t c summary opinion united_states tax_court john michafl kernan petitioner v commissioner of internal revenue respondent docket no 5655-0o1s filed date john michael kernan pro_se alvin a ohm for respondent couvillion special_trial_judge this case was heard pursuant to sec_7463 in effect when 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 respondent determined a deficiency of dollar_figure in petitioner's federal_income_tax for unless otherwise indicated section references hereafter are to the internal_revenue_code in effect for the year at issue the sole issue for decision is whether petitioner is entitled to deductions under sec_162 for expenses while away from home for the year some of the facts were stipulated those facts and the accompanying exhibits are so found and are incorporated herein by reference petitioner's legal residence at the time the petition was filed was dallas texas petitioner is a certified_public_accountant in the state of texas for the year at issue petitioner was a consultant specializing in the implementation of computer systems and in particular a software application known as oracle financials he conducted this work as a self-employed trade_or_business activity that he reported on his federal_income_tax return for on schedule c profit or loss from business from the time of his graduation from texas a m university at college station texas in petitioner lived at austin texas he was employed for approximately years by a nationally recognized accounting firm and thereafter was employed by the texas workers'_compensation insurance fund the fund at austin texas sometime during date petitioner's superior or supervisor at the fund obtained employment with josten's inc josten's at memphis tennessee through the efforts or assistance of his former supervisor petitioner was interviewed at josten's for the specific purpose of teaching josten's project managers in the use of the oracle software system referred to above petitioner terminated his employment with the fund and sometime in date he entered into a contract with josten's for a period of months commencing on date petitioner began work on or about the scheduled commencement_date by mutual agreement with josten's petitioner worked approximately l month beyond the expiration date of the contract until date all the work petitioner performed under this contract was at the business facilities of josten's at memphis tennessee he was not required to travel away from josten's facilities and he in fact did not incur any traveling or other expenses in connection with his contract except those that are at issue in this proceeding moreover josten's did not impose on petitioner any restriction or requirement as to where petitioner was to live during the contract while living in austin texas petitioner owned a half interest in a home that he shared with another individual his interest in this home was fully paid for and petitioner retained that interest while he was engaged on the contract with josten's at memphis tennessee petitioner did not incur any expenses relating to the austin home while he was engaged on the josten's contract petitioner moved out of the austin texas home on or about date and took up residence with a young lady who lived at knoxville tennessee whom petitioner had met in date one of the reasons petitioner became interested in the contract with josten's at memphis was that it would lessen the distance between austin texas and knoxville tennessee his expectation was that the relationship with the young lady whom petitioner referred to as his girlfriend would become permanent as petitioner described it at trial i had started dating a girl in knoxville in december of '95 and wanted to try and make more of the distance between knoxville and austin and so when this opportunity came up i was talking with her regarding it basically the understanding was that t'll accept it if we want to give this a shot you know basically i'll live with her and move into knoxville make the commute and then hopefully find work in knoxville petitioner moved in with his girlfriend at knoxville tennessee on date and began his contract with josten's at memphis tennessee on date he commuted on weekends to knoxville during the week petitioner rented an apartment in memphis the arrangement between petitioner and his girlfriend was that petitioner paid the rent on the apartment they shared in knoxville and his girlfriend paid the utilities and telephone expenses petitioner was not a party to the rental contract on the apartment nor was there any written_agreement between petitioner and his girlfriend with respect to their living arrangement initially petitioner commuted between memphis and knoxville either by automobile or by commercial airline both methods proved to be time consuming and costly petitioner made a cost benefit analysis from which he concluded it would be more economical to purchase an airplane to make the weekly commute between knoxville and memphis accordingly petitioner in early date purchased a cessna model airplane and after paying for flying lessons thereafter used the plane to commute between memphis and knoxville petitioner's contract with josten's was completed in date and he had no further contractual or employment relationship with josten's petitioner then gave up the memphis apartment and continued living with his girlfriend at knoxville he did not find employment at knoxville in date the relationship between petitioner and his girlfriend terminated petitioner moved back to austin texas and found employment there on his federal_income_tax return for petitioner reported the income and expenses of the contract activity with josten's as a trade_or_business activity which respondent does not dispute petitioner reported gross_income of dollar_figure expenses of dollar_figure and a net profit of dollar_figure in the notice_of_deficiency respondent disallowed deductions claimed for expenses in the amount of dollar_figure the disallowed deductions consisted essentially of petitioner's meals and other living_expenses in memphis including rent on the memphis apartment and the expenses related thereto the cost of the airplane and the flying lessons repairs to the plane insurance and the traveling expenses_incurred prior to purchase of the plane ’ respondent's position is that petitioner's tax_home during was memphis tennessee and therefore the expenses at issue were not incurred away from home within the intent and meaning of sec_162 petitioner's position is that his business activity at memphis tennessee was temporary and not permanent or indefinite and the expenses he incurred there are deductible under sec_162 this court has consistently held that a taxpayer's home for purposes of sec_162 is the vicinity of the taxpayer's principal_place_of_business or employment and not where the taxpayer's personal_residence or place of abode is located if such residence or place of abode is at a place different from the location of the place of employment 74_tc_578 49_tc_557 garlock v commissioner 34_tc_2 of the total amount claimed dollar_figure represented the cost of the plane that petitioner deducted pursuant to sec_179 klection to expense certain depreciable assets petitioner at trial conceded a dollar_figure adjustment in the notice_of_deficiency disallowing a deduction for clothing expenses however there is an exception to this rule where the taxpayer accepts employment away from home if such employment is considered temporary as opposed to indefinite 254_f2d_483 4th cir affd per curiam 358_us_59 where such employment is temporary the taxpayer's tax_home does not shift to the situs of the temporary employment the taxpayer is regarded as away from home while working at the temporary location the underlying purpose for this exception which allows a deduction for living costs incurred at the temporary job is that it is unreasonable to expect the taxpayer to move a residence to a temporary location thus by allowing a deduction for living_expenses at the temporary employment location the burden is mitigated for the taxpayer who incurs duplicate living_expenses which result from maintaining the regular place of abode and the place of abode at the temporary location however if a taxpayer for personal reasons chooses to reside ina different vicinity from the vicinity of the principal place of employment the residence is not recognized as the taxpayer's tax_home 326_us_465 54_tc_734 affd 444_f2d_508 5th cir the court is satisfied from the record that petitioner's home during for tax purposes was not austin texas petitioner terminated his employment there and thereafter incurred no further living_expenses at austin the record is clear that petitioner left his employment at austin to accept the contract at memphis tennessee which would be nearer to his girlfriend at knoxville tennessee since petitioner left his home at austin texas the site of his employment became his tax_home the record is clear that petitioner's choice of knoxville tennessee as a residence was solely for personal reasons and was in no way related to the exigencies of his contract with josten's at memphis the general_rule is that a taxpayer's home under sec_162 is his abode at or near the vicinity of his principal place of employment 608_f2d_1269 9th cir affg in part and revg and remanding in part 67_tc_426 it is immaterial whether petitioner's contract at memphis tennessee was temporary or indefinite because those distinctions are relevant only when the taxpayer maintains a well-established home and is away from it 332_f2d_91 9th cir the court holds therefore that the expenses at issue were personal expenses under sec_262 that are not deductible under sec_162 respondent therefore is sustained reviewed and adopted as the report of the small_tax_case division decision will be entered for respondent


internal_revenue_service number release date index number ------------------------ ----------------------- ---------------------------------------------------- ------------------------------------- --------------------------------------- - department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------------------ id no ------------ -------- telephone number --------------------- refer reply to cc tege eoeg teb plr-154177-06 date date legend system county state medical center bonds county board act date year year year a b --------------------------------------------- --------------------------------------- -------------- -------------------------------------------- ----------------------------------------------------------------------------------------- ---------------------------------- --------------------------------------------------------- ---------------------------------------------------------------- ---------------------- ------- ------- ------- --- --- --- ----- ------ ------ plr-154177-06 c d e f dear ----------------- this is in response to the request for rulings that system is an instrumentality of county and a constituted_authority empowered to issue bonds described in sec_103 of the internal_revenue_code the code on behalf of county facts and representations county a political_subdivision of state owns and operates the medical center a large public teaching hospital a portion of the medical center has been refinanced with the bonds issued by county in year the county board appointed a task force to evaluate the operation of the medical center in a changing health care environment while yet preserving its public mission as a result of the recommendations of the task force and pursuant to state legislative authority ie the act the county board created system as a public corporation that will operate as a subsidiary of county to provide health care and related_services to the general_public and related education and research programs the county board has filed a certificate of approval giving effect to certain provisions of the act as required by the act county has approved system’s initial bylaws system has only one member county system will be governed by a board_of directors the system board_of between a and b directors two of which must be county commissioners the two directors that are county commissioners are chosen and may be removed by a majority vote of the county board the chief_executive_officer of the system will be an ex officio director the initial system board other than the county commissioners was appointed by the county board upon expiration of the terms of these directors the county board will appoint directors other than the county commissioners and chief_executive_officer by slate for staggered 3-year terms the slates will be nominated by a committee of the system board the system board may appoint directors to fill unexpired terms however such directors must be submitted to the county board for approval when the next slate is submitted a system director that is not a county commissioner may be removed without cause by a two-thirds majority vote of the system board the county board may remove a system board director that is a county commissioner may remove other directors for cause and with a two-thirds plr-154177-06 vote of the entire county board may remove the entire system board for county to resume management of the medical center the directors other than the chief_executive_officer will serve without compensation system must submit to the county board for review and approval a health services plan including education research and services to improve the health of the community system is required to provide its services to persons who are indigent in addition the county board retains the authority to require system to provide health care or related_services as the county board determines to be in the best interests of county to be paid at county’s expense system also must submit to the county board its annual capital and operating budgets for approval and an annual audited financial statement the county board’s authority over system’s budget and expenditures includes review and approval of capital_expenditure budget line items when those items exceed stated threshold percentages and approval of capital expenditures that exceed the amounts approved in the budget the county board also must approve any debt incurred by system other than that defined in the bylaws as de_minimis debt effective on date county has leased the real_property used by the medical center to system for dollar_figure per year and contributed the other tangible and intangible assets used exclusively by the medical center to system county also has entered into an operating and funding agreement with an initial term of c years to provide system with payments projected to be dollar_figured million in year equal to e percent of system’s actual average medical assistance reimbursement rates for uncompensated care provided to residents of county in excess of the average level of uncompensated care provided by the other hospitals in county one or more capital infusions if necessary to ensure system has sufficient working_capital and dollar_figuref million for capital improvement projects approved through county’s budgeting process during the period of year through year county intends to issue general obligation bonds to fund these capital improvement projects the act generally considers system as a municipality for purposes of bond issuance however it limits system’s authority to the issuance of revenue bonds for its corporate purposes subject_to the county’s reserved powers security for system’s bonds is restricted to system’s pledge of its interests in property and its revenues system may not transfer or dispose_of substantially_all of its assets without approval by the county board upon dissolution of the system its net assets must be distributed to county for public purposes no part of the net_earnings and assets of system may inure to the benefit of any private individual nor may any part of the income or assets of system be distributed to or divided among any private individuals as dividends or otherwise system is exempt from state income corporate franchise and general sales and use taxes interest on any bonds to be issued by system will be exempt from state personal income_taxation if such interest is excludable for federal_income_tax purposes plr-154177-06 law and analysis instrumentality status of system sec_103 provides in general that gross_income does not include interest on any state_or_local_bond sec_103 provides in part that sec_103 shall not apply to any private_activity_bond that is not a qualified_bond within the meaning of sec_141 sec_141 defines private_activity_bond to mean any bond issued as part of an issue which meets the private_business_use_test of sec_141 and the private_security_or_payment_test of sec_141 or which meets the private_loan_financing_test of sec_141 an issue meets the private_business_use_test of sec_141 if more than percent of the proceeds of the issue are to be used for any private_business_use sec_141 defines private_business_use as use directly or indirectly in a trade_or_business carried on by any person other than a governmental_unit sec_1 a of the income_tax regulations provides that the percent private business test of sec_141 is met if more than percent of the proceeds of an issue is used in a trade_or_business of a nongovernmental person sec_1_141-1 defines a nongovernmental person as a person other than a governmental person a governmental person means a state_or_local_governmental_unit as defined in sec_1_103-1 or any instrumentality thereof revrul_57_128 1957_1_cb_311 sets forth the following factors to be taken into account in determining whether an entity is an instrumentality of one or more governmental units whether the organization is used for a governmental purpose and performs a governmental function whether performance of its function is on behalf of one or more states or political subdivisions whether there are any private interests involved or whether the states or political subdivisions have the power and interests of an owner whether control and supervision of the organization is vested in a public authority or authorities whether express or implied statutory or other authority is necessary for the creation and or use of the organization and whether this authority exists and the degree of financial autonomy of the entity and the source of its operating_expenses system will operate medical center and provide health care services including indigent care and education to the general_public it must provide such services as determined by the county board to be in the best interests of county thus system is used for a governmental purpose and performs a governmental function on behalf of county a political_subdivision the sole member of system is county and upon dissolution of system its assets will be distributed to county for public purposes accordingly county has the power and interests of an owner of system and there are no private interests the county board appoints the directors serving on the system board with the exception of the chief_executive_officer of system and may remove the directors plr-154177-06 the county board must approve system’s health service plan and its annual budgets for capital and operating_expenses in addition the county board must approve budget line items for capital expenditures above certain thresholds and expenditures that exceed the budgeted amounts and must approve debt to be incurred by system above that defined as de_minimis debt thus control and supervision of system are vested in county and system’s financial autonomy is limited by county the act provides the statutory authority to create system last county has leased the medical center to system for dollar_figure per year will reimburse system for certain uncompensated care and will provide operating funds to system as needed considering the factors of revrul_57_128 as applied to the facts and representations of this ruling we conclude that system is an instrumentality of county and therefore a governmental person for purposes of sec_141 on behalf of issuer sec_103 defines a state_or_local_bond for purposes of sec_103 and sec_141 through as an obligation of a state or political_subdivision thereof sec_1 a provides in part that interest upon obligations of a state territory a possession_of_the_united_states the district of columbia or any political_subdivision thereof hereinafter collectively or individually called state_or_local_government unit is not includable in gross_income sec_1_103-1 provides in part that an obligation issued by or on behalf of any governmental_unit by a constituted_authority empowered to issue such an obligation is the obligation of such a unit revrul_57_187 1957_1_cb_65 holds that bonds issued by an industrial development board formed under a state statute the entity are considered issued on behalf of a political_subdivision of the state under the following conditions the entity is formed only after the governing body of the political_subdivision has formally approved the entity's creation and the form of certificate of incorporation a board_of directors of the entity is elected by the governing body of the political_subdivision and serves without compensation the entity may issue bonds to carry out any of its corporate powers which include the power to acquire improve maintain equip and furnish projects to lease such projects and collect rent and to sell and convey any and all of its property whenever the board_of directors find such action to be in furtherance of the purposes for which the entity is established all bonds are payable solely out of revenues and receipts derived from the leasing or sale by the entity of its projects the political_subdivision is not liable for the payment of principal or interest on any of the bonds of the entity the entity is exempt from all taxation and interest on bonds issued by the entity is exempt from state taxes the entity is a nonprofit organization and none of its net_earnings may inure to the benefit of any private person and upon dissolution of the entity title to all property it owns would vest in and become the property of the state or political_subdivision which creates it plr-154177-06 the facts of this ruling are similar to those of revrul_57_187 therefore we conclude that system will qualify as a constituted_authority eligible to issue bonds on behalf of county conclusions we conclude that system is an instrumentality of county and therefore a governmental person for purposes of sec_141 and system is a constituted_authority eligible to issue bonds on behalf of county 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 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 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 in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your representative sincerely assistant chief_counsel exempt_organizations employment_tax government entities ___________________________________ by johanna som de cerff senior technician reviewer tax exempt bond branch


internal_revenue_service number release date index number 468a --------------------- ----------------------------------------------- -------------------------------- ------------------------- ----------------------------- re revised schedule of ruling amounts department of the treasury washington dc person to contact --------------------------- id no ---------------- ----------------- telephone number ---------------------- refer reply to cc psi b06 - plr-111728-13 date date legend taxpayer parent plant state location method date date date date date date date a b c d e f g h commission a commission b order year year year year year --------------------------------------------------------- --------------------------------------------------------- --------------------------------------------------------------------------------- --------------------------------------------------------------------------------- -------------- ------------------------------------------------------------------- ------------ ------------------ ---------------------------- --------------------- ------------------- ------------------------ ---------------------- ---------------------- ------------ ---------- ------------------ -------------------- ---- ---- ---- ---------------- -------------------------------------------------------------- ------------------------------------------------------------------ --------------------------------------------------------- ------- ------- ------- ------- ------- plr-111728-13 year year fund director ------- ------- -------------------------------------------- --------------------------------------------------------------------------------- ---------------------------------------------------------------------------------- dear ----------------- this letter responds to your request dated ---------------------- for a mandatory revised schedule of ruling amounts under sec_468a of the internal_revenue_code and sec_1_468a-3 of the income_tax regulations taxpayer was previously granted revised schedules of ruling amounts most recently on --------------------- this request is mandatory as a result of a substantial variation in the ruling_amount determined under the formula approved by the prior revised schedule of ruling amounts supplemental information was submitted pursuant to sec_1_468a-3 taxpayer represents the facts and information relating to its request for a revised schedule of ruling amounts as follows taxpayer is a subsidiary which files as part of the consolidated federal_income_tax return of parent and is an investor-owned public_utility incorporated in state taxpayer is engaged in the generation transmission purchase distribution and sale of electric energy in state taxpayer is the sole owner and operator of the plant which is situated at location the proposed method of decommissioning the plant is method the plant’s amended operating license is scheduled to expire on date taxpayer intends to pursue a license extension for the plant with the nuclear regulatory commission nrc that would extend the operating license from date to date by letter of date taxpayer advised the nrc of its intention to file an application in the second quarter of year for a license renewal of the plant with respect to the decommissioning costs related to the plant that are included in taxpayer’s cost of service for ratemaking purposes taxpayer is subject_to regulation by commission a a percent and commission b b percent commission a in order effective date granted taxpayer’s request to reduce the amount of its annual nuclear decommissioning contribution to the fund pursuant to taxpayer’s intention to request a license extension from the nrc commission a based its findings on a decommissioning cost estimate dated date provided by taxpayer that is based on the assumption that the plant will receive an extension of the operating license the estimated cost of dollar_figurec year dollars was used as a base cost for decommissioning the plant the estimated cost of decommissioning the plant is dollar_figured plr-111728-13 year dollars it is estimated if the license extension is granted that substantial decommissioning costs will first be incurred in year and that decommissioning will be substantially complete at the end of year the methodology used to convert the year dollars to year dollars was by escalating the estimated costs at an inflation rate that ranged from e to f percent the assumed after-tax rate of return to be earned by the amount collected for decommissioning is g percent taxpayer in prior schedules of ruling amounts dated date and date was granted permission to use a formula pursuant to sec_1_468a-3 to determine its schedule of ruling amounts the ruling_amount for each year of the period is determined on or before the deemed payment_date for the year expressed mathematically taxpayer uses the following formula to determine the ruling_amount formula a x b x x c d - e where a total kwh sales subject_to nuclear decommissioning nd surcharge b multiplied by the commission a average nd surcharge expressed as cents kwh multiplied by dollar_figure to convert to dollar_figure c multiplied by the percentage of the total surcharge allocated to nuclear decommissioning and low-level radwaste disposal d plus ferc nd deposits e minus low-level radwaste deposits if the formula should result in a negative number the ruling_amount will be assumed to be zero using the formula results in the following calculation for year -------------------------------------------------------------------------------------------------------------------- ------------------------ if taxpayer does not request an extension of the plant’s operating license by the end of year taxpayer must file a request for a revised schedule of ruling amounts on or before the deemed payment deadline for that taxable_year similarly if taxpayer requests and is denied an extension of the plant’s operating license taxpayer must file a request for a revised schedule of ruling amounts on or before the deemed payment deadline for the first taxable_year that begins after the taxable_year in which the request is denied if taxpayer requests and is granted an extension of the plant’s operating license pursuant to sec_468a taxpayer must file a request for a revised schedule of plr-111728-13 ruling amounts on or before the deemed payment deadline for the taxable_year that includes the date on which the operating license is renewed 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 prior to the changes made by the act the deduction was limited to the lesser_of the amount included in the utility’s cost of service for ratemaking purposes or the ruling_amount generally as a result only regulated utilities could take advantage of sec_468a the act amendment of sec_468a eliminated the cost-of-service limitation accordingly decommissioning costs of an unregulated nuclear power plant may now be funded by deductible contributions to a qualified nuclear decommissioning fund 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 sec_468a 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 2½ 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 sec_1_468a-1 provides that an eligible_taxpayer may elect to deduct nuclear decommissioning costs under sec_468a of the code an eligible_taxpayer as defined under sec_1_468a-1 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-2 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 plr-111728-13 taxable_year the limitation on the amount of cash payments for purposes of sec_1_468a-2 does not apply to any special transfer permitted under sec_1_468a-8 sec_1_468a-3 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-3 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 sec_1_468a-3 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-3 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 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 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-3 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 plr-111728-13 sec_1_468a-3 provides that the service will approve at the request of the taxpayer a formula or method for determining a schedule of ruling amounts rather than providing a schedule specifying a dollar amount for each taxable_year if the formula or method is consistent with the principles and provisions of this section and is based on reasonable assumptions sec_1_468a-3 further provides a special rule relating to the mandatory review of ruling amounts that are determined pursuant to a formula or method sec_1_468a-3 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 sec_1_468a-3 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-3 provides rules for determining the estimated_useful_life of a nuclear plant for purposes of sec_468a in general under sec_1_468a-3 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-3 provides that if the nuclear plant is not described in sec_1_468a-3 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-3 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-3 sec_1_468a-3 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-3 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-3 provides the rules regarding the manner of requesting a schedule of ruling amounts sec_1_468a-3 provides that the service will not provide or revise a ruling_amount applicable to a taxable_year in response to a request for a schedule of ruling amounts that is filed after the deemed payment_date as defined in sec_1_468a-2 for such taxable_year plr-111728-13 sec_1_468a-3 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-3 provides that the service may prescribe administrative procedures that supplement the provisions of sec_1_468a-3 and in addition that section provides that the service may in its discretion waive the requirements of sec_1_468a-3 and under appropriate circumstances sec_1_468a-3 describes the circumstances in which a taxpayer must request a revised schedule of ruling amounts sec_1_468a-3 requires that a taxpayer request a revised schedule of ruling amounts for the fund if the operating license of the nuclear plant to which the fund relates is extended the request for the revised schedule of ruling amounts must be submitted on or before the deemed payment deadline for the taxable_year that includes the date on which the license extension is granted sec_1_468a-3 provides that any taxpayer that has previously obtained a schedule of ruling amounts may request a revised schedule of ruling amounts such a request must be made in accordance with the rules of sec_1_468a-3 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 sec_468a and the regulations thereunder based solely upon these representations of the facts we reach the following conclusions pursuant to sec_1_468a-3 taxpayer has met its burden of demonstrating that the proposed schedule of ruling amounts is consistent with the principles of the code and regulations and is based on reasonable assumptions taxpayer has a qualifying interest in the plant and is therefore an eligible_taxpayer under sec_1_468a-1 of the regulations taxpayer as owner of the plant has calculated the total decommissioning costs under sec_1_468a-3 of the regulations the proposed schedule of ruling amounts was derived by following the assumptions contained in a decommissioning cost estimate that taxpayer has represented is a standard type study used in the industry in addition the plr-111728-13 same underlying assumptions were used by commission a to calculate the amount of decommissioning costs to be included in taxpayer’s cost of service for ratemaking purposes thus taxpayer has demonstrated pursuant to sec_1_468a-3 that the proposed schedule of ruling amounts is based on reasonable assumptions and 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-2 of the regulations based solely on the determinations above we conclude that taxpayer’s proposed schedule of ruling amounts satisfies the requirements of sec_468a of the code we have approved the following revised schedule of ruling amounts approved schedule of ruling amounts year year year - year commission a h to be determined from formula if any of the events described in sec_1_468a-3 occur in future years taxpayer must request a review and revision of the schedule of ruling amounts generally 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 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 this schedule of ruling amounts is received except as specifically determined above no opinion is expressed or implied concerning the federal_income_tax consequences of the transaction described above plr-111728-13 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 a copy of this letter is being sent to your authorized representative we are also sending a copy of this letter_ruling to the director pursuant to sec_1_468a-7 a copy of this letter must be attached with the required election statement to taxpayer's federal_income_tax return for each tax_year in which taxpayer claims a deduction for payments made to the fund sincerely yours peter c friedman senior technician reviewer branch office of the associate chief_counsel passthroughs and special industries


t c no united_states tax_court texasgulf inc and subsidiaries as successor_in_interest to texasgulf inc and subsidiaries petitioner v commissioner of internal revenue respondent docket no filed date under the ontario mining tax omt mine operators are generally liable for a tax on gross_receipts less deductions for several expenses and a processing allowance p paid the omt and claimed a foreign_tax_credit under sec_901 i r c p and r agree that sec_1_901-2 income_tax regs applies to the years at issue r concedes that the omt is a tax and that it meets realization and gross_income requirements imposed by those regulations but contends that the omt does not meet the net_income requirement sec_1_901-2 income_tax regs a foreign tax meets the net_income requirement if it meets any one of three tests under one of those tests a foreign tax meets the net_income requirement if judged on the basis of its predominant character the base of the tax is computed by reducing gross_receipts to permit recovery_of significant expenses under a method that is likely to approximate or exceed those expenses sec_1_901-2 income_tax regs held whether judged by the predominant character of the omt the processing allowance is likely to approximate or exceed expenses related to gross_receipts which are nonrecoverable under the omt is a question of fact accord texasgulf inc v united_states cl_ct modified per order date held further p has proven that judged on the basis of the predominant character of the omt the processing allowance is likely to approximate or exceed expenses related to gross_receipts which are nonrecoverable under the omt 677_f2d_72 distinguished sec_1_901-2 income_tax regs did not apply willard b taylor richard j urowsky michael lacovara c barr flinn ann t kenny jared m rusman and scott l lessing for petitioner lewis r mandel monica e koch and christopher w shoen for respondent colvin judge respondent determined deficiencies in petitioner’s federal_income_tax of dollar_figure for dollar_figure for and dollar_figure for the sole issue for decision is whether the ontario mining tax omt is creditable under sec_901 we hold that it is 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 findings_of_fact some of the facts have been stipulated and are so found a petitioner and kidd creek mine petitioner was a delaware corporation the principal_place_of_business of which was in stamford connecticut when it filed the petition petitioner is the successor_in_interest to texasgulf inc a texas corporation which filed consolidated federal_income_tax returns for taxable years and as the parent of texasgulf canada texasgulf canada discovered the kidd creek mineral reserves near timmins ontario canada in texasgulf canada explored the reserves acquired some land claims from current owners and began to develop the reserves texasgulf canada was incorporated in delaware in as ecstall mining ltd ecstall in texasgulf canada transferred the kidd creek land claims to ecstall at that time the property had a significant amount of mineral reserves and substantial value ecstall began mining and concentrating operations at kidd creek mine in kidd creek mine is an open pit mine at which ore from a copper zinc lead and silver deposit is produced in kidd creek mine had a concentrator which was about miles from the mine a railroad connected them texasgulf canada owned and operated the kidd creek mine from to from to texasgulf canada crushed the ore from kidd creek mine into pieces 7½ inches or smaller texasgulf canada then put the ore in storage bins and carried it by rail to the concentrator for further processing the concentrator further crushed pulverized and concentrated the ore ecstall changed its name to texasgulf canada ltd in and to kidd creek mines ltd in texasgulf canada was subject_to the omt because it mined and processed ore at kidd creek mine texasgulf canada paid omt of dollar_figure for dollar_figure for and dollar_figure for b the ontario mining industry and the production of metal many metallic and nonmetallic minerals are mined and produced in ontario metallic minerals mined in ontario include base metals such as nickel copper and zinc and precious metals such as gold silver and platinum nonmetallic minerals mined in ontario include asbestos peat gypsum talc and salt generally metal production in ontario and elsewhere has four phases exploration development mining and processing exploration the exploration phase consists of finding and delineating ore reserves these activities range from prospecting to exploring by aircraft with advanced scientific techniques such as electromagnetic and seismic surveying texasgulf canada discovered minerals near the kidd creek mine by using airborne exploration techniques development the development phase includes activities needed to bring a mineral reserve into production for an underground mine development activities include sinking a shaft adit an almost horizontal entrance to a mine or ramp from the surface of the ground into the mineral reserves for an open pit mine such as the kidd creek mine development activities include removing waste rock that separates the ore from the surface mining the mining phase is the process of extracting ore from the ground typically by blasting and mechanical removal processing the processing phase generally includes three different stages a milling or concentrating b smelting and c refining milling is the process of separating waste rock from ore generally through chemical treatment to produce concen- trate copper concentrate for example is approximately percent copper a mill or concentrator is built at or near virtually every mine in ontario smelting is the process of converting concentrate into a relatively pure product a copper smelter for example produces about percent pure copper refining is the process of producing pure metal from smelted product by heat-induced chemical reactions electrolytic methods solvent extraction hydro metallurgical methods or vapometallurigical methods it is rare for a mining company to buy mineral_property outright in ontario for this reason ontario mining companies typically do not incur high costs to acquire reserves and consequently do not have high cost_depletion small entities called junior exploration companies do much of the exploring for new mining properties in ontario typically junior exploration companies do not have enough financial resources to produce the ore they find the junior company once it has identified a body of ore usually enters into an agreement with an established producer under which the producer does additional work on the property in exchange for an ownership_interest in it if the additional work by the senior company shows that the property should be developed the junior company and the senior company typically agree for the junior company to keep an ownership_interest in the property c the ontario mining tax omt application of the omt the omt applies to every mine in ontario to the extent that its omt profits exceed a statutory exemption mining tax act mta rev stat ont r s o ch sec_3 in most cases the omt is imposed on the mine operator id sec_2 the mine operator is the party that has the right to produce and sell minerals from the mine id sec_1 the omt does not apply to holders of royalties omt profit profit for omt purposes is the difference between either gross_receipts from production or pit’s mouth value and certain expenses payments allowances and deductions id sec_3 under the mta there are three ways to calculate the amount from which deductions and allowances are subtracted to compute profit for omt purposes id sec_3 b and c first if an omt taxpayer sells ore without processing it gross revenues are the total receipts from selling the ore id sec_3 second if an omt taxpayer processes ore before selling it the omt taxpayer subtracts deductions and allowances from the market_value at the pit’s mouth of the mined minerals id sec b third if an omt taxpayer does not know the market_value of the output at the pit's mouth deductions and allowances are subtracted from the value of the ore at the pit's mouth as appraised by the mine assessor to compute profit for omt purposes id sec c most omt taxpayers use the third method also known as the appraisal method to calculate profit for omt purposes this method is not based on the on-site value of ore it is based on financial statements and other information included on an omt return the omt exempts some taxable profit ontario has increased the exemption over the years the statutory exemption was a dollar_figure before mta r s o ch sec_3 b dollar_figure from to an act to amend the mining tax act r s o ch sec_2 c dollar_figure from to an act to amend the mining tax act of r s o ch sec_2 and d dollar_figure beginning in an act to amend the mining tax act of r s o ch sec_1 deductions for expenses an omt taxpayer calculates its profit for omt purposes by deducting specified expenses from either the pit’s mouth value or its gross_receipts from production mta r s o ch sec_3 the mta allows an omt taxpayer to deduct expenses for a scientific research in canada relating to mining in ontario added mta r s o ch sec_3 b working the mine above and below the ground including salaries and wages for miners and office workers c operations and maintenance added mta r s o ch sec_3 d power and light for mining e transportation of minerals f food and provisions g explosives fuel and other supplies h safeguarding the mine and its output i insurance on the output mining plant machinery equipment and buildings j depreciation of the mining plant machinery equipment and buildings k charitable donations and l certain costs of developing a mine id sec_3 through n in and an omt operator could claim a depreciation allowance from to percent of the remaining undepreciated cost of its depreciable assets id sec_3 an omt taxpayer may not deduct expenses for a plant machinery equipment or buildings except as described above b investment capital_investment interest or stock_dividends c depreciation in the value of the mine mining land or mining_property due to exhaustion of the ore or mineral d royalties paid for the output of a mine on private ie non-crown land and e the cost of developing a mine except as described above id sec_3 exploration expenses were not recoverable in but are recoverable in the years in issue processing allowance most omt taxpayers can deduct a processing allowance under the third method for calculating omt profit id sec_3 and ii as amended in ont rev regs sec_4 during the years in issue the processing allowance was calculated at a rate prescribed by the regulations or determined by the mine assessor mta r s o ch sec_3 the processing allowance was a percentage of the cost of assets used to process a mined product asset cost_basis or a percentage of profits from mining and processing activities combined profits ont rev regs sec_5 an omt taxpayer which used the asset cost_basis method multiplied the original cost of assets by a percentage which varied based on which processing assets the mine operator owned eg concentrator smelter refinery and semi-fabricating plant and where those assets were located eg in northern ontario id the minimum processing allowance wa sec_15 percent of combined profits id sec_5 the maximum processing allowance wa sec_65 percent of the omt taxpayer's combined profits id most mine operators claimed the percent amount the processing allowance was zero if an operator had no taxable 1the processing allowance is not available to mining companies that do not process mined material eg gypsum salt etc these are very insignificant in numbers and dollars in ontario profits or had a loss for a taxable_year there is nothing analogous to the processing allowance in financial_accounting calculating omt liability most omt taxpayers started to calculate the omt with net_income from mining and processing reported on their financial statements omt taxpayers adjusted their financial statement net_income by adding expenses which the mta did not allow to be recovered and subtracting items of income not related to ontario mining and processing omt taxpayers made these adjustments by reconciling omt taxable_income and financial statement net_income omt taxpayers computed taxable profit by deducting specified expenses payments allowances and deductions as described above mta r s o ch sec_3 d the mine assessor during the years in issue the mine assessor was responsible for enforcing the mining tax act the mine assessor encouraged taxpayers to comply with the mta administered the mta interpreted and applied the mta and its regulations recommended policy related to mineral taxation and developed and implemented tax_assessment standards the mine assessor reviewed all omt returns either confirmed or changed the liability that the omt taxpayer reported and assessed the omt due from operators mine operators who disagreed with the mine assessor's determinations could appeal to the minister of natural_resources the minister of natural_resources referred the appeal to the mining commissioner or the ontario municipal board to be tried and decided in the position of mine assessor was renamed senior manager of the mining tax in it was renamed manager of the mining tax the duties of these positions are the same as those of the mine assessor described above kumara rachamalla rachamalla was appointed mine assessor in and served in that position as renamed until the date of trial e texasgulf canada’s omt liability nonrecoverable expenses and processing allowance texasgulf canada's total processing allowance for to was candollar_figure and its nonrecoverable expenses were candollar_figure texasgulf canada had financial statement net_income omt profit and depreciation nonrecoverable expenses and processing allowances as follows thousands of candollar_figure financial omt statement omt nonrecoverable processing year profit net_income depreciation expenses allowance big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number total big_number big_number big_number big_number big_number the nonrecoverable expenses are as follows year total f financial statement depreciation big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number private recoverable other non- interest royalties expenses total -0- big_number big_number -0- big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number comparison of processing allowances and nonrecoverable expenses for other omt taxpayers from to the processing allowance exceeded nonrecoverable expenses for most omt taxpayers for those years total processing allowances claimed by omt taxpayers were more than three times greater than nonrecoverable expenses total processing allowances exceeded nonrecoverable expenses each year from to except and g respondent’s determination and petitioner’s election on date respondent issued a notice_of_deficiency to petitioner for and respondent did not determine a deficiency for but adjusted petitioner’s net_operating_loss to be carried forward from to petitioner timely elected for sec_1_901-2 income_tax regs to apply in deciding whether its omt and other canadian taxes are creditable under sec_901 opinion a background and contentions of the parties the parties dispute whether the omt is creditable under sec_901 our decision on this issue depends on whether the omt is an income_tax under sec_1_901-2 income_tax regs a taxpayer may deduct foreign taxes unless the taxpayer elects and is entitled to use the foreign_tax_credit sec_901 if a taxpayer is a citizen or a domestic_corporation the taxpayer may be entitled to a credit for any income war profits and excess_profits_tax paid_or_accrued during the taxable_year to a foreign_country or possession_of_the_united_states sec_901 sec_901 provides in pertinent part continued the purpose of the foreign_tax_credit is to mitigate the evil of double_taxation of domestic corporations on income from foreign sources 285_us_1 168_f2d_745 2d cir revg and remanding 8_tc_1232 a credit against u s income_tax is in effect an exemption from taxation and is dependent upon legislative grace 133_f2d_894 3d cir a taxpayer who claims a foreign_tax_credit must show that it clearly comes within the statute that allows the credit id petitioner bears the burden_of_proof rule a the reaches of the word ‘income’ in sec_901 have been the subject of a long and tortuous history in terms of legislative background the decided cases and respondent's rulings which history is permeated with vagaries confusion and contradictions 61_tc_752 affd without published continued sec_901 amount allowed --subject to the limitation of sec_904 the following amounts shall be allowed as the credit under subsection a citizens and domestic corporations --in the case of a citizen_of_the_united_states and of a domestic_corporation the amount of any income_war_profits_and_excess_profits_taxes paid_or_accrued during the taxable_year to any foreign_country or to any possession_of_the_united_states opinion 538_f2d_334 9th cir in 459_f2d_513 the u s court of claims concluded that an income_tax for purposes of sec_901 covers all foreign_income_taxes designed to fall on some net gain or profit and includes a gross_income tax if but only if that impost is almost sure or very likely to reach some net gain because costs or expenses will not be so high as to offset the net profit fn ref and citation omitted b sec_1_901-2 income_tax regs respondent proposed_regulations under sec_901 in sec_1_901-2 proposed income_tax regs fed reg date and issued temporary regulations in sec_4 temporary income_tax regs fed reg date see 104_tc_256 construing these temporary regulations on date respondent issued new proposed_regulations sec_1_901-2 proposed income_tax regs fed reg date the regulations under sec_901 sec_1_901-2 income_tax regs were adopted on date t d 1983_2_cb_113 the parties do not dispute that the regulations apply to petitioner for the years in issue to understand how the regulations apply here we must consider a series of defined terms and phrases in the regulations we begin with the definition of income_tax the regulations define income_tax as follows sec_1_901-2 income war profits or excess_profits_tax paid_or_accrued -- a definition of income war profits or excess profits tax-- in general whether a foreign levy is an income_tax is determined independently for each separate_foreign_levy a foreign levy is an income_tax if and only if-- i it is a tax and ii the predominant character of that tax is that of an income_tax in the u s sense except to the extent otherwise provided in paragraphs a ii and c of this section a tax either is or is not an income_tax in its entirety for all persons subject_to the tax sec_1_901-2 income_tax regs respondent concedes that the omt is a tax under sec_1_901-2 income_tax regs however the parties dispute whether the predominant character of the tax is that of an income_tax in the u s sense the regulations describe that requirement as follows predominant character the predominant character of a foreign tax is that of an income_tax in the u s sense-- i if within the meaning of paragraph b of this section the foreign tax is likely to reach net gain in the normal circumstances in which it applies sec_1_901-2 income_tax regs thus for a tax to be creditable under the regulations it must be likely to reach net gain in the normal circumstances in which it applies under the regulations that standard is met if and only if the tax judged on the basis of its predominant character meets specified realization gross_receipts and net_income requirements sec_1_901-2 income_tax regs the regulations provide in part as follows b net gain-- in general a foreign tax is likely to reach net gain in the normal circumstances in which it applies if and only if the tax judged on the basis of its predominant character satisfies each of the realization gross_receipts and net_income requirements set forth in paragraphs b b and b respectively of this section sec_1_901-2 income_tax regs respondent concedes that the omt meets the realization and gross_receipts requirements but contends that it does not meet the net_income requirement of sec_1_901-2 income_tax regs thus for present purposes the omt is creditable according to sec_1_901-2 income_tax regs if and only if it meets the net_income requirement a foreign tax meets the net_income requirement of sec_1_901-2 income_tax regs if judged on the basis of it sec_3this standard was first used in 459_f2d_513 one commentator said that fortunately the regulations provide specific tests for determining whether the general bank of america standard is satisfied dolan general standards of creditability under sec_901 and sec_903 final regulations -- new words old concepts tax mgt intl j bna sec_1_901-2 income_tax regs provides continued predominant character the base of the tax is computed by reducing gross_receipts to permit -- recovery_of significant costs and expenses attributable to gross_receipts sec_1_901-2 income_tax regs or recovery_of significant costs and expenses computed under a method that is likely to produce an amount that approximates or is greater than recovery_of such significant costs and expenses sec_1_901-2 income_tax regs a foreign tax also meets the net_income requirement of sec_1_901-2 income_tax regs if it provides allowances that effectively compensate for nonrecovery of continued net_income -- i in general a foreign tax satisfies the net_income requirement if judged on the basis of its predominant character the base of the tax is computed by reducing gross_receipts including gross_receipts as computed under paragraph b i b of this section to permit-- a recovery_of the significant costs and expenses including significant capital expenditures attributable under reasonable principles to such gross_receipts or b recovery_of such significant costs and expenses computed under a method that is likely to produce an amount that approximates or is greater than recovery_of such significant costs and expenses a foreign tax law that does not permit recovery_of one or more significant costs or expenses but that provides allowances that effectively compensate for nonrecovery of such significant costs or expenses is considered to permit recovery_of such costs or expenses significant costs or expenses sec_1_901-2 flush language income_tax regs petitioner prevails if the omt meets one or more of these net_income requirements a recap may be helpful the task of deciding whether the predominant character of the omt is that of an income_tax in the u s sense is simplified because the terms and clauses in the regulations just described tie the predominant character inquiry to several specific tests to summarize for a tax to be creditable its predominant character must be that of an income_tax in the u s sense sec_1_901-2 income_tax regs its predominant character is that of an income_tax in the u s sense if it is likely to reach net gain in the normal circumstances in which it applies sec_1_901-2 income_tax regs it is likely to reach net gain in the normal circumstances in which it applies if and only if the tax judged on the basis of its predominant character meets among other requirements the net_income requirement sec_1_901-2 income_tax regs it meets the net_income requirement if judged on the basis of its predominant character it meets one of three tests 5to borrow a phrase the reader by now has divined that 'predominant character' is the leitmotif of the continued sec_1_901-2 income_tax regs we next consider whether it meets one of these tests c whether the omt meets the net_income requirement in sec_1_901-2 income_tax regs under one of the three net_income tests a tax meets the net_income requirement if judged on the basis of its predominant character the base of the tax is computed by reducing gross_receipts to permit recovery_of significant costs and expenses under a method that is likely to produce an amount that approximates or exceeds recovery_of such significant costs or expenses sec_1_901-2 income_tax regs because of respondent's concessions the omt is creditable if it meets that test consideration of representative omt data petitioner offered evidence intended to prove that the processing allowance is likely to approximate or exceed nonrecoverable expenses petitioner's evidence consisted of a broadly representative study of omt tax returns filed from to petitioner's study showed that the processing allowance far exceeded the nonrecoverable expenses both in the aggregate for all returns studied and for a large majority of omt returns continued regulations isenbergh the foreign_tax_credit royalties subsidies and creditable taxes tax l rev we agree with petitioner that use of broadly representative data is an appropriate way to show whether the processing allowance is likely to exceed nonrecoverable expenses two factors lead us to that conclusion first both the processing allowance and the amount of nonrecoverable expenses vary from year to year and from taxpayer to taxpayer whether one is likely to exceed the other is a factual question accord texasgulf inc v united_states cl_ct modified per order date whether the processing allowance is likely to approximate or exceed nonrecoverable expenses can be shown by actual omt data second we think it is appropriate to consider industry data because a foreign tax either is or is not an income_tax in its entirety for all persons subject_to it sec_1_901-2 flush language income_tax regs whether a tax is creditable for all persons subject_to it can be shown by multiyear data from a broadly representative group of taxpayers subject_to the tax expert testimony petitioner's expert was robert b parsons parsons he prepared a report entitled study of ontario mining tax returns parsons omt report and an overview of the ontario mining 6see dolan supra note industry the parsons omt report was based on a review of omt returns that represented about percent of the total omt paid from to the mining operators which filed those returns had about percent of ontario’s mineral production during that period william j hallett hallett was respondent’s expert he testified about the omt returns that parsons analyzed parsons prepared a memorandum that rebutted parts of hallett’s testimony we are not bound by the opinion of any expert witness and we may accept or reject expert testimony exercising our sound judgment 304_us_282 fitts’ 237_f2d_729 8th cir affg tcmemo_1955_269 97_tc_496 petitioner's study of omt taxpayers respondent concedes that the parsons omt report included a representative cross-section of omt taxpayers only one significant taxpayer did not give its omt tax returns to parsons for the study respondent's expert stated that this taxpayer's information would not have materially changed the results of the 7kumara rachamalla was petitioner’s other expert respondent objected to our consideration of his report and testimony canadian law precluded him from revealing the data upon which he based his opinion and answering questions about this data on cross-examination he agreed with parsons’ conclusion in every material aspect however we have not considered his report or testimony in deciding this case parsons omt report parsons analyzed returns as filed ie before assessment by the mine assessor later parsons obtained records of the mine assessor’s adjustments to the filed returns he included assessment data in his rebuttal memorandum to the extent it was available the parties stipulated that the data but not the opinions and conclusions in the parsons omt report was accurate of the returns that parsons reviewed returns percent reported omt liability nonrecoverable expenses exceed the processing allowance on only of the omt returns which reported omt liability percent the parsons omt report shows that in the aggregate processing allowances claimed by omt taxpayers dwarfed nonrecoverable expenses millions of candollar_figure nonrecoverable processing expenses year total average allowance big_number for the 13-year period the total amount of processing allowance claimed on returns in the parsons omt report was candollar_figure which is more than three times the total amount of nonrecoverable expenses candollar_figure parsons concluded that the aggregate amount of processing allowance claimed by omt taxpayers in his report exceeded their aggregate amount of nonrecoverable expenses by to respondent does not dispute that conclusion total processing allowances claimed on returns exceeded nonrecoverable expenses for of the years in the parsons omt report the parsons omt report also shows that the processing allowances claimed by the vast majority of omt taxpayers in the study exceeded those taxpayers' nonrecoverable expenses the parsons omt report also shows that nonrecoverable expenses exceeded processing allowances in of returns from eight omt taxpayers respondent’s expert hallett concluded that nonrecoverable expenses exceeded the processing allowance in only of omt returns in the parsons omt report if all omt returns are considered whether or not tax was due nineteen of those returns were from taxpayers that owed omt hallett stated his opinion that the nonrecoverable expenses were significant his opinion even if correct does not affect the result here we need not decide whether nonrecoverable costs are significant because we decide the case by considering whether the processing allowance is likely to exceed nonrecoverable expenses under sec_1_901-2 income_tax regs the question under sec_1_901-2 income_tax regs is not whether the nonrecoverable expenses are significant it is whether the processing allowance is likely to approximate or exceed them conclusion petitioner has shown that the processing allowance exceeded nonrecoverable expenses both in the aggregate and for the vast majority of omt taxpayers we conclude that the omt processing allowance was likely to approximate or exceed the nonrecoverable expenses for the years in issue d respondent’s contentions respondent contends that petitioner has not proven that the omt meets the requirements of sec_1_901-2 income_tax regs because according to respondent this case is governed by cases decided before the regulations applied 8similarly we need not decide the parties’ dispute about the concept of pit’s mouth value respondent contends that the omt’s use of pit’s mouth value shows that no nexus exists between the amount of the processing allowance and nonrecoverable expenses sec_1_901-2 b i b income_tax regs requires us to consider whether the processing allowance approximates or exceeds nonrecoverable expenses not whether there is a nexus between the two see par d-3 infra p such as 677_f2d_72 and also by texasgulf inc v united_states cl_ct the omt is not creditable unless its predominant character is that of an income_tax for each omt taxpayer and for the omt to be creditable the processing allowance must have been intended to compensate for nonrecoverable expenses we address each of these contentions next extent to which this case is governed by cases decided before the regulations were issued and by texasgulf inc v united_states a preamble to the regulations respondent contends that the omt is not creditable because it fails to meet standards of creditability applied in cases decided before the regulations were issued respondent contends that the preamble to sec_1_901-2 income_tax regs shows that the regulations adopted prior case law we disagree the preamble does not support respondent’s broad use of the preregulation cases the preamble to the final regulations under sec_901 t d c b states in part under these final regulations the predominant character of a foreign tax is that of an income_tax in the u s sense if the foreign tax is likely to reach net gain in the normal circumstances in which it applies this standard found in sec_1_901-2 adopts the criterion for creditability set forth in 677_f2d_72 ct_cl 459_f2d_513 ct_cl and 61_tc_752 the regulations set forth three tests for determining if a foreign tax is likely to reach net gain the realization test the gross_receipts_test and the net_income test all of these tests must be met in order for the predominant character of the foreign tax to be that of an income_tax in the u s sense the preamble states that the regulations adopt the creditability criterion from certain cases to use in deciding whether the predominant character of a foreign tax is likely to reach net gain for purposes of sec_1_901-2 income_tax regs the preamble states that a tax is likely to reach net gain if it meets three tests provided in the regulations the regulations provide objective and quantitative standards that were not used in cases which decided creditability of foreign taxes before the regulations became final regulations can supersede prior case law to the extent that they provide requirements and definitions not found in prior case law see 101_tc_207 89_tc_765 b inland steel co v united_states and texasgulf inc v united_states respondent contends that inland steel co v united_states supra and texasgulf inc v united_states supra establish as a matter of law that the omt is not creditable we disagree with respondent’s contention that either of those cases decided the issue before us here the u s court of claims held in inland steel co v united_states supra that the omt was not creditable and that for and the omt paid_by caland ore co did not fit the u s concept of an income_tax primarily because there were significant nonrecoverable expenses ie land expenses rent and private royalties id pincite in inland steel the u s court of claims evaluated caland data for and in caland could not claim a processing allowance because it sold only unprocessed ore id pincite in caland could claim a processing allowance equal to not less than percent or more than percent of the profits of the combined mining and processing operations because it sold both unprocessed ore and processed iron pellets id pincite caland reported the minimum percent of combined profits processing allowance on its omt return for id the record in that case did not include omt returns for any other omt taxpayers or any other years the u s court of claims decided inland steel before the regulations were issued in inland steel the u s court of claims analyzed the history and purpose of the omt and held that a foreign tax was creditable only if it was the substantial equivalent of an income_tax in the united_states id pincite see also new york honduras rosario mining co v commissioner f 2d pincite the proposed_regulations included a form of the substantial equivalence test sec_1_901-2 proposed income_tax regs fed reg date however this standard was dropped by the final regulations issued in and replaced with a predominant character test the use of the predominant character and effectively compensates tests in sec_1_901-2 income_tax regs is a change from the history and purpose approach used in the cases decided before the regulations applied a factual quantitative approach this change to a quantitative approach is also made by the provision of the regulations which provides that the predominant character of a foreign tax is that of an income_tax in the u s sense if among other things the foreign tax is likely to reach net gain in the normal circumstances in which it applies sec_1_901-2 income_tax regs we have considered the parties’ use of industry data in this case see par c-1 supra p the record contains broadly representative data which shows that the omt processing allowance effectively compensates for the disallowed deductions see par c-3 and supra pp the u s court of claims in 677_f2d_72 did not have industry-wide data to consider and the secretary had not yet promulgated regulations using a quantitative approach the court in inland steel did not discuss the relationship between nonrecoverable expenses and the omt processing allowance based on the parsons omt report caland's situation was unusual because most omt taxpayers could and did claim a processing allowance equal to percent of the maximum combined profits thus the use of the processing allowance by caland was not typical for the foregoing reasons we conclude that we are not bound by inland steel in deciding this case respondent points out that inland steel co v united_states supra focused on the significance of expenses that are nonrecoverable under the omt as discussed in paragraph c-4 supra p we need not decide whether the nonrecoverable expenses are significant under sec_1_901-2 income_tax regs because we hold that petitioner meets the requirements under sec_1_901-2 income_tax regs in texasgulf inc v united_states cl_ct the u s claims_court granted the government's motion for partial summary_judgment the u s claims_court later modified that ruling in an unpublished order texasgulf inc v united_states no 532-83t cl_ct date order partially denying summary_judgment in that order the u s claims_court reaffirmed its opinion in texasgulf inc v united_states supra that nonrecoverable expenses under the omt were significant as a matter of law under inland steel co v united_states f 2d pincite however in that order the u s claims 9we note also that exploration expenses were not recoverable in 677_f2d_72 but are fully recoverable in the years in issue court reversed its holding that the omt processing allowance does not effectively compensate for expenses that may not be recovered under the omt as a matter of law texasgulf inc v united_states no 532-83t cl_ct date order partially denying summary_judgment thus the u s claims_court treats that issue as a question of fact the u s claims_court left for decision based on an appropriate record the question whether the omt processing allowance effectively compensates for the disallowed deductions texasgulf inc v united_states no 532-83t cl_ct date order partially denying summary_judgment our record enables us to make a factual finding on this point as discussed above we have found that judged on the predominant character of the omt the processing allowance is likely to exceed nonrecoverable expenses whether the predominant character of the omt must be an income_tax in the u s sense for each taxpayer respondent contends that for a tax to be creditable its predominant character must be that of an income_tax in the u s sense for each taxpayer subject_to it respondent bases this argument on the following language from the regulations a tax either is or is not an income_tax in its entirety for all persons subject_to the tax sec_1_901-2 flush language income_tax regs we disagree this phrase does not mean that to be creditable a tax must be an income_tax for each taxpayer subject_to it it means that a tax is creditable by either all or none of the taxpayers subject_to it regardless of variations in how the tax applies to each taxpayer subject_to it respondent contends that petitioner may not use aggregate data to show that the omt is creditable respondent also contends that if we adopt petitioner’s position the commissioner would be required to evaluate each omt taxpayer every year to determine whether its omt payment was creditable we disagree use of aggregate data is appropriate because a tax is or is not creditable for all taxpayers subject_to it this conclusion does not require the commissioner to evaluate each omt taxpayer every year to determine whether its omt payment is creditable whether the processing allowance must be intended to compensate for nonrecoverable expenses respondent contends that for the omt to be creditable the processing allowance must be intended to compensate for nonrecoverable expenses respondent points out that the processing allowance is computed without considering the amount of nonrecoverable expenses and contends that the amount of one bears no predictable relationship to the amount of the other respondent contends that the fact that the processing allowance exceeds nonrecoverable expenses for most omt taxpayers does not make the omt creditable because that relationship is coincidental we disagree the regulations do not provide that the processing allowance must bear a predictable relationship to nonrecoverable expenses the regulations do provide that a foreign tax meets the net_income requirement if among other requirements judged by its predominant character the tax permits the recovery_of nonrecoverable expenses under a method that is likely to produce an amount that approximates or is greater than the amount of the nonrecoverable expenses sec_1_901-2 income_tax regs the effect of respondent’s position would be to exclude from sec_1_901-2 income_tax regs the words or is greater than e conclusion we conclude that the omt processing allowance meets the requirements of sec_1_901-2 income_tax regs and that the omt is creditable under sec_901 for the years in issue to reflect the foregoing and concessions decision will be entered under rule


internal_revenue_service number release date index number ------------------------------------ ----------------------------------------------- -------------------------------------------------- ---------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ---------------------------- id no -------------- ---------------------------------------------------- telephone number --------------------- refer reply to cc psi b01 plr-144246-12 date date legend x --------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------- -------------------------------------------------------------- state ------------------- corporation ----------------------------------------------------------- ----------------------------- ----------------------- shareholder a ------------------------------------------------------------- shareholder b ----------------------- ------------------------------------------------------------- d1 d2 d3 d4 ------------------------- ------------------------- --------------------------- ------------------- plr-144246-12 d5 --------------------- dear ------------- this responds to a letter dated date and subsequent correspondence submitted on behalf of x requesting a ruling under sec_1361 of the internal_revenue_code facts according to the information submitted x was formed on d2 under state x timely filed form_2553 to make an election to be treated as an s_corporation after d2 and on or before the 15th day of the third month of its first taxable_year beginning d2 x intended to make its s election effective d2 but a recent review of its books_and_records has indicated that x’s form_2553 may have instead listed a desired effective date of d1 which precedes the date of x’s formation on d2 by several days x has always treated itself as having been an s_corporation since its formation on d2 x represents that x was formed to effect a split-off under sec_355 a divisive_reorganization under sec_368 for a transitory period from d2 to d3 x was wholly owned by corporation the split-off occurred on d3 at which time x became wholly owned by shareholder a x corporation and shareholder a all treated shareholder a as the sole owner of x for its entire first taxable_year beginning d2 as part of a recent internal investigation x has just discovered several instances in which its share register and general ledger were not properly maintained or followed these errors resulted in several discrepancies including disproportionate distributions x represents that these discrepancies and disproportionate distributions were not intentional and x represents it will make remedial distributions to correct the effect of the disproportionate distributions as a result of the remedial distributions each shareholder of x will have received aggregate distributions that are pro_rata and in accordance with share ownership x represents that under state law all of x’s stock have identical rights to distribution and liquidation proceeds no provision in x’s articles of incorporation bylaws or any other governing instruments altered those rights x further represents that there is no agreement written or oral that any shareholder would be entitled to a preference regarding x’s distribution or liquidation proceeds on d4 x redeemed stock owned by shareholder b under the terms of the redemption agreement shareholder b’s shares were redeemed in exchange for cash plr-144246-12 and a promissory note from x secured_by a security_interest in stock of x if x defaulted on its promissory note shareholder b would have had the right to cause x to issue shares of stock to shareholder b x made final payment under the promissory note on d5 x did not intend for the shares subject_to the security_interest to be treated as issued or outstanding for federal tax purposes shareholder b received no distributions or allocations of income gain loss deduction or credit with respect to the stock in which shareholder b held a security_interest x represents that in entering into the arrangement with shareholder b it did not have a principal purpose of circumventing the rights to distribution or liquidation proceeds conferred by the outstanding shares of stock or of circumventing the limitation on eligible shareholders x represents it did not intend to create a second class of stock or to terminate x’s s_corporation_election and that the circumstances resulting in the possible termination of the election were not motivated by tax_avoidance or retroactive planning x seeks a ruling that if its s_corporation_election on form_2553 listed a desired effective date of d1 it will nonetheless be treated as having made its s election effective d2 additionally x seeks a ruling that corporation’s transitory ownership of x from d2 to d3 as part of the reorganization under sec_368 will not cause x to have an ineligible shareholder for any portion of its first taxable_year under sec_1361 and will not in itself render x ineligible to elect to be an s_corporation for its first taxable_year x also seeks a ruling that the discrepancies and disproportionate distributions resulting from the inadvertent failure to properly maintain and follow its share register and general ledger will not constitute issuance of a second class of stock which would jeopardize x’s s_corporation status under sec_1361 additionally x seeks a ruling that shareholder b’s security_interest in stock of x will not constitute a second class of stock law and analysis sec_1361 provides that the term s_corporation means with respect to any taxable_year a small_business_corporation for which an election under sec_1362 is in effect sec_1362 provides that an s_corporation_election may be made by a small_business_corporation for any taxable_year at any time during the preceding_taxable_year or at any time during the taxable_year and on or before the 15th day of the third month of the taxable_year sec_1_1362-6 of the income_tax regulations provides that a small_business_corporation makes an election to be an s_corporation by filing a completed form_2553 sec_1361 defines a small_business_corporation as a domestic_corporation which is not an ineligible_corporation which does not a have more than shareholders b have as a shareholder a person other than an estate a_trust described in subsection c or an organization described in subsection c who is not an individual c have a nonresident_alien as a shareholder and d have more plr-144246-12 than class of stock sec_1362 provides in part that if an s_corporation_election is made for any taxable_year during such year and on or before the 15th day of the third month of such year but on one or more days in such taxable_year before the day on which the election was made the corporation did not meet the requirements of sec_1361 then such election shall be treated as made for the following taxable_year sec_1_1361-1 provides that except as provided in sec_1_1361-1 relating to instruments obligations or arrangements treated as a second class of stock a corporation is treated as having only one class of stock if all outstanding shares of stock of the corporation confer identical rights to distribution and liquidation proceeds differences in voting rights among shares of stock of a corporation are disregarded in determining whether a corporation has more than one class of stock sec_1_1361-1 provides that the determination of whether all outstanding shares of stock confer identical rights to liquidation and distribution proceeds is made based on the corporate charter articles of incorporation bylaws applicable state law and binding agreements collectively the governing provisions a commercial contractual agreement such as a lease employment agreement or loan agreement is not a binding agreement relating to distribution and liquidation proceeds and thus is not a governing provision unless a principal purpose of the agreement is to circumvent the one class of stock requirement although a corporation is not treated as having more than one class of stock so long as the governing provisions provide for identical distribution and liquidation rights any distributions including actual constructive or deemed distributions that differ in timing or amount are to be given appropriate tax effect in accordance with the facts and circumstances in sec_1_1361-1 example distributions that differ in timing s a corporation has two equal shareholders a and b under s's bylaws a and b are entitled to equal distributions s distributes dollar_figure to a in the current_year but does not distribute dollar_figure to b until one year later the circumstances indicate that the difference in timing did not occur by a binding agreement relating to distribution or liquidation proceeds the example concludes that under sec_1_1361-1 the difference in timing of the distributions to a and b does not cause s to be treated as having more than one class of stock however sec_7872 or other recharacterization principles may apply to determine the appropriate tax consequences sec_1_1361-1 provides that subject_to certain exceptions not relevant here instruments obligations or arrangements are not treated as a second class of stock unless they are described in sec_1_1361-1 or iii sec_1_1361-1 provides subject_to certain exceptions not relevant here that any instrument obligation or arrangement issued by a corporation other than outstanding shares of stock described in sec_1_1361-1 regardless of whether designated as debt is treated as a second class of stock of the corporation if the instrument obligation or arrangement constitutes equity or otherwise results in plr-144246-12 the holder being treated as the owner of stock under general principles of federal tax law and a principal purpose of issuing or entering into the instrument obligation or arrangement is to circumvent the rights to distribution or liquidation proceeds conferred by the outstanding shares of stock or to circumvent the limitation on eligible shareholders contained in sec_1_1361-1 sec_1 l iii provides rules for when a call option warrant or similar instrument issued by a corporation is treated as a second class of stock conclusion based solely on the facts submitted and representation made we conclude that x’s s_corporation_election is effective d2 furthermore we conclude that corporation’s transitory ownership of x from d2 to d3 as part of the reorganization under sec_368 will not cause x to have an ineligible shareholder for any portion of its first taxable_year under sec_1361 and will not in itself render x ineligible to elect to be an s_corporation for its first taxable_year if x otherwise meets the requirements of a small_business_corporation under sec_1361 x is eligible to elect to be an s_corporation under sec_1362 for its first taxable_year additionally we conclude that because x has identical distribution and liquidation rights under its governing provisions the disproportionate distributions made by x and the difference in timing between x’s disproportionate distributions and the corrective distributions to its shareholders do not cause x to be treated as having more than one class of stock for purposes of sec_1361 however x’s disproportionate and corrective distributions to its shareholders must be given appropriate tax effect under these circumstances we conclude that x’s s_corporation_election did not terminate because of the disproportionate and corrective distributions this ruling is contingent upon x making corrective distributions so that each shareholder has received distributions proportionate to their interests in x from d2 and thereafter within days of the date of this letter failure to make such corrective distributions will render this ruling void furthermore we conclude that shareholder b’s security_interest in stock of x from d4 to d5 does not cause x to be treated as having more than one class of stock for purposes of sec_1361 and x’s s_corporation_election did not terminate because of the security_interest therefore x will be treated as continuing to be an s_corporation from d2 provided that x’s s_corporation_election was otherwise valid and that x’s s_corporation_election is not otherwise terminated under sec_1362 except as expressly provided herein no opinion is expressed or implied as to the federal tax consequences of the facts described above under any other provision of the code in particular no opinion is expressed as to whether x is an s_corporation for plr-144246-12 federal tax purposes 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 pursuant to the power_of_attorney on file with this office a copy of this letter will be sent to x’s authorized representative sincerely david r haglund david r haglund chief branch office of associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes cc