internal_revenue_service department of the treasury number release date index number 468a washington dc person to contact telephone number refer reply to cc psi br 6-plr-160087-01 date date legend seller buyer parent subsidiary operator plant commission commission location state trust state state statute a b c d e f g h i j k l m plr-160087-01 dear this letter responds to the request submitted by your authorized representative dated date and subsequent communications for a private_letter_ruling concerning the tax consequences of the sale to buyer of seller’s interest in the plant and associated assets and liabilities including the assets and liabilities associated with decommissioning the plant specifically you have requested rulings regarding the tax consequences under sec_468a of the internal_revenue_code to the seller’s qualified nuclear decommissioning fund as well as rulings regarding the proper realization and recognition of gain and loss on the sale of the nuclear power plant and associated assets and the proper allocation_of_basis among the assets received by buyer the seller and buyer in a jointly-filed ruling_request have represented the following facts and information relating to the ruling_request seller a regulated_public_utility company files its corporate return on a calendar_year basis using the accrual_method of accounting seller is under the audit jurisdiction of the industry director natural_resources lm nr buyer is a third-tier subsidiary of parent a public_utility holding_company buyer is a member of parent’s consolidated_group and joins parent in filing a consolidated_return on a calendar_year basis using the accrual_method of accounting buyer owns subsidiary which will be the legal purchaser of plant and the associated assets and liabilities buyer represents that subsidiary is a disregarded_entity for federal_income_tax purposes buyer through subsidiary and its affiliate operator will be engaged in the business of operating nuclear power plants for the generation and sale of electric power buyer and parent are under the audit jurisdiction of the industry director natural_resources lm nr commission has established and regulated the rates charged by seller for the electricity generated by the plant including the recovery_of nuclear decommissioning costs seller is also subject_to the jurisdiction of commission buyer will operate as an exempt wholesale generator under the jurisdiction of commission as to the terms and conditions of its wholesale electric power sales and of the nuclear regulatory commission the nrc as to the requirements and conditions of the ownership and operation including decommissioning of the plant however buyer’s sales of electric power are not subject_to regulation by a public_utility commission or by the rural electrification administration along with buyer through subsidiary operator will be a named licensee on the license issued by the nrc operator will be the employer of all personnel and act as agent for buyer pursuant to an operating_agreement with buyer to operate the plant plr-160087-01 the plant is located in location and consists of a reactor internal piping systems turbines recirculating piping systems cooling towers a spent nuclear fuel storage pool a transformer on-site low-level radioactive waste storage facilities and ancillary facilities as well as the existing inventory of nuclear fuel and spent nuclear fuel in a b investor-owned utilities organized seller as a utility company under state law the plant began commercial operation in c seller sells all of the electrical power generated by the plant to the b utility owners trust established by seller on d to fund the decommissioning of the plant maintains two separate funds a fund qualifying under sec_468a qualified_fund and a fund that did not meet the requirements of sec_468a non-qualified fund the non-qualified fund is treated as a grantor_trust for federal_income_tax purposes under sec_671 through the level of funding in the decommissioning funds are estimates of the future costs that the owner of the plant will incur upon the decommissioning of the plant the cost of disposing of low-level radioactive waste upon decommissioning is part of this calculation on e buyer entered into an asset purchase agreement with seller to purchase seller’s entire f percent interest in the plant the agreement contemplates that buyer through subsidiary will pay dollar_figureg to seller in cash and assume all decommissioning liabilities associated with the plant including the costs of disposing of low-level nuclear waste1 in addition to other plant-related liabilities the parties have structured the pursuant to the low-level radioactive waste policy act of state accepted responsibility for providing a low-level radioactive waste facility for waste produced in the state in congress passed the low-level radioactive waste policy amendments act which encouraged states that had accepted such responsibility to meet that responsibility by participating in interstate compacts in h state established a fund which held amounts to be used by state to provide a disposal site for low-level radioactive waste within the state the fund was funded by assessments by state on generators of radioactive waste within the state seller was assessed and paid about dollar_figurei to the fund between h and j however all but dollar_figurek of this amount was used by state for administrative expenses and engineering studies seller took a deduction for the amount contributed to the fund to date state has not developed a waste facility in l congress approved a multi-state compact among state state and state the compact by passing the statute under the compact state is required to develop and operate a storage_facility for low-level radioactive waste for use by state and state once certain contingencies occur state and state will each be required to pay certain amounts to state and to the county within state in which the disposal plr-160087-01 transaction as a sale of assets subject_to sec_1060 and the service is not disputing that characterization of the transaction the asset purchase agreement the agreement obligates seller to transfer to subsidiary at the closing of the transaction all the assets of the qualified_fund and the non-qualified fund seller is obligated under the agreement to continue to make contributions to the funds until the closing of the transaction however to the extent that the fair_market_value of the assets in the trust at closing is less than the minimum_funding requirement required by the nuclear regulatory commission up to a specified dollar amount seller is obligated to contribute adequate funds to seller’s non-qualified fund on or before the closing date buyer is further obligated under the agreement to sell electric power to seller through m prior to the closing of the transaction buyer will execute a master_trust agreement that will establish a qualified nuclear decommissioning fund and a non-qualified nuclear decommissioning fund at the closing of the transaction seller will transfer all assets of the qualified_fund to buyer’s qualified_fund and all assets of the non-qualified fund to buyer’s non-qualified fund facility is located to fund its obligations under the compact state passed a statute creating a low-level radioactive waste disposal fund compact fund pursuant to which generators of radioactive waste in state may be assessed the full administrative cost of state’s membership and participation in the compact the state statute also provides that amounts that were held in the fund are to be transferred to the compact fund accordingly the compact fund now holds the dollar_figurek that formally was held by the fund state has not located a site for the waste facility much less begun construction and may never do so as a consequence state does not have a current_liability and may never have a liability to state pursuant to the compact accordingly seller does not currently and may never have an obligation to state to fund the compact fund beyond the amount rolled over from the fund upon sale of the plant buyer will acquire seller’s right title and interest in the dollar_figurek contributed to the compact fund by seller and currently held by state if state does not site and build a waste facility pursuant to the compact then responsibility for providing an alternative disposal location for low-level radioactive waste generated in state falls back to state under its agreement with the federal government plr-160087-01 requested ruling seller’s qualified nuclear decommissioning trust will not be disqualified upon the sale of the plant and the transfer of the assets in seller’s qualified nuclear decommissioning fund to buyer’s qualified nuclear decommissioning fund and after the transfer buyer’s qualified nuclear decommissioning fund will be treated as a qualified_fund satisfying the requirements of sec_468a sec_468a provides that a taxpayer may elect to deduct payments made to a nuclear decommissioning reserve fund the qualified_fund sec_468a limits the annual deduction of the electing taxpayer to the lesser_of the ruling_amount or the amount of decommissioning costs included in the electing taxpayer’s cost of service for ratemaking purposes for the taxable_year sec_468a provides that the ruling_amount means the amount determined by the service to be necessary to a fund that portion of the nuclear decommissioning cost with respect to the nuclear power plant that bears the same ratio to the total nuclear decommissioning costs with respect to such nuclear power plant as the period for which the fund is in effect bears to the estimated_useful_life of the nuclear power plant and b prevent any excessive funding of such costs or the funding of such costs at a rate more rapid than level_funding sec_468a provides that the rate_of_tax on the income of a qualified_fund is percent sec_468a provides in pertinent part that the assets in a qualified_fund shall be used exclusively for satisfying the liability of any taxpayer contributing to the qualified_fund sec_1_468a-1 of the federal_income_tax regulations provides that an eligible_taxpayer is a taxpayer that possesses a qualifying interest in a nuclear power plant sec_1_468a-1 provides that a qualifying interest is a direct ownership_interest or a leasehold interest meeting certain additional requirements sec_1_468a-1 provides in part that a nuclear power plant is any nuclear power reactor that is used predominantly in the trade_or_business of the furnishing or sale of electric energy if the rates for such furnishing or sale have been established or approved by a public_utility commission sec_1_468a-5 sets out the qualification requirements for nuclear decommissioning funds it provides in part that a qualified_fund must be established and maintained pursuant to an arrangement that qualifies as a_trust under state law an electing taxpayer can establish and maintain only one qualified_fund for each nuclear power plant sec_1_468a-5 provides that if at any time during the taxable_year a nuclear decommissioning fund does not satisfy the requirements of sec_1_468a-5 the service may disqualify all or a portion of the fund as of the date that the fund does not satisfy the requirements sec_1_468a-5 provides that if a qualified_fund is disqualified the fair_market_value with certain adjustments of plr-160087-01 the assets in the fund is deemed to be distributed to the electing taxpayer and included in that taxpayer’s gross_income for the taxable_year sec_1_468a-6 generally provides rules for the transfer of an interest in a nuclear power plant and transfer of the qualified_fund where the transferee is an eligible_taxpayer after the transfer under sec_1_468a-6 the service may treat any disposition of an interest in a nuclear power plant occurring after date as satisfying the requirements of the regulations if the service determines that such treatment is necessary or appropriate to carry out the purposes of sec_468a under the specific facts herein the service will exercise its discretion under sec_1_468a-6 to treat this transaction as a disposition qualifying under the general provisions of sec_1_468a-6 thus under sec_1_468a-6 the qualified nuclear decommissioning fund of seller will not be disqualified upon the transfer of the assets to buyer’s qualified nuclear decommissioning fund and buyer’s qualified nuclear decommissioning fund after receiving the transferred assets will be treated as a qualified nuclear decommissioning fund for purposes of sec_468a requested ruling neither seller’s qualified nuclear decommissioning fund nor buyer’s qualified nuclear decommissioning fund will recognize gain_or_loss or otherwise take any income_or_deduction into account upon the transfer of the assets of seller’s qualified nuclear decommissioning fund to buyer’s qualified nuclear decommissioning fund as a result of the sale of the plant requested ruling neither buyer nor seller will recognize gain_or_loss or otherwise take any income_or_deduction into account by reason of the transfer of the assets of seller’s qualified nuclear decommissioning fund to buyer’s qualified nuclear decommissioning fund as a result of the sale of the plant sec_1_468a-6 provides that neither a transferor nor its fund will recognize gain_or_loss or otherwise take any income_or_deduction into account by reason of the transfer of the assets from a transferor’s qualified_fund to a transferee’s qualified_fund thus neither seller nor the qualified nuclear decommissioning fund maintained by seller will recognize gain_or_loss or otherwise take any income_or_deduction into account by reason of the transfer of the qualified nuclear decommissioning fund assets to buyer’s qualified nuclear decommissioning fund similarly sec_1_468a-6 provides that neither a transferee nor its fund will recognize gain_or_loss or otherwise take any income_or_deduction into account by reason of the transfer of the assets from a transferor’s qualified_fund to a transferee’s qualified_fund thus neither buyer nor its qualified nuclear decommissioning fund will recognize gain_or_loss or otherwise take any income_or_deduction into account by plr-160087-01 reason of the transfer of seller’s qualified nuclear decommissioning fund assets to buyer’s qualified nuclear decommissioning fund requested ruling buyer’s qualified nuclear decommissioning fund will have a basis in the assets received from seller’s qualified nuclear decommissioning fund that is the same as the basis of those assets in seller’s qualified nuclear decommissioning fund immediately before the close of the transaction sec_1_468a-6 provides that transfers of assets of a qualified_fund to which sec_1_468a-6 applies do not affect basis accordingly under sec_1_468a-6 buyer’s qualified nuclear decommissioning fund will have a basis in the assets received that is the same as the basis of those assets in seller’s qualified nuclear decommissioning fund immediately before the transfer requested ruling seller will be allowed current ordinary deductions for federal_income_tax purposes for any amounts treated as realized by seller or otherwise recognized as income to seller as a result of buyer’s assumption of seller’s decommissioning liabilities related to the plant sec_1_446-1 of the income_tax regulations provides that under an accrual_method of accounting a liability is incurred and generally taken into account for federal_income_tax purposes in the year in which all the events have occurred that establish the fact of the liability the amount of the liability can be determined with reasonable accuracy and economic_performance has occurred with respect to the liability sec_461 makes clear that generally the all_events_test is not treated as having been met any earlier than the taxable_year in which economic_performance has occurred with respect to a liability see also sec_1_461-4 of the regulations sec_461 provides that in the case of a liability that requires the taxpayer to provide services economic_performance occurs as the taxpayer provides the services sec_1_461-4 of the regulations provides that economic_performance occurs with respect to such service liabilities as the taxpayer incurs costs in connection with the satisfaction of the liability sec_1_461-4 of the regulations provides an exception to the general economic_performance rule for services where the taxpayer sells a trade_or_business where the purchaser expressly assumes a liability arising out of the taxpayer’s trade_or_business that the taxpayer but for the economic_performance requirement would have been entitled to incur as of the date of the sale economic_performance with respect to the liability occurs as the amount of the liability is properly included in the amount_realized on the sale by the taxpayer plr-160087-01 the first prong of the all_events_test requires that the fact of the liability be established at the time of the deduction this prong of the all_events_test is satisfied in the instant case here seller clearly has an obligation to decommission the plant the fact of the obligation arose many years ago at the time seller obtained its license to operate the plant see c f_r dollar_figure and requiring the operator of a nuclear power plant to decommission it moreover congress recognized the existence of the decommissioning liability when in it enacted sec_461 and sec_468a noting that g enerally under federal and state laws utilities that operate nuclear power plants are obligated to decommission the plants at the end of their useful lives h_r conf_rep no see also s prt no vol 98th cong 2d sess the second prong of the all_events_test requires that the amount of the liability be reasonably determinable sec_1_461-1 of the regulations this prong is also satisfied in the instant case the amount of seller’s decommissioning liability has been determined by experts in the nuclear decommissioning industry their calculations have been reviewed and accepted by both the nuclear regulatory commission and the federal energy regulatory commission in addition there is also support in the code for finding that the amount of the decommissioning liability is reasonably determinable at the time of sale sec_468a generally permits a current deduction for a ruling_amount based on estimated future decommissioning expenses to the extent the decommissioning costs are sufficiently determinable to entitle the utility to a deduction under sec_468a it is reasonable to conclude that the costs also must be sufficiently determinable to satisfy the second prong of the all_events_test given that the two prongs of the all_events_test are satisfied economic_performance with respect to the decommissioning liability occurs as of the date of the sale to the extent the liability is included in seller’s amount_realized at that time seller will be entitled to a deduction for the amount of its otherwise deductible decommissioning liability associated with the plant expressly assumed by buyer and included in seller’s amount_realized requested ruling buyer will not recognize any income for federal_income_tax purposes by reason of any transfer of the assets of seller’s non-qualified fund to buyer’s non-qualified find or the transfer to buyer from seller of any rights in funds held by state for the disposal of low-level radioactive waste during decommissioning except to the extent that the amount of cash and other cla sec_1 assets as such term is defined in sec_1_338-6t received by buyer exceeds the amount of consideration paid_by buyer as determined under sec_1060 before specifically making a determination with respect to requested ruling several preliminary determinations must be made plr-160087-01 sec_1012 provides in part that the basis_of_property shall be the cost of such property therefore buyer’s basis in the assets purchased from seller will include the cash paid to seller however the assumed decommissioning liability cannot be treated as incurred with respect to buyer for any federal_income_tax purpose -- including basis -- until economic_performance occurs with respect to that liability the legislative_history underlying the enactment of sec_461 makes it clear that congress intended to exclude an item from being taken into account for tax purposes until economic_performance occurs this treatment applies to capital as well as non-capital transactions h_r rep no pt 98th cong 2d sess s prt no vol 98th cong 2d sess despite criticism from some commentators that the service lacks authority to apply the economic_performance rules broadly enough to include the calculation of basis and cost_of_goods_sold the service explicitly stated in the preamble to the final regulations implementing sec_461 that the service and treasury believe the intended scope of the statutory provision is indeed broad enough to apply in this manner preamble to t d fed reg date c b consistent with this position the service amended the regulations under sec_446 to clarify that a liability is incurred and generally is taken into account for federal_income_tax purposes in the taxable_year in which the all_events_test is satisfied and economic_performance has occurred with respect to the item sec_1 c ii a of the regulations the regulations further clarify that applicable provisions of the code the regulations and other guidance published by the secretary prescribe the manner in which a liability that has been incurred is taken into account and specifically cite to the capitalization provisions of sec_263 as an example of a code provision subordinate to the economic_performance requirement specifically the regulations state for example an amount that a taxpayer expends or will expend for capital improvements to property must be incurred before the taxpayer may take the amount into account in computing its basis in the property sec_1_446-1 of the regulations thus critical to determining whether buyer is entitled to treat the future decommissioning liability as a component of its cost_basis in the assets purchased from seller is deciding whether the liability will be incurred for tax purposes as of the closing it will not economic_performance does not occur with respect to a service liability such as the decommissioning liability until and to the extent that costs are incurred in satisfaction of that liability sec_1_461-4 of the regulations because buyer will not have performed any services relating to the decommissioning liability at the time of the plant’s purchase economic_performance will not have occurred and the liability will not have been incurred at that time for any purpose under the internal_revenue_code including the cost_basis provisions of sec_1012 accordingly at the time of closing buyer will have a cost_basis in the assets purchased from seller equal to the cash paid to seller as well as any liabilities that are plr-160087-01 otherwise incurred for federal_income_tax purposes at the time of the closing date buyer will not be entitled to treat as a component of its cost_basis at the time of the closing any amount attributable to the future decommissioning liability not taken into account as a liability for federal_income_tax purposes as of the closing date the buyer’s cost_basis in the assets purchased from seller including all assets held in the non-qualified fund and the compact fund must be allocated among all such assets in accordance with the residual_method provided in sec_1060 and sec_1 1t d e of the regulations sec_1060 provides that in the case of an applicable_asset_acquisition the consideration received shall be allocated among the acquired assets in the same manner as amounts are allocated to assets under sec_338 sec_1 a provides that in the case of an applicable_asset_acquisition the seller and the purchaser each must allocate the consideration paid or received in the transaction under the residual_method as described in sec_1_338-6 and sec_1_338-7 in order to determine respectively the amount_realized from and the basis in each of the transferred assets sec_1060 defines the term applicable_asset_acquisition as the transfer of assets constituting a trade_or_business if the acquirer’s basis in the transferred assets is determined wholly by reference to the consideration paid for such assets sec_1_1060-1 defines a purchaser’s consideration as the amount in the aggregate of its cost of purchasing the assets in the applicable_asset_acquisition that is properly taken into account in basis sec_1060 provides no independent basis for determining a taxpayer’s cost of acquired assets cost is determined solely under generally applicable tax_accounting principles sec_1_1060-1 defines a seller’s consideration as the amount in the aggregate realized from selling the assets in the applicable_asset_acquisition under sec_1001 sec_1060 also provides no independent basis for determining the amount a taxpayer realizes on the sale of assets or the time such amount may be taken into account the amount_realized and the time such amount is taken into account are determined solely under generally applicable tax_accounting principles see sec_1001 the residual_method is based on a division of assets into seven classes class i generally consisting of cash and general deposit accounts held in banks savings and loan associations and other depository institutions class ii generally consisting of actively_traded personal_property like u s government securities and publicly traded stock but also including certificates of deposit and foreign_currency even if they are not actively_traded personal_property class iii accounts_receivable mortgages and credit card receivables from customers which arise in the ordinary course of business class iv stock_in_trade of the taxpayer or other_property of a kind which would properly be included in the inventory of taxpayer if on hand at the close of the taxable_year or property held by the taxpayer primarily_for_sale_to_customers in the ordinary course of its plr-160087-01 trade_or_business class v all assets other than class i ii iii iv vi and vii assets class vi all sec_197 intangibles as defined in that section except goodwill and going_concern_value and class vii goodwill and going_concern_value whether or not it qualifies as a sec_197 intangible sec_1_338-6 consideration is first reduced by the amount of class_i_assets transferred by the seller the remaining consideration is then allocated to the class_ii_assets pro_rata to the extent of their fair_market_value then to the class_iii_assets pro_rata to the extent of their fair_market_value then to the class_iv_assets pro_rata to the extent of their fair_market_value then to the class_v_assets pro_rata to the extent of their fair_market_value then to the class_vi_assets pro_rata to the extent of their fair_market_value and finally any remaining consideration is allocated to the class_vii_assets sec_1_338-6 and and c the following examples illustrate the operation of sec_1060 from a seller’s and a buyer’s perspective respectively a on date1 an applicable_asset_acquisition is made the consideration consists of dollar_figure cash and an assumed liability of dollar_figure that under applicable tax_accounting principles is taken into account at the time of the applicable_asset_acquisition the assets sold consist of class_i_assets in the amount of dollar_figure class_ii_assets with a fair_market_value of dollar_figure and a basis in the hands of the seller of dollar_figure class_iii_assets with a fair_market_value of dollar_figure and a basis of dollar_figure class_iv_assets with a fair_market_value of dollar_figure and a basis of dollar_figure class_v_assets with fair_market_value of dollar_figure and a basis of dollar_figure and class_vi_assets with a fair_market_value of dollar_figure and a basis of dollar_figure the consideration first will be reduced by dollar_figure the amount of class_i_assets the remaining consideration will be allocated as follows dollar_figure to class_ii_assets pro_rata according to fair_market_value resulting in a dollar_figure gain dollar_figure to the class_iii_assets pro_rata according to fair_market_value resulting in no gain_or_loss dollar_figure to the class_iv_assets pro_rata according to the fair_market_value resulting in a dollar_figure gain dollar_figure to the class_v_assets pro_rata according to the fair_market_value resulting in no gain_or_loss dollar_figure to the class_vi_assets pro_rata according to the fair_market_value resulting in a dollar_figure gain and the remaining dollar_figure to the class_vii_assets pro_rata according to the fair_market_value resulting in a dollar_figure gain the character of the amounts of gain_or_loss recognized by the seller as well as any applicable holding periods is determined by the nature of the underlying assets sec_1_338-6 sec_1_1060-1 and sec_1_1060-1 b on date1 an applicable_asset_acquisition is made the consideration consists of dollar_figure cash and an assumed liability for which economic_performance has not occurred the assets acquired consist of class_i_assets in the amount of dollar_figure class_ii_assets with a fair_market_value of dollar_figure class_iii_assets with a fair_market_value of dollar_figure class_iv_assets with a fair_market_value of dollar_figure and plr-160087-01 class_v_assets with a fair_market_value of dollar_figure there are no class vi or vii assets on date1 the purchaser has provided dollar_figure of consideration that may be allocated as basis it first will be reduced by dollar_figure the amount of class_i_assets the remaining dollar_figure will be allocated to class_ii_assets pro_rata according to fair_market_value nothing is allocated to class iii or below on date2 economic_performance occurs with respect to the liability to the extent of dollar_figure at that time the purchaser has an additional dollar_figure of basis that may be taken into account of that amount dollar_figure is allocated to class_ii_assets which will then have been allocated their full dollar_figure fair_market_value - as determined on the acquisition_date and the remaining dollar_figure is allocated to the class_iii_assets pro_rata according to fair_market_value - as determined on the acquisition_date on date3 economic_performance occurs to the extent of an additional dollar_figure which is then taken into account as basis of that amount dollar_figure will be allocated to the class_iii_assets which will then have been allocated their full dollar_figure fair_market_value - as determined on the acquisition_date dollar_figure will be allocated to the class_iv_assets which will then have been allocated their full dollar_figure fair_market_value - as determined on the acquisition_date dollar_figure will be allocated to the class_v_assets which will then have been allocated their full dollar_figure fair_market_value - as determined on the acquisition_date and the remaining dollar_figure will be allocated to the class vii as goodwill the last amount is allocated to goodwill even though goodwill was not identified as a separate asset having value on date1 if on date3 instead of an addition to purchaser’s consideration there is a dollar_figure decrease in consideration the consideration previously allocated to the class_iii_assets dollar_figure would be reduced to zero and the consideration previously allocated to the class_ii_assets would be reduced by the remaining dollar_figure pro_rata according to fair_market_value if under general tax principles there is a subsequent adjustment to the consideration that amount is allocated in a manner that produces the same allocation that would have been made at the time of the acquisition had such amount been paid_or_incurred on the acquisition_date sec_1_338-7 sec_1_1060-1 and sec_1 c the plant including equipment and operating_assets and the assets of the non- qualified_fund comprise a trade_or_business in seller’s hands and the basis buyer takes in these assets will be determined wholly by reference to the buyer’s consideration thus seller’s transfer of the plant including equipment and operating_assets and assets of the non-qualified fund to buyer in exchange for cash and the assumption of the decommissioning liability except to the extent funded by the qualified_fund is an applicable_asset_acquisition as defined in sec_1060 as such its federal tax treatment is determined under sec_1060 and the regulations thereunder accordingly seller must allocate the consideration in the applicable assets in accordance with the provisions of sec_1060 and the regulations thereunder plr-160087-01 specifically seller will first reduce the consideration received by the amount of class_i_assets it transfers in the transaction including any class_i_assets held in the non- qualified_fund to the extent seller’s consideration exceeds the class_i_assets it transfers such excess will be allocated to the class_ii_assets then to the class_iii_assets then to the class_iv_assets then to the class_v_assets then to the class_vi_assets and finally to the class_vii_assets such consideration is allocated to each class of assets pro_rata according to the fair_market_value of those assets up to their total fair_market_value the character and other attributes of the amounts of gain and loss are determined by that of the underlying assets additionally on the acquisition_date buyer’s basis in the assets acquired must be determined by allocating its cost ie the consideration provided by buyer on the acquisition_date which includes the cash but not the assumption of the decommissioning liability among the acquired assets in accordance with the provisions of sec_1060 and the regulations thereunder specifically buyer will first reduce its consideration by the amount of the class_i_assets it receives in the transaction including any class_i_assets held in the non-qualified fund to the extent the class_i_assets received exceed the consideration buyer provides buyer will recognize income to the extent buyer’s consideration exceeds the class_i_assets it receives such excess will be allocated in accordance with the provisions of sec_1060 and the regulations thereunder as described above when and to the extent additional_amounts are paid_or_incurred for the assets acquired in the applicable_asset_acquisition eg when and to the extent the buyer’s non-qualified fund pays or incurs decommissioning expenses such amounts will be taken into account as increases to buyer’s consideration and allocated in the same manner and subject_to the same conditions as though they were paid_or_incurred on the acquisition_date sec_1_338-6 sec_1_338-7 sec_1_1060-1 and sec_1_1060-1 finally a taxpayer generally does not realize gross_income upon its purchase of a business’ assets even where those assets include cash or marketable_securities and in connection with the purchase the taxpayer assumes liabilities of the seller see 194_f2d_190 2d cir revrul_55_675 1955_2_cb_567 in this case buyer cannot acquire the plant without assuming the decommissioning liability which is inextricably associated with ownership and operation of plant and there is no indication that the transaction is other than a bona_fide purchase of the business and its associated assets and liabilities the exception to the general_rule set forth in revrul_71_450 1971_2_cb_78 does not apply in revrul_71_450 unlike the present situation the purchaser agreed to assume the prepaid subscription liability in return for a separate cash payment and the liability was not reflected in the sales_price of the business accordingly buyer will not realize income from its purchase of the plant and seller’s interests in the assets in the decommissioning funds the buyer will realize income from its purchase of the plant and related assets to the extent that the amount plr-160087-01 of cash and other class_i_assets as defined in sec_1_338-6 received exceeds its total cost determined under sec_1012 which will be the sum of its cash consideration and the fair_market_value of any other consideration it provides to seller that is under applicable tax principles taken into account on the date of the applicable_asset_acquisition if buyer is thus required to take an amount into account as income then when under general principles of tax law buyer is permitted to take additional consideration into account eg when it satisfies the economic_performance requirement with respect to the decommissioning liability assumed buyer will be entitled to deduct currently and will not be required to capitalize such amount 344_us_6 except as specifically determined above no opinion is expressed or implied concerning the federal_income_tax consequences of the transaction described above this ruling is directed only to the taxpayers who requested it sec_6110 of the code provides it may not be used or cited as precedent in accordance with the power_of_attorney you submitted with the request we are sending copies of this ruling to your authorized representatives we are also sending a copy of this letter_ruling to the industry director natural_resources lm nr sincerely peter c friedman peter c friedman senior technician reviewer branch office of associate chief_counsel passthroughs and special industries cc


t c memo united_states tax_court stephen m and rebecca a kerns petitioners v commissioner of internal revenue respondent docket no filed date charles wist and joan kehlhof for petitioners john d faucher for respondent memorandum opinion colvin judge respondent determined that petitioners are liable for deficiencies in federal_income_tax of dollar_figure for and dollar_figure for and accuracy-related_penalties under sec_6662 of dollar_figure for and dollar_figure for after concessions the sole issue for decision is whether a dollar_figure payment by petitioner stephen m kerns’s wholly owned corporation in for a permanent seat license allowing him to buy six season tickets to houston texans football games was a constructive_dividend to petitioners we hold that it was references to petitioner are to stephen m kerns section references are to the internal_revenue_code in effect for the years in issue rule references are to the tax_court rules_of_practice and procedure background the parties submitted this case fully stipulated under rule a petitioners and insurmark petitioners resided in houston texas when they filed their petition in and petitioners owned percent of the stock of insurmark inc a corporation which sells annuities to insurance and financial agents petitioner was the president and chief_executive_officer of insurmark inc in and and is currently its president b the permanent seat license on date petitioner submitted an application to the harris county-houston sports authority for a permanent seat license under which petitioner had the right to buy six season tickets for all home games of the houston texans football team1 to be played in the new football stadium now called reliant stadium that was then under construction in houston texas petitioner listed his home address and social_security_number on the application insurmark paid dollar_figure with the application but did not deduct this payment on its corporate_income_tax return on date petitioner signed a harris county stadium permanent seat license agreement under which the permanent seat license fee was payable in three installments of dollar_figure totaling dollar_figure petitioner signed the agreement as president but did not specify the entity of which he was president petitioner had the exclusive right to use the seat license he could not transfer the license before the end of date without the consent of the harris county-houston sports authority other than to an immediate_family member petitioner indicated in the agreement that he was not acquiring the license as an investment and that he intended to use the license himself and not to distribute it or season tickets to others insurmark also paid dollar_figure for the permanent seat license in the year ending date and dollar_figure in the year ending date for a total of dollar_figure by the end of the houston texans are a member of the national football league nfl the houston texans football team played its first regular season home game at reliant stadium on date on date after the petition was filed in this case petitioner asked the harris county-houston sports authority to transfer his permanent seat license to insurmark c petitioners’ returns and respondent’s determination petitioners filed federal_income_tax returns for and respondent determined that petitioners had unreported income of dollar_figure for and dollar_figure for in the form of constructive dividends from insurmark for its payment of their personal expenses discussion petitioners contend that insurmark’s purchase of the permanent seat license was not a constructive_dividend to them in they contend that the license conferred no benefit on them and thus they received no constructive_dividend in because the houston texans football team and reliant stadium did not exist in petitioners point out that insurmark did not deduct its dollar_figure payment for the permanent seat license in and contend that a property right for which their corporation claimed no deduction and which can be used only in the future does not result in a constructive_dividend to them in we need not decide whether the burden_of_proof shifts to respondent under sec_7491 because the facts are not in dispute and the issue is one of law see sec_7491 we disagree a shareholder receives a constructive_dividend to the extent of the corporation’s earnings_and_profits if the corporation pays a personal_expense of its shareholder or the shareholder uses corporate property for a personal purpose sec_301 sec_316 85_tc_332 60_tc_728 if the earnings_and_profits requirement is met a payment is a constructive_dividend if the corporation has conferred an economic benefit on the shareholder without expectation of repayment 418_f2d_589 5th cir 89_tc_1280 petitioners economically benefited from insurmark’s payment of the seat license fee in because they acquired without cost to themselves the permanent seat license the fact that the football team and the stadium did not exist in did not prevent the seat license from conferring an economic benefit on petitioners ie the right to buy season tickets when the houston texans began playing football games petitioner not insurmark had the exclusive right to use the seat license the permanent seat license agreement was between the harris county-houston sports authority and petitioner he could not transfer the license other than to an petitioners do not contend that insurmark’s earnings_and_profits were less than the amount of constructive dividends respondent determined immediate_family member before the end of date without the consent of the harris county-houston sports authority in the license agreement petitioner agreed to use the license himself rather than to distribute it or the season tickets to others because petitioner held title to the seat license until insurmark did not benefit from the license in we conclude that insurmark’s dollar_figure payment in for the permanent seat license was a constructive_dividend to petitioners decision will be entered for respondent petitioners do not contend and we do not find that the primary benefit of the permanent seat license ran to insurmark rather than to them cf 115_tc_172


internal_revenue_service number release date index number ------------------------------------------- ------------------------------------------- ------------------------------------ ------------------------ ---------------------------- legend department of the treasury washington dc third party communication none date of communication not applicable_person to contact --------------------------- id no ------------- telephone number --------------------- refer reply to cc psi b01 plr-131158-11 date december x --------------------------------------------------- -------------------------------------------- state d1 d2 ------ -------------------------- ---------------------- dear --------------- this responds to a letter dated date submitted on behalf of x requesting relief under sec_1362 of the internal_revenue_code facts according to the information submitted x was incorporated on d1 under the laws of state x intended to be treated as an s_corporation effective d2 but the form_2553 election by a small_business_corporation was not timely filed accordingly x requests a ruling that it will be treated as an s_corporation effective d2 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 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 sec_1362 provides plr-131158-11 that if the election is made after the first two and one-half months of a corporation’s taxable_year then the corporation will not be treated as an s_corporation until the taxable_year after the year in which the s election is made sec_1362 provides that if no election is made pursuant to sec_1362 or if made the election is made after the date prescribed for making such an election and the secretary determines there was reasonable_cause for the failure to timely make the election then the secretary may treat such election as timely made for such taxable_year and effective as of the first day of that year x did not file a timely election to be treated as an s_corporation under sec_1362 effective d2 x has however established reasonable_cause for not making a timely election and is entitled to relief under sec_1362 conclusion based solely on the facts submitted and representations made and provided that x otherwise qualifies as an s_corporation we conclude that x will be recognized as an s_corporation effective d2 if within days from the date of this letter x submits a properly completed form_2553 with a copy of this letter attached to the appropriate service_center 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 specifically no opinion is expressed or implied concerning whether x otherwise qualifies as an s_corporation for federal tax purposes this rule is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to the taxpayer’s authorized representative sincerely joy c spies joy c spies acting senior technician reviewer office of the associate chief_counsel passthroughs special industries enclosures copy of this letter copy of this letter for sec_6110 purposes cc


t c memo united_states tax_court phyllis herrmann witcher petitioner v commissioner of internal revenue respondent docket no filed date phyllis herrmann witcher pro_se w randolph shump for respondent memorandum opinion panuthos chief special_trial_judge respondent determined a deficiency in petitioner’s federal_income_tax of dollar_figure and an addition_to_tax under sec_6651 of dollar_figure after unless otherwise indicated all section references are to the internal_revenue_code in effect for the year in issue and all rule references are to the tax_court rules_of_practice and procedure - - concessions by the parties the issues for decision are whether the distributions petitioner received from her former husband’s military pension are includable in gross_income whether a settlement payment that petitioner received is includable in gross_income whether petitioner is entitled to a deduction for depreciation on rental property and whether petitioner is liable for an addition_to_tax under sec_6651 for failure_to_file a return timely petitioner resided in wilmington delaware at the time she filed her petition the stipulation of facts and attached exhibits are incorporated herein by this reference for convenience we combine findings_of_fact and conclusions military pension distribution petitioner and murray h witcher jr mr witcher were married in mr witcher served in the u s navy for a number of years during their marriage pursuant to a divorce proceeding between petitioner and mr witcher in the court of common pleas of delaware county court of common pleas respondent concedes that petitioner is entitled to deductions for fees and dues paid with respect to rental property respondent determined that petitioner received dollar_figure in wages from horizon temps staffers inc and dollar_figure in capital_gain and ordinary dividends petitioner does not dispute respondent’s determination with respect to these issues and we deem them conceded the parties agree that petitioner received dollar_figure of income from a rental property net of expenses because petitioner does not dispute that she received the income or that it is taxable to her we deem this issue conceded pennsylvania concluded that mr witcher’s u s navy pension was a marital asset available for equitable division pursuant to a plan of distribution and awarded petitioner dollar_figure percent of the military pension the value of which was determined by the court of common pleas to be dollar_figure petitioner requested that the defense finance and accounting service dfas pay the portion of the military pension directly to her petitioner received distributions totaling dollar_figure from the military pension during the tax_year petitioner filed a form_1040 u s individual_income_tax_return for the tax_year on date petitioner filed a return that reflected her name address social_security_number signature date and telephone numbers but was otherwise blank it did not reflect either income reported or deductions claimed respondent determined in the notice_of_deficiency that the dollar_figure that petitioner received from the military pension is includable in petitioner’s gross_income as pension and annuity income gross_income means all income from whatever source derived sec 6l1l a pensions and retirement allowances paid_by the government constitute gross_income unless excluded by law sec_61 weir v commissioner tcmemo_2001_184 ebatinger v q4e- commissioner tcmemo_1990_310 sec_1_61-11l a income_tax regs the supreme court in 453_us_210 determined that military retirement pay could not be attached to satisfy a property settlement incident to a divorce and was not subject_to a state’s community_property_laws in response to mccarty congress enacted u s c sec in the uniformed_services former spouses’ protection act publaw_97_252 stat the provisions of u s c sec payment of retired or retainer pay in compliance with court orders relevant to the case at hand provide as follows a definitions --in this section the term court means--- a any court of competent jurisdiction of any state the term court order means a final decree of divorce dissolution annulment or legal_separation issued by a court or a court ordered ratified or approved property settlement incident to such a decree including a final decree modifying the terms of a previously issued decree of divorce dissolution or a court ordered ratified or approved property settlement incident to such previously issued decree x which--- b provides for-- division of property and c in the case of a division of property specifically provides for the payment of an amount expressed in dollars or as a percentage of disposable retired pay from the disposable retired pay of a member to the spouse or former spouse of that member c authority for court to treat retired pay as property of the member and spouse a court may treat disposable retired pay payable to a member for pay periods beginning after date either as property solely of the member or as property of the member and his spouse in accordance with the law of the jurisdiction of such court notwithstanding any other provisions of law this section does not create any right title or interest which can be sold assigned transferred or otherwise_disposed_of including by inheritance by a spouse or former spouse congress intended that u s c sec allow state courts to treat a military pension either as the property solely of the member or as the property of the member and his spouse 6s rept pincite see also pfister v commissioner tcmemo_2002_198 congress further noted that the bill does not require any division of retired pay by a state court nor does it prohibit such division treatment of such retired pay--with certain limitations--- generally would be dependent on the divorce and property laws applied by the courts of the jurisdiction in which a divorce or other related decree is issued s rept pincite a court in pennsylvania has the authority to equitably divide marital property in an action for divorce pa cons stat ann sec_3502 west it has been clearly established in pennsylvania that military pension benefits gualify as marital property and are subject_to equitable distribution pa cons stat ann sec_3501 sec_3502 west berrington v berrington pa super affd pa as indicated income from property is taxed to the owner of the property eatinger v commissioner tcmemo_1990_310 citing 309_us_331 282_us_101 281_us_111 under sec_1041 no gain or 1osss is recognized ona transfer of property from an individual to a spouse or former spouse if the transfer is incident to a divorce such transfers are treated as nontaxable gifts and the transferee has the transferor’s basis sec_1041 in enacting sec_1041 in the deficit_reduction_act_of_1984 publaw_98_369 98_stat_793 congress indicated its belief that it is inappropriate to tax transfers between spouses h rept part ii pincite - petitioner was awarded dollar_figure percent of her former husband’s navy retirement pay and received dollar_figure directly from the dfas in petitioner argues that she is not the legal owner of the military pension therefore the payments distributed to her are not includable in her gross_income the court of common pleas determined that the navy pension was a marital asset available for equitable distribution incident to the divorce the court of common pleas awarded her an equitable distribution of percent of the marital estate as set forth in the plan petitioner has a right to those distributions that were awarded to her u s c sec c petitioner alleges that the military considers the military pension to be pay because it is taxed before a distribution and the distribution is net of taxes petitioner has not presented any reason why the distributions to her if they are pay are not includable in her income petitioner argues that the military pension distributions she received are excludable from gross_income by virtue of sec_1041 an owner of an interest ina military retirement pension like other pensions has a right to receive future petitioner relies on u s c sec a and batinger v commissioner tcmemo_1990_310 for support for the argument that the military pension distribution is net of income taxes congress amended the statute in the national defense authorization act for fiscal_year publaw_101_510 a - d 104_stat_1569 and income_tax_withholding is no longer taken into account in determining disposable military retired pay under u s c sec a c income from the retiree’s employer eatinger v commissioner supra the pension distributions that petitioner received directly from dfas represent a division of a military pension if we were to assume arguendo that the division of the military pension effected a transfer of property to petitioner subject_to sec_1041 petitioner has no basis in such property and thus the full amount of the pension distribution to her is includable in her income sec_1041 the case at hand can be distinguished from 98_tc_368 in which this court determined that payments to the taxpayer a former spouse of a retired military serviceman were transfers incident to a divorce under sec_1041 and income was not recognized by the taxpayer in balding the taxpayer received cash payments directly from her former spouse in consideration of her agreement to relinguish all claims to the former spouse’s military retirement pay id pincite the court viewed the taxpayer’s release of rights to the military retirement pay in exchange for the settlement payments as a transfer of property id pincite petitioner in contrast received distributions from the dfas as a result of her retained ownership_interest in her former spouse’s military pension sec_61 we conclude that the distributions to petitioner in from the military pension are includable in her gross_income see batinger v commissioner --- - tcmemo_1990_310 respondent’s determination with respect to this issue is sustained lawsuit settlement in petitioner filed a complaint in the united_states district_court for the eastern district of pennsylvania against the wilmington trust company and other parties for breach of contract breach of the implied covenant of good_faith and fair dealing defamation due to reporting a charge-off to a credit reporting service fraud and the intentional infliction of emotional distress pursuant to a settlement of the lawsuit petitioner received dollar_figure in the parties’ basis for settlement is not set forth in the settlement document respondent determined in the notice_of_deficiency that the payment received in settlement of the lawsuit was includable in petitioner’s income gross_income does not include the amount of any damages other than punitive_damages received whether by suit or agreement and whether as lump sums or periodic_payments on account of personal physical injuries or physical sickness sec_104 for purposes of paragraph emotional distress prior to the amendment of sec_104 by the small_business job protection act of publaw_104_188 sec a stat effective for amounts received after date gross_income did not include damages received on account of personal injuries or sickness personal injuries included nonphysical injuries 515_us_323 n citing 504_us_229 n - shall not be treated as a physical injury or physical sickness except to the extent of any damages not in excess of the amount_paid for medical_care attributable to the emotional distress sec_104 damages received that are excludable from gross_income include an amount received through a settlement agreement entered into in lieu of prosecution of a legal suit or action based upon tort or tort type rights sec_1_104-1 income_tax regs while the defamation and emotional distress causes of action alleged in the lawsuit complaint are injuries personal to petitioner see eg 87_tc_1294 affd 848_f2d_81 6th cir freeman v commissioner tcmemo_2001_254 breaching implied covenant of good_faith is not a personal injury we are unable to find that any portion of the settlement was paid to petitioner as compensation_for physical injury or physical sickness the settlement document pursuant to which the lawsuit was settled does not provide the basis for the parties’ settlement petitioner has not argued that she received the dollar_figure settlement on account of a physical injury or physical sickness sec_104 we conclude that sec_104 is not applicable to exclude the dollar_figure payment received from gross_income because petitioner did not receive the settlement on account of a physical injury or physical sickness respondent is sustained with respect to this issue depreciation deduction petitioner owned a condominium in pennsylvania that she held as rental property in petitioner moved into the condominium in date after being forcibly ejected from the house in which she had lived for the previous years ina foreclosure action petitioner alleges that she is entitled toa depreciation deduction on the condominium which she held as rental property the notice_of_deficiency disallowed the claimed depreciation deduction on the basis that petitioner failed to establish entitlement to the deduction a taxpayer may be allowed as a depreciation deduction a reasonable allowance for the exhaustion wear_and_tear of property_held_for_the_production_of_income sec_167 a taxpayer is generally required to keep sufficient records to enable the secretary to determine the taxpayer’s correct income_tax_liability sec_6001 sec_1_6001-1 income_tax regs petitioner did not provide any testimony or documentary_evidence concerning the amount of depreciation on the rental property that she believes she is entitled to deduct or her adjusted_basis in the rental property the burden is on petitioner to substantiate the depreciation deduction rule the court held the record open after trial to allow petitioner the opportunity to supplement the record on this issue however no additional evidence was offered anda supplemental stipulation was not filed -- a we conclude that petitioner has not established that she is entitled to a deduction for depreciation sec_665l a addition_to_tax sec_6651 imposes an addition_to_tax on the failure_to_file timely any return required to be filed unless it is shown that such failure is due to reasonable_cause and not due to willful neglect the secretary has the burden of production in any court_proceeding with respect to the liability of the individual for any penalty addition_to_tax or additional_amount imposed sec_7491 see 116_tc_438 petitioner had requested and was granted extensions of time to file her return until august and date petitioner stipulated that she filed her return for the tax_year with respondent on date petitioner testified that she thought that she filed an additional request for an extension to file her return extending the filing_date to date after she was evicted from her house in date petitioner in date permanently moved into the condominium that she owned and had previously rented out petitioner asserts that she was living in temporary housing and lacked sec_7491 does not apply to place the burden_of_proof on respondent because petitioner has neither alleged that sec_7491 is applicable nor established that she complied with the requirements of sec_7491 a and b to substantiate items maintain required records and fully cooperate with respondent’s reasonable requests access to her belongings prior to date while living in temporary housing her belongings were in storage we conclude that respondent has produced sufficient evidence indicating that petitioner failed to file her return timely and the application of sec_6651 1s appropriate we also conclude that petitioner has not demonstrated that her failure_to_file the return timely was due to reasonable_cause accordingly respondent’s determination is sustained to reflect the foregoing decision will be entered under rule


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 intl b02 plr-124162-08 date september ty ------- ty ------- legend taxpayer year year year year fc country x country y trust ----------------------- ------------------------ ------- ------- ------- ------- ------------------------------- ------------------ ----------- ------------------------- trustee o trustee r ---------------------------- ------------------------------ law firm p law firm q ------------------------------------------------------------------------------------------ ---------------------- ---------------------------------------------------------- dear ------------------ this is in response to your letter received by our office on date submitted by your authorized representative requesting the consent of the plr-124162-08 commissioner of the internal_revenue_service to make a retroactive qualified_electing_fund qef election under sec_1295 of the internal_revenue_code code and sec_1_1295-3 with respect to your investment in fc the rulings contained in this letter are based upon information and representations submitted by taxpayer and accompanied by a penalties of perjury statement executed by the appropriate parties 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 facts taxpayer is a u s citizen and a named beneficiary of the trust established under the laws of country x by taxpayer's grandmother a citizen and resident of country y in year the trust acquired shares in fc a corporation organized under the laws of country y at all times since its formation the trust was administered and managed by various foreign nationals who served as the trustees of the trust trustee o who served as a trustee of the trust at all times since inception is an attorney with substantial experience in transnational tax planning and was a partner at law firm p during all the years at issue trustee o is competent to render international tax_advice trustee o and the other trustees had full access to all the records of the trust and trustee o was aware at all relevant times that taxpayer resided permanently in the united_states taxpayer is not a tax professional and has no experience in international tax matters taxpayer represents that as a beneficiary of the trust taxpayer had no control_over the assets of the trust and relied on the trustees to manage the assets of the trust at all times the trustees and in particular trustee o never informed taxpayer that the trust held shares of fc that fc was a passive_foreign_investment_company pfic under sec_1297 of the code for u s federal_income_tax purposes and of the consequences of such investment and of the possibility of making any elections qef or otherwise with respect to such shareholdings for u s federal_income_tax purposes in year after the death of taxpayer's father taxpayer engaged law firm q and others to determine the extent of the family's assets in year during its evaluation of the trust's assets law firm q determined that fc had been a pfic since year and informed taxpayer of fc's characterization as a pfic at that time taxpayer has submitted an affidavit signed under penalties of perjury describing the events that led to the failure to make the qef election by the election due_date plr-124162-08 including the role of the trustees taxpayer has also submitted affidavits of trustee o and trustee r corroborating the representations made by taxpayer taxpayer represents that as of the date of this request_for_ruling the pfic status of fc has not been raised by the irs on audit for any of the taxable years at issue ruling requested taxpayer requests the consent of the commissioner of the internal_revenue_service to make a retroactive qef election with respect to fc for year under sec_1_1295-3 law sec_1295 of the code provides that any pfic shall be treated as a qef with respect to a taxpayer if an election by the taxpayer under sec_1295 applies to such company for the taxable_year and the company complies with such requirements as the secretary may prescribe for purposes of determining the ordinary_earnings and net capital_gains of such company under sec_1295 a qef election may be made for any taxable_year at any time on or before the due_date determined with regard to extensions for filing the return for such taxable_year to the extent provided in regulations such an election may be made after such due_date if the taxpayer failed to make an election by the due_date because the taxpayer reasonably believed the company was not a pfic under sec_1_1295-3 a taxpayer may request the consent of the commissioner to make a retroactive qef election for a taxable_year if the shareholder reasonably relied on a qualified_tax professional within the meaning of sec_1_1295-3 granting consent will not prejudice the interests of the united state sec_3 government as provided in sec_1_1295-3 the request is made before a representative of the internal_revenue_service raises upon audit the pfic status of the corporation for any taxable_year of the shareholder and the shareholder satisfies the procedural requirements of sec_1 f the procedural requirements include filing a request for consent to make a retroactive election with and submitting a user_fee to the office of the associate chief_counsel international sec_1_1295-3 additionally affidavits signed under penalties of perjury must be submitted that describe plr-124162-08 the events which led to the failure to make a qef election by the election due_date the discovery of such failure the engagement and responsibilities of the qualified_tax professional and the extent to which the shareholder relied on such professional sec_1_1295-3 and iii conclusion based on the information submitted and representations made with taxpayer’s ruling_request we conclude that taxpayer has satisfied sec_1_1295-3 accordingly consent is granted to taxpayer to make a retroactive qef election with respect to fc for year provided that taxpayer complies with the rules under sec_1_1295-3 regarding the time and manner for making the retroactive qef election this private_letter_ruling is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent a copy of this ruling must be attached to any_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 taxpayer's authorized representative sincerely ethan a atticks senior technical reviewer branch international cc


department of the treasury internal_revenue_service washington d c date number release date tl-n-5992-96 uilc internal_revenue_service national_office field_service_advice memorandum for from deborah a butler assistant chief_counsel field service cc dom fs subject this field_service_advice responds to your memorandum dated date field_service_advice is not binding on examination or appeals and is not a final case determination this document is not to be cited as precedent legend corp ein1 date date date date year year year state u s possession1 country1 u s possession1 code1 u s possession1 code2 u s possession1 code3 country1 code1 country1 code2 law issue sec_1 what is the proper entity to execute a consent to extend the statute_of_limitations for assessment for corp for the tax periods ending on date and date what is the proper entity to execute a consent to extend the statute_of_limitations for assessment for corp for the tax periods ending on date and date should a transferee consent be obtained from corp because it received the assets from corp which dissolved on date and corp which dissolved on date what is the proper entity to execute a consent to extend the statute_of_limitations for assessment for p for the tax period ending on date and date conclusion sec_1 a corporate officer of corp should execute a form_872 consent for corp a corporate officer of corp should execute a form_872 consent for corp form_2045 transferee agreement should be executed by corp for corp and form_2045 should be executed by corp for corp corp should execute form_977 consent to extend the time to assess liability against a transferee for corp and form_977 for corp llc1 should execute a form 872-p consent as a successor-in-interest of p for a tax_year prior to the conversion to a limited_liability_company facts corp was incorporated on date under the laws of state for federal_income_tax purposes corp has filed timely consolidated u s_corporation income_tax returns forms for all relevant tax periods corp was incorporated on date under the laws of state similarly corp has filed timely consolidated u s_corporation income_tax returns for all relevant calendar_year tax periods on or about date corp acquired control of corp and its subsidiaries at that time corp became a wholly-owned subsidiary of corp on or about date by consent of the board_of directors corp merged with corp with corp the surviving entity accordingly corp no longer exists and corp has assumed all of corp 2's liabilities and obligations a certificate of ownership and merger was filed with the secretary of state state on date and subsequently with state corp included two foreign sales corporations fsc required to file forms fsc you have advised us that the fsc entities ceased doing business subsequently corp and corp were dissolved not merged and the respective assets and liabilities were transferred to and reported by corp on its balance_sheet corp was dissolved on date corp was dissolved on date the corp group of affiliated entities also reported the distributive results of tefra partnerships required to file forms you have advised us that in year the p tefra partnership converted into a limited_liability_company llc under the law of state law and analysis issue fscs are by definition corporations organized pursuant to the laws of a qualified foreign_country or u s possession sec_922 in general the corporate existence of a fsc is respected for u s tax purposes including periods of limitation see generally 110_tc_375 because a fsc is organized under the laws of a foreign_country or a u s possession it cannot be part of its u s parent’s consolidated_group sec_922 a b thus it is generally not appropriate to obtain a consent to extend the period of limitations for assessment with respect to a fsc from the u s parent or from that parent’s successor-in-interest corp was prior to its dissolution on date a corporation organized under the laws of u s possession1 u s possession1 code1 provides that a corporation’s existence is deemed to continue for three years from the date of dissolution for the limited purpose of winding up its affairs u s possession1 code2 provides that the directors of the corporation shall act as trustees during the specified three-year period after dissolution finally u s possession1 code3 provides that a court of u s possession1 upon the petition by shareholders or creditors may continue the directors as liquidating trustees or appoint trustees for the purpose of winding up the corporation business based upon the facts given no trustees have been appointed to wind up the affairs of corp therefore the directors continue as liquidating trustees delaware law is virtually identical to u s possession1 law in a case involving delaware law the board_of_tax_appeals held that the officer of a dissolved corporation had authority to execute a consent provided that the consent was executed within the three-year winding-up period 25_bta_1109 compare 43_bta_1143 acq 1941_1_cb_11 extension executed after expiration of three-year winding-up period specified by delaware law invalid the authority of a corporate officer to act for a dissolved corporation in tax matters derives from the law of the state or territory of incorporation 121_f2d_842 3rd cir cert_denied 314_us_677 because the winding-up period of corp has not elapsed the form_872 consent to extend the time to assess income_tax should be executed by a corporate officer such as the president vice president treasurer assistant treasurer chief accounting officer or any other officer duly authorized to act on behalf of corp under u s possession1 law the form_872 must be executed prior to the expiration of the winding-up period on date in addition under sec_6501 form_872 must be executed prior to the expiration of the statute_of_limitations for the tax years in question assuming corp 3's returns for year were due to be filed with an extension on date the three-year statute_of_limitations expires on date finally u s possession1 code1 provides that the corporation will continue to exist beyond the three-year winding-up period to satisfy any judgment against it but only if the action or proceeding was begun during the winding-up period under delaware law the execution of a consent does not constitute the commencement of a suit or proceeding rather it is the service of a notice_of_deficiency that constitutes the commencement of a suit or proceeding 230_fsupp_701 d del since u s possession1 law is virtually identical to delaware law we also recommend that any notice_of_deficiency be mailed within the three-year winding-up period the proper wording for the execution of the form_872 is corp ein3 this with respect to the tax_liability of corp for the tax years ended date and date issue corp was prior to its dissolution on date a corporation organized under the laws of country the articles of dissolution indicate that the company was dissolved pursuant to country1 code1 on the basis that it had no property and no liabilities however country1 code2 provides that notwithstanding the dissolution of a company under the act a civil criminal or administrative action or proceeding may be brought against the company within two years after its dissolution as if the company had not been dissolved in this case prior to date the authority of an officer to consent to extend the period of limitations for assessment must be determined under country1 law we recommend that the service obtain a form_872 consent to extend the time to assess tax executed by a corporate officer of the dissolved fsc because there is a two-year winding-up period under country1 law we believe the form_872 must be executed prior to the expiration of the winding-up period on date in addition under the sec_6501 the form_872 must be executed prior to the expiration of the statute_of_limitations for the tax years in question assuming corp 4's returns for year were due to be filed with an extension on date the three-year statute_of_limitations expires on date the proper wording for the execution of the form_872 is corp ein2 this with respect to the tax_liability of corp for the tax years ended date and date case development hazards and other considerations issue because corp and corp have dissolved and no longer exist we also recommend that consents to extend the statute_of_limitations for transferee_liability and transferee agreements be obtained from the transferee of corp and corp sec_6901 provides a procedure through which the service may collect from a transferee of assets unpaid taxes owed by the transferor of the assets if a basis exists under applicable state law or equity for holding the transferee liable 100_tc_180 the service bears the burden of proving that a taxpayer’s acts render the taxpayer liable as a transferee see sec_6902 t c rule a transferee’s liability may be established either at law or in equity 37_tc_945 subsequent proceedings 40_tc_275 in general stockholders who receive liquidating_distribution from a corporation that subsequently winds up its affairs and dissolves without paying its federal_income_tax liability have been held to be transferees under the trust fund doctrine 64_tc_797 foster v commissioner tcmemo_1967_224 245_f2d_645 5th cir commercial finance co v commissioner tcmemo_1968_229 thus we recommend you obtain form_2045 transferee agreement and form_977 consent to extend the time to assess liability at law or in equity for income gift and estate_tax against a transferee or fiduciary from corp we note that you should not rely on form_2045 to satisfy the service’s burden_of_proof with respect to transferee_liability case law suggests that the execution of form_2045 merely provides evidence of transferee_liability see 84_tc_367 n two form sec_2045 should be executed by corp - one for corp and a second for corp subsequently corp should execute two form_977 consents as transferee for both corp and corp the proper wording for the execution of the forms is corp ein1 as transferee of corp ein3 this with respect to the tax_liability of corp for the tax years ended date and date corp ein1 as transferee of corp ein2 this with respect to the tax_liability of corp for the tax years ended date and date issue you have also requested advice on the correct entity to execute consents to extend the statute_of_limitations for assessment for p in this case p was converted to a limited_liability_company under state law see law1 a partnership that converts is for all purposes the same entity that existed before the conversion law2 a new employer_identification_number ein was obtained for the limited_liability_company but the partnership ein could have been retained because p did not terminate but was converted to a limited_liability_company there are no transferees for this reason and to avoid confusion due to the ein change the appropriate entity to execute the form 872-p consent for a partnership for tax years prior to the conversion is llc1 ein4 successor-in-interest to p ein5 please call if you have any further questions


internal_revenue_service index number department of the treasury washington dc telephone number in reterence to cc dom corp plr-114417-98 date sct parent distributing controlled sub this letter responds to your date request that we supplement our letter_ruling dated date as amended by a letter dated date tr-31-0425-93 published as plr together the prior fetter ruling capitalized terms retain the meanings originally assigned them additional information was submitted in letters dated date date and october effective date all of the shareholders of distributing contributed all of their common and preferred_stock in distributing to parent in return for the same plr-114417-98 4z number of shares of common and preferred_stock of parent the shares of parent transferred te the former sharehoiders of distributing constituted all of parent’s issued and outstanding_stock all of the issued and outstanding_stock of distributing was thereafter contributed by parent to sub in return for all of sub’s issued and outstanding_stock the prior letter_ruling includes the following two representations gj i there is no plan or intention by the shareholders of distributing to sell exchange transfer by gift or otherwise dispose_of any of their stock in either distributing or controlled subsequent to the transaction neither distributing nor controlled will elect to be treated as an s_corporation under sec_1361 of the code for federal_income_tax purposes the principal_shareholder of parent is considering whether the shareholders should cause parent to redeem its outstanding preferred_stock and make an s election the same shareholder of parent would like to transfer stock of parent to certain family members by gift the contemplated transfers of parent's stock include the following the redemption of parent's preferred_stock in exchange for cash or other_property the conversion of parent's preferred_stock into parent's common_stock and the transfer by gift of parent's common_stock or preferred_stock from parent's principal_shareholder to his spouse as well as to his children and grandchildren and their spouses or to trusts for their respective benefit to the extent parent preferred_stock is transferred by gift and thus remains outstanding parent will not make an s_corporation_election based on the information and representations included with the request for the prior ruling letter and with this submission we hold as follows neither the filing of an election by parent to be treated as an s_corporation under sec_1361 of the internal_revenue_code nor any of the proposed transfers of interests in parent specifically described above after the date hereof will cause the internal_revenue_service to revoke the prior letter_ruling retroactively we hereby reaffirm the rulings and caveats set forth in the prior letter_ruling this letter is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent plr-114417-98 pursuant to a power_of_attorney on file in this office we have sent a copy of this letter to the taxpayer sincerely yours assistant chief_counsel corporate by kes bon ken cohen senior technician reviewer branch


tax_exempt_and_government_entities_division department of the treasur internal_revenue_service washington d c jan uniform issue list sde p-ma-t3 attention legend company a company b company c company d trustee e plan x dear this is in response to your request for a private_letter_ruling submitted by your authorized representative by letter dated date concerning the federal_income_tax consequences of the repayment of an exempt loan under sec_4975 sec_415 and sec_401 of the internal_revenue_code the code correspondence dated date date date date and date supplemented the request your authorized representative has submitted the following facts and representations company a sponsors plan x plan x is qualified under sec_401 of the code and consists of i an employee_stock_ownership_plan esop as described in sec_4975 of the code and ii a profit sharing plan which includes a qualified_cash_or_deferred_arrangement as described in sec_401 company a is a wholly-owned subsidiary of company b trustee e is the independent discretionary trustee of the trust established pursuant to the esop portion of plan x the trust page trustee e in its capacity as trustee of the trust purchased ares of roximately i percent of the outstanding common_stock of company b company b’s class a common voting_stock the shares constituting for se hc purchase_price and such purchase of shares being the original transaction’ a the trust borrowed from company b an amount equal to the purchase_price the loan’ pursuant to a term_loan and security_agreement dated company b borrowed a portion of the funds from an independent third-party lender you represent that the trust used the loan proceeds solely to purchase directly from shareholders of company b the shares primarily for the benefit of plan x participants and their beneficiaries the loan was secured_by a pledge of the shares subject_to release of the shares from such security as the loan was paid in accordance with the release provision in plan x and sec_54_4975-7 of the income_tax regulations the regulations and section 408b-3 of the department of labor regulations the dol regulations you also represent that the loan constitutes an exempt loan within the meaning of sec_4975 of the code sec_408 of erisa sec_54_4975-7 of the regulations and section 408b-3 of the dol regulations at the time the loan was entered into company a contemplated that plan x would continue at least until the loan was repaid over the amortization period and all shares in the suspense_account were allocated to the participants each month since the original transaction company a has contributed sufficient funds to plan x to enable it to make all payments on the loan on a timely basis approximately i years after the original transaction company b received an unsolicited inquiry from company c an unrelated publicly-traded corporation regarding the purchase of all of the issued and outstanding_stock of company b subsequently certain shareholders of company b including trustee e on behalf of plan x entered into negotiations with company c and company d a wholly-owned subsidiary of company c on or about be substantially_all of the shareholders of company b including trustee e entered into a stock purchase agreement the agreement with company c and company d under which company d will acquire all of the issued and outstanding_stock of company b for cash the purchase_price will be an amount sufficient for trustee e to repay the loan in full with and into company d will follow the purchase the stock purchase considered together with the subsequent merger as a single integrated transaction the transaction’ is intended to qualify for federal_income_tax purposes as a tax-free reorganization under the provisions of sec_368 of the code a merger of company b the value of the shares held by plan x for purposes of the proposed transaction subject_to certain adjustments specified in the agreement is expected to represent an increase of approximately wi percent over the purchase_price of the shares in nd an increase of approximately ij percent over the value of the shares as determined by the fiduciaries of plan x on the transaction is subject_to an escrow arrangement relating to certain post- closing indemnity obligations of the shareholders of company b page trustee e has agreed that at closing the trust will repay the loan in full following payment of the loan the remaining proceeds of the transaction with respect to the unallocated shares excess sale proceeds’ will be allocated to participants’ accounts under plan x the excess sale proceeds realized by the trust in the transaction will consist of both i the amounts to be held in escrow under an escrow agreement to which trustee e is a party which will be allocated later when the escrow terminates and ii amounts to be allocated to individual accounts under plan x effective as of the closing date of the transaction closing date in accordance with subsection e of plan x as amended amounts held in the escrow agreement when released from escrow if any will be allocated in the same manner to the accounts of the same individuals who are eligible to receive an allocation of the original allocation of excess sale proceeds at the closing date the esop portion of plan x will be terminated after the escrowed amounts are released from escrow and allocated to participants’ accounts the total amount in the escrow under the escrow agreement is the portion of the escrow funds attributable to the esop is dollar_figure escrow agreement provides in sec_3 that if no claim is made against the escrow fund by company d the esop’s share of the escrow funds will be distributed to the esop trustee on the fifth anniversary of the closing date the length of the escrow agreement was negotiated by company c and the selling shareholders one of which was trustee e in connection with its review of the terms of the sale trustee f obtained the advice of its independent financial advisor which issued an opinion to the effect that the transaction including the escrow agreement was fair to plan x and its participants the resulting dollar amount and the five-year term of the escrow agreement were based primarily on two large class action lawsuits that are pending against company a the results of which cannot be predicted the based on the foregoing you have requested the following rulings the use of the cash proceeds of the sale of the shares held by plan x to repay plan x’s indebtedness does not cause the loan to fail to satisfy the requirements for exemption under sec_4975 of the code any allocation of excess sale proceeds made to the accounts of the participants of plan x as a result of the transaction will not constitute annual_additions to participants’ accounts for purposes of sec_415 of the code when allocated to the participants’ accounts an esop is an arrangement designed to invest primarily in employer_securities an esop must be part of a stock_bonus_plan qualified under sec_401 of the code or a stock_bonus_plan and a money purchase plan qualified under sec_401 a leveraged_esop borrows funds which it uses to purchase employer_securities usually from the employer the esop_loan is generally guaranteed by the employer the acquired employer_securities are held in a suspense_account pending allocation to the accounts of plan participants in accordance with the rules of sec_54_4975-11 of the page regulations the esop generally uses employer contributions to the plan to repay the exempt loan under sec_4975 of the code an esop_loan generally is exempt from the prohibitions provided in sec_4975 of the code and the excise_taxes imposed by sec_4975 and b of the code only if the loan is primarily for the benefit of the participants and beneficiaries of the plan the primary benefit requirement sec_54_4975-7 of the regulations provides that all of the surrounding facts and circumstances will be considered in determining whether an esop_loan satisfies the primary benefit requirement among the relevant facts and circumstances are whether the transaction promotes employee ownership of employer stock whether contributions to the esop are recurring and substantial and the extent to which the method of repayment of the loan benefits the employees all aspects of the loan transaction including the method of repayment will be scrutinized to determine whether the primary benefit requirement is satisfied sec_54_4975-7 of the regulations indicates that the employer has the primary responsibility for the repayment of an exempt loan through contributions to the plan sec_54_4975-7 of the regulations provides for the repayment of the loan in the event of default however the exemption provided by sec_4975 of the code and described in the associated regulations will not fail to be met merely because the trustee sells the unallocated suspense_account shares and used the proceeds to repay the exempt loan if such transaction satisfies the primary benefit requirement based on all the surrounding facts and circumstances it is represented that since the original transaction company a has contributed as sufficient funds to enable plan x to enable it to make all payments on a timely basis a result of the unanticipated offer to purchase all of company a stock by company c company a stock held in the suspense_account was sold at a significant premium and the portion of the proceeds remaining after repayment of the loan will be allocated to the esop participants the esop will be terminated as soon as the escrow amounts are released from escrow and allocated to participants’ accounts upon consideration of all the surrounding facts and circumstances of this case in accordance with sec_54_4975-7 of the regulations we conclude with respect to your first ruling_request that the use of the cash proceeds of the sale of the shares held by plan x to repay plan x’s indebtedness does not cause the loan to fail to satisfy the requirements for exemption under sec_4975 of the code with respect to your second ruling_request sec_415 of the code provides that contributions and other additions under a defined_contribution_plan with respect to a participant for any taxable_year may not exceed the limits of subsection c sec_415 generally prohibits contributions and other additions under all defined contribution plans of an employer including an esop with respect to any participant for any limitation_year from exceeding the limitations in sec_415 sec_415 of the code provides that contributions and other additions with respect to a participant shall not when expressed as an annual_addition to the participant's account exceed the lesser_of a dollar_figure or b of the participant's_compensation sec_415 defines annual_addition as the sum for any year of employer contributions the employee contributions and forfeitures page sec_415 of the code provides that if no more than one-third of the employer contributions to an employee_stock_ownership_plan are allocated to highly compensated employees then certain forfeitures and certain contributions used to repay interest on the exempt loan are not subject_to the limitations imposed by sec_415 sec_1 g of the regulations sets forth special rules for employee_stock_ownership_plans sec_1 g provides in part that for purposes of applying the limitations of sec_415 of the code and sec_1 g of the regulations the amount of employer contributions which is considered an annual_addition for the limitation_year is calculated with respect to employer contributions of both principal and interest used to repay the exempt loan for that limitation_year sec_1 b i of the regulations provides that the commissioner may in appropriate cases considering all of the facts and circumstances treat certain allocations to participant accounts as giving rise to annual_additions sec_54_4975-7 of the regulations provides in part that an exempt loan must provide for the release from encumbrance under this subdivision i of plan assets used as collateral for the loan for each plan_year during the duration of the loan the number of securities released must equal the number of encumbered securities held immediately before release for the current plan_year multiplied by a fraction the numerator of the fraction is the amount of the principal and interest_paid for the year the denominator of the fraction is the sum of the numerator plus the principal and interest to be paid for all future years the proceeds used to repay the loan result from the sale of the shares to company d in a bona_fide transaction and do not result from employer contributions employee contributions or forfeitures the excess sale proceeds reflects the extent of the appreciation in the value of the shares held in the suspense_account as previously noted sec_1 b i of the regulations provides that the commissioner may in appropriate cases considering all of the facts and circumstances treat certain allocations to participant accounts as giving rise to annual_additions in the present case the proceeds result from the repayment of the loan following the sale of the unallocated plan assets to company d in this transaction we have determined that no employer contributions were used to repay the loan accordingly in our view the facts and circumstances of the present case do not support the recharacterization of the esop suspense_account allocations as annual_additions under the authority of sec_1 b i accordingly we conclude with respect to your second ruling_request that any allocation of excess sale proceeds made to the accounts of the participants of plan x as a result of the transaction will not constitute annual_additions to participants’ accounts for purposes of sec_415 of the code when allocated to the participants’ accounts in reaching these conclusions we have assumed that i the loan extended by company a to plan x is an exempt loan under sec_4975 of the code at all relevant times ii plan x qualifies under sec_401of the code and its esop portion and constitute an esop under sec_4975 at all relevant times and iii page the allocations as described in your second ruling_request will not violate sec_401 no opinion is expressed as to the federal tax consequences of the transaction described above under any other provisions of the code also we express no opinion as to whether the subject transactions comply with title of employee retirement income security act erisa because title of erisa is within the jurisdiction of the department of labor 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 by others as precedent a copy of this letter is being sent to your authorized representative in accordance with a power_of_attorney on file in this office private_letter_ruling please contact id at _ not a toll-free number if you have any questions concerning this sincerely yours v bee bras frances v sloan manager employee_plans technical group cc