internal_revenue_service number release date index number ------------------------ ------------------------ ---------------------------------- -------------------------- - - department of the treasury washington dc person to contact -------------------- id no ------------- telephone number --------------------- refer reply to cc psi - plr-132453-04 date date company company ------------------------- ------------------------- -------------------------- ----------------- ------------------------------ manager ----------------------------------------------------- shareholders ------------------------------------------------------- ----------------------------------------------------------- ------------------------------------------------------- -------------------------------------------------------------------------------- ------------------------------------------------------- ---------------------------------------------------------------------------------- ------------------------------------------------------- ------------------------------------------------------ ------------------------------------------------------- ------------------------------------------------ ------------------------------------------------------- ------------------------------------------------------------------------------------- --------------------------------------------------------- ----------------------------------------------------- ----------------------------------------------------------------------------------- --------------------------------------------------------- ------------------------------------------------------- ------------------------------------------------------- ---------------------------------------------------------------------- ----------------------------------------------------- ----------------------------------------------------- ------------------------------------------------------- ----------------------------------------------------- ---------------------------------------------------------------- ----------------------------------------------------- ---------------------------- plr-132453-04 ----------------------------------------------------- --------------------------------------- properties ------------------------------------------------------------- --------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------ ---------------------------------------------------------------- --------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------- state a b c d e f ------------- ------------- ------------- -------------------------- -------------------------- ------------- ------------- dear ------------- this letter responds to your letter dated date as well as subsequent correspondence submitted on behalf of company requesting a ruling that the rental income received by company from the properties is not passive_investment_income within the meaning of ' d c i of the internal_revenue_code facts company a state corporation intends to elect under ' a to be an s_corporation it owns operates leases and manages commercial real_estate through its directors officers an independent property management company manager and various independent contractors company provides various services in leasing and managing the properties these services not all services are provided to all properties include the installation cleaning maintenance repair and replacement as appropriate of building structural_components including roofs exterior walls and plr-132453-04 foundations building heating ventilation and air conditioning systems and equipment parking sidewalk and driveway areas exterior and other common area lighting service and loading areas exterior stairs trash enclosures and disposal facilities fire sprinkler systems sanitary sewer and storm drainage systems underground gas electric and cable tv lines and equipment property signs and markers and landscaping company provides security and on-call emergency services in addition to the services provided to tenants company handles the usual leasing and administrative functions involved in managing rental real_estate company received or accrued approximately a in rents and paid_or_incurred approximately b in relevant expenses for c on the properties the comparable figures for d are e and f respectively law and analysis except as provided in ' g ' a provides that a small_business_corporation may elect in accordance with the provisions of ' to be an s_corporation sec_1362 provides that an election under ' a terminates whenever the corporation i has accumulated_earnings_and_profits at the close of each of three consecutive tax years and ii has gross_receipts for each of such tax years more than percent of which are passive_investment_income the term passive_investment_income means gross_receipts derived from royalties rents dividends interest annuities and sales or exchanges of stock_or_securities except as otherwise provided in ' d c ' d c i provides that sec_1_1362-2 of the income_tax regulations provides that rents means amounts received for_the_use_of or the right to use property whether real or personal of the corporation sec_1_1362-2 provides that rents does not include rents derived in the active trade_or_business of renting property rents received by a corporation are derived in an active trade_or_business of renting property only if based on all the facts and circumstances the corporation provides significant services or incurs substantial costs in the rental business generally significant services are not rendered and substantial costs are not incurred in connection with net leases whether significant services are performed or substantial costs are incurred in the rental business is determined based upon all the facts and circumstances including the number of persons employed to provide the services and the types and amounts of costs and expenses_incurred other than depreciation conclusion plr-132453-04 based solely on the facts and representations submitted we conclude that the rents company receives from the properties are not passive_investment_income under ' d c i except for the specific ruling above we express or imply no opinion concerning the federal tax consequences of the facts of this case under any other provision of the code specifically we express or imply no opinion regarding company's eligibility to be an s_corporation further the passive_investment_income rules of ' are independent of the passive_activity rules of ' unless an exception under ' applies the rental_activity remains passive for purposes of ' under a power_of_attorney on file with this office we are sending a copy of this letter to your authorized representative this ruling is directed only to the taxpayer who requested it according to ' k this ruling may not be used or cited as precedent sincerely jeanne sullivan senior technician reviewer branch office of associate chief_counsel passthroughs and special industries enclosures copy for ' purposes cc --------------------------------------------------------------- --------------------------------- --------------------------- ------------------------------------ ------------------------------------------- --------------------------------------


internal_revenue_service department of the treasury index number washington dc person to contact telephone number refer reply to cc tege eoeg teb-plr-105129-00 date date number release date legend x y z state bonds facility s t dear sir or madam this in response to your request for a private_letter_ruling that the facility will be a qualified_residential_rental_project for purposes of sec_142 facts x is a body politic and corporate and an instrumentality of the state x was created by state law for the purposes among others of financing housing production and housing improvement to further this purposes x issues bonds and makes loans for capital projects and other purposes x issued the bonds and loaned a portion of the bond proceeds s dollars to y to construct an assisted living facility the facility that meets the requirements of sec_501 and sec_145 of the internal_revenue_code y is a nonprofit corporation under sec_501 organized and existing in the state the facility is an assisted living community with t housing units that are similarly constructed and intended for non-transient senior adults who may need help with the activities_of_daily_living the facility’s housing units will be open to members of the general_public plr-105129-00 y proposes to sell the facility to z a state limited_liability_company to maintain the tax-exempt status of the bonds x y and z are simultaneously with the submission of this ruling_request taking remedial actions as provided for by sec_1_141-12 and sec_1_145-2 of the income_tax regulations and by revproc_97_15 1997_1_cb_635 to change the use of the facility from one qualifying as an exempt sec_501 facility described in sec_145 to a facility that qualifies as a qualified_residential_rental_project under sec_142 following the sale throughout the qualified_project period1 at least of the housing units in facility will be leased to residents whose income i sec_50 or less of the area_median_gross_income within the meaning of sec_142 the determination of whether the income of a resident of a unit in facility exceeds the required income limit will be made at least annually on the basis of the current income of the resident as required by sec_142 an annual certification as to whether the facility continues to meet the requirements of sec_142 will be submitted to the secretary_of_the_treasury at such time and in such manner as the secretary prescribes following the sale services will be made available to each resident in the facility that include daily meals three per day daily living activity assistance emotional support assistance pre-packaged medication intake assistance medication record maintenance housekeeping health promotion including exercise programs and transportation scheduling the facility staff will consist of home health aides certified nurses aides licensed practical nurses and registered nurses two certified nurses aides or home health aides will be on staff at the facility hours per day days a week a licensed practical nurse and a registered nurse will be on staff at the facility hours per day days a week during daytime hours certified nurses aides and home health aides under the supervision of the registered nurse will provide services that include health monitoring and assistance with daily living activities these services include the following emotional support assistance equipment assistance such as changing colostomy apparatus or helping with portable oxygen tanks vital signs collection including temperature pulse respiration and blood pressure physical assessments including weight measurements and blood glucose monitoring and other assistance as needed including helping with the period beginning when z acquires the facility and ending on the latest of the date which i sec_15 years after the date of which of the housing units in facility are occupied the first day on which no tax-exempt private_activity_bond issued with respect to the facility is outstanding or the date on which any assistance provided with respect to the facility under section of the united_states housing act of as amended terminates plr-105129-00 meal intake or with baths the licensed practical nurses and the registered nurses will provide services that include additional assistance with daily living needs record keeping first aid treatment health monitoring and medication administration the registered nurse will be specifically responsible for training staff supervision facility policies and procedures medical appointment scheduling and general health assessment at admission and every six months thereafter if a tenant’s physical condition is such that continuous hour and permanent nursing care is required the tenant will be required to move from the facility state law requires that a registered nurse be available by telephone or pager at all time and that periodic health assessments be performed by a registered nurse law under the general_rule of sec_103 gross_income does not include interest on any state_or_local_bond sec_103 however provides that the exclusion does not apply to any private_activity_bond unless it is a qualified_bond under sec_141 among the types of qualified bonds are exempt facility bonds and qualified sec_501 bonds sec_142 describes an exempt_facility_bond as any bond issued as part of an issue of bonds if percent or more of the net_proceeds of the issue are to be used to provide qualified residential rental projects sec_142 defines a qualified_residential_rental_project as a project for residential_rental_property that houses occupants who meet one of the alternative income tests at all times throughout a qualified_project_period income_tax regulations have not been promulgated under sec_142 nevertheless regulations promulgated under sec_103 of the internal_revenue_code of the predecessor to sec_142 continue to apply to residential_rental_property except as otherwise modified by the act and subsequent law under sec_1_103-8 a residential_rental_project is residential_rental_property that meets certain requirements including occupancy requirements by low-income tenants during the period when the units must be continually rented or available for rental residential_rental_property is a building containing one or more similarly constructed units that are available to members of the general_public and used on other than a transient_basis the regulations also provide that hotels motels dormitories fraternity and sorority houses rooming houses the tax_reform_act_of_1986 vol c b the act reorganized sec_103 and sec_103a of the internal_revenue_code of code into sec_103 and sec_141 through of the internal_revenue_code_of_1986 congress intended that to the extent not amended by the act all principles of pre-1986 act law would continue to apply to the reorganized provisions h_r conf_rep no at ii-686 vol c b conference_report plr-105129-00 hospitals nursing homes sanitariums rest homes and trailer parks and courts for use on a transient_basis are not residential projects sec_1_103-8 defines a unit as any accommodation containing separate and complete facilities for living sleeping eating cooking and sanitation the regulations note that an example of a unit would be a separate and distinct apartment containing a living area a sleeping area bathing and sanitation facilities and cooking facilities equipped with a cooking range refrigerator and sink revrul_98_47 1998_2_cb_397 provides guidance on whether facilities offering non-housing services for the residents of the facility will cause the facility to be other than residential_rental_property for purposes of sec_142 and sec_145 if the facility makes available continual or frequent nursing medical or psychiatric services it will not be residential rental housing under sec_142 and sec_145 the focus of these sections their legislative histories and the applicable regulations thereunder is whether the facilities are in substance residences or health care facilities therefore the nature and degree of the service provided by the facility controls revrul_98_47 describes building y as having similarly constructed housing units with separate and complete facilities for living sleeping eating cooking bathing and sanitation the housing units are available on a non-transient basis to members of the public services provided in building y for its residents include assistance by medication management technicians in medication management and intake maintenance of detailed medication records consultation with a nurse as needed about health concerns and medication plans assistance by non-medically certified aides each day during waking hours in activities_of_daily_living that include getting in and out of bed and chairs walking using the toilet dressing eating and bathing and routine checks by staff members to insure the residents general well-being some residents of the facility have incapacitating infirmities that require continual assistance but do not require continual or frequent nursing medical or psychiatric services revrul_98_47 concludes that building y is residential_rental_property for purposes of sec_142 in this case the nursing services provided in facility are different in some respects than those described in revrul_98_47 nevertheless they are not provided to the tenants on a continuing or frequent basis as in a nursing home for example a tenant that requires 24-hour nursing care is required to move to another facility conclusion based on the facts and representations submitted we conclude that the facility will be a qualified_residential_rental_project for purposes of sec_142 except as specifically ruled above no opinion is expressed concerning this transaction under any other provision of the code or regulations thereunder plr-105129-00 specifically no opinion is expressed concerning whether interest on the bonds is or after the sale of the facility to z will be excludable from gross_income under sec_103 this letter is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent sincerely yours assistant chief_counsel exempt_organizations employment_tax government entities by timothy l jones assistant to the chief tax exempt bonds branch enclosure copy for sec_6110 purposes


t c memo united_states tax_court brokertec holdings inc f k a icap us investment_partnership petitioner v commissioner of internal revenue respondent docket no filed date david b blair robert l willmore and teresa m abney for petitioner frederick petrino for respondent memorandum findings_of_fact and opinion jacobs judge respondent determined deficiencies in petitioner’s federal_income_tax for tax years ended tye date and years involved as follows tye mar deficiency dollar_figure big_number big_number big_number the deficiencies arise from members of petitioner’s consolidated group’s petitioner’s affiliates participation in the state of new jersey’s economic development program wherein new jersey made cash grants to petitioner’s affiliates during the years involved after concessions the issue involved is whether the cash grants are taxable as respondent maintains or nontaxable contributions to capital as petitioner maintains unless otherwise indicated all section references are to the internal_revenue_code as amended in effect for the years involved and all amounts are rounded to the nearest dollar findings_of_fact some of the facts have been stipulated and are so found the stipulation of facts and the exhibits attached thereto are incorporated herein by this reference 1the parties filed a joint stipulation of settled issues on date wherein they resolved the following two issues for tye date respondent determined in the notice_of_deficiency that petitioner must include in income a sec_481 adjustment of dollar_figure resulting from a change in method_of_accounting for beip grants received by petitioner’s affiliates the parties agreed that no such adjustment would be included in petitioner’s gross_income for tye date the parties agreed that petitioner would not be entitled to a corresponding increase in the basis of certain stock when petitioner filed its petition its principal_place_of_business and mailing address were in jersey city new jersey i petitioner during the years involved petitioner was a financial services company specifically a voice and electronic broker-dealer it was the parent of a consolidated_group that included icap north america inc formerly known as garban intercapital north america inc garban and first brokers holdings inc formerly known as first brokers securities inc first brokers petitioner under its former name icap us investment_partnership filed a form_1120 us corporation income_tax return for each of the years involved for the consolidated_group on date petitioner converted to a delaware corporation as a result of a reorganization and changed its name to brokertec holdings inc 2petitioner is a corporation organized and existing under the laws of the state of delaware 3the record does not reveal whether petitioner had elected under the check- the-box rules of sec_301_7701-1 sec_301_7701-2 and sec_301_7701-3 proced admin regs to be treated as an association_taxable_as_a_corporation respondent does not dispute that petitioner was entitled to file form_1120 for the consolidated_group for the years involved garban was an interdealer-broker it acted as an intermediary arranging transactions in the financial services industry typically between banks and investment banks garban arranged transactions in a wide array of products including securities foreign exchange and energy garban provided its clients the opportunity to trade anonymously through a neutral party at the most attractive prices available first brokers also was an interdealer-broker it specialized in corporate debt securities high-yield securities mortgage-backed_securities high-grade industry securities and various other debt-driven markets garban acquired first brokers on or about date ii the attack of date on date garban had offices in both towers of the world trade center in new york city wherein it employed brokers and other employees each office was specially outfitted for garban’s business having a large open space for trading areas the trading areas had false floors to allow garban to run lines from the telephone rooms and computer rooms to each broker’s desk both of garban’s offices were destroyed in the terrorist attack of date the day after the attack garban’s managers met in borrowed office space donald marshall one of garban’s directors was tasked with quickly finding new temporary and permanent office space on date first brokers employed approximately individuals at its office near the world trade center although first brokers’ office was not directly damaged by the attack the destruction in the area rendered it nearly impossible for first brokers employees to return to the firm’s office to conduct business consequently first brokers’ management concluded that the firm had to search for permanent office space elsewhere in new york or in new jersey iii garban’s search for a new office garban secured temporary office space in midtown manhattan but it was not adequate to allow the company to fully resume business mr marshall’s search for a permanent office was restricted because garban needed a large open space to build a trading room with a false floor to support the expansive telephone and computer networks required by the business no preexisting space met garban’s needs therefore mr marshall sought new_construction that could build the office to its specifications the firm budgeted dollar_figure to dollar_figure million for construction purposes lower manhattan was ruled out as a location because a number of garban’s employees did not want to return to the vicinity of the world trade center and the state of new york was unable to offer financial assistance on the other hand when mr marshall contacted new jersey he learned that new jersey had a program the new jersey business employment incentive program beip which offered financial incentives to attract businesses to move to the state the new jersey economic development authority eda administered the beip iv new jersey’s financial assistance the eda is an independent agency of the state of new jersey its stated mission is to develop new jersey’s economy and revitalize its cities by inducing businesses and not-for-profit_organizations to move to or remain in new jersey by providing financial and technical assistance during the years involved the eda’s staff included a sales force that promoted the eda’s programs to businesses an underwriting group that determined whether the proposed projects qualified for the eda’s program offerings which included cash grants loans loan guaranties and bond deals and a portfolio services group that worked with the recipient through the life of the incentive project overseeing the staff was the eda board the eda board was charged by the beip’s enabling law to review and approve or disapprove financial assistance under the beip to entities recommended by the staff the eda board comprised individuals from both the state government and private industry including the financial industry overseeing the program was the governor of new jersey who had unrestricted veto authority over the action of the board during the years involved the eda made cash grants under the beip enacted as part of the business employment incentive program act assembly no n j introduced date enabling law the beip was designed t o grow new jersey’s economy and revitalize its cities through providing financial and technical assistance to businesses not-for-profits and the local_government specifically the eda used beip grants to induce companies to locate in new jersey it was intended that a business attracted to new jersey by a beip grant would operate as an anchor for a neighborhood this in turn would encourage other large employers to move into the neighborhood as well as attract other businesses such as restaurants and shops that would be patronized by the beip grant recipient’s employees in addition to attracting businesses to new jersey the state had compiled a list of municipalities called urban-aid municipalities 4the beip is no longer used by the state of new jersey that demonstrated certain demographic metrics that would show that there’s been a lack of investment over time the state sought to encourage businesses to move their operations to those urban-aid municipalities certain businesses such as financial services were referred to as target industries the state provided larger beip grants to targeted industries willing to locate their business facilities in urban-aid municipalities the beip was a discretionary aid program an applicant seeking to participate in the program would not automatically receive a grant after filing an application rather the eda board made a determination as to whether the applicant would receive an award and in what amount new jersey’s enabling law directed that the award of beip grants be based on criteria developed by the eda after taking into consideration the number of eligible employees at the project site the expected duration of these positions the type of contribution the business could make to the long-term growth of the new jersey economy the amount of other financial assistance the business would receive from the state for the project and the total dollar investment the business was making in the project applicants were required to relocate or 5in contrast in an entitlement program or an as-of-right program if the applicant meets the stated criteria it automatically receives the incentive or grant upon filing the proper forms no review by a board or commission occurs expand a project in new jersey and maintain a minimum employment level at the project site applicants were also required to remain at the project site for a period of at least of the period over which the beip grant was paid as cash disbursements were usually paid over a period of years the grant recipient was generally obligated to remain at the project site for years grants were paid after the creation of the jobs in new jersey beginning after the grant recipient had operated under its agreement with the eda for at least one year and were based on remitted new jersey state_income_tax withheld from the recipients’ employees’ wages the amount of the grant awarded by the eda wa sec_30 to of the recipient’s employees’ state_income_tax withholdings the eda had discretion in determining this amount although the grant was based on the withholding_tax paid_by the employees the grant was not a rebate of the tax paid rather the grant was paid from the state’s general appropriations v the beip grant applications a garban’s beip application process garban engaged stadtmauer bailkin biggins llc sbb a trenton new jersey law firm to assist it in applying for beip grants sbb attorneys jay 6the law firm is now known as biggins lacy shapiro co biggins joe lacy and laura gitlin guided garban through each step of the beip grant application process mr lacy drafted and on date submitted garban’s beip application to the eda the goal of the application was to highlight each aspect of garban’s business that would make it attractive to the eda garban’s application emphasized the fact that garban was a financial services company one of the eda’s targeted industries and that garban intended to house its facilities in jersey city new jersey one of the eda’s targeted areas in the application’s cover letter garban stated that its move to new jersey would involve the following expenditures real_estate the company intends to lease an existing facility able to accommodate certain of the company’s operations the company requires approximately big_number to big_number square feet the space will require substantial tenant improvements estimated at dollar_figure million employment payroll the project will result in the relocation of approximately new high quality jobs to the state of new jersey the new employees will have a minimum average salary of approximately dollar_figure resulting in an estimated annual payroll of approximately dollar_figure million 7the eda allowed companies to receive a conditional approval with a to be determined project site however the applicant was still required to inform the eda as to the actual project site in order to receive final approval technology and ff e the company anticipates an initial capital_investment in technology and ff e in sic of approximately dollar_figure million the application letter highlighted that garban’s heavy use of technology would require it to make constant capital expenditures to keep the equipment up to date the letter stated that the build-out of the office space would create local construction jobs and generate the sale of equipment and material as well as capital expenditures necessary to construct office space the application letter also noted that the presence of the large number of new well-paid employees would encourage other businesses to create jobs to cater to garban’s employees and that the presence of a financial services firm such as garban would make the jersey city area more attractive to other high-end businesses although the eda staff had discretion in calculating the grant amount the eda staff used a standard business employment incentive guidelines form to score the project in determining the grant percentage they would recommend to the eda board to consider at the time garban applied for a beip grant the guidelines were as follows project location targeted defined as urban-aid municipalities only non-targeted 8the term ff e is not defined in the record creation of eligible new jobs if in a non-targeted non urban-aid municipality if in targeted urban-aid municipality note minimum of jobs in an urban-aid municipality or jobs in a non urban-aid municipality jobs at risk to to to industry type targeted non-targeted leverage of private investment to state investment exposure to and up to to private investment debt and equity by the applicant in project - - - average wages of eligible new employee sec_3 dollar_figure dollar_figure - dollar_figure dollar_figure - dollar_figure dollar_figure - dollar_figure total possible score maximum grant score grant grant score bonus increases in beip grant percentage 9bonus increases could not result in an increase above the maximum continued if project is located in a ucc municipality if recycling a brownfield site if job creation is or more urban coordinating council municipalities new additions to list in bold asbury park camden elizabeth jersey city long branch neptune township newark new brunswick franklin perth amboy plainfield pleasantville trenton vineland relying on the guidelines the eda staff gave garban the following scores criteria location jersey city job creation jobs at risk industry financial services leverage uez tax exemption equity wages dollar_figure score total score recommended term years estimated total project costs dollar_figure the eda staff determined garban was financially viable and that the beip grant would be a material factor in garban’s decision to locate in new jersey on continued grant date the eda staff recommended to the eda board that garban receive an grant for a period of years on date the eda sent a letter to garban informing the company that the eda board had approved garban’s application and offered the company a beip grant for a 10-year period at the level garban’s representatives and the eda then began negotiating a final agreement the eda relied on a standard agreement drafted by the new jersey office of the attorney_general garban sought to modify that section of the agreement governing remedies available to the state should garban default on its obligations the eda agreed to garban’s modification request garban also sought several changes to the commitments it made on its beip application after receiving the date approval from the eda board first garban sought to change the location of its office in its application garban stated that the proposed project would be located pincite washington boulevard or another facility within new jersey to be determined in jersey city new jersey subsequently garban decided to place its office in the harborside financial center in jersey city the eda approved this request noting that the move did not affect garban’s overall score because the project continued to be located in a targeted location of jersey city in order to increase the amount of the beip grant garban sought to modify its employment commitment to increase the number of employees located in new jersey in its application garban had committed to hiring employees garban chose this figure because of the uncertainty in the business climate ie in the aftermath of the september terrorist attack the company was unsure as to the number of its employees willing to continue to work because garban would be subject_to penalties under the beip agreement if the company did not meet the employment goal the company made a conservative commitment however after receiving approval from the eda board garban had a higher level of confidence with respect to the business climate and sought to increase its employment commitment to employees garban further sought to adjust its estimated average salary to dollar_figure per employeedollar_figure on date the eda informed garban that its requests had been approved and garban’s beip grant originally estimated to be dollar_figure paid over years was increased to an estimated dollar_figure over years with these changes approved garban’s chief operating officer james nance signed the beip agreement on date the beip agreement 10politics was also a factor in making this change mr marshall was informed that the then-incoming governor was considering capping beip grants because of budget concerns thus the change was requested before the change in administration detailed garban’s and the eda’s commitments rights and responsibilities garban committed to employing full-time workers at the harborside financial center location for years garban agreed that it could not move its new jersey office during that period and that it would not move its office to another state without the express written approval of the eda upon signing the beip agreement garban prepared to move to the harborside financial center in jersey city construction of the harborside financial center began in the fall of in date garban was given access to the construction site to customize its office space to the standard of the world trade center facilities garban installed an electric generator on the roof of the building as a power backup in a memorandum to its board_of directors garban stated that with respect to the harborside financial center us management have indicated that anticipated expenditure on the us build out is likely to be in the region of usdollar_figurem some usdollar_figurem has been committed after taking account of a usdollar_figurem landlord lease contribution net cash outflows were predicted to be dollar_figurem on date garban achieved the minimum eligibility threshold qualifying it to receive beip grant payments garban first received its beip grants in date after garban made the capital outlays necessary to build its office as noted supra p the grant payments were to be made from the state’s general appropriations however beginning in the eda was authorized to issue bonds to fund the beip in years in which a state appropriation was insufficient to pay grants because the state legislature failed to appropriate sufficient funds in some years garban did not receive all or any of its beip grant payments from state appropriations garban received beip payments as follows tye mar amount dollar_figure big_number big_number -0- big_number big_number -0- big_number big_number big_number garban received a total of dollar_figure from the beip the state of new jersey placed no restrictions on garban’s use of this money the beip grant stabilized garban’s financial position inasmuch as garban was financially able to pay for the improvements to its harborside financial center office without the grant moneys garban as well as first brokers see infra p used all of it sec_11this total represents the rounded sum of the beip grants beip proceeds to acquire all of the stock of icap holdings usa inc this acquisition was part of a series of transactions designed to expand petitioner’s business into other trading markets b first brokers’ beip application process after the date attack first brokers worked out of borrowed office space requiring a permanent solution first brokers engaged sbb on date and filed a beip application with the eda on date in its application letter first brokers highlighted the following expenditures real_estate the company intends to lease approximately big_number square feet within an existing facility which is able to satisfy the company’s cost and facility technology requirements the space will require tenant improvements estimated at dollar_figure million employment payroll the project will result in the relocation of approximately new high quality jobs to the state of new jersey the new employees will have a minimum average salary of approximately dollar_figure resulting in an estimated annual payroll of approximately dollar_figure million technology and ff e the company anticipates an initial capital_investment in technology and ff e of approximately dollar_figure first brokers’ application highlighted attributes similar to those highlighted by garban in its application and stated that first brokers intended to move to a facility in hoboken new jersey the eda staff determined first brokers was financially viable and found that the beip grant would be a material factor in first brokers’ decision to locate in new jersey relying on the same guidelines used for garban the eda staff gave first brokers the following scores criteria location hoboken-targeted job creation jobs at risk industry financial services-targeted leverage all private equity wages dollar_figure average score total score recommended term years estimated total project costs dollar_figure the eda board considered and approved a beip grant for first brokers on date before any other action was taken garban acquired first brokers on or about date on date garban sent a letter to the eda requesting that the agency approve garban’s acquisition of first brokers and approve changing first brokers’ project location from hoboken to jersey city first brokers informed the eda that upon the acquisition first brokers would retain its corporate existence and be a wholly owned subsidiary of garban and first brokers would move into garban’s harborside financial center office garban requested that the eda incorporate first brokers into garban’s agreement with the eda to that end garban requested that its job commitment under the agreement be increased from to and that the average wages in the beip agreement be increased to dollar_figure upon acceptance of these modifications to the garban beip agreement first brokers stated that it intended to withdraw its beip application the eda partially approved garban’s request first brokers was permitted to change its project site from hoboken to the harborside financial center but the eda declined to allow garban and first brokers to combine their grants as the grants involved different percentages ie versus and different start dates on date first brokers and the eda executed the beip agreement first brokers received beip grants as follows tye mar amount dollar_figure big_number big_number big_number -0- big_number big_number big_number big_number as noted supra pp these amounts were used to acquire all of the stock of icap holdings usa inc vi petitioner’s tax returns petitioner timely filed its federal_income_tax returns for the years involved petitioner excluded the following amounts of beip payments from those returns asserting they are nontaxable nonshareholder contributions to capital tye mar amount excluded dollar_figure big_number big_number big_number opinion i introduction gross_income generally means all income from whatever source derived see sec_61 sec_1_61-1 income_tax regs because of the sweeping scope of sec_61 the supreme court has held that exclusions from income must be narrowly construed 515_us_323 petitioner argues that it falls under one such exclusion sec_118 which provides that in general i n the case of a corporation gross_income does not include any contribution_to_the_capital_of_the_taxpayer as relevant in this matter sec_1_118-1 income_tax regs provides in the case of a corporation sec_118 provides an exclusion_from_gross_income with respect to any contribution of money or property to the capital of the taxpayer sec_118 also applies to contributions to capital made by persons other than shareholders for example the exclusion applies to the value of land or other_property contributed to a corporation by a governmental_unit or by a civic group for the purpose of inducing the corporation to locate its business in a particular community or for the purpose of enabling the corporation to expand its operating facilities however the exclusion does not apply to any money or property transferred to the corporation in consideration for goods or services rendered or to subsidies paid for the purpose of inducing the taxpayer to limit production sec_118 was originally enacted as part of the internal_revenue_code of ch 68a stat pincite without counterpart in earlier versions of the code while the section does not contain a definition of contribution to the capital the 12congress amended sec_118 to provide that the term contribution_to_capital does not include any contribution by any governmental entity or civic group other than a contribution made by a shareholder as such effective as of the date of enactment of the statute date except that contributions made by a governmental entity pursuant to a master development plan approved before the enactment_date are not affected by the statute tax cuts and jobs_act of pub_l_no sec a - stat pincite3 senate_finance_committee report s rept no pincite u s c c a n stated the house and your committee’s bill provide that in the case of a corporation gross_income is not to include any contribution_to_the_capital_of_the_taxpayer this in effect places in the code the court decisions on the subject it deals with cases where a contribution is made to a corporation by a governmental_unit chamber of commerce or other association of individuals having no proprietary interest in the corporation in many such cases because the contributor expects to derive indirect benefits the contribution cannot be called a gift yet the anticipated future_benefits may also be so intangible as to not warrant treating the contribution as a payment for future services we deem reviewing the judicial decisions as to the meaning of the term contribution_to_the_capital_of_the_taxpayer within the purview of sec_118 to be instructive and we now do so in 268_us_628 the supreme court articulated a functional_use_test with respect to the characterization of contributions to a corporation that operated a railroad in cuba the cuban government paid the taxpayer subsidies for the construction and maintenance of certain railroad lines noting that the payments were not given as gratuities but were provided to induce the construction and operation of railroads to serve the public at large the supreme court held that the payments were not to be used for the payment of dividends interest or anything else properly chargeable or payable out of earnings or income were not made for services rendered or to be rendered and were not profits or gains from the use or operation of the railroad id pincite consequently the court held that the payments did not constitute income within the meaning of the sixteenth_amendment id pincite in contrast in 286_us_285 the supreme court concluded that income subsidies paid to the taxpayer railroad were taxable during world war i the federal government took control of the railways upon relinquishing control railroads were guaranteed a minimum operating income id pincite if a railroad’s income fell below a fixed minimum the government was obliged to make up the deficiency if the railroad’s income exceeded a certain amount the railroad was bound to repay the excess payment to the federal treasury id pincite the supreme court distinguished cuba r r co stating that in the earlier case the payments were conditioned upon construction work performed here they were to be measured by a deficiency in operating income and might be used for the payment of dividends of operating_expenses of capital charges or for any other purpose within the corporate authority just as any other operating revenue might be applied the government’s payments were not in their nature bounties but an addition to a depleted operating revenue consequent upon a federal activity id pincite subsequently in 319_us_98 the supreme court ruled on whether payments to the taxpayer telephone company for the estimated cost of the necessary construction with regard to extending facilities to service those customers were included in the taxpayer’s basis for purposes of depreciation the taxpayer added the disputed payments when received to its surplus and t hey have not been taxed as income presumably because it has been thought to be precluded by this court’s decisions in edwards v cuba r co id pincite focusing on the motivation of the contributors of the funds the supreme court reasoned that i t is enough to say that it overtaxes imagination to regard the farmers and other customers who furnished these funds as makers either of donations or contributions to the company id pincite as a consequence of its finding that the payments were not capital contributions but rather the price of service the supreme court concluded that in calculating cost_basis for depreciation the customer payments could not be considered id pincite in the court_of_appeals for the third circuit where an appeal in this matter would ordinarily lie decided 178_f2d_639 3d cir rev’g 9_tc_1082 a case similar to the case now before us people in the community of sayre pennsylvania sought during the depression to bring industries to town for the obvious purpose of increasing local payrolls and thus to promote general prosperity to this end a group of citizens organized valley industries inc a pennsylvania non-profit corporation and subscribed a sum of money to it a company which is in fact the taxpayer’s predecessor but will be referred to as the taxpayer moved to town and received a plant for the conduct of its business id pincite the terms of the agreement involved in mckay prods corp were that valley industries would purchase and improve a vacant factory building to be occupied by the taxpayer the property would be deeded to the taxpayer once it had moved to sayre and had paid dollar_figure million in payroll which it was estimated would take approximately years the payroll condition was later waived and the property transferred to the taxpayer after the taxpayer had advanced money to valley industries to enable it to meet its obligations id n the court_of_appeals addressed the issue of whether a corporation could receive a contribution of capital from a nonshareholder the court held that it could and that the transfer of property by a nonshareholder was a capital_contribution ie that valley industries contributed to the taxpayer’s working_capital id pincite the court stated that ‘ w orking capital’ in common parlance means the value of that with which the enterprise carries on its activity how much stake is in the game what is the amount of money which is in the business commissioner v mckay products corp f 2d pincite the court found that the transfer was not a payment to the taxpayer for services while the taxpayer received consideration for the move to sayre ie the transfer of the property the mere presence of consideration did not preclude the treatment of the contribution as a gift to the taxpayer id pincite the ruling by the court_of_appeals for the third circuit created a split with the court_of_appeals for the eighth circuit which had come to the opposite conclusion with respect to contributions of property by nonshareholders in 175_f2d_305 8th cir rev’g 10_tc_291 rev’d 339_us_583 dollar_figure to resolve this split the supreme court granted certiorari in brown shoe co in brown shoe co v commissioner u s pincite the taxpayer received cash and other_property from community groups in several different municipalities to induce the taxpayer to locate or expand its factory operations within those municipalities the taxpayer entered into three main categories of agreements 13the court_of_appeals for the eighth circuit had reversed the decision of this court wherein we held that the community group contributions of property and money were not contribution s to capital included in the taxpayer’s computation of its equity invested capital under former sec but that property acquired through the contributions could be depreciated as assets that the taxpayer purchased directly with the community groups build or enlarge a factory and operate it for at least years with a minimum payroll requirement enlarge a factory with a stipulated minimum addition to personnel for years and construct an addition to an existing factory id pincite the supreme court noted that n o restriction was imposed in any instance as to the use which petitioner might make of the property contributed or acquired with cash or of the proceeds if the property should be disposed of after expiration of the required period of operation id pincite the cash payments the taxpayer received from the several community groups were not earmarked for or held intact and applied against the plant acquisitions in the respective communities but were deposited in the taxpayer’s general bank account from which were paid general operating_expenses and the cost of all assets acquired including factory buildings and equipment in the towns involved the cash payments were debited to cash account on the assets side of the taxpayer’s ledger and were credited to earned surplus either upon receipt or after having first been assigned to contributed surplus id relying on detroit edison co the internal_revenue_service irs argued that the taxpayer could not depreciate the property contributed or the property acquired with the cash received from the community groups see brown shoe co v commissioner u s pincite the supreme court rejected the irs’ position concluding that the assets transferred to petitioner by the community groups represented contributions to capital within the meaning of sec_113 and required no reduction in the depreciation basis of the properties acquired the values which the taxpayer received were additions to capital as that term has commonly been understood in both business and accounting practice conformably with this usage the pertinent treasury regulations have consistently recognized that contributions to capital may originate with persons having no proprietary interest in the business that this interpretation is in harmony with broad congressional policy as to depreciation_deductions was emphasized by the third circuit when considering the similar situation presented in commissioner v mckay products corp supra f 2d pincite id pincite fn refs omitted the supreme court distinguished detroit edison co stating since in this case there are neither customers nor payments for service we may infer a different purpose in the transactions between petitioner and the community groups the contributions to petitioner were provided by citizens of the respective communities who neither sought nor could have anticipated any direct service or recompense whatever their only expectation being that such contributions might prove advantageous to the community at large under these circumstances the transfers manifested a definite purpose to enlarge the working_capital of the company id pincite fn ref omitted in 27_tc_722 aff’d 254_f2d_105 3d cir a reviewed opinion of this court we held that payments received from customers to finance the construction of a television antenna system were payment for services and not contributions to capital the taxpayer’s customers were required to make this contribution to be eligible to receive television service and the customer was required to make monthly payments to receive the signals id pincite we found that these facts made the case similar to detroit edison co we stated t here was nothing altruistic in the motive which prompted the petitioner’s prospective customers to finance the television antenna system they wanted television service and they were willing to pay for it id pincite in contrast in 426_f2d_417 6th cir aff’g 51_tc_500 the court_of_appeals for the sixth circuit affirmed a decision of this court holding that the contribution of land and cash to the taxpayer was a capital_contribution under sec_118 in that matter a real_estate developer induced the taxpayer to construct and operate a department store in a shopping center it was developing by conveying acres in the development to the taxpayer and paying the taxpayer dollar_figure per year for years id pincite in affirming the tax_court the court_of_appeals acknowledged that these inducements were made with the expectation that the department store would promote the real_estate developer’s financial interests however the court_of_appeals concluded that this expectation was clearly of such a speculative nature that any benefit necessarily must be regarded as indirect in all the cases relied upon by the government the contributions had a reasonable nexus with the services which it was the business of the recipient corporation to provide such is not this case id pincite thus any benefit expected to be derived by sharpstown the real_estate developer was so intangible as not to warrant treating its contribution as a payment to taxpayer for future services id see also may dep’t stores co v commissioner tcmemo_1974_253 real_estate developer’s contribution of land to taxpayer in exchange for building and operating store for years was a capital_contribution aff’d 519_f2d_1154 8th cir three years later the supreme court decided 412_us_401 wherein several states required the taxpayer to construct numerous railroad safety improvements the taxpayer entered into a series of contracts in which states would fund some or all of the costs incurred the states were later reimbursed for these costs by the federal government id pincite the taxpayer sought to depreciate certain of the improvements paid for before date from the public funds see id pincite the supreme court held that these subsidies were not contributions to capital within the context of former sec_118 and thus the taxpayer had a zero basis in the assets constructed with the subsidies in reaching its decision the supreme court focused on the intent of the donors the supreme court reviewed its reasoning in detroit edison co and brown shoe co and those cases’ differing holdings if at first glance detroit edison and brown shoe seem somewhat inconsistent they may be reconciled and indeed must be on the ground that in detroit edison the transferor intended no contribution to the transferee’s capital whereas in brown shoe the transferor did have that intent id pincite further the supreme court stated it seems fair to say that neither in detroit edison nor in brown shoe did the court focus upon the use to which the assets transferred were applied or upon the economic and business consequences for the transferee corporation instead the court stressed the intent or motive of the transferor and determined the tax character of the transaction by that intent or motive thus the decisional distinction between detroit edison and brown shoe rested upon the nature of the benefit to the transferor rather than to the transferee and upon whether that benefit was direct or indirect specific or general certain or speculative these factors of course are simply indicia of the transferor’s intent or motive id pincite fn ref omitted the intent of the states providing funding for the safety improvements was not immediately obvious to discern the donors’ intent the supreme court listed the following characteristics of a nonshareholder capital_contribution it certainly must become a permanent part of the transferee’s working_capital structure it may not be compensation such as a direct payment for a specific quantifiable service provided for the transferor by the transferee it must be bargained for the asset transferred foreseeably must result in benefit to the transferee in an amount commensurate with its value and the asset ordinarily if not always will be employed in or contribute to the production of additional income and its value assured in that respect id pincite see s pac transp co v commissioner 75_tc_497 supplemented by 82_tc_122 this was not a new test but rather was a distillation of characteristics examined in detroit edison co and brown shoe co in rejecting the taxpayer’s contention the supreme court held that the third and fourth characteristics were not satisfied with respect to the third characteristic there was no real bargaining between the taxpayer and the states it was take-it-or-leave-it e xcept for the orders by state commissions and the governmental subsidies the facilities most likely would not have been constructed at all chi burlington quincy r co u s pincite with respect to the fourth characteristic a ny incremental economic benefit to cb q was marginal the facilities were peripheral to its business and did not materially contribute to the production of further income by the railroad a nd the need of the railroad for capital funds was not considered id fn ref omitted it should be emphasized that chi burlington quincy r co did not overrule brown shoe co or detroit edison co moreover the case did not establish a strict formula by which governmental assistance should be judged rather it established a way to infer the intent of the donor when the facts do not make it clear as we observed in 65_tc_217 quoting chi burlington quincy r co u s pincite that the supreme court did not intend to lay a rigid analytical framework for problems arising under sec_118 is clear from its statement that whether the governmental subsidies qualified as income to the railroad is an issue not raised in this case and we intimate no opinion with respect to it state farm road corp turned on whether moneys received by the taxpayer from charges levied against prospective users to tie into a sewer system should be included in income except in limited circumstances the sewer tie-in charges were nonrefundable one-time charges for hooking up property to the sewer system and were deposited into the corporation’s bank account id pincite we did not rely on the factors enunciated in chi burlington quincy r co instead after reviewing the legislative_history of sec_118 as well as the decisions in among other cases cuba r r co brown shoe co federated dep’t stores teleserv co of wyo valley and detroit edison co we found the facts to be substantially_similar to those in teleserv co of wyo valley and detroit edison co holding that the payments were not contributions to capital id pincite ii application we now apply the aforementioned judicial principles to resolve the dispute before us the evidence presented at trial shows the intent or motive of the state of new jersey in making the payments to petitioner’s affiliates and the key to determining whether payments from a nonshareholder here the state of new jersey are taxable to the recipient here petitioner’s affiliates or nontaxable as a contribution_to_capital is the intent or motive of the nonshareholder donor it is undisputed that the eda’s purpose in making the beip grant to petitioner’s affiliates was to induce them to establish their offices in a targeted_area ie an urban-aid municipality not only to bring in new jobs but also to revitalize the area in the instant case we have clear evidence of the donor’s intent and we find that the eda’s intent and motivation for the beip grant was to provide a nontaxable contribution_to_capital the statute enacting the beip stated that the purpose of the program was to develop new jersey’s economy and revitalize its cities by providing financial and technical assistance to amongst other entities businesses both witnesses from the eda ms hassett and ms butterfield stated that their only interest in making such grants was to bring new jobs to the state the facts in this case fall squarely within the four corners of sec_1_118-1 income_tax regs and are strikingly similar to those of brown shoe co and mckay prods corp wherein the donor entities sought to induce the businesses in question to move to facilities within the donors’ localities respondent asserts that these cases are inapplicable because brown shoe was not decided on the basis that it was a ‘location inducement’ case and t he mckay products case was not a case involving the payment of grants in exchange for making withholding payments relating to the creation of new jobs it involved a transfer of what was clearly a capital_asset ie the plant that was acquired for the taxpayer to occupy continuing respondent asserts in the instant case unlike the cases petitioner cites the beip agreements do not provide that the petitioner incur a specified amount of costs or any cost at all for capital assets or for any other type of asset mckay products and brown shoe involved the transfer of capital assets and a requirement to construct and enhance capital assets and did not require that the transferee pay a specified amount to the community groups based on wages paid to employees that were relocated from another state as a condition for the receipt of payments respondent misinterprets the facts of those cases instead of focusing on the intent of the donor respondent focuses on the donee’s construction of capital assets in both brown shoe co and mckay prods corp the localities sought to induce the taxpayers in question to move to their respective localities the localities sought the economic benefits arising from the new jobs in the areas just as new jersey did in this matter the taxpayer in brown shoe co was required to establish or expand facilities and then operate those facilities for a minimum period generally years it was the operation of the business that generated the economic benefits the localities sought not the construction of the facilities as the taxpayer in brown shoe co was a manufacturing company the hoped-for economic benefits required the construction or expansion of large buildings with heavy machinery had the taxpayer failed to meet the requirements of the agreement it would have forfeited the aid it received and once it had met its requirements the taxpayer was free to do with the facilities as it wished the circumstances in mckay prods corp were similar there the donor purchased a factory building and offered to give the building to the taxpayer once the taxpayer moved its operations to sayre and paid dollar_figure million in payroll which was estimated to take years if it did not meet these obligations the taxpayer would not receive ownership of the factory and the purpose of the donor was not to induce the taxpayer to build or buy a factory but rather to induce the taxpayer to move its business to the area and create jobs respondent objects that petitioner’s affiliates ultimately received dollar_figure in aid via beip grants while expending only some dollar_figure million in moving to new jersey respondent implies that this disparity in aid versus the cost of establishing its office is excessive respondent would not be alone in reaching this conclusion ms butterfield testified that in the early years of the program beip grants were too generous and the eda subsequently changed its beip grant policies t here were multiple changes to the program the program was very generous early on in the early years and later--and--and there were some studies done by rutgers indiscernible school of public policy to evaluate the level of awards being given to companies and some recommendations made to cap the awards based on certain factors those caps were put into place around but they were prospective as to the newer applications not retroactive to those that had been approved but these facts do not affect our analysis petitioner’s affiliates were required to establish facilities in new jersey and to operate the facilities for a minimum period with an agreed number of employees had petitioner’s affiliates failed to do so they would have forfeited their state_aid respondent conflates capital_asset such as a factory or machinery with working_capital as the supreme court observed the phrase contribution_to_capital is not statutorily defined chi burlington quincy r co u s pincite in commissioner v mckay prods corp f 2d pincite the court_of_appeals for the third circuit used the common definition of the phrase stating it meant the value of that with which the enterprise carries on its activity how much stake is in the game what is the amount of money which is in the business the supreme court adopted this definition of working_capital when citing mckay prods corp with approval in brown shoe co v commissioner u s pincite and in chi burlington quincy r co u s pincite the supreme court cited brown shoe co stating that one characteristic of a contribution to a company’s working_capital was that the contributed funds were intended to benefit not only the transferors but the transferee as well as the assets were put to immediate use by the taxpayer to generate additional income thus we believe that the supreme court has adopted the common-sense definition of working_capital used by the court_of_appeals for the third circuitdollar_figure petitioner’s affiliates are financial services companies they rely primarily on human capital ie their employees as well as the substantial cash reserves necessary to function as interdealer-brokers petitioner’s affiliates have no need for massive facilities rather an office with computers and telephones is sufficient for them to conduct business petitioner’s affiliates made the cash 14our own jurisprudence has defined working_capital for example as current_assets less current liabilities excluding current maturities of long-term debt and line of credit estate of gallagher v commissioner tcmemo_2011_148 slip op pincite supplemented by tcmemo_2011_244 grants a part of their stake in the game by using the funds to acquire all of the stock of icap holdings usa inc which enhanced the efficiency of petitioner’s affiliates’ businesses respondent raises one more objection respondent asserts that new jersey received direct and substantial benefits from having beip applicants commit to creating jobs in new jersey for years by creating tax revenues that it would not otherwise have received thus respondent asserts that petitioner’s affiliates received the beip grant as a direct payment for a specific quantifiable service ie new jersey bought tax revenue respondent’s argument is not well taken initially we note that the goal of the beip was to develop new jersey’s economy and revitalize its cities of course new jersey benefited from the increased tax revenue of the new business brought to the state under the beip but that is an indirect benefit as contemplated by the legislative_history as in federated dep’t stores inc v commissioner f 2d pincite there is no nexus between the services provided by petitioner’s affiliates and the aid provided by the donor moreover respondent’s argument runs afoul of the holding in brown shoe co wherein programs that included a requirement to remain in the locality for a set time were found to be capital contributions iii conclusion we find that the beip grant disbursements were contributions to the capital of petitioner’s affiliates pursuant to sec_118 the circumstances surrounding the payments are substantially_similar to those in brown shoe co and mckay prods corp and manifest the definite purpose of enlarging the working_capital of petitioner’s affiliates in the light of the foregoing decision will be entered for petitioner


t c summary opinion united_states tax_court faraidoon emanie petitioner v commissioner of internal revenue respondent docket no 790-02s filed date faraidoon emanie pro_se amy dyar seals for respondent panuthos chief special_trial_judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect at the time the petition was filed the decision to be entered is not reviewable by any other court and this opinion should not be cited as authority unless otherwise indicated subsequent section references are to the internal_revenue_code in effect for the year in issue respondent determined a deficiency in petitioner’s federal_income_tax of dollar_figure for the taxable_year the issues for decision are whether petitioner is entitled to dependency_exemption deductions for his son and daughter for the taxable_year and whether petitioner is entitled to head-of-household filing_status for the taxable_year background some of the facts have been stipulated and they are so found the stipulation of facts and the attached exhibits are incorporated herein by this reference at the time the petition was filed petitioner resided in rockford illinois petitioner was previously married to charlotte beck ms beck they have two children jonathan f emanie jonathan born date and jennifer s emanie jennifer born in in petitioner and ms beck entered into a marital settlement agreement agreement which provides in part article ii custody visitation and support of the minor children ms beck shall have the sole physical care custody control and education of the minor children of the parties subject_to petitioner’s rights of reasonable and seasonable visitation petitioner shall have the dependent exemptions for tax purposes so long as he fulfills his obligations regarding child_support health insurance and payment for uncovered medical_expenses article vi general provision sec_1 petitioner and ms beck shall upon demand of the other party execute any and all instruments and documents that may be reasonably necessary to make effective the provisions of this agreement the agreement was incorporated into a judgment for dissolution of marriage by the circuit_court of the 17th judicial circuit county of winnebago state of illinois petitioner and ms beck were divorced on date during the year in issue jonathan resided with petitioner for about a month in date and jennifer resided with petitioner for about a month and a half during the summer for the remainder of and indeed the majority of the taxable_year jonathan and jennifer resided with ms beck petitioner filed a timely federal_income_tax return for the taxable_year petitioner filed as head_of_household and claimed a child_tax_credit of dollar_figure petitioner also claimed dependency_exemption deductions for jonathan and jennifer but did not attach a written declaration or form_8332 release of claim to exemption for child of divorced or separated parents executed by ms beck petitioner asked ms beck to sign a form_8332 for the taxable_year but she refused to do so respondent in a notice_of_deficiency dated date disallowed the head-of-household filing_status child_tax_credit and dependency_exemption deductions discussion as the return for was filed after date sec_7491 is applicable petitioner did not assert or present evidence or argument that he satisfied the requirements of sec_7491 we conclude that resolution of the issues in the present case does not depend upon who has the burden_of_proof dependency_exemption deductions a taxpayer may be entitled to claim as a deduction an exemption_amount for each of his or her dependents sec_151 an individual must meet the following five tests in order to qualify as a dependent of the taxpayer support_test relationship or household test citizenship or residency test gross_income_test and joint_return_test sec_151 and sec_152 if the individual fails any of these tests he or she does not qualify as a dependent as to the support_test a taxpayer generally must provide more than half of a claimed dependent’s support for the calendar_year in which the taxable_year of the taxpayer begins sec_152 in the case of a child of divorced parents if the child respondent determined that petitioner was entitled to a filing_status of single for the taxable_year is in the custody of one or both of his parents for more than one-half of the calendar_year and receives more than half his support during that year from his parents such child shall be treated for purposes of sec_152 as receiving over half of his support during the calendar_year from the parent having custody for a greater portion of the calendar_year the custodial_parent sec_152 a custodial_parent may release claim to the exemption pursuant to the provisions of sec_152 which provides sec_152 support_test in case of child of divorced parents etc -- exception where custodial_parent releases claim to exemption for the year --a child of parents shall be treated as having received over half of his support during a calendar_year from the noncustodial_parent if-- a the custodial_parent signs a written declaration in such manner and form as the secretary may by regulations prescribe that such custodial_parent will not claim such child as a dependent for any taxable_year beginning in such calendar_year and b the noncustodial_parent attaches such written declaration to the noncustodial parent’s return for the taxable_year beginning during such calendar_year for purposes of this subsection the term noncustodial_parent means the parent who is not the custodial_parent the temporary regulations promulgated with respect to sec_152 provide that a noncustodial_parent may claim the exemption for a dependent_child only if the noncustodial_parent attaches to his her income_tax return for the year of the exemption a written declaration from the custodial_parent stating that he she will not claim the child as a dependent for the taxable_year beginning in such calendar_year sec_1 4t a q a-3 temporary income_tax regs fed reg date see 114_tc_184 affd on another ground sub nom 293_f3d_1208 10th cir the declaration required under sec_152 must be made either on a completed form_8332 or on a statement conforming to the substance of form_8332 miller v commissioner supra pincite form_8332 requires a taxpayer to furnish the names of the children for which exemption claims were released the years for which the claims were released the signature of the custodial_parent confirming his or her consent the social_security_number of the custodial_parent the date of the custodial parent’s signature and the name and the social_security_number of the parent claiming the exemption id pincite temporary regulations are entitled to the same weight as final regulations see peterson marital trust v commission102_tc_790 affd 78_f3d_795 2d cir 98_tc_141 in the present case ms beck had custody of jonathan and jennifer for a greater portion of and she is deemed to be the custodial_parent for purposes of sec_152 petitioner as the noncustodial_parent is not entitled to the claimed dependency_exemption deductions unless he complied with the provisions of sec_152 and the regulations thereunder by attaching to his return a written declaration or form_8332 executed by ms beck petitioner did not attach such a declaration or form_8332 to his return and accordingly he is not entitled to the dependency_exemption deductions for jonathan and jennifer for the taxable_year petitioner nevertheless argues that he is current in his obligations regarding child_support health insurance and payment for uncovered medical_expenses and that under the terms of the agreement he is entitled to the dependency_exemption deductions we are not unsympathetic to petitioner’s position however we are bound by the language of the statute as it is written and the accompanying regulations when consistent therewith 87_tc_1412 the internal_revenue_code is clear as to the precise circumstance in which a noncustodial_parent becomes entitled to a dependency_exemption see neal v commissioner tcmemo_1999_97 respondent is sustained on this issue filing_status to qualify for head_of_household a taxpayer must satisfy the requirements of sec_2 under sec_2 a taxpayer shall be considered a head_of_household if he or she is not married at the close of the taxable_year is not a surviving_spouse and among other choices maintains as his or her home a household which constitutes for more than half of such taxable_year the principal_place_of_abode as a member of such household of a son or daughter sec_2 in the present case petitioner’s home was not a household that constituted the principal_place_of_abode for jonathan and jennifer for more than half of accordingly petitioner was not a head_of_household within the meaning of sec_2 we sustain respondent’s determination on this issue respondent determined that petitioner was not entitled to a child_tax_credit of dollar_figure for the taxable_year we sustain respondent’s determination on this issue even though respondent did not raise this issue at the time of trial or in his pretrial memorandum sec_24 provides for a credit against the tax for the taxable_year with respect to each qualifying_child of the taxpayer the term qualifying_child means any individual if three tests are satisfied one of which is whether the taxpayer is allowed a deduction under sec_151 with respect to such individual for the taxable_year sec_24 because we conclude that petitioner is not entitled to dependency_exemption deductions for jonathan and jennifer are not qualifying children and petitioner is not entitled to the child_tax_credit of dollar_figure for reviewed and adopted as the report of the small_tax_case division to reflect the foregoing decision will be entered for respondent


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 ita b05 plr-121985-04 date date internal_revenue_service number release date index number -------------------------------------------------------- ---------------------------------------- ----------------------------------- -------------------------------------------------- ------------------------------------------- ---------------------------------------- ----------------------------------------------------- ----------------------------------- ------------------------------------- in re ------------------------------- ------------------------------------------------- -------------------------------- ------------------------------- ------------------------------------------------------------------ legend a b dear ---------- this is in response to your request dated date for a private_letter_ruling under sec_1031 of the internal_revenue_code_of_1986 code concerning whether a qualifies as a financial_institution providing routine financial services when it loans money to its customers to acquire replacement properties in like-kind_exchanges including like-kind_exchanges in which b a related_party to a serves as a qualified_intermediary qi and whether a’s sale or offering_for_sale of properties it owns as replacement properties to customers of b in like-kind_exchanges results in a or b being treated as a disqualified_person with respect to such customers plr-121985-04 statement of facts a is a ------------ limited_partnership b is a ----------limited liability company a is the sole owner and member of b the headquarters of both a and b are located at ------- --------- ----------------------------------------------------------------------- b a disregarded_entity for federal_income_tax purposes and a file a single federal_income_tax return a and b use an accrual_method of accounting for maintaining their books_and_records and for filing their federal_income_tax returns and both use an annual_accounting_period that ends on december a is a privately held specialty finance company a’s core businesses are the acquisition of seasoned loans loans that have been in existence for a substantial period of time residential and commercial real_estate loans and the wholesale origination of small balanced commercial real_estate loans through various wholly owned limited_liability companies a also originates commercial real_estate loans and acquires real_estate investment properties throughout the united_states a holds the necessary licenses to make loans and is qualified to do business in all states as a means of providing funding and liquidity for its core business a through an affiliate issues fixed and floating rate asset-backed securities that are collateralized by mortgage loans acquired or originated by a a retains ownership of the equity classes of such securitizations a sometimes acquires and holds real_property for investment and as a consequence of its lending activities also holds real_estate owned assets that are properties acquired through foreclosure a does not hold any customer deposits and is therefore not subject_to the federal and state laws that regulate traditional banks savings and loan associations or other similar organizations a wishes to expand its business and begin offering services as a qi as defined in sec_1_1031_k_-1 in like-kind_exchange transactions intended to qualify under sec_1031 to accomplish this objective a has established b as the entity that will perform the qi services for a’s customers b intends to market its qi services through a’s existing network of mortgage and real_estate brokers and a’s existing loan customers in addition a has developed a loan program that is specifically targeted to providing financing for replacement properties in deferred and reverse like-kind_exchanges this loan program will be marketed through a’s network of independent brokers and existing loan customers and through relationships that b develops with exchange accommodation titleholders who will hold relinquished or replacement_property b does not expect to act as an exchange accommodation titleholder these loans will be offered to customers of b and to others who are not customers of b plr-121985-04 a may also offer properties that it holds in its portfolio of real_estate investments and real_estate owned properties as a source of possible replacement properties in deferred or reverse like-kind_exchanges such properties will be made available to customers of b and to others who are not customers of b statement of law and anlysis sec_1031 of the code provides for the nonrecognition_of_gain_or_loss in an exchange of properties that are held for productive use in a trade_or_business or for investment if such properties are exchanged solely for like-kind properties that are held for productive use in a trade_or_business or for investment a deferred_exchange is an exchange wherein the property to be exchanged by the taxpayer is relinquished before the replacement_property is acquired a reverse exchange is an exchange wherein the replacement_property is acquired before the property to be exchanged by the taxpayer is relinquished generally a deferred or reverse_like-kind_exchange utilizes an intermediary to hold the relinquished or acquired property before such property is transferred to the exchanging taxpayer if a taxpayer in a deferred_like-kind_exchange actually or constructively receives money or non-like-kind property before the taxpayer actually receives the replacement_property gain may be recognized on the exchange further if a taxpayer in a deferred_exchange actually or constructively receives money or non-like-kind property in the full amount of the consideration for the relinquished_property then the transaction will constitute a taxable sale and not an exchange even though the taxpayer may ultimately receive like-kind replacement_property sec_1_1031_k_-1 to assist taxpayers in structuring like-kind_exchanges the sec_1031 regulations provide four safe harbors whereby taxpayers will not be in actual or constructive receipt of exchange proceeds in a deferred_like-kind_exchange security or guarantee arrangements qualified escrow accounts and qualified trusts qualified intermediaries and interest and growth factors of these four only the safe_harbor for qualified intermediaries also provides a safe_harbor against characterization of the accommodator facilitating the deferred_exchange as an agent of the taxpayer sec_1_1031_k_-1 the use of the qualified_intermediary safe_harbor further requires that the qualified_intermediary not be considered a disqualified_person with respect to the taxpayer involved in the exchange within the meaning of sec_1_1031_k_-1 sec_1_1031_k_-1 defines a disqualified_person in part as an agent of the taxpayer at the time of the transaction sec_1_1031_k_-1 provides some examples of a disqualified_person including a person who has acted as the taxpayer’s employee attorney accountant investment banker or broker or real_estate agent or broker within the 2-year period ending on the date of the transfer of the first of the relinquished properties in a like-kind_exchange will be considered an agent of the plr-121985-04 taxpayer see sec_1_1031_k_-1 solely for this purpose however services to the taxpayer with respect to exchanges intended to qualify for nonrecognition_of_gain_or_loss under sec_1031 and routine financial title insurance escrow or trust services for the taxpayer by a financial_institution title insurance_company or escrow company are not taken into account in this case a intends to offer loans to customers to facilitate like-kind_exchanges thus in order to qualify for the exception to the disqualified_person definition a must meet two requirements a must be a financial_institution and its loan services must be considered routine financial services although the exception comprises two separate requirements the requirements are interrelated the deferred_like-kind_exchange regulations do not define the terms financial_institution or routine financial services such terms however are defined for purposes of other provisions in the code the sec_165 regulations provide a broad definition of the term financial_institution for purposes of sec_165 the term includes banks investment advisers and finance corporations a substantial part of the business of which consists of the making of loans or servicing debt obligations sec_1 c iv g the regulations under sec_1441 that deal with the obligation to withhold tax on the u s source income of nonresident_aliens define the terms financial_institution and foreign_financial_institution by reference to the definition under sec_165 sec_1_1441-1 one of the principal activities of financial institutions is the lending of money as the supreme court has stated the principal product of banks is various types of credit 374_us_321 n the tax_court has also observed that the principal businesses of banks consist s of accepting demand and time deposits and using the amounts deposited together with other funds to make loans 110_tc_349 one of the principal activities of a is to loan money to its customers to facilitate like-kind_exchange transactions this activity qualifies a as a financial_institution as that term is defined in the code in addition in exchange transactions a acts as a financial_institution providing routine financial services because making loans is a routine financial service thus a’s loaning of money to customers to facilitate like-kind_exchange transactions will not by itself cause a to be a disqualified_person however in order to qualify for the exception to the disqualified_person definition in the sec_1031 regulations a’s other activities must not cause it to be considered an agent of its customers in bollinger v 485_us_340 the supreme court reaffirmed its agency analysis previously articulated in 336_us_422 the supreme court’s agency analysis has four factors and two plr-121985-04 requirements the sum of which has become known as the ‘six national carbide factors ’ the four factors include whether the party in question operates in the name and for the account of the principal binds the principal by its actions transmits money received to the principal and whether receipt of income is attributable to the services of employees of the principal and to assets belonging to the principal the two requirements provide that the agency-principal relationship cannot be founded solely on the fact that the principal owns the agent and the business_purpose of the party in question must be the carrying on of the normal duties of an agent bollinger v commissioner u s pincite in transactions in which a sells or offers to sell properties to a customer utilizing b as a qi none of these six factors would be present thus the sale or offering_for_sale of properties by a to a customer as replacement_property by itself does not cause a the seller of the property or b acting as a qi to be considered an agent of the customer for purposes of sec_1_1031_k_-1 so long as a does not act as a real_estate broker or agent conclusions for purposes of the deferred_exchange regulations a is a financial_institution and the making of loans to customers including loans to finance the acquisition of replacement_property in a like-kind_exchange where b is the qualified_intermediary constitutes routine financial services a’s sale or offering_for_sale of properties that it owns as replacement_property in a like-kind_exchange utilizing b’s qi services makes neither a nor b the agent of a customer utilizing their services in a like-kind_exchange 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 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 a copy of this letter must be attached to any income_tax return to which it is relevant in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to the taxpayer plr-121985-04 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 sincerely william a jackson branch chief branch income_tax accounting