department of the treasury internal_revenue_service washington d c number release date date cc pa cbs br3 tl-n-1591-98 uil memorandum for jody tancer associate area_counsel lmsb - brooklyn cc lm fsh brk from subject lawrence h schattner chief branch collection bankruptcy summonses leasing issue specialization program - enforcement of summons served on u s citizen who resides abroad this responds to your request of date on the above subject your proposed advice starts with the assumption that the service’s revenue service representatives rsrs in foreign countries may personally serve u s citizens who reside abroad with irs administrative summonses pursuant to sec_7603 the remainder of your memorandum is then devoted to considering how the service might go about seeking enforcement of a summons served on a u s citizen abroad in this manner while we agree with much of your proposed analysis on the manner of seeking enforcement of a summons properly served by the irs on a u s citizen who resides abroad we do not accept your initial assumption that the service’s rsrs in foreign countries may personally serve u s citizens who reside abroad with irs administrative summonses as a general matter for the reasons described further below we also do not believe that the new provisions of sec_7603 - allowing the irs to serve administrative summonses upon specified third party recordkeepers by certified or registered mail - may be utilized by the irs as a general matter to effect service of irs administrative summonses by mail upon u s citizens abroad who are third party recordkeepers in a particular examination of another taxpayer it is the service’s position as a general matter that no irs agent or officer has the authority to serve a summons outside of the united_states that any act of this type may be considered a violation of sovereignty by the country in which service of the summons is attempted see ccdm this position is consistent with the legal principles discussed in the case of f t c v compagnie de saint-gobin-pont-a-mousson 636_f2d_1300 d c cir which you cited accordingly the summons enforcement jurisdiction venue conferred upon the u s district_court for the district of columbia by sec_7701 is much narrower in practice than your proposed advice suggests tl-n-1591-98 background you indicate that a u s citizen who resides abroad1 is believed to have knowledge of transactions relevant to the federal tax_liability of u s taxpayers and that the service’s possible ability to obtain information from witnesses of this type by means of irs administrative summonses has arisen in connection with leasing isp issues in multiple non-docketed cases issues conclusions issue constitutionally may the u s congress enact and may the u s federal courts enforce a statute that allows u s citizens in a foreign_country to be served with an investigative summons or a subpoena that requires them to return to the united_states to give testimony and or to produce documents irrespective of whether service of the investigative summons or subpoena abroad would conflict with applicable international law conclusion yes the case of 284_us_421 cited in your memorandum stands for this proposition but the intent of congress to override applicable international law must also be unmistakable pursuant to f t c v compagnie de saint-gobin-pont-a- mousson 636_f2d_1300 d c cir which you also cited see also irm - discussing the ability of the united_states to subpoena a u s citizen abroad for testimony in a criminal or civil tax case in federal district_court pursuant to u s c the successor to the walsh act of upheld in blackmer issue in sec_7603 or sec_7701 did the u s congress indicate an unmistakable intent to override applicable international law so as to permit the irs to effect service of irs administrative summonses as a general matter upon u s citizens abroad conclusion no although there are no geographic limitations on service of an irs administrative_summons stated in sec_7603 there is also no express authorization for extraterritorial service in the statutory language or in the legislative_history of subsections a or b of sec_7603 necessary to indicate that congress unmistakably intended to allow the irs to serve administrative summonses abroad where such service would be contrary to your proposed advice and your request for assistance does not specify any particular country or countries in which the u s citizen s the service wants information from reside s tl-n-1591-98 international law in pertinent part sec_7701 confers upon the u s district_court for the district of columbia appropriate jurisdiction venue for considering complaints to enforce or quash irs administrative summonses on any witness or formal document requests upon a taxpayer for records maintained in foreign countries pursuant to sec_982 for cases in which the summonsed witness or the taxpayer seeking to quash the summons or formal_document_request is a u s citizen or resident who does not reside in or is not found in any u s judicial district however it does not logically follow from sec_7701 that because congress provided a forum with jurisdiction to consider enforcement of an irs administrative_summons that was properly served on a u s citizen who resides abroad that congress intended in sec_7603 to allow extraterritorial service by the irs of administrative summonses upon u s citizens abroad when such service abroad would be contrary to international law issue if the irs may not properly serve administrative summonses outside the united_states upon u s citizens abroad as a general matter due to prohibitions on such service arising under international law does that interpretation deny any practical impact to sec_7701 conclusion no consistent with the absence of reported case law construing sec_7701 since it was enacted in the practical effect of this provision of the internal_revenue_code may be relatively narrow but it is not without any practical applications in the case of a u s citizen residing in spain who was personally served with an irs administrative_summons while visiting the united_states our office has previously concluded that jurisdiction venue for the united_states enforcing that summons lay with the u s district_court for the district of columbia based upon sec_7701 when it enacted sec_982 and sec_7701 together as part of the tax equity and fiscal responsibility act of tefra congress also indicated in the legislative_history of these provisions that sec_7701 would confer jurisdiction venue on the u s district_court for the district of columbia for a u s taxpayer residing interpreting the laws of particular foreign nations and the provisions of particular international treaties is within the jurisdiction of associate chief_counsel international any summons enforcement cases brought pursuant to sec_7701 would be appealable to the circuit_court for the district of columbia in f t c v compagnie de saint-gobin-pont-a-mousson 636_f2d_1300 d c cir that court found that international law and the federal rules of civil procedure treat the service of subpoenas or investigatory summonses quite differently from the service of a complaint by a summons to initiate a lawsuit upon a person or company located abroad tl-n-1591-98 abroad to file a complaint to quash a sec_982 formal_document_request made by the irs for documentation maintained in a foreign_country pursuant to sec_982 see conf_rep no reproduced pincite_2_cb_600 pincite discussion issue the constitutional authority of congress to compel testimony from u s citizens abroad in contravention of international law upon discovery of the teapot dome scandal in a number of the prominent americans involved including harry blackmer fled the united_states for france to compel their testimony in the subsequent criminal proceedings congress passed the walsh act authorizing the federal district courts to compel the attendance of american witnesses abroad in connection with criminal proceedings in the united_states the walsh act expressly authorized service of judicial subpoenas that had been approved by a district_court judge upon u s citizens found outside of the united_states and specified the means of service to be employed for such subpoenas personal service by the consul of the united_states within the country where the witness was found f t c v compagnie de saint-gobin-pont-a- mousson 636_f2d_1300 d c cir 284_us_421 n the walsh act is the statute the supreme court considered and upheld in re blackmer the court held in that case that the united_states possesses the power inherent in sovereignty to require the return of a citizen residing abroad whenever the public interest requires it and to penalize him her in case of refusal irm under the successor to the walsh act u s c courts of the united_states not including the tax_court may issue judicial subpoenas to u s nationals or residents who are in a foreign_country in either a criminal or civil case if certain showings are made a subpoena issued pursuant to u s c may be served in accordance with the provisions of the federal rules of civil procedure relating to service of process for a complaint in a foreign_country ie f_r c p f and k see irm - the walsh act of and u s c are examples of statutes where congress specifically gave extraterritorial effect to the power of the courts of the united_states to compel testimony from u s citizens who are found abroad and provided a specific means of effecting service of subpoenas upon such u s citizens outside of the united_states the court_of_appeals for the district of columbia to which any appeal based upon the jurisdiction venue conferred by sec_7701 would lie has interpreted blackmer as a case upholding the constitutional authority of congress to give extraterritorial effect to its laws notwithstanding international law but consistent with due process so long as congressional intent in this regard is unmistakable or unambiguous see f t c tl-n-1591-98 v compagnie de saint-gobin-pont-a-mousson f 2d pincite and d c cir 924_f2d_1086 d c cir 110_fsupp2d_10 d d c issue congressional intent regarding extraterritorial service of irs administrative_summons pursuant to sec_7603 prior to sec_7603 authorized the irs to serve administrative summonses only by delivering an attested copy in hand to the person to whom the summons was directed or by leaving such copy of the summons at the person’s last and usual place of abode this traditional manner of serving any type of irs administrative_summons has been retained in present sec_7603 in congress added a second possible manner - by certified or registered mail to the last_known_address of the witness - for the irs to serve its administrative summonses if the summonses were directed to certain specified types of third party recordkeeper witnesses sec_7603 among the types of individual witnesses whom the irs may now choose to serve by certified or registered mail when the witness is a third party recordkeeper with respect to the transaction at issue are any attorney any accountant or any enrolled_agent see sec_7603 sec_7603 and b do not themselves indicate that proper service of irs administrative_summons served either in person or by certified registered mail for certain third party recordkeepers is limited geographically to service that may be effected by the irs only within the geographical boundaries of the united_states the legislative histories of what is now sec_7603 and of new sec_7603 also do not address the issue of whether there are territorial limits on the irs serving administrative summonses in the manner described in sec_7603 nevertheless it is the service’s position as a general matter that no irs agent or officer has the authority to serve a summons outside of the united_states because the act may be considered contrary to international law referring to the pre-1998 provisions of sec_7603 for serving an administrative_summons ccdm explains as follows while sec_7701 provides for jurisdiction for enforcement service of a summons must still be made pursuant to sec_7603 by personal service or by delivery to the summonsed party or by leaving the summons at the summonsed party’s last and usual place of abode no internal_revenue_service agent or officer has the authority to serve a summons outside of the united_states any act of this type may be considered a violation of sovereignty by the country in which service is attempted accordingly permission of the other government is required before service is attempted branch of the associate chief_counsel international should be contacted so that service can be coordinated with the assistant_commissioner and the other government tl-n-1591-98 the above-described position of the service is consistent with the previously cited views of the court_of_appeals for the district of columbia that the government should not presume that congress intended to give extraterritorial effect to its laws unless that intent is made unmistakably clear in f t c v compagnie de saint- gobin-pont-a-mousson 636_f2d_1300 d c cir the federal trade commission had adopted a rule purporting to allow the agency to serve investigatory subpoenas by registered mail outside of the united_states the court_of_appeals held the rule invalid because service of the investigatory subpoena in this manner was inconsistent with international law and congress had not made its intent to allow service of such subpoenas outside of the united_states in this manner unmistakably clear at the time the subpoena was issued you have not directed our attention to and we are not aware of any case where the irs has served or attempted to enforce a summons that was served outside of the territorial limits of the united_states one generally respected tax law treatise bna’s compelled production of documents and testimony in tax examinations portfolio contains a discussion of this issue which you may have relied upon but which is ambiguous to us on closer inspection at page a-44 the treatise states the irs may seek the assistance of a treaty partner or a revenue service representative based outside the territorial jurisdiction of the united_states to serve or enforce a summons issued to a u s citizen or resident located abroad as authority for this statement the treatise guides the reader to another portion of the treatise at page a-49 where the authors explain without referring again to an irs administrative_summons that could be served outside of the united_states but enforced within the united_states as follows in addition to information that it may already have in its possession or obtained through exchange of information requests with treaty partners the irs assistant_commissioner international office of international programs can utilize revenue service representatives rsrs who are frequently able to gather information for the geographical area for which they are responsible because the rsr works outside the territorial jurisdiction of the united_states the procedures utilized in investigating a particular matter depend upon certain formal and informal understandings with the government of the specific country where the records are maintained thus the freedom which an rsr can exercise may depend upon such factors as whether the information sought is publicly available or whether a u s citizen is being interviewed as opposed to a citizen of the country involved or a citizen of a third country on occasion agents of foreign taxing authorities assist collaborate or accompany the rsr to an investigation in other cases however the scope of permissible action by the rsr may be severely limited accordingly unless international law by treaty or otherwise in a particular foreign_country so provides it does not appear that rsr’s may properly serve an irs tl-n-1591-98 administrative_summons outside of the united_states that would be enforceable through the courts of the united_states issue the narrow practical impact of sec_7701 sec_7701 and sec_982 were both added to the internal_revenue_code in as part of tefra sec_982 regards the admissibility by a taxpayer of documentation maintained in a foreign_country as part of a civil_proceeding involving an examined tax issue if the irs served the taxpayer during the examination with a formal_document_request for such records maintained abroad and the taxpayer failed to substantially comply with such request within days sec_982 provides that a person served with a formal_document_request of this type may begin a proceeding to quash the request within days and that in any such proceeding to quash the united_states may seek to compel compliance with the request sec_7701 reads as follows persons residing outside united_states if any citizen or resident_of_the_united_states does not reside in and is not found in any united_states judicial district such citizen or resident shall be treated as residing in the district of columbia for purposes of any provision of this title relating to - a jurisdiction of courts or b enforcement of summons for advice regarding the law of a particular foreign nation or the interpretation of a particular international treaty you may wish to contact branch of associate chief_counsel international for instance the united_states united kingdom switzerland france germany japan and other countries are signatories to the hague convention on the service abroad of judicial and extrajudicial documents in civil or commercial matters hague service convention see u s c a appendix following rule frcp associate chief_counsel international has advised us that terms used in the hague service convention such as civil or commercial matters and extrajudicial documents are not subject_to uniform interpretations in all signatory countries while article of the hague service convention refers only to modes of sending or serving judicial documents where the state of destination does not object article goes on to state extrajudicial documents emanating from authorities and judicial officers of a contracting state may be transmitted for the purpose of service in another contracting state by the methods and under the provisions of the present convention for advice on how any particular country may interpret the provisions of the hague service convention with respect to service of an irs administrative_summons contact branch of associate chief_counsel international tl-n-1591-98 you have not directed our attention to and we are not aware of any case where a court has construed sec_7701 the legislative_history of sec_7701 is also not very expansive or informative regarding the anticipated or intended practical applications of the new provision the conference_report indicates that a senate amendment extends the jurisdiction and the summons power of the united_states district_court of the district of columbia to reach u s citizens and residents not present in the united_states see conf_rep no reproduced pincite_2_cb_600 pincite the summons power of the united_states district_court as opposed to the summons power of the irs pursuant to sec_7603 presumably refers to the court’s ability to effect service of process upon the witness abroad of the complaint filed by the united_states to enforce a prior properly served irs administrative_summons on the witness now located abroad the conference_report pincite c b pincite also indicates an agreement of the conferees which apparently relied on new sec_7701 in circumstances where a taxpayer who is located abroad wants to file a complaint to quash an irs foreign document request under sec_982 as follows in any proceeding to quash the secretary may seek to compel compliance with the request jurisdiction over a proceeding to quash is retained in the united_states district_court for the district in which the person to whom the formal_document_request is mailed resides or is found if that person resides outside the united_states the united_states district_court for the district of columbia has jurisdiction in addition to providing jurisdiction venue for a federal district_court to hear the request of a taxpayer to quash an irs foreign document request pursuant to sec_982 when the taxpayer resides abroad our office also previously opined in that when the service personally served a u s citizen who resided in spain with an irs administrative_summons while the taxpayer was visiting the united_states that jurisdiction venue for the united_states filing a complaint to enforce the summons lay with the u s district_court for the district of columbia on the basis of then new sec_7701 please call the attorney assigned to this case pincite-3630 if you require further assistance we found one case where the service apparently cited sec_7701 in a tax_court brief for the proposition that the case of one of the married taxpayers who had petitioned the tax_court would be appealable to the court_of_appeals for the district of columbia rather than to the fourth circuit in which the petitioner’s spouse resided because the petitioner at issue was a u s citizen who resided outside of the united_states the tax_court determined however that the outcome of that case did not turn on the identity of the circuit to which appeal would lie in the taxpayer’s case see 88_tc_1024 tl-n-1591-98 cc branch associate chief_counsel international attn w edward williams senior technical reviewer


fj irs department of the treasury internal_revenue_service p o box cincinnati oh number release date uil dear date date employer id number contact person id number contact telephone number form you must file tax years this letter is our final_determination that you don't qualify for tax-exempt status under sec_501 of the internal_revenue_code the code recently we sent you a proposed adverse determination in response to your application the proposed adverse determination explained the facts law and basis for our conclusion and it gave you days to file a protest because we didn't receive a protest within the required days the proposed determination is now final because you don't qualify as a tax-exempt_organization under sec_501 of the code donors can't deduct contributions to you under sec_170 of the code you must file federal_income_tax returns for the tax years listed at the top of this letter using the required form also listed at the top of this letter within days of this letter unless you request an extension of time to file we'll make this final adverse determination_letter and the proposed adverse determination_letter available for public inspection as required under sec_611 of the code after deleting certain identifying information please read the enclosed notice notice of intention to disclose and review the two attached letters that show our proposed deletions if you disagree with our proposed deletions follow the instructions in the notice on how to notify us if you agree with our deletions you don't need to take any further action we'll also notify the appropriate state officials of our determination by sending them a copy of this final letter and the proposed determination_letter under sec_61 c of the code you should contact your state officials if you have questions about how this determination will affect your state responsibilities and requirements letter4038 rev catalog number if you have questions about this letter you can contact the person listed at the top of this letter if you have questions about your federal_income_tax status and responsibilities call our customer service number pincite-829-1040 tty for deaf or hard of hearing or customer service for businesses pincite-829-4933 sincerely jeffrey i cooper director exempt_organizations rulings and agreements enclosures notice redacted letter proposed adverse determination under sec_501 c redacted letter final adverse determination under sec_501 c -no protest letter rev catalog number fj l irs department of the treasury internal_revenue_service p o box cincinnati oh legend b state c date d location f date z dollars amount dear date date employer number contact person number contact telephone number contact fax number uil we considered your application_for recognition of exemption from federal_income_tax under sec_501 of the internal_revenue_code the code based on the information provided we determined that you don't qualify for exemption under sec_501 of the code this letter explains the basis for our conclusion please keep it for your records issues do you qualify for exemption under sec_501 of the code no for the reasons stated below facts you were incorporated in the state ofb on c you submitted form 1023-ez streamlined application_for recognition of exemption under sec_501 ofthe internal_revenue_code on f your purposes as stated in your articles of incorporation are to collect funds from its members and expend those funds for the marketing advertising and promotion of the d for the benefit of all the members and to represent the interests of the tenants of d in connection with issues involving the operation and administration of the d by its landlord including but not limited to issues relating to administration of the marketing funds collected by the landlord common area maintenance signage and community events affecting the d your articles of incorporation indicate that upon dissolution your assets shall be dedicated to an appropriate public agency to be used for purposes similar to those for which this association was created in the event that such dedication is refused acceptance such assets shall be granted conveyed and assigned to any nonprofit corporation association trust or other organization to be devoted to such similar purposes letter rev catalog number 47630w per your articles of incorporation your membership consists of persons leasing a unit or units in d who choose to pay your required assessments eligibility for membership is automatic upon the transfer and or execution for a lease for a unit in d all members are entitled to vote on all matters except those who are in default on any obligations to you merchants pay into your fund based on the square footage of their unit your activities include three events and two annual merchant meetings all events and meetings are held at d event and is open to anyone the the first event is the event is held twice a year on a saturday night stores participate by serving wine and a snack the cost to attend is z dollars each person participating receives a wine glass and a passport which is stamped at each store the passport is then turned in at the end of the evening to be entered into a drawing for a gift certificate attendance has averaged around people at each event expenses for the advertising barricades collateral printing wine glasses set up rentals such as chairs and tables permitting and license sales_tax and security the proceeds from the event after expenses are donated to a charity of your choice event include wine the second event is the halloween event the halloween event is free and open to all at the event d stores pass out candy to the approximately children that attend expenses for the event include candy barricades and advertising the third event is the thanksgiving holiday event it is free and open to all the thanksgiving holiday event includes arts and crafts projects for children santa claus snacks and lighting the holiday tree expenses for the event include advertising barricades and arts and crafts project supplies you also have merchant meetings twice a year these meetings are social gatherings where you discuss issues and concerns such as property management and social media ideas you also review the budget law sec_501 c of the code provides for the exemption from federal_income_tax of organizations organized and operated exclusively for charitable educational and scientific purposes sec_1 50l c -l a l states that in order to be exempt as an organization described in sec_501 c of the code an organization must be both organized and operated exclusively for one or more of the purposes specified in such section if an organization fails to meet either the organizational_test or the operational_test it is not exempt sec_1 c -l b l i provides that an organization is organized exclusively for one or more exempt purposes only if its articles of organization limit its purposes to one or more exempt purposes and do not expressly empower it to engage otherwise than as an insubstantial part in activities which in themselves are not in furtherance of one or more exempt purposes sec_1 c -l b states than an organization is not organized exclusively for one or more exempt purposes unless its assets are dedicated to an exempt_purpose an organization's assets will be considered dedicated to an exempt_purpose if upon dissolution such assets would by reason of a provision in the organization's articles of organization or by operation of law be distributed for one or more exempt purposes letter rev catalog number 47630w sec_1_501_c_3_-1 provides that an organization will be regarded as operated exclusively for one or more exempt purposes only if it engages primarily in activities that accomplish one or more of such exempt purposes specified in sec_501 an organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt_purpose sec_1_501_c_3_-1 provides that an organization is not organized or operated exclusively for exempt purposes unless it serves a public rather than a private interest to meet this requirement it is necessary for an organization to establish that it is not organized or operated for the benefit of private interests revrul_73_411 1973_2_cb_180 held that a shopping center merchants' association whose membership is restricted to and required of tenants of a one-owner shopping center and their common lessor and whose activities are directed to promoting the general business interests of its members does not qualify as a business league or chamber of commerce under sec_501 of the code the organization's activities include serving as a means for communication between the owner and tenants and arranging and conducting various seasonal and other promotional affairs designed to stimulate the overall volume of trade in the center revrul_77_111 1977_1_cb_144 held that an organization formed to increase business patronage in a deteriorated area by providing information on the area's shopping opportunities local transportation and accommodations is not operated exclusively for charitable purposes and does not qualify for exemption under sec_501 of the code similarly an organization whose purpose is to revive retail sales in an area of economic decline by constructing a shopping center does not qualify for exemption revrul_78_86 1978_1_cb_151 held that the service will not follow the monterey public parking corporation decision that an organization formed by merchants to establish and operate a public off-street parking facility that provides free or reduced_rate parking for the merchants' customers through a validation stamp qualifies for exemption as either a charitable corporation under sec_501 of the code or a social_welfare_organization under sec_501 c a parking arrangement whereby merchants join together to provide parking for their customers at a reduced_rate serves the merchants' private interests by encouraging the public to patronize their stores in better business bureau v united_states 326_us_278 the court held that an organization is not operated exclusively for charitable purposes and thus will not qualify for exemption under sec_501 if it has a single non-charitable purpose that is substantial in nature this is true regardless of the number or importance of the organization's charitable purposes application of law you are not organized and operated exclusively for charitable educational or scientific purposes consistent with sec_501 of the code or sec_1_501_c_3_-1 and therefore fail to meet the organizational and operational tests specifically the facts above indicate that you are not operated for exempt purposes but for the private interests of your members organizational_test you do not meet the requirements in sec_1 c -1 b i your articles of incorporation state in part that you were formed to collect funds from its members and expend those funds for the letter rev catalog number 47630w marketing advertising and promotion of the d for the benefit of all the members and to represent the interests of the tenants of d in connection with issues involving the operation and administration of the d by its landlord because you are organized to benefit your members by collecting funds and using them for marketing advertising and promoting d your purpose clause does not describe exclusive 50l c purposes and you fail the organizational_test moreover you fail the organizational_test because your articles of incorporation do not have a valid dissolution clause that dedicates your assets to an exempt_purpose under sec_501 of the code as required in sec_1 c -l b operational_test you are not described in sec_1_501_c_3_-1 because more than an insubstantial part of your activities are not in furtherance of a 50l c exempt_purpose you are operating for the private interests of your members like the organization in better business bureau v united_states supra you operate for the substantial non-exempt purpose of marketing advertising and promoting d by marketing advertising and promoting d you are working to bring business to your members who lease units in d you hold several events throughout the year that bring people to d additionally the events you hold the event the halloween event and the thanksgiving holiday event are social and recreational in nature and do not fulfill a c purpose you are not described in sec_1_501_c_3_-1 because you are operating for the private interests of your members your membership is made up of persons leasing a unit or units in d who choose to pay your required assessments which are used for marketing and promoting d where your members are tenants you represent the interests of the tenants of d in connection with issues involving the operation and administration of d by the landlord you have meetings twice a year where you discuss issues and concerns such as property management and social media ideas your events are used as a vehicle to get people to d and to each store at the have stamped at each store at the halloween event participants have to go to each store to receive candy like the organizations in revrul_77_111 your activities are directed at generally promoting business and benefiting your members who are tenants in d rather than accomplishing a c purpose your activities are also like those of the organization in revrul_73_411 even though the organization in revrul_73_411 applied for exemption under sec_501 of the code you are similar in that you do not qualify for exemption because you are serving the private interests of your members event each participant receives a passport which they have to by serving the private interests of your members who are merchants at d you are also like the organization in revrul_78_86 you join together to market advertise and promote the d and your events are designed to bring people to the d to patronize your stores although there may be some public benefit to your events the events are social and recreational in nature and do not fulfill a c purpose conclusion you are not organized and operated exclusively for exempt purposes under sec_501 ofthe code you do not meet the organizational_test because your organizing document does not contain a valid purpose or dissolution clause likewise you do not meet the operational_test because you benefit the private interests of your members and you conduct more than an insubstantial amount of social and recreational activities ifyou don't agree you have a right to file a protest ifyou don't agree with our proposed adverse determination to do so you must send a statement to us within days of the date of this letter the statement must include letter rev catalog number 47630w your name address employer_identification_number ein and a daytime phone number a copy of this letter highlighting the findings you disagree with an explanation of why you disagree including any supporting documents the law or authority if any you are relying on the signature of an officer director trustee or other official who is authorized to sign for the organization or your authorized representative one of the following declarations for an officer director trustee or other official who is authorized to sign for the organization under penalties of perjury i declare that i examined this protest statement including accompanying documents and to the best of my knowledge and belief the statement contains all relevant facts and such facts are true correct and complete for authorized representatives under penalties of perjury i declare that i prepared this protest statement including accompanying documents and to the best of my knowledge and belief the statement contains all relevant facts and such facts are true correct and complete your representative attorney certified_public_accountant or other individual enrolled to practice_before_the_irs must file a form_2848 power_of_attorney and declaration of representative with us ifhe or she hasn't already done so you can find more information about representation in publication practice_before_the_irs and power_of_attorney we'll review your protest statement and decide if you provided a basis for us to reconsider our determination if so we'll continue to process your case considering the information you provided if you haven't provided a basis for reconsideration we'll forward your case to the office of appeals and notify you you can find more information about the role of the appeals_office in publication how to appeal an irs decision on tax exempt status if you don't file a protest within days you can't seek a declaratory_judgment in court at a later date because the law requires that you use the irs administrative process first sec_7428 of the code where to send your protest please send your protest statement form_2848 if needed and any supporting documents to the applicable address letter rev catalog number 47630w u s mail street address for delivery service internal_revenue_service eo determinations quality assurance room p o box cincinnati oh internal_revenue_service eo determinations quality assurance main street room cincinnati oh you can also fax your statement and supporting documents to the fax number listed at the top ofthis letter if you fax your statement please contact the person listed at the top of this letter to confirm that he or she received it lfyou agree if you agree with our proposed adverse determination you don't need to do anything if we don't hear from you within days we'll issue a final adverse determination_letter that letter will provide information on your income_tax filing_requirements you can find all forms and publications mentioned in this letter on our website at www irs gov formspubs if you have questions you can contact the person listed at the top of this letter sincerely jeffrey i cooper director exempt_organizations rulings and agreements enclosure publication letter rev catalog number 47630w


office_of_chief_counsel internal_revenue_service memorandum number release date cc corp b05 roburch presp-133053-07 uilc date date third party communication none date of communication not applicable to roger p blythe lead internal revenue_agent field specialist financial products large mid-size business from rebecca o burch general attorney branch office of associate chief_counsel corporate debra l carlisle branch chief branch office of associate chief_counsel corporate subject presp-133053-07 tp protesting appeal on application of sec_1032 this chief_counsel_advice responds to your request for assistance this advice may not be used or cited as precedent legend corporation a --------------------------------------- acquiring parent counterparty date date date date date date date --------------------------------------------------------- -------------------------- --------------------- ------------------- -------------------------- --------------------- --------------------- ------------------- ---------------------- ------------------- presp-133053-07 date dollar_figurea dollar_figureb dollar_figurec dollar_figured dollar_figuree dollar_figuref dollar_figureg dollar_figureh dollar_figurei dollar_figurej dollar_figurek dollar_figurel v w x y z issue -------------------------- ------------ -------------- ------------- ----------------- -------------- ------------- ----------------- -------------- ----------------- -------------- ----------------- ------------------------------------------------------------------------------------------- ----------------------------------------------------- -------- -------------- ------------------ ----------- ------------------ does a change in the underlying stock to be delivered under the terms of a forward_contract originally specifying the corporation’s own stock due to a merger render sec_1032 inapplicable when the loss on the forward_contract is based on the value of the corporation’s own stock as of the date of the merger conclusion no the use of a conversion ratio in conjunction with the change in the underlying stock locked in the amount of loss on the forward_contract such loss was based on the value of the corporation’s own stock on the date of the merger and accordingly sec_1032 applies to the loss facts on date corporation a announced a dollar_figurea share buyback program by entering into equity forward contracts with several counterparties in which corporation a agreed to buy back a certain number of its own shares for a set price the forward price on various scheduled termination dates or settlement dates the counterparties agreed to deliver the agreed amount of shares each contract could be settled in one of three ways first_corporation a could deliver the forward price and the counterparty would deliver the agreed amount of shares physical settlement the parties could also settle the contract by one party delivering to the other party the amount of net equity in the contract using either cash presp-133053-07 cash settlement or additional corporation a shares share settlement under a cash or share settlement corporation a would deliver cash or additional shares to the counterparty if on the date of settlement the market price of corporation a’s shares were less than the forward price corporation a agreed to pay the counterparty would deliver cash or additional shares to corporation a if on the date of settlement the market price of corporation a’s shares were more than the forward price corporation a agreed to pay during the tax years ending date and date corporation a physically settled seven of nine contracts in these contracts corporation a paid the forward price and the counterparty delivered the agreed amount of shares corporation a relied on sec_1032 to report no gain_or_loss on these contracts on date when corporation a had two contracts remaining parent formed a merger subsidiary the acquiring_corporation into which corporation a merged via a reorganization represented as qualifying under sec_368 under the terms of the two remaining contracts the shares corporation a agreed to buy back under the contract changed from corporation a’s shares to shares of acquiring’s parent using a conversion ratio of v the use of the conversion ratio pinpointed the number of parent shares that would equal the value of one corporation a share on the merger date corporation a’s value was declining up to the date of the merger parent’s stock rose in value after the date of the merger just before the date of the merger if the two contracts were settled with either cash or additional shares corporation a would have realized an approximate dollar_figureb loss the conversion ratio preserved this loss in the contracts going forward_contract prior to the merger the terms of the first contract provided that corporation a would pay dollar_figurec per share for w of its shares for a total_payment of dollar_figured on date the application of the conversion ratio changed the number of shares to x shares of parent stock the total_payment of dollar_figured stayed nearly the same the resulting price per share under this contract was dollar_figuree per share contract prior to the merger the terms of the second contract provided that corporation a would pay dollar_figuref per share for y of its shares for a total_payment of dollar_figureg on date the application of the conversion ratio changed the number of shares to z shares of parent stock the total_payment of dollar_figureg stayed nearly the same the resulting price per share under this contract was dollar_figureh per share on date acquiring cash settled the two remaining contracts acquiring owed the counterparty dollar_figurei on both contracts the counterparty sold for dollar_figurej the number of parent shares it would otherwise have been required to deliver acquiring paid the counterparty the remaining dollar_figurek in cash on its tax_return for the year ending date acquiring reflected a capital_loss of dollar_figurek due to the contracts parent relies on sec_1032 not applying to the forward contracts to assert that acquiring is entitled to deduct the loss presp-133053-07 arguing that the loss was realized with respect to stock which was not acquiring’s own stock law and background the first sentence of sec_1032 provides that no gain_or_loss shall be recognized to a corporation on the receipt of money or other_property in exchange for stock including treasury_stock of such corporation this sentence was enacted in the history of sec_1032 demonstrates that congress intended that it be applied broadly in its current form sec_1032 reflects several changes from the original provision all of which were intended to reach the result of nonrecognition with respect to gain_or_loss on a corporation’s various transactions in its own stock prior to the enactment of sec_1032 the treasury regulations under gross_income provided how a corporation should be taxed on transactions involving its shares of capital stock these regulations were in force from to and broadly declared that there was no gain_or_loss from the purchase or sale of a corporation’s own stock the rule_of nonrecognition was uniformly applied to cases in which the taxpayer sold or purchased its stock at a price different from the stock’s fair_market_value at the time of the exchange in simmons hammond manufacturing co 1_bta_803 the taxpayer purchased its own shares for market_value sold the shares below their fair_market_value and claimed a loss the court explained that had the shares been sold at fair_market_value the transaction would have constituted a capital_transaction that would not have changed the corporation’s capital accounts because the assets and liabilities would have been equally increased when the corporation sold the shares for less than their fair_market_value however the loss was not the corporation’s loss by acquiring the shares at less than fair_market_value simmons and hammond increased their proportionate share in a distribution of the corporate assets without contributing proportionately to the asset account in effect they had gotten the equivalent of a distribution of surplus to the extent of their below market purchase_price while the court acknowledged that the sale of the shares below fair_market_value created a diminution in value for the other remaining shareholders it held that this was not a loss to the corporation in illinois rural credit association 3_bta_1178 the taxpayer did not include in its income payments it received to purchase stock that was never issued the corporation planned to issue its stock in exchange for a fully paid subscription price however when some shareholders did not pay the full subscription price the corporation retained their money without issuing stock the corporation did not treat the amounts received as income and the court agreed that such amounts were not income the board_of_tax_appeals later overruled simmons hammond in r j reynolds tobacco co v comms’r 553_bta_949 the board_of_tax_appeals was following its ruling in s a woods 57_f2d_635 1287_us_613 that triggered recognition when a corporation dealt with its own shares as it would shares of another corporation in response to s a woods and cases following that rule congress changed the law by enacting sec_1032 presp-133053-07 the subscribers made the payments as capital payments to provide capital for the corporation the fact that the stock was never issued for such payments because they were not fully paid did not alter their capital character which was distinguishable from income in 15_bta_210 aff’d 42_f2d_849 2d cir a subscription agreement allowed a corporation’s two shareholders to purchase additional stock during a certain amount of time for a set price and only one did so after the corporation’s stock had greatly increased in value hearn the shareholder who had not purchased additional stock sued the other to enforce his right to subscribe to the shares at the previously set price the shareholders settled the suit by having the corporation give an amount of cash to hearn which amount the corporation deducted on its return relying on the capital_transaction reasoning in simmons supra the court explained that the effect of the corporation’s payment to hearn was to reduce the value of the other shareholder’s shares because such reduction affects only the owners of the stock there was no loss to the corporation despite the decisional law that favored nonrecognition when a taxpayer engaged in transactions involving its own stock an opposite decision was made in 57_f2d_635 1287_us_613 in s a woods the woods company the respondent sued the yates company for infringement of a patent and obtained a decree in its favor for damages in connection with the settlement the yates company transferred to the woods company big_number shares of the woods company capital stock having a value of dollar_figure after acquiring the stock the woods company retired it thereby reducing its capital stock from big_number shares to big_number shares the commissioner ruled that the value of the stock was taxable_income unlike the decisions in the prior cases the woods court considered whether the receipt and retirement of the shares in this case justified a different result the court reasoned that where a corporation has legally dealt in its own stock as it might in the shares of another corporation and in so doing has had a gain_or_loss there is no reason why gain_or_loss should not be taken into account in computing taxable_income the court found that the transaction was the equivalent of the payment of cash to the woods company and the investment of the cash in its own stock the result of the cash received would have been taxable_income and the court held that the transaction was not changed in its essential character by the fact that the woods company received its own stock the first circuit_court of appeals decided s a woods in in the treasury regulations were changed to give effect to the decision by implementing a facts and circumstances analysis to discern whether a corporation was engaging in only a capital_transaction or whether the corporation was intending to deal in its own shares as it might in another corporation’s shares the latter decision required recognition and the former did not over the next two decades the courts continued ruling on this issue with increasing inconsistency presp-133053-07 sec_1032’s legislative_history indicates congress understood that the developing case law and the facts_and_circumstances_test of the regulations were creating uncertainty for taxpayers in enacting the current first sentence of sec_1032 in congress codified the rule that was consistent with the pre-1954 case law and regulations it eliminated the rule that required recognition in s a woods-type transactions see s rep no 83d cong 2d sess congress amended sec_1032 in and to broaden its application to transactions involving instruments that were substitutes for a taxpayer’s own stock in for example taxpayers were engaging in transactions that allowed them to elect into and out of nonrecognition under sec_1032 by using illinois rural credit supra to avoid the result in revrul_72_198 1972_1_cb_223 revrul_72_198 addressed a situation in which corporation x acquired all of the outstanding_stock of corporation y in exchange for the issuance of its own stock warrants the warrants entitled the holder to purchase a certain amount of x voting_stock at a certain price within a specified period of time the revenue_ruling noted that sec_1032 provides that no gain_or_loss shall be recognized to a corporation upon the receipt of money or other_property in exchange for stock including treasury_stock of such corporation accordingly the revenue_ruling held that no gain_or_loss is recognized to x upon the issuance of its stock warrants in exchange solely for the outstanding_stock of y sec_1032 applies when any warrants are exercised and stock is issued and consequently no gain_or_loss will be recognized to x upon such exercise and issuance if however the warrants lapsed without being exercised the revenue_ruling applied sec_1_1234-1 and held that x would recognize gain in an amount equal to the fair_market_value of the y stock at the date of its exchange for the issuance of the warrants congress understood the problem created by these seemingly inconsistent rules the committee report included an example of how a taxpayer could make use of the ruling to whipsaw the government present law can put the service into an unacceptable position if a corporation issues a warrant for dollar_figure and buys it back for dollar_figure it is likely to argue that notwithstanding rev it recognizes no income citing illinois rural credit association and other authorities if the corporation's stock goes up in value and the corporation buys the warrant back for dollar_figure it is likely to claim a loss citing revrul_72_198 the committee desires to end this discontinuity furthermore the committee believes that the repurchase of a warrant by the issuing_corporation should not produce different tax consequences to the corporation than an exercise of the warrant followed by a repurchase by the corporation of the newly issued stock revrul_86_9 1986_4_irb_6 declared revrul_72_198 obsolete with respect to options acquired or lapsing after date the effective date of sec_57 of the tax_reform_act_of_1984 presp-133053-07 see staff of h comm on ways and means 83d cong report on deficit_reduction_act_of_1984 comm print based on the consistent trend by congress to broadly apply sec_1032 and the policies underlying that trend the service interprets sec_1032 as applying to forward contracts whether or not stock is actually transferred where gain_or_loss is determined based on the value of the taxpayer’s own stock the service issued a private_letter_ruling in which it ruled that sec_1032 applies in a case where no stock was sold and where it resulted in the nonrecognition of gain under the facts of this ruling the corporation had gain resulting from payments made by holders of contracts in cash settlement of the corporation’s contracts to sell its stock see plr this letter_ruling has been discussed by commentators see tnt and tnt note that private letter rulings are not precedent and are not cited herein for that purpose discussion the cases and rulings cited above are cited in support of the service’s view that congress did not intend sec_1032 to be elective or to be avoided by economically equivalent transactions and that it should be applied broadly the instant case presents facts that were not previously ruled upon by the service or the courts however the overriding principle that is present in the service’s rulings and the history of sec_1032 does apply to the instant case this principle is that when taxpayers engage in transactions that result in a gain_or_loss that is based on the value of their own stock sec_1032 requires nonrecognition of such gain_or_loss in this case corporation a entered into the two forward contracts at issue using corporation a’s stock as the underlying subject of the contract the forward price under contract was dollar_figurec and the forward price under contract was dollar_figuref between date and the merger date corporation a’s value had fallen while we do not know the value of corporation a’s stock on date nor the value on the merger date the facts that we have indicate that the value of corporation a’s stock dropped and was below the forward price in both contracts on the merger date the cash settlement of these forward contracts as of the date of the merger based on the value of corporation a’s own stock would have resulted in a loss to which sec_1032 would have applied corporation a merged into acquiring via a transaction represented to qualify as a tax-free reorganization the reorganization provisions in the code treat the merged corporation corporation a as continuing in a modified corporate form via the surviving corporation acquiring see sec_1_368-1 as a result of the merger acquiring stepped into the shoes of corporation a with respect to the forward contracts remaining see eg sec_381 the regulations thereunder and boris i bittker and james s eustice federal income_taxation of corporations and shareholders 6th ed para dollar_figure warren gorham and lamont presp-133053-07 on or around the date of the merger the contract was changed to provide that parent’s stock would be the underlying subject of the contract in addition to the change to parent stock the value of corporation a’s stock on the merger date was used to establish the number of shares of the substitute stock that would be measured against the original forward price that was set at the beginning of each contract conversion ratio by using the conversion ratio the loss based on the value of corporation a’s stock up to the merger date was locked into the forward contracts and remained so after the underlying subject of the contracts changed to parent’s stock after the merger parent stock rose in value until the contract was settled even with parent’s rise in value however the previous locked in loss the difference between the forward price and corporation a’s value on the merger date was so significant that the gain produced by parent’s rise in value merely reduced the amount of overall loss when the contracts were settled corporation a’s representatives refer to revrul_70_305 1970_1_cb_169 to support recognizing the loss on the forward_contract in revrul_70_305 x a wholly- owned subsidiary of p purchased p shares on the open market x then sold the shares to outside interests at a gain the ruling holds that the stock of p held by x is not treasury_stock that the sale of such stock is not a sale by the corporation of its own stock for purposes of sec_1032 and that the transaction results in a gain_or_loss recognized by x corporation a’s representatives assert that because acquiring settled the forward_contract using parent’s stock the ruling applies and the transaction falls outside sec_1032 which allows the taxpayer to recognize the loss on the forward_contract however the revenue_ruling does not apply to the loss in the instant case the loss to x in the revenue_ruling was based on the value of a different corporation’s stock in contrast the loss to acquiring in the instant case was based on the value of acquiring’s own stock ie acquiring’s sec_381 predecessor’s stock up to the point of the merger the loss on corporation a stock that was embedded in the changed contract did not change or disappear just because the parties agreed to change the underlying stock to be delivered under the contract for example if parent’s stock had not risen in value between the merger date when the underlying stock to be delivered changed and the settlement_date of the contracts there would have been a loss at the end of the contracts of exactly the amount of loss that occurred up to the merger date that loss originated from and was attributable solely to the value of the corporation a stock it did not lose its origin when the parties changed the underlying stock to be delivered under the forward contracts accordingly taxpayer’s loss on the forward contracts should have been treated as a nonrecognized loss under sec_1032 this writing may contain privileged information any unauthorized disclosure of this writing may undermine our ability to protect the privileged information if disclosure is determined to be necessary please contact this office for our views presp-133053-07 please call rebecca o burch or me at not a toll-free call if you have any further questions sincerely _debra l carlisle__________ debra l carlisle chief branch office of associate chief_counsel corporate


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 corp plr-101009-13 date date legend parent -------------------------------------------------------------------- ------------------------------------------------------------ ----------------------------------------------- subsidiary -------------------------------------------------------------------- ----------------------------------------------------------- ----------------------------------------------- parent official -------------------------------------------------------------------- -------------------------------------------------------------------------------- ---------------------- tax professional ---------------------------------------------------------- ---------------------------------- date a --------------------------- dear ----------------- this letter responds to a letter dated date requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations to file a statement under sec_1_337_d_-2 and sec_1_1502-35 of the income_tax regulations as in effect for the taxable_year ended date a the elections the material information submitted for consideration is summarized below plr-101009-13 parent is the common parent of a consolidated_group the parent consolidated_group up to and including date a subsidiary was a direct wholly owned subsidiary of parent and a member of the parent consolidated_group during the taxable_year ended date a parent’s stock in subsidiary became worthless however parent failed to claim a worthless securities deduction on the parent consolidated group’s tax_return for such year elections under sec_1_337_d_-2 and sec_1_1502-35 to recognize the loss with respect to the disposition of the stock of subsidiary were required to be filed with or as part of parent’s timely filed return for it taxable_year ended date a however for various reasons the elections were not filed subsequently this request was submitted under sec_301_9100-3 for an extension of time to file the elections parent has represented that it is not seeking to alter a return position for which an accuracy-related_penalty has been or could be imposed under sec_6662 at the time of the request for relief under sec_301_9100-1 the commissioner has discretion to 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 code except subtitles e g h and i sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make a regulatory election sec_301_9100-1 sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides extensions of time for making regulatory elections that do not meet the requirements of sec_301 requests for relief under sec_301_9100-3 will be granted when the taxpayer provides 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 in this case the time for filing the elections is fixed by the regulations ie sec_1_337_d_-2 and sec_1_1502-35 therefore the commissioner has discretionary authority under sec_301_9100-3 to grant an extension of time for parent to file the elections provided parent acted reasonably and in good_faith the requirements of sec_301_9100-1 and sec_301_9100-3 are satisfied and granting relief will not prejudice the interests of the government information affidavits and representations submitted by parent parent official and tax professional explain the circumstances that resulted in the failure to timely file valid elections the information establishes that parent reasonably relied on qualified_tax professionals who failed to make or advise parent to make the elections and that the request for relief was filed before the failure to make the elections was discovered by the internal_revenue_service see sec_301_9100-3 and v plr-101009-13 based on the facts and information submitted including the representations that have been made we conclude that parent has established it acted reasonably and in good_faith the requirements sec_301_9100-1 and sec_301_9100-3 are satisfied and granting relief will not prejudice the interests of the government accordingly we grant an extension of time under sec_301_9100-3 until days from the date on this letter for parent to file the elections the above extension of time is conditioned on the parent consolidated group's tax_liability if any not being lower in the aggregate for all years to which the elections apply than it would have been if the elections had been made timely taking into account the time_value_of_money no opinion is expressed as to the parent consolidated group's tax_liability for the years involved a determination thereof will be made upon audit of the federal_income_tax returns involved we express no opinion with respect to whether parent qualifies substantively to make the elections specifically no opinion is expressed regarding whether or when parent’s stock in subsidiary became worthless in addition no opinion is expressed as to the tax effects or consequences of filing the elections late under the provisions of any other section of the code and regulations or as to the tax treatment of any conditions existing at the time of or resulting from filing the elections late that are not specifically set forth in the above ruling for purposes of granting relief under sec_301_9100-3 we relied on certain statements and representations made by the taxpayer and its representatives however all of the essential facts must be verified in addition notwithstanding that an extension is granted under sec_301_9100-3 to file the elections penalties and interest that would otherwise be applicable if any continue to apply 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 in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely __________________ ken cohen senior technician reviewer branch office of associate chief_counsel corporate


department of the treasury washington dc third party communication none date of communication not applicable_person to contact -------------------------------- id no ---------- ------------------ telephone number ---------------------- refer reply to cc ita b02 plr-104824-15 date august internal_revenue_service number release date index number ---------------------- ------- --------------------------------------- ------------------- ---------------------------------- ty ------- legend taxpayer ------------------------------------------------------------------------------------------------------------- x y ------------------------------------------------------------------------ --------------------- ------------------------------------------------------------------------ ------------------------------------------------------------------------ ------------------------------------------------------------------------ ------------------------------------------------------- ------------------------------ ---------------- --------------------- ------------------------ ------ ------------------------ ---------------------- ---------------------------- ------------------------------------------ ------- ------- ----------- ------------------ ---------------- ---------------- ---------------- z vice president of finance cpa firm tax_return_preparer month date1 date2 date3 corp year1 year2 city state dollar_figurea dollar_figureb dollar_figurec plr-104824-15 dear -------------- this is in response to your letter of date1 requesting permission to attach an election statement to taxpayer's originally filed federal tax_return for taxable year1 the election statement was not included although it was required in order for taxpayer to use a safe_harbor method_of_accounting under section dollar_figure of revproc_2011_29 2011_1_cb_746 this request is made in accordance with sec_301_9100-1 and sec_301_9100-3 of the procedure and administration regulations facts and representations taxpayer represents the following taxpayer is an x company headquartered in city state it provides a diversified range of y services to z taxpayer acquired the equity interests of corp in a transaction dated date2 the transaction qualifies as a covered transaction under sec_1_263_a_-5 of the income_tax regulations in connection with the acquisition of the equity interests taxpayer incurred success-based transaction fees in the amount of dollar_figurea taxpayer elected to deduct or dollar_figureb and capitalize the remaining or dollar_figurec taxpayer engaged cpa firm to prepare and file its year1 federal tax_return taxpayer relied upon cpa firm to accurately prepare the return after discussions with the tax_return_preparer who was a partner in cpa firm about the transaction success-based fees and the availability of the safe_harbor election in revproc_2011_29 taxpayer’s vice president of finance informed tax preparer that taxpayer decided to use the safe_harbor election that tax_return_preparer suggested for tax year1 taxpayer provided documentation and information relating to the transactions to tax_return_preparer taxpayer and taxpayer’s vice president of finance relied on tax_return_preparer as a qualified_tax professional to prepare a complete and accurate federal_income_tax return for tax year1 using the safe- harbor election they discussed the federal_income_tax was timely filed under extension on or about date3 and included a deduction of of the success-based_fee while the remaining of the success-based_fee was capitalized consistent with the requirements of the safe_harbor election in month of year2 tax_return_preparer discovered that he had accidentally omitted the statement required under sec_4 of revproc_2011_29 for taxpayers electing to plr-104824-15 use the safe_harbor method of allocating success-based fees this oversight was discovered by tax_return_preparer before any discovery by the internal_revenue_service tax_return_preparer had not informed taxpayer about the need to attach the statement to the return in order to properly make the election upon discovering the omission tax_return_preparer immediately contacted taxpayer and informed taxpayer of the oversight and the need to file a letter_ruling request for relief under sec_301_9100-1 and sec_301_9100-3 of the procedure and administration regulations accordingly taxpayer requests an extension of time be granted to allow taxpayer to attach to its year1 return the mandatory statement regarding the election to use the safe_harbor method of allocating success-based fees under revproc_2011_29 law and analysis sec_263 of the internal_revenue_code and sec_1_263_a_-2 of the income_tax regulations generally provide that no deduction shall be allowed for any amount_paid out for property having a useful_life substantially beyond the taxable_year in the case of an acquisition or reorganization of a business_entity costs that are incurred in the process of acquisition and that produce significant long-term benefits must be capitalized 503_us_79 397_us_572 under sec_1_263_a_-5 a taxpayer must capitalize an amount_paid to facilitate a business acquisition or reorganization transaction described in sec_1_263_a_-5 an amount is paid to facilitate a transaction described in sec_1_263_a_-5 if the amount is paid in the process of investigating or otherwise pursuing the transaction whether an amount is paid in the process of investigating or otherwise pursuing the transaction is determined based on all of the facts and circumstances see sec_1_263_a_-5 sec_1_263_a_-5 provides that an amount that is contingent on the successful closing of a transaction described in sec_1_263_a_-5 success-based_fee is presumed to facilitate the transaction and thus must be capitalized a taxpayer may rebut the presumption by maintaining sufficient documentation to establish that a portion of the fee is allocable to activities that do not facilitate the transaction and thus may be deductible a taxpayer's method for determining the portion of a success-based_fee that facilitates a transaction and the portion that does not facilitate the transaction is a method_of_accounting under sec_446 because the treatment of success-based fees was a continuing subject of controversy between taxpayers and the service the service published revproc_2011_29 revproc_2011_29 provides a safe_harbor method_of_accounting for allocating success- plr-104824-15 based fees paid in business_acquisitions or reorganizations described in sec_1 a - e in lieu of maintaining the documentation required by sec_1_263_a_-5 this safe_harbor permits electing taxpayers to treat percent of the success-based_fee as an amount that does not facilitate the transaction ie an amount that can be deducted the remaining portion of the fee must be capitalized as an amount that facilitates the transaction section dollar_figure of revproc_2011_29 allows a taxpayer to make a safe_harbor election with respect to success-based fees section dollar_figure provides that the service will not challenge a taxpayer's allocation of success-based fees between activities that facilitate a transaction described in sec_1_263_a_-5 costs that must be capitalized and activities that do not facilitate the transaction costs that may be deducted if the taxpayer does three things first the taxpayer must treat percent of the amount of the success-based_fee as an amount that does not facilitate the transaction and thus may be deducted second the taxpayer must capitalize the remaining amount of the success-based_fee as an amount which does facilitate the transaction third the taxpayer must attach a statement to its original federal_income_tax return for the taxable_year the success-based_fee is paid_or_incurred stating that the taxpayer is electing the safe_harbor identifying the transaction and stating the success-based_fee amounts that are deducted treated as not facilitating the transaction and capitalized treated as facilitating the transaction it is this third requirement that taxpayer requests permission to accomplish with this ruling_request taxpayer requests permission to attach the statement required by sec_4 of revproc_2011_29 to its return by amending its original filed return and superseding it with a return with the proper election statement completed and attached sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make an election sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides extensions of time for making elections that do not meet the requirements of sec_301_9100-2 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 certain regulatory elections sec_301_9100-1 defines a regulatory election as an election whose due_date is prescribed by a regulation published in the federal_register or a revenue_ruling revenue_procedure notice or announcement published in the internal_revenue_bulletin sec_301_9100-3 provides that requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish to the satisfaction of the plr-104824-15 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 the interests of the government are prejudiced if granting relief would result in the taxpayer having a lower tax_liability in the aggregate for all taxable years affected by the election than the taxpayer would have had if the election had been timely made the interests of the government are ordinarily prejudiced if the taxable_year in which the regulatory election should have been made or any taxable years that would have been affected by the election had it been timely made are closed by the period of limitations on assessment sec_301_9100-3 provides special rules for accounting_method regulatory elections sec_301_9100-3 provides that the interests of the government are deemed prejudiced except in unusual or compelling circumstances if the accounting_method regulatory election for which relief is requested is subject_to the advance consent procedures for method changes requires a sec_481 adjustment would permit a change from an impermissible method_of_accounting that is an issue under consideration by examination or any other setting or provides a more favorable method_of_accounting if the election is made by a certain date or taxable_year conclusion based upon our analysis of the facts and representations provided taxpayer acted reasonably and in good_faith and granting relief will not prejudice the interests of the government therefore the requirements of sec_301_9100-1 and sec_301_9100-3 have been met taxpayer is granted an extension of days from the date of this ruling to file its mandatory statement for the tax year1 transaction as required by sec_4 of revproc_2011_29 stating that taxpayer is electing the safe_harbor for success-based fees identifying the transaction and stating the success-based_fee amounts that are deducted and capitalized for tax year1 the rulings contained in this letter are based on information and representations submitted by 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 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 in particular no opinion is expressed as to whether taxpayer properly included the correct costs as its success-based fees subject_to the retroactive election or whether taxpayer's transactions are within the scope of revproc_2011_29 plr-104824-15 a copy of this letter must be attached to any income_tax return to which it is relevant alternatively a taxpayer filing its return electronically may satisfy this requirement by attaching a statement to its return that provides the date and control number of the letter_ruling in accordance with the provisions of the power_of_attorney currently on file with this office a copy of this letter is being sent to your authorized representatives we are also sending a copy of this letter to the appropriate operating division director enclosed is a copy of the letter_ruling showing the deletions proposed to be made in the letter when it is disclosed 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 sincerely ______________________________ norma c rotunno senior technician reviewer branch office of associate chief_counsel income_tax accounting