office_of_chief_counsel internal_revenue_service memorandum number release date cc pa apjp b02 jmmoran postn-153429-05 uilc date date to bradford a johnson associate area_counsel hartford large and midsized business cc lm f har attn raymond m boulanger senior attorney cc lm f har b from janice r feldman assistant to the branch chief procedure administration administrative provisions and judicial practice cc pa apjp b02 sec_6501 how to determine gross_income subject this memorandum responds to your request for assistance regarding an issue raise by a team coordinator that concerns what constitutes gross_income for purposes of the six-year period of limitations on assessment under sec_6501 sec_6501 uses a percentage of gross_income to measure whether the omission of an amount from the gross_income stated on an income_tax return is substantial and thereby triggers an extended period of assessment issues issue how is the amount of gross_income stated in a tax_return determined for purposes of sec_6501 where the computation shown thereon includes items of capital_loss as well as items of capital_gain issue whether a capital_loss transaction may result in an omission of gross_income for purposes of sec_6501 if the loss is disallowed in its entirety postn-153429-05 conclusions issue the amount of gross_income stated in the return takes into account items of capital_gain but not those of capital_loss issue like the amount of gross_income stated in the return the amount of gross_income omitted takes into account items of capital_gain but not those of capital_loss a capital_loss transaction does not result in an omission of gross_income even if the loss is disallowed in its entirety if the adjustment goes beyond disallowing the loss and results in gain being recognized on the transaction because either the amount_realized was understated or the basis was overstated an omission of gross_income results facts the following figures were provided by the team coordinator for purposes of discussing issue gross_receipts cost_of_goods_sold gross_profit interest dollar_figure big_number capital_gain capital_loss big_number net_capital_gain income net_capital_loss of dollar_figure is carried forward dollar_figure dollar_figure big_number total dollar_figure at issue is the treatment of the capital_gain and the capital_loss items the methods for determining gross_income stated in the return for purposes of this issue are as follows method a start with dollar_figure which reflects a netting of the capital items - gross_income per return before special rule in sec_6501 add back cost_of_goods_sold special rule in sec_6501 gross_income for sec_6501 purposes method b gross_receipts dollar_figure dollar_figure big_number dollar_figure postn-153429-05 cost_of_goods_sold big_number gross_profit interest capital_gain gross_income per return before special rule in sec_6501 special rule in sec_6501 add back cost_of_goods_sold dollar_figure big_number big_number dollar_figure big_number dollar_figure gross_income for sec_6501 purposes law discussion sec_6501 provides if the taxpayer omits_from_gross_income an amount properly includible therein which is in excess of percent of the amount of gross_income stated in the return the tax may be assessed or a proceeding in court for the collection of such tax may be begun without assessment at any time within years after the return was filed because we reference the code below we note that this language is the same as that in sec_275 of the code issue amount of gross_income stated in the return2 a general meaning of gross_income for purposes of sec_6501 with the exception of sec_6501 where the statute carves out a special definition for trade_or_business gross_income from the sale_of_goods or services which is not at issue here gross_income for purposes of sec_6501 is defined by reference to sec_61 see 101_tc_294 n under sec_61 only the gain from the sale of property is included in gross_income and not the entire amount of the sale proceeds sec_61 the code added subsections a i and a ii to the above to end confusion about certain applications of the language that are not relevant here subsection a i defines gross_income to include cost of goods and subsection ii allows an item omitted from the computation of income on the return to nevertheless not be taken into account for purpose of the percent test if the amount was disclosed on the return in a manner that apprised the service of the nature and amount of the omitted item a tax_return ordinarily does not provide any place for stating gross_income the total income as used in the forms might in some simple cases equate with gross_income but in general as the tax_court has explained as a result of the lack of a place for stating gross_income we have dealt with the taxpayers' tax returns by determining whether one or another item was properly an item_of_gross_income within the appropriate contemporary statutory definition of gross_income 116_tc_31 postn-153429-05 includes in its nonexclusive list of items that constitute gross_income a g ains derived from dealings in property sec_61 treasury regulations further define these property gains as athe excess of the amount_realized over the unrecovered cost or other basis for the property sold or exchanged sec_1_61-6 which is in accordance with sec_1001 see schneider v commissioner tcmemo_1985_139 in which the court rejected the taxpayer’s attempt to include the gross_proceeds from a sale at a capital_loss in the amount of gross_income stated in the return the definition of gross_income under sec_6501 may have to take account of special meanings provided in other parts of the code in addition to that provided in sec_61 eg an exclusion of income an example of a provision providing a special meaning for gross_income is one that provides beneficial treatment for capital_gains under sec_117 of the code prior to the revenue act of only percent of recognized capital_gains was taken into account in computing net_income and corresponding treatment was provided for recognized losses the courts held that for purposes of sec_6501’s predecessor sec_275 of the code only percent of such gains had to be shown on the return for the gross_income to be considered fully stated see 45_bta_1104 we think it evident that the term ‘gross income’ as used in sec_275 supra refers to the statutory gross_income required to be reported on the return maloy was cited with approval in 338_us_692 ndollar_figure a case which applied sec_117 of the code to a limitation for charitable_contributions that was based on gross_income in benedict the supreme court found that the treatment of the half not taken into account under sec_117 of the code was not addressed in the code the legislative_history or administrative practice and therefore sought the purposes of the applicable sections of the code and adopted that construction which best gives effect to those purposes u s pincite the court held that the half not to be taken into account was excluded from statutory gross_income citing maloy the nature of the capital_gains benefit in sec_117 of the code was changed by the revenue act of from an exclusion to a deduction from gross_income thereafter the courts held that all of the recognized capital_gain is includable in gross_income for purpose of the extended statute of limitation see 44_tc_80 acq 1965_2_cb_6 in which the tax_court noted that maloy is no longer controlling authority due to revenue act of sec_117 of the code was carried into the code as sec_1202 sec_1202 was repealed by the tax_reform_act_of_1986 and currently the capital_gains benefit is generally provided neither by an exclusion nor a deduction but instead by the application of special rates to various categories of capital_gain see sec_1 this does not affect the conclusion in roschuni that generally all capital_gain is includible in gross_income however in a partial exclusion was enacted as sec_1202 for gain from certain small_business stock held by noncorporate taxpayers the partial exclusion provided for in sec_1202 is similar to the partial exclusion at postn-153429-05 issue in maloy following the reasoning in maloy gross_income for purposes of sec_6501 does not include the portion of capital_gain excluded by sec_1202 b treatment of capital_loss transactions for purposes of sec_6501 sec_63 defines taxable_income generally as gross_income minus the deductions allowed by chapter of the code sec_161 provides that in computing taxable_income under sec_63 there shall generally be allowed as deductions the items specified in chapter part iv of the code sec_1001 provides that the gain from the sale_or_other_disposition of property is the excess of the amount_realized over the adjusted_basis for determining gain and the loss is the excess of the adjusted_basis for determining loss over the amount_realized sec_165 which is in chapter part iv of the code provides a deduction for any loss sustained during the tax_year and not_compensated_for_by_insurance_or_otherwise sec_165 provides however that losses from sales or exchanges of capital assets that is capital losses shall be allowed only to the extent allowed in sec_1211 and sec_1212 under sec_1211 a corporation is allowed to apply otherwise deductible capital losses to the extent of capital_gains sec_1211 allows noncorporate taxpayers to do the same and in addition allows a deduction of up to dollar_figure of any excess married taxpayers filing separately are limited to dollar_figure any capital_loss that exceeds these limitations ie a net_capital_loss see sec_1222 is carried back or carried over to other years under sec_1212 if an individual has a single capital_transaction for a year that results in a dollar_figure loss there is no argument for having the dollar_figure sec_165 deduction reduce gross_income for purposes of sec_6501 the treatment of a capital_loss in the determination of gross_income for purposes of the extended assessment statute was established under the code in 7_tc_263 aff’d 168_f2d_994 6th cir the taxpayer reported net long-term gain_or_loss from sale_or_exchange of capital assets - loss big_number for the tax_year t c pincite the tax_court upheld the taxpayer's contention that gross_income must be computed without any deduction for the long-term_capital_loss stating that nothing is contained in any of the provisions of sec_22 the code’s predecessor of sec_61 requiring an adjustment to be made in the computation of gross_income on account of capital losses provision for deduction of such losses is found in subsection g of sec_23 entitled ‘deductions from gross_income ’3 code sec_23 contained provisions similar to current sec_165 and g postn-153429-05 t c pincite the tax_court concluded that it seems clear from these provisions that capital losses form no part of the gross_income but are to be deducted from gross_income in arriving at net_income t c pincite green was cited with approval in benedict u s pincite ndollar_figure and in northern ind pub serv co t c pincite the same reasoning was followed in the schneider memorandum_decision thus in arriving at 'gross income stated in the return' under sec_6501 petitioners' computation is unaffected by capital losses sustained or gross_proceeds derived from dealing in real_property emphasis added neither green nor schneider explicitly discussed the effect of sec_1211 or its predecessor on the definition of gross_income however as the reference in sec_165 makes clear sec_1211 is simply a provision that limits the amount of a deduction it does not change a sec_165 deduction to an exclusion offset or other type of adjustment_to_gross_income accordingly for purposes of sec_6501 the netting procedure in sec_1211 has no effect on the gross_income stated in the return while the effect of the netting procedure for purposes of the extended statute_of_limitations has not been directly addressed by the courts the service did argue that capital_gains netting did not affect gross_income in 251_f2d_764 7th cir a case concerning personal_holding_company_income for the tax_year at issue was a code provision that defined personal holding income as the portion of the gross_income which consists of gains from futures transactions the taxpayer argued that the provision required a netting or an offsetting of those futures transactions that resulted in gain and those that resulted in loss with the inclusion of the single composite gain in gross_income the service argued as follows that the general statutory scheme of the code supported a contrary answer further respondent contends it is obvious from usage throughout chapter one that the term 'gains' in itself does not mean a netting of gains and losses he points out that in sec_117 the predecessor of sec_1211 the term 'gains' is used as distinguished from 'losses' where the code provides that 'in the case of a corporation losses from sales or exchanges of capital assets shall be allowed only to the extent of gains from such sales or exchanges ' the same section provides in addition that in the case of a corporation the excess of gains from sales or exchanges of capital assets over the losses from such sales or exchanges is 'net capital_gain ' sec_117 see sec_1222 and defining capital_gain_net_income and net_capital_gain respondent urges and the tax_court found that the term 'gains' would not be used by green focused on whether gross_income should be reduced by the dollar_figure capital_loss which may have been net of gains if there were such gains they should have been included in gross_income and the issue should have been whether the full amount of loss should have been taken into account as a negative_amount the primary issue in schneider was whether the taxpayer could include only the amount_realized without regard to basis in gross_income postn-153429-05 congress to refer to the concept of 'net capital gain' as contended by petitioner and that if congress had meant 'net capital gain' it would have said just that finally respondent points out that sec_111 of the code the predecessor of sec_1001 obviously envisioned a separate computation of gain_or_loss from each sale of an asset as a preliminary to the addition of gains to gross_income and subsequent deduction of losses f 2d pincite the court adopted the taxpayer's position citing the specific purpose of the personal_holding_company provisions and the fact that congress had changed the statute in what the court felt was a clarification however the service’s analysis of the structure of the1939 code is relevant for purposes of the subject issue because the same reasoning applies to the interpretation of sec_6501 under the 1986_code and supports the position that capital losses do not reduce gross_income for that purpose as noted in the excerpt from sicanoff quoted above in addition to sec_1211 the code contains certain other netting procedures that are used in the determination of the character of capital_gains_and_losses and which capital_gains_tax rate will apply for example under sec_1231 gains and losses from certain assets and transactions are netted to determine whether the gains and losses are capital or ordinary in nature and sec_1 and perform a number of netting procedures to determine the rates at which different types of capital_gains will be taxed however like sec_1211 these provisions do not affect the basic character of a capital_loss or a sec_1231 loss as a sec_165 deduction that is taken into account in determining taxable_income under sec_63 not gross_income under sec_61 we note that while a netting approach might favor the service in regard to determining the amount of stated gross_income it might work against the service in determining the amount of omitted gross_income for purposes of sec_6501 if the capital_gains_and_losses were net and a gain transaction was not reported then if the taxpayer was still left with a net_capital_loss after the inclusion of gain the taxpayer might argue there was no omission of gross_income as the inclusion of the gain item did not increase the stated gross_income but only decreased the amount of stated loss the service would be left arguing that the meaning of gross_income for purposes of determining what is stated in the return is not consistent with that for determining if gross_income has been omitted we believe that the interpretation that captures the omission in such a case is more consistent with the purpose of sec_6501 see eg 82_tc_546 of capital_gain included in determining both amount stated and amount omitted citing roschuni accordingly we believe method b is the correct method for determining gross_income stated in the return it appears that the service previously argued that the netting of capital items reduces gross_income for purposes of sec_6501 see 84_tc_203 n we do not address respondent's alternative contention that petitioners' commodities gains and losses should postn-153429-05 issue omission of gross_income for sec_6501 purposes as discussed in connection with issue the same treatment of capital_gains_and_losses should normally apply for both determining the amount stated in the return and the amount omitted from the return the service’s adjustment for a sales transaction may result in the complete elimination of a loss ie the service may find that the amount_realized was understated or basis was overstated the inflation of a deduction will not cause an omission_of_income if the service’s adjustment only eliminates the loss compare green t c pincite capital losses form no part of the gross_income but are to be deducted from gross_income in arriving at net_income for example if a return reports a dollar_figure loss on a sale resulting from an amount_realized of dollar_figure and a basis of dollar_figure and the service adjusts the basis down to dollar_figure resulting in no gain_or_loss on the sale there is no omission of gross_income if however the service’s adjustment of a sales transaction reporting a loss goes beyond simply eliminating the loss and results in a gain the amount of that unreported gain constitutes an omission of gross_income for purposes of sec_6501 for example if in the preceding example the service adjusts the basis down to dollar_figure resulting in dollar_figure of gain on the sale there is an omission of dollar_figure please call john moran of cc pa apjp b02 at if you have questions regarding this memorandum be offset and that petitioners' thus had no gains from dealings in commodities under sec_61 as explained in this memorandum we disagree with this approach


department of the treasury certified taxpayer_identification_number person to contact employee id number kkk tel fax kkkk refer reply to in re exempt status tax years and subsequent years uil index internal_revenue_service tege appeals programs n los angeles street los angeles ca release number release date date date redaction legend a b b dear this is a final adverse determination as to your application_for exempt status under sec_501 as an organization described under sec_501 of the internal_revenue_code our adverse determination was made for the following reasons you are not operated exclusively for exempt purposes within the meaning of internal_revenue_code sec_501 and sec_1_501_c_3_-1 you do not engage primarily in activities that accomplish one or more of the exempt purposes specified in internal_revenue_code sec_501 more than an insubstantial part of your activities are in furtherance of a non-exempt purpose you are not operated primarily for a public purpose as is required by internal_revenue_code sec_501 and sec_1_501_c_3_-1 you operate for the benefit of private interests in addition because we have determined that you are not an organization described under sec_501 you cannot be classified as a public charity under sec_509 contributions to your organization are not deductible under code sec_170 you are required to file federal form_1120 for the year s shown above if you decide to contest this determination under the declaratory_judgment provisions of code sec_7428 a petition to the united_states tax_court the united_states court of claims or the district_court of the united_states for the district of columbia must be filed before the ninety-first day after the date this determination was mailed to you contact the clerk of the appropriate court for rules for filing petitions for declaratory_judgment to secure a petition form from the united_states tax_court write to the united_states tax_court second street n w washington d c you also have the right to contact the office_of_the_taxpayer_advocate however you should first contact the person whose name and telephone number are shown above since this person can access your tax information and can help you get answers you can call and ask for taxpayer_advocate assistance taxpayer_advocate assistance cannot be used as a substitute for established irs procedures formal appeals procedures etc the taxpayer_advocate is not able to reverse legal or technically correct_tax determinations or extend the time fixed by law that you have to file a petition in the united_states tax_court the taxpayer_advocate can however see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling we will notify the appropriate state officials of this final adverse determination of your exempt status as required by code sec_6104 if you have any questions please contact the person whose name and telephone number are shown in the heading of this letter sincerely nan shimizu appeals team manager er fai irs department of the treasury internal_revenue_service constitution ave n w washington d c uil number legend date state system dear i i date ae contact person id number contact telephone number contact fax number we considered your application_for recognition of exemption from federal_income_tax under sec_501 of the internal_revenue_code the code or i r c 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 whether you are exempt under sec_501 and classified as a public charity under sec_509 facts you were incorporated on date in state as a nonprofit corporation for charitable scientific or educational_purposes within the meaning of sec_501 and specifically to promote and support directly or indirectly the interests and purposes of system system is a not-for-profit healthcare corporation recognized as tax-exempt under sec_501 and classified as a public charity under sec_509 you were formed by system in order to serve as the legal and operational vehicle for achieving clinical care integration coordination and accountability among both employed and independent physicians practicing throughout system affiliated facilities you have submitted a form_1023 application requesting a determination that you are exempt under sec_501 and classified as a supporting_organization under sec_509 you letter rev catalog number 47630w - indicate that you are an accountable_care_organization aco you do not participate in the medicare shared savings program mssp you do not engage in the direct delivery of medical_care or provide health services to the general_public rather you indicate that all of your time and resources are dedicated to the furtherance of the triple aim health care reform goals established by the patient protection and affordable_care_act ppaca namely reducing the cost of health care for individuals improving patient access to and the quality of care and improving population health and patient experience your mission goals and activities are focused on the achievement of these triple aim goals you have formed a clinically integrated network of health care providers by entering into participation agreements with those providers who meet your eligibility and performance standards the network participants include physicians employed by system and its facilities as well as those from independent practice groups who are members of the medical staff at system affiliated facilities and those practicing at other non-system affiliated hospitals and in other healthcare systems information included in your application materials indicates that approximately half of your participating physicians are in independent practices or affiliated with other hospitals and regional health systems you are developing and implementing performance measures to assess the care delivery of participating providers you have established data infrastructure for collecting aggregating and analyzing data including an electronically integrated clinical information data warehouse and analysis a patient satisfaction survey tool and clinical network infrastructure necessary for tracking provider performance and sharing clinical data you have developed and implemented financial incentives that motivate network providers to achieve improvement tying payments to participating providers to their collective success at achieving the triple aim goals as determined by your performance measures according to the terms of your participation agreements you act as the representative for all participating providers including the independent and other non- system affiliated physicians in the negotiation and execution of certain agreements with third-party payers these agreements link rewards and penalties for participants to their achievement of your performance measures in order to incentivize changes in participant behavior in furtherance of the triple aim goals you have negotiated two such payor agreements so far on behalf of your participant practitioners law lr c sec_501 provides that an organization may be exempted from tax if it is organized and operated exclusively for religious charitable scientific testing for public safety literary or educational_purposes and no part of the net_earnings inures to the benefit of any private_shareholder_or_individual lr c sec_509 excludes from the definition of the term private_foundation an organization which a is organized and at all times thereafter is operated exclusively for the benefit of to perform the functions of or to carry out the purposes of one or more specified organizations described in sec_509 or sec_509 b is operated supervised or controlled by or in connection with one or more organizations described in sec_509 or and c is not controlled directly or indirectly by one or more disqualified persons as defined in sec_4946 other letter rev catalog number 47630w than foundation managers and other than one or more organizations described in sec_509 or sec_1_501_c_3_-1 provides that in order to be exempt under sec_501 an organization must be both organized and operated exclusively for one or more of the exempt purposes specified in that section if an organization fails to meet either the organizational_test or the operational_test it does not qualify for exemption 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 which 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 states that an organization is not operated exclusively for charitable purposes if its net_earnings inure in whole or in part to the benefit of private shareholders or individuals courts have interpreted the term net_earnings as referring to an advantage profit fruit privilege gain or interest derived from the organization 505_f2d_1068 6th cir 78_tc_280 sec_1_501_c_3_-1 provides that an organization is not organized or operated for an exempt_purpose unless it serves a public rather than a private interest even though an organization serves a public interest it will not qualify for status under sec_501 if it also serves a private interest more than incidentally therefore the organization has to establish that it is not organized or operated for the benefit of private interests such as designated individuals the creator or his family shareholders of the organization or persons controlled directly or indirectly by such private interest the private benefit prohibition of sec_501 applies to all kinds of persons and groups not just to those insiders subject_to the stricter inurnment proscription prohibited private benefit may include an advantage profit fruit privilege gain or interest retired teachers legal defense fund supra sec_1_501_c_3_-1 provides that the term charitable as used in sec_501 includes its generally accepted legal sense and includes such purposes as relief of the poor and distressed or of the underprivileged advancement of religion advancement of education or science and lessening the burdens of government the promotion of health has long been recognized as a charitable purpose see restatement third trusts sec_28 austin w scott and william f fratcher the law of trusts sec_38 sth ed and revrul_69_545 1969_2_cb_117 however not every activity that promotes health supports tax exemption under sec_501 for example selling prescription pharmaceuticals promotes health but pharmacies cannot qualify for recognition of exemption under sec_501 on that basis alone 72_tc_687 aff'd 625_f2d_804 8th cir see also 325_f3d_1188 10th cir noting that engaging in an activity that promotes health standing alone offers an insufficient indicium of an organization’s purpose as n umerous for-profit enterprises offer products or services that promote health furthermore an institution for the promotion of health is not a charitable institution if it is privately owned and is run for the profit of the owners revrul_98_15 sec_1_509_a_-4 provides that in order to qualify as a supporting_organization an organization must be both organized and operated exclusively for the benefit of to perform the functions of or to carry out the purposes of one of more specified publicly supported organizations if it fails to meet either the organizational_test or operational_test it cannot qualify as a supporting_organization letter rev catalog number 47630w sec_1_509_a_-4 provides that a supporting_organization will be regarded as operated exclusively to support one or more specified publicly supported organizations hereinafter referred to as the operational_test only if it engages solely in activates which support or benefit the specified publicly supported organizations in 326_us_279 the supreme court stated that the presence of a single nonexempt purpose if substantial in nature will destroy the exemption regardless of the number or importance of truly exempt purposes this case is the basis of sec_1_501_c_3_-1 which provides that an organization will be regarded as operated exclusively for one or more exempt purposes only if it engages primarily in activities which 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 are not in furtherance of an exempt_purpose in 92_tc_1053 the tax_court held that an organization that as its primary activity operated a school to train individuals for careers as political campaign professionals was not operated exclusively for exempt purposes as described in sec_501 because the school’s activities conferred impermissible private benefit the court defined private benefit as nonincidental benefits conferred on disinterested persons that serve private interests an organization may provide benefits to private individuals provided those benefits are incidental quantitatively and qualitatively to be qualitatively incidental private benefit must be a necessary concomitant of an activity that benefits the public at large in other words the benefit to the public cannot be achieved without necessarily benefiting certain private individuals to be quantitatively incidental the private benefit must be insubstantial measured in the context of the overall public benefit conferred by the activity to illustrate the quantitatively incidental concept compare revrul_68_14 1968_1_cb_243 with revrul_75_286 1975_2_cb_210 in revrul_68_14 an organization that helped beautify a city was exempt under sec_501 when it planted trees in public areas cooperated with municipal authorities in tree plantings and programs to keep the city clean and educated the public in advantages of tree planting in revrul_75_286 an organization with similar activities did not qualify under sec_501 where its members consisted of residents and business operators of a city block and its activities were limited to that block the facts in revrul_75_286 indicate that the organization was organized and operated for the benefit of private interests by enhancing the value of members’ property for a benefit to be qualitatively incidental it must be a necessary concomitant of the activity which benefits the public at large that is the benefit to the public cannot be achieved without necessarily benefiting certain private individuals for example in revrul_70_186 supra an organization was formed to preserve a lake as a public recreational facility and to improve the condition of the water in the lake to enhance its recreational features although the organization clearly benefited the public at large there necessarily was also significant benefit to the private individuals who owned lake front property in this ruling the irs determined that the private benefit was incidental in a qualitative sense stating the benefits to be derived from the organization’s activities flow principally to the general_public through the maintenance and improvement of public recreational facilities any private benefits derived by the lake front property owners do not lessen the public benefits flowing from the organization’s operations in fact it would be impossible for the organization to accomplish its purposes without providing benefits to the lake front property owners letter rev catalog number 47630w thus the organization qualified for exemption under sec_501 revrul_77_69 1977_1_cb_143 describes and agency that was organized and operated pursuant to federal statute to establish and maintain a system of health planning and resource development aimed at providing adequate health care for a specified geographic area it was funded by federal grants and managed by government officials and members of the public the organization gathered and analyzed health data established health system plans and goals coordinated activities with professional standards review organizations reviewed and approved grant applications for federal funds and assisted states in reviewing health services capital expenditures the organization promoted the health of the residents of the area in which it functioned and met the requirements of lessening the burdens of government and therefore operated for charitable purposes under sec_501 revrul_81_276 1981_2_cb_128 describes a professional standards review organization established pursuant to a federal statute to review health care practitioners’ and institutions’ provision of health care services and items for which payment is made under medicare and medicaid and determine whether the quality of services met professionally recognized standards of care the irs ruled that by taking on the government's burden of reviewing the quality of services under medicare and medicaid the organization lessened the burdens of government within the meaning of sec_1_501_c_3_-1 any benefit to members of the medical profession from such activities was incidental to the benefit the organization provided in lessening the burdens of government therefore the organization qualified for exemption under sec_501 revrul_85_2 1985_1_cb_178 sets forth the criteria for determining whether an organization's activities are lessening the burdens of government whether the governmental_unit considers the organization's activities to be its burden and whether these activities actually lessen the burden of the governmental_unit an activity is a burden of the government if there is an objective manifestation by the governmental_unit that it considers the activities of the organization to be its burden the interrelationship between the governmental_unit and the organization may provide evidence that the governmental_unit considers the activity to be its burden whether the organization is actually lessening the burdens of government is determined by considering all of the relevant facts and circumstances revrul_86_98 1986_2_cb_74 holds that an individual practice association ipa that provides health services through written agreements with health maintenance organizations hmos does not qualify for exemption from federal_income_tax as a social_welfare_organization under sec_501 the ipa’s stated purpose is to arrange for the delivery of health services through written agreements negotiated with hmos membership in the ipa is limited to practicing licensed physicians who are members of a specified county medical society the ipa’s members generally maintain a private medical practice in addition to performing services for the ipa the ipa’s members are required to enter into written service contracts under which they provide services to the hmo’s patients in accordance with a negotiated compensation arrangement between the hmo and an ipa the ipa’s primary activities are to serve as a bargaining agent for its members in dealing with hmos and to perform the administrative claims services required by the agreements members agree to reimbursement by the ipa according to a fee schedule established by the ipa’s board_of directors the ruling finds that the ipa is akin to a billing and collection service and a collective bargaining representative negotiating on behalf of its member-physicians with hmos in addition the ipa does not provide medical services that would not have been available but for its establishment or that are available at fees below what is customarily and reasonably charged by the members in their private practices the ipa is held to operate in a manner similar to a for-profit entity and its primary beneficiaries are its member-physicians rather than the community as a whole the american_recovery_and_reinvestment_act_of_2009 arra p l enacted date includes the provision of various economic incentives to encourage the use of health information_technology letter rev catalog number 47630w the conference_report to arra h rept 111th cong 1st sess includes the following statement relating to these incentives pincite as a result of the incentives and appropriations for health information_technology provided in this bill it is expected that nonprofit_organizations may be formed to facilitate the electronic use and exchange of health-related information consistent with standards adopted by hhs and that such organizations may seek exemption from income_tax as organizations described in sec_501 consequently if a nonprofit organization otherwise organized and operated exclusively for exempt purposes described in sec_501 engages in activities to facilitate the electronic use or exchange of health-related information to advance the purposes of the bill consistent with standards adopted by hhs such activities will be considered activities that substantially further an exempt_purpose under sec_501 specifically the purpose of lessening the burdens of government private benefit attributable to cost savings realized from the conduct of such activities will be viewed as incidental to the accomplishment of the nonprofit organization’s exempt_purpose notice_2011_20 2011_16_irb_652 date summarizes how the irs expects existing irs guidance may apply to sec_501 tax-exempt organizations charitable organizations such as chartable hospitals participating in the medicare shared savings program through acos application of law as described in sec_1_501_c_3_-1 in order to qualify for exemption as an organization described in sec_501 an organization must be both organized and operated exclusively for one or more of the purposes specified in that section an organization must establish that it operates primarily for activities that accomplish exempt purposes and that no more than an insubstantial part of its activities do not further an exempt_purpose the presence of a single substantial nonexempt purpose destroys the exemption regardless of the number or importance of the exempt purposes see 326_us_279 exempt charitable purposes include among others relief of the poor and distressed and the lessening of the burdens of government see sec_1_501_c_3_-1 in order for an activity to further the exempt charitable purpose of lessening the burdens of government there must be an objective manifestation that the government considers the activities to be its burden revrul_85_2 supra certain provisions of the ppaca encourage and support aco and cost sharing arrangements furthermore as indicated in notice_2011_20 congress established the mssp to be conducted through acos in order to promote quality improvements and cost savings in health care therefore participation in the mssp by an aco will generally further the charitable purpose of lessening the burdens of government within the meaning of sec_1_501_c_3_-1 in contrast however the law does not provide an objective manifestation that the government considers non-mssp related aco activities to be its burden regardless of their furtherance of the ppaca’s overall triple aim goals you are not like the organizations described in revrul_77_69 supra and revrul_81_276 supra because you are not established pursuant to a statute managed by government officials or funded by government grants there is no government oversight of your activities similar to that of an aco participating in the mssp you are not engaged primarily in assisting the medicare or medicaid population which could further the charitable purpose of relieving the poor and distressed see sec_1_501_c_3_-1 letter rev catalog number 47630w the promotion of health is also recognized as a charitable purpose however not every activity that generally promotes health furthers charitable purposes under sec_501 for example selling prescription pharmaceuticals promotes health but pharmacies cannot qualify for recognition of exemption under sec_501 on that basis alone see federation pharmacy services inc supra the triple aim goals of the ppaca that you have identified while generally promoting health are not coextensive with exempt purposes under sec_501 and not all activities advancing those goals are necessarily in furtherance of charitable purposes therefore you have not established that you are operated primarily for exempt purposes under sec_501 in addition it is clear from your application materials that one of your substantial activities is the negotiation of payer agreements on behalf of your healthcare provider participants as evidenced by the representative participation_agreement and the payer agreements you provided approximately half of your participating physicians are not employed by system or system hospitals negotiating with private health insurers on behalf of unrelated healthcare providers is not a charitable activity see revrul_86_98 supra as the irs has stated in notice_2011_20 negotiating with private health insurers on behalf of unrelated parties generally is not a charitable activity regardless of whether the agreement negotiated is a program aimed at achieving cost savings in health care delivery these activities are primarily beneficial to the non-system affiliated physician hospital and other health care provider participants because you are providing them with specific long and short term planning information that can be used in their business activities organizations seeking exemption under sec_501 must be organized and operated exclusively for exempt purposes pursuant to sec_1_501_c_3_-1 an entity that is substantially organized or operated to serve private rather than public interests cannot be recognized as operating exclusively for exempt purposes see sec_1 c - d ii and american campaign academy supra the tax_court has explained that prohibited private benefits may include an advantage profit fruit privilege gain or interest see american campaign academy pincite your negotiation of payer agreements on behalf of the non-system affiliated physicians only indirectly benefits the community as a whole the private benefit to these members is not qualitatively or quantitatively incidental or insubstantial in comparison to the community benefit produced by your activities your negotiation of payer agreements on behalf of independent healthcare providers and those employed at other hospitals and healthcare systems therefore comprises a substantial part of your activities and confers an impermissible private benefit to participants who are not affiliated with system although your electronic health records activities may further charitable purposes under sec_501 as described in the conference_report to arra the fact that you may have some programs that further exempt purposes is immaterial because as provided in better business bureau of washington d c supra the presence of a substantial nonexempt purpose destroys the exemption under sec_501 regardless of the number or importance of truly exempt purposes for similar reasons even if you were recognized as exempt under sec_501 you would not be classified as other than a private_foundation under sec_509 a supporting_organization must be organized exclusively for the benefit of to perform the functions of or to carry out the purposes of one or more specified organizations described in sec_509 or sec_509 as discussed above your networking and contracting activities on behalf of non-system healthcare providers does not exclusively provide a benefit to system therefore you do not meet the operational_test for a supporting_organization set out under sec_1_509_a_-4 conclusion based on the information provided in your form_1023 and supporting documentation we conclude that you are not operated exclusively for purposes described in sec_501 accordingly you do not qualify for exemption as an organization described in sec_501 in addition even if you were determined to be described under sec_501 you would not be classified not a supporting_organization under sec_509 letter rev catalog number 47630w if you don’t agree you have a right to file a protest if you don’t agree with our proposed adverse determination to do so you must send us a statement within days of the date of this letter the statement must include e your name address employer_identification_number ein and a daytime phone number acopy of this letter highlighting the findings you disagree with anexplanation 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 we'll review your protest statement and decide if you provided a basis for us to reconsider our determination you also have a right to a conference after you submit your statement if you want a conference you must request it when you file your protest statement 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 if he or she hasn’t already done so you can find more information about representation in publication practice_before_the_irs and power_of_attorney for an authorized representative 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 you can also ask the office of appeals to review your application_for tax-exempt status your right to request appeals review is in addition to your right to a conference as outlined in revenue_procedure rev_proc and revproc_2014_9 you must notify us in writing if you want us to forward your case to the appeals_office you can find more information about the process and the role of the appeals_office in section of revproc_2014_9 and publication overview of the appeals process if the person representing you in this process is not an officer director trustee or other official who is authorized to sign for the organization he or she must file form_2848 as explained above and otherwise meet the requirements in publication conference and practice requirements letter rev catalog number 47630w 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 any request for consideration by the office of appeals form_2848 if needed and any supporting documents to the applicable address us mail street address delivery service you can also fax your statement and supporting documents to the fax number listed at the top of this 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 if you 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 we sent a copy of this letter to your representative as indicated on your power_of_attorney michael seto manager eo technical sincerely cc letter rev catalog number 47630w


internal_revenue_service national_office technical_advice_memorandum date tam-153049-03 cc psi b09 number release date index uil no case-mis no territory manager field compliance sb_se territory taxpayer's name taxpayer's address taxpayer's identification no years involved date of conference legend ------------------------------ ------------------------------------------------- ----------------------------- -------------------------- ----------------- ------- date decedent ------------------------------------------------------------------------------------------------ ------------------- --------- ----------------------------------------------------------------- ---------------------------------------------------------------- ------------------------- date state property property daughter ------------------------------ issue whether the election made by decedent’s estate to deduct the value of decedent’s qualified family-owned business interests under sec_2057 is valid conclusions although the value of decedent’s qualified family-owned business interests exceeded percent of the adjusted_gross_estate the estate’s election to deduct decedent’s qualified family-owned business interests is invalid and no deduction may be claimed because the estate did not deduct sufficient property to satisfy the tam-153049-03 threshold requirements of sec_2057 and because the qualified heirs did not consent to the recapture_tax provisions under sec_2057 with respect to property facts decedent died on date at his death decedent owned an interest as a proprietor in an agricultural business that included farmland located in state property and property and a bank account pursuant to the terms of decedent’s will property was devised to daughter however shortly after decedent’s death and during the administration of his estate property was sold to unrelated third parties the executrix of decedent’s estate timely filed the estate’s form_706 united_states estate and generation-skipping_transfer_tax return estate_tax_return on schedule t of the estate_tax_return the estate elected the application of sec_2057 and listed_property and the bank account as qualified family-owned business interests based on the information contained on the estate_tax_return as filed the adjusted_value of property and the bank account exceeded percent of decedent’s adjusted_gross_estate and therefore the estate appeared to qualify for the sec_2057 deduction the internal_revenue_service examined the estate_tax_return and determined that the estate failed to include the amount of decedent’s other gifts made within years of his death in determining the value of decedent’s adjusted_gross_estate when the amount of decedent’s other gifts are taken into account the adjusted_value of property and the bank account do not exceed percent of the adjusted_gross_estate and therefore sec_2057 does not apply to decedent’s estate when the service informed decedent’s estate that it did not qualify for the sec_2057 deduction the estate argued that property should be included in the computation to determine whether the adjusted_value of decedent’s qualified family-owned business interests plus the amount of the gifts of such interests exceed sec_50 percent of the adjusted_gross_estate law and analysis sec_2057 provides that for purposes of the tax imposed by sec_2001 in the case of an estate of a decedent to which this section applies the value of the taxable_estate shall be determined by deducting from the value of the gross_estate the adjusted_value of the qualified family-owned business interests of the decedent that are described in sec_2057 sec_2057 provides that the maximum deduction allowed by sec_2057 shall not exceed dollar_figure sec_2057 provides generally that sec_2057 shall apply to an estate if a the decedent was at the date of the decedent’s death a citizen or resident_of_the_united_states b the executor elects the application of sec_2057 and files the agreement referred to in sec_2057 c the sum of the adjusted_value of the qualified family-owned business interests described in sec_2057 plus the amount of the gifts of such interests determined under sec_2057 exceed sec_50 percent of the adjusted gross tam-153049-03 estate and d during the 8-year period ending on the date of the decedent’s death there have been periods aggregating years or more during which such interests were owned by the decedent or a member_of_the_decedent’s_family and there was material_participation within the meaning of sec_2032a by the decedent or a member_of_the_decedent’s_family in the operation of the business to which such interests relate sec_2057 provides that the qualified family-owned business interests described in sec_2057 are the interests that are included in determining the value of the gross_estate and are acquired by any qualified_heir from or passed to any qualified_heir from the decedent within the meaning of sec_2032a sec_2057 provides that the amount of the gifts of qualified family-owned business interests determined under sec_2057 is the sum of the amount of such gifts from the decedent to members of the decedent’s family taken into account under sec_2001 plus the amount of such gifts otherwise excluded under sec_2503 to the extent such interests are continuously held by members of the decedent’s family other than the decedent’s spouse between the date of the gift and the date of the decedent’s death sec_2057 provides that for purposes of sec_2057 the term adjusted_gross_estate means the value of the gross_estate reduced by any amount deductible under sec_2053 or and increased by the excess of i the sum of the amount of gifts determined under sec_2057 plus ii the amount if more than de_minimis of other transfers from the decedent to the decedent’s spouse within years of the date of the decedent’s death plus iii the amount of other gifts not included under i or ii from the decedent within years of the date of the decedent’s death other than gifts to members of the decedent’s family otherwise excluded under sec_2503 over the sum of the amounts described in sec_2057 ii and iii that are otherwise includible in the gross_estate sec_2057 provides generally that for purposes of sec_2057 the term qualified_family-owned_business_interest means an interest as a proprietor in a trade_or_business carried on as a proprietorship or an interest in an entity carrying_on_a_trade_or_business if certain ownership percentages are met sec_2057 provides generally that an additional estate_tax is imposed if within years after the date of the decedent’s death and before the date of the qualified heir’s death the qualified_heir disposes of any portion of a qualified family- owned business_interest other than by a disposition to a member of the qualified heir’s family or through a qualified_conservation_contribution under sec_170 sec_2057 provides that the agreement referred to in this subsection is a written_agreement signed by each person in being who has an interest whether or not in tam-153049-03 possession in any property designated in such agreement consenting to the application of sec_2057 with respect to such property sec_2057 provides that for purposes of sec_2057 the term qualified_heir has the meaning given to such term by sec_2032a sec_2057 provides that for purposes of sec_2057 the term member_of_the_family has the meaning given to such term by sec_2032a sec_2032a provides in part that for purposes of sec_2032a the term qualified_heir means with respect to any property a member_of_the_decedent’s_family who acquired such property or to whom such property passed_from_the_decedent sec_2032a provides in part that for purposes of sec_2032a the term member_of_the_family means with respect to any individual only a an ancestor of such individual b the spouse of such individual c a lineal descendant of such individual of such individual’s spouse or of a parent of such individual or d the spouse of any lineal descendant described in sec_2032a sec_2057 provides that for purposes of sec_2057 rules similar to the rule contained in sec_2032a shall apply sec_2032a provides that the election under sec_2032a shall be made on the return of the tax imposed by sec_2001 such election shall be made in such manner as the secretary shall by regulations prescribe such an election once made shall be irrevocable sec_20_2032a-8 of the estate_tax regulations provides in part that an election under sec_2032a need not include all real_property included in an estate that is eligible for special_use_valuation but sufficient property to satisfy the threshold requirements of sec_2032a must be specially valued under the election the internal_revenue_service restructuring and reform act of pub_l_no b repealed the sec_2033a1 qualified_family-owned_business_exclusion and replaced it with an estate_tax deduction under sec_2057 effective for estates of decedents dying after date the senate report that accompanies the taxpayer_relief_act_of_1997 indicates that sec_2033a was added to the internal_revenue_code to reduce estate_taxes for qualified family-owned businesses preserve family farms and sec_2033a was enacted by the taxpayer_relief_act_of_1997 pub_l_no sec_502 and provided an estate_tax exclusion for certain qualified family-owned business interests the internal_revenue_service restructuring and reform act of redesignated sec_2033a as sec_2057 sec_2057 is virtually identical to sec_2033a with the exception of several clarifications and corrections made to facilitate the conversion of the exclusion into a deduction tam-153049-03 other family-owned businesses and prevent the liquidation of these enterprises to pay estate_taxes s rep no pincite in order for sec_2057 to apply to an estate several requirements must be satisfied one of these requirements is that under sec_2057 the value of the qualified family- owned business interests described in sec_2057 with certain adjustments must be greater than percent of a decedent’s adjusted_gross_estate under sec_2057 the qualified family-owned business interests described in sec_2057 are the interests that are included in determining the value of the gross_estate and are acquired by a qualified_heir from or passed to a qualified_heir from the decedent in this case property is an interest included in determining the value of the gross_estate because decedent owned property at the time of his death in addition pursuant to decedent’s will property was acquired by daughter a qualified_heir from decedent therefore property is a qualified_family-owned_business_interest described in sec_2057 when the value of property is considered the adjusted_value of decedent’s qualified family-owned business interests exceed sec_50 percent of the adjusted_gross_estate sec_2057 provides however that rules similar to the rules contained in sec_2032a and apply for purposes of sec_2057 the rules in sec_2032a and pertain to the election that must be made and the agreement that must be filed to qualify for the special valuation of property used as a farm or in a trade_or_business under sec_20_2032a-8 the election under sec_2032a need not include all real_property included in an estate that is eligible for special_use_valuation but sufficient property to satisfy the threshold requirements of sec_2032a must be specially valued under the election if rules similar to those under sec_2032a apply to sec_2057 it follows that the estate must deduct sufficient property to satisfy the threshold requirements of sec_2057 furthermore the election alone is not sufficient to obtain the benefits of sec_2057 without the recapture agreement the election is neither valid nor effective under sec_2057 the agreement required under sec_2057 must be executed by all parties who have any interest in the property designated in the agreement in the case of a qualified_heir the agreement must express consent to personal liability for the additional tax imposed under sec_2057 in the event of certain early dispositions of property the failure to satisfy the material_participation requirements the qualified heir’s loss of united_states citizenship or the principal_place_of_business of a trade_or_business of the qualified_family-owned_business_interest ceases to be located in the united_states the recapture of tax benefits under sec_2057 is a limitation designed to ensure continued use of qualified family-owned business interests as a family business without the recapture agreement it is not clear that qualified heirs are on notice of and tam-153049-03 may be subject_to the recapture_tax provisions see also 88_tc_1453 in this case the value of decedent’s qualified family-owned business interests exceeded the percent requirement of sec_2057 the estate however sought to deduct the value of the qualifying property property and the bank account that did not exceed percent of the value of the adjusted_gross_estate in addition the estate did not list property as a qualified_family-owned_business_interest on schedule t of the estate_tax_return and therefore the qualified heirs did not agree to the recapture provisions of sec_2057 with respect to such property therefore the estate’s election to deduct decedent’s qualified family-owned business interests under sec_2057 is invalid and no deduction may be claimed under sec_2057 caveat s a copy of this technical_advice_memorandum is to be given to the taxpayer s sec_6110 of the code provides that it may not be used or cited as precedent


internal_revenue_service department of the treasury washington dc person to contact telephone number refer reply to cc psi plr-147554-01 date date number release date index number company shareholder state date dear this letter responds to a letter from your authorized representative dated date as well as subsequent correspondence requesting a ruling under sec_1362 of the internal_revenue_code regarding company's late s_corporation_election facts company owned by the shareholder was incorporated in state on date company represents that it intended to be an s_corporation from inception however form_2553 election by a small_business_corporation was not timely filed with the internal_revenue_service company timely filed form_1120s u s income_tax return for an s_corporation for its first tax_year and the shareholder filed his individual_income_tax_return for the same year consistent with company’s intended status as an s_corporation law and analysis sec_1362 provides in general that an election by a small_business_corporation under sec_1362 to be an s_corporation may be made for any_tax year- a at any time during the preceding tax_year or b at any time during the tax_year and on or before the 15th day of the 3d month of the tax_year sec_1362 provides that if-- a a small_business_corporation makes an election under sec_1362 for any_tax year and b that election is made after the 15th day of the 3d month of the tax_year and plr-147554-01 on or before the 15th day of the 3d month of the following tax_year then that election shall be treated as made for the following tax_year sec_1362 provides that if-- a an election under sec_1362 is made for any_tax year determined without regard to sec_1362 after the date prescribed by this subsection for making the election for that tax_year or no such election is made for any_tax year and b the secretary determines that there was reasonable_cause for the failure to timely make the election the secretary may treat such election as timely made for that tax_year and sec_1362 shall not apply based solely on the facts and representations submitted by company we conclude that there was reasonable_cause for company’s failure to make a timely s_corporation_election therefore we conclude that company's late election under sec_1362 is to be treated under sec_1362 as filed timely for its tax_year beginning date this ruling is contingent however on company filing form_2553 to be effective on date with the appropriate service_center no later than days from the date of this letter a copy of this letter should be attached to the form_2553 except for the specific ruling above we express or imply no opinion concerning the federal tax consequences of the facts of this case under any other provision of the code specifically we express or imply no opinion on whether company otherwise is eligible to be an s_corporation under a power_of_attorney on file with this office we are sending the original of this letter to you and a copy to the taxpayer this ruling is directed only to the taxpayer who requested it according to sec_6110 this ruling may not be used or cited as precedent sincerely jeanne sullivan senior technician reviewer branch office of associate chief_counsel passthroughs and special industries enclosure copy of this letter copy for sec_6110 purposes


number release date internal_revenue_service index number 468a ------------------------------------ ---------------------------- --------------------------- ------------------------------------ department of the treasury washington dc person to contact ------------------------ id no ------------------- --------------------------------------------------- telephone number ---------------------- refer reply to cc psi b06 - plr-134152-15 plr-134153-15 plr-137641-15 date legend taxpayer ----------------------------- ------------------------- -------------------------------- -------------------------------------------- ----------------------------------------------------- -------------- -------------- --------- --------------------------------------------------------------------------------- seller ------------------------------------------------------------- seller ------------------------------------------------------------- buyer -------------------------------------------------------------------------------------------------------- ------------------------------------------------------------- state a state b state c plant a-1 ----------------------------------------------------------------------------------------------------------------- plant a-2 ---------------------------------------------------------------------------------------------------------------- plant b location a location b date dollar_figurea dollar_figureb dollar_figurec dollar_figured ------------------------------------- ------------------------------- --------------------------------- ---------------------------- ------------------- ---------------------- ------------------- ------------------- --------------------------------------------------------------------------------- plr-134152-15 plr-134153-15 plr-137641-15 dollar_figuree dollar_figuref x y z ---------------------- ------------------- ----------- ----------- ------ director --------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------- dear --------------------- this letter responds to your request for private_letter_ruling dated date you requested that we rule on certain tax consequences under sec_468a of the internal_revenue_code of the restructuring discussed below facts taxpayer has represented the following facts and information relating to the ruling_request taxpayer a state a corporation is the common parent of an affiliated_group_of_corporations filing a consolidated federal_income_tax return it uses an accrual_method of accounting seller a state b corporation is a wholly-owned subsidiary of taxpayer and a member of the affiliated_group it is a regulated_public_utility engaged in the generation and purchase of electricity and the distribution transmission and retail_sale of such electricity it is the sole owner of plant a-1 and plant a-2 both of which are nuclear- powered electric generating plants located at location a seller maintains a separate nuclear decommissioning trust for each of these nuclear plants each trust is irrevocably committed to the decommissioning of the facility the nuclear decommissioning trusts each include a fund that meets the requirements of sec_468a and sec_1_468a-1 through 468a-9 the plant a-1 and plant a-2 qualified funds as of date the plant a-1 and plant a-2 qualified funds maintained with respect to these nuclear plants totaled approximately dollar_figurea there is no nonqualified decommissioning fund as of date the total estimated nuclear decommissioning plr-134152-15 plr-134153-15 plr-137641-15 liability for the plant a-1 and plant a-2 is dollar_figureb which exceeded the fair_market_value of the assets held in the plant a-1 and plant a-2 qualified funds by approximately dollar_figurec seller a state b corporation is also a wholly-owned subsidiary of taxpayer and a member of the affiliated_group it is a single-asset base-load electric generator it owns x and leases y of plant b a nuclear-powered electric generating plant located at location b the remaining z is owned by an entity unrelated to taxpayer under the lease agreements seller is fully and primarily liable for decommissioning the leased interest it maintains a nuclear decommissioning trust that is irrevocably committed to the decommissioning of the facility the nuclear decommissioning trust includes a fund that meets the requirements of sec_468a and sec_1_468a-1 through 468a-9 the plant b qualified_fund as of date the plant b qualified_fund was approximately dollar_figured there is no nonqualified decommissioning fund as of date the estimated nuclear decommissioning liability was dollar_figuree which exceeded the fair_market_value of the assets held in the plant b qualified_fund by approximately dollar_figuref the proposed transaction involves seller and seller each transferring their assets and liabilities including the nuclear-powered electric generating plants and the associated nuclear decommissioning trusts to buyer in exchange for a member interest buyer is currently a subsidiary of taxpayer but it is not a member of the affiliated_group because taxpayer does not own sufficient shares of buyer to satisfy the ownership requirements of sec_1504 buyer has sold voting preferred member interests to the public and these preferred member interests are entitled to more than of the voting power of all outstanding membership interests buyer will not be a member of the taxpayer affiliated_group because taxpayer and its affiliates will not own the requisite percentage of voting power pursuant to sec_1504 seller represents that its liabilities including the nuclear decommissioning liability that are assumed by buyer will exceed the basis of all of the property that it will transfer to buyer in the proposed transaction by an amount at least equal to the nuclear decommissioning liability seller represents that its liabilities including the nuclear decommissioning liability that are assumed by buyer will exceed the basis of all of the property that it will transfer to buyer in the proposed transaction by an amount at least equal to the nuclear decommissioning liability the taxpayers will treat the proposed transfers of their assets and liabilities including the nuclear-powered electric generating plants and the associated nuclear decommissioning trusts as taxable transactions regardless of whether they are governed by sec_351 if sec_351 does not apply they will recognize gain under sec_1001 if sec_351 does apply the taxpayers will recognize gain under sec_357 because the transferors are being relieved of liabilities in excess of the adjusted_basis of the property transferred plr-134152-15 plr-134153-15 plr-137641-15 taxpayer has requested the following rulings requested ruling the plant a-1 and plant a-2 qualified funds will not be disqualified by the transfer from seller to buyer and the plant b qualified_fund will not be disqualified by the seller transfer to buyer requested ruling the plant a-1 qualified_fund the plant a-2 qualified_fund and the plant b qualified_fund will each continue to be treated as satisfying the requirements of sec_468a and sec_1_468a-5 following the transfers of the qualified funds to buyer requested ruling the plant a-1 qualified_fund the plant a-2 qualified_fund and the plant b qualified_fund will not recognize any gain_or_loss or otherwise take any income_or_deduction into account by reason of the transfers of the qualified funds to buyer requested ruling seller seller and buyer will not recognize gain_or_loss under sec_468a or otherwise take any income_or_deduction into account under sec_468a by reason of transfers of the qualified funds to buyer requested ruling pursuant to sec_1_468a-6 the tax basis of the assets of the qualified funds will not be changed by the transfers of the qualified funds to buyer requested ruling the amount_realized by seller from the transfer of its assets and liabilities in the proposed transaction will include the nuclear decommissioning liabilities associated respectively with plant a-1 and plant a- but not including the portion of the nuclear decommissioning liabilities funded by the plant a-1 and plant a-2 qualified funds on the date of the transfer requested ruling the amount_realized by seller from the transfer of its assets and liabilities in the proposed transaction will include the nuclear decommissioning liability associated with plant b but not including the portion of the nuclear decommissioning liability funded by the plant b qualified_fund on the date of the transfer requested ruling seller and seller will each be entitled to treat their respective nuclear decommissioning liability to the extent that it is included in plr-134152-15 plr-134153-15 plr-137641-15 amount_realized as satisfying economic_performance under sec_1 d law and analysis issues sec_468a of the code provides that a taxpayer may elect to deduct payments made to a nuclear decommissioning reserve fund that meets the requirements of sec_468a ie a fund that is a qualified nuclear decommissioning fund sec_1_468a-1 provides that a qualified nuclear decommissioning fund is a fund that satisfies the requirements of sec_1_468a-5 sec_1_468a-5 of the income_tax regulations sets out the qualification requirements for nuclear decommissioning funds it provides in part that a qualified nuclear decommissioning fund must be established and maintained pursuant to an arrangement that qualifies as a_trust under state law sec_1_468a-5 provides that an electing taxpayer can establish and maintain only one qualified nuclear decommissioning fund for each nuclear power plant if a nuclear power plant is subject_to the ratemaking jurisdiction of two or more public_utility commissions and any such public_utility commission requires a separate fund to be maintained for the benefit of ratepayers whose rates are established or approved by the public_utility commission the separate funds maintained for such plant whether or not established and maintained pursuant to a single trust agreement shall be considered a single nuclear decommissioning fund sec_1_468a-6 provides rules applicable to the transfer of an interest in a nuclear power plant and transfer of the qualified nuclear decommissioning fund where certain requirements are met specifically sec_1_468a-6 provides that sec_1_468a-6 applies if-- immediately before the disposition the transferor maintained a qualified nuclear decommissioning fund with respect to the interest disposed of and immediately after the disposition-- plr-134152-15 plr-134153-15 plr-137641-15 i the transferee maintains a qualified nuclear decommissioning fund with respect to the interest acquired ii the interest acquired is a qualifying interest of the transferee in the nuclear power plant in connection with the disposition either- i the transferee acquires part or all of the transferor’s qualifying interest in the plant and a proportionate amount of the assets of the transferor’s fund all such assets if the transferee acquires the transferor’s entire qualifying interest in the fund is transferred to a fund of the transferee or ii the transferee acquires the transferor’s entire qualifying interest in the plant and the transferor’s entire fund is transferred to the transferee and the transferee continues to satisfy the requirements of sec_1 468a- a iii which permits an electing taxpayer to maintain only one qualified nuclear decommissioning fund for each plant sec_1_468a-6 provides that a disposition that satisfies the requirements of sec_1_468a-6 will have the following tax consequences at the time it occurs i neither the transferor nor the transferor’s qualified nuclear decommissioning fund will recognize gain_or_loss or otherwise take any income into account by reason of the transfer of a proportionate amount of the assets of the transferor’s qualified nuclear decommissioning fund to the transferee’s qualified nuclear decommissioning fund or by reason of the transfer of the transferor’s entire qualified nuclear decommissioning fund to the transferee for purposes of the regulations under sec_468a this transfer or the transfer of the transferor’s qualified nuclear decommissioning fund will not be considered a distribution of assets by the transferor’s qualified nuclear decommissioning fund ii notwithstanding sec_1_468a-6 if the transferor has made a special transfer under sec_1_468a-8 prior to the transfer of the fund or fund assets any deduction with respect to that special transfer allowable under sec_468a for a taxable_year ending after the date of the transfer of the fund or fund assets is allowed under sec_468a for the taxable_year that includes the date of the transfer of the fund or fund assets plr-134152-15 plr-134153-15 plr-137641-15 neither the transferee nor the transferee’s qualified nuclear decommissioning fund will recognize gain_or_loss or otherwise take any income into account by reason of the transfer of a proportionate amount of the assets of the transferor’s qualified nuclear decommissioning fund to the transferee’s qualified nuclear decommissioning fund or by reason of the transfer of the transferor’s entire qualified nuclear decommissioning fund to the transferee for purposes of the regulations under sec_468a this transfer or the transfer of the transferor’s qualified nuclear decommissioning fund will not constitute a payment or a contribution of assets by the transferee to its qualified nuclear decommissioning fund transfers of assets of a qualified nuclear decommissioning fund to which this section applies do not affect basis thus the transferee’s qualified nuclear decommissioning fund will have a basis in the assets received from the transferor’s qualified nuclear decommissioning fund that is the same as the basis of those assets in the transferor’s qualified nuclear decommissioning fund immediately before the distribution under sec_1_468a-6 the service may treat any disposition of an interest in a nuclear power plant occurring after date as satisfying the requirements of the regulations if the service determines that such treatment is necessary or appropriate to carry out the purposes of sec_468a issues and sec_1001 provides that a seller's amount_realized from the sale of property is the sum of any money received plus the fair_market_value of the property other than money received sec_1_1001-2 provides that a seller's amount_realized from the sale of property includes the amount of liabilities from which the seller is discharged as a result of the sale the decommissioning liabilities from which each seller will be relieved are fixed and determinable for purposes of sec_461 and as discussed below under issue are described in sec_1_461-4 these amounts are included in amount_realized see sec_1_461-4 as an owner and operator of a nuclear-powered plant each seller is required_by_law to provide for eventual decommissioning and the amount of each seller’s liability can be determined with reasonable accuracy accordingly the amount of each seller’s nuclear decommissioning liability that is assumed by buyer in excess of the fair_market_value of the assets in the qualified funds on the date of the transfer will be included in each seller’s amount_realized and taken into account in computing taxable_income in the year of the sale as discussed above the proposed transaction plr-134152-15 plr-134153-15 plr-137641-15 will not result in the disqualification of the qualified funds and each seller will not have any gain or income as a result of the transfer of its interests in the assets of the qualified funds to buyer because the transfer of the qualified funds by each seller to buyer will not be a taxable transfer the amount of the liabilities assumed by buyer that are included in each seller's amount_realized will not include the portion of the liability to decommission the plant that is equal to the fair_market_value of the assets in the qualified_fund on the date of the transfer issue sec_1_446-1 provides that under an accrual_method of accounting a liability is incurred and generally taken into account for federal_income_tax purposes in the year in which all the events have occurred that establish the fact of the liability the amount of the liability can be determined with reasonable accuracy and economic_performance has occurred with respect to the liability sec_461 provides that in determining whether an amount has been incurred with respect to any item during any taxable_year the all_events_test shall not be treated as met any earlier than when economic_performance with respect to such item occurs see also sec_1_461-4 sec_461 provides that the all_events_test is met with respect to any item if all events have occurred that determine the fact of liability and the amount of such liability can be determined with reasonable accuracy sec_461 provides that in the case of a liability that requires the taxpayer to provide services economic_performance occurs as the taxpayer provides the services sec_1_461-4 provides that except as otherwise provided in sec_1_461-4 if a liability requires the taxpayer to provide services to another person economic_performance occurs as the taxpayer incurs costs in connection with the satisfaction of the liability sec_1_461-4 provides an exception to the general economic_performance rule for services where the taxpayer sells or exchanges a trade_or_business where the purchaser expressly assumes a liability arising out of the taxpayer's trade_or_business that the taxpayer but for the economic_performance requirement would have been entitled to incur as of the date of the sale economic_performance with respect to that liability occurs as the amount of the liability is properly included in the amount_realized on the transaction by the taxpayer the first prong of the all_events_test requires that the fact of the liability be established at the time of the deduction this prong of the all_events_test is satisfied in the instant case for each seller here each seller as an owner and operator of a plr-134152-15 plr-134153-15 plr-137641-15 nuclear-powered plant was required to obtain an operating license before commercial operations begun c f_r sec_50 see also c f_r sec_50 k each seller also has an obligation to seek license termination c f_r sec_50 a and the license termination process provides that a licensee shall take actions necessary to decommission and decontaminate the facility c f_r sec_50 b and bb see also c f_r sec_72 the fact of the obligation arose at the time each seller became subject_to the decommissioning requirements associated with the plant's license moreover congress recognized the existence of the decommissioning liability when in it enacted sec_461 and sec_468a noting that g enerally under federal and state laws utilities that operate nuclear power plants are obligated to decommission the plants at the end of their useful lives h_r conf_rep no see also s prt no vol 98th cong 2d sess the second prong of the all_events_test requires that the amount of the liability can be determined with reasonable accuracy see sec_1_461-1 this prong is also satisfied in the instant case the amount of each seller’s decommissioning liability has been determined by experts in the nuclear decommissioning industry their estimates have been accepted by the nuclear regulatory commission which is charged with ensuring that sufficient funds are available to decommission the plants in addition there is also support in the internal_revenue_code for finding that the amount of the decommissioning liability can be determined with reasonable accuracy at the time of sale sec_468a generally permits a current deduction for a ruling_amount based on estimated future decommissioning expenses to the extent the decommissioning costs are sufficiently determinable to entitle a utility to a deduction under sec_468a it is reasonable to conclude that the costs must also be sufficiently determinable to satisfy the second prong of the all_events_test conclusions based on the information submitted by taxpayer we reach the following conclusions ruling the plant a-1 and plant a-2 qualified funds will not be disqualified by the transfer from seller to buyer and the plant b qualified_fund will not be disqualified by the seller transfer to buyer ruling the plant a-1 qualified_fund the plant a-2 qualified_fund and the plant b qualified_fund will each continue to be treated as satisfying the plr-134152-15 plr-134153-15 plr-137641-15 requirements of sec_468a and sec_1_468a-5 following the transfers of the qualified funds to buyer ruling the plant a-1 qualified_fund the plant a-2 qualified_fund and the plant b qualified_fund will not recognize any gain_or_loss or otherwise take any income_or_deduction into account by reason of the transfers of the qualified funds to buyer ruling seller seller and buyer will not recognize gain_or_loss under sec_468a or otherwise take any income_or_deduction into account under sec_468a by reason of transfers of the qualified funds to buyer ruling pursuant to sec_1_468a-6 the tax basis of the assets of the qualified funds will not be changed by the transfers of the qualified funds to buyer ruling the amount_realized by seller from the transfer of its assets and liabilities in the proposed transaction will include the nuclear decommissioning liabilities associated respectively with plant a-1 and plant a-2 but not including the portion of the nuclear decommissioning liabilities funded by the plant a-1 and plant a-2 qualified funds on the date of the transfer ruling the amount_realized by seller from the transfer of its assets and liabilities in the proposed transaction will include the nuclear decommissioning liability associated with plant b but not including the portion of the nuclear decommissioning liability funded by the plant b qualified_fund on the date of the transfer ruling seller and seller will each be entitled to treat their respective nuclear decommissioning liability to the extent that it is included in amount_realized as satisfying economic_performance under sec_1_461-4 except as specifically determined above no opinion is expressed or implied concerning the federal_income_tax consequences of the transaction described above specifically we express no opinion on the tax consequences of the transaction under sec_351 in addition the request notes without requesting any rulings on this matter that seller and seller may reincorporate in another state to facilitate the transfers discussed above and that taxpayer expects such reincorporation to be a reorganization described in sec_368 we express no opinion on any aspect or tax consequence of such reincorporations if undertaken also except as specifically determined above we express no opinion on the federal_income_tax consequences to buyer resulting from the acquisition of assets and liabilities including the nuclear-powered electric generating plants and the nuclear decommissioning liabilities of seller and seller plr-134152-15 plr-134153-15 plr-137641-15 this letter_ruling is directed only to the taxpayer that requested it sec_6110 provides that this ruling may not be used or cited as precedent in addition a copy of this letter_ruling is being sent to the director sincerely peter c friedman senior technician reviewer branch office of associate chief_counsel passthroughs and special industries cc