internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc psi br 6-plr-118595-01 date date re revised schedule of ruling amounts legend taxpayer parent plant location commission director dear this letter responds to the request on behalf of taxpayer dated for a revised schedule of ruling amounts in accordance with sec_1_468a-3 of the income_tax regulations relating to the plant’s nuclear decommissioning fund fund taxpayer previously received a schedule of ruling amounts on taxpayer as a part of its restructuring and withdrawal from the power generation industry expects to sell all of its interest in plant in the coming months and is requesting an extension of the previous schedule of ruling amounts to cover part of the period through the anticipated sale date information was submitted pursuant to sec_1_468a-3 taxpayer directly owns a percent undivided tenancy_in_common in the plant which is situated in location taxpayer files a consolidated_return with parent the commission has exclusive regulatory jurisdiction over the rates of taxpayer and taxpayer is under the audit jurisdiction of director it is expected that the sale of taxpayer’s interest in the plant will include the facilities licenses records nuclear fuel and assets comprising both the qualified and plr-118595-01 nonqualified decommissioning trust funds relating to plant in addition the entity purchasing plant is expected to assume taxpayer’s liability for decommissioning plant and taxpayer expects to make no further payments to the qualified decommissioning trust fund following the sale of plant the estimated cost of decommissioning the plant is of which taxpayer's share is the commission in docket no provided for decommissioning costs for the plant of to be included in taxpayer's cost of service for ratemaking purposes commission has not subsequently redetermined this amount and taxpayer will continue to receive the same amount of decommissioning charge as a component of its cost-based rates through the closing date of the sale of plant any additional expenses for decommissioning plant that are borne by taxpayer through the date of sale of the plant will be recouped through a non-bypassable contract termination charge paid with respect to taxpayer’s transmission and distribution activities and collected by taxpayer’s retail distribution company affiliates from their customers the funding_period and level_funding limitation period begins on and ends on the assumed after-tax rate of return to be earned by the assets of the fund is percent the rate of escalation to determine the future decommissioning cost of the plant is percent compounded annually the estimated date on which the plant will no longer be included in taxpayer's rate base for ratemaking purposes is the proposed method for decommissioning the plant is taxpayer has determined the estimated period for which the fund is to be in effect is and the estimated_useful_life of the plant is therefore the qualifying percentage is percent no proceeding is pending before the commission that may result in an increase or decrease in the amount of decommissioning costs for the plant to be included in taxpayer's cost of service sec_468a of the code provides that a taxpayer may elect to deduct the amount of payments made to a qualified decommissioning fund however sec_468a limits the amount_paid into such fund for any taxable_year to the lesser_of the amount of nuclear decommissioning costs allocable to this fund which is included in the taxpayer's cost of service for ratemaking purposes for the tax_year or the ruling_amount applicable to this year plr-118595-01 sec_468a of the code provides that no deduction shall be allowed for any payment to the nuclear decommissioning fund unless the taxpayer requests and receives from the secretary a schedule of ruling amounts the ruling_amount for any_tax year is defined under sec_468a as the amount which the secretary determines to be necessary to fund that portion of nuclear decommissioning costs which bears the same ratio to the total nuclear power plant as the period for which the nuclear decommissioning fund is in effect bears to the estimated_useful_life of the plant this term is further defined to include the amount necessary to prevent excessive funding of nuclear decommissioning costs or funding of these costs at a rate more rapid than level_funding taking into account such discount rates as the secretary deems appropriate sec_468a of the code provides that a taxpayer shall be deemed to have made a payment to the nuclear decommissioning fund on the last day of the tax_year if the payment is made on account of this tax_year and is made within ½ months after the close of the tax_year sec_1_468a-1 of the regulations provides that an eligible_taxpayer may elect to deduct nuclear decommissioning costs under sec_468a of the code an eligible_taxpayer as defined under sec_1_468a-1 of the regulations is a taxpayer that has a qualifying interest in among other things a direct ownership_interest including an interest as a tenant in common or joint tenant sec_1_468a-2 of the regulations provides that the maximum amount of cash payments made or deemed made to a nuclear decommissioning fund during any_tax year shall not exceed the lesser_of i the cost of service amount applicable to the nuclear decommissioning fund for such tax_year or ii the ruling_amount applicable to the nuclear decommissioning fund for such tax_year if the amount of cash payments made or deemed made to a nuclear decommissioning fund during any_tax year exceeds the limitation of paragraph b the excess is not deductible by the electing taxpayer in addition under sec_1_468a-5 there are rules which provide that the internal_revenue_service may disqualify a nuclear decommissioning fund if the amount of cash payments made or deemed made to a nuclear decommissioning fund during any_tax year exceeds the limitation of paragraph b sec_1_468a-3 of the regulations provides that in general a schedule of ruling amounts for a nuclear decommissioning fund is a ruling specifying annual payments that over the tax years remaining in the funding_period as of the date the schedule first applies will result in a projected balance of the nuclear decommissioning fund as of the last day of the funding_period equal to and in no event more than the amount of decommissioning costs allocable to the fund sec_1_468a-3 of the regulations provides that to the extent consistent plr-118595-01 with the principles and provisions of this section each schedule of ruling amounts shall be based on the reasonable assumptions and determinations used by the applicable public_utility commission in establishing or approving the amount of decommissioning costs to be included in the cost of service for ratemaking purposes under sec_1_468a-3 the internal_revenue_service shall provide a schedule of ruling amounts identical to the schedule proposed by the taxpayer but no such schedule shall be provided by the service unless the taxpayer’s proposed schedule is consistent with the principles and provisions of that section sec_1_468a-3 of the regulations provides that in general the amount for any_tax year in the level_funding limitation period shall not be less than the ruling_amount for any earlier tax_year under sec_1_468a-3 the level_funding limitation period begins on the first day of the first tax_year for which a deductible payment is made to the nuclear decommissioning fund and ends on the last day on which the nuclear power plant will no longer be included in the taxpayer’s rate base for ratemaking purposes sec_1_468a-3 of the regulations provides that the amount of decommissioning costs allocable to a nuclear decommissioning fund is the taxpayer’s share of the total estimated cost of decommissioning the nuclear power plant multiplied by the qualifying percentage sec_1_468a-3 of the regulations provides that in general the total estimated cost of decommissioning a nuclear power plant is the reasonably estimated cost of decommissioning used by the applicable public_utility commission in establishing or approving the amount of these costs to be included in cost of service for ratemaking purposes sec_1_468a-3 of the regulations provides that a taxpayer’s share of the total estimated cost of decommissioning a nuclear power plant equals the total estimated cost of decommissioning such plant multiplied by the taxpayer’s qualifying interest in the plant under sec_1_468a-3 the qualifying percentage for any nuclear decommissioning fund is equal to a fraction the numerator of which is the number of tax years in the estimated period for which the nuclear decommissioning fund is to be in effect and the denominator of which is the number of tax years in the estimated_useful_life of the applicable plant sec_1_468a-3 of the regulations provides that the internal_revenue_service shall not provide a taxpayer with a schedule of ruling amounts for any nuclear decommissioning fund unless the public_utility commission that establishes or approves the rates for electric energy generated by the plant has determined the amount of decommissioning costs to be included in the taxpayer’s cost of service for ratemaking purposes and has disclosed the after-tax rate of return and any other assumptions and plr-118595-01 determinations used in establishing or approving the amount we have examined the representations and the data submitted by the taxpayer in relation to the requirements set forth in the code and the regulations based solely upon these representations of the facts we reach the following conclusions taxpayer has a qualifying interest in the plant and is therefore an eligible_taxpayer under sec_1_468a-1 of the regulations the commission has determined the decommissioning costs to be included in taxpayer’s cost of service for ratemaking purposes as required by sec_1_468a-3 of the regulations taxpayer as one of several owners of the plant has calculated its share of the total decommissioning costs under sec_1_468a-3 of the regulations taxpayer has proposed a schedule of ruling amounts which meets the requirements of sec_1_468a-3 and of the regulations the annual payments specified in the proposed schedule of ruling amounts are based on the reasonable assumptions and determinations used by the commission and will result in a projected fund balance at the end of the funding_period equal to or less than the amount of decommissioning costs allocable to the fund based solely on the determinations above we conclude that the taxpayer’s proposed schedule of ruling amounts in regard to the commission satisfies the requirements of sec_468a of the code accordingly the schedule of ruling amounts requested by the taxpayer under sec_468a is approved as follows approved schedule of ruling amounts allocable to the taxpayer year approval of the schedule of ruling amounts is contingent on there being no change in the facts and circumstances known or assumed at the time the current ruling is issued if any of the events described in sec_1_468a-3 of the regulations occur in future years the taxpayer must request a review and revision of the schedule of ruling amounts generally the taxpayer is required to file such a request on or before the deemed payment deadline date for the first tax_year in which the rates reflecting such action became effective when no such event occurs the taxpayer must file a request for a revised schedule of ruling amounts on or before the deemed payment deadline of the 10th tax_year following the close of the tax_year in plr-118595-01 which the most recent schedule of ruling amounts was received except as specifically determined above no opinion is expressed or implied concerning the federal_income_tax consequences of the transaction described above in particular no opinion is expressed or implied concerning whether the societal benefits charge is includible in the gross_income of and deductible by any entity other than taxpayer the approved schedule of ruling amounts is relevant only to those payments made to the fund payments allocable to any funds other than the fund cannot qualify for purposes of the deduction under the provisions of sec_468a of the code payments made to such fund can qualify only to the extent they are made while taxpayer is the owner of the plant and only to the extent that they do not exceed the lesser_of the decommissioning costs applicable to such fund or the ruling amounts applicable to this fund in the tax_year this ruling is directed only to the taxpayer who requested it section 6ll0 k of the code provides it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office the original of this letter is being sent to taxpayer’s authorized representative we are also sending a copy of this letter_ruling to the director pursuant to sec_1_468a-7 of the regulations a copy of this letter must be attached with the required election statement to the taxpayer's federal_income_tax return for each tax_year in which the taxpayer claims a deduction for payments made to the fund sincerely peter c friedman senior technician reviewer branch office of associate chief_counsel passthroughs and special industries cc


internal_revenue_service national_office technical_advice_memorandum date number release date third party communication none date of communication not applicable index uil no case-mis no tam-121007-08 territory manager lmsb ---------------------- -------------------- ------------------------------ taxpayer's name taxpayer's address taxpayer's identification no years involved date of conference ---------------------------- ------------------------------ ---------------- -------------------------------------------- ------------------ legend ---------------------------------------------- taxpayer ---------------------------- parent ---------------------------- entity x ------------- state a -------------------- state b -- c -- d --- e --- f ------- year ------- year ---------------------------------------------------------------- statute a cite a ----------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------- tam-121007-08 statute b ------------------------------------------------------------------------------------ -------- ---------------------------------------------------- issues are amounts that taxpayer receives as payments for sales of gift cards includible in taxpayer’s gross_income are the amounts that taxpayer receives as payments for sales of gift cards advance_payments within the meaning of either sec_1_451-5 of the income_tax regulations or section dollar_figure of revproc_2004_34 i r b if an amount that taxpayer receives as payment for a sale of a gift card must be included in gross_income on receipt may taxpayer take an immediate deduction for the liability to pay the amount to a retailer conclusions the amounts that taxpayer receives are includible in its gross_income the amounts that taxpayer receives are not advance_payments within the meaning of either sec_1_451-5 or section dollar_figure of revproc_2004_34 taxpayer may deduct the liability to make the payment to a retailer no earlier than the time at which all events have occurred that establish the fact of the liability namely no earlier than when the customer redeems the gift card at a retailer facts taxpayer a corporate subsidiary of parent and an accrual_method taxpayer was formed to manage parent’s gift card program taxpayer oversees the entire gift card program for parent’s consolidated_group and all gift cards used in stores operated by parent certain related entities and certain stores operated by an unrelated entity entity x are issued and sold by taxpayer gift cards sold by taxpayer may be exchanged for goods and a limited number of services integral to those goods from retailers operated by other taxpayers within the consolidated_group the retailers and from entity x the gift card program agreement the agreement was entered into by taxpayer and the various entities within the consolidated_group that own and operate the retailers the general terms of the agreement are as follows taxpayer is in the business of selling gift cards to the general_public and of providing related gift card management tam-121007-08 services to the consolidated_group members the retailers agree to sell distribute and reload taxpayer’s gift cards in their respective stores and the retailers must remit all amounts paid to the retailers to taxpayer the retailers further agree to redeem the shopping cards in exchange for merchandise products goods or services in each of their respective stores subject_to the general gift card rules after the cards are redeemed taxpayer pays the retailers amounts equal to the amounts of the redeemed gift cards taxpayer is responsible for all aspects of managing the gift card program from purchase and design of the cards to tracking sales redemptions and all aspects of marketing of the cards in return taxpayer receives a management fee from the retailers for managing the gift card program taxpayer is solely liable and obligated to the purchasers and holders of the gift cards retailers have no liability to purchasers and holders of the gift cards except that retailers are liable to taxpayer to accept the balance on a gift card as payment for goods and services all payments under the gift card program are reflected by appropriate entries to intercompany accounts maintained and settled periodically in a separate agreement between taxpayer and parent parent agreed to provide support services to taxpayer in exchange for_the_use_of taxpayer funds free of interest parent has a standard license agreement that it enters into with unrelated licensees that wish to buy gift cards and make them available to their customers as a promotional incentive the licensee must agree to be bound by the terms of the agreement and must buy the cards at face value under the retailers’ current business practices gift card holders may receive cash refunds for card balances of dollar_figurec or less if a cardholder returns a purchase made with a gift card the retailer will increase the balance on the cardholder’s gift card by the amount of the return if the return is less than dollar_figured however the retailer will refund cash to the cardholder a card can be used by anyone in possession of the card law and analysis issue sec_61 of the internal_revenue_code defines gross_income as all income from whatever source derived gross_income includes instances of undeniable accessions to wealth clearly realized and over which the taxpayers have complete dominion see 348_us_426 taxpayer asserts that because of a customer’s right to a refund in certain states the payments for sales of gift cards are nontaxable deposits because the gift card holders may request and obtain a full cash refund at any time under the laws of state a and state b in addition the taxpayer asserts that the payments are deposits because of its business practice of issuing refunds of dollar_figurec or less claim_of_right_doctrine tam-121007-08 286_us_417 holds that amounts received under a claim of right and without restriction as to their disposition constitute income in the year of receipt even though the taxpayer later might be required to restore an equivalent amount citing north american oil the court in 366_us_213 stated w hen a taxpayer acquires earnings lawfully or unlawfully without the consensual recognition express or implied of an obligation to repay and without restriction as to their disposition he has received income in the present case after the cards are redeemed either for goods services or refunds taxpayer must transfer amounts received for gift cards to the retailer in an amount equal to the redeemed amount however from the time of the receipt these payments are in taxpayer’s direct control the payments are not in escrow or other special account outside taxpayer’s control as in north american oil the fact that taxpayer may have to transfer funds to a third party does not mean that taxpayer does not have income upon receipt taxpayer will make reimbursements to a retailer if the gift cards are redeemed or amounts are refunded whether and to what extent the taxpayer will transfer funds is subject_to the contingency that the customer will redeem the card for goods or services or obtain a refund there is no certainty at the time of taxpayer’s receipt of the payment for gift cards that the cards will be redeemed in full or in part and whether any refund will be issued income v nontaxable deposit a deposit is not income when received because it is not an undeniable accession to wealth clearly realized over which the taxpayer has complete dominion the leading case on this issue is 493_us_203 in that case the supreme court considered whether amounts received by indianapolis power light company ipl an electric utility company should be treated as taxable advance_payments or nontaxable deposits ipl required customers with suspect credit to make deposits to insure prompt payment of future utility bills the customer was entitled to a refund of the deposit after making timely payments for several months or satisfying a credit test the customer could choose to receive the refund by cash or check or to apply the refund against future bills the deposits were commingled with other receipts and at all times were subject_to ipl's unfettered use and control the service argued the deposits were advance_payments immediately includable in income ipl argued they were analogous to loans and not taxable in its analysis the supreme court noted that the distinction between advance_payments and deposits was one of degree rather than kind while both bestow economic benefits to the recipient economic benefits qualify as income only if the taxpayer has complete dominion the key to determining whether a taxpayer enjoys complete dominion over a given sum is whether the taxpayer has some guarantee that it will be allowed to keep the money see indianapolis power pincite the proper focus is on the rights and tam-121007-08 obligations of the parties at the time the payment was made the court noted that the deposits were acquired subject_to an express obligation to repay either at the time the service was terminated or at the time a customer established good credit in 108_tc_448 aff’d on this issue 184_f3d_786 8th cir the tax_court explained the application and limits of indianapolis power as follows indianapolis power and light did not purport to overrule prior authority and establish refundability as the exclusive criterion for distinguishing taxable sales income from nontaxable deposits in all cases 998_f2d_513 7th cir aff’g on this issue tcmemo_1989_636 what distinguished the nontaxable deposits in the indianapolis power and light line of cases from taxable_income was not their refundability per se ultimately the classification of these amounts as nontaxable deposits turned on the fact that the taxpayer’s right to retain them was contingent upon the customer’s future decision to purchase services and have deposits applied to the bill see johnson v commissioner pincite in 451_f3d_970 9th cir rev’g 82_tc_175 the taxpayer received advance trade discounts in consideration for a commitment to make future volume purchases the taxpayer had to fulfill a volume purchase obligation before it could keep the advance trade discount payments a condition_precedent if the purchase obligation was not met the taxpayer had an obligation to repay a pro_rata portion of the advance trade discounts under those facts the appellate court determined that upfront cash payments received were like security deposits or loans liabilities rather than accession to wealth constituting income taxpayer asserts that the payments received from gift card sales are deposits in states where a cardholder may request a cash refund the field first asserts that the state law that taxpayer cites does not require a retailer to issue a full cash refund of the gift card upon the cardholder’s demand the field also asserts that any portion that taxpayer might be required to refund after the cardholder had spent some portion of the card on goods or services is not a deposit taxpayer interprets state a and state b law to require that the cardholder may obtain a full cash refund at any time and represents that it has operated its program consistent with this interpretation state a law prior to year allowed the gift card retailer the option of whether to issue a cash refund or to provide a new gift card for the value of the remainder on the original card the customer could not independently demand a cash refund the legislative_history to the relevant statute statute a clearly indicates that statute a allowed the retailer and not the customer the option of whether or not to issue a cash refund cite a after the amendment to statute a in year gift card tam-121007-08 retailers are required to issue a cash refund if there is less than dollar_figuree remaining on the gift card in state b gift card retailers are required to provide a cash refund only after at least f of the card’s value has been redeemed statute b therefore under both state a and state b law a customer who buys a gift card cannot demand a full cash refund for the initial value of the card unless it is a gift card for less than dollar_figuree in state a for years beginning in year thus taxpayer’s premise for characterizing the payments as deposits is misplaced focusing on the nature of the rights and obligations of the parties in the present case taxpayer has complete dominion over the payments and the payments for the sale of cards are not deposits at the time a customer buys the card the customer acquires the right to use the card as a vehicle to obtain goods or services from retailers customers pay money for a gift card that the parties expect to be redeemed for goods or services any refund is dependent on a subsequent action condition_subsequent of the cardholder and requires an affirmative action of the customer to obtain goods or services and to request a refund taxpayer does not acquire the payment subject_to a definite obligation to pay amounts to retailers or refund any amount to a customer in conclusion taxpayer receives payments over which it exercises complete dominion and control and over which it holds under a claim of right unless and until a subsequent event occurs that would require it to transfer amounts to retailers or refund amounts to a customer therefore the payments that taxpayer receives for gift cards are not deposits and are income issue sec_1_451-1 of the income_tax regulations provides that under an accrual_method of accounting_income generally is includible in gross_income when all the events have occurred that fix the right to receive the income and the amount can be determined with reasonable accuracy in general all events that fix the right to receive income occur upon the earliest of when required performance takes place payment is due or payment is made see 372_us_128 thus when a taxpayer receives a payment for goods or services from a customer that is includible in the taxpayer’s gross_income under sec_61 the taxpayer generally is required to include the payment in income upon receipt even where the goods or services are to be provided in a future taxable_year sec_1_451-1 schlude v commissioner supra however a taxpayer may be entitled to use one of two deferral methods for certain advance_payments the first deferral method is found in sec_1_451-5 the regulation an advance_payment under the regulation means in relevant part any amount which is received in a taxable_year by a taxpayer using an accrual_method of accounting for purchases and sales pursuant to and to be applied against an agreement f or the sale_or_other_disposition in a future taxable_year of goods held by the a taxpayer primarily for sale to tam-121007-08 customers in the ordinary_course_of_his_trade_or_business sec_1_451-5 an agreement includes a gift certificate that can be redeemed for goods sec_1_451-5 the second deferral method is found in revproc_2004_34 i r b the revenue_procedure section dollar_figure of the revenue_procedure provides that a payment received by a taxpayer is an advance_payment if including the payment in gross_income for the taxable_year of receipt is a permissible method_of_accounting for federal_income_tax purposes without regard to the revenue_procedure the payment is recognized by the taxpayer in whole or in part in revenues in its applicable_financial_statement for a subsequent taxable_year and the payment is for inter alia services or the sale_of_goods other than the sale_of_goods for which the taxpayer uses a method of deferral provided in sec_1_451-5 of the income_tax regulations taxpayer asserts that the payments that it receives for the gift cards are advance_payments under the regulation consistent with this position taxpayer includes the gross_receipts from the sale of the gift cards in income the earlier of when a cardholder uses the card to make a purchase or the second taxable_year following the taxable_year the customer purchased the card alternatively taxpayer asserts that the payments are advance_payments under the revenue_procedure the field argues and we agree that the payments received by taxpayer are not advance_payments within the meaning of the regulation because the payments are not for the sale_of_goods held by the taxpayer primarily_for_sale_to_customers in the ordinary_course_of_his_trade_or_business sec_1_451-5 emphasis added the field argues and we agree that the revenue_procedure contemplates that in order to meet the definition of an advance_payment the payment must be received by the same taxpayer that provides the goods or services with respect to that payment because taxpayer neither holds goods for sale nor provides goods to customers who purchase gift cards payments for the gift cards are not for the sale_of_goods and therefore are not advance_payments within the meaning of the revenue_procedure taxpayer relies primarily on two cases for the proposition that a payment received by a taxpayer may be for the sale_of_goods even in cases in which the taxpayer holds no goods for sale to customers the first case is epic metals corp v commissioner tcmemo_1984_322 aff’d 770_f2d_1069 3rd cir this case involved a taxpayer that never took physical possession of the goods it sold to customers because the goods were shipped directly from the taxpayer’s suppliers to the taxpayer’s customers the issue in epic metals did not involve advance_payments instead the issue was whether the taxpayer was required to use inventory_accounting under sec_471 the court noted that under the sec_471 regulations the question of whether merchandise must be included in inventories is determined by whether a taxpayer ever has title to goods not whether the taxpayer ever has physical possession of the goods in concluding that the tam-121007-08 taxpayer was in fact required to use inventories the court found that the taxpayer held momentary title to the goods the second case is straight v commssioner unpublished order dated date wl tax ct memo lexis rev’g in part on reconsideration tcmemo_1997_569 the relevant issue in this case was whether a taxpayer held goods for sale for purposes of sec_1_451-5 where the taxpayer never had physical possession of the goods and never held title to the goods however in this unpublished order the court found that the government had conceded the issue by failing to address it on brief thus while the court found for the taxpayer the issue had been deemed conceded and was not reached on the merits taxpayer asserts that its situation is similar to the taxpayers in epic metals and straight because taxpayer is required to provide goods to the retail customers and taxpayer has contracted with the retailers to provide those goods thus while taxpayer never takes title to the goods taxpayer provides goods to customers within the meaning of both the regulation and the revenue_procedure epic metals is distinguishable from the present case both because epic metals did not involve sec_1_451-5 and because taxpayer never has even momentary title to goods furthermore unlike in both epic metals and straight taxpayer does not hold itself out as selling goods or otherwise providing goods to customers taxpayer’s assertion that it is contractually obligated to provide goods to customers does not reflect either the form or the substance of the agreement entered into with the retailers it is clear from the agreement that taxpayer’s business is to sell gift cards not retail goods and to manage the gift card program with respect to liabilities pertaining to the gift cards the agreement states taxpayer shall be solely liable and obligated to the purchasers or holders of the gift cards for the value of all gift cards and similar cards sold to the retailers’ customers the retailers shall be liable to taxpayer to accept the balance on any gift card or such other similar card as payment for goods and services in its retail outlets the retailers shall have no liability to purchasers or holders of the gift cards with respect to the sale of the gift cards or the redemption of the balances remaining on the gift cards for goods or services taxpayer shall not reduce the balance due to the customer on the card for any reason except for the amount used by customers to purchases goods and services from the retailers thus taxpayer’s sole liability with respect to the gift cards relates to the value on the cards not to the provision of retail goods the agreement specifically states that the goods and services are to be purchased from the retailers rather than taxpayer in addition to the terms of the agreement it is also clear from taxpayer’s actual operations that taxpayer is not selling goods to customers throughout the entire process of purchasing and redeeming gift cards taxpayer has no interaction with customers-the tam-121007-08 customers purchase the gift cards at the retailers and then return to the retailers to obtain goods and they likely are completely unaware of the existence of taxpayer or the role it plays in the transactions taxpayer also does not have inventory costs related to the goods and does not show a profit from sales of goods to customers finally taxpayer argues that the definition of an advance_payment in the revenue_procedure as a payment for the sale_of_goods should be interpreted broadly to apply to situations in which goods are provided by a taxpayer other than the taxpayer receiving the payment unlike the definition of an advance_payment in the regulation the revenue_procedure does not explicitly require that the payment be for goods held_for_sale by the taxpayer we disagree that the revenue_procedure should be interpreted in this manner rather as an administrative exception to the well established principle that items of gross_income are includible in income no later than when received see schlude supra the revenue_procedure applies only to taxpayers who fall expressly within its scope specifically the revenue_procedure applies only to taxpayers who receive payments for sales of goods and nothing in the revenue_procedure indicates that the activities of one taxpayer may be imputed to or combined with a second taxpayer in order to fall within its scope even where the two taxpayers are related entities or are members of an affiliated_group taxpayer does not hold itself out to retail customers as a seller of goods and in fact does not sell goods to customers issue taxpayer asserts that if the payments from sales of gift cards are includible in income on receipt the corresponding liabilities should be deductible by taxpayer at the same time sec_1_461-1 of the income_tax regulations provides that under an accrual_method of accounting a liability is incurred and generally is taken into account for federal_income_tax purposes in the taxable_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 a taxpayer may not deduct a liability that is contingent nor may a taxpayer deduct an estimate of an anticipated expense no matter how statistically certain if it is based on events that have not occurred by the close of the taxable_year 481_us_239 291_us_193 the field argues and we agree that taxpayer’s liability to make a payment to a retailer with respect to a gift card is contingent and is not fixed until the customer redeems the gift card at the retailer tam-121007-08 taxpayer argues that the liabilities in this case are not contingent citing as authority 476_us_593 and 158_f3d_484 9th cir the courts in hughes properties and gold coast determined that a casino’s liability for a slot machine payout which was governed by certain state gaming regulations was a fixed liability even though the payout would not occur until a future date the court determined that the event creating the liability was in hughes properties the last play of the slot machine before the end of the tax_year and in gold coast the accumulation by a club member of the minimum number of points needed to redeem a prize at which time a fixed liability was incurred pursuant to state gaming regulations mandating payouts the facts of the present case are more analogous to the facts of general dynamics supra in which the supreme court held that an employer’s liability to make a payment under a self-insured medical plan was not fixed until an employee filed a claim for payment similarly in 436_f3d_644 6th cir aff’g tcmemo_2000_283 the court held that a warranty liability was fixed not by the mere existence of the warranty but instead by the filing of a valid warranty claim in so holding the court stated that it agreed with the lower court’s opinion that hughes properties read in light of general dynamics stands for the proposition that ‘ t he first prong of the all event events test may be met when a statute has the effect of irrevocably setting aside a specific amount by the close of the tax_year and to be paid at a future date ’ id pincite quoting chrysler corp v commissioner t c memo the court noted that the focus in hughes properties remained on when the last event occurred that fixed the liability applying this analysis to the warranty liability at issue the court concluded that as in general dynamics the liability remained only a potential liability until it was firmly established by the filing of a claim until a customer returns to a retailer and redeems a gift card taxpayer faces only a contingent_liability to pay an amount to the retailer furthermore there is no law which has the effect of irrevocably setting aside a specific amount as if it were to be put into an escrow account by the close of the tax_year id as was the case in hughes properties and gold coast finally taxpayer argues that its liability to pay the retailer should be deductible at the same time that the gift card income is includible in gross_income because this is the only timing that results in a clear_reflection_of_income see sec_446 taxpayer cites 184_f3d_786 8th cir aff’g in part and rev’g in part 108_tc_448 as authority for this proposition in johnson the taxpayer paid a portion of the proceeds of sales of vehicle service contracts to an escrow fund a portion of these proceeds in turn were paid as a fee for administrative services administrative fee the tax_court had held that the taxpayer was not entitled to deduct the administrative fee on payment because the services provided for the fee were be to performed in a future year the appellate court reversed the tax_court and in so holding stated tam-121007-08 if taxpayers are going to be required to take into income the entire amount_paid into the escrow fund in the year of receipt and payment we think as a matter of fairness that they should also be allowed to deduct in that year the entire amount of the fee paid to the administrator we hold only that what is sauce for the goose is sauce for the gander in the tax_year in which the fees are paid to the administrator all events have occurred that establish liability for that payment and the amount of the liability can be determined with reasonable accuracy the commissioner argues that economic_performance has not yet occurred with respect to the liability because the services in connection with which the administrator must incur costs have not yet all been performed see sec_1_461-4 while this is certainly true in the abstract the question in this case is whether the method_of_accounting proposed by the commissioner clearly reflects income to answer that question both income and deductions must be considered if the income is to be recognized and we have upheld the commissioner’s decision on this point the deduction associated with it should also be recognized we do not think that johnson is persuasive on this issue first the court cited no law in its holding and the court explicitly disregarded the economic_performance regulations promulgated under sec_461 second clear_reflection_of_income principles do not require taxpayers to deduct liabilities for services to be provided in the future at the same time as the related payments are includible in income see eg 41_tc_75 nevertheless johnson is distinguishable from the present case because the johnson court found that the liability was fixed in the year of payment ie all events had occurred to establish the fact of the liability and the amount thereof could be determined with reasonable accuracy in the present case taxpayer’s liability is contingent and is not fixed until the customer returns to a retailer and redeems the gift card united_states v general dynamics supra taxpayer has no liability to pay a retailer an amount with respect to a gift card unless and until a customer returns and redeems the card at a retailer thus the return of the customer and redemption of the gift card is a condition_precedent to the establishment of taxpayer's liability taxpayer may deduct the liability to make the payment to the retailer no earlier than the time at which all events have occurred that establish the fact of the liability namely no earlier than when the customer redeems the gift card at the retailer caveat a copy of this technical_advice_memorandum is to be given to the taxpayer sec_6110 of the code provides that it may not be used or cited as precedent


tax_exempt_and_government_entities_division department of the treasury internal_revenue_service washington d c aug dollar_figure uniform issue list tep ra t2 vik wik thk kik kek kkkn kkk kkk tik nk nkk kk khe vik ake rik ok kkk kkk kkk legend decedent taxpayer a plan x ira date date date date date date date date date company v kik page of companyf amount amount state n dear kkk kkk this is in response to your request dated date in which you request a waiver of the 60-day rollover requirement contained in sec_402 of the internal_revenue_code the code’ the following facts and representations have been submitted under penalty of perjury in support of the ruling requested taxpayer a represents that he attempted a rollover from plan x totaling amount taxpayer a asserts that his failure to accomplish a rollover within the 60-day period prescribed by sec_402 of the code was due to the accepting bank’s failure to timely process the attempts at transfer and the death of decedent taxpayer a further represents that amount has not been used for any other purpose decedent who was born on date and died on date not having attained age was a resident of state n decedent was not married at his death and was survived by his brother taxpayer a as of his death decedent was a participant in plan x which is represented to be a retirement_plan meeting the requirements of sec_401 of the code under which decedent had a lump sum benefit of amount on date decedent appointed taxpayer a as his power_of_attorney under the laws of state n with the authority to make decisions on decedent's behalf for among other things all employment issues including but not limited to benefits and elections insurance effectuating decedent's retirement electing pension options and any and all other retirement related matters taxpayer a is also the nominated executor of decedent's_estate and its sole distributee and sole beneficiary on date as decedent's authorized agent taxpayer a retired decedent from company v and signed a pension election authorization form that authorized company v to pay out a lump sum from plan x for amount further while decedent was still alive taxpayer a executed a direct debit authorization permitting company v to transfer the lump sum payment from plan x of amount to ira y an ira account for the decedent established on date which designated taxpayer a as the sole beneficiary taxpayer a represents that prior to decedent's death on date sec_5 and attempts to complete wire transfers from plan x to ira y for amount were disallowed by the accepting bank because the bank claimed the wire instructions were too long to process after decedent's death company v issued a check for amount to company f the custodian of ira y however since the decedent had passed away the check could not be deposited into ira y further company f closed out ira y after decedent had passed away on date company v issued a new check made payable to the decedent's_estate for amount amount less federal_income_tax withholding on date me page of taxpayer a represents that it was clearly decedent's intent to timely and directly contribute his lump sum benefit of amount from plan x to the ira y a newly created ira established in decedent's name to receive amount and that decedent through the actions of his authorized agent taxpayer a took all appropriate and reasonable actions to achieve that result based on the above facts and representations you through your authorized representative request that taxpayer a be permitted to deposit the portion of decedent's account in plan x authorized by company v not to exceed amount into an ira rollover ira in the name of the decedent deceased for the benefit of taxpayer a within sixty days of the date of notification to taxpayer of the granting of this letter_ruling with respect to your ruling requests sec_402 of the code provides that except as otherwise provided in sec_402 any amount actually paid or distributed from a_trust described in sec_401 which is tax exempt under sec_501 shall be taxed to the distributee in the taxable_year of the distributee in which distributed in the manner provided under sec_72 relating to annuities sec_402 of the code provides generally that if any portion of an eligible_rollover_distribution from a sec_401 qualified_retirement_plan is transferred into an eligible_retirement_plan the portion of the distribution so transferred shall not be includible in gross_income in the taxable_year in which paid sec_402 of the code provides that except with respect to sec_402 the exclusion from income under sec_402 shall not apply to any transfer of a distribution made after the day following the day on which the distribute received the property distributed sec_402 provides that this 60-day requirement may be waived where the failure to waive such requirement would be against equity or good conscience including casualty disaster or other events beyond the reasonable control of the individual subject_to such requirement sec_401 provides the rules for governing direct transfers of eligible rollover distributions sec_1 a -1 of the income_tax regulations question and answer-15 provides in relevant part that an eligible_rollover_distribution that is paid to an eligible_retirement_plan in a direct_rollover is a distribution and rollover and not a transfer of assets and liabilities revproc_2003_16 2003_4_irb_359 provides that in determining whether to grant a waiver of the 60-day rollover requirement pursuant to sec_402 of the code the service will consider all relevant facts and circumstances including errors committed by a financial_institution inability to complete a rollover due to death disability hospitalization incarceration restrictions imposed by a foreign_country or postal error the use of the amount distributed for example in the case of payment by check whether the check was cashed and the time elapsed since the distribution occurred the information presented and documentation submitted by taxpayer a is consistent with his assertion that his failure to accomplish a timely rollover was caused by both the failure page of of the accepting bank to process his attempts to wire transfer amount from plan x to ira y and the death of decedent therefore pursuant to sec_402 of the code the service hereby waives the 60-day rollover requirement with respect to the distribution of an amount authorized by company v not to exceed amount from plan x taxpayer a is granted a period of days from the issuance of this ruling letter to contribute an amount authorized for distribution from plan x by company v not exceeding amount into a rollover ira provided all other requirements of sec_402 of the code except the 60-day requirement are met with respect to such contribution an amount authorized for distribution from plan x by company v not exceeding amount will be considered a rollover_contribution within the meaning of sec_402 of the code this ruling does not authorize the rollover of amounts that are required to be distributed by sec_401 of the code we note that the rollover ira into which an amount authorized by company v be distributed from plan x not to exceed amount may be rolled over will not have a designated_beneficiary as that term is defined in sec_401 of the code the sec_401 distribution period with respect to the rollover ira will be that applicable to an ira owner who dies prior to attaining his required_beginning_date without having designated a beneficiary thereof accordingly the entirety of decedent's interest in plan x that is rolled over into the rollover ira must be distributed to taxpayer a no later than the end of the calendar_year containing the fifth anniversary of decedent's death finally the scope of taxpayer a’s authority both under the executed power_of_attorney while decedent was alive and as an executor of decedent’s estate after decedent’s death are matters governed by state law this ruling assumes taxpayer a’s actions relevant to the ruling_request contained herein are in accordance with the laws of state n and taken pursuant to taxpayer a’s authority as decedent's power_of_attorney while decedent was alive and as executor of decedent’s estate after decedent's death no opinion is expressed as to the tax treatment of the transaction described herein under the provisions of any other section of either the code or regulations which may be applicable thereto this letter is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent as page of if you wish to inquire about this ruling please contact ewsenensenetenees at ee_eee_ phone-not a toll-free number or fax sincerely yours fajen leu aehiay gx dennt littlejhn littlejohn manager mployee plans technical group enclosures deleted copy of ruling letter notice of intention to disclose cc wkk nhk whe


internal_revenue_service national_office technical_advice_memorandum date ---------------------- tam-163777-03 cc psi b07 --------------------- number release date third party contact index uil no case-mis no district_director - taxpayer's name taxpayer's address -------------------- ---------------------------------- ---------------------------- --------------------- ---------------------------------- ---------------- ------------------------ ------------------ taxpayer's identification no years involved date of conference issue whether the conclusion of taxpayer’s experts that there is a statistically significant chemical change from the feedstock coal to taxpayer’s synthetic_fuel as reflected in a comparison of ftir spectra is based on sound scientific procedures conclusion in this request for technical_advice after consideration of all of the information on the record and after consultation with appropriate experts we conclude that although we do not now believe that the processes implemented by taxpayer produce the level of chemical change required by sec_29 nevertheless taxpayer’s experts’ conclusion that there is a statistically significant chemical change from the feedstock coal to taxpayer’s synthetic_fuel as reflected in a comparison of ftir spectra is based on sound scientific procedures if the procedures are applied in a consistent and unbiased manner accordingly the conclusions reached by taxpayer’s experts were not unreasonable and taxpayer may continue to rely on the conclusions reached in the private letter rulings consistent with announcement taxpayer should tam-163777-03 observe the sampling testing and record data retention practices enumerated therein in order to demonstrate that the test procedures used by taxpayer to show chemical change have been applied in a consistent and unbiased manner facts taxpayer operates synthetic_fuel facilities at two sites taxpayer has requested and received private letter rulings from the internal_revenue_service with regard to the facilities the private letter rulings concluded that the process that taxpayer implements at the facilities results in a qualified_fuel for purposes of sec_29 of the internal_revenue_code the conclusion in the ruling was based on taxpayer’s submission of a report in which an expert in the chemistry of coal concluded that taxpayer’s process effected a significant chemical change to feedstock coal in the formation of a synthetic_fuel product taxpayer’s expert based the conclusion on the analysis and interpretation of data obtained from complex and sophisticated analytical procedures these procedures included a form of infrared spectroscopy ftir and thermo-gravimetric analysis tga irs examiners have questioned the conclusions of taxpayer’s expert the examiners have questioned both the manner in which taxpayer’s expert implemented the analytic procedures and the manner in which the data derived from those procedures was manipulated and analyzed the examiners have provided documentation of these concerns in the form of an expert report that reaches an opposite conclusion from that presented by taxpayer’s expert taxpayer has in turn documented taxpayer’s concerns with the examiners’ expert’s report and has supplemented the record with statements from additional experts in the chemistry of coal and statistics in the event that we reach a conclusion that is adverse to taxpayer the examiners have requested that we consider the revocation of taxpayer’s private_letter_ruling law and analysis evidence derived from ftir provided the principal basis for both taxpayer’s expert’s conclusions and those of the expert who provided a report to the examiners both experts looked to evidence from tga as support for the conclusions based on ftir there are numerous areas in which the experts disagreed these included the appropriate use of an internal standard to normalize ftir spectra the appropriate techniques for base line correction of spectra the selection of absorption peaks and integration points for analysis of differences between spectra and the appropriate use of statistics to evaluate differences between spectra tam-163777-03 both taxpayer and the examiners have made detailed presentations of their evidence and conclusions in evaluating the opposing arguments this office has sought the assistance of independent experts in the use of ftir and tga in determining the nature of chemical change we note that during the time that this request for technical_advice has been under consideration the internal_revenue_service has completed a review of the scientific validity of test procedures and results that have been presented as evidence of chemical change by members of the synthetic fuels industry as evident in announcement the service believes that the processes approved under its long standing ruling practice and as set forth in revproc_2001_30 as modified by revproc_2001_34 2001_1_cb_1293 do not produce the level of chemical change required by sec_29 and revrul_86_100 1986_2_cb_3 nevertheless because taxpayers who have received rulings have relied on the service’s ruling position in making their investments announcement indicates that the service will continue to adhere to the ruling position in cases where taxpayers are identically situated while announcement indicated that the test procedures and results used by taxpayers to show chemical change are scientifically valid if the procedures are applied in a consistent and unbiased manner the announcement stated that the service has continuing concerns regarding the sampling and data record retention practices prevalent in the synthetic fuels industry accordingly taxpayers will be required to i maintain sampling and quality control procedures that conform to astm or other appropriate industry guidelines at their synthetic_fuel production facilities ii obtain regular reports from independent laboratories that have analyzed the synthetic_fuel produced in such facilities to verify that the coal used to produce the fuel undergoes a significant chemical change consistent with prior ruling practice and iii maintain records and data underlying the reports that taxpayers obtain from independent laboratories including raw ftir data and processed ftir data sufficient to document the selection of absorption peaks and integration points caveat s a copy of this technical_advice_memorandum is to be given to taxpayer sec_6110 of the code provides that it may not be used or cited as precedent


internal_revenue_service national_office technical_advice_memorandum date number release date index uil no case mis no tam-118929-99 cc intl b3 district_director taxpayer’s name taxpayer’s address taxpayer’s identification no years involved date of conference legend taxpayer business a ussub business b country x agreement c certain country x laws and government decrees generally applicable tax laws of country x country x taxes treaty statutory rate date d treaty rate e treaty rate f article g article h tam-118929-99 article i issue when applying the safe_harbor method of sec_1_901-2a should the statutory tax_rate or the lower treaty rate be used in the d factor conclusion the statutory rate should be used in the d factor under the regulatory safe_harbor method facts taxpayer is a domestic_corporation engaged with its affiliates in business a taxpayer owns indirectly of the stock of ussub a domestic_corporation engaged in business b through a permanent_establishment in country x ussub’s operations are conducted under agreement c with a controlled_entity of the government of country x agreement c obligates ussub to be subject_to and pay country x taxes imposed by certain country x laws and government decrees as in effect when agreement c was entered into ussub’s obligation under agreement c to pay country x taxes as provided for in these laws and government decrees is not affected by changes that may be made to country x law for the years under audit the total_tax imposed by these country x laws and government decrees on ussub consisted of a tax on business profits and an additional tax on after-tax profits during the same years the generally applicable tax laws of country x also imposed corporate_income_tax and an additional tax on the after-tax profits of non-country x corporations that are owned by foreign shareholders and operate in country x through a permanent_establishment the rate of additional tax under the generally applicable laws of country x is hereinafter referred to as the statutory rate the rate of additional tax applicable to ussub under agreement c was the same as the statutory rate an income_tax treaty was in effect between the u s and country x during the period under audit treaty the treaty allows country x to impose a tax on the business profits of u s_corporations that operate in country x through a permanent_establishment see article g of the treaty in addition under article h of the treaty country x is allowed to impose a tax at the treaty rate on the after-tax profits of u s_corporations that operate in country x through a permanent_establishment prior to date d the treaty rate of additional tax was treaty rate e a protocol to the treaty which reduced the treaty rate from treaty rate e to treaty rate f entered into force on date d on and after date d the treaty rate was treaty rate f treaty rates e and f were both lower than the statutory rate article i of the treaty specifically provides however that the reduced treaty rates do not apply to corporations like ussub operating under tam-118929-99 agreements such as agreement c agreement c was entered into before and continued to apply after the treaty went into effect as a result ussub remained subject_to and paid tax to country x on its business profits and after-tax profits at rates contractually fixed when agreement c was entered into by ussub during the audit period ussub was a dual_capacity_taxpayer as defined in sec_1_901-2 ussub elected the safe_harbor method of sec_1_901-2a e to determine the portion of country x levies that is considered to be a tax for purposes of sec_901 and sec_903 of the internal_revenue_code under the safe_harbor method ussub’s country x tax_base must be multiplied by the country x general tax_rate the d factor in the formula to determine the amount of creditable tax ussub used the generally applicable country x corporate tax_rate on its business income and the generally applicable statutory rate on its after-tax profits in the d factor ussub did not use the lower treaty rates law and analysis sec_901 of the internal_revenue_code allows a credit for the amount of income taxes paid_or_accrued by or on behalf of a taxpayer to a foreign_country or possession_of_the_united_states a foreign levy is creditable only if it is a tax whose predominant character is that of an income_tax in the u s sense a levy is a tax if it requires a compulsory payment pursuant to the foreign country’s authority to levy taxes under sec_1_901-2 a payment in exchange for a specific_economic_benefit is not a tax a taxpayer who is subject_to a foreign levy and who also directly or indirectly receives a specific_economic_benefit from a foreign government is a dual_capacity_taxpayer sec_1_901-2 under sec_1_901-2 a i a dual_capacity_taxpayer must establish the portion if any of the foreign levy that is a tax during the audit period ussub was a dual_capacity_taxpayer because under agreement c it received the right to engage in business b in country x because the laws governing amounts levied pursuant to agreement c were different than those applicable to non-dual capacity taxpayers ussub must establish the distinct element of the levy that is a tax sec_1_901-2a provides that a dual_capacity_taxpayer may use either the facts and circumstances method or the safe_harbor method to establish the tax amount under the facts and circumstances method not relevant here the taxpayer must establish by all of the facts and circumstances the portion if any of the levy that is not paid in exchange for a specific_economic_benefit see sec_1_901-2a the portion so established is the creditable tax ussub elected to apply the safe_harbor method which employs a splitting approach to determine the portion if any of the payments made under the foreign levy that is a creditable tax under the safe_harbor method described in sec_1_901-2a the dual capacity tam-118929-99 taxpayer applies a formula to determine the amount of the levy that is the qualifying_amount or the creditable tax sec_1_901-2a provides that the formula is intended to provide a foreign_tax_credit for an amount approximately equal to the amount of generally imposed income_tax that would have been required to be paid in the taxable_year by the dual_capacity_taxpayer if it had not been a dual_capacity_taxpayer and if the amount considered to be paid for the specific_economic_benefit had been deductible in determining the income_tax_liability the safe_harbor formula is a-b-c x d 1-d where a the amount of gross_receipts determined under foreign law b the amount of costs and expenses c the total amount_paid pursuant to the levy and d the tax_rate sec_1_901-2a provides that the tax_rate the d factor for purposes of the safe_harbor formula is the tax_rate that is applicable in computing tax_liability under the general tax if the rate of the general tax varies with the amount of the base the rate to be used is the rate that applies under the general tax to a person whose base is the same as that of the dual_capacity_taxpayer minus the specific_economic_benefit amount_paid provided that such rate applies in practice to non-dual capacity taxpayers id sec_1_901-2a further provides if the general tax is a series of income taxes eg on different types of income or if the application of the general tax differs by its terms for different classes of persons subject_to the general tax eg for persons in different industries then except as otherwise provided in this paragraph e the qualifying_amount shall be computed by reference to the income_tax contained in such series of income taxes or in the case of such different applications the application of the general tax that by its terms and in practice imposes the highest tax burden on persons other than dual capacity taxpayers notwithstanding the preceding sentence the general tax amount shall be computed by reference to the application of the general tax to entities of the same type as determined under the general tax as the dual_capacity_taxpayer and to persons of the same resident or nonresident status as determined under the general tax as the dual_capacity_taxpayer and if the general tax treats business income differently from non-business eg investment_income as determined under the general tax the dual capacity taxpayer’s business and non-business income shall be treated as the general tax treats such income if for example the dual_capacity_taxpayer would under the general tax be treated as a resident and as a corporation ie because the rules of the general tax treat an entity like the dual_capacity_taxpayer as a corporation the dual_capacity_taxpayer shall be so treated in computing the qualifying_amount tam-118929-99 it is not disputed that ussub was actually required under agreement c to use a rate equal to the statutory rate on its after-tax profits to compute its tax_liability to country x in the years under audit the reduced treaty rates did not apply because ussub was a dual_capacity_taxpayer that entered into agreement c see article i of the treaty the disputed point is whether to use the statutory rate or the u s treaty rate as the general tax_rate in the safe_harbor formula in determining the portion of ussub’s tax_payments that qualify as creditable taxes in other words the question is whether the dual capacity taxpayer’s status as a u s taxpayer that would be eligible for reduced tax_rates under the treaty if it were not a dual_capacity_taxpayer is a factor that should be taken into account in determining the applicable_rate sec_1_901-2a suggests that the reduced treaty rates should be used because use of those rates would approximate the amount of tax ussub itself as a u s resident eligible to be taxed at the reduced treaty rates would have paid to country x on its profits if it had been a non-dual capacity taxpayer however sec_1_901-2a provides only a general statement of what the safe_harbor formula is designed to do the specific rules for determining what tax_rate is used in the d factor are contained in sec_1_901-2a and i sec_1_901-2a indicates that the appropriate rate is the highest tax_rate imposed in practice on a person that is a non-dual capacity taxpayer with income comparable to that of the dual_capacity_taxpayer this suggests that the specific dual capacity taxpayer’s eligibility for treaty benefits is not taken into account in determining the generally applicable tax_rate similarly sec_1_901-2a provides that if the general tax applies differently to different classes of persons the qualifying_amount is computed by reference to the application that by its terms and in practice imposes the highest tax burden on persons other than dual capacity taxpayers this language indicates that the higher statutory rate rather than lower treaty rates for which some but not all classes of taxpayers are eligible should be used the context of the reference in sec_1_901-2a to entities of the same type suggests that this factor refers to entity classification such as corporation partnership or trust and not to all of the specific attributes of the dual_capacity_taxpayer there is no dispute in this case over the application of the other rules referenced in sec_1_901-2a while the regulations are ambiguous the better view is that the generally applicable statutory rate of additional tax and not the lower u s treaty rate should be used in computing the d factor this reading of the regulations best furthers the underlying purpose of the safe_harbor formula as discussed above the purpose of the safe_harbor formula is to approximate the portion of the payment made by the dual_capacity_taxpayer that is a tax the regulations identify the highest tax burden imposed by the foreign_country on non-dual capacity taxpayers as the amount treated as a tax so that only amounts paid in excess of this amount by the dual_capacity_taxpayer are considered to be paid in exchange for the specific_economic_benefit that it received ie tam-118929-99 the deemed royalty element of the payment if the highest_rate that applies in practice to other non-dual capacity taxpayers is not used in the safe_harbor formula an amount of tax paid_by a non-dual capacity taxpayer would be treated as a royalty when paid_by a dual_capacity_taxpayer accordingly use of the statutory rate in the d formula reaches the correct result in this case a copy of this technical_advice_memorandum is to be given to the taxpayer sec_6110 of the code provides that it may not be used or cited as precedent - end -


ry atin argan ha sec_5 wee - tax_exempt_and_government_entities_division department of the treasury internal_revenue_service te_ge eo examinations commerce street dallas tx release number release date legend org organization name xx date address address date org address person to contact identification_number contact telephone number in reply refer to te_ge review staff ein certified mail - returned receipts dear last date for filing a petition with the tax_court august 20xx a final adverse determination_letter as to your exempt status under section this i sec_501 of the internal_revenue_code your exemption from federal_income_tax under sec_501 of the code is hereby revoked effective july 20xx our adverse determination was made for the following reasons organizations are organizations exempt from federal_income_tax under sec_501 of the code are required to operate exclusively for charitable educational or other exempt purposes not operated exclusively for exempt purposes if the net_earnings of the organization inure in whole or in part to the benefit of private shareholders or individuals of the organization see sec_1_501_c_3_-1 during 20xx 20xx and 20xx we have determined your net_earnings inured to the benefit of private individuals by regularly paying expenses of employees without contemporaneously recording the personal expenditures as salary or compensation in addition you paid expenses of a related for-profit owned by employees the transactions that resulted in funds inuring to private individuals were multiple or repeated transactions during the year as aresult of your practices the local school district took control of your organization and closed all school and other exempt_activities as such you have not operated exclusively for exempt purposes and have operated for the benefit of the private interests of your founder in contravention of the requirements of sec_1_501_c_3_-1 also you have been administratively dissolved by the state of state since 20xx and have not demonstrated you distributed your assets for exempt purposes as required by sec_501 and your articles of organization contributions to your organization are no longer deductible under sec_170 of the internal_revenue_code you are required to file federal_income_tax returns on form_1120 these returns should be filed with the appropriate service_center for the year ending june 20xx and for all years thereafter processing of income_tax returns and assessment of any taxes due will not be delayed should a petition for declaratory_judgment be filed under sec_7428 of the internal_revenue_code if you decide to contest this determination in court you must initiate a suit for declaratory_judgment in the united_states tax_court the united_states claim court or the district_court of the united_states for the district of columbia before the day after the date this determination was mailed to you contact the clerk of the appropriate court for the rules for initiating suits for declaratory_judgment 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 or you can contact the taxpayer_advocate from the site where the tax_deficiency was determined by calling or writing to taxpayer_advocate assistance cannot be used as a substitute for established irs procedures formal appeals processes etc the taxpayer_advocate is not able to reverse legal or technically correct_tax determinations nor 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 action as required by sec_6104 of the internal_revenue_code if you have any questions please contact the person whose name and telephone number are shown in the heading of this letter sincerely yours nanette m downing director eo examinations internal_revenue_service tax_exempt_and_government_entities_division commerce street dallas texas department of the treasury date date org address certified mail - return receipt requested dear taxpayer_identification_number form tax_year s ended person to contact id number contact telephone number contact fax number we have enclosed a copy of our report of examination explaining why we believe revocation of your exempt status under sec_501 of the internal_revenue_code is necessary if you accept our findings take no further action we will issue a final revocation letter if you do not agree with our proposed revocation you must submit to us a written request for appeals_office consideration within days from the date of this letter to protest our decision your protest should include a statement of the facts the applicable law and arguments in support of your position an appeals officer will review your case the appeals_office is independent of the director eo examinations the appeals_office resolves most disputes informally and promptly the enclosed publication the examination process and publication exempt_organizations appeal procedures jor unagreed issues explain how to appeal an internal_revenue_service irs decision publication also includes information on your rights as a taxpayer and the irs collection process you may also request that we refer this matter for technical_advice as explained in publication if we issue a determination_letter to you based on technical_advice no further administrative appeal is available to you within the irs regarding the issue that was the subject of the technical_advice if we do not hear from you within days from the date of this letter we will process your case based on the recommendations shown in the report of examination if you do not protest this proposed determination within days from the date of this letter the irs will consider it to be a failure to exhaust your available administrative remedies sec_7428 of the code provides in part a declaratory_judgment or decree under this section shall not be issued in any proceeding unless the tax_court the claims_court or the district_court of the united_states for the district of columbia determines that the organization involved has exhausted its administrative remedies within the internal_revenue_service we will then issue a final revocation letter we will also notify the appropriate state officials of the revocation in accordance with sec_6104 of the code you have the right to contact the office_of_the_taxpayer_advocate taxpayer_advocate assistance is not a substitute for established irs procedures such as the formal appeals process the taxpayer_advocate cannot reverse a legally correct_tax determination or extend the time fixed by law that you have to file a letter rev catalog number 34809f petition in a united_states 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 you may call toll-free and ask for taxpayer_advocate assistance if you prefer you may contact your local taxpayer_advocate at if you have any questions please call the contact person at the telephone number shown in the heading of this letter contact you if you write please provide a telephone number and the most convenient time to call if we need to thank you for your cooperation sincerely sunita lough director eo examinations enclosures publication publication report of examination envelope letter rev catalog number 34809f form 886-a name of taxpayer explanation of items year ended june 20xx june 20xx xx vp date vp city city state state director director co-1 co-2 org legend org organization name president president companies issue whether org’s tax-exempt status under sec_501 should be revoked as of july 20xx facts org hereafter referred to as org was granted tax-exempt status under sec_501 of the internal_revenue_code from the date it incorporated oct 20xx org was formed for the purpose of operating an alternative school to give children a second chance to get an equivalent to a high school education initially org operated a school in city but eventually expanded and operated a second school at a city location org has been inactive since the beginning of 20xx and is not involved in any educational activities the two alternative schools that were operated by org were taken over by the city county school district in the early part of 20xx the two schools were taken over by the city county school district because of the following concerns poor supervision unsound business practices and use of public money for personal gain an audit flagged the annual dollar_figure purchase of football season tickets and parking and the dollar_figure monthly lease of a bmw for the principal of the city campus there were also concerns regarding the snack facility that was operated by the co-1 org pursued court action to the state supreme court to try get the schools returned but as of this time the schools still are under the control of the city county school district and the operation of the schools will not be returned to org org paid various expenditures that were charged on the for-profit’s american express card the co-1 as of today org has failed to provide verification that the various expenditures were under an accountable_plan and were used for business related purposes please refer to exhibit i for a breakdown of the expenditures that are classified as not under an accountable_plan the co-1 was controlled by the president its director president and by vp its director vice president secretary president was also the founder of org and the principal of the city school vp was the principal of the co-2 the co-1 is no longer operating org purchased city football tickets to be used as rewards to the students for their achievements when asked for an accounting of who was rewarded with the free tickets the organization was not able to provide the information to show the tickets were used for the benefit of the students therefore the ticket expenditures were not under an accountable_plan department of the treasury - internal_revenue_service form 886-a form 886-a name of taxpayer org explanation of items year ended june 20xx june 20xx org' corporation status is not current with the state of state the organization has forfeited their corporate status with the state of state during a recent conversation with org’s president director he stated there was not an operating board_of directors and that he was no longer serving as the president of org he also indicated that he would not be able to provide any additional information law sec_501 of the code describes certain organizations which are exempt from income_tax under sec_501 of the code and reads in part as follows corporations and any community chest fund or foundation organized and operated exclusively for religious charitable scientific testing for public safety literary or educational_purposes or to foster national or international amateur sports competition but only if no part of its activities involve the provision of athletic_facilities or equipment or for the prevention of cruelty to children or animals no part of the net_earnings of which inures to the benefit of any private_shareholder_or_individual no substantial part of the activities of which is carrying on propaganda or otherwise attempting to influence legislation except as otherwise provided in subsection h and which does not participate in or intervene in including the publishing or distributing of statements any political campaign on behalf of or in opposition to any candidate for public_office sec_1_501_c_3_-1 of the regulations provides that in order to be exempt as an organization described in sec_501 of the code the organization must be one that is both organized and operated exclusively for one or more of the purposes specified in that section sec_1_501_c_3_-1 of the regulations provides that an organization will not be regarded as operated exclusively for exempt purposes if more than an insubstantial part of its activities is not in furtherance of exempt purposes sec_1_501_c_3_-1 of the regulations provides that an organization is not organized or operated exclusively for one or more exempt purposes unless it serves a public rather than a private interest thus it is necessary for an organization 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 interests sec_1_501_c_3_-1 of the regulations provides that the term charitable is used in sec_501 of the code in its generally accepted legal sense and includes the promotion of education private benefit- inurement - law department of the treasury - internal_revenue_service form 886-a form 886-a name of taxpayer explanation of items year ended org june 20xx june 20xx the presence of a single substantial nonexempt purpose can destroy the exemption regardless of the number or importance of exempt purposes 326_us_279 90_led_67 66_sct_112 am campaign acad v commissioner 92_tc_1053 see also old dominion box co inc v united_states f2d cir cert_denied 413_us_910 operating for the benefit of private parties who are not members of a charitable_class constitutes a substantial nonexempt purpose when an organization operates for the benefit of private interests such as designated individuals the creator or his family or persons directly or indirectly controlled by such private interests the organization by definition does not operate exclusively for exempt purposes am campaign acad v commissioner supra pincite- an organization will not qualify for exempt status under ilr c sec_501 if it is 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 interests sec_1_501_c_3_-1 inurement refers to the non-incidental diversion of assets which are supposed to be dedicated to charitable purposes to an insider of the organization see sec_1_501_a_-1 ginsburg v commissioner 46_tc_47 in 75_tc_127 a newly formed christian religious_organization which was founded by one of its ministers paid its founder and its other ministers a predetermined percentage of the gross tithes and offerings that were received by the organization after determining that part of the organization’s net_earnings inured to the benefit of private shareholders or individuals ie the ministers the tax_court held that the organization was not exempt as an organization described in sec_501 in 203_f2d_872 sth cir a corporation filed suit to recover overpayments of income taxes on grounds that it was entitled to charitable exemption the united_states district_court for the northern district of texas entered judgment against the plaintiff and the plaintiff appealed the court_of_appeals affirmed the district court’s judgment and concluded that the district court’s finding that the salary that was paid to the founder of the charitable foundation to which all of the founder’s stock in the corporation was transferred was excessive and constituted inurement of net_earnings to the benefit of a private individual was not clearly erroneous in the 412_f2d_1197 ct_cl cert_denied 397_us_1009 in addition to receiving salary commission and royalty payments the founder of the church and several members of his family received unexplained payments in the nature of loans and reimbursements for expenditures made in plaintiff's behalf for expenses and other purposes the court of claims held that the plaintiff was not entitled to exemption from federal_income_tax because it failed to prove that no part of the corporate net_earnings benefited private individuals thus the plaintiffs claim was denied and the petition was dismissed department of the treasury - internal_revenue_service form 886-a form 886-a name of taxpayer org explanation of items year ended june 20xx june 20xx in 365_f2d_792 8th cir after the court_of_appeals concluded that the tax_court was justified in ruling that the corporate petitioner was not entitled to tax exemption as a religious_organization under sec_501 it turned its attention to the unaccounted-for and unexplained withdrawals from the corporation’s bank accounts and the checks which were made payable to the founder that were drawn on the organization’s account the commissioner credited the unidentified withdrawals to the founder’s income the tax_court sustained such action and the court_of_appeals affirmed the tax court’s determination noting that djue to the extremely close relationship between the founder and the day-to-day financial activities of organization and due to the founder’s complete and unfettered control_over the organization the founder has the burden of explaining unidentified withdrawals from the organization’s accounts id pincite citing 280_us_227 295_f2d_98 8' cir if he is unable to do so the commissioner may validly assume that the withdrawals were income to the founder 365_f2d_792 8th cir no evidence of any kind was produced explaining the withdrawals or indicating that the founder did not receive the benefit from them thus the court_of_appeals concluded that the assessments were proper in 823_f2d_1310 og cir cert_denied 486_us_1015 the court_of_appeals affirmed the tax court’s judgment which upheld the commissioner’s assessment of tax deficiencies and penalties against the church following the revocation of the church’s tax exempt status the court of appeal reviewed the tax court’s factual finding that a portion of the church’s net_earnings inured to the benefit of l ron hubbard and his family and otc a private for-profit corporation for clear error in finding that a portion of the church’s net_earnings inured to the benefit of l ron hubbard his family and otc the tax_court isolated two indicia of inurement overt and covert inurement the overt indicia included salaries living_expenses and royalties and the covert indicia included debt repayments and l ron hubbard’s unfettered control_over millions of dollars of church assets the tax_court concluded that these indicia when viewed in light of the self-dealing associated with them coupled with the church’s failure to carry its burden_of_proof and to disclose the facts candidly proved conclusively that the church was operated for the benefit of l ron hubbard and his family id at p in addition to hubbard’s salary the church paid for all of the hubbards’ living and medical_expenses aboard the cruise_ship apollo the church paid substantial royalties to l ron hubbard for his books recordings and e-meters the record revealed that l ron hubbard had unfettered control_over millions of dollars in church assets and supported the tax court’s conclusion that l ron hubbard had unfettered control_over church of scientology trust fund assets additionally the tax_court found that church income incurred to the benefit of l ron hubbard in a grand scale in the form of debt repayments id at p in sum the tax_court held that significant sums of money inured to the benefit of l ron hubbard and his family during the years at issue the court_of_appeals found no clear error and noted that a lthough neither the salaries nor the living_expenses necessarily constituted evidence of inurement the cumulative effect of hubbard’s use of the church to promote royalty department of the treasury - internal_revenue_service form 886-a form 886-a name of taxpayer org year ended june 20xx explanation of items june 20xx income hubbard’s unfettered contro over millions of dollars of church assets and his receipt of untold thousands of dollars worth of debt repayments strongly demonstrative inurement inadequate books_and_records - law sec_1_6001-1 of the regulations states that the books_or_records required by this section shall be kept at all times available for inspection by authorized internal revenue officers or employees and shall be retained as long as the contents thereof may be material in the administration of any internal revenue law sec_1_6033-1 of the regulations provides that every organization which has established its right to exemption from tax whether or not it is required to file an annual return of information shall submit such additional information as may be required by the district_director for the purpose of enabling him to inquire further into its exempt status and to administer the provisions of subchapter_f sec_501 and the following chapter of the code and sec_6033 rev_rul 1959_1_cb_627 concerns an exempt_organization that was requested to produce a financial statement and statement of its operations for a certain year however its records were so incomplete that the organization was unable to furnish such statements the service held that the failure or inability to file the required information_return or otherwise to comply with the provisions of sec_6033 of the code and the regulations which implement it may result in the termination of the exempt status of an organization previously held exempt on the grounds that the organization has not established that it is observing the conditions required for the continuation of exempt status in accordance with the above cited provisions of the code and regulations under sec_6001 and sec_6033 organizations recognized as exempt from federal_income_tax must meet certain reporting requirements these requirements relate to the filing of a complete and accurate annual information and other required federal tax forms and the retention of records sufficient to determine whether such entity is operated for the purposes for which it was granted tax-exempt status and to determine its liability for any unrelated_business_income_tax sec_62 a which defines adjusted_gross_income agi bears on the issue with respect to employees expenses paid_or_incurred by an employee in_connection_with_the_performance_of_services as an employee are deductible from the employee's gross_income in determining agi but only under an expense allowance arrangement with the employer which requires the employee to substantiate the expenses and to return amounts in excess of the substantiated expenses within a reasonable period of time see sec_62 and sec_62 treasury regulations and c refers to such an expense allowance arrangement as an accountable_plan in general if an expense allowance arrangement fails to meet any of the three requirements business connection substantiation and return of the amounts in excess of expenses then it is a nonaccountable_plan however if the arrangement meets the accountable rules except for the allowance of the other bona department of the treasury - internal_revenue_service form 886-a form 886-a name of taxpayer explanation of items year ended org june 20xx june 20xx fide expenses related to the employer's business that are not deductible eg travel that is not away from home then part of the expense allowance is treated as an accountable_plan and part as a nonaccountable_plan see sec_1_62-2 issue whether org’s tax-exempt status under sec_501 should be revoked as of july 20xx taxpayer’s position taxpayer’s has not provided their position org does not have an active board_of directors and when org’s president director was contacted to discuss org’s tax-exempt status he indicated that he was no longer acting as the president of org government’s position sec_1_501_c_3_-1 of the regulations provides that an organization is not organized or operated exclusively for one or more exempt purposes unless it serves a public rather than a private interest thus it is necessary for an organization 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 interests under sec_1_6033-2 every organization exempt from tax whether or not it is required to file an annual information_return shall submit additional information as may be required by the internal_revenue_service for the purpose of inquiring into its exempt status during our examination we made several requests for information but org failed to supply all the requested information except for organizations that are exempted from the annual filing_requirements sec_6033 a and sec_1_6033-2 provide that every organization_exempt_from_taxation under sec_501 a is required to file an annual return form_990 stating specifically the items of gross_income receipts and disbursements and shall keep such records render under oath such statements make such other returns and comply with such rules and regulations as the secretary_of_the_treasury or_his_delegate may from time to time prescribe sec_1_6033-2 provides that every organization that is exempt from tax whether or not it is required to file an annual information_return shall submit such additional information as may be required by the internal_revenue_service for the purpose of inquiring into its exempt status various expenditures paid_by org appear to be for the benefit of the two principals that operated the schools org has not provided information to clarify that various amounts that were paid for the benefit of president vp or the llc that was controlled by president and vp were under an accountable_plan and were business related expenditures therefore org’ funds were used for the private benefit of president and vp org was not operating within the meaning of section department of the treasury - internal_revenue_service form 886-a form 886-a name of taxpayer org explanation of items year ended june 20xx june 20xx c since it was serving the private interests of the principals president and vp org in no longer operating and has forfeited its exempt status with the state of state the board_of directors has dissolved and the former president director indicated that he does not wish to be contacted in the future org is no longer active and will not be active in the future therefore org is not operating within the meaning of sec_501 conclusion it is the internal revenues position that org has failed to meet the requirements for an organization described in internal_revenue_code sec_501 org has failed to provide requested information to confirm that they were operated exclusively for an exempt_purpose org’s records were incomplete and did not provide verification that various payments that were made for the benefit of president vp and the co-1 were within the meaning of sec_501 org is not operating and their board has dissolved org has not provided information to show it was not serving the private interest of its principals president and vp org was not operating within the meaning of sec_501 org does not meet the operational_test under sec_501 therefore org’ c tax-exempt status should be revoked as of july 20xx if you do not agree please send your response to the following internal_revenue_service department of the treasury - internal_revenue_service form 886-a