internal_revenue_service number release date index number ----------------------------- ------------------- ---------------------------- ------------------------------------ ---------------------------------- ---------------------------------------- department of the treasury washington dc third party communication date of communication month dd yyyy person to contact --------------- id no ------------ telephone number -------------------- refer reply to cc psi plr-127202-05 date date legend ---------------------------- taxpayer --------------------------------------------------------------------------------- ------------------------------------------------------------------------------- ---------------------------------------------------------------------- holdco ----------------------------------------------------------------- llc ---------------------------------------------------------------------- project company ---------------------------------------------------------------------- --------------------------------- ---------------------------- --------------------------------------------- ------------------------------------ --------------------------------------------------- ------------------------------------------------------------------------------- project ----------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------- company company utility ---------------------------------------------- ---------------------------------- ------------------------------- plr-127202-05 -- --- ------------------ ------------------ ----------------------- ------------------------------ operator ------------ state a investor ------------------------------------------------------------------------ --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------ b c d e f g h i j k l m n o p q r -------------------------- ----------- ----------- --------- ------- ------- ------- ------- ------- ------- --- -- plr-127202-05 -- --- -- ----- ----------- s t u v w x y z dear --------------- regarding holdco’s qualification for tax_credits under sec_45 of the internal_revenue_code for the production and sale of electricity from its wind-based generation project the project this letter responds to your letter dated e requesting private letter rulings ----------------------- --------- --- the relevant facts as represented in your submission are set forth below taxpayer is a state a limited_partnership that owns all of the interests of llc llc is a state a limited_liability_company that is disregarded for federal tax purposes llc and a united_states domestic investor the investor will form holdco which will be treated as a partnership for federal tax purposes holdco llc and investor will enter into a limited_liability_company agreement operating_agreement project company a state a limited_liability_company is owned by an affiliate of taxpayer and is a disregarded_entity for federal tax purposes the proceeds of the issuance of membership interests in holdco will be used by holdco to purchase all of the interests in project company project company entered into a wind lease agreement the wind lease agreement with company effective as of b under the wind lease agreement project company leased the project site on company 2’s land for a period of c years with one d-year renewal option the wind lease agreement permits project company to construct the project on the site and to construct a transmission line across the project site to a substation located on company 2’s land the project consists of c separate mw wind turbine generators plr-127202-05 project company paid dollar_figureh on the effective date of the lease and will pay a quarterly royalty fee equal to i percent of the gross_receipts from electricity sold and the proceeds from the sale of certain credits such as state renewable energy credits but not sec_45 credits the quarterly royalty fee minimum is dollar_figurej per wind turbine generator and is adjusted every d years based on average electricity sales during the prior d-year period project company entered into a power purchase agreement the ppa with utility dated f project company will sell to the utility electricity produced from the project that is not for the operation of the project itself during the k-year delivery period of the ppa which production is projected to be l mwhs per year the utility will pay project company dollar_figurem per mwh during contract_year dollar_figuren per mwh during contract_year dollar_figureo per mwh during contract_year dollar_figurep per mwh during contract_year and dollar_figureq per mwh during contract years project company guarantees energy production of r mwhs per contract_year and will credit the utility dollar_figurek per mwh for any shortfall in actual annual output project company has also entered into several other agreements for the interconnection facilities and interconnection with utility a turbine supply agreement with operator the balance of a plant engineering procurement and construction agreement with company and an operation and maintenance agreement with operator o m agreement dated z taxpayer expects to form holdco on or before g prior to the end of the project construction_period pursuant to the membership interest agreement and equity_capital agreement holdco will issue membership interests designated as class a units to the investor and class b units to llc in exchange for capital contributions the class a units and class b units will have different economic and management rights class a units will constitute s percent of the acquisition price of project company and class b units will constitute the balance ------------------------------------------------------------------------------------------------------------ --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- -------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- plr-127202-05 --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------ --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------- based upon expected distributions of cash to the members of holdco llc as the holder of the class b units expects to receive a positive cash-on-cash return and the investor as the holder of the class a units does not expect to receive a positive cash-on-cash return on its investment although the investor expects to achieve a positive return taking into account its allocation of sec_45 credits the operating_agreement contains certain restrictions on the transfer of the class a units and the class b units moreover upon the occurrences of certain events including the y year anniversary of the investor’s investment llc as holder of the class b units will have the option to purchase the class a units from the investor for the then-appraised fair_market_value taxpayer makes the following representations the utility will not be a related_person to holdco under sec_45 holdco currently projects that at the end of the term including the renewal the electricity generated by the wind turbines within the project is not being sold to a utility pursuant to a contract originally entered into before date whether or not amended or restated after that date for purposes of sec_45 term of the wind lease agreement it will be economically feasible for the project company to remove the project wind turbines from the land negotiated at arm’s length and the fees or other_amounts paid or to be paid under such agreements are believed to represent fair_market_value consideration law and analysi sec_4 the terms of the agreements described above have been or will be plr-127202-05 under sec_45 the renewable_electricity_production_credit for any taxable_year is an amount equal to the product of cents multiplied by the kilowatt hours of electricity produced_by_the_taxpayer from qualified_energy_resources and at a qualified_facility during the 10-year period beginning on the date the facility was originally placed_in_service and sold by the taxpayer to an unrelated_person during the taxable_year under sec_45 the amount of the credit determined under sec_45 with respect to any project for any taxable_year determined after the application of sec_45 and is reduced by the amount which is equal to the product of the amount so determined for such year and the lesser_of one-half or a fraction a the numerator of which is the sum for the taxable_year and all prior years of i grants provided by the united_states a state or a political_subdivision of a state for use in connection with the project ii proceeds of an issue of state_or_local_government obligations used to provide financing for the project the interest on which is exempt from tax under sec_103 iii the aggregate amount of subsidized_energy_financing provided directly or indirectly under a federal state or local program in connection with the project and iv the amount of any other credit allowable with respect to any property which is part of the project and b the denominator of which is the aggregate amount of additions to the capital_account for the project for the taxable_year and all prior taxable years the amounts under the preceding sentence for any taxable_year shall be determined as of the close of the taxable_year sec_45 does not apply to any facility described in sec_45 sec_45 defines qualified_energy_resources to include wind sec_45 defines a qualified_facility in the case of a facility using wind to produce electricity as any facility owned by the taxpayer that is originally placed_in_service after date and before date under revrul_94_31 1994_1_cb_16 with respect to electricity produced from wind_energy the term facility under sec_45 means each separate wind turbine together on the tower on which the turbine is mounted and the supporting pad on which the tower is situated although sec_45 does not define placed_in_service the term has been defined for purposes of the deduction for depreciation and the investment_tax_credit for these purposes property is considered to be placed_in_service in the taxable_year that the property is placed in a condition or state of readiness and availability or a specifically assigned function see sec_1_46-3 and sec_1_167_a_-11 of the income_tax regulations sec_702 provides that each partner determines the partner’s income_tax by taking into account separately the partner’s distributive_share of the partnership’s other items of income gain loss deductions or credit to the extent provided by plr-127202-05 regulations prescribed by the secretary under sec_1_702-1 the distributive_share is determined under sec_704 and sec_1_704-1 sec_704 provides that a partner’s distributive_share of income gain loss deduction or credit is except as otherwise provided in chapter of subtitle a of title_26 determined by the partnership_agreement under sec_704 a partner’s distributive_share of income gain loss deduction or credit or item thereof is determined in accordance with the partner’s interest in the partnership determined by taking into account all facts and circumstances if i the partnership_agreement does not provide for the partner’s distributive_share of income gain loss deduction or credit or item thereof or ii the allocation to a partner under the agreement of income gain loss deduction or credit or item thereof lacks substantial economic_effect sec_1_704-1 provides that allocations of tax_credits and tax_credit recapture except for sec_38 property are not reflected by adjustments to the partners’ capital accounts thus these allocations cannot have economic_effect under sec_1_704-1 and the tax_credit and tax recapture must be allocated in accordance with the partners’ interest in the partnership as of the time the credit or recapture arises if a partnership expenditure whether or not deductible that gives rise to a tax_credit in a partnership taxable_year also gives rise to valid allocations of partnership loss or deduction or other downward capital_account adjustment for the year the partners’ interests in the partnership regarding the credit or the cost giving rise to it are in the same proportion as the partners’ respective distributive shares of the loss or deduction and adjustments see sec_1_704-1 example identical principles apply in determining the partners’ interests in the partnership regarding tax_credits that arise from income of the partnership whether or not taxable if a partnership receipt gives rise to a tax_credit such as the credit under sec_45 and that receipt also gives rise to a valid allocation of partnership income the partners’ interests in the partnership with respect to the item of credit will be in the same proportion as the partners’ respective distributive shares of such income see sec_1 b ii sec_708 provides that a partnership will be considered as terminated if within a month period there is a sale_or_exchange of percent or more of the total interests in partnership capital and profits under sec_1_708-1 if a partnership is terminated by a sale_or_exchange of an interest the following is deemed to occur the partnership contributes all of its assets and liabilities to a new partnership in exchange for an interest in the new partnership immediately thereafter the terminated partnership distributes interests in the new partnership to the purchasing partner and the other remaining partners in proportion to their respective interests in the terminated partnership in liquidation of the terminated plr-127202-05 partnership either for the continuation of the business by the new partnership or for its dissolution and winding up sec_301_7701-3 of the procedure and administration regulations provides that unless it elects otherwise a domestic eligible_entity is disregarded as an entity separate from its owner if it has a single owner sec_7701 provides that the term taxpayer means any person subject_to any internal revenue tax sec_7701 provides that when used in title_26 where not otherwise distinctly expressed or manifestly incompatible with the intent thereof the term person will be construed to mean and include an individual trust estate partnership_association company or corporation conclusions based solely on the facts and representations provided and the relevant law and regulations set forth above we conclude as follows the project wind turbines will be deemed to have been originally placed_in_service for purposes of sec_45 on the date the turbines are placed in a condition or state of readiness and availability to produce electricity within the meaning of sec_1_46-3 and sec_1_167_a_-11 of the income_tax regulations the electricity generated from the project wind turbines that is sold to the utility will qualify for the production_tax_credit under sec_45 provided the project is placed_in_service before date the production of electricity from the project wind turbines will be attributable to the project company and as a result holdco will be entitled to the sec_45 credits for electricity that is sold to the utility the sec_45 credits attributable to holdco will be passed through to and allocated among the members of holdco to consist of llc and the investor under the principles in sec_702 in accordance with each member’s interest in holdco at the time the sec_45 credit arises for purposes of allocating the sec_45 credit a partner’s interest in the partnership is determined under sec_1_704-1 and is proportionate to valid allocations of gross_income arising from the project company’s receipts from the sale of electricity from the project wind turbines that is sold to unrelated persons during the taxable_year any termination of holdco under sec_708 arising from sales or exchanges of interests in holdco will not preclude holdco as reconstituted from taking the sec_45 credit for the project company’s production and sale of electricity from the project wind turbines to unrelated persons during the taxable_year plr-127202-05 except as specifically set forth above no opinion is expressed concerning the federal_income_tax consequences of the above described facts under any other provision of the code or regulations specifically we express no opinion regarding the validity of the allocations under sec_704 or any other partnership provision further we express no opinion as to whether sec_45 regarding credit reductions for grants tax- exempt bonds subsidized_energy_financing and other credits is applicable in this case this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent sincerely susan j reaman branch chief branch office of associate chief_counsel passthroughs and special industries


office_of_chief_counsel internal_revenue_service memorandum number release date cc psi b07 mhbeker postn-148017-11 uilc date date to holly l mccann chief excise_tax program from frank boland chief branch office of associate chief_counsel passthroughs special industries third party communication none date of communication not applicable subject oil_spill_liability_trust_fund_tax and fuel supplies for aircraft engaged in foreign trade this chief_counsel_advice responds to your request for assistance dated date this advice may not be used or cited as precedent issue sec_1 does the oil_spill_liability_trust_fund_tax osltf tax imposed by sec_4611 of the internal_revenue_code code apply to aviation_fuel admitted into a foreign trade zone of the united_states ftz for warehousing and later used as supplies for aircraft actually engaged in foreign trade as described in u s c does the osltf tax apply to aviation_fuel entered into a customs bonded_warehouse and later used as supplies for aircraft actually engaged in foreign trade as described in u s c if the osltf tax applies to the aviation_fuel in issue and issue is the person that paid the tax eligible for a credit or refund of the tax on aviation_fuel that is later used as supplies for aircraft actually engaged in foreign trade as described in u s c if the answer to issue is yes under what authority does the irs have to refund the osltf tax postn-148017-11 if the answer to issue is yes how and when may a taxpayer claim a credit or refund for the osltf tax on aviation_fuel that is later used as supplies for aircraft actually engaged in foreign trade as described in u s c conclusion sec_1 the osltf tax applies to aviation_fuel admitted into an ftz for warehousing that is later used as supplies for aircraft actually engaged in foreign trade or certain other limited types of trade as described in u s c the osltf tax applies to aviation_fuel entered into a customs bonded_warehouse and later used as supplies for aircraft actually engaged in foreign trade or certain other limited types of trade as described in u s c the person that paid the osltf tax is eligible for a refund_or_credit of the tax for aviation_fuel that is later used as supplies for aircraft actually engaged in foreign trade as described in u s c under sec_6402 the irs has the authority to refund overpayments of the osltf tax a taxpayer may claim a credit or refund for the osltf tax on aviation_fuel that is later used as supplies for aircraft actually engaged in foreign trade as described in u s c on the form_720 quarterly excise_tax return in accordance with the instructions for that form alternatively a taxpayer may claim a refund for the osltf tax on form_8849 claim_for_refund of excise_taxes in accordance with the instructions for that form facts a fuel supplier enters aviation_fuel into the united_states the aviation_fuel is a petroleum_product and the entry is an entry described in sec_4611 upon entry the aviation_fuel is either delivered to storage tanks that are in a customs bonded_warehouse or in ftzs all of the aviation_fuel is later delivered into the fuel supply tanks of aircraft some of these aircraft are actually engaged in foreign trade and other aircraft are engaged in domestic air transportation law and analysis sec_4611 imposes a tax on petroleum products entered into the united_states for consumption use or warehousing under sec_4611 the person entering the products is liable for the tax sec_4612 defines the term united_states to include ftzs the code does not exempt from this tax petroleum products that are actually used in foreign trade postn-148017-11 section a of title u s c provides that articles of foreign or domestic origin may be withdrawn under such regulations as the secretary_of_the_treasury may prescribe from any customs bonded_warehouse or from an ftz free of duty and internal revenue tax for certain specified purposes including for supplies not including equipment of aircraft registered in the united_states and actually engaged in foreign trade or trade between the united_states and any of its possessions or between hawaii and any other part of the united_states or between alaska and any other part of the united_states section d of title u s c provides a similar rule for aircraft registered in a foreign_country if the secretary_of_the_treasury is advised by the secretary of commerce that the foreign_country allows or will allow substantially reciprocal privileges with respect to aircraft registered in the united_states 104_fsupp2d_106 cit involves the harbor_maintenance_tax hmt which is imposed by sec_4461 on among other things the unloading of commercial_cargo from a commercial_vessel at a port in the united_states in this case importer was subject_to the tax on its cargo of aviation_fuel that it entered into a customs bonded_warehouse in the united_states importer later withdrew the fuel from the warehouse as supplies for aircraft actually engaged in foreign trade similar to the osltf tax the code does not exempt from the hmt petroleum products that are actually used in foreign trade however the court found that u s c applied to the facts of the case even though the activity addressed in the withdrawal from a customs bonded_warehouse occurred after the incidence of the hmt the unloading of cargo at the port thus importer was allowed a refund for the hmt on the fuel actually used in foreign trade the irs has the authority under sec_6402 to allow a credit or make a refund of an overpayment to the person who made the overpayment an overpayment_of_tax is read in its usual sense as meaning any payment in excess of that which is properly due whatever the reason the payment of more than is rightfully due is what characterizes an overpayment 332_us_524 when the aviation_fuel enters into the united_states and is stored in a customs bonded_warehouse or admitted into an ftz the enterer is liable for the osltf tax at the time of entry sec_4611 however when the fuel is later withdrawn from the customs bonded_warehouse or ftz and supplied to aircraft actually engaged in foreign trade the u s c exemption from the osltf tax applies see citgo f_supp 2d pincite the proper tax_liability would then not include the osltf tax accordingly the tax paid_by the enterer would be in excess of that which is properly due which results in an overpayment accordingly we conclude that under sec_6402 the service has the authority to issue a refund of an overpayment of osltf taxes to the enterer postn-148017-11 a taxpayer may claim a credit or refund of an osltf tax overpayment on form_720 alternatively a taxpayer may claim a refund of an osltf tax overpayment on form_8849 on form_720 the taxpayer should attach schedule c claims to form_720 with the claim amount entered on line other claims if the taxpayer uses form_8849 to claim a refund the claim should be made by attaching schedule other claims to the form_8849 please call if you have any further questions


department of the treasury internal_revenue_service washington d c commissioner tax_exempt_and_government_entities_division mar uniform issue list seitep kh tf legend taxpayer a taxpayer b company c amount d amount e hospital q hospital u hospital k city l deal the following facts and representations have been submitted under penalty of perjury in support of the ruling requested in letters dated date date and date your authorized representative requested a waiver of the 60-day rollover requirement contained in sec_402 of the internal_revenue_code the code taxpayer a an employee of company c accumulated amount d in company c’s retirement_plan a plan qualified under code sec_401 you represent that taxpayer a’s decision making ability was impaired due to brain tumors his medical_condition is terminal as a consequence of said impairment taxpayer a requested a complete withdrawal of his benefits in company c’s plan in one lump sum company c issued a check in amount e on date which represented the net amount of the distribution after federal and state_income_tax withholding amount e reflected withholding for federal and state income taxes taxpayer a never cashed the check due to taxpayer a’s severe physical and mental impairment members of his family managed his financial affairs during this period taxpayer b the daughter of taxpayer a and his attorney-in-fact discovered the uncashed check in date while attending to taxpayer a’s tax affairs taxpayer b immediately sought tax_advice and subsequently filed this ruling_request your authorized representative has made the following representations concerning taxpayer a’s health on or about date taxpayer a suffered an onset of convulsive seizures he was taken to hospital q in city l where he was diagnosed as suffering from multiple brain tumors on or about date taxpayer a entered hospital u where a cat scan determined that one of his brain tumors was bleeding as a result taxpayer a underwent immediate brain surgery the brain surgery resulted in a finding of brain cancer on or about date taxpayer a was released to undergo radiation and chemotherapy treatment on or about date taxpayer a was admitted to the emergency room at hospital q where he underwent a mri on or about date a radiation oncologist determined that based on his mri taxpayer a had a very limited time to live on or about date taxpayer a was hospitalized at hospital k as a result n o of brain seizures and swelling of the brain on or about date taxpayer a began receiving hospice care on or about date taxpayer a admitted to hospital k as a result of brain seizures on or about date taxpayer a resumed receiving hospice care at home based on the facts and representations you request that the service waive the 60-day rollover requirement with respect to the distribution of amount d because the failure to waive such requirement would be a hardship and against equity or good conscience with respect to your request to waive to day rollover requirement sec_402 of the code provides that except as otherwise provided in sec_402 any amount distributed out of an employees' trust described in sec_401 that is exempt from tax under sec_501 shall be taxable to the distributee in the taxable_year of the distributee in which distributed in the manner provided under sec_72 of the code relating to annuities sec_402 of the code provides rules governing rollovers of amounts from exempt trusts to eligible retirement plans including iras sec_401 of the code provides that a_trust shall not constitute a qualified_trust under this section unless the plan of which such trust is a part provides that if the distributee of any eligible rollover distribution- i elects to have such distribution paid directly to an eligible_retirement_plan and ii specifies the eligible_retirement_plan to which such distribution is to be paid in such form and at such time as the plan_administrator may prescribe such distribution shall be made in the form of a direct trustee-to-trustee transfer to the eligible_retirement_plan so specified sec_401 of the code provides that for purposes of code sec_401 a the term eligible_retirement_plan has the meaning given such term by sec_402 with an exception not pertinent to this ruling_request thus a direct transfer defined in code sec_401 may be made into an ira sec_1_401_a_31_-1 of the income_tax regulations question and answer-5 provides in relevant part that a direct_rollover described in code sec_401 is a distribution and rollover of the eligible_rollover_distribution and not a transfer of assets and liabilities thus for example the consent and requirements of code sec_401 sec_411 and sec_417 apply to transactions described in code sec_401 code sec_402 provides that except as provided in subparagraph b paragraph shall not apply to any transfer of a distribution made after the 60th day following the day on which the distributee received the property distributed sec_402 of the code provides that the secretary may waive the 60-day requirement under sec_402 of the code where the failure to waive such requirement would be against equity or good conscience including casualty disaster or other events beyond the reasonable control of the individual subject_to such requirement only distributions that occurred after date are eligible for the waiver under sec_402 of the code revproc_2003_16 r b date provides that in determining whether to grant a waiver of the 60-day rollover requirement pursuant to sec_402 the service will consider all relevant facts and circumstances including errors committed by a financial_institution inability to complete a rollover due to death disability hospitalization incarceration restrictions imposed by a foreign_country or posta error the use of the amount distributed for example in the case of payment by check whether the check was cashed and the time elapsed since the distribution occurred the information provided by the taxpayer’s authorized representative demonstrates a failure on the part of taxpayer a to satisfy the code sec_402 rollover requirements due to an inability to understand the nature of the transaction described above this was a consequence of taxpayer a’s documented mental impairment resulting from life threatening brain tumors taxpayer a has made no attempt to cash the amount e plan distribution check furthermore members of his family have been handling his financial affairs for a number of months and it was said family members specifically taxpayer b who discovered that taxpayer a had withdrawn amount d from his qualified_retirement_plan and filed this request for a waiver of the 60-day rollover period on behalf of taxpayer a thus taxpayer a is granted a period of days from the issuance of this ruling letter to contribute amount d or any portion thereof to an ira provided all other requirements of sec_402 of the code except the 60-day requirement are met with respect to such contributions the contributed amounts will be considered rollover_contributions within the meaning of sec_402 of the code please note that this letter_ruling does not authorize the rollover of the amount required to be distributed pursuant to code sec_401 if any see code sec_402 no opinion is expressed as to the tax treatment of the transaction described herein under the provisions of any other section of either the code or regulations which may be applicable thereto this letter 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 if you wish to inquire about this ruling please contact mn please address all correspondence to se t ep ra t3 a copy of this letter has been sent to your authorized representative in accordance with a power_of_attorney on file in this office sincerely yours frances v sloan manager employee_plans technical group enclosures deleted copy of letter_ruling notice of intention to disclose


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 date number release date cc intl postf-149523-01 uilc internal_revenue_service national_office legal advice memorandum for joseph f maselli area_counsel heavy manufacturing and transportation cc lm hmt new from john m breen senior technical reviewer cc intl subject - tax_year ending this chief_counsel_advice responds to your memorandum dated date in accordance with sec_6110 this chief_counsel_advice should not be cited as precedent legend amount a amount b amount c amount d amount e amount f amount g amount h amount i amount j amount k amount l amount m amount n postf-149523-01 city city city company country a country a co country a entity country a sub country a law date date date date date date date date date division division foreign co percent a percent b product a taxable_year taxable_year usco x y z issues whether country a sub was a separate_entity eligible to make an election effective on date under the check-the-box_regulations sec_301_7701-3 postf-149523-01 whether sec_382 limits or eliminates the amount of taxable_income that can be offset by the loss recognized by usco on its sale of the division assets to foreign co whether sec_269 may apply to disallow usco’s loss on the sale of the division assets to foreign co whether under the authority of sec_482 the service may disregard country a co’s check-the-box election and then reallocate to country a co as a separate_entity the loss recognized by usco on the sale of country a sub stock to foreign co conclusions based on the evidence presented neither country a sub nor country a entity country a sub’s purported predecessor entity was incorporated under the laws of country a on date however country a sub’s check- the-box election should be effective on date the filing_date of the form_8832 provided the election otherwise complies with the check-the-box requirements sec_382 applies to limit the amount of taxable_income that can be offset by the loss recognized by us co on its sale of the division assets sec_269 may apply to disallow us co’s loss on the sale of the division assets to foreign co although sec_482 would permit the service to reallocate losses from usco to country a co when such an allocation is necessary to clearly reflect income or to prevent the evasion of taxes we do not believe it is appropriate in the present factual context to apply sec_482 to disregard country a co’s check-the-box election facts usco a united_states_corporation is a major manufacturer of product a on date usco purchased the worldwide business operations of company with a few exceptions not relevant here usco purchased the assets of company 1's united_states businesses and the stock of company 1's foreign businesses usco paid approximately dollar_figureamount a for company 1's worldwide business operations this amount included approximately dollar_figureamount b in cash and usco stock worth dollar_figureamount c after the acquisition transaction company 1's shareholders owned directly or indirectly a percent a ie less than percent interest in usco postf-149523-01 at the time of the purchase usco was a publicly traded corporation and the majority of its stock was held by public shareholders none of whom held a five percent or greater interest usco represents that prior to the purchase of company 1's worldwide business usco was not related to company in any way and company 1's shareholders did not hold any interest in usco the parties apportioned approximately dollar_figureamount d of the total purchase_price to the stock of the foreign businesses of this amount approximately dollar_figureamount e was specifically apportioned to the purchase of the stock of a country a corporation country a co which became a controlled_foreign_corporation cfc of usco usco filed a form_5471 information_return of u s persons with respect to certain foreign_corporations for country a co with its taxable_year federal_income_tax return schedule f balance_sheet of that form_5471 states that on date country a co’s total asset value before liabilities was dollar_figureamount f usco supplied an additional balance_sheet for country a co as of date according to this balance_sheet country a co had assets before liabilities of dollar_figureamount g the adjusted_basis of the assets of country a co exceeded their fair_market_value immediately before the sale to usco at present no information indicates that country a co was engaged_in_a_trade_or_business_within_the_united_states prior to the purchase by usco country a co had two separately operated divisions division and division the division facilities were located in city and city in country a the division facilities were located in city in country a according to usco’s taxable_year annual report at the time of purchase usco did not intend to retain the division business because it did not fit well with usco’s core business examination determined that of country a co’s dollar_figureamount g book_value in assets approximately dollar_figureamount h was attributable to division assets and dollar_figureamount i of the liabilities were attributable to division less than two years after date the date of the acquisition of company 1's worldwide business operations the following occurred i country a co established a new wholly owned entity in country a country a sub the facts surrounding the formation of country a sub are unclear at this time usco represents that country a co had previously incorporated an entity called country a entity in country a on date usco claims that country a entity then changed its name to country a sub which required a reincorporation in country a usco indicated it did not perform nor did it have any other party perform a valuation study of the foreign businesses it purchased postf-149523-01 a country a certificate of incorporation dated date indicates that country a entity was incorporated on date this is the only country a certificate of incorporation currently available for country a entity country a sub’s form_966 complete dissolution or liquidation lists the name of the corporation as country a sub country a entity this form_966 lists date as the date of incorporation ii on date country a co and country a sub executed forms entity classification election in which they checked the box electing to be treated as disregarded entities each form_8832 stated that the election was to be effective on date a date not more than days before date and that the election was a change in the entity’s current classification the entity name on country a sub’s form_8832 is country a sub f k a country a entity usco did not specify an order of election iii on date usco transferred the division assets and liabilities to country a sub country a co agreed to transfer the division business to country a sub as a going concern with certain exceptions the transfer comprised all the assets and liabilities of the division business usco supplied a balance_sheet for the division and division businesses as of date according to this balance_sheet the total asset value of the division business before liabilities was approximately dollar_figureamount j the total liabilities of the division business were approximately dollar_figureamount k iv on date country a co sold the stock in country a sub to foreign co a country a entity usco represents that usco and foreign co were unrelated steps ii through iv occurred during the same month see sec_301_7701-3 when check-the-box elections for a series of tiered entities are effective on the same date the eligible entities may specify the order of the elections on form_8832 if no order is specified for the elections the transactions that are deemed to occur under sec_301_7701-3 as a result of the classification change will be treated as occurring first for the highest tier entity’s classification change then for the next highest tier entity’s classification change and so forth down the chain of entities postf-149523-01 on its federal_income_tax return for taxable_year usco treated the sale of country a sub to foreign co as an asset sale usco reported an amount_realized from the sale of dollar_figureamount l and an adjusted_basis in the assets transferred of dollar_figureamount m usco reported a dollar_figureamount n loss on the sale law and analysis issue sec_7701 sets forth definitions to be used in determining the classification of an organization as a corporation or as a partnership for federal tax purposes sec_301 of the treasury regulations known as the check-the-box_regulations provides a regime for the classification of entities that generally is elective the first issue presented is whether country a sub was a separate_entity eligible to make an election effective on date under the check-the box regulations sec_301_7701-1 of the treasury regulations clarifies that whether an organization is an entity separate from its owners for federal tax purposes is a matter of federal tax law and does not depend on whether the organization is recognized as an entity under local law under these regulations an entity may elect the form that it takes for tax purposes if that entity is considered an eligible_entity sec_301_7701-2 of the treasury regulations generally provides that a business_entity is any entity recognized for federal tax purposes that is not properly classified as a_trust under sec_301_7701-4 or otherwise subject_to special treatment under the internal_revenue_code sec_301_7701-3 of the treasury regulations generally provides that a business_entity that is not classified as a corporation under sec_301_7701-2 or is an entity eligible to elect its classification for federal tax purposes an eligible_entity with a single owner can elect to be classified as an association or to be disregarded as an entity separate from its owner for purposes of this advice we assume that country a co and country a sub are entities eligible to elect their classification for federal tax purposes an election under the check-the-box_regulations is made on a form_8832 entity classification election sec_301_7701-3 of the treasury regulations generally provides that an election will be effective on the date specified by the entity on the form_8832 or on the date the form is filed if no such date is specified the regulations further specify that the effective date on the form_8832 cannot be more than days prior to the date on which the election is filed and cannot be more than twelve months after the date on which the election is filed postf-149523-01 the information that you submitted states that under country a law a company is incorporated as of the date of incorporation listed on the certificate of incorporation see country a law section x furthermore under country a law a company cannot commence operation as an incorporated entity before it has been incorporated see country a law section y based on the information we have been provided it appears that neither country a sub nor country a entity was properly characterized as a business_entity under country a law on date the effective date specified on the form_8832 therefore neither country a sub nor country a entity are eligible to make an election effective on date the check-the-box_regulations provide no authority for the service to use a date other than the filing_date or the date specified on the form_8832 as the effective date of the election consequently the service must use the filing_date for the form_8832 in the event that the specified date is unavailable to the entity based on the information provided the filing_date of the form_8832 date is the effective date for the election provided the election complies with the check-the-box requirements in other respects issue the next issue is whether sec_382 limits or eliminates the amount of taxable_income that can be offset by the loss recognized by usco on its sale of the division assets to foreign co sec_382 generally limits the amount of pre-change of ownership losses that can be used to offset the taxable_income of any loss_corporation the sec_382 limitation is triggered by the occurrence of an ownership_change an ownership_change occurs if immediately after any owner shift involving a 5-percent_shareholder or any equity_structure_shift the percentage of the stock of the loss_corporation owned by one or more 5-percent shareholders has increased by more than percentage points over the lowest percentage of stock of the loss_corporation owned by such shareholders at any time during the 3-year testing_period sec_382 and based on the information submitted we agree that country a co underwent an ownership_change within the meaning of sec_382 usco held less than five the testing_period is generally defined in sec_382 as the 3-year period ending on the day of any owner shift involving a 5-percent_shareholder or equity_structure_shift postf-149523-01 percent of the stock of country a co prior to date a shift of owners involving a percent shareholder occurred when the usco shareholders including the public shareholders as a single public_group under sec_1_382-2t increased their ownership of country a co by attribution under sec_382 and sec_1_382-2t from zero to percent b ie by more than percentage points over their former ownership of country a co which was zero sec_382 specifies that a loss_corporation includes any corporation with a net_unrealized_built-in_loss nubil sec_382 defines a nubil with respect to any old_loss_corporation as the amount by which the fair_market_value of the assets of such corporation immediately before an ownership_change is less than the aggregate adjusted_basis of such assets at such time the information submitted states that immediately before usco’s acquisition of all the country a co stock the adjusted_basis of the assets of country a co exceeded their fair_market_value by an amount greater than the threshold under sec_382 because the purchase of the country a co stock resulted in an ownership_change it follows that country a co had a nubil within the meaning of sec_382 therefore country a co was a loss_corporation as defined in sec_382 moreover because country a co was a loss_corporation immediately before the ownership_change country a co was an old_loss_corporation as defined in sec_382 furthermore because country a co was a loss_corporation after an ownership_change it was also a new_loss_corporation as defined in sec_382 assuming that the check-the-box elections under sec_301_7701-3 are valid and also assuming that the deemed liquidations of country a co and country a sub that resulted under sec_301_7701-3 qualify under sec_332 usco was the successor to country a co see sec_1_382-2t sec_1_382-2 defining a successor_corporation to include a distributee corporation that succeeds to items described in sec_381 from a corporation as the result of an asset acquisition described in sec_381 as the successor to country a co usco and country a co are treated as one entity for purposes of applying sec_382 sec_382 usco’s recognition of a loss upon the sale of the division assets resulted in a recognized_built-in_loss rbil within the meaning of sec_382 thus usco is subject_to the sec_382 limitation in the same way as country a co sec_382 and sec_382 postf-149523-01 sec_382 provides that the sec_382 limitation for any post-change_year is an amount equal to the value of the old_loss_corporation multiplied by the long- term tax-exempt rate under sec_382 the value of the old_loss_corporation is the value of the stock of such corporation including any stock described in sec_1504 immediately before the ownership_change a special rule under sec_382 provides that in determining the value of any old_loss_corporation that is a foreign_corporation only items treated as connected with the conduct_of_a_trade_or_business in the united_states are considered except as otherwise provided in regulations there are no regulations interpreting this provision it is our understanding that the service presently does not have any information indicating that country a co was engaged_in_a_trade_or_business_within_the_united_states if after further development of the facts the service concludes that country a co had no items connected or which should be treated as connected with the conduct_of_a_trade_or_business in the united_states there may be an argument that the sec_382 limitation is zero under sec_382 alternatively if the service develops facts indicating that country a co had any items connected or properly treated as connected with the conduct_of_a_trade_or_business in the united_states we recommend that you contact the national_office for further advice concerning the application of sec_382 for purposes of determining the sec_382 limitation in addition to the requirements discussed above we also note that sec_382 generally provides that if the new_loss_corporation does not continue the business_enterprise of the old_loss_corporation at all times during the two-year period following the ownership_change then the sec_382 limitation is zero this test is the same as the continuity of business_enterprise rule_of sec_1_368-1 that is generally applicable to reorganizations see s rep no 99th cong 2d sess vol c b to satisfy the continuity of business_enterprise test the new_loss_corporation must either continue the historic_business of the old_loss_corporation or use a significant portion of the old loss corporation’s assets in the business of the new_loss_corporation see sec_1_368-1 and since usco continued the division business after the acquisition of country a co we agree that the continuity of business_enterprise requirement of sec_382 was satisfied issue the third issue is whether sec_269 may apply to disallow usco’s loss on the sale of the division assets to foreign co postf-149523-01 sec_269 allows the service to disallow a deduction credit or other allowance if a there is a qualified_stock_purchase by a corporation of another corporation b an election is not made under sec_338 with respect to such purchase c the acquired_corporation is liquidated pursuant to a plan_of_liquidation adopted not more than years after the acquisition_date and d the principal purpose for such liquidation is the evasion or avoidance of federal_income_tax by securing the benefit of a deduction credit or other allowance which the acquiring_corporation would not otherwise enjoy the terms qualified_stock_purchase and acquisition_date have the same meanings as in sec_338 sec_269 the acquisition of country a co stock by usco appears to be a qualified_stock_purchase as defined in sec_338 assuming that it is a qualified_stock_purchase sec_269 potentially applies because the deemed liquidation of country a co which occurred under sec_301_7701-3 if a valid disregarded_entity election was made under sec_301_7701-3 was less than two years after country a co’s acquisition by usco in addition the fact that the loss sale of the division assets occurred only a period of z days after the making of the disregarded_entity elections may be evidence of a tax_avoidance purpose although usco and country a co may have a good business_purpose for selling the division that was transferred to country a sub usco and country a co could have sold that division without first making elections to liquidate country a co and country a sub for tax purposes and in effect transferring to usco country a co’s loss on the sale sec_269 however applies only if as a factual matter the liquidation of country a co was motivated by the principal purpose of tax_evasion or avoidance by securing the benefit of a deduction that usco would not otherwise enjoy under sec_1_269-7 sec_269 may disallow a deduction even though sec_382 also limits or reduces the deduction but the fact that sec_382 applies may be relevant to whether the principal purpose of the acquisition is tax_avoidance issue finally we are asked whether in the alternative sec_482 may be applied under the facts of this case postf-149523-01 sec_482 provides the service broad authority to distribute apportion or allocate gross_income deductions credits or allowances between or among controlled parties to ensure that taxpayers clearly reflect income and to prevent the evasion of taxes you have asked whether under the facts presented the service has authority under sec_482 to disregard country a co’s check-the-box election and then reallocate to country a co as a separate_entity the loss recognized by usco on the sale of the country a sub stock to foreign co please note that this discussion does not affect our conclusions above that the recognition of any loss by any party on the sale of the country a sub stock to foreign co may properly be limited by sec_382 and or sec_269 independently of the loss limitations mandated by sec_382 and sec_269 sec_482 may permit the service to reallocate losses from usco to country a co if such an allocation is necessary to clearly reflect income or to prevent the evasion of taxes see eg general electric co v united_states cl_ct such an allocation would not however have any u s tax effect provided that country a co’s check-the-box election remained in effect and country a co were disregarded as an entity separate from usco in the present factual context we do not believe it is appropriate to apply sec_482 to disregard country a co’s check-the-box election given that entity classification for federal_income_tax purposes does not directly implicate the allocation of items of income between controlled taxpayers it is not clear therefore that sec_482 should have application to these facts given the extensive limitations on recognition of built-in losses contained in sec_382 we believe that the relevant losses in the present case are more appropriately addressed under this targeted statutory framework rather than the general authority of sec_482 case development hazards and other considerations because sec_382 applies to the loss sale without regard to the underlying purpose of the deemed liquidation it may be harder to prove that the liquidation was motivated by tax_avoidance under sec_269 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 by john m breen senior technical reviewer cc intl


internal_revenue_service number release date index number ------------------------ ----------------------------------- --------------------------- --------------------------- ---------------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------ id no ------------------ telephone number ---------------------- refer reply to cc corp plr-101699-19 date date legend purchaser ----------------------------------------------------------------------------- --------------------------------------------------------------------- ---------------------------------------------- s_corporation target -------------------------------------------------------------------------------- --------------------------------------------------------------------- --------------------------- shareholders ---------------------------- ----------------------- --------------------------------------------------------------------------- --------------------------------------------------------------------------------- ------------------------------------------------------------------------- ----------------------- -------------------------------------------------------------------------- --------------------------------------------------------------------------------- ------------------------------------------------------------------------- ----------------------- --------------------------------------------------------------------- --------------------------------------------------------------------------------- ----------------------------------------------------------------------------------- --------------------------------------------------------------------------------- --------------------------------------------------------------------------- ----------------------------------------------------------------------------- plr-101699-19 -------------------------------------------------------------------------------- --------------------------------------------------------------------------- ----------------------------------- ------------------------ date -------------------------- company official ---------------------------------------------------------------------------- ------------------------------------------------------------------------ ------------------- dear --------------- this letter responds to a letter dated date submitted on behalf of purchaser s_corporation target and shareholders collectively the parties requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations to file an election the parties are requesting an extension of time to properly execute the agreement referenced in sec_1_336-2 of the income_tax regulations the agreement and to file an election statement under sec_1_336-2 election statement with respect to purchaser’s acquisition of all of the stock of s_corporation target from shareholders on date additional information was received subsequently the material information submitted is summarized below on date purchaser a corporation acquired all of the stock of s_corporation target from shareholders in exchange for cash the disposition it has been represented that the disposition qualified as a qualified_stock_disposition as defined in sec_1 b the parties intended for the stock sale to be treated as an asset sale but for various reasons a timely election was not made subsequently the parties submitted a request under sec_301_9100-3 of the procedure and administration regulations for an extension of time to enter into the agreement and file the election statement the parties each represented that they are not seeking to alter a return position for which an accuracy-related_penalty has been or could be imposed under sec_6662 at the time of the request for relief regulations promulgated under sec_336 permit certain_sales exchanges or distributions of stock of a corporation to be treated as asset dispositions if the disposition is a qualified_stock_disposition as defined in sec_1_336-1 and a sec_336 election is made sec_1_336-2 provides that a sec_336 election for an s_corporation target is made by i all of the s_corporation shareholders including those who do not dispose_of any stock in the qualified_stock_disposition and the s_corporation target entering into a written binding agreement on or before the due_date including extensions of the federal_income_tax return of the s_corporation target for the taxable_year that includes plr-101699-19 the disposition date to make a sec_336 election ii the s_corporation target retaining a copy of the written_agreement and iii the s_corporation target attaching the sec_336 election statement described in sec_1_336-2 and to its timely filed including extensions federal_income_tax return for the taxable_year that includes the disposition date under sec_301_9100-1 the commissioner has discretion to grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make a regulatory election sec_301_9100-1 sec_301_9100-2 provides automatic extensions of time for making certain elections requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish to the satisfaction of the commissioner 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 the time for entering into the agreement and filing the election statement is fixed by the regulations ie sec_1_336-2 and iii therefore the commissioner has discretionary authority under sec_301_9100-3 to grant an extension of time to enter into the agreement and to file the election statement provided the parties acted reasonably and in good_faith the requirements of sec_301_9100-1 and sec_301_9100-3 are satisfied and granting relief will not prejudice the interests of the government information affidavits and representations submitted by the parties and company official explain the circumstances that resulted in the failure to enter into the agreement and file the election statement the information establishes that the request for relief was filed before the failure to timely enter into the agreement and file the election statement was discovered by the internal_revenue_service see sec_301_9100-3 based on the facts and information submitted including the representations made we conclude that the parties have acted reasonably and in good_faith the requirements of sec_301_9100-1 and sec_301_9100-3 are satisfied and granting relief will not prejudice the interests of the government accordingly an extension of time is granted under sec_301_9100-3 until days from the date on this letter to enter into the agreement and file the election statement within days of the date on this letter s_corporation target and shareholders must enter into a written binding agreement in accordance with sec_1_336-2 to make the sec_336 election and s_corporation target must file the election statement in accordance with sec_1_336-2 the election statement must be attached to s_corporation target’s tax_return for the taxable_year including date alternatively if s_corporation target files its return electronically it may satisfy the requirement of attaching a copy of this letter to the return by attaching a plr-101699-19 statement to its return that provides the date on this letter and control number of this letter_ruling plr-101699-19 within days of the date on this letter all relevant parties must file or amend as applicable all returns and amended returns if any necessary to report the transaction consistently with the making of a sec_336 election for the taxable_year in which the transaction was consummated and for any other affected_taxable_year the above extension of time is conditioned on the parties’ tax_liabilities if any being not lower in the aggregate for all years to which the sec_336 election applies than it would have been if the agreement had been timely entered into and the election statement had been timely filed taking into account the time_value_of_money no opinion is expressed as to the taxpayers' tax_liabilities for the years involved a determination thereof will be made by the applicable director’s office upon audit of the federal_income_tax returns involved we express no opinion as to whether the disposition qualifies as a qualified_stock_disposition or any other tax consequences arising from the sec_336 election in addition we express no opinion as to the tax consequences of making the sec_336 election late under the provisions of any other section of the code and regulations or as to the tax treatment of any conditions existing at the time of or resulting from making the sec_336 election late that are not specifically set forth in the above ruling for purposes of granting relief under sec_301_9100-3 we have relied on certain statements and representations made by the parties and company official however the director should verify all essential facts in addition notwithstanding that an extension is granted under sec_301_9100-3 to file the sec_336 election penalties and interest that would otherwise be applicable if any continue to apply this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office copies of this letter are being sent to your authorized representatives sincerely thomas i russell chief branch office of associate chief_counsel corporate cc


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc tege eoeg teb-plr-161979-01 date date legend issuer facility month year year year year year dear this is in response to your request for the following rulings the issuance maturities and mandatory sinking_fund redemptions of the refunding bonds and subsequent bonds as defined below and together the proposed bonds will not give rise to replacement_proceeds as defined in sec_1_148-1 of the income_tax regulations the proposed bonds will not be considered to finance restricted working_capital expenses and the proceeds-spent-last rule in sec_1_148-6 will not apply the issuance of the proposed bonds will not be considered as the use of an abusive arbitrage device or to be an overburdening of the tax-exempt_bond market under sec_1_148-10 facts and representations in year the issuer issued four series of revenue bonds as part of a single issue to fund construction of the facility the prior bonds the facility is expected to be placed into service in month of year revenues of the facility will not be generated until the facility is placed into service and thereafter are expected to increase over an extended period of time as usage increases the prior bonds include current interest bonds capital appreciation bonds the prior capital appreciation bonds and convertible capital appreciation bonds the issuer selected the particular mix of the types amounts and maturities of bonds in a manner designed to finance the facility at the lowest possible debt service cost with the entire issue having a payment schedule that could be paid from the estimated amounts of revenues available from the facility the issuer sought to accomplish this goal by issuing as many bonds as possible with investment-grade ratings the issuer also sought to use current interest bonds to the maximum extent possible and minimize the use of capital appreciation bonds this is because capital appreciation bonds which allow the issuer to defer payment of interest until redemption would sell at yields higher than those for current interest bonds with similar maturities factors affecting the number of current interest bonds that could be issued were the revenues expected to be available to make interest payments on current interest bonds and in the absence of such revenues the market’s willingness to purchase bonds the proceeds of which will be used to pay interest on current interest bonds the weighted_average_maturity of the prior bonds is not greater than percent of the reasonably expected economic useful_life of the facility the issuer wishes to enter into the transaction described below to refund all or a portion of the prior capital appreciation bonds the refunded bonds the refunded bonds mature on june 15th of years spanning from year through year the weighted_average_maturity of the refunded bonds is not greater than percent of the reasonably expected economic useful_life of the facility the issuer proposes to issue current refunding bonds the refunding bonds that will be variable rate demand bonds paying interest semiannually the refunding bonds will mature in year but will be subject_to mandatory sinking_fund redemptions from year through year in amounts that to the extent feasible correspond to the amounts that would have been payable on the refunded bonds were they not refunded the weighted_average_maturity of the refunding bonds will not be greater than the weighted_average_maturity of the refunded bonds in addition the issuer proposes to issue separate issues of bonds periodically to fund the payment of the semiannual interest payable on the refunding bonds and on any bonds previously issued for this purpose the subsequent bonds any subsequent bonds would be issued on interest payment dates in an amount necessary to make the interest payment due on that date however to the extent monies in the debt service fund for the proposed bonds exceed the amount of principal payable within the next months on the proposed bonds ie to the extent the issuer has funds on deposit in the debt service fund to pay interest the issuer expects to use the excess to pay interest on the proposed bonds rather than issuing subsequent bonds moreover the issuer will not issue subsequent bonds and will retire outstanding subsequent bonds if and to the extent that in the exercise of the issuer’s prudent judgment the issuer’s funds exceed the amounts reasonably required to satisfy its anticipated business needs notwithstanding the issuer does not expect that it will make periodic monthly deposits to the debt service fund to pay the interest payments on the proposed bonds the issuer anticipates issuing subsequent bonds on each interest payment_date of the refunding bonds to pay the then-current interest payment on the refunding bonds and on any previously issued subsequent bonds the issuer does not expect the issuance of subsequent bonds will exceed in either maturity or amount the bonds which would be issued if the interest on such bonds were not excludable under sec_103 of the internal_revenue_code the code assuming that the hypothetical taxable interest rate would be the same as the actual tax-exempt_interest rate the subsequent bonds like the refunding bonds will be variable rate demand bonds that pay interest semiannually the subsequent bonds similarly will mature in year but be subject_to mandatory sinking_fund redemptions from year through year in amounts that to the extent feasible correspond to the amounts that would have been payable on the refunded bonds the weighted_average_maturity of the proposed bonds considered as a whole will be less than the remaining weighted_average_maturity of the refunded bonds the issuer will hedge the variable interest payments on the proposed bonds to accomplish this the issuer will enter into one or more agreements the agreements with a counterparty in which the issuer will make payments based on a fixed rate of interest and receive payments based on an indexed floating rate expected to be substantially equivalent to the rate on the proposed bonds throughout their term the total notional_principal_amount on the agreements will be equal to the principal_amount of the refunding bonds the amount of each party’s payment will compound semiannually on the dates interest payments on the refunding bonds are due the fixed payments will compound at the fixed interest rate and the variable payments will compound at the then-variable rate although amounts are calculated at these intervals payments are not made at these intervals rather the counterparty’s payments will occur on the retirement or redemption dates of the proposed bonds the issuer’s corresponding payments to the counterparty will be made within days of the counterparty’s payments the term of the agreements will correspond with the term of the proposed bonds however the issuer will be able to terminate any of the agreements in whole or in part on any date at the then-market value of such agreements potentially resulting in a termination_payment by the issuer or the counterparty for example if the issuer does not issue subsequent bonds on a particular date it may terminate the portion of the agreements that relates to such bonds the structure proposed by the issuer is economically equivalent to the issuance of fixed rate capital appreciation bonds but at a lower debt service cost to the issuer than the refunded bonds or a refunding actually utilizing fixed rate capital appreciation bonds in addition to the debt service fund referred to above the indenture for the prior bonds and the proposed bonds provides for the creation of the debt service reserve fund the construction fund the capitalized_interest fund the operating reserve fund the renewal and replacement fund the supplemental reserve fund the rebate fund and the surplus fund the indenture describes the flow of revenues of the facility into certain of these funds and specifies the sequence of the funds into which the deposits of revenues will be made and the funding requirements for these funds generally the indenture requires the revenues to be deposited into each fund in the sequence until the amount of the funding requirement of that fund is reached the last fund in the flow of revenues the surplus fund has no funding requirement the funding requirements for the funds created under the indenture will not exceed the levels that would be required if the interest on the proposed bonds were not excludable under sec_103 assuming that the hypothetical taxable interest rate would be the same as the actual tax-exempt_interest rate with respect to the operating reserve fund the supplemental reserve fund and the renewal and replacement fund the funding requirements were established at the levels reasonably expected to be necessary to serve the purposes for which such funds were created and were based on discussions with the bond rating agencies and the bond insurer the anticipated needs of the authority and the market requirements as reflected in other similar financings whether taxable or tax-exempt however to the extent that the amount on deposit in any of the operating reserve fund the supplemental reserve fund and the renewal and replacement fund is less than its funding requirement the indenture imposes no obligation to deposit amounts into the fund other than to the extent of available revenues moreover there is no event of default under the indenture if the available revenues are insufficient to fully satisfy the funding requirements for these funds with respect to the operating reserve fund the renewal and replacement fund the supplemental reserve fund the rebate fund and the surplus fund ie the funds that are not funded with proceeds the amounts in such funds are not expected to be used to pay debt service on the proposed bonds and there is no assurance that such amounts will be available to pay debt service on the proposed bonds the operating reserve fund may be used to pay operating_expenses of the facility not paid from other sources the renewal and replacement fund may be used for maintenance and repair of and environmental mitigation for the facility the rebate fund may only be used to pay federal arbitrage rebate payments the supplemental reserve fund may be used for capital expenditures related to the facility the surplus fund may be used by the issuer for any authorized purpose the indenture does not contain any restrictions on the use of the funds for these respective purposes other than in the circumstances described below in the event of default on the proposed bonds amounts in each of these funds other than the rebate fund may be used for debt service on the proposed bonds also if on any date the amount in the debt service fund for the proposed bonds is insufficient to pay the debt service or redemption price due on that date eg if no subsequent bonds are issued the indenture will require monies to be transferred to the debt service fund from the surplus fund the supplemental reserve fund the renewal and replacement fund the debt service reserve fund the capitalized_interest fund and the construction fund in that order to the extent necessary law sec_103 of the internal_revenue_code the code provides that except as provided in subsection b gross_income does not include interest on any state_or_local_bond sec_103 provides in part that subsection a shall not apply to any arbitrage_bond within the meaning of sec_148 sec_148 provides that the term arbitrage_bond means any bond issued as part of an issue any portion of the proceeds of which are reasonably expected at the time of issuance of the bond to be used directly or indirectly to acquire higher_yielding_investments or to replace funds which were used directly or indirectly to acquire higher_yielding_investments further for purposes of sec_148 a bond shall be treated as an arbitrage_bond if the issuer intentionally uses any portion of the proceeds of the issue of which such bond is a part in a manner described in or sec_1_148-1 provides that amounts are replacement_proceeds of an issue if the amounts have a sufficiently direct nexus to the issue or to the governmental purpose of the issue to conclude that the amounts would have been used for that governmental purpose if the proceeds of the issue were not used or to be used for that governmental purpose for this purpose governmental purposes include the expected use of amounts for the payment of debt service on a particular date the mere availability or preliminary earmarking of amounts for a governmental purpose however does not in itself establish a sufficient nexus to cause those amounts to be replacement_proceeds replacement_proceeds include but are not limited to sinking funds pledged funds and other replacement_proceeds described in sec_1_148-1 to the extent that those funds or amounts are held by or derived from a substantial beneficiary of the issue a substantial beneficiary of an issue includes the issuer and any related_party to the issuer and if the issuer is not a state the state in which the issuer is located a person is not a substantial beneficiary of an issue solely because it is a guarantor under a qualified guarantee sec_1_148-1 provides that a sinking_fund includes a debt service fund redemption fund reserve fund replacement fund or any similar fund to the extent reasonably expected to be used directly or indirectly to pay principal or interest on the issue sec_1_148-1 provides that a pledged fund is any amount that is directly or indirectly pledged to pay principal or interest on the issue a pledge need not be cast in any particular form but in substance must provide reasonable assurance that the amount will be available to pay principal or interest on the issue even if the issuer encounters financial difficulties sec_1_148-1 provides that an amount is treated as pledged to pay principal or interest on an issue if it is held under an agreement to maintain the amount at a particular level for the direct or indirect benefit of the bondholders or a guarantor of the bonds an amount is not treated as pledged however if a the issuer or a substantial beneficiary may grant rights in the amount that are superior to the rights of the bondholders or the guarantor or b the amount does not exceed reasonable needs for which it is maintained the required level is tested no more frequently than every months and the amount may be spent without any substantial restriction other than a requirement to replenish the amount by the next testing_date sec_1_148-1 provides that replacement_proceeds arise to the extent that the issuer reasonably expects as of the issue_date that the term of an issue will be longer than is reasonably necessary for the governmental purposes of the issue and there will be available amounts during the period that the issue remains outstanding longer than necessary whether an issue is outstanding longer than necessary is determined under sec_1_148-10 replacement_proceeds are created under sec_1_148-1 at the beginning of each fiscal_year during which an issue remains outstanding longer than necessary in an amount equal to available amounts of the issuer as of that date sec_1_148-1 provides as a safe_harbor that replacement_proceeds do not arise under sec_1_148-1 for the portion of an issue that is to be used to finance restricted working_capital expenditures if that portion is not outstanding longer than years for the portion of an issue including a refunding_issue that is to be used to finance or refinance capital projects if that portion has a weighted_average_maturity that does not exceed percent of the average reasonably expected economic life of the financed capital projects determined in the same manner as under sec_147 or for the portion of an issue that is a refunding_issue if that portion has a weighted_average_maturity that does not exceed the remaining weighted_average_maturity of the prior issue and the issue of which the prior issue is a part satisfies sec_1 c i b or revrul_79_134 1979_1_cb_76 addressed the application of the arbitrage provisions to a depreciation_reserve fund pledged as security for certain bonds issued to finance construction of a hospital the hospital owner derived nearly percent of its revenues from medical_reimbursement_plans that required the owner to set_aside the portion of reimbursed medical payments allocated to the cost of depreciation and make such funds available to replace the owner’s depreciable_property under the indenture the owner agreed to deposit monthly in the depreciation_reserve fund an amount equal to one-twelfth of its annual depreciation expense the depreciation_reserve fund consisted of a restricted account and a surplus account the amounts in the surplus account were not expected to exceed the amount needed to replace the depreciable_property the monies in the surplus account could be used in the absence of default for the construction of improvements the purchase of depreciable_property or for any lawful purpose the ruling concluded that the issuer did not reasonably expect the amounts in the surplus account to be used for debt service and held that the amounts in the surplus account would not be subject_to the arbitrage rules sec_1_148-1 defines restricted working_capital expenditures as working_capital expenditures that are subject_to the proceeds-spent-last rule in sec_1_148-6 and are ineligible for any exception to that rule sec_1_148-1 defines capital project as all capital expenditures plus related working_capital expenditures to which the de_minimis_rule under sec_1_148-6 applies that carry out the governmental purposes of an issue sec_1_148-6 provides that except as otherwise provided in sec_1 d or d proceeds of an issue may only be allocated to working_capital expenditures as of any date to the extent that those working_capital expenditures exceed available amounts as defined in sec_1_148-6 as of that date ie a proceeds-spent-last method for this purpose proceeds include replacement_proceeds described in sec_1_148-1 sec_1_148-6 provides that sec_1_148-6 does not apply to expenditures_for payment of principal interest or redemption prices on a prior issue and for a crossover refunding_issue interest on that issue sec_1_148-6 provides that the exceptions provided in sec_1 d ii do not apply if the allocation merely substitutes gross_proceeds for other_amounts that would have been used to make those expenditures in a manner that gives rise to replacement_proceeds for example if a purported reimbursement allocation of proceeds of a reimbursement_bond does not result in an expenditure under sec_1_150-2 those proceeds may not be allocated to pay interest on an issue that absent this allocation would have been paid from the issuer's current revenues sec_1_148-10 provides that bonds of an issue are arbitrage_bonds under sec_148 if an abusive arbitrage device under sec_1_148-10 is used in connection with the issue sec_1_148-10 is to be applied and interpreted broadly to carry out the purposes of sec_148 as further described in sec_1_148-0 except as otherwise provided in sec_1_148-10 any_action that is expressly permitted by sec_148 or sec_1_148-1 through is not an abusive arbitrage device eg investment in higher_yielding_investments during a permitted temporary period under sec_148 sec_1_148-10 provides that any_action is an abusive arbitrage device if the action has the effect of i enabling the issuer to exploit the difference between tax- exempt and taxable interest rates to obtain a material financial advantage and ii overburdening the tax-exempt_bond market sec_1_148-10 provides that an action overburdens the tax-exempt_bond market if it results in issuing more bonds issuing bonds earlier or allowing bonds to remain outstanding longer than is otherwise reasonably necessary to accomplish the governmental purposes of the bonds based on all the facts and circumstances whether an action is reasonably necessary to accomplish the governmental purposes of the bonds depends on whether the primary purpose of the transaction is a bona_fide governmental purpose eg an issue of refunding bonds to achieve a debt service restructuring that would be issued independent of any arbitrage benefit an important factor bearing on this determination is whether the action would reasonably be taken to accomplish the governmental purpose of the issue if the interest on the issue were not excludable from gross_income under sec_103 assuming that the hypothetical taxable interest rate would be the same as the actual tax-exempt_interest rate factors evidencing an overissuance include the issuance of an issue the proceeds of which are reasonably expected to exceed by more than a minor portion the amount necessary to accomplish the governmental purposes of the issue or an issue the proceeds of which are in fact substantially in excess of the amount of sale proceeds allocated to expenditures_for the governmental purposes of the issue one factor evidencing an early issuance is the issuance of bonds that do not qualify for a temporary period under sec_1_148-2 e or e one factor evidencing that bonds may remain outstanding longer than necessary is a term that exceeds the safe harbors against the creation of replacement_proceeds under sec_1 c i b these factors may be outweighed by other factors however such as bona_fide cost underruns or long-term financial distress sec_1_150-1 defines refunding_issue as an issue of obligations the proceeds of which are used to pay the principal interest or redemption price on another issue a prior issue as more particularly defined in sec_1_150-1 including the issuance costs accrued interest capitalized_interest on the refunding_issue a reserve or replacement fund or similar costs if any properly allocable to that refunding_issue sec_1_150-1 provides that an issue is not a refunding_issue if the only principal and interest that is paid with proceeds of the issue determined without regard to the multipurpose issue rules of sec_1_148-9 is interest on another issue that a accrues on the other issue during a one-year period including the issue_date of the issue that finances the interest b is a capital_expenditure or c is a working_capital expenditure to which the de_minimis_rule of sec_1_148-6 applies analysis certain of the issuer’s representations concerning its proposed actions are expressed in terms of its expectations our analysis is based on the issuer’s acting in accordance with those expectations replacement_proceeds we conclude that the issuance maturities and mandatory sinking_fund redemptions of the proposed bonds will not give rise to replacement_proceeds as more specifically described below there are no amounts that have a sufficiently direct nexus to the proposed bonds or to the governmental purposes of the proposed bonds to conclude that the amounts would have been used for that governmental purpose if the proceeds of the proposed bonds were not used or to be used for that purpose the issuance of the proposed bonds will not replace any amounts in the debt service fund the issuer expects to issue the subsequent bonds to pay interest on the proposed bonds and therefore does not expect to make any deposits to the debt service fund to pay such interest to the extent that the issuer deposits monies into the debt service fund to pay interest on the proposed bonds the issuer will not issue the subsequent bonds in addition amounts on deposit in the operating reserve fund the renewal and replacement fund the supplemental reserve fund the rebate fund and the surplus fund will not be replacement_proceeds of the proposed bonds the amounts in these funds will not be a sinking_fund as they are not expected to be used to pay debt service on the proposed bonds they will not be a pledged fund because there is no assurance that such monies will be available to pay debt service on the proposed bonds in general these funds are designated for specified purposes other than debt service under the indenture and may be used by the issuer for such purposes without limitation with respect to the operating reserve fund the supplemental reserve fund and the renewal and replacement fund the funding requirements were established at the levels expected to be reasonably necessary to serve the purposes for which such funds were created and were based on discussions with the bond rating agencies and the bond insurer the anticipated needs of the authority and the market requirements as reflected in other similar financings whether taxable or tax-exempt the funding requirements for these funds will not exceed the levels that would be required if the interest on the proposed bonds were not excludable under sec_103 assuming that the hypothetical taxable interest rate would be the same as the actual tax-exempt_interest rate moreover there is no negative pledge as there is no agreement to maintain such funds at a particular level to the extent that the amount on deposit in any of the operating reserve fund the supplemental reserve fund and the renewal and replacement fund is less than its funding requirement the indenture imposes no obligation to deposit amounts into the fund other than to the extent of available revenues there is no event of default under the indenture if the available revenues are insufficient to fully satisfy the funding requirements for these funds while the amounts in these funds may be used for debt service in the case of an event of default or if monies in the debt service fund on a given date are insufficient to pay debt service due on such date these provisions do not by themselves cause the amounts to be replacement_proceeds see revrul_79_134 1979_1_cb_76 if however either of these eventualities were to occur then the amounts that are transferred or for which the use becomes restricted would become replacement_proceeds finally the proposed bonds will not lead to the creation of other replacement_proceeds the refunding bonds meet the safe_harbor in sec_1_148-1 as the weighted_average_maturity of the refunding bonds is less than percent of the reasonably expected useful_life of the facility however there is no safe_harbor applicable to the subsequent bonds to determine if they result in the creation of other replacement_proceeds as they will not be used to finance restricted working_capital expenditures as discussed below and they do not finance a capital project under sec_1_148-1 or constitute a refunding_issue under sec_1_150-1 regardless we conclude that the subsequent bonds will not be outstanding longer than necessary and therefore do not result in the creation of other replacement_proceeds in the first instance the maturities of the refunded bonds were reasonably determined as part of a larger issue based on the revenues expected to be available from the facility and the refunded bonds met the safe_harbor in sec_1_148-1 as capital appreciation bonds the refunded bonds had an issue_price with interest accruing and compounding on such amount to maturity the subsequent bonds are being issued to perform the same function as the interest that would otherwise have permissibly accrued and compounded on the refunded bonds without the creation of other replacement_proceeds and the maturities and mandatory sinking_fund redemptions will correspond to the extent feasible to the amounts that would have been payable on the refunded bonds ultimately the substance of the proposed transaction is the same as if the issuer refunded the refunded bonds with fixed rate capital appreciation bonds but at a lower debt service cost to the issuer than actually issuing fixed rate capital appreciation bonds moreover the issuer does not expect the maturity of the subsequent bonds to exceed that which would be issued if the interest on such bonds were not excludable under sec_103 assuming that the hypothetical taxable interest rate would be the same as the actual tax-exempt_interest rate finally the issuer will retire outstanding subsequent bonds to the extent that the issuer has funds in excess of its anticipated business needs restricted working_capital expenses the proceeds-spent-last rule will not apply to the proposed bonds the proposed bonds qualify for the exception under sec_1_148-6 for the payment of principal interest and redemption prices on a prior issue and thus will not be considered to be used to finance restricted working_capital expenses the refunding bonds will be used to pay principal and interest on the refunded bonds the subsequent bonds will be used to pay interest on the refunding bonds and previously issued subsequent bonds moreover as discussed above and as required by sec_1 d ii d the issuance of the proposed bonds will not result in the creation of replacement_proceeds abusive arbitrage device overburdening the issuance of the proposed bonds will not be an abusive arbitrage device or an overburdening under sec_1_148-10 because neither the refunding bonds nor the subsequent bonds overburden the tax-exempt market the refunding bonds will not overburden the tax-exempt market there is not an issuance of more bonds than necessary because the proceeds will be issued in an amount necessary to pay the refunded bonds they will not be issued too early because as current refunding bonds the proceeds will be used to pay off the refunded bonds within days last the refunding bonds will not be outstanding longer than necessary the maturities of the refunded bonds were reasonably determined as part of a larger issue based on the revenues expected to be available from the facility the refunding bonds do not extend the average maturity of the refunded bonds also the refunding bonds meet the safe_harbor against the creation of replacement_proceeds under sec_1_148-1 the subsequent bonds will not overburden the tax-exempt market there is not an issuance of more bonds than necessary because the amount of such bonds issued will be that needed to pay interest on the refunding bonds and previously issued subsequent bonds reduced to take into account any monies in the debt service fund available to pay interest on such bonds this amount corresponds to the amount of interest that would have permissibly accrued and compounded on the refunded bonds in the absence of the refunding transaction as noted earlier the structure of the transaction is the economic equivalent of fixed rate capital appreciation bonds but at a lower debt service cost to the issuer the issuer does not expect the issuance of subsequent bonds to exceed in either maturity or amount the bonds that would be issued if the interest on such bonds were not excludable under sec_103 assuming that the hypothetical taxable interest rate would be the same as the actual tax-exempt_interest rate further the issuer will not issue the subsequent bonds and will retire outstanding subsequent bonds if and to the extent that in the exercise of its prudent judgment their funds exceed the amounts reasonably necessary to satisfy its anticipated business needs the subsequent bonds will not be issued too early as they will be issued on interest payment dates to fund the interest payment on that date finally as discussed under replacement_proceeds above the subsequent bonds will not be outstanding longer than necessary conclusions in its representations the issuer indicated its expectations as to certain actions as reflected in the above description of facts and representations provided that the issuer acts in accordance with its expectations the issuance maturities and mandatory sinking_fund redemptions of the proposed bonds will not give rise to replacement_proceeds as defined in sec_1_148-1 of the income_tax regulations the proposed bonds will not be considered to finance restricted working_capital expenses and the proceeds-spent-last rule in sec_1_148-6 will not apply the issuance of the proposed bonds will not be considered as the use of an abusive arbitrage device or to be an overburdening of the tax-exempt_bond market under sec_1_148-10 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 except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter specifically no opinion is expressed concerning whether interest on the proposed bonds is excludable from gross_income under sec_103 or whether the agreements are a qualified hedge under sec_1_148-4 this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely assistant chief_counsel exempt_organizations employment_tax government entities by bruce m serchuk senior technician reviewer tax exempt bond branch