id office uilc cca_2008120912220341 -------------- number release date from ------------------ sent tuesday december pm to ----------------- cc subject re irm hi -------- i had to meet with my reviewer to discuss your first question it is true that only a member-manager can be a tmp but a member-manager does not have the authority to execute a contract on behalf of the llc unless he she is a manager under state law being a member-manager is irrelevant unless that person is a manager under state law for this reason manager should be used instead of member-manager -------------------------------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------------------------------- -------------------------- thank you


internal_revenue_service number release date index number ------------------------------ ------------- ---------------------------------- ----------------------------- ------------------------------ - department of the treasury washington dc third party communication none date of communication not applicable_person to contact ----------------------- id no ------------- telephone number --------------------- refer reply to cc fip b1 plr-161388-04 date date ---------------------------------- -------------------------------------------- -------------------------------- -------------------------------------------------- ---------------------------------------- legend taxpayer ----------------------------------------------------------------------- subsidiary ----------------------------------------------------------------------- llp llc firm state date date date date date year year year -------------------------- ---------------------- --------------------- --------------------- ------------------ ------------ ------- ------- ------- --- --- -- plr-161388-04 a b c dear ------------------- this is in reply to a letter dated date requesting an extension of time under sec_301_9100-1 and sec_301_9100-3 of the procedure and administration regulations for taxpayer to file an election under sec_856 of the internal_revenue_code to treat subsidiary as a taxable_reit_subsidiary trs facts investment_trust reit under subchapter_m of chapter of the code taxpayer is a calendar_year taxpayer and uses the accrual_method of accounting taxpayer is a domestic_corporation that elected to be taxed as a real_estate subsidiary is a domestic_corporation formed on date its first corporate tax taxpayer is structured as an upreit with real_property holdings in several return for the year taxable_year is required to be filed in year states title to the real_property is held by llp a state limited_partnership all of the shares of subsidiary are owned by llp at all times since the formation of subsidiary taxpayer has owned about a of the interests in llp and has served as the sole general_partner in the partnership during year taxpayer’s advisor firm noted that the amount of management subsidiary was formed to provide property management services to shopping malls prior to the formation of subsidiary management services were performed by llc which is owned b by llp and c by taxpayer fee income earned by llc had gradually increased as a result of an acquisition by llp to avoid any future reit qualification problem for taxpayer firm recommended that taxpayer either i check the box to treat llc as an association_taxable_as_a_corporation and then elect trs status for llc or ii form a new entity transfer some of llc’s employees to it and then elect trs status for the new entity made retroactively for months and days after the desired effective date thus if a partner at firm advised taxpayer that an election for trs status could be plr-161388-04 taxpayer opted to check the box with regard to llc by date then it could make a trs election for llc at that time which would be effective date if a new entity was formed then so long as it elected trs status within months and days of its formation it could be a trs from the date of its formation an officer of taxpayer who was responsible for supervising the formation of the trs misunderstood this advice by not realizing that a trs election would have to be filed within months and days even if a new entity were formed the officer understood the advice as requiring that the decision whether to check the box for llc or form a new entity had to be made within days of the start of the year to be retroactive to date the officer believed that the trs election would not have to be filed until the reit and the subsidiary filed their forms for the year taxable_year a filing requirement for the trs election at the time of corporate return filing would be consistent with most other elections with which the officer was familiar was formed on date within months and days of the start of the year taxable_year consistent with the officer’s understanding of firm’s advice taxpayer represents that it always intended that a trs would be formed by this transaction taxpayer has submitted documentary_evidence and affidavits in support of its representation that subsidiary was intended to be a trs of taxpayer however because of the misunderstanding about the required timing for the trs election no trs election was filed by taxpayer and subsidiary within months and days of the formation of subsidiary partner in connection with the transaction independent legal counsel for taxpayer sent a due diligence checklist of items which a public reit partner might require including the production of any forms supporting taxpayer’s holding of interests in any trs after receipt of this request on date taxpayer’s officer discovered that his understanding of when the trs election should be made was not correct and that the form_8875 for subsidiary was past due this request for relief originated immediately after that discovery taxpayer opted to form a new entity subsidiary to serve as the trs the entity on date taxpayer began contemplating a transaction with a public reit taxpayer has submitted the affidavit of its director of tax llc’s chief accounting officer and vice president-tax and subsidiary’s vice president-tax and the affidavit of firm’s financial services tax partner who advised taxpayer regarding the formation of a trs in support of this requested ruling law and analysis sec_856 provides that a reit and a corporation other than a reit may jointly elect to treat such corporation as a trs to be eligible for treatment as a trs with respect to a reit sec_856 provides that the reit must directly or indirectly own stock in the corporation and the reit and the corporation must jointly elect such sec_856 provides that the term taxable_reit_subsidiary includes any plr-161388-04 treatment the election is irrevocable once made unless both the reit and the subsidiary consent to its revocation both the election and the revocation of trs status may be made without the consent of the secretary corporation other than a reit with respect to which a trs of such reit owns directly or indirectly securities possessing more than percent of the total voting power or total value of the outstanding securities of such corporation service announced the availability of form_8875 taxable_reit_subsidiary election pursuant to the announcement this form is to be used for tax years beginning after for eligible entities to elect treatment as a trs the instructions to form_8875 provide that the subsidiary and the reit can make the election at any time during the tax_year the effective date of the election however depends on when the form_8875 is filed specifically the instructions provide that the effective date of the election cannot be more than months and days prior to the date of the filing of the election or more than months after the date of the filing of the election if no date is specified on the form the election is effective on the date the form is filed with the service in announcement 2001_1_cb_716 the internal_revenue_service sec_301_9100-1 provides that the commissioner has discretion to grant a reasonable extension of time to make a regulatory election defined in sec_301_9100-1 as an election whose due_date is prescribed by regulations or by a revenue_ruling a revenue_procedure a notice or an announcement published in the internal_revenue_bulletin or a statutory election but no more than months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-3 through c i sets forth rules that the internal_revenue_service generally will use to determine whether under the particular facts and circumstances of each situation the commissioner will grant an extension of time for regulatory elections that do not meet the requirements of sec_301_9100-2 sec_301_9100-3 provides that subject_to paragraphs b i through iii of sec_301_9100-3 when a taxpayer applies for relief under this section before the failure to make the regulatory election is discovered by the service the taxpayer will be deemed to have acted reasonably and in good_faith and sec_301_9100-3 provides that the interests of the government are prejudiced if granting relief would result in the taxpayer having a lower tax_liability in the aggregate for all years to which the regulatory election applies than the taxpayer would have had if the election had been timely made taking into account the time_value_of_money conclusion based on the information submitted and representations made we conclude that taxpayer has satisfied the requirements for granting a reasonable extension of time to plr-161388-04 elect under sec_856 to treat subsidiary as a trs of taxpayer as of date therefore taxpayer together with subsidiary is granted a period of time not to exceed days from the date of this letter to submit form_8875 this ruling is limited to the timeliness of the filing of the form_8875 this ruling’s application is limited to the facts representations code sections and regulations cited herein no opinion is expressed with regard to whether taxpayer otherwise qualifies as a reit under subchapter_m of the code no opinion is expressed with regard to whether the tax_liability of taxpayer and subsidiary is not lower in the aggregate for all years to which the election applies than such tax_liability would have been if the election had been timely made taking into account the time_value_of_money upon audit of the federal_income_tax returns involved the director’s office will determine such tax_liability for the years involved if the director’s office determines that such tax_liability is lower that office will determine the federal_income_tax effect the code provides that it may not be used or cited as precedent this ruling is directed only to the taxpayer requesting it sec_6110 of in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representatives sincerely ___________________________________ elizabeth a handler chief branch office of associate chief_counsel financial institutions and products s enclosures copy of this letter copy for sec_6110 purposes


internal_revenue_service national_office technical_advice_memorandum date third party communication none date of communication not applicable index uil no case-mis no number release date ---------------------------------------------- tam-135331-05 taxpayer's name taxpayer's address taxpayer's identification no year s involved date of conference legend legend --------------------------------------------------------------- ---------------------------------------------- ---------------------------- ----------------------- ---------------- --------------------- ------------------------- ---------------------- taxpayer -------------------------------------------------------- subsidiary ------------------------------------------ subsidiary ------------------------ parent ------------------ state a ------------------------- date ------------------------- date ------------------- date --------------------------- date ----------------------- date ---------------------- date -------------------------- date -------------------------- date ------- tax_year the act --------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------- section a section b ------------------------------- ------------------------------- tam-135331-05 section c plant dollar_figurea dollar_figureb dollar_figurec dollar_figured dollar_figuree dollar_figuref dollar_figureg dollar_figureh dollar_figurei dollar_figurej dollar_figurek dollar_figurel dollar_figurem issue ------------------------------- ---------------- -------------------- -------------------- -------------------- -------------- ---------------- ------------------- ------------------- ----------------- ----------------- ----------------- ----------------- ------------------- ------------------- whether certain gain proceeds from the sale of the taxpayer’s generating assets are includible in gross_income under sec_61 of the internal_revenue_code in the tax_year of the sale of the assets conclusion the proceeds from the sale of the taxpayer’s generating assets were received under a claim of right and were therefore includible in gross_income under sec_61 of the code in the year_of_sale facts taxpayer owns operating electric utilities including subsidiarie sec_1 and collectively companies on date taxpayer merged into parent on date state a enacted the act which restructured its electric utility industry in order to create direct access by retail customers to the competitive market for electricity the act recognized that in order to serve their customers public_utilities had undertaken long-term investments in generation transmission and distribution facilities and had entered into long-term power supply agreements as required by federal_law these investments and agreements have created costs which may not be recoverable in a competitive market these costs are known as transition or stranded costs companies were impacted by the act section a of the act defines transition or stranded costs as an electric utility’s known and measurable net electric generation-related costs determined on a net present_value basis over the life of the asset or liability as part of its restructuring plan which traditionally would be recoverable under a regulated environment but which may not be recoverable in a competitive electric generation market and which the public_utilities tam-135331-05 commission commission determines will remain following mitigation by the electric utility this term includes certain costs and charges including those relating to regulatory assets and other deferred charges ie the unfunded portion of the utility’s projected nuclear generating plant decommissioning costs and cost obligation under contracts with nonutility generating projects which have received a commission order prudently incurred costs related to cancellation buyout buydown or renegotiation of nonutility generating projects relating to cogeneration rules and regulations and numerous other costs the act empowered the commission to determine the level of transition or stranded costs for each electric utility and to permit the utility to recover an appropriate amount of such costs through a competitive transition charge ctc which is a nonbypassable charge applied to the bill of every customer accessing the transmission or distribution network and which is designed to recover an electric utility’s transition or stranded costs as determined by the commission section b of the act governs public_utility restructuring plans it requires the unbundling of electric utility_services tariffs and customer bills to separate the charges for generation transmission and distribution authorizes various rate caps during the transition_period and provides that the commission may permit but shall not require an electric utility to divest itself of facilities or to reorganize its corporate structure section c of the act provides that each electric utility will be able to recover its transition or stranded costs through the ctc from every customer accessing its transmission or distribution network the transition or stranded costs recoverable through the ctc include i regulatory assets and other deferred charges typically recoverable under current practice the unfunded portion of the utility’s projected nuclear generating plant decommissioning costs and cost obligations under contracts with nonutility generating nug projects that have received a commission order ii an electric utility’s prudently incurred costs related to cancellation buyout buydown or renegotiation of nonutility generating nug projects and iii other generation-related transition or stranded costs that may be recovered through the ctc section c also provides that in determining the level of transition or stranded costs that an electric utility may recover through the ctc the commission shall consider the extent to which the electric utility has undertaken efforts to mitigate generation-related transition or stranded costs section c imposes a duty to mitigate transition or stranded costs on electric utilities throughout the transition_period by several methods including the reduction of book assets by application of new proceeds of any sale of idle or under-utilized existing rate base generation assets the act required all state a electric utilities to submit a restructuring plan to the commission companies filed a restructuring plan the commission was required to determine what portion of companies' assets would become uneconomic or stranded in the new unregulated market for generation and to develop an appropriate rate ctc that will permit it to recover those stranded costs over a reasonable period of time from ratepayers in determining stranded costs the commission acknowledged that tam-135331-05 companies stated that they would divest generating assets fossil and nuclear assets through an auction process and private sale which offered potential for mitigating stranded costs of companies on date the commission entered its opinions and orders approving the proposed restructuring plan and allowing recovery_of certain stranded costs the amount of which was determined by the generation assets’ market_value in excess of book values however companies objected to the methodology used by the commission for determining the amount of certain stranded costs after hearings and negotiations all parties to the restructuring of the companies reached joint petition for full settlement settlement on date resolving all issues concerning companies’ restructuring plan pursuant to the settlement the commission would approve and implement the full settlement including approval of companies’ transfer of generation assets the settlement permits companies to recover certain stranded costs and requires the use of the net_proceeds from the sale of generation assets to mitigate or offset stranded costs under the terms of the settlement companies will sell its generation assets at fair_market_value to third parties companies agreed that percent of all state a-jurisdictional net divestiture proceeds which are defined in the settlement as the difference between the selling_price of the generation assets and the sum of i the net_book_value of the assets and ii the incremental transaction costs incurred in selling the assets would be used to offset stranded costs in the following order of priority the balance of company-owned generation costs regulatory assets including nug buyouts and prior nug deferrals nuclear decommissioning costs and operating nug costs subsidiary on an interim basis was permitted to recover from its retail customers dollar_figureb of stranded assets and costs through a ctc to remain in effect from date to date that includes a separate_accounting mechanism to track the recovery_of operating nug- related stranded costs which will continue in effect until all nug contracts have terminated provided that it expires no later than date which is several decades after date similarly subsidiary was permitted to recover dollar_figurec from its retail customers in stranded assets and costs the parties agreed that this settlement and the nug cost_recovery mechanism initially through the ctc and subsequently through a separate recovery mechanism would provide for full and actual cost_recovery of all costs and charges for energy and capacity existing under the nug agreements during the period from date through date companies are required to submit quarterly and annual reports to the commission addressing the recovery_of actual nug-related costs through the ctc periodically the commission and the companies will readjust ctcs to recover companies’ actual rather than estimated operating nug costs under the settlement which was incorporated into the final order see below the ctc would be reflected in the rate charged to ratepayers for electricity and was to be separately_stated along with distribution charges transmission charges and generation shopping credits the settlement also required that as of date companies would establish and maintain nug trusts into which companies were to deposit net of tax any net tam-135331-05 proceeds from the sale of their generating assets above the amounts of their non-nug stranded costs the use of trusts was not required by the act but rather were the product of negotiation between the commission and the companies in order to provide for the recovery_of actual nug costs companies thus are assured of full cost_recovery of their contractual obligations relating to non-utility generation projects the settlement states that the primary purpose of these separate nug trusts is to ensure an actual source of cash from which the companies can pay their respective on-going nug obligations under existing nug power purchase contracts ratepayers are entitled to any remaining amount in the nug trusts after the companies’ nug obligations have been met in full companies must use reasonable efforts to maximize the earnings on funds in the nug trusts consistent with the type and nature of risk associated with these types of investments and the need to make future payments to nugs from such funds companies remain obligated to pay the nug contract costs regardless of the existence of the nug trusts or adequacy of funds therein at any particular point in time if either company’s cumulative nug ctc revenues and any funds in the applicable nug trust are less than its actual above-market nug costs that company ie subsidiary and shall be entitled to defer all such sums on their books for future recovery from customers the settlement provides that subject_to any prior adjustment to the ctc resulting from the final outcome and accounting for the net_proceeds of the companies’ sales of their generating assets every years the companies shall each file with the commission a written nug statement comparing i their respective nug ctc revenues as of the date of that statement with ii each company’s actually incurred above-market costs over the same period the nug statements must contain for the period covered by the statement a summary of actual market_value of the nug project’s energy actual market_value of the capacity associated with the applicable nug contract nug project output any nug buy-outs nug contract rates nug mitigation efforts and other pricing variables the commission will consider whether this summary results in higher or lower nug-related costs than were projected previously for purposes of this settlement after consideration of each nug statement the commission will adjust the amount or the duration of the ctc rate or the successor recovery mechanism in order to reconcile the companies’ actual nug costs for the applicable_period with the amounts previously reflected in each of the companies’ ctcs companies must file a separate final nug statement in the date year which the commission will review and then enter an order addressing the final reconciliation of any over or under recoveries of nug costs in the companies’ respective ctcs on date the settlement was approved and made final final order the final order included the commission's approval of the sale of companies' generating assets and the requirement that all of companies’ state a-jurisdictional net divestiture proceeds will be used by the companies to offset stranded costs including the payment of operating nug obligations accordingly prior to the sale of any assets the final order incorporating the settlement was in place tam-135331-05 in tax_year taxpayer sold its generating assets to third party buyers for an amount net of certain adjustments of dollar_figured the assets had a book_value of dollar_figuree but a tax basis substantially less taxpayer reported all of the gains from the sales of its generating assets on form_4797 after certain audit adjustments taxpayer will have a sec_1231 gain which is afforded the benefit of being treated as a capital_gain on the tax_year tax_return on its tax returns for tax_year and for subsequent tax years taxpayer claimed ordinary deductions for various stranded costs that were identified and offset with net divestiture proceeds these included decommissioning costs tax basis of nuclear assets and other deductions in later tax years taxpayer and parent incurred substantial capital losses which have been carried back into the tax_year and are offsetting the capital_gains reported on the tax_year tax_return the interplay between net divestiture proceeds and stranded costs is shown in a report on actual net divestiture proceeds and reconciliation of stranded costs this report indicates that the dollar_figuref of net divestiture proceeds from plant sales were treated as negative stranded costs and offset against the following stranded costs in tax_year the year in which the assets were sold book basis of dollar_figureg in a nuclear plant after the sale regulatory assets of dollar_figureh including the buyout costs of nug contracts deferred energy costs clean-up of an ash site over time dam restoration costs unamortized loss on reacquired debt and payment for deferred income taxes energy costs paid in earlier years of dollar_figurei nug buyouts of dollar_figurej and decommissioning costs for two nuclear power units of dollar_figurek after the above offsets dollar_figurel of negative stranded costs remained and were placed into a nug trust to cover the operating nug contracts operating nug contracts are stranded costs that represent payments to be made for the contractual purchase of energy from non-utility generators these nug costs were above market charges and were to be paid through a collection of the ctc from ratepayers and the withdrawal of divestiture proceeds from the nug trust therefore taxpayer’s non-nug stranded costs were fully recovered through net divestiture proceeds net divestiture proceeds in excess of non-nug stranded costs were placed in the nug trust per the settlement and final order although taxpayer’s ctc rate does not fully recover operating nug costs each year it is able to fully collect its operating nug costs by withdrawing proceeds from the nug trust these withdrawals keep the taxpayer current in its collection of operating nug cost obligations law and analysis sec_61 defines gross_income as all income from whatever source derived sec_61 specifically refers to gains derived from dealings in property as an item_of_gross_income a taxpayer must recognize the gain from the sale of property unless the gain is otherwise excluded by law sec_1_61-6 of the income_tax regulations the above definition of gross_income must be considered in the context of the claim_of_right_doctrine which has evolved from cases such as 286_us_417 in that case the court held that i f a taxpayer receives earnings under a claim of right and without restrictions as to its disposition he has received income and accordingly must be taxed on it id pincite however where a taxpayer is obligated to dispose_of the money it receives in a certain way accruing no benefit to itself the money is not includible in the taxpayer's gross_income see 51_f2d_939 8th cir while the united_states supreme court has not directly addressed the precise set of facts presented by this case it has addressed the income_tax treatment of amounts received by utilities in other circumstances in 493_us_203 an electric utility ipl required certain 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 take 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 that the deposits were advance_payments immediately includable in income while ipl argued they were analogous to loans and as such not taxable the court reasoned that in economic terms the distinction between advance_payments and loans was one of degree rather than kind id pincite while both bestow economic benefits to the recipient economic benefits qualify as income only if they are undeniable accessions to wealth clearly realized and over which the taxpayers have complete dominion id pincite quoting 348_us_426 the key to determining whether a taxpayer enjoys complete dominion over a given sum is whether the taxpayer has some guarantee that he will be allowed to keep the money indianapolis power and light u s pincite the proper focus is on the rights and obligations of the parties at the time the payment was made id pincite because ipl's customers controlled the ultimate disposition of the deposit and had not committed to purchasing any electricity at the time the deposit was made the court found that ipl had no guarantee that it would be allowed to keep the money and held that the deposit amount was not income a long line of cases has consistently held that when a taxpayer receives funds with an unequivocal statutory or regulatory duty to repay them thus receiving no economic benefit from the funds they are not includible in gross_income at the time of receipt for instance in 792_f2d_683 7th cir rate increases collected by the taxpayer utility pursuant to a state commerce commission's order to discourage consumption were not includable in gross_income in the years received because such increases were not intended to enrich nor be retained by the taxpayer the taxpayer was required to repay these extra amounts to customers in later years even though the customers obtaining the benefit of the repayments were not the same as the customers who paid the increased rates see also 204_f2d_160 9th cir tam-135331-05 a number of recent cases address the tax consequences of fuel overrecoveries to the utilities collecting such overrecoveries in 125_f3d_1442 fed cir fuel cost overrecoveries received by the utility taxpayer were excludable because the taxpayer had a statutory obligation to repay such amounts to customers thus the taxpayer did not have unrestricted dominion and control_over such amounts when received the court reasoned that it did not matter whether the amounts were refunded by check to customers or offset against customers' bills because either method had the same effect in 114_tc_587 overrecoveries of estimated fuel and energy conservation costs were excludable because the utility did not have complete dominion and control_over such amounts upon receipt regulatory authority required the taxpayer to return overrecoveries with interest to customers the repayment mechanism afforded the taxpayer no opportunity to benefit from overrecoveries and the taxpayer was subject_to a fixed and certain liability to refund overrecoveries that were determinable when the funds were received in cinergy corp v united_states fed cl the taxpayer was not required to recognize fuel cost overrecoveries as income when received because it was required to return overrecoveries to its customers and it lacked complete dominion over the funds as evidenced by the fact that the time and method of refund was controlled by the regulatory authorities and the taxpayer was required to make monthly reconciliation of these accounts to the regulators as set forth in the facts part of the dollar_figuref in gain proceeds was used to offset non-nug stranded costs in the tax_year the tax_year of receipt there is no dispute between the field and the taxpayer that this amount of the gain proceeds is includible in the taxpayer’s gross_income in that year the parties disagree strongly on whether the dollar_figurel amount of the gain proceeds which was placed in the nug trust is also included in taxpayer’s gross_income in the tax_year of receipt or deferred from gross_income until actually used to offset stranded costs associated with the operating nug costs citing the above cases the field argues that the gain proceeds are not includible in gross_income in the tax_year of the sale since the statutory and regulatory scheme established by state a requires that such amounts be used to mitigate the amount of the ctc that would otherwise be billed to ratepayers the economic benefits from the sale of the generation assets thus inure to the ratepayers rather than to the taxpayer in the form of lower ctcs than they would have otherwise had to pay since it has a binding obligation to pay the gain proceeds to the ratepayers or on their behalf by reducing stranded costs the field concludes that the taxpayer lacks a claim of right to the gain proceeds until such proceeds are used to offset stranded costs the field also in revrul_2003_39 2003_17_irb_811 the service accepted the holdings in houston industries florida progress and cinergy corp and indicated that it will follow those cases in situations involving substantially_similar facts tam-135331-05 argues that the gain proceeds should not be includible in gross_income in tax_year since the trust imposed substantial restrictions on the taxpayer’s access to the funds the taxpayer asserts that its agreement to use the gain proceeds from the sale of the assets to mitigate or reduce ctcs recoverable from ratepayers does not equate to an unequivocal statutory or regulatory duty to repay such proceeds to the ratepayers within the meaning of the above line of cases taxpayer’s position is that as a result of the bargaining process with the commission it was entitled to retain the gain proceeds and to use such funds as a source of funds to recover its actual operating nug costs it therefore received the economic benefits from the gain proceeds and thus the full amount of the gain proceeds are includible in gross_income at the time of receipt it is apparent that the taxpayer is statutorily entitled to receive an amount of ctc sufficient to recover its transition or stranded costs it is also a fact that the sale of the generating assets did reduce the amount of ctcs ultimately chargeable to ratepayers from the amount of ctcs that the ratepayers would have otherwise had to pay if the taxpayer is to fully recover its stranded costs accordingly taxpayer became entitled to recover its transition or stranded costs from two sources the ratepayers or plant sales in our view amounts from either source constitute income when received while the amounts recovered from plant sales may not be recovered again from ratepayers and thus may constitute a benefit of sorts to ratepayers in the form of reduced ctcs collected from them this factor at best is incidental to the more significant obvious and direct benefit taxpayer received under the settlement and the final order the right to receive and retain the gain proceeds from plant sales including dollar_figurel placed in the nug trusts and earmarked for use in meeting its obligations to pay operating nug costs this case is also distinguishable from the court cases cited above in the overrecovery cases the taxpayers collected amounts that they were not by statute permitted to keep thus the use of the term overrecovery in the cases here the gain proceeds cannot be considered overrecoveries that the companies were not permitted to keep under the act rather the act provides that the sale of assets is a method of mitigation of stranded costs but it does not specifically require the utility to repay or return the proceeds from such sales to ratepayers eg as a cash refund credit on their bills etc the taxpayer sold assets and was entitled to keep the amounts it received from the sale of its plants the commission and the taxpayer agreed that taxpayer would apply the gain proceeds as a reduction to the ctc balance estimated by the taxpayer as sufficient to recover its stranded costs including its actual operating nug costs as a consequence the gain proceeds reduced the ctc amount the ratepayers would have otherwise have had to pay in later years such offset does not however equate to the refund of an overrecovery in other words the ratepayers ultimately were not the sole source of funds to which taxpayer was entitled for recovery_of its stranded costs the gain proceeds from plant sales became a second source which served as an offset to what could otherwise be levied in the form of rates charged to ratepayers they were also like the ctc rates includible in income the same would be true in the case of a tam-135331-05 taxpayer who performs a service for which he is entitled to dollar_figure compensation from source a or source b but not both in such a case the taxpayer has gross_income of dollar_figure when source a makes his required_payment even though that payment completely offsets the amount owed by source b another notable difference in this case is that the gain proceeds were received from third party purchasers of taxpayer’s generating assets not from the ratepayers themselves the court cases and revenue rulings in this area are not on point with respect to the sale of assets in a situation similar to the instant case furthermore the act does not require a utility to sell its generating assets nor does the act specifically state that the proceeds from the sale of the assets inures to the benefit of ratepayers instead the act recognizes that a utility has the right to fully recover its transition or stranded costs and provides that the ctc is the mechanism by which such recovery will be made the act thus contemplates that the ctc is intended to render an economic benefit to the utility by compensating it for any losses due to stranded costs resulting from deregulation the fact that the sale of assets by a utility reduces the amount of ctcs charged to ratepayers in no way reduces the total amount of that economic benefit to the utility it therefore cannot be said that a mitigation or reduction in ctcs charged to ratepayers by the amount of gain on the sale of assets is the equivalent of a duty to repay the proceeds from such sale to ratepayers consequently this situation is distinguishable from the overrecovery cases where the utility was not entitled to retain the amount of the overrecovery in the tax_year collected unlike the the field argues that the fact that the settlement states that ratepayers are entitled to any amounts remaining in the nug trusts after the companies’ nug obligations have been met in full supports its position that the gain proceeds benefit ratepayers it thus analogizes this case to the overrecovery cases the settlement does use such terminology with respect to the final nug statement which the companies will file with the commission for the date year in that year which is decades after the year_of_sale the commission will issue a final reconciliation of any over or under recoveries of nug costs in the companies’ respective ctcs any funds remaining in the nug trusts would then be returned to ratepayers however if cumulative nug ctc revenues and the funds in the nug trusts are less than actual above-market nug costs the difference will be recovered from ratepayers we think that this equates to a contingent refund obligation that the taxpayer may have to meet many years in the future such contingencies do not necessarily entitle a seller to delay recognizing income until the time during which the contingencies could have materialized is past see eg 998_f2d_513 7th cir cert_denied 510_us_1041 interest_income received by bank held includible in gross_income even though such interest was received subject_to a contingent obligation to rebate it to customers accordingly the possibility many years in the future that the companies may have to pay or refund some of the funds in the nug trusts to the ratepayers does not somehow convert the proceeds from the sale of the taxpayer’s assets into the ratepayers’ funds and thus should not preclude the tam-135331-05 taxpayers in houston industries inc and similar cases the taxpayer had unrestricted dominion and control_over the gain proceeds from the asset sales when received and the only detriment to taxpayer in receiving its ctc via the sale of assets was that it could not again collect such amount from the ratepayers the field also asserts that there are substantial restrictions on the taxpayer’s access to the gain proceeds which preclude the inclusion of such amounts in gross_income in the year_of_sale see north american oil consolidated u s pincite first the field notes that the taxpayer entered into the binding settlement before the asset sales and that the settlement required gain proceeds to offset certain stranded costs with the remaining proceeds being placed in the nug trust second the trust money could only be used to pay future nug obligations third all earnings eg interest on the trust funds further reduced ratepayers’ nug obligations the field concludes that these facts constitute substantial restrictions on the gain proceeds which prevent them from being taxable until used to offset against the stranded costs both nug and non-nug in support for this argument 210_f2d_367 4th cir is cited there a state law required a race track operator to pay over to the state racing commission a percentage of its gross_receipts for deposit into a special fund the race track operator was entitled to withdraw amounts from the fund only with the express permission of the state racing commission and for the limited purpose of repair maintenance and expansion of its facilities at the end of three years any amount remaining in the fund reverted to the state it was taxpayer’s own receipts from its own operations of which it was temporarily deprived of enjoyment but as to which it later realized enjoyment to the extent that the fund was utilized id pincite the court noted that little or no money placed in the fund had ever reverted to the state the court held that the amounts the operator received and transferred to the fund were not income until the racing commission actually credited the amounts to the operator the field also cites mutual telephone co supra for this position there a telephone utility was authorized by its regulatory commission to collect additional funds from customers in and through increased rates in order to curtail demand the commission indicated that the additional funds were not being received as additional revenue or collected for the taxpayer's benefit but rather the amounts were paid into a special account over which the commission held ultimate control until the court held that the amounts were not includible in taxpayer's gross_income in and but were includible in gross_income when made available to the taxpayer in we note that in maryland jockey club the taxpayer was entitled to withdraw amounts from the fund only with the express permission of the state racing commission in taxpayer from having to include the full amount of such gain proceeds in its gross_income in the year_of_sale tam-135331-05 mutual telephone co the additional_amounts were paid into a special account over which the commission held ultimate control in the instant case however the facts do not indicate that the taxpayer must obtain the commission’s permission in order to withdraw funds to pay its operating nug obligations nor do the facts indicate that the commission has ultimate control_over the nug trusts rather the facts only specify the investment parameters of the nug trust and the accounting or bookkeeping requirements of the taxpayer in maintaining the trusts the fact that the earnings on the funds in the nug trusts are also applied to taxpayer’s stranded costs do not constitute a substantial restriction but instead results in an additional source_of_income out of which the taxpayer may satisfy its nug obligations as noted previously the use of the trusts to hold the funds was not mandated by the act consequently we believe that these cases are distinguishable from the present case additionally we do not view the taxpayer’s and the commission’s agreement prior to the actual sale of the assets that the taxpayer would place a portion of the gain proceeds in trust as a substantial restriction on the taxpayer’s access to the funds with respect to this point we note that the economic_benefit_doctrine developed in case law provides that if a promise to pay an amount is funded and secured_by the payor and the payee is not required to do anything other than wait for the payments an economic benefit is considered to have been conferred on the payee and the amount of such benefit is considered to have been received see eg 16_tc_244 aff’d f 2d 6th cir further if a taxpayer is required to deposit receipts otherwise taxable into a_trust the receipts are taxable upon receipt notwithstanding the trust if the funds in the trust must be paid to taxpayer or used for taxpayer’s benefit see eg firetag v commissioner tcmemo_1999_355 aff’d by unpublished opinion 232_f3d_887 4th cir and 108_tc_448 aff’d in part and rev’d in part on another issue 184_f3d_786 8th cir the key is that the taxpayer had a fixed_right to the proceeds since ultimately they would inure to his benefit in the instant case the settlement which was incorporated into the final order provides that the primary purpose of the separate nug trusts was to ensure an actual source of cash from which the taxpayer can pay nug obligations under existing nug contracts therefore the funds in the nug trusts inure to the benefit of the taxpayer by being earmarked for use in the payment of the taxpayer’s existing operating nug obligations under the above line of cases the fact that the gain proceeds were placed into the nug trusts as a source from which to pay taxpayer’s nug obligations does not preclude such funds from immediate inclusion in taxpayer’s gross_income the use of the nug trusts was not required by the act in addition the submissions do not cite to any court cases or revenue rulings that treat proceeds from the sale of assets as overrecovery situations involving regulated utilities accordingly the gain proceeds from the sale of taxpayer’s generation plants are within the meaning of gross_income under sec_61 were received by taxpayer under a claim of tam-135331-05 right and are includible in taxpayer’s gross_income in the year of the sale of the generation assets caveat s a copy of this technical_advice_memorandum is to be given to the taxpayer s sec_6110 of the code provides that it may not be used or cited as precedent


department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division ule fos cc-co as7 oe co-o0 dec tt ee tal legend employer a state b city c plan x this is in response to a letter dated date submitted on your behalf by your authorized representative in which you request a private_letter_ruling dealing with the taxability of employer vacation pay benefit contributions made to plan x the following facts and representations have been submitted employer a is a state b local governmental entity with its principal_place_of_business located in city c employer a sponsors plan x which is a defined_contribution_plan with profit sharing features plan x meets the qualification requirements of sec_401 of the internal_revenue_code the code plan x provides for an employer vacation pay benefit contribution that is defined as a member's permitted unused vacation pay for the year that would otherwise be forfeited by the participant section xxx of the plan entitled the employer vacation pay benefit contribution provides that the employer shall contribute for each plan_year an amount which equals the value of the member's permitted unused vacation pay for the plan_year that the member elects to have contributed to the plan on his behalf section xxx of the plan defines member's permitted unused vacation pay as member's permitted unused vacation pay means the paid vacation time that a member will permanently forfeit during the plan_year if such member either does not actually take a paid vacation from the employer during the plan_year or have the employer contribute on behalf of the member an amount equal to the value of the paid vacation time that would otherwise be forfeited by the member during the plan_year each employee accrues paid vacation time based on the employee's years_of_service with employer a vacation time that is accrued and unused may not be carried over to the next year and results in forfeitable vacation pay an employee that does not utilize his her forfeitable vacation pay for the year and does not elect to have the employer vacation pay benefit contribution made to plan x by employer a on his behalf will permanently forfeit his forfeitable vacation pay an employee does not have the option of receiving a cash payment in lieu of vacation time an employee has three options with respect to forfeitable vacation pay the employee can forfeit the unused vacation time at the end of the year the employee can use all vacation time accrued or the employee may exercise the option to have an amount contributed on his or her behalf to the plan that is equivalent to the employee’s forfeitable vacation pay plan x allows for distributions upon termination of employments death pursuant to a qualified_domestic_relations_order under sec_404 of the code or as required by sec_401 of the code plan x does not allow for in service distributions or loans to participants based upon the foregoing the following ruling is requested that employer vacation pay benefit contributions made by employer a to plan x on behalf of employees are not cash or deferred elections as described in sec_401 of the code and are not includible in the employees’ gross_income for federal_income_tax purposes or in the employees’ gross wages for purposes of fica sec_1_401_k_-1 of the income_tax regulations the regulations states that a cash or deferred election is any election or modification of an earlier election by an employee to have the employer either provide an amount to the employee in the form of cash or some other taxable benefit that is not currently available or contribute an amount to a_trust or provide an accrual or benefit under a plan deferring the receipt of compensation sec_451 of the code provides that the amount of any item_of_gross_income shall be included in gross_income for the taxable_year in which received by the taxpayer unless under the method_of_accounting used in computing taxable_income such amount is to be properly accounted for as of a different period sec_1_451-1 of the regulations provides that under the cash_receipts_and_disbursements_method of accounting an amount is includible in gross_income when actually or constructively received section‘ a of the regulations further provides that income is constructively received in the taxable_year during which it is credited to the taxpayer's account set apart for him or otherwise made available so that he may draw upon it at any time however income is not constructively received if the taxpayer's control of its receipt is subject_to substantial limitations or restrictions - sec_3121 of the code provides in general that a payment on behalf of an employee to a qualified_trust is not included in wages for purposes of fica sec_3121 provides that an employer_contribution under a qualified_cash_or_deferred_arrangement under sec_401 is included in wages in this case an employee’s only options with respect to forfeitable vacation pay is to use the vacation time within the year for which it has been earned elect to have employer a contribute the monetary value of the forfeitable vacation pay to plan x or forfeit permanently the forfeitable vacation pay the employee’s cash compensation is not effected by his her choice because the employee does not have the option to receive cash or any other taxable benefit in lieu of the additional employer_contribution to plan x the employee’s choice among the above options is not a cash_or_deferred_arrangement the employer vacation pay benefit contribution is a non-elective employer_contribution to a qualified_plan further because an employee does not have the option to receive cash or any other taxable benefit in lieu of the employer vacation pay benefit contribution he she is not in constructive receipt of income and the employer vacation pay benefit contribution is not includable in the employee’s gross_income until distributed from plan x we have already determined that the employer vacation pay benefit contribution is not part of a cash_or_deferred_arrangement because it is however a non-elective employer_contribution to a qualified_trust the general_rule of sec_3121 excludes it from wages for purposes of fica accordingly based upon the information submitted we conclude that employer vacation pay benefit contributions made by employer a to plan x on behalf of employees are not cash or deferred elections as described in sec_401 k of the code and are not includible in the employees’ gross_income for federal_income_tax purposes or in the employees’ gross wages for purposes of fica this ruling is based upon the assumption that plan x is qualified under sec_401 of the code no opinion is expressed concerning the application of any other section of the code or the regulations thereunder this ruling is directed only to the taxpayer that requested it sec_61 k of the code provides that it may not be used or cited by others as precedent a copy of this ruling is being sent to your authorized representative pursuant to a power_of_attorney on file ‘in this office should you have any questions pertaining to this ruling you may contact of this office at sincerely yours andrew e z manager employee pians technical branch rman


t c memo united_states tax_court creston swaim petitioner v commissioner of internal revenue respondent docket no filed date creston swaim pro_se michael d zima for respondent memorandum findings_of_fact and opinion dean special_trial_judge this case was assigned pursuant to the provisions of sec_7443a and rule sec_180 sec_181 and sec_182 respondent determined a deficiency in petitioner's federal_income_tax in the amount of dollar_figure and additions to tax 1unless otherwise indicated all section references are to the internal_revenue_code in effect for the year at issue and all rule references are to the tax_court rules_of_practice and procedure dollar amounts are rounded to the nearest dollar under sec_6651 in the amount of dollar_figure and under sec_6654 in the amount of dollar_figure the issues for decision are whether certain payments received by petitioner during are includable in his gross_income whether petitioner is liable for additional tax on early retirement distributions under sec_72 and whether petitioner is liable for additions to tax under sec_6651 and sec_6654 some of the facts have been stipulated and are so found the stipulation of facts and the exhibits received into evidence are incorporated herein by reference petitioner resided in altamonte springs florida at the time he filed his petition findings_of_fact for the and tax years petitioner filed form sec_1040 which he signed without altering the jurat for the tax_year however petitioner filed a form 1040nr u s nonresident_alien income_tax return dated date which was received by respondent on date on this return petitioner reported that he was a citizen of the country of florida america petitioner claimed other single nonresident_alien filing_status after reported estimated_tax payments federal_income_tax withheld and excess social_security_tax withheld petitioner claimed a tax_refund of dollar_figure the only income petitioner reported was dollar_figure of unemployment_compensation petitioner altered the jurat on the 1040nr form by adding the phrase with express reservation of all my rights in law equity and all natures of law respondent considered this return to be frivolous and it was not processed respondent issued a notice_of_deficiency to petitioner based on information returns received from several payors indicating payments to petitioner during as follows payor office equipment exchange florida department of labor employment security nationsbank of texas kemper clearing corp a g edwards sons a g edwards sons a g edwards sons ucf federal credit_union amount dollar_figure big_number type of payment wages unemployment_compensation big_number ira distribution big_number ira distribution dividend sec_2 stock sale proceeds big_number stock sale proceed sec_198 interest respondent determined petitioner's tax under sec_1 for unmarried individuals the deficiency in income_tax includes the 10-percent additional tax imposed by sec_72 on early distributions from qualified_retirement_plans respondent also determined that petitioner was liable for additions to tax under sec_6651 for failure_to_file a timely return and under sec_6654 for failure to make estimated_tax payments opinion respondent's determinations are presumed correct and petitioner bears the burden of proving otherwise rule a 290_us_111 gross_income sec_61 defines gross_income as all income from whatever source derived the burden is on petitioner to demonstrate that the payment in question falls into a specific statutory exclusion 348_us_426 petitioner concedes that he received the payments in question in the amounts determined by respondent petitioner does not contend that any of the payments fall into a specific statutory exclusion consequently we sustain respondent's determination that the amounts in question are includable in petitioner's gross_income sec_72 additional tax sec_72 imposes an additional tax equal to percent of the portion of an early distribution from a qualified_retirement_plan that is includable in the taxpayer's gross_income an individual_retirement_account ira is included in the definition of a qualified_retirement_plan sec_72 sec_4974 sec_72 provides for certain exceptions to the general_rule contained in paragraph one important exception provides that the 10-percent additional tax does not apply if the distribution was made on or after the date that the taxpayer attained age sec_72 2in the stipulation of facts petitioner concedes that he received the payments in question but some of the amounts stipulated are slightly greater by less than one dollar than the amounts determined in the notice_of_deficiency to the extent the amounts in the stipulation of facts exceed the amounts in the notice_of_deficiency we deem respondent to have conceded the excess there is no dispute that petitioner received ira_distributions in in the amount of dollar_figure or that that amount was includable in petitioner's gross_income petitioner was born on date and clearly had not attained the age of at the time of the distributions petitioner does not claim to fall within any of the other statutory exceptions found in sec_72 consequently we hold that petitioner is liable for the 10-percent additional tax pursuant to sec_72 as determined by respondent sec_6651 failure_to_file a timely return sec_6651 provides for an addition_to_tax of percent of the tax required to be shown on the return for each month or fraction thereof for which there is a failure_to_file not to exceed percent the addition_to_tax for failure_to_file a timely return will be imposed if a return is not timely filed unless the taxpayer shows that the delay was due to reasonable_cause and not willful neglect sec_6651 petitioner's federal_income_tax return was due on date sec_6072 respondent received petitioner's form 1040nr which is dated date on date however petitioner introduced no evidence or testimony to establish contrary to respondent's determination that such document constitutes a return for purposes of sec_6651 see 82_tc_766 affd per curiam 793_f2d_139 6th cir for example there is no evidence here to show that there was an honest and reasonable attempt to satisfy the requirements of the tax law id accordingly we find that petitioner's purported return does not constitute a return for purposes of sec_6651 petitioner offered no evidence to show that his failure_to_file a timely return was due to reasonable_cause and not willful neglect and we therefore sustain respondent's imposition of the addition_to_tax under sec_6651 sec_6654 failure to pay estimated_tax where payments of tax either through withholding or by making estimated quarterly tax_payments during the course of the year do not equal the amount required under the statute imposition of the addition_to_tax under sec_6654 is automatic unless the taxpayer shows that one of the statutory exceptions applies 99_tc_202 75_tc_1 petitioner bears the burden to show qualification for such exception 78_tc_304 petitioner has not sustained his burden therefore we hold that he is liable for the addition_to_tax under sec_6654 for the taxable_year to reflect the foregoing decision will be entered for respondent


department of the treasury internal_revenue_service washington d c date o f f ic e o f c h ief c o u n sel number info release date dear cc tege eoeg et2 suetterlein genin-147993-01 uil- reference local_government defining gross wages this responds to your letter dated date requesting information regarding whether it is legal for a local_government to collect an occupational tax on the totals of boxe sec_5 and from a form_w-2 the internal_revenue_code does not prohibit local governments from defining wages for local_tax purposes the issue of defining wages is decided by the local_tax jurisdictions subject_to any state prohibitions this letter provides general information only it describes well-established interpretations and principles of tax law without applying them to a specific set of facts it is advisory only and has no binding effect with the internal_revenue_service this letter is intended only to provide you with general guidance for determining how to comply with applicable law the attorney assigned to this matter is he can be reached at sincerely jerry e holmes chief employment_tax branch office of the assistant chief_counsel exempt_organizations employment_tax government entities