internal_revenue_service number release date index number -------------------------------------------------- ------------------- ----------------------------- in re ---------------------------------------- department of the treasury washington dc third party communication date of communication none person to contact ------------------------------ id no ------------- ------------------------------------------------------ telephone number --------------------- refer reply to cc psi b04 plr-120310-08 date date legend legend decedent city country state museum date x y dear ------------ ----------------------------- --------------- --------- ------------- ---------------------------------------------------------------------- ----------------------- --------- ---- this is in response to your authorized representative’s letter dated date requesting rulings under sec_2055 of the internal_revenue_code the facts submitted and the representations made are as follows decedent died on date a united_states citizen domiciled in state in her will decedent bequeathed dollar_figurex in trust to city in country to be used for charitable purposes and y paintings to museum located in city city is a municipality of country that engages in public functions that are not charitable but are authorized by law museum is a department of the municipal government of city dedicated to the encouragement of the arts it is a public entity thus it does not have any articles of incorporation or association its purpose and function are the housing and display of its collections of art work to the public these collections are held by museum in trust for the exclusive benefit of the public and are inalienable museum has tax exempt status under country law and gratuitous transfers to it are exempt from country transfer_taxes you have requested the following rulings the bequest of dollar_figurex to city will qualify for a charitable deduction under sec_2055 and the bequest of y paintings to museum will qualify for a charitable deduction under sec_2055 and or sec_2055 plr-120310-08 law and analysis sec_2055 provides in relevant part that for purposes of the federal estate_tax the value of the taxable_estate shall be determined by deducting from the value of the gross_estate the amount of all bequests to or for_the_use_of the united_states any state any political_subdivision thereof or the district of columbia for exclusively public purposes to or for_the_use_of any corporation organized and operated exclusively for religious charitable scientific literary or educational_purposes including the encouragement of art or for the prevention of cruelty to children or animals provided no part of the net_earnings of which inures to the benefit of any private stockholder or individual which is not disqualified for tax exemption under sec_501 by reason of attempting to influence legislation and which does not participate in or intervene in any political campaign on behalf of or in opposition to any candidate for public_office to a trustee or trustees but only if such contributions or gifts are to be used by such trustee or trustees exclusively for religious charitable scientific literary or educational_purposes or for the prevention of cruelty to children or animals such trust would not be disqualified for tax exemption under sec_501 by reason of attempting to influence legislation and such trustee or trustees does not participate in or intervene in any political campaign on behalf of or in opposition to any candidate for public_office sec_20_2055-1 of the estate_tax regulations provides that the charitable deduction under sec_2055 is not limited in the case of estates of citizens or residents of the united_states to transfers to domestic corporations or associations or to trustees for use within the united_states revrul_74_523 1974_2_cb_304 concludes that a gift to a foreign government or political_subdivision to be used exclusively for charitable purposes qualifies for an estate_tax charitable deduction under sec_2055 the revenue_ruling cites with approval 438_f2d_684 1st cir in which an estate_tax charitable deduction was allowed for a transfer to a hospital corporation owned by a canadian municipality 436_f2d_799 2nd cir in which the deduction was allowed for the value of a coin collection bequeathed to a foreign_country for perpetual exhibition in a museum and 436_f2d_458 ct_cl in which the deduction was allowable for a bequest to a german city on the condition that it be used for the construction or improvement of a home for the aged the revenue_ruling states that deductions under sec_2055 will be disallowed for bequests of property to foreign governments or political subdivisions thereof if the use of plr-120310-08 the property is not limited to exclusively charitable purposes within the meaning of sec_2055 and sec_2055 based upon the facts submitted and the representations made we conclude that the bequest of dollar_figurex to city qualifies for a charitable deduction under sec_2055 and that the bequest of y paintings to museum qualifies for a charitable deduction under sec_2055 and 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 further no opinion is expressed or implied regarding the consequences of any estate_tax treated between country and the united_states see sec_894 and sec_7852 this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination sincerely lorraine e gardner lorraine e gardner senior counsel branch passthroughs special industries enclosures copy for sec_6110 purposes cc


internal_revenue_service department of the treasury number release date index numbers washington dc person to contact telephone number refer reply to cc psi b09-plr-103292-03 date date re legend decedent trust trustee attorney accountant accountant date date date date year dollar_figurex dear sir this is in response to your letter dated date requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations and sec_2642 of the internal_revenue_code to make allocations of decedent’s generation-skipping_transfer gst_exemption plr-103292-03 the facts and representations submitted are summarized as follows on date decedent created and funded trust an irrevocable_trust for the benefit of his descendants the form_709 united_states gift and generation-skipping_transfer_tax return which was due on date was not timely filed and no notice of allocation for decedent’s gst_exemption was made decedent died on date in the course of preparing decedent’s form_706 united_states estate and generation-skipping_transfer_tax return it was discovered that no allocation of decedent’s gst_exemption had been made for the transfer to trust on date the required_year form_709 was filed late on date and dollar_figurex of decedent’s gst_exemption was allocated to trust on that form you represent that decedent who was not knowledgeable on tax matters relied upon several professionals including attorney accountant accountant and trustee due to miscommunications between these professionals the gift_tax_return was not timely filed trust provides that the beneficiaries of the trust are the children grandchildren and great-grandchildren of decedent pursuant to sec_2 of the trust specific quarterly payments are to be made to decedent’s daughter granddaughter and great- granddaughters sec_2 further provides that upon the death of daughter daughter’s interest shall be paid to granddaughter if living and if not then to the great-granddaughters share and share alike until trust shall terminate at decedent’s granddaughter’s death her income_interest shall be paid to decedent’s great-granddaughters share and share alike until trust shall terminate upon the death of daughter and granddaughter and the youngest granddaughter attain sec_45 years the trust shall terminate and the balance shall be distributed to decedent’s great-granddaughters share and share alike you have requested the following rulings an extension of time under sec_2642 and sec_301_9100-1 and sec_301_9100-3 to make an allocation of decedent’s gst_exemption for the transfer to the trust on date and that such allocation shall be made based on the value of the property transferred to trust as of the date of the original transfer sec_2601 imposes a tax on every generation-skipping_transfer gst a gst is defined under sec_2611 as a taxable_distribution a taxable_termination and a direct_skip sec_2631 provides that for purposes of determining the inclusion_ratio every individual shall be allowed a gst_exemption of dollar_figure adjusted for inflation under sec_2631 that may be allocated by such individual or his executor to any property with respect to which such individual is the transferor plr-103292-03 sec_2632 provides that any allocation by an individual of his or her gst_exemption under sec_2631 may be made at any time on or before the date prescribed for filing the estate_tax_return for such individual’s estate determined with regard to extensions regardless of whether such a return is required to be filed sec_2642 provides that except as provided in sec_2642 if the allocation of the gst_exemption to any transfers of property is made on a gift_tax_return filed on or before the date prescribed by sec_6075 for such transfer or is deemed to be made under sec_2632 or c the value of such property for purposes of sec_2642 shall be its value as finally determined for purposes of chapter within the meaning of sec_2001 or in the case of an allocation deemed to have been made at the close of an estate_tax_inclusion_period its value at the time of the close of the estate_tax_inclusion_period and such allocation shall be effective on and after the date of such transfer or in the case of an allocation deemed to have been made at the close of an estate_tax_inclusion_period on and after the close of such estate_tax_inclusion_period sec_2642 provides generally that the secretary shall by regulation prescribe such circumstances and procedures under which extensions of time will be granted to make an allocation of gst_exemption described in sec_2642 or and an election under sec_2632 or c such regulations shall include procedures for requesting comparable relief with respect to transfers made before the date of the enactment of sec_2642 which was enacted into law on date sec_2642 provides that in determining whether to grant relief under this paragraph the secretary shall take into account all relevant circumstances including evidence of intent contained in the trust instrument or instrument of transfer and such other factors as the secretary deems relevant for purposes of determining whether to grant relief under this paragraph the time for making the allocation or election shall be treated as if not expressly prescribed by statute notice_2001_50 2001_34_irb_189 provides that under sec_2642 the time for allocating the gst_exemption to lifetime transfers and transfers at death the time for electing out of the automatic allocation rules and the time for electing to treat any trust as a generation-skipping_trust are to be treated as if not expressly prescribed by statute the notice further provides that taxpayers may seek an extension of time to make an allocation described in sec_2642 or b or an election described in sec_2632 or c under the provisions of sec_301_9100-3 sec_301_9100-1 provides that the commissioner has discretion to grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make a regulatory election or a statutory election but no more than months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i plr-103292-03 sec_301_9100-3 provides the standards used to determine whether to grant an extension of time to make an election whose due_date is prescribed by a regulation and not expressly provided by statute under sec_301_9100-1 a regulatory election includes an election whose due_date is prescribed by a notice published in the internal_revenue_bulletin in accordance with sec_2642 and notice_2001_50 taxpayers may seek an extension of time to make an allocation described in sec_2642 or b or an election described in sec_2632 or c under the provisions of sec_301_9100-3 requests for relief under sec_301_9100-3 will be granted when the taxpayer provides the evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-3 provides that a taxpayer is deemed to have acted reasonably and in good_faith if the taxpayer reasonably relied on a qualified_tax professional including a tax professional employed by the taxpayer and the tax professional failed to make or advise the taxpayer to make the election based on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-3 have been satisfied therefore the personal representative of decedent’s estate is granted an extension of time of days from the date of this letter to make allocations of decedent’s available gst_exemption with respect to decedent’s transfer to trust on date the allocation will be effective as of the date of the transfer to trust and the gift_tax value of the transfer will be used in determining the amount of gst_exemption to be allocated to trust therefore the gst_exemption allocations will be based on the value of the property transferred to trust as of the date of the transfer the allocation should be made on a supplemental form_709 united_states gift and generation-skipping_transfer_tax return and filed with the internal_revenue_service center cincinnati oh a copy of this letter should be attached to the supplemental form_709 a copy is enclosed for this purpose the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination except as specifically ruled herein we express or imply no opinion on the federal tax consequences of the transaction under the cited provisions or under any other provisions of the code in addition we express or imply no opinion regarding the value of the property transferred to trust plr-103292-03 in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent sincerely heather c maloy associate chief_counsel passthroughs and special industries enclosures copy for sec_6110 purposes copy of this letter


internal_revenue_service number release date index numbers -------------------------------------------- ------------------------------------------------- ---------------------- ---------------------------------------------------------- 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-140090-12 date february legend x ------------------------------------------- -------------------------------------------- d country --------------------------- ----------------------- dear ------------- this is in response to a letter dated date submitted on behalf of x requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations to file an election under sec_301_7701-3 to be treated as a disregarded_entity for federal tax purposes facts according to the information submitted x was formed on d under the laws of country x intended to be treated as a disregarded_entity for federal tax purposes effective d however x inadvertently failed to timely file form_8832 entity classification election to be treated as a disregarded_entity for federal tax purposes law and analysis sec_301_7701-3 provides that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes an eligible_entity with at least two members can elect to be classified as either an association or a partnership plr-140090-12 sec_301_7701-3 provides guidance on the classification of a foreign eligible_entity for federal tax purposes generally a foreign eligible_entity is treated as an association if all members have limited_liability unless the entity makes an election to be treated otherwise a foreign eligible_entity with two or more members having limited_liability may elect to be treated as a partnership pursuant to the rules of sec_301 c sec_301_7701-3 provides that an entity classification election must be filed on form_8832 and can be effective up to days prior to the date the form is filed or up to months after the date the form is filed under sec_301_9100-1 the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-1 defines the term regulatory election as including an election whose due_date is prescribed by a regulation published in the federal_register sec_301_9100-1 through provide the standards that the commissioner will use to determine whether to grant an extension of time to make an election sec_301_9100-1 sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides rules for requesting extensions of time for regulatory elections that do not meet the requirements of sec_301_9100-2 requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government conclusion based solely on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-3 have been satisfied as a result x is granted an extension of time of days from the date of this letter to make an election to be treated as a disregarded_entity for federal tax purposes effective d x should make the election by filing a properly executed form_8832 with the appropriate service_center a copy of this letter should be attached to the form 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 plr-140090-12 this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representatives sincerely curt g wilson associate chief_counsel passthroughs special industries by david r haglund david r haglund branch chief branch office of the associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes cc


internal_revenue_service department of the treasury number release date index number u i l no washington dc person to contact telephone number refer reply to cc psi plr-124068-01 date date legend company state shareholder a b dear this letter responds to a letter dated date and subsequent correspondence requesting a ruling on behalf of company under sec_1362 of the internal_revenue_code the information submitted discloses that company was incorporated on a in state company has one shareholder shareholder it is represented that company had intended to be an s_corporation since b however company discovered that its s election had not been filed timely company requests a ruling under sec_1362 that its sec_1362 election will be treated as timely made for its taxable_year that began on b sec_1362 provides that a small_business_corporation may elect to be an s_corporation sec_1362 provides when an s election will be effective generally if an s election is made within the first two and one half months of a corporation's taxable_year then that corporation will be treated as an s_corporation for the year in which the election is made sec_1362 provides that if an s election is made after the first two and one half months of a corporation's taxable_year then that corporation will not be treated as an s_corporation until the taxable_year following the year in which the s election is made plr-124068-01 sec_1362 provides that if no sec_1362 election is made for any taxable_year and the secretary determines that there was reasonable_cause for the failure to timely make such election then the secretary may treat such an election as timely made for such taxable_year and sec_1362 shall not apply based on the facts submitted and representations made we conclude that company has established reasonable_cause for failing to make a timely s election for its taxable_year that began on b accordingly we conclude that company's sec_1362 election will be treated as timely made for its taxable_year that began on b however this ruling is contingent on company filing form_2553 election by a small_business_corporation with an effective date of b with the appropriate service_center within days from the date of this ruling a copy of this letter should be attached to the form_2553 except as specifically set forth above we express or imply no opinion concerning the federal tax consequences of the foregoing facts specifically we express or imply no opinion on whether company otherwise qualifies as an s_corporation pursuant to a power_of_attorney on file with this office a copy of this letter is being sent to company’s authorized representative this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent sincerely yours christine ellison chief branch office of the associate chief_counsel passthroughs and special industries enclosure copy for sec_6110 purposes


department of the treasury internal_revenue_service washington d c date number release date cc dom fs fi p tl-n-7368-98 uilc internal_revenue_service national_office field_service_advice memorandum for from deborah a butler assistant chief_counsel cc dom fs subject remarketed bonds secured_by u s treasury securities this responds to your memorandum dated date requesting supplemental field_service_advice field_service_advice was previously issued with respect to this matter on date field_service_advice is not binding on examination or appeals and is not a final case determination this document is not to be cited as precedent legend partnership development town districts state district a corporation bond sec_1 bond sec_2 year year year year year date date a b c d e f g h i j k l m n o p q r s t u v w issues whether the information provided supports a determination that the transaction enabled the parties to exploit the difference between tax-exempt and taxable rates whether the remarketing of the bonds resulted in a reissuance conclusion based on the documentation provided and your representations there is a strong argument that the transaction enabled the parties to exploit the difference between tax-exempt and taxable rates this result is inconsistent with sec_103 of the internal_revenue_code the changes to the bonds after remarketing appear so material as to amount to the issuance of new securities further as the bonds in question were reissued at a yield lower than the investments the bonds appear to be arbitrage_bonds facts partnership was the original developer and owner of development located within town in year partnership acquired a acres of real_property within the boundaries of the development for approximately dollar_figureb or less than dollar_figurec per acre in year the districts were organized to provide water sewer street park safety and recreation improvements within the development districts are quasi- municipal_corporations created under the laws of state and are political subdivisions state law requires preparation and approval of a service plan for the organization of a district a service plan consists of financial and engineering surveys showing how the district will provide and finance the proposed services in year district a issued its bond sec_1 general obligation bonds in the original principal_amount of dollar_figured bond sec_1 were secured in part by taxes service charges and development fees in connection with the issuance of bond sec_1 partnership entered into a development fee agreement wherein it agreed to pay a total of dollar_figuree to district a for the right to use its facilities the fees due district a under the development fee agreement were projected to be the primary source of repayment of bond sec_1 until development produced enough revenues to pay debt service from reasonable mill levies on taxable property within district a subsequently in year partnership defaulted on its obligations under the fee agreement with district a and filed for bankruptcy protection at the time of partnership’s bankruptcy no home construction or other development had begun within the geographic boundaries of district a further assessed valuation of property in district a was approximately dollar_figuref without collecting the anticipated fees from partnership district a concluded that a levy of approximately g mills on taxable property within district a would have been necessary to pay the debt service on bond sec_1 its board believed the levy was uncollectible and district a filed a chapter bankruptcy petition on date after partnership and district a filed for bankruptcy each of the districts and town executed an agreement requiring each district to submit an amendment to its service plan before any future development may begin within the development town will not formally consider the amendments to any district’s service plan until all districts amend their service plans information previously received from your office indicates that town has not approved amendments to any of the districts’ service plans and no construction has begun in development in year district a received relief from the bankruptcy court to foreclose on its lien against partnership’s property arising under the development fee agreement an appraisal obtained by district a at that time valued approximately h acres of the property at dollar_figurei or approximately dollar_figurej an acre slightly more per acre than the amount partnership originally paid in year after acquiring the property district a pledged it to the payment of bond sec_1 on date the bankruptcy court approved district a’s plan for emerging from bankruptcy under district a’s reorganization plan the holders of bond sec_1 received the following a the pro rate distribution of the unexpended bond sec_2 proceeds in the amount of approximately dollar_figurek or approximately dollar_figurel per dollar of the creditor claims and b an exchange refunding_bond for the remaining portion of their claims after confirmation of its bankruptcy plan district a issued its bond sec_2 the exchange refunding bonds in the amount of dollar_figurem for the purpose of exchanging them for bond sec_1 bond sec_2 are limited tax obligations payable from district a’s revenues bond sec_2 are also secured_by a mortgage encumbering the property acquired by district a from partnership ‘the property district a’s records for year show that the property had a value of dollar_figuren bond sec_2 do not pay current interest during their term but rather pay principal and accreted interest on the maturity_date the form 8038-g filed for bond sec_2 reports that the yield on the bonds is o percent at substantially the same time as the issuance of bond sec_2 corporation made a tender offer to purchase bond sec_2 from the bondholders for dollar_figurep per dollar the tender offer made to the holders of bond sec_2 states that corporation has no present plan to remarket the bonds corporation eventually purchased substantially_all bond sec_2 the bankruptcy plan filed by district a indicated that the holders of bond sec_2 may receive an additional dollar_figurep per dollar of outstanding principal from corporation if they approved the plan with the purchase of bond sec_2 corporation purchased from district a the property a total of q acres was sold for dollar_figurer approximately dollar_figures per acre this amount is nearly times the amount per acre similar_property was appraised for in year district a deposited with the trustee of bond sec_2 the proceeds from the sale of the property district a used the proceeds to purchase u s treasury securities to defease bond sec_2 the yields on the securities reportedly range from t percent to u percent corporation remarketed bond sec_2 to individual investors for dollar_figurev after the remarketing the yield on bond sec_2 is approximately w percent law and analysis revrul_94_42 sec_103 of the internal_revenue_code provides that except as provided in subsection b gross_income does not include interest on any state_or_local_bond sec_1_103-1 provides that interest on obligations of a state territory a possession_of_the_united_states the district of columbia or any political_subdivision thereof is not includable in gross_income except as otherwise provided the exclusion_from_gross_income of interest on obligations of states and political subdivisions thereof is not all-embracing and applies only where consistent with the purposes of sec_103 see 65_f2d_575 2d cir an overriding purpose of sec_103 is to enable state and local governments to borrow at subsidized interest rates to carry out governmental purposes revrul_94_42 1994_2_cb_15 revrul_94_42 provides that amounts paid_or_accrued under an agreement guaranteeing payment on bonds is not excludable from gross_income under sec_103 if the agreement is not incidental or is in substance a separate debt_instrument or similar investment when purchased an agreement is considered as both incidental and not a separate debt_instrument or similar investment only if at the time it is purchased the amount_paid to obtain the agreement is reasonable customary and consistent with the reasonable expectation that the issuer of the bonds rather than the insurer will pay debt service on the bonds in revrul_94_42 a county issued zero coupon bonds having a year maturity and a stated redemption price of dollar_figurex the bonds were payable solely from the revenues of the facility acquired with the bonds at the time of issuance there was significant risk that revenues from the facility would be insufficient to pay debt service in an unrelated transaction m the sole holder of the bonds entered into an agreement with g under the agreement m paid g 14x in exchange for g guaranteeing the payment of all scheduled debt service on the bonds to m or any subsequent holders g then purchased 14x of u s treasuries in connection with its agreement with m the treasuries had a yield of the treasuries were transferred to a_trust to secure the payment of the bonds the principal and interest on the treasuries will be sufficient to pay off all debt service on the bonds the agreement with g allowed m to obtain the highest rating for the bonds from a national rating agency m then sold the bonds to the general_public for a price of dollar_figurex giving the purchasers an annual yield of approximately according to revrul_94_42 treating the amounts paid_or_accrued under the g agreement as excludable from gross_income would in substance permit either g the issuer of the purported insurance or m the purchaser of the purported insurance to obtain the benefit of borrowing at a tax-exempt rate and investing the proceeds at a taxable rate obtaining the benefit of borrowing at tax-exempt rates provided the arbitrage benefit and assured the economic viability of the purported bond insurance arrangement this result is inconsistent with the purposes of sec_103 amounts paid_or_accrued under an agreement guaranteeing payment on bonds is not excludable from gross_income under sec_103 if the agreement is not incidental or is in substance a separate debt_instrument or similar investment when purchased based on the information provided the economic_substance of this transaction is analogous to the transaction in revrul_94_42 at the time of issuance of bond sec_2 there was significant risk that revenues from district a would be insufficient to pay debt service as development had not begun there was no tax_base in addition district a’s own records indicate that the value of the property securing bond sec_2 was dollar_figuren ostensibly corporation was able to purchase bond sec_2 from bondholders for dollar_figurep per dollar due to this risk further the subsequent sale of the property to corporation for r appears to be nothing more than a device to provide district a with sufficient funds to defease bond sec_2 with the u s treasury securities thus increasing their marketability the device enabled corporation to remarket bond sec_2 at a premium so that the yield on the remarketed bond sec_2 was materially lower than that on the treasury securities district a’s participation provided corporation with the opportunity to exploit the difference between tax-exempt and taxable interest rates accordingly this transaction the sale agreement between district a and corporation the defeasance of bond sec_2 and the subsequent remarketing of bond sec_2 at a premium was not incidental to the issuance of bond sec_2 but resulted in a separate debt_instrument or investment when remarketed from the information provided the amount_paid for the property does not appear to reflect its fair_market_value but rather the amount necessary to defease bond sec_2 the defeasance in turn effectively guaranteed the payment of debt service on bond sec_2 enabling corporation to remarket bond sec_2 at a premium thereby assuring the economic viability of the transaction treating interest on the remarketed bond sec_2 as tax- exempt would effectively permit corporation to obtain the benefit of borrowing at tax-exempt rates this result is inconsistent with the intent of sec_103 reissuance sec_103 provides that subsection a of sec_103 shall not apply to any arbitrage_bond within the meaning of sec_148 sec_148 defines the term 'arbitrage bond' to mean any bond issued as part of an issue any portion of the proceeds of which are reasonably expected at the time of issuance of the bond to be used directly or indirectly to acquire higher_yielding_investments or to replace funds which were used directly or indirectly to acquire higher_yielding_investments for purposes of sec_148 a bond shall be treated as an arbitrage_bond if the issuer intentionally uses any portion of the proceeds of the issue of which such bond is a part in a manner described in sec_148 or the taking of any deliberate intentional action by the issuer or person acting on its behalf after the issue_date in order to earn arbitrage causes the bonds of the issue to be arbitrage_bonds if that action had it been expected on the issue_date would have caused the bonds to be arbitrage_bonds an intent to violate the requirements of sec_148 is not necessary for an action to be intentional sec_1 c as discussed in the prior field_service_advice the sale of the property the defeasance of bond sec_2 and their subsequent remarketing resulted in a reissuance because the underlying arrangement with district a resulted in a change to the terms of bond sec_2 that is so material as to amount to the issuance of a new security sec_1001 governs for determining when securities received in exchange for securities surrendered in a transaction gives rise to a gain_or_loss the standard under sec_1_1001-1 for determining whether an exchange of property is a disposition is whether the properties exchanged differ materially either in_kind or extent where the changes are so material as to amount virtually to the issuance of a new security the same income_tax consequences should follow as if a new security were actually issued revrul_81_169 1981_1_cb_429 in this case the sale of the property securing bond sec_2 to corporation provided district a with sufficient funds to defease bond sec_2 this enabled corporation to remarket bond sec_2 at a premium reducing the effective yield on bond sec_2 from o percent to approximately w percent prior to the sale agreement between corporation and district the repayment of bond sec_2 was speculative in addition to the fact that there was no reasonably anticipated source of revenues to pay debt service the land securing bond sec_2 had a book_value of only dollar_figuren after the sale of the property apparently at an inflated price debt service bond sec_2 was guaranteed by the investment in u s treasury securities a fact reflected by the nearly percent drop in the yield on bond sec_2 after remarketing accordingly as a result of the sale of the property to corporation and the guarantee of the payment of debt service on bond sec_2 the legal entitlements on bond sec_2 after the defeasance and remarketing were sufficiently distinct from those originally associated with bond sec_2 to cause a disposition under sec_1001 see 499_us_554 evidence of a reissuance includes the change in payment expectations as result of the defeasance of the bonds and the resulting change in yield the consequence of treating the remarketed bond sec_2 as a reissuance is that the yield on the u s treasury securities is materially higher than the yield on the reissued bonds thus it appears the bonds would be arbitrage_bonds for alterations of the terms of a debt_instrument on or after date sec_1_1001-3 addresses when a modification of a debt_instrument is deemed to cause an exchange for purposes of sec_1_1001-1 of the regulations the provisions of this section may also be relied on for alterations of the terms of a debt_instrument after date and before date this conclusion is also consistent with current regulations for example under sec_1_1001-3 significant modifications include changes in yield of more than dollar_figure percent case development hazards and other considerations based on the information provided it is our opinion that under the principles enunciated in revrul_94_42 there is a strong argument that this transaction is inconsistent with the intent of sec_103 the form 8038-g filed by district a evidences that the yield on bond sec_2 was o percent prior to the remarketing the yield on the treasuries was between t and u percent the remarketing memorandum for bond sec_2 indicates that the remarketed bonds will have a yield of approximately w percent these facts coupled with the questionable financial history of both the development and the district create a compelling argument that this transaction enabled corporation to exploit the difference between tax-exempt and taxable rates the overpayment by corporation for the property assures the economic viability of the transaction by providing district a with the funds to guarantee the payment of bond sec_2 thus increasing their marketability first the service’s position articulated in revrul_94_42 has not been addressed by any court while the principles set forth in revrul_94_42 are fairly fundamental to sec_103 in addition the current transaction occurred prior to the publication of revrul_94_42 generally however revenue rulings are retroactive unless the commissioner specifically provides otherwise the parties may argue relief from retroactive relief from the application of revrul_94_42 the facts must establish that the changes to bond sec_2 are so material as to amount virtually to the issuance of a new security the issuer will presumably argue that there is no prohibition against establishing the defeasance for bond sec_2 and that the subsequent remarketing of the bonds at a premium merely reflects their increased value on the secondary market in addition current regulations addressing when a reissuance occurs specifically state that a defeasance of tax-exempt_bonds is not a significant modification if the defeasance occurs by operation of the terms of the original bond and the issuer places in trust government securities that are reasonably expected to provide interest and principal payments sufficient to satisfy the payment obligation under the bond sec_1_1001-3 please call if you have any further questions by joel e helke joel e helke branch chief financial institutions products cc


internal_revenue_service department of the treasury number release date index number x washington dc person to contact telephone number refer reply to cc psi 2-plr-101133-03 date date a b c trust1 trust2 d1 d2 d3 d4 dear this letter responds to a letter dated date submitted on behalf of x by its authorized representative requesting relief under sec_1362 of the internal_revenue_code a the president of x represents that x elected to be an s_corporation effective d1 a further represents that b and c shareholders of x created trust1 a wholly-owned grantor_trust and permitted shareholder of x on d2 b and c his wife transferred their shares of x stock to trust1 at the formation of the trust or shortly plr-101133-03 thereafter following the death of b trust1 divided into three separate trusts on d3 stock of x was transferred from trust1 to two of the three new trusts created upon the death of b a represents that one of these trusts qualified as a wholly-owned grantor_trust and a permitted shareholder of x the other trust trust2 was intended to qualify as a qualified_subchapter_s_trust qsst however c the beneficiary of the trust2 did not know and the accountants and attorneys advising c did not inform c of the need to file the election required under sec_1361 on d4 all the shareholders of x were advised of the failure_to_file the qsst election for trust2 and the resultant termination of x’s s_corporation_election the shareholders advised the accounting firm to prepare the request for relief this request for relief under sec_1362 was subsequently submitted a represents that the failure_to_file the qsst election was not motivated by tax_avoidance or retroactive tax planning c represents that c has filed c’s federal_income_tax return consistent with the treatment of trust2 as a qsst the shareholders of x represent that they have filed their federal_income_tax returns consistent with the treatment of x as an s_corporation since d1 the shareholders of x also represent that they had no control_over or knowledge of the events that led to the termination of x’s election to be an s_corporation x and its shareholders have agreed to make any adjustments that the commissioner may require consistent with the treatment of x as an s_corporation sec_1361 of the code 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 for such year sec_1361 provides that the term small_business_corporation means a domestic_corporation which is not an ineligible_corporation and which does not have as a shareholder a person other than an estate and other than a_trust described in sec_1361 who is not an individual sec_1361 provides that for purposes of sec_1361 a_trust all of which is treated under subpart e of part i of subchapter_j of chapter as owned by an individual who is a citizen or resident_of_the_united_states may be a shareholder sec_1361 provides that in the case of a qsst for which a beneficiary makes an election under sec_1361 the trust is treated as a_trust described in sec_1361 and for purposes of sec_678 the beneficiary of the trust shall be treated as the owner of that portion of the trust that consists of stock in an s_corporation with respect to which the election under sec_1361 is made sec_1361 provides that a beneficiary of a qsst may elect to have that section apply sec_1_1361-1 of the income_tax regulations provides that the current income_beneficiary of the trust must make the election under sec_1361 by signing and filing with the service_center with which the corporation files its income_tax returns plr-101133-03 the applicable form or a statement including the information listed in sec_1_1361-1 sec_1362 provides that if an election under sec_1362 by any corporation a was not effective for the taxable_year for which made determined without regard to sec_1362 by reason of a failure to meet the requirements of sec_1361 or to obtain shareholder consents or b was terminated under sec_1362 or the secretary determines that the circumstances resulting in the ineffectiveness or termination were inadvertent no later than a reasonable period of time after discovery of the circumstances resulting in the ineffectiveness or termination steps were taken a so that the corporation is a small_business_corporation or b to acquire the shareholder consents and the corporation and each person who was a shareholder of the corporation at any time during the period specified pursuant to sec_1362 agrees to make such adjustments consistent with the treatment of the corporation as an s_corporation as may be required by the secretary with respect to such period then notwithstanding the circumstances resulting in the ineffectiveness or termination the corporation will be treated as an s_corporation during the period specified by the secretary based solely on the facts submitted and the representations made we conclude that x’s s_corporation_election terminated on d3 when trust2 an ineligible s_corporation shareholder acquired x stock we also conclude that the termination was inadvertent within the meaning of sec_1362 we further hold that pursuant to the provisions of sec_1362 x will be treated as continuing to be an s_corporation from d3 and thereafter provided x's s_corporation_election was otherwise valid and provided that the election was not terminated under sec_1362 trust2 will be treated as a_trust described in sec_1361 and c will be treated for purposes of sec_678 as the owner of the portion of the trust which consists of x stock the shareholders of x must include their pro_rata share of the separately_stated and nonseparately computed items of x as provided in sec_1366 make any adjustments to basis as provided in sec_1367 and take into account any distributions made by x as provided in sec_1368 if x or its shareholders fail to treat themselves as described above this ruling is null and void this ruling is conditioned upon c filing an appropriately completed qsst election effective d3 with the appropriate service_center within days following the date of this letter a copy of this letter should be attached to the election except as specifically ruled above we express no opinion concerning the federal tax consequences of the transactions described above under any other provision of the code in particular we express no opinion on whether trust2 is or ever was a qsst within the meaning of sec_1361 this ruling is directed only to the taxpayer that requested it sec_6110 plr-101133-03 provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file a copy of this letter is being sent to x's authorized representative sincerely yours j thomas hines chief branch office of the associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes plr-101133-03 cc


t c memo united_states tax_court donald a robins petitioner v commissioner of internal revenue respondent docket no filed date donald a robins pro_se randall p andreozzi for respondent memorandum opinion pajak special_trial_judge this case was heard pursuant to sec_7443a of the code and rule sec_180 sec_181 and sec_182 all section references are to the internal_revenue_code in effect for the taxable years in issue all rule references are to the tax_court rules_of_practice and procedure respondent determined additions to petitioner's federal income taxes as follows additions to tax sec_6653 a a sec_6653 a b sec_6661 dollar_figure dollar_figure -- year percent of the interest due on dollar_figure which represents the portion of the underpayment attributable to negligence or intentional disregard of rules or regulations percent of the interest due on dollar_figure which represents the portion of the underpayment attributable to negligence or intentional disregard of rules or regulations the court must decide whether petitioner is liable for additions to tax under sec_6653 for and and whether petitioner is liable for an addition_to_tax under sec_6661 for some of the facts have been stipulated and are so found for clarity and convenience our findings_of_fact and opinion have been combined petitioner resided in fairport new york when his petition was filed the issues in this case result from the court's decision to sustain respondent's disallowance of charitable_contribution deductions claimed by mount mercy associates a limited_partnership in and see mount mercy associates v commissioner tcmemo_1994_83 affd without published opinion 50_f3d_2 2d cir our decision in mount mercy associates has been made a part of the record in the instant case and to the extent necessary to decide the issues before us we rely on the facts found by the court in that decision mount mercy associates mount mercy or the partnership was formed to acquire property which overlooked the hudson river in westchester county new york the partnership planned to build residential condominium units on the property the property was owned by the institution of mercy a not-for-profit corporation wholly owned by the sisters of mercy sisters a religious_order the sisters resided at and operated a nursing home in the mount mercy convent building on the property offered for sale the convent building and surrounding grounds were situated on approximately acres the convent property as a condition of the sale the sisters desired continued use of the convent property the institution of mercy offered the entire property for sale at a dollar_figure million asking price the partnership's confidential private_placement memorandum memorandum outlined plans to purchase the property from the institution of mercy there were no plans to develop the convent property instead the partnership intended to build up to luxury condominiums on the remaining unimproved property it was anticipated and understood in accordance with the sisters' desire to remain in possession of the convent property that the partnership intended to deed the convent property back to the institution of mercy to maximize anticipated tax benefits percent of the convent property was to be donated in and the remainder in the memorandum outlined the tax benefits and the tax risks to investors attributable to the donation of the convent property the memorandum explained that the partnership has engaged an independent real_estate appraiser to determine the fair_market_value of the convent building his appraisal is not expected to be completed before this offering closes the value of the proposed gift is a question of fact and there can be no assurance that if the partnership is audited by the internal_revenue_service such value will be accepted the internal_revenue_service may engage on its own an independent_appraiser to value the charitable gift and it is possible that the service will arrive at a different value the partnership may have to resort to litigation to settle the issue the memorandum repeatedly cautioned that the internal_revenue_service might challenge the valuation of the convent property in a section entitled risk factors the memorandum warned that there can be no assurance that the value the partnership will claim for the charitable deduction will be accepted by the internal_revenue_service in the event of an audit of the partnership's tax_return if the valuation is contested and a lower valuation results the partnership and hence each partner will have disallowed to that extent a portion of its charitable deduction along with the assessment of interest on the deficiency and also the possible assessment of penalties including the substantial overvaluation penalty see tax aspects which is equal to of the deficiency in tax caused by the overvaluation in the subsection additions to tax - penalties interest the memorandum explained in detail that the substantial_understatement_penalty under sec_6661 or the valuation_overstatement_penalty under sec_6659 could apply to the proposed charitable_contributions the memorandum stated that investors should be aware however that these penalties exist and that the activities in which the partnership will engage and certain of the tax positions which it intends to take are of the sort at which the penalties are directed for example a substantial charitable deduction will be claimed the amount of which is based upon an appraisal the value of the charitable_contribution could be the subject of a valuation dispute and there is no assurance that the partnership would ultimately prevail in a dispute on this issue if questioned by the service the issue of valuation may be resolvable only by litigation the memorandum warned that a prospective investor should obtain professional guidance from his own tax advisor in evaluating the tax risks involved this warning was made repeatedly throughout the memorandum the memorandum also stated that the summary of the federal_income_tax consequences was prepared under the direction of the law firm of petralia webb bersani p c which has agreed to make itself available to answer the questions of potential investors and which will develop at closing its opinion of the major tax consequences of an investment attached as an exhibit to the memorandum was a copy of the date purchase and sale agreement between the partnership's initial general_partner and the institution of mercy after the date purchase and sale agreement was signed the partnership renegotiated the provisions of the sale with the institution of mercy the purchase_price remained at dollar_figure million but cash to be paid at closing was reduced from dollar_figure million to dollar_figure and the dollar_figure million note and mortgage were correspondingly increased to dollar_figure million on date the institution of mercy conveyed the property to the partnership for dollar_figure million under the following terms dollar_figure deposit paid date dollar_figure additional deposit paid date dollar_figure paid date dollar_figure million note and mortgage secured_by the convent property and dollar_figure million note secured_by the remaining unimproved property the dollar_figure million note and mortgage was nonrecourse and had an interest rate equal to the greater of percent or percent plus the prime commercial rate of the bank of new york the dollar_figure million note and mortgage was nonrecourse had no stated_interest rate and was subordinate to all mortgages which existed at the closing or arose thereafter payment of the dollar_figure million note was due_date as of the date of trial in mount mercy associates v commissioner supra the mortgage note secured_by the covenant property was not paid even though all other obligations concerning the transactions were fully executed this court found that the donation to the institution of mercy lacked economic_substance and held that the partnership was not entitled to charitable deductions for and mount mercy associates v commissioner supra we found that the substance of the transaction considered in its entirety is that the partnership purchased only the unimproved land for dollar_figure million mount mercy associates v commissioner supra the court found that the partnership attempted to structure a transaction which had the appearance but not the substance of a gift to charity the court stated that the partnership's purchase of an unwanted and unnecessary asset with no additional cost to it should not result in a tax_benefit where none was actually intended by the statutes or as a matter of substance the donee received nothing more than it already possessed mount mercy associates v commissioner supra the court went on to observe that it was the partnership that produced the subterfuge we must ignore mount mercy associates v commissioner supra consequently we sustained respondent's disallowance of the partnership's charitable_contribution deductions petitioner was issued schedules k-1 for the years in issue reflecting among other items his distributive shares of the partnership's charitable deductions petitioner gave these to his tax_return_preparer petitioner deducted dollar_figure in and dollar_figure in as his share of mount mercy's charitable deductions as a result of our decision in mount mercy associates v commissioner supra respondent disallowed petitioner's claimed charitable_contribution deductions the corresponding deficiencies plus interest were assessed and then paid_by petitioner with respect to the claimed charitable_contribution deductions respondent determined that petitioner is liable for additions to tax for negligence under sec_6653 for and sec_6653 sec_6653 for provides that if any part of any underpayment_of_tax is due to negligence or intentional disregard of rules or regulations there shall be added to the tax an amount equal to percent of the underpayment sec_6653 sec_6653 for provides for an addition_to_tax in the amount of percent of the interest payable on the portion of the underpayment_of_tax attributable to negligence negligence is defined as lack of due care or failure to do what a reasonable and ordinarily prudent person would do under the circumstances 85_tc_934 petitioner bears the burden to prove that respondent's determinations are in error rule a 58_tc_757 reasonable and good_faith reliance on the advice of an accountant or attorney may offer relief from the imposition of the negligence addition 469_us_241 however reliance on professional advice is not an absolute defense to negligence but rather a factor to be considered 89_tc_849 affd 904_f2d_1011 5th cir affd 501_us_868 reliance on representations by insiders promoters or offering materials has been held an inadequate defense to negligence 39_f3d_402 2d cir affg tcmemo_1993_480 94_tc_637 affd without published opinion 956_f2d_274 9th cir affd without published opinion sub nom cowles v commissioner 949_f2d_401 10th cir our focus in this case is only with respect to the charitable_contributions deductions claimed by petitioner which were part of the mount mercy partnership transaction petitioner asserts that he is not liable for the additions to tax under sec_6653 because of reasonable good_faith reliance on professional advice which he received from arnold r petralia petralia an attorney petralia is an attorney with offices in rochester new york the parties stipulated that petralia is an attorney with expertise in tax law in petralia was retained by the mount mercy partnership to write the memorandum including the portions relating to the charitable_contribution deductions petralia and his firm were to answer the tax questions of potential investors petralia was paid_by mount mercy for his legal services petralia was not a salesman for the partnership and did not receive any other compensation_for the sale of interests in the partnership petralia also was a limited_partner in mount mercy as a limited_partner petralia had an interest in seeing that the partnership would be fully subscribed according to petralia one of the special limited partners could have brought in enough new york city area investors to fully subscribe the partnership petralia had to fight to get available units for the rochester investors he would be bringing into the partnership petralia discussed the mount mercy partnership with petitioner and other investors petralia did not offer any significant opinion on the validity of the contemplated charitable_contribution deductions beyond what was stated in the memorandum petitioner was aware of petralia's relationship with mount mercy at the time of these discussions petralia did not charge petitioner for legal or tax_advice pertaining to his discussions regarding mount mercy because according to petralia that would have constituted a conflict of interest with his work for mount mercy petralia stated he had done legal work for petitioner and his partner the parties stipulated that petralia was outside counsel for petitioner's business flexseal packaging providing a wide range of legal services to the business and its principals since it is obvious from the above that petralia considered himself the attorney for mount mercy in every respect insofar as the partnership aspects were concerned petralia's response to petitioner with respect to the partnership was consistent with his obligations to his client mount mercy where an adviser is so closely tied to a promoter and the taxpayer knows of this we do not believe the taxpayer received independent advice cf 90_tc_908 petralia perceived there was the possibility of a conflict and did not offer any significant opinion beyond that in the memorandum the court_of_appeals for the second circuit has stated that a party cannot reasonably rely for professional advice on someone they know to be burdened with an inherent conflict of interest goldman v commissioner supra this is the circuit to which an appeal in this case will lie petitioner a successful businessman was a sophisticated aggressive investor petitioner reported wage income of dollar_figure and dollar_figure in and respectively he deducted partnership losses of dollar_figure and dollar_figure from a number of partnerships for those years respectively it appears to us that petitioner was familiar with partnership transactions petitioner reviewed the memorandum and the investor analysis with all the warnings in the memorandum some of which we have set forth it is clear that the purported charitable deduction was dubious at best and might have to be defended in court yet petitioner did not hesitate to take advantage of what he termed in his testimony a nice extra petitioner was willing to take advantage of this nice extra to reduce his tax_liability despite the numerous warnings in the memorandum this court has referred to that nice extra as a subterfuge we find that the memorandum advertised improbable tax advantages with respect to the charitable_contribution petitioner actually paid dollar_figure in and dollar_figure in for his partnership share for those years he deducted dollar_figure and dollar_figure as cash contributions on the schedules a of the respective returns at his tax_bracket these specific deductions almost paid for his investment in the partnership during the years in issue moreover petitioner is a sophisticated businessman who on his own had reason to doubt whether the charitable_contribution deductions were proper deductions instead petitioner admittedly considered the deductions a little extra tax_benefit we believe petitioner knew that the deductions were at the least problematic for all the foregoing reasons we find that petitioner is liable for the negligence additions to tax for and we turn to the question of whether petitioner is liable for the addition_to_tax for a substantial_understatement_of_income_tax under sec_6661 for sec_6661 provides for an addition_to_tax in the amount of percent of any underpayment attributable to a substantial_understatement of tax an understatement is substantial if it exceeds the greater of percent of the tax required to be shown on the return or dollar_figure sec_6661 in general if a taxpayer had substantial_authority for his tax treatment of the item in question or if the taxpayer adequately disclosed the tax treatment of the item on his return then the taxpayer may escape liability for the addition_to_tax with respect to that liability sec_6661 however if the item in question is attributable to a tax_shelter the substantial_authority exception will apply only if there was substantial_authority for the treatment of the item on the return and the taxpayer reasonably believed that the treatment of the item was more_likely_than_not the proper treatment sec_6661 and c petitioner bears the burden to prove that respondent's determination is in error rule a it is clear from the record that a substantial_understatement exists for petitioner appears to concede that there was no substantial_authority for the treatment of the charitable_contribution on his return rather petitioner argues that respondent abused his discretion by failing to waive the addition_to_tax for a substantial_understatement of tax_liability sec_6661 provides that the secretary may waive all or part of the addition_to_tax under sec_6661 on a showing by the taxpayer that there was reasonable_cause for the understatement and that the taxpayer acted in good_faith the denial of a waiver under sec_6661 is reviewable by the court and the appropriate standard of review is whether respondent has abused his discretion in not waiving the addition_to_tax 91_tc_1079 we have found that petitioner failed to prove that he acted reasonably in claiming the charitable loss deduction in on the record before us we further find that assuming arguendo that petitioner sought a waiver under sec_6661 he has not established that respondent abused his discretion in not granting any such request based on the record before us we find that petitioner has failed to satisfy his burden of proving that he had substantial_authority for claiming on his return the charitable deduction of dollar_figure with respect to mount mercy he has also failed to prove that that return position was more_likely_than_not the proper treatment in addition assuming arguendo that petitioner requested a waiver under sec_6661 petitioner has failed to prove that respondent abused his discretion in not granting any such request accordingly we sustain respondent's determination imposing the addition_to_tax under sec_6661 for to reflect the foregoing decision will be entered for respondent


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc psi 7-plr-102756-02 date date re sec_29 request for a ruling credit for producing fuel from a nonconventional source legend taxpayer parent subsidiary a subsidiary b company a b c d date dollar_figurex dollar_figurey dollar_figurez dear this letter responds to a letter dated date submitted on behalf of taxpayer by its authorized representative requesting rulings under sec_29 of the internal_revenue_code facts the facts as represented by taxpayer and taxpayer’s authorized representative are as follows taxpayer is a limited_liability_company that is classified as a partnership for federal tax plr-102756-02 purposes all of the interests in which presently are owned by subsidiary a and subsidiary b parent is a publicly traded corporation and the parent of an affiliated_group_of_corporations that includes subsidiary a and subsidiary b taxpayer has entered into an agreement with a to purchase all of the interests in the company a limited_liability_company whose sole asset is a synthetic_fuel facility the facility that produces solid synthetic_fuel from coal the product it is represented that the company will be disregarded as a separate_entity from taxpayer for federal tax purposes in consideration for its purchase of the interests in the company i taxpayer will make a cash payment of approximately dollar_figurex to a and ii taxpayer will make contingent cash payments of approximately dollar_figurey per ton of product produced in the facility subject_to certain adjustments set forth in the agreement the facility was constructed pursuant to a construction_contract between b and c entered into on date the construction_contract did not limit the amount of damages that either party could seek against the other party in the event of the other party’s default under the contract b obtained an opinion of counsel that the construction_contract constituted a binding written contract under applicable state laws prior to date and at all times thereafter through completion of the contract the facility was designed and built with equipment that can be readily disassembled and moved to another site to take advantage of a supply of coal or for other business reasons the facility’s equipment includes a pug mill that mixes coal with binder and water three roll briquetters conveyers pumps storage tanks a control center and other associated equipment taxpayer intends to relocate the facility taxpayer has represented that following the relocation the fair_market_value of the original property will be more than percent of the facility’s total value the cost of the new property plus the value of the original property taxpayer will enter into an operations and maintenance agreement with d regarding the facility d will be paid a fee of dollar_figurez per ton of product produced in the facility subject_to certain adjustments to be set forth in the agreement taxpayer will pay all costs and expenses associated with the operation and maintenance of the facility including any applicable_property taxes and the cost of hazard insurance taxpayer has supplied a detailed description of the process employed at the facility as described the facility and the process implemented in the facility including the chemical reagent used to produce the synthetic_fuel meet the requirements of revproc_2001_34 2001_22_irb_1293 a recognized expert in coal combustion chemistry has performed numerous tests on the coal to be used at the facility and has submitted a report in which the expert plr-102756-02 concludes that significant chemical changes take place with the application of the process to the coal the rulings requested by taxpayer are as follows the construction_contract constitutes a binding written contract in effect before date within the meaning of sec_29 taxpayer with use of the enumerated process will produce a qualified_fuel within the meaning of sec_29 production of qualified_fuel from the facility will be attributable solely to taxpayer entitling taxpayer to the sec_29 credit for the production of the qualified_fuel from the facility that is sold to unrelated persons if the facility was placed_in_service prior to date the relocation of the facility after date or the replacement of parts of the facility after that date will not result in a new placed_in_service_date for the facility for purposes of sec_29 provided that fair_market_value of the original property is more than twenty percent of the facility’s total fair_market_value at the time of the relocation or replacement the sec_29 credit attributable to taxpayer may be allocated to the members of taxpayer in accordance with the members’ interests in taxpayer when the credit arises for the sec_29 credit a member’s interest in taxpayer is determined based on a valid allocation of the receipts from the sale of the sec_29 qualified_fuel a termination of taxpayer under sec_708 will not preclude the reconstituted partnership from claiming the sec_29 credit on the production and sale of synthetic_fuel to unrelated persons ruling_request sec_29 and f provide that sec_29 applies with respect to qualified_fuels which are produced in a facility placed_in_service after date and before date and which are sold before date sec_29 modifies sec_29 in the case of a facility producing qualified_fuels described in sec_29 sec_29 provides that for purposes of sec_29 a facility shall be treated as placed_in_service before date if the facility is placed_in_service before date pursuant to a binding written contract in effect before date sec_29 provides that if the facility is originally placed_in_service after date sec_29 shall be applied by substituting date for date plr-102756-02 a contract is binding only if it is enforceable under local law against a taxpayer and does not limit damages to a specified amount eg by use of a liquidated_damages provision a contract provision limiting damages to an amount equal to at least five percent of the total_contract_price for example should be treated as not limiting damages the construction_contract for the facility executed prior to date did not limit the amount of damages that either party could seek against the other party in the event of breach b obtained an opinion of counsel that the contract is binding under applicable law therefore the contract is a binding written contract for purposes of sec_29 ruling requests and sec_29 allows a credit for qualified_fuels sold by the taxpayer to an unrelated_person during the taxable_year the production of which is attributable to the taxpayer the credit for the taxable_year is an amount equal to dollar_figure adjusted for inflation multiplied by the barrel-of-oil_equivalent of qualified_fuels sold sec_29 defines qualified_fuels to include liquid gaseous or solid synthetic fuels produced from coal including lignite including such fuels when used as feedstocks in revrul_86_100 1986_2_cb_3 the internal_revenue_service ruled that the definition of the term synthetic_fuel under sec_48 and its regulations are relevant to the interpretation of the term under sec_29 former sec_48 provided a credit for the cost of equipment used for converting an alternative_substance into a synthetic liquid gaseous or solid fuel revrul_86_100 notes that both sec_29 and former sec_48 contain almost identical language and have the same overall congressional intent namely to encourage energy conservation and aid development of domestic energy production under sec_1_48-9 of the income_tax regulations a synthetic_fuel differs significantly in chemical composition as opposed to physical composition from the alternate_substance used to produce it coal is an alternate_substance under sec_1_48-9 based on the information submitted and representations made including the preponderance of the test results we agree that the fuel to be produced in the facility using the described process on the coal will result in a significant chemical change in coal transforming the coal feedstock into a solid synthetic_fuel because taxpayer will own the facility and operate and maintain the facility through its agent we conclude that taxpayer will be entitled to the sec_29 credit for the production of the qualified_fuel from the facility that is sold to an unrelated_person plr-102756-02 ruling_request to qualify for the sec_29 credit a facility must be placed_in_service before date pursuant to a binding written contract in effect before date while sec_29 does not define placed_in_service the term has been defined for purposes of the deduction for depreciation and the investment_tax_credit property is placed_in_service in the taxable_year the property is placed in a condition or state of readiness and availability for a specifically assigned function sec_1_167_a_-11 and sec_1_46-3 of the income_tax regulations placed_in_service has consistently been construed as having the same meaning for purposes of the deduction for depreciation and the investment_tax_credit see revrul_76_256 1976_2_cb_46 revrul_94_31 1994_1_cb_16 concerns sec_45 which provides a credit for electricity produced from certain renewable resources including wind the credit is based on the amount of electricity produced_by_the_taxpayer at a qualified_facility during the 10-year period beginning on the date the facility was originally placed_in_service and sold by the taxpayer to an unrelated_person during the taxable_year revrul_94_31 holds that for purposes of sec_45 a facility qualifies as originally placed_in_service even though it contains some used_property provided the fair_market_value of the used_property is not more than percent of the facility’s total value the cost of the new property plus the value of the used_property revrul_94_31 concerns a factual context similar to the present situations consistent with the holding in revrul_94_31 if the facility was placed_in_service prior to date within the meaning of sec_29 the relocation of the facility after date or replacement of parts of the facility after that date will not result in a new placed_in_service_date for the facility for purposes of sec_29 provided the fair_market_value of the original property is more than percent of the facility’s total fair_market_value at the time of the relocation or replacement when property is placed_in_service is a factual determination and we express no opinion on when the facility was placed_in_service ruling_request sec_29 allows a credit for qualified_fuels sold by the taxpayer to an unrelated_person during the taxable_year the production of which is attributable to the taxpayer sec_7701 provides that taxpayer means any person subject_to any internal revenue tax generally under sec_7701 the term person includes an individual a_trust estate partnership_association company or corporation sec_702 provides that each partner in a partnership determines the partner’s income_tax by taking into account separately the partner’s distributive_share of the partnership’s other items of income gain loss deduction or credit to the extent plr-102756-02 provided by regulations prescribed by the secretary sec_1_702-1 provides that the distributive_share is determined as provided in sec_704 and sec_1_704-1 sec_704 provides that a partner’s distributive_share of income gain loss deduction or credit is except as otherwise provided in chapter of subtitle a of title_26 determined by the partnership_agreement sec_704 provides that a partner’s distributive_share of income gain loss deduction or credit or item thereof is determined in accordance with the partners interest in the partnership determined by taking into account all facts and circumstances if the partnership_agreement does not provide as to the partner’s distributive_share of income gain loss deduction or credit or item thereof or the allocation to a partner under the agreement of income gain loss deduction or credit or item thereof does not have substantial economic_effect sec_1_704-1 provides that allocations of tax_credits and tax_credit recapture except for sec_38 property are not reflected by adjustments to the partners’ capital accounts thus these allocations cannot have economic_effect under sec_1 b ii b and the tax_credits and tax_credit recapture must be allocated in accordance with the partners’ interest in the partnership as of the time the tax_credit or tax_credit recapture arises if a partnership expenditure whether or not deductible that gives rise to a tax_credit in a partnership_tax_year also gives rise to valid allocations of partnership loss or deduction or other downward capital_account adjustments for the year then the partners’ interests in the partnership with respect to such tax_credit or the cost giving rise to it are in the same proportion as the partners’ respective distributive shares of the loss or deduction and adjustments see sec_1 b example identical principles apply in determining the partners’ interests in the partnership with respect to tax_credits that arise from receipts of the partnership whether or not taxable based on the information submitted and the representations made we conclude that the sec_29 credit attributable to taxpayer may be allocated to the members of taxpayer in accordance with the members’ interests in taxpayer when the credit arises for the sec_29 credit a member’s interest in taxpayer is determined based on a valid allocation of the receipts from the sale of the sec_29 qualified_fuel we express no opinion however regarding how the members’ interests in taxpayer are determined ruling_request sec_708 provides that a partnership shall be considered as terminated if within a twelve-month period there is a sale_or_exchange of percent or more of the total interest in partnership capital and profits plr-102756-02 sec_1_708-1 provides that if a partnership is terminated by a sale_or_exchange of an interest the following is deemed to occur the partnership contributes all of its assets and liabilities to a new partnership in exchange for an interest in the new partnership and immediately thereafter the terminated partnership distributes interests in the new partnership to the purchasing partner and the other remaining partners in proportion to their respective interests in the terminated partnership in liquidation of the terminated partnership either for the continuation of the business by the new partnership or for its dissolution and winding up sec_1_708-1 applies to terminations of partnerships under sec_708 occurring on or after date as discussed above the placed-in-service deadline in sec_29 and sec_29 must be read as applying to when the facility is first placed_in_service within the applicable dates the placed-in-service deadlines contained in sec_29 and sec_29 focus on the facility and not the taxpayer owning the facility accordingly the determination of whether a facility has satisfied the placed-in-service deadline under sec_29 and sec_29 is made by reference to when the facility is first placed_in_service not when the facility is placed_in_service by a transferee taxpayer therefore we conclude that a termination of taxpayer under sec_708 will not preclude the reconstituted partnership from claiming the sec_29 credit on the production and sale of synthetic_fuel to unrelated persons conclusions accordingly based on the information submitted and the representations made we conclude as follows the contract for construction of the facility constitutes a binding written contract in effect before date within the meaning of sec_29 taxpayer with the use of the enumerated process will produce a qualified_fuel within the meaning of sec_29 the production of the qualified_fuel from the facility will be attributable solely to taxpayer entitling taxpayer to the sec_29 credit for the production of the qualified_fuel from the facility that is sold to an unrelated_person if the facility was placed_in_service prior to date within the meaning of sec_29 relocation of the facility after date or replacement of parts of the facility after that date will not result in a new placed_in_service_date for the facility for purposes of sec_29 provided the fair_market_value of the original property is more than percent of the facility’s total fair_market_value at the time of the relocation or replacement we express no opinion on when the facility was placed in plr-102756-02 service the sec_29 credit attributable to taxpayer may be allocated to the members of taxpayer in accordance with the members’ interest in taxpayer when the credit arises for the sec_29 credit a member’s interest in taxpayer is determined based on a valid allocation of the receipts from the sale of the sec_29 qualified_fuel a termination of taxpayer under sec_708 will not preclude the reconstituted partnership from claiming the sec_29 credit on production and sale of synthetic_fuel to unrelated persons except as specifically ruled upon above we express no opinion concerning the federal_income_tax consequences of the transaction described above specifically we express no opinion on when taxpayer’s facility was placed_in_service or how the members’ interests in p are determined this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent temporary or final regulations pertaining to one or more of the issues addressed in this ruling have not yet been adopted therefore this ruling may be modified or revoked by the adoption of temporary or final regulations to the extent the regulations are inconsistent with any conclusion in this ruling see section dollar_figure of revproc_2001_1 2001_1_irb_1 however when the criteria of section dollar_figure of revproc_2001_1 are satisfied a ruling is not revoked or modified retroactively except in rare or unusual circumstances in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to taxpayer and to a second authorized representative sincerely yours joseph h makurath senior technician reviewer branch office of associate chief_counsel passthroughs and special industries enclosure