internal_revenue_service number release date index number -------------------------- ----------------------------- ------------------ ------------------------------------ in re ---------------------------------------------------- ------------------------------------------------------------ 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 b04 plr-126361-14 date december legend grantor_trust daughter granddaughter granddaughter’s trust ------------------------------------------------------------------------------- --------------------------- ---------------------------------------------------------- -------------------------- ------------------------- ------------------------- ------------------------------------------------- ------------------- ------------------------------------------------------------------------------- ------------------------------------------------------------------------------- ------------------------------------------------------------------------------- foundation state state statutes court year date date date date date date date a y dear ------------ --------------------------- ------ -------------------------- --------------------------- -------------------------- --------------------- ------------------- ------------------ ----------------------------------- ------ this letter responds to your letter dated date and subsequent correspondence submitted by your authorized representative requesting income gift and generation-skipping_transfer gst tax rulings with respect to the proposed conversion of an income-only trust to a total return unitrust pursuant to state statutes plr-126361-14 grantor established an irrevocable_trust trust on date a date prior to date grantor died on date a date prior to date the trustees of trust represent that there have been no additions actual or constructive to trust or any trust created under trust after date paragraph e of trust provides that on date a the trustees shall divide trust’s assets into equal shares for each of grantor’s grandchildren who are living on date a and for each of grantor’s grandchildren who die before date a leaving issue who are living on date a any share set_aside under subparagraph e will continue to be held in trust date a occurred on date on date the trustees established separate trusts for each grandchild including a_trust for granddaughter granddaughter’s trust this private_letter_ruling pertains to granddaughter’s trust paragraph f ii provides that after grantor’s death the trustees may accumulate the trust income of a grandchild’s trust or may at any time and from time to time pay over all or any part of the current and accumulated income to the grandchild for whom the trust was established during his or her lifetime paragraph f iii provides that upon the death of the grandchild the grandchild’s trust estate is to be distributed to that grandchild’s issue pursuant to that grandchild’s testamentary limited_power_of_appointment in default of this exercise the trust estate is to be distributed per stirpes to the issue of that grandchild then living if any and if none per stirpes to the then living issue of daughter if any and if none to foundation on date state enacted state statutes allowing a trustee other than an interested trustee or where two or more persons are acting as trustees a majority of the trustees who are not interested trustees in either case hereafter trustee in the trustee’s sole discretion and without court approval to convert an income trust to a total return unitrust reconvert a total return unitrust to an income trust or change the percentage used to calculate the unitrust_amount or the method used to determine the fair_market_value of the trust if all of the following apply a the trustee adopts a written policy for the trust providing i in the case of a_trust being administered as an income trust that future distributions from the trust will be unitrust amounts rather than net_income as determined pursuant to the state uniform principal and income act ii in the case of a_trust being administered as a total return unitrust that future distributions from the trust will be net_income rather than unitrust amounts or iii that the percentage used to calculate the unitrust_amount nor the method used to determine the fair_market_value of the trust will be changed as stated in the policy the percentage to be used by the trustee in determining the unitrust_amount must be a reasonable current return from the trust but not less than percent nor more than percent taking into account the intentions of the settlor of the trust as expressed in the terms of the trust the needs of plr-126361-14 the beneficiaries general economic conditions projected current earnings and appreciation for the trust assets and projected inflation and its impact on the trust on date the trustees of granddaughter’s trust petitioned court pursuant to the state statutes requesting that court order the conversion of granddaughter’s trust to a total return unitrust on date court issued an order effective as of date in year converting granddaughter’s trust to a total return unitrust and approving the modification of the terms of granddaughter’s trust to provide that the annual unitrust_amount equals y percent of the fair_market_value of the assets of granddaughter’s trust the order made no other changes to the terms of granddaughter’s trust and is contingent upon receipt of a favorable private_letter_ruling the trustees have requested the following rulings the conversion of granddaughter’s trust to a total return unitrust pursuant to state statutes effective for year and future years will not cause granddaughter’s trust to lose its status as exempt from the gst tax the conversion of granddaughter’s trust to a total return unitrust pursuant to state statutes effective for year and future years will not cause any beneficiary of granddaughter’s trust to be deemed to have made a gift_for gift_tax purposes the conversion of granddaughter’s trust to a total return unitrust pursuant to state statutes effective for year and future years will not cause granddaughter’s trust or any beneficiary of granddaughter’s trust to realize capital_gains from an exchange of a_trust interest for income_tax purposes law and analysis - ruling sec_2601 of the internal_revenue_code imposes a tax on every gst sec_2611 defines a gst as a taxable_distribution a taxable_termination and a direct_skip under b a of the tax_reform_act_of_1986 and sec_26_2601-1 of the generation-skipping_transfer_tax regulations the gst tax provisions do not apply to any gst under a_trust that was irrevocable on date however this exemption does not apply if additions actual or constructive are made to the trust after date sec_26_2601-1 provides that any trust in existence on date will be considered an irrevocable_trust except as provided in sec_26_2601-1 or c which relate to property includible in a grantor’s gross_estate under sec_2038 and sec_2042 plr-126361-14 sec_26_2601-1 provides rules for determining when a modification judicial construction settlement agreement or trustee action with respect to a_trust that is exempt from the gst tax under sec_26_2601-1 or hereinafter referred to as an exempt trust will not cause the trust to lose its exempt status in general unless specifically provided otherwise the rules contained in sec_26_2601-1 are applicable only for purposes of determining whether an exempt trust retains its exempt status for gst tax purposes unless specifically noted the rules do not apply in determining for example whether the transaction results in a gift subject_to gift_tax or may cause the trust to be included in the gross_estate of a beneficiary or may result in the realization of gain for purposes of sec_1001 sec_26_2601-1 provides that a modification of the governing instrument of an exempt trust including a trustee distribution settlement or construction that does not satisfy sec_26_2601-1 b or c by judicial reformation or nonjudicial reformation that is valid under applicable state law will not cause an exempt trust to be subject_to the provisions of chapter if the modification does not shift a beneficial_interest in the trust to any beneficiary who occupies a lower generation as defined in sec_2651 than the person or persons who held the beneficial_interest prior to the modification and the modification does not extend the time for vesting of any beneficial_interest in the trust beyond the period provided for in the original trust sec_26_2601-1 provides that for purposes of this section a modification of an exempt trust will result in a shift in beneficial_interest to a lower generation beneficiary if the modification can result in either an increase in the amount of a gst or the creation of a new gst to determine whether a modification of an irrevocable_trust will shift a beneficial_interest in a_trust to a beneficiary who occupies a lower generation the effect of the instrument on the date of the modification is measured against the effect of the instrument in existence immediately before the modification if the effect of the modification cannot be immediately determined it is deemed to shift a beneficial_interest in the trust to a beneficiary who occupies a lower generation as defined in sec_2651 than the person or persons who held the beneficial_interest prior to the modification a modification that is administrative in nature that only indirectly increases the amount transferred for example by lowering administrative costs or income taxes will not be considered to shift a beneficial_interest in the trust in addition administration of a_trust in conformance with applicable local law that defines the term income as a unitrust_amount or permits a right to income to be satisfied by such an amount or that permits the trustee to adjust between principal and income to fulfill the trustee’s duty_of impartiality between income and principal beneficiaries will not be considered to shift a beneficial_interest in the trust if applicable local law provides for a reasonable apportionment between the income and remainder beneficiaries of the total return of the trust and meets the requirements of sec_1_643_b_-1 of the income_tax regulations plr-126361-14 sec_26_2601-1 example considers a situation where in grantor a resident of state x established an irrevocable_trust for the benefit of grantor’s child a and a’s issue the trust provides that trust income is payable to a for life and upon a’s death the remainder is to pass to a’s issue per stirpes in state x amends its income and principal statute to define income as a unitrust_amount of percent of the fair_market_value of the trust assets valued annually for a_trust established prior to the statute provides that the new definition of income will apply only if all the beneficiaries who have an interest in the trust consent to the change within two years after the effective date of the statute the statute provides specific procedures to establish the consent of the beneficiaries a and a’s issue consent to the change in the definition of income within the time period and in accordance with the procedures prescribed by the state statute the administration of the trust in accordance with the state statute defining income to be a percent unitrust_amount will not be considered to shift any beneficial_interest in the trust therefore the trust will not be subject_to the provisions of chapter of the internal_revenue_code further under these facts no trust_beneficiary will be treated as having made a gift_for federal gift_tax purposes and neither the trust nor any trust_beneficiary will be treated as having made a taxable_exchange for federal_income_tax purposes similarly the conclusions in this example would be the same if the beneficiaries’ consent was not required or if the change in administration of the trust occurred because the situs of the trust was changed to state x from a state whose statute does not define income as a unitrust_amount or if the situs was changed to such a state from state x the trustees represent that trust was irrevocable on date and that there have been no additions constructive or otherwise to trust or any trust created under trust including granddaughter’s trust after date consequently granddaughter’s trust is currently exempt from gst tax the facts in this case are similar to those set forth in example of sec_26 b i e which provides that the conversion of an income_interest to a unitrust_interest pursuant to state statute will not be considered to shift a beneficial_interest in a_trust for gst purposes the conversion meets the requirements of the state statutes and is pursuant to court’s order accordingly based upon the facts submitted and the representations made we conclude that the conversion granddaughter’s trust to a total return unitrust pursuant to state statutes effective for year and future years will not cause granddaughter’s trust to lose its status as exempt from the gst tax ruling sec_2501 imposes a tax for each calendar_year on the transfer of property by gift during such calendar_year by an individual plr-126361-14 sec_2511 provides that the tax imposed by sec_2501 will apply whether the transfer is in trust or otherwise whether the gift is direct or indirect and whether the property is real or personal tangible or intangible in this case the conversion of granddaughter’s trust to a total return unitrust pursuant to state statutes effective for year and future years does not increase decrease or otherwise change any beneficiary’s beneficial_interest in granddaughter’s trust accordingly based upon the facts submitted and the representations made we conclude that the conversion of granddaughter’s trust to a total return unitrust pursuant to state statutes effective for year and future years will not cause any beneficiary of granddaughter’s trust to be deemed to have made a gift_for gift_tax purposes ruling sec_61 provides that except as provided in subtitle a gross_income means all income from whatever source derived including income from dealings in property sec_1_61-1 provides that gross_income means all income from whatever source derived unless excluded by law gross_income includes income realized in any form whether in money property or services sec_1001 provides that the gain from the sale_or_other_disposition of property shall be the excess of the amount_realized therefrom over the adjusted_basis provided in sec_1011 for determining gain and the loss shall be the excess of adjusted_basis provided in sec_1011 for determining loss over the amount_realized sec_1_1001-1 provides that except as otherwise provided in subtitle a the gain_or_loss realized from the conversion of property into cash or from the exchange of property differing materially in_kind or in extent is treated as income or as loss sustained the amount_realized from a sale_or_other_disposition of property is the sum of any money received plus the fair_market_value of any property other than money received sec_643 provides in relevant part that for purposes of this subpart and subparts b c and d the term income when not preceded by the words taxable distributable net undistributed net or gross means the amount of income of the estate_or_trust for the taxable_year determined under the terms of the governing instrument and applicable local law sec_1_643_b_-1 provides in relevant part that for purposes of subparts a through d part i subchapter_j chapter income when not preceded by the words taxable distributable net undistributed net or gross means the amount of income of the estate_or_trust for the taxable_year determined under the terms of the governing instrument and applicable local law trust provisions that depart plr-126361-14 fundamentally from traditional principles of income and principal will generally not be recognized for example if a_trust instrument directs that all trust income shall be paid to the income_beneficiary but defines ordinary dividends and interest as principal the trust will not be considered one that under its governing instrument is required to distribute all its income currently for purposes of sec_642 relating to the personal_exemption and sec_651 relating to simple trusts thus items such as dividends interest and rents are generally allocated to income and proceeds from the sale_or_exchange of trust assets are generally allocated to principal however an allocation of amounts between income and principal pursuant to applicable local law will be respected if local law provides for a reasonable apportionment between the income and remainder beneficiaries of the total return of the trust for the year including ordinary and tax-exempt_income capital_gains and appreciation for example a state statute providing that income is a unitrust_amount of no less than percent and no more than percent of the fair_market_value of the trust assets whether determined annually or averaged on a multiple year basis is a reasonable apportionment of the total return of the trust sec_1_643_b_-1 further provides in relevant part that allocations pursuant to methods prescribed by such state statutes for apportioning the total return of a_trust between income and principal will be respected regardless of whether the trust provides that the income must be distributed to one or more beneficiaries or may be accumulated in whole or in part and regardless of which alternate permitted method is actually used provided the trust complies with all requirements of the state statute for switching methods a switch between methods of determining trust income authorized by state statute will not constitute a recognition event for purposes of sec_1001 and will not result in a taxable gift from the trust’s grantor or any of the trust’s beneficiaries based on the facts submitted and representations made we conclude that the conversion of granddaughter’s trust to a total return unitrust pursuant to state statutes as described above will not constitute a recognition event for purposes of sec_1001 and no gain_or_loss will be recognized to granddaughter’s trust or to any beneficiary of granddaughter’s trust as a result of the conversion effective for year and future years the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination plr-126361-14 this ruling is directed only to the taxpayer s requesting it sec_6110 provides that it may not be used or cited as precedent sincerely lorraine e gardner lorraine e gardner senior counsel branch passthroughs special industries enclosures copy for sec_6110 purposes cc


id office uilc cca_2009012708491842 ------------ number release date from --------------------- sent tuesday date am to ----------------------- cc ------------------------------------------------------------------------------------------------------------------------ subject re action response due february tei liaison meetings ---------------------------- ------------------- ------ attached are some slides probably more than you need if you'd like we could try to brainstorm what might be likely q's tei folk might raise perhaps at the same time that is set up for our call re dc transfer_pricing conference let me know regards ---------- attachment current developments in transfer_pricing transfer_pricing goal - arm’s length compensation_for offshore transfer of intangible value however effected fully developed intangibles by license sale embedded in services by incorp reorg sec_1_482-4 thru -6 sec_1_482-2 -9t sec_367 sec_1_367_d_-1t goal - arm’s length compensation_for offshore transfer of intangible value however effected intangibles in process contract r d jv arrangements r d cost sharing sec_1_482-2 -9t sec_1_482-4 thru -6 -9t sec_1_482-7t cost sharing background income_method and other specified methods commensurate with income cwi comparability synergy aggregation nonconforming arrangements transition_rules cost sharing scenarios crown jewel product platform intangibles us operations r d us operating_intangibles - mfg process - mktg eg usgwgcv foreign operations early stage - cash_box - no intangibles mature stage - cash_box - foreign operating_intangibles mfg process mktg eg fgwgcv income_method determines the buy-in or pct as net present_value of expected income ceded to the cost sharing licensee projections for window period - eg r d costs sales cogs other operating_expenses terminal growth rate beyond the projection window risky discount rates including betas etc returns to routine functions arm’s length range - generated based on variable market-based input parameters pre- post-tax adjustments conversion among different payment forms - fixed lump sum royalty contingent on sales or profits etc other specified methods residual_profit_split method acquisition_price_method market_capitalization_method cwi periodic adjustments cwi triggered if actual results diverge from projected results by a factor of reduced from a factor of under the prop regs cwi periodic adjustments effectively revalue the buy-in as of the time of the irs examination as an antidote to information asymmetry to reconcile with the arm's length standard a taxpayer may prove out of cwi periodic adjustments - show to the satisfaction of the commissioner that outsized returns were the result of factors beyond the taxpayer's control and not reasonably expected at the time of the transfer - apa sec_482 generally sets prices by reference to comparable uncontrolled transactions cuts csas typically cover all the crown jewels for the long term comparability thus tend not to be any cuts synergy aggregation patent pool paradox controversial cases tend to involve interrelated nonroutine contributions such as - crown jewel platform intangible plus - expert r d team plus - marketing manufacturing process and other operating contributions - income_method is a full value method carve-out for goodwill going concern or so-called business opportunity - foreign startup cannot have much goodwill - functional whole must be valued in the aggregate nonconforming arrangements nonconforming arrangements -including partnerships - not subject_to sec_1_482-7t but reglets under sec_1_482-4t transfers of intangibles and sec_1_482-9t services provide that those provisions require consideration of the principles methods comparability and such arrangements are subjected to a similar analysis adjusted appropriately reliability considerations set forth in sec_1_482-7t transition_rules they conform with the requirements by generally old csas will be deemed to meet the requirements of the temp regs provided for this purpose certain temp_reg requirements do not apply to old csas special rule for cwi temp_reg cwi rules do not apply to a pct under an old csa unless - the pct occurs after the date of a material_change in the scope of the csa from its scope on services simplified cost method other specified methods for risky services contingent payment arrangements imputation of contractual terms based upon economic_substance sunset in date services cost method specified covered services rev_proc - rev_proc low-margin covered services shared services arrangements business judgment excluded services total services costs stock-based comp benefit competent_authority transitional year - notice_2007_5 one-year grandfather of b subject_to business judgment rule services cost method is elective scm documentation need not be generated contemporaneously shared services arrangements possible for non-scm services under robust generally applicable rules taxpayer’s have a couple years under belt working with temp regs back office scm - experience ways to improve user-friendliness taxpayer’s experience specified covered services rp shared services arrangements benefit rules timing - sunset in date


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc corp -plr date date legend company district selling shareholders date date date date state c xxx ppp project b ddd percent purchaser purchaser purchaser ccc plr hhh dollar_figurefff dollar_figureggg dollar_figureiii case j dear this letter responds to the date request for rulings submitted by your representative on behalf of company and the selling shareholders listed on the attached schedule a with respect to the transfer of certain water rights you have requested a ruling that for federal_income_tax purposes company's participation in the procedures by which the transfer of the water is accomplished in conjunction with the sales by the selling shareholders of their rights to the water will not constitute a sale_or_other_disposition of property by company nor a distribution_of_property by the company to the selling shareholders with respect to their stock additionally you have requested rulings on whether the water rights will constitute capital assets in the hands of the selling shareholders and whether certain_sales of these water rights will constitute sales or exchanges of capital assets the information submitted in the request and in a later submission is summarized below facts company was organized on date as a ditch and reservoir company and is subject_to state c's statutory requirements for mutual ditch companies company uses the cash_method_of_accounting and its fiscal_year ends on date approximately xxx of the company's shareholders are selling shareholders the other shareholders are not transferring any of their water rights and are not involved in the transactions described herein state c mutual ditch companies generally were created when a group of farmers banded together and formed the cooperative company for the express purpose of storing and conducting water for irrigation purposes company's primary function has been to deliver to and store the water of its shareholders the company's assets are limited to those necessary to deliver and store the water these assets include weirs canals dams water control devices and a storage reservoir the shareholders used the bylaws and shares to quantify each of their beneficial use rights in the water transported by the company the company owns no land on which to make use of the water it transports and stores although water is derived from two sources only the water from project b the project b water as described below is the subject of this ruling_request plr on date district a quasi-governmental corporation subject_to state c's statutory requirements for such entities entered into an agreement the repayment contract with the united_states bureau of reclamation the bureau for the development of project b project b emanates from the reclamation act of as amended the repayment contract grants district the right to allocate the project b water the district does so through allotment contracts that require the water users to pay their proportionate share of the district's costs to operate and maintain project b and to repay the federal government for its construction costs the operating reimbursements costs on date district entered into an allotment contract with company which provided that company would be entitled to receive an allocation of water for the beneficial use of its shareholders the project b water was then allocated pro_rata among the shareholders based on their shares in addition to paying on a pro_rata basis company's annual operating_expenses based on their respective allocation of project b water each shareholder pays his proportionate share of the operating reimbursements costs under the allotment contract conditions in state c are such that water is in great demand as such the selling shareholders intend to relinquish their beneficial_ownership of ddd percent of the project b water through three sales agreements the master sales agreements with purchaser purchaser and purchaser the master sales agreements with purchaser and purchaser provide they will acquire an aggregate of ccc units of project b water at dollar_figurefff per unit and dollar_figureggg per unit respectively the master sales agreement with purchaser provides for an allocation of hhh units of project b water at dollar_figureiii per unit in order to satisfy certain transfer requirements of the district the master sales agreement with purchaser includes an option for purchaser to take all or some of the units through a twenty-five year interruptible supply contract the interruptible supply contract under the interruptible supply contract the price for the units is the same as in the master sales agreement and it includes an option to purchase the units for a nominal fee by its terms the interruptible supply contract will remove beneficial_ownership of the units from the selling shareholders you have indicated that purchaser has elected to take all the units pursuant to the interruptible supply contract the selling shareholders will be paid in full for all units upon the closing of all three transactions including the transaction subject_to the interruptible supply contract to facilitate the negotiation of the master sales agreements and the interruptible supply contract the selling shareholders created ppp to act as their agent the only members of ppp are the selling shareholders the selling shareholders are not selling their shares in company but their shares will bear a legend to reflect that they are no longer entitled to their full allocation of the project b water plr you have indicated that company is not materially participating in the transactions described above company as a party to the allotment contract however will agree to the amendment of the allotment contract to reflect the reduced allotment of project b water the master sales agreements and the interruptible supply contract are conditioned on our rulings herein however the selling shareholders due to the crisis situation in state c have already transferred some of the project b water to the purchasers the emergency sales the consideration received by the selling shareholders from these emergency sales is being held in escrow pending our rulings herein according to the courts of state c mutual ditch companies are unique entities which are formed not under state c' s general corporation statutes but under special legislation reserved for ditch and reservoir companies in analyzing the relationship between the shareholders and mutual ditch companies in regards to water rights the supreme court of state c in case j has stated that a mutual ditch company is merely engaged in the business of transporting and storing the water for its shareholders benefit and the law of state c uniformly holds that the actual ownership of the water rights is in the shareholder the supreme court's analysis noted that a longstanding tenet of state c law is that ownership of a water right can be acquired only by the actual beneficial use of the water mere diversion is not sufficient to meet the requirements of state c's constitution finally the supreme court noted that it is well established that the water rights owned by the shareholders are property rights accordingly based on this supreme court's decision and other decisions by this court it is clear that under state c law company is not the beneficial_owner of any of the water it transports for the benefit of its shareholders including the project b water representations company has represented that it is not a party to the master sales agreements or the interruptible supply contract and shall not receive any proceeds or other consideration arising or resulting from the transactions described herein based on the information and representations submitted we rule as follows the selling shareholders for federal_income_tax purposes are the beneficial owners of the project b water rights and the sale of such rights including the short-term emergency sales described above will not be deemed to be a sale_or_other_disposition of property by the company or a distribution_of_property by the company to the selling shareholders with respect to their stock accordingly the company will not realize gain_or_loss as a result of the selling shareholders' transactions sec_1001 sec_301 sec_311 plr the beneficial rights in the project b water constitutes a capital_asset in the hands of the selling shareholders sec_1221 the transfer of the beneficial rights in the project b water under the master sales agreements and the interruptible supply contract constitute sales of capital assets by the selling shareholders sec_1222 caveat no opinion is expressed about the tax treatment of the transactions under other provisions of the code and regulations or about the tax treatment of any conditions existing at the time of or effects resulting from the transactions that are not specifically covered by the above ruling for example no opinion is expressed about whether the short-term emergency sales constitute sales or exchanges of capital assets nor are we opining on the selling shareholders' bases in these water rights the rulings contained in this letter are based upon information and a representation submitted by the company and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination procedural statements this ruling is directed only to the taxpayers requesting it sec_6110 of the code provides that it may not be used or cited as precedent a copy of this letter must be attached to any income_tax return to which it is relevant in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your taxpayer_representative sincerely steven hankin senior technical reviewer branch office of associate chief_counsel corporate


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc ita 1-plr-111780-00 date date legend estate decedent foreign_country a foreign_country b original ancillary administrator current ancillary administrator domiciliary administrator court a county a date date date date date date year dollar_figurea dollar_figureb dollar_figurec dollar_figured x dear this letter responds to estate’s request for a private_letter_ruling dated date specifically estate has requested a ruling that interest on bank accounts and plr-111780-00 dividends on stock held by decedent should be included in the gross_income of estate in the taxable years in which actually received conclusion interest on bank accounts and dividends on stock held by decedent should be included in the gross_income of estate in the taxable years in which actually received facts decedent was a citizen of foreign_country a and died intestate and without heirs on date while a resident of city a foreign_country b decedent was born in foreign_country a and to the best of current ancillary administrator’s knowledge was never a resident_of_the_united_states under the law of foreign_country b the property of an individual who dies intestate and without heirs passes after a certain number of years to the x in which the decedent died a resident as representative of the x of city a foreign_country b domiciliary administrator was appointed to marshal the assets of decedent in the course of marshaling decedent’s assets the domiciliary administrator found that decedent had owned common_stock in a number of united_states publicly traded corporations he was unable however to locate the actual stock certificates the domiciliary administrator prepared and filed form 706na united_states estate_tax_return - estate of a nonresident_not_a_citizen_of_the_united_states on or about date the gross_estate as shown on form 706na was dollar_figurea consisting of united_states publicly traded common stocks valued at dollar_figureb two united_states bank accounts valued at dollar_figurec and non-united states assets valued at dollar_figured generally assets located in the united_states including bank accounts and stock that are unclaimed after a certain period of time are held by the abandoned estate also requested rulings regarding whether for the taxable years in which estate must include the interest and dividends in gross_income estate is required to file fiduciary income_tax returns the tax_rate imposed on the interest and dividends is the rate imposed under the applicable united_states foreign_country a tax_treaty and current ancillary administrator is required to withhold income_tax on the distribution of estate’s remaining income to the domiciliary administrator these rulings however are dependent on a determination of whether estate is a foreign_estate in a letter of date the service cited section dollar_figure of revproc_99_7 1999_1_irb_226 and explained that rulings ordinarily will not be issued with respect to whether an estate_or_trust is a foreign_estate_or_trust for federal_income_tax purposes under sec_7701 of the internal_revenue_code accordingly we are unable to rule on these three issues plr-111780-00 property division of the state in which the property is located until claimed by the owner or a qualified_representative of the owner the domiciliary administrator in country b was not qualified to legally receive decedent’s united_states_assets thus the domiciliary administrator engaged the services of original ancillary administrator in the united_states to assist in locating those assets original ancillary administrator was appointed on date by court a county a division he was charged with gathering decedent’s assets in the united_states and transferring them to the domiciliary administrator in country b in carrying out that charge original ancillary administrator wrote to each state treasurer to locate any abandoned property in decedent’s name from various states he recovered unpaid interest on decedent’s bank accounts located in the united_states and dividends on decedent’s united_states stock in most instances original ancillary administrator was required to post lost security indemnification bonds to recover the interest and dividends from the abandoned property divisions original ancillary administrator served in his capacity as the united_states administrator until his death on date current ancillary administrator was appointed on date by court a county a division to complete the administration of estate in the united_states the estate uses the cash_receipts_and_disbursements_method of accounting and files its returns on the basis of a calendar_year law and analysis sec_61 provides in part that gross_income means all income from whatever source derived including interest and dividends sec_451 provides that the amount of any item_of_gross_income is included in gross_income for the taxable_year in which received by the taxpayer unless under the method_of_accounting used in computing taxable_income the amount is properly accounted for in a different period sec_1_451-1 of the income_tax regulations provides that gains profit and income are to be included in gross_income for the taxable_year in which actually or constructively received by the taxpayer unless includible for a different year in accordance with the taxpayer’s method_of_accounting under the cash_receipts_and_disbursements_method an amount is includible in gross_income when actually or constructively received sec_1_451-2 provides that income although not actually reduced to a taxpayer’s possession is constructively received by him in the taxable_year during which it is credited to his account set apart for him or otherwise made available so that he may draw upon it at any time or so that he could have drawn upon it during the taxable_year if notice of intention to withdraw had been given however income is not constructively received if the taxpayer’s control of its receipt is subject_to substantial plr-111780-00 limitations or restrictions estate uses the cash_receipts_and_disbursements_method of accounting and thus must include amounts in gross_income when actually or constructively received estate did not actually receive interest and dividends until year and years thereafter thus the issue is whether estate constructively received any interest or dividends prior to actual receipt the doctrine_of constructive receipt treats as taxable_income amounts that are unqualifiedly subject_to the demand of the taxpayer whether or not the income has actually been received in cash 169_f2d_483 1st cir in ross the court stated the doctrine_of constructive receipt was no doubt conceived by the treasury in order to prevent a taxpayer from choosing the year in which to return income merely by choosing the year in which to reduce it to possession thereby the treasury may subject income to taxation when the only thing preventing its reduction to possession is the volition of the taxpayer ross f 2d pincite thus the basis of the constructive_receipt_doctrine essentially is unfettered control by the taxpayer over the date of actual receipt 47_tc_428 acq 1967_2_cb_2 in the instant case the interest and dividends earned on decedent’s assets after his death were set apart and made available to decedent’s qualified_representative however a qualified_representative was not appointed to estate until date when original ancillary administrator was appointed by court a county a division there is no indication that there was an intentional or unreasonable delay in appointing original ancillary administrator thus there could be no constructive receipt of the interest and dividends prior to year further estate’s control_over the interest and dividends was subject_to substantial limitations and restrictions once original ancillary administrator was appointed he was charged with recovering decedent’s united_states_assets from the various states he wrote to every state treasurer in the states and asked if they had any abandoned property in decedent’s name in most instances he was required to post lost security indemnification bonds to recover the assets there is no indication that there was an intentional or unreasonable delay by original ancillary administrator although the posting of a bond alone may be a ministerial_act in some cases see eg 612_f2d_1276 10th cir the facts of the instant case as a whole indicate that there were substantial restrictions on estate’s control_over the interest and dividends plr-111780-00 in recovering the interest and dividends under these particular facts and circumstances estate did not have unfettered control_over the date of actual receipt of the interest and dividends see 207_f2d_618 3d cir eminent_domain proceeds were not constructively received at the time of the taking because taxpayer was required to show clear title to the land and obtain a court order before being entitled to the proceeds estate of sutton v commissioner 5_tcm_213 dividends set_aside for decedent’s estate were not constructively received by estate until administrator could demonstrate right to draw upon dividends thus interest on bank accounts and dividends on stock held by decedent should not be included in the gross_income of estate until actually received except as expressly provided herein no opinion is expressed or implied concerning the estate_tax or income_tax consequences of any aspect of any item discussed or referenced in this letter this ruling 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 a copy of this letter must be attached to any income_tax return to which it is relevant sincerely douglas a fahey assistant to the chief cc ita office of associate chief_counsel income_tax accounting


office_of_chief_counsel department of the treasury internal_revenue_service washington d c date number release date cc ita postf-150119-01 uilc memorandum for from ---------------------------------------------------- ----------------- william a jackson chief branch income_tax and accounting supplemental issues related to tam-115287-01 subject this chief_counsel service advice responds to your request for additional guidance regarding issues raised by the taxpayer related to our previous technical_advice_memorandum tam-115287-01 tam ---------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------- chief_counsel service advice is not binding on examination or appeals and is not a final case determination this document is not to be used or cited as precedent chief_counsel_advice is open to public inspection pursuant to the provisions of sec_6110 the provisions of sec_6110 require the service to remove taxpayer identifying information and provide the taxpayer with notice of intention to disclose before it is made available for public inspection sec_6110 and i sec_6110 also authorizes the service to delete information from chief_counsel_advice that is protected from disclosure under u s c sec_552 b and c before the document is provided to the taxpayer with notice of intention to disclose only the national_office function issuing the chief_counsel_advice is authorized to make such deletions and to make the redacted document available for public inspection accordingly the examination appeals or counsel recipient of this document may not provide a copy of this unredacted document disclosure statement to the taxpayer or their representative the recipient of this document may share this unredacted document only with those persons whose official tax_administration duties with respect to the case and the issues discussed in the document require inspection or disclosure of the chief_counsel_advice legend taxpayer district_court patent holder unit year year year year year year year amount dollar_figure amount dollar_figure amount dollar_figure amount dollar_figure amount dollar_figure amount dollar_figure amount dollar_figure amount dollar_figure month issue whether taxpayer is eligible for the benefits of sec_1341 for the payment of damages in a patent infringement lawsuit conclusion taxpayer is not eligible for the benefits of sec_1341 for the payment of damages in a patent infringement lawsuit facts from year to year taxpayer produced and sold over ------------------ ----------- ---- -- ----- ------------------------------------------------------------------------------------------------- amounting to sales in excess of amount dollar_figure in year patent holder filed a patent infringement lawsuit in district_court in its lawsuit against taxpayer patent holder alleged that taxpayer’s manufacture and sale of the units infringed certain patents of patent holder and therefore violated u s c sec_271 under u s c whoever without authority makes uses offers to sell sells or imports any patented invention infringes the patent under u s c damages for patent infringement are an amount adequate to compensate for the infringement but in no event less than a reasonable royalty for the use made of the invention by the infringer the district_court determined that taxpayer did not infringe upon patent holder’s patents on appeal the district court’s ruling was reversed ultimately taxpayer was ordered to pay patent holder the sum of amount dollar_figure constituting damages and pre-judgment interest in the respective amounts of amount dollar_figure and amount dollar_figure ------------------------------------------------------------------------------ in the fiscal_year ending month year fye year taxpayer paid the amount awarded to patent holder taxpayer claims that the damages paid to patent holder are based upon a reasonable royalty for fye year taxpayer allocated the damages on an annual basis to tax years year through year and computed its income_tax_liability by applying sec_1341 for the tax years year through year the years of the infringement for which the rate applicable for fye year was different from the rates applicable for those years in applying sec_1341 taxpayer determined its tax_liability for fye year to be amount dollar_figure without the benefit of sec_1341 taxpayer’s liability for fye year would have been amount dollar_figure in the facts section of taxpayer’s summary of position concerning applicability of sec_1341 to patent infringement costs taxpayer’s summary taxpayer states as follows the -------------------- assigned by the court to assist in computing the infringement damages required a portion of profits earned by taxpayer to be disgorged to patent holder further on in the law and analysis section of taxpayer’s summary taxpayer disputes the tam’s description of the patent infringement damages as analogous to a royalty paid_by taxpayer to patent holder however this statement in the tam comes directly from the joint statement of facts included in the original request for technical_advice agreed to by both taxpayer and the field this joint statement of facts clearly states that taxpayer claims that the damages paid to patent holder were based upon a reasonable royalty while the tam was being considered in the national_office taxpayer never provided any third-party substantiation or court files to support the factual premise taxpayer now is asserting in taxpayer’s summary which is that the damages paid were a disgorgement of profits earned by taxpayer we are not aware of any such information being provided by taxpayer to date that would support this new assertion thus based on the information provided to the national_office and agreed to by both taxpayer and the field we stand by the facts statement in the tam that the patent infringement damages paid_by taxpayer are based upon a reasonable royalty see also the discussion infra on sec_263a law sec_1341 of the code provides that if an item was included in gross_income for a prior taxable_year or years because it appeared that the taxpayer had an unrestricted right to such item a deduction is allowable for the taxable_year because it was established after the close of such prior taxable_year or years that the taxpayer did not have an unrestricted right to such item or to a portion of such item and the amount of such deduction exceeds dollar_figure then the tax imposed by this chapter for the taxable_year shall be the lesser_of the tax for the taxable_year computed with such deduction or the tax for the taxable_year computed without such deduction minus the decrease in tax under this chapter for the prior taxable_year or years which would result solely from the exclusion of such item or portion thereof from gross_income for such prior taxable_year or years sec_1_1341-1 of the income_tax regulations provides that a taxpayer is entitled to the benefits of sec_1341 of the code if the taxpayer is entitled to a deduction of more than dollar_figure because of the restoration to another of an item which was included in the taxpayer’s gross_income for a prior taxable_year or years under a claim of right sec_1_1341-1 of the regulations provides that income included under a claim of right means an item included in gross_income because it appeared from all the facts available in the year of inclusion that the taxpayer had an unrestricted right to such item also this section provides that the phrase restoration to another means a restoration resulting because it was established after the close of the prior taxable_year or years that the taxpayer did not have an unrestricted right to all or a portion of the item included in gross_income analysi sec_1 enactment and legislative_history of under former sec_1342 if a taxpayer took a deduction for patent infringement damages paid in a prior year and later recovered the damages due to reversal of the court decision on the ground of fraud or undue influence the taxpayer was allowed the option of either including the recovered amount in gross_income or excluding the recovered damages from the taxpayer’s gross_income and adding to the tax of the recovery year an amount equal to the difference between the tax paid in the prior year of deduction and the tax that would have been paid had the deduction not been taken if the tax so computed is less than the tax which would be paid_by including the recovery in gross_income that is the amount of tax to be paid for the recovery year sec_1342 applied with respect to taxable years ending after the enactment_date of date this section was repealed in see the section a of the taxpayer relief act of pub law in its original submission and its recent rebuttal to the tam taxpayer claims that the enactment of sec_1342 shows that congress intended patent infringement payments to qualify for sec_1341 relief taxpayer points to the fact that sec_1341 and sec_1342 use the same terminology and to the legislative_history accompanying sec_1342 in support of its assertion first we agree with your statement included in your original tam submission that legislative intent behind sec_1342 may not be used to interpret sec_1341 particularly in light of the fact that sec_1342 was enacted subsequently and by a different congress generally subsequent statutes may not be used to interpret earlier former sec_1342 expressly provided that if an item was deducted from gross_income for a prior taxable_year because it appeared that another person held an unrestricted right to such item as a result of a court decision in a patent infringement suit and gross_income is increased for the taxable_year because it was established after the close of such prior taxable_year that such other person did not have an unrestricted right to such item because of the subsequent reversal of such court decision on the ground that the court decision was induced by fraud or undue influence and the amount of the increase in gross_income exceeds dollar_figure then the tax for the taxable_year shall be the lesser_of the tax for the taxable_year computed with the gross_income so increased or an amount equal to the tax for the taxable_year computed without such increase in gross_income plus the increase in tax including interest which would result solely from the elimination os such item as a deduction from gross_income for such prior taxable_year laws 252_us_523 392_us_157 nor is there any suggestion in the language of sec_1342 that sec_1341 applies to the payment of patent infringement damages sec_1342 provides a method for computing tax on an amount received by a taxpayer in a very unique set of facts eg the lower court decision must be reversed on the ground of fraud or undue influence sec_1341 on the other hand applies to certain payments by a taxpayer in short sec_1342 on its face provides no support for taxpayer’s position second the legislative_history accompanying the enactment of sec_1342 does not support the taxpayer’s position the senate committee report describes sec_1342 as similar and complementary to sec_1341 s rep no 84th cong 1st sess taxpayer argues that the legislative_history surrounding the enactment of sec_1342 makes it clear that in providing this new relief congress assumed similar relief was already available to the infringing taxpayers under sec_1341 but the committee report language cited by taxpayer is merely an acknowledgment that some of the same terms and similar framework of sec_1341 was used to construct an exception for the limited number of taxpayers falling under the provisions of sec_1342 both sec_1341 and sec_1342 were similar and complimentary because they each created a particular exception to the annual system of accounting this legislative_history does not state nor does it suggest that sec_1341 is intended to apply to the payor of patent infringement damages thus we reject taxpayer’s argument that sec_1342 and its legislative_history provides support for taxpayer’s position sec_263a in our previous technical_advice_memorandum tam we concluded that taxpayer was required to include certain payments for patent infringement damages in its inventory costs pursuant to sec_263a taxpayer disputes this conclusion as explained in detail below the arguments presented by taxpayer related to the application of sec_263a to patent infringement damages are unpersuasive unsupported or incorrect our prior tam correctly concludes that the patent infringement damages at issues are sec_1341 deals with the situation where a taxpayer mistakenly includes an item in his gross_income of a prior year s and in a later year is required to restore the money or property which gave rise to the item_of_income in the prior year where the restored items amounts to dollar_figure or more sec_1341 allows the taxpayer the option of first deducting the restored amount in the tax_year it is restored to a third party or second computing the tax for the restoration year without deducting the amount restored and then lowering the tax or the taxable-restoration-year by the amount of decrease in tax caused by excluding the restored item s from the income of the earlier year s in which reported the senate amendment simply extends a similar option to a taxpayer who mistakenly believing that a third party had a claim of right to money on property takes a deduction for the item or items in an earlier year or years part congressional record page date jenkins this amendment adds a new section to the code intended to be complementary to sec_1341 of that code id pincite5 cooper includible in inventory costs under sec_263a because they are incurred by reason of an inventory production activity taxpayer contends that u s v skelly oil co 394_us_678 makes it clear that in the context of sec_1341 it is irrelevant whether the deduction represents a loss or business_expense or for that matter a deduction in cost_of_goods_sold as long as it would represent a valid offset against income the skelly oil opinion however does not actually say that the parties disagreed over whether a deduction for the refunds at issue in the case was allowed under sec_162 or sec_165 the opinion states that whether the deduction at issue was allowed under sec_162 or sec_165 was irrelevant so long as a deduction was allowed the supreme court’s opinion does not mention or make any implications with regard to cost_of_goods_sold or valid offsets against income skelly oil does not support taxpayer’s position second taxpayer cites a group of authorities - burnham corp v comm f 2d 2nd cir becker bros v u s f 2d 2nd cir plr sec_111 sec_29 sec_1_461-1 - intended to support its contention that patent infringement damages are deductible business_expenses under sec_162 rather than inventory costs under sec_263a as explained below however the cited authorities either do not address the sec_162 versus sec_263a issue or involved taxable years prior to the effective date of sec_263a thus the authorities do not support taxpayer’s position at issue on appeal in burnham was whether that taxpayer had satisfied the all-events test in so that it was entitled to a current deduction for patent infringement damages it agreed to pay beginning in burnham corp was a manufacturer of heating and cooling equipment but the burnham opinion does not address the applicability of sec_263a because sec_263a was not applicable to the years at issue in the case in becker bros the question of whether the damages were properly characterized as an inventory cost was not at issue the case involved the question of whether the taxpayer could deduct losses that arose from an illegal transaction moreover becker bros was decided well before the enactment of sec_263a in plr a taxpayer engaged in manufacturing equipment was sued for infringing the patent of another corporation at the time the taxpayer filed its ruling_request it was appealing an adverse decision by the trial_court that plr concludes that a ny amount allowable as a deduction under chapter of the code with respect to taxpayer’s payment of either the court-awarded judgment entered against taxpayer or a negotiated settlement of that judgment will constitute a deduction with respect to a liability that arises out of a tort within the meaning of sec_172 and to the extent it is an amount taken into account in computing a nol for the year of the deduction is eligible for the ten-year carryback as provided in sec_172 this ruling is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent taxpayer’s reliance on plr is misplaced the applicability of sec_263a to patent infringement damages was not considered or discussed in the plr indeed the plr expressly provides that its conclusion applies only if the infringement damages or settlement payments are allowed as a deduction under chapter of the code the conclusion of the plr is inapplicable to the extent that those costs are includible in inventory costs in addition the plr as well as sec_6110 specifically provide that the plr may not be used or cited as precedent the and regulations cited by taxpayer do not support the proposition that patent infringement damages incurred by reason of an inventory production activity are deductions rather than inventory costs those regulations do not consider the applicability of sec_263a because they pre-date the effective date of sec_263a moreover the regulations cited address the proper time for deducting a liability where the liability is disputed assuming that a deduction is otherwise allowable sec_1_461-1 provides where there is a dispute and the entire liability is contested judgments on account of patent infringement personal injuries or other causes or other binding adjudications including decisions of referees and boards of review under workmen’s compensation laws are deductions from gross_income when the claim is finally adjudicated or is paid depending upon the taxpayer’s method_of_accounting this does not provide authority for allowing a deduction for costs properly included in inventory costs the regulations assume that the costs are otherwise deductible obviously if an individual is found liable for a personal injury to another and there is no statutory provision that allows the individual a deduction for the damages the individual is not entitled to deduct the damage award by virtue of these regulations these regulations simply clarify that the all-events test is not satisfied until the claim is finally adjudicated and that a taxpayer using the cash_receipts_and_disbursements_method may not deduct a disputed claim until it is paid third taxpayer argues that the tam characterizes the patent infringement damages as royalties and that that characterization is factually incorrect along these same lines taxpayer argues that our reliance on plastic engineering co v commissioner tcmemo_2001_324 is misplaced because that case involved royalties for future use of a patent3 rather than patent infringement damages attributable to past production of property these arguments are based on a misinterpretation of the tam we did not conclude that the patent infringement payments were royalties we concluded that they were indirect_costs incurred by reason of an inventory production activity and analogous to royalties patent infringement damages are essentially payment for_the_use_of an asset ie a patent as such they are similar to royalty expenses which must be included in inventory costs if incurred in connection with a production activity irrespective of how the infringement damages were computed taxpayer was required to pay patent holder for retroactive and continued use of its patent without obtaining its permission had taxpayer obtained permission prior to using the patent the costs of using the patent would be indirect_costs includible in inventory costs under sec_263a that taxpayer was found liable for these payments by a court does not change the fact that they were incurred by reason of a production activity fourth taxpayer asserts that our conclusion that patent infringement damages are includible in inventory costs is erroneous because such inclusion is inconsistent with the matching principles underlying sec_263a in effect taxpayer argues that sec_263a is inapplicable to indirect_costs to the extent inclusion of those costs in inventory would not result in what taxpayer considers a proper matching of income and expense neither the statute nor the regulations contain an exception to capitalization in circumstances where capitalization would not yield a satisfactory matching of income and expense sec_263a and the regulations thereunder produce a better matching of income and expense than was required under prior_law but those provisions may not produce a perfect matching of income and expense in all cases the regulations provide that direct and indirect_costs properly allocable to inventory produced_by_the_taxpayer must be included in inventory costs see sec_1_263a-1 indirect_costs are properly allocable to property produced when the costs are incurred by reason of the performance of a production activity see sec_1_263a-1 emphasis added the nature of a cost in terms of whether it is an indirect_cost because incurred by reason of the performance of a production activity does not change simply because the production activity was completed before the cost was incurred for federal_income_tax purposes 3contrary to taxpayer’s assertion plastic engineering involved royalty liabilities arising from contemporaneous not future use of a patent tcmemo_2001_324 finally taxpayer asserts that patent infringement damages are deductible as losses under sec_165 and that sec_165 losses are not required to be capitalized under sec_263a sec_1_263a-1 does in fact provide that losses deductible under sec_165 are indirect_costs that are not required to be capitalized under sec_263a however in the tam we determined that the patent infringement damages in this case are ordinary business_expenses that are deductible under sec_162 rather than losses under sec_165 taxpayer in its summary provided no additional support for its assertion that the damages are deductible under sec_165 therefore based on our prior determination we maintain that sec_1_263a-1 is inapplicable here in conclusion taxpayer was held liable for damages for infringing a patent absent the applicability of sec_263a and the regulations thereunder patent infringement damages are deductible business_expenses under sec_162 sec_263a requires inclusion in inventory costs of otherwise deductible expenditures that are incurred by reason of a production activity had taxpayer entered into a proper contractual agreement for use of the patent the expenses_incurred by taxpayer for the use the patent would have been capitalized to inventory produced using the patent in the year that the inventory was produced plastic engineering supra the patent infringement damages are characterized based on the activity which resulted in the liability - the use of a patent in the production of taxpayer’s inventory these costs would have been includible in inventory costs if incurred at the time of production and remain inventory costs even though incurred in subsequent taxable years inventory exception we maintain the position in the tam that even if taxpayer’s payment of the patent infringement damages to patent holder met all of the requirements of sec_1341 taxpayer would still not be entitled to relief under sec_1341 because of the inventory exception of sec_1341 sec_1341 provides that sec_1341 does not apply to any deduction allowable with respect to an item which was included in gross_income by reason of the sale_or_other_disposition of stock_in_trade of the taxpayer or other_property of a kind which would properly have been included in the inventory of the taxpayer if on hand at the close of the prior taxable_year or property held by the taxpayer primarily_for_sale_to_customers in the ordinary course of the taxpayer’s trade_or_business sec_1_1341-1 of the regulations states that the provisions of sec_1341 do not apply to deductions attributable to items which were included in gross_income by reason of the sale_or_other_disposition of stock_in_trade of the taxpayer or other_property of a kind which would properly have been included in inventory of the taxpayer if on hand at the close of the prior taxable_year or property held by the taxpayer primarily_for_sale_to_customers in the ordinary course of the taxpayer’s trade_or_business this section is therefore not applicable to sales returns and allowances and similar items taxpayer interprets sec_1_1341-1 narrowly and believes that the exception only applies to sales returns and allowances and similar items it asserts that because its alleged deduction for the patent infringement payment was not a sales return allowance or similar item the exception is inapplicable taxpayer argues that the legislative_history of sec_462 and killeen v united_states ustc cch p9351 s d cal supports its assertion each of taxpayer’s arguments is addressed separately below a plain language of the statute and the regulations as discussed in the tam we believe that the plain language of sec_1341 is clear therefore analysis of the legislative_history behind this statutory provision is unnecessary in addition the plain meaning of the regulations does not support the taxpayer’s conclusion that the sec_1341 exception is limited to sales returns and allowance and similar items as the plain meaning of the regulatory provision indicates the second sentence merely provides examples of the inventory exception and does not constitute the entire rule b legislative_history i legislative_history of sec_1341 even if the plain language of sec_1341 demanded an analysis of its legislative_history the legislative_history does not support taxpayer’s assertion the legislative_history behind sec_1341 does not state that the sec_1341 b exception is limited to sales returns and allowances and similar items the committee reports state that sec_1341 is inapplicable to refunds allowances bad_debts etc pertaining to sales of inventory or stock_in_trade which may be provided for under sec_462 relating to reserves s rep no 83rd cong 2d sess see also h rep 2d sess a294 this language particularly the words etc and pertaining to is not restrictive but suggestive and illustrative in fact the interpretation of a statute must begin with the statute's language see 489_us_235 471_us_681 if the plain meaning of the statutory text is clear recourse to the legislative_history is unnecessary 509_us_137 ins v phinpathya 464_us_183 this court has noted on numerous occasions that in all cases involving statutory construction our starting point must be the language employed by congress and we assume that the legislative purpose is expressed by the ordinary meaning of the words used legislative_history indicates that congress intended to keep the scope of sec_1341 somewhat undetermined in the hearings before the committee on finance united_states senate 83rd congress 2d session part it states although the wording is not clear it would appear that sales of electric energy and gas may fall within the scope of the exception provisions of subsection b of sec_1341 ii former sec_462 similarly the legislative_history behind sec_462 also does not suggest that the sec_1341 exception is restricted to sales returns and allowances and similar items in congress enacted both sec_462 and sec_1341 sec_462 allowed an accrual_method taxpayer to take a deduction for certain expenses estimated to be incurred in the succeeding tax_year approximately one year after its enactment sec_462 was repealed retroactively committee reports at the time of the repeal clearly indicate that the repeal was necessary due to a substantial underestimation in the loss of revenue the repeal did not intend to disturb prior_law and relied on treasury assurances that the repeal of sec_462 should operate simply to reestablish the law which would have been applicable if sec_462 had never been enacted h_rep_no 84th cong 1st sess 1955_2_cb_852 s rep no 84th cong 1st sess pincite_2_cb_858 consequently we believe that the legislative_history of sec_462 is not the proper source from which to draw inferences regarding the present state of the law taxpayer asserts that the inventory exception of sec_1341 was designed to prevent a taxpayer from claiming both a deduction under former sec_462 as well as the benefit under sec_1341 for the same item however sec_462 was repealed shortly after enactment and sec_1341 was not repealed or amended contemporaneously with sec_462’s repeal if the sole purpose for the sec_1341 exception was to disallow sec_1341 relief for an item covered by sec_462 sec_1341 would have been repealed contemporaneously with sec_462 the fact that sec_1341 remains effective suggests that congress intended the exception to encompass more than sale returns and allowances and similar items for which a deduction is allowed under sec_462 c an unpublished memorandum in its taxpayer summary taxpayer makes reference to an unpublished technical_advice_memorandum provided by the irs national_office to the joint_committee we are not aware of such a technical_advice_memorandum further we are not aware of procedures for the issuance of a technical_advice_memorandum to the joint_committee taxpayer may be referring to an unpublished internal irs memorandum issued by the corporate tax_division to the appeals_division this internal memorandum does suggest a narrow interpretation of the scope of sec_1341 the memorandum is inconsistent with irs office of chief counsel’s current interpretation of sec_1341 see tam and fsa we believe that the memorandum’s conclusions pertaining to sec_1341 are incorrect and that this unpublished memorandum does not provide any precedential value from which to draw inferences regarding the correct application of the law to taxpayer’s case see sec_6110 of the code d killeen v united_states taxpayer suggests that its case is comparable to the case of killeen v united_states ustc cch p9351 s d cal an unreported case in killeen the taxpayer entered into an agreement with sachs in which killeen agreed to manufacture and sell a device and sachs agreed to design and market the device this joint_venture agreement provided that the net profits would be divided equally between the two parties sachs later obtained a judgment in state court that killeen had wrongfully withheld a portion of the profits killeen satisfied the judgment by paying the disputed amount to sachs and then claimed a refund under sec_1341 the district_court held that the profits paid in satisfaction of the state court judgment had been included as an item of the taxpayer's gross_income the district_court also held as a finding of fact that the item was not included in killeen’s gross_income by reason of the sale_or_other_disposition of stock_in_trade of the taxpayer or property held by the taxpayer primarily_for_sale_to_customers in the ordinary course of the taxpayer’s trade_or_business instead the district_court held that the item was included in gross_income because killeen had wrongfully withheld the portion of profits in violation of the joint_venture agreement we agree with your statement included in your original tam submission that killeen is factually distinguishable from the present case unlike the present case killeen involved in killeen there was no question that the amounts paid in satisfaction of the judgment were profits because the parties stipulated in their pretrial conference order that the satisfaction of judgment by the transfer of money and property in_kind constituted a restoration within the meaning of and subject_to sec_1341 an income_splitting arrangement in which one party failed to pay over the correct share of profits to the other party we believe that the case is distinguishable because the deduction for the damages arose from a claim for a share of the profits pursuant to the joint_venture agreement and not from a sale of infringing inventory in summary we continue to disagree with taxpayer’s position that the sec_1341 limitation only applies to sales returns and allowances and similar items the plain language of sec_1341 and sec_1_1341-1 of the regulations does not support taxpayer’s interpretation because of the unambiguous meaning of the language of sec_1341 it is unnecessary to refer to the legislative_history underlying the statute even if the legislative_history is examined however it does not provide clear support for taxpayer’s position that sec_1341 is limited to sales returns and allowances and similar items nor does it support taxpayer’s assertion that sec_1341 only precludes the availability of sec_1341 relief to an item for which an estimated expense deduction is available under former sec_462 a code section that was retroactively repealed in finally killeen v united_states does not support taxpayer’s position because it is factually distinguishable from taxpayer’s case additional arguments taxpayer’s summary sets out five statutory requirements that must be satisfied in order to qualify for relief under sec_1341 the submission correctly points out that the tam denies relief based on two of these requirements the absence of a deduction allowed when it is established that the taxpayer did not have a right to the item_of_gross_income and is required to restore it and the application of the limitation of sec_1341 which denies sec_1341 relief for inventory related items implicit in taxpayer’s summary is the suggestion that the national_office and exam concede that taxpayer meets the other requirements and have no other arguments upon which to deny sec_1341 relief this is not the case in stating the two reasons for the court in maier brewing co v commissioner t c memo a case similar to the present case made a similar distinction maier involved a sale of a corporation the minority shareholder objected to the terms of the sale and obtained a rescission order in the sales_price was repaid by the corporation ten years after the sale was completed and the taxpayer maintained that it was entitled to relief provided by sec_1341 because a portion of the repayment represented profit during the ten years generated by the corporation’s assets the ninth circuit held that this portion of the repayment was not for a profit generated by the corporate assets but was akin to interest or rent because it was a payment made for_the_use_of the corporation’s assets bound by this determination the tax_court ruled that this portion of the repayment did not represent an item that the taxpayer had previously included in its gross_income because the court determined that the taxpayer was not entitled to sec_1341 treatment on this ground the court did not address the applicability of sec_1341 however the court noted in making its sec_1341 determination that killeen was factually distinguishable from the case at issue the present case more closely resembles maier because in both cases the damage payment was apparently made to compensate for the taxpayer’s infringing use denial of relief in the tam the national_office did not intend to foreclose other arguments for denying relief because the failure to meet any one of the five requirements listed in taxpayer’s summary results in the denial of sec_1341 relief it was not necessary for the tam to discuss all reasons for denial the fact that the tam is silent on these other requirements should not suggest that taxpayer has met these requirements ----------------------------------------------------------------------------------------------- we provide the following additional arguments as reasons for denying sec_1341 relief to taxpayer’s payment of patent infringement damages a an item included in gross_income in a previous year sec_1341 of the code states that the statute does not apply unless an item was included in gross_income for a prior taxable_year or years because it appeared that the taxpayer had an unrestricted right to such item we agree with your statement included in your original tam submission that the income earned by taxpayer when it sold infringing products was included in taxpayer’s gross_income for sec_1341 purposes taxpayer received gross_proceeds from the sale of the infringing goods it paid damages in the form of royalties these damages as discussed above are includible in cogs we do not view cogs as a factor in determining whether an item was included in gross_income under sec_1341 rather we interpret included in gross_income under sec_1341 to mean included in the computation of gross_income this view was applied in revrul_72_28 1972_1_cb_269 revrul_72_28 essentially held that gross_receipts is considered in determining whether an item was included in gross_income under sec_1341 see gcm irs gcm lexi sec_177 in revrul_72_28 a public_utility company paid a rate on gas purchases and included the rate in charging its customers the company included this rate in calculating its cogs and included the comparable amount it received from its customers in its gross_receipts thus in the same year the company's gross_receipts and cogs increased by the same amount leaving gross_income as defined under sec_1_61-3 unaffected the ruling holds that the public_utility company was eligible for sec_1341 treatment and the fact that the taxpayer had increased cogs in the prior year had no relevancy in determining the application of sec_1341 the g_c_m states that this interpretation allows for consideration of items included in gross_receipts which are included in the computation of gross_income under sec_1_61-3 if included in gross_income were not so interpreted the utility company would have been precluded from applying sec_1341 to items received in prior years and restored in later years to the extent cogs was equal to or greater than gross_receipts such a result may be viewed as contrary to sec_1341 which specifically allows a utility company to apply the statute moreover looking to gross_receipts enables us to comply with the requirement of sec_1341 that an item has been included in gross_income under a claim of right if we were instead to adopt the definition under sec_1_61-3 no items would remain after the calculation of gross_income on this issue gcm stated all that would remain would be a net aggregate amount in no case would it be possible to b item included in gross_income in a previous year under a claim of right because it appeared that the taxpayer had an unrestricted right to the item sec_1341 of the code states that the statute applies if a deduction is allowable for the taxable_year because it was established after the close of the taxable_year in which an item was included in gross_income that the taxpayer did not have an unrestricted right to such item or to a portion of such item sec_1_1341-1 of the regulations clarifies that a deduction must be allowable because an item received and included in gross_income in a prior year has been restored to another taxpayer claims that the infringement payments it made to patent holder should be characterized as a restoration of a portion of the proceeds generated by the sale of the infringing goods however in its complaint filed with the district_court patent holder sought an injunction and an award of damages adequate to compensate for the infringement of its patents no where in its complaint did patent holder seek to recover any part of the profits taxpayer derived from the sales of the infringing goods in its order the court awarded patent holder damages pursuant to u s c for infringement because the amount of damages pursuant to u s c is based on the patent holder’s lost profits and or a reasonable royalty and the service has no contrary evidence showing otherwise we agree with your statement included in your original tam submission that taxpayer’s payment of damages was not a restoration of sale proceeds to patent holder see maier brewing co v commissioner tcmemo_1987_385 aff’d 916_f2d_716 9th cir involving a taxpayer that purchased the assets of another company and as a result of the rescission of the sale paid damages to the seller the tax_court held that the buyer was not entitled to sec_1341 treatment because the damages were equivalent to rent for_the_use_of the seller’s assets rather than a repayment of the buyer’s profits see also sec_1_1341-1 and h of the regulations payment of legal fees not an item previously included in payor's gross_income because taxpayer was not required to pay to patent holder any of taxpayer’s proceeds derived from the sales of the infringing goods taxpayer’s right to the sale proceeds remained unrestricted in other words its obligation to pay damages for patent infringement did not restrict taxpayer’s right to retain an item_of_gross_income consequently taxpayer does not meet the terms of sec_1341 because its payment of the patent infringement damages is not a restoration of an item included in its gross_income because it appeared that the taxpayer had an unrestricted right to the item identify an item_of_gross_income it must necessarily be possible to identify the various component items of gross_income in order for sec_1341 to have any vitality see rep no 93d cong 2d sess stating i f the right to the payment is absolute the fact that a subsequent liability arises in a related transaction should not entitle the taxpayer to a special relief of sec_1341 thus bad_debt deductions are not entitled to sec_1341 treatment because even though the debt is uncollectible the taxpayer’s right to payment is unrestricted see also 309_fsupp_748 s d iowa aff’d 439_f2d_757 8th cir cert_denied 404_us_831 holding sec_1341 inapplicable to dividends received by taxpayer and paid over to former wife pursuant to divorce decree because taxpayer had unrestricted right to the dividend income and merely used the dividend income to in order to satisfy his marital claims for all of the reasons stated above we find that arguments asserted by taxpayer in taxpayer’s summary to be unpersuasive and we reaffirm our conclusion in the tam that taxpayer is not entitled to relief under sec_1341 for the payment of patent infringement damages if you have any questions regarding this advice please contact -------------------- pincite0


t c memo united_states tax_court john a and margaret r gosling petitioners v commissioner of internal revenue respondent docket no filed date john a gosling pro_se ross m greenberg for respondent memorandum findings_of_fact and opinion armen special_trial_judge this case was heard pursuant to the provisions of sec_7443a and rule sec_180 sec_181 and sec_182 unless otherwise indicated all section references are to the internal_revenue_code in effect for the taxable years in continued respondent determined deficiencies in petitioners' federal income taxes for the taxable years and in the amounts of dollar_figure and dollar_figure respectively after concessions by petitioners the issue for decision is whether petitioners are entitled to certain deductions our disposition of this issue will depend upon whether petitioner husband's home_office constitutes his principal_place_of_business we hold that petitioner husband's home_office was his principal_place_of_business and that petitioners are therefore entitled to the deductions at issue herein findings_of_fact some of the facts have been stipulated and are so found petitioners resided in savannah georgia at the time that their petition was filed with the court ‘ continued issue and all rule references are to the tax_court rules_of_practice and procedure petitioners concede that they are not entitled to deductions for the following expenses expense claimed advertising dollar_figure dollar_figure office --- travel big_number other expense sec_271 insurance big_number during the years in issue petitioner husband petitioner was primarily employed as the music director of the hilton head orchestra a community orchestra and the hilton head choral society collectively hilton head as a music director petitioner rendered services in a number of capacities as a conductor as an organizer or producer and as an impresario during that same year petitioner was also employed as the choir conductor for the first presbyterian church and as an adjunct professor of music at the university of south carolina hilton head branch for a brief period during petitioner was employed as the principal guest conductor of the savannah orchestra none of the various entities that employed petitioner provided him with an office petitioners reside in a four bedroom single-family home throughout the years in issue the fourth bedroom of petitioners' house was used exclusively by petitioner as a home_office the room was set up as a typical office containing a desk shelving a computer filing cabinets and other office equipment used by petitioner to perform business-related duties petitioner spent the majority of his working hours at his home_office part of that time he performed duties related to his position as a conductor an important aspect of petitioner's job as a conductor was to select the repertoire for each concert selecting the repertoire was a time consuming process and petitioner spent much time at his home_office performing that duty petitioner also spent time preparing for concerts by studying scores researching the composer and musical epoch and evaluating the caliber of individual participating musicians petitioner also used his home_office to perform duties that related to his position as an organizer for hilton head in that capacity he was both a manager as well as an administrator petitioner used his home_office to negotiate contracts for future engagements prepare schedules for upcoming events reserve facilities and obtain licensing rights petitioner also spent a substantial amount of time on the phone coordinating the hiring of musicians and the procurement of instruments further he used his home_office to prepare promotional literature for upcoming concerts and to write short story books which he utilized in conjunction with children's concerts also at the home_office petitioner met with new musicians counseled performers and held minor rehearsals further an important aspect of petitioner's role as a music director was to act as the impresario responsible for attracting talented and well known soloists to perform at hilton head petitioner used his home_office to establish and maintain contact with such performers almost all of petitioner's efforts in this regard were carried out from his home_office a smaller portion of petitioner's time was spent at the hilton head concert hall rehearsing performances and conducting concerts petitioner traveled about miles round trip to perform these duties at the hilton head concert hall on petitioners' returns for and petitioners claimed home_office expense deductions in the amounts of dollar_figure and dollar_figure respectively petitioners also claimed car and truck expense deductions in the amounts of dollar_figure for and dollar_figure for opinion sec_162 allows a deduction for the ordinary and necessary expenses paid_or_incurred during the taxable_year in carrying_on_a_trade_or_business sec_280a provides that in the case of a taxpayer who is an individual no deduction otherwise allowable under chapter of the internal_revenue_code relating to normal taxes and surtaxes shall be allowed with respect to the use of a dwelling_unit which is used by the taxpayer during the taxable_year as a residence sec_280a provides for exceptions to the general_rule of sec_280a as pertinent herein section respondent concedes that there is no issue as to substantiation and does not contend that the ratio of expenses allocated to the home_office exceeds the proper allocation similarly respondent concedes that these expenses have been substantiated 280a a shall not apply to any item to the extent that such item is allocable to a portion of the dwelling_unit which is exclusively used on a regular basis as the principal_place_of_business for any trade_or_business of the taxpayer see sec_280a a petitioners are therefore entitled to the home_office deduction only if the home_office was exclusively used on a regular basis as the principal place of petitioner's business similarly petitioners’ entitlement to the car and truck expense is also dependent upon petitioner's home office's meeting the requirements of sec_280a a the commuting expense from a taxpayer's home to his regular place of business is generally a nondeductible expense see sec_1_162-2 income_tax regs by contrast expense of travel between a taxpayer's home_office and another place of business is not commuting expense and is deductible under sec_162 if the home_office is the taxpayer's principal_place_of_business within the meaning of sec_280a a see 73_tc_766 we have found that petitioner's home_office was used exclusively and regularly in petitioner's business we now consider whether petitioner's home_office was his principal_place_of_business in 506_us_168 the supreme court identified two primary factors to be considered in deciding whether a home_office is the taxpayer's principal_place_of_business the relative importance of the activities performed at each business location and the time spent at each place see id pincite the relative importance of the activities performed at each business location is to be determined by the basic characteristics of the taxpayer's particular business the point where goods and services are delivered must be given great weight in determining the place where the most important functions are performed see id we think that the importance of the activities performed at petitioner's home_office and the amount of time spent on such activities support the conclusion that petitioner's home_office was his principal_place_of_business in so concluding we rely heavily on the fact that petitioner was not only a conductor but rendered services in a number of other capacities in those other capacities petitioner's most important functions were performed at his home_office cf genck v commissioner tcmemo_1998_105 petitioner's role as an organizer dictated that he actually perform rather than merely prepare for a substantial amount of his important duties at the home_office from his home_office essentially his center of operations he carried out his managerial and administrative duties it was there that he coordinated almost every logistical aspect of an upcoming concert he also performed his duties as hilton head's impresario from that location finally he performed part of his duties as a conductor eg selecting the repertoire at his home_office his home_office was therefore the point of delivery of a substantial portion of his services also important is the fact that petitioner spent the majority of his working hours at his home_office this factor bolsters the conclusion that petitioner's home_office was not just an ancillary place of business but rather the principal place of his business having considered the importance of the activities performed at petitioner's home_office and the amount of time spent on such activities we are convinced that petitioner's principal_place_of_business was his home_office in light of the foregoing we hold that petitioners are entitled to the deductions for home_office and car and truck expenses at issue herein to reflect our disposition of the disputed issue as well as petitioners' concessions decision will be entered under rule


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc psi b1-plr-105599-02 date date legend x y state d state dear this letter responds to your letter dated date and related correspondence written on behalf of x requesting an extension of time under sec_301_9100-1 through of the procedure and administration regulations to file an election to treat its wholly owned subsidiary y as a qualified_subchapter_s_subsidiary qsub under sec_1361 of the internal_revenue_code facts x was incorporated under the laws of state1 x is an s_corporation for federal tax purposes on d x purchased all of the stock of y y was incorporated under the laws of state2 x represents that it intended to elect to treat y as a qsub but failed to timely make the election x requests a ruling that it be granted an extension of time to make the qsub election for y effective as of d law and analysis sec_1361 of the internal_revenue_code defines a qsub as a domestic_corporation that is not an ineligible_corporation if percent of the stock of the corporation is owned by an s_corporation and the s_corporation elects to treat the corporation as a qsub a taxpayer makes a qsub election with respect to a subsidiary by filing a form_8869 qualified_subchapter_s_subsidiary election with the appropriate service_center plr-105599-02 sec_1_1361-3 of the income_tax regulations provides that the election will be effective on the date specified on the election form or on the date the election is filed if no date is specified the effective date specified on the election cannot be more than two months and days prior to the date of filing and cannot be more than months after the date of filing sec_301_9100-1 provides that the commissioner has discretion to grant a reasonable extension of time under the rules set forth in sec_301_9100-3 to make a regulatory election sec_301_9100-1 defines a regulatory election to mean an election whose due_date is prescribed by a regulation published in the federal_register or a revenue_ruling revenue_procedure notice or announcement published in the internal_revenue_bulletin requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-3 conclusion based solely on the facts submitted and representations made we conclude that x has satisfied the requirements of sec_301_9100-1 and sec_301_9100-3 accordingly x is granted an extension of time of sixty days from the date of this letter to elect to treat y as a qsub effective as of d the election should be made by filing form_8869 with the appropriate service_center a copy of this letter should be attached to the election except as specifically set forth above no opinion is expressed concerning the federal tax consequences of the facts described above under any other provision of the code specifically no opinion is expressed concerning whether x is a valid s_corporation or whether y is a valid qsub this ruling 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 mailed to your authorized representatives sincerely paul f kugler associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes cc