office_of_chief_counsel internal_revenue_service memorandum number release date cc intl b03 rlchewning postf-112106-05 uilc date may to vicki j hyche associate area_counsel atlanta large mid-size business from barbara a felker chief cc intl br3 subject compulsory payment--exhaustion of administrative remedies this chief_counsel_advice responds to your request for assistance this advice may not be used or cited as precedent legend sub taxpayer country x country y de year a year b year c tax law date d date e date f amount n amount o amount p amount q amount r ----------------------------------------------------- -------------------------------------- ------------------------- ----------------- --------------------- --------------------------------- ------- ------- ------- -------------------------------- -------------------------- ------------------- ------------------------- -------------------- ------------------- ------------------- --------------------- --------------------- --------------------- postf-112106-05 amount s issue sec_1 whether sub a dual-resident company under the u s -country x income_tax treaty the treaty is obligated to request pursuant to article -- -- residence of the treaty that the competent_authorities resolve by mutual agreement whether sub is solely a resident of one of the two states in order to determine whether sub’s payment of tax to country x on bank interest arising in country y is a compulsory payment within the meaning of sec_1_901-2 alternatively even if it is determined that sub’s payment of country x tax was a compulsory payment whether the imputation credits received by the holders of a hybrid instrument issued by de sub’s country x parent were subsidies under sec_901 so that sub’s payments of country x tax will not be considered an amount of income_tax paid_or_accrued conclusions yes sub is required to request that the competent_authorities resolve its country of residence before it will be considered to have exhausted all effective and practical remedies to reduce its liability for country x tax with respect to the interest_income received from the country y bank if an agreement can be reached on its residence article --- other income of the treaty would allocate taxing rights solely to the country of residence with respect to that income since on the facts of this case it is reasonable to expect that the competent_authorities would agree that sub is solely a resident_of_the_united_states for purposes of the treaty sub’s failure to seek competent_authority resolution of the issue of residency constitutes a failure to exhaust all effective and practical remedies to reduce its liability for country x tax accordingly sub’s payments of country x tax attributable to the country y interest_income are not compulsory payments under sec_1_901-2 and therefore are not treated as payments of creditable foreign_income_taxes compulsory the service should not seek to disallow the credit on the ground that imputation credits allowed by country x to the holders of the hybrid_instruments issued by de constitute a subsidy within the meaning of sec_901 if the payments made by sub attributable to the country y interest_income were facts in year a as part of a u s -country y cross-border sale leaseback_transaction sub deposited funds equal to the present_value of the taxpayer’s consolidated group’s future lease obligations under the transaction in an interest-bearing account in a bank in country y sub a company incorporated in the united_states is an indirect wholly- owned subsidiary of taxpayer and was included in taxpayer’s consolidated_return for years b and c postf-112106-05 in year b in order to increase the yield on sub’s deposit in the country y bank taxpayer’s consolidated_group entered into a multi-step financing_transaction ------------- ------------------------- to convert the yield on the deposit into a fixed rate of interest denominated in country x currency financing_transaction as part of that financing_transaction sub became a subsidiary of de a country x corporation that is a subsidiary of a domestic subsidiary of taxpayer de which was created as part of the financing_transaction is treated as a corporation for country x tax purposes and as a disregarded_entity for u s tax purposes as part of the financing_transaction de issued hybrid_instruments that were purchased by newly-formed country x corporations that were owned by unrelated third-party investors ------------------------------------------------------------------------------------------------------ --------------------------------------------------------------------------------------------------------------------- -----------those hybrid_instruments were considered equity for country x tax purposes accordingly payments made by de to the country x corporations under the hybrid_instruments were treated as dividends for country x tax purposes entitling the corporations to imputation tax_credits under section ------ of the country x tax law the imputation credits were based on the country x tax paid_by de the company paying the dividends if the imputation credits exceeded a taxpayer’s country x tax owed for the year in which it received the dividend the excess was not refundable in cash but the taxpayer could claim a loss deduction for the excess_amount in a later year at the same time as the financing_transaction sub appointed ------- country x directors to its board so that the country x directors would be the majority of the directors of the board -------------------------------------------------------------------------------------- -----------------------------------sub would be treated as a resident of country x under section ------- of the country x tax law -----------------------------contingent upon country x directors continuing to constitute a majority of sub’s directors in meetings held by telephone or upon directors’ meetings being held in country x in a ruling on date d the country x tax authorities approved de’s and sub’s application to file a consolidated_income_tax_return the country x tax authorities in its ruling issued on date f affirmed de’s and sub’s entitlement to file a consolidated_income_tax_return but made that entitlement contingent upon sub not being considered a nonresident of country x under a tax_treaty the date f ruling also authorized the two companies to maintain a consolidated imputation account which comprised the country x tax paid_by the consolidated_group consolidation was necessary as part of the ----------------------------------------------------------------------------------------------------------------------------------------- ----------------------------------- a -------------------------------------------------- b ------------------------------------------------------- c ---------------------------------------------------------------------- d ---------------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------- postf-112106-05 financing_transaction in order for the country x tax paid on the interest received by sub on the country y bank deposit to be claimed as an imputation credit by the hybrid instrument holders that were treated as shareholders of de for country x tax purposes for years b and c sub and de filed consolidated country_x_income_tax returns and paid country_x_income_tax in amount n and amount o respectively included in income on those consolidated_returns were the following reportable income and expense amounts expressed in country x currency income expense item a interest from country y bank b --------------------------------- ------------------- c ----------------------- d -------------------------- e --------------------------------- --------------------------------- year b amount p year c amount q --------------------- --------------------- ------------------ ----------------------- ------------------------- ----------------------- ------------------------- total ----------------------- ----------------------- all of the income items were paid_by nonresidents of country x only the first item interest from the country y bank was income earned by sub items b through e were earned or were expenses_incurred by de sub is a resident_of_the_united_states under the treaty because its place of incorporation is in the united_states and we understand that sub is also a resident of country x under the treaty apparently because sub’s place of management is located in country x according to country x law the ------member board_of directors includes ------- members who are residents of country x and meetings are conducted by telephone or in country x sub has not requested pursuant to paragraph -- of article -- residence of the treaty competent_authority relief to determine that it is solely a resident_of_the_united_states its country of incorporation under the treaty and therefore is not subject_to country x tax on the interest_paid to it by the country y bank item a in the above table correspondence between sub’s country x representative and the country x tax authorities demonstrates that sub was well-aware of competent_authority procedures for resolving issues of dual residency and that sub does not intend to seek competent_authority resolution of the residency issue for purposes of the financing_transaction sub chose to subject itself to double_taxation on the country y interest payments by becoming a resident of country x according to that country’s domestic law --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- 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--------------------------------------------------------------------------------------------------- -------- --------------------------------------------------------------------------------------------------------------------- ------------------------------- --------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------- on its year b and year c u s income_tax returns taxpayer reported interest_income received by sub on its deposits in the country y bank of amount r and amount s postf-112106-05 respectively along with items of income and expense incurred by de taxpayer claimed foreign tax_credits with respect to the taxes paid to country x by the sub-de consolidated_group of amount n and amount o for year b and year c respectively law and analysis sec_901 of the code allows a foreign_tax_credit for the amount of any income_war_profits_and_excess_profits_taxes paid_or_accrued during the taxable_year to any foreign_country a foreign levy is an income_tax if and only if it is a tax and the predominant character of that tax is that of an income_tax in the u s sense sec_1_901-2 a foreign levy is a tax if it requires a compulsory payment pursuant to the authority of a foreign_country to levy taxes sec_1 a i and e a foreign_tax_credit is allowed only for the amount of income_tax that is both owed and paid to a foreign_country by the taxpayer sec_901 and sec_1_901-2 and e compulsory payment requirement issue a foreign levy is a tax that may be claimed as a foreign_tax_credit under sec_901 if it requires a compulsory payment pursuant to the authority of a foreign_country to levy taxes sec_1_901-2 provides as follows an amount_paid is not a compulsory payment and thus is not an amount of tax paid to the extent that the amount_paid exceeds the amount of liability under foreign law for tax an amount_paid does not exceed the amount of such liability if the amount_paid is determined by the taxpayer in a manner that is consistent with a reasonable interpretation and application of the substantive and procedural provisions of foreign law including applicable tax_treaties in such a way as to reduce over time the taxpayer's reasonably expected liability under foreign law for tax and if the taxpayer exhausts all effective and practical remedies including invocation of competent_authority procedures available under applicable tax_treaties to reduce over time the taxpayer's liability for foreign tax including liability pursuant to a foreign tax audit adjustment in interpreting foreign tax law a taxpayer may generally rely on advice obtained in good_faith from competent foreign tax advisors to whom the taxpayer has disclosed the relevant facts a remedy is effective and practical only if the cost thereof including the risk of offsetting or additional tax_liability is reasonable in light of the amount at issue and the likelihood of success the issue in this case is whether sub was required to request that the competent_authorities resolve its dual-resident status pursuant to article -- -- residence of the treaty in order to satisfy the requirement that it invoke competent_authority procedures available under the treaty that might reasonably be expected to result in a reduction in postf-112106-05 sub’s liability for country x tax with respect to income earned by sub from a country y bank account the residence of a company is determined under article -- residence of the treaty paragraph -- of article -- residence defines the term resident in part as any person who under the laws of a contracting state is taxable therein by reason of domicile residence place of management place of incorporation or any other similar criterion sub is a resident_of_the_united_states under the treaty because its place of incorporation is in the united_states and we understand that sub is also a resident of country x under the treaty apparently because sub’s place of management is located in country x according to country x law the ------member board_of directors includes ------- members who are residents of country x and meetings are conducted by telephone or in country x article -- -- residence of the treaty provides that when a corporate taxpayer is a resident of both contracting states the competent_authorities will attempt to settle by mutual agreement the issue of whether the corporation will be considered a resident solely of one of the states if they are unable to agree the corporation will be considered a resident of neither state for purposes of the treaty the procedure for obtaining a mutual agreement is contained in article --- mutual_agreement_procedure of the treaty a request for assistance under article --- mutual_agreement_procedure must be presented to the competent_authority within ------- years from the first notification that the actions of one or both of the contracting states result or will result in double_taxation see article --- -- mutual_agreement_procedure this period of limitations would commence to run from the date taxpayer first receives notification that its claim of foreign tax_credits will be denied if the competent_authorities agreed that sub was solely a resident_of_the_united_states for purposes of article -- -- residence taxing rights with respect to the country y interest_income would be resolved in favor of the united_states under article --- other income which provides --------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------ the correspondence available to us between sub’s country x representative and the country x tax authorities as detailed above shows that sub was aware that competent_authority procedures were available to resolve issues of dual residency had sub availed itself of those procedures sub might reasonably have expected to avoid country x tax on the interest from the country y bank account for purposes of the financing_transaction however sub chose to subject itself to double_taxation on the postf-112106-05 country y interest payments by becoming a resident of country x according to that country’s domestic law and affirming its intent not to avail itself of the competent_authority procedures an amount_paid to country x is not a compulsory payment and may not be claimed as a foreign_tax_credit to the extent it exceeds the amount of tax_liability determined under country x law the amount_paid does not exceed the amount of such tax_liability if among other things the taxpayer invokes competent_authority procedures available under the applicable treaty in an effort to reduce such liability the treaty provided sub with the opportunity to resolve its dual-resident status and the attendant exposure to double_taxation but sub chose not to seek relief instead after taking specific steps designed to create a country x tax residence sub engaged in correspondence with country x tax authorities and tried to counter any suggestion that sub’s country x tax_liability might be avoided the regulations under sec_901 require a taxpayer to exhaust all effective and practical remedies including invocation of competent_authority procedures available under applicable tax_treaties to reduce over time the taxpayer’s liability for foreign tax in this case the approach taken by taxpayer did not satisfy this standard tax paid-subsidy issue a foreign_tax_credit is allowed only for the amount of income_tax that is paid to a foreign_country by the taxpayer sec_901 and sec_1_901-2 and e an amount_paid is not treated as a tax if the amount is used directly or indirectly by the country imposing the tax to provide a subsidy to the taxpayer a related_person or any party to the transaction or to a related transaction provided that the subsidy is determined directly or indirectly by reference to the amount of that tax or the base used to compute the amount of that tax sec_901 and sec_1 e sec_1_901-2 provides that a subsidy may be provided by any means including a credit substance and not form controls in determining whether a subsidy exists sec_1_901-2 the house of representatives committee on ways and means in h rept pincite 1986_3_cb_1 explained the reason for the enactment of sec_901 as follows as indicated above a treasury regulation denies a foreign_tax_credit for foreign taxes used directly or indirectly as a subsidy to the taxpayer absent this rule the u s treasury would in effect bear the cost of tax subsidy programs instituted by foreign countries for the direct or indirect benefit of their residents and certain nonresidents who do business with their residents the committee is informed that some u s lenders and other u s taxpayers take tax_return positions that are inconsistent with this rule the committee does not believe that foreign tax_credits should be allowed for foreign taxes which while ostensibly imposed are effectively rebated by the levying country by means of a government subsidy to the taxpayer a related_party or a party to a transaction postf-112106-05 with the taxpayer to eliminate any uncertainty in this area the committee believes that the treasury regulation disallowing foreign tax_credits for taxes used as a subsidy to the taxpayer should be codified under country x law the country x corporations that purchased the de hybrid_instruments as part of the financing_transaction received a non-refundable imputation credit based upon the amount of tax paid_by the de-sub consolidated_group however in our view the service should not argue that the imputation credit constitutes a subsidy under sec_901 and sec_1_901-2 so long as the tax paid_by the de-sub consolidated_group is retained by country x under the country x imputation credit system a tax albeit a single level tax is paid to and retained by country x thus this is not a situation identified in the house report involving a tax that is ostensibly imposed but effectively rebated by the levying country by means of a government subsidy to the taxpayer a related_party or a party to a transaction with the taxpayer while sec_1_901-2 provides that a subsidy may take the form of a credit courts have held that a tax_credit allowed to a related_party does not constitute a subsidy if the original tax payment on which the related_party tax_credit is based is retained by the foreign taxing authority see 113_tc_363 accordingly we recommend against raising this issue please call richard chewning at if you have any further questions


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 psi b03 plr-133136-06 date date x a b ------------------------------------------------------------------------------------------------------ ------------------------ ------------------------------------------------------------------------------------------------------ ------------------------- ------------------------------------------------------------------------------------------------------ -------------------------- ------------------------- state --------- d1 dear ----------------- we received the letter dated date submitted on behalf of x by x’s authorized representative requesting a ruling under sec_1362 of the internal_revenue_code this responds to your request facts x was incorporated under the laws of state on d1 a and b x’s shareholders represent that they intended for x to be an s_corporation as of d1 however x’s form_2553 election by a small_business_corporation was not filed timely x represents that both x and its shareholders have reported their income consistent with x’s intended status as an s_corporation x requests a ruling that it will be recognized as an s_corporation effective d1 law and analysis plr-133136-06 sec_1362 provides in general that except as provided in sec_1362 a small_business_corporation may elect in accordance with the provisions of sec_1362 to be an s_corporation sec_1362 provides that in general an election under sec_1362 may be made by a small_business_corporation for any taxable_year a at any time during the preceding_taxable_year or b at any time during the taxable_year and on or before the 15th day of the third month of the taxable_year sec_1362 provides that if a a small_business_corporation makes an election under sec_1362 for any taxable_year and b such election is made after the 15th day of the third month of the following taxable_year then such election shall be treated as made for the following taxable_year sec_1362 provides that if an election under sec_1362 is made for any taxable_year determined without regard to sec_1362 after the date prescribed by sec_1362 for making the election for the taxable_year or no sec_1362 election is made for any taxable_year and the secretary determines that there was reasonable_cause for the failure to make the election then the secretary may treat the election as timely made for the taxable_year and sec_1362 shall not apply conclusion based solely on the facts submitted and representations made we conclude that x has established reasonable_cause for failing to make a timely s_corporation_election thus we conclude that x is eligible for relief under sec_1362 accordingly if x makes an election to be an s_corporation by filing with the appropriate service_center a completed form_2553 effective d1 within days following the date of this letter we rule that the election shall be treated as timely made a copy of this letter should be attached to form_2553 except for the specific ruling above no opinion is expressed or implied concerning the federal tax consequences of the facts of this case under any other provision of the code specifically no opinion is expressed or implied regarding as to whether x otherwise qualifies as a subchapter_s_corporation under sec_1361 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 plr-133136-06 the rulings contained in this letter are 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 sincerely s christine ellison chief branch office of the associate chief_counsel passthroughs special industries enclosures cc a copy of this letter a copy for sec_6110 purposes ---------------------------- ----------------------- ---------------------------------- ---------------------------------- ------------------------------ -------------------- ------------- ------------------------- ---------------------------------- ------------- ---------------------------- --------------------- -------------------------------


internal_revenue_service number release date index number ---------------------- -------------------- --------------------------- ---------------------------- ------------------------------ parent acquiror target 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 b04 plr-151233-07 date date --------------------------- ------------------------- -------------------------------- ----------------------- ------------------------- ------------------------------------- ------------------------ ------------------------- ------------------------------------- ---------------------- ------------------------------------- ---------------------------------- ------------------------------------------------ third party bank third party holding_company x state a state b government agency --------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------- -------------- -------------- ------------ plr-151233-07 dear ------------ this letter responds to your date request for rulings on certain federal_income_tax consequences of a proposed transaction the information submitted in that letter and in later correspondence is summarized below summary of facts parent a state a corporation is a bank_holding_company parent is the common parent of an affiliated_group that files a consolidated federal_income_tax return with its subsidiaries including acquiror and target acquiror and target are state a chartered banks parent owns all the stock of acquiror and target third party holding_company a state b corporation is a bank_holding_company that is unrelated to parent third party holding_company owns all the stock of third party bank for what are represented to be valid business reasons parent wants to combine the operations of target and acquiror and sell the bank charter of target government agency will not permit a state a bank charter to be transferred by itself government agency will approve the proposed sale of the bank charter if it is effected in the manner described below the proposed transaction proposed transaction i ii iii iv target will transfer to acquiror all its assets and liabilities except for target's bank charter and the minimum capital required by government agency to maintain target’s corporate existence parent will sell the stock of target to third party holding_company for a payment of x plus the value of the minimum capital parent will transfer to acquiror the fair_market_value of the minimum capital third party holding_company will merge target with and into third party bank with third party bank surviving all of the parties to the agreements effecting the proposed transaction have agreed to treat the proposed transaction consistently with the requested rulings provided for herein for federal tax purposes representations plr-151233-07 in connection with the proposed transaction the following representations have been made a b target will issue no stock in the transaction acquiror will acquire at least percent of the fair_market_value of the net assets and at least percent of the fair_market_value of the gross assets held by target immediately prior to the proposed transaction for purposes of this representation amounts used by target to pay its reorganization expenses and all redemptions and other distributions except for regular normal dividends made by target immediately preceding the transfer will be included as assets of target held immediately prior to the proposed transaction in addition for purposes of this representation the corporate charter and the minimum capital retained by target will be included as assets of target held immediately prior to the transaction the minimum capital will be included in both the numerator and the denominator of the percent and percent tests c all transfers of assets and stock described above will occur pursuant to written binding contracts entered into before the proposed transaction is undertaken d after the transaction parent will be in control of acquiror within the meaning of sec_368 of the internal_revenue_code code e at the time of the proposed transaction acquiror will not have outstanding any warrants options convertible securities or any other right pursuant to which any person could acquire stock in acquiror that if exercised or converted would affect parent's acquisition or retention of control of acquiror as defined in sec_368 f except as may be deemed to occur as a result of the recast of the proposed transaction under sec_1_1502-13 of the income_tax regulations acquiror has no plan or intention to reacquire any of its stock constructively issued in the proposed transaction g the fair_market_value of the acquiror stock constructively received by parent will be approximately equal to the fair_market_value of the target stock surrendered in the exchange h at least of the proprietary interest in target will be exchanged for acquiror stock and will be preserved within the meaning of sec_1_368-1 i acquiror has no plan or intention to sell or otherwise dispose_of any of the assets of target acquired in the proposed transaction except for dispositions made in the ordinary course of business plr-151233-07 j the liabilities of target assumed by acquiror plus the liabilities if any to which the transferred assets are subject were incurred by target in the ordinary course of its business and are associated with the assets transferred k following the proposed transaction acquiror will continue the historic_business of target or use a significant portion of target's historic_business_assets in a business l acquiror target and parent will pay their respective expenses if any incurred in connection with the proposed transaction m there is no intercorporate indebtedness existing between acquiror and target that was issued acquired or will be settled at a discount n no parties to the proposed transaction are investment companies as defined in sec_368 and iv o the fair_market_value of the assets of target transferred to acquiror will equal or exceed the sum of the liabilities assumed by acquiror plus the amount of the liabilities if any to which the transferred assets are subject p the total adjusted_basis of the assets of target transferred to acquiror will equal or exceed the sum of the liabilities assumed by acquiror plus the amount of the liabilities if any to which the transferred assets are subject q target is not under the jurisdiction of a court in a title_11_or_similar_case within the meaning of sec_368 r target will retain only its corporate charter and minimum capital rulings based solely upon the information submitted and the representations set forth above we rule as follows for federal_income_tax purposes the proposed transaction will be viewed as i the acquisition by acquiror of all the assets of target including the bank charter and the minimum capital solely in exchange for constructive acquiror common_stock and the assumption by acquiror of the liabilities of target ii the distribution to parent by target of the acquiror stock in exchange for all of parent's target stock in complete_liquidation of target iii the distribution to parent by acquiror of the bank charter and minimum capital of target in redemption of a portion of parent's acquiror stock constructively received in ii above iv the contribution by parent of the bank charter and the minimum capital of target received in iii above to the capital of new target the deemed contribution in exchange for the issuance of new target stock to plr-151233-07 parent and v the sale of all the stock of new target to third party holding_company the deemed sale for x plus the minimum capital the acquisition by acquiror of all the respective assets of target including the bank charter and the minimum capital solely in exchange for acquiror common_stock and the assumption by acquiror of the liabilities of target followed by the deemed_distribution to parent by target of the acquiror stock in exchange for all of parent's respective target stock in complete_liquidation of target will constitute a tax-free reorganization within the meaning of sec_368 parent acquiror and target will each be a_party_to_a_reorganization within the meaning of sec_368 no gain_or_loss will be recognized by acquiror upon the receipt of target's assets in exchange for acquiror stock sec_1032 the basis of the assets of target in the hands of acquiror will be in each instance the same as the basis of those assets in the hands of target immediately prior to the proposed transaction sec_362 the holding_period of the assets of target in the hands of acquiror will include the period during which such assets were held by target immediately prior to the proposed transaction sec_1223 no gain_or_loss will be recognized by target upon the transfer of its assets to acquiror in exchange for acquiror stock and the assumption by acquiror of the liabilities of target sec_361 and sec_357 no gain_or_loss will be recognized by target upon the distribution of acquiror stock in exchange for parent's target stock sec_361 no gain_or_loss will be recognized to parent upon the receipt of acquiror stock in exchange for its target stock sec_354 the basis of the shares of acquiror stock received by parent will be the same as its basis in the target stock surrendered in exchange therefore sec_358 the distribution by acquiror of the target charter and the minimum capital in redemption of parent's acquiror stock will be treated as a redemption to which sec_302 applies sec_1_1502-13 the distribution of the target charter and the minimum capital in redemption of parent's acquiror stock will not be included in the gross_income of parent parent will however be required to make a corresponding negative adjustment in the amount of the distribution to its basis in its acquiror stock under sec_1_1502-32 sec_1_1502-13 plr-151233-07 acquiror will recognize gain_or_loss under sec_311 or sec_1_1502-13 from the distribution of the target charter and the minimum capital in redemption of parent's acquiror stock and such gain_or_loss shall be taken into account under the timing rules of sec_1_1502-13 sec_1 c f iii with respect to such gain_or_loss with respect to the bank charter and the minimum capital of target such gain_or_loss shall be taken into account upon the deemed sale of new target sec_1_1502-13 parent’s basis in the target charter and the minimum capital will be the fair_market_value of such assets sec_301 the holding_period of the target bank charter and the minimum capital in the hands of parent will include the holding_period of such assets in the hands of target sec_1_1502-13 immediately following the deemed contribution to new target new target will be treated for federal tax purposes as a new corporation and will obtain a new employer_identification_number rev_proc 1989_2_cb_631 see also revrul_73_526 c b parent's basis in the stock of new target following the deemed_distribution and contribution_to_capital will be equal to parent's basis in the charter treated as transferred to new target sec_358 and sec_1_358-1 caveats the rulings contained in this letter are 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 no opinion is expressed or implied about the tax treatment of the proposed transaction under other provisions of the code or regulations or the 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 rulings the 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 each taxpayer involved in this transaction should attach a copy of this ruling letter to the taxpayer's federal_income_tax return for the taxable_year in which the transaction is completed 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 plr-151233-07 in accordance with the power_of_attorney on file in this office a copy of this ruling letter will be sent to your authorized representative sincerely _____________________________ lewis k brickates chief branch associate chief_counsel corporate


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-149426-07 date date ------------------------------------------------------------------------- --------------------------------------------------------------------------------------- --------------------------------------- ----------------------------------------- ty --------------- ty --------------- ab llc cd llc blackacre greenacre dear ----------------- this responds to your request for a private_letter_ruling dated date specifically you have requested a ruling that sec_1031 of the internal_revenue_code will not require the recognition of gain by related parties engaging in exchanges of like- kind property facts ab llc and cd llc are both classified as partnerships for federal_income_tax purposes and are related_persons within the meaning of sec_1031 ab llc owns blackacre and cd llc owns greenacre ab llc has agreed to transfer blackacre to an unrelated buyer buyer ab llc intends to sell blackacre as part of a deferred like- kind exchange for replacement_property in a transaction intended to qualify for nonrecognition treatment under sec_1031 ab llc intends to identify greenacre as one of the potential replacement properties in its exchange cd llc also intends to dispose_of greenacre and use the proceeds from the disposition to acquire like-kind_property cd llc’s replacement_property in a transaction intended to qualify for nonrecognition treatment under sec_1031 to facilitate their exchanges ab llc and cd llc will enter into exchange agreements with a qualified_intermediary qi in accordance with sec_1_1031_k_-1 of the income_tax regulations pursuant to ab llc's exchange_agreement qi will be treated as the seller of blackacre to buyer moreover qi will be treated as acquiring greenacre from cd llc and transferring it to ab llc in exchange for blackacre similarly in plr-149426-07 accordance with to cd llc's exchange_agreement qi will be treated as acquiring cd llc’s replacement_property to replace greenacre and transferring it to cd llc in exchange for greenacre cd llc’s replacement_property will be acquired through qi from a seller that is not related to either ab llc or cd llc within the meaning of sec_1031 once all of the transactions are completed assuming ab llc acquires greenacre as replacement_property in its exchange buyer will own blackacre ab llc will own greenacre and cd llc will own cd llc’s replacement_property if ab llc acquires greenacre as replacement_property in ab llc’s exchange ab llc will not dispose_of greenacre and cd llc will not dispose_of cd llc’s replacement_property within two years of ab llc’s receipt of greenacre or cd llc’s receipt of cd llc’s replacement_property whichever is later other than a disposition described in sec_1031 law analysis sec_1031 generally provides that no gain_or_loss shall be recognized on the exchange of property held for productive use in a trade_or_business or for investment if such property is exchanged solely for property of like_kind which is to be held either for productive use in a trade_or_business or for investment sec_1031 establishes special rules for exchanges between related_persons sec_1031 provides that if a a taxpayer exchanges property with a related_person b there is nonrecognition_of_gain_or_loss to the taxpayer in accordance with sec_1031 with respect to the exchange and c within years of the date of the last transfer that was part of the exchange either the taxpayer or the related_person disposes of the property received in the exchange then there is no nonrecognition_of_gain_or_loss in the exchange in other words the gain_or_loss that was deferred under sec_1031 must be recognized any gain_or_loss the taxpayer is required to recognize by reason of sec_1031 is taken into account as of the date of the disposition of the replacement_property the second_disposition sec_1031 provides that certain dispositions will not be taken into account for purposes of sec_1031 these include any disposition a after the earlier of the death of the taxpayer or the death of the related_person b in a compulsory or involuntary_conversion within the meaning of sec_1033 if the exchange occurred before the threat or imminence of such conversion or c with respect to which it is established to the satisfaction of the secretary that neither the exchange nor the second_disposition had as one of its principal purposes the avoidance of federal_income_tax sec_1031 provides that sec_1031 shall not apply to any exchange that is part of a transaction or series of transactions structured to avoid the purposes of sec_1031 thus if a transaction is set up to avoid the restrictions on exchanges between related_persons sec_1031 operates to prevent nonrecognition of the gain_or_loss on the plr-149426-07 exchange both the ways_and_means_committee report and the senate_finance_committee print describe the policy concern that led to enactment of sec_1031 because a like-kind_exchange results in the substitution of the basis of the exchanged property for the property received related parties have engaged in like-kind_exchanges of high basis property for low basis property in anticipation of the sale of the low basis property in order to reduce or avoid the recognition of gain on the subsequent sale basis shifting also can be used to accelerate a loss on retained property the committee believes that if a related_party exchange is followed shortly thereafter by a disposition of the property the related parties have in effect cashed out of the investment and the original exchange should not be accorded nonrecognition treatment h_r rep no 101st cong 1st sess s print no pincite further in its explanation of sec_1031 the conference committee report states that the non-tax avoidance exception generally will apply to dispositions in nonrecognition transactions h_r rep no 101st cong 1st sess sec_1031 is not applicable to currently tax ab llc's disposition of blackacre in the present case because ab llc is exchanging property with a qualified_intermediary who is not a related_party however sec_1031 provides that sec_1031 shall not apply to any exchange that is part of a transaction or series of transactions structured to avoid the purposes of sec_1031 thus sec_1031 will not apply if ab llc’s exchange with qi is structured to avoid the purposes of sec_1031 see rev_rul 2002_2_cb_927 in the present case the only subsequent disposition of replacement_property contemplated by the parties is the use of the proceeds from the disposition of greenacre by cd llc to acquire cd llc’s replacement_property in another exchange under sec_1031 a nonrecognition_transaction therefore sec_1031 will not apply to require recognition of gain_or_loss in the exchanges of either related_party both ab llc's exchange and cd llc's exchange are structured as like-kind_exchanges qualifying under sec_1031 there is no cashing out of either party's investment in real_estate upon completion of the series of transactions both related parties will own property that is of like_kind to the property they exchange neither exchanger will receive cash or other nonlike-kind property other than some possible boot in return for the relinquished_property ruling assuming ab llc acquires greenacre as replacement_property in its exchange for blackacre cd llc transfers greenacre as part of its own exchange for cd llc’s plr-149426-07 replacement_property and both ab llc and cd llc retain their replacement properties for two years after the receipt of greenacre by ab llc or cd llc’s replacement_property by cd llc whichever occurs later then sec_1031 will not apply to require gain recognition by either ab llc or cd llc caveats these rulings relate only to the application of sec_1031 to the exchanges described no opinion is expressed regarding whether the other requirements of sec_1031 are met nonrecognition treatment does not apply to the extent of any boot in the form of cash or other nonlike-kind real personal or intangible_property received by ab llc or cd llc in the exchanges at issue see sec_1031 and revrul_67_255 1967_2_cb_270 except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter the rulings contained in this letter are based upon information and representations submitted by the applicant taxpayer and accompanied by penalty of perjury statements 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 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 we enclose a copy of the letter for this purpose 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 also enclosed is a copy of the letter showing the deletions proposed to be made when it is disclosed under sec_6110 sincerely michael j montemurro branch chief branch income_tax accounting enclosures


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 --------------------------- ------------------- telephone number --------------------- refer reply to cc psi b02 plr-121915-07 date june legend x ------------------------------------------------------------------------------------------------------ a ------------------------------------------------------------------------------------------------------ ------------------------ -------------------------- state ------------------- -------------------------- d1 ---------------------- d2 dear-------------- this responds to the letter dated date submitted on behalf of x by x's authorized representative requesting a ruling under sec_1362 of the internal_revenue_code the information submitted states that x was incorporated in state on d1 a the sole shareholder of x intended for x to be an s_corporation however x's internal_revenue_service center has no record of form_2553 election by a small_business_corporation being timely filed for x accordingly x requests a ruling that it will be treated as an s_corporation effective d2 sec_1362 provides that a small_business_corporation may elect to be an s_corporation sec_1362 provides the rule on when an s election will be effective generally if an s election is made within the first two and one-half months of a corporation's taxable plr-121915-07 year then the corporation will be treated as an s_corporation for the year in which the election is made sec_1362 provides that if an s election is made after the first two and one-half months of a corporation's taxable_year then the corporation will not be treated as an s_corporation until the taxable_year after the year in which the s election is made sec_1362 provides that if an election under sec_1362 is made for any taxable_year after the date prescribed by sec_1362 for making the election for the taxable_year or no sec_1362 election is made for any taxable_year and the secretary determines that there was reasonable_cause for the failure to timely make the election then the secretary may treat the election as timely made for such taxable_year and sec_1362 shall not apply based solely on the facts and the representations submitted we conclude that x has established reasonable_cause for failing to make a timely election to be an s_corporation effective d2 accordingly provided that x makes an election to be an s_corporation by filing a completed form_2553 with the appropriate service_center effective d2 within days following the date of this letter then such election will be treated as timely made for x's taxable_year beginning d2 a copy of this letter should be attached to the form_2553 except as specifically set forth above no opinion is expressed concerning the federal tax consequences of the facts described above under any other provision of the code including whether x was or is a small_business_corporation under sec_1361 this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file with this office a copy of this letter is being sent to x's authorized representative sincerely bradford r poston senior counsel branch office of the associate chief_counsel passthroughs special industries enclosures copy of this letter


t c memo united_states tax_court fleming g and sherry h brooks petitioners v commissioner of internal revenue respondent estate of fleming s brooks deceased william h carr and merle r brooks personal_representatives and merle r brooks petitioners v commissioner of internal revenue respondent docket nos filed date jo karen parr alan e rothfeder and carla c gilmore for petitioners marshall r jones and robert w west iii for respondent 1these cases are consolidated for purposes of briefing and opinion hereafter collectively the instant case memorandum opinion wells judge respondent determined deficiencies in federal income taxes for petitioners fleming g brooks and sherry h brooks in the case at docket no as follows year deficiency dollar_figure big_number addition_to_tax sec_6662 dollar_figure dollar_figure respondent determined deficiencies in federal income taxes and additions to tax for the estate of fleming s brooks and merle r brooks in the case at docket no as follows year deficiency dollar_figure big_number after concessions the issue to be decided is whether the advances of open_account_debt by petitioners to their closely held s_corporation in and provided petitioners with basis to offset repayments of open_account_debt made by the company in and prior to each respective advance 2all section references are to the internal_revenue_code as amended and all rule references are to the tax_court rules_of_practice and procedure background the parties submitted the instant case fully stipulated without trial pursuant to rule the parties’ stipulations of fact are incorporated herein by reference and are found as facts in the instant case petitioners fleming g brooks and sherry h brooks are husband and wife at the time of filing the petition they resided in samson alabama during the years in issue fleming s brooks and merle r brooks were husband and wife fleming s brooks died on date at the time of filing the petition merle r brooks resided in samson alabama fleming g brooks and fleming s brooks messrs brooks and their respective spouses were calendar_year taxpayers at all relevant times fleming s brooks owned percent of the stock of brooks ag company inc the company and fleming g brooks owned percent the company was an s_corporation with a calendar_year tax_year and messrs brooks each had a zero basis in their stock in the company during all relevant times before and during the years in issue messrs brooks advanced money to the company on open account on three occasions the open account transactions and related computations of messrs brooks are described in detail in the appendix to this opinion the first such advance occurred during when messrs brooks each advanced dollar_figure to the company on open account referred to collectively as the dollar_figure million advance the second advance occurred on date when messrs brooks each advanced dollar_figure to the company on open account referred to collectively as the dollar_figure million advance the third advance occurred on date when messrs brooks each advanced dollar_figure million to the company on open account referred to collectively as the dollar_figure million advance on date the company made a dollar_figure repayment to each of messrs brooks referred to collectively as the dollar_figure million repayment on date the company made a dollar_figure repayment to each of messrs brooks referred to collectively as the dollar_figure million repayment as of the close of the outstanding balance of open_account_debt owed by the company to messrs brooks equaled the amount advanced to the company during ie dollar_figure million however pro_rata company losses during and had reduced messrs brooks’s basis in the open_account_debt to zero when messrs brooks made the dollar_figure million advance at the close of it was an amount sufficient in messrs brooks’s view to provide a basis offset for the dollar_figure million repayment and allow for the recognition by messrs brooks of their pro_rata share of company losses_incurred during 3petitioners contend that messrs brooks’s bases in the open account debts were also reduced by offsetting the dollar_figure million repayment as discussed below respondent contends that the repayment of open_account_debt may not be offset by the basis of continued when messrs brooks made the dollar_figure million advance at the close of it was an amount sufficient in messrs brooks’s view to provide a basis offset for the dollar_figure million repayment and allow for the recognition by messrs brooks of their pro_rata share of company losses during respondent concedes that messrs brooks’s advances to the company and the company’s repayments of the advances constituted open_account_debt and does not contend that any of the advances constituted separate indebtedness other than the advances described above messrs brooks advanced no money to the company from to date discussion we must decide whether the dollar_figure million advance provided sufficient basis to offset the dollar_figure million repayment on date in addition to allowing recognition of messrs brooks’s pro_rata share of company losses for and whether the dollar_figure continued an open account advance subsequent to the repayment however respondent does not dispute that the dollar_figure million advance provided messrs brooks with sufficient bases to recognize their respective pro_rata losses for 4petitioners contend that messrs brooks’s bases in the open account debts were also reduced by offsetting the dollar_figure repayment as discussed below respondent contends that the repayment of open_account_debt may not be offset by the basis of an open account advance subsequent to the repayment however respondent does not dispute that the dollar_figure advance provided messrs brooks with sufficient bases to recognize their respective pro_rata losses for million advance provided sufficient basis to offset the dollar_figure million repayment on date in addition to allowing recognition of messrs brooks’s pro_rata share of losses for a lender recognizes income to the extent that repayment of the debt exceeds the lender’s basis in the debt see sec_1001 c because a lender generally takes a basis equal to the face_amount of the debt a repayment generally does not generate taxable_income to the lender see sec_1001 sec_1011 sec_1012 however taxable_income may result from the repayment of a debt if the lender’s basis in the debt is reduced from the face_amount see sec_1001 if a shareholder advances money to an s_corporation and the shareholder’s pro_rata share of s_corporation losses exceeds the shareholder’s basis in the stock of the s_corporation a reduction in the basis of a debt may occur see sec_1367 sec_1_1367-2 income_tax regs a shareholder of an s_corporation must take into account the shareholder’s pro_rata share of the s corporation’s items of income loss deduction and credit sec_1366 items of sec_1366 special rules for losses and deductions -- cannot exceed shareholder’s basis in stock and debt -- the aggregate amount of losses and deductions taken into account by a shareholder under subsection a for any taxable_year shall not exceed the sum of-- continued income increase the shareholder’s basis in stock of the s_corporation stock basis and items of loss decrease the shareholder’s stock basis sec_1367 in the instant case messrs brooks each had a zero basis in their stock in the company at all relevant times although a shareholder may not reduce stock basis below zero a shareholder with a zero stock basis may recognize further losses to the extent of the shareholder’s debt basis including the shareholder’s advances to the s_corporation see sec_1366 sec_1367 and sec_1_1367-2 income_tax regs provide that a shareholder must reduce debt basis but not below zero to the extent that the shareholder’s pro_rata share of losses exceeds the shareholder’s stock basis after taking into account any income items for the tax_year in continued a the adjusted_basis of the shareholder’s stock in the s_corporation determined with regard to paragraphs and a of sec_1367 for the taxable_year and b the shareholder’s adjusted_basis of any indebtedness of the s_corporation to the shareholder determined without regard to any adjustment under paragraph of sec_1367 for the taxable_year sec_1_1367-2 reduction in basis of indebtedness-- general_rule if after making the adjustments required by sec_1367 for any taxable_year of the s_corporation the amounts specified in sec_1367 c d and e relating to losses deductions noncapital nondeductible expenses and certain oil_and_gas depletion deductions exceed the basis of a shareholder’s stock in the corporation the excess continued a year subsequent to such a reduction in debt basis if the shareholder’s pro_rata share of income exceeds the pro_rata share of losses sec_1367 and sec_1_1367-2 income_tax regs provide that the excess income shall first restore the shareholder’s debt basis and then restore the shareholder’s stock basis the reduction of debt basis pursuant to sec_1367 and sec_1_1367-2 income_tax regs and the continued is applied to reduce but not below zero the basis of any indebtedness of the s_corporation to the shareholder held by the shareholder at the close of the corporation’s taxable_year any such indebtedness that has been satisfied by the corporation or disposed of or forgiven by the shareholder during the taxable_year is not held by the shareholder at the close of that year and is not subject_to basis_reduction sec_1_1367-2 restoration of basis-- general_rule if for any taxable_year of an s_corporation beginning after date there has been a reduction in the basis of an indebtedness of the s_corporation to a shareholder under sec_1367 any net increase in any subsequent taxable_year of the corporation is applied to restore that reduction for purposes of this section net increase with respect to a shareholder means the amount by which the shareholder’s pro_rata share of the items described in sec_1367 relating to income items and excess deduction for depletion exceed the items described in sec_1367 relating to losses deductions noncapital nondeductible expenses certain oil_and_gas depletion deductions and certain distributions for the taxable_year these restoration rules apply only to indebtedness held by a shareholder as of the beginning of the taxable_year in which the net increase arises the reduction in basis of indebtedness must be restored before any net increase is applied to restore the basis of a shareholder’s stock in an s_corporation in no event may the shareholder’s basis of indebtedness be restored above the adjusted_basis of the indebtedness under sec_1016 excluding any adjustments under sec_1016 for prior taxable years determined as of the beginning of the taxable_year in which the net increase arises restoration of debt basis pursuant to sec_1367 and sec_1_1367-2 income_tax regs are hereinafter collectively referred to as debt basis adjustments in the instant case the record reveals that the amount of the company’s losses in and exceeded the amount of the company’s income in each respective tax_year consequently pursuant to sec_1_1367-2 income_tax regs the losses reduced messrs brooks’s respective open_account_debt bases at each respective year end respondent does not challenge petitioners’ recognition of such losses for the purpose of determining taxable_income upon an s corporation’s repayment of shareholder advances a separate transaction involving an advance and repayment of indebtedness is generally treated separately see sec_1_1367-2 b c income_tax regs shareholders may not offset the repayment of a shareholder advance with the basis of another separate shareholder advance 58_tc_417 discussed further below affd 494_f2d_465 5th cir however multiple shareholder advances and repayments that constitute open account indebtedness are treated 8respondent concedes that the date open account advance provided sufficient debt basis for petitioners to recognize the losses claimed in and that the date advance provided sufficient debt basis for petitioners to recognize the losses claimed in as a single indebtedness rather than separate indebtedness see 494_f2d_465 5th cir sec_1_1367-2 income_tax regs petitioners contend that the basis of a shareholder’s open_account_debt is properly determined at the close of the s corporation’s tax_year by first netting advances and repayments of open_account_debt during the tax_year and then making any necessary debt basis adjustments respondent relies on 494_f2d_465 5th cir for the proposition that messrs brooks must recognize income on the repayment of their advances to the extent that the repayments exceed their basis in the advance on the date of repayment without regard to the basis of subsequent advances in the year of repayment we believe that respondent’s reliance in the instant case on cornelius v commissioner supra is misplaced in cornelius the fifth circuit_court of appeals affirmed the finding of this court that the advances by the taxpayers to their s_corporation and the repayments of those advances constituted separate and sec_1_1367-2 income_tax regs provides that advances and repayments of open_account_debt are treated as a single indebtedness for the purpose of making debt basis adjustments and defines open_account_debt as shareholder advances not evidenced by separate written instruments and repayments on the advances complete transactions as opposed to open account debtdollar_figure cornelius v commissioner f 2d pincite the court_of_appeals stated the real question to be decided is whether each advance to the corporation by the shareholders and its corresponding repayment constitute a separate and complete transaction or whether the indebtedness should be considered as an open account whose fluctuations are to be measured for tax purposes at the end of each taxable_year the tax_court properly determined that the loans and the repayments thereof constituted a completed transaction and the loans occurring later in were separate and apart from such transaction id citation omitted based on the tax court’s finding in cornelius that the loans were separate transactions and not open account indebtedness the taxpayers were required to recognize as taxable_income the amount of the repayment in excess of the taxpayers’ basis in the advance at the time of repayment without regard to the basis of a subsequent advance in the year of repayment cornelius v commissioner t c pincite it may be inferred that a netting of advances and repayments during the year would have been proper if the loans had been open account indebtedness rather than separate transactionsdollar_figure cornelius v commissioner f 2d pincitepursuant to 661_f2d_1206 11th cir the precedent of the fifth circuit_court of appeals decided as of date is followed by the eleventh circuit_court of appeals the circuit to which an appeal of this case absent stipulation to the contrary would lie 11in 48_tc_872 affd in part and revd in part on another issue 424_f2d_219 9th cir continued in contrast to cornelius the parties in the instant case have stipulated that the advances in issue constitute open_account_debt respondent has made no contention that any advance and repayment constitutes a separate indebtedness or closed transaction based on the parties’ stipulations that the advances were open_account_debt and respondent’s failure to contend that any advance and repayment composed a separate transaction we hold that the basis of the open account indebtedness is properly computed by netting at the close of the year advances of open_account_debt during the year and repayments of open_account_debt during the year cf 494_f2d_465 5th cir consequently the advances in and shielded petitioners from the realization of gain upon the repayments during those years we have considered all contentions that the parties have continued respondent did not dispute that advances and repayments of open_account_debt were properly netted prior to determining income on repayment in that opinion we stated the net payment’ approach utilized by petitioners has not been questioned by respondent id pincite n raiseddollar_figure to the extent not addressed herein those contentions are without merit or unnecessary to reach to reflect the foregoing and concessions by the parties decisions will be entered under rule 12we note that the parties have argued extensively regarding the scope of sec_1_1367-2 income_tax regs respondent contends that the open_account_debt rule_of sec_1_1367-2 income_tax regs does not apply to the instant case because the shareholder advances in issue are not allowed restoration of debt basis pursuant to sec_1_1367-2 income_tax regs petitioner contends that the open_account_debt rule_of sec_1_1367-2 income_tax regs provides for the netting of the advances and repayments in issue at the close of the tax_year for purposes of determining income on a repayment based on our holding above we need not address the parties’ contentions concerning sec_1_1367-2 income_tax regs and leave this issue for another day appendix i computation of debt bases a respondent with respect to the tax_year respondent’s position results in a debt basis of dollar_figure for petitioners in docket no at the close of reflecting a reduction of basis in the dollar_figure advance only by an allowable loss of dollar_figure and a debt basis of dollar_figure for petitioners in docket no at the close of reflecting a reduction of basis in the dollar_figure advance only by an allowable loss of dollar_figure for petitioners’ tax_year with respect to the tax_year respondent’s position results in a debt basis of dollar_figure for petitioners in docket no at the close of reflecting a reduction of basis in the dollar_figure advance only by an allowable loss of dollar_figure and a debt basis of dollar_figure for petitioners in docket no at the close of reflecting a reduction of basis in the dollar_figure advance only by an allowable loss of dollar_figure b petitioners with respect to the tax_year petitioners contend that the basis of each dollar_figure advance was first reduced by the dollar_figure repayments on date and then further reduced by dollar_figure of pro_rata company losses resulting in a zero debt basis at the close of with respect to the tax_year petitioners contend that the basis of each dollar_figure advance was first reduced by the dollar_figure repayments on date and then further reduced by dollar_figure of pro_rata company losses resulting in a zero debt basis at the close of ii computation of gain a respondent with respect to the tax_year respondent determined that petitioners in docket no had a taxable gain of dollar_figure related to the repayment of date dollar_figure repayment less zero debt basis and petitioners in docket no had a taxable gain of dollar_figure related to the repayment of date dollar_figure repayment less zero debt basis dollar_figure 13respondent attached to the docket no statutory_notice_of_deficiency the following calculation of taxable gain on debt repayment computation of taxable debt repayment loan from shareholder less loss applied to basis less loss applied to the basis loan basis loan repayment taxable gain on loan repayment big_number big_number big_number big_number big_number respondent attached to the docket no statutory_notice_of_deficiency the following calculation of taxable gain on debt repayment computation of taxable debt repayment continued with respect to the tax_year respondent determined that petitioners in docket no had a taxable gain of dollar_figure related to the repayment of date dollar_figure repayment less dollar_figure debt basis and that petitioners in docket no had a taxable gain of dollar_figure related to the repayment of date dollar_figure repayment less dollar_figure debt basis dollar_figure b petitioners with respect to the tax_year petitioners contend that the dollar_figure basis of each advance offset the dollar_figure repayments continued loan from shareholder less loss applied to basis less loss applied to the basis loan basis loan repayment taxable gain on loan repayment big_number big_number big_number big_number big_number 14respondent attached to the docket no statutory_notice_of_deficiency the following calculation of taxable gain on debt repayment loan from shareholder less loss used against loan basis of loan repayment of loan made in taxable gain on loan repayment big_number big_number big_number big_number big_number respondent attached to the docket no statutory_notice_of_deficiency the following calculation of taxable gain on debt repayment loan from shareholder less loss used against loan basis of loan repayment of loan made in taxable gain on loan repayment big_number big_number big_number big_number big_number on date and also allowed for the recognition of dollar_figure of the pro_rata share of the company’s losses with respect to the tax_year petitioners contend that the dollar_figure basis of each advance offset the dollar_figure repayments on date and also permitted each petitioner to recognize dollar_figure of the pro_rata share of the company’s losses


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 b05 plr-132741-05 date date ------------ ------------------------------------ ---------------------------------------------- legend parent ----------------------------------------------------------- electing sub ------------------------------------------------------------------- state a date date date tax professional -------------------------------------------------------------------- ------------------------------------------------------------------------------- dear -------------- and electing sub parent and electing sub are requesting an extension of time under sec_301_9100-1 through of the procedure and administration regulations to file an election to restore value under sec_1_382-8 of the income_tax regulations hereinafter referred to as the election additional information was submitted in this letter responds to a letter dated date submitted on behalf of parent ----------------------------- -------------------------- ----------------------- ---------------------- parent experienced a sec_382 ownership_change on date prior to the ownership plr-132741-05 correspondence dated september and date the material information submitted for consideration is summarized below parent a state a corporation is the common parent of an affiliated_group which files a consolidated federal_income_tax return at the time of the transaction electing sub was a component_member of parent’s controlled_group within the meaning of sec_1_382-8 and and was a controlled_foreign_corporation as defined in sec_957 of the internal_revenue_code electing sub has not been engaged in the conduct_of_a_trade_or_business in the united_states and has not filed a united_states income_tax return change parent’s consolidated_group had generated a net_operating_loss nol in accordance with the value adjustment rules of sec_1_382-8 parent’s value was reduced for purposes of computing the sec_382 limitation sec_1_382-8 sec_382 provides that the amount of the taxable_income of any new_loss_corporation for any post-change_year which may be offset by pre-change losses shall not exceed the sec_382 limitation for such year under sec_382 the sec_382 limitation is determined by multiplying the value of the old_loss_corporation by the applicable long-term_tax-exempt_rate a special rule designed to prevent double counting by controlled groups is set forth in sec_1_382-8 sec_1_382-8 requires that the value of the stock of each component_member of the controlled_group be reduced by the value of the stock owned by that component_member in any other component_member component members of a controlled_group can elect under sec_1_382-8 to restore some or all of the value to another component_member the election to restore value is made by following the procedures set forth in sec_1_382-8 the election was required to be filed with parent’s income_tax return for its tax_year ending date however for various reasons parent and electing sub failed to make a valid election subsequent to date the last day for timely filing the election it was discovered that a valid election had not been filed thereafter this request was submitted under sec_301_9100-3 for an extension of time to file a valid election the period of limitations on assessments under sec_6501 has not expired for the taxable_year for which the election should have been filed or for any subsequent taxable_year extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the code except subtitles e g h and i election whose due_date is prescribed by a regulation revenue_ruling revenue_procedure notice or announcement sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of under sec_301_9100-1 the commissioner has discretion to grant a reasonable sec_301_9100-1 defines the term regulatory election as including an information affidavits and representations submitted by parent electing sub in this case the time for filing the election is fixed by the regulations ie plr-132741-05 time to make a regulatory election sec_301_9100-1 sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides extensions of time for making regulatory elections that do not meet the requirements of sec_301_9100-2 requests for relief under sec_301_9100-3 will be granted when it is established that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the government’s interests sec_301_9100-3 sec_1_382-8 therefore the commissioner has discretionary authority under sec_301_9100-3 to grant an extension of time for parent and electing sub to file the election provided parent and electing sub establish that they acted reasonably and in good_faith the requirements of sec_301_9100-1 and sec_301_9100-3 are satisfied and granting relief will not prejudice the interests of the government and tax professional explain the circumstances that resulted in the failure to timely file a valid election the information establishes that parent and electing sub reasonably relied on a qualified_tax professional who failed to make or advise either parent or electing sub to make the election and that the interests of the government will not be prejudiced if relief is granted see sec_301_9100-3 and the representations that have been made we conclude that parent and electing sub have established that they acted reasonably and in good_faith in failing to timely file the election the requirements of sec_301_9100-1 and sec_301_9100-3 are satisfied and granting relief will not prejudice the interests of the government accordingly we grant an extension of time under sec_301_9100-3 until days from the date on this letter for parent and electing sub to file the election the regulation taxpayer’s return for the taxable_year in which the ownership_change occurred must be amended to attach the election the election statement should commence with the following language prescribed by sec_1_382-8 this is an election under sec_1_382-8 of the income_tax regulations to restore all or part of the value of insert name and e i n of the electing member to insert name and e i n of the corporation to which value is restored the election statement must be signed by the persons specified in the regulation also the election must include all the other information required by the regulation see sec_1_382-8 as to who must sign and what information must be included the above extension of time is conditioned on the taxpayers’ parent’s and the consolidated_group members’ tax_liability if any being not lower in the aggregate for all years to which the election applies than it would have been if the election had been based on the facts and information submitted including the affidavits submitted the election must be filed in accordance with sec_1_382-8 in accordance with a copy of this letter should be attached to the election statement except as expressly provided herein no opinion is expressed or implied plr-132741-05 made timely taking into account the time_value_of_money no opinion is expressed as to the taxpayers’ tax_liability for the years involved a determination thereof will be made by the director’s office upon audit of the federal_income_tax returns involved further no opinion is expressed as to the federal_income_tax effect if any if it is determined that taxpayers’ tax_liability is lower sec_301_9100-3 concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter in particular we express no opinion with respect to whether or when an ownership_change occurred whether sec_382 applies to any ownership_change whether parent and electing sub are or were members of a controlled_group the value of any corporation the amount of value if any that may be restored whether parent is or was a loss_corporation and the amounts of any nols in addition we express no opinion as to the tax effects or consequences of filing the election late under the provisions of any other section of the code or regulations or as to the tax treatment of any conditions existing at the time of or effects resulting from filing the return or the election late that are not specifically set forth in the above ruling statements and representations made by parent electing sub and tax professional under penalties of perjury however the director should verify all essential facts moreover notwithstanding that an extension is granted under sec_301_9100-3 to file the election any otherwise applicable penalties and interest continue to apply k provides that that it may not be used or cited as precedent being sent to your authorized representative _ken cohen_________________ ken cohen senior technician reviewer branch office of associate chief_counsel corporate- pursuant to a power_of_attorney on file with this office a copy of this letter is for purposes of granting relief under sec_301_9100-3 we relied on certain this letter is directed only to the taxpayer s who requested it section 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 psi b03 plr-126984-10 date date legend x trust --------------------------------------------------------------------------------------------- ----------------------- --------------------------------------------------------------------------------------------- ----------------------- shareholder --------------------------------------------------------------------------------------------- ------------------------- a state date date date date year --------------------------------------------------------------------------------------------- ------------------------- ----------- ---------------- ----------------- --------------------- ------------------ ------- dear -------------- plr-126984-10 this responds to a letter dated date and subsequent correspondence submitted on behalf of x by its authorized representatives requesting a ruling under sec_1362 of the internal_revenue_code facts x was incorporated on date under the laws of state and elected to be an s_corporation effective date on date shareholder transferred stock in x to trust x represents that trust is eligible to be an electing_small_business_trust esbt within the meaning of sec_1361 however no election was made under sec_1361 to treat trust as an esbt therefore trust was not a permissible shareholder and as a result x’s s_corporation_election terminated on date on date x redeemed some of its stock from trust trust transferred the remaining shares of x stock to a an individual beneficiary of trust x represents that the circumstances resulting in the termination of x’s s_corporation_election was inadvertent and was not motivated by tax_avoidance or retroactive tax planning x and its shareholders have agreed to make any adjustments the commissioner may require consistent with the treatment of x as an s_corporation law and analysis sec_1361 provides that the term s_corporation means with respect to any taxable_year a small_business_corporation for which an election under sec_1362 is in effect for such year sec_1361 provides that a small_business_corporation cannot have as a shareholder a person other than an estate a_trust described in sec_1361 or an organization described in sec_1361 who is not an individual sec_1361 provides that for purposes of sec_1361 an esbt is a permissible shareholder sec_1361 provides that except as provided in sec_1361 an esbt means any trust if i such trust does not have as a beneficiary any person other than i an individual ii an estate iii an organization described in sec_170 or or iv an organization described in sec_170 which holds a contingent_interest in such trust and is not a potential_current_beneficiary ii no interest in such trust was acquired by purchase and iii an election under sec_1361 applies to the trust sec_1361 provides that an election under sec_1361 shall be made by the trustee any such election shall apply to the taxable_year of the trust for which made and all subsequent taxable years of such trust unless revoked with the consent of the secretary plr-126984-10 sec_1_1361-1 of the income_tax regulations provides that the trustee of an esbt must make the esbt election by signing and filing with the service_center where the s_corporation files its income_tax return a statement that meets the requirements of sec_1_1361-1 sec_1362 provides that a in general an election under sec_1362 shall be terminated whenever at any time on or after the first day of the first taxable_year for which the corporation is an s_corporation such corporation ceases to be a small_business_corporation and b any termination under sec_1362 shall be effective on and after the date of cessation sec_1362 provides in relevant part that if an election under sec_1362 by any corporation was terminated under sec_1362 or the secretary determines that the circumstances resulting in termination were inadvertent no later than a reasonable period of time after discovery of the circumstances resulting in the termination steps were taken so that the corporation is a small_business_corporation and the corporation and each person who was a shareholder of the corporation at any time during the period specified pursuant to sec_1362 agrees to make such adjustments consistent with the treatment of the corporation as an s_corporation as may be required by the secretary with respect to such period then notwithstanding the circumstances resulting in termination the corporation will be treated as an s_corporation during the period specified by the secretary conclusion based on the information submitted and the representations made we conclude that x’s election to be treated as an s_corporation terminated on date upon the failure by the trustee of trust to properly file an esbt election for trust we also conclude that the termination constituted an inadvertent termination within the meaning of sec_1362 pursuant to the provisions of sec_1362 x will be treated as continuing to be an s_corporation on and after date unless x’s s_corporation_election is otherwise terminated under sec_1362 accordingly x's shareholders in determining their respective income_tax liabilities during the termination period and thereafter must include their pro_rata share of the separately_stated items of income including tax- exempt_income loss deduction or credit and nonseparately computed items of income or loss of x as provided in sec_1366 make any adjustments to basis as provided in sec_1367 and take into account any distributions made by x as provided by sec_1368 this ruling is contingent upon the trustee of trust filing an esbt election effective date with the appropriate service_center and trust filing amended returns for taxable years beginning date and thereafter consistent with the treatment of the trust as an esbt the esbt election and the amended returns must be filed within days following the date of this letter and a copy of this letter should be attached to plr-126984-10 such election and returns if x or its shareholders fail to treat themselves as described above this ruling is null and void except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter specifically no opinion is expressed on whether x was or otherwise eligible to be treated as an s_corporation or whether trust is eligible to be an esbt 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 in accordance with a power_of_attorney on file with this office we are sending a copy of this letter to your authorized representatives 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 sincerely s danielle m grimm acting senior technician reviewer branch passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes cc