t c memo united_states tax_court jack howard taylor petitioner v commissioner of internal revenue respondent docket no filed date p was a north carolina fireman for over years before retiring on disability in at that time he began receiving from lgers a disability retirement allowance computed with reference to his age length of service and average final compensation in a later year he also began receiving an frswpf pension for p received information returns from lgers and frswpf showing taxable_distributions of dollar_figure and dollar_figure respectively but reported only dollar_figure of taxable retirement income for p also failed to report as income certain distributions an error he has since conceded held the lgers and frswpf distributions are not excludable from gross_income as amounts received under workmen’s compensation acts as compensation_for injuries or sickness because they are retirement pensions determined by reference to p’s age or length of service or his prior contributions see sec_1_104-1 income_tax regs jack howard taylor pro_se corey r clapper and amy dyar seals for respondent memorandum opinion laro judge this case arises out of respondent’s adjustments to petitioner’s return for the taxable_year the case was submitted fully stipulated for decision without trial see rule respondent determined a dollar_figure deficiency in petitioner’s federal_income_tax for tax_year petitioner has conceded all adjustments save for the inclusion in taxable_income of an additional dollar_figure in benefits paid_by the local governmental employees’ retirement_system of north carolina lgers and an additional dollar_figure in benefits paid_by the north carolina firemen and rescue squad workers’ pension fund frswpf 1unless otherwise indicated section references are to the internal_revenue_code code applicable for the relevant years rule references are to the tax_court rules_of_practice and procedure 2lgers reported total benefits paid of dollar_figure with dollar_figure taxable frswpf reported total benefits paid of dollar_figure with dollar_figure taxable petitioner on his return reported only dollar_figure of taxable retirement income which respondent treated in the notice_of_deficiency as allocable to the lgers benefit we decide whether respondent properly treated dollar_figure paid_by lgers and dollar_figure paid_by frswpf as taxable retirement income we hold that he did i overview background the parties submitted this case fully stipulated under rule the parties’ stipulation of facts is incorporated herein petitioner is a resident of asheville north carolina this case is appealable to the court_of_appeals for the fourth circuit absent stipulation of the parties to the contrary ii petitioner’s service as a fireman and subsequent retirement petitioner was born in date he was hired by the city of asheville fire department on date his last day of work was date and he retired on disability effective date in hi sec_24th year_of_service with the department lgers began paying petitioner a disability retirement allowance on date which was computed with reference to his age length of service and average final compensation before his disability retirement at an unspecified later date petitioner also began receiving a pension from frswpf petitioner turned in date whereupon as he acknowledged on brief lgers sent him a letter notifying him that he was being transferred from disability retirement to regular service retirement effective date iii petitioner’ sec_2012 retirement benefits and tax_return for petitioner was paid dollar_figure in retirement benefits by lgers and dollar_figure in retirement benefits by frswpf he was issued a form 1099-r distributions from pensions annuities retirement or profit-sharing_plans iras insurance contracts etc by lgers indicating that he had received dollar_figure in taxable retirement benefits during the tax_year petitioner was also issued a form 1099-r by frswpf showing that he had received dollar_figure in taxable retirement benefits during the tax_year box of each form 1099-r was marked with the distribution code indicating a normal distribution petitioner timely filed a form_1040 u s individual_income_tax_return for the tax_year on his return petitioner reported dollar_figure of taxable retirement income for that year further petitioner did not report any dividend income on the return notwithstanding the issuance to him of a form 1099-div dividends and distributions by national financial services llc showing ordinary dividend income of dollar_figure and capital_gain distributions of dollar_figure petitioner has since conceded respondent’s adjustments related to these items of dividend income iv notice_of_deficiency and petition respondent on date issued a notice_of_deficiency to petitioner in the notice respondent made three adjustments relating to petitioner’ sec_2012 taxable_year increased taxable dividends from zero to dollar_figure increased schedule d capital_gain dividends from zero to dollar_figure and increased taxable retirement income from dollar_figure to dollar_figure as noted above petitioner has conceded the first two adjustments as to the third adjustment respondent indicated that petitioner received taxable retirement income from two payors for the first lgers respondent identified dollar_figure as shown on petitioner’s return and increased that amount by dollar_figure to arrive at the dollar_figure of taxable_income reported on the form 1099-r generated by lgers for the second frswpf respondent identified zero as shown on petitioner’s return and increased that amount by dollar_figure to reflect the taxable_income reported on the frswpf form 1099-r the notice_of_deficiency specified that the last date to file a petition with this court was date the petition was received by the court and filed in the morning of date it was signed and dated by petitioner on date and bore a postmark indicating that it was mailed by fedex standard overnight service on date since the petition was mailed timely using a designated private delivery service see notice_2015_38 2015_21_irb_984 it is treated as filed timely see sec_7502 f discussion i overview generally the commissioner’s determination of a taxpayer’s liability for an income_tax deficiency is presumed to be correct and the taxpayer bears the burden of proving the determination improper by a preponderance_of_the_evidence see rule a 290_us_111 we find that petitioner has failed to establish that respondent’s determination of his tax_liability was incorrect we need not address whether under sec_7491 the burden_of_proof has shifted from petitioner to respondent because there are no outstanding factual issues relevant to ascertaining petitioner’s tax_liability the parties agree on the salient facts and dispute only the legal question of the proper classification of petitioner’s retirement income ii includibility of retirement payments in gross_income sec_61 provides that unless a statutory exemption applies gross_income means all income from whatever source derived pensions and retirement allowances are included in gross_income unless excluded by law sec_61 sec_1_61-11 income_tax regs any statutory exclusions from gross_income must be construed narrowly 515_us_323 see also 89_tc_49 e xemptions and exclusions from taxable_income should be construed narrowly and the taxpayers must bring themselves within the clear scope of the exclusions under sec_104 gross_income does not include amounts received under workmen’s compensation acts as compensation_for personal injuries or sickness this exclusion also applies to statutes in the nature of workmen’s compensation acts which provide compensation to employees for personal injuries or sickness incurred in the course of employment sec_1_104-1 income_tax regs the exclusion however does not apply to a retirement pension or annuity to the extent that it is determined by reference to the employee’s age or length of service or the employee’s prior contributions even though the employee’s retirement is occasioned by an occupational injury or sickness id since the issuance of petitioner’s retirement payments is governed by state law to evaluate those benefits we look to the relevant north carolina statutes cf eg green v commissioner tcmemo_1994_264 wl at looking to connecticut state law to determine whether payments received by a policeman and fireman are excludable under sec_1_104-1 income_tax regs aff’d 60_f3d_142 2d cir iii north carolina state employee retirement provisions a lgers article of chapter of the general statutes of north carolina establishes and governs lgers the retirement_system for the state’s counties cities and towns lgers is a defined_benefit_plan funded by employer and employee contributions n c gen stat ann sec westlaw under the plan an employee with at least five years_of_service may retire on a disability retirement allowance upon medical certification of incapacity for the further performance of his duties id sec c the five-year service minimum does not apply to law enforcement officers firemen and eligible rescue squad workers who become incapacitated for duty as the natural and proximate result of injuries incurred while in the actual performance of their duties id employees retiring by reason of disability may be required to undergo medical examinations annually for years after their retirement and once every years thereafter until they attain the age of years id sec e a beneficiary’s payments are reduced if he is determined to be engaged in or be able to engage in a gainful occupation paying more than a certain amount id sec e in lieu of this reduction the beneficiary irrevocably may elect to convert his disability retirement allowance to a service retirement allowance calculated on the basis of his average final compensation and creditable service at the time of disability retirement and his age at the time of conversion to service retirement id an employee retiring for disability after date shall receive a service retirement allowance if he has qualified for an unreduced service retirement allowance id sec d4 otherwise the allowance equals a service retirement allowance calculated on the member’s average final compensation prior to his disability retirement and the creditable service he would have had had he continued in service until the earliest date on which he would have qualified for an unreduced service retirement allowance id the service retirement allowance for an employee not a law enforcement officer retiring from service on or after date but before date equal sec_1 of his average final compensation multiplied by the number of years of creditable service provided that the service retirement date occurs on or after hi sec_65th birthday upon completing years_of_service after completing years_of_service or on or after his 60th birthday upon completing years_of_service id sec b12 the retirement allowance is reduced if the employee did not satisfy the minimum service requirements id a former employee receiving a disability retirement allowance upon reaching the earliest date on which he would have qualified for an unreduced service retirement allowance is no longer subject_to further medical reexaminations or a reduction in benefits by engaging in gainful employment with an employer not participating in lgers n c gen stat ann sec e furthermore the former employee ceases to receive a disability retirement allowance and instead is considered a beneficiary in receipt of a service retirement allowance id if a beneficiary’s disability retirement allowance was reduced by reason of medical reexamination or ability to engage in a gainful occupation before the date on which he would have qualified for an unreduced retirement allowance he has only the right to immediately convert to an early or service retirement allowance as provided in n c gen stat ann sec e id b frswpf unlike lgers frswpf is governed by article of chapter of the general statutes of north carolina it was established to provide pension allowances and other_benefits for eligible firemen and rescue squad workers in the state who elect to become members of the fund n c gen stat sec firemen who participate in the fund must contribute dollar_figure monthly id sec an frswpf participant must have served years as an eligible fireman or rescue squad worker and attained the age of years to be entitled to a monthly pension from the fund id sec a participants who became totally and permanently disabled as a result of discharging their official duties are entitled to the monthly benefit when they reach the age of years id sec c participants who became disabled other than in the line of duty who leave their position because of the disability and who have contributed to the pension fund for at least years may continue to contribute until they have made years’ worth of contributions and thereupon become eligible for benefits once they reach the age of years id sec d in all cases the monthly benefit is dollar_figure id sec iv includibility of lgers retirement payments in petitioner’s gross_income a petitioner’s arguments to support his cause petitioner argues that the payments were neither a retirement pension nor an annuity as referenced in sec_1_104-1 income_tax regs s ection a does not apply to a retirement pension or annuity to the extent that it is determined by reference to the employee’s age or length of service petitioner points out that n c gen stat ann sec defines both annuity and pension as payments for life petitioner likens his situation to that of the taxpayer in 165_f3d_744 9th cir rev’g tcmemo_1997_320 where the court_of_appeals for the ninth circuit held in the taxpayer’s favor on the excludability of disability retirement income petitioner argues that as was the case with the taxpayer in picard if he were determined to be fit for work his disability retirement payments would cease because he was subject_to medical reexaminations and his disability retirement allowance could be reduced if he were determined to be able to earn over a certain amount see n c gen stat ann sec e petitioner maintains that his payments were not for life and so were not a retirement pension or annuity for purposes of sec_1_104-1 income_tax regs moreover petitioner submits that while north carolina law allows disability beneficiaries to convert a disability retirement allowance to a reduced service retirement allowance if they are determined to be engaged in or able to engage in a gainful occupation paying more than a certain amount n c gen stat ann sec e the rule in subdivision e of that section which treats disability retirement beneficiaries as service retirement beneficiaries when they reach the earliest date on which they would have qualified for an unreduced service retirement allowance uses a different word considered petitioner understands this to mean that beneficiaries are not transferred from one retirement system to another petitioner reads into this court’s precedent see eg tateosian v commissioner tcmemo_2008_101 mabry v commissioner tcmemo_1985_328 wiedmaier v commissioner tcmemo_1984_540 aff’d 774_f2d_109 6th cir a requirement that there be a clear unambiguous formal transfer of a taxpayer from one system to another b respondent’s position respondent admits that petitioner was not eligible for an unreduced service retirement allowance under lgers as of the date of his retirement because he was only years old with years and months of creditable service however respondent argues since petitioner’s disability retirement allowance was calculated with reference to his age and length of service it is includible in his gross_income see sec_104 sec_1_104-1 income_tax regs respondent further asserts that regardless of the initial classification of petitioner’s retirement income petitioner is no longer receiving a disability retirement allowance under n c gen stat ann sec e respondent points out once a beneficiary in receipt of a disability retirement allowance becomes eligible for an unreduced service retirement allowance he is deemed to be in receipt of the latter this occurred respondent claims when petitioner turned years old in years before the taxable_year in issue respondent looks for further support to several cases in this court tateosian v commissioner tcmemo_2008_101 mabry v commissioner tcmemo_1985_328 and wiedmaier v commissioner tcmemo_1984_540 in which disability payments initially were excludable but later became includible in gross_income when the taxpayer would have qualified for a service retirement pension had he continued to work as in those cases respondent maintains petitioner’s retirement payments are includible in his gross_income as nondisability pension income respondent also distinguishes picard in which the court_of_appeals for the ninth circuit determined that the taxpayer’s retirement payments were not taxable because they were determined by his date of hire and not by reference to his length of service respondent argues that picard differs from this case in two respects first petitioner’s disability benefit and service retirement allowance both are computed with regard to his age and length of service and not his employment anniversary see n c gen stat ann sec defining creditable service as the total of ‘prior service’ plus ‘membership service’ plus service both noncontributory and purchased for which credit is allowable as provided in g s and second petitioner’s disability retirement allowance converted to a service retirement allowance when he turned years of age in c classification of petitioner’s lgers retirement income while sec_104 excludes from gross_income amounts received under workmen’s compensation acts sec_1_104-1 income_tax regs specifies that the exclusion does not apply to a retirement pension or annuity to the extent that it is determined by reference to the employee’s age or length of service or the employee’s prior contributions petitioner ports the definitions of annuity and pension from the general statutes of north carolina to interpret the phrase retirement pension or annuity in the regulation however the proper place to seek the definition of words as used in the code and its appurtenant regulations is in the federal tax law not state statutes cf cri-leslie llc v commissioner t c ___ ___ slip op pincite date looking to the code for the definition of a term used therein regulations are interpreted in the same manner as statutes 143_tc_1 which in turn are interpreted according to their plain meaning looking to the particular statutory language at issue as well as the language and design of the statute as a whole 486_us_281 sec_1_104-1 income_tax regs does not define pension however within the code’s structure subchapter_d of chapter of subtitle a encompassing sec_401 through governs pension plans sec_401 establishes what constitutes a qualified_pension plan while sec_1_401-1 income_tax regs elaborates on the definition of pension_plan a pension_plan within the meaning of sec_401 is a plan established and maintained by an employer primarily to provide systematically for the payment of definitely determinable benefits to his employees over a period of years usually for life after retirement retirement benefits generally are measured by and based on such factors as years_of_service and compensation received by the employees the determination of the amount of retirement benefits and the contributions to provide such benefits are not dependent upon profits a pension_plan may provide for the payment of a pension due to disability and may also provide for the payment of incidental death_benefits through insurance or otherwise there is nothing to support petitioner’s assertion that a pension need be for life nor is there corroboration for his suggestion that a pension cannot be conditional upon certain factors such as continued medical verification of disability similarly for annuities this hoary definition from this court’s earliest days still applies in the present the term annuity has been variously defined but the definitions although differing in form are substantially alike in meaning in general terms it is a yearly payment of a certain sum of money granted to another in fee for life or for years estate of jackson v commissioner 3_bta_832 quoting ruling case law emphasis omitted as with pensions there is nothing to establish that annuities must be for life and cannot be terminable lgers is a pension_plan it was established by the state of north carolina to provide definitely determinable periodic retirement payments to former employees section of the general statutes of north carolina designates lgers as a governmental_plan within the meaning of sec_414 and requires that the plan operate consistently with sec_401 accordingly payments from lgers are payments from a retirement pension or annuity as those words are used in sec_1_104-1 income_tax regs the parties have stipulated that petitioner’s disability retirement allowance was computed with reference to petitioner’s age length of service and average final compensation before his disability retirement thus the amounts he received are from a retirement pension determined by reference to the employee’s age or length of service or the employee’s prior contributions and the exclusion for workmen’s compensation under sec_104 does not apply see sec_1_104-1 income_tax regs because we have found that petitioner’s disability retirement allowance under lgers was a retirement pension determined by reference to his age and length of service we need not address the extent to which petitioner in upon his 60th birthday was transferred from a disability retirement allowance to a service retirement allowance we have established that petitioner’s disability retirement allowance was not received under a workmen’s compensation act or a statute in the nature of such see sec_1_104-1 income_tax regs and so was not excludable from gross_income under sec_104 if petitioner remained on a disability retirement allowance after then the treatment of his payments--includible as they were in gross income--was unchanged if petitioner in ceased to receive a disability retirement allowance and was considered thereafter a beneficiary in receipt of a service retirement allowance see n c gen stat ann sec e then consistently with n c gen stat ann sec b12 he would receive a pension calculated by reference to his age and length of service such a pension too would not fall within the sec_104 exclusion_from_gross_income see sec_1_104-1 income_tax regs v classification of petitioner’s frswpf retirement income respondent suggests that petitioner’s income from frswpf appears to have been reported on petitioner’s original federal_income_tax return we note that respondent’s statement is at odds with the notice_of_deficiency in which he allocated the dollar_figure of taxable retirement income shown on petitioner’s return to lgers not frswpf however we agree with respondent that petitioner has not asserted a dispute regarding the frswpf payment’s taxability and so has conceded it see eg thiessen v commissioner 146_tc_100 i ssues and arguments not advanced on brief are considered to be abandoned see also rule b providing that issues not raised in a petition are deemed to be conceded even were the frswpf income contested it is not in the nature of workmen’s compensation a fireman becomes eligible for the frswpf fixed monthly pension once he reaches the age of years and either contributes to the fund for years or contributes for a lesser period of time but becomes totally and permanently disabled in the course of his official duties because eligibility for the frswpf pension is determined by reference to the employee’s age and prior contributions it is not excludable from gross_income under sec_104 see sec_1_104-1 income_tax regs petitioner also has not raised nor are there sufficient facts in the record enabling us to evaluate the extent to which frswpf payments may be excludable from gross_income as amounts received through accident_or_health_insurance see sec_104 sec_105 vi conclusion the fireman’s vocation is not an easy one petitioner fought fires for over years and retired disabled but lady justice is blind and the tax law takes its toll without regard for sentiment it is true that nobody owes any public duty to pay more than the law demands 159_f2d_848 2d cir hand j dissenting rev’g 5_tc_603 but where the law demands a result the courts are bound to enforce it petitioner’s income from lgers and frswpf is in both instances a retirement pension determined by reference to his age or length of service or his prior contributions and under the code cannot be excluded from his gross_income for the tax_year we have considered all of the parties’ arguments and to the extent not discussed above conclude that those arguments are irrelevant moot or without merit to reflect the foregoing decision will be entered for respondent


department of the treasury internal_revenue_service washington d c t a x e x e m p t a n d g o v e r n m e n t e n t i t i e s d i v i s i o n ------------- ---------------- identification_number employer_identification_number contact person ------------------- telephone number --------------------- release number release date date date uil ------------------------ -------------------------------- ---------------------------------------- ----------------------------- ------------------------- legend y ---------------------------- z ------------------------ a ----------------------- b ------------ c ------- dear we have considered the request of y and z dated date for a ruling concerning the federal income and excise_tax consequences of a proposed transfer of one-half of y’s net assets to z facts a incorporated y in and incorporated z in both organizations are recognized as exempt from federal_income_tax under sec_501 of the internal_revenue_code and are private_foundations under sec_509 a has two sets of four grandchildren the b grandchildren and the c grandchildren currently a and one member of each of the two sets of grandchildren control y a’s grandchildren have developed diverging charitable interests so a proposed that y transfer one-half of its assets comprised of corporate stocks and bonds to z after the transfer a and the b grandchildren will control y and a and the c grandchildren will control z both y and z state that they will make grants to organizations that are exempt under sec_501 of the code y states that it will continue its charitable activities does not intend to terminate and has never participated in an act or activity that would give rise to liability under chapter of the code y represents that its assets do not constitute excess_business_holdings ------------------------ as described in sec_4943 and has promised to exercise expenditure_responsibility with regard to the transferred assets and has drafted a written_agreement that will ensure that z will use the transferred funds properly you have requested the following rulings the transfer of assets will not affect the tax-exempt status of either of the foundations under sec_501 of the code the transfer of assets will qualify as a transfer under sec_507 of the code y will neither terminate nor incur a termination_tax on the transfer under sec_507 of y will not incur an excise_tax on net_investment_income under sec_4940 of the code the code due to the transfer of assets the basis of the assets received in the transfer by z will be y’s basis in the assets the transfer will not be an act of self-dealing under sec_4941 of the code y will not incur a tax on undistributed_income under sec_4942 of the code y will not incur a tax_on_excess_business_holdings on the transfer under sec_4943 of the code the transfer will not constitute an investment that jeopardizes y’s exempt purposes under sec_4944 of the code the transfer and the reasonable and necessary expenses in making such transfer will not constitute taxable_expenditures under sec_4945 of the code provided appropriate expenditure_responsibility requirements are satisfied law sec_501 of the code exempts organizations that are organized and operated exclusively for charitable and other exempt purposes from federal_income_tax sec_507 of the code states that the status of any organization as a private_foundation is terminated only if it notifies the secretary of its intent to terminate or there have been either willful repeated acts or a willful and flagrant act giving rise to liability for tax under chapter and the secretary notifies the organization that it is liable for termination_tax under sec_507 sec_507 of the code permits one private_foundation to transfer its assets to another private_foundation without treating the transferee foundation as a newly created organization sec_507 of the code imposes a tax on a private_foundation that terminates its private_foundation_status by notifying the service of its intent to terminate or that has made willful repeated acts or failures to act or a willful and flagrant act or failure to act that results in tax under chapter and the service has notified the organization that it is liable for the tax and either the organization has paid the tax or the tax was abated sec_509 of the code describes exempt_organizations that are exempt from federal ------------------------ income_tax under sec_501 and that are private_foundations sec_4940 of the code imposes an excise_tax on certain net_investment_income of private_foundations sec_4940 of the code defines net_investment_income as the amount by which the sum of the gross_investment_income and the capital_gain_net_income exceeds the allowable deductions sec_4940 of the code defines gross_investment_income as the gross amount of income from interest dividends rents payments_with_respect_to_securities_loans and royalties sec_4941 of the code imposes an excise_tax on acts of self-dealing between a private_foundation and its disqualified persons as described in sec_4946 sec_4942 of the code imposes a tax on the undistributed_income_of_a_private_foundation for the taxable_year it requires a private_foundation to pay annual qualifying distributions as defined in sec_4942 to accomplish one or more exempt purposes a qualifying_distribution includes any amount_paid to accomplish one or more purposes described in sec_170 sec_4943 a of the code imposes a tax on the excess_business_holdings of a private_foundation during the tax_year sec_4944 of the code imposes a tax on any investment that jeopardizes an exempt organization’s charitable purpose sec_4945 of the code imposes a tax on the taxable_expenditures of a private_foundation sec_4945 of the code defines the term taxable_expenditure as any amount_paid or incurred by a private_foundation as a grant to an organization unless the organization is described in paragraph or of sec_509 or is an exempt_operating_foundation or the private_foundation exercises expenditure_responsibility with respect to the grant sec_1_507-1 of the income_tax regulations states that a transfer of assets made by a private_foundation as described in sec_507 of the code does not constitute a termination of the transferor foundation’s private_foundation_status under sec_507 sec_1_507-3 of the regulations requires a private_foundation to meet the distribution_requirements of sec_4942 for any taxable_year in which it makes a sec_507 transfer of all or part of its net assets to another private_foundation under sec_507 of the code sec_1_507-3 of the regulations provides that where the transferor has transferred all of its assets during any period during in which the transferor has no assets sec_4945 and h shall not apply to the transferee or the transferor with respect to any expenditure_responsibility grants made by the transferor ------------------------ sec_1_507-3 of the regulations states that the tax basis and holding_period of the assets will carry over to the transferee foundation for purposes of sec_4940 of the code sec_1_507-3 of the regulations states that if a private_foundation transfers all of its net assets to one or more private_foundations which are effectively controlled by the same person or persons which effectively control the transferor private_foundation for purposes of chapter and part ii of subchapter_f of chapter of the code such a transferee private_foundation shall be treated as if it were the transferor sec_1_507-3 of the regulations defines the term significant disposition of assets to one or more private_foundations as any disposition or series of dispositions where the cumulative total of dispositions i sec_25 percent or more of the fair_market_value of the net assets of the foundation at the beginning of the taxable_year sec_53_4945-6 of the foundation and similar excise_taxes regulations provides that a private foundation’s payment of administrative expenses including compensation consultant fees and other fees for services rendered is not a taxable_expenditure depending upon whether such expenses are reasonable sec_53_4946-1 of the regulations states that for purposes of sec_4941 only the term disqualified_person shall not include any organization which is described in sec_501 analysis the proposed transactions involve a private foundation's transfer of a significant part of its assets to an entity that qualified for exemption under sec_501 of the code and not a notification of its termination as a private_foundation accordingly the proposed transfer is not a transfer described in sec_507 of the code which is subject_to tax under sec_507 also because z is exempt under sec_501 of the code the transfer of y’s assets to z will constitute a distribution for a charitable purpose and will not adversely affect the exempt status of y or z nor will it be treated as investment_income an act of self-dealing a jeopardizing investment or taxable_expenditure within the meaning of sec_4940 sec_4941 sec_4944 and sec_4945 in addition y’s payment of reasonable expenses_incurred in connection with the transfer will not be treated as acts of self-dealing under sec_4941 or taxable_expenditures under sec_4945 based on the foregoing we rule as requested as follows the transfer is a transfer described in sec_507 of the code because the transfer is a transfer described in sec_507 of the code ------------------------ a the transfer shall not affect y’s qualification as an organization described in sec_501 of the code b z will not be treated as a newly created organization as provided in sec_507 of the code and sec_1_507-3 of the regulations c z will succeed to the aggregate tax_benefit of y in proportion to the assets transferred to it by z as provided in sec_1_507-3 of the regulations d if y incurs liability for any taxes imposed by chapter or any penalty resulting therefrom prior to or as a result of the transfer in any case where transferee_liability applies z shall be treated as receiving the transferred assets subject_to such liability to the extent that foundation does not satisfy such liability as provided in sec_1_507-3 of the regulations e y will be required to meet its distribution_requirements for the year or years in which the transfer takes place in accordance with sec_1_507-3 of the regulations and f the provisions of sec_1_507-3 through g of the regulations will apply to z with respect to the assets transferred from z the transfer will not cause the termination of y’s status as a private_foundation the transfer will not cause the imposition of a termination_tax under sec_507 in the year or years in which the transfer takes place the transfer will not give rise to net_investment_income for either y or z and will not result in the imposition of tax under sec_4940 of the code the transfer will not constitute an act of self-dealing under sec_4941 of the code for y or z the transfer will not constitute a jeopardy investment under sec_4944 of the code with respect to y or z the transfer will not constitute a taxable_expenditure under sec_4945 of the code as y will exercise expenditures responsibility under sec_4945 with respect to its transfer to z the payment or reimbursement by y of all the transfer and related expenses if reasonable in amount will not constitute taxable ------------------------ expenditures within the meaning of sec_4945 of the code this ruling will be made available for public inspection under sec_6110 of the code after certain deletions of identifying information are made for details see enclosed notice notice of intention to disclose a copy of this ruling with deletions that we intend to make available for public inspection is attached to notice if you disagree with our proposed deletions you should follow the instructions in notice this ruling is directed only to the organization that requested it sec_6110 of the code provides that it may not be used or cited by others as precedent if you have any questions about this ruling please contact the person whose name and telephone number are shown in the heading of this letter enclosure notice debra j kawecki manager exempt_organizations technical group sincerely


internal_revenue_service number release date index number ----------------------------- -------------------- ------------------------------------------------------------ ------------------------------------- -------------------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------- id no ----------------- telephone number ------------------- refer reply to cc corp plr-129625-15 date date legend oldco ---------------------------------------------------------------------------- -------------------------------------------------------------------- --------------------------------------- holdco a holdco b merger sub ------------------------------- ------------------------------- ------------------------------- sub -------------------------------------------------------------------------- -------------------------------------------------------------------- --------------------------------------- sub -------------------------------------------------------------------------- -------------------------------------------------------------------- -------------------------------------- sub -------------------------------------------------------------------------- -------------------------------------------------------------------- ------------------------------------ sub -------------------------------------------------------------------------- -------------------------------------------------------------------- ---------------------------------- sub -------------------------------------------------------------------------- -------------------------------------------------------------------- --------------------------------------------- plr-129625-15 partnership ------------------------------------------------------------------------------------- -------------------------------------------------------------------- ---------------------------------------------- segment a ------------------------------------------------------------------------ --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------- segment b ------------------------------------------------------------------------ --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- ---------------------------------------------------------- a b c state x dear ----------------- ------ --- -- ------------- this letter responds to your authorized representatives’ letter dated date requesting a ruling on certain federal_income_tax consequences of a proposed transaction the proposed transaction the information provided in that letter and in later correspondence is summarized below the ruling contained in this letter is based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination this letter and the ruling contained herein are issued pursuant to section dollar_figure of revproc_2015_1 2015_1_irb_1 regarding a significant issue under sec_368 and only addresses a discrete legal issue involved in the transaction this office expresses no opinion as to the overall tax consequences of the transaction described in this letter or as to any issue not specifically addressed by the rulings below plr-129625-15 summary of facts oldco is a state x corporation that is publicly-traded and is the common parent of an affiliated_group the includible corporations of which join in the filing of a consolidated federal_income_tax return the oldco group oldco directly owns all of the stock of sub sub sub and sub sub owns a of the stock of sub an unrelated third party owns the remaining stock of sub oldco owns b and sub owns c of the interest in partnership the oldco group is engaged in segment a through sub and segment b through sub sub sub and partnership proposed transaction oldco is entering into the proposed transaction to facilitate the restructuring of segment a and segment b the relevant steps of the proposed transaction are set forth below i ii iii iv v vi oldco will form holdco a state x corporation holdco a will form merger sub state x corporation merger sub will merge with and into oldco with oldco as the surviving legal entity and merger sub ceasing to exist in the merger the oldco shareholders will exchange their oldco shares for holdco a shares immediately following this step holdco a will own all of the outstanding_stock of oldco pursuant to state x law oldco will convert to a limited_liability_company old llc that will be treated as a disregarded_entity for federal_income_tax purposes steps i through iv collectively are referred to as the potential reorganization old llc will distribute the stock of sub to holdco a holdco a will form holdco b state x corporation holdco a will contribute all of its interest in old llc to holdco b in exchange for all of the stock of holdco b holdco b will act as the holding_company for segment b vii old llc will re-convert to a corporation under state x law newco and for federal_income_tax purposes the reincorporation plr-129625-15 ruling based solely on the information submitted we rule that the reincorporation will not preclude the potential reorganization from otherwise qualifying as a reorganization under sec_368 caveats no opinion is expressed or implied about the federal_income_tax consequences of any other aspect of any transaction or item discussed or referenced in this letter or the federal_income_tax treatment of any conditions existing at the time of or effects resulting from the proposed transaction that are not specifically covered by the above ruling procedural statements this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent a copy of this letter must be attached to any income_tax return to which it is relevant alternatively taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of this letter_ruling in accordance with the power_of_attorney on file with this office a copy of this ruling letter is being sent to your authorized representative sincerely _____________________________________ mark j weiss chief branch office_of_chief_counsel corporate


internal_revenue_service number release date index numbers ------------------------------ ------------------------------------------------------------ ----------------------------- -------------------------------------------- ---------------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ---------------------- id no ------------------ telephone number ---------------------- refer reply to cc psi b03 plr-125617-18 date date legend p1 p2 a ----------------------------------------------------------------------------------------------------- ---------------------------- ----------------------------------------------------------------------------------------------------- ----------------------- ------------------- state -------------- year1 ------- r ---- dear ------------------ this letter responds to a letter dated date and subsequent correspondence submitted on behalf of p2 by its authorized representative requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations to file an election under sec_754 of the internal_revenue_code code the information submitted states that p1 is a state limited_partnership that is classified as a partnership for federal tax purposes p2 is a state general_partnership that is facts plr-125617-18 classified as a partnership for federal tax purposes p1 owns an r interest in p2 a a partner in p1 died during year1 p1 and p2 inadvertently failed to file timely elections under sec_754 for year1 law sec_754 provides in part that if a partnership files an election in accordance with the regulations prescribed by the secretary the basis of partnership property is adjusted in the case of a distribution_of_property in the manner provided in sec_734 and in the case of a transfer of a partnership_interest in the manner provided in sec_743 such an election shall apply with respect to all distributions of property by the partnership and to all transfers of interests in the partnership during the taxable_year with respect to which the election was filed and all subsequent taxable years the optional_adjustment_to_basis under sec_754 will be available to both an upper-tier partnership utp and a lower-tier partnership ltp when there is a sale_or_exchange of a partnership_interest or the death of a partner in utp and both utp and ltp have made an election under sec_754 to adjust the basis of partnership property on a sale_or_exchange of a partnership_interest or on the death of a partner revrul_87_115 1987_2_cb_163 sec_1_754-1 of the income_tax regulations provides in part that an election under sec_754 to adjust the basis of partnership property under sec_734 and sec_743 with respect to a distribution_of_property to a partner or a transfer of an interest in a partnership shall be made in a written_statement filed with the partnership return for the taxable_year during which the distribution or transfer occurs for the election to be valid the return must be filed not later than the time prescribed by sec_1_6031_a_-1 including extensions thereof for filing the return for the taxable_year sec_301_9100-1 provides that the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than months except in the case of a taxpayer who is abroad under all subtitles of the code except subtitles e g h and i sec_301_9100-1 defines the term regulatory election as an election whose due_date is prescribed by a regulation published in the federal_register or a revenue_ruling revenue_procedure notice or announcement published in the internal_revenue_bulletin sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make an election sec_301_9100-2 provides the rules governing automatic extensions of time for making certain elections sec_301_9100-3 provides the standards the commissioner will use to determine whether to grant an extension of time for regulatory elections that do not meet the requirements of sec_301_9100-2 plr-125617-18 under sec_301_9100-3 a request for relief will be granted when the taxpayer provides the evidence including affidavits described in sec_301_9100-3 to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and the grant of relief will not prejudice the interests of the government conclusion based solely on the information submitted and the representations made we conclude that the requirements of sec_301_9100-1 and sec_301_9100-3 have been satisfied as a result p2 is granted an extension of time of days from the date of this letter to make an election under sec_754 effective for its year1 taxable_year and thereafter the election should be made in a written_statement filed with the appropriate service_center for association with p2's year1 return a copy of this letter should be attached to the statement filed this ruling is contingent on p2 adjusting the basis of its properties to reflect any sec_734 or sec_743 adjustments that would have been made if the sec_754 election had been timely made these basis adjustments must reflect any additional_depreciation that would have been allowable if the sec_754 election had been timely made regardless of whether the statutory period of limitation on assessment or filing a claim_for_refund has expired for any year subject_to this grant of late relief any depreciation deduction allowable for an open_year is to be computed based upon the remaining useful_life and using property basis as adjusted by the greater of any depreciation deduction allowed_or_allowable in any prior year had the sec_754 election been timely made additionally the partners of p2 must adjust the basis of their interests in p2 to reflect what that basis would be if the sec_754 election had been timely made regardless of whether the statutory period of limitation on assessment or filing a claim_for_refund has expired for any year subject_to this grant of late relief specifically the partners of p2 must reduce the basis of their interests in p2 in the amount of any additional_depreciation that would have been allowable if the sec_754 election had been timely made except as specifically ruled upon above we express or imply no opinion concerning the tax consequences of any facts discussed or referenced in this letter specifically we express no opinion as to whether p2 is a partnership for federal tax purposes this ruling 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 the ruling contained in this letter is based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the ruling_request it is subject_to verification on examination plr-125617-18 in accordance with a power_of_attorney on file with this office we are sending a copy of this letter_ruling to your authorized representative sincerely associate chief_counsel passthroughs special industries by _____________________________ caroline e hay assistant to the branch chief branch office of the associate chief_counsel passthroughs special industries enclosures copy of this letter copy of this letter for sec_6110 purposes cc


office_of_chief_counsel internal_revenue_service memorandum number release date cc psi b06 ---------------- postf-145525-05 uilc date date to associate area_counsel denver large mid-size business from senior technician reviewer branch passthroughs and special industries subject request relating to proper asset classification of intermodal assets under revproc_87_56 this chief_counsel_advice responds to your request for assistance dated date this advice may not be used or cited as precedent legend ------------------------------------------------------ taxpayer a ---------- b ---------- c ------ issue sec_1 under which asset classes are taxpayer’s assets used in taxpayer’s intermodal facilities and consisting of container handlers load unload ramps straddle cranes piggypacker side loaders tire shredder passive and operative truck scales translift cranes and crane pads properly classified under which asset classes are taxpayer’s assets used in taxpayer’s intermodal facilities and consisting of an administrative building a maintenance building and an office building properly classified postf-145525-05 under which asset classes are taxpayer’s assets used in taxpayer’s intermodal facilities and consisting of fences paving sewer lighting outside wiring road crossings and computerized access gate properly classified conclusion sec_1 taxpayer’s assets used in taxpayer’s intermodal facilities and consisting of container handlers load unload ramps straddle cranes piggypacker side loaders tire shredder passive and operative truck scales translift cranes and crane pads are classified in asset cla sec_40 railroad machinery and equipment of revproc_87_56 1987_2_cb_674 as clarified and modified by revproc_88_22 1988_1_cb_785 taxpayer’s assets used in taxpayer’s intermodal facilities and consisting of an administrative building a maintenance building and an office building are classified as nonresidential_real_property under sec_168 having a statutorily- prescribed recovery_period of years under sec_168 taxpayer’s assets used in taxpayer’s intermodal facilities and consisting of fences paving sewer lighting outside wiring road crossings and computerized access gate are classified in asset cla sec_40 railroad structures and similar improvements of revproc_87_56 facts the term intermodal refers to connections and coordination between different modes of transportation by road rail water and or air intermodal service is referred to as tofc cofc service in regulations issued by the surface transportation board stb u s department of transportation c f_r tofc cofc service is defined as the stb is a regulatory agency that congress charged with the fundamental missions of resolving railroad rate and service disputes and reviewing proposed railroad mergers the stb is decisionally independent although it is administratively affiliated with the u s department of transportation it was created in the interstate commerce commission termination act of and is the successor agency to the interstate commerce commission the stb has jurisdiction over railroad rate and service issues and rail restructuring transactions mergers line sales line construction and line abandonments certain trucking company moving van and non- contiguous ocean shipping company rate matters certain intercity passenger bus company structure financial and operational matters and rates and services of certain pipelines not regulated by the federal energy regulatory commission postf-145525-05 a rail trailer-on-flatcar container-on-flatcar tofc cofc service means the transportation by rail in interstate or foreign_commerce of-- any freight-laden highway truck trailer or semitrailer the freight-laden container portion of any highway truck trailer or semitrailer having a demountable chassis any freight-laden multimodal vehicle designed to operate both as a highway truck trailer or semitrailer and as a rail car any freight-laden intermodal container comparable in dimensions to a highway truck trailer or semitrailer and designed to be transported by more than one mode of transportation or any of the foregoing types of equipment when empty and being transported incidental to its previous or subsequent use in tofc cofc service b highway tofc cofc service means the highway transportation in interstate or foreign_commerce of any of the types of equipment listed in paragraph a of this section as part of a continuous intermodal movement that includes rail tofc cofc service and during which the trailer or container is not unloaded c f_r fr date tofc cofc services are intermodal operations in which the various goods to be shipped are not handled individually improvement of tofc cofc regulations railroad-affiliated motor carriers and other motor carriers i c c 2d date rather they are loaded often by the shipper into a trailer for inland moves or container for inland water moves that can then be expeditiously transferred as a unit from one mode of transportation to another id under a typical cofc operation for example a container filled with one or more commodities may be transferred at a port from an ocean vessel to a railroad id the railroad then transports the container to an inland tofc cofc ramp id there the railroad turns the container over either to a motor carrier or to one of its own trucks for delivery to the receiver or receivers id taxpayer is a railroad company and owns intermodal terminals that transfer freight in containerized cargoes from one mode of transportation to another ie from trucks to railcars and vice versa in response to growing demand for intermodal transport of freight via rail and truck taxpayer has built larger intermodal facilities capable of handling high volumes of intermodal shipments these modern intermodal facilities include areas for railroad operations and truck terminal operations postf-145525-05 the portion of intermodal facilities related to railroad operations will generally include tracks for temporarily storing trains storage support tracks tracks for loading and unloading trains and truck trailers loading tracks tracks for accessing the loading and unloading areas receiving and departure tracks and tracks for sorting and assembling railcars into blocks of railcars for combination into trains switch yard tracks the portion of intermodal facilities related to truck terminal operations typically includes equipment for moving containers from railcars to truck trailers paved and or black- topped areas sufficient to store a large number of intermodal containers an automated gate entrance for sorting and routing trucks to the correct location within the facility upon arrival administrative and maintenance buildings lighting security systems and a truck repair shop the administration building typically houses personnel operating the truck terminal portion of the intermodal facility and sometimes is used to house personnel of other companies involved in the freight intermodal transportation network maintenance buildings which are not accessible by rail provide repair services for the truck trailers and the equipment used within the truck terminal portion of the intermodal facility for taxable years a and b taxpayer depreciated assets used in its intermodal facilities including the assets used in the truck terminal portion of the intermodal facility under asset cla sec_40 railroad machinery and equipment of revproc_87_56 having a class_life of years with a recovery_period of years under sec_168 of the internal_revenue_code and asset cla sec_40 railroad structures and similar improvements of revproc_87_56 having a class_life of years with a recovery_period of years under sec_168 in c taxpayer filed a claim seeking a refund for years a and b based on its position that the truck terminal portion of its intermodal facilities should have been assigned to asset cla sec_42 motor transport-freight of revproc_87_56 asset cla sec_42 includes assets used in the commercial and contract carrying of freight by road and has a class_life of years with a recovery_period of years under sec_168 according to taxpayer’s claim recent case law has clarified that i t is the nature of the use of a depreciable asset - not the primary business activity of the owner - which determines its proper classification for purposes of determining the time period over which it will be depreciated citing 354_f3d_786 8th cir 338_f3d_600 6th cir and 172_f3d_1255 10th cir in its claim taxpayer states that the classification of the assets used in the truck terminal portion of the intermodal facility under asset cla sec_42 is appropriate since the nature of these assets is more closely aligned with a trucking operation than a rail operation the assets at issue in this case are used in the truck terminal portion of the intermodal facility and are machinery and equipment consisting of container handlers load unload ramps straddle cranes piggypacker side loaders tire shredder passive and operative truck scales translift cranes and crane pads fences - these include interior fences located on the intermodal facility that surround machinery and trucks and includes postf-145525-05 fences that surround the intermodal facility paving - paved and or black-topped areas sufficient to store a large number of intermodal containers sewer lighting outside wiring and road crossings computerized access gate - an automated gate entrance used on the fences for sorting and routing trucks to the correct location within the facility upon arrival an administrative building that includes dispatch equipment office space conference room file room lunchroom rest rooms leased space for customer use mechanical electrical room and telecommunications closet an office building that is used as an office and houses personnel operating the truck terminal portion of the intermodal facility and that includes five office rooms conference rooms vending machines lunch room mechanical electrical room copy room file room supervisor office and locker rooms and a maintenance building that is not accessible by rail and is used for a truck repair garage providing repair services for the truck trailers and the equipment used within the truck terminal specifically in its refund claim taxpayer has reclassified under asset cla sec_42 motor transport-freight of revproc_87_56 the following assets located at its intermodal facility as follows administrative building taxpayer originally classified these assets under asset cla sec_40 maintenance building taxpayer originally classified these assets under asset cla sec_40 office building taxpayer originally classified these assets under asset cla sec_40 fences taxpayer originally classified these assets under asset cla sec_40 paving taxpayer originally classified these assets under asset cla sec_40 sewer lighting outside wiring road crossings taxpayer originally classified these assets under asset cla sec_40 container handlers taxpayer originally classified these assets under asset cla sec_40 load unload ramps taxpayer originally classified these assets under asset cla sec_40 straddle cranes taxpayer originally classified these assets under asset cla sec_40 piggypacker side loaders taxpayer originally classified these assets under asset cla sec_40 postf-145525-05 tire shredder passive and operative taxpayer originally classified these assets under asset cla sec_40 truck scales taxpayer originally classified these assets under asset cla sec_40 translift cranes taxpayer originally classified these assets under asset cla sec_40 computerized access gate taxpayer originally classified these assets under asset cla sec_40 crane pad taxpayer originally classified these assets under asset cla sec_40 law and analysis sec_167 of the internal_revenue_code provides a depreciation deduction of a reasonable allowance for the exhaustion wear_and_tear or obsolescence of property used in a trade_or_business or for the production_of_income the depreciation deduction provided by sec_167 for tangible_property placed_in_service after generally is determined under sec_168 the classification of depreciable_property subject_to sec_168 is determined under sec_168 by reference to class_life or by statute the applicable_recovery_period for purposes of the general depreciation system under sec_168 or the alternative_depreciation_system under sec_168 is keyed to the class_life of the property sec_168 provides that the term class_life means the class_life if any that would be applicable with respect to any property as of date under former sec_167 as if it were in effect and the taxpayer had elected under that section prior to its revocation sec_167 provided that if a taxpayer elected the asset_depreciation_range_system of depreciation the depreciation deduction would be computed based on the class_life prescribed by the secretary that reasonably reflected the anticipated useful_life of that class of property to the industry or other group sec_1_167_a_-11 of the income_tax regulations provides rules for classifying property under former sec_167 under these rules property is included in the asset_guideline_class for the activity in which the property is primarily used and is classified according to primary use even though the activity in which such property is primarily used is insubstantial in relation to all the taxpayer’s activities sec_1_167_a_-11 states that asset classes are established in revproc_72_10 1972_1_cb_721 or its successors consistent with sec_1_167_a_-11 which adopts the placing of assets into groups by primary activity of use revproc_72_10 established asset guideline classes based on business activity postf-145525-05 on date the interstate commerce commission icc created new_accounts to reflect railroad investment in intermodal assets ie icc account sec_25 tofc cofc terminals and highway revenue equipment revproc_73_23 1973_2_cb_474 revised revproc_72_10 to include the intermodal assets contained in icc account now stb account in asset classe sec_40 railroad machinery and equipment and railroad structures and similar improvements at the time that intermodal assets were included within asset classe sec_40 and asset cla sec_42 motor transport-freight involving the carrying of freight by road was already in existence see revproc_72_10 treasury considered grouping the assets in icc account under asset cla sec_42 see treasury’s office of industrial economics oie report titled a study of railroad transportation assets under the class_life_asset_depreciation_range_system for modification of revenue_procedure date oie report however treasury did not take this approach instead as implemented in revproc_73_23 treasury concluded that the assets of tofc cofc terminals ie icc account properly belong under the railroad transportation class the current successor to revproc_72_10 is revproc_87_56 this revenue_procedure sets forth the class lives of property that are necessary to compute the depreciation allowances under sec_168 revproc_87_56 establishes two categories of depreciable assets asset classes dollar_figure through which consist of specific assets used in all business activities asset categories and asset classes through which consist of assets used in specific business activities activity categories based on broadly defined industry classifications the activity categories correspond to the industry classification described in the legislative_history of former sec_167 the same item of depreciable_property may be described in both an asset category and an activity category in which case the item is classified in the asset category unless specifically excluded from the asset category or specifically included in the activity category see 111_tc_105 item included in both an asset category and an activity category should be placed in the asset category the three different asset classes described in revproc_87_56 at issue here are and for the years and assets in issue revproc_87_56 provides the following descriptions of depreciable assets used in the following activities railroad transportation classes with the prefix include the assets identified below that are used in the commercial and contract carrying of passengers and freight by rail assets of electrified railroads will be classified in a manner corresponding to that set forth below for railroads not independently operated as electric lines excludes the the icc has been replaced by the surface transportation board stb postf-145525-05 assets included in classes with the prefix beginning and above and also excludes any non-depreciable assets included in interstate commerce commission accounts enumerated for this class asset cla sec_40 railroad machinery and equipment includes assets in pertinent part classified in the following interstate commerce commission accounts tofc cofc terminals freight handling machinery and equipment only assets described in asset cla sec_40 have a class_life of years and are depreciated over a recovery_period of years under the general depreciation system of sec_168 asset cla sec_40 railroad structures and similar improvements includes assets in pertinent part classified in the following interstate commerce commission accounts tofc cofc terminals operating structures only assets described in asset cla sec_40 have a class_life of years and are depreciated over a recovery_period of years under the general depreciation system of sec_168 asset cla sec_42 motor transport-freight includes assets used in the commercial and contract carrying of freight by road except the transportation assets included in classes with the prefix assets described in asset cla sec_42 have a class_life of years and are depreciated over a recovery_period of years under the general depreciation system of sec_168 regulations governing icc account now stb account describe the account as follows tofc cofc terminals this account shall include the cost of structures fixtures machinery and appurtenances comprising terminals used for loading and unloading trailers and containers on and from flat cars tofc cofc terminal structures and details cranes and hoists including related machinery and appurtenances drainage and sewerage fences grading and preparing grounds for tofc cofc terminals offices tofc cofc terminal postf-145525-05 lighting system platforms ramps and appurtenances power distribution systems sidewalks pavements and driveways on terminal grounds terminal trucks and tractors note a trailer as used in the text and elsewhere in this system of accounts unless otherwise indicated in the context means trailer bodies used in tofc cofc service which are permanently mounted on running gear containers means trailer bodies used in tofc cofc service which are not permanently mounted on wheels or chassis but are separated from such running gear before being loaded on flat cars note b the cost of grading and preparing grounds both before and after the construction of tofc cofc terminals the cost of constructing sidewalks driveways and fences thereon and the cost of permanent water rights shall be included in the cost of the buildings the fees and expenses of architects employed to design or supervise the construction of the buildings shall also be included in the cost of the buildings however the cost of restoring the grounds after addition and betterment work shall be included in the appropriate operating expense accounts cfr part subpart a edition thus asset cla sec_40 does not include all assets listed in icc account now stb account but is limited to freight handling machinery and equipment icc account includes the cost of machinery and appurtenances comprising terminals used for loading and unloading trailers and containers on and from flat cars examples of freight handling machinery and equipment specifically listed in icc account that are classified in asset cla sec_40 include cranes and hoists including related machinery and appurtenances ramps and appurtenances and terminal trucks and tractors further asset cla sec_40 does not include all assets listed in icc account now stb account but is limited to operating structures only icc account includes the cost of structures fixtures comprising terminals used for loading and unloading trailers and containers on and from flat cars examples of such structures and fixtures specifically listed in icc account that are classified in asset cla sec_40 include drainage and sewerage fences grading and preparing grounds for tofc cofc terminals offices tofc cofc terminals lighting system platforms ramps for example a ramp attached to a platform and appurtenances power distribution systems and sidewalks pavements and driveways on terminal grounds asset cla sec_42 includes assets used in the commercial and contract carrying of freight by road except the transportation assets included in classes with the prefix asset classes that begin with the prefix include asset class that includes postf-145525-05 trucks for use over the road actual unloaded weight less than big_number pounds asset class that includes trucks for use over the road actual unloaded weight big_number pounds or more asset class dollar_figure that includes tractor units for use over-the-road and asset class dollar_figure that includes trailers and trailer-mounted containers thus assets - other than the actual trucks tractor units trailers and trailer-mounted containers themselves - used in the commercial and contract carrying of freight by road are included in asset cla sec_42 currently treasury has no authority to alter the class lives of existing assets or to create class lives for assets that are not described in revproc_87_56 see sec_168 prior to and for a short_period of time after the enactment of the tax_reform_act_of_1986 the authority to set class lives rested with the secretary_of_the_treasury in the tax_reform_act_of_1986 congress directed the treasury_department to study the actual depreciation pattern of all depreciable assets and granted the department authority both to change class lives for assets with existing class lives and to prescribe class lives for assets that did not have any see sec_168 as in effect on the day before the date of enactment of the technical_and_miscellaneous_revenue_act_of_1988 1988_3_cb_1 however pursuant to section of the technical_and_miscellaneous_revenue_act_of_1988 treasury's authority to alter the class lives of existing assets or to create class lives for assets without any class lives was eliminated taxpayer’s position is that certain assets used at its intermodal facilities are used for trucking activities as opposed to railroad activities thus taxpayer believes that these assets are properly characterized under asset cla sec_42 governing highway motor carrier activity as opposed to asset classe sec_40 and governing railroad activity taxpayer further states that its identity as a railroad company is not relevant for purposes of properly classifying its intermodal assets taxpayer points to the appellate decisions in 354_f3d_786 8th cir 338_f3d_600 6th cir and 172_f3d_1255 10th cir the central issue in these three cases was whether the taxpayer’s natural_gas gathering pipeline systems should be classified for tax purposes as production assets in asset class exploration for and production of petroleum and natural_gas deposits it should be noted that asset cla sec_42 does not include sec_1250 property sec_1250 property is defined in sec_1250 and includes buildings as defined in sec_1_48-1 thus sec_1250 property includes structures such as factory and office buildings warehouses and garages see sec_1 e and c the description of asset cla sec_42 in revproc_87_56 does not explicitly include sec_1250 property thus asset cla sec_42 does not include buildings in 103_tc_582 the tax_court dealt with a similar issue involving whether another asset class description encompassed sec_1250 property the opinion closely followed the legislative and administrative history of the asset classes and class lives of sec_1250 property the court found that congress intended the asset class for sec_1250 property to be explicitly prescribed and not merely by inference particularly in light of the difficulties the service had experienced in establishing workable class lives for sec_1250 property postf-145525-05 under revproc_87_56 or as transportation assets in asset cla sec_46 pipeline transportation under revproc_87_56 asset class includes assets used by petroleum and natural_gas producers for drilling of wells and production of petroleum and natural_gas including gathering pipelines and related storage facilities asset cla sec_46 includes assets used in the private commercial and contract carrying of petroleum gas and other products by means of pipes and conveyors in these three cases the courts interpreted the primary use standard in sec_1_167_a_-11 as being a use-driven functional standard for assigning asset classification in duke energy the 10th circuit found the gathering systems are literally used by producers for gas production and the literal terms of the description of asset class include any gathering system as long as it is used by a gas producer f 3d pincite taxpayer’s intermodal assets clearly fall within the literal descriptions of asset classe sec_40 and of revproc_87_56 both asset classes specifically include assets classified in icc account tofc cofc terminals now stb account tofc cofc terminals asset cla sec_40 includes the freight handling machinery and equipment in icc account and asset cla sec_40 includes the operating structures in icc account thus the plain language of asset classe sec_40 and of revproc_87_56 includes taxpayer’s intermodal assets both the rail portion and trucking portion further at the time that intermodal assets were included within asset classe sec_40 and asset cla sec_42 involving the carrying of freight by road was already in existence see revproc_72_10 1972_1_cb_721 treasury could have separated the trucking portion of intermodal terminals from the rail portion of intermodal terminals and included assets related to the trucking portion under asset cla sec_42 this is what taxpayer has asked for in its claim however treasury did not take this approach moreover tofc cofc transportation cannot be compartmentalized as either rail or motor transportation see i c c 2d pincite therefore we must follow the classification of assets in icc account now stb account first implemented by treasury in revproc_73_23 1973_2_cb_474 as superseded by revproc_87_56 assets used in the commercial and contract carrying of freight by rail described under asset classe sec_40 and of revproc_87_56 specifically include intermodal assets used at tofc cofc terminals including even those assets that are similar to assets used by the trucking industry in carrying freight by road this approach classifies taxpayer’s intermodal assets both the rail portion and trucking portion of the assets under asset classe sec_40 and issues issue under which asset classes are taxpayer’s assets used in taxpayer’s intermodal facilities and consisting of container handlers load unload ramps straddle postf-145525-05 cranes piggypacker side loaders tire shredder passive and operative truck scales translift cranes and crane pads properly classified as stated above asset cla sec_40 railroad machinery and equipment of revproc_87_56 does not include all assets listed in icc account now stb account but only freight handling machinery and equipment used in conjunction with tofc cofc terminals in addition to machinery and equipment icc account includes structures and fixtures used on tofc cofc terminals icc account includes machinery comprising terminals used for loading and unloading trailers and containers on and from flat cars examples of such machinery specifically listed in icc account include cranes and hoists including related machinery and appurtenances and terminal trucks and tractors taxpayer originally listed the following machinery and equipment used in conjunction with its tofc cofc terminal under asset cla sec_40 container handlers load unload ramps straddle cranes piggypacker side loaders tire shredder passive and operative truck scales translift cranes and crane pad as discussed above taxpayer has taken the position that this machinery and equipment are properly classified under asset cla sec_42 motor transport-freight of revproc_87_56 and should be depreciated over years under the general depreciation system based on the foregoing discussions in our analysis relating to the incorporation of the intermodal assets contained in icc account into asset cla sec_40 and asset cla sec_40 by revproc_73_23 and assets used in the commercial and contract carrying of freight by rail described under asset classe sec_40 and of revproc_87_56 include assets at intermodal terminals the above items of machinery and equipment that taxpayer originally listed under asset cla sec_40 are properly classified in asset cla sec_40 with a recovery_period of years under the general depreciation system issue under which asset classes are taxpayer’s assets used in taxpayer’s intermodal facilities and consisting of fences paving sewer lighting outside wiring road crossings and computerized access gate properly classified and issue under which asset classes are taxpayer’s assets used in taxpayer’s intermodal facilities and consisting of an administrative building a maintenance building that is used for a truck repair garage and an office building properly classified postf-145525-05 as stated above asset cla sec_40 railroad structures and similar improvements of revproc_87_56 does not include all assets listed in icc account now stb account but only operating structures used in conjunction with tofc cofc terminals icc account includes the cost of structures fixtures comprising terminals used for loading and unloading trailers and containers on and from flat cars examples of such structures and fixtures specifically listed in icc account include drainage and sewerage fences offices tofc cofc terminals lighting system platforms power distribution systems sidewalks pavements and driveways on terminal grounds taxpayer originally listed the following structures located on its tofc cofc terminal under asset cla sec_40 administrative building maintenance building that is used for a truck repair garage office building fences paving sewer lighting outside wiring road crossings computerized access gate taxpayer has now taken the position that these structures are properly classified under asset cla sec_42 motor transport-freight and should be depreciated over years under the general depreciation system the term operating structure under asset cla sec_40 is not defined as a starting point under icc regulation c f_r sec_1201 edition now stb regulation c f_r sec_1201 governing railroads the term structure includes buildings and facilities including fixtures permanently attached to and made a part thereof however note the discussion below under nonresidential_real_property asset cla sec_40 railroad machinery and equipment includes the freight handling machinery and equipment category of intermodal assets of the icc account and asset cla sec_40 railroad structures and similar improvements includes operating structures category of intermodal assets of the icc account icc account lists examples of these intermodal asset categories those assets listed that are not in the freight handling machinery and equipment category are in the operating structure category which includes such land improvements as drainage and sewerage fences and sidewalks pavements and driveways on the terminal grounds in view of the foregoing discussion the term operating structures in asset cla sec_40 encompasses the fences paving postf-145525-05 sewer lighting outside wiring road crossings and computerized access gate therefore these assets fall within asset cla sec_40 and should be depreciated over years under the general depreciation system nonresidential_real_property although the buildings and other structures located on taxpayer’s intermodal facility would initially appear to be included in asset cla sec_40 and therefore have a recovery_period of years under the general depreciation system this is not correct buildings and other structures located on taxpayer’s intermodal facility that fall under the definition of nonresidential_real_property as defined under sec_168 have a statutory_recovery_period of years under sec_168 and sec_40 years under sec_168 sec_168 defines the term nonresidential_real_property as sec_1250 property that is not residential_rental_property or property with a class_life of less than years for purposes of the general depreciation system sec_168 provides that the applicable_recovery_period for nonresidential_real_property i sec_39 years for property placed_in_service after date and years for property placed_in_service after and before date section dollar_figure of revproc_87_56 was clarified and modified by revproc_88_22 1988_1_cb_785 by adding the following paragraph at the end thereof under sec_168 of the code nonresidential_real_property does not include any property described in an asset class with a class_life of less than years even if nonresidential_real_property is described in an asset class with a class_life of years or more the applicable_recovery_period for that property i sec_31 years for purposes of the general depreciation system and years for purposes of the alternative_depreciation_system regardless of the applicable recovery periods set out for the asset class in the tables below note that it is recognized that fences are also described in asset class land improvements an asset category however an asset that is included in both an asset category and an activity category is placed in the asset category unless it is specifically excluded from the asset category or specifically included in the activity category asset class specifically excludes land improvements that are explicitly included in any other class asset cla sec_40 is an activity category that specifically includes land improvements contained in icc account that are considered operating structures land improvements such as fences located on terminal grounds are specifically included within icc account because fences are specifically included in activity category it falls within this asset class notwithstanding the fact that fences are also described in asset category it should be noted that asset cla sec_42 does not explicitly include land improvements consequently asset cla sec_42 does not include land improvements thus if taxpayer’s position that asset cla sec_42 is the proper activity class for its truck terminal operations at the intermodal facility is correct the land improvements at issue are included in asset class land improvements an asset category and not asset cla sec_42 an activity category postf-145525-05 under revproc_87_56 as clarified and modified by revproc_88_22 the class_life of assets that fall under asset cla sec_40 i sec_30 years therefore the assets that taxpayer previously classified under asset cla sec_40 that are properly characterized as nonresidential_real_property under sec_168 have a statutorily-prescribed recovery_period of years under the general depreciation system and years under the alternative_depreciation_system thus the following assets listed in taxpayer’s claim should be depreciated under the general depreciation system over years in accordance with sec_168 the administrative building the maintenance building and the office building case development hazards and other considerations --------------------------------------------------------------------------------------------------------------------- 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information if disclosure is determined to be necessary please contact this office for our views please call if you have any further questions it should be noted that these same assets would be depreciated under the general depreciation system over years if taxpayer’s position that asset cla sec_42 is the proper activity class for its truck terminal operations at the intermodal facility is correct the description of asset cla sec_42 in revproc_87_56 does not explicitly include sec_1250 property thus asset cla sec_42 does not include buildings see footnote