internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc corp -plr date date legend company district selling shareholders date date date date state c xxx ppp project b ddd percent purchaser purchaser purchaser ccc plr hhh dollar_figurefff dollar_figureggg dollar_figureiii case j dear this letter responds to the date request for rulings submitted by your representative on behalf of company and the selling shareholders listed on the attached schedule a with respect to the transfer of certain water rights you have requested a ruling that for federal_income_tax purposes company's participation in the procedures by which the transfer of the water is accomplished in conjunction with the sales by the selling shareholders of their rights to the water will not constitute a sale_or_other_disposition of property by company nor a distribution_of_property by the company to the selling shareholders with respect to their stock additionally you have requested rulings on whether the water rights will constitute capital assets in the hands of the selling shareholders and whether certain_sales of these water rights will constitute sales or exchanges of capital assets the information submitted in the request and in a later submission is summarized below facts company was organized on date as a ditch and reservoir company and is subject_to state c's statutory requirements for mutual ditch companies company uses the cash_method_of_accounting and its fiscal_year ends on date approximately xxx of the company's shareholders are selling shareholders the other shareholders are not transferring any of their water rights and are not involved in the transactions described herein state c mutual ditch companies generally were created when a group of farmers banded together and formed the cooperative company for the express purpose of storing and conducting water for irrigation purposes company's primary function has been to deliver to and store the water of its shareholders the company's assets are limited to those necessary to deliver and store the water these assets include weirs canals dams water control devices and a storage reservoir the shareholders used the bylaws and shares to quantify each of their beneficial use rights in the water transported by the company the company owns no land on which to make use of the water it transports and stores although water is derived from two sources only the water from project b the project b water as described below is the subject of this ruling_request plr on date district a quasi-governmental corporation subject_to state c's statutory requirements for such entities entered into an agreement the repayment contract with the united_states bureau of reclamation the bureau for the development of project b project b emanates from the reclamation act of as amended the repayment contract grants district the right to allocate the project b water the district does so through allotment contracts that require the water users to pay their proportionate share of the district's costs to operate and maintain project b and to repay the federal government for its construction costs the operating reimbursements costs on date district entered into an allotment contract with company which provided that company would be entitled to receive an allocation of water for the beneficial use of its shareholders the project b water was then allocated pro_rata among the shareholders based on their shares in addition to paying on a pro_rata basis company's annual operating_expenses based on their respective allocation of project b water each shareholder pays his proportionate share of the operating reimbursements costs under the allotment contract conditions in state c are such that water is in great demand as such the selling shareholders intend to relinquish their beneficial_ownership of ddd percent of the project b water through three sales agreements the master sales agreements with purchaser purchaser and purchaser the master sales agreements with purchaser and purchaser provide they will acquire an aggregate of ccc units of project b water at dollar_figurefff per unit and dollar_figureggg per unit respectively the master sales agreement with purchaser provides for an allocation of hhh units of project b water at dollar_figureiii per unit in order to satisfy certain transfer requirements of the district the master sales agreement with purchaser includes an option for purchaser to take all or some of the units through a twenty-five year interruptible supply contract the interruptible supply contract under the interruptible supply contract the price for the units is the same as in the master sales agreement and it includes an option to purchase the units for a nominal fee by its terms the interruptible supply contract will remove beneficial_ownership of the units from the selling shareholders you have indicated that purchaser has elected to take all the units pursuant to the interruptible supply contract the selling shareholders will be paid in full for all units upon the closing of all three transactions including the transaction subject_to the interruptible supply contract to facilitate the negotiation of the master sales agreements and the interruptible supply contract the selling shareholders created ppp to act as their agent the only members of ppp are the selling shareholders the selling shareholders are not selling their shares in company but their shares will bear a legend to reflect that they are no longer entitled to their full allocation of the project b water plr you have indicated that company is not materially participating in the transactions described above company as a party to the allotment contract however will agree to the amendment of the allotment contract to reflect the reduced allotment of project b water the master sales agreements and the interruptible supply contract are conditioned on our rulings herein however the selling shareholders due to the crisis situation in state c have already transferred some of the project b water to the purchasers the emergency sales the consideration received by the selling shareholders from these emergency sales is being held in escrow pending our rulings herein according to the courts of state c mutual ditch companies are unique entities which are formed not under state c' s general corporation statutes but under special legislation reserved for ditch and reservoir companies in analyzing the relationship between the shareholders and mutual ditch companies in regards to water rights the supreme court of state c in case j has stated that a mutual ditch company is merely engaged in the business of transporting and storing the water for its shareholders benefit and the law of state c uniformly holds that the actual ownership of the water rights is in the shareholder the supreme court's analysis noted that a longstanding tenet of state c law is that ownership of a water right can be acquired only by the actual beneficial use of the water mere diversion is not sufficient to meet the requirements of state c's constitution finally the supreme court noted that it is well established that the water rights owned by the shareholders are property rights accordingly based on this supreme court's decision and other decisions by this court it is clear that under state c law company is not the beneficial_owner of any of the water it transports for the benefit of its shareholders including the project b water representations company has represented that it is not a party to the master sales agreements or the interruptible supply contract and shall not receive any proceeds or other consideration arising or resulting from the transactions described herein based on the information and representations submitted we rule as follows the selling shareholders for federal_income_tax purposes are the beneficial owners of the project b water rights and the sale of such rights including the short-term emergency sales described above will not be deemed to be a sale_or_other_disposition of property by the company or a distribution_of_property by the company to the selling shareholders with respect to their stock accordingly the company will not realize gain_or_loss as a result of the selling shareholders' transactions sec_1001 sec_301 sec_311 plr the beneficial rights in the project b water constitutes a capital_asset in the hands of the selling shareholders sec_1221 the transfer of the beneficial rights in the project b water under the master sales agreements and the interruptible supply contract constitute sales of capital assets by the selling shareholders sec_1222 caveat no opinion is expressed about the tax treatment of the transactions under other provisions of the code and regulations or about the tax treatment of any conditions existing at the time of or effects resulting from the transactions that are not specifically covered by the above ruling for example no opinion is expressed about whether the short-term emergency sales constitute sales or exchanges of capital assets nor are we opining on the selling shareholders' bases in these water rights the rulings contained in this letter are based upon information and a representation submitted by the company 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 procedural statements 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 a copy of this letter must be attached to any income_tax return to which it is relevant in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your taxpayer_representative sincerely steven hankin senior technical reviewer branch office of associate chief_counsel corporate


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 fip b01 plr-142072-13 date date legend llc llc llc lp firm hotel property_tax director representative representative state a a b ----------------------------------------- ----------------------- ----------------------------------- ----------------------- ------------------------------------- --------------------------------------------- ---------------------- ---------------------------- ------------------------------- ----------------- ----------------- ------------------------ ------------ --- -- plr-142072-13 c year year date date date date date date date date date date -- ------ ------ ----------------- ------------------ ------------------- -------------------------- ------------------- ------------------ ------------------ ---------------- ------------------ ----------------- dear --------------------- this ruling responds to a letter dated date and subsequent correspondence submitted on behalf of llc and llc collectively taxpayers taxpayers request an extension of time under sec_301_9100-1 and sec_301_9100-3 of the procedure and administration regulations so that the election for llc to be treated as a taxable_reit_subsidiary trs of llc under sec_856 of the internal_revenue_code code made on form_8875 taxable_reit_subsidiary election filed on date be effective as of date facts lp is a global investment firm one of its fastest growing investment portfolios is its real_estate sector as described below in further detail lp acquired a a percent interest in hotel property through a real_estate_investment_trust reit structure that includes taxpayers plr-142072-13 llc is a state a limited_liability_company that was formed on date it was organized and has operated in a manner intended to satisfy the reit requirements under sec_856 through llc plans to make an election to be treated as a reit pursuant to sec_1_856-2 of the income_tax regulations regulations when timely filing its tax_return form 1120-reit u s income_tax return for real_estate_investment_trusts for the tax_year ending date llc is a state a limited_liability_company that was formed on date it was organized and has operated in a manner intended to be treated as a trs of llc under sec_856 llc commenced operations on date on date llc a state a limited_liability_company in which llc indirectly holds a a percent interest acquired hotel property from a third party llc is classified as a disregarded_entity for u s federal_income_tax purposes on the same date date llc entered into a b-year nonrenewable lease agreement with llc wherein llc leased hotel property to llc and llc engaged an eligible_independent_contractor to undertake the daily operation and management of hotel property in exchange for a management fee from llc under this arrangement llc receives all revenue and bears all expenses of operating hotel property less the rent payment made to llc and management fees paid to the independent_contractor this structure is intended to conform to the requirements of sec_856 llc always has intended to be treated as a trs of llc to this purpose on date llc filed an entity classification election form in which it elected to be treated as an association_taxable_as_a_corporation for u s federal_income_tax purposes the election listed an effective date of date this election was approved by the internal_revenue_service service on date taxpayers also intended to timely file form_8875 to make a trs election for llc that would have an effective date of date taxpayers understand that failure to do so could result in potential adverse tax consequences for llc this is because for any period during which llc is not treated as a trs of llc the rental income llc receives from llc through its indirect ownership in llc would not be considered rents_from_real_property pursuant to sec_856 taxpayers anticipate that the rental income attributable to the period beginning on date and ending date the date the trs election filed on date will be effective in the absence of relief will exceed c percent of llc 1’s gross_income for year if llc were to elect reit status for year llc would be disqualified as a reit for failing to meet sec_856 as a practical matter therefore without the requested relief llc cannot elect reit status for year during the time surrounding lp’s acquisition of hotel property lp also was involved in numerous other real_estate and private equity transactions that were either plr-142072-13 in progress or closing all of which required a substantial time commitment from lp’s tax department lp’s tax department is led by tax director tax director’s day-to-day responsibilities include managing a tax department and providing tax_advice and tax compliance services for numerous lp-sponsored global investment portfolios in the private equity hedge fund and real_estate sectors in addition to managing lp’s internal tax department tax director also works closely with lp’s external tax advisor firm on tax compliance projects and regularly consults with firm on tax matters throughout the year lp has engaged firm to provide it with professional tax services since late year on date firm representatives representative and representative both tax partners and primary firm contacts for lp’s real_estate investment portfolio contacted tax director to inquire whether tax director’s team would need assistance with preparing and filing the trs election for llc on the same day tax director informed representative and representative that lp’s tax team had been handling entity classification elections for applicable entities and represented that his team would be responsible for preparing and filing the trs election as well on date representative requested tax director to forward a filed copy of the form_8875 for llc later that day after reviewing his records tax director determined that the requested form_8875 had not been filed due to a miscommunication within lp tax director mistakenly believed that the form_8875 with an effective date of date already had been filed with the service and executed along with other tax filings that included numerous forms submitted in year immediately after learning of the failure to timely file the form_8875 tax director recognized that not having a valid trs election for llc effective as of date would have a serious tax consequence on the same day tax director approached firm for guidance once tax director informed firm of the failure_to_file firm advised that it would be prudent for taxpayers to request relief under sec_301_9100-1 and sec_301_9100-3 taxpayers authorized firm to prepare and file the request for relief addressed herein in addition on date tax director’s team filed the form_8875 election for llc to be treated as a trs of llc with an effective date of date because this effective date was retroactive by more than two months and days if the relief requested were not granted it would be deemed effective on date in light of the facts set forth above taxpayers request under sec_301_9100-1 and sec_301_9100-3 that the trs election pursuant to sec_856 on the form_8875 filed on date be effective as of date taxpayers make the following additional representations plr-142072-13 the request for relief was filed by taxpayers before the failure to make the regulatory election was discovered by the service granting the relief will not result in taxpayers having a lower tax_liability in the aggregate for all years to which the regulatory election applies than that they would have had if the election had been timely made taking into account the time_value_of_money taxpayers did not seek to alter a return position for which an accuracy-related_penalty has been or could have been imposed under sec_6662 of the code at the time they requested relief and the new position requires or permits a regulatory election for which relief is requested being fully informed of the required regulatory election and related tax consequences taxpayers did not choose to not file the election in addition affidavits on behalf of taxpayers were provided with the submission as required by sec_301_9100-3 of the procedure and administration regulations law and analysis sec_856 of the code provides that a reit and a corporation other than a reit may jointly elect to treat such corporation as a taxable_reit_subsidiary to be eligible for treatment as a taxable_reit_subsidiary sec_856 provides that the reit must directly or indirectly own stock in the corporation and the reit and the corporation must jointly elect such treatment the election is irrevocable once made unless both the reit and the subsidiary consent to its revocation in addition the election and the revocation may be made without the consent of the secretary in announcement 2001_1_cb_716 the internal_revenue_service service announced the availability of form_8875 taxable_reit_subsidiary election the announcement provides that this form is to be used for tax years beginning after for eligible entities to elect treatment as a taxable_reit_subsidiary the instructions to form_8875 provide that the subsidiary and the reit can make the election at any time during the tax_year the instructions further provide that the effective date of the election cannot be more than months and days prior to the date of filing the elections or more than months after the date of filing the election if no date is specified on the form the election is effective on the date the form is filed with the service officers of both the reit and the taxable_reit_subsidiary must jointly sign the form which is filed with the irs service_center in ogden utah sec_301_9100-1 of the income_tax regulations provides that the commissioner has discretion to grant a reasonable extension of time to make a regulatory election defined in sec_301_9100-1 as an election whose due_date is plr-142072-13 prescribed by regulations or by a revenue_ruling a revenue_procedure a notice or an announcement published in the internal_revenue_bulletin or a statutory election but no more than 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_9100-3 through c i sets forth rules that the internal_revenue_service generally will use to determine whether under the particular facts and circumstances of each situation the commissioner will grant an extension of time for regulatory elections that do not meet the requirements of sec_301_9100-2 sec_301_9100-3 provides that subject_to paragraphs b i through iii of sec_301_9100-3 when a taxpayer applies for relief under this section before the failure to make the regulatory election is discovered by the service the taxpayer will be deemed to have acted reasonably and in good_faith sec_301_9100-3 provides that the interests of the government are prejudiced if granting relief would result in the taxpayer having a lower tax_liability in the aggregate for all years to which the regulatory election applies than the taxpayer would have had if the election had been timely made taking into account the time_value_of_money conclusion based on the information submitted and representations made we conclude taxpayers have shown good cause for granting a reasonable extension of time to file an election under sec_856 for llc to be treated as a trs of llc we conclude further that taxpayers’ joint trs election made pursuant to sec_856 on the form_8875 filed on date is effective as of date which is the date taxpayers always have intended that their joint trs election be effective except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer requesting it sec_6110 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 copies of this letter are being sent to your authorized representatives plr-142072-13 the rulings contained in this letter are 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 robert a martin senior technician reviewer branch office of associate chief_counsel financial institutions products enclosures copy of this letter copy for sec_6110 purposes cc


tcmemo_2004_110 united_states tax_court riggs national corporation subsidiaries f k a riggs national bank and subsidiaries petitioner v commissioner of internal revenue respondent docket no filed date joel v williamson thomas c durham gary s colton jr russell r young charles w hall and stephen m feldhaus for petitioner theodore j kletnick and courtney l shepardson for respondent this supplemental memorandum findings_of_fact and opinion supplements our supplemental memorandum opinion in tcmemo_2001_12 revd and remanded 295_f3d_16 d c cir which supplemented our opinion in 107_tc_301 revd and remanded 163_f3d_1363 d c cir supplemental memorandum findings_of_fact and opinion jacobs judge this case is before the court on remand from the u s court_of_appeals for the district of columbia circuit for further consideration consistent with its opinion in 295_f3d_16 d c cir riggs iv revg and remanding tcmemo_2001_12 riggs iii the sole issue to be decided on remand is whether in computing petitioner’s foreign tax_credits under sec_9011 for and brazilian income taxes withheld by banco central do brasil the central bank must be reduced by the pecuniary benefit equal to percent of those withheld brazilian income taxes that the central bank received from through date 1unless otherwise indicated all section references are to the internal_revenue_code in effect for the years in issue and all rule references are to the tax_court rules_of_practice and procedure 2we have previously held that in computing a u s lender’s foreign_tax_credit brazilian taxes withheld and paid on behalf of the lender must be reduced by the pecuniary benefit received by the brazilian borrower 89_tc_765 norwest corp v commissioner tcmemo_1992_282 affd 69_f3d_1404 8th cir first chicago corp v commissioner tcmemo_1991_44 continental ill corp v commissioner tcmemo_1988_318 affd in part and revd in part 998_f2d_513 7th cir affd per curiam sub nom 919_f2d_1492 11th cir in the cited cases unlike here the withheld taxes were not paid and the pecuniary benefit was not received by a tax-immune brazilian governmental entity such as the central bank findings_of_fact we incorporate herein the findings_of_fact set forth in 107_tc_301 163_f3d_1363 d c cir riggs ii and riggs iii by this reference we also incorporate herein the stipulations and exhibits in riggs i and riggs iii by this reference for ease of understanding we repeat those facts set forth in riggs i and riggs iii which we deem necessary to clarify the supplemental findings set forth herein and the ensuing opinion involving the issue for decision in brazil the central bank performed a number of governmental functions in conjunction with banco do brazil including the unified management and operation of brazil’s monetary and financial system under what was known as the caixa unico system from through banco do brazil had four primary functions a commercial bank a monetary authority management control and distribution of currency and responsibility for bank clearing further like the central bank banco do brazil functioned as a lender of last resort to public-sector entities a development bank responsible for various subsidized credit programs of the brazilian government and a fiscal authority that managed the 3until the central bank was formed in banco do brazil served as the country’s sole monetary authority brazilian government’s budget during the time relevant to this case banco do brazil was owned percent by the brazilian government and percent by private shareholders during the years in issue banco do brazil was the brazilian national treasury’s agent for payment of taxes the central bank collected and paid over to banco do brazil for the account of the national treasury withholding taxes export taxes taxes on financial operations and social_security_taxes on its books banco do brazil made entries reflecting the following transfers of central bank tax_payments to banco do brazil’s banking reserves account at the central bank collections of federal government tax receipts and deposits of federal government revenues payable upon demand to the national treasury brazil imposed restrictions on the receipt and exchange of foreign_currency law no big_number enacted on date and amended by law no big_number on date established the basic rules for foreign investments in brazil and the remittances of funds abroad with respect to such investments law no big_number regulated and set conditions for loans made to a person or entity residing or domiciled in brazil by a person or entity residing or domiciled abroad by law the central bank set the official exchange rates and registered and approved all loans from foreign lenders to brazilian borrowers through the registration process the central bank set the range of acceptable interest rates and periodically established the minimum repayment terms of loans once the central bank approved a loan the foreign lender remitted the proceeds in foreign_currency to the brazilian borrower via a commercial bank in brazil the exchange bank the exchange bank converted the foreign_currency into brazilian currency by means of an exchange contract whereby the borrower sold the foreign_currency to the exchange bank in exchange for brazilian currency at the official exchange rate the brazilian borrower received a certificate of registration that enabled the borrower to effect payment of interest and principal in the foreign_currency in which the loan was made remittances abroad required the recording of each payment on a certificate of registration the certificate of registration had to be presented to the central bank for approval before approving the payment of interest the central bank would verify that the amount of the interest payment corresponded to the amount indicated on the certificate of registration for that loan and that all required tax_payments had been made brazilian law imposed a withholding_tax on interest_paid to foreign lenders and prohibited remittance of an interest payment to a foreign lender without proof of payment of the withholding_tax certain brazilian commercial banks were authorized to collect the taxes so withheld collecting banks a collecting bank was required to maintain an account for the brazilian revenue service brs taxes collected by the collecting bank were deposited into the account of the brs those amounts were then transferred to banco do brazil under brazilian law the borrower initiated payment of the withholding_tax by preparing four copies of a documento de arrecadacao de receitas federais darf the borrower submitted the darfs along with the tax payment to a collecting bank the collecting bank retained one copy of the darf returned to the borrower two copies stamped to reflect the interest and tax_payments and sent one copy to the brs along with the taxes it had collected the borrower paid the interest on the loans by purchasing foreign_currency at the official exchange rate by means of an exchange contract with the exchange bank handling the payment to the lender on each payment_date the borrower delivered a copy of the darf and the certificate of registration to the exchange bank and instructed the bank to pay the interest the exchange bank then prepared an exchange contract that enabled the borrower to purchase foreign_currency to be paid to the foreign lender the exchange bank recorded the amount of interest and tax on the certificate of registration and then submitted the certificate along with the exchange contract and the darf to the central bank for approval upon approval by the central bank the exchange bank tendered the foreign_currency to the foreign lender and returned to the brazilian borrower the certificate of registration stamped to reflect the interest and tax payment a stamped copy of the darf and a copy of the exchange contract most often the collecting bank and the exchange bank were one and the same in that situation the collection of the withholding_tax and payment to the foreign lender were transacted simultaneously many of the brazilian companies that needed working_capital were unable to provide foreign lenders with adequate financial information or proper guaranties to obtain a loan as a result the central bank issued resolution which permitted certain brazilian banks borrowing banks to borrow funds from abroad for the specific purpose of re-lending repassing the corresponding borrowed funds in brazilian currency to brazilian companies repass borrowers the loan between the foreign lender and the borrowing bank repass loan was independent of the loan between the borrowing bank and the repass borrower the foreign lender had no legal relationship with the repass borrower and normally did not know the repass borrower’s identity except for the term of the repass loan resolution required all financial conditions between the borrowing bank and the repass borrower to be the same as those between the foreign lender and the brazilian bank the charges paid_by a repass borrower to the borrowing bank were in the same proportion as the charges paid_by the borrowing bank to the foreign lender if the interest rate charged by the foreign lender to the brazilian bank was net of the brazilian withholding_tax then the interest rate payable by the repass borrower was net of the brazilian withholding_tax beginning in borrowing banks could deposit with the central bank resolution funds not used in repass operations when such funds were so deposited the central bank paid the interest on the foreign loan and if a net loan4 was involved no withholding_tax was paid with respect to the central bank’s interest payment 4in a net loan the borrower contractually agrees to pay both the interest on the loan to the lender and any local in this case brazilian tax that the lender incurs as a result of the interest_income under brazilian law when the brazilian borrower under a net loan assumes the burden of withholding_tax the amount of interest remitted is considered net of tax and an adjustment known as a gross up is required for purposes of computing the withholding_tax this gross-up adjustment is computed as follows grossed-up interest net interest - withholding_tax rate 5art of the brazilian constitution prohibits the brazilian government states and municipalities from taxing the assets income and operations of public-sector entities including autarquias like the central bank the brazilian supreme court held that public-sector entities were not required to pay withholding_tax with respect to their net loan interest remittances abroad because they assumed the tax burden in such continued as a result of the historically high inflation in brazil and the periodic currency devaluations the national monetary council issued resolution which authorized borrowers of registered foreign_currency loans to hedge cruzeiros intended to be used for payments on the loans against currency devaluations by depositing foreign funds at the borrower’s brazilian bank pursuant to resolution the borrower would purchase the funds to be deposited at its brazilian bank at the official exchange rate the foreign funds remained on deposit until such time as the borrower was required to make payment to the lender the foreign_currency deposited at the borrower’s bank was then transferred to the central bank which paid days before the date the borrower was required to make payment to the lender interest on the deposited funds at a rate equal to that payable by the brazilian borrower to the foreign lender as set forth in the certificate of registration to the extent that interest was paid to the foreign lender with funds deposited in the central bank the brazilian borrower had no obligation to withhold income taxes thereon continued cases and they were immune from taxation under the brazilian constitution the brazilian revenue service specifically authorized the central bank to waive the withholding of tax on remittances abroad made by the central bank and or other public-sector entities that had assumed the tax burden ie interest due on net loans if the program loan was a gross loan the central bank would pay the withholding_tax due on the interest payable to the foreign lender during the period the funds were deposited in the central bank if the program loan was a net loan the central bank would pay no withholding_tax with respect to the interest payable to the foreign lender some foreign lenders sought to have the central bank pay withholding_tax and issue them darfs with respect to the central bank’ sec_432 loan program net loan interest remittances as this would enable these foreign lenders to claim potential foreign tax_credits their efforts were unsuccessful however because the central bank a tax-immune governmental entity was not required to pay the withholding_tax decree-law big_number enacted date gave the brazilian minister of finance discretion to grant a reimbursement or reduction of or exemption from the withholding_tax on interest decree-law big_number enacted on date as amended by decree-law big_number enacted date authorized the national monetary council to reduce the income_tax on interest commissions and expenses remitted to persons resident or 6although in the case of a net loan the u s lender had to pay u s income_tax with respect to the additional interest_income resulting from the gross-up the lender would receive a foreign_tax_credit equal to the additional interest_income that would reduce the lender’s u s income_tax_liability dollar for dollar domiciled abroad or grant pecuniary benefits to brazilian borrowers receiving loans in foreign_currency pursuant to that authority borrowers taking out foreign loans duly registered with the central bank were granted a pecuniary benefit equal to percent of the tax paid on the interest commissions and expenses due on those loans circular issued by the central bank set forth the regulations governing the procedure for payment of the pecuniary benefit a darf was to be used for the payment of the income_tax on interest_paid on foreign_currency loans on the date of payment of the tax the collecting banking receiving the tax payment would by means of a credit to the borrower’s account pay to the borrower the equivalent of percent of the income_tax in the case of a resolution repass loan on the date of payment the borrowing bank would be obligated to transfer the total value of the pecuniary benefit to the repass borrowers and the collecting bank would debit the amount of the pecuniary benefit to an account of the collecting bank entitled pecuniary benefit -- d l big_number the pecuniary benefit account and on the same day as the payment of the tax to banco do brazil the collecting bank would charge the pecuniary benefit account against banco do brazil the amount of the pecuniary benefit varied over the years from date to date the pecuniary benefit wa sec_40 percent of the withheld tax on date it was reduced to zero brazil began experiencing problems in paying its foreign debt in petitioner was one of hundreds of banks involved in the restructuring of brazil’s foreign debt as part of this restructuring the central bank served as the borrower under certain restructuring debt loans it entered into with brazil’s foreign lenders the brazilian government guaranteed the central bank’s obligations to the foreign lenders under these restructuring debt loans all of these restructuring debt loans were net loans i e the central bank and the foreign lenders agreed that all specified_payments of principal and interest to the foreign lenders under the loan contracts would be made net of any applicable brazilian taxes as relevant herein the restructuring of brazil’s foreign debt was divided into three phases the loans made to the central bank under phase i and phase ii were net loans that had repayment terms of to years in phase i and phase ii certain funds lent to the central bank were to be re-lent by the central bank to other brazilian persons and companies the phase i and phase ii loans provided that there would be an initial period of about or months during which funds could be re- lent to other brazilian persons and companies the re-lending period originally the re-lending period was to end on date but it was extended to march or date on or about date the head of the central bank’s department of foreign capital fiscalization and registration firce submitted a consulta or ruling_request to the brs firce sought a ruling regarding the central bank’s obligation to pay withholding taxes on interest_paid on the restructuring loans and its right to the attendant subsidy pecuniary benefit in reviewing the ruling_request the brs formulated a theory that the central bank was required to pay withholding_tax on its restructuring debt interest remittances during the re-lending periods because until the expiration of the applicable re-lending period the loan funds were not irrevocably committed to the central bank and it therefore had to pay withholding_tax on behalf of future unidentified borrowers-to-be the borrowers-to-be theory the brs incorporated this borrowers-to-be theory into its draft ruling which ultimately became the final version of the ruling the brs issued to the central bank in date by letter dated date the brazilian finance minister forwarded the ruling by the brs and his decision on the ruling to the central bank’s president the finance minister’s decision stated case no interested_party central bank of brazil decision i agree fully with the conclusions of the attached opinion of the brs in view of item of said opinion i direct the central bank of brazil to implement the payment of income_tax on or before the last business_day of the month following the month in which the withholding is made brasilia date ernane galveas ernane galveas minister of finance the brs ruling which he enclosed to the central bank stated federal government service ministry of finance brs opinion income_tax withheld on interest due to parties resident or domiciled abroad firce of the central bank of brazil requests an opinion about the tax treatment of agreements under which such government agency autarquia is liable for the payments and remittances pertaining to them in the period of availability of such funds for relending by virtue of the special characteristics of these transactions the question arises as to whether there is an incidence of income_tax in view of the government agency’s autarquia’s assumption of the burden and if so whether a the darfs may be issued in the name of the agent bank centralizing each project considering that the large number of lenders makes it impractical to complete one darf for each of them b the tax_rates established in the treaties signed by brazil to avoid double_taxation may be applied c the pecuniary benefit applies d it is possible to establish another period for the payment of the tax as from the date of remittance of the interest to the foreign lenders because of the complex calculation of the interest and consequently of the tax itself e it is possible in space of the darf to indicate brazilian financing plan as a reference given the absence of a certificate of registration for these transactions f in the event that the income_tax is paid late f whether the bank will nevertheless be entitled to the above-mentioned pecuniary benefit f whether it would be possible to waive the monetary correction delinquent interest and penalty interest received by individuals or legal entities resident or domiciled abroad from individuals or entities resident or domiciled in brazil or received from a permanent_establishment located in brazil owned by individuals or legal entities resident or domiciled abroad is subject_to_withholding tax at the rate of as provided for by law the contributor of this tax is an individual or legal entity resident or domiciled abroad which has the legal availability of the interest said tax must be withheld at the time of payment or credit by the interest paying source bearing in mind that the contributor individual or legal entity resident or domiciled abroad--does not file an income_tax return in brazil said tax must be withheld even if the paying source is a legal entity of public law with tax immunity because this is not a tax on the entity of public law that has immunity but rather on parties resident or domiciled abroad it is obvious that if the party resident or domiciled abroad the interest creditor is immune or exempt from this tax on account of international treaty or domestic legislation the tax should not be withheld in the case of the interest_paid by the central bank there is an atypical situation the central bank is a federal government agency autarquia responsible among other duties for issuing currency acting as depositary of the official gold and foreign_currency reserves providing for the placement of domestic and foreign loans furthering the normal function of the exchange market acting as a monetary policy instrument of the government and exercising control_over credit in all its forms the financial transactions conducted by the central bank are in general conducted on behalf of the federal union or in its interest in loan transactions agreed upon with a net interest rate the financial burden of the tax is transferred to the borrower when the borrower assumes the tax burden what actually happens is a gross-up of the income of the beneficiary lender for this reason and in order to calculate the gross_income obtained the law determines that the basis of calculation of the tax--the amount of interest--be grossed up in this way the borrower pays the income_tax to the union on behalf of the lender ensuring the net rate promised to the lender by means of the payment of a greater amount following the same reasoning it is possible to deduct as an expense of a legal entity the amount of tax incident on income_tax paid to third parties when the legal entity contractually assumes the burden as it is a supplemental expense and not a withholding_tax now when the central bank acts on behalf of the interest of the federal union in cases of transactions agreed upon with net interest rates it could claim a reimbursement for the amount_paid in the form of income_tax in reality the central bank would pay the tax to the federal union and the federal union could return it to the central bank under this scenario the payment of tax as it would be a simple accounting transaction could be waived it should be noted that as regards the possibility mentioned-- loans of funds which must be relent to borrowers in brazil--said bank must in substitution of the future not yet identified debtors of the tax pay the income_tax on the interest_paid during the period in which the funds remained available for relending the fact is that since the loan benefits persons which have not yet been identified from whom the payment of withholding_tax is stipulated law the central bank must in practice perform these acts on behalf of such persons considering therefore the peculiarity of the relationship the central bank federal union and the central bank final borrowers of the relent funds i believe that as regards the funds that must be released to those as yet unidentified borrowers in brazil the central bank must as a substitute for such borrowers pay the income_tax incident on the interest from date to the end of the period of availability for such funds to be relent on account of the foregoing there are the following consequences to the transactions in question a payment of withholding_tax is due and the calculation base should be adjusted ie grossed up b as there are innumerable lenders and income is received through an agent bank which will then distribute it the darf may be issued in the name of the agent to simplify the payment c if there is a convention to avoid double income_taxation signed with countries in which beneficiaries are domiciled the rates established in the conventions shall be applied to that portion of the income corresponding to each d once the tax has been made the pecuniary benefit established in decree-law no is applicable with the wording given by decree-law no e in completing the darf the code to be used is code and as no certificate of registration is issued in these transactions brazilian financing plan may be indicated in the appropriate space as the reference to the certificate is merely a control requirement as regards the delay in paying the tax not withheld if the taxable_event occurs while the inquiry is pending the tax must be paid with monetary correction and without penalties as the term for payment of the tax is suspended as far as the taxable events occurring while the inquiry is pending are concerned as a consequence the pecuniary benefit will be applicable in relation to the tax paid_by the thirtieth day from the date of knowledge of the decision as far as the extension of the tax payment period is concerned this matter falls under the authority of the minister of finance for higher consideration brasilia eivany antonio da silva assistant secretary of the brs i agree with the above opinion which i approve for the consideration of the minister of finance brasilia luiz romero patury accioly acting secretary of the brs the ruling issued to the central bank was a private ruling that was given limited circulation beginning in the central bank issued darfs to the agent banks of the foreign lenders to whom it transmitted loan payments reflecting its withholding_tax payments on restructuring debt interest remittances during the re-lending periods of the loans from through the central bank issued a total of darfs to these agent banks the central bank did not issue a separate darf to each foreign lender specifying the withholding_tax that had been paid_by the central bank on each foreign lender’s behalf on the interest remittance rather each darf covered the collective withholding_tax the 7the ruling was not made available to the public and was not published in the brazilian government’s official gazette central bank had paid on behalf of an entire group of foreign lenders subject_to a particular withholding_tax rate ie a 5-percent withholding_tax rate a 15-percent withholding_tax rate or a 25-percent withholding_tax rate the central bank sent to morgan bank which served as the agent bank of foreign lenders that included petitioner group darfs reporting the aggregate withholding_tax the central bank had paid on behalf of that group of lenders the central bank enclosed with the darfs supporting schedules setting forth with respect to each foreign lender the net interest remitted the grossed-up interest the withholding_tax imposed the 40-percent pecuniary benefit the central bank received and the 60-percent balance of actual withholding_tax paid notwithstanding that on date the pecuniary benefit had been reduced to zero the central bank continued to report to the foreign lenders that it received a pecuniary benefit equal to percent of the withholding_tax imposed on its post-date interest remittances to them the supporting schedules reported that the central bank withheld and paid brazilian income taxes of dollar_figure for and dollar_figure for in connection with debt interest remittances to petitioner the supporting schedules reported that the central bank received pecuniary benefits of dollar_figure for and dollar_figure for before date with respect to those interest remittances on its through income_tax returns petitioner generally reported its interest_income and withholding_tax payments with respect to its brazilian loans on a cash_basis petitioner claimed a foreign_tax_credit and reported grossed-up interest_income on its returns covering the period from through date petitioner reduced the amount of foreign_tax_credit it claimed in connection with its brazilian loans by an amount equal to the pecuniary benefit provided by the brazilian government to brazilian borrowers in its amended petition petitioner asserted among other things that the foreign_tax_credit for brazilian taxes withheld by the central bank otherwise allowable to it for through should not be reduced by the pecuniary benefit provided to brazilian borrowers opinion as relevant here sec_901 and sec_903 permit a domestic_corporation to receive a tax_credit in the amount of any income_tax or any_tax paid in lieu of a tax on income that is paid_or_accrued during the taxable_year to a foreign_country a foreign levy is a tax if it requires a compulsory payment pursuant to the authority of a foreign_country to levy taxes sec_1_901-2 income_tax regs credit is not allowed however for an amount of tax paid_by a taxpayer to a foreign_country that is used directly or indirectly by the foreign_country to provide a subsidy by any means to the taxpayer sec_1_901-2 income_tax regs the purpose of the foreign_tax_credit is to protect against the double_taxation of foreign_income 493_us_132 am chicle co v united_states 316_us_450 as an exemption from tax the credit provisions of sec_901 are to be strictly construed 677_f2d_72 61_tc_752 affd without published opinion 538_f2d_334 9th cir in riggs i we determined that the central bank was not required under brazilian law to pay withholding_tax on its interest remittances to petitioner and that the withholding_tax paid_by the central bank was a noncompulsory payment rather than a tax thus we concluded that petitioner was not legally liable for the central bank’s withholding_tax payments and held 8the position set forth in the regulation regarding subsidies has been codified in sec_901 which is effective for foreign taxes paid_or_accrued in taxable years beginning after date tax_reform_act_of_1986 publaw_99_514 sec a 100_stat_2532 nissho iwai am corp v commissioner t c pincite n that the withholding_tax payments were not creditable to petitioner on appeal in riggs ii the u s court_of_appeals for district of columbia circuit concluded that petitioner was legally liable for the withholding_tax payments made by the central bank because the date ruling constituted an order by the finance minister treated as an act of state that the central bank pay the withholding taxes riggs ii f 3d pincite9 the court_of_appeals remanded the case to us to determine among other things whether the central bank in fact paid withholding taxes on petitioner’s behalf and if so whether in determining petitioner’s creditable amount the brazilian withholding_tax paid_by the central bank must be reduced by the amount of any pecuniary benefit that the central bank may have received id pincite in riggs iii we determined that petitioner had failed to establish that the withholding taxes were paid_by the central bank as required under sec_905 we questioned the reliability of the schedules accompanying the darfs and found inexplicable the central bank’s reporting that it had received a pecuniary benefit after date the date on which the pecuniary benefit was eliminated consequently we held that petitioner was not entitled to any credit for taxes purportedly withheld by the central bank on appeal in riggs iv the court_of_appeals concluded that the brazilian taxes were withheld and paid_by the central bank the court_of_appeals explained that the darfs issued by the central bank constituted official tax receipts of the brazilian government and were entitled to a presumption of regularity it reasoned that respondent had failed to rely on clear and specific evidence necessary to rebut this presumption of regularity attaching to the darfs the court_of_appeals remanded the case to us to decide whether in determining petitioner’s creditable amount under sec_901 the withheld taxes paid_by the central bank should be reduced by any pecuniary benefit received by the central bank riggs iv f 3d pincite we begin the task assigned to us in riggs iv by reviewing sec_1_901-2 income_tax regs which provides detailed interpretations of the foreign_tax_credit provisions paragraphs a b and c of sec_1_901-2 income_tax regs define an income_tax for purposes of sec_901 paragraph e contains rules for determining the amount of tax paid_by a person and paragraph f contains rules for determining by whom foreign tax is paid sec_1_901-2 income_tax regs as effective for and applicable to and sec_1_901-2 income_tax regs provides the following rules for determining the amount of tax paid_by a person e amount of income_tax that is creditable -- subsidies -- i general_rule an amount is not an amount of income_tax paid_by a taxpayer to a foreign_country to the extent that- a the amount is used directly or indirectly by the country to provide a subsidy by any means such as through a refund_or_credit to the taxpayer and b the subsidy is determined directly or indirectly by reference to the amount of income_tax or the base used to compute the income_tax imposed by the country on the taxpayer ii indirect subsidies a foreign_country is considered to provide a subsidy to a taxpayer if the country provides a subsidy to another person that- a owns or controls directly or indirectly the taxpayer or is owned or controlled directly or indirectly by the taxpayer or by the same persons that own or control directly or indirectly the taxpayer or b engages in a transaction with the taxpayer but only if the subsidy received by such other person is determined directly or indirectly by reference to the amount of income_tax or the base used to compute the income_tax imposed by the country on the taxpayer with respect to such transaction 9for earlier years an identical provision was found in sec_4 f ii b temporary income_tax regs fed reg date although amended regulations under sec_901 were issued in those regulations are not effective for or applicable to petitioner’s and taxable years iii example the provisions of this paragraph e may be illustrated by the following example example country x imposes a 30-percent tax on interest received by non-resident lenders from borrowers who are residents of country x and it is established that this tax is a tax in lieu of an income_tax within the meaning of sec_1_903-1 country x remits to resident borrowers an incentive payment for engaging in foreign loans which payment is an amount equal to percent of the interest_paid to non- resident lenders because the incentive payment is based on such interest it is determined by reference to the base used to compute the tax in lieu of an income_tax that is imposed on the nonresident lender under paragraph e ii b of this section the incentive payment is considered a subsidy provided indirectly to the nonresident lender since it is provided to a person the borrower that engaged in a business transaction with the lender and is based on the amount of tax in lieu of an income_tax that is imposed on the lender with respect to the transaction therefore two-thirds percent percent of the amount withheld by a resident borrower from interest payments to a non-resident lender is not tax in lieu of an income_tax that is paid_by the lender under paragraph e i of this section and sec_1_903-1 the regulation deems the taxpayer to have been subsidized if the country provides a subsidy to a person with whom the taxpayer engages in a business transaction provided the subsidy is determined directly or indirectly by reference to the amount of income_tax or to the base used to compute the income_tax imposed by the country on the taxpayer with respect to the transaction the existence of an indirect subsidy does not depend upon a finding that the u s taxpayer derived an actual economic benefit it is sufficient that another person who engages in a transaction with the u s taxpayer has received a subsidy that was based on the amount of tax paid 69_f3d_1404 8th cir affg tcmemo_1992_282 998_f2d_513 7th cir affg in part and revg in part on another ground tcmemo_1988_318 riggs i t c pincite this court the u s court_of_appeals for the eighth circuit and the u s court_of_appeals for the seventh circuit have held that the regulation is valid and applies to the brazilian subsidy at issue here norwest corp v commissioner supra pincite0 continental ill corp v commissioner supra pincite 89_tc_765 brazil provides the subsidy to a brazilian borrower who engages in a business transaction the loan with the u s taxpayer lender the subsidy provided to the brazilian borrower i sec_40 percent of the tax imposed by brazil on the u s lender’s brazilian income the interest_paid on the loan and thus the subsidy is measured by that tax in nissho iwai am corp v commissioner supra pincite we stated payment of the tax and receipt of the subsidy are in lockstep commonsense dictates that payment of the tax and receipt of the subsidy be viewed together in determining the amount of foreign taxes creditable for purposes of sec_901 if we accept payment of the brazilian tax as one transaction and receipt of the subsidy as another we would ignore the true unity of the transaction and elevate form over substance this we shall not do in riggs iv f 3d pincite the court_of_appeals stated as we understand the brazilian tax system a borrower paid the entire amount of interest owed on a foreign debt and then later received a credit equal to the amount of the pecuniary benefit such a system necessitates two separate and independent transactions with due respect we wish to clarify that the brazilian borrower paid the withholding_tax and simultaneously received the pecuniary benefit before paying the interest to the foreign lender the brazilian borrower paid the interest by purchasing foreign_currency at the official exchange rate by means of an exchange contract with the exchange bank handling the payment of the interest to the lender the borrower could not pay the interest without a copy of the darf evidencing the payment of withheld tax on each payment_date the borrower delivered a copy of the darf and the certificate of registration to the exchange bank the exchange bank then prepared an exchange contract that enabled the borrower to purchase foreign_currency to be paid to the foreign lender the exchange bank recorded the amount of interest and tax on the certificate of registration and submitted the certificate along with the exchange contract and darf to the central bank for approval before approving the payment of interest the central bank would verify that the amount of the interest payment corresponded to the amount indicated on the certificate of registration for that loan and verify that any required tax_payments had been made upon approval by the central bank the exchange bank tendered the foreign_currency to the foreign lender and returned to the brazilian borrower the certificate of registration stamped to reflect the interest and tax_payments a stamped copy of the darf and a copy of the exchange contract thus the borrower was required to pay the withholding_tax before the interest owed on a foreign debt could be paid at the time of payment of the withholding_tax the brazilian borrower automatically and immediately received a credit from the tax collecting bank in the amount of the subsidy mechanically the tax-collecting bank credited the account of the national treasury for the entire tax due and simultaneously debited reduced the account of the national treasury for the amount of the subsidy the effect of this accounting procedure was that the national treasury was credited only with the amount by which the withholding_tax exceeded the subsidy nissho iwai am corp v commissioner supra pincite as explained by the u s court_of_appeals for the eighth circuit in norwest corp v commissioner supra pincite0 the regulation reasonably views the payment of the local_tax and the receipt of the pecuniary benefit or subsidy together in order to determine the amount of foreign taxes creditable for purposes of sec_901 see nissho t c pincite viewing payment of tax and receipt of subsidy as in lockstep this interpretation is also consistent with the intent of congress to reduce international double_taxation the taxpayer can claim a foreign_tax_credit for the amount of brazilian taxes it paid that is the amount of the local_tax reduced by the pecuniary benefit or subsidy the taxpayer is not subject_to double_taxation because the pecuniary benefit or subsidy was not paid to the brazilian government this is because the pecuniary benefit or subsidy operated as a rebate of the local_tax in effect reducing the tax_rate see continental f 2d pincite the reduction in the local_tax rate constituted an indirect subsidy within the plain language of the regulation it is provided to the brazilian borrower that engaged in a business transaction with the taxpayer and is calculated as a specific percentage of the tax imposed on the payment to the taxpayer in riggs i we held that the withholding taxes that non- tax-immune brazilian borrowers had paid from through on their net loan interest remittances to petitioner were creditable to petitioner riggs i t c pincite and in determining petitioner’s creditable taxes the withholding taxes had to be reduced by the pecuniary benefit that the non-tax- immune brazilian borrowers received id pincite see also norwest corp v commissioner supra pincite0 continental ill corp v commissioner supra pincite nissho iwai am corp v commissioner supra pincite petitioner did not appeal the latter holding the courts have applied the subsidy provisions of sec_1_901-2 income_tax regs to repass loans in such cases when the primary borrower made the interest payment to the foreign lender it received the subsidy which it was required to pass along to the repass borrowers by brazilian law norwest corp v commissioner f 3d pincite those repass loans fell within the letter as well as the spirit of the subsidy regulation continental illinois corp v commissioner f 2d pincite see also norwest corp v commissioner supra pincite as a threshold matter petitioner maintains that this court should find that the central bank did not receive any pecuniary benefit from through date according to petitioner in riggs i this court found that the record does not contain any evidence that the central bank received a pecuniary benefit with respect to the tax that it withheld for interest remittance to riggs petitioner further argues that there has been no new evidence submitted that would contradict this court’s prior finding the court_of_appeals did not reach and thus did not reverse this court’s factual finding that the pecuniary benefit had not been paid the court_of_appeals made no finding as to whether the pecuniary benefit actually had been paid to the central bank and if there was no pecuniary benefit paid to the central bank there can be no subsidy petitioner concludes that unless this court decides to reverse its prior finding petitioner is entitled to the full amount of the foreign_tax_credit claimed petitioner points to riggs i t c pincite where we said we are unable to ascertain whether the central bank received the pecuniary benefit based on those withholding_tax payments this sentence however is taken out of context it does not represent a prior factual finding of this court that the central bank from through date received no pecuniary benefit the paragraph in our riggs i findings containing this sentence reads on the record presented in this case it is impossible to determine what entries were made on the respective books of the central bank and the national treasury to reflect the central bank’s payment of withholding_tax on the restructuring debt interest remittances we are unable to ascertain what if any entries were made to determine whether the central bank was reimbursed by the national treasury for its withholding_tax payments or whether the central bank received the pecuniary benefit based on those withholding_tax payments the central bank’s ruling_request raised these two matters and the date brazilian irs ruling discussed the two possibilities id fn ref omitted see also id pincite n n a virtually identical paragraph appears in our riggs iii findings contrary to petitioner’s argument in riggs i and riggs iii we did not expressly find that the central bank did not receive a pecuniary benefit with respect to those brazilian taxes it withheld and paid from through date in riggs i and riggs iii we did not reach and did not have to decide the issue of whether the pecuniary benefit the central bank reportedly received with respect to those brazilian taxes must reduce petitioner’s foreign tax_credits for those brazilian taxes indeed in riggs i t c pincite we stated we need not reach the issue of whether any pecuniary benefit the central bank received represents an indirect subsidy for purposes of sec_1_901-2 income_tax regs we made a similar statement in riggs iii petitioner bears the burden_of_proof on the basis of the record herein we conclude that petitioner has failed to establish that the central bank during and did not in fact receive a pecuniary benefit until date the pecuniary benefit provided to brazilian borrowers with foreign loans had been equal to percent of the withheld brazilian tax on their foreign loan interest remittances the date ruling specifically provided that the pecuniary benefit applied to taxes withheld by the central bank on behalf of the borrowers-to-be and the schedules attached to the darfs issued by the central bank reported that the central bank received a 40-percent pecuniary benefit with respect to those brazilian taxes withheld and paid_by the central bank from through june dollar_figure since the 10in riggs iii we gave no weight to the schedules because they reported that the central bank continued to receive a pecuniary benefit equal to percent of the withholding_tax imposed on post-date interest remittances in riggs iv f 3d pincite the court_of_appeals opined that at best the schedules reflected clerical errors at worst they reflected continued darfs the official tax receipts report only the aggregate amount of tax paid for all lenders it is the schedules accompanying the darfs upon which petitioner relies to establish its portion of the withheld taxes ie the amount of withholding_tax the central bank paid on interest remitted to petitioner dollar_figure for and dollar_figure for for which it is seeking the foreign_tax_credit the schedules established and consequently we find that the central bank received pecuniary benefits of dollar_figure for and dollar_figure for petitioner alternatively maintains that 138_f3d_1139 7th cir affg tcmemo_1996_159 controls and is dispositive of the issue to be herein resolved petitioner contends that the central bank is to be considered part of the brazilian government petitioner asserts that the transaction between petitioner and the central bank complies with sec_1_901-2 example income_tax regs and is specifically exempted from the subsidy rules of sec_1_901-2 income_tax regs accordingly petitioner posits that its and foreign tax_credits for the continued the receipt of an erroneous pecuniary benefit after date since the parties have reached an agreement as to petitioner’s foreign_tax_credit for amounts withheld after date we need not decide whether the central bank made a clerical_error or received an erroneous pecuniary benefit for that period we have no reason to question the accuracy of the schedules with respect to the amount of the pecuniary benefit received by the central bank on or before date withholding taxes paid_by the central bank should not be reduced by the pecuniary benefit received by the central bank respondent on the other hand contends that amoco was wrongly decided and should not be followed in this case specifically respondent argues that in amoco this court and the u s court_of_appeals for the seventh circuit misapplied sec_1 f ii example income_tax regs to exempt the transaction involving a corporation owned by the egyptian government and the u s taxpayer from the subsidy rules of sec_1_901-2 income_tax regs alternatively respondent argues that this case is distinguishable from amoco respondent suggests that consistent with the borrowers-to-be theory used in the brazilian finance minister’s date ruling the borrowers-to-be on whose behalf the ruling concluded the central bank must act in paying the withholding_tax and not the central bank were the recipients of the pecuniary benefit the central bank received and respondent concludes such borrowers-to-be are private parties who cannot be considered part of the brazilian government because we agree that the facts in this case are distinguishable from those in amoco it is not necessary for us to reconsider the holding in that case petitioner argues that the pecuniary benefit at issue here was provided by the brazilian government to its own instrumentality the central bank and thus in accordance with amoco and sec_1_901-2 example income_tax regs the foreign_tax_credit should not be reduced paragraph f of sec_1_901-2 income_tax regs contains rules for determining by whom foreign tax is paid sec_1_901-2 income_tax regs sec_1_901-2 income_tax regs provides in pertinent part f taxpayer-- in general the person by whom tax is considered paid for purposes of sec_901 and sec_903 is the person on whom foreign law imposes legal liability for such tax even if another person eg a withholding_agent remits such tax party undertaking tax obligation as part of transaction-- i in general tax is considered paid_by the taxpayer even if another party to a direct or indirect transaction with the taxpayer agrees as a part of the transaction to assume the taxpayer’s foreign tax_liability the rules of the foregoing sentence apply notwithstanding anything to the contrary in paragraph e of this section see sec_1_901-2a for additional rules regarding dual capacity taxpayers ii examples the provisions of paragraphs f and f i of this section may be illustrated by the following examples example under a loan agreement between a a resident of country x and b a united_states_person a 11a dual_capacity_taxpayer is a person who is subject_to a levy of a foreign state and who also directly or indirectly receives a specific_economic_benefit from the state or an instrumentality of the state sec_1_901-2 income_tax regs specific economic benefits are economic benefits that foreign governments do not make available on substantially the same terms to substantially_all persons subject_to the generally imposed income_tax eg a concession to extract government- owned petroleum sec_1_901-2 income_tax regs agrees to pay b a certain amount of interest net of any_tax that country x may impose on b with respect to its interest_income country x imposes a percent tax on the gross amount of interest_income received by nonresidents of country x from sources in country x and it is established that this tax is a tax in lieu of an income_tax within the meaning of sec_1_903-1 under the law of country x this tax is imposed on the nonresident recipient and any resident of country x that pays such interest to a nonresident is required to withhold and pay over to country x percent of the amount of such interest which is applied to offset the recipient’s liability for the tax because legal liability for the tax is imposed on the recipient of such interest_income b is the taxpayer with respect to the country x tax imposed on b’s interest_income from b’s loan to a accordingly b’s interest_income for federal_income_tax purposes includes the amount of country x tax that is imposed on b with respect to such interest_income and that is paid on b’s behalf by a pursuant to the loan agreement and under paragraph f i of this section such tax is considered for purposes of sec_903 to be paid_by b example the facts are the same as in example except that in collecting and receiving the interest b is acting as a nominee for or agent of c who is a united_states_person because c not b is the beneficial_owner of the interest legal liability for the tax is imposed on c not b c’s nominee or agent thus c is the taxpayer with respect to the country x tax imposed on c’s interest_income from c’s loan to a accordingly c’s interest_income for federal_income_tax purposes includes the amount of country x tax that is imposed on c with respect to such interest_income and that is paid on c’s behalf by a pursuant to the loan agreement under paragraph f i of this section such tax is considered for purposes of sec_903 to be paid_by c no such tax is considered paid_by b example country x imposes a tax called the country_x_income_tax a a united_states_person engaged in construction activities in country x is subject_to that tax country x has contracted with a for a to construct a naval base a is a dual_capacity_taxpayer as defined in paragraph a ii a of this section and in accordance with paragraphs a and c of sec_1_901-2a a has established that the country_x_income_tax as applied to dual capacity persons and the country_x_income_tax as applied to persons other than dual capacity persons together constitute a single levy a has also established that that levy is an income_tax within the meaning of paragraph a of this section pursuant to the terms of the contract country x has agreed to assume any country x tax_liability that a may incur with respect to a’s income from that contract for federal_income_tax purposes a’s income from that contract includes the amount of tax_liability that is imposed by country x on a with respect to its income from the contract and that is assumed by country x and for purposes of sec_901 the amount of such tax_liability assumed by country x is considered to be paid_by a by reason of paragraph f i of this section country x is not considered to provide a subsidy within the meaning of paragraph e of this section to a sec_1_901-2 income_tax regs defines the term foreign_country as any foreign state any possession_of_the_united_states and any political_subdivision of any foreign state or of any possession_of_the_united_states in amoco corp v commissioner tcmemo_1996_159 an affiliate of amoco corp amoco egypt entered into an arrangement with the egyptian general petroleum corp egpc under the agreement egpc assumed and paid tax amoco owed to the egyptian government on its income egpc erroneously claimed a credit against its egyptian income taxes for the tax paid on amoco egypt’s behalf the expiration of the limitations_period barred the egyptian government from recovering the tax erroneously claimed as a credit by egpc the commissioner asserted that the tax_credit claimed by egpc was an indirect subsidy to amoco egypt that reduced the amount of amoco egypt’s creditable_foreign_tax payments this court held and the u s court_of_appeals for the seventh circuit agreed that amoco egypt’s foreign_tax_credit was not to be reduced by egpc’s tax_credit because the transaction between amoco egypt and egpc complied with the terms of sec_1_901-2 example income_tax regs and thus was specifically exempted from the subsidy rules of sec_1 e income_tax regs in reaching this holding we concluded that for purposes of applying sec_1_901-2 example and g income_tax regs egpc was to be considered part of the egyptian government notwithstanding that egpc was a separate legal entity under egyptian lawdollar_figure the fact that a governmental instrumentality may be treated as part of the government with respect to certain matters does not necessarily mean that the instrumentality will be treated as such in all circumstances compare 513_us_374 where the supreme court held that the national railroad passenger corporation commonly 12in affirming our decision the u s court_of_appeals for the seventh circuit specifically focused on the twin facts that egpc is an instrumentality of the egyptian government though not the country itself and that it was the sole entity that received the benefit of the erroneous tax_credit 138_f3d_1139 7th cir affg tcmemo_1996_159 the court_of_appeals found it clear that any benefit to egpc is a benefit to the government of egypt and vice versa id known as amtrak was part of the government for purposes of the first amendment to the u s constitution with 49_f3d_1269 7th cir where the court_of_appeals held that employees of amtrak are not employees of the united_states for purposes of punishing unauthorized disclosures of an individual’s income_tax return under sec_7431 generally an instrumentality may be treated as part of the government in circumstances where the instrumentality acts as an agent on behalf of the sovereign 200_f3d_843 d c cir in this case although the central bank frequently acts on behalf of the brazilian government the finance minister’s ruling indicates that with respect to withholding taxes there is an atypical situation when interest is paid_by the central bank because the central bank is a federal government agency autarquia responsible among other duties for issuing currency acting as depositary of the official gold and foreign_currency reserves providing for the placement of domestic and foreign loans furthering the normal function of the exchange market acting as a monetary policy instrument of the government and exercising control_over credit in all its forms the ruling recognizes that although financial transactions conducted by the central bank generally are conducted on behalf of the brazilian government or in its interest some transactions are conducted by the central bank on behalf of private individuals furthermore the ruling makes clear that the central bank’s obligation to withhold taxes is determined by the person upon whose behalf the central bank is conducting the transaction specifically when the central bank acts on behalf of the interest of the brazilian government it could claim a reimbursement for the amount_paid in reality the central bank would pay the tax to the brazilian government and the brazilian government could return it to the central bank the ruling concludes that under that scenario the payment of tax would be a simple accounting transaction and could be waived the ruling notes however that with respect to loans of funds that were to be re-lent the central bank was required to in substitution of the future not yet identified debtors of the tax pay the income_tax on the interest_paid during the period in which the funds remained available for relending the fact is that since the loan benefits persons which have not yet been identified from whom the payment of withholding_tax is stipulated law the central bank must in practice perform these acts on behalf of such persons considering therefore the peculiarity of the relationship the central bank federal union and the central bank final borrowers of the relent funds i believe that as regards the funds that must be released to those as yet unidentified borrowers in brazil the central bank must as a substitute for such borrowers pay the income_tax incident on the interest from date to the end of the period of availability for such funds to be relent emphasis supplied the finance minister’s ruling makes clear that when the central bank paid the withholding taxes it was not acting on behalf of the brazilian government but rather it was acting on behalf of the borrowers-to-be as pointed out by the u s court_of_appeals for the district of columbia circuit in riggs ii f 3d pincite the minister deemed it appropriate to look through the central bank to those ultimate private borrowers--so-called borrowers-to-be -- for purposes of deciding the proper tax treatment of the loans the minister concluded that the borrowers-to-be aspect of the loans compelled an analogy to the garden variety private borrower situation emphasis supplied the court_of_appeals further stated the minister’s order to the central bank to withhold and pay the income_tax on the interest_paid to the bank goes beyond a mere interpretation of law such an order has been treated as an act of state id pincite with respect to the pecuniary benefit the finance minister’s ruling holds that once the tax has been paid the pecuniary benefit is applicable in accordance with brazilian law under brazilian law borrowers were granted a pecuniary benefit equal to a percentage of the withholding_tax paid on the interest due on net loans in the case of repass loans where the borrower is a bank but the funds are re-lent to brazilian persons the borrowing bank collects the tax from the repass borrowers and is obligated to transfer the total value of the pecuniary benefit to those repass borrowers the finance minister’s ruling treats the central bank as a borrowing bank in a repass loan transaction the central bank must pay the withholding_tax on behalf of the borrowers-to-be and we believe it receives the pecuniary benefit on behalf of the borrowers-to- be otherwise if the receipt of the pecuniary benefit is separated from the payment of tax and the central bank is entitled to receive the pecuniary benefit from the brazilian government on behalf of the brazilian government the central bank could return it to the brazilian government thus under the rationale of the finance minister’s ruling the payment of the pecuniary benefit would be a simple accounting transaction and could be waived having concluded that the central bank did not receive the pecuniary benefit as an agent of the brazilian government but rather on behalf of the borrowers-to-be a finding of a subsidy would not mean that the brazil was subsidizing itself under the facts of this case we believe that it is proper to treat the central bank as separate from the brazilian government and therefore as another person for purposes of determining the existence of a subsidy since the central bank was acting on behalf of the borrowers-to-be rather than the brazilian government the instant case is closer to example than to example of sec_1_901-2 income_tax regs both the payment of the withholding_tax and the central bank’s receipt of the subsidy were inextricably linked to the transaction between petitioner and the central bank hence the provisions of sec_1_901-2 income_tax regs are applicable to the loans and the subsidies paid to the central bank on behalf of the borrowers-to-be reduce petitioner’s foreign_tax_credit to conclude we hold that petitioner’s potential foreign tax_credits for and for brazilian taxes withheld by the central bank are to be reduced by the pecuniary benefit the central bank received with respect to those brazilian taxes ie petitioner is entitled to a foreign_tax_credit of dollar_figure dollar_figure - dollar_figure for and dollar_figure dollar_figure - dollar_figure for with respect to the brazilian withholding taxes to reflect the foregoing and concessions by the parties decision will be entered under rule


internal_revenue_service number release date index number ------------------------------------ -------------------------------------- ------------------- -------------------------- department of the treasury washington dc person to contact ---------------- id no ------------- telephone number --------------------- refer reply to cc psi b01 - plr-161569-03 date date ----------------------------------------- x ---------------------------------------------- state date dear ---------------- --------------------- ------------- this responds to a letter dated date and subsequent x was incorporated on date under the laws of state the shareholder of x correspondence submitted on behalf of x requesting relief under sec_1362 of the internal_revenue_code facts desired that x elect s_corporation treatment effective on date but the election to be treated as an s_corporation was not timely filed accordingly x requests a ruling that it will be treated as an s_corporation effective date 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 sec_1362 provides in relevant part that 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 under sec_1362 provides that if no sec_1362 election is made for sec_1362 however if an s election is made after the first two and one-half months of a corporation's taxable_year then that corporation will not be treated as an s_corporation until the taxable_year after the year in which the s election is filed any taxable_year and the secretary determines that there was reasonable_cause for the failure to timely make such election then the secretary may treat such an election as timely made for such taxable_year and sec_1362 shall not apply x did not file an election to be treated as an s_corporation under sec_1362 x has however established reasonable_cause for not making a timely s election and is entitled to relief under sec_1362 conclusion based solely on the facts submitted and the representations made and provided that x otherwise qualifies as an s_corporation we conclude that x will be treated as an s_corporation effective date provided that within days from the date of this letter x submits 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 or implied as to the federal_income_tax consequences of the transaction described above under any other provision of the code specifically no opinion is expressed concerning whether x is in fact an s_corporation for federal tax purposes 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 sincerely dianna k miosi chief branch office of the associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes


internal_revenue_service department of the treasury index number number release date via facsimile first class mail washington dc person to contact telephone number refer reply to cc dom p si plr-117168-98 date date legend x y z d1 d2 this responds to your letter dated date written on behalf of x requesting a waiver of the five-year waiting_period imposed by sec_1361 of the internal_revenue_code to permit x to make a qualified_subchapter_s_subsidiary qsub election under sec_1361 cc dom p si plr-117168-98 facts x and y are unrelated corporations prior to d1 z was a subsidiary of y for which a qsub election had been made on d1 y sold percent of z’s outstanding_stock to x the sale of z stock to x terminated z’s qsub status on d2 x filed a qsub election with respect to z to be effective d1 law and analysis sec_1361 provides that except as provided in regulations prescribed by the secretary for purposes of the code i a corporation which is a qsub shall not be treated as a separate corporation and ii all assets liabilities and items of income deduction and credit of a qsub shall be treated as assets liabilities and such items as the case may be of the s_corporation sec_1361 defines a qsub as a domestic_corporation that is not an ineligible_corporation if percent of the stock of the corporation is owned by the s_corporation and the s_corporation elects to treat the corporation as a qsub sec_1361 provides that for purposes of the code if any corporation which was a qsub ceases to meet the requirements of sec_1361 the corporation shall be treated as a new corporation acquiring all of its assets and assuming all of its liabilities immediately before the cessation from the s_corporation in exchange for its stock sec_1361 provides that if a corporation's status as a qsub terminates such corporation and any successor_corporation shall not be eligible to make i an election under sec_1361 to be treated as a qsub or ii an election under sec_1362 to be treated as an s_corporation before the 5th taxable_year for which the termination was effective unless the secretary consents to the election in explaining sec_1361 the joint_committee on taxation states as follows it is expected that the secretary will provide waivers of the five-year rule in appropriate instances for example if the stock of the qsub is distributed to the individual shareholders of the subsidiary's parent the subsidiary will no longer be a qsub and would be subject_to the five-year rule if the parent_corporation retains its subchapter_s_election and the secretary determines that the distribution was not made for tax_avoidance it would seem appropriate for the secretary to waive the five-year rule cc dom p si plr-117168-98 joint_committee on taxation general explanation of tax legislation enacted in 104th congress jcs-12-96 104th cong 2d sess conclusions based solely on the facts submitted and the representations made the service waives the five-year waiting_period imposed by sec_1361 and consents to x’s qsub election under sec_1361 with respect to z effective d1 and thereafter unless otherwise terminated except as specifically set forth above we express no opinion concerning the federal tax consequences of the facts described above under any other provision of the 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 sincerely signed daniel j coburn daniel j coburn assistant to the branch chief branch office of the assistant chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes