internal_revenue_service number release date index number ----------------------------- ------------------------------------------- --------------------- ------------------------------- department of the treasury washington dc third party communication date of communication month dd yyyy person to contact ---------------------- id no ----------- telephone number -------------------- refer reply to plr-128565-14 date date legend legend taxpayer parent corp a corp b corp c corp d corp e state facility power plant location date date a a b c d e process process a process b ---------------------------------------- ---------------------------------------------------------- ---------------------- --------------------------------------------------------------- ------------------------- -------------------------------------------- ------------------------------------------------------------- ------------------------------- ------------ ---------------------------------------- ------------------------------------------------- -------------------- ---------------- --------------------- ----------------------------------- --- --- --- --- ----- ----------- -------------- -------------- plr-128565-14 dear ------------- this is in response to your request submitted by your authorized representative on date to supplement ruling plr-116599-12 dated date concerning the federal_income_tax consequences of the transaction described below the most salient facts are as follows facts taxpayer information taxpayer is a state limited_liability_company that is a wholly owned subsidiary of corp a taxpayer was formed to lease and operate the facility because taxpayer has not elected to be classified as an association_taxable_as_a_corporation for federal_income_tax purposes it is disregarded as an entity separate from corp a for such purposes corp a a state corporation is wholly owned by parent a state corporation that is the common parent of a consolidated_group of companies whose members include corp a parent uses the accrual_method of accounting and has adopted the calendar_year as its annual_accounting_period the refined_coal production process taxpayer has entered into an agreement to lease the facility from corp b for a term ending on date corp b is owned by corp c the facility was designed and constructed by corp c to produce a refined_coal product that reduces emissions of nitrous oxide nox and mercury hg when burned as fuel in a coal-fired power plant the facility was placed_in_service in date and it is currently located at the power plant located in location on land owned by corp d the power plant is a coal-fired and steam-producing power plant in regular commercial operation taxpayer has entered into a contract with corp d for the sale of refined_coal produced by the facility to corp d for use as feedstock in the power plant the facility can be moved and reassembled at other power plant locations the process the technology employed to produce refined_coal in the facility is known as the process a proprietary process which is designed to reduce nox and hg emissions in cyclone coal-fired boilers the rights to the technology are licensed by corp e to corp c and have been sublicensed from corp c to taxpayer for the full term of the lease of the facility from corp b plr-128565-14 the process involves the use of two separate inorganic chemicals chemical reagents which are applied to feedstock consisting of a a coal or a combination of a coal and b coal the first chemical reagent referred to as process a is a solid material that mixes evenly with coal’s native ash in power plant boilers and affects the melting properties of coal’s native ash during combustion in power plant boilers this allows adjustment of the air-fuel ratio in the boiler which reduces oxygen in the boiler and provides more favorable conditions for reduction of nox emissions the second chemical reagent referred to as process b is an inorganic liquid solution which reacts with the mercury in coal resulting in changes to the chemical form of the mercury oxidizing more of it as a result more of the mercury is captured with the fly-ash in the particulate control equipment resulting in a higher degree of removal the facility’s equipment transports the chemical reagents to a coal conveyor belt where they are applied evenly to the coal feedstock the chemical reagents are combined with the coal at a rate proportional to the coal flow rate the application of each chemical reagent is controlled separately by computer equipment which determines the rate of application based on the flow rate of the coal on the conveyor belt the minimum proportion of each chemical reagent to be applied per ton of feedstock coal is set based on previously verified emissions test results the amount of each chemical reagent applied per ton of feedstock coal may be increased above but will not be decreased below the per-ton amounts used to produce the refined_coal used in the most recent emissions testing cems field testing on date corp c conducted full-scale emissions tests using continuous emission monitoring cems field testing at the power plant using percent a coal feedstock and refined_coal produced in the facility from the same coal feedstock since the date emissions tests taxpayer has conducted periodic emissions tests using cems field testing at the power plant the emissions tests were conducted in the following manner to establish a baseline for nox and mercury emissions one unit of the power plant was operated for a three-hour period at or above a percent of full load using a coal feedstock the same power plant unit was operated for a second three- hour period under the same operating conditions except for adjustments to primary or secondary air in accordance with good air pollution control practices using refined_coal produced in the facility using the process from the same coal feedstock and the chemical reagents applied at a predetermined proportion during both the baseline tests and the tests using refined_coal nox and mercury emissions were measured using cems equipment that conforms to applicable united_states epa standards the nox cems device was located upstream of the scrubber plr-128565-14 and electrostatic precipitator the mercury cems device is located in the stack downstream of hg and nox emission controls which were operated under the same conditions throughout the testing_period each cems field test indicated that burning refined_coal produced using the process in the boilers at the power plant results in a reduction of nox emissions in excess of b percent and a reduction of mercury emissions in excess of c percent excluding dilution caused by materials combined or added during the production process when compared to emissions resulting from burning coal feedstock to produce the same amount of useful thermal energy the emission reductions demonstrated in each cems field test have been verified by an independent in combustion and environmental engineering as required by notice_2010_54 2010_40_irb_403 notice including verification that any post-combustion hg controls were operated under the same conditions throughout the test period licensed professional engineer experienced additional emissions testing taxpayer will conduct additional emissions tests on or before the first to occur of i a change in the process used to produce refined_coal at the facility ii a change in the source or rank of the feedstock coal used to produce refined_coal or iii the expiration of six months since the most recent redetermination test if additional testing is conducted due to a change in the process taxpayer will conduct a cems field test or other test permitted by section dollar_figure of the notice taxpayer anticipates that where there has been no change in the process it will ordinarily conduct redetermination testing using laboratory analysis establishing that the sulfur and mercury content of both the feedstock coal and the refined_coal on average do not vary by more than percent below the bottom nor by more than percent above the top of the range of the sulfur content and range of the mercury content of the feedstock coal and refined_coal used in the most recent section dollar_figure test period taxpayer plans to use the following protocol to collect samples for laboratory analysis during the cems field test taxpayer will collect coal samples from the moving conveyor belt during the period that refined_coal for the cems test is being fed to the coal bunkers in the power plant and will collect refined_coal samples from the moving conveyor belt during the same period a minimum of d samples will be collected taxpayer will submit the samples to an independent laboratory which will conduct a separate analysis of the sulfur and hg content of each sample using standard laboratory techniques this analysis will establish a range of sulfur content and hg content for the coal and refined_coal burned during the cems field test during each six-month redetermination period samples of both feedstock coal and refined_coal will be collected on a regular basis from a moving conveyor belt both plr-128565-14 before and after the facility using this protocol it is expected that during normal operation of the facility at least e samples of feedstock coal and at least e samples of refined_coal will be collected each day after a specified number of samples of feedstock coal and refined_coal have been collected those samples will be sent to an independent laboratory which will combine each set of samples into a single gross sample for preparation and analysis of sulfur and hg content the testing results for sulfur and hg content for the gross samples of feedstock coal and refined_coal respectively collected during the six-month redetermination period will then be averaged the average sulfur and mercury content of the coal and refined_coal will be acceptable if it does not vary by more than percent below the bottom nor by more than percent above the top of the range of sulfur and hg content of the samples taken during the cems test period ruling requested based on the foregoing taxpayer has requested that we rule that the redetermination requirement of section dollar_figure of the notice may be satisfied by laboratory analysis establishing that the sulfur and mercury content of both the feedstock coal and the refined_coal on average do not vary by more than percent below the bottom or by more than percent above the top of the range of the sulfur content and the range of mercury content of the feedstock coal and the refined_coal used in the most recent test conducted in accordance with section dollar_figure of the notice law and analysis sec_45 of the code generally provides a credit against federal_income_tax for_the_use_of renewable or alternative resources to produce electricity or fuel for the generation of steam sec_45i provides that in the case of a producer of refined_coal the credit available under sec_45 for any taxable_year shall be increased by an amount equal to dollar_figure5 per ton of qualified refined_coal i produced_by_the_taxpayer at a refined_coal_production_facility during the 10-year period beginning on the date that the facility was originally placed_in_service and which is ii sold by the taxpayer to an unrelated_person during such 10-year period and such taxable_year for purposes of sec_45 section dollar_figure of the notice provides that the term refined_coal means a fuel which - i is a liquid gaseous or solid fuel including feedstock coal mixed with an additive or additives produced from coal including lignite or high carbon fly ash including such fuel used as a feedstock ii is sold by the taxpayer with the reasonable expectation that it will be used for the purpose of producing steam and iii is certified by the taxpayer as resulting when used in the production of steam in a qualified_emission_reduction sec_45i and section dollar_figure of the notice provide that the term qualified_emission_reduction means in the case of refined_coal produced at a facility placed_in_service after date a reduction of at least twenty percent of the emissions of nitrogen oxide and at least forty percent of the plr-128565-14 emissions of either sulfur dioxide so2 or hg released when burning the refined_coal excluding any dilution caused by materials combined or added during the production process as compared to the emissions released when burning the feedstock coal or comparable coal predominantly available in the marketplace as of date and in the case of production at a facility placed_in_service before date a reduction of at least percent of the emissions of nox and at least percent of the emissions of either so2 or hg released when burning the refined_coal excluding any dilution caused by materials combined or added during the production process as compared to the emissions released when burning the feedstock coal or comparable coal predominantly available in the marketplace as of date sec_45 generally provides that the term refined_coal_production_facility means a facility which is placed_in_service after date and before date section dollar_figure of the notice provides that the refined_coal credit is allowed for qualified refined_coal produced and sold to an unrelated_person by the taxpayer without regard to whether the taxpayer owns the refined_coal_production_facility in which the refined_coal is produced accordingly a taxpayer that leases or operates a facility owned by another person may claim the credit for refined_coal that the taxpayer produces in the facility section dollar_figure of the notice provides that a refined_coal_production_facility will not be considered to have been placed_in_service after date if more than percent of the total fair_market_value of the facility the cost of the new property plus the value of the used_property is attributable to property that was placed_in_service on or before date section dollar_figure of the notice generally provides that a qualified emissions reduction does not include any reduction attributable to mining processes or processes that would be treated as mining as defined in sec_613i a c or i if performed by the mine owner or operator accordingly in determining whether a qualified_emission_reduction has been achieved the emissions released when burning the refined_coal must be compared to the emissions that would be released when burning the feedstock coal feedstock coal is the product resulting from processes that are treated as mining and are actually applied by a taxpayer in any part of the taxpayer’s process of producing refined_coal from coal sec_613i describes treatment processes that are not considered as mining unless they are provided for in sec_613i or any necessary or incidental to a process provided for in sec_613i any cleaning process such as a process that uses ash separation dewatering scrubbing through a centrifugal pump spiral concentration gravity concentration flotation application of liquid hydrocarbons or alcohol to the surface of the fuel particles or to feed slurry provided such cleaning does not change the physical or chemical structure of the coal and drying to remove free water provided plr-128565-14 such drying does not change the physical or chemical identity of the coal will be considered as mining section of the notice provides in part that emissions reduction may be determined using continuous emission monitoring system cems field testing section a provides in part that cems field testing is testing that meets all the following requirements i the boiler used to conduct the test is coal-fired and steam-producing and is of a size and type commonly used in commercial operations ii emissions are measured using a cems iii if epa has promulgated a performance standard that applies at the time of the test to the pollutant emission being measured the cems must conform to that standard iv emissions for both the feedstock coal and the refined_coal are measured at the same operating conditions and over a period of at least hours during which the boiler is operating at a steady state at least percent of full load v a qualified_individual verifies the test results in a manner that satisfies the requirements of section b section of the notice provides that methods other than cems field testing may be used to determine the emissions reduction if a method other than cems field testing is used the service may require the taxpayer to provide additional proof that the emission reduction has been achieved the permissible methods include a testing using a demonstration pilot-scale combustion furnace if it established that the method accurately measures the emission reduction that would be achieved in a boiler described in section a a i and a qualified_individual verifies the test results in a manner that satisfies the requirements of sections c i ii v and vi of the notice and b a laboratory analysis of the feedstock coal and the refined_coal that complies with a currently applicable epa or astm standard and is permitted under section b i or ii of the notice section of the notice provides that a taxpayer may establish that a qualified_emission_reduction determined under section dollar_figure applies to production from a facility by a determination or redetermination that is valid at the time the production occurs a determination or redetermination is valid for the period beginning on the date of the determination or redetermination and ending with the occurrence of the earliest of the following events i the lapse of six months from the date of such determination or redetermination ii a change in the source or rank of feedstock coal that occurs after the date of such determination or iii a change in the process of producing refined_coal from the feedstock coal that occurs after the date of such determination or redetermination section of the notice provides that in the case of a redetermination required because of a change in the process of producing refined_coal from the feedstock coal the redetermination required under section dollar_figure must use a method that meets the requirements of section in any other case the redetermination requirement may be satisfied by laboratory analysis establishing that - a the sulfur s or mercury hg content of the amount of refined_coal necessary to produce an amount plr-128565-14 of useful energy has been reduced by at least percent percent in the case of facilities placed_in_service after date in comparison to the s or hg content of the amount of feedstock coal necessary to produce the same amount of useful energy excluding any dilution caused by materials combined or added during the production process or b the s or hg content of both the feedstock coal and the refined_coal do not vary by more than percent from the s and hg content of the feedstock coal and refined_coal used in the most recent determination that meets the requirements of section dollar_figure of the notice section dollar_figure of the notice provides that the certification requirement of sec_3 i is satisfied with respect to fuel for which the refined_coal credit is claimed only if the taxpayer attached to its tax_return on which the credit is claimed a certification that contains the following a statement that the fuel will result in a qualified emissions reduction when used in the production of steam a statement indicating whether cems field testing was used to determine the emissions reduction if cems field testing was not used to determine the emissions reduction a description of the method used a statement that the emissions reduction was determined or redetermined within the six months preceding the production of the fuel and that there have been no changes in the source or rank of feedstock coal used or in the process of producing refined_coal from the feedstock coal since the emissions reduction was determined or was most recently determined and a declaration signed by the taxpayer in the following form under penalties of perjury i declare that i have examined this certification and to the best of my knowledge and belief it is true correct and complete section of the notice provides in part that in the case of a redetermination required because of a change in the process of producing refined_coal from the feedstock coal the redetermination required under section dollar_figure must use a method that meets the requirements of section in any other case the redetermination requirement may be satisfied by laboratory analysis establishing that the sulfur and mercury content of both the feedstock coal and the refined_coal do not vary by more than percent from the sulfur and mercury content of the feedstock coal and refined_coal used in the most recent redetermination that meets the requirements of the notice accordingly we conclude the redetermination requirement of section dollar_figure of the notice may be satisfied by laboratory analysis establishing that the sulfur and mercury content of both the feedstock coal and the refined_coal on average do not vary by more than percent below the bottom of nor more than ten percent above the top of the range of the sulfur and mercury content of the feedstock coal and refined_coal used in the most recent determination test that meets the requirements of section dollar_figure of the notice this ruling expresses no opinion regarding any issue not specifically addressed in this ruling letter including whether any person has sold refined_coal to an unrelated_person or when the facility was placed_in_service in particular we express or imply no opinion that taxpayer has sufficient risk or rewards of the plr-128565-14 production activity to qualify as the producer of the refined_coal the service may challenge an attempt to transfer the credit to a taxpayer who does not qualify as a producer including transfers structured as partnerships sales or leases that do not also transfer sufficient risks and rewards of the production activity in accordance with the power_of_attorney on file with this office we are sending a copy of this letter to your authorized representative a copy of this ruling 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 the letter_ruling this ruling is directed only to the taxpayer who requested it sec_6110 of the code provides it may not be used or cited as precedent we are sending a copy of this letter_ruling to the industry director sincerely peter c friedman senior technician reviewer branch office of associate chief_counsel passthroughs special industries cc


internal_revenue_service national_office technical_advice_memorandum date number release date index uil no case mis no tam-119433-99 cc dom it a b7 chief appeals_office taxpayer’s name taxpayer’s address taxpayer’s identification no years involved date of conference legend x y year year year issue does the modification that x seeks to make to its year and year allocation of its basis in certain mortgages between mortgages sold and mortgage servicing rights retained in situations where sec_1286 of the internal_revenue_code applies constitute the correction_of_an_error or a change in x’s method_of_accounting conclusion the change in the methodology used by x in year and year to allocate basis between mortgages sold and mortgage servicing rights retained involves a change in x’s method_of_accounting under sec_446 which requires the consent of the commissioner x may not change from its established method_of_accounting by filing amended returns even though the method that it had previously utilized was not consistent with the requirements of revrul_91_46 1991_2_cb_358 revproc_91_50 1991_2_cb_778 and sec_1286 facts x is a wholly owned subsidiary of y x uses an overall accrual_method of tam-119433-99 accounting and is included in consolidated federal_income_tax returns filed by y x is engaged in the mortgage banking business as a mortgage banker x originates mortgages for sale in the secondary mortgage market and sells and services mortgages mortgages are originated in two ways either directly by x or alternatively by a third party mortgage originator and then acquired by x mortgages originated under both methods are pooled by x and sold into the secondary mortgage market x typically retains the right to service the mortgages sold revrul_91_46 revproc_91_50 and sec_1286 contain rules which are applicable to mortgage servicing contracts revrul_91_46 which applies to taxpayers who sell mortgages and at the same time enter into a contract to service the mortgages for amounts received from interest payments thereon provides special rules in conjunction with sec_1286 that apply when a mortgage servicing contract entitles a taxpayer to receive amounts that exceed reasonable_compensation for the services to be performed revproc_91_50 provides an elective safe_harbor for determining the extent to which amounts that a taxpayer is entitled to receive under a mortgage servicing contract represent reasonable_compensation for the services to be provided x filed a form_3115 application_for change in accounting_method with y’s year consolidated_return and obtained consent pursuant to the automatic consent procedures of revproc_91_51 1991_2_cb_779 to change its method_of_accounting in relation to mortgages sold where it retained mortgage servicing rights effective for its year taxable_year to a method in accordance with revrul_91_46 and sec_1286 x also made an election effective for its year taxable_year to apply the safe_harbor rules of revproc_91_50 to amounts received under mortgage servicing contracts by attaching a statement to that effect to the year return in its year and year taxable years x applied the new method_of_accounting compliance with the provisions of revrul_91_46 revproc_91_50 and sec_1286 only to mortgages that were originated by it directly x did not apply the new method to mortgages originated by third parties x accounted for these mortgages in its year and year tax returns as though no change in accounting_method was ever made x continued to allocate a portion of the purchase_price of mortgages sold to retained mortgage servicing rights regardless of whether or not excess servicing charges existed x filed another form_3115 and received consent to an additional change in its method_of_accounting which involved the method of computing the amount of basis to be allocated to retained mortgage servicing rights effective for its year taxable_year x had been allocating its total basis in mortgages originated by third parties and then acquired by x between the mortgages that it sold in the secondary market and the mortgage servicing rights which it retained in a manner inconsistent with the requirements of revrul_91_46 revproc_91_50 and sec_1286 under x’s new tam-119433-99 method_of_accounting x began to allocate a portion of the basis in an acquired mortgage to retained mortgage servicing rights only when and to the extent required by revrul_91_46 revproc_91_50 and sec_1286 this change granted pursuant to the terms of revproc_91_51 was implemented on a cut-off basis and thus covered only mortgages sold on or after the first day of year the year_of_change the method_of_accounting for mortgages sold before year was not affected by the change and no sec_481 adjustment was involved y filed amended returns for its year and year taxable years based upon its purported correction_of_an_error in those returns y seeks to correct x’s allocation of the basis of purchased mortgages between mortgages sold in year and year and mortgage servicing rights retained which occurred in connection with the asserted failure to allocate basis in a manner that complied with the requirements of revrul_91_46 revproc_91_50 and sec_1286 x contends that it allocated too much basis to retained mortgage servicing rights and too little basis to mortgages sold a change in basis allocation relating to the mortgages sold in year and year would give rise to an adjustment in the amount of gain_or_loss which had to be recognized in those years it is this adjustment to gain_or_loss which is reflected in the amended returns filed by y y is also seeking to adjust the tax basis of mortgage servicing rights retained by x in year and year which would then be carried into subsequent taxable years law and analysis sec_446 and sec_1_446-1 of the income_tax regulations require that except as otherwise expressly provided a taxpayer must secure the consent of the commissioner before changing a method_of_accounting for federal_income_tax purposes consent must be secured whether or not such method is proper or is permitted under the internal_revenue_code or the regulations thereunder sec_1286 provides for the tax treatment of stripped bonds revrul_91_46 explains the application of sec_1286 to certain mortgage transactions sec_1_446-1 provides that a change in the method_of_accounting includes a change in the overall plan of accounting for gross_income or deductions or a change in the treatment of any material_item used in such overall plan although a method_of_accounting may exist under this definition without the necessity of a pattern of consistent treatment of an item in most instances a method_of_accounting is not established for an item without such consistent treatment a material_item is any item which involves the proper time for the inclusion of the item in income or the taking of a deduction sec_1_446-1 provides that a change in method_of_accounting does not include correction of mathematical or posting errors or errors in the computation of tax_liability such as errors in computation of the foreign_tax_credit net_operating_loss percentage_depletion or investment_credit also a change in method_of_accounting tam-119433-99 does not include adjustment of any item_of_income or deduction which does not involve the proper time for the inclusion of the item in income or the taking of a deduction certain mortgage transactions engaged in by x trigger the application of sec_1286 which provides for the tax treatment of stripped bonds revrul_91_46 provides that the sale of a mortgage if mortgage servicing rights are retained which involve the receipt from interest payments of amounts in excess of reasonable_compensation for services to be rendered is a transaction subject_to the provisions of sec_1286 when this occurs the mortgages sold are stripped bonds and the retained rights to receive mortgage interest other than as reasonable_compensation for services to be performed are stripped coupons within the meaning of and subject_to the requirements of sec_1286 sec_1286 then applies to determine the proper allocation of the basis in the mortgages immediately before sale between the mortgages sold bonds and excess servicing rights retained coupons as indicated in revrul_91_46 x had permission to apply the provisions of revrul_91_46 revproc_91_50 and sec_1286 to the sale of all mortgages where excess servicing rights were retained beginning with its year taxable_year x had received consent to use the method_of_accounting prescribed by revrul_91_46 and sec_1286 as a result of its filing pursuant to revproc_91_51 x had also made a valid election to use the safe_harbor provisions of revproc_91_50 to determine the extent to which amounts that it was entitled to receive under mortgage servicing contracts represented reasonable_compensation for services to be rendered any amounts which were to be received in excess of the safe_harbor amount should have been accounted for as a stripped_coupon as provided by revproc_91_50 however for year and year x applied the provisions of revrul_91_46 revproc_91_50 and sec_1286 only to the sale of mortgages originated by it directly x did not apply these provisions to the sale of mortgages originated by and acquired from third parties instead x continued to apply its previous method_of_accounting when making basis allocations between mortgages sold and mortgage servicing rights retained upon the sale of mortgages originated by third parties x asserts that this method produced basis allocations which did not comply with the requirements of revrul_91_46 revproc_91_50 and sec_1286 the issue presented in this case is whether a change from the method that x actually used in year and year to account for the sale of mortgages originated by third parties where excess servicing rights were retained to the method required by revrul_91_46 revproc_91_50 and sec_1286 involves the correction_of_an_error or a change in method_of_accounting as provided in sec_1_446-1 a change in method_of_accounting includes a change in the treatment of any material_item a material_item is defined therein as any item which involves the proper time for the inclusion of the item in income or the taking of a deduction if a taxpayer’s accounting practice does not tam-119433-99 permanently affect lifetime income but does or could change the taxable_year in which income is reported it involves timing and is therefore a method_of_accounting see revproc_99_49 1999_52_irb_725 revproc_91_31 1991_1_cb_566 x’s allocation of its basis in mortgages originated by third parties between mortgages sold and mortgage servicing rights retained affects the taxable_year in which income is reported thus x’s accounting practice relative to these mortgages involves timing and represents a method_of_accounting the existence of a method_of_accounting is also established by x’s consistent application of an impermissible method_of_accounting in year and year for the sale of mortgages originated by third parties where excess servicing rights were retained the treatment of a material_item in the same way in determining gross_income or deductions in two or more consecutively filed tax returns without regard to whether the method used is permissible or impermissible or any subsequent change in such status represents consistent treatment of that item for purposes of sec_1_446-1 and establishes a method_of_accounting for purposes of sec_1_446-1 revproc_99_49 revrul_90_38 1990_1_cb_57 although x had permission to apply the provisions of revrul_91_46 revproc_91_50 and sec_1286 to the year and year sale of mortgages originated by and then acquired from third parties and in fact was required to do so x did not the method_of_accounting actually and consistently applied in those two tax years which was also the same method used prior to year represents x’s method_of_accounting for that material_item revproc_91_51 provides that a change to comply with the requirements of revrul_91_46 and sec_1286 is a change in method_of_accounting x sought and received consent to a change in method_of_accounting relative to the sale of mortgages originated by third parties for year any change to the method used in year and year likewise would involve a change in method_of_accounting not the correction_of_an_error sec_446 and sec_1_446-1 provide that a taxpayer must secure consent before changing a method_of_accounting whether or not such method is proper or is permitted under the code or the regulations amended returns may not be used to change a method_of_accounting even if the method previously applied was erroneous see revrul_90_38 which held that a similarly situated taxpayer could not retroactively change from an erroneous to a permissible method_of_accounting by filing amended returns instead the taxpayer was required to secure consent to a change in method_of_accounting see also 891_f2d_1579 fed cir cert_denied 498_us_823 where the court determined that a change in the taxpayer’s classification of certain property was a change in method_of_accounting requiring consent and that any claim_for_refund by way of amended returns would represent an impermissible change in method_of_accounting the court noted that even if the prior method was erroneous any correction would still be considered a change in method_of_accounting to which consent would be required id pincite accord 292_f2d_225 3d cir cert_denied 368_us_898 tam-119433-99 x argues that it should be permitted to correct an error in its application of revrul_91_46 revproc_91_50 and sec_1286 by extending its use of these provisions to sales of mortgages originated by third parties and sold in year and year in cases where excess servicing rights were retained correction_of_an_error is defined in sec_1_446-1 to include correction of mathematical or posting errors or errors in the computation of tax_liability such as errors in computation of the foreign_tax_credit net_operating_loss percentage_depletion or investment_credit however what x is attempting to do is not in the nature of the correction of a mathematical or posting error or an error in the computation of tax_liability instead x is seeking to change the method by which it allocates the basis of mortgages originated by third parties between mortgages sold and mortgage servicing rights retained this change affects the treatment of a material_item which had been accounted for up to that point on a consistent basis and thereby constitutes a change in method_of_accounting despite the relatively narrow definition of an error in the regulations there have been a few cases where courts have deemed a change in the treatment of items that had initially been accounted for in a manner inconsistent with an overall election to constitute the correction_of_an_error and not a change in method_of_accounting x relies on these cases coupled with the language in section dollar_figure of revproc_91_50 which indicates that the safe_harbor election is applicable to all contracts in support of its position x argues that it is merely correcting an error in order to conform with its election however this position is clearly inconsistent with the definition of an error in sec_1_446-1 and the terms of sec_1_446-1 which provides that consistent treatment of a material_item establishes a method_of_accounting the service has previously indicated that it does not agree with the position that correction_of_an_error not a change in method_of_accounting is involved in situations where some items were treated in a manner inconsistent with an overall election as is noted in the examination of the primary cases that x relies on which follows 535_f2d_14 ct_cl involved a taxpayer that had made an election to use the installment_method however the taxpayer had previously excluded a certain type of charge account from its application of the installment_method it is important to note that it was then the policy of the internal_revenue_service that sales made on that type of account did not qualify for installment reporting this policy was later changed in response to a court decision by the issuance of new regulations the taxpayer filed refund claims arguing that extension of the installment_method to the excluded charge accounts in the years covered by its election of the installment_method involved the correction of erroneous reporting the court held that the taxpayer’s election covered all installment_sales which encompassed sales on the excluded accounts and that extension of the installment_method thereto represented the correction_of_an_error and not a change in accounting_method the court in gimbel brothers appeared to be influenced by the taxpayer’s adherence to the former policy of the service and a desire given the policy change to grant the taxpayer the full benefit of the installment statute which would allow it to defer the obligation to pay taxes until the proceeds of sale were received and tam-119433-99 avoid any difficulty and uncertainty involved in valuing a multitude of department store accounts revrul_90_38 states that the service will not follow gimbel brothers in 77_tc_349 acq in result 1989_2_cb_1 the taxpayer had elected to deduct intangible drilling costs but had capitalized certain other costs of constructing offshore drilling platforms the court characterized the taxpayer’s requested revision of its previous treatment of these other costs as a correction of its failure to report similar items consistently and not a change in accounting_method the service acquiesced in standard oil in result only since as was the case in gimbel brothers it does not follow the reasoning which permits correction_of_an_error in the case of less than complete application of an election thus the rationale upon which x attempts to rely has been consistently rejected by the service finally x believes that convergent technologies inc v commissioner tcmemo_1995_320 supports its position x argues that like the taxpayer in convergent technologies it should not be required to obtain consent to make its change and that the question of whether it had the opportunity to regularly use the method_of_accounting to which it had permission to change in year should be a consideration however x’s situation is distinguishable from that in convergent technologies where the court stated that characterization not timing was involved the court determined that the taxpayer’s earlier method and the method advocated by the commissioner were both erroneous and did not clearly reflect income in addition particular importance was placed on the fact that the commissioner was trying to impose a different method on the taxpayer a context in which the court believed consent would not be required based on those specific facts the court permitted a change to what it believed was a proper method without consent in x’s case the service is not challenging x’s method_of_accounting and attempting to impose a different method on it as was the situation in convergent technologies instead the service is merely requiring x to obtain consent before changing from its existing method_of_accounting in accordance with the clear requirements of the code and regulations in addition x consistently used the method from which it seeks to change not only in year and year but previously which is a time interval that without question establishes it as a method_of_accounting consistent but improper treatment by x of mortgage basis allocations a material_item in year and year gave rise to a method_of_accounting any change in a method_of_accounting requires consent x’s use of an impermissible method_of_accounting for its basis in mortgages sold in year and year does not qualify as an error which can be corrected through the filing of amended returns for those years caveats a copy of this technical_advice_memorandum is to be given to the taxpayer sec_6110 provides that it may not be used or cited as precedent


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 ita b04 plr-126442-05 date date x --------------------------------------------------- x --------------------------------------------------- date ---------- date ------------------ date -------------------------- date --------------------- year ------- dear ---------------- this letter_ruling is in reference to x’s request that its form_1128 application to adopt change or retain a tax_year be considered timely filed under the authority contained in sec_301_9100-3 of the procedure and administrative regulations x is requesting permission to change its accounting_period for federal_income_tax purposes from a taxable_year ending on date to one ending on date effective date the information submitted indicated that x advised its tax professionals during the fall of year of its desire to become an electing small_business_corporation the tax professionals of x advised x to file a short-year federal_income_tax return form_1120 u s corporate_income_tax return to change its accounting_period from a tax_year ending on date to one ending on date along with form_2553 election by a small_business_corporation to be filed by date at no time was x advised that form_1128 was required to be filed to change its accounting_period the forms and were timely filed due to an error or misunderstanding on the part of the tax professional the form_1128 was not timely filed sec_301_9100-3 provides that requests for extensions of time for regulatory elections that do not meet the requirements of sec_301_9100-2 automatic extensions such as the instant case must be made under the rules of sec_301_9100-3 requests for relief subject_to sec_301_9100-3 will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good_faith and that the granting of relief will not prejudice the interest of the government plr-126442-05 based on the facts and information submitted and the representations made we have concluded that x has acted reasonably and in good_faith in respect to this matter furthermore we have determined that the granting of relief in this case will not prejudice the interest of the government within the intendment of sec_301_9100-3 accordingly the requirements of sec_301_9100-3 for the granting of relief have been satisfied and x’s late filed form_1128 requesting permission to change from a tax_year ending on date to one ending on date effective date is considered timely filed the ruling contained in this letter is based upon facts and representations submitted by x and accompanied by a penalty of perjury statement executed by an appropriate party this office has not verified any of the material submitted in support of the request for a ruling verification of the factual information representations and other data may be required as part of an examination process this ruling addresses the granting of sec_301_9100-3 relief only no opinion is expressed or implied regarding the tax treatment of the instant transaction under the provisions of any other section of the internal_revenue_code or income_tax regulations that may be applicable thereto or regarding the tax treatment of any conditions existing at the time of or effects resulting from the instant transaction specifically no opinion is expressed or implied as to whether x is permitted under the code and the applicable regulations to change to the tax_year requested in the subject form_1128 this ruling is directed only to the taxpayer that requested it sec_6110 provides that it may not be used or cited as precedent enclosed is a copy of the letter_ruling showing the deletions proposed to be made in the letter when it is disclosed under sec_6110 in accordance with the provisions of a power_of_attorney currently on file we are ending a copy of this letter to the taxpayer’s authorized representative enclosure michael j montemurro acting branch chief office of associate chief_counsel income_tax accounting sincerely


number release date id office uilc cca_2009021908105416 ---------------------------- from ----------------------- sent thursday date am to --------------- cc subject re u s - --------- tax issues -------- ------------------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------ hi ---- yes a tiea is an executive agreement does not need senate or other congressional approval a tiea is usually signed by the secretary of treasury or the assistant secretary -------------------------------------------------------------- -------------------------------------------------------------- -------------------