t c no united_states tax_court schmidt baking company inc petitioner v commissioner of internal revenue respondent docket no filed date p funded its vacation and severance_pay obligations to its employees for by purchasing an irrevocable letter_of_credit on date the letter_of_credit constituted a transfer of an interest in substantially_vested property includable in income of the employees as of that date under sec_83 i r c p an accrual basis taxpayer deducted the amount of the letter_of_credit on its return on the basis that it paid the vacation pay within months of the close of its taxable_year and was therefore entitled to the claimed deduction under sec_83 i r c and sec_1_83-6 income_tax regs r disallowed the deduction on the ground that the letter_of_credit did not constitute payment to the employees within the month period with the result that sec_404 i r c and sec_1_404_b_-1t temp income_tax regs fed reg date applied and the deduction was not allowable to p for its taxable_year held the letter_of_credit constituted payment on date so that sec_404 i r c does not apply and the deduction for vacation and severance_pay is an allowable deduction for p's taxable_year under sec_83 i r c and sec_1_83-6 income_tax regs theodore w hirsh andrea r macintosh and frances m angelos for petitioners clare j brooks for respondent opinion tannenwald judge respondent determined the following deficiencies in petitioner's federal income taxes taxable_year ended date date date deficiency dollar_figure dollar_figure dollar_figure dollar_figure after concessions the sole issue for decision is whether petitioner may deduct for its tax_year amounts for vacation and severance_pay which accrued in that year were funded within months of the end of that year ie date by means of an irrevocable letter_of_credit and were includable in the income of the employees as of that date background this case was submitted fully stipulated under rule the stipulation of facts and supplemental stipulation of facts are incorporated herein by this reference and found accordingly petitioner an accrual basis taxpayer is a corporation with over big_number employees that at the time of the filing of the petition had its principal_place_of_business in baltimore maryland it filed timely federal_income_tax returns for the years at issue with the internal_revenue_service center philadelphia pennsylvania petitioner had in place a vacation plan whereby vacation earned in the first year could only be taken between january 1st and december 31st of the following year terminated employees could get cash for their unused vacation pay with proper notice to petitioner petitioner also had a plan of severance_pay in the event employees were laid off on date petitioner purchased an irrevocable standby_letter_of_credit in the amount of dollar_figure representing accrued liabilities of dollar_figure for vacation pay and dollar_figure for severance_pay petitioner's employees were designated as the beneficiaries with each employee and the amount of the accrued_benefit to which he or she was entitled separately unless otherwise indicated all section references are to the internal_revenue_code in effect for the taxable years in issue and all rule references are to the tax_court rules_of_practice and procedure listed the letter_of_credit was secured_by petitioner's general assets and its employees were named as sole beneficiaries thereunder under this arrangement if petitioner failed to pay secured vacation benefits they would be paid_by the issuer of the letter_of_credit upon the request of the employees' agent petitioner's chief financial officer under applicable bankruptcy law petitioner's general creditors had no right with respect to payments under the letter_of_credit the parties have stipulated that the letter_of_credit represented a transfer of substantially_vested interests in property to the employees for purposes of sec_83 and that the fair_market_value of the interests was includable in the employees' gross incomes for as of the date the interests were transferred on its return timely filed for the taxable_year ending date petitioner deducted all liabilities for vacation and severance_pay accrued during that year that were listed in the letter_of_credit in the amount of dollar_figure by way of a net_operating_loss_carryback petitioner also claimed a although we recognize that this stipulation represents a conclusion of law that may not be binding upon us we have found no reason not to utilize it as an element of decision see 90_tc_200 n barnette v commissioner tcmemo_1992_595 affd without published opinion 41_f3d_667 11th cir deduction arising from this payment in the taxable_year respondent determined that the deduction and hence the carryback to was not allowable discussion resolution of the question before us involves an analysis of several interrelated statutory and regulatory provisions which can only be described as a semantical exercise worthy of judge learned hand's famous commentary on the complexity of the internal_revenue_code a commentary which has acquired added significance in the years since it was first articulated as a consequence we set forth that analysis in order to bring into focus the precise question that we must decide namely whether the amounts of the accrued vacation and severance_pay were paid when the letter_of_credit was purchased on date statutory framework the parties have stipulated that the purchase of the irrevocable letter_of_credit was a transfer under sec_83 resulting in includability of the value of the interest transferred in the income of the employees as of the date of t he words of such an act as the income_tax merely dance before my eyes in a meaningless procession cross-reference to cross-reference exception upon exception at times i cannot help recalling a saying of william james about certain passages of hegel that they were no doubt written with a passion of rationality but that one cannot help wondering whether to the reader they have any significance save that the words are strung together with syntactical correctness hand thomas walter swan yale l j transfer ie date petitioner claims the deduction at issue based on sec_83 h and sec_1_83-6 income_tax regs sec_83 allows a deduction in the year the amount of a transfer is included in the employees' income sec_1_83-6 first sentence income_tax regs allows an accrual basis employer an earlier deduction in accordance with his method_of_accounting where there has been a transfer of substantially_vested assets to the employee sec_83 provides h deduction by employer --in the case of a transfer of property to which this section applies or a cancellation of a restriction described in subsection d there shall be allowed as a deduction under sec_162 to the person for whom were performed the services in connection with which such property was transferred an amount equal to the amount included under subsection a b or d in the gross_income of the person who performed such services such deduction shall be allowed for the taxable_year of such person in which or with which ends the taxable_year in which such amount is included in the gross_income of the person who performed such services sec_1_83-6 income_tax regs provides in pertinent part exceptions where property is substantially_vested upon transfer the deduction shall be allowed to such person in accordance with his method_of_accounting in conformity with sec_446 and sec_461 in the case of a transfer to an employee_benefit_plan described in sec_1_162-10 or other transfers not applicable in this case sec_83 and this section do not apply however should another section require that petitioner not use its usual method_of_accounting sec_1_461-1 income_tax regs provides that the sec_461 rules will defer to that other provision sec_1_83-6 second sentence income_tax regs provides that sec_83 and the regulations thereunder do not apply to a transfer to an employee_benefit_plan described in sec_1_162-10 sec_1_162-10 income_tax regs provides that as a general_rule a taxpayer may deduct vacation pay and severance_pay under that section however deductions for amounts used to provide benefits under a deferred_compensation plan of the type referred to in sec_404 shall be governed by the provisions of sec_404 and the regulations issued thereunder sec_1_162-10 third and fourth sentences income_tax regs sec_1_162-10 income_tax regs provides certain employee_benefits a in general amounts paid_or_accrued by a taxpayer on account of injuries received by employees and lump-sum amounts paid_or_accrued as compensation_for injuries are proper deductions as ordinary and necessary expenses such deductions are limited to the amount not_compensated_for_by_insurance_or_otherwise amounts paid_or_accrued within the taxable_year for dismissal wages unemployment benefits guaranteed annual wages vacations or a sickness accident hospitalization medical expense recreational welfare or similar benefit plan are deductible under sec_162 if they are ordinary and necessary expenses of the trade_or_business however except as provided in paragraph b of this section not applicable herein such amounts shall not be deductible under sec_162 if under any circumstances they may be used to provide benefits under a stock bonus pension annuity profit-sharing or other deferred_compensation plan of the type referred to in sec_404 in such an event the extent to which these amounts are deductible from gross_income shall be governed by the provisions of sec_404 and the regulations issued thereunder emphasis added sec_404 covers deductions in respect of contributions to pension trusts employees' annuities stock bonus and profit- sharing trusts foreign trusts and other plans deferring the receipt of compensation sec_404 deals with deductions in respect of other plans specifically including deductions for vacation pay which is treated as deferred_compensation sec_404 provides that any method or arrangement that has the effect of a plan deferring the receipt of compensation or other_benefits for employees will be treated as a deferred_compensation plan sec_1_404_b_-1t a-2 temporary8 income_tax regs fed reg date provides a for purposes of sec_404 b and d a plan or method or arrangement defers the receipt of compensation or benefits to the extent it is one under which an employee receives compensation or benefits more than a brief period of time after the end of the employer's taxable_year in which the services creating sec_404 provides other plans --if the plan is not one included in paragraph or in the taxable_year in which an amount attributable to the contribution is includible in the gross_income of employees participating in the plan but in the case of a plan in which more than one employee participates only if separate_accounts are maintained for each employee for purposes of this section any vacation pay which is treated as deferred_compensation shall be deductible for the taxable_year of the employer in which paid to the employee temporary regulations are accorded the same weight as final regulations truck equipment corp v commissioner t c l41 89_tc_357 affd 883_f2d_1350 7th cir the right to such compensation or benefits are performed the determination of whether a plan or method or arrangement defers the receipts of compensation or benefits is made separately with respect to each employee and each amount of compensation or benefit b a plan or method or arrangement shall be presumed to be one deferring the receipt of compensation_for more than a brief period of time after the end of an employer's taxable_year to the extent that compensation is received after the 15th day of the 3rd calendar month after the end of the employer's taxable_year in which the related_services are rendered the month period c a plan or method or arrangement shall not be considered as deferring the receipt of compensation or benefits for more than a brief period of time after the end of the employer's taxable_year to the extent that compensation or benefits are received by the employee on or before the end of the applicable month period emphasis added to summarize our complicated march through the code and regulations sec_1_83-6 income_tax regs implementing sec_83 refers us to sec_1_162-10 income_tax regs which refers us to sec_404 which refers us to sec_404 and as implemented by sec_1_404_b_-1t temporary income_tax regs fed reg date which contains the test that we must apply sec_1_404_b_-1t temporary income_tax regs provides that if the benefits were received within the month period the amounts would not be deferred_compensation they two and months is often used interchangeably with days continued would not be paid pursuant to plans under sec_404 they would not be described in sec_404 and thus sec_1_162-10 income_tax regs would not apply and petitioner would be entitled to its deduction under sec_83 and sec_1_83-6 income_tax regs according to the regulations if the benefits in question were not received within the month period it is presumed that the amounts would be deferred_compensation they would be paid pursuant to plans under sec_404 they would be described in sec_404 and then sec_1_162-10 income_tax regs would apply sending us back to sec_404 for the deductibility of the amounts the parties have stipulated that the amounts specified in the letter_of_credit were includable in the employees' gross_income under sec_83 as of the date of transfer petitioner maintains that since the amounts were vested funded and includable within the month period they must have been received within that period for purposes of sec_1 b - 1t temporary income_tax regs respondent contends that mere includability in income is not enough that received requires that the employee must have been able to put the amount included in his pocket for the month window under the continued for an illuminating discussion of the correlation between months and days see 143_f2d_286 2d cir affg 1_tc_932 regulations to apply thus we must decide whether includability of income is sufficiently equivalent to the receipt of income to satisfy the month rule an inextricable element in arriving at this decision is whether petitioner paid the benefits within the month period since the statutory provision ie sec_404 speaks in terms of payment in respect of vacation pay and as will subsequently appear see infra pp the legislative_history reveals that congress considered that payment provided the foundation for the application of the month rule indeed this emphasis on payment ie paid may account for respondent's in the pocket interpretation of the word received in the temporary regulations for it is clear that if the employees could put the vacation pay in their pockets it must have been paid to them sec_404 first sentence allows a deduction in respect of deferred_compensation plans generally when an item is includible in the gross_income of employees emphasis added as does sec_1_404_a_-12 income_tax regs similarly sec_83 allows a deduction when an item is included in the employee's income furthermore sec_1 h -4t temporary income_tax regs fed reg date indicates that includability is the test of receipt for section dollar_figure in sec_1 h -4t q a-1 temporary income_tax regs fed reg provides q-1 what is the relationship between the economic continued this frame of reference it is at least arguable that includability in income and receipt are matching elements with the result that since the amounts represented by the letter_of_credit were includable in the income of the employees as of date they were received by the employees on that date and the window provided by the month rule_of sec_1_404_b_-1t has been satisfied such a conclusion would be based upon the proposition that the word received in the regulations standing as it does without any qualifying adjective such as actually means nothing more than received for income_tax purposes however we find it necessary to go beyond this simple analysis because the governing statutory provision sec_404 speaks in terms of payment as well as includability in income before proceeding to discuss the implications of this statutory thrust there are several tangential elements which should be noted first the month rule is not specifically continued performance requirements of sec_461 and sec_404 and sec_419 a-1 in the case of a contribution or compensation subject_to sec_404 or sec_419 pursuant to the authority under sec_461 economic_performance occurs i in the case of a plan subject_to sec_404 either as the contribution is made under the plan or if sec_404 is applicable as an amount attributable to such contribution is includible in the gross_income of an employee emphasis added see discussion of sec_1 h -4t which mirrors this explanation in revrul_88_68 1988_2_cb_117 set forth in a statutory provision dealing with deferred_compensation arrangements but is a creature of regulations and recognition in legislative_history see 97_f3d_1435 fed cir 98_tc_141 second we recognize that it does not necessarily follow that funds have been paid because they have been constructively received for income_tax purposes see 63_tc_11 third the decided cases are less than models of clarity in delineating distinctions in meaning among included received and paid a view reflected in the opinion of the court_of_appeals for the ninth circuit in 42_f3d_537 9th cir affg 95_tc_415 the ninth circuit noted that for nonqualified plans the employer is ordinarily allowed no deduction for contribution payments or benefits until they are taxed to the employee which it equated with a denial of the employer's deduction until the deferred_amount is included in the employee's income meaning in its view that current law defers the deduction until the year of payment the court concluded that an employer cannot take tax deductions for payments to its employees until the dca participants include those payments in their taxable income--that is until the employees actually receive the compensation promised to them albertson's inc v commissioner f 3d pincite citations omitted and emphasis added against the foregoing background we turn to an analysis of whether there was not only includability in income but also payment as of date if these two elements are found to be present we think there need be no further consideration of the word received in the regulations because the combination of includability and payment must necessarily be equated with received to better understand our analysis we repeat the text of sec_404 other plans --if the plan is not one included in paragraph or in the taxable_year in which an amount attributable to the contribution is includible in the gross_income of employees participating in the plan but in the case of a plan in which more than one employee participates only if separate_accounts are maintained for each employee for purposes of this section any vacation pay which is treated as deferred_compensation shall be deductible for the taxable_year of the employer in which paid to the employee clearly sec_404 on its face provides no clear guidance to the question before us since it speaks first sentence in terms of includable in income in respect of deferred_compensation other than vacation pay and in terms of paid in respect of vacation pay second sentence under these circumstances we find it appropriate indeed mandated that we look to the legislative_history particularly since that history articulates the month rule which is our main concern see 107_tc_116 particularly pincite furthermore the use of legislative_history in this case is particularly appropriate where neither party questions the validity of the month rule but merely its application prior to sec_404 contained only the first sentence the rules governing vacation pay were contained in sec_463 which provided for a deduction based on the establishment of a reserve in when the omnibus budget reconciliation act of publaw_100_203 101_stat_1330 was being considered both the house and senate proposed to repeal sec_463 and make no change in sec_404 as it then stood in so doing the house ways_and_means_committee and the senate_finance_committee discussed the proposed action in the following identical language reserve for accrued vacation pay sec of the bill and sec_463 of the code present law under present law an accrual-method taxpayer generally is permitted a deduction in the taxable_year in which all the events have occurred that determine the fact of a liability and the amount thereof can be determined with reasonable accuracy the all-events test in determining whether an amount has been incurred with respect to any item during the taxable_year all events that establish liability for such amount are not treated as having occurred any earlier than the time economic_performance occurs sec_461 with respect to a liability that arises as a result of another person's providing services to the taxpayer such as the liability to provide vacation pay in exchange for service by an employee economic_performance generally occurs when such other person provides the services in order to ensure the proper matching of income and deductions in the case of deferred benefits such as vacation pay earned in the current taxable_year but paid in a subsequent year for employees an employer_generally is entitled to claim a deduction in the taxable_year of the employer in which ends the taxable_year of the employee in which the benefit is includible in gross_income sec_404 this rule applies to deferred benefits without regard to the economic_performance rules consequently an employer is entitled to a deduction for vacation pay in the taxable_year of the employer in which ends the earlier of the taxable_year of the employee for which the vacation pay vests if the vacation pay plan is funded by the employer or is paid an exception to this rule applies to amounts that are paid within months after the close of the taxable_year of the employer in which the vacation pay is earned such amounts are not subject_to the deduction timing rules applicable to deferred benefits but are subject_to the general rules under which an employer is entitled to a deduction when performance occurs ie when the services of the employee for which vacation pay is earned are performed because amounts paid within months after the close of the employer's taxable_year generally will qualify for the exception to the economic_performance requirements such amounts generally will be deductible for the preceding_taxable_year the year in which the vacation pay is earned even though the employee does not include the benefit in income in the preceding_taxable_year reasons for change the special rules under present law relating to the reserve for accrued vacation pay create a disparity in tax treatment between accrued vacation pay and other deferred benefits the committee believes that the timing of deductions for vacation pay should not be more favorable than the timing of deductions for other deferred benefits explanation of provision the special rule that permits taxpayers a deduction for additions to a reserve for vacation pay would be repealed accordingly under the bill deductions for vacation pay would be allowed in any taxable_year for amounts paid or funded amounts that vest during the year or within months after the end of the year h rept pincite2 s print pincite emphasis added respondent argues that a proper reading of the foregoing language indicates that the committees intended to draw a distinction between situations where the vacation pay was vested and funded and where it is paid we disagree given a reading of the entire expression of the committees' viewpoint we think they intended to equate rather than separate funding and vesting and payment in this connection we also are of the view that the broad language of the reports particularly the reference to deferred benefits with vacation pay is simply an example which indicates that the committees intended the month rule to apply to deferred benefits such as severance_pay which is involved herein along with vacation pay respondent further seeks to buttress her position by pointing to the second sentence of sec_404 see supra note which was added by the conference committee with the following explanation the conference agreement follows the senate amendment with modifications the conference agreement provides that vacation pay earned during any taxable_year but not paid to employees on or before the date that is months after the end of the taxable_year is deductible for the taxable_year of the employer in which it is paid to employees this provision is an almost identical language was contained in the committee reports when changes in the then existing reserve provision were made in h rept 1986_3_cb_641 s rept 1986_3_cb_674 exception to the general_rule for deferred_compensation and deferred benefits pursuant to which an employer is allowed a deduction for the taxable_year of the employer in which ends the taxable_year of the employee in which the compensation or benefit is includible in gross_income h conf rept 1987_3_cb_193 emphasis added respondent argues that this change coupled with the absence of any reference to funded and vested amounts shows that the conference committee and hence the congress which enacted the added sentence intended to exclude such amounts from payment and permit only actual cash in pocket to be considered as having been paid again we disagree a careful reading of the conference committee report shows that the committee was making a change only in the timing of the deduction in respect of vacation pay in contrast to the timing of other deferred_compensation payments and then only in the context of clear recognition that its change applied only to payments after the month period having found our way through the statutory briarpatch of sec_83 sec_162 and sec_404 and the regulations thereunder it is obvious that the disposition of this case turns on a single straightforward question namely whether petitioner paid the vacation and severance_pay within the month period viewing the totality of the statutory and regulatory provisions and the pertinent legislative_history in their entirety we think that petitioner did so by means of an irrevocable parting of funds through the creation of the letter_of_credit with the separately designated employee-beneficiaries which was not subject_to the claims of petitioner's creditors and which constituted amounts includable in the income of such employee- beneficiaries as of date as a consequence and in accordance with sec_1_404_b_-1t temporary income_tax regs neither the vacation nor the severance_pay constituted a deferred_compensation plan to which sec_404 applies this being the case sec_83 and sec_1_83-6 income_tax regs apply and petitioner is entitled to deduct the amounts in question in accordance with its normal accrual_method of accounting ie for its fiscal_year ending date in order to take into account concessions by petitioner on other issues decision will be entered under rule


internal_revenue_service department of the treasury washington dc person to contact telephone number refer reply to cc psi plr-118220-00 date date number release date index number legend x e assets b dear this responds to your letter dated date submitted on behalf of x requesting a ruling under sec_7704 of the internal_revenue_code facts x is a publicly_traded_partnership ptp that has made an election under sec_7704 to remain exempt from sec_7704 x owns and manages assets that are leased to b x is listed on e x plans to sell a substantial amount of its assets and to remove its listing from e as a result x represents that it will no longer be traded on an established_securities_market or readily_tradable on a secondary market after it is delisted x intends to revoke its election under sec_7704 x requests the following rulings with respect to the revocation of its election under sec_7704 its status as a ptp is tested only on or after the effective date of the revocation and not for the entire taxable_year and the percent tax on gross_income under sec_7704 does not apply to gross_income accrued on or after the effective date of the revocation law and analysis sec_7704 provides that except as provided in sec_7704 a ptp is treated as a corporation sec_7704 defines a partnership as a ptp if interests in the partnership are either traded on an established_securities_market or are readily_tradable on a secondary market or the substantial equivalent thereof sec_7704 provides that as of the first day that a partnership is treated as a plr-118220-00 corporation under sec_7704 the partnership will be treated as transferring all of its assets subject_to its liabilities to a newly formed corporation in exchange for the stock of the corporation and distributing such stock to its partners in liquidation of their interests in the partnership sec_7704 provides that an existing 1987_partnership may elect to remain exempt from sec_7704 by agreeing to pay each taxable_year a percent tax on gross_income from the active_conduct of all trades and businesses of the partnership a ptp may make the election under sec_7704 if the partnership is an existing partnership as defined in c of the revenue reconciliation act of sec_7704 has not applied and without regard to sec_7704 would not have applied to the partnership for all prior taxable years beginning after date and before date and the partnership elects the application of sec_7704 for its first taxable_year beginning on or after date and consents to the application of the percent tax imposed for each taxable_year on gross_income from the active_conduct of all trades_or_businesses of the partnership notice_98_3 1998_1_cb_333 provides that a partnership may voluntarily terminate its sec_7704 election at any time by filing a notice of revocation the revocation will be effective as of the date designated in the notice but not earlier than the date that the notice is filed with the internal_revenue_service once x revokes its sec_7704 election x will no longer be an electing_1987_partnership under sec_7704 effective as of the date designated in x’s notice of revocation notice_98_3 provides that if the partnership remains a ptp on the date of termination and does not meet the exception for partnerships with passive-type income contained in sec_7704 then absent an actual transaction that eliminates the partnership the conversion from a partnership to a corporation will be determined under sec_7704 conclusion after applying the law to the facts submitted and representations made we conclude that x’s status as a ptp within the meaning of sec_7704 is tested as of the effective date of the revocation of x’s election under sec_7704 and not for the entire taxable_year and the percent tax on gross_income under sec_7704 does not apply to x’s gross_income that accrues on or after the effective date of the revocation except as specifically set forth above no opinion is expressed or implied as to the federal_income_tax consequences of the transactions described above under any other provision of the code specifically no opinion is expressed concerning whether x is an electing_1987_partnership under sec_7704 this ruling is directed only to the taxpayer on whose behalf it was requested sec_6110 provides that it may not be used or cited as precedent under the power_of_attorney on file in this office we are sending a copy of this sincerely yours mary beth collins assistant to the chief branch office of the associate chief_counsel passthroughs and special industries plr-118220-00 letter to x’s authorized representative enclosures copy of this letter copy for sec_6110 purposes


t c no united_states tax_court chan q kieu and quynh kieu petitioners v commissioner of internal revenue respondent docket no filed date on date ps filed a bankruptcy petition under chapter of the bankruptcy code on date r issued a notice_of_deficiency to ps for the taxable_year on date the bankruptcy court entered an order granting summary_judgment against ps and determining that ps' debts are nondischargeable under u s c sec on date ps filed a petition for redetermination with this court on date the bankruptcy court entered an order granting ps' motion for relief from judgment and vacating its order entered date on date this court issued an order directing the parties to show cause why this case should not be dismissed for lack of jurisdiction held the bankruptcy court's order entered date denied ps a discharge of their debts under u s c sec and thus served to terminate the automatic_stay imposed under u s c sec_362 see u s c sec_362 held further the bankruptcy court's order entered date while vacating the bankruptcy court's order entered date does not reinstate the automatic_stay see 97_tc_544 held further the petition filed herein was not filed in violation of the automatic_stay and ps properly invoked this court's jurisdiction sec_6213 i r c kevin o'hara and thomas a greco for petitioners linas n udrys and peter reilly for respondent opinion gerber judge this case was assigned to special_trial_judge carleton d powell pursuant to the provisions of sec_7443a and rule sec_180 sec_181 and sec_183 the court agrees with and adopts the opinion of the special_trial_judge which is set forth below opinion of the special_trial_judge powell special_trial_judge this case is before the court on the court's order dated date directing the parties to show cause why this case should not be dismissed for lack of jurisdiction the issues are whether the so-called automatic_stay imposed pursuant to u s c sec_362 was lifted by an order of a bankruptcy court determining that all debts of the petitioners debtors are nondischargeable and if so whether a subsequent order entered approximately months later vacating that order reinstates the automatic_stay provisions background on date chan q kieu and quynh kieu petitioners filed a voluntary petition for relief under chapter of the bankruptcy code with the u s bankruptcy court for the central district of california on date pacific inland bank pacific a creditor filed an adversary action against petitioners requesting that the bankruptcy court determine that petitioners' debts were nondischargeable pursuant to u s c section a a and b on the same date the bankruptcy trustee filed all section references are to the internal_revenue_code in effect for the year in issue unless otherwise indicated all rule references are to the tax_court rules_of_practice and procedure u s c sec a a and b provides in pertinent part a a discharge under section of this title does not discharge an individual debtor from any debt-- a separate adversary action against petitioners requesting that the bankruptcy court determine that petitioners' debts were nondischargeable pursuant to u s c section a after filing the above-described complaints pacific and the bankruptcy trustee filed separate motions for summary_judgment with the bankruptcy court these matters were consolidated under the docket number for pacific's action and all pleadings were filed under that action on date respondent mailed a notice_of_deficiency to petitioners determining a deficiency in their federal_income_tax for in the amount of dollar_figure along with an accuracy-related_penalty pursuant to sec_6662 in the amount of dollar_figure on date the bankruptcy court entered an order granting pacific's motion for summary_judgment the bankruptcy court's order states in pertinent part for money property services or an extension renewal or refinancing of credit to the extent obtained by-- a false pretenses a false representation or actual fraud other than a statement respecting the debtor's or an insider's financial condition b use of a statement in writing-- i that is materially false ii respecting the debtor's or an insider's financial condition iii on which the creditor to whom the debtor is liable for such money property services or credit reasonably relied and iv that the debtor caused to be made or published with intent to deceive the bankruptcy trustee argued that the bankruptcy court should deny petitioners a discharge pursuant to u s c sec a which provides in pertinent part that a debtor shall be granted a discharge unless the debtor is found to have transferred removed destroyed mutilated or concealed property of the debtor or property of the estate with the intent to hinder delay or defraud a creditor or an officer of the estate charged with custody of property under the bankruptcy code it is further ordered adjudged and decreed that pacific's debt be determined non-dischargeable pursuant to u s c of the bankruptcy code and such judgment shall be res_judicata on any further proceedings before this court or any other it is further ordered adjudged and decreed that judgment be and it is hereby entered that all debts pursuant to u s c are determined non-dischargeable in this case and any other proceeding currently pending or to be filed by the debtors this judgment should be considered res_judicata to any future filing by either chan quang kieu or quynh kieu the debtors herein emphasis added there was no stay and the order contains no mention of the status of the automatic_stay imposed under u s c sec_362 on date petitioners filed a petition with this court seeking a redetermination of their tax_liability for the taxable_year at the time the petition was filed petitioners resided at irvine california on date petitioners made a motion for relief in respect of the bankruptcy court's order entered date on date the bankruptcy court entered an order granting petitioners' motion for relief and vacating its prior order entered date the bankruptcy court's order entered date contains no mention of the automatic_stay imposed under u s c sec_362 and does not impose any stay of proceedings on date this court issued an order directing the parties to show cause why this case should not be dismissed for lack of jurisdiction on the ground that the petition was filed in violation of the automatic_stay imposed under u s c sec_362 both parties filed responses to the court's order a hearing was conducted in this case in washington d c on date counsel for respondent appeared at the hearing and presented oral argument although petitioners were not represented at the hearing they did file a written_statement with the court pursuant to rule c discussion title of the united_states_code provides uniform procedures designed to promote the effective rehabilitation of the bankrupt debtor and the equitable distribution of his assets among his creditors see h rept pincite one of the key elements to achieving these aims is the automatic_stay that generally operates to temporarily bar actions against or concerning the debtor or property of the debtor or the bankruptcy_estate see 96_tc_895 the automatic_stay serves to preclude the commencement or continuation of proceedings in this court specifically u s c sec_362 provides in pertinent part a except as provided in subsection b of this section a petition filed under sec_301 sec_302 or sec_303 of this title operates as a stay applicable to all entities of-- the commencement or continuation of a proceeding before the united_states tax_court concerning the debtor in short the filing of a bankruptcy petition invokes the automatic_stay that precludes the commencement or continuation of proceedings in this court 97_tc_544 notwithstanding the foregoing respondent is free to issue a notice_of_deficiency to a taxpayer involved in bankruptcy proceedings see u s c sec_362 in the event that respondent issues a notice_of_deficiency to a taxpayer during the pendency of a bankruptcy case the running u s c sec_362 provides in pertinent part b the filing of a petition under sec_301 sec_302 or sec_303 of this title does not operate as a stay-- under subsection a of this section of the issuance to the debtor by a governmental_unit of a notice of tax_deficiency of the time for filing a petition with this court is suspended for the period during which the taxpayer is prohibited by reason of the automatic_stay from filing a petition in this court and for days thereafter sec_6213 86_tc_1314 and cases cited therein see also 105_tc_220 the period that the automatic_stay remains in effect is prescribed in u s c sec_362 as follows c except as provided in subsections d e and f of this section-- the stay of an act against property of the estate under subsection a of this section continues until such property is no longer property of the estate and the stay of any other act under subsection a of this section continues until the earliest of-- a the time the case is closed b the time the case is dismissed or c if the case is a case under chapter of this title concerning an individual or a case under chapter or of this title the time a discharge is granted or denied emphasis added thus unless relief from the automatic_stay is granted by order of a bankruptcy court see u s c sec_362 the automatic_stay generally remains in effect until the earliest of the closing of the case dismissal of the case or the grant or denial of a discharge u s c sec_362 see also allison v commissioner supra pincite 96_tc_10 94_tc_1 in the instant case respondent issued a notice_of_deficiency to petitioners on date during the pendency of petitioners' bankruptcy proceedings as is permitted under u s c sec_362 it is not disputed that petitioners were precluded by the automatic_stay imposed under u s c sec_362 from filing a petition with this court at that time on date however the bankruptcy court entered its order granting pacific's motion for summary_judgment and determined that all of petitioners' debts were nondischargeable under u s c section on date the bankruptcy court entered an order granting petitioners' motion for relief and vacating its order entered date it is under these circumstances that we decide whether the petition filed with this court on date was filed in violation of the automatic_stay petitioners argue that the bankruptcy court's order of nondischargeability entered date served to deny them a discharge and therefore terminated the automatic_stay but petitioners maintain that the bankruptcy court's order entered date vacating its order of date had the effect of reinstating the automatic_stay as of that date respondent concurs with the proposition that the order of nondischargeability had the effect of terminating the automatic_stay respondent however disagrees with petitioners' contention that the bankruptcy court's order entered date reinstated the automatic_stay in respondent's view the automatic_stay is terminated by the judgment of nondischargeability and absent express language in the bankruptcy court's vacating order to the contrary the stay is not reinstated the automatic_stay while the parties agree that the automatic_stay was lifted by the order of nondischargeability they disagree as to the effect of the order entered approximately months later that vacated that order there are as we view the issue three possible results first when a judgment described in u s c sec_362 is vacated the stay is deemed to have been in effect and any_action taken in the interim is in violation of the stay second as petitioner contends if the stay is lifted by a judgment described in u s c sec_362 and that order is vacated the stay is automatically reimposed third as respondent contends once the stay is lifted by an order described in u s c sec_362 it is not automatically reimposed in discussing these alternatives we begin with the question whether the bankruptcy court's order entered date had the effect of terminating the automatic_stay as previously discussed the automatic_stay imposed under u s c sec_362 normally remains in effect until the earliest of the closing of the case dismissal of the case or the grant or denial of a discharge u s c sec_362 consistent with the plain language of u s c sec_362 we agree with the parties that the bankruptcy court's order entered date wherein the bankruptcy court ruled that petitioners' debts were nondischargeable under u s c section served to terminate the automatic_stay of proceedings in this court see in re 973_f2d_862 10th cir see also in re trevino bankr bankr m d pa cf in re de jesus saez 721_f2d_848 1st cir automatic_stay lifted by dismissal of chapter petition 96_tc_10 automatic_stay terminated as the result of a waiver of discharge by the taxpayer debtor in re weston bankr e d cal automatic_stay lifted by dismissal of chapter petition affd without published opinion 967_f2d_596 9th cir reinstating a stay there is no evidence in the record that the bankruptcy court intended for its date order to have any other effect or that petitioners sought a continuance of the automatic_stay pending the filing of their motion for relief having determined that the bankruptcy court's order entered date had the effect of terminating the automatic_stay we are left with the question whether that court's order entered date vacating its order entered date reinstated that stay the order entered date contains no mention of the stay initially we note that we as do the parties reject the approach that the stay is deemed still to have been in effect there is no support for this approach in the statute and the case law indeed such a result would only lead to confusion and uncertainty see in re de jesus saez supra in re weston bankr pincite in 97_tc_544 we were confronted with the question whether the reopening of a bankruptcy case had the effect of reinstating the automatic_stay under u s c sec_362 we find that much of what we said in that case in support of our conclusion that the automatic_stay was not reinstated to be pertinent here like the tax_court a bankruptcy court possesses only the jurisdiction and powers expressly or by necessary implication conferred by congress 719_f2d_270 8th cir u s c sec_362 provides that the automatic_stay is imposed when a petition is filed under sec_301 sec_302 or sec_303 of title sec_301 sec_302 and sec_303 of title relate to voluntary cases in bankruptcy joint cases and involuntary cases respectively in the absence of an indication of congressional intent to the contrary we must assume that congress meant what it said and that the automatic_stay should be imposed only upon the filing of a petition in bankruptcy in re state airlines inc 873_f2d_264 11th cir there is nothing in the language of u s c sections b or a which equates the reopening of a case with the filing of a bankruptcy petition thus there is no statutory provision in which congress has authorized a bankruptcy court once it has terminated the automatic_stay pursuant to sec_362 to continue imposition of the automatic_stay in re trevino bankr bankr m d pa allison v commissioner supra pincite in concluding that the automatic_stay was not reinstated in allison v commissioner supra we observed that the taxpayer there as here had failed to show that the bankruptcy court would consider the tax issues pending before this court id pincite while an argument might be made that the bankruptcy court's intent to reinstate the automatic_stay in the present case may be inferred from the fact that the bankruptcy court vacated its order entered date we decline to decide the issue presented in this case on such an assumption we are mindful that the automatic_stay respecting the commencement or continuation of proceedings in this court was adopted in part to avert duplicative and inconsistent litigation over tax issues 96_tc_895 given the consequences however that follow from a determination respecting the status of the automatic_stay the soundest approach is to adhere to the reasoning in allison v commissioner supra simply stated where a bankruptcy court has taken action that serves to terminate the automatic_stay under u s c sec_362 the automatic_stay remains terminated absent an express indication from the bankruptcy court to the contrary certainly if a bankruptcy court intends to exercise its jurisdiction to resolve the issues surrounding petitioners' tax_liability that court has the means to bring about a stay of the proceedings in this court see allison v commissioner supra pincite referring to u s c sec_105 which permits the bankruptcy court to issue any order necessary to carry out title in sum we shall proceed in this case consistent with the view that the automatic_stay was terminated on date and was not reinstated by virtue of the bankruptcy court's order entered date in this regard it follows that the petition filed herein was not filed in violation of the automatic_stay and that petitioners have properly invoked this court's jurisdiction sec_6213 to reflect the foregoing an appropriate order will be issued discharging this court's order to show cause dated date


t c memo united_states tax_court reina martinez petitioner v commissioner of internal revenue respondent docket no filed date jack f bonanno for petitioner allan d hill for respondent memorandum opinion foley judge by notice dated date respondent determined a deficiency in petitioner's federal_income_tax of dollar_figure after concessions the issue for decision is whether petitioner pursuant to sec_104 is entitled to exclude amounts received in settlement of a class action suit we hold she is not unless otherwise indicated all section references are to the internal_revenue_code as in effect for the year in issue and all rule references are to the tax_court rules_of_practice and procedure background the facts have been fully stipulated under rule and are so found at the time the petition was filed petitioner resided in san francisco california in the fall of petitioner sought the entry-level sales position of trainee agent with state farm insurance co state farm state farm's agents discouraged petitioner from pursuing such a position on date a class action suit was filed in the u s district_court for the northern district of california kraszewski v state farm gen ins co the plaintiffs in the class action alleged that state farm in violation of title vii of the civil rights act of title vii had discriminated against women in the hiring of its insurance agents on date the district_court bifurcated the litigation into a liability and a remedy phase on date the district_court ruled in the liability phase that state farm was liable under title vii for classwide discrimination on the basis of sex specifically it ruled that women who attempted to become trainee agents were lied to misinformed and discouraged in their efforts to obtain the entry level sales position the court found state farm liable with respect to all female applicants and deterred applicants who at any time since date have been are or will be denied recruitment selection and or hire as trainee agents by defendant companies within the state of california petitioner ultimately joined the class action suit against state farm the parties to the class action subsequently reached an agreement in a consent decree as to the remedy phase of the litigation the consent decree provided for informal individual hearings before a special master to determine whether each claimant was entitled to damages and the amount of such damages in october of petitioner's hearing was held before a special master who on date ruled that state farm had discriminated against petitioner on date state farm issued a dollar_figure check payable to petitioner and her attorney petitioner's attorney retained legal fees of dollar_figure and the dollar_figure balance was paid to petitioner on her federal_income_tax return petitioner excluded the dollar_figure payment from her gross_income respondent determined that the entire amount should have been included in petitioner's gross_income the petition in this case was filed on date discussion except as otherwise provided gross_income includes income from all sources sec_61 348_us_426 while sec_61 is to be broadly construed statutory exclusions from income must be narrowly construed commissioner v schleier u s ___ 115_sct_2159 under sec_104 gross_income does not include the amount of any damages received whether by suit or agreement and whether as lump sums or as periodic_payments on account of personal injuries or sickness sec_1_104-1 income_tax regs provides that the term 'damages received whether by suit or agreement ' means an amount received through prosecution of a legal suit or action based upon tort or tort type rights or through a settlement agreement entered into in lieu of such prosecution thus an amount may be excluded from gross_income only when it was received both through prosecution or settlement of an action based upon tort or tort type rights and on account of personal injuries or sickness commissioner v schleier u s at ___ s ct pincite7 where amounts are received pursuant to a settlement agreement the nature of the claim that was the actual basis for settlement controls whether such amounts are excludable under sec_104 504_us_229 102_tc_116 affd in part revd in part and remanded 70_f3d_34 5th cir the critical question is in lieu of what was the settlement amount_paid 105_tc_396 determination of the nature of the claim is a factual inquiry robinson v commissioner supra pincite the amounts petitioner received under the settlement agreement were intended to settle petitioner's claim under title vii as a result the u s supreme court's decision in united_states v burke supra controls in burke the court considered whether amounts received in settlement of a claim under title vii were excludable under sec_104 the court analyzed title vii and concluded that it did not provide for remedies to recompense claimants for tort type personal injuries instead the court noted that the statute offered only injunctions back and front pay and other equitable relief id pincite as a result the court concluded that title vii did not redress a tort type personal injury and consequently that settlement proceeds based on such a claim are not excludable under sec_104 petitioner contends that burke is distinguishable petitioner notes that the taxpayers in burke were employed by the defendant at the time of the discrimination and that the award was essentially for a breach of contract petitioner contends that it was the contractlike violation that led the court to the conclusion that the title vii damages were not excludable as a result petitioner contends that consistent with burke an award of back pay under title vii may be excludable where the taxpayer was not employed by the defendant at the time of the discrimination petitioner's contention fails to grasp the central thrust of burke in burke the supreme court concluded that title vii does not provide remedies that redress tort type personal injuries that rationale does not depend upon the particular circumstances of a taxpayer's claim under title vii all claims under title vii including petitioner's are subject_to the same limited range of damages consequently we reject petitioner's contention petitioner also contends that remedies available to her under other laws redressed tort type personal injuries and that the consent decree was partially intended to settle these claims petitioner emphasizes that the consent decree indicated that state farm was concerned about its liability under other laws petitioner has not established however that the payment under the consent decree was intended to settle petitioner's claims relating to other laws in addition the consent decree failed to allocate any portion of petitioner's recovery to the settlement of other claims consequently petitioner has failed to prove that any part of the recovery is excludable see 91_tc_160 affd on this issue revd on other issues 913_f2d_1486 9th cir accordingly we conclude that petitioner is not entitled to exclude any part of the dollar_figure recovery under sec_104 petitioner also contends that she is entitled to exclude the portion ie dollar_figure of the settlement used to pay legal fees respondent contends that the legal fees are deductible under sec_212 as an expense for the production_of_income and treated as a miscellaneous itemized_deduction under sec_67 we agree with respondent that the legal fees are deductible to the extent they exceed percent of petitioner's adjusted_gross_income see 72_f3d_938 1st cir affg tcmemo_1995_51 see also sec_1 1t a ii temporary income_tax regs fed reg date we have considered all other arguments made by the parties and found them to be either irrelevant or without merit to reflect the foregoing decision will be entered under rule


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 pis plr-101876-12 date april company trust a ------------------------------------------------------------------------------------------------ ---------------------- ------------------------------------------------------------------------------------------------ ---------------------- ------------------------------------------------------------------------------------------------ ------------------------- purchaser --------------------------------- d1 d2 d3 z ---------------------- ------------------------ ------------------ ------------ dear ---------------------------------------- this responds to a letter dated date submitted by your authorized representative requesting certain rulings under sec_1361 of the internal_revenue_code plr-101876-12 facts company elected to be an s_corporation on d1 for the taxable_year beginning d1 on d2 trust received shares of company’s stock subsequently a the income_beneficiary of trust filed an election under sec_1361 to have trust treated as a qualified_subchapter_s_trust qsst as of d2 a reported all pass-through items of income deduction and credit allocable to the shares of company's stock held by trust on d3 all of the shareholders of company including trust agreed to sell all of their shares of company stock to purchaser a c_corporation the transaction closed on d3 as part of the stock purchase agreement purchaser and the shareholders of company made an election under sec_338 it is represented that the corporate gain from the deemed sale of company's assets resulting from the sec_338 transaction is approximately z ruling requested the taxpayers request a ruling that the corporate and shareholder gain on the deemed sale of assets resulting from a sec_338 election that is allocable to shares of s_corporation stock held by trust is that of trust and not of a law and analysis sec_1361 provides that for purposes of sec_678 the beneficiary of a qsst is treated as owner of that portion of the trust which consists of stock in an s_corporation with respect to which the qsst election is made sec_1_1361-1 of the income_tax regulations provides that the income_beneficiary who makes the qsst election and is treated for purposes of sec_678 as the owner of that portion of the trust that consists of s_corporation stock is treated as the shareholder for purposes of sec_1361 sec_1366 sec_1367 and sec_1368 sec_1_1361-1 provides that if a valid qsst election is made the income_beneficiary is treated as owner for purposes of sec_678 of that portion of the trust that consists of the stock of the s_corporation for which the qsst election was made however solely for purposes of applying the preceding sentence to a qsst an income_beneficiary who is a deemed sec_678 owner only by reason of sec_1361 will not be treated as the owner of the s_corporation stock in determining and attributing the federal_income_tax consequences of a disposition of the stock by the qsst for example if the disposition is a sale the qsst election terminates as to the stock sold and any gain_or_loss recognized on the sale will be that of the trust not the income_beneficiary plr-101876-12 similarly if a qsst distributes its s_corporation stock to the income_beneficiary the qsst election terminates as to the distributed stock and the consequences of the distribution are determined by reference to the status of the trust apart from the income beneficiary's terminating ownership status under sec_678 and sec_1361 the portions of the trust other than the portion consisting of s_corporation stock are subject_to subparts a through d of subchapter_j of chapter except as otherwise required by subpart e of the code sec_1_338_h_10_-1 provides that if a sec_338 election is made the target_corporation is generally deemed to sell all of its assets and distribute the proceeds in complete_liquidation sec_1_338_h_10_-1 provides that a sec_338 election may be made for a target_corporation if a purchasing_corporation acquires the target_corporation in a qualified_stock_purchase from s_corporation shareholders under sec_1_1361-1 any gain_or_loss on the sale of s_corporation stock is reported by a qsst rather than the qsst beneficiary as part of the stock purchase agreement purchaser and the shareholders of company made a sec_338 election consequently under sec_338 company is deemed to sell all of its assets and distribute the proceeds in complete_liquidation a gain_or_loss resulting from a sec_338 election is one of the tax consequences of a disposition of stock by the qsst for which the qsst beneficiary is not treated as the owner of stock therefore any gain_or_loss resulting from an election under sec_338 is allocated to the qsst as owner of the stock who reports all tax consequences relating to a stock sale under sec_1_1361-1 conclusion based on the facts submitted and the representations made we rule that company’s gain from the deemed sale of company’s assets resulting from a sec_338 election that is allocable to the shares of company’s stock held by trust is that of trust and not a except as expressly provided herein no opinion is expressed or implied concerning the federal tax consequences of any aspect of any transaction or item discussed or referenced in this letter specifically no opinion is expressed or implied concerning whether company’s s_corporation_election was a valid election under sec_1362 whether trust is a qsst under sec_1361 or the validity of company’s and purchaser’s sec_338 election 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-101876-12 in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative a copy of this letter must be attached to any income_tax return to which it is relevant alternatively taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of the letter_ruling sincerely richard t probst senior technician reviewer branch associate chief_counsel passthroughs special industries cc


internal_revenue_service number release date index numbers ------------------------ -------------------------------------------- -------------------------- in re --------------------------- ----------------------------------------------- --------------------- --------------------------------------------- department of the treasury washington dc person to contact -------- id no --------------- telephone number --------------------- refer reply to cc intl br1 - plr-102370-04 date date do ----------------------------------------------------ty ------- legend taxpayer ------------------------------------------------------------------------------------------- date b year one ---------------------------- -------------------------- ------- --------------------------- ------- ------- ------- --------------------- ---------------------- --------------------------------------- year two year three year four country a cpa firm new cpa firm individual a dear ------------------- this replies to your letters dated date date and date in which you request an extension of time under sec_301_9100-1 and sec_301_9100-3 to submit a ruling_request pursuant to sec_877 of the internal_revenue_code the code and section iv of notice_97_19 1997_1_cb_394 as modified by notice_98_34 1998_2_cb_29 the ruling contained in this letter is predicated upon facts and representations submitted by taxpayer and accompanied by a penalty of perjury statement executed by taxpayer 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 a part of the audit process plr-102370-04 taxpayer is a citizen and resident of country a he obtained his green card in year one in year two he retired and permanently relocated to country a where he has lived with his wife ever since also in year two taxpayer surrendered his green card on date b individual a with cpa firm was aware of taxpayer’s tax status as a part-year nonresident for year two as individual a prepared a dual status return for that year however individual a did not advise taxpayer of the u s tax ramifications of surrendering his green card in year two before taxpayer surrendered his green card individual a also did not advise taxpayer of the requirement to request a ruling for relief under sec_877 within one year of date b taxpayer engaged cpa firm to prepare and file his u s federal_income_tax return for year three during this process cpa firm filed two applications for extensions of time to file the tax_return nevertheless individual a became uncommunicative when taxpayer attempted to determine the status of his return eventually it became apparent to taxpayer that individual a was not going to respond to taxpayer’s inquiries and that the deadline for filing the tax_return would not be met accordingly taxpayer engaged the services of new cpa firm upon gathering the taxpayer’s information and documents to file the year three return new cpa firm discovered that the taxpayer had surrendered his green card on date b and determined that the one-year period for taxpayer to file his request for a ruling under sec_877 had expired new cpa firm recommended that taxpayer seek relief under sec_301_9100-1 and sec_301_9100-3 sec_301_9100-1 provides that the commissioner in his discretion may grant a taxpayer a reasonable extension of time under the standards set forth in sec_301_9100-3 to make a regulatory election under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-1 provides standards to be used by the commissioner in determining whether relief should be granted to allow an extension of time to make a regulatory election sec_301 -1 b provides that an election includes an application_for relief in respect of tax and defines a regulatory election as an election whose due_date is prescribed by a regulation a revenue_ruling revenue_procedure notice or announcement sec_301_9100-3 provides that requests for relief subject_to this section will be granted when the taxpayer provides the evidence including affidavits described in sec_301_9100-3 to establish to the satisfaction of the commissioner that plr-102370-04 the taxpayer acted reasonably and in good_faith and the grant of relief will not prejudice the interests of the government in the present situation section iv of notice_97_19 fixes the time for an individual to submit a ruling_request under sec_877 of the code therefore the commissioner has discretionary authority under sec_301_9100-1 to grant taxpayer an extension of time provided that taxpayer satisfies the standards set forth in sec_301_9100-3 based on the facts and circumstances of this case we conclude that taxpayer satisfies sec_301_9100-3 accordingly taxpayer is granted an extension of time until days from the date of this ruling letter to submit a ruling_request under sec_877 of the code as provided by section iv of notice_97_19 as modified by notice_98_34 except as expressly provided herein no ruling has been requested and none is expressed as to the application of any other section of the code or regulations to the facts presented specifically no opinion is expressed as to the tax consequences under sec_877 of the code a copy of this ruling letter should be associated with the ruling_request filed pursuant to notice_97_19 this ruling is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file in this office a copy of this letter is being sent to taxpayer sincerely allen goldstein reviewer office of the associate chief_counsel international enclosure copy for sec_6110 purposes cc ------------------- ---------------------------------------------------------------------------


internal_revenue_service number release date index number ---------------------------------------- ------------------------------------------ ------------------------------------ ------------------------------ in re ----------------------- dear ---- ------------- 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 cc ita b02 plr-119814-17 date date ty -------------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------- legend taxpayer --------------------------------------------------------------------------------------------------- -------------- tradename -------------------- entity a --------------------------------------------------------------------------------------------------- -- entity b ------------------------------------------------------ entity c -------------------------------------------- entity d -------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- ------------------------- state a -------------- servicesa --------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------- -------------------------------- plr-119814-17 servicesb --------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------- ---------- date1 date2 date3 ------------------- ------------------- ------------------- date4 ----------------- date5 date6 date7 ---------------------------- ---------------------------- ------------------------ date8 --------------------------- amount1 ------------------ amount2 ---------------- amount3 ------------------ employee --------------------- resident -------------- number1 number2 ---- ---- this is in response to a letter dated date1 requesting an extension of time to file the required election statement to make a safe-harbor election under revproc_2011_29 2011_1_cb_746 to allocate success-based fees between facilitative and non-facilitative amounts for taxpayer’s transaction during ty this request is made in accordance with sec_301_9100-1 and sec_301_9100-3 of the procedure and administration regulations facts and representations taxpayer represents the following a statement of taxpayer’s business_purpose plr-119814-17 taxpayer is the u s parent_corporation of a group of u s_corporations and foreign entities that operate globally under the name tradename this group of entities provides servicesa taxpayer also provides servicesb b transaction giving rise to success-based fees taxpayer was incorporated under state a law on date2 taxpayer was incorporated as the acquisition vehicle for all the outstanding shares of entity a a state a corporation taxpayer was formed by its ultimate owner entity b to wholly purchase the shares of entity a from entity a’s ultimate parent entity c prior to the acquisition entity a was the u s parent_corporation of a group of u s_corporations and foreign entities that operated globally under the name tradename for tax years prior to the acquisition entity a filed a consolidated form_1120 u s_corporation income_tax return as the parent_corporation of the consolidated_group on date3 taxpayer and entity a entered into an exclusivity agreement with regard to the purchase of entity a in an advisory agreement dated date4 taxpayer entered into an agreement with entity b for entity b to provide business and organizational strategy and financial and advisory services to the tradename entities pursuant the advisory agreement taxpayer agreed to pay entity b amount1 as consideration for the services entity b provided with respect to the acquisition of entity a and with respect to the financing related to the acquisition including but not limited to due diligence investigations financial advisory services and corporate structure review the payment of the transaction fee was contingent upon the successful closing of the transaction on date4 the transaction closed with taxpayer acquiring all of the outstanding shares of entity a entity b was paid amount1 by wire transfer upon closing of the transaction on date4 in connection with the above acquisition of entity a taxpayer incurred transaction costs including a success-based_fee for tax years after the acquisition taxpayer has filed a consolidated form_1120 as the parent_corporation of the consolidated_group employee the tax director of tradename is responsible for the preparation of taxpayer’s income_tax provision for financial reporting purposes and for preparing and filing taxpayer’s income_tax returns employee has been a resident certified_public_accountant for approximately number1 years and has number2 years’ experience preparing u s income_tax returns tradename relies on employee’s knowledge and expertise in preparing and filing its income_tax returns employee reviewed the transaction cost invoices and additional information in order to allocate the costs plr-119814-17 between facilitative and non-facilitative amounts as part of the preparation of the income_tax provision for the date5 financial statements prepared for entity d during this review employee examined the amount1 fee paid to entity b pursuant to the advisory agreement dated date4 based on discussions with entity b it was determined that amount2 of this fee was paid for financing-related services and was capitalized as debt acquisition costs the remaining amount3 fee was determined to be a success-based_fee for which taxpayer would make the safe_harbor election described in dollar_figure of revproc_2011_29 in order to capitalize percent of the fee and treat the remaining percent as an amount which did not facilitate the transaction the financial statements were prepared consistent with having made a timely election under dollar_figure of revproc_2011_29 in the consolidated federal_income_tax return for taxpayer and its subsidiaries the treatment of the amount3 success-based_fee was consistent with the safe_harbor election provided in revproc_2011_29 percent of the fee was capitalized as an amount that facilitated the transaction and the remaining percent was treated as an amount that did not facilitate the transaction the income_tax return for taxpayer and its subsidiaries was filed on date6 on date7 during preparation of the date8 financial statements for entity d it was discovered that the statement required by dollar_figure of rev_proc to make the safe_harbor election was not included with the income_tax return filed by taxpayer and its subsidiaries this oversight was discovered prior to any discovery by the service law sec_263 of the internal_revenue_code and sec_1_263_a_-2 of the income_tax regulations generally provide that no deduction shall be allowed for any amount_paid out for property having a useful_life substantially beyond the taxable_year in the case of an acquisition or reorganization of a business_entity costs that are incurred in the process of acquisition and that produce significant long-term benefits must be capitalized 503_us_79 397_us_572 under sec_1_263_a_-5 a taxpayer must capitalize an amount_paid to facilitate a business acquisition or reorganization transaction described in sec_1_263_a_-5 an amount is paid to facilitate a transaction described in sec_1_263_a_-5 if the amount is paid in the process of investigating or otherwise pursuing the transaction whether an amount is paid in the process of investigating or otherwise pursuing the transaction is determined based on all of the facts and circumstances see sec_1_263_a_-5 sec_1_263_a_-5 provides that an amount that is contingent on the successful closing of a transaction described in sec_1_263_a_-5 success-based_fee is presumed to plr-119814-17 facilitate the transaction and thus must be capitalized a taxpayer may rebut the presumption by maintaining sufficient documentation to establish that a portion of the fee is allocable to activities that do not facilitate the transaction and thus may be deductible a taxpayer's method for determining the portion of a success-based_fee that facilitates a transaction and the portion that does not facilitate the transaction is a method_of_accounting under sec_446 see section dollar_figure of revproc_2011_29 because the treatment of success-based fees was a continuing subject of controversy between taxpayers and the service the service published revproc_2011_29 revproc_2011_29 provides a safe_harbor method_of_accounting for allocating success- based fees paid in business_acquisitions or reorganizations described in sec_1 a - e in lieu of maintaining the documentation required by sec_1_263_a_-5 this safe_harbor permits electing taxpayers to treat percent of the success-based_fee as an amount that does not facilitate the transaction ie an amount that can be deducted the remaining portion of the fee must be capitalized as an amount that facilitates the transaction section dollar_figure of revproc_2011_29 allows a taxpayer to make a safe_harbor election with respect to success-based fees section dollar_figure provides that the service will not challenge a taxpayer's allocation of success-based fees between activities that facilitate a transaction described in sec_1_263_a_-5 and activities that do not facilitate the transaction if the taxpayer does three things first the taxpayer must treat seventy percent of the amount of the success-based_fee as an amount that does not facilitate the transaction second the taxpayer must capitalize the remaining amount of the success-based_fee as an amount which does facilitate the transaction third the taxpayer must attach a statement to its original federal_income_tax return for the taxable_year the success-based_fee is paid_or_incurred this statement should state that the taxpayer is electing the safe_harbor identify the transaction and state the success- based fee amounts that are deducted and capitalized it is this third requirement that taxpayer requests permission to accomplish with this ruling_request taxpayer requests permission to attach the statement required by sec_4 of revproc_2011_29 to its return by amending its original filed return for ty to include a completed election statement sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make an election sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides extensions of time for making elections that do not meet the requirements of sec_301_9100-2 sec_301_9100-1 provides that the commissioner has discretion to grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 plr-119814-17 to make certain regulatory elections sec_301_9100-1 defines a regulatory election as an election whose due_date is prescribed by a regulation published in the federal_register or a revenue_ruling revenue_procedure notice or announcement published in the internal_revenue_bulletin sec_301_9100-3 provides that requests for extensions of time for regulatory elections under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-3 provides that in general a taxpayer is deemed to have acted reasonably and in good_faith if the taxpayer i requests relief before the failure to make the regulatory election is discovered by the service ii failed to make the election because of intervening events beyond the taxpayer’s control iii failed to make the election because after exercising reasonable diligence the taxpayer was unaware of the necessity for the election iv reasonably relied on the written advice of the service or v reasonably relied on a qualified_tax professional and the tax professional failed to make or advise the taxpayer to make the election sec_301_9100-3 provides that a taxpayer is deemed to have not acted reasonably and in good_faith if the taxpayer i seeks to alter a return position for which an accuracy-related_penalty has been or could be imposed under sec_6662 at the time the taxpayer requests relief and the new position requires or permits a regulatory election for which relief is requested ii was informed in all material respects of the required election and related tax consequences but chose not to file the election or iii uses hindsight in requesting relief sec_301_9100-3 provides that the interests of the government are prejudiced if granting relief would result in the taxpayer having a lower tax_liability in the aggregate for all taxable years affected by the election than the taxpayer would have had if the election had been timely made the interests of the government are ordinarily prejudiced if the taxable_year in which the regulatory election should have been made or any taxable years that would have been affected by the election had it been timely made are closed by the period of limitations on assessment under sec_6501 before the taxpayer’s receipt of a ruling granting relief under this section sec_301_9100-3 provides special rules for accounting_method regulatory elections sec_301_9100-3 provides that the interests of the government are deemed prejudiced except in unusual or compelling circumstances if the accounting_method regulatory election for which relief is requested is subject_to the advance consent procedures for method changes requires a sec_481 adjustment would permit a change from an impermissible method_of_accounting that is an issue under plr-119814-17 consideration by examination or any other setting or provides a more favorable method_of_accounting if the election is made by a certain date or taxable_year taxpayer’s election is a regulatory election as defined in sec_301_9100-1 because the due_date of the election is prescribed in sec_1_263_a_-5 of the income_tax regulations the commissioner has the authority under sec_301_9100-1 and sec_301_9100-3 to grant an extension of time to file a late regulatory election conclusion based upon our analysis of the facts and representations provided taxpayer acted reasonably and in good_faith and granting relief will not prejudice the interests of the government therefore the requirements of sec_301_9100-1 and sec_301_9100-3 have been met taxpayer is granted an extension of days from the date of this ruling to file the statement required under sec_4 of revproc_2011_29 stating that it is electing the safe_harbor treatment for success-based fees identifying the transaction and stating the success-based_fee amounts that are deducted and capitalized for ty caveats the rulings contained in this letter are based on information and representations submitted by taxpayer and accompanied by a penalty of perjury statement executed by appropriate parties 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 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 in particular no opinion is expressed as to whether taxpayer properly included the correct costs as its success-based fees subject_to the retroactive election or whether taxpayer's transaction is within the scope of revproc_2011_29 a copy of this letter must be attached to any income_tax return to which it is relevant alternatively a taxpayer filing its return electronically may satisfy this requirement by attaching a statement to its return that provides the date and control number of the letter_ruling in accordance with the provisions of the power_of_attorney currently on file with this office a copy of this letter is being sent to your authorized representatives we are also sending a copy of this letter to the appropriate operating division director 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 plr-119814-17 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 sincerely yours _______________________________ bridget tombul chief branch office of associate chief_counsel income_tax accounting enclosure copy for sec_6110 purposes-


department of the treasury internal_revenue_service washington d c government entities division uil date jan employer_identification_number contact person identification_number telephone number -v m q m z z o o x i n i q i u o w o l o n u u o y m e dear sir or madam this letter is in response to the letter of your authorized representative dated date and supplements the private_letter_ruling issued by our office dated date the ruling letter’ the first paragraph of page of the ruling letter is amended as follows x’s s was originally published by an unrelated third party from year d to w purchased the rights to s from such unrelated third party and s is one of the most comprehensive annual analyses of the united states’ health statistics each state is ranked by five categories of individual components based on statistical information compiled from other sources each state is ranked overall based on a formula that weighs the various components in w z representation of the ruling letter found at the top of page is supplemented as follows x will change its name going forward in a manner that makes x’s name more distinguishable from the name of z than was the case previously specifically x will change its name by inserting a space between the words m and n ruling of the ruling letter on page of the letter is amended as follows based on the representations set forth above z’s transfer of all its rights to s to x and x’s publication and distribution of s will be treated as furthering x’s exempt purposes and will not adversely affect x’s exempt status under sec_501 of the code further x’s publication and distribution of s will not constitute an act of self-dealing under sec_4941 of the code additionally z’s transfer of its rights to s to x will not constitute an act of self-dealing under sec_4941 this ruling is directed only to organization that requested it sec_6110 of the code provides that it may not be used or cited as precedent this ruling does not purport to rule on any issue under any code section not specifically addressed herein lf you have any questions about this ruling please contact the person whose name and telephone number are shown in the heading of this letter pursuant to a power_of_attorney on file with this office we are sending a copy of this ruling letter to your attorney sincerely signed robert c harper jr robert c harper jr manager exempt_organizations technical group


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 b02 plr-140473-09 date date x state a b d1 d2 d3 m year ------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------ ---------------------- ------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------ --------------------- ------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------ ------- dear ------------------ this responds to a letter dated date and subsequent correspondence submitted on behalf of x by x’s authorized representative requesting inadvertent termination relief under sec_1362 of the internal_revenue_code the information submitted states that x was incorporated under the laws of state and elected to be an s_corporation effective d1 pursuant to an agreement dated d2 x transferred m shares of x stock to a a corporation wholly owned by b who is represented as being an eligible s_corporation shareholder a is not an eligible plr-140473-09 shareholder of an s_corporation under b b neither x or x’s shareholders were aware that the transfer of stock to a would cause x’s s_corporation_election to be terminated on d3 x learned that its s_corporation_election terminated as a result of the transfer of x stock to a an ineligible s_corporation shareholder x represents that the circumstances resulting in the termination of x’s s_corporation_election were inadvertent and not motivated by tax_avoidance x further represents that x has filed returns consistent with x’s status as an s_corporation x and its shareholders have agreed to make adjustments consistent with the treatment of x as an s_corporation as required by the secretary sec_1362 provides that if an election under sec_1362 by any corporation a was not effective for the taxable_year for which it was made determined without regard to sec_1362 by reason of a failure to meet the requirements of sec_1361 or to obtain shareholder consents or b was terminated under sec_1362 or the secretary determines that the circumstances resulting in such ineffectiveness or termination were inadvertent no later than a reasonable period of time after discovery of the event resulting in the ineffectiveness or termination steps were taken a so that the corporation is a small_business_corporation or b to acquire the required shareholder consents 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 such ineffectiveness or termination the corporation shall be treated as an s_corporation during the period specified by the secretary based solely on the facts submitted and the representations made we conclude that x’s s_corporation_election terminated on d2 because a was not an eligible shareholder of x we also conclude that this termination of x’s s election on d2 was an inadvertent termination within the meaning of sec_1362 therefore we conclude that x will continue to be treated as an s_corporation for the period from d2 provided that x’s s_corporation_election was valid and was not otherwise terminated under sec_1362 this ruling is conditioned on a transferring its x stock to b within days of the ruling this ruling is also conditioned on x a and b filing within days of this ruling any initial or amended returns for year as necessary to treat b as the owner of the x stock originally owned by a 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 specifically no opinion is expressed regarding x’s eligibility to be an s_corporation or the validity of its s_corporation_election plr-140473-09 this ruling is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent 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 copy for sec_6110 purposes