of issues which were fully researched and discussed amongst the working group however the gain_recognition_agreement issue including representation kk and the discussion in the opinion regarding the effects of sec_367 was not among them the affidavit also states that the opinion letter’s discussion of sec_367 was based on accounting firm x’s view that the transfer of stock in a reorganization described in sec_368 to a foreign acquiring_corporation was concurrently subject_to sec_367 and b based on the parenthetical language in sec_1_367_a_-3 and the example in sec_1_367_a_-3 the affidavit further provided that we did not examine whether a different conclusion was warranted in the circumstances of taxpayer’s transaction where corporation y received taxpayer stock rather than stock of the acquiring foreign_corporation in this same affidavit representative e asserts that the principal purpose of the opinion letter was to address the requirements to qualify the transaction as a reorganization under sec_368 moreover the affidavit states t he discussion of the gain_recognition_agreement in the draft document was intended to insure that the exchanging shareholder would not recognize gain beyond the sec_1248 amount with respect to its sec_354 exchange neither the opinion letter nor any other correspondence from accounting firm x that was circulated among the working group indicated that the analysis and discussion tam-117370-08 regarding the application of sec_367 was more or less valid than the analysis and discussion of any other issues addressed in the opinion letter neither the opinion letter nor any other contemporaneous communications among members of the working group raise or discuss any of the arguments now being made by taxpayer with respect to issue of this memorandum that the outbound stock transfer is not subject_to sec_367 no one in the working group including employee a and employee b questioned or otherwise informed accounting firm x that they disagreed with accounting firm x’s conclusion that filing a gain_recognition_agreement was necessary to avoid the application of sec_367 to the outbound stock transfer in addition no one in the working group including employee a and employee b questioned the need for the gra representation to ensure that the outbound stock transfer was not subject_to sec_367 d tax compliance process as noted above employee a had the primary responsibility for the preparation and filing of all elections agreements and information statements related to matters within her responsibility employee b reviewed every such election agreement and statement and met with employee a annually to review with her this element of the tax_return process as part of the tax_return review process employee c met with the tax managers responsible for planning and tax research matters including employee a to review all transactions that occurred during the year these meetings were intended to ensure that all of the required forms statements elections and return disclosures were made in accordance with the law with respect to the transaction taxpayer included with its timely filed tax_return for year the notices required under sec_1_367_b_-1 and sec_1_368-3 as noted above taxpayer did not however include in its timely filed tax_return for year a gain_recognition_agreement under sec_1_367_a_-8 with respect to the outbound stock transfer employee b asked employee a to research all reporting issues with respect to the transaction as well as with respect to other unrelated restructuring transactions that took place during year employee a asserts that as part of her overall duties she researched the application of sec_367 to the outbound stock transfer including examining the regulations legislative_history and other existing precedents according to employee a she concluded in early fall year that the sec_367 regulations then in effect did not require the filing of a gain_recognition_agreement to avoid the application of sec_367 to the outbound stock transfer taxpayer asserts that tam-117370-08 employee a conducted robust research and analysis to arrive at her conclusion however employee a did not create any contemporaneous documents or other materials in connection with this research and analysis such as memoranda outlines e-mails or notes in addition employee a did not discuss her research or analysis with anyone including any other member of the working group or employee c when employee a conducted her research on this issue she did not recall that accounting firm x had reached the opposite conclusion in its opinion letter nor did she recall that contrary to her conclusion accounting firm x required the gra representation as a condition for rendering its opinion employee a did not recall having read the sections of the opinion letter including the gra representation that addressed the filing of a gain_recognition_agreement with respect to the outbound stock transfer although she was e-mailed several documents prepared by accounting firm x that addressed the application of sec_367 to the transaction including the opinion letter she asserts that she only reviewed the portions of the documents that related to the specific issues she was asked to consider such as certain treasury issues employee a asserts that if she had been aware that the opinion letter concluded that a gain_recognition_agreement was required she would have consulted with accounting firm x before determining whether to include a gain_recognition_agreement in taxpayer’s tax_return employee b met with employee a to discuss and review the year tax_return filing process employee a recalls that the conclusion not to file a gain_recognition_agreement was mentioned as part of this general review but that she did not identify the decision of whether to file a gain_recognition_agreement as an ambiguous situation requiring further investigation employee a further recalls that employee b accepted her conclusion that no gain_recognition_agreement was required employee b does not recall specifically discussing this issue with employee a but stated that employee a had the authority to make decisions on certain tax matters without his express approval employee b further stated that his philosophy and normal practice in an ambiguous situation would be to file a protective gra but neither employee a nor employee b has any recollection of having discussed this possibility with each other employee a and employee b did not discuss the opinion letter or gra representation during this meeting in addition they did not review any of the accounting firm x documents addressing the application of sec_367 including the opinion letter and the gra representation they assert that the reason they did not review these documents at such time is because the opinion letter and representations were never tam-117370-08 finalized and because they were unaware that the opinion letter addressed sec_367 or contained the gra representation employee c also met with employee a as part of the year tax_return review process employee c and employee a assert that they discussed the year filings related to the transaction including whether a gain_recognition_agreement was required in connection with the outbound stock transfer employee c asserts that he raised the issue of whether a gain_recognition_agreement was required for the outbound stock transfer employee a asserts that she determined that a gain_recognition_agreement was not necessary employee a and employee c had no further discussions regarding the application of sec_367 to the outbound stock transfer e notification of requirement to file a gain_recognition_agreement on date the internal_revenue_service as part of its examination of taxpayer’s year federal_income_tax return furnished to taxpayer an information_document_request informing taxpayer that the outbound stock transfer was subject_to the general_rule and therefore taxable unless taxpayer filed a gain_recognition_agreement taxpayer did not file a gain_recognition_agreement at that time issue whether the outbound stock transfer is subject_to the general_rule of sec_1_367_a_-3 i law a reorganizations described in sec_368 a reorganization described in sec_368 b reorganization means the acquisition by one corporation in exchange solely for all or part of its voting_stock or in exchange solely for all or part of the voting_stock of a corporation which is in control of the acquiring_corporation of stock of another corporation if immediately after the acquisition the acquiring_corporation has control of such other corporation whether or not such acquiring_corporation had control immediately before the acquisition in the case of a b reorganization both the acquiring_corporation and the acquired_corporation qualify as parties to a reorganization sec_368 in the case of a b reorganization where voting_stock of a corporation in control of the acquiring_corporation is exchanged triangular b reorganization the corporation controlling the acquiring_corporation issuing_corporation also qualifies as a_party_to_a_reorganization sec_368 first sentence of flush language sec_354 provides that no gain_or_loss shall be recognized if stock_or_securities in a corporation a_party_to_a_reorganization are in pursuance of the plan of tam-117370-08 reorganization exchanged solely for stock_or_securities in such corporation or in another corporation a party to the reorganization b general_rule of sec_367 sec_367 provides that if in connection with any exchange described in sec_332 sec_351 sec_354 sec_356 or sec_361 a united_states_person transfers property to a foreign_corporation such foreign_corporation shall not for purposes of determining the extent to which gain shall be recognized on such transfer be considered to be a corporation thus the general_rule of sec_367 is that a u_s_person recognizes gain on its transfer of property to a foreign_corporation when one of the enumerated provisions such as sec_354 applies to the transfer sec_367 states that except to the extent provided in regulations sec_367 shall not apply to the transfer of stock_or_securities of a foreign_corporation which is a party to the exchange or a party to the reorganization congress enacted sec_367 to prevent the avoidance of tax on transfers of appreciated_property outside the united_states in nonrecognition transfers involving foreign_corporations s_r rep no vol 98th cong 2d sess pincite date congress has been concerned with the potential avoidance of tax by means of such transfers since when congress enacted the predecessor to sec_367 h_r rep no 72d cong 1st sess s rep no 72d cong 1st sess enacting sec_112 the predecessor to sec_367 sec_1_367_a_-1t provides that a transfer described in sec_367 is any transfer of property by a u_s_person to a foreign_corporation pursuant to an exchange described in sec_332 sec_351 sec_354 sec_355 sec_356 or sec_361 it further provides that sec_367 applies to such a transfer whether it is made directly indirectly or constructively finally it notes that indirect or constructive transfers that are described in sec_367 include the transfers described in sec_1_367_a_-1t through such as transfers involving partnerships trusts_and_estates the second sentence of sec_1_367_a_-3 the general_rule specifically identifies which transfers of stock_or_securities are subject_to sec_367 it states in general a transfer of stock_or_securities by a u_s_person to a foreign_corporation that is described in sec_351 sec_354 including a reorganization described in sec_368 and including an indirect stock transfer described in paragraph d of this section or sec_361 or b is subject_to sec_367 and therefore is treated as a taxable_exchange unless one of the exceptions set forth in paragraph b of this section regarding transfers of tam-117370-08 foreign stock_or_securities or paragraph c of this section regarding transfers of domestic stock_or_securities applies thus the general_rule provides that notwithstanding the statutory exception under sec_367 transfers of stock_or_securities in connection with the enumerated exchanges are subject_to sec_367 unless one of the exceptions provided under sec_1_367_a_-3 or c applies c indirect stock transfers sec_1_367_a_-3 provides special rules under sec_367 for indirect stock transfers in general for purposes of sec_1_367_a_-3 a u_s_person who exchanges under sec_354 or sec_356 stock_or_securities in a domestic or foreign_corporation for stock_or_securities in a foreign_corporation in connection with certain enumerated transactions shall be treated as having made an indirect transfer of such stock_or_securities to a foreign_corporation that is subject_to the rules of sec_1_367_a_-3 including for example the requirement where applicable that the u s transferor enter into a gain_recognition_agreement to preserve nonrecognition treatment under sec_367 sec_1_367_a_-3 one of the enumerated indirect stock transfers is a triangular b reorganization where the issuing_corporation is foreign foreign issuing triangular b reorganization sec_1_367_a_-3 at the time of the transaction a triangular b reorganization where the issuing_corporation is domestic domestic issuing triangular b reorganization was not enumerated as an indirect stock transfer on date however proposed_regulations were issued that would amend the indirect stock transfer rules to include a domestic issuing triangular b reorganization prop sec_1_367_a_-3 the proposed_regulations would make conforming changes to related regulations including a modification to the definition of the term transferee foreign_corporation discussed below prop sec_1_367_a_-3 on date the proposed_regulations were subject_to certain modifications adopted as final regulations td 2006_1_cb_475 the treatment of domestic issuing triangular reorganizations as indirect stock transfers applies prospectively sec_1_367_a_-3 d exceptions to general_rule of sec_367 two exceptions from sec_367 may apply to a u s person’s transfer of foreign stock that is otherwise subject_to the general_rule sec_1_367_a_-3 and ii the first exception applies if the u_s_person owns less than five percent applying the attribution_rules of sec_318 as modified by sec_958 of both the total voting power and the total value of the stock of the transferee foreign_corporation immediately_after_the_transfer sec_1_367_a_-3 tam-117370-08 at the time of the transaction the term transferee foreign_corporation was defined in two provisions of the regulations first it was defined in sec_1_367_a_-3 which addressed transfers of stock_or_securities of domestic corporations specifically sec_1_367_a_-3 defined the transferee foreign_corporation as the foreign_corporation whose stock is received in the exchange by u s persons the term was also defined in sec_1_367_a_-3 which addressed indirect stock transfers specifically sec_1_367_a_-3 defined the transferee foreign_corporation as the foreign_corporation that issues stock_or_securities to the u_s_person in the exchange neither of these definitions however explicitly identified the transferee foreign_corporation in a domestic issuing triangular b reorganization because in these reorganizations the issuing_corporation is domestic accordingly sec_1_367_a_-3 was modified to among other things clarify the definition of transferee foreign_corporation in such a case td 2006_1_cb_475 as modified sec_1_367_a_-3 provides that in the case of a domestic issuing triangular b reorganization the transferee foreign_corporation is the foreign acquiring_corporation the second exception applies if the u_s_person enters into a five-year gain_recognition_agreement with respect to the transferred stock as provided in sec_1_367_a_-8 sec_1_367_a_-3 the definition of transferee foreign_corporation is also relevant for purposes of applying the gain_recognition_agreement rules discussed below see for example sec_1_367_a_-8 e gain recognition agreements as indicated above the exception to the general_rule provided under sec_1_367_a_-3 requires the u_s_person that transfers the stock_or_securities to file a gain_recognition_agreement with respect to the transfer pursuant to the gain_recognition_agreement the person generally agrees among other things to include in income the gain realized but not recognized on the initial transfer of the stock_or_securities and pay any applicable_interest upon certain events such as a disposition of the transferred stock_or_securities by the transferee foreign_corporation that occur before the close of the fifth full taxable_year following the year of the initial transfer sec_1_367_a_-8 and i ii analysis a application of the general_rule taxpayer does not argue that an exception under sec_1_367_a_-3 applies to the outbound stock transfer rather taxpayer makes three primary arguments that the outbound stock transfer is not subject_to the general_rule first taxpayer argues that the general_rule is inapplicable to the outbound stock transfer because of the inability to identify the transferee foreign_corporation for purposes of applying the exception under sec_1_367_a_-3 and sec_1_367_a_-8 second taxpayer tam-117370-08 argues that the general_rule is inapplicable because of subsequent revisions to the indirect stock transfer rules third taxpayer claims that direct transfers and indirect transfers are mutually exclusive and that the transaction can only be an indirect transfer taxpayer’s first argument the general_rule is inapplicable because of inability to identify the transferee foreign_corporation taxpayer argues that the outbound stock transfer is not subject_to the general_rule because there is no entity in the transaction that as a technical matter satisfies the definition of a transferee foreign_corporation as indicated above at the time of the transaction the transferee foreign_corporation was defined as the foreign_corporation whose stock is received in the exchange by u s persons or as the foreign_corporation that issues stock_or_securities to the u_s_person in the exchange sec_1_367_a_-3 and d i although taxpayer states that these definitions do not technically apply to the outbound stock transfer taxpayer argues that it is reasonable to apply these definitions for purposes of direct stock transfers in the outbound stock transfer the stock received is stock in a domestic rather than a foreign_corporation accordingly taxpayer argues that it cannot identify the transferee foreign_corporation a term that is used in the exceptions to the general_rule provided under sec_1_367_a_-3 and the gain_recognition_agreement rules of sec_1_367_a_-8 taxpayer argues that the inability to identify the transferee foreign_corporation renders it unable to file a gain_recognition_agreement with respect to the outbound stock transfer such that all such transfers would be taxable under the general_rule taxpayer concludes that this cannot be an appropriate result and consequently the outbound stock transfer should not be subject_to the general_rule taxpayer’s argument is incorrect the outbound stock transfer is subject_to the general_rule and the definition of the transferee foreign_corporation does not change this result applying the general_rule to taxpayer’s facts the outbound stock transfer is subject_to sec_367 corporation x a u_s_person transferred stock the stock of corporation z to a foreign_corporation corporation y in a transfer described in sec_354 moreover the parenthetical contained in the general_rule cites as an example of a transaction that is taxable under sec_367 pursuant to the general_rule taxpayer’s very transaction - that is a b reorganization thus the outbound stock transfer is taxable under sec_367 as a result of the application of the general_rule unless an exception under sec_1_367_a_-3 applies as indicated above the term transferee foreign_corporation is defined in sec_1 a - c vi which applies to transfers of stock_or_securities of domestic corporations the term is also defined in sec_1_367_a_-3 which applies to indirect stock transfers the outbound stock transfer does not involve the transfer of domestic stock_or_securities and is not in connection with an indirect stock transfer as a result taxpayer asserts that neither definition of transferee foreign_corporation explicitly applies to the outbound stock transfer tam-117370-08 the term transferee foreign_corporation is relevant for purposes of applying the exceptions to the general_rule but is irrelevant for purposes of interpreting the general_rule indeed the term transferee foreign_corporation does not even appear in the general_rule and in no way affects the application of the general_rule although the interpretation of a term that is found in an exception but not the general_rule affects the application of the exception itself it does not affect the application of the general_rule to which the exception applies in addition to the general_rule by its terms expressly applying to the outbound stock transfer such application comports with the policies underlying sec_367 as noted above congress enacted sec_367 to prevent the avoidance of u s tax on transfers of appreciated_property outside the united_states in nonrecognition transfers involving foreign_corporations s_r rep no vol 98th cong 2d sess pincite date specifically congress enacted sec_367 to provide that a u s person's transfer of appreciated_property including stock to a foreign_corporation in connection with certain nonrecognition exchanges is treated as a taxable transaction unless an exception applies if the outbound stock transfer were not subject_to the general_rule the result would be contrary to the longstanding policy of sec_367 because it would allow a u_s_person corporation x to transfer appreciated_property the stock of corporation z to a foreign_corporation corporation y in a nonrecognition transfer sec_354 exchange without being subject_to sec_367 in such a case the foreign acquiring_corporation could then sell the appreciated_property without being subject_to u s tax it is precisely this concern with potential tax_avoidance that spurred congress to enact sec_367 see h_r rep no 72d cong 1st sess s rep no 72d cong 1st sess enacting sec_112 the predecessor to sec_367 taxpayer’s position that the outbound stock transfer is not subject_to the general_rule is directly contrary to the policies underlying sec_367 taxpayer also incorrectly asserts that the exceptions to the general_rule contained in sec_1_367_a_-3 are unavailable for transfers such as the outbound stock transfer while it is true that the definitions of the term transferee foreign_corporation in the regulations do not explicitly describe an entity in the transaction this does not prevent the application of the exceptions because the term is not explicitly defined with respect to the outbound stock transfer the term transferee foreign_corporation must be construed in a reasonable manner taking into account the plain meaning of the words and the purpose of the provision in the outbound stock transfer corporation y is the foreign_corporation to which property is transferred accordingly it would be reasonable to construe the regulations such that corporation y is the transferee foreign under cannons of construction statutes and regulations are interpreted in a manner consistent with the drafters’ intent see 486_us_281 477_us_207 35_f3d_143 4th cir black’s law dictionary defines transferee as o ne to whom a property interest is conveyed black's law dictionary 8th ed tam-117370-08 corporation for purposes of applying the exceptions to the general_rule thus taxpayer could have avoided the application of the general_rule by entering into a gain_recognition_agreement in summary although the term transferee foreign_corporation is relevant for purposes of applying the exceptions to the general_rule the term does not appear in the general_rule and is irrelevant for purposes of applying the general_rule the term is however relevant for purposes of applying the exceptions to the general_rule and such exceptions are available provided taxpayer applies them in a reasonable manner moreover even if it is unclear which entity in the transaction is the transferee foreign_corporation the outbound stock transfer is clearly described in and therefore subject_to the general_rule this is true both as a technical matter and as a policy matter ambiguity regarding the application of an exception to a general_rule does not render the general_rule inapplicable taxpayer’s second argument the general_rule is inapplicable because of subsequent revisions to the indirect stock transfer rules taxpayer asserts that the outbound stock transfer is not subject_to the general_rule because of subsequent revisions to the indirect stock transfer rules of sec_1_367_a_-3 taxpayer notes that at the time of the transaction only foreign issuing triangular b reorganizations were subject_to the indirect stock transfer rules after the transaction the indirect stock transfer rules were revised to apply prospectively to domestic issuing triangular b reorganizations such as the one that occurred in connection with the transaction td 2006_1_cb_475 taxpayer argues that this subsequent change to the indirect stock transfer rules implies that the outbound stock transfer was not subject_to the general_rule in further support of its position taxpayer cites language in the preamble to the regulations that states that indirect stock transfers would be extended to include domestic issuing triangular b reorganizations taxpayer’s argument is incorrect adding a transaction to the indirect stock transfer rules does not prove that the general_rule did not apply to the transaction prior to such addition transfers such as the outbound stock transfer were subject_to the general_rule in year and remain subject_to the general_rule today the plain language of the general_rule cannot be ignored that is transfers such as the outbound stock transfer involve a transfer of property by a u_s_person to a foreign_corporation in a taxpayer asserts that certain issues would arise in applying the exceptions even if corporation y were treated as the transferee foreign_corporation consistent with the discussion above these issues would not arise if the exceptions were applied in a reasonable manner the current regulations do not however treat as an indirect stock transfer a triangular sec_368 reorganization where the acquiring_corporation is foreign and the controlling_corporation is domestic the proposed_regulations would extend the indirect stock transfer rules to include triangular sec_368 reorganizations in which a u_s_person exchanges stock of the acquired_corporation for voting_stock of a domestic_corporation that controls the foreign acquiring_corporation t d 2006_1_cb_475 tam-117370-08 nonrecognition exchange described in sec_354 corporation x a u_s_person transferred stock the stock of corporation z to a foreign_corporation corporation y in a transfer described in sec_354 thus the outbound stock transfer is subject_to sec_367 under the general_rule without regard to the application of the indirect stock transfer rules the indirect stock transfer rules serve two purposes first they subject_to the general_rule certain transactions that are not otherwise described in the general_rule but that have an effect substantially_similar to transfers that are described in the general_rule for example an indirect stock transfer includes a reorganization described in sec_368 where a u_s_person exchanges stock_or_securities of a domestic_corporation for voting_stock or securities of a foreign_corporation that controls a domestic_acquiring_corporation sec_1_367_a_-3 but for its treatment as an indirect stock transfer this transaction would not be described in the general_rule even though has the effect of a transaction that would be described in the general_rule that is the transaction has the effect of the u_s_person transferring the stock of the_domestic_corporation to the foreign_corporation that controls the domestic_acquiring_corporation pursuant to a nonrecognition_provision second the indirect stock transfer rules set forth provisions necessary to apply the exceptions to the general_rule provided under sec_1_367_a_-3 including the application of the gain_recognition_agreement provisions of sec_1_367_a_-8 to triangular b reorganizations which are direct transfers subject_to the general_rule without regard to the indirect stock transfer rules most direct stock transfers that are subject_to the general_rule involve three entities or persons the u_s_person that transfers the stock_or_securities the foreign_corporation to which stock_or_securities is transferred and the entity the stock_or_securities of which are transferred the gain_recognition_agreement rules generally apply based on a framework comprised of these three entities or persons for example a taxable disposition of the stock of the transferred corporation by the foreign_corporation to which the stock is transferred is generally an event that triggers the gain_recognition_agreement see sec_1_367_a_-8 further a taxable disposition by the u s transferor of the stock of the foreign_corporation to which the stock is transferred may terminate the gain_recognition_agreement see sec_1_367_a_-8 however direct stock transfers that are triangular b reorganizations involve a fourth entity - that is the issuing_corporation in such a case special provisions are needed to explain how the entities are treated for purposes of the exceptions to the general_rule including the gain_recognition_agreement rules the later revision to the indirect stock transfer rules provided these provisions for domestic-issuing triangular reorganizations see sec_1_367_a_-3 as taxpayer’s first argument indicates at the time of the transaction there was some uncertainty as to the application of the exceptions to the general_rule with respect to domestic issuing triangular b reorganizations because as a technical matter the tam-117370-08 transferee foreign_corporation was not clearly defined this is the very reason the indirect stock transfer rules were subsequently revised see sec_1 a - d iii b and -3 d iv second to last sentence as contained in cfr part revised as of date this revision did not as taxpayer asserts subject domestic issuing triangular b reorganizations to the general_rule for the first time clarifying how an exception to a general_rule applies to a transfer does not prove that the general_rule did not apply to the transfer before such clarification moreover the indirect stock transfer rules can only expand the types of transfers that are subject_to the general_rule they cannot as taxpayer asserts operate to exclude a transfer from being subject_to the general_rule only the exceptions to the general_rule provided under sec_1_367_a_-3 and c can exclude a transaction from the application of the general_rule sec_1_367_a_-3 finally and contrary to what taxpayer asserts nothing in the preamble to the proposed_regulations or the preamble to the final regulations suggests that domestic issuing triangular reorganizations were not subject_to the general_rule before being included as indirect stock transfers merely noting the undisputed fact that the current regulations do not treat as an indirect stock transfer domestic issuing triangular b reorganizations or correctly stating that the effect of the change to the indirect stock transfer rules was to extend the rules to include domestic issuing triangular b reorganizations does not support taxpayer’s position these statements are entirely consistent with the second purpose of the indirect stock transfer rules taxpayer’s third argument direct and indirect stock transfers are mutually exclusive and domestic issuing triangular reorganizations can only be indirect stock transfers taxpayer argues that prior to applying the general_rule it must first be determined whether a transfer is described in sec_367 within the meaning of sec_1_367_a_-1t next taxpayer claims that pursuant to sec_1_367_a_-1t and the general framework of the sec_367 regulations direct and indirect transfers are mutually exclusive taxpayer then asserts that domestic issuing triangular b reorganizations should be categorized solely as indirect transfers it follows according to the taxpayer that because the indirect stock transfer rules did not include a domestic issuing triangular b reorganization at the time of the transaction the outbound stock transfer is excepted from sec_367 by virtue of sec_367 this argument is incorrect a application of sec_1_367_a_-1t prior to the applying the general_rule taxpayer argues that prior to applying the general_rule to a transfer it must first be determined whether a transfer is described in sec_367 within the meaning of sec_1_367_a_-1t tam-117370-08 this argument is incorrect first on its face sec_1_367_a_-1t does not purport to serve the gatekeeper function that taxpayer ascribes to it the first sentence of sec_1_367_a_-1t simply paraphrases sec_367 a transfer described in sec_367 is any transfer of property by a u_s_person to a foreign_corporation pursuant to an exchange described in sec_332 sec_351 sec_354 sec_355 sec_356 or sec_361 under this rule and consistent with the general_rule the outbound stock transfer is taxable under sec_367 the second sentence only explains that a transfer described in the first sentence which would include the outbound stock transfer can be direct indirect or constructive finally the third sentence explains that the types of transfers that are indirect or constructive include the transfers described in paragraphs c through of that provision for example certain transfers made by partnerships trusts estates and transfers incident to sec_1504 election terminations thus nothing in the regulation suggests that it must be applied prior to applying the general_rule second taxpayer’s argument is inconsistent with the structure of sec_1_367_a_-3 the opening sentences of sec_1_367_a_-3 including the general_rule contain no mention of sec_1_367_a_-1t instead these opening sentences set forth self-contained and self-referencing rules of what is an exchange described in sec_367 that is sec_1_367_a_-3 operates independently and occupies the field on stock transfers indeed several sentences after the general_rule sec_1_367_a_-3 provides for rules regarding other indirect or constructive transfers of stock_or_securities subject_to sec_367 see sec_1_367_a_-1t emphasis added thus sec_1_367_a_-3 does not suggest any overarching function for sec_1_367_a_-1t or its various categories to the contrary sec_1_367_a_-3 suggests that sec_1_367_a_-1t is relevant only insomuch as it includes transfers not explicitly described in the general_rule such as the partnership and trust rules it does not as taxpayer asserts somehow narrow or otherwise affect the scope of the general_rule finally taxpayer’s interpretation is inconsistent with the structure of sec_1_367_a_-1t itself the third sentence of sec_1_367_a_-1t provides rules concerning the application of sec_367 to transfers of stock_or_securities are provided in sec_1_367_a_-3 b direct and indirect transfers are mutually exclusive and the transaction could only be categorized as an indirect stock transfer taxpayer asserts that the use of the word or in sec_1_367_a_-1t and in a preamble to a sec_367 regulation coupled with the general outbound_transfers of stock that are subject_to sec_367 may be either direct such as an outbound_transfer of stock described under sec_351 indirect as described below with respect to certain transfers or constructive such as an outbound stock transfer that may occur pursuant to a tam-117370-08 framework of the sec_367 regulations divide transfers into the mutually exclusive categories of direct transfers and indirect transfers taxpayer argues that the use of the term or indicates that the regulation intended to treat direct indirect and constructive transfers as mutually exclusive because the word or is commonly understood to have disjunctive meaning taxpayer asserts that the disjunctive or would not have been used if it was intended that these categories of transfers were not mutually exclusive taxpayer next asserts that a triangular b reorganization can only be an indirect transfer because it fits the paradigm of an indirect stock transfer taxpayer supports its position by noting that triangular b reorganizations were included as indirect stock transfers in the regulationsdollar_figure taxpayer concludes that because domestic issuing triangular reorganizations were not included as indirect stock transfers at the time of the transaction the outbound stock transfer is not subject_to sec_367 this argument is incorrect first the general_rule makes no distinction between a direct transfer an indirect transfer and a constructive transfer the general_rule straightforwardly applies to a particular category of transfers that includes the outbound stock transfer the use of the word or when generally describing transfers in sec_1_367_a_-1t and the preamble cited by taxpayer is not relevant and does not change this result the use of the word or in sec_1_367_a_-1t and the preamble cannot exempt a transaction described in the general_rule from being subject_to the general_rule this can only be done by the exceptions to the general_rule provided in sec_1_367_a_-3 second even if sec_1_367_a_-1t were relevant taxpayer’s interpretation of that rule is incorrect the first sentence of sec_1_367_a_-1t describes the transaction and states that it is described in sec_367 and therefore is taxable absent an exception taxpayer asserts that the second sentence somehow narrows the scope of the first sentence - or narrows the scope of the general_rule in sec_1_367_a_-3 taxpayer asserts that the use of or in the second sentence divides the transactions described in the first sentence into mutually exclusive categories such that a transaction that is clearly described in the first sentence ceases to be so described this assertion is incorrect the second sentence does not narrow the first sentence or the general_rule but rather simply explains that sec_367 applies to all transfers described in the first sentence this is evident by the use of the words such transfer which refer to transfers described in the first sentence including the transaction without regard to whether it is made directly indirectly or constructively change in an entity's classification see sec_1_367_a_-3 as amended for the general rules regarding the scope of stock transfers that are subject_to sec_367 t d 1998_2_cb_3 as noted above foreign issuing triangular b reorganizations were included as indirect stock transfers at the time of the transaction and domestic issuing triangular b reorganizations were subsequently added to the list of indirect stock transfers tam-117370-08 third and again assuming sec_1_367_a_-1t is relevant it is well established that or can have conjunctive rather than disjunctive meaning where the context dictates the former meaning sec_1_368-2 provides as used in sec_368 as well as in other provisions of the internal_revenue_code if the context so requires the conjunction or denotes both the conjunctive and the disjunctive and the singular includes the plural for example the provisions of the statute are complied with if stock and securities are received in exchange as well as if stock_or_securities are received consistent with this regulation courts have recognized that while or may be naturally disjunctive in statutory construction it is well settled that or has conjunctive meaning when the context so dictates see 73_us_759 351_us_570 719_f2d_608 2d cir here the context requires that the use of or denotes both the conjunctive and the disjunctive that is the general_rule applies to a transfer that is made both directly and indirectly as well as a transfer that is made directly or indirectly the plain language of the general_rule mandates this result because it does not draw a distinction between transfers made directly indirectly or constructively rather it simply applies to transfers from a u_s_person to a foreign_corporation pursuant to enumerated exchanges moreover and as noted above this interpretation is consistent with the policy underlying sec_367 taxpayer’s position that the use of the word or should have only the disjunctive meaning is directly contrary to both the plain language of the general_rule and would yield a result that undermines the policy of sec_367 finally the use of the word or as opposed to and more coherently illustrates the application of the rules for example if a rule governing tax professionals stated that it applied to lawyers or accountants the rule could not reasonably be read such that it did not apply to a person that is both a lawyer and an accountant in this example or is preferable to and because it avoids the question of whether both conditions have to be met in order for the rule to apply that is so that it is not read to only apply to a person who is both a lawyer and an accountant in addition to read substantive meaning into the choice of the word or instead of and in this context is inappropriate because the use of the alternative word and would render the sentence incoherent sec_367 applies to a transfer whether it is made directly indirectly and constructively b exceptions to the general_rule tam-117370-08 because the outbound stock transfer is subject_to the general_rule it is taxable under sec_367 unless one of the exceptions in sec_1_367_a_-3 applies the first exception applies if the u_s_person owns less than five percent applying the attribution_rules of sec_318 as modified by sec_958 of both the total voting power and the total value of the stock of the transferee foreign_corporation immediately_after_the_transfer sec_1_367_a_-3 this exception is inapplicable to the outbound stock transfer because as taxpayer notes there is no corporation that technically meets the definition of transferee foreign_corporation furthermore the exception would not apply if taxpayer treated one of the foreign_corporations involved in the transaction such as corporation y or corporation z as the transferee foreign_corporation applying the attribution_rules of sec_318 as modified by sec_958 corporation x owns percent of the stock of corporation y and corporation z immediately_after_the_transfer the second exception applies if the u_s_person enters into a five-year gain_recognition_agreement with respect to the transferred stock as provided in sec_1_367_a_-8 sec_1_367_a_-3 because no gain_recognition_agreement was entered into in connection with the outbound stock transfer this exception is inapplicable unless taxpayer demonstrates that its failure to enter into a gain_recognition_agreement was due to reasonable_cause and it filed the agreement as soon as it became aware of the failure see sec_1_367_a_-8 and issue of this memorandum iii conclusion the application of the stock transfer rules is straightforward if a transfer is described in the general_rule it is taxable under sec_367 unless an exception described in sec_1_367_a_-3 applies here the outbound stock transfer is described in the general_rule thus unless the taxpayer is entitled to relief under sec_1_367_a_-8 no exception applies and the outbound stock transfer is taxable under sec_367 moreover this application of the general_rule is consistent with the policy underlying sec_367 despite this straightforward application of the stock transfer rules taxpayer makes several lengthy and complicated arguments to support its assertion that the outbound stock transfer should not be subject_to the general_rule as discussed above none of these arguments is correct these arguments are based on various provisions having little or no bearing on the application of the general_rule or the exceptions thereto in addition this result would be directly contrary to the policy underlying sec_367 issue whether taxpayer qualifies for the reasonable_cause exception under sec_1_367_a_-8 i law tam-117370-08 if a person that is required to file a gain_recognition_agreement fails to file the agreement in a timely manner then the initial transfer of property is described in sec_367 and will be treated as a taxable_exchange sec_1_367_a_-8 however the transfer will not be described in sec_367 if the person is able to show that the failure to enter into the gain_recognition_agreement was due to reasonable_cause and not willful neglect and the person files the agreement as soon as he becomes aware of the failure sec_1_367_a_-8 whether a failure_to_file a gain_recognition_agreement was due to reasonable_cause is determined under all the facts and circumstances id no authority directly addresses the question of what constitutes reasonable_cause under sec_1_367_a_-8 thus to make this determination it is necessary to look to other areas of law that invoke the reasonable_cause standard for example a taxpayer may not be subject_to the failure_to_file_penalty if it can show that such failure is due to reasonable_cause and not due to willful neglect sec_6651 in addition taxpayers may avoid the underpayment penalties provided under sec_6662 and sec_6663 with respect to any portion of an underpayment if it is shown that there was a reasonable_cause for such portion and that the taxpayer acted in good_faith with respect to such portion sec_6664 a reasonable_cause - in general the supreme court has defined reasonable_cause as ordinary business care and prudence 469_us_241 consistent with sec_1_367_a_-8 other regulations and case law generally require the determination of reasonable_cause to be made on a case-by-case basis taking into account all pertinent facts and circumstances sec_1_6664-4 296_f3d_607 7th cir 123_tc_144 the most important factor is the extent of the taxpayer’s effort to assess its proper tax_liability thompson v comm’r 499_f3d_129 2d cir reynolds f 3d pincite sec_1_6664-4 reasonable_cause is determined at the time the tax_return was filed or if not filed when it was due morrissey v comm’r tcmemo_1998_443 reasonable_cause determinations do not factor in subsequent legal developments such as newly decided cases or the issuance of new regulations id taxpayers bear the burden of establishing reasonable_cause see boyle u s pincite regarding filing standards the supreme court stated t he government has millions of taxpayers to monitor and our system of self-assessment in the initial calculation of a tax simply cannot work on any basis other than one of strict filing standards boyle tam-117370-08 u s pincite any less rigid standard would risk encouraging a lax attitude toward filing dates id b circumstances that may indicate reasonable_cause although the facts and circumstances are unique to any particular case courts have considered various circumstances that if present should be taken into account in determining reasonable_cause circumstances that are relevant to the case at hand include taxpayer’s sophistication experience knowledge and education contemporaneous documentation research analysis and supporting legal authority complexity uncertainty and ambiguity of the law mistaken belief and lack of knowledge and advice from qualified_tax professionals taxpayer’s sophistication experience knowledge and education when determining whether a taxpayer has reasonable_cause for failing to comply with his obligations under the tax laws the taxpayer’s experience knowledge and education must be taken into account see 439_f3d_1243 10th cir 390_f3d_1210 10th cir 235_f3d_1207 9th cir for example a taxpayer’s sophistication may factor into a determination of whether a misunderstanding of law was reasonable compare reynolds f 3d pincite upholding penalties for overstated deductions because taxpayer’s misunderstanding of law was not reasonable in light of the fact that taxpayer was a licensed attorney certified_public_accountant and former internal_revenue_service audit supervisor with geary f 3d pincite reversing penalties because taxpayer’s attempt to deduct expenses was an honest misunderstanding of law that was reasonable in light of taxpayer’s relative lack of experience and the absence of case law on point contemporaneous documentation research analysis and supporting legal authority the extent to which a taxpayer documents the position taken conducts related analysis and has supporting legal authority must be considered because such efforts reflect a taxpayer’s attempt to properly assess its tax_liability a taxpayer demonstrates a lack of reasonable_cause when it fails to make a required filing based on an interpretation of a tax provision without conducting documenting or memorializing any analysis ballmer v comm’r tcmemo_2007_295 wadsworth v comm’r tcmemo_2008_171 complexity uncertainty and ambiguity of the law the complexity uncertainty and ambiguity of the underlying tax provision are circumstances to consider in determining reasonable_cause 158_f2d_472 6th cir 488_f2d_858 5th cir in economy savings loan co and brennan courts tam-117370-08 determined that reasonable_cause existed where the underlying tax provision was complex or ambiguous however the complexity uncertainty or ambiguity of a tax provision alone is not sufficient to deem noncompliance reasonable ellwest stereo theatres of memphis tcmemo_1995_610 123_tc_144 providing that reasonable_cause determinations are made on a case-by-case basis taking into account all the facts and circumstances 56_tc_717 noting that complexity is not sufficient to show reasonable_cause moreover while uncertainty may be one of the many facts and circumstances that goes into a reasonable_cause determination complexity without any proof that the complexity actually affected the taxpayer’s decision not to comply with the tax law does not support a finding that a taxpayer had reasonable_cause for his compliance failure ellwest stereo theatres of memphis tcmemo_1995_610 mistaken belief and lack of knowledge the mistaken belief that a tax filing is unnecessary does not by itself constitute reasonable_cause see 27_tc_840 acq 1957_2_cb_3 in beck the taxpayer believed that it did not have sufficient profits to necessitate filing a required excess_profits_tax return in finding that the taxpayer did not have reasonable_cause for failing to file the excess_profits_tax return the tax_court stated even if it was unaware of the fact that sales and income for and were substantial its failure_to_file a return cannot be excused on the ground of reasonable_cause unless it had reliable and affirmative information that its share of the earnings for the years in question were in fact less than the amount of the exemption the personal good_faith belief that the taxpayer is not required to file an excess_profits_tax return is insufficient alone to discharge the addition_to_tax under sec_291 citations omitted beck chem equip corp t c pincite taxpayers who decide not to make tax filings must take reasonable steps to ensure that their decision is correct and must demonstrate that care was taken in making the decision id pincite taxpayers deliberately omitting to file returns must use reasonable care to ascertain that no returns were necessary m istaken belief on the part of petitioner that no return was required under the statute does not constitute reasonable_cause for noncompliance citations omitted in 36_tc_395 acq 1962_2_cb_3 taxpayer did not have reasonable_cause for failing to file a personal_holding_company return when it incorrectly argued a transaction was a loan and thus it did not necessitate a personal_holding_company return filing the tax_court stated tam-117370-08 a lthough reasonable men might differ on the effect of the transfer petitioners failed to show that they consulted a lawyer or other tax counsel concerning the transactions of or that they relied upon any competent advice received on the matter indeed there is no showing that petitioners themselves considered the question even though they were aware of all the facts saigh t c pincite lack of knowledge of relevant material facts is insufficient to establish reasonable_cause for the failure to comply with a tax provision 860_f2d_1235 5th cir aff’g tcmemo_1987_391 estate of rector v comm’r tcmemo_2007_367 morrissey tcmemo_1998_443 the relevant inquiry is whether the taxpayer knew or should have known the relevant facts roberts f 2d pincite estate of rector tcmemo_2007_367 for example in roberts the court held that the wife of a husband who earned kickback income related to real_estate transactions did not have reasonable_cause for failing to file an income_tax return reporting that income because she knew or should have known about the income as a result of having access to her family’s books_and_records roberts f 2d pincite see also sec_1_6664-4 -4 b example and -4 c thus when making a reasonable_cause determination it is necessary to look beyond a taxpayer’s actual knowledge and consider what the taxpayer should have known advice from qualified_tax professionals a taxpayer’s reliance on advice received from qualified_tax professionals may indicate reasonable_cause if such reliance is reasonable advice can come in many forms whether formal informal written or oral sec_1_6664-4 states that advice is any communication and does not need to be in any particular form many cases address fact patterns where taxpayers follow erroneous advice of counsel and the court must determine the extent to which such reliance is reasonable e g 162_f2d_628 3d cir 122_f2d_843 3d cir ellwest stereo theatres of memphis inc v comm’r tcmemo_1995_610 however few reported cases address facts where taxpayer was correctly advised by its tax professional but chose not to follow such advice in such cases reasonable_cause is only found if the taxpayer’s decision not to follow the advice was reasonable see wadsworth v comm’r tcmemo_2008_171 98_tc_203 rev’d in part on other grounds 78_f3d_1355 9th cir in wadsworth the taxpayer filed amended tax returns claiming an erroneous contingent_liability deduction under sec_461 the taxpayer’s certified_public_accountant tam-117370-08 advised wadsworth that he was not entitled to a sec_461 deduction but wadsworth filed the amended returns contrary to this advice tcmemo_2008_171 the taxpayer presented no evidence that he relied upon any authority that rebutted his advisor’s opinion or that he had a reason other than to obtain a tax_refund for disregarding his certified public accountant’s advice id the tax_court held that the certified public accountant’s advice should have raised a red flag in the taxpayer’s mind that the claimed deduction was not allowable and thus the taxpayer a successful businessman who operated a multi-million dollar business did not have reasonable_cause for claiming the sec_461 deduction in error id similarly in condor international the tax_court held that when a taxpayer erroneously relied upon the advice of one advisor that tax returns were not required instead of contrary advice from another advisor that tax returns were required it did not have reasonable_cause condor international t c pincite because the taxpayer was unable to explain why it chose one advisor’s advice over the other’s advice the taxpayer did not have reasonable_cause for its failure_to_file the required tax returns id although as noted above a taxpayer may be able to establish reasonable_cause by reasonable reliance on a qualified_tax professional a corporate taxpayer cannot rely on its own tax department employees to establish reasonable_cause 90_f3d_1190 6th cir cf sec_301_9100-3 allowing taxpayers to rely upon their employees to obtain relief for missing deadlines for regulatory elections under sec_301_9100-1 because corporations only act through their employees a corporation cannot argue it reasonably relied on an outside qualified_tax professional when it relies on one of its own employees valen mfg co f 3d pincite a corporate taxpayer cannot show reasonable_cause for the failure to perform a tax compliance obligation by showing that it delegated tax compliance duties to employees obstetrical gynecological group p a v united_states ustc d colo ii analysis a reasonable_cause taxpayer makes several arguments why its failure_to_file a gain_recognition_agreement in connection with the outbound stock transfer was due to reasonable_cause taxpayer first argues that where the tax law is complex ambiguous or uncertain noncompliance should be excused for that reason alone second taxpayer argues that relief for failure_to_file a gain_recognition_agreement should be governed by standards similar to those provided in granting relief under sec_301_9100-1 through -3 relief and based on those standards it is entitled to relief third taxpayer argues that it satisfied the ordinary business care and prudence standard tam-117370-08 taxpayer’s first argument because the law was ambiguous the failure_to_file the gain_recognition_agreement was per se due to reasonable_cause taxpayer cites two cases for the proposition that a failure to comply with a complex uncertain or ambiguous provision is deemed automatically to be due to reasonable_cause without regard to other facts and circumstances brennan 488_f2d_858 and 158_f2d_472 further taxpayer argues that no reported case has found reasonable_cause not to exist where the underlying tax provision was complex or ambiguous this argument is incorrect first taxpayer’s argument is inconsistent with the express language of sec_1_367_a_-8 which provides that whether a failure_to_file was due to reasonable_cause shall be determined under all the facts and circumstances emphasis added taxpayer’s argument requires construing the word all in the governing regulation to have no meaning which violates basic canons of construction see 515_us_687 second taxpayer’s per se argument is contrary to the case law the complexity of a statute alone is not sufficient for a reasonable_cause finding rather the complexity of a statute is one circumstance to consider in determining whether the taxpayer had reasonable_cause brennan f 2d pincite in brennan the court considered both the ambiguity in the statute and the knowledge of the taxpayer for example the court considered what the taxpayer actually knew about the issue before holding that taxpayer had reasonable_cause for failing to pay interest equalization tax when taxpayer had no notice that a tax might be due id such a multi-factored analysis comports with other case law that states that whether a taxpayer has reasonable_cause is a case-by- case facts and circumstances determination see eg 296_f3d_607 123_tc_144 in economy savings loan co the sixth circuit found the taxpayer had a reasonable belief that an excess_profits_tax return was not required and that the taxpayer made an honest effort upon reasonable grounds to determine whether it had to file the return f 2d pincite central to the court’s finding that the taxpayer had reasonable_cause was its determination that taxpayer acted reasonably in trying to interpret the ambiguous rules regarding whether an excess_profits_tax return was necessary this case does not support the proposition that complexity or ambiguity alone necessitates a finding of reasonable_cause because the court also considered whether the taxpayer acted reasonably in interpreting the provision at issue in addition taxpayer’s argument is contrary to authority that provides that complexity alone is insufficient to establish reasonable_cause in ellwest stereo theatres of memphis the tax_court wrote e ven if we grant that the reporting and withholding obligations involved in these cases are relatively complicated petitioners have not tam-117370-08 demonstrated that this complexity was responsible for their failure to comply ellwest stereo tcmemo_1995_610 the tax_court also wrote t hat tax obligations are complex does not necessarily make noncompliance reasonable id this further illustrates that complexity does not constitute reasonable_cause as a per se rule_of law see also 56_tc_717 instead all the facts and circumstances must be considered taxpayer’s second argument relief standards should be used to determine whether taxpayer’s failure_to_file the gain_recognition_agreement was due to reasonable_cause taxpayer argues that relief standards should apply to determine whether its failure_to_file was due to reasonable_cause because the filing of a gain_recognition_agreement constitutes a tax election consistent with the relief standards taxpayer argues that reasonable_cause relief should be granted in this case because it would not prejudice the interests of the government taxpayer asserts that the government’s interests would not be prejudiced because there has not been a triggering event that would have required taxpayer to recognize the gain had the gain_recognition_agreement been timely filed taxpayer’s argument is incorrect the standards for determining reasonable_cause and the relief standards are distinct and must be separately applied as appropriate no reported federal tax case has looked to the relief standards to determine whether a taxpayer had reasonable_cause moreover sec_301_9100-1 expressly states that for elections where alternative relief is provided by a regulation published in the federal_register the commissioner may not grant relief here sec_1_367_a_-8 provides relief is granted if a taxpayer has reasonable_cause for failing to file a gain_recognition_agreement and files the agreement as soon as he becomes aware of the failure this provision renders relief inapplicable by its terms to the outbound stock transfer further nowhere in the relief regulations is reasonable_cause even mentioned thus it is inappropriate to look to relief standards to determine whether reasonable_cause exists reasonable_cause and relief are distinct concepts and reasonable_cause is governed by standards entirely separate from the relief standardsdollar_figure assuming only for the sake of argument that relief standards govern the determination of whether taxpayer had reasonable_cause for its failure_to_file taxpayer would be ineligible for relief under sec_301_9100-3 taxpayers that were informed in all material respects of the required election and related tax consequences but chose not to file the election are ineligible for relief accounting firm x informed taxpayer through the opinion letter and other documents of the need for a gain_recognition_agreement for the outbound stock transfer and of the related tax consequences despite being informed of the need to file a gain_recognition_agreement taxpayer chose not to file one thus taxpayer would not be eligible for relief even if that were the standard governing relief in this case tam-117370-08 taxpayer is also incorrect in its assertion that granting reasonable_cause relief is appropriate if doing so would not prejudice the interests of the governmentdollar_figure no reported case has considered prejudice to the government when determining reasonable_cause moreover as discussed in boyle the government has millions of taxpayers to monitor filing_requirements such as gain recognition agreements are the responsibility of taxpayers and must be governed by strict filing standards whether gain recognition agreements might later be triggered is of no consequence to determining whether they must be filed or whether the failure_to_file one is due to reasonable_cause this kind of wait-and-see approach is antithetical to sound tax_administration taxpayer’s third argument it satisfied the ordinary business care and prudence standard taxpayer claims it acted with ordinary business care and prudence and therefore has reasonable_cause for its failure_to_file a gain_recognition_agreement taxpayer argues that it acted with ordinary business care and prudence in determining its tax obligations by taking the degree of care that a reasonably prudent person would exercise it claims this degree of care led it to interpret sec_1_367_a_-3 to not require the filing of a gain_recognition_agreement for the outbound stock transfer taxpayer asserts that its normal_tax return review process including the analysis by employee a of whether a gain_recognition_agreement should be filed along with employee a’s meetings with employee b and employee c constitutes ordinary business care and prudence to further support its position taxpayer notes that it included in its return for year the notices required under sec_1_368-3 and sec_1_367_b_-1 which demonstrates taxpayer’s willingness to comply with the law taxpayer also asserts that it is entitled to relief notwithstanding the opinion letter advising it that a gain_recognition_agreement must be filed in support of this contention it argues that the opinion letter did not constitute advice and therefore need not be considered in further support of this position taxpayer states that at the time the year tax_return was filed employee a and employee b were unaware of the opinion letter’s conclusions regarding sec_367 for the reasons discussed below this argument is incorrect the discussion analyzes five circumstances that should be considered in determining whether taxpayer had reasonable_cause for its failure_to_file although certain aspects of these circumstances overlap with one another each will be analyzed separately a taxpayer’s sophistication experience knowledge and education no inference is intended as to whether there would be prejudice to the government under these facts tam-117370-08 taxpayer is sophisticated taxpayer is a large multinational corporation with substantial foreign operations it has a sophisticated tax department that is staffed with experienced tax professionals including certified public accountants for example employee a and employee b the primary taxpayer employees involved in the transaction had significant international tax experience both at taxpayer and with firms prior to being employed by taxpayer employee a was a former senior manager at accounting firm x and had k years of tax experience employee b was a former international tax partner at accounting firm y and had l years of federal tax experience including extensive experience in the area of cross-border mergers and acquisitions further taxpayer has the means to and does hire respected accounting and law firms such as accounting firm x and law firm to assist it in its tax matters including the transaction finally the transaction itself was highly-structured and tax-motivated many aspects of which involved detailed review and consideration from members of the working group a taxpayer with taxpayer’s resources experience knowledge and sophistication does not reasonably disregard the unqualified advice of accounting firm x on such a significant tax issue without at a minimum conducting thorough research and analysis to reasonably question its advisor’s conclusions and subsequently discussing the issue with its advisor indeed ordinary business care and prudence would require taxpayer to follow the advice of its advisor or at a minimum to conduct further research and analysis to verify or disprove that advice before choosing to disregard it taxpayer did neither here which indicates that taxpayer did not exercise ordinary business care and prudence b contemporaneous documentation research analysis and supporting legal authority contemporaneous documentation research analysis and supporting legal authority compiled by a taxpayer with respect to the issue at hand indicate that the taxpayer exercised ordinary business care and prudence ballmer tcmemo_2007_295 wadsworth tcmemo_2008_171 in ballmer the tax_court ruled that a taxpayer’s interpretation of a tax provision made without any proof that the taxpayer conducted any contemporaneous analysis to properly interpret that provision demonstrated a lack of reasonable_cause for failure to follow that provision ballmer tcmemo_2007_295 the facts at hand are similar to those in ballmer taxpayer asserts that employee a reviewed the applicable law and conducted a robust analysis of the application of sec_1_367_a_-3 to the outbound stock transfer however taxpayer has produced no evidence other than employee a’s assertion that would establish the extent of the research supporting that interpretation or that such research was even conducted before or contemporaneous with the decision not the file a gain_recognition_agreement it was unable to produce any memoranda notes e-mails lists of authority or other legal analysis discussing why it believed a gain_recognition_agreement was not required indeed employee a did not even discuss her analysis with anyone including any other tam-117370-08 member of the working group or employee c the only contemporary evidence of any legal analysis produced by taxpayer reached the opposite conclusion the opinion letter and gra representation explicitly provided that taxpayer was required to file a gain_recognition_agreement to avoid the application of sec_367 to the outbound stock transfer taxpayer’s lack of contemporaneous documentation and support for its position is also similar to the lack of authority wadsworth had wadsworth tcmemo_2008_171 both wadsworth and taxpayer received advice from a qualified_tax advisor that their position was incorrect and both still took the position without contemporaneous legal support id taking the position that a gain_recognition_agreement was not required with no contemporaneous documented legal authority to support that position notwithstanding accounting firm x’s unqualified advice that a gain_recognition_agreement was in fact required demonstrates that taxpayer did not have reasonable_cause for failing to file the gain_recognition_agreement c complexity uncertainty and ambiguity of the law the complexity uncertainty and ambiguity of a tax provision is a relevant factor to determine if reasonable_cause exists for the failure to comply with the tax provision economy savings loan co f 2d pincite brennan f 2d pincite the law governing cross border mergers and acquisitions such as sec_367 and the underlying regulations is complex such complexity is a factor that may indicate reasonable_cause however as discussed above the complexity of the provision at issue is only one factor in the reasonable_cause determination and does not as a per se rule mean that taxpayer had reasonable_cause for failing to file the gain_recognition_agreement in determining whether taxpayer had reasonable_cause for its failure_to_file a gain_recognition_agreement all the pertinent facts and circumstances must be considered d mistaken belief and lack of knowledge taxpayer’s mistaken belief that it did not have to file a gain_recognition_agreement does not indicate reasonable_cause such a belief must be reasonable in light of all the facts and circumstances beck chem corp t c pincite taxpayer failed to thoroughly research and document its conclusion on the issue and failed to consider the accounting firm x advice including the opinion letter which specifically stated a gain_recognition_agreement was due in addition taxpayer’s compliance efforts with respect to the outbound stock transfer were lacking employee a and employee b’s forgetting that the draft opinion letter stated that a gain_recognition_agreement was due is not relevant employee a and employee b the two tam-117370-08 taxpayer employees most involved with the transaction received reviewed and commented on the opinion letter and other advice including several drafts of representations from accounting firm x this should have alerted them to the need to file a gain_recognition_agreement employee a asserts that she did not read the portions of the opinion letter involving sec_367 including the gra representation at any time employee a was the primary international tax planner and tax technical research source within taxpayer’s tax department and the application of sec_367 to the outbound stock transfer was the sole international tax issue addressed in the opinion letter for purposes of reasonable_cause determinations what the taxpayer knew or should have known is the relevant inquiry roberts f 2d pincite estate of rector tcmemo_2007_367 taxpayer should have known that accounting firm x specifically and unequivocally advised it to file a gain_recognition_agreement and required the gra representation in determining whether taxpayer had reasonable_cause taxpayer is charged with that knowledge the application of sec_367 to the outbound stock transfer would cause taxpayer to recognize an amount of gain that would substantially eliminate the desired tax benefits of the transaction nevertheless when employee a and employee b met to discuss the reporting of the transaction employee a did not identify the application of sec_367 to the outbound stock transfer as an ambiguous situation requiring further investigation employee b does not recall discussing the application of sec_367 moreover apparently neither employee a nor employee b consulted or reviewed the opinion letter or other correspondence from accounting firm x when considering whether all the appropriate filings were included in the tax_return employee c states that he accepted employee a’s assertion that a gain_recognition_agreement was not due employee c did not however discuss employee a’s conclusion with her question her assertions or request any supporting documentation for the reasons discussed above taxpayer’s mistaken belief or lack of knowledge regarding the requirement to file a gain_recognition_agreement is not reasonable e advice from qualified_tax professionals taxpayer argues that it reasonably relied upon the judgment of a qualified_tax professional employee a in deciding not to file a gain_recognition_agreement it notes that employee a had extensive experience in tax matters and asserts that employee a reviewed the facts and relevant law and determined that taxpayer did not have to file a gain_recognition_agreement taxpayer argues that its reliance upon employee a satisfied the ordinary business care and prudence standard taxpayer further asserts that the opinion letter does not affect this result first taxpayer argues that the discussion of the need for a gain_recognition_agreement in the opinion letter did not constitute advice that would have alerted taxpayer to the need to file a gain_recognition_agreement this is the case according to taxpayer because the tam-117370-08 opinion was never finalized and because accounting firm x did not focus on the sec_367 issue as a critical aspect of the transaction taxpayer argues that the discussion of sec_367 did not constitute robust advice that was meant to advise taxpayer to file a gain_recognition_agreement rather taxpayer asserts that the gra representation allowed accounting firm x to assume away the issue instead of providing in-depth legal analysis of the issue second taxpayer argues that reasonable_cause is determined at the time the tax_return is filed at such time over a year after the outbound stock transfer occurred neither employee a nor employee b recalled that the opinion letter addressed the issue as a result taxpayer asserts that the opinion letter need not be taken into account this argument is incorrect for the reasons discussed below i relevance of advice from employee a taxpayer cannot rely on advice from employee a as the court in valen mfg co stated corporations only act through their employees taxpayer cannot rely upon its own employee to establish reasonable_cause for failure_to_file a gain_recognition_agreement further as illustrated by obstetrical gynecological group a corporate taxpayer cannot claim it has reasonable_cause because a delegated-to employee failed to appropriately comply with the tax law instead employee a’s actions and role in this matter must be considered along with all the other facts and circumstances ii relevance of opinion letter the opinion letter constitutes advice and therefore must be taken into account in determining whether taxpayer had reasonable_cause under sec_1 c advice is any communication and a dvice does not need to be in any particular form the opinion letter written by experienced tax practitioners representative d and representative e analyzed the relevant provisions unequivocally stated that a gain_recognition_agreement was necessary and required the gra representation this would put a reasonable taxpayer on notice that it should file a gain_recognition_agreement conduct a thorough documented analysis to determine that accounting firm x was incorrect in its position or at a minimum discuss the issue with accounting firm x a reasonable taxpayer does not simply disregard advice from a firm such as accounting firm x that taxpayer will recognize a substantial gain if it does not file a gain_recognition_agreement in addition no language in the opinion letter or in any other contemporaneous documents states that the sec_367 analysis was less valid than any other analysis contained in the opinion letterdollar_figure unlike with respect to certain other issues addressed in the opinion letter accounting firm x did not express any doubt as to its representative e’s assertions to the contrary were not supported by any contemporaneous documents tam-117370-08 conclusion regarding the filing of a gain_recognition_agreement nor did it state that it was merely assuming that taxpayer would file a gain_recognition_agreement the unqualified opinion letter analyzed the issue plainly concluded that a gain_recognition_agreement was due and as a result required the gra representation from taxpayer moreover the opinion letter stated if any of these facts assumptions or representations is not entirely complete or accurate it is imperative that we be informed immediately in writing because the incompleteness or inaccuracy could cause us to change our opinions this language demonstrates the importance of the representations underlying the opinions expressed in the opinion letterdollar_figure employee a and employee b’s failing to recall the fact that the opinion letter addressed sec_367 does not affect the significance of the opinion letter taxpayers are assumed to have the knowledge they reasonably should have 860_f2d_1235 in this case considering taxpayer’s sophistication and the amount of gain at issue both employee a and employee b international tax professionals with years of experience and education should have known that the opinion letter addressed sec_367 employee a and employee b should have consulted the file and the opinion letter to ensure they properly treated the outbound stock transfer on taxpayer’s tax_return taxpayer’s employees received reviewed and commented on several documents including the opinion letter that provided that a gain_recognition_agreement must be filed accordingly taxpayer should have known at the time it filed its tax_return that it was advised by accounting firm x that a gain_recognition_agreement was required thus the opinion letter must be taken into account as a result it must be determined the extent to which the opinion letter affects the reasonable_cause determination iii effect of opinion letter on reasonable_cause determination disregarding advice from taxpayer’s tax advisor especially without any contemporaneous justification for doing so does not support a finding of reasonable_cause wadsworth tcmemo_2008_171 condor international t c pincite taxpayer’s facts are similar to the facts presented in wadsworth in both situations sophisticated taxpayers had the advice of qualified_tax professionals interpreting a tax provision in both cases the taxpayers failed to follow that advice moreover the taxpayers failed to provide any sort of documentation that would justify their failure to follow the advice in wadsworth the tax_court stated that the certified public accountant’s refusal to amend tax returns based on claiming a sec_461 deduction should have raised a red flag in the taxpayer’s mind similarly the unqualified opinion letter stating that a gain_recognition_agreement was required should at a minimum have alerted taxpayer that it ought to file a gain_recognition_agreement question taxpayer did not at any time inform accounting firm x that it disagreed with or questioned the accuracy of the gra representation tam-117370-08 accounting firm x’s opposite conclusion or at least discuss the issue with the working group just as mr wadsworth did not have reasonable_cause for disregarding his advisor’s opinion that he could not claim a sec_461 deduction taxpayer’s disregarding accounting firm x’s advice indicates a lack of reasonable_cause b filing a gain_recognition_agreement when becoming aware of failure_to_file taxpayer argues that it was not required to file a gain_recognition_agreement with respect to the outbound stock transfer as soon as it was notified that one was due because of its belief that a gain_recognition_agreement was not required that is taxpayer asserts that this requirement of sec_1_367_a_-8 does not apply if the taxpayer disputes the need for a gain_recognition_agreement to be filed with respect to the transaction this argument is incorrect nothing in the regulation suggests that the filing obligation does not apply if taxpayer believed that a gain_recognition_agreement was not due taxpayer’s failure_to_file a gain_recognition_agreement as soon as being notified one was due renders it ineligible for relief under sec_1_367_a_-8 iii conclusion for the reasons discussed above taxpayer has not met its burden of establishing that its failure_to_file a gain_recognition_agreement was due to reasonable_cause and not willful neglect as provided under sec_1_367_a_-8 in addition taxpayer’s failure_to_file a gain_recognition_agreement after being notified one was due renders it ineligible for relief under sec_1_367_a_-8 thus the outbound stock transfer is described in sec_367 and is a taxable_exchange issue whether the application of sec_367 to the outbound stock transfer causes the transfer to be characterized as a transaction to which sec_304 applies i law as noted above in the discussion of issue sec_367 provides that if in connection with any exchange described in sec_332 sec_351 sec_354 sec_356 or sec_361 a united_states_person transfers property to a foreign_corporation such foreign_corporation shall not for purposes of determining the extent to which gain is recognized on such transfer be considered to be a corporation thus the general_rule of sec_367 is that a u_s_person must recognize gain on its transfer of property to a foreign_corporation when one of the enumerated provisions such as sec_354 applies to the transfer tam-117370-08 character and source of gain recognized under sec_367 are determined as if the transferred property had been disposed of in a taxable_exchange with the transferee foreign_corporation sec_1_367_a_-1t sec_304 generally provides that if one or more persons are in control of each of two corporations and in return for property one of the corporations acquires stock in the other corporation from the person or persons so in control then such property shall be treated as a distribution in redemption of the stock of the corporation acquiring such stock sec_317 provides that for purposes of part i of subchapter_c of the code which includes sec_304 the term property is defined as money securities and any other_property other than stock of a corporation making the distribution or rights to acquire such stock legislative_history to sec_304 provides that where the reorganization provisions apply including those governing the treatment of exchanges by shareholders pursuant to a plan_of_reorganization the rules of sec_304 providing treatment as a stock_redemption would not apply see h_r rep no pt dollar_figure ii analysis sec_367 does not apply to characterize the outbound stock transfer as an acquisition to which sec_304 applies instead sec_367 and sec_1001 apply to cause corporation x to recognize an amount of gain equal to the excess of the fair_market_value of the corporation z stock over such stock’s basis sec_1_367_a_-1t does not cause the outbound stock transfer to be characterized as an acquisition to which sec_304 applies this regulation applies only for purposes of determining the character and source of the gain that is recognized under sec_367 it does not affect the characterization of the underlying transaction as an exchange to which sec_354 appliesdollar_figure see also h_r rep no 98th cong 1st sess pincite in explaining the scope of sec_304 which coordinates sec_304 and sec_351 the house stated that only the nonrecognition_provision governing transfers to a corporation in which the shareholders have control sec_351 would be made inapplicable to exchanges involving controlled corporations treated as redemptions thus where the reorganization provisions apply including those governing the treatment of exchanges by shareholders pursuant to a plan_of_reorganization the rules of sec_304 providing treatment as a stock_redemption would not apply and revrul_2004_83 2004_31_irb_157 sec_304 does not override sec_368 reorganization treatment this is consistent with prop sec_1_367_a_-1t clarifying that gain recognized because of sec_367 does not cause a nonrecognition exchange to be characterized as something other than that nonrecognition exchange fed reg pincite8 date tam-117370-08 nor does the fact that taxpayer stock in the hands of corporation y is property within the meaning of sec_317 cause the outbound stock transfer to be characterized as an acquisition to which sec_304 applies sec_367 only disregards the corporate status of corporation y for purposes of determining the extent to which gain is recognized by corporation x in connection with its transfer of the corporation z stock to corporation y in the sec_354 exchange the application of sec_367 to the outbound stock transfer does not preclude reorganization treatment for example although gain may be recognized under sec_367 other provisions that apply to reorganizations such as sec_358 sec_362 and sec_381 may still apply to the transaction see eg sec_1_367_a_-1t gain recognized under sec_367 is reflected in basis as determined under sec_362 because sec_367 does not deny a transaction’s status as a reorganization congress’ intent that sec_304 does not override reorganization treatment means that the outbound stock transfer should not be characterized as an acquisition to which sec_304 applies iii conclusion the application of sec_367 to the outbound stock transfer does not cause the transfer to be characterized as an acquisition to which sec_304 applies caveat s a copy of this technical_advice_memorandum is to be given to the taxpayer s sec_6110 of the code provides that it may not be used or cited as precedent this document may not be used or cited as precedent sec_6110 of the internal_revenue_code