internal_revenue_service national_office technical_advice_memorandum date number release date third party contact none index uil no case mis no tam-111188-02 cc psi b2 taxable periods date of conference no conference held issue is taxpayer’s use of the vehicle described below subject_to the excise_tax imposed by sec_4051 of the internal_revenue_code conclusion taxpayer’s use of the described vehicle is not subject_to the excise_tax imposed by sec_4051 facts taxpayer is an automotive dealership in august of it purchased what is commonly known as a toterhome vehicle tax free pursuant to its written certification to the seller that it intended to resell the vehicle the toterhome has a gross vehicle weight rating gvw of big_number pounds as does the toterhome chassis it is equipped with a fiberglass reinforced body with interior features that include among other items cabinetry and countertops windows sofa bed dinette overcab sleeper refrigerator microwave oven range television and shower stall a fresh water tank propane tam-111188-02 furnace and air conditioner are also included the toterhome body has a rear outside multipurpose deck accessible from the forward living compartment by a rear door the toterhome is equipped with air brakes and a big_number pound rated gooseneck hitch is installed into the deck to allow the toterhome to tow a trailer taxpayer did not in fact resell the toterhome but instead diverted it to its own use during an examination of taxpayer the irs office submitting this request determined that the toterhome was a truck tractor and that taxpayer was liable for tax under sec_4052 on its use of the vehicle law and analysis sec_4051 imposes a percent excise_tax on the first_retail_sale of automobile truck chassis and bodies truck trailer and semitrailer chassis and bodies and tractors of the kind chiefly used for highway transportation in combination with a trailer or semitrailer sec_4051 provides that this tax does not apply to automobile truck chassis and automobile truck bodies suitable for use with a vehicle that has a gvw of big_number pounds or less under sec_145_4051-1 of the temporary excise_tax regulations under the highway revenue act of pub l the term tractor means a highway vehicle primarily designed to tow a vehicle such as a trailer or semitrailer but does not carry cargo on the same chassis as the engine a vehicle equipped with air brakes and or towing package will be presumed to be primarily designed as a tractor sec_145_4051-1 defines a truck as a highway vehicle that is primarily designed to transport its load on the same chassis as the engine even if it is also equipped to tow a vehicle such as a trailer or semitrailer sec_4052 provides that the term first_retail_sale means the first sale for a purpose other than for resale or leasing in a long-term_lease after production manufacture or importation sec_48_4052-1 provides that tax is not imposed where the seller accepts written certification from the buyer that the article is purchased for resale or lease on a long-term basis sec_4052 provides that if any person uses an article taxable under sec_4051 before the first_retail_sale of the article then the person is liable for tax under sec_4051 in the same manner as if the article were sold at retail by him sec_4053 provides that no tax is imposed by sec_4051 on any article designed to be mounted or placed on automobile trucks automobile truck chassis or automobile chassis and to be used primarily as living quarters or camping accommodations tam-111188-02 revrul_75_545 1975_2_cb_427 holds that an aluminum sleeper cab designed for permanent installation on a heavy-duty long-distance-hauling automobile truck chassis or highway tractor with access through the rear cab window to provide sleeping quarters for the vehicle driver does not qualify for exemption from the tax imposed under sec_4061 a manufacturers tax now repealed but the predecessor to the retailers tax imposed by sec_4051 as living quarters or camping accommodations under sec_4063 the predecessor to sec_4053 although equipped with a mattress and luggage compartment the sleeper cab is not designed as camping accommodations nor is it designed as living quarters instead the cab is designed merely to provide a sleeping compartment for the driver revrul_73_197 1973_1_cb_423 holds that sales of specially designed chassis for use in the manufacture of mobile homes are not subject_to the tax imposed on truck chassis under sec_4061 however that tax does apply to sales of conventional truck chassis even though they are used as components of mobile homes the sec_4051 tax applies to certain automotive articles including truck bodies and chassis with a gvw of more than big_number pounds and truck tractors regardless of gvw pursuant to sec_48_4052-1 otherwise taxable articles may be purchased tax free for resale under a certification procedure however no certificate is required if the articles are not subject_to the tax imposed by sec_4051 the exemption from the sec_4051 tax provided under sec_4053 includes bodies that are primarily designed for use as living quarters for self-propelled mobile homes in contrast a heavy-duty highway tractor equipped with accommodations such as the sleeper cab described in revrul_75_545 would not come within the purview of the exemption the standard features of the toterhome body of the vehicle at issue include household furnishings and appliances that would allow the vehicle users to comfortably use the vehicle as living quarters the majority of space in the toterhome body is dedicated to living quarters the rear space of the toterhome body is comprised of a deck with a gooseneck hitch although under sec_145_4051-1 a vehicle equipped with a towing package in this case the gooseneck hitch and air brakes is presumed to be a tractor the primary design of the toterhome body for use as living quarters effectively rebuts that presumption accordingly the toterhome body comes within the exemption provided under sec_4053 and is not subject_to the tax imposed by sec_4051 under revrul_73_197 a specially designed chassis for a mobile home is not subject_to tax whereas a conventional truck chassis used as a component of a mobile home is subject_to tax insufficient information has been provided for a determination of whether the chassis at issue is specially designed for a mobile home or is of a conventional design however sec_4051 provides that no tax is imposed on truck chassis suitable for use with a vehicle that has a gvw of big_number pounds or less inasmuch as the gvw of the toterhome truck chassis is big_number pounds it does not meet the weight threshold for taxability under sec_4051 tam-111188-02 accordingly neither the toterhome body nor the chassis used to produce the toterhome is an article subject_to the tax imposed under sec_4051 thus taxpayer has no liability for the tax under sec_4052 on its use of the vehicle caveats a copy of this technical_advice_memorandum is to be given to the taxpayer sec_6110 provides that it may not be used or cited as precedent in accordance with sec_6110 names addresses and other identifying numbers have been deleted


date internal_revenue_service number info release date uil date attn dear this letter is in response to your inquiry dated concerning whether funding for set-asides for a club recognized as tax-exempt under sec_501 of the internal_revenue_code code may be satisfied with a contribution of stock with a fair_market_value equal to the amount of the set-aside set-aside income is income set-aside for religious charitable scientific literary educational_purposes or for the prevention of cruelty to children or animals the purposes specified in sec_170 of the code or the reasonable cost of administration of these activities by a club such income is exempt_function_income and is not subject_to the unrelated_business_income_tax under sec_512 the general_rule is that set-aside income may be temporarily invested or accumulated as long as the amount and duration are not unreasonable provided that it is earmarked and placed in a separate_account your question is very factual and the response could vary depending upon the specific circumstances in this situation the questions are based upon specific facts and there is little information concerning why stock is being contributed to the tax-exempt_organization furthermore it would not appear that stock would be income for determining gross_income of an exempt_organization a ruling could be requested by a club on a specific set of facts such requests for rulings should be submitted to the service following the procedures outlined in revproc_2000_4 bulletin no page and revproc_2000_8 bulletin no page hopefully the above information will assist you if you have any questions about this letter please contact at or at i appreciate your interest in this matter sincerely gerald v sack manager exempt_organizations technical group


number release date id office uilc cca-831316-12 -------------------------- from --------------------- sent friday date pm to -------------------- cc subject cca --------- this email is in response to your questions about a taxpayer who received an overpayment from her employer’s qualified_plan in ------- the overpayment herein referred to as dollar_figurex was in addition to a lump sum payment to which the taxpayer was entitled the taxpayer was provided an erroneous form 1099-r and in good_faith believed that the entire distribution was an eligible_rollover_distribution based on that erroneous information the taxpayer rolled over the entire distribution into an individual_retirement_account ira in ------- the taxpayer excluded the dollar_figurex from her gross_income on her form_1040 for ------- based on the same erroneous information that the dollar_figurex was an eligible_rollover_distribution then in ------- her former employer informed her of the error and she withdrew the dollar_figurex from her ira in ------- the taxpayer was age when she withdrew the dollar_figurex in general sec_402 provides that first you ask whether the dollar_figurex was taxable in ------- any amount actually distributed to a distributee from a qualified_plan described in sec_401 will be taxable to the distributee in the taxable_year of distribution under sec_72 relating to annuities sec_402 applies to any distribution from a qualified_plan even an overpayment see revrul_2002_84 2002_50_irb_953 sec_402 provides that an eligible_rollover_distribution that is rolled over to an eligible_retirement_plan is not includible in gross_income for the taxable_year in which paid however both the operative language of sec_402 and the definition of eligible_rollover_distribution in sec_402 limit the applicability of the exclusion for rollovers to distributions of any portion of the balance_to_the_credit of an employee in a qualified_trust contrary to the information the taxpayer was provided the dollar_figurex exceeded her balance in the qualified_trust and was not eligible for the exclusion in sec_402 based on the corrected information she should have treated the dollar_figurex as taxable under sec_72 in ------- next you ask whether the distribution of the overpayment from the taxpayer’s ira was taxable in ------- sec_408 provides that except as otherwise provided any amount_paid or distributed out of an individual_retirement_plan shall be included in gross_income by the payee or distributee as the case may be in the manner provided under sec_72 thus unless an exception applies the amount distributed in ------- would be taxable to the taxpayer in that year the taxpayer asserts that her --------distribution falls within an exception for distributions of excess rollover_contributions under sec_408 the exception in sec_408 only applies if the taxpayer reasonably relies on information supplied pursuant to subchapter_f for determining the amount of the rollover but the information was erroneous the taxpayer asserts that she rolled the dollar_figurex into her ira based on information supplied on a form 1099-r that stated that the amount of the overpayment was an eligible_rollover_distribution but that she now knows the information was erroneous and as a result the dollar_figurex distribution in ------- is excludable under sec_408 however the duty_of_consistency precludes this result because it is contrary to the position she took on her ------- return the duty_of_consistency is an affirmative defense that prevents a party usually the taxpayer from taking a tax position with respect to a tax_year and then taking a contrary position in a subsequent year as it applies to a taxpayer the three elements of the duty_of_consistency are the taxpayer made a representation for tax purposes in one tax_year the commissioner acquiesces to the representation or relies on it and the taxpayer desires to change the representation in a later tax_year after the statute_of_limitations bars an adjustment to the earlier year 109_tc_290 aff’d without published opinion 212_f3d_600 11th cir see also 461_f3d_1080 9th cir 231_f3d_541 9th cir and 100_f3d_778 10th cir in this case the taxpayer excluded the dollar_figurex from her gross_income in ------- based on the position that the dollar_figurex was an eligible_rollover_distribution the service relied on that information when it did not assess tax on the dollar_figurex for ------- now new information has come to light that the dollar_figurex was in fact not an eligible_rollover_distribution and the taxpayer seeks to exclude the dollar_figurex from her gross_income in ------- based on this new information however the duty_of_consistency prevents the taxpayer from basing her ------- return on one set of facts that the dollar_figurex was an eligible_rollover_distribution and basing her --------- return on a different set of facts that the dollar_figurex was not an eligible_rollover_distribution even if the service were to accept an amended ------- return with the new information on it the time period during which the service could have assessed the tax on the dollar_figurex for -- ------- has expired and the service’s reliance on the misinformation on the ------- return cannot be undone accordingly she is precluded from claiming the exception under sec_408 on her ------- return and the distribution of the dollar_figurex from her ira was taxable under sec_72 in ------- notably the sec_408 exception could have applied if the time period for assessing the tax on the dollar_figurex for ------- had not expired in that case after consistently applying the new information to both ------- and ------- the overpayment would be included in her gross_income for ------- but not for ------- finally you ask whether the taxpayer is liable for the excise_tax under sec_4973 for the years ------- through ------- sec_4973 imposes an excise_tax equal to of the amount of excess_contributions in an ira in the case of an ira sec_4973 defines excess_contributions to be the sum of the excess of the amount contributed for the taxable_year to the account other than a contribution to a roth_ira or a rollover_contribution described in sec_402 sec_403 sec_403 sec_408 or sec_457 over the amount allowable as a deduction under sec_219 plus the amount of excess_contributions for the previous taxable_year minus certain distributions and the amount allowable as a deduction under sec_219 for the taxable_year in this case the excise_tax applies to the amount of the excess_contribution in each year from ------- through ------- assuming that the taxpayer made no ira contributions other than the ones described in your question the excess_contribution for ------- was equal to the amount of the overpayment that the taxpayer contributed to the ira minus the sec_219 limit for ------- the excess_contribution for ------- was equal to the excess_contribution for ------- minus the sec_219 limit for ------- each year the excess_contribution is reduced by the sec_219 limit for that year less any ira contributions actually made by the taxpayer in that year the taxpayer paid the excise_taxes and is now seeking a refund note that the taxpayer may not assert the duty_of_consistency to generate a refund of these excise_taxes the duty_of_consistency is an affirmative defense against the party seeking to change its own prior representation changing positions and the inaccurate information provided in ------- cannot be used to require the service to refund the excise_taxes in this case it is the taxpayer not the service that is we have not addressed any potential statute_of_limitations questions regarding the excise_tax nor have we raised any issues regarding corrections and relief from the sec_4973 excise_tax involving overpayments from qualified_plans under the employee_plans_compliance_resolution_system see revproc_2008_50 i r b this document may not be used or cited as precedent sec_6110 of the internal_revenue_code


release number release date date date uil code internal_revenue_service te_ge technical_advice_memorandum area director office of appeals field operations east area philadelphia pa taxpayer's name taxpayer's address taxpayer's id number years involved conference held legend m issue is m’s sale of life_insurance policies to the non-member widows of deceased insured members within a year following the member's death - policies under which the widow can name as a beneficiary someone other than a dependent of the member - substantially related within the meaning of sec_513 performance by m of any purpose or function described in sec_501 of the internal_revenue_code the code to the exercise or facts m is the parent entity of a fraternal beneficiary society that operates under the lodge_system membership in m is limited to men of a particular faith under a group ruling issued by the internal_revenue_service m and its subordinate chapters are recognized as exempt from federal_income_tax under sec_501 of the code by reason of being an organization described in sec_501 among the purposes enumerated in m’s corporate charter for which m was formed are the purposes of rendering pecuniary aid to its members their families and beneficiaries of members and their families and of rendering mutual aid and assistance to its sick disabled and needy members and their families m operates as an insurance_company and contracts with full-time insurance sales persons to sell life_insurance annuities and related products to its members m sells individual life_insurance contracts to members that may include separate coverage for the member's spouse or dependents such contracts also provide the insured’s spouse the right after the insured’s death to request insurance coverage on her life and on the lives of the insured’s minor children the right must be exercised within one year following m's receipt of proof of the insured’s death specifically insurance contracts issued to members include the following provision or endorsement spouses right to apply for insurance in addition to the other rights and benefits provided under this contract after the insured’s death the insured’s spouse shall have the right to request insurance coverage on her life and on the lives of the insured’s minor children this right must be exercised within one year following the order's receipt of proof of the insured’s death the insurance coverage requested will be issued provided that satisfactory evidence of insurability is submitted to the order the date the insurance coverage takes effect will depend upon the rules of the order and the date the order accepts the evidence of insurability for purposes of this provision the following definitions apply insurance coverage includes all plans of life_insurance annuities and long term care insurance offered by the order at the age and premium class of the proposed insured or annuitant at the time of the exercise of this right insured’s minor children includes all children stepchildren and legally adopted children of the insured who have not yet reached their birthday as of the date insurance coverage is requested and insured’s spouse means the person to whom the insured is married as of the date of the insured’s death the widow’s right to purchase insurance within one year of her husband’s death is available only to a spouse whose husband was insured by m at the time of his death insured by m at the time of his death the widow may not purchase insurance from m the widow may apply for coverage in a different amount or of a different type than that previously held by the member a widow must meet normal underwriting requirements and criteria for the policy and amount she requests and the insurance products that the widow is entitled to purchase are virtually indistinguishable both in features and in price from the insurance sold by taxable insurance providers m represents that the widow is under no obligation to name a dependent of the deceased member as a beneficiary of any insurance coverage she purchases and is entitled to change the beneficiary at any time subject_to any state law restrictions if the member was not law sec_501 of the code exempts from federal income_taxation fraternal beneficiary societies orders or associations- a operating_under_the_lodge_system or for the exclusive benefit of the members of a fraternity itself operating_under_the_lodge_system and b providing for the payment of life sick accident or other_benefits to the members of such society order or association or their dependents sec_1_501_c_8_-1 of the income_tax regulations the regulations’ provides that a fraternal beneficiary society is exempt from tax only if operated under the lodge_system or for the exclusive benefit of the members so operating operating_under_the_lodge_system means carrying on its activities under a form of organization that comprises local branches chartered by in order to a parent organization and largely self-governing called lodges chapters or the like be exempt it is also necessary that the society have an established system for the payment to its members or their dependents of life sick accident or other_benefits revrul_73_165 1973_1_cb_224 holds that a fraternal beneficiary society which carries on fraternal activities operates under a lodge_system and provides for member benefit payments may qualify for exemption under sec_501 of the code the ruling indicates that there is no requirement for exemption that either the fraternal features or the benefit features predominate as long as both features are present sec_511 of the code imposes a tax on the unrelated_business_taxable_income of organizations otherwise exempt from federal_income_tax under sec_501 sec_512 of the code defines the term unrelated business taxable income’ as the gross_income derived by any organization from any unrelated_trade_or_business regularly carried on by it less the deductions allowed under chapter which are directly connected with the carrying on of such trade_or_business both computed with the modifications provided in sec_512 in the case of an organization subject_to the tax imposed by sec_511 sec_513 of the code defines the term unrelated_trade_or_business as any trade_or_business the conduct of which is not substantially related aside from the need of such organization for income or funds or the use it makes of the profits derived to the exercise or performance by such organization of the purpose or function constituting the basis for its exemption under sec_501 sec_1_513-1 of the regulations says that gross_income of an exempt_organization subject_to the tax imposed by sec_511 is includible in the computation of unrelated_business_taxable_income if it is income from a trade_or_business such trade_or_business is regularly carried on by the organization and the conduct of such trade_or_business is not substantially related other than through the production of funds to the organization’s performance of its exempt functions sec_1_513-1 of the regulations says that gross_income derives from unrelated_trade_or_business within the meaning of sec_513 if the conduct of the trade_or_business which produces the income is not substantially related other than through the production of funds to the purposes for which exemption is granted the presence of this requirement necessitates an examination of the relationship between the business activities which generate the particular income in question - the activities that is of producing or distributing the goods or performing the services involved - and the accomplishment of the organization’s exempt purposes sec_1_513-1 of the regulations says that trade_or_business is related to exempt purposes in the relevant sense only where the conduct of the business activities has causal relationship to the achievement of exempt purposes other than through the production_of_income and it is substantially related for purposes of sec_513 only if the causal relationship is a substantial one thus for the conduct of trade_or_business from which a particular amount of gross_income is derived to be substantially related to purposes for which exemption is granted the production or distribution of the goods or the performance of the services from which the gross_income is derived must contribute importantly to the accomplishment of those purposes where the production or distribution of the goods or the performance of the services does not contribute importantly to the accomplishment of the exempt purposes of the organization the income from the sale of the goods or the performance of the services does not derive from the conduct of related trade_or_business whether activities productive of gross_income contribute importantly to the accomplishment of any purpose for which an organization is granted exemption depends in each case upon the facts and circumstances involved analysis a fraternal beneficiary society described in sec_501 of the code is one operating_under_the_lodge_system and providing for the payment of life sick accident or other_benefits to the members of such society order or association or their dependents since the code does not define a fraternal beneficiary society we presume that congress used the term in the ordinary sense and according to its legal significance at the time that fraternal beneficiary societies were first exempted from federal income_taxation under sec_38 of the tariff act of date 36_stat_113 see 278_us_55 when congress exempted building and loan associations from the income_tax of course it was speaking of existing societies that commonly were known as such not of ideals that would have been hard to find 235_f_370 n d ohio the court shall assume that congress used the term fraternal beneficiary association according to its legal significance at the time the act of was passed citation omitted the term fraternal beneficiary society or association or order was extensively defined judicially and by state statute in the early twentieth century although most of the authorities containing these definitions do not directly address sec_501 or its predecessors they have legal significance when interpreting the term fraternal beneficiary society and the phrase providing for the payment of life sick accident and other_benefits to the members of such society order or association or their dependents contained in sec_501 the most thorough judicial definition of the term fraternal beneficiary association can be found in 74_f_775 cir where the court said we must accordingly assume that the words fraternal-beneficial were used in their ordinary sense -- to designate an association or society that is engaged in some work that is of a fraternal or beneficial character according to this view a fraternal-beneficial society would be one whose members have adopted the same or a very similar calling avocation or profession or who are working in unison to accomplish some worthy object and who for that reason have banded themselves together as an association or society to aid and assist one another and to promote the common cause as a general_rule such associations have been formed for the purpose of promoting the social moral and intellectual welfare of the members of such associations and their families as well as for advancing their interests in other ways and in other respects many of these associations make a practice of assisting their sick and disabled members and of extending substantial aid to the families of deceased members in commercial travelers’ life accident ass'n f pincite a federal court applied this definition of federal beneficiary society contained in nat'l union v marlow to conclude that a mutual protective association was not exempt from federal income_taxation under the predecessor of sec_501 as originally conceived then fraternal beneficiary societies existed principally to foster the communion and cooperation of their members for their mutual aid and benefit in furtherance of that confraternity the members took it upon themselves to contribute jointly and uniformly in the aid of their sick members and the families of deceased members an early treatise on fraternal insurance summarized the ideal of fraternalism as follows therefore let it be understood that the american fraternal system had its beginnings as a result of the fraternal desire of men to cooperate for their mutual welfare and happiness and that the benefit plan they introduced followed an innate prompting to protect their dependents see walter basye history and operation of fraternal insurance the first fraternal benefit funds were simple equal assessments against all the members of the society t he benefit fund under the plan of the first society consisted of a single assessment and the money remained in the hands of the subordinate lodge recorders until demanded by the grand lodge for the purpose of paying a death claim each death exhausted the fund but it was renewed by another assessment each member upon an assessment call being made without distinction on account of age or length of membership paid an equal amount - one dollar id pincite this memorandum does not specifically address the definition or limits of the term dependent for purposes of sec_501 as setting the limits of that term is not necessary to address the issue raised it was the distinctiveness of the early fraternal benefit funds that provided a justification for the treatment accorded fraternal beneficiary societies under federal and state law in addition to exemption from federal income_taxation fraternal beneficiary societies have commonly been exempted from the operation of the general insurance laws of the states and from state taxes except property taxes as is the case under the laws of the state from which m received its charter and courts have found that the feature that most distinguishes fraternal benefit plans from commercial insurance is that the fraternal plans are an expression of the fraternal ties between the members and not a commercial undertaking between insurer and insured thus in peterson v manhattan life ins co n e ill the court said the following regarding how fraternal beneficiary societies were distinguishable from commercial insurance_companies at the time the former were first exempted from federal income_taxation in the ordinary sense a fraternal order is not an insurance_company t he two classes of corporations are organized under different acts and for different purposes a life_insurance_policy may be obtained either by the insured or any one having an interest in his life may be payable to his estate to a creditor or to a beneficiary named the certificate of a beneficiary society may be obtained only by the member it cannot be payable to his estate but only to his widow or children or some one belonging to the classes mentioned in the statute again in 77_f2d_331 2d cir the court said like mutual insurance_companies beneficial associations doing business without capital on the assessment plan differ from companies dealing in insurance only the point of distinction lies in their organization they are formed usually not as insurance_companies but as social and benevolent associations the insurance being but an incident and not their main purpose the insurance feature is conducted not for the purpose of gain but for the object of benevolence the benefits are usually confined to limited classes of persons one not a member of the society being unable as a rule to obtain a certificate of insurance and the member's right to nominate the person to whom death_benefits shall be paid is usually limited either by statute article or by by-law usually the society and its members by their elected representatives are both the insurer and the insured and the members have the right through their representatives to make or change their contract of membership or insurance the insurance feature of such a fraternal society is exactly what its members through their representative form of government provide the idea that fraternal insurance derives its uniqueness from the fraternal bonds of the members was expounded by the supreme court of missouri in biggs v modern woodmen of america s w 2d mo fraternal benefit associations are essentially different in many respects from insurance_companies they confine their operations to their own members they do not solicit business from the general_public they usually limit the class of persons who may be designated as beneficiaries to certain relatives of members they do not operate for profit but accumulate a fund from contributions of members to be used in the aid or relief of members or their beneficiaries the members are in effect both insurers and insured the rights of the members or their beneficiaries to participate in the fund are not fixed by the terms of the certificate as in the case of an ordinary_life_insurance policy but depend also upon the constitution and by-laws of the association since they are self governing bodies regulations are made by the members themselves through their duly elected representatives and therefore there is good reason to regard them ina somewhat different light from conditions written in a policy of insurance by an ordinary insurance_company dealing with the general_public for profit recognizing such differences our legislature has enacted a statute that such societies shall be exempt from all provisions of the insurance laws of this state not only in governmental relations with the state but for every other purpose and no law hereafter enacted shall apply to them unless they be expressly designated therein the courts recognized that because state law at the time fraternal beneficiary societies were first exempted from federal income_taxation did not impose on these societies the heavy duties and restrictions that were imposed on old-line companies it was lawful and proper for the state to admit these societies into the arena of life_insurance only to the extent of mak ing provisions for the payment of benefits in case of death of its members from funds derived from assessments or dues collected from its members see state ex rel supreme lodge k p v vandiver s w mo accordingly a primary distinction between the payment of life sick accident or other_benefits to the members of a fraternal beneficiary society or their dependents and insurance sold by taxable insurance firms lies in the nature of the membership rights in a fraternal beneficiary society the sale of insurance to a member is part of the mutuality of interest that exists between the members of such societies on the other hand the sale of insurance to a non- member is nothing more that a mere contractual relationship between a policyholder and an insurance_company in 331_us_586 the supreme court said the relationship between a member and his fraternal benefit society differs from the ordinary contractual relationship between a policyholder and a separately owned corporate or stock insurance_company it differs also from that between an insured member of the usual business form of a mutual_insurance_company and that company the fact of membership in the fraternal benefit society is the controlling and central feature of the relationship as an organization described in sec_501 of the code m is subject_to the tax imposed under sec_511 on its unrelated_business_taxable_income sec_512 tells us that unrelated_business_taxable_income is income from an unrelated_trade_or_business regularly carried on furthermore sec_1_513-1 of the regulations tells us that gross_income is includible in the computation of unrelated_business_taxable_income if it is income from a trade_or_business such business is regularly carried on and the conduct of such trade_or_business is not substantially related to the organization’s exempt purposes m derives income from frequent and regular sales of insurance contracts to the widows of deceased members the sale of insurance is a trade_or_business and in the case of m such sales are regularly carried on thus unless such sales are substantially related to m’s performance of its exempt fraternal functions the revenue derived from those sales is includible in m’s unrelated_business_taxable_income to determine whether such sales constitute an unrelated_trade_or_business sec_1_513-1 of the regulations tells us to examine the relationship between those sales and the accomplishment of m’s fraternal purposes if it is found that such sales do not contribute importantly to m’s exempt fraternal purposes sec_1 d tells us that those sales are not substantially related to exempt purposes and are therefore unrelated_trade_or_business within the meaning of sec_513 of the code any sale of insurance that is inconsistent with the historical meaning of the term fraternal beneficiary society and the sec_501 phrase providing for the payment of life sick accident and other_benefits to the members of such society order or association or their dependents’ is not substantially related to m’s exempt purposes described in sec_501 emphasis added see 135_tc_276 aff'd 672_f3d_284 4th cir logically if an organization's tax- exempt_purpose in the context of determining whether an organization qualifies for exemption activities do not contribute to then surely these same activities cannot be said to be related to the organization's exempt_purpose in the context of the ubti provisions quoting 78_tc_246 aff'd 726_f2d_1097 6th cir m is organized for the exempt fraternal purpose of rendering pecuniary and mutual aid and assistance to its members and their dependents membership in m is limited to men the insurance contracts that m enters into with its members gives the member-insured’s spouse upon the death of the member-insured the right to request insurance coverage on her own life or the lives of the member-insured’s minor children which insurance can provide benefits to individuals who are not dependents of the member the member-insured’s spouse is ineligible for membership in m and thus lacks any fraternal relationship or mutuality of interest with the members of m the insurance coverage that is offered to the widow after the member's death is no mere continuation of the member's policy the widow may apply for coverage in a different amount or of a different type than that previously held by the member the widow is not guaranteed coverage but must satisfy m’s usual underwriting criteria before a policy will be issued to her indistinguishable both in features and in price from the insurance sold by taxable insurance providers consequently the sale of insurance to the widow is no different than an ordinary contractual relationship between a policyholder and an insurance_company further the insurance products that the widow is entitled to purchase are virtually importantly among the requirements for exemption under sec_501 is the requirement that a fraternal beneficiary society provide for the payment of life sick accident or other_benefits emphasis added to the members of the society or their dependents thus the sale of an insurance_policy by a fraternal beneficiary society cannot be said to contribute importantly to such society's exempt fraternal purpose to the extent that anyone other than a member of the society or a dependent of the member is named as a beneficiary of the policy if m allows the widow of a deceased member to purchase life_insurance on her own life the proceeds of the policy would be payable on the widow's own death to beneficiaries selected by the widow though the widow might name a dependent of the deceased member as the beneficiary of the policy she is under no obligation to do so and she is entitled to change the beneficiary at any time thus the widow could name as a beneficiary someone who was not a member or dependent of a member of the fraternal benefit society were to remarry after the member's death she could name her new spouse or any children of the new spouse as beneficiaries of her insurance_policy none of whom could be considered dependents of the member at the time of his death for example if the widow consequently m's sales of insurance contracts to the widows of deceased members have none of the characteristics that courts have said make fraternal insurance distinguishable from commercial insurance so as to justify exemption from taxation such contracts are not benefits payable to the widow on the death of the member compare state ex rel supreme lodge k p v vandiver above instead such insurance contracts are obtainable by persons other than members are paid for by persons other than members and are payable to persons who were never nominated by the member and who may not even have been dependents of the member compare peterson v manhattan life ins co and van de water v order of united commercial travelers of america above furthermore by selling insurance contracts to the widows of deceased members m does not confine its insurance operations to its own members rather it enters into purely commercial arrangements with insureds whose rights are fixed by the terms of the insurance_policy and not dependent by membership on the constitution and by-laws of the society compare biggs v modern woodmen of america above and because the insurance contracts offered to widows are substantially_similar in features and price to insurance contracts offered by large mutual life_insurance_companies such sales are not conducted for the object of although m’s corporate charter uses the term families sec_501 describes providing for the payment of benefits to dependents consistent with the code section constituting the basis for m's exemption we use the term dependents in describing m's exempt_purpose benevolence but appear to be conducted for the purpose of gain see van de water v order of united commercial travelers of america since there is nothing in m’s sale of insurance contracts to the widow of a deceased member to distinguish the relationship that exists between the widow and m from an ordinary contractual relationship between a policyholder and a corporate insurance_company compare order of united commercial travelers of america v wolfe above and since the widow would be able to name as a beneficiary of her policy someone other than a dependent of the member such sales do not contribute importantly to m’s exempt fraternal purpose of rendering pecuniary aid to its members and their dependents and thus are not substantially related other than through the production of funds to m’s exempt fraternal purposes therefore m's sales of commercial-type_insurance to non-members constitutes an unrelated_trade_or_business conclusion m's sale of life_insurance policies to the non-member widows of deceased insured members within a year following the member's death - policies under which the widow can name as a beneficiary someone other than a dependent of the member - is not substantially related within the meaning of sec_513 of the internal_revenue_code the code’ to the exercise or performance by m of any purpose or function described in sec_501


t c memo united_states tax_court clifford f asher petitioner v commissioner of internal revenue respondent docket no filed date jon r vaught for petitioner elaine sierra for respondent memorandum findings_of_fact and opinion wright judge respondent determined deficiencies of dollar_figure and dollar_figure in petitioner's income_tax and accuracy- related penalties under sec_6662 of dollar_figure and dollar_figure for the taxable years and respectively unless otherwise indicated section references are to the internal_revenue_code in effect for the years in issue rule references are to the tax_court rules_of_practice and procedure the issues to be decided are whether petitioner is required under sec_1034 to defer recognition of gain he realized on the sale of a residence in whether petitioner received a constructive_dividend from golden gate litho in whether petitioner is liable for the accuracy-related_penalty under sec_6662 for and 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 petitioner resided in oakland california when the petition was filed in this case in petitioner formed golden gate litho a california corporation the corporation the corporation is in the lithography and commercial printing business during petitioner owned percent of the corporation's stock and his son donald asher owned percent during petitioner owned percent of the corporation's stock and his son owned percent the corporation's principal_place_of_business is located in a building on golf links road in oakland california the office building petitioner owns the office building and leases it to the corporation during all relevant periods petitioner was a full-time year-round employee of the corporation and his place of work was in the office building on date petitioner purchased a residence located on forest avenue in castro valley california the castro valley house for dollar_figure petitioner occupied the castro valley house on that date and lived there until date on date petitioner sold a residence that had been his principal_residence former residence prior to the purchase of the castro valley house on his federal_income_tax return petitioner reported the sale of the former residence on a form_2119 sale_or_exchange of principal_residence on the form_2119 petitioner reported that he realized gain in the amount of dollar_figure based on the dollar_figure selling_price of the former residence with an adjusted_basis of dollar_figure petitioner reported taxable gain of dollar_figure the difference between the dollar_figure selling_price of the former residence and the dollar_figure cost of the castro valley house and deferred gain of dollar_figure the difference in the dollar_figure gain realized and the dollar_figure taxable gain petitioner reported that his adjusted_basis in the castro valley house was dollar_figure the dollar_figure cost less the dollar_figure deferred gain on date petitioner purchased a condominium located in incline village nevada for dollar_figure at that time petitioner moved all of his furniture and personal belongings into the condominium on the same day that petitioner purchased the condominium he leased the castro valley house to robert whitlock and patricia lofton-whitlock the whitlocks under the agreement petitioner leased the house to the whitlocks for a 1-year term commencing date subject_to automatic month-to-month renewal and granted the whitlocks the option to purchase the house when the whitlocks did not exercise their option to purchase the house by the end of the 1-year term petitioner listed the house for sale on date petitioner sold the castro valley house for dollar_figure incurring selling_expenses of dollar_figure and thus realizing dollar_figure on the sale of the house petitioner reported the sale of the castro valley house as the sale of his principal_residence on a form_2119 attached to his return on the form_2119 petitioner reported an dollar_figure gain on the sale dollar_figure amount_realized less dollar_figure basis of home sold he reported that the cost of the new home wa sec_1the dollar_figure purchase_price includes the dollar_figure contract sales_price of the condominium plus dollar_figure of capitalized closing costs paid_by petitioner dollar_figure and that his taxable gain on the sale of the castro valley house was dollar_figure dollar_figure adjusted_sales_price of the castro valley house less the dollar_figure cost of the condominium in the notice_of_deficiency dated date respondent determined that petitioner realized a capital_gain of dollar_figure that must be recognized in on the sale of his castro valley house the condominium in incline village nevada is approximately miles from the corporate office building in oakland california it took petitioner approximately hours to drive from the condominium to the office building from the time petitioner acquired the condominium until date2 he resided in the condominium on weekends and during vacation periods during the work week he stayed in the vicinity of his place of work the san francisco bay area when petitioner was in the san francisco bay area he usually stayed with his mother or friends who live in the area but occasionally he stayed in a hotel petitioner has received his personal mail at the office building since he acquired the building in although petitioner was not registered to vote during through he had a california driver's license filed income_tax return sec_2in date petitioner sold the condominium and purchased a house in incline village with the state of california and used the corporate business address on his federal_income_tax returns during the corporation needed more office space3 and constructed a loft area in the office building the cost of constructing the loft was dollar_figure the loft area consists of approximately big_number square feet and includes offices a storage area a lounge area with a kitchen square feet and a bathroom with a shower square feet another bathroom is located in the back of the office building the new bathroom was constructed so that petitioner and clients would not have to walk through the manufacturing area to the other bathroom petitioner uses the lounge area to meet with clients the kitchen has a sink and microwave but is not equipped with a stove or pots and pans after work donald asher likes to work out before going home he requested the shower be installed so that he could shower before going home after working out donald asher lived in the loft for a few weeks following a domestic dispute with his wife until he could find an apartment he slept on a mattress on the floor in the storage room petitioner does not use the shower and has never lived in the loft 3donald asher had become the production manager and took over petitioner's office space on his federal_income_tax return for petitioner reported income from two sole proprietorships sungate travel and sungate tours located on alcosta boulevard in san ramon california in addition to his wages from the corporation he reported gross_receipts of dollar_figure from sungate travel and dollar_figure from sungate tours on his return he reported gross_receipts of dollar_figure from sungate travel and he reported the sale of sungate tours during and an agent of the internal_revenue_service conducted an audit of the corporation's returns for the taxable years ending date and and petitioner's individual returns for taxable years and petitioner's accountant was present at all meetings with petitioner and the agent the agent reviewed documents such as invoices and contracts supporting the corporation's depreciation schedule of items related to the construction and furnishings of the loft the documents showed the purchase of a leather sofa and chair kitchen cabinets fixtures for the bathroom and blinds during the course of the audit the agent visited the office building twice once in date and again in date while walking down the hallway in the loft during the second visit the agent noticed a mattress with box spring and a cabinet in one of the rooms the agent concluded that petitioner lived in the office building because petitioner used the office address on his income_tax returns and received most of his mail at the office building and because of the 4-hour drive from the condominium to the office building the presence of the cabinet and mattress with box spring in a room in the loft during date and the presence of the kitchen and shower in the loft consistent with the revenue agent's conclusion and adjustment to petitioner's income respondent determined in the notice_of_deficiency that petitioner received a constructive_dividend as a result of the construction of the loft in opinion whether the gain petitioner realized on the sale of the castro valley house is taxable in the year of the sale generally sec_1001 and sec_61 require a taxpayer to recognize gain realized on the sale of property in the year of the sale sec_1034 however requires a taxpayer to defer recognition of gain realized on the sale of the taxpayer's principal_residence in certain circumstances if the taxpayer purchases and uses a new principal_residence within the 4-year replacement_period the taxpayer will recognize gain only to the extent that the taxpayer's adjusted_sales_price of the old residence exceeds the taxpayer's cost of purchasing the new residence sec_1034 thus if the cost of the new residence equals or exceeds the adjusted_sales_price of the old residence the entire gain will be deferred if the cost of the new residence is less than the adjusted_sales_price of the old residence gain will be recognized to the extent of the difference sec a income_tax regs the deferral of the gain is accomplished by reducing the basis of the new residence by the amount of gain not recognized on the sale of the old residence sec_1034 the 4-year replacement_period begin sec_2 years before the date of the sale of the old residence and end sec_2 years after such date sec_1034 if however during the 4-year replacement_period the taxpayer purchases more than one residence that is used by him as his principal_residence at some time within years after the date of the sale of the old residence only the last of such residences is treated as the new residence sec_1034 petitioner contends that the castro valley house was his old principal_residence and the condominium was his new principal_residence petitioner concludes that since he purchased and used the condominium as his new principal_residence within years prior to the sale of the castro valley house he is required by sec_1034 to defer recognition of the gain on the sale of the house respondent argues that sec_1034 does not apply because the castro valley house was not petitioner's principal_residence on the date of the sale because he rented the property prior to its sale and the condominium was not petitioner's new principal_residence because he lived most of the time in the oakland area either at his place of work or at the home of his mother or friends both parties however fail to recognize the consequence of applying sec_1034 to the sale of petitioner's former residence on date petitioner purchased and occupied the castro valley house on date and he purchased and occupied the condominium on date if the condominium was used by petitioner as his principal_residence then the castro valley house and the condominium were both purchased and used by petitioner as his principal_residence during the 4-year replacement_period and were both used by petitioner during the 2-year period after the sale of the former residence since the condominium would be the last principal_residence to be used by petitioner during the 2-year period after the date of the sale of the former residence the condominium would constitute the new residence with respect to the sale of the former residence sec_1034 where a taxpayer purchases and sells a number of principal residences during the statutory period following a sec_1034 nonrecognition sale that statute ignores all of the transactions except for the last purchase occurring within the period see 56_tc_191 kerns v commissioner tcmemo_1984_22 thus if the condominium became petitioner's primary residence on date under sec_1034 the castro valley house would have ceased to be petitioner's primary residence and would not have been his primary residence when it was sold on date if the condominium was petitioner's principal_residence sec_1034 would not apply to the gain on the sale of the castro valley house by virtue of sec_1034 nor would sec_1034 apply to such gain if the condominium was not petitioner's primary residence because in that event petitioner did not purchase and use a new principal_residence within the year replacement_period required by sec_1034 therefore in either event petitioner must recognize the gain realized on the sale of the castro valley house in the year of the sale the amount of gain petitioner realized on the sale of the castro valley house however depends upon whether the castro valley house or the condominium became petitioner's new principal_residence with respect to the sale of petitioner's former residence if the castro valley house was not petitioner's new principal_residence for purposes of the deferral of gain on the sale of petitioner's former residence petitioner's adjusted_basis in the castro valley house was not reduced by the amount of the deferred gain therefore we must determine whether the condominium was petitioner's primary residence as of date the determinations of whether property is used by a taxpayer as his residence and is used as his principal_residence depends upon all the facts and circumstances sec_1 c income_tax regs for purposes of sec_1034 property is used by taxpayer as his residence if the taxpayer physically occupies or lives in that property 323_f2d_383 5th cir bayley v commissioner 35_tc_288 an individual may have more than one residence 16_tc_157 affd 202_f2d_28 9th cir a residence is a taxpayer's principal_residence if it is his chief or main place of residence considering all relevant facts including the amount of time the taxpayer spends at one residence as opposed to another 40_tc_345 affd per curiam 326_f2d_760 2d cir a residence as distinguished from a domicile does not mean one's permanent place of abode in stolk v commissioner supra pincite we stated the elements of residence are the fact of abode and the intention of remaining and the concept of residence is made up of a combination of acts and intention neither bodily presence alone nor intention alone will suffice to create a residence residence is something less than domicile friedman v commissioner 37_tc_539 an individual may have a domicile in one place and a residence in another and may also have more than one residence id residence does not mean one's permanent place of abode where he intends to live all his days or for an indefinite or unlimited time nor does it mean one's residence for a temporary purpose with the intention of returning to his former residence when that purpose has been accomplished 48_tc_350 stolk v commissioner supra pincite when petitioner was in the san francisco bay area during the work week he stayed with his mother or friends or in a hotel sleeping at his mother's or friends' homes is not enough to make those locations petitioner's abode nor did he intend to remain there his mother or friends could at any time change the locks or otherwise exclude petitioner from the premises lacking any actual dominion over the property petitioner was merely a guest at sufferance and neither his mother's home nor his friends' homes constitute petitioner's actual place of abode generally property is not used by the taxpayer as his principal_residence within the meaning of sec_1034 unless the taxpayer physically occupies and lives in the property 91_f3d_82 9th cir affg tcmemo_1994_247 houlette v commissioner supra stolk v commissioner supra petitioner kept all of his possessions in the condominium and spent most weekends and holidays at the condominium unlike the taxpayers in friedman v commissioner supra and stolk v commissioner supra petitioner did not own or occupy any other dwelling in the san francisco bay area on a regular basis or for periods greater than the time he spent at the condominium the phrase used by the taxpayer as his principal_residence means habitual use of the residence in perry v commissioner supra pincite the u s court_of_appeals for the ninth circuit stated while literal definitions of home are elusive here it is enough that a residence is one's actual home in the sense of having no other home whether one intends to reside there permanently or for a definite or indefinite length of time 163_f2d_299 10th cir alteration made by the court_of_appeals for the ninth circuit the condominium was petitioner's actual home he had no other home we find that for purposes of sec_1034 the condominium was petitioner's primary residence as of date since the condominium is the last residence used by petitioner during the 2-year period after the date of the sale of the former residence the condominium constitutes the new residence with respect to the sale of the former residence sec_1034 since the castro valley house was not petitioner's new principal_residence for purposes of the deferral of gain on the sale of petitioner's former residence petitioner's adjusted_basis in the castro valley house was not reduced by the amount of the deferred gain therefore for purposes of computing the gain on the sale of the house petitioner's basis in the house is its dollar_figure cost petitioner realized dollar_figure on the sale of the house and his gain is dollar_figure dollar_figure less dollar_figure since petitioner reported dollar_figure of taxable gain on the sale of the house he must include the additional gain of dollar_figure in income for whether petitioner received a constructive_dividend as a result of the construction of the loft sec_61 includes in a taxpayer's gross_income dividends received by the taxpayer sec_316 defines a dividend as any distribution_of_property by a corporation to its shareholders out of earning and profits a taxpayer can be charged with disguised or constructive_dividend income even though the corporation has not observed the formalities of dividend declaration has not made a pro_rata distribution to the entire class of stockholders and did not record the distribution as a dividend for bookkeeping purposes and even though neither the corporation nor the shareholder intended a dividend see 496_f2d_1384 5th cir 418_f2d_589 5th cir 153_f2d_602 5th cir affg a memorandum opinion of this court where a corporation has incurred costs to construct maintain or otherwise improve real_property owned by a shareholder such costs may constitute constructive dividends to be recognized by the shareholder as dividend income if the shareholder receives a benefit attributable to such costs without the expectation of repayment 73_tc_980 54_tc_1149 42_tc_358 affd without published opinion 355_f2d_929 6th cir not every corporate expenditure incidentally conferring economic benefit on a shareholder is a constructive_dividend crosby v united_states supra pincite an indirect or incidental benefit to the shareholder should not by itself be treated as a distribution to him 61_tc_624 affd in part and revd in part f 2d l52 5th cir the crucial test of the existence of a constructive_dividend is whether the expenditure was primarily for the benefit of the shareholder 577_f2d_1206 5th cir 472_f2d_449 5th cir affg in part and remanding t c memo magnon v commissioner supra pincite whether a corporate payment was made primarily for the shareholder's benefit rather than for the corporation's benefit is a question of fact loftin woodard inc v united_states supra respondent contends that the loft was used by petitioner as a residence and therefore the corporation's payment for the construction of the loft constitutes a constructive_dividend to petitioner respondent contends that petitioner lived in the office building because of the use of the office address on petitioner's income_tax returns and receipt of mail at the office building the presence of the cabinet and mattress with box spring in a room in the loft during date the 4-hour drive from the condominium to the office building and the presence of the kitchen and shower in the loft petitioner used the office address on his returns and received his mail at the office even when he lived in the castro valley house furthermore it is not unusual for a business to have a kitchen or bathroom with a shower when petitioner was in the san francisco bay area he stayed with friends or his mother we found petitioner to be credible and his testimony to be candid and forthright additionally petitioner's accountant 4the agent testified that petitioner said he lived in incline village but also on several occasions said he lived in the business since respondent contends that petitioner's statement was an admission that petitioner resided in the loft assuming without finding that petitioner made such a statement we think that the statement is ambiguous during the years in issue not only did petitioner work full time as an employee of the corporation he also was the sole_proprietor of two other businesses sungate travel and sungate tours that were located at another location and generated over dollar_figure million in gross_receipts each year under the circumstances we do not think that lived in the business would necessarily mean that petitioner was residing in the loft corroborated much of petitioner's testimony we find that petitioner did not reside in the loft the loft was constructed in order to provide more office space after donald archer became the production manager and to provide an appropriate place for petitioner to meet with the corporation's customers petitioner did not use the loft as a residence the loft was constructed and used for valid corporate business purposes therefore we hold that petitioner did not receive a constructive_dividend in as a result of the corporation's construction of the loft whether petitioner is liable for the accuracy-related_penalty under sec_6662 for and respondent determined that petitioner is liable for the accuracy-related_penalty under sec_6662 for and taxpayers are liable for a penalty equal to percent of the part of the underpayment to which sec_6662 applies sec_6662 with respect to the taxable_year petitioner failed to report part of the gain on the sale of the castro valley house he introduced no evidence disputing the accuracy-related_penalty and failed to argue during trial or on brief as to why the penalty should not be applied to the understatement for that year accordingly we sustain respondent's determination that petitioner is liable for the sec_6662 accuracy-related_penalty for for the taxable_year we have held that petitioner did not receive a constructive_dividend therefore petitioner is not liable for the sec_6662 accuracy-related_penalty for to reflect the foregoing decision will be entered under rule


internal_revenue_service number release date index number 468a ------------------------------------------------------ ------------------------------------------- ---------------------------- ----------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ----------------------- id no ------------- telephone number --------------------- refer reply to cc psi b06 plr-112705-08 date august legend ------------------------------------------------------- -------------------------------------------------------- taxpayer --------------------------------------------------------------- utility ------------------------------------------------------------------------ parent ----------------------------------------------------------------- subsidiary ----------------------------------------------------------- plant industry director location commission method fund ---------------------------------------------- ------------------------------------------------- ----------------------------------------------------------- ------------------------------------------------------------------------- --------------- -------------------------------------------------- ---------------------- ------------------------------------------- dear -------------- this letter responds to your request dated --------------------- for a schedule of ruling amounts pursuant to sec_468a of the internal_revenue_code and sec_1_468a-3t of the temporary income_tax regulations taxpayer represents the facts and information relating to its request for a revised schedule of ruling amounts as follows taxpayer owns ----- percent interest in the plant which is situated in location taxpayer is a wholly-owned subsidiary of parent taxpayer is under the audit jurisdiction of the industry director taxpayer is subject_to the jurisdiction of commission plant’s operating license is set to expire in ------- the method of plr-112705-08 decommissioning the plant is method substantial decommissioning will be completed by ------- on ------------------- the utility entered into a settlement agreement before the commission that specified the framework for deregulation of the utility’s electric generation business this agreement also provides for the collection and recovery_of decommissioning costs relating to deregulated nuclear generation assets as part of the utility’s unbundled delivery service rates on ---------------- utility transferred the plant the qualified nuclear decommissioning trust funds and its rights to recover decommissioning cost to taxpayer in exchange for the stock of taxpayer pursuant to a tax-free reorganization that qualified under sec_355 and sec_368 of the code the utility then distributed the stock of taxpayer to parent parent then contributed the stock of taxpayer to subsidiary all parties involved are members of the same consolidated_group in connection with this restructuring parent taxpayer and utility received a private_letter_ruling from the internal_revenue_service dated -------------------- plr--------- --------------- which stated in part that following the transfer of the plant and nuclear decommissioning funds to taxpayer taxpayer will be considered as the eligible_taxpayer and electing taxpayer with respect to the nuclear decommissioning funds as a result taxpayer may make deductible contributions to its qualified nuclear decommissioning funds in an amount consistent with sec_468a of the code and the regulations thereunder this ruling was expressly conditioned on the utility receiving an order from the commission requiring that it collect decommissioning costs as an agent for the taxpayer and pay all such collections to the taxpayer and on the continued direct or indirect ownership of the taxpayer by parent or subsidiary on ------------------------- taxpayer requested a revised schedule of ruling amounts for -------- taxpayer requested a schedule of ruling amounts for unit of dollar_figure----------------- and was the same as the schedule of ruling amounts previously issued to utility on ---- ----------------- the service approved taxpayer’s proposed schedule of ruling amounts for dollar_figure----------------for the tax years ------ through ------- on ----------------- utility made a compliance filing with commission setting forth its requested customer contributions for decommissioning pursuant to the settlement agreement effective ---------------- the current value of decommissioning as of ------------- ---------------------------was determined using the procedures prescribed in the settlement agreement specifically the current value of decommissioning dollar_figure------------------for plant was increased based on the nrc inflation factors through -------------------------- the current value of decommissioning as of ---------------------------was dollar_figure------------------for plant additionally in determining the future value of decommissioning and the annual plr-112705-08 customer collections utility also considered the balance in the external trust funds as well as internal reserve a forecasted future earnings rate on the external trust funds of ------ a forecasted future earnings rate on the internal reserve of ------ a forecasted nuclear inflation factor of -- and decommissioning taking place in ------- based on these assumptions utility concluded that annual customer collections should be maintained at the current level of dollar_figure------ --------- per year in a letter dated ------------------- commission informed utility that it had reviewed the compliance filing in accordance with the settlement agreement and had approved the status quo customer decommissioning collections of dollar_figure----------------per year based on this authorization customer obligation for decommissioning set forth in the settlement agreement and other information taxpayer has relied on the following four underlying assumptions for purposes of computing the schedule of rulings amounts an estimated decommissioning cost in ------- dollars of dollar_figure------------------ a forecasted decommissioning inflation rate to estimate the cost of decommissioning in future dollars of -- an assumed after-tax rate of return in the internal reserve of ------ and an implied forecasted after-tax rate of return of the qualified decommissioning trust of ------ sec_468a as amended by the energy tax incentives act of the act publaw_109_58 119_stat_594 allows an electing taxpayer to deduct payments made to a nuclear decommissioning reserve fund sec_468a limits the amount that may be paid into the nuclear decommissioning fund in any year to the ruling_amount applicable to that year sec_468a provides that no deduction shall be allowed for any payment to the nuclear decommissioning fund unless the taxpayer requests and receives from the secretary a schedule of ruling amounts the ruling_amount for any_tax year is defined under ' 468a d as the amount which the secretary determines to be necessary to fund the total nuclear decommissioning cost of that nuclear power plant over the estimated_useful_life of the plant this term is further defined to include the amount necessary to prevent excessive funding of nuclear decommissioning costs or funding of these costs at a rate more rapid than level_funding taking into account such discount rates as the secretary deems appropriate sec_468a provides that a taxpayer shall be deemed to have made a payment to the nuclear decommissioning fund on the last day of a taxable_year if the payment is made on account of such taxable_year and is made within months after the close of the tax_year this section applies to payments made pursuant to either a schedule of ruling amounts or a schedule of deduction amounts plr-112705-08 sec_1_468a-1t a provides that an eligible_taxpayer may elect to deduct nuclear decommissioning costs under sec_468a of the code an eligible_taxpayer as defined under ' 468a-1t b of the regulations is a taxpayer that has a qualifying interest in any portion of a nuclear power plant a qualifying interest is among other things a direct ownership_interest sec_1_468a-2t b provides that the maximum amount of cash payments made or deemed made to a nuclear decommissioning fund during any_tax year shall not exceed the ruling_amount applicable to the nuclear decommissioning fund for such taxable_year the limitation on the amount of cash payments for purposes of sec_1 468a- 2t b does not apply to any special transfer permitted under sec_1_468a-8t sec_1_468a-3t a provides that in general a schedule of ruling amounts for a nuclear decommissioning fund is a ruling specifying annual payments that over the tax years remaining in the funding_period as of the date the schedule first applies will result in a projected balance of the nuclear decommissioning fund as of the last day of the funding_period equal to and in no event more than the amount of decommissioning costs allocable to the fund sec_1_468a-3t a provides that to the extent consistent with the principles and provisions of this section each schedule of ruling amounts shall be based on reasonable assumptions concerning the after-tax rate of return to be earned by the amounts collected for decommissioning the total estimated cost of decommissioning the nuclear plant and the frequency of contributions to a nuclear decommissioning fund for a taxable_year under ' 468a-3t a the internal_revenue_service shall provide a schedule of ruling amounts identical to the schedule proposed by the taxpayer but no such schedule shall be provided by the service unless the taxpayer's proposed schedule is consistent with the principles and provisions of that section sec_1_468a-3t a provides that the taxpayer bears the burden of demonstrating that the proposed schedule of ruling amounts is consistent with the principles of the regulations and that it is based on reasonable assumptions that section also provides additional guidance regarding how the service will determine whether a proposed schedule of ruling amounts is based on reasonable assumptions for example if a public_utility commission established or approved the currently applicable rates for the furnishing or sale by the taxpayer of electricity from the plant the taxpayer can generally satisfy this burden_of_proof by demonstrating that the schedule of ruling amounts is calculated using the assumptions used by the public_utility commission in its most recent order in addition a taxpayer that owns an interest in a deregulated nuclear plant may submit assumptions used by a public_utility commission that formerly had regulatory jurisdiction over the plant as support for the assumptions used in calculating the taxpayer’s proposed schedule of ruling amounts with the plr-112705-08 understanding that the assumptions used by the public_utility commission may be given less weight if they are out of date or were developed in a proceeding for a different taxpayer the use of other industry standards such as the assumptions underlying the taxpayer's most recent financial assurance filing with the nrc are described by the temporary regulations as an alternative means of demonstrating that the taxpayer has calculated its proposed schedule of ruling amounts on a reasonable basis sec_1_468a-3t a further provides that consistency with financial_accounting statements is not sufficient in the absence of other supporting evidence to meet the taxpayer’s burden_of_proof sec_1_468a-3t b provides that in general the ruling_amount for any_tax year in the funding_period shall not be less than the ruling_amount for any earlier tax_year under ' 468a-3t c the funding_period begins on the first day of the first tax_year for which a deductible payment is made to the nuclear decommissioning fund and ends on the last day of the taxable_year that includes the last day of the estimated_useful_life of the nuclear power plant to which the fund relates sec_1_468a-3t c provides rules for determining the estimated_useful_life of a nuclear plant for purposes of sec_468a in general under sec_1_468a-3t c i a if the plant was included in rate base for ratemaking purposes for a period prior to date the date used in the first such ratemaking proceeding as the estimated date on which the nuclear plant will no longer be included in the taxpayer’s rate base is the end of the estimated_useful_life of the nuclear plant sec_1_468a-3t c i b provides that if the nuclear plant is not described in sec_1_468a-3t c i a the last day of the estimated_useful_life of the nuclear plant is determined as of the date the plant is placed_in_service under sec_1_468a-3t c i c any reasonable method may be used in determining the estimated_useful_life of a nuclear power plant that is not described in sec_1_468a-3t c i a sec_1_468a-3t d provides that the amount of decommissioning costs allocable to a nuclear decommissioning fund is the taxpayer's share of the total estimated cost of decommissioning the nuclear power plant sec_1_468a-3t d provides that a taxpayer's share of the total estimated cost of decommissioning a nuclear power plant equals the total estimated cost of decommissioning such plant multiplied by the taxpayer's qualifying interest in the plant sec_1_468a-3t e enumerates the information required to be contained in a request for a schedule of ruling amounts filed by a taxpayer in order to receive a ruling_amount for any taxable_year sec_1_468a-3t f requires a taxpayer that has obtained a schedule of ruling amounts pursuant to sec_1_468a-3t e to file a request for a revised schedule of ruling amounts on or before the deemed payment deadline date for the 10th taxable_year plr-112705-08 that begins after the taxable_year in which the most recent schedule of ruling amounts was received if the taxpayer calculated its most recent schedule of ruling amounts on any basis other than an order issued by a public_utility commission the taxpayer must file a request for a revised schedule of ruling amounts on or before the deemed payment deadline date for the 5th taxable_year that begins after the taxable_year in which the most recent schedule of ruling amounts was received sec_1_468a-3t f provides that any taxpayer that has previously obtained a schedule of ruling amounts can request a revised schedule of ruling amounts such a request must be made in accordance with the rules of ' 468a-3t e the internal_revenue_service shall not provide a revised schedule of ruling amounts applicable to a taxable_year in response to a request for a schedule of ruling amounts that is filed after the deemed payment deadline date for such taxable_year we have examined the representations and information submitted by the taxpayer in relation to the requirements set forth in ' 468a and the regulations thereunder based solely upon these representations of the facts we reach the following conclusions taxpayer has a qualifying interest in the plant and is therefore an eligible_taxpayer under sec_1_468a-1t b of the regulations taxpayer as owner of the plant has calculated its share of the total decommissioning costs under sec_1_468a-3t d of the regulations taxpayer has proposed a schedule of ruling amounts which meets the requirements of sec_1_468a-3t a and of the regulations the annual payments specified in the proposed schedule of ruling amounts are based on the reasonable assumptions and determinations used by commission and will result in a projected fund balance at the end of the funding_period equal to or less than the amount of decommissioning costs allocable to the fund pursuant to sec_1_468a-3t a as an owner of a deregulated nuclear power plant taxpayer has met its burden_of_proof in showing that the assumptions used by the commission continue to be valid and reasonable for purposes of demonstrating that its proposed schedule of ruling amounts is consistent with the principles of sec_468a and the regulations thereunder the maximum amount of cash payments made or deemed made to the fund during any_tax year is restricted to the ruling_amount applicable to the fund as set forth under sec_1_468a-2t b of the regulations plr-112705-08 based solely on the determinations above we conclude that the taxpayer’s proposed schedule of ruling amounts satisfies the requirements of sec_468a of the code approved schedule of ruling amounts amount dollar_figure--------------- year -------------- ------- each year approval of the schedule of ruling amounts is contingent on there being no change in the facts and circumstances known or assumed at the time the current ruling is issued if any of the events described in ' 468a-3t f occur in future years the taxpayer must request a review and revision of the schedule of ruling amounts generally the taxpayer is required to file such a request on or before the deemed payment deadline date for the first taxable_year in which the rates reflecting such action became effective when no such event occurs the taxpayer must file a request for a revised schedule of ruling amounts on or before the deemed payment deadline of the tenth taxable_year following the close of the tax_year in which the most recent schedule of ruling amounts was received except as specifically determined above no opinion is expressed or implied concerning the federal_income_tax consequences of the transaction described above this ruling is directed only to the taxpayer who requested it sec_6110 of the code provides it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office we are sending a copy of this letter to your authorized representatives we are sending a copy of this letter_ruling to the director pursuant to ' 468a-7t a a copy of this letter must be attached with the required election statement to the taxpayer's federal_income_tax return for each tax_year in which the taxpayer claims a deduction for payments made to the fund sincerely peter c friedman senior technician reviewer branch passthroughs special industries