t c memo united_states tax_court cambridge partners l p kenneth i nowak state of new jersey appointed receiver et al petitioners v commissioner of internal revenue respondent docket nos filed date cp and cpii are limited_partnerships their sole general_partner and tax_matters_partner ceased to be a general_partner on date because of a consent decree appointing a receiver that stemmed from the partner’s guilty plea on three felony counts kn in his capacity as the state-court-appointed receiver filed aars and thereafter a petition for adjustment of each partnership’s partnership items under i r c sec for the and taxable years r moved to dismiss the cases for lack of jurisdiction on the 1the following cases are consolidated herewith cambridge partners ii l p kenneth i nowak state of new jersey appointed receiver docket nos cambridge partners ii l p kenneth i nowak state of new jersey appointed receiver docket no and cambridge partners l p kenneth i nowak state of new jersey appointed receiver docket no basis that the petitions and the underlying aars were not filed by the tax_matters_partner held r’s motions to dismiss for lack of jurisdiction will be granted because the receivership has been terminated by the state of new jersey and there remains no party with legal standing to pursue this litigation flavio l komuves for petitioners joseph j boylan and lydia a branche for respondent memorandum opinion wherry judge these cases concern four petitions for adjustment of partnership items under section the cases are now before the court on respondent’s motions to dismiss for lack of jurisdiction and are consolidated solely for purposes of this opinion the issue for decision is whether this court has jurisdiction to decide these cases the problem is that with the termination of the receivership there remains no representative of the limited_partnerships to maintain and prosecute these cases further neither the tax_court petitions nor the 2prior to date and the termination of the receiverships by the state of new jersey petitioners were represented by george f nagel 3unless otherwise indicated section references are to the internal_revenue_code in effect for the years in issue and rule references are to the tax_court rules_of_practice and procedure underlying refund claims forms notice of inconsistent treatment or administrative_adjustment_request aar were filed by the tax_matters_partner tmp as required by section and rules and background the information below is based upon an examination of the pleadings moving papers responses and attachments submitted in connection with these cases factual recitations are meant to provide context for our analysis of respondent’s motions and to set forth matters that appear undisputed they do not however constitute findings_of_fact in the event of a subsequent trial or trials the partnerships are two new jersey limited partnerships--cambridge partners l p and cambridge partners ii l p cambridge i and cambridge ii or collectively the partnerships petitioner is a receiver appointed for them by the new jersey superior court superior court their primary place of business when the petitions were filed was in new jersey new jersey resident john c natale formed cambridge i as the sole general_partner during or about and subsequently created cambridge ii during or about date these entities were advertised as investment partnerships hedge funds and each promptly solicited investors to purchase whole and fractional interests in each entity during their time in operation the partnerships amassed a total of approximately and investors respectively mr natale was general_partner and tmp of both and purportedly used the partnerships to manage investments on behalf of the partnerships’ limited partners unfortunately mr natale’s management led to immediate and sustained losses for both the partnerships and the partners rather than report the losses however mr natale reported fictitious profits in substance the partnerships quickly became if they were not from the beginning ponzi schemes to that end mr natale fabricated the partners’ monthly statements sent fictitious information to trade and industry publications cashed out redeeming investors with other investors’ money and--as is most important in these cases-- provided false tax information to the limited partners and the internal_revenue_service irs specifically for at least the and tax years he reported fictitious information on the schedules k-1 partner’s share of income deductions credits etc that he provided to the partners and the forms u s return of partnership income that he provided to the irs as a result at least some of the partners when they filed their federal_income_tax returns presumptively relying on the schedules k-1 appear to have reported more income than they actually earned and many suffered significant loses although they thought they had income consequently in many if not all cases these partners may have paid more federal_income_tax than they actually owed mr natale was not caught by law enforcement authorities and continued to provide false information to the limited partners and the irs until he voluntarily surrendered to the new jersey attorney general’s office and acknowledged his fraudulent activities in his confession and surrender to authorities was brought on in material part by the partnerships’ inability to acquire sufficient new investors to meet their ongoing redemption obligations to old investors resulting in the scheme’s collapse by then the divergence between mr natale’s misrepresentations and economic reality was dramatic mr natale and his investment activities through the partnerships and a related_entity caj trading inc thereafter became the target of various criminal and civil proceedings in the state of new jersey mr natale was alleged by prosecutors and plaintiffs to have defrauded investors communicated inflated 4some partners apparently used tax-advantaged sec_401 or individual_retirement_account funds for their investment s in the partnerships and therefore would have had no taxable_income to report even if the schedules k-1 had been accurate other partners who withdrew their investments and fabricated profits may have actually made money at the expense of other investors and may have been subject_to voidable preference clawback provisions asset and profitability figures for the partnerships and misapplied new investor funds to cover redemptions of existing investors’ partnership accounts in the resulting criminal case mr natale pleaded guilty to felony counts of securities fraud theft by deception and misappropriation and was sentenced to to years in prison in the civil case he consented to a finding that he had committed fraud in violation of new jersey’s securities laws in a date civil consent judgment the superior court permanently enjoined mr natale and the partnerships from engaging in the securities business ordered mr natale and the partnerships to disgorge any money they had obtained in connection with the misconduct and to make restitution to the partners and appointed james r zazzali to serve as receiver for mr natale and the partnerships pursuant to n j stat ann sec_49 west in the consent judgment the superior court specified the powers and responsibilities that mr zazzali would have as receiver ordering that he would i immediately take into possession all of defendants’ assets including but not limited to holdings in all bank brokerage and trading accounts and undertake all actions necessary or appropriate to maintain optimal value of those assets including the power to liquidate any such assets ii review all the books_and_records of and pertaining to defendants and report to the court within days of this order a the identities of all of defendants’ investors and creditors past and present and the status of their accounts b the financial conditions of defendants and c a preliminary plan to distribute monies to investors and creditors vii have the full statutory powers to perform his duties including the powers delineated in n j s a c and d in date mr zazzali was appointed to the new jersey supreme court and on date the superior court appointed kenneth i nowak to replace him as receiver for the partnerships in that capacity mr nowak reviewed the partnerships’ books_and_records and identified the inaccurate tax information that mr natale had reported to the partners and the irs this work required a considerable period in april of as to and february or march of as to and mr nowak in his capacity as receiver filed on behalf of the partnerships amended returns forms and aars for purposes of revising the amounts reported on the original partnership tax returns forms submitted by mr natale explanatory statements included with the aars represented that deception on the part of mr natale had resulted in the reporting of fictitious profits and amounts on the original federal tax returns and that a comprehensive and time-consuming reconstruction of books_and_records had been undertaken to ascertain the correct figures during the course of the ensuing review of the aars the irs attempted to find a limited_partner for each of the partnerships willing to serve as tmp and in that capacity to ratify the aars however none of the limited partners contacted by the irs was willing to agree to serve as a tmp after consideration the irs declined to treat the changes shown on the aars as corrections of errors on the partnership returns on the grounds that they were not signed by the tmp of either of the partnerships on date petitions signed by mr nowak were filed with this court on behalf of the partnerships as to their respective taxable years these petitions were followed on date by respondent’s above- described motions to dismiss the cases for lack of jurisdiction thereafter on date the superior court issued the following order entitled order confirming the authority of the receiver to act as tax_matters_partner nunc_pro_tunc t he receiver is and has been authorized to act as and take all actions required of the tax_matters_partner on behalf of the cambridge entities including but not limited to the filing of documents returns amended returns k-1s administrative adjustment requests and any and all other filings and petitions necessary or appropriate to carryout sic and fulfill the obligations of the receiver with and to the internal_revenue_service the united_states tax_court any and all appeals motions or any related matter before or from the internal_revenue_service and or the united_states tax_court including any other agency court or appellate tribunal this shall include but not be limited to the filing of administrative adjustment requests with the internal_revenue_service and all actions in connection with any state and federal agencies all administrative matters and proceedings administrative agencies administrative courts tax courts and or appellate review nunc_pro_tunc as of the date of the receiver’s initial appointment on date a hearing was held on respondent’s motions to dismiss the cases and the motions were taken under advisement three days later on date mr nowak filed a separate petition with the court for each partnership with respect to the and aars on date respondent moved to dismiss the cases concerning those aars thereafter it appears the parties worked cooperatively to informally work out a procedure agreeable to both sides to resolve any inequities although no formal written settlement agreement has been found by either party or filed with the court the receiver’s report to the investors and his motion to the new jersey superior court to close the receivership respectively stated that through litigation with the irs we were able to allow all of you to file amended tax returns to recoup the taxes you paid on fictitious profits in prior years a t the time we sought to obtain this benefit for you several years ago the g overnment had adamantly opposed it and we pursued the matter successfully in the t ax c ourt and as a result of the litigation the irs ultimately agreed to allow the receiver to coordinate the filing of returns and to allow the limited partners’ prior returns to be amended we believe and the irs also noted that this was breaking new ground at the time and was an enormous benefit for many investors who had paid taxes on the false profits as a result we believe that the limited partners were able to obtain refunds on certain of their taxes for the false profits upon which they had previously reported and paid taxes none of the limited partners has ratified the petition agreed to serve as tmp or agreed to participate in any of these cases respondent on date filed a status report in an effort to bring these cases to a conclusion mr nowak the putative tmp for the partnerships through counsel flavio komuves also filed status reports on august and date discussion i general rules a partnership_taxation and aars a partnership is not a tax-paying entity sec_701 see 96_tc_792 although a partnership reports its income gains losses deductions and credits to the irs on a form_1065 information_return those partnership items pass through the partnership to its partners who are responsible for paying any federal_income_tax resulting from them sec_701 sec_702 sec_6031 see garcia v commissioner t c pincite- to facilitate this process the partnership issues each partner a schedule_k-1 indicating that partner’s share of the partnership items each partner must then report that information to the irs on a form_1040 u s individual_income_tax_return or other equivalent form if any partner objects to how the partnership reported a partnership item--for example if the partner believes that the partnership overstated its income ultimately resulting in an increased tax_liability for the partner--the partner can seek an administrative adjustment of that partnership_item by filing an aar with the secretary sec_6227 the secretary may act on the request in one of four ways process the request in the same manner as a claim for credit or refund with respect to items which are not partnership items assess any additional tax that would result from the requested adjustments mail to the partner a notice that all partnership items of the partner for the partnership taxable_year to which such request relates shall be treated as nonpartnership_items or 5partnership items are defined in sec_6231 see sec_301 a - a i proced admin regs conduct a partnership proceeding sec_6227 if the secretary ultimately disallows an aar filed pursuant to sec_6227 depending on the action taken by the secretary the partner may file a refund claim or initiate a civil_action for refund pursuant to sec_7422 sec b in addition the partnership’s tmp can file an aar on behalf of the partnership sec_6227 when as here such an aar is not treated by the secretary as a substituted return the secretary may act on the aar in one of three ways i without conducting any proceeding allow or make to all partners the credits or refunds arising from the requested adjustments ii conduct a partnership proceeding under this subchapter or iii take no action on the request sec_6227 if the secretary does not allow any part of the tmp’s aar the tmp may file a petition for adjustment of those partnership items with the tax_court the u s court of federal claims or the appropriate u s district_court sec a b tax_matters_partner the tmp role was introduced by the tax equity and fiscal responsibility act of tefra pub_l_no secs stat pincite codified as amended at sec_6221 to see sec_6231 tefra’s primary purpose was to enhance the efficiency of partnership_taxation 64_f3d_101 2d cir noting that the intended effect of tefra was to avoid duplication of administrative and judicial resources and inconsistent results between partners to do so it provided that--whenever possible--issues involving partnership items would be litigated and resolved in a central partnership-level proceeding rather than in separate partner-level proceedings see 128_tc_192 stating that the purpose behind tefra was to have a single point of adjustment for the irs rather than having to make separate partnership_item adjustments on each partner’s individual return the creation of the tmp’s role was one of many means by which congress sought to enhance the efficiency of partnership_taxation in a tefra partnership the tmp serves as the partnership’s central representative before the irs and the 6a partnership is subject_to tefra if it has more than partners or if certain other conditions not relevant here apply sec_6231 courts see 114_tc_115 the tmp is the central figure of partnership proceedings and consequently the tmp’s status is of critical importance to the proper functioning of the partnership audit and litigation procedures aff’d 272_f3d_1172 9th cir as a tefra partnership’s central representative the tmp possesses important powers and responsibilities such as keeping all partners informed of the status of the administrative or judicial proceedings involving the adjustment of partnership items having priority in choosing the forum in which the partnership will seek judicial review and binding other partners to the terms of a settlement the partnership reaches with the irs see eg sec_6223 c a given the importance of the tmp the law provides a precise procedure for determining who a partnership’s tmp is sec_6231 tax_matters_partner --the tax_matters_partner of any partnership is-- a the general_partner designated as the tax_matters_partner as provided in regulations or b if there is no general_partner who has been so designated the general_partner having the largest profits interest in the partnership at the close of the taxable_year involved or where there is more than such partner the of such partners whose name would appear first in an alphabetical listing if there is no general_partner designated under subparagraph a and the secretary determines that it is impracticable to apply subparagraph b the partner selected by the secretary shall be treated as the tax_matters_partner sec_301_6231_a_7_-1 proced admin regs provides that a designation of a tax_matters_partner for a taxable_year under this section shall remain in effect until one of five specified events occurs as relevant here a tmp designation terminates if t he partnership items of the tax_matters_partner become nonpartnership_items under sec_6231 id subdiv iv the regulations promulgated under sec_6231 state the following with respect to the appointment of a receiver the treatment of items as partnership items with respect to a partner for whom a receiver has been appointed in any receivership proceeding before any court of the united_states or of any state or the district of columbia will interfere with the effective and efficient enforcement of the internal revenue laws accordingly partnership items arising in any partnership taxable_year ending on or before the last day of the latest taxable_year of the partner with respect to which the united_states could file a claim for income_tax due in the receivership proceeding shall be treated as nonpartnership_items as of the date a receiver is appointed in any receivership proceeding before any court of the united_states or of any state or the district of columbia sec_301_6231_c_-7t b temporary proced admin regs fed reg date accordingly as of date the day on which a receiver was appointed mr natale ceased to be the tmp of the partnerships for any partnership taxable_year for which respondent could file a claim for income_tax due in mr natale’s receivership proceedings new jersey law requires a receiver to within days following the date of his appointment give notice requiring all creditors to present their claims in writing n j stat ann sec 14a west see also sec_6036 sec_301_6036-1 proceed admin regs requiring receivers to give notice of their designation to the irs within days of appointment the receiver in this case was appointed on date as is relevant here respondent could have filed a claim with the receiver for income_tax due from mr natale for the partnership taxable years and which are at issue in this case see sec_6501 and b a and b internal_revenue_manual pt date accordingly pursuant to the regulations mr natale ceased to be the tmp for the partnerships for those tax years on date detailed regulations promulgated in accordance with sec_6231 provide further guidance and requirements for selection of a tmp by the irs but do not permit the designation of a limited_partner as tmp except by the irs under limited circumstances sec_301_6231_a_7_-1 q proced admin 7those circumstances include where no general_partner can be selected to serve as tmp sec_301_6231_a_7_-1 proced admin regs the continued regs the statute does not permit the designation of a nonpartner as tmp under any circumstances see 95_tc_51 holding that a partnership’s court-appointed receiver could not qualify as its tmp under the statute because he was never a partner in the partnership aff’d without published opinion 995_f2d_235 9th cir see also 95_tc_477 mcauliffe could not be selected by respondent as tax_matters_partner of montana sapphire for the same reason that he could not qualify under sec_6231 or b he is not and never was a partner in the partnership under limited circumstances federal courts may appoint a tmp see comput programs lambda ltd v 90_tc_1124 see also 16_f3d_383 fed cir that authority is rooted not in sec_6231 but in the extrastatutory notion that a court possesses certain inherent powers to protect parties to the litigation before it and to effectively manage its docket see comput programs lambda ltd v commissioner t c pincite stating that continued regulations lay out a set of rules regarding the disqualification of a partner as tmp the regulations are controlling here 562_us_44 the court’s authority to appoint a tmp stems from its inherent powers as a court see also 370_us_626 the authority of a court to dismiss sua sponte for lack of prosecution has generally been considered an ‘inherent power ’ governed not by rule or statute but by the control necessarily vested in courts to manage their own affairs so as to achieve the orderly and expeditious disposition of cases in lambda after a petition_for_readjustment had been properly filed we appointed a limited_partner tmp to fill the void left after the general partners were disqualified see comput programs lambda ltd v commissioner t c pincite in so doing we invoked our inherent power to manage our docket and stressed the importance of a tmp in protect ing the rights of partners interested in the partnership proceeding before us and assur ing the fair 8the person appointed receiver and who filed the aars in this case was not a partner in either partnership and could not qualify as a tmp under sec_6231 see 95_tc_477 95_tc_51 aff’d without published opinion 995_f2d_235 9th cir there was no general_partner other than mr natale who was no longer eligible to serve as tmp had a limited_partner been appointed receiver or appointed in some assisting capacity to file or ratify the aars the internal_revenue_service might have accepted and processed the aars and the problem could have resolved itself efficient and consistent disposition of partnership litigation pursuant to sec_6621 et seq id pincite the court’s inherent power to manage its docket however is subject_to two limitations first a court cannot use its inherent power to manage its docket for any other purpose our appointment of a tmp in lambda was clearly aimed at docket management because we limited the tmp to acting in an administrative capacity solely for the litigation of this case id pincite second a court cannot use its inherent power if doing so would violate or circumvent a statutory provision see generally 517_us_820 the extent of inherent powers must be delimited with care for there is a danger of overreaching when one branch of the government without benefit of cooperation or correction from the others undertakes to define its own authority although sec_6231 does not explicitly authorize a court to appoint a tmp we did not circumvent that section in lambda because of the limited nature of the court-appointed tmp’s role specifically the court- appointed tmp was merely a conduit for information from the court to other interested partners enabling the court to effectively manage and resolve the tefra litigation before it--nothing more see comput programs lambda ltd v commissioner t c pincite the court in lambda recognized that it could not empower that tmp to act concerning a matter other than the particular litigation with respect to which that tmp was appointed see degen u s pincite in many instances the inherent powers of the courts may be controlled or overridden by statute or rule in the wake of lambda we amended our rules by adding rule which provides for the appointment and removal of a tmp by the court rule our stated purpose in adding rule was so that there will always be a tax_matters_partner who is responsible for keeping each partner fully informed of the partnership action rule note 90_tc_1379 accordingly as in lambda we stressed the limited authority of a court-appointed tmp any_action that the court might take in either appointing a tax_matters_partner or removing a tax_matters_partner is for the limited purpose of the pending partnership action only iddollar_figure 9in adding rule a which permits us to appoint a tmp we did not specifically address a situation involving a petition filed by a nonpartner see rule note 90_tc_1378 rule a deals with the situation where a petition is filed by a partner other than the tax_matters_partner and the petition fails to allege the name and current address of the tax_matters_partner 10our authority to appoint a tmp derives from our inherent authority as a court--and not from sec_6231 it is disputable and as yet undecided by this court whether in exercising our inherent authority we are constrained to appoint as tmp an individual or entity that is qualified to serve as tmp under sec continued ii analysis under section a and rule our jurisdiction over these cases is conditioned on an aar filed by the tmp that was not allowed in full and a proper petition for adjustment filed by the tmp at issue is whether those jurisdictional prerequisites have been satisfied in this case which depends upon whether mr nowak was the tmp of the partnerships when he filed the aars and the petitions in these cases at the outset we reiterate that sec_6231 does not permit a nonpartner such as mr nowak to serve as tmp see supra pp we also note that mr nowak is not--and was never-- a partner in either partnership involved in these cases nor does he contend otherwise instead in his responses to respondent’s motions to dismiss mr nowak asserts that the tax_court has the inherent nonstatutory authority to appoint a nonpartner as tmp and that the superior court enjoyed the similar authority to control its docket and empower its receiver to act as tmp on the partnerships’ behalf thus the question now before us is whether any_action that the superior court has taken or that we can now take permits mr nowak to serve as tmp of continued a cambridge i and cambridge ii so as to permit us to continue to hear these cases on their merits a this court cannot appoint a tmp in these cases we must have jurisdiction over a case in order to use our inherent power to appoint a tmp see transpac drilling venture f 3d pincite we agree with the court of federal claims that the court does not have inherent power to appoint anyone as tmp where the cases are not properly before the court because the petitions were not properly filed stated another way we cannot invoke our inherent power to appoint a tmp in order to bootstrap invoking our jurisdiction over these cases to use our inherent power for that purpose would be to abolish by judicial fiat the jurisdictional limitations of section dollar_figure moreover as discussed earlier our inherent power to appoint a tmp and or powers under rule do not permit us to give that tmp the powers that would be necessary to invoke our jurisdiction namely the powers to file aars and petition the court see supra pp 11petitioner alternatively asks us to appoint him representative of the partnerships with the power to file aars and petitions even if he is not qualified to serve as tmp of the partnerships whether we refer to a court-appointed tmp as a representative rather than a tmp is merely a matter of semantics no matter what we now decide to call mr nowak we cannot retroactively give ourselves jurisdiction over these cases b mr nowak is not now a tmp of either partnership who may pursue these cases whether mr nowak was tmp of the cambridge partnerships when he filed the aars and tax_court petitions in these cases turns on the effect of the superior court’s consent judgment and nunc_pro_tunc order purporting to empower him to act as tmp of the cambridge partnerships for the purpose of filing the aars and followup tax_court petitionsdollar_figure whether mr nowak qualified as tmp of the partnerships when he filed the aars and the tax_court petitions is unquestionably a matter of federal tax law as such that issue is not governed by a state court’s orders and judgments see 114_tc_184 noting that a state court cannot determine issues of federal tax law grober v commissioner tcmemo_1972_240 31_tcm_1179 t he question of 12it is also critical whether at the time the respective aars were filed mr nowak was the tmp of each partnership by virtue of inherent authority properly used by the new jersey superior court for that to be true the date nunc_pro_tunc order must be treated as if it were a valid order issued in date when a receiver was initially appointed see 45_tc_530 this court is generally unwilling to give effect to such orders when as here they reflect an intention or design originating subsequent to the date of the original order 68_tc_494 while the new jersey superior court from the start sought to wind up the partnerships in an orderly fashion it appears to have been unaware of the need to appoint a tmp until shortly before the nunc_pro_tunc order doing so was issued whether or not a joint_venture exists for federal tax purposes must be decided under standards prescribed in the internal_revenue_code and is not controlled by the determinations of a state court aff’d sub nom 499_f2d_1186 2d cir see also nieto v commissioner tcmemo_1992_296 63_tcm_3050 therefore even assuming arguendo that petitioner is correct in his contention the nunc_pro_tunc order issued by the superior court avails him nothing because he did not comply with the requirements set down in the internal_revenue_code moreover the superior court purported to give mr nowak the general powers of a tmp appointed under sec_6231 --eg the power to file aars and tax_court petitions sec_6231 does not authorize any state court or for that matter any court to do so and any court’s inherent authority to appoint a tmp if it exists at all should be narrowly delineated to harmonize with federal tax law to the extent reasonably possible as was the case in 95_tc_51 we need not decide whether new jersey courts have the inherent power to appoint a tmp because the new jersey court that established the receivership and purported to authorize mr nowak to act as tmp has at his request terminated the receivership consequently there is no longer any party even purporting to act as tmp under statutory or inherent court power to pursue this litigation rule c mont sapphire assocs ltd v commissioner t c pincite 94_tc_794 universal tr v commissioner tcmemo_2000_390 iii conclusion mr nowak now lacks the requisite authority to act as tmp on behalf of the partnerships regardless of whether he had that power when he filed the underlying aars and petitions as a consequence no party properly before the court continues to argue that we have jurisdiction over these cases further the parties and those taxpayers affected by this litigation appear to now be satisfied with the status quo and the informal resolution of the tax matters disputes rendering these cases moot consequently we will grant respondent’s motions to dismiss for lack of jurisdictiondollar_figure to reflect the foregoing appropriate orders of dismissal for lack of jurisdiction will be entered 13we note that any remaining inequity in these cases is mitigated to some degree by the fact that all of the limited partners were permitted to file their own aars relating to partnership items


t c memo united_states tax_court jill r scott petitioner v commissioner of internal revenue respondent docket no filed date jill r scott pro_se jordan s musen and benjamin a de luna for respondent memorandum opinion panuthos chief special_trial_judge this matter is before the court on respondent's motion to dismiss for lack of jurisdiction and petitioner's motion to restrain assessment and collection as explained in greater detail below we shall grant respondent's motion and deny petitioner's motion background three separate notices of deficiency were issued as follows on date respondent issued a notice_of_deficiency to petitioner determining a deficiency in her federal_income_tax for in the amount of dollar_figure and an addition_to_tax under sec_6651 a in the amount of dollar_figure the notice was mailed to petitioner at an address in gainesville florida on date respondent issued a joint notice_of_deficiency to petitioner and her husband charles n scott determining a deficiency in their federal_income_tax for in the amount of dollar_figure and an accuracy-related_penalty under sec_6662 in the amount of dollar_figure the notice was mailed to p o box lake buena vista florida the lake buena vista address on date respondent issued a notice_of_deficiency to charles n scott determining a deficiency in his federal_income_tax for in the amount of dollar_figure and additions to tax in the amounts of dollar_figure and dollar_figure under sec_6651 and sec_6654 respectively the notice was mailed to the lake buena vista address on date petitioner and charles n scott filed a joint petition for redetermination with the court the all section references are to the internal_revenue_code as amended all rule references are to the tax_court rules_of_practice and procedure at the time the petition was filed petitioner resided at continued petition states that the taxable_year in dispute is attached to the petition is a copy of the notice_of_deficiency dated date which was issued to charles n scott the petition was delivered to the court in an envelope bearing a u s postal service postmark dated date which date is days after the mailing of the date notice on date respondent filed a motion to dismiss for lack of jurisdiction asserting that the petition was not filed within the time prescribed in sec_6213 on date petitioner and charles n scott filed an objection to respondent's motion asserting that the 90-day period for filing a timely petition with the court runs from the date of receipt of the notice_of_deficiency the objection includes arguments directed at the merits of respondent's determinations respecting the scotts' tax_liability for and by order dated date respondent's motion to dismiss was granted in that the case was dismissed for lack of jurisdiction as to charles n scott and his name was struck from the caption on the ground that the petition was not timely filed with respect to the deficiency_notice issued to him on date continued the lake buena vista florida address on date respondent issued a notice_of_intent_to_levy to petitioner and charles n scott demanding payment of dollar_figure in satisfaction of their tax_liability for respondent subsequently filed a motion to dismiss for lack of jurisdiction asserting that the notice_of_deficiency issued to petitioner for is invalid on the ground that it was not mailed to petitioner's last_known_address petitioner filed an objection to respondent's motion to dismiss asserting that the taxable years in dispute are and and that the notices of deficiency for those years are invalid on the ground that they have no basis in material fact petitioner also filed a motion to restrain assessment and collection respondent maintains that the court has no jurisdiction to consider the validity of the notice_of_deficiency issued to petitioner and charles n scott for because the taxable_year was not placed in dispute in the petition this matter was called for hearing in washington d c at a motions session of the court counsel for respondent appeared at the hearing and presented argument on the pending motions although petitioner did not appear at the hearing she did file a written_statement with the court pursuant to rule c discussion the tax_court is a court of limited jurisdiction and we may exercise our jurisdiction only to the extent authorized by congress 85_tc_527 our jurisdiction to redetermine a deficiency depends upon the issuance of a valid notice_of_deficiency and a timely filed petition rule a c 93_tc_22 90_tc_142 sec_6212 expressly authorizes the commissioner after determining a deficiency to send a notice_of_deficiency to the taxpayer by certified or registered mail it is sufficient for jurisdictional purposes if the commissioner mails the notice_of_deficiency to the taxpayer's last_known_address sec_6212 81_tc_42 if a deficiency_notice is mailed to the taxpayer's last_known_address actual receipt of the notice is immaterial 857_f2d_676 9th cir affg 88_tc_1042 89_tc_806 frieling v commissioner supra pincite the taxpayer in turn ha sec_90 days or days if the notice is addressed to a person outside of the united_states from the date the notice_of_deficiency is mailed to file a petition in this court for a redetermination of the deficiency sec_6213 respondent issued a notice_of_deficiency to petitioner for on date the petition was filed nearly year later on date although it is evident that the petition was not filed within the 90-day period prescribed in sec_6213 respondent concedes that the notice is invalid because it was not issued to petitioner's last_known_address we accept respondent's concession and we shall grant respondent's motion to dismiss for lack of jurisdiction as to on this ground respondent further contends that we lack jurisdiction in this proceeding to consider the validity of the joint notice_of_deficiency issued to petitioner and charles n scott for the taxable_year in particular respondent asserts that the court lacks jurisdiction over the taxable_year because that year was not placed in dispute in the petition petitioner contends that the notice_of_deficiency for is invalid on the ground that the notice_of_deficiency has no basis in material fact before expressing any opinion with respect to petitioner's argument concerning the validity of the notice_of_deficiency for we must consider respondent's argument that the taxable_year was not placed in dispute in this proceeding the note to rule a states that the court's jurisdiction over parties and years in issue is fixed by the petition as originally filed or as amended within the statutory period for because we shall grant respondent's motion to dismiss for lack of jurisdiction on the ground that the notice for was not issued to petitioner's last_known_address we do not consider petitioner's contention that the notice for is invalid on the ground that it lacks a basis in material fact filing the petition 60_tc_1089 we agree with respondent that the petition filed in this case contains no mention of the taxable year--the only year placed in dispute in the petition is the taxable_year moreover even if we were to view petitioner's objection to respondent's motion to dismiss as an attempt to amend the petition to place the year in dispute the objection was not filed within the statutory period for filing the petition in fact the petition itself was not timely filed with respect to either the notice_of_deficiency for or the notice_of_deficiency for there appears to be no dispute that the joint notice_of_deficiency issued for the taxable_year was sent to petitioner's last_known_address the same address reflected by petitioner in the petition in any event petitioner's contention that the notice_of_deficiency for is invalid plainly lacks merit we understand petitioner to contend that the notice is invalid on the ground that respondent did not determine a deficiency within the meaning of sec_6212 see 814_f2d_1363 9th cir revg 81_tc_855 normally the court will not look behind the notice_of_deficiency to examine the basis for the commissioner's motives or administrative policies or procedures in making the determinations reflected in the notice see 79_tc_185 62_tc_324 however in scar v commissioner supra pincite the court_of_appeals held that the commissioner must consider information that relates to a particular taxpayer in order to determine a deficiency in respect to that taxpayer subsequently in clapp v commissioner 875_f2d_1369 9th cir the court_of_appeals commented on its decision in scar as follows furthermore as the tax_court has since pointed out scar did not even require any affirmative showing by the commissioner that a determination set forth in an alleged notice_of_deficiency was made on the basis of the taxpayers' return only where the notice_of_deficiency reveals on its face that the commissioner failed to make a determination is the commissioner required to prove that he did in fact make a determination 90_tc_110 based upon our review of the notice_of_deficiency for we are satisfied that respondent determined a deficiency in petitioner's tax_liability within the meaning of sec_6212 in particular the notice is addressed to petitioner and charles scott lists charles scott's social_security_number and contains an explanation that respondent disallowed specific amounts of unsubstantiated deductions reported on the scotts' tax_return considering all of the circumstances we would conclude that the notice_of_deficiency for is valid see stinnett v commissioner tcmemo_1993_429 as a final matter we turn to petitioner's motion to restrain assessment and collection sec_6213 provides that the tax_court may enjoin the commissioner's collection efforts if the commissioner is attempting to collect amounts that have been placed in dispute in a timely filed petition for redetermination 99_tc_466 96_tc_707 the record reflects that the amount that respondent is attempting to collect relates to petitioner's tax_liability for having resolved that we lack jurisdiction over the taxable_year in this proceeding it follows that we have no authority to enjoin respondent's collection efforts accordingly we shall deny petitioner's motion to restrain assessment and collection to reflect the foregoing an order will be entered granting respondent's motion to dismiss for lack of jurisdiction and denying petitioner's motion to restrain assessment and collection although petitioner cannot pursue her case respecting her tax_liability for in this court she is not without a remedy in short petitioner may pay the tax file a claim for a refund with the internal_revenue_service and if the claim is denied sue for a refund in the federal district_court or the u s court of federal claims see 55_tc_138


internal_revenue_service number release date index number ------------------------------------------------------ -------------------------------- -------------------------------- ----------------------------------- - department of the treasury washington dc third party communication none date of communication not applicable_person to contact ---------------------- id no ------------- telephone number --------------------- refer reply to cc corp plr-143521-06 date date -------------------------------------- -------------------------------------------------- ---------------------------------------------------- legend distributing ---------------------------------------------------------------------------- -------------------------------------------------------------------- distributing ---------------------------------------------------------------------------- -------------------------------------------------------------------- controlled ---------------------------------------------------------------------------- -------------------------------------------------------------------- distributingsub ----------------------------------------------------------------------------------------------- corporation z u date date v w busine sec_1 --------------------------------------------------------------------------------------------------------------- -------------------------------------------- --------------------------- ---------------------- ------------------- -------------- ------------- ----------- ----------------------------------------------------------------------- plr-143521-06 ----------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------- busine sec_2 --------------------------------------------------------------------------------------------------------------------- --- ------------------------------------------------------------------------------------------------ assets ----------------------------------------------------------------------- --------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------ ------------ ---------------------------------- x license ----------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- -- ------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------- ------- -------------------------------- y z s t state x ----------------------------------------------------------------------- transaction agreement --------------------------------------------------------------------------------------------------------------------- --- --------------------------------- ------------------------------ ------------- -------------------------------------------------------------------- ------------------------------------------------------------------------ ------------------------------------------------------------------------ ------------------------------------------------------------------------ ------------------------------------------------------------------------ -------------------------- dear ------------------ plr-143521-06 this letter responds to your date request for rulings on certain federal_income_tax consequences of a proposed transaction the information submitted is summarized below the rulings contained in this letter are based on facts and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party this office has not verified any of the materials submitted in support of the request for rulings verification of the information representations and other data may be required as part of the audit process in particular this office has not reviewed any information pertaining to and has made no determination regarding whether distribution a or distribution b defined below i satisfies the business_purpose requirement of sec_1_355-2 of the income_tax regulations ii is used principally as a device for the distribution of the earnings_and_profits of the distributing_corporation or the controlled_corporation or both see sec_355 of the internal_revenue_code and sec_1_355-2 or iii is part of a plan or series of related transactions pursuant to which one or more persons will acquire directly or indirectly stock representing a 50-percent_or_greater_interest in the distributing_corporation or the controlled_corporation see sec_355 and sec_1_355-7 except as expressly stated in rulings and summary of facts distributing a state x corporation is a publicly-held corporation and common parent of a consolidated_group of corporations distributing has approximately u shares of common_stock outstanding certain employees and directors of distributing hold restricted shares of distributing common_stock and options to acquire distributing common_stock issued in exchange for services as of date such employees and directors held v distributing restricted shares to which sec_83 applies and with respect to which no sec_83 election has been or will be made restricted shares as of date such employees and directors held nonvested compensatory options described in sec_1_83-7 to acquire w shares of distributing common_stock nonvested compensatory options no holder of restricted shares or nonvested compensatory options is a controlling shareholder or a ten-percent shareholder of distributing or controlled as defined in sec_1_355-7 nor is any such holder a member of a coordinating group that is a controlling shareholder or a ten-percent shareholder as defined in sec_1_355-7 distributing is a holding_company whose primary asset is the stock of distributing distributing wholly owns distributing a state x corporation and holding_company whose primary asset is the stock of several operating subsidiaries including the stock of controlled and distributingsub through distributingsub and its subsidiaries distributing is engaged in busine sec_1 through controlled and its subsidiaries distributing is engaged in busine sec_2 plr-143521-06 the financial information submitted that indicates that busine sec_1 conducted by distributingsub and its subsidiaries and busine sec_2 conducted by controlled each had gross_receipts and operating_expenses representing the active_conduct_of_a_trade_or_business for each of the past five years in order for controlled’s busine sec_2 to become larger and more competitive in its industry by combining with companies engaged in the same line_of_business distributing proposes to separate busine sec_2 from busine sec_1 proposed transaction the taxpayer proposes the following transaction the transaction i distributing will transfer assets value of dollar_figures and adjusted tax basis of dollar_figuret to controlled ii controlled will make a cash payment to distributing of dollar_figurex the cash distribution a portion of the cash distribution dollar_figurez will pay off intercompany debt iii distributing will distribute the stock of controlled to distributing distribution a iv distributing will transfer license to controlled in exchange for dollar_figurey v distributing will distribute the stock of controlled to the exchange agent for the benefit of the distributing shareholders distribution b in distribution b holders of restricted shares will be entitled to receive unrestricted controlled stock and holders of nonvested compensatory options held by persons becoming employees of newco following the transaction will be converted into nonvested compensatory options in controlled stock controlled nonvested compensatory options with the same terms and conditions vi newco a state x corporation will be organized with two wholly owned subsidiaries mergersub and mergersub vii mergersub will merge into controlled merger and mergersub will merge into corporation z merger all fractional shares of newco that would otherwise be received by the shareholders of controlled and the shareholders of corporation z will be bundled by the exchange agent on behalf of such shareholders and sold on the open market with the proceeds then distributed to such shareholders viii under transaction agreement each outstanding share of controlled stock and corporation z stock held by the exchange agent for the benefit of the controlled and corporation z shareholders the transferors will be converted into the right to plr-143521-06 receive newco common_stock once merger and merger are effective under state law the exchange agent will exchange the outstanding controlled and corporation z shares for newco shares to which the shareholders are entitled and distribute the newco shares to such shareholders and controlled nonvested compensatory options will cease to exist and convert into nonvested compensatory options of newco newco nonvested compensatory options with the same terms and conditions the exchange restricted shares held by persons becoming employees of newco in the transaction will be converted to restricted shares of newco newco restricted shares with the same terms and conditions representations distributing distributing and controlled taxpayers have made the following representations concerning the transaction distribution a 1a no part of the consideration to be distributed by distributing will be received by a shareholder as a creditor employee or in any capacity other than that of a shareholder of distributing 1b the five years of financial information submitted on behalf of the business conducted by distributingsub a member of the distributing separate_affiliated_group as defined in sec_355 sag is representative of the present business operations of distributingsub and with regard to such business there have been no substantial operational changes since the date of the last financial statements submitted 1c the five years of financial information of controlled is representative of the present business operations of controlled and with regard to such business there have been no substantial operational changes since the date of the last financial statements submitted 1d following distribution a the distributing sag and controlled will continue the active_conduct of their respective businesses independently and with their separate employees 1e distribution a is carried out to separate busine sec_2 from busine sec_1 so that busine sec_2 can pursue its own long-term strategic objectives distribution a is motivated in whole or substantial part by these corporate business purposes 1f distribution a is not used principally as a device for the distribution of earnings_and_profits of distributing or controlled or both 1g for purposes of sec_355 immediately after distribution a no person determined after applying sec_355 will hold stock possessing percent or more of plr-143521-06 the total combined voting power of all classes of distributing stock entitled to vote or percent or more of the total value of shares of all classes of distributing stock that was acquired by purchase as defined in sec_355 and during the five-year period determined after applying sec_355 ending on the date of distribution a 1h for purposes of sec_355 immediately after distribution a no person determined after applying sec_355 will hold stock possessing percent or more of the total combined voting power of all classes of controlled stock entitled to vote or percent or more of the total value of shares of all classes of controlled stock that was either i acquired by purchase as defined in sec_355 and during the five-year period determined after applying sec_355 ending on the date of distribution a or ii attributable to distributions on distributing stock that was acquired by purchase as defined in sec_355 and during the five-year period determined after applying sec_355 ending on the date of distribution a 1i assets transferred to controlled will not include property for which an investment_tax_credit was taken in prior years 1j distributing neither accumulated its receivables nor made extraordinary 1k no intercorporate debt will exist between distributing and controlled at the payment of its payables in anticipation of distribution a time of or subsequent to distribution a distributing and controlled will be for fair_market_value based on terms and conditions arrived at by the parties bargaining at arm’s length sec_368 and iv 1m no two parties to distribution a are investment companies as defined in 1l payments made in connection with all continuing transactions between 1n distribution a is not part of a plan or series of related transactions within the meaning of sec_1_355-7 pursuant to which one or more persons will acquire directly or indirectly stock representing a 50-percent_or_greater_interest within the meaning of sec_355 in distributing or controlled including any predecessor or successor of any such corporation 1o there is no plan or intention to liquidate distributing or controlled to merge either corporation with any other corporation except in the case of controlled the merger or to sell or otherwise dispose_of the assets of either corporation after distribution a except in the ordinary course of business distribution b plr-143521-06 2a except for shares of controlled stock received by holders of restricted shares no part of the consideration to be distributed by distributing will be received by a shareholder as a creditor employee or in any capacity other than that of a shareholder of distributing 2b the five years of financial information submitted on behalf of the business conducted by distributingsub a member of the distributing sag is representative of the present business operations of distributingsub and with regard to such business there have been no substantial operational changes since the date of the last financial statements submitted 2c the five years of financial information of controlled is representative of the present business operations of controlled and with regard to such business there have been no substantial operational changes since the date of the last financial statements submitted 2d following distribution b the distributing sag and controlled will continue the active_conduct of their respective businesses independently and with their separate employees 2e distribution b is carried out to separate busine sec_2 from busine sec_1 so that busine sec_2 can pursue its own long-term strategic objectives distribution b is motivated in whole or substantial part by these corporate business purposes 2f distribution b is not used principally as a device for the distribution of earnings_and_profits of distributing or controlled or both 2g for purposes of sec_355 immediately after distribution b no person determined after applying sec_355 will hold stock possessing percent or more of the total combined voting power of all classes of distributing stock entitled to vote or percent or more of the total value of shares of all classes of distributing stock that was acquired by purchase as defined in sec_355 and during the five-year period determined after applying sec_355 ending on the date of distribution b 2h for purposes of sec_355 immediately after distribution b no person determined after applying sec_355 will hold stock possessing percent or more of the total combined voting power of all classes of controlled stock entitled to vote or percent or more of the total value of shares of all classes of controlled stock that was either i acquired by purchase as defined in sec_355 and during the five-year period determined after applying sec_355 ending on the date of distribution b or ii attributable to distributions on distributing stock that was acquired by purchase as defined in sec_355 and during the five-year period determined after applying sec_355 ending on the date of distribution b plr-143521-06 2i distributing neither accumulated its receivables nor made extraordinary 2j no intercorporate debt will exist between distributing and controlled at the payment of its payables in anticipation of distribution b time of or subsequent to distribution b distributing and controlled will be for fair_market_value based on terms and conditions arrived at by the parties bargaining at arm’s length sec_368 and iv 2l no two parties to distribution b are investment companies as defined in 2k payments made in connection with all continuing transactions between 2m distribution b is not part of a plan or series of related transactions within the meaning of sec_1_355-7 pursuant to which one or more persons will acquire directly or indirectly stock representing a 50-percent_or_greater_interest within the meaning of sec_355 in distributing or controlled including any predecessor or successor of any such corporation 2n immediately before distribution b items of income gain loss deduction and credit will be taken into account as required by the applicable intercompany_transaction regulations see sec_1_1502-13 further distributing 2’s excess_loss_account if any with respect to the controlled stock will be included in income immediately before distribution b see sec_1_1502-19 2o shares of controlled stock distributed with respect to shares of distributing restricted shares will not exceed in the aggregate percent of the voting power of the controlled stock outstanding immediately after distribution b 2p there is no plan or intention to liquidate distributing or controlled to merge either corporation with any other corporation except in the case of controlled the merger or to sell or otherwise dispose_of the assets of either corporation after distribution a except in the ordinary course of business the exchange 3a stock_or_securities for services rendered to or for the benefit of newco will not constitute in the aggregate percent or more of the stock issued in connection with the exchange and no stock_or_securities will be issued for indebtedness of newco that is not evidenced by a security or for interest on indebtedness of newco which accrued on or after the beginning of the holding_period of the transferors for the debt 3b none of the controlled stock to be transferred to newco is sec_306 stock within the meaning of sec_306 plr-143521-06 3c the transferors will not retain any rights in the property transferred to newco 3d the transfers and exchanges will occur under a plan agreed upon before the transaction in which the rights of the parties are defined 3e all exchanges will occur on approximately the same date 3f there is no plan or intention on the part of newco to redeem or otherwise reacquire any stock or indebtedness to be issued in the transaction 3g taking into account any issuance of additional shares of newco stock any issuance of stock for services the exercise of any newco stock_rights warrants or subscriptions a public offering of newco stock and the sale exchange transfer by gift or other_disposition of any of the stock of newco to be received in the exchange the transferors will be in control of newco within the meaning of sec_368 3h each transferor will receive stock or other_property approximately equal to the fair_market_value of the property transferred to newco 3i newco will remain in existence and retain and use the property transferred to it in the trade_or_business of being a holding_company 3j there is no plan or intention by newco to dispose_of the transferred property 3k each of the parties to the exchange will pay its or his her own expenses if any incurred in connection with the proposed transaction 3l newco will not be an investment_company within the meaning of sec_351 and sec_1_351-1 3m taxpayers are not aware of any transferor that is under the jurisdiction of a court in a title_11_or_similar_case within the meaning of sec_368 3n newco will not be a personal_service_corporation within the meaning of sec_269a 3o the total fair_market_value of the assets transferred to newco by the controlled shareholders exceeds the sum of a the amount of liabilities assumed by newco in connection with the exchange b the amount of liabilities owed to newco that are discharged or extinguished in connection with the exchange and c the amount of any money and the fair_market_value of any other_property other than stock permitted to be received under sec_351 without the recognition of gain received by the controlled shareholders in connection with the exchange the fair_market_value of the assets of newco exceeds the amount of its liabilities immediately_after_the_exchange plr-143521-06 3p the distribution of cash in lieu of fractional shares of newco common_stock will be undertaken solely for the purpose of saving the corporation the expense and inconvenience of issuing and transferring fractional shares will not be separately bargained-for consideration and will not represent more than one percent of the total consideration that will be issued in the exchange rulings based solely on the information submitted and the representations set forth above we rule as follows distribution a gain_or_loss will be recognized by distributing on the transfer of assets to controlled sec_1001 such gain_or_loss will be taken into account immediately before distribution b sec_1_1502-13 the remainder of the cash distribution not paid in satisfaction of intercompany debt and not exchanged for assets will be treated as a distribution under sec_301 and sec_1_1502-13 the basis of assets received by controlled will be the cost of such property to controlled sec_1012 no gain_or_loss will be recognized by distributing on its receipt of controlled stock in distribution a sec_355 no gain_or_loss will be recognized by distributing on the distribution of the controlled stock to distributing in distribution a sec_355 the aggregate basis of the distributing and controlled stock in the hands of distributing immediately after distribution a will be the same as distributing 2’s aggregate basis in the distributing stock held immediately before distribution a allocated between the stock of distributing and the stock of controlled in proportion to the relative fair market values of each corporation in accordance with sec_1_358-2 sec_358 and c the holding_period of the controlled stock received by distributing will include the holding_period of distributing stock held by distributing provided that such stock is held as a capital_asset on the date of distribution a sec_1223 provided that the shareholders of controlled acquire in the aggregate a percent interest in newco stock as defined in sec_355 and the shareholders of corporation z acquire in the aggregate a percent interest in newco stock as defined in sec_355 the 50-percent acquisitions one or plr-143521-06 more shareholders at the time of the exchange hold shares not acquired pursuant to a plan as defined in sec_1_355-7 in both controlled and corporation z overlapping shareholders and no other acquisitions of stock pursuant to a plan as defined in sec_1_355-7 exist no gain will be recognized by distributing under sec_355 as a result of the exchange newco restricted shares and restricted shares of corporation z will not be taken into account in determining the 50-percent acquisitions to the extent that such property is subject_to sec_83 and no sec_83 election has been or will be made with respect to such property controlled nonvested compensatory options newco nonvested compensatory options and nonvested compensatory options of corporation z will not be taken into account in determining the 50-percent acquisitions to the extent that such instruments are described in sec_1_83-7 in order to identify overlapping shareholders taxpayers may rely on their actual knowledge the receipt of cash in lieu of fractional shares in the exchange will not be taken into account in the sec_355 analysis earnings_and_profits will be allocated between distributing and controlled in accordance with sec_312 and sec_1_312-10 distribution b no gain_or_loss will be recognized by the shareholders of distributing on their receipt of controlled stock in distribution b sec_355 no gain_or_loss will be recognized by distributing on the distribution of the controlled stock to its shareholders in distribution b sec_355 the aggregate basis of the distributing and controlled stock in the hands of the distributing shareholders immediately after distribution b will be the same as the distributing shareholders’ aggregate basis in their distributing stock held immediately before distribution b allocated between the stock of distributing and the stock of controlled in proportion to the relative fair market values of each corporation in accordance with sec_1_358-2 sec_358 and c the holding_period of the controlled stock received by the distributing shareholders will include the holding_period of distributing stock held by the distributing shareholders provided that such stock is held as a capital_asset on the date of distribution b sec_1223 provided that the shareholders of controlled acquire in the aggregate a percent interest in newco stock as defined in sec_355 and the shareholders of corporation z acquire in the aggregate a percent interest in plr-143521-06 newco stock as defined in sec_355 the 50-percent acquisitions one or more shareholders at the time of the exchange hold shares not acquired pursuant to a plan as defined in sec_1_355-7 in both controlled and corporation z overlapping shareholders and no other acquisitions of stock pursuant to a plan as defined in sec_1_355-7 exist no gain will be recognized by distributing under sec_355 as a result of the exchange newco restricted shares and restricted shares of corporation z will not be taken into account in determining the 50-percent acquisitions to the extent that such property is subject_to sec_83 and no sec_83 election has been or will be made with respect to such property controlled nonvested compensatory options newco nonvested compensatory options and nonvested compensatory options of corporation z will not be taken into account in determining the 50-percent acquisitions to the extent that such instruments are described in sec_1_83-7 in order to identify overlapping shareholders taxpayers may rely on their actual knowledge the receipt of cash in lieu of fractional shares in the exchange will not be taken into account in the sec_355 analysis earnings_and_profits will be allocated between distributing and controlled in accordance with sec_312 and sec_1_312-10 the exchange the transfers by the transferors to newco represent a transaction within the provisions of sec_351 revrul_68_357 1968_2_cb_144 accordingly no gain_or_loss will be recognized by the transferors on the transfer of their stock to newco sec_351 the basis in the newco common_stock received by the transferors will be the same as their basis in the respective property transferred sec_358 the holding_period of the newco common_stock received by the transferors will include the period during which each shareholder held the respective property transferred provided that such property was held as a capital_asset at the time of the exchange sec_1223 no gain_or_loss will be recognized by newco on the receipt of controlled stock in exchange for its newco common_stock transferred in the exchange sec_1032 the basis in the controlled stock received by newco will be the same as the basis of such property in the hands of the transferors sec_362 plr-143521-06 the holding_period of the controlled stock received by newco will include the holding_period during which such property was held by the respective transferors sec_1223 the receipt by controlled shareholders of cash in lieu of fractional shares of newco stock will be treated for federal_income_tax purposes as if the fractional shares had been distributed to the controlled shareholders as part of the exchange and then had been disposed of by such shareholders for the amount of such cash in a sale_or_exchange the gain_or_loss if any determined using the basis allocated to the fractional shares in ruling and the holding_period given the fractional shares in ruling will be treated as a capital_gain or loss provided the stock was held as a capital_asset by the selling shareholder sec_1001 caveats except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter in particular no opinion is expressed as to the tax consequences under sec_83 of the distribution in distribution b of unrestricted controlled shares with respect to restricted shares procedural statements this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative a copy of this letter must be attached to any income_tax return to which it is relevant alternatively taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of the letter_ruling sincerely ______________________________ gerald b fleming senior technician reviewer branch office of associate chief_counsel corporate