internal_revenue_service number release date index number ------------------- ------------- ---------------------------------- ---------------- ------------------ -------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact -------------------------- id no ------------- telephone number --------------------- refer reply to cc corp plr-136579-12 date date legend distributing ----------------------------------------------------------------------------- ----------------------------------------------------------------------------------- ----------------------------------- controlled ----------------------------------------------------------------------------- ----------------------------------------------------------------------------------- ------------------------------ sub ------------------------------------------------------------------------------ ----------------------------------------------------------------------------------- -------------------------------------------------------------- sub --------------------------------------------------------------------------- -------------------------------------------------------------- ------------------------------------------------------------------- ------------------------------------------------------------------------------ state a date a shareholder group a shareholder group b shareholder group c ---------- ------------------ ---------------- -------------- --------------------------------------------------------------- plr-136579-12 x y n dollar_figurea ------ ------ ----- ----------- exchanging shareholders --------------------------------------------------------------- business x business y dear --------------- -------------------------------------------- ------------------------------------------------ this letter responds to a letter dated date requesting rulings as to certain federal_income_tax consequences to the proposed transaction described below the proposed transaction the information submitted in that request and in subsequent correspondence is summarized below the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party this office has not verified any of the materials submitted in support of the request for rulings verification of the information representations and other data may be required as part of the audit process in particular this office has not reviewed any information pertaining to and has made no determination regarding whether the proposed transaction i satisfies the business_purpose requirement of sec_1_355-2 of the income_tax regulations ii is used principally as a device for the distribution of earnings_and_profits of the distributing_corporation or the controlled_corporation or both see sec_355 of the internal_revenue_code and sec_1_355-2 or iii is part of a plan or series of related transactions pursuant to which one or more persons will acquire directly or indirectly stock representing a 50-percent_or_greater_interest in the distributing_corporation or the controlled_corporation see sec_355 and sec_1_355-7 summary of facts distributing is a corporation organized under the laws of state a that is engaged in business x and business y through its two wholly owned subsidiaries sub and sub which are national banks distributing is owned by approximately n shareholders however approximately x of distributing is owned by shareholder group a and shareholder group b the remaining approximately y of distributing is owned by shareholder group c shareholder group a is chiefly involved with the operation of sub while shareholder group b is chiefly involved with the operation of sub financial information submitted by distributing indicates that sub and sub plr-136579-12 each has had gross_receipts and operating_expenses representing the active_conduct_of_a_trade_or_business for each of the past five years on date a distributing formed controlled for the purposes of the proposed transaction described below controlled is currently a shell corporation with no assets business or employees proposed transaction for what are represented to be valid business reasons distributing proposes the following proposed transaction i ii distributing will contribute all of the outstanding_stock in sub approximately dollar_figurea of cash and certain other assets to the capital of controlled in exchange for all of the outstanding_stock in controlled and the assumption by controlled of certain liabilities the contribution distributing will thereafter distribute all of the controlled stock to the exchanging shareholders in complete redemption of their distributing stock the distribution representations the taxpayer makes the following representations with respect to the proposed transaction a indebtedness if any owed by controlled to distributing after the distribution will not constitute stock_or_securities b no part of the consideration to be distributed in the distribution will be received by a shareholder as a creditor employee or in any capacity other than that of a shareholder of distributing c no security holder of distributing will receive any consideration in the distribution d distributing and controlled will treat all members of their respective separate affiliated groups within the meaning of sec_355 sags as one corporation in determining whether the requirements of sec_355 regarding the active_conduct_of_a_trade_or_business are satisfied e the five years of financial information submitted on behalf of business x conducted by the distributing sag is representative of the business’s present operation and with regard to such business there have been no substantial operational changes since the date of the last financial statements submitted plr-136579-12 f the five years of financial information submitted on behalf of business y conducted by the distributing sag prior to the contribution and distribution and to be conducted by the controlled sag after the contribution and distribution is representative of the business’s present operation and with regard to such business there have been no substantial operational changes since the date of the last financial statements submitted g the distributing sag neither acquired_business x nor acquired control of an entity conducting business x during the five-year period ending on the date of the distribution in a transaction in which gain_or_loss was recognized or treated as recognized in whole or in part throughout the five-year period ending on the date of the distribution the distributing sag has been the principal_owner of the goodwill and significant assets of business x and will continue to be the principal_owner following the distribution h the distributing sag neither acquired_business y nor acquired control of an entity conducting business y during the five-year period ending on the date of the distribution in a transaction in which gain_or_loss was recognized or treated as recognized in whole or in part throughout the five-year period ending on the date of the distribution the distributing sag has been the principal_owner of the goodwill and significant assets of business y and will continue to be the principal_owner following the distribution i following the transaction the distributing sag and the controlled sag will each continue the active_conduct of business x distributing sag and business y controlled sag respectively independently and with its separate employees j the distribution of the stock of controlled is carried out for the following corporate business_purpose and is motivated in whole or substantial part by this business_purpose to resolve divergent shareholder views regarding the short and long-term business plans and strategies of sub and sub the distribution of the stock of controlled is motivated in whole or substantial part by this corporate business_purpose k the distribution is not being used principally as a device for the distribution of the earnings_and_profits of distributing or controlled or both l following the distribution no person will hold a greater than percent interest in either distributing or controlled within the meaning of sec_355 who did not hold such an interest immediately before the distribution m immediately after the distribution neither distributing nor controlled will be a disqualified_investment_corporation within the meaning of sec_355 plr-136579-12 n for the purposes of sec_355 immediately after the distribution no person determined after applying the aggregation rules of sec_355 will hold stock possessing percent or more of the total combined voting power of all classes of distributing stock entitled to vote or percent or more of the total value of shares of all classes of distributing stock that was acquired by purchase as defined in sec_355 and during the five year period determined after applying sec_355 ending on the date of the distribution o for the purposes of sec_355 immediately after the distribution no person determined after applying the aggregation rules of sec_355 will hold stock possessing percent or more of the total combined voting power of all classes of controlled stock entitled to vote or percent or more of the total value of shares of all classes of controlled stock that was either i acquired by purchase as defined in sec_355 and during the five year period determined after applying sec_355 ending on the date of the distribution or ii attributable to distributions on distributing’s stock_or_securities that were acquired by purchase as defined in sec_355 and during the five year period determined after applying sec_355 ending on the date of the distribution p the distribution is not part of a plan or series of related transactions within the meaning of sec_1_355-7 pursuant to which one or more persons will acquire directly or indirectly stock representing a percent or greater interest within the meaning of sec_355 in distributing or controlled including any predecessor or successor of any such corporation q the fair_market_value of the controlled stock and any other consideration to be received by the exchanging shareholders in the distribution will be approximately equal to the fair_market_value of the distributing stock surrendered by such shareholders in the distribution r the total fair_market_value of the assets transferred to controlled in the contribution will be equal to or exceed the aggregate adjusted_basis of those assets so transferred s the total adjusted_basis of the assets transferred by distributing to controlled in the contribution will equal or exceed the sum of the total liabilities assumed within the meaning of sec_357 if any by controlled plus any liabilities to which the transferred assets are subject t the total fair_market_value of the assets transferred by distributing to controlled in the contribution will exceed the sum of i the total amount of liabilities assumed within the meaning of sec_357 if any by controlled ii the amount of any liabilities owed to controlled by distributing if any that are discharged or extinguished in connection with the contribution and iii the amount of any cash and the fair_market_value of any other_property other than stock and securities permitted to be received under plr-136579-12 sec_361 without the recognition of gain if any received by distributing from controlled in connection with the contribution u the fair_market_value of the assets of controlled will exceed the amount of its liabilities immediately after the contribution v the fair_market_value of the assets of controlled will exceed controlled's aggregate basis in those assets immediately after the contribution w the liabilities if any assumed within the meaning of sec_357 by controlled in the contribution and the liabilities if any to which the assets transferred in the contribution are subject were incurred in the ordinary course of business and are associated with the assets being transferred x distributing will neither accumulate its receivables nor make extraordinary payment of its payables in anticipation of the contribution and distribution y no property will be transferred by distributing to controlled for which an investment_credit allowed under sec_46 has been or will be claimed z no intercorporate debt will exist between distributing and controlled at the time of or subsequent to the distribution other than intercompany loans or obligations that have arisen or will arise between the parties in the ordinary course of business aa immediately before the distribution items of income gain loss deduction and credit will be taken into account as required by the applicable intercompany_transaction regulations see sec_1_1502-13 and sec_1 as in effect before publication of t d 1995_2_cb_147 and as currently in effect sec_1_1502-13 as published by t d further distributing’s excess_loss_account with respect to controlled stock will be included in income immediately before the distribution bb payments made in connection with all continuing transactions if any following the proposed transaction between distributing and controlled will be made for fair_market_value based on terms and conditions arrived at by the parties bargaining at arm’s length cc no two parties to the transaction are investment companies as defined in sec_368 and iv dd distributing and controlled each will pay its own expenses if any incurred in connection with the contribution and the distribution rulings plr-136579-12 based solely on the information submitted and the representations set forth above we rule as follows regarding the proposed transaction the contribution and the distribution taken together will qualify as a reorganization within the meaning of sec_368 distributing and controlled will each be a party to the reorganization within the meaning of sec_368 distributing will not recognize any gain_or_loss on the contribution sec_361 and sec_357 controlled will not recognize any gain_or_loss on the contribution sec_1032 controlled’s basis in each asset received from distributing in the contribution will equal the basis of such asset in the hands of distributing immediately before the contribution sec_362 controlled’s holding_period in each asset received from distributing in the contribution will include the period during which distributing held such asset sec_1223 distributing will not recognize any gain_or_loss upon the distribution of controlled stock in the distribution sec_361 no gain_or_loss will be recognized by and no amount otherwise will be included in the income of the exchanging shareholder’s upon the receipt of controlled stock in the distribution sec_355 the basis of the controlled stock in the hands of the exchanging shareholders immediately after the distribution will be the same as the exchanging shareholders basis in their distributing stock held immediately before the distribution allocated in the manner described in sec_358 through c and sec_1_358-2 the holding_period of the controlled stock received by the exchanging shareholders will include the holding_period of the distributing stock held by the exchanging shareholders provided the distributing stock was held by the exchanging shareholders as a capital_asset on the date of the distribution sec_1223 earnings_and_profits if any will be allocated between distributing and controlled in accordance with sec_312 and sec_1_312-10 caveats plr-136579-12 no opinion is expressed about the tax treatment of the proposed transaction under other provisions of the code and regulations or the tax treatment of any conditions existing at the time of or effects resulting from the proposed transaction that are not specifically covered by the above rulings in particular no opinion is expressed regarding i whether the proposed transaction satisfies the business_purpose requirement of sec_1_355-2 ii whether the proposed transaction is used primarily as a device for the distribution of the earnings_and_profits of distributing or controlled or both see sec_355 and sec_1_355-2 iii whether the proposed transaction is part of a plan or series of related transactions pursuant to which one or more persons will acquire directly or indirectly stock representing a percent or greater interest in either distributing or controlled see sec_355 and sec_1_355-7 and iv any non-arm’s length transactions between any of the parties to the proposed transaction procedural statements this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent a copy of this letter must be attached to any income_tax return to which it is relevant alternatively taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of the letter_ruling in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely __________________________ leah m thompson assistant branch chief branch office of associate chief_counsel corporate cc


internal_revenue_service number info release date index number ----------------------------------------------- ------------------------ ------------------------------------- ------------------------------ department of the treasury washington dc person to contact -------------------- id no ------------- telephone number --------------------- refer reply to cc psi b1 - genin-151255-04 date nov taxpayer ----------------------------------------------- this responds to a letter dated date submitted by your representative in which it was requested that we recognize taxpayer’s election to be an s_corporation effective for the tax_year a corporation which meets the definition of a small_business_corporation under sec_1362 of the internal_revenue_code may elect to be treated as an s_corporation in order for an s_corporation_election to be effective for the taxable_year in which it is made it must be made within the first two and one-half months of the corporation’s taxable_year sec_1362 if an s election is made after that time then the corporation will not be treated as an s_corporation until the taxable_year following the one in which the s election was filed sec_1362 an election made after the first two and one-half months of the taxable_year in which it is intended to be effective may be treated as effective if the secretary determines that there was reasonable_cause for the corporation’s failure to make a timely election sec_1362 unfortunately we cannot grant relief under revproc_2003_43 because the original due_date of the taxpayer’s s election was date and therefore more than months had passed since the original due_date of the election and the time the taxpayer filed its request for relief date in addition relief cannot be granted under revproc_97_48 because our records indicate that the return for the first taxable_year in which it was intended that taxpayer be an s_corporation was not timely filed relief for your late s_corporation may be obtained through a letter_ruling announcement copy enclosed provides guidance on seeking relief for late s_corporation elections generally to request relief for a late s_corporation_election you must request a private_letter_ruling from the national_office the procedures for requesting a private_letter_ruling are set out in revproc_2004_1 copy enclosed in addition revproc_2004_1 requires taxpayers to submit a user_fee along with their ruling_request the standard user_fee for a private_letter_ruling is dollar_figure however taxpayers with gross_income of less than dollar_figure million on their tax_return for the most recent 12-month taxable_year qualify for a reduced user_fee in the amount of dollar_figure if you qualify for the reduced fee you must include a statement certifying your gross_income for the last 12-month taxable_year otherwise the higher fee will apply if you decide to submit a formal request for a private_letter_ruling please review appendix b of revproc_2004_1 and be certain to include all required procedural statements also include the proper user_fee and any documents that substantiate your intent to be an s_corporation from inception please refer your request to our office by adding the following to the address attn cc pa t p o box ben franklin station washington dc direct to cc psi room please contact -------------- at -------------------- not a toll-free call we hope that this information is helpful to you if you have additional questions s dianna k miosi sincerely dianna k miosi chief branch office of the associate chief_counsel passthroughs and special industries enclosures announcement revproc_2004_1


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 plr-128763-15 date date legend decedent spouse date date dear ------------ ------------------------------------------------ ------------------------------------------------- ------------------------- ----------------- this letter responds to your personal representative’s letter of date requesting an extension of time pursuant to sec_301_9100-3 of the procedure and administration regulations to make the election under sec_2010 of the internal_revenue_code code portability election to allow a decedent’s surviving_spouse to take into account that decedent’s deceased spousal unused exclusion dsue amount the facts and representations submitted are as follows decedent died on date survived by spouse date is a date after the effective date of the amendment to sec_2010 which provides for portability of a dsue amount to a surviving_spouse to obtain the benefit of portability of decedent’s dsue amount to spouse decedent’s estate was required to file form_706 united_states estate and generation-skipping_transfer_tax return on or before the date that is nine months plr-128763-15 after decedent’s date of death or the last day of the period covered by an extension decedent’s form_706 was due on date but the estate did not file a form_706 to make the portability election the estate discovered its failure to elect portability after the due_date for making the election spouse as executor of decedent’s estate represents that the value of decedent’s gross_estate is less than the basic exclusion amount in the year of the decedent’s death and that during her lifetime decedent made no taxable_gifts as executor spouse requests an extension of time pursuant to sec_301_9100-3 to elect portability of decedent’s dsue amount pursuant to sec_2010 law and analysis sec_2001 imposes a tax on the transfer of the taxable_estate of every decedent who is a citizen or resident_of_the_united_states sec_2010 provides that a credit of the applicable credit_amount shall be allowed to the estate of every decedent against the tax imposed by sec_2001 sec_2010 provides that the applicable credit_amount is the amount of the tentative_tax that would be determined under sec_2001 if the amount with respect to which such tentative_tax is to be computed were equal to the applicable_exclusion_amount on date congress amended sec_2010 effective for estates of decedents dying and gifts made after date to allow portability of a decedent’s unused applicable_exclusion_amount between spouses tax relief unemployment insurance reauthorization and job creation act of pub_l_no sec_303 124_stat_3296 sec_2010 provides that the applicable_exclusion_amount is the sum of the basic exclusion amount and in the case of a surviving_spouse the dsue amount sec_2010 generally provides that the basic exclusion amount is dollar_figure to be adjusted for inflation annually after calendar_year sec_2010 defines the dsue amount to mean the lesser_of a the basic exclusion amount or b the excess of -- i the applicable_exclusion_amount of the last deceased spouse of the surviving_spouse over ii the amount with respect to which the tentative_tax is determined under sec_2001 on the estate of such deceased spouse sec_2010 provides that a dsue amount may not be taken into account by a surviving_spouse under sec_2010 unless the executor of the estate of the deceased spouse files an estate_tax_return on which such amount is computed and makes an plr-128763-15 election on such return that such amount may be so taken into account the election once made shall be irrevocable no election may be made if such return is filed after the time prescribed by law including extensions for filing such return sec_2010 provides that the secretary shall prescribe regulations as may be necessary or appropriate to implement sec_2010 sec_20_2010-2t a of the estate_tax regulations as in effect on date provides that to allow a decedent’s surviving_spouse to take into account that decedent’s dsue amount the executor of the decedent’s estate must elect portability of the dsue amount on a timely-filed form_706 under sec_20_2010-2t a the due_date of an estate_tax_return required to elect portability is nine months after the decedent’s date of death or the last day of the period covered by an extension if an extension of time for filing has been granted under sec_20_2010-2t a the portability election is made by timely filing a complete and properly prepared estate_tax_return unless the executor satisfies the requirements for the election not to apply in sec_20_2010-2t a i sec_301_9100-1 provides that the commissioner may grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the code except subtitles e g h and i sec_301_9100-1 provides that the term statutory election means an election whose due_date is prescribed by statute the term regulatory election means 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 the standards the commissioner will use to determine whether to grant an extension of time to make an election whose due_date is prescribed by a regulation and not expressly provided by statute a request for relief 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_30 b iii provides that a taxpayer is deemed to have acted reasonably and in good_faith if the taxpayer failed to make the election because after exercising reasonable diligence taking into account the taxpayer’s experience and the complexity of the return or issue the taxpayer was unaware of the necessity for the election plr-128763-15 the due_date for the portability election is prescribed by statute in the case of an estate required to file an estate_tax_return under sec_6018 see sec_2010 sec_6075 and sec_6018 in the case of an estate that is not required to file an estate_tax_return under sec_6018 the due_date is prescribed by regulation see sec_20_2010-2t a see also sec_20_2010-2 and revproc_2014_18 2014_7_irb_513 sec_2 accordingly in the latter case a taxpayer may seek an extension of time to elect portability under the provisions of sec_301_9100-3 sec_6018 requires the filing of an estate_tax_return in all cases where the gross_estate exceeds the basic exclusion amount in effect under sec_2010 for the calendar_year which includes the date of death for purposes of this determination under sec_6018 the basic exclusion amount is reduced but not below zero by the sum of -- a the amount of the adjusted_taxable_gifts within the meaning of sec_2001 made by the decedent after date plus b the aggregate amount allowed as a specific exemption under sec_2521 as in effect before its repeal by the tax reform act of with respect to gifts made by the decedent after date as executor spouse represents that based on the value of the gross_estate and taking into account any taxable_gifts decedent’s estate is not required to file an estate_tax_return under sec_6018 under these facts the commissioner has discretionary authority under sec_301_9100-3 to grant to decedent’s estate an extension of time to elect portability based on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-3 have been satisfied accordingly we grant an extension of time of days from the date of this letter in which to elect portability under sec_2010 the election should be made by filing a complete and properly-prepared form_706 and a copy of this letter within days from the date of this letter to the cincinnati service_center at the following address internal_revenue_service cincinnati service_center stop cincinnati oh for purposes of electing portability a form_706 filed by decedent’s estate within days from the date of this letter will be considered to be timely filed the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination if it is later determined that based on the value of the gross_estate and taking into account any taxable_gifts decedent’s estate is required to file an estate_tax_return pursuant to sec_6018 the commissioner is without authority under sec_301_9100-3 to grant to decedent’s estate an extension of time to elect portability and the grant of the extension referred to in this letter is deemed null and void plr-128763-15 this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely leslie h finlow leslie h finlow senior technician reviewer office of the associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes cc


internal_revenue_service date cc ita b02 ------------------ conex-163079-04 uil number info release date the honorable carl levin united_states senator michigan avenue room detroit michigan attention david allen dear senator levin this letter responds to your inquiry dated date on behalf of your constituents ------------------------------------------------------- -----------------------asked why they cannot offset their bond interest_income with losses they have incurred on sales of stock under the internal_revenue_code generally a taxpayer may deduct losses from the sale_or_exchange of capital assets such as shares of stock to the extent the taxpayer has gains from the sale of capital assets an individual however may deduct up to dollar_figure dollar_figure in the case of a married individual filing a separate_return of additional capital losses to offset ordinary_income such as interest_income although the limit on capital losses may in some circumstances prove frustrating to taxpayers the limit is statutory only congress can change it i hope this general information is helpful if you have any additional questions please contact me or ----------------------- identification_number ------------- at ------------------------ sincerely robert m brown associate chief_counsel income_tax and accounting


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc psi b07-plr-123132-02 date date a b c d e f g dear a acquired oil_and_gas working interests in leases located in the c and equipment from the predecessor of b the consideration a paid included i an initial cash payment and ii additional payments pursuant to a recourse promissory note payable based on the actual sec_29 credits produced plus interest prior to the assignment of the assets to a b transferred two carved-out production payments burdening the subject interests to an affiliate of b the senior production_payment was dollar denominated and the junior production_payment was volumetric also b agreed to manage the subject interests pursuant to a management services agreement the senior production_payment terminated on d a and b expect that the junior production_payment will terminate in e b will purchase from a a volumetric production_payment burdening the subject interests pursuant to the terms of the purchase and sale agreement the parties will agree to several changes to the documents from the original transaction in order to accommodate the creation of the production_payment the closing date of the production_payment will occur after a number of conditions precedent have been satisfied including the receipt of a favorable private_letter_ruling in response to this request the production_payment will be a volumetric production_payment entitling b as owner to of the monthly net profits attributable to the subject interests beginning pincite a m on the day the junior production plr-123132-02 payment ends through the hour of the day on which mmbtu’s have been produced and sold from the subject interests from date as consideration for the production_payment b has agreed to pay a at closing a purchase_price equal to dollar_figureg plus an adjustment amount that is a function of natural_gas prices the production_payment will be payable solely from production attributable to the subject interests and not from any other source the estimated present_value of the production attributable to the subject interests after the expiration of the production_payment will represent approximately of the present_value of the entire production from the subject interests as of date the production_payment is limited by a quantum of mineral a specified amount of production equal to of the estimated recoverable reserves as of date on the basis of the foregoing facts you requested the following rulings the purchase of the production_payment by b and the amendments to the transaction agreements do not affect a’s ownership of the entire economic_interest in the subject interests for purposes of sec_29 and sec_611 of the code and the treasury regulations the regulations thereunder the production_payment is properly characterized as a mortgage loan for purposes of sec_636 and the regulations thereunder a will continue to be entitled to claim all sec_29 tax_credits attributable to the subject interests sec_1_611-1 of the income_tax regulations provides that an economic_interest is possessed in every case in which the taxpayer has acquired by investment any interest in mineral in place and secures by any form of legal relationship income derived from the extraction of the mineral to which the taxpayer must look for a return of the taxpayer's capital sec_1_614-1 provides that the term_interest means an economic_interest in a mineral deposit within the meaning of sec_1_611-1 the term includes working or operating interests royalties overriding royalties net profits interests and to the extent not treated as loans under sec_636 production payments sec_636 and sec_1_636-1 provide that a carved out production_payment is treated as a mortgage loan on the burdened mineral_property sec_1_636-3 defines the term production_payment to mean a right to a specified share of the production from mineral in place if as and when produced or the proceeds from the production the right must be an economic_interest in the mineral in place it may burden more than one mineral_property and the burdened plr-123132-02 mineral_property need not be an operating_mineral_interest the right must have an expected economic life at the time of its creation of shorter duration than the economic life of one or more of the burdened mineral properties a right to mineral in place that can be required to be satisfied by other than the production of mineral from the burdened mineral_property is not an economic_interest in mineral in place a production_payment may be limited by a dollar amount a quantum of mineral or a period of time a right to mineral in place has an economic life of shorter duration than the economic life of a mineral_property burdened thereby if the right may not reasonably be expected to extend in substantial amounts over the entire productive life of the mineral_property sec_29 provides a credit for qualified_fuel as defined in sec_29 sold by the taxpayer to an unrelated_person during the taxable_year the production of which is attributable to the taxpayer in this case a will carve out a production_payment that is limited to a stated percentage of the reserves currently known to exist at the time the transaction is consummated the production_payment is payable solely from production from the burdened properties and has an economic life of shorter duration than the economic life of the burdened properties accordingly based on the information submitted and the representations made the production_payment meets the requirements of sec_1 a and is treated as a mortgage loan since a production_payment is treated as a loan a has not disposed of its economic_interest in the property therefore the production from the properties will be attributable to a based on your representations we conclude that the purchase of the production_payment by b and the amendments to the transaction agreements do not affect a’s ownership of the entire economic_interest in the subject interests for purposes of sec_29 and sec_611 of the code and the treasury regulations the regulations thereunder the production_payment is properly characterized as a mortgage loan for purposes of sec_636 and the regulations thereunder a will continue to be entitled to claim all sec_29 tax_credits attributable to the subject interests this ruling is directed only to the taxpayer s requesting it sec_6110 of the code provides that it may not be used or cited as precedent plr-123132-02 a copy of this letter must be attached to any income_tax return to which it is relevant sincerely joseph h makurath senior technician reviewer office of associate chief_counsel passthroughs and special industries


t c memo united_states tax_court peters gamm west vincent inc richard l west judith l west marc a vincent deborah s vincent gary l gamm and connie f gamm petitioners v commissioner of internal revenue respondent don s and constance j peters petitioners v commissioner of internal revenue respondent docket nos filed date thomas c triplett for petitioners in docket no jack d flesher for petitioners in docket no frank m schuler and michael l boman for respondent memorandum findings_of_fact and opinion körner judge respondent determined deficiencies additions and penalties with respect to petitioners' federal income taxes for the years and in the amounts as follows docket no petitioner year deficiency richard l and dollar_figure judith l west big_number marc a and big_number deborah s vincent big_number big_number gary l and big_number connie f gamm big_number big_number don s and constance j peters--docket no additions to tax penalty year deficiency sec_6651 sec_6653 sec_6662 dollar_figure dollar_figure dollar_figure -- big_number big_number -- dollar_figure big_number big_number -- big_number the above cases were consolidated for trial briefing and opinion all statutory references are to the internal_revenue_code in effect for the years in issue and all rule references are to the tax_court rules_of_practice and procedure except as otherwise noted petitioners richard l and judith l west filed joint income_tax returns for and petitioners marc a and deborah s vincent filed joint income_tax returns for through petitioners gary l and connie f gamm filed joint income_tax returns for taxable years through the gamms the vincents and the wests resided in wichita kansas at the time their respective petitions were filed petitioners don s and constance j peters filed joint income_tax returns for through and lived in towanda kansas at the time their petition was filed peters gamm west inc was an s_corporation formed under the laws of the state of kansas in after concession sec_2 and settlement of various issues we must decide whether peters gamm west vincent inc pgwv is entitled to a deduction for legal fees incurred in defending an action brought by the securities_and_exchange_commission sec against one of the principals of pgwv we hold that it is not whether the legal fees are deductible by pgwv as compensation to petitioner don s peters we hold that they are not whether petitioner don s peters individually is entitled to a deduction under sec_212 in an amount equal to the previously disallowed amounts paid_by pgwv in defending the legal action brought by the sec we hold that he is findings_of_fact in date gamm ivan west ivan and peters formed an equal partnership called investment management group img the in marc a vincent became a principal of the firm and accordingly in the name was amended to peters gamm west vincent inc pgwv hereinafter references to pgwv will be to peters gamm west inc or peters gamm west vincent inc depending on the year involved petitioners peters conceded the sec_6651 addition_to_tax for tax years and and the sec_6662 penalty for the tax_year respondent conceded the sec_6653 addition_to_tax for the tax_year and the sec_6662 penalty for the tax_year business_purpose of img was to act as an investment adviser provide advice with respect to the buying and selling of securities and manage money for clients on a discretionary basis the partnership filed a form adv dated date with the sec to register as an investment adviser certain prior activities of the partners were excluded from img's business pursuant to the partnership_agreement one of the excluded activities of ivan was a consulting agreement with energy reserves group erg a publicly held company located in wichita kansas pursuant to the consulting agreement ivan along with wayne swearingen was to obtain debt or equity financing for erg on date a public_tender_offer was made for all outstanding_stock of erg prior to the tender offer several individuals purchased substantial quantities of erg stock which they sold for a significant profit after announcement of the tender offer on date bernard lounsbury lounsbury tendered checks in the amount of dollar_figure each to peters and gamm on date mr peters deposited a check into his personal checking account from kenneth mick mick in the amount of dollar_figure lounsbury and mick were business associates of mr peters but were not clients of img at the time of these payments the payors were indebted to peters in amounts greater than the payments mr peters reported the dollar_figure as income on his schedule c for in date the img partners received subpoenas from the sec that sought documents and testimony concerning the transactions involving erg stock made around the time of the tender offer the partners met with attorneys from various law firms located in wichita kansas and washington d c to determine how best to respond to the subpoenas to determine what the implications were as to the firm or the individual partners and to ascertain what steps needed to be taken initially none of the partners knew that the investigation was specifically targeting the conduct of peters on date an agreement was executed whereby ivan withdrew from the partnership pursuant to such agreement ivan received the value of his capital_contribution as well as a commitment for one-sixth of the annual net_income of the partnership or any successor to the partnership on date img was dissolved and replaced by peters gamm west inc the corporation began conducting business in date the corporation assumed all of the partnership's assets retained its clients kept the same employees and place of business and assumed all partnership obligations and liabilities the business of img wa sec_3 pgwv's income_tax return shows that the date of election as an s_corporation was date this conflicts with the withdrawal agreement executed by the investment management group on date the validity of the s election is not in issue nor is the validity of the partnership withdrawal agreement uninterrupted and the clients of img were told that there had been a name change payments were made to ivan pursuant to the deferred_compensation agreement previously executed by img sometime after ivan's departure his son richard west richard who had been employed by img and pgwv became a shareholder of pgwv on date the corporation adopted a resolution that stated resolved that the corporation continue to pay legal expenses for attorneys engaged by mr don peters in connection with the investigation by the securities exchange commission with respect to sales of stock of erg the payment of such expenses is subject_to the understanding and acknowledgment by mr peters that payment of such expenses is not to be construed by sic any indication that the corporation has any responsibility with respect to the particular matters being investigated or obligated as to any liability damages penalties or fines that may result from said investigation it is to be understood that the corporation may at any time discontinue the payment of such legal expenses and thereupon will have no obligation with respect to such expenses based on this resolution we conclude that at the time of incorporation the pgwv shareholders knew that the investigation was focused on the activities of peters peters owned percent percent and percent of pgwv during the years through respectively on date the corporation filed an amendment to the adv form with the sec which indicated that its name had changed from img to pgwv at the end of the name was amended to peters gamm west vincent inc to reflect the addition of a shareholder mark a vincent in date the principals were informed by counsel that if the sec were successful against peters it would rescind his license and it would probably turn its attention towards the company and attempt to revoke its license the principals of pgwv were involved in all aspects of the representation by counsel and in forming a strategy as to how to proceed they did not want peters to make any decisions without them especially regarding any settlements with the sec their efforts were aimed at avoiding litigation in date the sec filed a complaint against peters and five other individuals alleging acts in violation of the securities exchange act of and rules promulgated thereunder pgwv was not named as a party to the suit specifically the sec alleged in its complaint that peters improperly obtained material nonpublic information from ivan's files which he communicated to mick and lounsbury who were able to profit by buying the stock of erg themselves or by supplying the information to others who did so pursuant to such scheme peters allegedly received a portion of those profits in the form of repayment of loans previously made by him to mick and lounsbury at the time of repayment mick had financial problems the case was heard before a jury which held for peters the sec appealed to the tenth circuit_court of appeals which reversed and remanded to the trial_court sec v peters 978_f2d_1162 10th cir prior to rehearing the parties reached a settlement pursuant to the settlement peters was to pay dollar_figure representing the profits of the alleged inside trading such payment was waived in light of peters' poor financial condition the allegations of the sec were never proven by the sec and peters did not admit to any wrongdoing when the complaint was filed pgwv was told by counsel to amend its adv filing with the sec such amendment made on date disclosed the existence and nature of the suit pgwv also disclosed the suit on its audited balance sheets indicating that the company is committed to retaining the services of this officer and accordingly indemnified him for any legal fees incurred in connection with this complaint pgwv hired sullivan higdon a public relations firm to assist in damage control deductions were claimed for such payment but they are not in issue as a result of the sec's complaint merrill lynch a brokerage firm deleted pgwv from its list of investment managers available to clients of one of its consulting services the notice from merrill lynch acknowledged that pgwv was not implicated but indicated that the removal of the latter from the list was prudent licensing bureaus for the states of maine and kentucky suggested that pgwv withdraw its application_for investment adviser registration until the matter with the sec was resolved one of the largest clients of pgwv the kansas public employees retirement_system kpers representing about percent of the firm's business was valued at around dollar_figure million and later grew to almost dollar_figure million trustees of the kpers fund informed img at a public meeting that the fund would no longer utilize the services of pgwv if peters were found to have committed any of the alleged insider trading or any other wrongdoing pgwv claimed as a deduction legal fees in the amounts of dollar_figure dollar_figure and dollar_figure in computing its net_income on its subchapter_s return for the tax years through respectively respondent disallowed dollar_figure dollar_figure and dollar_figure of those amounts in her timely notices of deficiency stating that it had not been established that those amounts were for ordinary and necessary business_expenses rather than nondeductible business_expenses of peters the pro_rata share of such deductions claimed by petitioners on their income_tax returns was disallowed respondent has conceded that the amounts claimed as legal fees were paid_by pgwv opinion the primary issue is whether pgwv in computing net_income for subchapter_s purposes may deduct legal fees incurred in defending an action brought by the sec against petitioner peters one of the shareholders of pgwv sec_162 allows a taxpayer to deduct ordinary and necessary expenses paid_or_incurred in carrying_on_a_trade_or_business if we determine that the amounts in question are not deductible as legal fees we must determine whether they are deductible as compensation to peters if the fees are not deductible by pgwv we must determine whether peters individually is entitled to a deduction under sec_212 petitioners have the burden_of_proof rule a 290_us_111 deductibility of legal fees by pgwv under sec_162 sec_162 allows a deduction for all the ordinary and necessary expenses paid_or_incurred during the taxable_year in carrying on any trade_or_business for an expense to be deductible under sec_162 it must meet five basic elements a it must be ordinary b it must be necessary c it must be paid_or_incurred by the taxpayer in the taxable_year d there must be a trade_or_business and e the expense must arise in connection with or proximately result from that trade_or_business o'malley v commissi91_tc_352 these elements are in the conjunctive if just one is not satisfied the deduction is not allowed because we make our decision based on the last element whether the expenses arose in the carrying on of pgwv's trade_or_business we do not consider the other elements respondent has conceded that legal fees of dollar_figure dollar_figure and dollar_figure were incurred for the tax years through respectively and that pgwv paid them respondent argues that the legal fees are personal in nature and they did not arise in connection with or proximately from pgwv's business petitioners take the position that pgwv the successor to img incurred the legal fees to protect its trade_or_business as well as its reputation and that because payment of the fees was helpful to pgwv's trade_or_business they are deductible expenses which are personal in nature are not generally deductible sec_262 72_tc_340 an expense must be directly connected with or proximately result from the business_of_the_taxpayer 276_us_145 see also 308_us_488 where expenses of litigation are involved the origin of the claim which gave rise to the litigation rather than the consequences of the litigation is evaluated to ascertain whether the expenses are business or personal in nature 372_us_39 the expenses of an activity are not automatically rendered nondeductible merely because the activity is illegal or inappropriate see johnson v commissioner supra legal expenses_incurred in unsuccessful defense against criminal charges brought against taxpayer's husband due to his participation in a tax_fraud scheme treated as deductible under sec_212 because the criminal prosecution arose from his profit-seeking activities additionally otherwise allowable deductions under sec_162 or sec_212 which arose from an illegal activity will not be disallowed on public policy grounds 383_us_687 in 59_tc_708 we stated quite plainly the origin of the claim rule does not contemplate a mechanical search for the first in the chain of events which led to the litigation but rather requires an examination of all the facts the inquiry is directed to the ascertainment of the kind of transaction out of which the litigation arose consideration must be given to the issues involved the nature and objectives of the litigation the defenses asserted the purpose for which the claimed deductions were expended the background of the litigation and all the facts pertaining to the controversy citations and fn ref omitted we must identify the claim that gave rise to the legal fees whose deductibility is here in question and then determine whether the claim was proximately related to the trade_or_business of pgwv in 320_us_467 a dentist who sold mail order false teeth was allowed to deduct legal fees stemming from allegations that he made fraudulent claims regarding the quality of his product finding that there was no doubt that the legal expenses of taxpayer were directly connected with 'carrying on' his business id pincite the court determined that the expenditures were ordinary and necessary under sec_23 of the revenue act of ch 49_stat_1658 commissioner v heininger supra pincite in united_states v gilmore supra by contrast the taxpayer incurred legal fees in a divorce proceeding brought by this section is essentially the same as present sec_162 his wife who stood to gain control of his three incorporated auto dealerships the taxpayer argued that because he faced losing control of his corporations the legal expenses were incurred in the defense or preservation of income-producing property the court declined to attach controlling importance to the consequences that the taxpayer faced but rather examined whether the claim arose in connection with the taxpayer's profit- seeking activity the court did not allow the deductions because the wife's claims stemmed from the marital relationship and not from any income-producing activity of the taxpayer united_states v gilmore supra pincite see kornhauser v united_states supra pincite respondent argues that the origin of the sec's claim did not arise from pgwv's trade_or_business and that under united_states v gilmore supra the consequences to pgwv are irrelevant to the analysis respondent also argues that the origin of the claim was not in pgwv's trade_or_business because img's partnership_agreement specifically excluded the erg deal and that peters' activities were not a business activity of img or pgwv petitioners argue that the alleged claim had its origin in the trade_or_business of the firm which was in the business of acting as an investment adviser and therefore deduction of the legal expenses_incurred in defending such action is not barred by united_states v gilmore supra the actual tender offer which was excluded from the partnership_agreement was not the origin of the claim rather the origin of the claim was the alleged misappropriation of inside information followed by improper trading peters received dollar_figure from lounsbury and dollar_figure from mick on november and respectively the sec alleged in its suit brought against peters that although these payments were debt repayment they were only made as a result of peters' having illicitly obtained inside information concerning the pending tender offer for stock of erg which he then relayed to mick and lounsbury who profited therefrom by trading in erg stock the underlying transaction or set of facts that gave rise to the claim is not the actual debt repayment but rather the facts giving rise to the claim are that the debt repayment was in actuality the profits of insider trading the claim is the sec's allegations pgwv was not named as a defendant in the sec's suit if the gain had been realized by or for the benefit of pgwv then the activity although illicit would have been within the company's trade_or_business for instance if a bank executive is charged with embezzlement that conduct would be within his own profit-seeking activities not that of the bank but if the bank executive were found guilty of causing improper foreclosures and such foreclosures benefited the bank that activity although improper would be in the trade_or_business of the bank petitioners have introduced evidence that there would have been injurious consequences to the business reputation of pgwv if the sec prevailed although we are instructed by boagni v commissioner supra to consider all the facts and circumstances we are bound by the rule established by united_states v gilmore supra to look to the origin of the underlying claim and not the consequences the origin of the claim herein was not in the trade_or_business of pgwv but rather in peters' separate activities the legal expenses were incurred defending a claim which had its origin in a transaction that was not part of pgwv's business and which benefited peters personally we find that the claim did not arise in the trade_or_business of pgwv and therefore the amounts in question are not deductible as legal fees by pgwv under sec_162 to this extent respondent's determination is sustained deductibility of the fees by pgwv as compensation to peters having concluded that the amounts in question are not deductible by pgwv as legal fees we now consider petitioners' contention that payment of such fees is deductible by pgwv as compensation to peters sec_162 allows a deduction for reasonable salaries or compensation_for_personal_services actually rendered such payments are deductible only if they were made with the intention to compensate paula constr co v this issue was raised by petitioners other than mr peters in this case commissioner 58_tc_1055 affd without published opinion 474_f2d_1345 5th cir petitioners have failed to introduce any evidence that the payment of legal fees was intended by pgwv to serve as compensation or salary to mr peters accordingly pgwv is not allowed to deduct the payment of the legal fees as compensation to peters whether a portion of the firm's expense was an allowable deduction to peters last we must decide whether the expenses_incurred were deductible by peters under sec_212 individuals may deduct all the ordinary and necessary expenses paid_or_incurred during the tax_year for the production_or_collection_of_income our analysis is similar to that used for sec_162 the difference being that the profit-seeking or income-producing activity need not amount to a trade_or_business 72_tc_340 accordingly the expense must meet four basic elements a payment of the legal fees must be ordinary b it must be necessary c they must be paid_or_incurred during the tax_year by the taxpayer and d the expense must arise in connection with or proximately result from the taxpayer's profit-seeking activity o'malley v commissi91_tc_352 this issue was raised in this case by petitioners peters a ordinary ordinary expenses have been described as normal usual or customary deputy v du pont u s pincite ordinary has been used to distinguish currently deductible expenses from capital expenses such as startup costs or acquisition costs or costs in defending title 403_us_345 397_us_572 211_f2d_66 2d cir affg 19_tc_1235 an expense may be deductible as one incurred in the ordinary course of business even if it is unlikely to recur welch v helvering 289_us_111 the supreme court in 320_us_467 allowed a deduction for legal fees where obtaining legal representation was the normal response of one whose business was threatened by a law suit see also kanelos v commissioner a memorandum opinion of this court dated date respondent argues that the origin of the claim giving rise to the legal expenses here in issue was capital in nature because the claim involved the sale of a capital_asset namely the erg stock and because peters undertook to defend against the claim in order to prevent disgorgement of proceeds of insider trading respondent contends that under 96_tc_713 such legal fees are not currently deductible respondent's argument fails for the following reasons although the underlying transaction here did remotely involve a capital_transaction the purchase of the erg stock the relation of peters to such transaction is too attenuated peters allegedly gave inside information to mick and lounsbury who then profited from such information and returned some of the profits by the repayment of loans peters did not buy any stock furthermore the allegations of the sec were never proven or admitted by peters in barrett v commissioner supra the taxpayer was sued by the sec inter alia for alleged inside trading as part of a settlement he disgorged his profits the case is distinguishable because there the taxpayer was a buyer-broker and the underlying transaction was the purchase of certain options by the taxpayer based on inside information in our case peters was not a buyer-broker but was an investment adviser he did not personally buy the stock which gave rise to the claim in the present case peters was alleged to have committed an inside trade and faced losing his license as an investment adviser there being nothing capital concerning the legal fees they were spent to protect peters and his money-making activity we find that defending the sec allegations was proximately related to his business and accordingly we hold that the payment of the legal fees was ordinary in nature for him b necessary a necessary expense is one that is appropriate or helpful to the taxpayer in his profit-seeking activities commissioner v heininger supra pincite peters was an investment adviser the aim of the litigation with the sec was to revoke his license in such endeavors we find that the legal expenses were necessary to protect his profit-seeking activities c paid_or_incurred during the tax_year respondent conceded that legal fees of dollar_figure dollar_figure and dollar_figure were incurred for the tax years through respectively and that pgwv paid them respondent disallowed deductions of dollar_figure dollar_figure and dollar_figure for the years through we have held that the payment of the legal fees was not deductible as an expense by pgwv under sec_162 petitioner argues that the legal fees were constructively paid_by him and refers to broad v commissioner tcmemo_1990_317 for support in broad a c_corporation made payments on a loan that was a personal obligation of one of the shareholders this court held that the payment of the loan obligation was a constructive_dividend we then allowed the taxpayer a deduction for the interest on the loan in other words we reasoned that because he was treated as having received an amount equal to the loan payment by the bank for him he should be treated as having paid the interest to the bank which was part of that payment broad v commissioner supra citing hufnagle v commissioner tcmemo_1986_119 we have repeatedly held that where a corporation pays the personal expenses of a shareholder such payment will be treated as a constructive_dividend to the shareholder to the extent of the corporation's earnings_and_profits and to the extent that the corporation does not expect repayment 85_tc_332 60_tc_728 37_tc_650 mcwilliams v commissioner tcmemo_1995_454 smith v commissioner tcmemo_1995_410 generally the case law deals with deemed or constructive dividends respondent has not determined nor argued that peters received dividend income and accordingly we analyze only whether there has been a constructive distribution neither party has sought to characterize the payment of the legal fees as a dividend to peters nor are the facts necessary for such an analysis before us in our case legal fees were paid_by pgwv there was no expectation of repayment and the payment directly benefited peters we therefore find that the payment of the legal fees constituted a distribution to peters we make no decision as to the characterization of the distribution either as income to peters a loan to him or a return_of_capital it is not necessary to our conclusion that peters received a constructive distribution of the funds which in turn were used to pay the legal charges incurred for his benefit we hold that peters was in constructive receipt of the distribution in the amount of the legal fees and for purposes of claiming them as a deduction he has also constructively paid the legal fees cf 496_f2d_899 5th cir affg in part revg in part and remanding 60_tc_36 d incurred in connection with taxpayer's profit-seeking activity the final element will be met where the activity proximately results from the taxpayer's profit-seeking activity 308_us_488 276_us_145 we have held above that the origin of the claim was not in the trade_or_business of pgwv but rather arose in peters' own activities the question becomes whether the activity was a profit-seeking activity for purposes of sec_212 the transaction in question involved peters' receipt of certain payments that the sec alleged were made only as the result of an inside trade those allegations were never proven if they were true and peters did engage in an inside trade such trade was a profit-seeking activity albeit an improper one see kent v commissioner tcmemo_1986_324 charter boat captain arrested for marijuana smuggling allowed to deduct legal fees paid_by an undisclosed third party if the allegations were not true then the underlying transaction was the repayment of loans from colleagues who were not clients of pgwv the loans resulted from peters' profit-making business relationship with such colleagues and we conclude that the payment of the legal fees cannot reasonably be construed as being personal as opposed to business in nature kornhauser v united_states supra pincite the necessary elements having been met we hold that peters is entitled to a deduction under sec_212 for the previously disallowed legal fees paid on his behalf by pgwv decisions will be entered under rule


department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------------- id no ------------- telephone number --------------------- refer reply to cc corp bo1 plr-101889-07 date date internal_revenue_service number release date index number ------------------------ ------------------------- ---------------------- ---------------------------- ---------------------------------- in re ----------------- parent subsidiary subsidiary -------------------- ---------------------------- ------------------------- ----------------------------------------- ---------------------------- ------------------------- --------------------- ---------------------------- business a country x country y country y regulator a year date b date c date d ----------- ---------- ------ ---------------- -------- ------- -------------------- ------------------ ----------------------- plr-101889-07 date e dear --------------- --------------------- this letter replies to your letter dated date requesting rulings concerning certain federal_income_tax consequences of a proposed transaction the following information is provided in that letter and subsequent correspondence the rulings contained in this letter are based on facts and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party this office has not verified any of the materials submitted in support of the request for rulings sec_3 of revproc_2007_3 2007_1_irb_108 provides that the service will not rule on the qualification of a transaction as a reorganization under sec_368 of the internal_revenue_code unless the service determines that there is a significant issue that is not clearly and adequately addressed by published authority the taxpayer has submitted information indicating that a significant issue exists with respect to the sec_368 transaction described below summary of facts parent a country x corporation is the parent company of a worldwide group engaged in business a in year parent acquired solely for cash approximately a percent of the shares of subsidiary a country y corporation engaged in business a between date b and date c the acquisition although the acquisition was a qualified_stock_purchase within the meaning of sec_338 parent has not made and does not intend to make an election under sec_338 with respect to the acquisition under country y law the acquisition was required to be and was approved by the country y regulator parent represented to the country y regulator that it would continue to conduct subsidiary 1’s business a operations in country y in a separate corporation both parent and subsidiary operate u s branches and have historically filed united_states income_tax returns as foreign_corporations engaged in a u s trade_or_business subsidiary 1’s u s branch has an effectively connected net_operating_loss carryforward a portion of which is subject_to limitation under sec_382 parent believes that the fair_market_value of one or more of subsidiary 1’s u s branch assets may exceed subsidiary 1’s basis therein at this time parent now desires to simplify its organizational structure and to integrate subsidiary 1’s operations into the parent worldwide group in addition parent desires plr-101889-07 to eliminate the minority ownership of subsidiary which is less than percent the proposed restructuring described below the restructuring will allow the integration of subsidiary 1’s non-country y operations including its u s branch with their parent counterparts and will eliminate the minority shareholders of subsidiary the restructuring requires the approval of the country y regulator and cannot be undertaken in a manner that results in parent’s direct ownership of subsidiary 1’s business a operations in country y even as an interim step in an overall transaction providing for such operations to be conducted by a parent subsidiary proposed transaction for the above reasons parent proposes to undertake the restructuring pursuant to one overall plan through the following steps some of which have been consummated and all of which have occurred or will occur after year i on date d subsidiary established subsidiary as a wholly owned country y subsidiary with a contribution of cash ii on date e parent and subsidiary entered into an agreement under which parent will acquire all of subsidiary 1’s assets and assume all of its liabilities other than those transferred to subsidiary in step iii below through the merger of subsidiary with and into parent the merger iii pursuant to the merger agreement subsidiary will transfer subsidiary 1’s business a operations in country y to subsidiary solely in exchange for subsidiary 2’s issuance of stock to subsidiary and subsidiary 2’s assumption_of_liabilities related to such operations the contribution subsidiary will change its name after the contribution iv subsidiary will merge with and into parent in the merger parent’s shares in subsidiary will be cancelled and the minority shareholders of subsidiary will exchange their subsidiary shares solely for parent shares fractional shares will not be issued by parent instead any fractional shares of parent that any shareholders of subsidiary would otherwise receive in the merger will be aggregated and the shares sold the cash proceeds from the sale of those shares will be distributed to the shareholders who would otherwise receive fractional shares following these steps parent may transfer certain assets acquired in the merger to related parties other than subsidiary for purposes of i facilitating integration of subsidiary 1's operations with operations of parent or other related entities or ii achieving other efficiencies however the bulk of the u_s_assets acquired in the merger will not be transferred representations plr-101889-07 the taxpayer has provided the following representations in connection with the transactions described above a pursuant to the merger as a result of the operation of law the following will occur simultaneously i all of the assets and liabilities of subsidiary will become assets and liabilities of parent and ii subsidiary will cease its separate legal existence b the fair_market_value of the parent stock and other consideration received by each subsidiary shareholder will be approximately equal to the fair_market_value of the subsidiary stock surrendered in the exchange c the payment of cash to shareholders that would otherwise receive fractional shares of parent stock is solely for the purpose of avoiding the expense and inconvenience to parent of issuing fractional shares and does not represent separately bargained-for consideration the total cash consideration that will be paid in the transaction to the subsidiary shareholders instead of issuing fractional shares of parent stock will not exceed of the total consideration that will be issued in the transaction to the subsidiary shareholders in exchange for their shares of subsidiary stock the fractional share interests of each subsidiary shareholder will be aggregated and no subsidiary shareholder will receive cash in an amount equal to or greater than the value of one parent share d parent has no plan or intention to reacquire any of its stock issued in the transaction except pursuant to forward purchase agreements applicable to parent shares issued to minority shareholders in exchange for subsidiary shares currently subject_to such agreements e parent has no plan or intention to sell or otherwise dispose_of any of the assets of subsidiary acquired in the transaction except for dispositions made in the ordinary course of business or transfers described above in the proposed transaction section of this letter f the liabilities of subsidiary assumed by parent and the liabilities to which the transferred assets of subsidiary are subject were incurred by subsidiary in the ordinary course of its business g following the merger parent will continue the historic_business of subsidiary or use a significant portion of subsidiary 1’s historic_business_assets in a business either directly or indirectly through subsidiary h parent subsidiary and the shareholders of subsidiary will pay their respective expenses if any incurred in connection with the transaction i at the time of the merger there will be no intercorporate debt existing plr-101889-07 between parent and subsidiary other than intercorporate accounts arising in the normal course of business and no such intercorporate debt will have been issued acquired or settled at a discount j no two parties to the transaction are investment companies as defined in sec_368 and iv k subsidiary is not under the jurisdiction of a court in a title_11_or_similar_case within the meaning of sec_368 l the fair_market_value of the assets of subsidiary transferred to parent will equal or exceed the sum of the liabilities assumed by parent within the meaning of sec_357 m parent and subsidiary will adopt a plan of merger and the merger will occur pursuant to such plan n at the time of the acquisition parent had no plan or intention to merge subsidiary with and into parent or liquidate subsidiary into parent o since the acquisition no distribution will have been made with respect to stock of subsidiary other than regular normal distributions made pursuant to historic dividend-paying practice of subsidiary either directly or through any transaction agreement or arrangement with any other person p to the best of the knowledge of parent subsidiary and subsidiary the contribution will have no present or anticipated federal_income_tax consequences q there is no plan or intention for subsidiary to become a domestic_corporation within the meaning of sec_7701 a controlled_foreign_corporation within the meaning of sec_957 or a passive_foreign_investment_company within the meaning of sec_1297 rulings based solely on the information submitted and the representations set forth above we rule as follows the contribution will be treated for federal_income_tax purposes in accordance with its form as occurring prior to the merger provided the merger of subsidiary with and into parent qualifies as a statutory merger under applicable law the merger will be a reorganization within the meaning of sec_368 and subsidiary and parent will each be a_party_to_a_reorganization within the meaning of sec_368 plr-101889-07 subsidiary will recognize no gain_or_loss on the transfer of its assets to parent and the assumption by parent of subsidiary 1’s liabilities sec_361 and sec_357 the basis of subsidiary 1’s assets in the hands of parent will be the same as the basis of such assets in the hands of subsidiary immediately before the merger sec_362 the holding_period of subsidiary 1’s assets in the hands of parent will include the period during which the assets were held by subsidiary sec_1223 pursuant to sec_381 and sec_1_381_a_-1 parent will succeed to and take into account as of the close of the date of the merger subsidiary 1’s items described in sec_381 subject_to the conditions and limitations specified in sec_381 sec_382 sec_383 and sec_384 and the regulations thereunder each subsidiary shareholder will recognize no gain_or_loss on the receipt of parent stock in exchange for subsidiary stock sec_354 any subsidiary shareholder who receives cash pursuant to the fractional share procedure will recognize gain_or_loss measured by the difference between the amount of cash received and the basis allocated to the share s sold any gain_or_loss will be treated as capital_gain or loss provided each such share is held as a capital_asset on the date of the merger sec_1221 and sec_1222 each subsidiary shareholder’s basis in the parent stock received will be the same as the basis of the share or shares or allocable portions thereof of subsidiary stock exchanged therefor allocated in the manner described in sec_1_358-2 each subsidiary shareholder’s holding_period in the parent stock received in the merger will include the holding_period in the subsidiary shares exchanged therefor provided the subsidiary stock is held as a capital_asset on the date of the merger sec_1223 closing_agreement in connection with the issuance of this ruling letter a closing_agreement is being entered into between the internal_revenue_service on the one hand and parent and subsidiary on the other hand which will provide among other things that the contribution is an exchange under sec_351 and that the basis of the assets received by subsidary in the contribution will be determined under sec_362 this private_letter_ruling will become effective upon the execution of the closing agreements no opinion is expressed about the tax treatment of the proposed transaction caveats plr-101889-07 under other provisions of the code and regulations which may also be applicable thereto or about the tax treatment of any conditions existing at the time of or effects resulting from the transactions that are not specifically covered by the above rulings procedural statements this ruling letter 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 each taxpayer involved in the transaction should attach a copy of this ruling letter to the taxpayer's federal_income_tax return for the taxable_year in which the transaction covered by this letter is completed alternatively taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of this ruling letter in accordance with the power_of_attorney on file in this office a copy of this ruling letter will be sent to your authorized representatives sincerely ______________________________ michael j wilder senior technician reviewer branch office of associate chief_counsel corporate


internal_revenue_service number release date index number ---------------------------------- -------------------------------- ----------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact --------------------- id no -------------- telephone number ---------------------- refer reply to cc intl b02 plr-133095-12 date date legend taxpayers ----------------------- ------------------ ----------------------- ------------------ corp x country m us corp y us corp z year year year year -------------------------------- ----------------- ------------ -------------------------------------- ----------------- -------------------------------- ----------------- ------- ------- ------- ------- dear ---------------------------- plr-133095-12 this is in response to a letter received in this office dated date in which a ruling is requested to clarify the proper application of certain look-through rules for purposes of determining whether corp x is a passive_foreign_investment_company within the meaning of sec_1297 the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination facts taxpayers are a married couple who own shares in corp x and have filed joint federal_income_tax returns for all taxable years beginning after year corp x is a country m corporation that was founded in year and is a passive_foreign_investment_company pfic within the meaning of sec_1297 since its formation in year corp x has owned all of the outstanding shares of us corp y a domestic_corporation us corp y has owned all the outstanding shares of us corp z since the formation of us corp z in year corp x has always been a holding_company and has never been engaged directly in the conduct of business activities since its formation in year us corp y has been engaged in a business involving the development marketing and support of certain application software for businesses us corp z has been engaged in the conduct of a financing business since its formation nearly all of the income of us corp z has consisted of interest earned on receivables purchased in the course of us corp z’s financing business the amount of income earned by us corp y in the conduct of its business is less than -- of the total income of corp x us corp y and us corp z combined in year and each subsequent taxable_year the gross amount of interest_income earned by us corp y has been less than the amount of gross_income earned by us corp y in the course of its business the income of corp x has consisted almost exclusively of dividends received from us corp y nearly all of these dividends have been immediately re-distributed by corp x as dividends to its shareholders in year and each subsequent taxable_year the gross amount of interest_income earned by corp x when aggregated with the gross amount of interest_income earned by us corp y has been less than the amount of gross_income earned by us corp y in the course of its business from the sales and support of software applications us corp y and us corp z have historically earned significant amounts of taxable_income all of which has been subject_to u s federal_income_tax plr-133095-12 the portion of the outstanding shares of corp x owned directly or indirectly by individuals who are citizens or residents of the united_states for federal_income_tax purposes has been greater than ---- at all times since the beginning of year the board_of directors of corp x has adopted a resolution confirming that corp x has irrevocably waived any protection under the u s -country m treaty against the imposition of the u s accumulated_earnings_tax effective for all prior current and future taxable years law sec_1297 provides that a foreign_corporation is a passive_foreign_investment_company pfic with respect to a taxable_year if either percent or more of the gross_income of the corporation for the taxable_year is passive_income or the average percentage of assets held by the corporation during the taxable_year which produce passive_income or which are held for the production of passive_income is at least percent sec_1297 provides that for purposes of sec_1297 the term passive_income means any income other than income qualifying under the exceptions set forth in sec_1297 which is of a kind which would be foreign_personal_holding_company_income as defined in sec_954 sec_1297 contains a look-through_rule under which a dividend interest or royalty payment that is received by a foreign_corporation from a related_person is not treated as passive_income to the extent that the payment is allocable to income of the payor that is not passive_income sec_1297 contains a look-through_rule that provides that if a foreign_corporation owns directly or indirectly at least percent of the value of the stock of another corporation then the foreign_corporation is treated for purposes of sec_1297 as holding its proportionate share of the assets and as receiving directly its proportionate share of the income of the 25-percent owned subsidiary sec_1298 contains a look-through_rule that provides that if a foreign_corporation own sec_25 percent or more of the shares of a domestic_corporation first-tier domestic_corporation and if the foreign_corporation is either subject_to the u s accumulated_earnings_tax or waives any benefit under any treaty which otherwise would prevent the imposition of the accumulated_earnings_tax then for purposes of determining whether the foreign_corporation is a pfic any shares of another domestic_corporation other than a regulated_investment_company or real_estate_investment_trust second-tier domestic_corporation that are held by the first-tier domestic_corporation are treated as not being a passive_asset and any amount included in the gross_income of the first-tier domestic_corporation with respect to the plr-133095-12 shares of such second-tier domestic_corporation are treated as not being passive_income unless an income_tax treaty provides otherwise a foreign_corporation other than a pfic that has any shareholder who is a u s citizen or resident is subject_to the accumulated_earnings_tax with respect to the corporation’s u s -source income including u s -source dividend and interest_income that is not effectively connected with a trade_or_business conducted within the united_states by the foreign_corporation see sec_532 sec_1_532-1 and sec_1_535-1 an article of the u s -country m treaty provides that a country m corporation may be subject_to the u s accumulated_earnings_tax for a particular taxable_year if or more in value of the outstanding voting shares of the corporation is owned directly or indirectly throughout the last half of the taxable_year by citizens or residents of the united_states other than certain citizens of country m or by residents of a country other than the u s or country m the legislative_history of sec_1298 states the bill further treats stock of certain u s_corporations owned by another u s_corporation which is at least 25-percent owned by a foreign_corporation as a non-passive asset under this rule in determining whether a foreign_corporation is a pfic stock of a regular domestic c_corporation owned by a 25-percent owned domestic_corporation is treated as an asset which does not produce passive_income and is not held for the production of passive_income and income derived from that stock is treated as income which is not passive_income thus a foreign_corporation in applying the look-through_rule applicable to 25-percent owned corporations will be treated as owning nonpassive assets in these cases this rule does not apply however if under a treaty obligation of the united_states the foreign_corporation is not subject_to the accumulated_earnings_tax unless the corporation agrees to waive the benefit under the treaty this rule is designed to mitigate the potential disparate tax treatment between u s individual shareholders who hold u s stock investments through a u s holding_company and those who hold those investments through a foreign holding_company if a foreign_investment_company attempts to use this rule to avoid the pfic provisions it will be subject_to the accumulated_earnings_tax and thus the shareholders of that company will be subject_to tax treatment essentially equivalent to that of the shareholders of pfics h_r rep no 100th cong 2d sess s rep no 100th cong 2d sess joint_committee on taxation description of the technical corrections act of h_r and s jcs-15-87 date plr-133095-12 ruling for purposes of determining whether corp x is a pfic pursuant to sec_1298 corp x is treated as not receiving any portion of the income earned by us corp z and corp x is treated as not owning the assets held by us corp z any dividend received by us corp y from us corp z and any other income received by us corp y is treated under sec_1297 as being received directly by corp x the shares of us corp z that are held by us corp y and any other assets held by us corp y are treated under sec_1297 as being owned directly by corp x pursuant to sec_1298 any dividend received by us corp y from us corp z is treated as not being passive_income and the shares of us corp z that are held by us corp y are treated as not producing passive_income and as not being held for the production of passive_income 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 this private_letter_ruling is directed only to the taxpayer who requested it code sec_6110 provides that it may not be used or cited as precedent a copy of this letter must be attached to any income_tax return to which it is relevant alternatively taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of the letter_ruling in accordance with the power_of_attorney on file with this office copies of this letter are being sent to taxpayer's representatives sincerely jeffery g mitchell chief branch office of the associate chief_counsel international