internal_revenue_service number release date index number ------------------- --------------------- -------------------------------------- --------------------------------------- ---------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact -------------------- ------------------------------- telephone number ---------------------- refer reply to cc fip b02 plr-102542-17 date date legend taxpayer --------------------------------------------------------------------------------------- ----------------------------------------- company ----------------------------------------------------------------------------------------- ------------------------------------------- property a property b ------------------------------------ -------------------------------------- property c ------------------------------------------------------------------------------------------------------------- ------------------------------------------------------ property d property e a b c ------------------------------------------------------------------ ------------------------------------------------------ ------------------------------------------- ---- -- -- plr-102542-17 d e f g h i j k l m n o p -- ---- ---- ------- -------- -- -- ---- ---- ----------- -- -- -- dear -------------- this ruling responds to a letter dated date and subsequent correspondence requesting rulings on behalf of taxpayer specifically you have requested the following rulings the floating docks described below at properties a b c d and e collectively the properties are real_property for purposes of sec_1_856-10 and are real_estate_assets for purposes of sec_856 and amounts received for racking structure space in dry dock storage facilities described below will not be considered as other than rents_from_real_property for purposes of sec_856 the presence of cabins at property c will not cause the assets at property c other than the cabins and any areas reserved for cabin guests to be treated as lodging_facilities within the meaning of sec_856 plr-102542-17 facts taxpayer an indirect owner of interests in company represents that it intends to file form 1120-reit to be taxed as a real_estate_investment_trust reit company a partnership for federal tax purposes owns and leases or leases and subleases the properties which are located on inland lakes or coasts the properties contain boat slips floating docks storage facilities boat servicing facilities and support facilities such as laundry facilities and restaurants property c also contains cabins that are made available to guests for one-week or shorter stays a floating docks the properties' boat slips are bound by floating docks the floating docks have a limited range of vertical movement as necessary for tidal and weather conditions and are affixed to the lake bed or sea bottom using either pilings or winches and cables taxpayer represents that the floating docks provide a conduit or route for tenants to access their boat slips delineate the area of the slips and protect the boats from damage from the elements taxpayer further represents that the floating docks serve no active function within the meaning of sec_1_856-10 taxpayer's floating docks are generally attached to poured concrete walkways on land and in the case of floating docks located on coasts are also attached to concrete timber or steel bulkheads that retain contact with the land the configuration of each floating dock is determined during the original design of each of the properties and the sections of the dock bounding the boat slips are not interchangeable among the floating docks if a floating dock needs to be reconfigured the sections of the dock bounding the boat slips are destroyed company has never moved or reused these sections the floating docks weigh hundreds of thousands to millions of pounds and cannot be towed on the water taxpayer represents that the floating docks have a useful_life expectancy of greater than a years properties a d and e the piling method of affixation is present at property a property d and property e taxpayer represents that the pilings are inherently permanent structures for purposes of sec_1_856-10 the floating docks are permanently affixed to the pilings by steel pile guides that affix the docks to the pilings in a manner that allows the docks to float on the top of the water’s surface as the tide ebbs and flows but keeps the docks affixed to the pilings the steel pile guides contain rollers that surround and always touch the pilings and at no time is there space between the rollers and the pilings the steel pile guides are permanently connected to the docks with at least b mechanical fasteners steel or aluminum bolts or brackets per piling the floating docks are built around or surrounded by the pilings and are not designed to be removed from the pilings between b and c pilings bound each boat slip company plr-102542-17 generally employs the piling method of affixation if the water level is expected to fluctuate between d and e feet taxpayer represents that the floating docks affixed to pilings are designed to remain in place indefinitely company has never moved a floating dock and does not intend to ever do so removing a floating dock from its pilings would require total deconstruction of the floating dock and would require cutting the pilings down to the surface level of the water thereby destroying the pilings as well in rare and extraordinary circumstances a governmental body may close a marina for example due to a violation of the lease or willful neglect of the premises in that case all buildings would be completely demolished and removed and the land restored to its natural condition taxpayer represents that this has never happened with respect to a marina owned by company and company does not expect this to ever occur taxpayer further represents that with respect to the floating docks affixed using the piling method no other circumstances suggest that the expected period of affixation is not indefinite taxpayer further represents that removing the floating dock from its pilings would be extremely time-consuming and expensive exceeding the cost of new_construction properties b and c the winch and cable method of affixation is present at property b and property c under the winch and cable method of affixation the floating docks are attached to the seabed by a system of wire rope cables concrete anchors and winches the cables are between f and g inches in diameter and attach the winches on the docks to the anchors on the seabed or lake bottom the cables are the same type used to support suspension bridges and are attached to the winches and concrete anchors in the same manner as cables are attached to suspension bridges the anchors weigh in excess of h pounds and are embedded in the seabed or lake bottom galvanized anchor bolts affix the winches to winch stands that are affixed to the floating docks using industrial steel mounting bolts the winch and cable method allows the floating dock to move when water levels fluctuate and when affected by natural occurrences such as tides although the concrete anchors never move as they are permanently affixed to a specific point in the seabed or lake bottom the winch and cable method generally is used when the water level is expected to fluctuate by e feet or more taxpayer represents that the floating docks affixed using the winch and cable method are designed to remain in place indefinitely the docks are constructed in a particular manner based on the area in which they are located in order to withstand particular wind current and wave conditions of the area and would not be removed and reused in another location similarly the winches and winch stands are designed and constructed to be used in a particular location on a dock due to prevailing plr-102542-17 conditions unique to the area such as wind and tides and are not removed unless they are damaged or have reached the end of their useful lives in rare and extraordinary circumstances a governmental body may close a marina for example due to a violation of the lease or willful neglect of the premises in that case all buildings would be completely demolished and removed and the land restored to its natural condition taxpayer represents that this has never happened with respect to a marina owned by company and company does not expect this to ever occur taxpayer further represents that with respect to the floating docks affixed using the winch and cable method no other circumstances suggest that the expected period of affixation is not indefinite removing a dock affixed by the winch and cable method generally requires between i and j months depending on the size of the dock and costs generally between k and l percent of the cost to construct a new dock of similar size cutting the cables from the winches requires the use of specialized industrial tools and the employment of certified divers to remove bolts and to connect the crane lifting cables to trussing frames the anchors embedded into the seabed or lake bottom upon installation tend to burrow deeper into the sea bed or lake bottom over time exponentially increasing the force required to dislodge them the weight of the anchors typically exceeds the lifting capacity of available barge or crane equipment as a result the anchors and cables are generally abandoned in place rather than removed from the seabed the weight of the winch system typically requires removal by crane the removal of a winch and winch stand damages the dock to which it is attached and renders it unsafe for use removal of the floating docks themselves would require taxpayer to demolish the docks send certain scrap materials to a recycling center and haul the remainder to a landfill b dry dock storage facilities the properties contain dry dock storage facilities which taxpayer represents are inherently permanent structures for purposes of sec_1_856-10 the dry dock storage facilities contain steel racking structures arranged into vertical bays measuring several feet high to accommodate several tiers of boats company leases space in the racking structures to tenants for terms of at least m the dry dock storage leases do not allow the tenant to enter the facilities nor do they allocate to the tenant a specifically identified spot in a racking structure but they do guarantee the tenant a specified amount of storage space in a dry dock storage_facility for the dry dock storage of the tenant’s boat taxpayer represents that a taxable_reit_subsidiary trs of taxpayer or an independent_contractor from whom taxpayer derives no income will move the tenants’ boats into and out of the dry dock storage facilities taxpayer further represents that this is a service customarily performed at dry dock storage facilities in each of the geographic areas in which company’s marinas are located no other plr-102542-17 services will be provided in connection with the storage fee for leasing space in the dry dock storage facilities tenants of company's dry dock storage facilities may request services such as boat maintenance or repairs prior to storage dry dock services the storage fees for leasing space in the dry dock storage facilities will not include fees for these requested services and taxpayer represents that the dry dock services will be performed by a trs of taxpayer or by an independent_contractor from whom taxpayer derives no income c cabins property c contains n cabins used by guests for stays of less than one week company provides cabin guests with linens and basic toiletries at the beginning of their stay and cleans the cabin when the guests vacate the premises the cabin guests are generally not the same parties that lease boat slips or dry dock storage space from company the income generated by the cabins represents less than between o and p percent of company's revenues taxpayer intends to have a trs own the cabins and any areas reserved for cabin guests and to have company manage the cabins taxpayer represents that the income it receives attributable to the cabins will be treated as non-qualifying income for purposes of sec_856 and ruling law and analysis sec_856 of the code provides that at the close of each quarter of its tax_year at least percent of the value of a reit’s total assets must be represented by real_estate_assets cash cash items including receivables and government securities sec_856 defines the term real_estate_assets in part to mean real_property including interests_in_real_property sec_1_856-3 of the regulations provides that the term real_estate_assets means real_property interests in mortgages on real_property including interests in mortgages on leaseholds of land or other improvements thereon and shares in other qualified reits sec_1_856-10 provides that the term real_property means land and improvements to land local law definitions are not controlling for purposes of determining the meaning of the term real_property sec_1_856-10 provides that the term improvements to land generally means inherently permanent structures and their structural_components sec_1_856-10 provides that the term inherently_permanent_structure means any permanently affixed building or other permanently affixed structure affixation may be to land or to another inherently_permanent_structure plr-102542-17 and may be by weight alone if the affixation is reasonably expected to last indefinitely based on all the facts and circumstances the affixation is considered permanent a distinct asset that serves an active function such as an item of machinery or equipment is not a building or other inherently_permanent_structure sec_1_856-10 provides that in general other inherently permanent structures serve a passive function such as to contain support shelter cover protect or provide a conduit or a route and do not serve an active function such as to manufacture create produce convert or transport sec_1_856-10 provides a list of distinct assets that may qualify as other inherently permanent structures if they are permanently affixed stationary wharves and docks are included in the list of inherently permanent structures found in sec_1_856-10 sec_1_856-10 provides facts and circumstances that must be considered in determining if a distinct asset that serves a passive function and is not otherwise listed in sec_1_856-10 or iii b is an inherently_permanent_structure the factors that must be taken into account include a the manner in which the distinct asset is affixed to real_property b whether the distinct asset is designed to be removed or to remain in place indefinitely c the damage that removal of the distinct asset would cause to the item itself or to the real_property to which it is affixed d any circumstances that suggest the expected period of affixation is not indefinite for example a lease that requires or permits removal of the distinct asset upon the expiration of the lease e the time and expense required to move the distinct asset because only stationary wharves and docks are included in the list of inherently permanent structures under sec_1_856-10 floating docks that do not serve an active function must be analyzed based on all the facts and circumstances pursuant to sec_1_856-10 to determine if they are inherently permanent structures properties a d and e taxpayer represents that the pilings at property a property d and property e are inherently permanent structures for purposes of sec_1_856-10 with regard to the floating docks affixed to pilings at these properties taxpayer represents that a the floating docks are affixed to the pilings by steel pile guides containing rollers plr-102542-17 that always touch the pilings and that the pile guides are permanently connected to the docks with at least b steel or aluminum bolts or brackets b the floating docks are designed to remain in place indefinitely c removal of the floating docks from the pilings would require total deconstruction of the floating docks as well as the destruction of the pilings d no circumstances suggest that the expected period of affixation is not indefinite and e moving a floating dock would be time-consuming and more expensive than building a new one taxpayer represents that the floating docks provide a conduit or route to tenants' boat slips delineate the area of the slips and protect the boats from damage from the elements taxpayer further represents that the floating docks serve no active function within the meaning of sec_1_856-10 based on the information submitted and representations made we conclude that the floating docks at property a property d and property e affixed using the piling method are inherently permanent structures that are permanently affixed to other inherently permanent structures for purposes of sec_1_856-2 accordingly the floating docks at property a property d and property e are real_property within the meaning of sec_1_856-10 and therefore are real_estate_assets for purposes of sec_856 and properties b and c with regard to the floating docks affixed to the seabed by winch and cable at property b and property c taxpayer represents that a the floating docks are permanently attached to concrete anchors weighing in excess of h pounds that are embedded in the seabed or lake bottom b the floating docks are designed and intended to remain in place indefinitely c removal of the floating docks would require their demolition and the abandonment of the anchors in the seabed or lake bottom d no circumstances suggest that the expected period of affixation is not indefinite and e removing the floating docks requires specialized industrial tools and certified divers bears a cost of between k and l percent of new_construction and would take between i and j months taxpayer further represents that the floating docks provide a conduit or route to tenants' boat slips delineate the area of the slips and protect the boats from damage from the elements additionally taxpayer represents that the floating docks serve no active function within the meaning of sec_1_856-10 based on the information submitted and representations made we conclude that the floating docks at property b and property c affixed by the winch and cable method are inherently permanent structures that are permanently affixed to the ground for purposes of sec_1_856-2 accordingly the floating docks at property b and property c are real_property within the meaning of sec_1_856-10 and therefore are real_estate_assets for purposes of sec_856 and plr-102542-17 ruling sec_856 provides that at least percent of a reit's gross_income must be derived from among other sources rents_from_real_property sec_856 provides that at least percent of a reit's gross_income must be derived from among other sources rents_from_real_property sec_856 provides that the term rents_from_real_property includes rents from interests_in_real_property sec_1_856-3 provides that the term interests_in_real_property includes fee ownership or co-ownership of land or improvements thereon leasehold interests in the same and timeshare interests that represent an undivided fractional fee or leasehold interest and entitle the holders to the use and enjoyment of the property for a specified period of time each year sec_1_856-4 provides in relevant part that the term rents_from_real_property means generally the gross amounts received for_the_use_of or right to use real_property of the reit taxpayer represents that its dry dock storage facilities are inherently permanent structures for purposes of sec_1_856-10 and that it leases racking structure space in the facilities for terms of at least m additionally taxpayer represents that while dry dock storage leases do not allocate to the tenant a specifically identified spot in the racking structure they do guarantee the tenant a specified amount of storage space in a dry dock storage_facility for the dry dock storage of the tenant’s boat taxpayer further represents that the service of moving boats into and out of the dry dock storage facilities is the only service provided in connection with amounts received for_the_use_of racking structure space in the dry dock storage facilities is customarily provided to tenants of similar dry dock storage facilities in the geographic area and is being provided by a trs of the taxpayer or an independent_contractor from whom taxpayer derives no income based on the information submitted and representations made we conclude that the amounts received for_the_use_of racking structure space in dry dock storage facilities will not be considered as other than rents_from_real_property for purposes of sec_856 by reason of the storage leases' failure to convey to tenants a right of entry or a right to use specifically enumerated space within the dry dock storage facilities plr-102542-17 ruling sec_856 defines a trs as a corporation that is directly or indirectly owned in whole or in part by a reit and that makes a joint election with the reit to treat the corporation as a trs of the reit sec_856 provides that the term trs shall not include any corporation that directly or indirectly manages a lodging_facility sec_856 provides that the term lodging_facility means a hotel motel or other establishment more than one-half of the dwelling units in which are used_on_a_transient_basis the properties contain separately identifiable items of property that are rented and used independently of each other such as floating docks dry dock facilities and restaurants the characterization of a separately identifiable item of property that is rented and used independently of the greater property on which the item of property is physically located should not dictate the characterization of the greater property - for example the presence of a restaurant on a marina property should not automatically render the entire marina property a restaurant company provides linens basic toiletries and cleaning services to the cabin guests who stay for short periods of time additionally taxpayer represents that the cabin guests are generally not tenants of the marina boat slips or dry dock storage facilities and that income from the cabins comprises less than o to p percent of company's revenues the cabins at property c are dwelling units used_on_a_transient_basis together with any areas reserved for cabin guests they are an establishment that is a lodging_facility for purposes of sec_856 however based on the information submitted and representations made including the fact that the income from the cabins comprises less than o to p percent of company’s revenues the presence of the cabins at property c will not cause the assets at property c other than the cabins and any areas reserved for cabin guests to be treated as lodging_facilities for these purposes conclusions based on the information submitted and representations made by taxpayer we rule that the floating docks described above at properties a b c d and e are real_property for purposes of sec_1_856-10 and therefore are real_estate_assets for purposes of sec_856 and plr-102542-17 amounts received for racking structure space in dry dock storage facilities described above will not be considered as other than rents_from_real_property for purposes of sec_856 the presence of cabins at property c will not cause the assets at property c other than the cabins and any areas reserved for cabin guests to be treated as lodging_facilities within the meaning of sec_856 this ruling's application is limited to the facts representations code sections and regulations cited herein except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter in particular no opinion is expressed concerning whether any asset described herein constitutes real_property for purposes of any section of the code other than sec_856 additionally except as expressly provided herein no opinion is expressed or implied concerning whether any income is qualifying_income for purposes of sec_856 and furthermore no opinion is expressed concerning any services performed by taxpayer company any trs or any other party finally no opinion is expressed whether taxpayer otherwise qualifies as a reit under subchapter_m part ii of chapter of the code this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representatives sincerely andrea hoffenson______________ andrea hoffenson branch chief branch office of associate chief_counsel financial institutions products enclosure copy of this for sec_6110 purposes


t c memo united_states tax_court dan e butts and patricia j butts petitioners v commissioner of internal revenue respondent patricia j butts petitioner v commissioner of internal revenue respondent docket nos filed date ps did not timely file federal_income_tax returns for and r issued a notice_of_deficiency to each p for and to p-h for ps jointly petitioned this court with respect to those three notices of deficiency after ps filed their joint petition r issued a notice_of_deficiency to p-w for her tax_year and p-w then filed a separate petition with respect to that notice_of_deficiency thereafter ps filed joint federal_income_tax returns for and claiming on the return an overpayment attributable to tax withholding by p-w’s employer from p-w’s wages the parties have stipulated an overpayment for but dispute whether ps are entitled to a refund of that overpayment held sec_6512 requires the application in the instant case of the two-year lookback period in sec_6511 held further we lack jurisdiction under sec_6511 and sec_6512 to order a refund of the overpayment because no portion of it was paid within the applicable lookback period dan e butts and patricia j butts pro sese in docket no patricia j butts pro_se in docket no fred e green jr for respondent memorandum findings_of_fact and opinion wherry judge these consolidated cases are before the court on petitions for redetermination of deficiencies in income_tax as well as additions to tax for failure_to_file timely failure to pay timely and failure to pay estimated income_tax that respondent determined for petitioners’ and tax years we tried mr butts’ case and mrs butts’ case was submitted under rule the parties filed a stipulation of settled issues sosi a stipulation of facts with exhibits and a supplemental stipulation of facts with exhibits in mr butts’ case and a first stipulation of facts in mrs butts’ case the facts of each of which are agreed to by the parties and incorporated herein by this reference the parties have stipulated that petitioners have an overpayment of dollar_figure for the tax_year as claimed on their recently filed joint federal_income_tax return overpayment the parties have further stipulated that the only issue remaining for decision is whether petitioners are entitled to a refund of that the petition in docket no mr butts’ case was properly addressed u s postage prepaid and timely mailed on date that petition was filed on date and relates to petitioner patricia butts’ tax_year and to dan butts’ and tax years when that petition was filed respondent had not yet issued a notice_of_deficiency for patricia butts’ tax_year respondent issued such a notice on date and in response mrs butts timely mailed a separate petition which was filed on date giving the court jurisdiction over her tax_year in a separate case docket no mrs butts’ case unless otherwise indicated section references are to the internal_revenue_code_of_1986 as amended and in effect for the years in issue and all rule references are to the tax_court rules_of_practice and procedure overpayment or whether sec_6511 and sec_6512 preclude the court from ordering this refund after we tried mr butts’ case the parties submitted a joint status report in which they advised the court that petitioners had filed joint federal_income_tax returns for and that respondent generally agreed with the information reported on the returns and that a basis for settlement had been reached the parties thereafter filed the sosi rather than directly address the determined deficiencies and additions to tax the sosi stipulates succinctly that petitioners are entitled to a refund of a dollar_figure overpayment for the tax_year and that petitioners have but are not necessarily entitled to a refund of a dollar_figure overpayment for the tax_year by stipulating overpayments for both tax years for petitioners jointly respondent conceded the determined deficiencies and the failure to pay timely and failure to pay estimated income_tax additions the fate of the failure_to_file timely addition is less clear both petitions contested respondent’s determination of sec_6651 additions for failure to timely file federal_income_tax returns as a general_rule the commissioner bears the burden of production and must come forward with sufficient evidence indicating that it is appropriate to impose the relevant penalty 116_tc_438 see sec_7491 once the commissioner has satisfied this burden of production the burden shifts to the taxpayers to prove an affirmative defense or that they are otherwise not liable for the penalty or the addition_to_tax see higbee v commissioner t c pincite the parties stipulated that as of date petitioners had not filed federal_income_tax returns for the due_date for those returns was date see sec_6072 requiring calendar_year taxpayers to file returns on or before generally april of the following tax_year these facts satisfy respondent’s burden of production see sec_6651 providing for an addition_to_tax in the case of failure_to_file a required return by the prescribed date because petitioners presented no evidence and made no argument concerning the failure_to_file timely addition_to_tax during the trial in mr butts’ case or in connection with the rule stipulation in mrs butts’ case we would ordinarily conclude that petitioners are liable for the sec_6651 addition_to_tax yet the parties also stipulated that petitioners’ entitlement to a refund of the claimed overpayment was t he sole issue to be resolved and respondent continued findings_of_fact petitioners did not timely file their federal_income_tax returns for the taxable years and on date respondent issued a notice_of_deficiency to petitioner patricia butts mrs butts for her tax_year on date respondent issued notices of deficiency to petitioner dan butts mr butts for his and tax years on date petitioners timely filed a joint petition in this court seeking redetermination of the deficiencies and additions to tax determined in these three notices at that time they lived in nevada continued reiterated in a subsequently filed status report that the only issue remaining before the court was whether either petitioner was entitled to a refund if petitioners’ entitlement to a refund is the sole issue left for the court to resolve then the sec_6651 addition_to_tax must have already been resolved between the parties the sosi and the parties’ other stipulations leave the nature of that resolution ambiguous did petitioners concede the addition_to_tax or did respondent because respondent drafted the sosi and petitioners are unrepresented we will construe this ambiguity against respondent see 100_tc_319 construing closing_agreement in accordance with contract law principles aff’d 47_f3d_168 6th cir 87_tc_1451 construing stipulation in accordance with contract law principles cung v commissioner tcmemo_2013_81 at construing stipulation of settled issues in accordance with contract law principles corbin on contracts sec dollar_figure rev ed written contract may be construed against the drafting party for the purpose of resolving ambiguities accordingly we conclude that respondent conceded all additions to tax determined in the notices of deficiency that gave rise to these cases on date respondent issued a notice_of_deficiency to mrs butts for her tax_year as of that date neither petitioner had filed an income_tax return for on date mrs butts filed a petition in this court seeking redetermination of the deficiency and additions to tax determined in the fourth and latest notice_of_deficiency she still lived in nevada at that time on date petitioners submitted joint federal_income_tax returns for and claiming on their joint_return an overpayment of dollar_figure attributable to withholding from mrs butts’ wages the parties have stipulated that petitioners have an overpayment of dollar_figure for the tax_year we tried mr butts’ case on date mrs butts’ case was submitted under rule on date we consolidated the cases for purposes of opinion opinion petitioners individually and or together seek a refund of the overpayment respondent contends that the time limitations of sec_6511 and sec_6512 preclude a refund of any portion of the overpayment petitioners bear the burden of proving that they are entitled to a refund see rule a see eg krape v commissioner tcmemo_2007_125 93_tcm_1239 jackson v commissioner tcmemo_2002_44 83_tcm_1242 in general this court has jurisdiction to determine the amount of an overpayment_of_tax for a taxable_year and the amount so determined by the court must be credited or refunded to the taxpayer after the decision has become final see sec_6512 if a notice_of_deficiency is issued to a taxpayer for a particular taxable_period and the taxpayer files a timely petition in this court claiming an overpayment for that taxable_period that overpayment may be refunded only as provided in sec_6512 sec_6512 b sec_301_6512-1 proced admin regs sec_6512 limits the amount of the taxpayer’s credit or refund specifically sec_6512 circumscribes the amount of the taxpayer’s credit or refund to the portion of the overpayment if any paid-- a after the mailing of the notice_of_deficiency b within the period which would be applicable under sec_6511 c or d if on the date of the mailing of the notice_of_deficiency a claim had been filed whether or not filed stating the grounds upon which the tax_court finds that there is an overpayment or c within the period which would be applicable under sec_6511 c or d in respect of any claim_for_refund filed within the applicable_period specified in sec_6511 and before the date of the mailing of the notice_of_deficiency before testing whether any portion of the overpayment falls within one of these alternative periods we must first establish when petitioners paid the tax constituting the overpayment the parties stipulated that the overpayment is attributable to withholding from mrs butts’ wages by her employer under sec_6513 income_tax deducted and withheld from an employee’s wages is deemed to have been paid on april of the following tax year--that is in petitioners’ case date if that date satisfies any of the three alternative tests of sec_6512 petitioners are entitled to a refund it does not the u s supreme court considered an almost identical issue in 516_us_235 in this case we consider the look-back period for obtaining a refund of overpaid taxes in the united_states tax_court under sec_6512 and decide whether the tax_court can award a refund of taxes paid more than two years prior to the date on which the commissioner of internal revenue mailed the taxpayer a notice_of_deficiency when on the date the notice_of_deficiency was mailed the taxpayer had not yet filed a return we hold that in these circumstances the 2-year look-back period set forth in sec_6512 applies and the tax_court lacks jurisdiction to award a refund petitioners may not obtain a refund of the overpayment under sec_6512 because the deemed payment_date date fell before--not after as required by the statute--the mailing dates of both notices of deficiency issued to petitioners for the tax_year second sec_6512 will not avail petitioners because they filed a claim_for_refund at the earliest on february respondent mailed notices of deficiency for the tax_year to mr butts on date and to mrs butts on date even though respondent computed petitioners’ income_tax liabilities and mailed notices of deficiency to them separately the parties stipulated that p etitioners have an overpayment this stipulation begs the question of which of the separately mailed notices constitutes the notice_of_deficiency for purposes of sec_6512 where the overpayment in question is a joint one because the overpayment consists of tax withheld from mrs butts’ wages the notice_of_deficiency mailed to mrs butts might logically provide the relevant date see michelson v commissioner tcmemo_1997_39 73_tcm_1809 where the commissioner mailed separate notices of deficiency to married taxpayers and taxpayers later filed a joint_return on which they claimed an overpayment holding that husband was not entitled to any refund because he had no interest in any portion of the overpayment which arose entirely from withholding from his wife’s wages on the other hand because petitioners jointly have an overpayment one could reasonably argue that the date on which respondent mailed mr butts’ notice_of_deficiency should determine his refund entitlement regardless of which notice of deficiency’s date controls we would reach the same conclusions we therefore test petitioners’ refund claim under sec_6512 using both dates in the alternative see id t c m cch pincite where the commissioner mailed separate notices of deficiency to married taxpayers and taxpayers later filed a joint_return on which they claimed an overpayment applying sec_6512 to each spouse separately using the mailing date of his or her notice_of_deficiency anderson v commissioner tcmemo_1993_288 66_tcm_4 same aff’d without published opinion 36_f3d_1091 4th cir which was after--not before as required by the statute--the dates of mailing of both notices of deficiency accordingly as in lundy sec_6512 is the applicable_provision that provision incorporates the lookback periods of sec_6511 and directs the tax_court to determine the applicable lookback period by inquiring into the timeliness of a hypothetical claim_for_refund filed ‘on the date of the mailing of the notice_of_deficiency ’ commissioner v lundy u s pincite quoting sec_6512 sec_6511 in turn provides for two the parties stipulated that petitioners submitted a joint federal_income_tax return on date claiming an overpayment we find that this submission establishes the filing_date of petitioners’ refund claim see 314_us_186 stating that where an informal submission puts the commissioner on notice of a taxpayer’s claim it will be treated as a formal claim even if its defects are remedied after the applicable limitations_period has expired and especially if the commissioner has accepted and treated it as such sec_6511 also establishes the period of limitations for filing a refund claim but under the circumstances of this case that period of limitations is irrelevant unlike the provisions governing refund suits in united_states district_court or the united_states court of federal claims which make timely filing of a refund claim a jurisdictional prerequisite to bringing suit see sec_7422 833_f2d_655 7th cir the restrictions governing the tax court’s authority to award a refund of overpaid taxes incorporate only the look-back period and not the filing deadline from sec_6511 see continued alternative lookback periods a three-year period and a two year-period sec_6511 and b to decide which of these look-back periods to apply the tax_court must consult the filing provisions of sec_6511 and ask whether the claim described by sec_6512 b --a claim filed on the date of the mailing of the notice_of_deficiency --would be filed within years from the time the return was filed see sec_6511 incorporating by reference sec_6511 if a claim filed on the date of the mailing of the notice_of_deficiency would be filed within that year period then the look-back period is also three years and the tax_court has jurisdiction to award a refund of any taxes paid within three years prior to the date of the mailing of the notice_of_deficiency sec_6511 and sec_6512 if the claim would not be filed within that 3-year period then the period for awarding a refund is only two years sec_6511 and sec_6512 commissioner v lundy u s pincite petitioners’ hypothetical refund claim would have been filed on either date the date on which respondent mailed a notice_of_deficiency to mr butts or date the date on which respondent mailed a notice_of_deficiency to mrs butts because both of these dates precede the date on which petitioners submitted their joint tax_return regardless of which date we use their hypothetical refund claim would not have been filed within three years after continued u s c sec_6512 consequently a taxpayer who seeks a refund in the tax_court does not need to actually file a claim_for_refund with the irs the taxpayer need only show that the tax to be refunded was paid during the applicable look-back period 516_us_235 fn ref omitted the date on which they filed their tax_return hence as in commissioner v lundy u s pincite the two-year lookback period applies and is measured from the date of mailing of the notice_of_deficiency therefore we have jurisdiction to order a refund of any overpayment_of_tax paid within the two-year period preceding the filing_date of petitioners’ hypothetical refund claim--that is on or after either date two years before respondent mailed a notice_of_deficiency to mr butts or date two years before respondent mailed a notice_of_deficiency to mrs butts see sec_6511 sec_6512 because the overpayment was paid in its entirety on date well before the date of either notice_of_deficiency we lack jurisdiction to order a refund of any portion of it shortly after the supreme court decided 516_us_235 congress amended sec_6512 the amendment provided for a three- year lookback period where a notice_of_deficiency is mailed during the third year after the due_date with extensions for filing the return and no return has been filed before such time see sec_6512 flush language the due_date for petitioners’ tax_return was date see sec_6072 and no facts in the record indicate that petitioners sought or obtained a filing extension respondent mailed both notices of deficiency after not during the third year following that date and petitioners had not yet filed a return when either notice was mailed hence congress’ amendment of sec_6512 does not afford petitioners a three-year lookback period if petitioners had established that a three-year lookback period should apply they would be entitled to a refund only of an overpayment paid on or after continued petitioners offer two arguments against this conclusion first they contend that respondent’s preparation of substitutes for return sfrs establishes a filing_date for their tax_return for purposes of sec_6511 and sec_6512 we have held however that a substitute for return prepared by the commissioner pursuant to sec_6020 is not a return filed by the taxpayer for purposes of sec_6511 115_tc_316 the sfrs have no bearing on petitioners’ entitlement to a refund of the overpayment second petitioners contend that respondent is precluded from litigating the issues and amount in controversy in mrs butts’ case by events in mr butts’ case under the doctrines of res_judicata and or collateral_estoppel both doctrines apply only after a judgment has been entered by a court of competent jurisdiction see 333_us_591 explaining that res_judicata bars relitigation of a cause of action by the parties to the suit and their privies after a court of competent jurisdiction has entered a final judgment on the merits 90_tc_162 explaining that collateral_estoppel precludes parties and their privies from relitigating issues continued either date or date because the overpayment was paid on date before both of these dates application of a three-year lookback period would not produce a different outcome actually and necessarily litigated and decided in a final prior judgment by a court of competent jurisdiction aff’d 904_f2d_525 9th cir no such judgment has been entered in either of these consolidated cases we concur with petitioners that the amount of their tax_liability has already been resolved but by stipulation rather than through litigation and judgment by the court in mr butts’ case in any event the parties have not stipulated and we have neither found nor decided that petitioners are entitled to a refund of the overpayment pursuant to the sosi this remains the sole issue for our decision for the reasons explained above we resolve it against petitioners we hold that because no portion of the overpayment was paid during any of the alternative periods specified in sec_6512 no amount of that overpayment may be allowed or refunded to reflect the foregoing appropriate decisions will be entered


department of the treasury internal_revenue_service washington d c of f i c e of c h i e f c ou n s e l number release date date cc ita postf-154478-01 uilc internal_revenue_service national_office legal advice memorandum for associate area_counsel lm hmt from heather c maloy associate chief_counsel income_tax accounting subject this chief_counsel_advice responds to your memorandum dated date in accordance with sec_6110 of the internal_revenue_code it should not be cited as precedent legend taxpayer a taxpayer b taxpayer c league team state city city county statute park term x agreement old stadium fund dollar_figuren dollar_figureo postf-154478-01 dollar_figurep dollar_figureq dollar_figurer dollar_figures dollar_figuret dollar_figureu dollar_figurev dollar_figurew dollar_figurex dollar_figurey dollar_figurez year year year year issue sec_1 whether taxpayer b must include in gross_income the proceeds from the sale of personal seat licenses conducted by authority which used the proceeds to offset a part of b’s obligation to fund construction costs of a new stadium whether taxpayer b an accrual_method taxpayer must include in income in year the total sales proceeds of the personal seat licenses sold under an agreement executed in year although additional installment payments under the agreement were due in year and in year conclusion sec_1 taxpayer b must include in gross_income the proceeds from the sale of the personal seat licenses taxpayer b should report the income when each installment becomes due and payable or each installment is received whichever happens first facts taxpayer a owns x percent of the outstanding_stock of taxpayer b which holds the professional league franchise for the team for year taxpayer a filed a consolidated federal_income_tax return that included taxpayer b in year taxpayer a elected to file as an s_corporation consequently taxpayer b became the common parent for the affiliated_group and filed consolidated_returns beginning postf-154478-01 with year both taxpayer a and taxpayer b employed the accrual basis of accounting for tax purposes taxpayer b began to pursue the construction of a new stadium in city to keep the team competitive with other teams in the league a new stadium would incorporate many features lacking at old stadium and generate additional revenue streams from sources such as luxury suites and club seating during year taxpayer b was able to work out a plan with local governmental authorities to fund a new stadium under the plan taxpayer b was to be responsible for the construction of the stadium which was to be owned by a local public authority but leased to taxpayer b in year a memorandum of intent setting forth the terms of the plan was executed between taxpayer b and a public auditorium authority for city and county authority it was contemplated that the parties would negotiate definitive agreements reflecting the parties' understanding of the terms the memorandum of intent indicated that taxpayer b’s contribution toward the stadium project would include among other funds approximately dollar_figuren but not less than dollar_figureo in net_proceeds from the sale of personal seat licenses along with accrued interest thereon the team’s obligations in this regard however were contingent upon a successful completion of the sale by year any proceeds in excess of dollar_figuren from the personal seat licenses were to be allocated to any shortfalls or project cost overruns incurred by the authority and then to project cost overruns that were the responsibility of taxpayer b subsequent negotiations resulted in some changes to the terms of the plan as originally reflected in the memorandum of intent formal written agreements were executed by the parties in year the sale of personal seat licenses which were technically referred to as stadium builder licenses began in year the sale was well received by taxpayer b’s long-time season ticket holders and raised dollar_figurep per the license agreement the authority was the nominal licensor the agreement provided however that the authority would assign its interest in the licenses to taxpayer b upon completion of the stadium when the stadium itself was to be sub-leased to the season ticket holders purchased more personal seat licenses than were anticipated total_proceeds from the sale amounted to dollar_figurep of which dollar_figureq was received in year dollar_figurer in year and dollar_figures in year the examining agent has not uncovered any written_agreement authorizing the authority to sell the right to tickets to team games postf-154478-01 taxpayer b the term of the licenses correspondingly commenced on the date that construction of the stadium was completed and continued for so long as the team played games at the stadium a one-time license fee was payable by the licensees in three installments which were due in year year and year the payments were made to a fund an account established by the authority to be used exclusively to finance the design development and construction of the stadium if the stadium was not completed for any reason all payments made by the licensees would be refunded to them without interest per the license agreement the personal seat licenses entitled the licensees to buy tickets to all future team games to be played at the new stadium the licenses did not grant the licensees any ownership or other equity_interest in the stadium or the team the license agreement expressly states that the licensees had only a revocable right of personal privilege and that the licenses did not confer any real_property or leasehold interest in any particular stadium seats there are indications that in year just prior to the sale of the personal seat licenses taxpayer b filed for a waiver with the league to retain the visiting teams' share of the proceeds from the sale under league rules ticket receipts are to be shared between the home and visiting teams generally the home team receives x percent of ticket receipts and the visiting team is entitled to the balance it should also be noted that the league’s collective bargaining agreement with its players' union generally includes the proceeds from the sale of personal seat licenses in team revenues for a variety of purposes including the salary cap a special exemption is provided however for personal seat license proceeds used exclusively to build a new stadium that is not owned by the team or an affiliate to facilitate construction of the new stadium taxpayer b created a wholly-owned subsidiary taxpayer c groundbreaking for the stadium occurred in the late summer year with construction to be completed by year an agreement was executed by taxpayer c and the authority on year taxpayer c was designated as the developer authorized to act as sole and exclusive agent for the authority with respect to the design and construction of the stadium the authority was to hold title to the stadium which was to be leased to taxpayer c and then subleased to taxpayer b taxpayer c was obligated to provide financing toward the stadium project of not less than dollar_figuret the authority was required to contribute a sum not to exceed dollar_figureu while state was committed to providing funds in the total amount of dollar_figurev taxpayer c was obligated also to cover all cost overruns related to the design and construction of the stadium maximum amount that a league team can spend on players' salaries set at a percentage of designated team revenue postf-154478-01 by the terms of the agreement the amount of dollar_figurew from the sale of the personal seat licenses together with accrued interest thereon up to dollar_figurex was credited toward taxpayer c's required_contribution of dollar_figuret the proceeds from the sale of the personal seat licenses in excess of dollar_figurew amounting to dollar_figurey together with interest accruing on the deposited funds over dollar_figurex were allocated to future cost overruns if any which taxpayer c was required to cover the authority's obligations under the agreement were contingent upon taxpayer c providing funding of dollar_figuret inclusive of the proceeds from the sale of personal seat licenses taxpayer c's obligations under the agreement were likewise contingent upon the authority providing funding of dollar_figureu the authority was to meet its financial commitment by floating a bond issue in the event of a relocation of the team’ franchise to another city taxpayer c was required to repay the authority an amount equal to the authority's required_contribution including principal interest and other sums necessary to retire any bonds that were issued the state's portion of the stadium funding was made pursuant to a statute enacted year a stadium lease agreement between taxpayer c and the authority also executed on year ran for term taxpayer c agreed to make three payments of statutory rent as provided by chapter of the statute the statutory rent was payable to the authority which was to remit the payments to the state the statutory rent payable upon expiration of each 10-year period of the lease amounted to dollar_figurez subject_to reduction for credits based upon increases in certain tax revenue generated by the operation of the new stadium taxpayer c also agreed to manage and operate all aspects of the stadium and was responsible for all operating_expenses and the costs of ordinary maintenance and repairs in return taxpayer c retained x percent of the revenue from sporting events and related activities such as concessions luxury suites and club seats in-stadium advertising and naming rights and x percent of the net_revenues from non-sporting events held at the stadium the city county and the authority reserved the right collectively to use the stadium for up to three civic cultural or community events each year without charge and with the right to retain all proceeds from these events taxpayer b agreed to guarantee all of the obligations of taxpayer c arising from the various agreements with the authority including the agreement none of the proceeds from the sale of the personal seat licenses was included in taxpayer b's income in year on the consolidated_return filed by taxpayer a or in subsequent tax years also for tax purposes taxpayer b did not take any taxpayer b joined in the execution of the primary lease solely for the purpose of acknowledging that it was bound by the provisions of the lease to the extent required by chapter of the statute postf-154478-01 deduction for funds that it expended for construction of the new stadium rather the expenditures were accumulated in an asset account captioned stadium development the consolidated tax returns filed for year and year are under audit the examining agent proposes to increase gross_income in year by the amount of the proceeds generated by the sale of the personal seat licenses law and analysis issue under sec_61 gross_income means all income from whatever source derived unless otherwise provided by law the supreme court of the united_states has long recognized that the definition of gross_income sweeps broadly and reflects the intent of congress to exert the full measure of its taxing power and to bring within the definition of income any accession to wealth see 348_us_426 504_us_229 it is beyond cavil that the payment of a taxpayer’s obligation by a third party pursuant to an agreement between them results in income to the taxpayer 296_us_1 279_us_716 see also 242_f2d_838 3d cir in old colony trust an employer paid the taxes due on the salaries paid to its officers including its president the commissioner determined that the recipients were required to include the payment of taxes in their respective gross_income as additional salary in sustaining the determination of the commissioner the court opined t he discharge by a third person of an obligation to him is equivalent to receipt by the person taxed old colony trust co u s pincite the court found immaterial the fact that the employee never received the taxes because they were paid directly over to the government the court regarded the transaction as being the same in substance as if the taxes had been paid to the taxpayer who then transmitted them to the government this principle applies with equal force to the facts of the instant case under the memorandum of intent and the agreement taxpayer b and subsequently taxpayer c was obligated to provide dollar_figuret for construction of the stadium a portion of this commitment was to be discharged by dollar_figuren received from the sale of the personal seat licenses any amount in excess of dollar_figuren received from the sale of the licenses was to be used to defray cost overruns for which taxpayer c was also postf-154478-01 responsible by applying the proceeds of sale to discharge its obligation to partially fund construction costs taxpayer c has derived an economic benefit and must recognize income in that amount we do not believe the fact that the sale was conducted by the authority is material or requires a different conclusion revenue from the sale of personal seat licenses belongs to the individual teams in the league this revenue is considered owned by the individual team for many purposes including the determination of the annual salary cap on salaries paid to the players moreover while we do not believe it conforms to reality the authority agreed to assign its interest in the licenses to taxpayer b upon completion of the stadium we view this assignment as a mere attempt to imbue with substance the notion that the authority actually owned rights in the personal seat licenses issue sec_451 provides that the amount of any item_of_gross_income shall be included in gross_income for the taxable_year in which received by the taxpayer unless under the method_of_accounting used in computing income such amount is to be properly accounted for as of a different period sec_1_451-1 of the income_tax regulations states in part that under an accrual_method of accounting_income is includible in gross_income when all the events have occurred that fix the right to receive such income and the amount thereof can be determined with reasonable accuracy see also sec_1 c ii a all the events that fix the right to receive income occur when the required performance occurs payment therefor is due or payment therefor is made whichever happens earliest revrul_84_31 1984_1_cb_127 see also 372_us_128 the field contends that income from the personal seat licenses should be reported by taxpayer b in year the year the license agreement was executed the field’s argument seems to assume that the sale of the personal seat licenses occurs in year establishing the required performance under the all-events test the determination of when a sale occurs is essentially a question that requires consideration of all the facts and circumstances of a particular situation 426_f2d_1391 9th cir 114_f2d_706 6th cir 68_tc_115 a factor to consider in determining whether a sale has occurred is whether under the contract the seller has an unqualified right to receive the contract_price 281_us_11 86_f2d_637 2d cir other factors to be considered in postf-154478-01 determining when a sale occurs are when legal_title to the property is transferred and when the benefits_and_burdens_of_ownership of property are shifted from the seller to the buyer 40_tc_66 aff’d per curiam 336_f2d_771 9th cir a sale for tax purposes must result from a closed transaction the court in union pacific r r co above defined a closed transaction as follows a closed transaction for tax purposes results from a contract of sale which is absolute and unconditional on the part of the seller to deliver to the buyer a deed upon payment of the consideration and by which the purchaser secures immediate possession and exercises all the rights of ownership the delivery of a deed may be postponed and payment of part of the purchase_price may be deferred by installments but for taxing purposes it is enough if the vendor obtains under the contract the unqualified right to recover consideration the taxpayer in union pacific r r co whose books were kept on an accrual basis sold two parcels of real_property even though the contracts of sale involved deferred payments the court concluded that the sales had occurred at the time the contracts were executed rather than the year when the payments were made the court regarded the transactions as closed in the year the contracts were executed because at that time the seller had the unqualified right to recover the consideration similarly in elsinore cattle company v commissioner no big_number t c m which involved when the sale of real_property under an agreement of sale and purchase of property took place the united_states tax_court found that the contract reflected a closed sale on the date it was executed because the amount of and right to the purchase_price were fixed and unqualified the obligation to convey title on payment was absolute and enforceable complete dominion and control_over the property passed to the purchaser on the stated date thereafter all the benefits_and_burdens_of_ownership were enjoyed or assumed by the purchaser and after the basic date equitable_title resided in the purchaser leaving the vendor bare_legal_title that it agreed to convey on final payment years after the contract was executed if however the contract of sale is executory so that transfer of title and full payment are made conditions to the completion of the transaction a sale does not occur for tax purposes until the conditions are satisfied in lucas v north texas lumber co the taxpayer gave another a day option to purchase its timber lands for a specified price on date on date the buyer notified the taxpayer that it would exercise the option on date the papers postf-154478-01 required to effect the transfer were delivered the purchase_price was paid and the transaction was finally closed the court stated pincite an executory_contract of sale was created by the option and notice date in the notice the purchaser declared itself ready to close the transaction and pay the purchase_price as soon as the papers were prepared respondent did not prepare the papers necessary to effect the transfer or make tender of title or possession or demand the purchase_price in the title and right of possession remained in it until the transaction was closed consequently unconditional liability of vendee for the purchase_price was not created in that year in the situation presented unconditional liability of the licensee for the entire purchase_price is not created in year instead the licensor has a right to collect the purchase_price of the personal seat license only as installments become due and payable under the license agreement or as the installments are actually received although upon default the licensor can keep all payments received under the agreement the licensor cannot compel payment of any future installments not yet due thus there is no closed transaction in year for the sale of a personal seat license further the license agreement provides that a personal seat license is granted to the licensee for and in consideration of the payment of the personal seat license fee stated otherwise until a licensee pays the last installment due under the agreement the personal seat license remains with taxpayer b5 case development hazards and other considerations although we have concluded that a sale of the personal seat licenses did not occur in taxpayer b may make other arguments in an attempt to defer the reporting of the income from the sale of personal seat licenses for example taxpayer b might argue that the sale is contingent until the stadium is completed because the agreement provides that if the stadium is not completed for any reason all payments made by licensees will be refunded however if this contingency was fairly remote during the years at issue the refund possibility should be viewed as a although the agreement refers to a buyer as a licensee at the time the agreement is executed and says that a personal seat license can be revoked upon a buyer’s failure to pay an installment when due even though the license obviously has not yet been transferred we believe that these terms are used for convenience only and have no significance with respect to the timing of the sale of a personal seat license for tax purposes postf-154478-01 condition_subsequent and should not defeat taxpayer b’s right to receive income as the installments are due or received taxpayer b may also argue that any payments received prior to when the sale of the personal seat license occurs are merely deposits that should not be reported in income until the sale is complete there is some support for this argument in the context of real_property sales for which there is no taxable_event under sec_1001 until the sale is completed however there is also support for the argument that advance_payments for the sale_of_goods and services generally must be reported in income when received because the personal seat license does not fit specifically into either of these categories the sec_1001 argument may provide the service with some litigating hazards finally in addition to addressing the sec_451 issue the field’s memorandum notes that taxpayer b should not be entitled to any offsetting deduction s against income from the sale of the personal seat licenses in either of the tax years under audit we agree that any expenditures of the funds toward the stadium project should be treated as capital in nature this writing may contain privileged information any unauthorized disclosure of this writing may have an adverse effect on privileges such as the attorney client privilege if disclosure becomes necessary please contact this office for our views please call if you have any further questions


internal_revenue_service number release date index number ------------------------------- ------------------------------------------------- --------------------------------------- ------------------------------------------- ---------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact -------------------------- id no ------------- telephone number --------------------- refer reply to cc intl b02 plr-150386-10 date june re ----------------------------------- ---------------------------------------------- ---------------------------- ------------------------------------------ ---------------------------- ------------------ ------------------------------------ -------------------------- ------- ------- ------- --------------------------------------- ---------------------------------------------- ----------------------------- -------------------------------------- -------------------------- -------------------------- legend domestic fund foreign fund x pfic date year year year type a entity type b entity stock exchange firm a firm b tax advisor dear ------------------- this is in response to correspondence submitted on behalf of domestic fund by its authorized representative requesting an extension of time under sec_301_9100-1 and sec_301_9100-3 of the procedure and administration regulations to make a mark to market election under sec_1296 of the internal_revenue_code with respect to its investment in pfic plr-150386-10 the ruling contained in this letter is based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party this office has not verified any of the material submitted in support of the request for a ruling verification of the factual information representations and other data submitted may be required as part of the audit process facts domestic fund was formed on date as a type a entity and commenced business activities during year domestic fund is treated as a partnership for u s federal_income_tax purposes domestic fund holds an x interest in foreign fund foreign fund is a type b entity that is treated as a partnership for u s federal_income_tax purposes foreign fund’s activity consisted of investment in a range of securities and asset classes including offshore marketable_securities of passive foreign investment companies within the meaning of sec_1297 during year foreign fund held marketable_securities of pfic a company listed on the stock exchange the accounting and tax filings of domestic fund and foreign fund collectively the funds were both handled by the same firm firm a a year form_1065 u s return of partnership income was timely filed for each of the funds employees at firm a prepared a form_8621 electing mark to market treatment for the stock of pfic however the form_8621 was prepared for and attached to the form_1065 of foreign fund rather than domestic fund for independent business reasons the funds thereafter changed tax advisors during year while preparing the year forms for the funds firm b the successor tax advisors found that the year form_8621 electing mark to market treatment for the stock of pfic was erroneously prepared for foreign fund instead of domestic fund domestic fund represents that its federal_income_tax returns have been filed as if it rather than foreign fund had made the mark to market election with respect to the pfic stock in a timely manner domestic fund has made the following additional representations with respect to the mark to market election as of the submission date of its request for relief domestic fund had not been notified a of any_action taken by the irs with respect to the election b that the irs had discovered its failure to properly make the regulatory election or c that the treatment of affected items on the returns filed by domestic fund was incorrect plr-150386-10 government interests will not be prejudiced by virtue of granting relief for domestic fund to file the election because the late election will not result in a lower or different tax_liability in addition tax advisor from firm a submitted an affidavit stating that a domestic fund intended to make a mark to market election under sec_1296 for the pfic stock that domestic fund indirectly held through foreign fund and b at all times the funds accounted for the investments in pfic as if a mark to market election had been timely and properly made law sec_1296 provides that in the case of marketable_stock in a passive_foreign_investment_company that is owned or treated as owned under sec_1296 by a united_states_person at the close of any taxable_year the united_states_person may elect to include in gross_income the excess of the fair_market_value of the stock over its adjusted_basis sec_1296 provides in part that stock owned directly or indirectly by a foreign_partnership will be considered as being owned proportionately by its partners sec_1_1296-1 provides that an election under sec_1296 for a taxable_year must be made on or before the due_date including extensions of the person’s u s income_tax return for that year sec_301_9100-1 provides that the commissioner has the discretion to grant a taxpayer a reasonable extension of time under the rules set forth in sec_301_9100-3 to make a regulatory election under all subtitles of the code except subtitles e g h and i sec_301_9100-1 provides that an election includes an application_for relief in respect of tax and defines a regulatory election as an election whose due_date is prescribed by a regulation revenue_ruling revenue_procedure notice or announcement sec_301_9100-3 provides that requests for relief will be granted when the taxpayer provides the evidence including affidavits described in sec_301_9100-3 to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and the grant of relief will not prejudice the interests of the government sec_301_9100-3 provides that except as provided in sec_301_9100-3 a taxpayer is deemed to have acted reasonably and in good_faith if the taxpayer plr-150386-10 i ii iii iv v requests relief before the failure to make the regulatory election is discovered by the irs failed to make the election because of intervening events beyond the taxpayer’s control failed to make the election because after exercising reasonable diligence taking into account the taxpayer’s experience and the complexity of the return or issue the taxpayer was unaware of the necessity for the election reasonably relied on the written advice of the irs or reasonably relied on a qualified_tax professional including a tax professional employed by the taxpayer and the tax professional failed to make or advise the taxpayer to make the election sec_301_9100-3 provides that a taxpayer is deemed not to have acted reasonably or in good_faith if the taxpayer i ii iii seeks to alter a return position for which an accuracy-related_penalty has been or could be imposed under sec_6662 at the time the taxpayer requests relief taking into account any qualified_amended_return filed within the meaning of sec_1_6664-2 and the new position requires or permits a regulatory election for which relief is requested was informed in all material respects of the required election and related tax consequences but chose not to file the election or uses hindsight in requesting relief sec_301_9100-3 provides in part that the interests of the government are prejudiced if granting relief would result in the taxpayer having a lower tax_liability in the aggregate for all taxable years affected by the election than the taxpayer would have had if the election had been timely made taking into account the time_value_of_money sec_301_9100-3 provides in part that the interests of the government are ordinarily prejudiced if the taxable_year in which the regulatory election should have been made is closed or any taxable years that would have been affected by the election had it been timely made are closed by the period of limitations on assessment under sec_6501 before the taxpayer’s receipt of a ruling granting relief conclusion based on the information and representations submitted we conclude that domestic fund satisfies the requirements for a reasonable extension of time to make the mark to market election under sec_1296 of the code accordingly domestic fund is granted an extension of time of days from the date of this letter to make the election under sec_1296 with respect to the stock of pfic for year plr-150386-10 the granting of an extension of time is not a determination that domestic fund is otherwise eligible to make the election under sec_1296 sec_301 a 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 in accordance with the power_of_attorney on file with this office copies of this letter are being sent to domestic fund’s representative sincerely jeffery g mitchell chief branch office of the associate chief_counsel international cc


id office uilc cca_2008090213313117 ---------------- number release date from ------------------- sent tuesday september pm to --------------------- cc subject hedging -- inadvertent error and anti-abuse rule interaction this responds to your request for our views on the interaction between the inadvertent error rule_of sec_1_1221-2 and the anti-abuse rule_of sec_1_1221-2 of the hedging regulations your inquiry arises from a situation in which the service has asserted that taxpayer’s gain on a non-identified hedging_transaction is ordinary gain because taxpayer did not have reasonable grounds for failing to properly identify the transaction as a hedging_transaction taxpayer concedes the transaction qualified as a hedge for tax and financial_accounting purposes and was identified as such for financial_accounting purposes taxpayer claims that its failure to identify its hedges under the sec_1221 regulations was an inadvertent error within the meaning of sec_1_1221-2 and further claims that this supports two separate arguments against the service’s application of the sec_1_1221-2 anti-abuse rule first taxpayer asserts that by satisfying the inadvertent error rule_of sec_1_1221-2 it is insulated as a matter of law from having its gain treated as ordinary under the sec_1_1221-2 anti-abuse rule taxpayer claims that this is supported by the language of the inadvertent error regulation that states that a taxpayer may treat gain_or_loss as ordinary_income second taxpayer alternatively argues that inadvertent error is as a factual matter reasonable grounds for treating the transaction as other than a hedging_transaction taxpayer’s argument that inadvertent error gives it per se immunity from challenge under sec_1_1221-2 attempts to extend the sec_1_1221-2 inadvertent error rule beyond its stated purpose both sec_1_1221-2 and iii are described as exceptions to the general_rule of sec_1_1221-2 -- that the absence of an identification that satisfies the requirements of sec_1_1221-2 is binding and establishes that the transaction is not a hedging_transaction neither sec_1_1221-2 nor iii suggest that the inadvertent error rule overrides or is an exception to the service’s authority to challenge whether a taxpayer had reasonable grounds for failing to identify a transaction as a hedging_transaction the two provisions operate independently and satisfy different purposes convey differing rights to differing parties and contain differing standards for their application there are sound policy reasons for the service having an independent right to challenge abusive failures to identify in fact the potential ability of a taxpayer with the benefit of hindsight to claim inadvertence and to choose the character of gain_or_loss on a hedge makes all the more important the service’s ability to deny capital_gain treatment unless reasonable grounds for non-identification exists without the service ability to independently challenge the treatment of hedge gain as capital the sec_1_1221-2 exception for inadvertence would potentially afford taxpayers substantial selectivity with hindsight ie taxpayers could ignore the hedging identification requirements knowing that with hindsight that inadvertence could be claimed so that losses could be treated as ordinary and gains could be treated as capital taxpayer also seems to rely heavily on tam as you have already observed that technical_advice_memorandum does not even address sec_1 g iii or a relevant fact pattern moreover there is nothing startling about the statement in the technical_advice_memorandum that a taxpayer may but is not required to treat gain_or_loss as ordinary even if its failure to identify was due to inadvertent error the statement adds little or nothing to what is already reflected in the language of sec_1_1221-2 itself instead sec_1_1221-2 states that reasonableness is the taxpayer’s second argument is that the existence of inadvertent error factually establishes that it had reasonable grounds for failing to identify the transactions as hedges consistent with the analysis above there is nothing in sec_1 g iii that suggests that inadvertence in failing to make an election is even factually relevant to the substantive question of whether reasonable grounds for the election exist measured by taking into consideration not only the requirements of b the hedge definitional requirement of this section but also the taxpayer’s treatment of the transaction for financial_accounting or other purposes and the taxpayer’s identification of similar transactions as hedging_transactions thus reasonableness is assessed by looking at whether there was reasonable legal grounds based on the definition of a hedge for failing to identify taking into account two other factors - the taxpayer’s non- tax treatment of the item and the taxpayer’s tax treatment of similar transactions those two factors are sensibly considered relevant because they bear on whether there existed reasonable grounds for failing to identify the existence of inadvertence in making or not making an election however sheds little or no light on whether reasonable substantive grounds existed for failing to identify concedes the transactions were hedges for tax purposes and its financial_accounting for such bolsters that conclusion accordingly we see little if any basis for taxpayer’s contention that it had reasonable grounds within the meaning of sec_1 g iii for failing to identify the hedges for federal_income_tax purposes in this case taxpayer much of the discussion above assumes that taxpayer’s failure to identify was inadvertent we do not wish to substitute our judgment for yours on the issue of whether the taxpayer’s failure was inadvertent nevertheless taxpayer’s claim that it did not have hedging procedures in place for addressing similar transactions warrants comment while taxpayer is correct in its assumption that prior practice and procedures are relevant it is not enough for a taxpayer to simply claim that it had not identified similar transactions as hedges rather taxpayer’s practice with regard to all prior hedging_transactions including foreign_currency would be relevant moreover taxpayer cannot reasonably claim to have established inadvertence simply because the government does not have facts or documents showing that taxpayer knowingly chose not to identify the transaction obviously documentation of that nature would rarely be found instead taxpayer should bear the burden of proving inadvertence and its satisfaction should be judged on all surrounding facts and objective indicia of whether the claimed oversight was truly accidental the size of the transaction the treatment of the transaction as a hedge for financial_accounting purposes the sophistication of the taxpayer its advisors and counterparties among other things are all probative we particularly noticed that taxpayer had internal procedures requiring high level approval of hedges and that those procedures required consideration of the tax consequences of the hedging_transactions close attention was apparently given to financial_accounting aspects of its hedging yet complete unawareness of tax hedging issues is claimed evidence that tax personnel were consulted with or involved in these transactions would be particularly significant we hope that the above is helpful in your ongoing evaluation of this matter


internal_revenue_service significant index no department of the treasu washington dc person to contact telephone number refer reply to t ep ra t a2 date feb in re request_for_ruling on behalf of taxpayer c this letter is in response to your request dated november in which you asked for a ruling on behalf of taxpayer c as to whether certain proposed distributions from an individual_retirement_account ira owned by taxpayer c are part of a series of substantially_equal_periodic_payments and are therefore not subject_to the percent additional tax imposed under sec_72 of the internal_revenue_code code amended by you as the taxpayer's authorized representative pursuant to form office on january letter dated date and date and in your in telephone calls with the ruling_request was of our according to the facts as stated taxpayer c is the owner of taxpayer c would on or before date taxpayer c decided to after transferring funds from ira two iras ira and ira to ira start taking annual distributions from ira like to avoid the tax imposed on premature distributions by code sec_72 by calculating the annual distribution amount using one of the methodologies described in notice_89_25 c b for calculating substantially_equal_periodic_payments the annual distribution amount for will be calculated by dividing the account balance of ira annuity factor which is the cost of an annual dollar_figure per year life_annuity beginning at age calculated using commutation functions based on the up-1984 mortality_table where an interest rate is assumed equal to percent of the applicable annual federal_long-term_rate in effect for the month of date recalculated each year by dividing the account balance of ira of april by the applicable annuity factor calculated in the same manner except for later ages all distributions will be taken from ira the annual distribution amount will be as as of date by an the annuity factor will be -2- ruling requested based on these facts the following ruling has been requested on behalf of taxpayer cc the proposed method of determining periodic_payments a iv of the code and such payments will not be satisfies one of the methods described in notice_89_25 and results in substantially_equal_periodic_payments within the meaning of sec_72 subject_to the additional tax of sec_72 unless the requirements of sec_72 are not met expectancies mortality_table and interest rate used are such that they do not result in the circumvention of the requirements of sec_72 and sec_72 of the code through the use of an unreasonable high interest rate unreasonable life expectancies or an unreasonable mortality_table the life applicable law sec_408 of the internal_revenue_code provides that amounts paid or distributed out of an individual_retirement_plan must be included in gross_income by the payee or distributee in the manner provided under sec_72 of the code sec_72 of the internal_revenue_code provides rules for determining how amounts received as annuities endowments or life_insurance contracts and distributions from qualified_plans are to be taxed sec_72 of the internal_revenue_code was added to the code by the tax_reform_act_of_1986 tra effective generally for taxable years beginning after december t provides for the imposition of an additional percent tax on early distributions from qualified_plans including iras the additional tax is imposed on that portion of the distribution that is includible in gross_income section sec_72 of the code provides that sec_72 shall not apply to distributions which are part of a series of substantially_equal_periodic_payments not less frequently than annually made for the life or life expectancy of the employee or the joint lives or joint life expectancies of such employee and his beneficiary sec_72 of the code imposes the additional a iv that if the series of payments is limitation on distributions excepted from the percent tax by sec_72 subsequently modified other than by reason of death or disability before the later of beginning with the date of the first payment and the employee's attainment of age then the taxpayer's tax for the first taxable_year in which such modification occurs shall be increased by an amount determined under regulations equal to the tax which would have been imposed except for the sec_72 a iv exception plus interest for the deferral_period the close of the 5-year period sec_1_72-9 of the income_tax regulations regulations provides tables that are to be used in connection with computations under sec_72 and the regulations thereunder included in this section are tables giving life expectancies for one life table v and joint life and last survivor expectancies for two lives table vi notice_89_25 was published on date and provided guidance in the form of questions and answers on certain provisions of the tax_reform_act_of_1986 absence of regulations on sec_72 of the code this notice provides guidance with respect to the exception to the tax on premature distributions provided under sec_72 t a iv q a-12 of notice_89_25 provides three methods for determining substantially_equal_periodic_payments for purposes of sec_72 two of these methods involve the use of an interest rate assumption which must be an interest rate that does not exceed a reasonable interest rate on the date payments commence a iv of the code tra in the proposed methodolagy the proposed method for determining annual periodic_payments described in the ruling_request as modified is to calculate an annual payment for the year by dividing the account balance as of date of ira by an annuity factor which is the cost of a dollar_figure per year life_annuity beginning at age with such annuity factor calculated using commutation functions based on the up-1984 mortality_table where an interest rate is assumed equal to percent of the applicable annual federal_long-term_rate used for purposes of code sec_1274 in effect for the month of date be calculated by dividing the account balance of ira as of april of the distribution year by an annuity factor which is the cost for subsequent years the annual distribution amount will in the distribution year with such annuity factor dollar_figure per year life_annuity commencing at the age attained by of a taxpayer c calculated using commutation functions based on the up-1984 mortality_table where an interest rate is assumed equal to the percent of the applicable annual federal_long-term_rate used for purposes of code sec_1274 the distribution year taken from ira all annual distribution amounts will be in effect for the month of may of conclusion the life expectancies mortality_table and interest rate used are such that they do not result in the circumvention of the requirements of sec_72 a iv and t of the code through the use of an unreasonable high interest rate unreason- able life expectancies or unreasonable mortality_table accordingly we conclude that the proposed method as modified of determining periodic_payments satisfies one of the methods described in notice_89_25 and results in substantially_equal_periodic_payments within the meaning of sec_72 to the additional tax of sec_72 unless the requirements of sec_72 are not met a iv of the code and such payments will not be subject sincerely yours martin l pippins manager employee_plans actuarial group tax_exempt_and_government_entities_division