auc significant index no internal_revenue_service employee_plans technical_advice_memorandum cy ee ep area manager through ep special review taxpayer's name taxpayer's address taxpayer's identification_number year involved conference held date company plan plan plan plan issue - is plan fully funded for the plan_year and subsequent plan years oris there an accumulated_funding_deficiency as defined in sec_412 of the internal_revenue_code facts the company established plan effective date the company also maintained plan and plan the plans are qualified defined benefit plans subject_to the requirements of sec_412 of the code the plan_year for each plan was the calendar_year the funding method for all three plans was the unit credit funding method with the actuarial value of the assets determined as the fair_market_value of the assets the actuarial assumptions used for the plans were the same in some respects and differed in other respects the valuation_date for each of the plans was january the first day of the plan_year in date the actuarial valuation reports summarizing the results of the date actuarial valuation were prepared and transmitted to the company effective date plan and the plan were merged as defined in sec_414 of the code into plan the name of plan was changed to the and plan had a short plan_year beginning date and ending date the valuation_date for each of the three plans was date plan the schedule b of form_5500 that was filed for plan for the schedule b shows a normal_cost on line 9b of dollar_figure which was pro-rated to reflect the portion of the plan_year through date the schedule b also shows a credit balance of dollar_figure on line 9n and a funding deficiency of dollar_figure on line 9o in the funding_standard_account the attachment to the schedule b states that due to the merger with the plan that the contribution that would have been due to this plan could not be made because the merged plan is fully funded applicable law sec_404 of the internal_revenue_code sets out the rules under which deductible limits are derived for defined benefit pension plans it further states that in determining the amount deductible under these rules the funding method and the actuarial assumptions used are to be the same as those used under sec_412 and that the maximum amount deductible for a year shall be an amount equal to the full funding limitation for the year determined under sec_412 of the code sec_412 of the code provides the rules under which the minimum_required_contribution to a defined benefit pension_plan is determined a plan to which sec_412 applies shall have satisfied the minimum_funding_standard for the plan for a plan_year if as of the end of such plan_year the plan does not have an accumulated_funding_deficiency the term accumulated_funding_deficiency means for any plan_year the excess of the total charges to the funding_standard_account for all plan years beginning with the first plan_year to which sec_412 applies over the total credits to such account for such years sec_1_404_a_-14 of the income_tax regulations provides rules for determining the deductible limit under sec_404 of the code for defined benefit plans sec_1_404_a_-14 of the regulations provides this entry appears to be in error based on subtracting the full funding limitation credit from total credits instead of subtracting total charges from total credits - that regardless of the actual time when contributions are made to a plan in computing the deductible limit under sec_404 and iii the normal_cost and limit adjustments shall be computed as of the date when contributions are assumed to be made the computation_date and adjusted for interest at the valuation rate from the computation_date to the earlier of i the last day of the plan_year used to compute the deductible limit for the taxable_year or ii the last day of the taxable_year sec_1_404_a_-14 of the regulations provides that the deductible limit may not exceed the full funding limitation the rules under sec_412 and paragraphs d e and f of sec_1_404_a_-14 are to be used to determine the full funding limitation revrul_79_237 1979_2_cb_190 provides guidance as to the applicability of the minimum_funding_standard to plans that terminate revrul_79_237 generally states that the minimum_funding_standard applies to a plan until the end of the plan_year in which such plan terminates and does not apply to the plan in subsequent plan years in the case of the termination of a plan revrul_79_237 provides that the normal_cost and amortization charges and credits and the interest charges and credits are ratably adjusted to reflect the portion of the plan_year before the plan terminated rev_rul 79-237also provided that the extension period of sec_412 of the code will not be changed merely because the date of termination precedes the end of the plan_year revrul_82_125 1982_1_cb_64 provides examples of the determination of the full funding limitation under revrul_82_125 for purposes of sec_404 of the code the full funding limitation is determined as the excess of a the sum of the accrued liability plus the normal_cost determined as of the valuation_date and increased with interest to the end of the plan_year over b the lesser_of the fair market vaiue or the actuarial value of the assets as of the valuation_date increased with interest to the end of the plan_year with a further adjustment of then subtracting any contribution carryover without an interest adjustment revproc_87_27 1987_1_cb_769 provides rules for determining the deductible limit when there is a change in the plan_year sec_5 of revproc_87_27 provides for an adjustment to the deductible limit for the employer's taxable_year when the sum of the number of months of each plan_year associated with an employer's taxable_year is different from the number of months in the employer's taxable_year the adjustment is obtained by multiplying the sum of the deductible limits for the associated plan years by a fraction where the numerator is the number of months in the taxable_year and the denominator is the aggregate number of months in plan years associated with such taxable_year furthermore the deductible limit for a short plan_year is determined by ratably reducing the deductible limit for a 12-month plan_year in proportion to the number of months of the short plan_year analysis in general the minimum_funding_standard of sec_412 of the code is applied on the basis of a plan_year the minimum_funding_standard is satisfied for a plan_year if the accumulated credits in the funding_standard_account for the plan_year and prior plan years equal or exceed the accumulated charges for the plan_year and prior plan years for a particular plan_year the relevant charges and credits are based upon an actuarial valuation for the plan_year the actuarial valuation determines the normal_cost accrued liability actuarial asset value experience gains and losses and related amortization charges and credits as of the valuation_date for the plan_year the data used for the actuarial valuation is the relevant asset values demographic information and plan provisions as of the valuation_date funding_standard_account are adjusted with interest to the end of the plan_year once determined the relevant charges and credits to the as a consequence of choosing a valuation_date the results of the actuarial valuation as of that date are not affected by events occurring after the valuation_date thus for example demographic changes that occur after the valuation_date have no affect on the determination of the normal_cost for the plan or the accrued liability similarly changes in the value of the plan’s assets that occur after the valuation_date have no affect on the determination of the actuarial value of the plan’s assets if later events cause a plan to be fully funded ie the full funding limitation is zero as of the date of the next actuarial valuation that result does not alter the minimum_funding requirement based on the earlier actuarial valuation there is a minimum_funding requirement greater than zero as of the next valuation_date that result does not alter the result of the earlier valuation that shows the plan to be fully funded and that no contribution is due conversely if the results of the next actuarial valuation show that under sec_412 of the code the minimum_funding_standard applies through the end of the plan_year in which the plan ceases to exist termination that year is the plan_year in which the plan is terminated in the case of a merger of the plan with another plan that year is generally the plan_year in which the merger occurs the valuation_date for the plan_year beginning date was january the first day of the plan_year the results of the in the case of a plan_valuation indicated that a contribution of dollar_figure was needed to avoid a funding deficiency following the principles of revrul_79_237 such contribution could be made anytime during the month period after the end of the plan_year for this purpose contributions to the trust after the merger can be counted as contributions to the plan because the trust for the plan has become part of the trust after the merger in this case sufficient contributions were not made during the applicable month period accordingly there is a funding deficiency for the plan_year there is a funding deficiency regardless of subsequent events such as contributions made in the next plan_year after the end of the month period or an actuarial valuation for the next plan_year that shows the plan to be fully funded note however these subsequent events have a bearing on whether the funding deficiency has been corrected so as to avoid the percent excise_tax of sec_4971 of the code in situations such as this where a later actuarial valuation shows that the plan is fully funded the funding deficiency will have been corrected as a practical matter therefore under sec_412 of the code the taxpayer does not actually have to contribute to the plan an amount equal to the funding deficiency to avoid incurring sec_4971 tax for the plan_year or sec_4971 tax for later plan years the only out-of-pocket_expense is the percent excise_tax of sec_4971 for the plan_year beginning date under sec_1_404_a_-14 of the regulations the deductible limit for a defined_benefit_plan is determined for a plan_year based upon the computation_date generally as is the case here the computation_date is the valuation_date for the actuarial valuation for the plan_year once the deductible limit is determined as of the computation_date the limit is increased with interest to the earlier of the end of the plan_year or the end of the tax_year events that take place after the valuation_date do not affect the deductible limit thus the fact that a plan becomes fully funded at a later date does not affect the deductible limit for the year conversely if the results of the actuarial valuation for the year show the deductible limit to be zero the fact that the deductible limit for a later year is greater than zero for example because of experience losses does not alter the allowable deduction for the earlier period the funding deficiency appears to be slightly overstated the credit balance as of the beginning of the year plus interest on that credit balance should be applied towards the contribution that would be required this would reduce the funding deficiency the proposed_regulations under sec_412 are consistent with this procedure sec_1 c -1 b of the proposed_regulations provides that the assets and accrued liabilities are to be valued at the usual time used by the plan for valuation and projected to the end of the plan_year with interest at the valuation rate the results of the date actuarial valuation indicated that dollar_figure would be deductible consequently contributions made for the year up to that amount would still be deductible even if an actuarial valuation as of a later date indicated that the deductible limit was zero a merger of the plan with another plan is an event that takes place after the valuation_date and does not render a contribution for the plan_year as nondeductible even if the period up to the time of the merger were regarded as a short plan_year the deductible limit would first be ratably reduced and then adjusted upwards pursuant to revproc_87_27 producing a deductible limit of dollar_figure see example in dollar_figure of rev_proc - in the post-conference submission dated date the taxpayer argues that the view that there is a funding deficiency is a retroactive application of revproc_99_45 1999_45_cb_603 the taxpayer asserts that until the publication of revproc_99_45 there was no published guidance for the taxpayer to rely upon especially concerning mergers this is not the case as described above sec_1_404_a_-14 provided guidance as to the computation_date under sec_404 the regulation made no exception for a plan that was merged into another plan furthermore revrul_82_125 provided examples showing such treatment the taxpayer can point to no published guidance that would suggest the contrary result conclusion plan has an accumulated_funding_deficiency for the plan_year beginning january the company is liable for excise_tax under sec_4971 a of the code on account of this accumulated_funding_deficiency however because this accumulated_funding_deficiency was timely corrected the company is not liable for excise_tax under sec_4971 on account of this accumulated_funding_deficiency in addition the company’s liability for excise_tax under sec_4971 with respect to this accumulated_funding_deficiency relates only to the plan_year of plan beginning date and not to any subsequent plan years of plan this memorandum only applies to the taxpayer involved sec_6110 of the code provides that it may not be used or cited by others as precedent this amount was determined to be the full funding limitation calculated at the beginning of the plan_year plus interest pincite percent the full funding limitation limited the amounts determined under paragraphs i and ii of sec_404 this memorandum has been coordinated with the division counsel associate chief_counsel tax exempt and government entities cc tege eb qp'1


release number release date date date vil code internal_revenue_service national_office technical_advice_memorandum e exams programs and review internal_revenue_service attn eo mandatory review mc dal commerce street dallas tx taxpayer's name taxpayer's address taxpayer's identification_number tax years invoived date of conference legend foundation corporation grantee l e - i y u n i n w n o t n n n e a t t t e n e n should the first-tier excise_tax due under internal_revenue_code i r c sec_4945 on the foundation’s taxable_expenditure for the years at issue be abated in accordance with sec_4962 facts foundation is a sec_501 organization established in year1 and classified as a private_operating_foundation grantee is a not-for-profit membership entity whose membership at the time of the grants included foundation which held a percent membership interest the president of foundation is also the president of grantee n addition to the president grantee’s board_of directors included the chief financial officer cfo of foundation grantee applied for tax exemption under sec_501 on date1 foundation contributed a total of dollar_figurex on date2 and date3 to grantee for community and economic development at the time of the distributions foundation was aware that grantee was not recognized as exempt under sec_501 in addition foundation and grantee did not enter into a written terms commitment document signed by both parties as required by sec_53_4945-5 in date4 the trustees of grantee decided not to continue the application process and on date5 the service closed grantee's application_for tax exemption for failing to respond to a request for additional information foundation states that it was aware of the decision by grantee to discontinue the process for its application_for exemption in addition the president of foundation as president of grantee was involved in the decision to end the application process foundation states that it did not understand the significance in terms of the grant nor the result disqualification of that decision by grantee grantee’s assets and liabilities were transferred to a disregarded_entity under another organization exempt under sec_501 the grantee which is not tax-exempt continues with its activity limited to holding_real_estate interests during preparation of the form_990-pf foundation as part of its annual review considered the grant funds for expenditure_responsibility at that time foundation knew that grantee had discontinued its application process for sec_501 status but did not request repayment of the funds instead a statement was attached to the originally filed return in accordance with sec_4945 and sec_53_4945-5 to demonstrate that foundation exercised expenditure_responsibility regarding the grants in a letter dated date6 foundation notified the board_of managers of grantee of the repayment issue recalling the dollar_figurex grant and requested repayment of the grant funds within days foundation states that the unexpected repayment request as well as other factors prevented the grantee from immediate access to the funds the grant funds were not repaid until date foundation filed an amended form_990-pf reporting the grants previously reported as qualifying distributions as taxable_expenditures in a letter dated date8 in response to the service’s request for a copy of the terms commitment document foundation stated that during a review of its interaction with grantee for expenditure_responsibility purposes foundation discovered it was missing a key document a terms commitment document signed by both foundation and grantee as required by the regulations foundation stated that due to an oversight by the foundation this key document was never entered into the foundation filed form_4720 return of certain excise_taxes under chapter sec_41 and sec_42 of the internal_revenue_code for year ended date on date9 to report the excise_tax on taxable_expenditures under sec_4945 foundation paid the first-tier tax under sec_4945 in addition to penalties and interest calculated through date9 at the time of the filing of the return foundation requested that the initial tax be abated under sec_4962 no notice_of_deficiency with respect to the first-tier tax has been issued law r c sec_508 provides special rules with respect to sec_501 organizations subparagraph a provides that an organization organized after date must notify the secretary that they are applying for recognition of exempt status under sec_501 subparagraph b provides that any such organization that does not notify the secretary as prescribed that it is not a private_foundation shall be presumed to be a private_foundation sec_4945 imposes an initial tax of on a private_foundation for each taxable_expenditure sec_4945 provides that the term taxable_expenditure means any amount_paid or incurred by a private_foundation a as a grant to an organization unless such organization i is described in paragraph or of sec_509 ii is an organization described in sec_509 other than an organization described in clause i or ii of sec_4942 or iti is an exempt_operating_foundation as defined in sec_4940 or b the private_foundation exercises expenditure_responsibility with respect to such grant in accordance with sec_4945 ilr c sec_4945 provides that the expenditure_responsibility referred to in sec_4945 means that the private_foundation is responsible to exert all reasonable efforts and to establish adequate procedures to see that the grant is spent solely for the purpose which made to obtain full and complete reports from the grantee on how the funds are spent and to make full and detailed reports with respect to such expenditures to the secretary lr c sec_4945 defines the term correction to mean with respect to any taxable_expenditure recovering part or all of the taxable_expenditure to the extent recovery is possible and where full recovery is not possible such additional corrective action as is prescribed by the secretary or_his_delegate by regulations sec_4945 defines the term taxable_period to mean with respect to any taxable_expenditure the period beginning with the date on which the taxable_expenditure occurs and ending on the earlier of a the date of mailing a notice_of_deficiency with respect to the tax imposed by subsection a under sec_6212 or b the date on which the tax imposed by subsection a is assessed sec_4962 provides that if it is established to the satisfaction of the secretary that a taxable_event was due to reasonable_cause and not to willful neglect and such event was corrected within the correction_period for such event then any qualified_first_tier_tax imposed with respect to such event including interest shall not be assessed and if assessed the assessment shall be abated and if collected shall be credited or refunded as an overpayment sec_4963 provides that term correction_period means with respect to any taxable_event the period beginning on the date on which such event occurs and ending days after the date of mailing under sec_6212 of a notice_of_deficiency with respect to the second_tier_tax imposed on such taxable_event sec_1_508-1 provides in part that any organization including an organization in existence on date which is described in sec_501 and which does not notify the commissioner within the time and in the manner prescribed in subparagraph that it is not a private_foundation will be presumed to be a private_foundation subparagraph states that the notice filed under this paragraph may not be relied upon by the organization so filing unless and until the internal_revenue_service notifies the organization that it is an organization described in paragraph or of sec_509 subparagraph provides that respect to a grantor contributor or distributor to any organization for any period after the date on which the internal_revenue_service makes notice to the public such as by publication in the internal_revenue_bulletin that a grantor contributor or distributor to such organization can no longer rely upon the notice or statement submitted by such organization and ii upon any grant contribution or distribution made to an organization on or after the date on which a grantor contributor or distributor acquired knowledge that the internal_revenue_service has given notice to such organization that its notice or statement has failed to establish that such organization either is not a private_foundation or is an operating_foundation i with sec_53_4945-1 provides in part that except as otherwise provided correction of a taxable_expenditure shall be accomplished by recovering part or all of the expenditure to the extent recovery is possible and where full recovery cannot be accomplished by any additional corrective action which the commissioner may prescribe sec_53_4945-5 provides that the term taxable_expenditure includes any amount_paid or incurred by a private_foundation as a grant to an organization other than an organization described in sec_509 or unless the private_foundation exercises expenditure_responsibility with respect to such grant in accordance with sec_4945 sec_53_4945-5 provides that a private_foundation will be considered to be exercising expenditure_responsibility under sec_4945 as long as it exerts all reasonable efforts to establish adequate procedures i to see that the grant is spent solely for the purposes for which made ii to obtain full and complete reports from the grantee on how the funds are spent and iii to make full and detailed reports with respect to such expenditures to the commissioner sec_53_4945-5 provides that in order to meet the expenditure_responsibility requirements of sec_4945 a private_foundation must require that each grant to an organization with respect to which expenditure_responsibility must be exercised under this section be made subject_to a written commitment signed by an appropriate officer director or trustee of the grantee organization sec_53_4945-5 provides that in order to meet the expenditure_responsibility requirements of sec_4945 with regard to the making of a program-related_investment a private_foundation must require that each investment with respect to which expenditure_responsibility must be exercised under this section be made subject_to a written commitment signed by an appropriate officer director or trustee of the grantee organization sec_53_4945-5 provides that to satisfy the report making requirements of sec_4945 a granting foundation must provide the required information on its annual information_return for each taxable_year with respect to each grant made during the taxable_year which is subject_to the expenditure_responsibility requirements of sec_4945 the report must include i the name and address of the grantee ii the date and amount of the grant iii the purpose of the grant iv the amounts expended by the grantee v whether the grantee diverted any portion of the funds from the purpose of the grant vi the dates of any reports received from the grantee and vii the date and results of any verification of the grantee’s reports undertaken by or at the director of the grantor foundation in 93_tc_35 the tax_court held that a private foundation's grants to two related private_foundations were taxable_expenditures due to the foundation's failure to comply with the expenditure_responsibility requirements even though as a factual matter the grantor kept itself fully aware of the all three foundations shared a common founder and had officers and recipients’ activities trustees in common the grantor foundation made grants to the other two foundations but failed to obtain the written agreements and annual reports required by sec_53 b or to report the grants to the irs on its form_990-pf as required by sec_4945 acknowledging that the grantor kept itself informed of the activities of the other foundations and that none of the grant money was misspent the court held that there must be strict compliance with the expenditure_responsibility requirements in order to avoid the sec_4945 tax revrul_77_213 1977_1_cb_357 holds that a private_foundation that failed to list on its original annual information_return a grant to an organization not described in either sec_509 or of the code but corrected the omission on an amended_return filed after the due_date has failed to exercise the expenditure_responsibility requirements of sec_4945 with respect to the grant and the grant is a taxable_expenditure h_r rep no pt 98th cong 2d sess and s rep no vol 98th cong 2d sess in explanation of the abatement provision states a violation of the foundation rules which was due to ignorance of the law is not to qualify for such abatement under sec_4962 delegation_order formerly do-237 rev delegates authority to abate substantial first- tier excise_taxes to the director exempt_organizations substantial qualified first-tier tax amount is described as a sum exceeding dollar_figure for all such tax_payments or deficiencies excluding interest other taxes and penalties involving all related parties and transactions arising from chapter taxable events within the statute_of_limitations as determined by the area office involved see irm dollar_figure in addition foundation failed to enter into a written terms commitment analysis for the first-tier tax to be abated under sec_4962 the tax assessed must be from a taxable_event due to reasonable_cause and not to willful neglect and the taxable_event was corrected within the correction_period for such event here foundation’s two transfers of funds to grantee are taxable_expenditures within the meaning of sec_4945 and do not satisfy the requirement of sec_4945 because at the time of the transfers grantee was not a public charity described in sec_509 or document signed by the parties as required by sec_53_4945-5 and pursuant to sec_1_508-1 foundation’s argument that it relied on the grantee’s pending application is without merit foundation was fully aware that grantee was not exempt at the time of the grants the standard for whether a grant to an organization is taxable_expenditure is based on whether the grantee has a letter classifying it under sec_509 or grantee did not receive a determination_letter even though the transfers were not made to public_charities foundation might have avoided making taxable_expenditures under sec_4945 had it complied with the expenditure_responsibility requirements of having written agreements describing the terms and commitment signed by the parties as required by sec_53_4945-5 and however it did not do so as discussed in 93_tc_35 there must be strict compliance with the expenditure_responsibility requirements in order to avoid the sec_4945 tax the filing of an amended_return containing the information omitted on the original return will only prevent the imposition of the additional tax’ eg the second-tier tax under sec_4945 for example in revrul_77_213 1977_1_cb_357 a private_foundation failed to list on its original annual information_return a grant to an organization not described in either sec_509 or but corrected the omission on an amended_return filed after the due_date the organization failed to exercise the expenditure_responsibility requirements of sec_4945 with respect to the grant and the grant is considered a taxable_expenditure similarly by failing to enter into the terms and commitment document the contributions to grantee are considered taxable events under sec_4962 sec_4962 does not define ‘reasonable cause other code sections and the regulations including sec_53_4945-1 v indicate that the standard should be ordinary business care and prudence under sec_301_6651-1 and other provisions that impose a reasonable_cause standard determining whether reasonable_cause was shown requires consideration of all the facts and circumstances examples that do not establish reasonable_cause include ignorance of the law a form_990-pf was prepared by a paid professional and they gave no notice that a specifically identified questionable transaction occurred the foundation or related foundation had a similar previous abated tax under sec_4962 under a similar event a situation in which a tax may be abated include a foundation relying in good_faith on the written advice of an attorney or accountant dated prior to the transaction that the transaction was not subject_to chapter excise_tax sec_4962 does not define willful neglect sec_6653 or for returns due after date sec_6662 defines negligence for purposes of the negligence_penalty as including any failure to make a reasonable attempt to comply with the provisions in the generally accepted legal sense negligence is the failure to do something that a reasonable person guided by those considerations that ordinarily regulate the conduct of human affairs willful is would do or doing something that a prudent and reasonable person would not do defined in several places for example sec_53_4945-1 as voluntary conscious and intentional and sec_1_507-1 which provides that no motive to avoid the foundation restrictions is necessary to make an act or failure to act willful but that an act or failure to act is not willful if the foundation does not know that it is an act to which the foundation rules apply thus the term willful neglect implies a voluntary conscious and intentional failure to exercise the care that a reasonable person would observe under the circumstances to see that the standards were observed despite knowledge of the standards or rules in question a finding that a violation was caused by willful neglect will preclude abatement of the first-tier tax but a mere finding of no willful neglect does not in itself justify abatement here foundation submitted no evidence that they had reasonable_cause foundation argues that it relied on grantee's pending application in making the grant however as noted above the grantee cannot be treated as an organization described as a public charity in sec_509 unless the organization receives a determination_letter from the internal_revenue_service describing the organization as a public charity foundation also argues that the failure to enter into a written terms commitment document was simply due to an oversight by the foundation and that foundation has going forward ensured that any subsequent grants that it makes are subject_to a written terms commitment document demonstrating foundation’s good_faith efforts in complying with the statutory requirements under sec_4962 the taxable_event must be corrected within the correction_period as provided in sec_4963 and sec_53_4963-1 the correction_period begins with the date on which the taxable_expenditure occurred and end sec_90 days after the mailing of a notice_of_deficiency with respect to the second-tier tax sec_4961 allows the abatement of the second-tier tax if a taxable_expenditure is corrected during the correction_period the second-tier tax imposed is not assessed and if assessed the assessment is abated sec_53_4961-1 here the correction_period remains open because foundation self-assessed the first-tier tax closing the taxable_period and then corrected the event prior to the service issuing a statutory_notice_of_deficiency with respect to the second-tier tax based on the above facts and circumstances foundation has failed to show that the taxable_event was due to reasonable_cause factors showing lack of reasonable_cause include foundation failing to enter into a terms commitment agreement as required by the regulations to exercise expenditure_responsibility and lack of explanation or documentation indicating that foundation consulted with or sought professional advice before making the grants other factors that show a lack of reasonable_cause was that foundation was aware that grantee had not received exemption and that the grants made by foundation to grantee were subject_to sec_4945 as a taxable_expenditure indicated by the close ties of the foundation and the grantee the president of foundation is also president of grantee and foundation’s cfo is on grantee's board_of directors in addition the expenditure_responsibility statements submitted with the originally filed return and the amended_return do not satisfy the strict compliance requirements of sec_53_4945-5 and the request to abate the tax is denied by the acting director exempt_organizations based on the foregoing facts we find that the first-tier excise_tax due under sec_4945 of the code on foundation’s taxable_expenditure for the year at issue should not be abated in accordance with sec_4962 foundation has not established reasonable_cause to justify abatement of the taxes a copy of this memorandum is to be given to sec_6110 of the internal_revenue_code provides that it may not be used or cited as precedent -end-


internal_revenue_service department of the treasury index number number release date washington dc person to contact telephone number refer reply to cc dom p si br 1-plr-108610-00 date date legend x d1 state this letter responds to the ruling_request dated date that was submitted by your representative and which requests relief under sec_1362 of the internal_revenue_code facts x was incorporated on d1 under the laws of state x intended to be treated as an s_corporation for federal_income_tax purposes effective on d1 but the s election was not timely filed law and analysis sec_1362 provides that a small_business_corporation may elect to be an s_corporation sec_1362 provides the rule on when an s election will be effective if an s election is made within the first two and one-half months of a corporation’s taxable_year then the corporation will be treated as an s_corporation for the year in which the election is made if the election is made after the first two and one-half months of a corporation’s taxable_year then the corporation will not be treated as an s_corporation until the taxable_year after the year in which the s election is made sec_1362 provides that if no election is made pursuant to sec_1362 or if made the election is made after the date prescribed for making such an election and the secretary determines there was reasonable_cause for the failure to timely make the plr-108610-00 election then the secretary may treat such an election as timely made for such taxable_year and effective as of the first day of that tax_year x did not file a timely election to be treated as an s_corporation under sec_1362 effective on d1 x has however established reasonable_cause for not making a timely election and is entitled to relief under sec_1362 conclusion based solely on the facts submitted and representations made and provided that x otherwise qualifies as a subchapter_s_corporation we conclude that x will be recognized as an s_corporation effective d1 within days from the date of this letter x should submit a properly completed form_2553 with a copy of this letter attached to the relevant service_center except as specifically set forth above no opinion is expressed as to the federal tax consequences of the transaction described above under any other provision of the internal_revenue_code this ruling is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent pursuant to the power_of_attorney on file with this office the original of this letter is being sent to the taxpayer and a copy will be sent to the taxpayer’s representative signed david r haglund sincerely yours senior technician reviewer branch office of the assistant chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes


internal_revenue_service number release date index number -------------------------------- ------------------------- ---------------------- re -------------------------- legend department of the treasury washington dc third party communication none date of communication not applicable_person to contact ----------------------- --------------- telephone number -------------------- refer reply to cc psi b04 plr-126064-14 date date ------------------------------------------------------ --------------------------------------------- ----------------------------------------------------- ------------------------------------------------------ ----------------------------------------- --------------------------- settlor ---------------------------------------------------------------------------------------- clat ------------------------------------------------------------------------------------------------------- clat --------------------------------------------------------------------------------- charitable_organization ------------------------------------------------------------------------------ trust ------------------------------------------------------------------------------------- trust ---------------------------------------------------------------------- date date date date date year year month a month b month c month d r s t attorney certified_public_accountant ------------------ ----------------------- --------------------- ----------------------- ------------------ ------ ------ ------------------- ------------- ------------------ ---------------- ------------ --------- ------------ ------------------------- ------------------------ plr-126064-14 dear --------------- this letter responds to a letter from your authorized representative dated date requesting an extension of time under sec_301_9100-1 and sec_301_9100-3 of the procedure and administration regulations to make an election under sec_7520 of the internal_revenue_code the facts and representations submitted are summarized as follows clat on date settlor transferred property with a stated_value of dollar_figurer to an irrevocable_trust clat described as a charitable_lead_annuity_trust the terms of the trust provide that an annuity is to be paid to charitable_organization for a period of s years on the expiration of the s-year period the remaining trust property is to be divided between trust and trust and held for the individual beneficiaries of those trusts on date settlor filed a gift_tax_return form_709 united_states gift and generation-skipping_transfer_tax return reporting the transfer the reported value of the charitable_annuity was determined using the sec_7520 federal midterm interest rate for month a a month that was two months preceding month b the month in which the date transfer was made however the gift_tax_return did not include the statement and information required under sec_25_7520-2 for making a prior month election that is an election to value the charitable interest using a prior-month interest rate instead of the interest rate prescribed for the month in which the transfer was made the statement and information were subsequently attached to the form_1041 u s income_tax return for estates and trusts filed for clat for year on date clat on date settlor transferred property with a stated_value of dollar_figuret to another irrevocable_trust clat described as a charitable_lead_annuity_trust as with clat the terms of clat provide that an annuity is to be paid to charitable_organization for a period of s years on the expiration of the s-year period the remaining trust property is to be divided between trust and trust and held for the individual beneficiaries of those trusts on date settlor filed a gift_tax_return reporting the transfer the reported value of the charitable_annuity was again determined using the sec_7520 interest rate for month c a month that was two months preceding month d the month in which the date transfer was made this gift_tax_return as well did not include the statement and information required under sec_25_7520-2 for making an election to use a prior month interest rate in determining the value of the charitable_annuity plr-126064-14 settlor relied on attorney and certified_public_accountant to prepare and file the prior-month elections under sec_7520 as part of her gift_tax returns filed for year and year attorney who structured the trusts directed certified_public_accountant who prepared the form_1041 for year to attach the election to the form_1041 settlor has requested an extension of time under sec_301_9100-1 and sec_301_9100-3 to file amended form_709 gift_tax returns making the respective prior-month elections in valuing the charitable annuities payable from clat and clat law and analysis sec_2512 of the internal_revenue_code provides that if the gift is made in property the value thereof at the date of the gift shall be considered the amount_of_the_gift sec_2522 provides that in computing taxable_gifts for the calendar_year there shall be allowed as a deduction the amount of all gifts made during the year to or for_the_use_of the charitable purposes described therein sec_2522 provides that where a donor transfers an interest in property to a person or for a use described in subsection a and an interest in the same property is retained by the donor or is transferred or has been transferred for less than an adequate_and_full_consideration in money or money’s worth from the donor to a person or for a use not described in subsection a no deduction shall be allowed for the interest which is or has been transferred to the person or for the use described in subsection a unless in the case of any interest other than a remainder_interest the interest is in the form of a guaranteed annuity or is a fixed percentage distributed yearly of the fair_market_value of the property to be determined yearly sec_25_2522_c_-3 provides in part that the charitable interest is a guaranteed_annuity_interest whether or not such interest is in trust the term guaranteed_annuity_interest means an irrevocable right pursuant to the instrument of transfer to receive a guaranteed annuity a guaranteed annuity is an arrangement under which a determinable amount is paid periodically but not less often than annually for a specified term of years or for the life or lives of certain individuals each of whom must be living at the date of the gift and can be ascertained at such date under sec_25_2512-5 the fair_market_value of annuities is the present_value of such interests determined by the use of standard or special sec_7520 actuarial factors see also sec_25_2512-5a plr-126064-14 sec_7520 provides in part that the value of any annuity shall be determined under tables prescribed by the secretary and by using an interest rate rounded to the nearest 10ths of percent equal to percent of the federal midterm rate in effect under sec_1274 for the month in which the valuation_date falls under sec_7520 if a gift_tax charitable_contribution is allowable for any part of the property transferred the taxpayer may elect to use such federal midterm rate for either of the two months preceding the month in which the valuation_date falls for purposes of paragraph in the case of transfers of more than one interest in the same property with respect to which the taxpayer may use the same rate under paragraph the taxpayer shall use the same rate with respect to each such interest sec_25_7520-2 of the procedure and administration regulations provides in part that the fair_market_value of annuities for which a gift_tax_charitable_deduction is allowable is the present_value of such interests determined under sec_25_7520-1 sec_25_7520-2 provides in part that if any part of the property interest transferred qualifies for a gift_tax_charitable_deduction under sec_2522 the donor may elect to compute the present_value of the interest transferred by use of the sec_7520 interest rate for the month during which the gift is made or the sec_7520 interest rate for either of the two months preceding the month during which the gift is made the interest rate for the month so elected is the applicable sec_7520 interest rate sec_25_7520-2 provides that a taxpayer makes a prior-month election under paragraph a of this section by attaching the information described in paragraph b of this section to the donor’s gift_tax_return or to an amended_return for that year that is filed within months after the later of the date the original return for the year was filed or the due_date for filing the return sec_25_7520-2 provides that a statement that the prior-month election under sec_7520 of the code is being made and that identifies the elected month must be attached to the gift_tax_return or to the amended_return sec_301 through provide the standards the commissioner will use to determine whether to grant an extension of time to make an election sec_301_9100-1 sec_301_9100-1 provides that the commissioner has discretion to grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and plr-126064-14 to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the code except subtitles e g h and i sec_301_9100-3 provides in part that requests for relief subject_to sec_301_9100-3 will be granted when the taxpayer provides the evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and the grant of relief will not prejudice the interests of the government sec_301_9100-3 provides in part except as provided in sec_301_9100-3 through iii that a taxpayer is deemed to have acted reasonably and in good_faith if the taxpayer reasonably relied on a qualified_tax professional including a tax professional employed by the taxpayer and the tax professional failed to make or advise the taxpayer to make the election based on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-3 have been satisfied settlor is granted an extension of time of days from the date of this letter to file amended returns making the prior month elections described above the elections will be effective as of date for clat and date for clat the elections should be made on form sec_709 united_states gift and generation-skipping_transfer_tax return for the years in which the transfers were made and filed with the internal_revenue_service center cincinnati ohio a copy of this letter should be attached to each form_709 a copy is enclosed for this purpose except as expressly provided herein we express no opinion on the federal tax consequences of the transaction under the cited provisions or under any other provisions of the code this ruling is directed only to the taxpayers requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representatives plr-126064-14 the ruling contained in this letter is based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination sincerely associate chief_counsel passthroughs special industries leslie h finlow senior technician reviewer branch office of associate chief_counsel passthroughs special industries enclosures copy for sec_6110 purposes two copies of this letter


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc psi 2-plr-108144-03 date date a b p1 p2 p3 p4 p5 p6 dear this responds to a letter dated date and subsequent correspondence submitted on behalf of p4 requesting rulings concerning the federal_income_tax consequences of the transactions described below facts plr-108144-03 according to the information submitted for various business reasons six partnerships p1 p2 p3 p4 p5 and p6 will consolidate into a single limited_liability_company that will be treated as partnership for federal_income_tax purposes by undertaking the following transactions first p1 p2 p3 p4 p5 and p6 will each contribute all of their assets and liabilities to a newly formed limited_liability_company llc in exchange for an interest in llc each partnership will receive a capital interest in llc equal to the fair_market_value net of liabilities of the property contributed by that partnership following its contribution of assets and liabilities to llc each partnership will liquidate and distribute its membership interests in llc to its partners each of the partnerships holds commercial real_estate p1 p3 p4 and p5 hold depreciable assets with a remaining basis the assets of p1 and p6 have been fully depreciated and have an adjusted_basis of zero the assets of each partnership include certain depreciable_property that was placed_in_service before a b and related_persons own of the six partnerships a and b directly own more than of p1 p2 p3 p4 and p5 a and b represent that p3 will contribute the assets having the greatest fair_market_value net of liabilities to llc law and analysis sec_708 of the internal_revenue_code provides that in the case of a merger or consolidation of two or more partnerships the resulting_partnership shall for purposes of sec_708 be considered the continuation of any merging or consolidating partnership whose members own an interest of more than percent in the capital and profits of the resulting_partnership under sec_1_708-1 if the resulting_partnership can be considered a continuation of more than one of the merging or consolidating partnerships it shall unless the commissioner permits otherwise be considered the continuation solely of that partnership which is credited with the contribution of assets having the greatest fair_market_value net of liabilities to the resulting_partnership any other merging or consolidating partnerships shall be considered as terminated sec_1_708-1 provides that when two or more partnerships merge or consolidate into one partnership under the applicable jurisdictional law without undertaking a form for the merger or consolidation or undertake a form that is not described in sec_1_708-1 any merged or consolidated partnership that is considered terminated under sec_1_708-1 is treated as undertaking the assets-over form for federal_income_tax purposes under the assets-over form each merged or consolidated partnership that is considered terminated under sec_1_708-1 contributes all of its assets and liabilities to the resulting_partnership in exchange for an interest in the resulting_partnership and immediately thereafter the terminated partnership distributes interests in the resulting_partnership to its partners in liquidation of the terminated partnership because the members of more than one of the partnerships including p3 will own an interest of more than percent in the capital and profits of llc and because p3 is credited with the contribution of assets to llc having the greatest fair_market_value net of liabilities llc will be considered the continuation of p3 accordingly the plr-108144-03 transfer of assets from p3 to llc will be disregarded and llc will be treated as the historic owner of those assets p1 p2 p4 p5 and p6 will be considered as having contributed all of their assets and liabilities to llc in exchange for an interest in llc thereafter p1 p2 p4 p5 and p6 will be considered terminated and the partners in p1 p2 p4 p5 and p6 will be considered to have received interests in llc in liquidation of these partnerships generally sec_168 applies to depreciable tangible_property placed_in_service after date sec_168 provides that sec_168 does not apply to property described in sec_168 as in effect before the amendments made by the tax_reform_act_of_1986 sec_168 provides that in the case of any property to which sec_168 would apply but for sec_168 the depreciation deduction under sec_167 is determined by the provisions of sec_168 as in effect before the amendments made by of the tax_reform_act_of_1986 sec_168 prior to the amendments made by the tax_reform_act_of_1986 provided in part that the term recovery_property does not include property placed_in_service by the transferor or distributor before date that is acquired by the taxpayer after date in a transaction described in sec_721 among other code sections to the extent that the basis of the property is determined by reference to the basis of the property in the hands of the transferor or distributor in the case of property to which sec_168 applies rules similar to the rules described in sec_381 shall apply sec_381 provides that the acquiring_corporation is treated as the distributor or transferor_corporation for purposes of computing the depreciation allowance under sec_167 and sec_168 on property acquired in a distribution or transfer with respect to so much of the basis in the hands of the acquiring_corporation as does not exceed the adjusted_basis in the hands of the distributor or transferor_corporation sec_721 provides that no gain_or_loss shall be recognized to a partnership or to any of its partners in the case of a contribution of property to the partnership in exchange for an interest in the partnership sec_723 provides that the basis_of_property contributed to a partnership by a partner shall be the adjusted_basis of such property to the contributing_partner at the time of the contribution increased by the amount if any of gain recognized under sec_721 conclusions because llc is considered to be the continuation of p3 under sec_1_708-1 the depreciation methods and useful lives of the property that was placed_in_service plr-108144-03 before date by p3 and that will be transferred to llc by p3 will be unaffected by the consolidation under sec_723 llc will take a carryover_basis in the properties contributed to llc from p1 p2 p4 p5 and p6 therefore the properties that were placed_in_service by these partnerships before date and that will be transferred to llc by these partnerships will be properties described in former sec_168 under sec_168 the provisions of former sec_168 will apply accordingly the depreciation deduction under sec_167 applicable to the properties transferred to llc by p2 p4 and p5 will be determined in accordance with the rules of sec_381 consequently the depreciation methods and useful lives of the property that was placed_in_service before date by these partnerships will be unaffected by the consolidation except as specifically ruled above we express no opinion concerning the federal tax consequences of the transactions described above under any other provision of the code this ruling letter is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent pursuant to the power_of_attorney on file with this office a copy of this letter is being sent to p4 sincerely yours matthew lay senior technician reviewer branch associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes


t c memo united_states tax_court commissioner of internal revenue respondent mary bui petitioner v docket no filed date ronda n edgar for petitioner adam b landy nancy m gilmore and thomas r mackinson for respondent memorandum findings_of_fact and opinion goeke judge respondent issued a notice_of_deficiency to petitioner determining an income_tax deficiency for of dollar_figure and an addition_to_tax under sec_6651 of dollar_figure after concessions the sole issue remaining for consideration is whether petitioner must include in gross_income cancellation of indebtedness of dollar_figure we hold that she may properly exclude dollar_figure but must include the remaining dollar_figure findings_of_fact this case was tried on date in san francisco california the parties have submitted a stipulation of facts and accompanying exhibits which are incorporated herein by this reference when the petition was timely filed petitioner resided in california petitioner is also known as nga thuy lan bui for petitioner excluded dollar_figure of discharged indebtedness from her gross_income and indicated the excluded indebtedness was qualified principal_residence 1unless otherwise indicated all section references are to the internal_revenue_code code as amended and in effect at all relevant times and all rule references are to the tax_court rules_of_practice and procedure 2the petition was received with an illegible postmark on date five days after the time to file a petition with this court had expired sec_301_7502-1 proced admin regs places on the taxpayer the burden to prove the date an illegible postmark was made on date we issued an order directing petitioner to sustain her burden of establishing that the postmark was timely made on date petitioner responded to our order and supplemented the record with proof of mailing on date accordingly we are satisfied of our jurisdiction to hear this case indebtedness on date respondent issued a notice_of_deficiency to petitioner for and proposed an adjustment disallowing her entire exclusion of discharged indebtedness income respondent now concedes that petitioner was insolvent by dollar_figure in i residences a red river property on date petitioner her former spouse and three other persons purchased a single-family residence on red river way in san jose california red river property for dollar_figure petitioner and her former spouse together owned a interest in the red river property by grant deed dated date and recorded date petitioner and her former spouse purchased the remaining interest in the red river property for dollar_figure by quitclaim_deed dated date and recorded date petitioner acquired sole ownership in the red river property petitioner legally_separated from her former spouse in or petitioner lived at the red river property from its acquisition in through date and treated it as her primary residence on date petitioner relinquished ownership of the red river property by short_sale for dollar_figure at that time the balance of the mortgage on the red river property was dollar_figure b cedar grove property on or around date petitioner and her former spouse purchased a single-family rental home on cedar grove circle in san jose california cedar grove property by quitclaim_deed dated date and recorded date petitioner acquired sole ownership in the cedar grove property after petitioner sold the red river property in date she moved into the cedar grove property and established it as her new primary residence ii wells fargo lines of credit before petitioner obtained three home equity lines of credit with wells fargo bank n a wells fargo petitioner executed a deed_of_trust dated date and recorded date securing a dollar_figure line of credit for an account ending in between herself and wells fargo with the red river property listed as collateral loan petitioner executed a deed_of_trust dated date and recorded date securing a dollar_figure line of credit for an account ending in between herself and wells fargo with the cedar grove property as collateral loan petitioner also executed a deed_of_trust dated date and recorded date securing a dollar_figure line of credit for an account ending in between herself and wells fargo with the cedar grove property as collateral loan in wells fargo issued three forms 1099-c cancellation of debt to petitioner indicating that the remaining debt associated with the loan the loan and the loan had been canceled on the forms 1099-c wells fargo described the debts as heq secured installment loan and checked the box indicating petitioner was personally liable for repayment of the debts petitioner’s canceled wells fargo debt for was as follows date of form 1099-c amount of canceled debt account no date date date dollar_figure big_number big_number petitioner executed at least four additional deeds of trust with wells fargo before in addition petitioner with and without her former spouse executed at least seven deeds of trust between and from banking institutions other than wells fargo the indebtedness indicated by these additional deeds of trust was not canceled in iii home improvements petitioner testified to carrying out a number of home improvement projects before for the red river property but she provided no documentation relating to when or how expenses of these projects were paid she did not testify to any home improvement project expenses related to the cedar grove property petitioner paid approximately dollar_figure for custom drapes to be installed at the red river property in in addition she spent approximately dollar_figure for driveway repair and expansion work at the red river property in the remaining home improvement expenditures petitioner testified to were made before the year she obtained the wells fargo lines of credit the associated debts were discharged in opinion generally the commissioner’s determinations in a notice_of_deficiency are presumed correct and the taxpayer bears the burden of proving the determinations are erroneous rule a 290_us_111 however for the presumption of correctness to attach in an unreported income case such as this the commissioner must base his deficiency determination on some substantive evidence that the taxpayer received unreported income 181_f3d_1002 9th cir aff’g tcmemo_1997_97 there is no dispute in this case that petitioner had debt that was forgiven sec_7491 shifts the burden_of_proof to the commissioner where the taxpayer has presented credible_evidence with respect to any factual issue relevant to ascertaining the correct_tax liability of the taxpayer sec_7491 also requires that the taxpayer have substantiated all appropriate items maintained records as required under the code and cooperated with all reasonable requests by the commissioner for witnesses information documents meetings and interviews sec_7491 and b petitioner has not attempted to argue and the record does not demonstrate her compliance with the requirements of sec_7491 accordingly the burden remains with petitioner to show respondent’s determinations were incorrect this is a dispute over whether petitioner had reportable cancellation_of_indebtedness_income that she failed to report on her tax_return the code defines income liberally as all income from whatever source derived sec_61 specifically income includes any income from the discharge_of_indebtedness sec_61 sec_1_61-12 income_tax regs the underlying rationale for the inclusion of canceled debt as income is that the release from a debt obligation the taxpayer would otherwise have to pay frees up assets previously offset by the obligation and acts as an accession to wealth--ie income 284_us_1 generally when canceled debt creates income the amount includible in income is equal to the face value of the discharged obligation minus any amount_paid in satisfaction of the debt rios v commissioner tcmemo_2012_128 wl at aff’d 586_fedappx_268 9th cir see 192_f3d_844 9th cir aff’g 109_tc_463 the income is recognized for the year in which the debt is canceled 65_tc_511 petitioner argues that although the cancellation of debt generally creates reportable income her canceled debt is excludable some accessions to wealth that would ordinarily constitute income may be excluded by statute or other operation of law 500_f3d_1065 9th cir rev’g 124_tc_180 even so given the clear congressional intent to ‘exert the full measure of its taxing power ’ exclusions from gross_income are construed narrowly in favor of taxation id quoting 348_us_426 citing merkel v commissioner f 3d pincite petitioner argues two exclusions apply to her cancellation_of_indebtedness_income sec_108 which offers an exclusion when the canceled debt is qualified_principal_residence_indebtedness and sec_108 which provides an exclusion where the taxpayer is insolvent we will examine both exclusions as applied to petitioner i qualified_principal_residence_indebtedness sec_108 provides that gross_income does not include amounts which would be includible as cancellation_of_indebtedness_income if the indebtedness discharged is qualified_principal_residence_indebtedness qualified_principal_residence_indebtedness is defined as acquisition_indebtedness with respect to the taxpayer’s principal_residence sec_108 acquisition_indebtedness is incurred in acquiring constructing or substantially improving any qualified_residence of the taxpayer and must be secured_by that residence sec_163 if only a portion of a discharged loan obligation meets the definition of qualified_principal_residence_indebtedness only the amount discharged which exceeds the nonqualified principal_residence_indebtedness is excludable sec_108 petitioner’s primary residence was the red river property until she sold it in date and established the cedar grove property as her new primary residence three of her wells fargo lines of credit--the loan the loan and the loan--were canceled in petitioner does not argue that any of these loans which were obtained in were used to acquire or construct either the red river property or the cedar grove property both of which were solely acquired by petitioner in petitioner instead argues that funds from these loans were used to substantially improve her primary residence petitioner provided no evidence regarding substantial improvements made to the cedar grove property for the qualified_principal_residence_indebtedness exclusion to apply the debt must be used to acquire construct or substantially improve the taxpayer’s primary residence and that residence must secure the loan see sec_108 sec_163 both the loan and the loan were secured_by the cedar grove property therefore because these loans were not used to acquire construct or substantially improve the cedar grove property they are not excludable from gross_income as qualified_principal_residence_indebtedness petitioner offered testimony on a number of improvements made to the red river property before she obtained the loan these improvements could not have been financed by a loan that had not materialized at the time they were made thus they will be disregarded for purposes of determining whether any portion of the loan was qualified personal_residence indebtedness petitioner spent dollar_figure on driveway expansion and repair work at the red river property in we are satisfied from her testimony that this amount was paid with the loan accordingly the portion of the loan that was used to finance the driveway project is qualified_principal_residence_indebtedness petitioner also testified that she had custom drapes installed at the red river property in for dollar_figure we do not find that this expense constitutes a substantial_improvement to the red river property and therefore it is not qualified_principal_residence_indebtedness we have determined that dollar_figure of the loan was qualified_principal_residence_indebtedness however the amount that petitioner may properly exclude is limited by sec_108 sec_108 provides that where only a portion of a discharged loan is qualified_principal_residence_indebtedness the amount that may be excluded is only so much of the amount discharged as exceeds the amount of the loan as determined immediately before such discharge which is not qualified_principal_residence_indebtedness to apply this limitation we must determine how much of the loan was not qualified_principal_residence_indebtedness the original line of credit was for dollar_figure we have determined that dollar_figure was qualified_principal_residence_indebtedness thus dollar_figure was not qualified_principal_residence_indebtedness therefore petitioner may exclude only dollar_figure of the canceled loan from her income under the qualified principal_residence_indebtedness exclusion dollar_figure canceled debt minus the dollar_figure of the debt that was not qualified_principal_residence_indebtedness ii insolvency exclusion petitioner argues that even if her cancellation_of_indebtedness_income is not excludable as qualified_principal_residence_indebtedness it should be excludable because she was insolvent in sec_108 provides an exclusion_from_gross_income of cancellation of indebtedness amounts where the taxpayer is insolvent at the time the discharge occurs a taxpayer is insolvent by the amount her liabilities exceed the fair_market_value of her assets determined immediately before the discharge_of_indebtedness sec_108 respondent concedes that petitioner was insolvent by dollar_figure and therefore admits that amount of cancellation_of_indebtedness_income is excludable in the case of a taxpayer who qualifies for the insolvency exclusion the excluded amount cannot exceed the amount by which the taxpayer is insolvent sec_108 petitioner suggests that respondent did not accurately account for her assets and liabilities when calculating her insolvency however petitioner stipulated respondent’s insolvency calculations and has offered no coherent argument as to why the calculations are in error accordingly petitioner is entitled to an insolvency exclusion for her cancellation_of_indebtedness_income of dollar_figure petitioner may exclude a total of dollar_figure--representing dollar_figure under the insolvency exclusion and dollar_figure under the qualified_principal_residence_indebtedness exclusion--of her cancellation_of_indebtedness_income from her gross_income in reaching our holding we have considered all arguments made and to the extent not mentioned above we conclude they are moot irrelevant or without merit decision will be entered under rule sec_108 provides that the insolvency exclusion does not apply to any discharge to which the qualified_principal_residence_indebtedness exclusion applies unless the taxpayer elects the insolvency exclusion to apply in lieu of the qualified_principal_residence_indebtedness exclusion petitioner made no such election however because three debts were discharged we may apply the insolvency exclusion to the loans not eligible for the qualified_principal_residence_exclusion


internal_revenue_service number release date index number - ------------------------------------------------ ---------------------------------------- ---------------- --------------------------------- ---------------------- - department of the treasury washington dc third party communication none date of communication not applicable_person to contact ----------------------- id no ------------- telephone number --------------------- refer reply to cc tege eoeg teb presp-144855-06 date date dear -------------- pursuant to sec_54 of the internal_revenue_code the code and notice_2005_98 2005_52_irb_1211 and after review of your application submitted on date including supplements thereto we have determined that the project described in appendix a attached hereto is qualified for purposes of sec_54 and will be owned by one or more qualified borrowers we allocate authority to ---------------------- --------------------------------- the issuer a qualified issuer under sec_54 to issue up to dollar_figure------------- of clean renewable energy bonds crebs bonds issued pursuant to this allocation must be designated by the issuer as bonds for purposes of sec_54 for the project described in appendix a up to the amount allocated for each project described in appendix a bonds so designated must be issued on or before date please be aware that in order for bonds to be crebs the applicable_requirements of the code including without limitation sec_54 notice_2005_98 and notice_2006_7 2006_10_irb_559 must be met please note that creb proceeds may be used to reimburse capital expenditures paid_by qualified borrowers for qualified projects only if the provisions of sec_54 are met if you have any questions with respect to this allocation please contact --------------------- -------- or -----------------------------of the office of division counsel associate chief_counsel tax-exempt and government entities on --------------------- not a toll-free call except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter presp-144855-06 for purposes of the renewable_electricity_production_credit under sec_45 of the code no inference may be drawn from this allocation that any project listed in appendix a is a qualified_facility or that electricity to be produced at such project s is electricity from a qualified_energy resource at a qualified_facility within the meaning of sec_45 this determination is directed only to the applicant named above sec_6110 of the code provides that it may not be used or cited as precedent a copy of this letter must be attached to any form 8038-g information_return for tax- exempt governmental obligations filed for bonds issued pursuant to this allocation the allocation contained in this letter is based upon information and representations submitted by the applicant for the creb allocation and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the application_for an allocation it is subject_to verification on examination sincerely assistant chief_counsel exempt_organizations employment_tax government entities tax exempt government entities by timothy l jones senior counsel tax-exempt_bonds branch amount allocated dollar_figure------------- presp-144855-06 borrower name appendix a project type project location -------------------------------- -------------------------------- -------------------------------- -------------------------------- -------------------------------- -------------------------------- -------------------------------- ------------ --------------------------------- ---------------------- solar_energy_facility ---------------------------------- ------------------------------------------------ ------------------------------------------------- -------------------------- -------------------------------------------- ---------------------------


internal_revenue_service number release date index number ------------------------------------------------------------ -------------------------- -------------------- ---------------------------- ------------------------------ department of the treasury washington dc third party communication none date of communication not applicable_person to contact --------------------- id no ---------------- telephone number -------------------- refer reply to cc psi b02 plr-117357-14 date date x state date date year year year a b legend --------------------------- ---------------------- ------------ ----------------------- ------------------------ ------ ------ ------ --------------------- ssn ---------------- --------------------- ssn ---------------- dear ---- ------- this responds to a letter dated date submitted on behalf of x by its authorized representative requesting a ruling under subchapter_s of the internal_revenue_code plr-117357-14 the information submitted states that x was incorporated in state on date x made an election to be treated as an s_corporation effective date from year to year x made disproportionate distributions to its shareholders grantor trusts owned by a and b x represents that it did not intend to create any differences in rights among the shares in year x made corrective distributions to a eliminating the cumulative amount of the disproportionate distributions as a result of the corrective distribution the cumulative distributions from x to its shareholders are proportionate to stock ownership x represents that it did not intend to create a second class of stock x and its shareholders consent to make such adjustments consistent with the treatment of x as an s_corporation as may be required by the secretary sec_1361 of the code provides that the term s_corporation means with respect to any taxable_year a small_business_corporation for which an election under sec_1362 is in effect for such year sec_1361 provides that the term small_business_corporation means a domestic_corporation which is not an ineligible_corporation and which does not have as a shareholder a person other than an estate a_trust described in sec_1361 or an organization described in sec_1361 who is not an individual sec_1_1361-1 of the income_tax regulations provides that a corporation is generally treated as having only one class of stock if all outstanding shares of stock of the corporation confer identical rights to distribution and liquidation proceeds differences in voting rights among shares of stock of the corporation are disregarded for purposes of determining whether a corporation has more than one class of stock sec_1_1361-1 provides that the determination of whether all outstanding shares of stock confer identical rights to distribution and liquidation proceeds is made based on the corporate charter articles of incorporation bylaws applicable state law and binding agreements relating to distribution and liquidation proceeds collectively the governing provisions a commercial contractual agreement such as a lease employment agreement or loan agreement is not a binding agreement relating to distribution and liquidation proceeds and thus is not a governing provision unless a principal purpose of the agreement is to circumvent the one class of stock requirement although a corporation is not treated as having more than one class of stock so long as the governing provisions provide for identical distribution and liquidation rights any distributions including actual constructive or deemed distributions that differ in timing or amount are to be given appropriate tax effect in accordance with the facts and circumstances sec_1362 provides that a in general an election under sec_1362 shall be terminated whenever at any time on or after the first day of the first taxable_year for which the corporation is an s_corporation such corporation ceases to be a small plr-117357-14 business corporation and b any termination under sec_1362 shall be effective on and after the date of cessation based solely on the facts submitted and the representations made we conclude that because x’s stock has identical distribution and liquidation rights under its governing provisions the disproportionate distributions did not cause x to have more than one class of stock for purposes of sec_1361 under these circumstances we conclude that x’s s_corporation_election did not terminate however disproportionate and corrective distributions must be given appropriate tax effect except as specifically ruled above we express no opinion concerning the federal tax consequences of the transactions described above under any other provisions of the code in particular we express no opinion regarding the validity of any sec_338 election see sec_1_338_h_10_-1 in accordance with the power_of_attorney on file with this office a copy of this letter_ruling will be sent to the taxpayer’s representatives this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent sincerely bradford poston senior counsel branch office of the associate chief_counsel passthroughs special industries cc


internal_revenue_service number release date index number - ------------------------------------------------- --------------------------------------------------- -------------------- ---------------------------- department of the treasury washington dc person to contact -------------------- -------- ------------- telephone number --------------------- refer reply to cc psi - plr-154435-05 date date --------------------- --------------------------- ------------------------------------------------------------- this letter responds to a letter dated date and subsequent x --------------------------------------------------- date date dear ---------------------- correspondence submitted on behalf of x requesting relief under sec_1362 of the internal_revenue_code corporation effective date on date x engaged in an event that terminated x’s s election in connection with this event x may have also created a second class of stock if x created a second class of stock this would have terminated x’s s election had the election not already terminated on date discovered the terminating event x initiated corrective action in order to once again become a small_business_corporation in addition x has eliminated the possible second class of stock x and its shareholders agree to make any adjustments consistent with the treatment of x as an s_corporation as may be required by the secretary the information submitted states that x was incorporated and elected to be an s x represents that it did not intend to terminate its s election as soon as x sec_1361 provides that the term s_corporation means with respect to any taxable_year a small_business_corporation for which an election under ' a is in effect for such year plr-154435-05 sec_1361 defines a asmall business corporation as a domestic_corporation that is not an ineligible_corporation and that does not a have more than shareholders b have as a shareholder a person other than an estate a_trust described in ' c or an organization described in ' c who is not an individual c have a nonresident_alien as a shareholder and d have more than one class of stock sec_1362 provides that an election under ' a shall be terminated whenever at any time on or after the first day of the first taxable_year for which a corporation is an s_corporation such corporation ceases to be a small_business_corporation a termination of an s_corporation_election under ' d is effective on and after the date of cessation sec_1362 provides that if an election under ' a by any corporation was terminated under ' d or the secretary determines that the circumstances resulting in such termination were inadvertent no later than a reasonable period of time after discovery of the circumstances resulting in the termination steps were taken so that the corporation is a small_business_corporation and the corporation and each person who was a shareholder of the corporation at any time during the period specified under ' f agrees to make the adjustments consistent with the treatment of the corporation as an s_corporation as may be required by the secretary for that period then notwithstanding the circumstances resulting in such termination the corporation shall be treated as an s_corporation during the period specified by the secretary based solely on the information submitted and the representations made we conclude that x’s s election terminated on date and that this termination was inadvertent within the meaning of sec_1362 under sec_1362 x will be treated as if it were an s_corporation from date and thereafter provided that x’s s_corporation_election was valid and not otherwise terminated under sec_1362 accordingly all of the shareholders of x in determining their respective income_tax liabilities for the period beginning date and thereafter must include their pro_rata share of the separately and nonseparately computed items of x as provided in sec_1366 make any adjustments to basis as provided in sec_1367 and take into account any distributions made by x as provided in sec_1368 if x or its shareholders fail to treat themselves as described above this ruling shall be null and void federal tax consequences of the facts described above under any other provision of the code specifically no opinion is expressed on whether x was otherwise eligible to be treated as an s_corporation except as specifically set forth above no opinion is expressed concerning the plr-154435-05 this ruling is directed only to the taxpayer who requested it sec_6110 pursuant to a power_of_attorney on file with this office a copy of this letter is of the code provides that it may not be used or cited as precedent being forwarded to x's authorized representative sincerely yours bradford r poston senior counsel branch office of the associate chief_counsel passthroughs and special industries ---


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc corp b05 - plr-118332-00 date date legend parent purchaser seller target date a date b date c date d y business x company official outside tax professional plr-118332-00 this responds to your letter dated date requesting on behalf of the taxpayers identified above an extension of time under sec_301_9100-1 through of the procedure and administration regulations to file an election parent as the common parent of the consolidated_group of which purchaser is a member and seller are requesting an extension to file a sec_338 election under sec_338 and sec_338 of the internal_revenue_code and sec_1_338_h_10_-1 of the income_tax regulations with respect to purchaser’s acquisition of the stock of target sometimes hereinafter referred to as the election on date b all citations in this letter to regulations under sec_338 are to the regulations as in effect for date b additional information was submitted in letters dated may september and date the material information is summarized below parent is the common parent of a consolidated_group that has a calendar taxable_year and uses an accrual_method of accounting purchaser is a wholly owned subsidiary of parent and is included in parent’s group parent’s group includes approximately y subsidiaries and the group is engaged in business x prior to the acquisitions target was an s_corporation within the meaning of sec_1361 that was wholly owned by seller on date a parent and seller entered into a stock purchase agreement for parent to acquire all of seller’s stock of target for cash on date b parent assigned to purchaser and purchaser assumed all of parent’s rights and obligations under the stock purchase agreement seller consented to the assignment but parent remained obligated to seller under the stock purchase agreement also on date b purchaser acquired all of the stock of target from seller pursuant to the stock purchase agreement in a fully taxable_acquisition it is represented that parent is not and was not at all times relevant related to seller within the meaning of sec_338 purchaser’s acquisition of all of the outstanding_stock of target qualified as a qualified_stock_purchase as defined in sec_338 and seller will not report gain on the transaction under the installment_method of sec_453 following the acquisition new target was included in parent’s consolidated_return parent and seller intended to file the election the election was due on date c but for various reasons it was not filed on date d which is after the due_date for the election company official and outside tax professional discovered that the election was not filed the period of limitations on assessment under sec_6501 has not expired for parent’s seller’s or target’s taxable_year in which the acquisition sale was consummated the taxable_year in which the election should have been filed or for any taxable_year s that would have been affected by the election had it been timely filed plr-118332-00 sec_338 permits certain stock purchases to be treated as asset acquisitions if the purchasing_corporation makes or is treated as having made a sec_338 election under sec_338 and the acquisition is a qualified_stock_purchase sec_1_338-1 provides that a sec_338 election is an election to apply sec_338 to target sec_338 specifies the requirements for making a sec_338 election sec_338 defines a qualified_stock_purchase as any transaction or series of transactions in which stock meeting the requirements of sec_1504 of corporation is acquired by another corporation by purchase during the 12-month_acquisition_period sec_338 provides that the term purchase means any acquisition of stock but only if i the basis of the stock in the hands of the purchasing_corporation is not determined i in whole or in part by reference to the adjusted_basis of such stock in the hands of the person from whom acquired or ii under sec_1014 relating to property_acquired_from_a_decedent ii the stock is not acquired in an exchange to which sec_351 sec_354 sec_355 or sec_356 applies and is not acquired in any other transaction described in regulations in which the transferor does not recognize the entire amount of the gain_or_loss realized on the transaction and iii the stock is not acquired from a person the ownership of whose stock would under sec_318 other than paragraph thereof be attributed to the person acquiring such stock sec_338 permits the purchasing and selling corporations to elect jointly to treat the target_corporation as deemed to sell all of its assets and distribute the proceeds in complete_liquidation the sale of stock included in the qualified_stock_purchase generally is ignored a sec_338 election may be made for target only if it is a member of a selling_consolidated_group a member of a selling affiliated_group filing separate returns or an s_corporation sec_1_338_h_10_-1 gain_or_loss on the deemed sale is included in the consolidated_return of the selling group unless the target_corporation is a member of a selling affiliated_group filing separate returns or an s_corporation sec_1_338_h_10_-1 provides that a sec_338 election may be made for the target_corporation if the purchasing_corporation makes a qualified_stock_purchase of the target_corporation stock sec_1_338_h_10_-1 provides that if a sec_338 election is made for the target_corporation it is irrevocable sec_1_338_h_10_-1 provides that a sec_338 election is jointly made by a purchaser and the selling_consolidated_group or the selling affiliate or the s_corporation shareholders on form_8023 in accordance with the instructions to the form the regulations further provide that the election must be made not later than the 15th day of the ninth month beginning after the month in which the acquisition_date occurs the instructions to form_8023 provide that a sec_338 election must be made jointly by the purchasing_corporation and the common parent of the selling_consolidated_group or selling affiliate or s_corporation shareholders the instructions provide that the form must be signed by a person authorized to act on behalf of each corporation and if made for an s_corporation it must be signed by each s_corporation shareholder who sells target stock in the qualified_stock_purchase the instructions further provide that plr-118332-00 the signatures dates and titles if applicable of those persons must be provided in a signature attachment and they provide specific details as to the preparation of the signature attachment and its attachment to form_8023 sec_1_1502-77 provides that the common parent for all purposes other than for several purposes not relevant here shall be the sole agent for each subsidiary in the group duly authorized to act in its own name in all matters relating to the tax_liability for the consolidated_return_year see also form_8023 and the instructions thereto under sec_301_9100-1 the commissioner has discretion to grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-1 defines the term regulatory election as including an election whose due_date is prescribed by a regulation revenue_ruling revenue_procedure notice or announcement sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make a regulatory election sec_301_9100-1 sec_301_9100-2 provides automatic extensions of time for making certain elections requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-3 in this case the time for filing the election is fixed by the regulations ie sec_1_338_h_10_-1 therefore the commissioner has discretionary authority under sec_301_9100-1 to grant an extension of time for parent and seller to file the election provided parent and seller show they acted reasonably and in good_faith the requirements of sec_301_9100-1 and sec_301_9100-3 are satisfied and granting relief will not prejudice the interests of the government information affidavits and representations submitted by parent seller company official and outside tax professional explain the circumstances that resulted in the failure to timely file the valid election the information also establishes that tax professionals were responsible for the election that parent and seller relied on the tax professionals to timely make the election and that the government will not be prejudiced if relief is granted see sec_301_9100-3 based on the facts and information submitted including the representations made we conclude that parent and seller have shown they acted reasonably and in good_faith the requirements of sec_301_9100-1 and sec_301_9100-3 are satisfied and granting relief will not prejudice the interests of the government accordingly an extension of time is granted under sec_301_9100-1 until days from the date of plr-118332-00 issuance of this letter for parent and seller to file the election with respect to the acquisition of target as described above the above extension of time is conditioned on the filing within days of the issuance of this letter of all returns and amended returns if any necessary to report the transaction in accordance with the election and the taxpayers' parent’s purchaser’s seller’s and target’s tax_liability if any being not lower in the aggregate for all years to which the election applies than it would have been if the election had been timely made taking into account the time_value_of_money no opinion is expressed as to the taxpayers' tax_liability for the years involved a determination thereof will be made by the district director's office upon audit of the federal_income_tax returns involved further no opinion is expressed as to the federal_income_tax effect if any if it is determined that the taxpayers' liability is lower sec_301_9100-3 the above extension is also conditioned on i parent and seller signing the election and ii parent and seller treating the acquisition sale of the stock of target as a sec_338 transaction parent and seller must file the election in accordance with sec_1_338_h_10_-1 that is a new election on form_8023 must be executed on or after the date of this letter which grants an extension and filed in accordance with the instructions to the form a copy of this letter should be attached to the election form parent and seller must file or amend their returns as applicable for the year in which the transaction was consummated to report the acquisition sale as a sec_338 transaction and to attach thereto a copy of this letter and a copy of the election form however if parent and or seller have already reported the transaction as a sec_338 transaction then they must merely amend their returns to attach thereto a copy of the election and a copy of this letter pursuant to sec_1_338_h_10_-1 target’s s election is not terminated accordingly target is not required to file an s_short_year return ie a year that ended the day before the acquisition nor a one day short return as a non-affiliated c_corporation we express no opinion as to whether the acquisition sale of target’s stock qualifies as a qualified_stock_purchase under sec_338 whether the acquisition sale of target’s stock qualifies for sec_338 treatment or if sec_338 is applicable as to the amount and character of gain_or_loss if any recognized by target and thus by seller on target’s deemed asset sale and deemed liquidation in addition we express no opinion as to the tax consequences of filing the election late under the provisions of any other section of the code and regulations or as to the tax treatment of any conditions existing at the time of or resulting from filing the election late that are not specifically set forth in the above ruling for purposes of granting relief under sec_301_9100-1 we relied on certain statements and representations made by the taxpayers however the district_director s should verify all essential plr-118332-00 facts in addition notwithstanding that an extension is granted under sec_301_9100-1 to file the election penalties and interest that would otherwise be applicable if any continue to apply this letter is directed only to the taxpayer s who requested it sec_6110 provides that it may not be used or cited as precedent a copy of this letter is being sent to company official and parent’s authorized representative pursuant to the power_of_attorney on file in this office sincerely yours associate chief_counsel corporate by ken cohen acting chief branch