o f f i c e o f c h i e f c o u n s e l department of the treasury int ernal revenue service washington d c date number release date cc corp postf-152499-01 uilc internal_revenue_service national_office legal advice memorandum for associate area_counsel from associate chief_counsel corp cc corp subject field_service_advice - foreign_currency transaction this chief_counsel_advice responds to your memorandum dated none specified field_service_advice is not binding on examination or appeals and is not a final case determination this chief_counsel_advice should not be cited as precedent legend p group p year year year date date postf-152499-01 date date dollar_figurea dollar_figureb dollar_figurec dollar_figured dollar_figuree units f units dollar_figureg h units dollar_figurej dollar_figurek m units n units dollar_figureo dollar_figurep individual country x relatedco sub1 sub2 postf-152499-01 fsub employee business r issues what theories can the internal_revenue_service pursue to disallow a loss created through a series of transactions among related parties that include the formation of a new foreign company the issuance of offsetting short-term intercompany notes the transfer by the foreign company in a sec_351 transaction of a nominal amount of foreign_currency in exchange for stock of a domestic transferee corporation and the purported assumption by the transferee corporation of the foreign corporation’s liability under one of the intercompany notes and the disposition of the foreign_currency for which an inflated basis is claimed as a result of step at a substantial loss conclusions the service can pursue the following theories that all of the intercompany loan transactions can be disregarded as factual shams that the domestic transferee corporation did not assume the foreign corporation’s liability under the intercompany note that the domestic transferee corporation’s assumption of the foreign corporation’s note was a constructive_dividend that sec_465 may disallow the loss that sec_269 may disallow the loss that sec_482 may require the reallocation of the loss to the foreign_corporation and that sec_1_988-1 may limit the loss facts the taxpayer is the p group which is an affiliated_group_of_corporations that files a consolidated_return for federal_income_tax purposes p is the parent of the p group the p group filed a consolidated_return for year and year this fsa addresses a claimed loss of dollar_figurea resulting from the disposition of foreign_currency with a basis in excess of its fair_market_value background during the relevant time frame individual and his family controlled either directly or indirectly all the entities that were involved in the transactions described below individual indirectly owned percent of p and directly owned percent of relatedco p owned percent of sub1 and sub2 which are u s_corporations that join in the filing of the p group’s consolidated_return in addition postf-152499-01 individual was also the president of p sub1 sub2 and fsub a newly formed corporation described below consequently individual is the principal indirect beneficiary of the tax benefits generated by this transaction formation of foreign company and creation of notes on date fsub was incorporated as a country x corporation on date p loaned dollar_figureb to employee an employee of relatedco in exchange for a promissory note the employee note employee then contributed the dollar_figureb to fsub in exchange for percent of the stock of fsub p also contributed dollar_figureb in exchange for the remaining percent of the stock of fsub the employee note provided for a single balloon payment of all outstanding principle and interest due in year the employee note also provided that all payments of principle and interest thereon could only be made through the transfer of employee’s shares in fsub to p the employee note was nonrecourse as to employee and p held actual possession of the stock certificates as security for the loan therefore p’s only option in the event of default was to take possession of employee’s fsub shares thus p effectively controlled percent of the fsub stock according to p fsub was created in order to take advantage of business r opportunities in country x there are no facts indicating that fsub has ever conducted any business activities other than the transactions described below on date sub1 purportedly loaned dollar_figurec to relatedco which was evidenced by a written promissory note the relatedco note or relatedco loan the relatedco note provided for a single balloon payment of all outstanding principal and interest in the amount of dollar_figured that was due on date on date relatedco purportedly loaned dollar_figuree to fsub which was evidenced by a written promissory note and security_agreement the fsub note or fsub loan the fsub note provided for a single balloon payment of all outstanding principal and interest in the amount of dollar_figured that was due on date on date fsub purportedly converted the dollar_figuree it received from relatedco into country x currency units for a total amount of f units and then loaned the f units to sub1 which was evidenced by a written promissory note the sub1 note or sub1 loan the relatedco note loan the fsub note loan and the sub1 note loan are hereinafter collectively referred to as the notes or the loans the sub1 note provided for a single balloon payment of all outstanding principal and interest that was due on date p claims that fsub entered into this loan although the same amounts were due on date on both the relatedco and fsub notes the relatedco note stated a slightly lower face_amount and a slightly higher interest rate postf-152499-01 transaction because it believed that the country x currency would increase in value relative to the united_states dollar and that fsub would earn a profit on its loan transactions when the sub1 and relatedco notes matured on date in each purported lending transaction on date it appears that no money was actually transferred and that the purported loan proceeds were credited to the respective borrower through the use of offsetting book entries it also appears that no collateral was provided to secure payment of any of the loans in addition based on the documents we have reviewed to date it is not clear whether or not any of the parties had sufficient cash or assets on hand to advance the loaned amounts or the independent ability to repay their respective borrowings sec_351 transaction on or before date fsub converted the dollar_figureb received from p and the dollar_figureb received from employee dollar_figureg combined into h units of country x currency on date fsub contributed the h units to sub2 in a purported transfer under sec_351 and in exchange sub2 assumed fsub’s obligations under the fsub note and issued sub2 common_stock to fsub the fsub exchange sub2’s assumption of fsub’s obligations under the fsub note was made pursuant to a separate assignment and assumption_agreement dated date the assumption_agreement the assumption_agreement provides as follows nothing herein shall release fsub from any of its own obligations under the loan agreement with relatedco and relatedco shall have the right to enforce the obligation under the loan agreement_against sub2 fsub or both simultaneously p contributed dollar_figurej to sub2 and in exchange received sub2 common_stock p’s transfer of cash for sub2 stock together with the fsub exchange is hereinafter referred to as the exchange after the exchange p owned approximately percent of sub2 and fsub owned approximately percent of sub2 p claims that its business_purpose for entering into the exchange was that p and its related entities had a long history of engaging in business r transactions at the time of the transfer p was in the process of investigating business r opportunities in country x and needed the h units of country x currency contributed in the fsub exchange for anticipated costs relating to investigating structuring and undertaking business r transactions in country x fsub claims that its business_purpose for entering into the fsub exchange was that it gave fsub the opportunity to pursue a joint investment strategy with p through the joint_ownership of sub2 and to benefit from p’s experience in business r fsub has also stated that it believed that converting its country x currency into stock of sub2 would allow fsub to earn a higher rate of return that it had earned on its other investments postf-152499-01 discharge of notes on date relatedco purchased sub1 as part of the purchase agreement relatedco assumed sub1’s obligations under the sub1 note and in exchange sub1 released relatedco from its obligations under the relatedco note on the same day relatedco entered into a settlement agreement with fsub whereby relatedco agreed to release fsub from its obligations under the fsub note in exchange for fsub releasing relatedco from the obligations it assumed under the sub1 note in addition fsub agreed to pay relatedco an additional dollar_figurek because country x currency had decreased in value relative to the dollar in the interim except as noted in the preceding sentence it appears that no cash was transferred in these transactions and that the cancellation of all of the loans was effected through offsetting book entries date sec_1 and are all within a seven month period in year later in year sub2 paid a bank fee of m units and a consulting fee to employee of n units using a portion of the h units contributed by fsub in the fsub exchange the p group’s tax treatment of the transactions the p group treated the exchange including the fsub exchange as a sec_351 transaction the p group claimed that because the dollar_figuree liability assumed by sub2 in the fsub exchange exceeded fsub’s dollar_figureg basis in the h units of country x currency fsub’s realized gain was subject_to sec_357 fsub however is not subject_to u s taxation on any gain recognized under sec_357 the p group claimed that as a result of the sec_357 gain sub2’s basis in the h units of country x currency under sec_362 was dollar_figuree an amount that is more than times greater than the fair_market_value of the h units the p group therefore reported a loss of dollar_figurea hereinafter the claimed loss when it subsequently paid the bank fee and consulting fee using a portion of the inflated-basis h units disregarding the basis increase resulting from the fsub exchange sub2’s actual economic loss on the disposition of the country x currency was dollar_figureo hereinafter the economic loss which is a de_minimis amount reflecting currency fluctuations between the time of the fsub exchange and the time of the disposition accordingly the since all of the purported loans may have been issued and satisfied through offsetting book entries the bona fides of the dollar_figurek payment should be examined for example it is unclear whether this payment was actually made and if so whether the payment in substance was part of the purported lending transaction or some other transaction between fsub and relatedco such as eg a foreign_currency derivative the transactions described above occurred prior to the effective date of sec_357 and sec_362 postf-152499-01 amount of loss that the service should seek to disallow is dollar_figurep hereinafter the loss which equals the claimed loss of dollar_figurea minus the dollar_figureo economic loss law and analysis following is a list of possible alternative theories for disallowing the loss that the service should consider in the development of this case theory the loan transactions can be disregarded as factual shams a loss is allowable as a deduction for federal_income_tax purposes only if it is bona_fide and reflects actual economic consequences sham transactions are not recognized for federal_income_tax purposes and losses generated by such transactions are not allowed see eg 904_f2d_1011 5th cir the sham_transaction doctrine originated with the supreme court decision in 293_us_465 in gregory the court affirmed the commissioner’s denial of losses and expense deductions incurred in a corporate_reorganization although the reorganization plan conformed to the terms of the statute the court nonetheless held that the reorganization was a mere device for the consummation of a preconceived plan and not a reorganization within the intent of the statute as it then existed gregory v helvering u s pincite the courts have recognized two types of sham transactions shams in fact and shams in substance 157_f3d_231 ndollar_figure 3d cir citing kirchman v comm’r 862_f2d_1492 11th cir a factual sham is a transaction that never actually occurs an economic sham is a transaction that actually occurs but lacks economic_substance 939_f2d_44 n 3d cir see also 861_f2d_494 7th cir it is well settled that the mere fact that a note is given does not prove the existence of a loan if there was no indebtedness existing which the note evidenced leonard v comm’r tcmemo_1985_51 citing 45_bta_685 and 54_tc_742 aff’d 445_f2d_985 10th cir in the instant case the loans may be shams in fact and therefore disregarded for federal_income_tax purposes if the purported loans were in fact never made then sub2’s alleged assumption of fsub’s obligations under the fsub note will be disregarded in determining sub2’s basis in the h units of country x currency in addition regardless of whether money was actually transferred the form of the loan transactions supports a determination that they constitute shams in substance the circular movement of the money shows that each party served only postf-152499-01 as a conduit in the circulation of loan proceeds back to sub1 over the course of a single day sub1 transferred funds to relatedco which transferred the same funds to fsub which purportedly converted the funds to country x currency and then transferred the funds back to sub1 thus rather than incurring a real expenditure sub1 merely transferred funds through a chain of related entities that ultimately returned the funds to sub1 in light of this circular flow and the relationship of the parties involved there is some doubt as to whether a lending transaction actually occurred for tax purposes see leonard v comm’r t c memo the fact that no collateral was apparently provided for any of the loans that the borrowers may not have had the independent means to satisfy their obligations under the loans and that none of the borrowers may have been expected to satisfy the loans out of their own funds also suggests that no lending transaction occurred for tax purposes see eg roe v comm’r 52_tcm_778 theory sub2 did not assume the fsub loan in the fsub exchange based on the facts submitted it appears that the parties did not expect that sub2 would pay off the fsub note purportedly assumed in the fsub exchange first it is not clear whether at the time of the fsub exchange sub2 had sufficient assets to pay off the fsub note second sub2 was the only obligor on any of the loans that did not hold a creditor interest in a corresponding loan with an offsetting amount which further suggests that fsub rather than sub2 was expected to satisfy the fsub note through the release of sub1 from its offsetting obligation under the sub1 note third as provided in the assumption_agreement fsub remained as a co-obligor on the fsub note and was thus at all times liable for the full amount of the debt fourth sub2 was never subsequently required to pay off any portion of the fsub note instead as indicated above fsub effectively discharged the fsub note by releasing relatedco as successor to sub1 from its obligations under the sub1 note see roe v comm’r 52_tcm_778 r ecourse debt should not be taken into account where taking economic realities postf-152499-01 into account there is no reasonable likelihood that the taxpayer actually will have to pay the debt finally as discussed under theory above the fsub note may not constitute genuine indebtedness if this is the case then any assumption of such indebtedness would have no effect for tax purposes accordingly for all the reasons above the service can argue that sub2 did not assume any liability in the fsub exchange and thus can not claim any basis increase in the h units under sec_357 or sec_362 the facts above also support the argument that because fsub’s discharge of the fsub note was contemplated at the time of the fsub exchange the assumption should be disregarded as transitory under the step_transaction_doctrine see eg 489_us_726 stating that interrelated yet formally distinct steps in an integrated transaction may not be considered independently of the overall transaction if upon further development of the facts it appears that the parties did intend for sub2 to assume and pay some portion of the liability on the fsub note then sub2’s basis under sec_362 in the h units should only be increased to the extent of the portion actually assumed in appropriate cases the courts have limited the portion of an assumed indebtedness that may be taken into account for federal_income_tax purposes for example where two or more persons are liable on the same indebtedness or hold separate properties subject_to the same indebtedness the amount taken into account for federal_income_tax purposes by each person generally is based on all the facts and circumstances including the economic realities of the situation and the parties’ expectations as to how the liabilities will be paid see maher v u s no w d mo property was not in substance subject_to liability where lender was not actually relying on property as collateral 469_f2d_225 8th cir corporation’s assumption of primary liability on shareholder’s indebtedness becomes taxable dividend only as corporation makes payments as promised but cf owen v for purposes of this memorandum we presume that the loans are recourse indebtedness the determination of whether the loans constitute recourse or nonrecourse indebtedness is a material fact in the development of this case if a nonrecourse debt substantially exceeds the fair_market_value of acquired property it encumbers the loan is deemed to lack economic_substance and is not includible in basis 64_tc_752 aff’d 544_f2d_1045 9th cir see also 748_f2d_908 4th cir aff’g and remanding 80_tc_588 cert_denied 471_us_1143 revrul_77_110 1977_1_cb_58 rev_rul postf-152499-01 comm’r 881_f2d_832 9th cir sec_357 applied to assumed liability where transferor remained as personal guarantor on such liability theory sub2's assumption of the fsub loan was a constructive_dividend to the extent that fsub received excess value in the fsub exchange if the facts ultimately indicate that sub2 did assume and intend to repay some or all of the fsub note at the time of the fsub exchange then depending on the value of the sub2 stock received by fsub and the amount of liability actually assumed by sub2 fsub may have realized an amount in excess of the fair_market_value of the h units it contributed in the fsub exchange if so then such excess_amount would be treated as occurring outside of fsub’s sec_351 transaction with sub2 see eg sec_1_301-1 to the extent that some or all of the liability on the fsub note was assumed by sub2 outside of the fsub exchange the most logical characterization of such assumption is as a distribution with respect to the sub2 stock id accordingly the portion of the liability assumed by sub2 that occurs outside of the sec_351 transaction would not be treated as assumed for purposes of sec_357 or sec_362 and would not otherwise increase sub2’s basis in the country x currency theory sec_465 may disallow the loss even if sub2 were able to establish that for tax purposes it assumed the full amount of fsub’s obligations under the fsub note and that it is entitled to an dollar_figuree basis in the h units under sec_357 and sec_362 sec_465 may disallow the loss under sec_465 the at risk provisions apply to sub2 because it is owned indirectly percent prior to the transaction and then percent after the transaction by individual although sub2 claims to have increased its basis in the country x currency by an amount that represented fsub’s sec_357 gain that amount also represents a liability that sub2 assumed as part of a transaction to acquire funds for use in its business fsub indicated that it contributed the h units to sub2 because it gave fsub the opportunity to pursue a joint investment strategy with p through joint_ownership of sub2 therefore if fsub’s characterization of the facts is respected sub2 would be in the trade_or_business for the production_of_income under sec_465 sub2 assumed the loan as part of a transaction to facilitate fsub becoming a part of the joint investment strategy since sub2 stepped into the shoes of the borrower when it assumed the fsub note under sec_465 sub2 became the borrower of an amount with respect to the income producing activity 1978_1_cb_62 postf-152499-01 sub2 may nevertheless not be considered at risk with respect to such borrowing for such income-producing activity because under sec_465 a taxpayer is not considered to be at risk with respect to amounts protected against loss through nonrecourse_financing guarantees stop loss agreements or other similar arrangements based on the facts discussed under theorie sec_1 and above eg the issuance of circular short-term offsetting loans with no collateral and the expectation that fsub rather than sub2 would repay the fsub note there appears to be an arrangement to protect sub2 against loss within the meaning of sec_465 with respect to the amount of the fsub liability assumed in the fsub exchange accordingly the amount of liability assumed by sub2 on the fsub note may not be includible in sub2's amount_at_risk with respect to the relevant income producing activities therefore the service can argue that any loss arising from such amount ie arising from the reflection of this amount in sub2's basis in the h units may be disallowed under sec_465 theory sec_269 may disallow the loss if a person acquires control of a corporation and the principle purpose of the acquisition is to evade or avoid federal_income_tax by securing the benefit of a deduction credit or other allowance that the person would not otherwise enjoy then sec_269 authorizes the service to disallow such tax_benefit control for these purposes means the ownership of stock possessing at least percent of the total combined voting power of all classes of stock entitled to vote or at least percent of the total value of shares of all classes of stock of the corporation in this case the formation of fsub constitutes the requisite acquisition of control under sec_269 as the formation of a new corporation can constitute an acquisition of control for sec_269 purposes see sec_1_269-1 see also 405_f2d_673 2d cir 242_f2d_396 4th cir the fact that p is the acquiring_corporation and that the p group rather than fsub claimed the tax benefits arising from the acquisition of fsub does not bar the application of sec_269 as sec_269 can be applied to deny tax benefits claimed by either an acquiring person or an acquired_corporation see eg sec_1_269-3 242_f2d_396 and 280_f2d_394 8th cir similarly the fact the possible application of sec_465 to sub2 should be considered when developing the sec_465 argument if sub2 is a qualified_c_corporation within the meaning of sec_465 then sec_465 would not disallow sub2's losses from any of its qualifying businesses we do not have sufficient facts on hand to determine whether sub2 is a qualified_c_corporation that carries on a qualified_business postf-152499-01 that the loss resulted from the combined effects of several of the transactions described ie the loss did not arise solely from the formation of fsub does not bar the application of sec_269 see eg sec_1_269-3 stating that if the principal purpose test is met with respect to an acquisition giving rise to a tax_benefit then it is immaterial by what method or by what conjunction of events the benefit is sought see also 334_f2d_269 2d cir accordingly the service can apply sec_269 to disallow the loss if the principle purpose of forming fsub was tax_avoidance if the purpose to evade or avoid federal income taxes exceeds in importance any other purpose for an acquisition then such purpose is the principle purpose for the acquisition sec_1_269-3 thus in determining whether fsub was formed for the principal purpose of tax_avoidance the non-tax purposes for the transaction must be weighed against its tax-avoidance purposes see also sec_1_269-2 the information submitted in this case suggests that the formation of fsub may have been undertaken for the principal purpose of evading or avoiding federal_income_tax since the tax_benefit of the loss may exceed in importance the non-tax purposes for the transaction representatives of p have stated that the business_purpose for the formation of fsub was to take advantage of business r opportunities in country x representatives of p and fsub have also stated that the exchange was entered into in part to pursue business r in country x and that the h units contributed by fsub to sub2 were needed to finance anticipated costs relating to these opportunities however the p group has not provided adequate substantiation for this business_purpose for instance the information submitted does not contain any indication that business r opportunities were actually sec_1_269-2 provides as follows under the code an amount otherwise constituting a deduction credit or other allowance becomes unavailable as such under certain circumstances characteristic of such circumstances are those in which the effect of the deduction credit or other allowance would be to distort the liability of the particular taxpayer when the essential nature of the transaction or situation is examined in the light of the basic purpose or plan which the deduction credit or other allowance was designed by the congress to effectuate the distortion may be evidenced for example by the fact that the transaction was not undertaken for reasons germane to the conduct of the business_of_the_taxpayer by the unreal nature of the transaction such as its sham character or by the unreal or unreasonable relation which the deduction credit or other allowance bears to the transaction the stated business purposes for the other transactions described in this fsa should also be considered in determining whether or not fsub was formed for the principle purpose of tax_avoidance postf-152499-01 considered or pursued by fsub p or sub2 or that such opportunities could reasonably be pursued with an investment of only h units the primary expenditure that was paid out of the h units was a small consulting fee to employee we recommend that the service develop the facts and circumstances relating to any possible business purposes for the transactions described above even if the parties involved eventually produce further evidence in support of the business purposes for the above transactions the strength of the evidence and underlying business purposes must be weighed against the significant tax savings produced by the transaction see coastal oil storage supra pincite we also note that while tax years after year are not presently before us to the extent that the service establishes that sub2 or the p group claimed further losses from the inflated-basis country x currency in later years the service can also apply sec_269 to disallow those losses see eg hall paving co v u s u s t c cch d ga which held that operating losses of acquired companies that occurred in years after the acquisitions could not be deducted where the original transactions were motivated principally by a tax-avoidance purpose theory sec_482 may reallocate the loss based on the facts provided sec_482 may apply to provide the commissioner the authority to reallocate the loss from sub2 to fsub if it can be shown that the parties acted in concert to shift the loss in question from fsub to sub2 sec_482 provides the following in any case of two or more organizations trades_or_businesses owned or controlled directly or indirectly by the same interests the secretary may distribute apportion or allocate gross_income deductions between or among such organizations if he determines that such distribution apportionment or allocation is necessary in order to prevent evasion of taxes or clearly to reflect the income of any of such organizations emphasis added see also sec_1_482-1 the district_director may make allocations between or among the members of a controlled_group if a controlled_taxpayer has not reported its true_taxable_income in such case the district_director may allocate income deductions or any other item or element affecting taxable_income referred to as allocations thus in order for sec_482 to apply to a transaction the transaction must be between two or more entities owned or controlled by the same interests if it is determined that the parties to the transaction are members of a controlled_group postf-152499-01 the service may make allocations among the members if the taxpayer has not reported its true_taxable_income because individual has common majority ownership of p sub1 sub2 and relatedco the primary question under sec_482 is whether fsub and these entities are controlled by the same interests see sec_1_482-1 a controlled_group is defined as taxpayers controlled directly or indirectly by the same interests the sec_482 regulations8 define control as including any kind of control direct or indirect whether legally enforceable or not and however exercisable or exercised including control resulting from the actions of two or more taxpayers acting in concert or with a common goal or purpose it is the reality of the control that is decisive not its form or the mode of its exercise a presumption of control arises if income or deductions have been arbitrarily shifted sec_1_482-1 where the actions of two unrelated parties were undertaken with respect to a joint_venture the tax_court found the unrelated parties to be in common_control of a company owned percent by each 453_f2d_1144 2nd cir rev’g in relevant part 54_tc_912 cert_denied 407_us_934 reh’g denied 409_us_899 nonacq 1975_2_cb_3 nonacquiescence relates to tax_court opinion only as the second circuit adopted an interpretation of control that is consistent with the and sec_482 regulations the regulations also state that i t is the reality of control that is decisive rather than a rigid focus on record ownership of the entities at issue id accord 42_tc_114 aff’d 358_f2d_342 6th cir cert_denied 385_us_899 17_tc_231 aff’d 202_f2d_873 5th cir cert_denied 346_us_819 acq in part and nonacq in part 1952_2_cb_2 revrul_65_142 1965_1_cb_223 372_f2d_415 4th cir aff’g tcmemo_1966_15 cert_denied 389_us_841 neither the regulations nor case law require majority ownership by one person or entity over the parties to a transaction to establish control furthermore the presence of an unrelated party is not an automatic bar to the application of sec_482 see 285_f3d_1210 9th cir where a third party is indifferent to the terms of the transaction affecting the allocated items its involvement does not interfere with the application of sec_482 see also gac produce co v comm’r 77_tcm_1890 the applicable regulations are the current regulations t d which were finalized in postf-152499-01 in the present case fsub was jointly owned in equal amounts by p and employee notwithstanding employee’s putative percent ownership_interest in fsub several factors demonstrate that individual was in reality in control of fsub for instance individual held the office of president of fsub additionally employee was an employee of relatedco a company in which individual owned percent also employee’s interest in fsub was used for payment and collateral in a nonrecourse loan owed to p a percent individual controlled_entity therefore during all of the transactions presently in question it was a foregone conclusion that individual or entities he controlled would eventually own greater than percent of fsub accordingly the facts at hand support the application of sec_482 because of individual’s joint legal and overlapping ownership of sub2 and fsub in the alternative the regulations provide that a presumption of control arises if income or deductions have been arbitrarily shifted sec_1 i see 598_f2d_1382 5th cir rev’g a f t r 2d ria n d tex holding that based on sec_1_482-1 - - which contained language similar to sec_1_482-1 of the current regulation - - the service properly argued that proof of income_shifting between two corporations establishes a presumption of common_control accord 294_f2d_82 5th cir aff’g 32_tc_390 acq 1959_2_cb_4 referring to reg sec_29 the regulations also state that control may exist as a result of the actions of two or more taxpayers acting in concert with a common goal or purpose sec_1_482-1 thus under the regulations joint legal or overlapping ownership is not required for unrelated corporations to come within the purview of sec_482 if income_or_deduction shifting is present or if there is a common goal to shift income or deductions but see 5_tc_558 acq c b acq withdrawn and substituted for nonacq revrul_65_142 1965_1_cb_223 where the service seeks to establish common_control due to the presence of an artificial shifting_of_income and deductions it is the service’s burden to prove the applicability of sec_482 by establishing a shifting_of_income and deductions dallas ceramic tile co f 2d pincite we believe this burden is met by the p group and fsub acting in concert to intentionally create a noneconomic gain in fsub which is not subject_to u s taxation and a corresponding noneconomic unrealized_loss in sub2 through the transfer of the country x currency from fsub to sub2 in the sec_351 transaction see notice_95_53 1995_2_cb_334 stating that for purposes of sec_482 the parties in a stripping transaction as defined in the notice generally are controlled by the same interests because they act in concert with the common goal of arbitrarily shifting income or deductions between the transferor and the transferee although this transaction may not technically fit into the definition of a stripping transaction this transaction is similar to stripping postf-152499-01 transactions since the p group claims that a sec_351 transaction resulted in fsub realizing noneconomic income and that fsub’s recognition of gain directly resulted in sub2’s acquisition of an artificially inflated basis accordingly a presumption of control arises since the loss on the country x currency may be viewed to have been arbitrarily shifted see sec_1_482-1 a controlled_group or controlled_taxpayer is defined to mean the entities owned or controlled by the same interests and includes the taxpayer that owns or controls other taxpayers sec_1_482-1 unlike the term control the phrase same interests is not defined in the sec_482 regulations case law as well as the legislative_history of sec_482 provide guidance however sec_482 was enacted to prevent the artificial shifting_of_income between controlled taxpayers to avoid federal taxes and thereby milk a taxable entity ie by moving losses to a taxable entity see eg 598_f2d_1375 5th cir citing h rept no 70th cong 1st sess c b part s rept no 70th cong 1st sess c b part see also h rept no and s rept no 67th cong 1st sess 42_tc_114 aff’d 358_f2d_342 6th cir cert_denied 385_us_899 in using the term same interests congress intended to include more than the same persons or the same individuals brittingham f 2d pincite 366_f2d_890 5th cir aff’g 43_tc_540 cert_denied 386_us_1016 2_bta_229 see also lxi-part cong rec statement of sen king referring to the same forces controlling a number of corporations different persons with a common goal or purpose for artificially shifting income can constitute the same interests for the purposes of the statute south texas rice warehouse f 2d pincite see also brittingham f 2d pincite citing ach t c pincite the phrase same interests should not be narrowly construed to frustrate the intent of sec_482 appeal of rishell phonograph co b t a pincite if ‘the same interests’ was intended to mean only the same persons ’ it would have been easy for congress by using the latter term to have avoided all ambiguity accord 17_tc_231 thus it is not necessary that the same person or persons own or control each controlled business before sec_482 can be applied but there must be a common design for the shifting_of_income in order for different entities to constitute the same interests indeed this definition of same interest is identical to the definition of control and the presumption relating thereto in the regulations and case law thus if there is a common design for shifting income or deductions then the requirements for control and same interests will be met see hall v comm’r supra t c pincite an arbitrary shifting_of_income coupled with the ability to postf-152499-01 direct the actions of an entity establishes control for the purposes of sec_482 -- whether or not ownership exists for the reasons discussed above we believe that p and fsub were controlled by the same interests as required for sec_482's application alternatively we believe the parties to the transaction acted pursuant to a common plan to shift a large amount of basis in the country x currency to sub2 through the sec_351 transaction once the secretary has proven that the parties are controlled by the same interests he may distribute apportion or allocate deductions between or among such organizations trades_or_businesses if he determines that such distribution apportionment or allocation is necessary in order to prevent evasion of taxes or clearly to reflect the income of any such organizations trades_or_businesses sec_482 generally the commissioner’s determinations under sec_482 must be sustained absent an abuse_of_discretion 88_tc_252 the taxpayer must meet a heavier than normal burden_of_proof and demonstrate that the commissioner’s determinations are arbitrary capricious or unreasonable in order for the courts to set_aside the commissioner’s determinations id under sec_1_482-1 the commissioner has specific regulatory authority to allocate to the transferor with respect to a nonrecognition_transaction the loss from a sale of property which had previously been transferred in a nonrecognition_transaction to the extent the taxpayer’s basis upon receipt of the property exceeded the property’s fair_market_value courts have sustained the commissioner’s reallocation in the context of sec_351 transactions in order to clearly reflect income in cases when the income was recognized by one party and the expenses_incurred in producing the income were deducted by another related_party even if there was no finding that tax_avoidance was a principal motive of the taxpayer see eg 305_f2d_681 9th cir 198_f2d_214 2d cir sec_482 has also been applied where the transfer of property in a sec_351 transaction was found to have been made with a tax_avoidance purpose 137_f2d_600 3d cir however by its terms sec_1 f iii a does not require that a tax_avoidance motive be present the regulation provides i f necessary to prevent the avoidance of taxes or to clearly reflect income the district_director may make an allocation under sec_482 with respect to transactions that otherwise qualify for nonrecognition_of_gain_or_loss under applicable provisions of the internal_revenue_code such as sec_351 or sec_1031 postf-152499-01 in addition courts have sustained the commissioner’s reallocation of gain_or_loss on taxable dispositions to the transferor with respect to the previous nontaxable transfer of the property under sec_351 or sec_311 as then in effect when the purpose of the transaction was tainted by tax_avoidance motives eg when the transferee was better able to use the loss absorb the capital_gain or use the deduction for charitable_contributions 556_f2d_889 8th cir the commissioner’s reallocation of charitable_contribution_deduction to the wholly owned subsidiary was sustained when the subsidiary distributed the appreciated stock to the parent_corporation and the parent contributed the stock to a charitable_organization so that the parent_corporation could make use of the charitable deduction 137_f2d_600 3d cir sustaining the commissioner’s reallocation of capital_loss to the parent_corporation when the parent_corporation contributed built in loss stock to its wholly owned subsidiary in a transaction tax free under the predecessor of current sec_351 so that ten months later upon sale of the stock the subsidiary could make use of the capital_loss deduction ruddick corp v u s cl_ct u s t c p on remand from 643_f2d_168 ct_cl aff’d 732_f2d_168 fed cir the commissioner’s reallocation of capital_gain to the subsidiary- transferor was sustained when a wholly owned subsidiary distributed appreciated stock to its parent in a tax free distribution under sec_311 as then in effect so that the parent could offset the capital_gain from the disposition of the stock with its net_operating_loss 67_tc_1022 for the reasons discussed above under theorie sec_1 and the service can argue that sub2's principal purpose for engaging in the sec_351 transaction was tax_avoidance accordingly based on sec_1_482-1 and the above- mentioned cases the commissioner may be able to reallocate sub2’s loss on the country x currency to the extent it was unrealized when sub2 acquired the country x currency to fsub theory sec_1_988-1 may limit the loss in the alternative to reallocating the loss from sub2 to fsub under sec_482 the commissioner may apply sec_1_988-1 to limit the sec_988 ordinary_loss treatment claimed by sub2 to that amount which reflects actual currency value fluctuations ie the economic loss sec_1_988-1 would exclude the remainder of the loss ie the loss realized by sub2 from sec_988 this exclusion from sec_988 would cause all of the loss which was not associated with actual currency fluctuations to be treated as capital_loss realized by sub2 sections which were enacted as part of the tax_reform_act_of_1986 set forth a comprehensive set of rules for the treatment of foreign_currency_transactions sec_988 provides that foreign_currency_gain_or_loss attributable to a sec_988 transaction is computed separately and treated as ordinary postf-152499-01 income or loss foreign_currency_gain on a sec_988 transaction is generally defined as the gain on the transaction to the extent such gain does not exceed gain realized by reasons of changes in exchange rates on or after the booking_date and before the payment_date sec_988 foreign_currency_loss is similarly defined in sec_988 in this manner congress intended that only gain_or_loss to the extent it is realized by reason of a change in exchange rates between the date the asset or liability is taken into account for tax purposes and the date it is paid or otherwise_disposed_of will be treated as foreign_currency_gain_or_loss s rep no 99th cong 2d sess in addition any gain_or_loss from the disposition of nonfunctional_currency is treated as foreign_currency_gain_or_loss the legislative_history of sec_985 - suggests that congress was concerned about tax_motivated_transactions the senate_finance_committee report accompanying the tax_reform_act_of_1986 stated that one of the two reasons for the enactment of sec_985 - was that prior_law provided opportunities for tax_motivated_transactions s rep no 99th cong 2d sess accordingly in enacting sec_985 - congress granted broad authority for the service to promulgate regulations as may be necessary or appropriate to carry out the purposes of sec_985 - sec_989 the legislative_history to the tamra in discussing the law prior to the enactment of tamra stated that t he secretary has general authority to provide the regulations necessary or appropriate to carry out the purposes of new subpart j for example the secretary may prescribe regulations appropriately recharacterizing transactions to harmonize the general realization and recognition provisions of the code with the policies of sec_988 h_r rep no 100th cong 2d sess s rep no 100th cong 2d sess containing identical language in response to congress’s concern about tax_motivated_transactions the service under the authority of sec_989 promulgated sec_1_988-1 sec_1_988-1 states in part that the commissioner may exclude a transaction or series of transactions which in form is a sec_988 transaction from the provisions of sec_988 if the substance of the transaction or series of transactions indicates that it is not properly considered a sec_988 transaction we believe that the only loss that can be properly characterized by sub2 as ordinary_loss under sec_988 is the economic loss to the extent that the loss is not disallowed or reallocated under theorie sec_1 through above the loss should be excluded from sec_988 under sec_1_988-1 and re-characterized as capital_loss for sub2 we note that this capital_loss may be carried back and carried forward for use by sub2 therefore application of sec_1 a may not result in a disallowance of tax benefits to sub2 postf-152499-01 case development hazards and other considerations 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 cc by ______________________________ senior technical reviewer branch


department of the treasury washington dc person to contact ------------------------- id no ------------- telephone number --------------------- refer reply to cc psi b04 - plr-161793-03 date march internal_revenue_service number release date index number -------------------------------- ------------------------------------------- --------------------------- ---------------------------- - re ------------------------------------------------------ legend ------------------------------------------------ -------------------------------------- -------------------------------- ----------------------- ------------------ ------------- ------------------------------------------------------------- - - - - - - - decedent taxpayer attorney date date state court dear --------------- this is in response to your letter dated date submitted by your authorized representative requesting an extension of time under sec_301 of the procedure and administration regulations to make a qualified family-owned business election under sec_2057 b b of the internal_revenue_code the facts submitted and representations made are as follows decedent died on date date is prior to date decedent’s gross_estate consists primarily of three rental properties located in state decedent was survived by a son and daughter the court appointed son as administrator days prior to the due_date of the decedent’s form_706 prior to filing any_tax returns the administrator became aware of the qualified_family-owned_business_interest deduction qfobi and contacted attorney and informed him that the estate would like to take advantage of the deduction on date attorney sent the administrator the estate’s form_706 united_states estate and generation- skipping transfer_tax return but inadvertently failed to make an election under sec_2057 on the form the estate requests an extension of time under section and sec_301_9100-1 and sec_301_9100-3 to make the sec_2057 election sec_2001 imposes a tax on the transfer of the taxable_estate of every sec_2057 a provides that for purposes of the tax imposed by sec_2001 decedent who is a citizen or resident_of_the_united_states in the case of an estate of a decedent to which this section applies the value of the taxable_estate shall be determined by deducting from the value of the gross_estate the adjusted_value of the qualified family-owned business interests of the decedent exceed dollar_figure sec_2057 provides that the deduction allowed by sec_2057 shall not sec_2057 b provides generally that sec_2057 shall apply to an estate if a the decedent was at the date of the decedent's death a citizen or resident_of_the_united_states b the executor elects the application of this section and files the agreement referred to in sec_2057 h c the sum of the adjusted_value of the qualified family-owned business interests described in sec_2057 b plus the amount of the gifts of such interests determined under sec_2057 exceed sec_50 percent of the adjusted_gross_estate and d during the 8-year period ending on the date of the decedent's death there have been periods aggregating years or more during which such interests were owned by the decedent or a member of the decedent's family and there was material_participation within the meaning of sec_2032a by the decedent or a member of the decedent's family in the operation of the business to which such interests relate sec_2057 b provides that the qualified family- owned business interests described in this paragraph are the interests which are included in determining the value of the gross_estate and are acquired by any qualified_heir from or passed to any qualified_heir from the decedent within the meaning of sec_2032a sec_2057 e provides generally that for purposes of sec_2057 the term qualified_family-owned_business_interest means an interest as a proprietor in a trade_or_business carried on as a proprietorship or an interest in an entity carrying_on_a_trade_or_business if at least percent of such entity is owned directly or indirectly by the decedent and members of the decedent's family at least percent of such entity is so owned by members of families and at least percent of such entity is so owned by the decedent and members of the decedent's family or at least percent of such entity is so owned by members of families and at least percent of such entity is so owned by the decedent and members of the decedent's family sec_2057 provides that for purposes of making the election and filing the agreement under sec_2057 rules similar to the rules under sec_2032a and regarding the election of special_use_valuation of farm and other qualified_real_property shall apply dying after date sec_2057 provides that sec_2057 will not apply to estates of decedent’s under sec_301_9100-1 of the procedure and administration regulations the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-3 provides the standards used to determine whether to grant an extension of time to make an election whose due_date is prescribed by a regulation and not expressly provided by statute requests for relief under sec_301_9100-3 will be granted when the taxpayer provides the evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and the grant of relief will not prejudice the interests of the government sec_301_9100-3 provides that a taxpayer is deemed to have acted reasonably and in good_faith if the taxpayer failed to make the election because after exercising reasonable diligence taking into account the taxpayer's experience and the complexity of the return or issue the taxpayer was unaware of the necessity for the election sec_301_9100-3 provides that a taxpayer is deemed to have acted reasonably and in good_faith if the taxpayer reasonably relied on a qualified_tax professional including a tax professional employed by the taxpayer and the tax professional failed to make or advise the taxpayer to make the election section -3 c ii provides that the interests of the government are normally prejudiced if the taxable_year in which the regulatory election should have been made or any taxable years that would have been affected by the election had it been timely made are closed by the period of limitations on assessment under sec_6501 before the taxpayer's receipt of a ruling granting relief under this section based on the facts submitted and the representations made we conclude that the taxpayer acted reasonably and in good_faith and the grant of relief will not prejudice the interests of the government therefore an extension of time is granted until days from the date of this letter for making an election under sec_2057 this election should be made on a supplemental form_706 united_states estate and generation-skipping_transfer_tax return and filed with the cincinnati service_center a copy of this letter should be attached to the supplemental form_706 a copy is enclosed for this purpose the ruling contained in this letter is based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party 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 in particular the burden is on the estate to establish to the service's satisfaction that all of the requirements of sec_2057 are met except as specifically ruled herein we express or imply no opinion on the federal tax consequences of the transaction under the cited provisions or under any other provisions of the code specifically we express or imply no opinion on whether the estate qualifies for the deduction under sec_2057 in addition we express or imply no opinion regarding the value of the property held in the family limited_partnership this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent sincerely heather c maloy associate chief_counsel passthroughs and special industries enclosures copy for sec_6110 purposes copy of this letter cc ---------------------------------- ------------------------------------- --------------------------------- ----------------------------- ---------------------------------------------- -----------------------------------------------------------


department of the treasury internal_revenue_service washington d c aug uniform issue list tax_exempt_and_government_entities_division xxxxxxxxaxxx xxxxxxxxxxxx xxxxxxxxxxxx xxxxxxxxxxxx xxxxxxxxxxxx legend mt j - ’ e r ta agency a xxxxxxxxxxxxxxxxxx state b xxxxxxxxxxxxxxxxxx plan c xxxxxxxxxxxxxxxxxx dear xxxxxxx this letter is in response to your ruling_request dated date as supplemented by correspondence dated date regarding whether agency a is a police department within the meaning of internal_revenue_code code sec_415 the following facts and representations are submitted under penalties of perjury in support of your request agency a is a department of state b whose employees are eligible to participate in plan c plan c is a pension_plan maintained by state b agency a is an integral part of the criminal justice system of state b agency a partners with other federal state local and criminal justice agencies to reduce crime and has a significant role in the development of criminal justice policy for state b agency a provides public safety corrections and law enforcement services in and outside of state b institutional grounds and state-operated medical facilities for state b mission statement states that its mission is to protect the public protect staff and provide safe secure and humane supervision of offenders its published agency a serves and protects the citizens of state b in a number of ways one way is by confining and controlling accused and sentenced offenders in correctional institutions centers and units throughout the state_agency a also administers medical mental soo0 oper oo health rehabilitative and community-based service programs and provides education and treatment willing inmates may utilize to improve themselves and the success of their eventual reintegration into society agency a cooperates with other law enforcement agencies in the state and around the country on standardization of systems to facilitate sharing information agency a employees have duties that include but are not limited to assignment on task forces that partner with a number of federal state and local_government entities on a range of public safety activities agency a employs parole officers who have statutory authority to carry firearms and conduct the arrest of offenders in the community perform investigations and submit sworn affidavits to court to obtain criminal arrest warrants prepare parole violation reports requesting warrants for re-imprisonment from the parole board and have the statutory authority to enter another state armed for the purpose of apprehending retaking of an offender agency a also operates specialized units such as an emergency response team a hostage rescue team a situational control team and k-9 units additionally agency a has a number of employees who have been appointed as peace officers peace officers may be members of the state police or an organized local police department adult probation officers and officials of agency a authorized by the commissioner of correction to make arrests in state correctional institutions or facilities employees who work in state b correctional facilities do not have the power to arrest per se but do have the authority to exercise control supervise restrain or to place conditions on an offender’s liberty whether under supervision in the community or in actual imprisonment confinement or detention in a correctional facility these employees are authorized to use restraints as physical force to prevent escape to prevent injuries to others or self to prevent property damage to ensure compliance with order and to maintain order safety and security they have the authority to conduct pat searches of inmates at random including any items in their possession further these employees may search non-inmates and their belongings upon entering the perimeter or grounds of a correctional facility or any other site operated by agency a agency a employees may use physical force on an inmate to maintain discipline order safety and security while in the performance of the employee’s official duties such employees are authorized to use deadly physical force when necessary to defend themselves or a third person from the use or imminent use of deadly physical force or to prevent an escape of a person reasonably believed to have committed or attempted to commit a felony involving the infliction or threatened infliction of serious physical injury these employees are armable that is while they have the authority to carry a weapon they are not always permitted to carry a firearm xxxxxxxxxxxx page based on the above facts and representations you request a ruling that agency a constitutes a police department organized and operated by state b to provide police protection and or emergency medical services for state b for purposes of the exemption from the age-reduced b limit created by code sec_415 and consequently all plan c members who have years_of_service credit or more as full-time agency a employees including military service_credit should be treated as qualified participants under code sec_415 and are therefore not subject_to the age-reduced limit pursuant to code sec_415 under code sec_415 a participant's annual_benefit under a qualified defined benefit pension_plan cannot exceed the lesser_of dollar_figure as adjusted annually for increases in the cost-of-living pursuant to sec_415 or percent of the participant's average compensation_for his or her high_three_years code sec_415 generally requires an actuarial reduction of the dollar_figure limitation of code sec_415 if the participant’s benefit begins before age however code sec_415 provides that such an actuarial reduction of the dollar_figure limitation for benefits commencing before age is not required for qualified participants as defined in code sec_415 code sec_415 provides that the term qualified_participant includes a participant in a defined_benefit_plan that is maintained by a state indian_tribal_government or any political_subdivision thereof with respect to whom the period_of_service taken into account in determining the amount of the benefit under the defined_benefit_plan includes at least years_of_service of the participant as either a member of the armed_forces_of_the_united_states or as a full-time_employee of any police department or fire department that is organized and operated by the state indian_tribal_government or any political_subdivision that maintains the defined_benefit_plan to provide police protection firefighting services or emergency medical services for any area within the jurisdiction of the state indian_tribal_government or any political_subdivision like code sec_415 sec_1_415_b_-1 of the income_tax regulations regulations states that a qualified_participant includes a participant in a defined_benefit_plan that is maintained by a state indian_tribal_government or any political_subdivision of a state or indian_tribal_government with respect to whom the service taken into account in determining the amount of the benefit under the defined_benefit_plan includes at least years_of_service of the participant as either a member of the armed_forces_of_the_united_states or as a full-time_employee of any police department or fire department that is organized and operated by the state indian_tribal_government or political_subdivision maintaining the defined_benefit_plan to provide police protection firefighting services or emergency medical services for any area within the jurisdiction of the state indian_tribal_government or political_subdivision example of sec_1_415_b_-1 of the regulations illustrates the proper identification of a qualified_participant under example participant o is a full-time civilian employee of the harbor police division of the state of x port authority the harbor police division provides police protective services participant o performs clerical services xxxxxxxxxxxx page o01 for the harbor police division participant o is a participant in the defined_benefit_plan that is maintained by the state of x with respect to whom the years_of_service taken into account in determining the amount of the benefit under the plan includes years_of_service working for the harbor police division and years_of_service as a member of the armed_forces_of_the_united_states the regulation concludes that under the facts of example for a distribution with an annuity_starting_date that occurs before participant o attains the age of there is no age adjustment to the code sec_415 dollar limit accordingly under the regulation as long as a participant works for a police or fire department a participant may be a qualified_participant under code sec_41 b h even though his or her job function is not directly to provide police protection firefighting services or emergency medical services example of sec_1_415_b_-1 of the regulations also illustrates the proper identification of a qualified_participant in example participant r is a full-time_employee of the emergency medical service_department of county y which is not part of a police or fire department who performs services as a driver of an ambulance risa participant ina defined_benefit_plan that is maintained by county y with respect to whom the years_of_service taken into account in determining the amount of the benefit under the plan include sec_15 years_of_service working for county y r does not have service_credit for time in the armed_forces_of_the_united_states the regulation concludes that under the facts of example the age adjustments to the limitations of code sec_415 pursuant to sec_415 do apply if r commences receiving a distribution before age therefore under the regulation a participant that is not employed by a police or fire department is not a qualified_participant even if he or she provides police protection firefighting services or emergency medical services for another employer of the state indian_tribal_government or political_subdivision thereof that maintains the defined_benefit_plan the legislative_history of code sec_415 and h includes a senate amendment to specifically include correctional employees as qualified participants’ that was not adopted in the conference committee report thus the legislative_history of sec_415 and h indicates that congress intended to define the term qualified_participant narrowly for purposes of those code sections under code sec_415 corrections probation parole and other public safety officers are not included in the definition of qualified_participant if congress had intended to include corrections probation parole and other public safety officers in the definition of qualified_participant it presumably would have done so rather as suggested by the legislative_history of code sec_415 and h congress chose to define the term qualified_participant more narrowly to include only full-time employees of police and fire departments u s house tax_reform_act_of_1986 conference_report to accompany h_r h rpt vol il title xi d washington government printing office u s senate committee on finance tax_reform_act_of_1986 together with dissenting views to accompany h_r s rpt washington government printing office xxxxxxxxxxxx page based on the foregoing identifying qualified participants for purposes of code sec_415 and h requires an inquiry into the overail nature of the employer and not the activities of any specific employees or groups of employees in‘the present case none of the operative laws documents or materials provided by agency a describe an organization whose overall mission and nature is to be a police department rather such laws documents and materials describe a state corrections department in addition to their mission-related corrections activities agency a’s employees perform work that is sophisticated varied and clearly relates to criminal justice and enforcement agency a’s employees work closely with state and local police departments and other state and federal_law enforcement agencies and some provide police protection and or emergency medical services however the stated purpose of agency a itself is not to be a police department or fire department accordingly these employees are not qualified participants within the meaning of code sec_415 therefore agency a employees are not eligible for the special limitation of code sec_415 and are pursuant to sec_415 subject_to an adjustment of the dollar_figure limit of sec_415 if benefits under plan c begin before age thus with respect to your ruling_request we conclude that agency a does not constitute a police department organized and operated by state b to provide police protection and or emergency medical services for state b for purposes of the exemption from the age- reduced b limit created by code sec_415 and consequently all plan c members who have years_of_service credit or more as full-time agency a employees including military service_credit should not be treated as qualified participants under code sec_415 and are therefore subject_to the age-reduced limit pursuant to code sec_415 no opinion is expressed as to the federal tax consequences of the transaction described above under any other provisions of the code this ruling is directed only to the specific taxpayer that requested it code sec_6110 provides that it may not be used or cited by others as precedent pursuant to a power_of_attorney on file with this office a copy of this letter_ruling is being sent to your authorized representative xxxxxxxxxxxx page should you have any questions or concerns regarding this ruling please contact xxxxxxxx i d number xxxxxxxxxx he can be reached by telephone during normal business hours at xxx xxx-xxxx please address correspondence to se t-ep ra‘t3 sincerely yours zk tc bet laura b warshawsky manager employee_plans technical group enclosures deleted copy of this letter notice of intention to disclose cc xxxxxxxxxxxxx xxxxxxxxxxxxx xxxxxxxxxxxxx xxxxxxxxxxxxx xxxxxxxxxxxxx


department of the treasury internal_revenue_service release number release date date date uil code person to contact identification_number contact telephone number in reply refer to te_ge review staff ein last date for filing a petition with the tax_court date dear fe this is a final adverse determination_letter as to the org ’s exempt status under sec_501 of the internal_revenue_code our adverse determination was made for the following reasons your exempt status as an organization described in sec_501 is being revoked effective date you did not operate exclusively for exempt purposes as required for an organization to be recognized as exempt pursuant to sec_501 in this regard your primary activities did not accomplish charitable or other exempt purposes as required by sec_1 c - c and more than an insubstantial part of your activities did not further exempt purposes your operations also served private interests more than insubstantially you have consented to this revocation by executing form_6018 consent to proposed action - sec_7428 contributions to your organization are no longer deductible under sec_170 of the internal_revenue_code you are required to file federal_income_tax returns on form_1120 these returns should be filed with the appropriate service_center for the year ending date and for all years thereafter you have already furnished these forms to the irs for ye date and date processing of income_tax returns and assessment of any taxes due will not be delayed should a petition for declaratory_judgment be filed under sec_7428 of the internal_revenue_code if you decide to contest this determination in court you must initiate a suit for declaratory_judgment in the united_states tax_court the united_states claim court or the district_court of the united_states for the district of columbia before the day after the date this determination was mailed to you contact the clerk of the appropriate court for the rules for initiating suits for declaratory_judgment you also have the right to contact the office_of_the_taxpayer_advocate however you should first contact the person whose name and telephone number are shown above since this person can access your tax information and can help you get answers you can call and ask for taxpayer_advocate assistance or you can contact the taxpayer_advocate from the site where the tax_deficiency was determined by calling xxx- or writing to internal_revenue_service taxpayer advocates office tao taxpayer_advocate assistance cannot be used as a substitute for established irs procedures formal appeals processes etc the taxpayer_advocate is not able to reverse legal or technically correct_tax determinations nor extend the time fixed by law that you have to file a petition in the united_states tax_court the taxpayer_advocate can however see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling we will notify the appropriate state officials of this action as required by sec_6104 of the internal_revenue_code if you have any questions please contact the person whose name and telephone number are shown in the heading of this letter sincerely yours marsha ramirez director eo examinations form 886-a explanation of items schedule or exhibit no name of taxpayer year ended issue has the org met the requirements to qualify for tax exempt status under sec_501 of the internal_revenue_code facts org was incorporated in july and recognized as a tax exempt_organization under c of the internal_revenue_code in july of in its articles of incorporation org stated this corporation is a nonprofit public benefit corporation and is not organized for the private gain of any person it is organized under the nonprofit public benefit corporation law for public and charitable purposes the specific purpose of this corporation is to buy distressed real_estate and then to rehabilitate it and sell or lease the real_estate at no profit to individuals who are qualified to receive low cost housing assistance during the year under examination date the organization bought four rental apartment buildings two buildings have four units each one has three units and one has two units through real_estate agents in the city of after evicting the tenants and rehabilitating the properties the organization sold these properties to individuals through real_estate agents per discussions with name the founder and the president of the organization rental apartment units cannot be sold separately and the buyer must purchase the building all together the buyers usually occupy one unit and rent out the remaining other units for rental income per name all four properties sold to low_or_moderate_income buyers but the organization failed confirm the buyer’s financial information to verify that the buyers are qualified as a charitable_class it did not mention the buyers’ income requirement on the contract agreements with the listing real_estate agents to sell the rental apartment building the organization did not provide documentation establishing that the buyers were qualified at low_or_moderate_income name incorporated name abrev is a for profit property management company located in city of name the organization does not have a written contract or agreement with name for services provided by name per name the verbal agreement with name was follows for each property purchased by the organization and managed by name the organization would receive a developer fee good_faith deposit from name name would arrange loans rehabilitate each property and lay out funds related to the rehabilitation and the holding of each property name would collect the rents and would evict tenants when necessary in order to properly rehabilitate each property name would also manage the selling process at close of escrow to the new buyer name would send the organization an invoice for the rehabilitation of each property name stated the organization selected from other companies before choosing name but the organization does not have documentation to prove the selection from other companies name paid org a developer fee averaging dollar_figure per property and total of dollar_figure for the four properties name arranged loans to purchase these properties per the statement from name two department of the treasury - internal_revenue_service form 886-a form 886-a explanation of items name of taxpayer org ein n year ended date schedule or exhibit no loans borrowed from name in the last quarter of at a interest rate and the other two loans were arranged by name and the organization does not have any details based on the escrow documents the four properties loans borrowed from name name managed the properties by collecting rents and evicting tenants before rehabilitating the properties name sent the rents to the organization and in turn the organization issued a check for the full amount of the rents to name name is responsible for rehabilitating the properties and managing the selling process of these properties upon close of escrow name sent an invoice to the organization including management fees insurance expenses legal fees interest payments utilities and cost associate with the rehabilitation the organization sent all the proceeds from escrow account to name there is no written contract or agreement for services between org and name name billed the interest_expenses rehabilitation fees insurance utilities management fees and all misc expenses at the same amounts as the proceeds from the escrow to the organization upon the escrow closing name is a corporation incorporated in california name has not filed federal_income_tax return for years date and date org is a proxy of name because name is the party who performs these transactions and benefits from these transactions summary of the property transactions addre sec_1 addre sec_2 addre sec_3 addre sec_4 dollar_figure dollar_figure dollar_figure dollar_figure property address purchase_price price sold gross_profit proceeds from escrow invoice from name for rehabilitation management cost by dollar_figure name dollar_figure dollar_figure dollar_figure dollar_figure - dollar_figure dollar_figure dollar_figure dollar_figure dollar_figures dollar_figure dollar_figure dollar_figure- dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure per the summary of the four properties above name billed to the organization for rehabilitation cost at the amount equal to the proceeds from escrow accounts department of the treasury - internal_revenue_service form 886-a form 886-a explanation of items schedule or exhibit no name of taxpayer org year ended date ein n law sec_501 of the internal_revenue_code provides that an organization described in sec_501 is exempt from income_tax sec_501 of the code exempts from federal_income_tax corporations organized and operated exclusively for charitable educational and other purposes provided that no part of the net_earnings inure to the benefit of any private_shareholder_or_individual sec_1_501_c_3_-1 of the regulations provides that in order to be exempt as an organization described in sec_501 an organization must be both organized and operated exclusively for one or more of the purposes specified in such section if an organization fails to meet either the organizational_test or the operational_test it is not exempt_income tax regulation c -1 c states primary activities an organization will be regarded as operated exclusively for one or more exempt purposes only if it engages primarily in activities which accomplish one or more of such exempt purposes specified in sec_501 an organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt_purpose income_tax regulation c -1 c provides that an organization is not operated exclusively for one or more exempt purposes if its net_earnings inure in whole or in part to the benefit of private shareholders or individuals the words private_shareholder_or_individual refer to persons having a personal and private interest in the activities of the organization the term private_shareholder_or_individual is defined in regulation sec_1_503_a_-1 an organization must establish that it serves a public rather than a private interest and that it is not organized or operated for the benefit of private interests such as designated individuals the creator or his family shareholders of the organization or persons controlled directly or indirectly by such private interests sec_1 c -1 d ii prohibited private interests include those of unrelated third parties as well as insiders 70_tc_1037 92_tc_1053 private benefits include an advantage profit fruit privilege gain or interest 78_tc_280 in 326_us_279 the court held that regardless of the number of truly exempt purposes the presence of a single substantial non exempt_purpose will preclude exemption under sec_501 of the code an organization formed to educate people in hawaii in the theory and practice of est was determined by the tax_court to a part of a franchise system which is operated for private benefit and therefore should not be recognized as exempt under sec_501 of the code est of hawaii v ’ department of the treasury - internal_revenue_service form 886-a form 886-a explanation of items name of taxpayer org ein n schedule or exhibit no year ended date commissioner 71_tc_1067 although the organization was not formally controlled by the same individuals who controlled the for-profit entity that owned the license to the est body of knowledge publications and methods the for-profit entity exerted considerable control_over the applicant’s activities by setting pricing the number and frequency of different kinds of seminars and training and providing the trainers and management personnel who are responsible to it in addition to setting price for the training the court stated that the fact that the organization’s rights were dependent upon its tax-exempt status showed the likelihood that the for-profit entities were trading on that status the question for the court was not whether the payments made to the for-profit were excessive but whether the for-profit entity benefited substantially from the operation of the organization the court determined that there was a substantial private benefit because the organization was simply the instrument to subsidize the for-profit corporations and not vice versa and had no life independent of those corporations government position the organization stated that its purpose is to purchase distressed real_estate properties and to rehabilitate those properties for sell or lease the properties at no profit to individuals who are qualified to receive low cost housing assistance the organization is not organized for the private gain of any person the organization purchased four multiple units rental apartment buildings and sold them at market price to the individuals at a profit there is no documentation to prove the buyers are low_or_moderate_income qualified individuals individuals who purchase rental properties with the intention for rental income is for investment purpose more than for releasing distress purpose the organization that purchased the rental properties and resells them for profit is for profit purpose and not for charitable purpose the organiization’s activities were not for charitable purpose thus not exempt from federal_income_tax all four transactions for the year under examination and subsequent years are a proxy of name a for profit corporation name name arranged the processes of these transactions from purchasing to reselling of these properties name paid to the organization total of dollar_figure developer fees for the four properties purchased under the organization’s name upon the close of the sell the proceeds from escrow account paid to name the transactions are directly benefit the for profit corporation name org has not operated exclusively for tax exempt_purpose and the proceeds from the transactions have been benefit of private individual therefore it does not qualify for exemption from federal_income_tax under sec_501 of the code the organization should file form_1120 effective on date taxpayer’s position department of the treasury - internal_revenue_service form 886-a form 886-a explanation of items schedule or exhibit no name of taxpayer org ein n year ended date org agreed with the revocation of its exempt status and signed the form_6018 on october org prepared and submitted forms for years datel and date conclusion org has not operated exclusively for tax exempt_purpose and the proceeds from the transactions have been benefit of private individual therefore it does not qualify for exemption from federal_income_tax under sec_501 of the code org filed forms for years date and date department of the treasury - internal_revenue_service form 886-a legend for day letter name ein tax period ended address of site of taxpayer_advocate org n datel tao legend for day letter name ein last date for filing a petition w tax_court org n datel effective date of revocation date2 ye date for forms address of site of taxpayer_advocate date3 tao legend for form 886-a rar name ein founder tax period ended org n name datel profit mgmt co name location of name name financial_institution name effective date of revocation date ye date and date department of the treasury internal_revenue_service n los angeles street ms los angeles ca tax_exempt_and_government_entities_division org form taxpayer_identification_number tax_year s ended person to contact id number contact numbers telephone fax certified mail - return receipt requested dear if you accept our findings take no further action we will issue a final revocation letter we have enclosed a copy of our report of examination explaining why we believe revocation of your exempt status under sec_501 of the internal_revenue_code code is necessary if you do not agree with our proposed revocation you must submit to us a written request for appeals_office consideration within days from the date of this letter to protest our decision your protest should include a statement of the facts the applicable law and arguments in support of your position an appeals officer will review your case the appeals_office is independent of the director eo examinations the appeals_office resolves most disputes informally and promptly the enclosed publication the examination process and publication exempt_organizations appeal procedures for unagreed issues explain how to appeal an internal_revenue_service irs decision publication also includes information on your rights as a taxpayer and the irs collection process you may also request that we refer this matter for technical_advice as explained in publication if we issue a determination_letter to you based on technical_advice no further administrative appeal is available to you within the irs regarding the issue that was the subject of the technical_advice letter catalog number 34809f if we do not hear from you within days from the date of this letter we will process your case based on the recommendations shown in the report of examination if you do not protest this proposed determination within days from the date of this letter the irs will consider it to be a failure to exhaust your available administrative remedies sec_7428 of the code provides in part a declaratory_judgment or decree under this section shall not be issued in any proceeding unless the tax_court the claims_court or the district_court of the united_states for the district of columbia determines that the organization involved has exhausted its administrative remedies within the internal_revenue_service we will then issue a final revocation letter we will also notify the appropriate state officials of the revocation in accordance with sec_6104 of the code you have the right to contact the office_of_the_taxpayer_advocate taxpayer_advocate assistance is not a substitute for established irs procedures such as the formal appeals process the taxpayer_advocate cannot reverse a legally correct_tax determination or extend the time fixed by law that you have to file a petition in a united_states court the taxpayer_advocate can however see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling you may call toll-free and ask for taxpayer_advocate assistance if you prefer you may contact your local taxpayer_advocate at tao sincerely telephone fax thank you for your cooperation if you write please provide a telephone number and if you have any questions please call the contact person at the telephone number shown in the heading of this letter the most convenient time to call if we need to contact you enclosures publication publication report of examination letter catalog number 34809f director eo e xaminations marsha a ramirez


department of the treasury i n t e r n a l r e v e n u e s e r v i c e w a s h i n g t o n d c date cc corp b03 genin-112241-11 o f f i c e o f t h e c h i e f c o u n s e l number release date uil ------------------ --------------------------------- ---------------------------------- --------------------------------------- ------------------------------------ dear --------------- this letter responds to your letter dated date requesting an extension of time for filing an election under sec_362 of the internal_revenue_code based on the facts that you have submitted it does not appear that an extension of time for filing the election is necessary therefore we are declining to rule as requested and closing your case in this office however we are providing the following general information regarding the election under sec_362 the sec_362 election is generally made on or with a u s return required to be filed for the year of the transfer to which it relates proposed regulation sec_1_362-4 provides rules for the making of the election with a return required to be filed in a later year if no return is required to be filed in the year of the transfer as a general matter a foreign_person that is not a controlled_foreign_corporation cfc within the meaning of sec_957 engaged in a u s trade_or_business or otherwise connected to the u s is not required to file a u s return merely because it engages in a transaction described in sec_351 this letter has called your attention to certain general principles of the law it is intended for informational purposes only and does not constitute a ruling see revproc_2011_1 sec_2 2011_1_irb_1 date procedures for refunding the user genin-112241-11 fee submitted with your case have been initiated with the user_fee unit and a refund will be handled by that office if you have any additional questions please contact ------- -----------at -------------------- not a toll-free number sincerely theresa a abell special counsel corporate cc