internal_revenue_service number release date index number ---------------------------------------------------------- ----------------------------- --------------------- --------------------------------- --------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact -------------------------------- telephone number --------------------- refer reply to cc fip b05 plr-129409-11 date january legend bonds ----------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------ ----------------------------------------------- county date ---------------------------------- ------------------- district -------------------------------------------------------- ------------------------------------------------------------------- entity d entity e -------------------------- ------------------------------------ entity f ----------------------------------------------- ------------------------------------------------------------------------- entity g ------------------------------------ ------------------------------------------------------------------ entity h -------------------------------------------------------------- plr-129409-11 --------------------------------------------------------------------------- ------------------------------------------------------------ --------------------- --------------------------- ------------------ --------------------------------- entity i entity j state system a university dear ------------- this letter is in reply to your request for a ruling regarding the effect of the strategic alliance agreement described below specifically you request that the strategic alliance agreement will not cause private_business_use of the district’s tax-exempt_bond financed facilities under sec_141 of the internal_revenue_code the code facts and representations the district is a public hospital district organized under the laws of the state and a political_subdivision of the state the university is also a political_subdivision of the state system a includes entities d e f g h i and j each referred to hereafter as a component entity each of which is either managed by the university or controlled within the meaning of sec_1_150-1 by the university the district represents that each component entity is a political_subdivision of the state or an instrumentality of the university the district and the university acting through system a entered into a strategic alliance agreement as of date the agreement which created an alliance to promote the common goal of providing high quality healthcare services to the public the expected advantages of the agreement include reductions in costs increased efficiency through shared services and improved clinical service through the alignment and growth of clinical programs the agreement establishes a board_of trustees the board for overseeing the operation of the district’s healthcare facilities including its facilities financed with the bonds the facilities and services rendered by the district collectively the services provided by the district and the district’s health care facilities are referred to herein as district health as an additional component of system a and branded as system a the board members are comprised of officers of the district or appointees of the district or a component entity of system a during the term of the agreement district heath plr-129409-11 will serve as the primary vehicle through which healthcare services are rendered by system a to patients residing within the district service area the agreement covers three types of integrated activities i business activities including but not limited to activities related to patient safety quality metrics compliance activities business planning processes and strategic planning where there is no sharing of either revenues or expenses between the participating entities ii the delivery of goods and services through one or more of the component entities which may relate to shared administrative technical and other support services where the participating entities share the costs but do not share the revenues of such arrangement and iii an alignment of the clinical activities and programs of district health with those of one or more of the component entities through the creation of new or expanded programs providing for patient care where there is a sharing of revenues and expenses among the participating entities pursuant to the agreement the district’s assets will remain as presently owned and titled and the district’s liabilities will remain exclusively liabilities of the district the university and system a also currently intend to operate district health through employees of district however the employment status of those employees may change as staffing needs evolve over time the agreement grants to the board broad powers of management over the district assets including the limited ability in the ordinary course of the operation of district health to dispose_of assets owned leased licensed and or otherwise controlled by the district if the disposition proceeds are used exclusively for the purpose of managing growing and operating district health disposal of any of the facilities must be consistent with the continued tax-exempt status of the bonds the agreement also authorizes the board to incur certain liabilities consistent with the budget of district health on behalf of the district certain actions by the board may not occur without the prior approval of the district’s board including but not limited to the transfer or encumbrance of any material asset of district health any decision to spend more than twice the average annual capital on annual capital improvements or equipment acquisition the exercise of the district’s power to raise revenues through the property_tax levy the relocation of the district’s hospital the sale or transfer of any bed license or certificate of need or other hospital licenses applicable to district health and the incurrence of certain indebtedness and the issuance of bonds by the district the board will maintain separate bank accounts in the name of and for the benefit of the district for receipt of all the district revenues derived from the operation of district health those funds will not be commingled with the accounts maintained for the university or system a but the district assets and revenues will be managed by the plr-129409-11 board during the term of the agreement and used exclusively for the benefit of district health law and analysis sec_103 provides that except as provided in sec_103 gross_income does not include interest on any state_or_local_bond sec_103 provides in part that sec_103 shall not apply to any private_activity_bond that is not a qualified_bond within the meaning of sec_141 sec_141 provides that the term private_activity_bond includes any bond issued as part of an issue that meets the private_business_use_test of sec_141 and the private_security_or_payment_test of sec_141 or meets the private_loan_financing_test of sec_141 sec_141 provides that except as otherwise provided in the subsection an issue meets the private_business_use_test if more than percent of the proceeds of the issue are to be used for any private_business_use sec_141 provides that for purposes of sec_141 the term private_business_use means use directly or indirectly in a trade_or_business carried on by any person other than a governmental_unit sec_141 provides that any activity carried on by a person other than a natural_person is treated as a trade_or_business sec_1_141-3 of the income_tax regulations provides that the percent private_business_use_test of sec_141 is met if more than percent of the proceeds of an issue is used in a trade_or_business of a nongovernmental person for this purpose the use of the financed property is treated as direct use of proceeds sec_1_141-1 defines a nongovernmental person as a person other than a governmental person sec_1_141-1 provides that a governmental person means a state_or_local_governmental_unit as defined in sec_1_103-1 or any instrumentality thereof but does not include the united_states or any agency_or_instrumentality thereof sec_1_103-1 describes a state_or_local_governmental_unit as a state territory a possession_of_the_united_states the district of columbia or any political_subdivision thereof sec_7701 provides that where not otherwise distinctly expressed or manifestly incompatible with the intent thereof the term person includes a partnership or association under sec_7701 the term partnership includes any group joint_venture or other unincorporated organization through or by means of which any business financial operation or venture is carried on and which is not a_trust estate or corporation plr-129409-11 under subchapter_k of the code a partnership is considered for various purposes to be either an aggregate of its partners or an entity independent of its partners s rep no pincite h_r rep no pincite under the aggregate approach each partner is treated as an owner of an undivided_interest in partnership assets and operations under the entity approach the partnership is a separate_entity in which partners have no direct interest in the partnership’s assets and operations revrul_75_62 1975_1_cb_188 provides that there is no exclusive rule as to when a partnership will be viewed as an entity or an aggregate the resolution is generally dependent upon the question to be resolved in this case the issue is whether the agreement causes the facilities to be used for a private_business_use here the district the university and the component entities are each either a governmental entity or an instrumentality of a governmental entity however if the agreement creates a partnership between the district and the university and the partnership is viewed as an entity then the partnership would cause private_business_use of the facilities although we are not expressing an opinion as to whether a partnership has been created nevertheless if it were created we conclude that the purposes of sec_141 would be furthered by treating any such partnership as an aggregate of the separate entities entering into the agreement under the aggregate approach the persons using the facilities as a result of the agreement are all governmental persons conclusion we conclude that the agreement does not cause the facilities to be used for a private_business_use under sec_141 this conclusion is based upon information and representations submitted by the district and accompanied by a penalty of perjury statement executed by an appropriate party this ruling is specifically made contingent upon the above-described provisions of the agreement being effective and binding upon the district and the university while this office has not verified any of the material submitted in support of the request for a ruling it is subject_to verification on examination except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any transaction or item discussed or referenced in this letter including whether any agreements other than the agreement fail to meet the private_business_use_test under sec_141 or whether the interest on the bonds is excludable from gross_income under sec_103 of the code plr-129409-11 this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with a power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely associate chief_counsel financial institutions and products by timothy l jones senior counsel branch cc


internal_revenue_service number release date index number ------------------------------------------------------------ --------------- ----------------------------------------------- --------------------------------------- ----------------------------- in re ---------------------------------------------------- ----------------------- 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 eee eb qp1 plr-129901-18 date august legend company ----------------------------------------------- plan trust debt year --------------------------------------------------------------------- ------------------------------------------------------------------------------------- --------------------------------------------------------- ------- dear ---------------- this letter responds to your request dated date as supplemented by correspondence dated date and date submitted on your behalf by your authorized representative requesting a private_letter_ruling on whether the proposed transactions described below will give rise to tax-deductible contributions as provided under sec_404 of the internal_revenue_code_of_1986 as amended the code facts you and your authorized representative represented the following facts under penalty of perjury in your letter of date the company provides insurance products and financial services and uses a calendar_year accounting_period and the accrual_method of accounting for federal_income_tax purposes the company maintains the plan for the benefit of its employees the plan is a single-employer defined benefit pension_plan that meets the qualification requirements of sec_401 and holds assets in a qualified_trust that meets plr-129901-18 the requirements of sec_501 the plan uses a calendar_year plan_year the assets of the plan are held in the trust the debt is various investment-grade debt securities issued by the company that are readily traded on an established_securities_market the company intends to acquire the debt in the market and then contribute it to the trust the debt will have an interest rate greater than the long-term applicable_federal_rate in effect on the date of contribution and will not have any unusual or atypical features such as embedded options or conversion features prior to redemption only interest payments will be made with respect to the debt and at maturity the entire principal will be repaid the debt can be redeemed early by lump-sum payment this lump sum payment is calculated as the present_value of the sum of the principal_amount and the remaining interest coupon payments discounted at the interest rate for the us treasury security having a maturity comparable to the remaining term of the security being redeemed plus an adjustment of between and basis points further in the final months prior to the maturity of the debt the debt can be redeemed pincite of principal immediately pursuant to a cleanup call once held by the plan there are no restrictions or conditions on what the trustee of the trust may do with the debt the trustee may sell or otherwise transfer all or part of the debt securities the company will make payments in cash in accordance with the terms of the debt accordingly in addition to interest payments the plan will receive cash or a cash_equivalent on the debt when principal payments are made on the debt if the debt is redeemed by the company which could be done at a date prior to maturity or if the debt is transferred from the trust to a third party for consideration the debt will satisfy the requirements to be treated as a marketable obligation under sec_407 of the employee_retirement_income_security_act_of_1974 as amended erisa it is intended that the contribution of the debt would not constitute a prohibited_transaction by reason of satisfying the exemption for a plan’s acquisition of qualifying employer_securities rulings requested you have requested that we issue the following rulings upon payment of principal in cash by the company pursuant to the terms of the debt whether at maturity in prepayment or in repurchase of the debt by the this ruling does not express an opinion on whether the transaction constitutes a prohibited_transaction whether a transaction is a prohibited_transaction is within the jurisdiction of the department of labor you have stated that no ruling is requested with respect to the deductibility of interest payments on the debt plr-129901-18 company pursuant to the right of early redemption the payment or prepayment is deductible by the company in the taxable_year in which it is made or deemed to be made pursuant to sec_404 subject_to the limits of sec_404 the cash or cash_equivalent proceeds received by the plan from a transfer or sale of the debt to a party not in a controlled_group with the company or otherwise affiliated with the company pursuant to sec_414 c m and o will be treated as a contribution by the company to the trust and the amount of the contribution equal to the amount of the transfer proceeds is deductible by the company in the taxable_year in which the transfer is made or deemed to be made pursuant to sec_404 subject_to the limits of sec_404 law chapter of subtitle a of the code permits an employer to deduct certain expenses from income for a taxable_year for example sec_162 permits an employer to claim a deduction on its federal_income_tax return for a taxable_year for ordinary and necessary expenses such as compensation paid_or_incurred during that taxable_year in carrying on the employer’s trade_or_business sec_404 provides rules regarding the deductibility of deferred_compensation including employer contributions made to the trust of a defined benefit pension_plan that is qualified under sec_401 pursuant to sec_404 if contributions are paid_by an employer to the trust of a pension_plan then those contributions are not deductible under sec_162 or any other provision of chapter of subtitle a instead employer contributions made to the pension_trust are deductible under sec_404 subject_to the limits set forth in sec_404 as to the amounts deductible in any year but only if they would otherwise be deductible under sec_162 or another provision of chapter of subtitle a see also sec_1_162-10 of the income_tax regulations sec_404 provides rules regarding the deductibility of contributions with respect to a qualified_pension plan pursuant to sec_404 contributions paid_by an employer to the trust of a qualified defined benefit pension_plan are deductible in the employer’s taxable_year when paid if that taxable_year ends within or with a taxable_year of the trust subject_to the applicable limits sec_404 provides that for purposes of sec_404 a taxpayer is deemed to have made a payment on the last day of the preceding_taxable_year if the payment is on account of such taxable_year and is made not later than the time prescribed by law for filing the return for that taxable_year including extensions sec_1_404_a_-1 provides deductions under sec_404 are generally allowable only for the year in which the contribution is paid regardless of the fact that the taxpayer may make his returns on the accrual_method of accounting exceptions plr-129901-18 are made as provided by sec_404 in the case of payments made by a taxpayer on the accrual_method of accounting not later than the time prescribed by law for filing the return for the taxable_year of accrual including extensions thereof this latter provision is intended to permit a taxpayer on the accrual_method to deduct such accrued contribution or compensation in the year of accrual provided payment is actually made not later than the time prescribed by law for filing the return for the taxable_year of accrual including extensions thereof sec_404 provides the deductible limit for contributions with respect to a single- employer defined benefit pension_plan in the case of such a plan sec_404 provides that the deductible limit for any taxable_year is equal to the greater of a the sum of the amounts determined under sec_404 with respect to each plan_year ending with or within the taxable_year or b the sum of the minimum required contributions under sec_430 for those plan years the amount determined under sec_404 for any plan_year is equal to the excess if any of i the sum of i the funding target for the plan_year ii the target_normal_cost for the plan_year and iii the cushion amount for the plan_year over ii the value determined under sec_430 of the plan’s assets that are held by the plan as of the valuation_date for the plan_year sec_404 provides that any term used in sec_404 that is also used in sec_430 shall have the same meaning as under sec_430 sec_430 provides that the term plan_sponsor includes any member of the plan sponsor’s controlled_group as defined in sec_412 sec_412 provides that the term controlled_group means any group treated as a single employer under sec_414 c m or o in 429_us_569 the supreme court held that an accrual-basis corporate taxpayer in delivering its fully secured promissory demand note to the trustees of its qualified employees’ profit-sharing_trust is not entitled to a deduction under sec_404 for the taxable_year in which the note is contributed because the note did not constitute actual payment under sec_404 the court stated the statutory terms paid and payment coupled with the grace period and the legislative history’s reference to paid and actually paid demonstrate that regardless of the method_of_accounting all taxpayers must pay out cash or its equivalent by the end of the grace period in order to qualify for the sec_404 deduction this accords also with the apparent policy behind the statutory provision namely that an objective outlay-of-assets test would insure the integrity of the employees’ plan and insure the full advantage of any contribution which entitles the employer to a tax_benefit don e williams pincite plr-129901-18 the court further noted t he taxpayer argues that because its notes are acknowledged to have had value it is entitled to a deduction equal to that value it is suggested that such a note would qualify as income to a seller-recipient whatever the situation might be with respect to the recipient the note for the maker even though fully secured is still only his promise to pay it does not in itself constitute an outlay of cash or other_property id pincite analysis ruling_request you have represented that the company will make payments in cash in accordance with the terms of the debt you have further represented that the trust will receive cash or a cash_equivalent on the debt when principal payments are made or if the debt is redeemed by the company prior to maturity the debt itself is only the company’s promise to pay and does not represent the paying out or reduction of the company’s assets consequently the contribution of the debt securities themselves is not a contribution paid to the trust within the meaning of sec_404 sec_1_404_a_-1 or don e williams and the company may not claim a deduction for the contribution of the debt for the company’s taxable_year for which the contribution is made however if a payment of principal made pursuant to the terms of the debt satisfies the objective outlay-of-assets test under don e williams then the payment is deductible by the company under sec_404 as a contribution for the taxable_year in which the payment is made or deemed to be made pursuant to sec_404 in the case of a contribution made on account of the employer’s prior taxable_year subject_to the applicable limits and other requirements of sec_404 and any other applicable code provisions such as the capitalization requirements of sec_263a this analysis applies to a payment by the company of principal in the form of unrestricted cash or a cash_equivalent whether upon maturity prepayment or repurchase made pursuant to the terms of the debt ruling_request pursuant to sec_404 and the objective outlay-of-assets test of don e williams employer contributions to the trust of a qualified_plan are deductible for the employer’s taxable_year ending within or with the plan_year in which the contribution is actually paid or deemed to be paid pursuant to sec_404 in the case of a contribution made on account of the employer’s prior taxable_year subject_to the applicable limits plr-129901-18 you have represented that once held by the trust there are no restrictions or conditions on what the trust may do with the debt and the plan’s fiduciaries may sell or otherwise transfer all or part of the debt however they deem suitable for the plan’s purposes you have further represented that aside from interest payments the trust will receive cash or a cash_equivalent on the debt when the debt is transferred at the direction of a plan fiduciary to a third party for consideration you have requested that the cash or cash_equivalent proceeds received by the plan from a transfer or sale of the debt to a party not in a controlled_group with the company or otherwise affiliated with the company pursuant to sec_414 c m and o referred to in this letter_ruling as an unrelated third party will be treated as a contribution by the company to the trust and the amount of the contribution equal to the amount of the transfer proceeds is deductible by the company for the taxable_year in which the transfer is made or deemed to be made pursuant to sec_404 subject_to the limits of sec_404 this approach is consistent with the objective outlay-of-assets test which as the supreme court in don e williams explained is intended to ensure the integrity of the employees’ plan and the full advantage of any contribution that entitles the employer to a tax_benefit here when the debt is transferred to an unrelated third party and that unrelated third party pays the proceeds to the trust the trust will obtain the full advantage of the contribution that entitles the company to a tax_benefit any cash or cash_equivalent proceeds received by the trust from a transfer or sale of the debt to an unrelated third party will be treated as a contribution by the company to the trust for purposes of the requirement under sec_404 that a contribution actually be paid as determined in accordance with the objective outlay-of-assets test under don e williams accordingly such a contribution equal to the amount of the proceeds from the transfer or sale to an unrelated third party is deductible by the company for the taxable_year in which the transfer is made or deemed to be made pursuant to sec_404 subject_to the applicable limits and other requirements of sec_404 and any other applicable code provisions such as the capitalization requirements of sec_263a except as specifically ruled above no opinion is expressed as to the federal tax consequences of the transaction described above under any other provision of the code or title of erisa in particular no opinion is expressed regarding the deductibility of interest payments made pursuant to the terms of the debt or whether part or all of the contributions to the trust must be capitalized under sec_263a the rulings contained in this letter are based upon information and representations submitted by company and accompanied by a penalty of perjury statement executed by an appropriate party as specified in revproc_2019_1 2019_1_irb_1 b plr-129901-18 this office has not verified any of the material submitted in support of the request_for_ruling and such material is subject_to verification on examination the associate office will revoke or modify a letter_ruling and apply the revocation retroactively if there has been a misstatement or omission of controlling facts the facts at the time of the transaction are materially different from the controlling facts on which the ruling was based or in the case of a transaction involving a continuing action or series of actions the controlling facts change during the course of the transaction see revproc_2019_1 sec_11 pursuant to a power_of_attorney on file with this office a copy of this letter_ruling is being sent to your authorized representatives this letter is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent sincerely linda s f marshall senior counsel qualified_plans branch office of the associate chief_counsel employee_benefits exempt_organizations and employment_taxes cc


internal_revenue_service number release date index number ------------------------- ----------------------------------------------------- ------------------------------------ -------------------- ----------------------------------------- department of the treasury washington dc person to contact ------------------------- id no ------------- telephone number --------------------- refer reply to cc fip b02 plr-112891-07 date date legend taxpayer ---------------------------------------------------------------------- --------------------------- date ------------------------ corporation -------------------------------------- property a ------------------------------------------------------------------ property b --------------------------------------------------------------------- property c ------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------- ----------------------------------------------- property d -------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------- property e -------------------------------------------------------------------------- year ------- year ------- year ------- plr-112891-07 lp ---------------------------------------- date ----------------- firm --------------------------- a ------------ b c d e f g h ---------------- ---------------- ---------------- -------------- ---- ---- dear ------------------ this is in reply to a letter dated date and subsequent information requesting certain rulings on behalf of taxpayer specifically you have requested a ruling that real_estate intangibles as described below will be treated as real_estate_assets and interests_in_real_property for purposes of sec_856 of the internal_revenue_code commencing with taxpayer’s year tax_year you have also requested a ruling that any rent payments attributable to the lease of the real_estate intangibles will be treated as rents_from_real_property under sec_856 facts taxed as a real_estate_investment_trust reit under subchapter_m of the code for its year tax_year taxpayer owns through wholly-owned subsidiaries all of the outstanding interests in lp taxpayer owns substantially_all of its operating_assets either directly or indirectly through various entities including wholly-owned or majority- owned subsidiaries partnerships joint ventures taxable reit subsidiaries trss and a subsidiary reit taxpayer is a domestic_corporation that was formed in year and elected to be on date taxpayer acquired the stock of a corporation that then became a plr-112891-07 qualified_reit_subsidiary of taxpayer as part of the stock acquisition taxpayer acquired property a property b property c property d and property e the properties on or about date taxpayer retained firm to determine the appropriate purchase_price allocation for generally_accepted_accounting_principles gaap purposes including the identification and fair valuation of the tangible and intangible assets for each of the properties on date taxpayer agreed to be acquired by corporation for cash in exchange for all of taxpayer’s common_stock and the assumption of taxpayer’s outstanding debt among the portfolio of properties that were acquired by corporation are the properties each of which is a widely-known resort hotel with a significant reputation as a travel destination dollars of that amount b dollars was allocated to the total identifiable intangible assets which included c dollars attributable to trade names and brand names the names under which the resorts operate additionally d dollars were allocated to goodwill the trade names or brand names together with the goodwill component of the total value comprise the real_estate intangibles the purchase_price allocation report prepared by firm valued the properties at a the purchase_price allocation report observed that certain intangible assets identified are closely related to and associated with the real_property of each subject resort the subject resorts are unique single location resorts and are considered one-of-a-kind in terms of their marketplace recognition while the franchise rights brand could be extended to other locations the fact is that the values associated with these intangible assets are tied to the real_property for which they are intrinsically linked taxpayer represents that i the goodwill portion of the real_estate intangibles relates to the location and physical structure of the properties ii the value attributable to the hotel name portion of the real_estate intangibles relates to the uniqueness in history and heritage that the properties represent to the marketplace iii the real_estate intangibles are inextricably and compulsorily tied to the real_estate portion of the properties and iv if taxpayer’s acquisition had been a taxable asset acquisition rather than a stock acquisition the goodwill and the value ascribed to the hotel names would have been included in the tax basis of the land and buildings for federal_income_tax purposes and would not have been separately amortizable prior to year taxpayer had approximately e dollars in total assets with a portfolio of more than f properties in year taxpayer’s balance_sheet changed dramatically after it sold over g properties to a third party the properties were the plr-112891-07 principal assets of taxpayer immediately prior to its acquisition by corporation the reduction in the number of properties in taxpayer’s portfolio caused a substantial decrease in taxpayer’s real_estate_assets as a result year marks a material_change in the effect of the real_estate intangibles on the tests under sec_856 and necessitates this ruling_request law and analysis must be derived from certain enumerated sources including rents_from_real_property as provided in sec_856 sec_856 provides that at least percent of a reit’s gross_income sec_856 provides that at the close of each quarter of its tax_year at least percent of the value of a reit's total assets must be represented by real_estate_assets cash and cash items including receivables and government securities sec_856 defines the term real_estate_assets in part to mean real_property including interests_in_real_property and interests in mortgages on real_property and shares or transferable certificates of beneficial_interest in other reits sec_856 provides that the terms interests_in_real_property includes fee ownership and co-ownership of land or improvements thereon leaseholds of land or improvements thereon options to acquire land or improvements thereon and options to acquire leaseholds of land or improvements thereon but does not include mineral oil or gas royalty interests sec_1_856-2 of the income_tax regulations provides that in determining the investment status of a reit the term total assets means the gross assets of the reit determined in accordance with generally_accepted_accounting_principles gaap sec_1_856-3 provides in part that the term real_estate_assets means real_property sec_1_856-3 provides that interests_in_real_property includes fee ownership and co-ownership of land or improvements thereon leaseholds of land or improvements thereon options to acquire land or improvements thereon and options to acquire leaseholds of land or improvements thereon sec_1_856-3 provides that real_property includes land or improvements thereon such as buildings or other inherently permanent structures thereon including items which are structural_components of such buildings or structures local law definitions will not be controlling for purposes of determining the meaning of real_property for purposes of sec_856 and the regulations thereunder under this regulation real_property includes for example the wiring in a building plumbing systems central heating or central air-conditioning machinery pipes or ducts elevators or escalators installed in a building or other items which are structural_components of a building or other permanent structure the term does not include assets accessory to each of properties a-f was valued in excess of replacement cost in each case plr-112891-07 the operation of a business such as machinery printing press transportation equipment which is not a structural_component of the building office equipment refrigerators individual air-conditioning units grocery counters furnishings of a motel hotel or office building etc even though such items may be termed fixtures under local law although the definitions and examples of real_property and interest_in_real_property provided in the regulations are not exclusive the plain language of those regulations leads to the conclusion that any asset other than the physical real_estate itself must be inextricably tied or connected to the real_estate to fall within either of those definitions in the present case the existence of the real_estate intangibles is a function of a gaap rule that provides that in business combinations such as this stock acquisition the allocation of value to assets in excess of replacement cost must be attributed to goodwill or another intangible asset this excess value results to some extent from a physical attribute of the real_estate such as the property’s architecture beach location or famous golf course the name of each resort has little or no value independent of its relationship to the physical real_estate attributes to which it relates for example naming a h a substantially_similar name as property c does not add extra value to the h because the physical real_estate attributes for which property c has become known do not exist with respect to the h therefore notwithstanding its treatment as a separate asset for gaap purposes the renown and value of the brand or franchise name of each property is a function of and is integrally related to the conditions that produced the renown and value in the present case the value is primarily a result of the underlying real_estate that makes the properties unique inextricably linked to the underlying real_estate the real_estate intangibles will be treated as real_estate_assets under sec_856 for purposes of sec_856 commencing with year furthermore to the extent that the real_estate intangibles constitute real_estate_assets any rent payments attributable to the real_estate intangibles will be treated as rents_from_real_property within the meaning of sec_856 except as specifically ruled upon above no opinion is expressed concerning any federal_income_tax consequences relating to the facts herein under any other provision of the code specifically we do not rule whether taxpayer otherwise qualifies as a reit under part ii of subchapter_m of chapter of the code accordingly to the extent that the value of the real_estate intangibles is plr-112891-07 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 representatives this ruling is directed only to the taxpayer who requested it sec_6110 sincerely yours william e coppersmith william e coppersmith chief branch office of associate chief_counsel financial institutions products


t c memo united_states tax_court michael j and carrie l woods petitioners v commissioner of internal revenue respondent jacquelyn woods petitioner v commissioner of internal revenue respondent docket nos filed date arthur i fixler for petitioners carmino j santaniello for respondent memorandum opinion colvin judge respondent determined that petitioners michael j and carrie l woods had a dollar_figure deficiency in income_tax for and that petitioner jacquelyn woods had a dollar_figure deficiency in income_tax for the sole issue for decision is whether part of the proceeds petitioners received in settlement of a tort action is prejudgment_interest and if so whether it is excludable from gross_income as damages for a personal injury under sec_104 we hold that dollar_figure dollar_figure percent of the dollar_figure payment to michael and carrie woods and dollar_figure dollar_figure percent of the dollar_figure payment to jacquelyn woods was prejudgment_interest and is not excludable from income under sec_104 unless otherwise specified section references are to the internal_revenue_code in effect for the year in issue rule references are to the tax_court rules_of_practice and procedure the parties submitted these cases fully stipulated under background rule a petitioners petitioners michael and carrie woods the woodses lived in warwick rhode island when they filed their petition jacquelyn woods jacquelyn is the minor child of the woodses jacquelyn was born on date jacquelyn's shoulder was injured during birth this injury resulted in stunted growth of her arm and permanent weakness and restricted motion of her arm and shoulder b the tort action judgment and interest the woodses were represented by mark decof decof who filed a medical malpractice suit in the superior court of rhode island on date individually and on behalf of jacquelyn against dr christos h erinakes dr erinakes and kent county hospital dr erinakes was represented by dennis j mccarten mccarten dr erinakes' medical malpractice insurer was joint underwriting association jua in date the woodses and jacquelyn settled their claim against the hospital for an unspecified amount of damages the settlement proceeds from the hospital are fully excludable from gross_income under sec_104 on date a jury awarded damages against dr erinakes of dollar_figure million to jacquelyn and dollar_figure to the woodses the clerk of the court added statutory prejudgment_interest of dollar_figure as required by r i gen laws section to jacquelyn's award totaling dollar_figure the jury award for jacquelyn of dollar_figure million is dollar_figure percent of dollar_figure the statutory prejudgment_interest of dollar_figure is dollar_figure percent of dollar_figure the clerk of the court added statutory prejudgment_interest of dollar_figure as required by r i gen laws section to the woodses' award totaling dollar_figure the jury award for the woodses of dollar_figure is dollar_figure percent of dollar_figure the statutory prejudgment_interest of dollar_figure is dollar_figure percent of dollar_figure on date dr erinakes moved for a new trial on all issues or alternatively on the issue of damages the trial_court denied the motion on date dr erinakes appealed the judgments and the trial court's denial of his motion for a new trial to the rhode island supreme court c the settlement while the appeal was pending dr erinakes agreed to pay jacquelyn dollar_figure and the woodses dollar_figure each for a release and discharge of any and all past or future claims the woodses for themselves and on behalf of jacquelyn and decof signed the releases on date the parties did not discuss tax consequences during settlement negotiations on date the woodses and dr erinakes filed a stipulation and stipulation of dismissal with the trial_court on date the trial_court granted the parties' motion to approve the settlement of jacquelyn's personal injury claim subject_to the creation of a_trust fund which would provide for the receipt investment and disbursement of the net settlement proceeds paid to jacquelyn the proceeds of the settlement were held in escrow by decof pending approval of the settlement by the judge the woodses created the jacquelyn r woods trust which the trial_court approved on date neither the judgment nor the jury award was an enforceable final judgment under rhode island law because both were voided by the parties' settlement and stipulation of dismissal jua issued a check for dollar_figure to the woodses and decof on date jua issued a check for dollar_figure payable to jacquelyn and decof on date jua did not issue a form_1099 to the woodses jacquelyn or respondent regarding the proceeds decof paid himself dollar_figure for legal fees and costs and paid the woodses dollar_figure decof paid himself dollar_figure for legal fees and costs and paid jacquelyn dollar_figure d petitioners' tax returns and respondent's determination the woodses and jacquelyn timely filed their federal_income_tax returns they did not report any of their settlement proceeds on their returns or deduct any legal fees or costs from the lawsuit respondent issued a notice_of_deficiency in which respondent determined that jacquelyn's deficiency in income_tax was attributed to unreported interest_income of dollar_figure computed as follows original award percentage1 settlement damages interest total dollar_figure big_number dollar_figure dollar_figure big_number dollar_figure rounded respondent allowed jacquelyn to deduct legal fees of dollar_figure under sec_212 the parties do not dispute this amount respondent determined the woodses' income_tax deficiency was attributable to unreported interest_income of dollar_figure computed as follows original award percentage1 settlement damages interest total dollar_figure big_number dollar_figure dollar_figure big_number dollar_figure rounded respondent allowed the woodses to deduct legal fees of dollar_figure under sec_212 the parties do not dispute this amount discussion a whether petitioners received prejudgment_interest and if so whether it is excludable from income under sec_104 petitioners contend that their settlement is excludable under sec_104 they did not receive prejudgment_interest and if they did receive prejudgment_interest it is excludable from income under sec_104 we disagree a taxpayer may exclude from income damages received whether by suit or agreement on account of personal injuries or sickness sec_104 however prejudgment_interest is not excludable from income under sec_104 154_f3d_1 1st cir affg tcmemo_1997_528 100_tc_124 affd without published opinion 25_f3d_1048 6th cir delaney v commissioner tcmemo_1995_378 affd 99_f3d_20 1st cir forest v commissioner tcmemo_1995_377 affd without published opinion 104_f3d_348 1st cir respondent's determination is presumed to be correct and petitioners bear the burden of proving otherwise rule a we must decide whether and if so to what extent the settlement petitioners received was prejudgment_interest and whether it is excludable from income under sec_104 in rozpad v commissioner supra the u s court_of_appeals for the first circuit the circuit in which this case is appealable approved the tax court's allocation of the prejudgment_interest component of a settlement under rhode island law where the parties did not allocate any amount to prejudgment_interest the allocation of prejudgment_interest in rozpad was calculated by applying a ratio based on the judgment of the state court to apportion the total settlement between prejudgment_interest added to the state court's tort damage award under r i gen laws section and compensatory_damages rozpad is indistinguishable from this case the clerk of the rhode island court calculated a prejudgment_interest component of dollar_figure to the woodses' award and dollar_figure to jacquelyn's award under r i gen laws section which was dollar_figure percent of each total award respondent determined that dollar_figure of the dollar_figure settlement with the woodses and dollar_figure of the dollar_figure settlement with jacquelyn was prejudgment_interest by using as the ratio of prejudgment_interest to total settlement the same ratio that the clerk of the state court had used to calculate the prejudgment_interest portion of the total judgment that is damages plus prejudgment_interest respondent correctly applied the rozpad allocation formula b petitioners' other contentions petitioners contend that prejudgment_interest is part of damages under rhode island law and is therefore excludable under sec_104 we disagree the court_of_appeals for the first circuit concluded that prejudgment_interest is separate and distinct from damages under rhode island law rozpad v commissioner supra pincite in kovacs v commissioner supra pincite we held that statutorily imposed interest in a wrongful death case under michigan law is not excluded from income under sec_104 petitioners contend that kovacs v commissioner supra was wrongly decided in part because it is inconsistent with the legislative_history of sec_104 we disagree with this argument which was rejected by the court_of_appeals for the first circuit in rozpad v commissioner supra pincite petitioners rely on mcshane v commissioner tcmemo_1987_151 where we found that a settlement did not include interest however mcshane does not control because in that case the parties agreed in a bona_fide arm's-length negotiated settlement that the settlement amount did not include costs or interest in contrast the parties here did not agree that the settlement amount did not include costs or interest petitioners point out that the stipulation to dismiss the tort action filed with the superior court specified no costs no interest and contend that the stipulation to dismiss controls the allocation of interest in the settlement at issue we rejected this argument in rozpad v commissioner tcmemo_1997_528 where we said the stipulations are not part of the settlement and do not relate to the allocation of settlement proceeds they are merely requests for the court to dismiss the action without imposing interest or costs c conclusion applying the allocation formula in rozpad we conclude that dollar_figure ie dollar_figure percent of dollar_figure of the settlement paid for the woodses and dollar_figure ie dollar_figure percent of dollar_figure of the settlement paid for jacquelyn was prejudgment_interest and is not excludable from income under sec_104 to reflect the foregoing decisions will be entered for respondent


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc corp plr-109223-00 date date legend a b distributing controlled state w date business x business y we respond to your authorized representative’s date letter requesting rulings regarding the tax treatment of a proposed transaction the pertinent facts as described in your letter and in an additional submission dated date are set forth below distributing is a state w corporation all of whose stock is owned equally by a and b distributing is an s_corporation engaged in business x distributing wholly owns controlled which is also a state w corporation controlled is a qualified_subchapter_s_subsidiary qsub that is engaged in business y financial information has been submitted indicating that distributing and controlled each have had gross_income and operating_expenses representing the conduct of an active business during each of the past five years controlled’s volume of work has increased significantly in recent years which plr-109223-00 has necessitated controlled’s hiring a key_employee in order to attract the appropriate key_employee controlled found it necessary to offer the key_employee an opportunity to purchase controlled stock the key_employee cannot acquire an interest in controlled without controlled’s disqualification as a qsub under sec_1361 controlled also would not qualify as an s_corporation under sec_1361 because distributing is not a permissible shareholder within the meaning of sec_1361 the taxpayer has proposed that distributing will distribute all of its stock of controlled to the distributing shareholders on a pro_rata basis the taxpayer has made the following representations with respect to the distribution a b c d e f g there is no plan or intention by the distributing shareholders to sell exchange or otherwise dispose_of a number of shares of controlled stock received pursuant to the transaction that would reduce the distributing shareholders’ ownership of controlled stock to a number of shares having a value as of the date of the transaction of less than percent of the value of all of the outstanding_stock of controlled as of the same date after the transaction the distributing shareholders will be in control of controlled within the meaning of sec_368 of the code at the time of the transaction controlled will not have outstanding any warrants options convertible securities or any other type of right pursuant to which any person could acquire stock in controlled that if exercised or converted would affect the distributing shareholders’ retention of control of controlled as defined in sec_368 there is no intercorporate indebtedness existing between controlled and distributing that was issued acquired or will be settled at a discount no parties to the transaction are investment companies as defined in sec_368 and iv no part of the consideration if any to be distributed by distributing will be received by a shareholder as a creditor employee or in any capacity other than that of a shareholder of distributing the five years of financial information submitted on behalf of distributing including its most recent balance_sheet is representative of distributing’s present operation and with regard to distributing there have been no substantial operational changes since the date of the last financial statements plr-109223-00 submitted h the five years of financial information submitted on behalf of controlled is representative of controlled’s present operation and with regard to controlled there have been no substantial operational changes since the date of the last financial statements submitted i j k l following the transaction distributing and controlled each will continue the active_conduct of its business independently and with its separate employees the distribution of the stock of controlled is carried out for the corporate business_purpose of providing a substantial equity_interest in controlled to its key_employee the distribution of the stock of controlled is motivated in whole or substantial part by this corporate business_purpose there is no plan or intention by either distributing or controlled directly or through any subsidiary_corporation to purchase any of its outstanding_stock after the transaction other than through stock purchases meeting the requirements of sec_4 b of revproc_96_30 there is no plan or intention to liquidate either distributing or controlled to merge either distributing or controlled or to sell or otherwise dispose_of the assets of either distributing or controlled after the transaction except in the ordinary course of business m distributing neither accumulated its receivables nor made extraordinary payment of its payables in anticipation of the transaction n o p q r no intercorporate debt will exist between distributing and controlled at the time of or subsequent to the distribution of the stock of controlled payments made in connection with all continuing transactions if any between distributing and controlled will be for fair_market_value based on terms and conditions arrived at by the parties bargaining at arm’s length distributing is an s_corporation within the meaning of sec_1361 controlled is a qualified_subchapter_s_subsidiary within the meaning of sec_1361 distributing and controlled have no accumulated_earnings_and_profits as of date distributing and controlled will have no current_earnings_and_profits as of the date of the distribution made pursuant to the transaction plr-109223-00 s t no distribution_of_property by distributing immediately before the transaction would require recognition of gain resulting in current_earnings_and_profits for the taxable_year of the distribution distributing is not aware of nor is distributing planning or intending any event that will result in distributing or controlled having any positive current or accumulated_earnings_and_profits after the distribution based solely on the information submitted and on the representations set forth above we hold as follows with respect to the proposed transaction no gain_or_loss will be recognized by distributing upon the distribution to the distributing shareholders of all the common_stock of controlled sec_361 no gain_or_loss will be recognized by and no amount will be included in the income of the distributing shareholders upon the receipt of shares of controlled common_stock sec_355 the basis of the common_stock of distributing and controlled in the hands of the distributing shareholders will be the same as the basis of their stock in distributing held immediately before the distribution allocated in proportion to the fair_market_value of each in accordance with sec_1_358-2 of the income_tax regulations the holding_period of the controlled stock to be received by the distributing shareholders will include the period during which the shareholders held the distributing stock with respect to which the controlled stock was received provided the distributing stock was held as a capital_asset on the date of the exchange sec_1223 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 a copy of this letter should be attached to the federal_income_tax returns of the taxpayers involved for the taxable_year in which the transaction covered by this letter_ruling is consummated in accordance with the power_of_attorney on file in this office a copy of this letter is being sent to your authorized representatives sincerely yours associate chief_counsel corporate by gerald fleming acting senior technician reviewer branch


internal_revenue_service number release date index number ------------------------------------------------------------ ---------------------- ----------------------------- -------------------------- --------------------------- - department of the treasury washington dc person to contact ------------------------ id no ------------- telephone number --------------------- refer reply to cc psi b01 - plr-112260-04 date date ----------------------------------------------------------------------------------------- legend x ---------------------------------------------------------------------------------------------------------------- --------------------------------------------------- country entity date dear ---------------- this letter responds to a letter dated date written on behalf of x requesting a ruling that x be granted an extension of time under sec_301_9100-3 of the procedure and administration regulations to file an election under sec_301_7701-3 to be treated as a disregarded_entity for federal tax purposes facts ------------ ------------------------ ---------------------- according to the information submitted x is a country entity x intended to elect to be treated as a disregarded_entity for federal tax purposes effective date however the form_8832 entity classification election inadvertently was not timely filed x represents that it is an entity that is eligible to elect under sec_301_7701-3 to be a disregarded_entity for federal_income_tax purposes law and analysis classified as a corporation under sec_301_7701-2 or an sec_301_7701-3 provides in part that a business_entity that is not plr-112260-04 eligible_entity can elect its classification for federal tax purposes as provided in sec_301_7701-3 sec_301_7701-3 provides guidance on the classification of a foreign eligible_entity for federal tax purposes generally a foreign eligible_entity is treated as an association_taxable_as_a_corporation if all members have limited_liability unless the entity makes an election to be treated otherwise if a foreign eligible_entity has one owner it may elect to be treated as a disregarded_entity pursuant to the rules in sec_301_7701-3 if a foreign eligible_entity has more than one owner it may elect to be treated as a partnership pursuant to the rules in sec_301_7701-3 sec_301_7701-3 provides that an entity classification election must be filed on form_8832 and can be effective up to days prior to the date the form is filed or up to months after the date on which the form is filed under sec_301_9100-1 the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the code except subtitles e g h and i sec_301_9100-1 defines the term regulatory election as including an election whose deadline is prescribed by a regulation published in the internal_revenue_bulletin sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make an election sec_301_9100-1 sec_301_9100-2 provides automatic_extension 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 requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301 a conclusion based solely on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-3 have been satisfied as a result x is granted an extension of time of days from the date of this letter to file form_8832 with the appropriate service_center and elect to be treated as a disregarded_entity for federal tax purposes effective date to be valid the election must contain any consents required under sec_301_7701-3 and iii further a copy of this letter should be attached to the election plr-112260-04 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 this ruling is directed only to the taxpayer on whose behalf it was requested sec_6110 of the internal_revenue_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 sincerely s heather c maloy heather c maloy associate chief_counsel passthroughs and special industries being sent to your authorized representative enclosures cc -------------------------- copy of this letter copy for sec_6110 purposes ------------- ------------------------------------- --------------------- -------------------------------------- ------------------------------------------------------------- -------------------------------------- -------------------------


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc psi plr-116993-00 date date legend x a b c d1 dear this letter responds to a letter dated date and subsequent correspondence written on behalf of x requesting a ruling under sec_1362 of the internal_revenue_code that x's s_corporation status will be effective as of the taxable_year beginning d1 facts according to the information submitted x was incorporated on d1 and it was decided that x would be an s_corporation x currently has three shareholders a b and c a and b the shareholders of x at the time of incorporation relied on an attorney and an accountant to file x's form_2553 election by a small_business_corporation with an effective date of d1 due to a miscommunication between the attorney and the accountant x's form_2553 was not timely filed however x a b and c have filed their returns consistent with x being an s_corporation for the taxable_year beginning d1 and for each subsequent taxable_year x requests a ruling that it will be recognized as an s_corporation effective for the taxable_year beginning d1 under sec_1362 law and analysis sec_1362 provides that a small_business_corporation may elect to be an s_corporation sec_1362 provides when an s election will be effective generally if an s plr-116993-00 election is made for a corporation’s taxable_year and within the first two and one half months of such taxable_year then that corporation will be treated as an s_corporation beginning the year in which the election is made however if an s election is made for a corporation’s taxable_year but after the first two and one half months of the beginning of such taxable_year then that corporation will not be treated as an s_corporation until the taxable_year after the year in which the s election is made sec_1362 provides that if an election under sec_1362 is made for any taxable_year after the date prescribed by sec_1362 for making the election or no sec_1362 election is made for any taxable_year and the secretary determines that there was reasonable_cause for the failure to timely make the election then the secretary may treat the election as timely made for such taxable_year conclusions based solely on the facts submitted and representations made we conclude that x has established reasonable_cause for not making a timely election and is eligible for relief under sec_1362 accordingly if x makes an election to be an s_corporation by filing with the appropriate service_center a completed form_2553 containing an effective date of d1 for the election within days following the date of this letter then such election will be treated as timely made a copy of this letter should be attached to the form_2553 filed with the service_center a copy is enclosed for that purpose 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 concerning whether x is an s_corporation for federal tax purposes this ruling is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file with this office we are sending a copy of this letter to your authorized representative sincerely yours donna m young senior technician reviewer branch office of the associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes


internal_revenue_service index no number release date cc dom p si - plr-104173-99 date x ein a date year dear this is in reply to a letter dated date and subsequent correspondence submitted on behalf of x by x’s authorized representative requesting a ruling under sec_1362 of the internal_revenue_code the information submitted states that x was formed on date a as x's president represents that it was the intent of x's shareholders that x elect to be an s_corporation effective for year x's first taxable_year this intent is stated in x’s original corporate minutes however a form_2553 election by a small_business_corporation was not timely filed for that year by x because the accountant who the shareholders relied on to handle the s election did not do so x filed a form_1120s for year and x’s shareholders filed their individual returns consistent with x’s having made a timely s election for year sec_1362 of the code provides that if -- a an election under sec_1362 is made for any taxable_year after the date prescribed by sec_1362 for making such election for such taxable_year or no such election is made for any taxable_year and b the secretary determines that there was reasonable_cause for the failure to timely make such election the secretary may treat such an election as timely made for such taxable_year based solely on the facts and the representations submitted we conclude that x has established reasonable_cause for failing to make a timely election to be an s_corporation for x's first taxable_year accordingly provided x makes an election to be an s_corporation by filing a completed form_2553 with the appropriate service_center effective for its year taxable_year within days following the date of this letter then such election will be treated as timely made for x’s year taxable_year a copy of this letter should be attached to the form_2553 except as specifically set forth above no opinion is expressed concerning the federal tax consequences of the facts described above under any other provision of the code including whether x was or is a small_business_corporation under sec_1361 of the code 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 the power_of_attorney on file with this office a copy of this letter is being sent to x’s authorized representative sincerely yours j thomas hines senior technician reviewer branch office of the assistant chief_counsel passthroughs and industries enclosures copy of this letter copy for sec_6110 purposes


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-117286-03 date date legend corporation date x y dear this letter responds to letters received from your authorized representative dated date and date requesting permission for corporation to revoke its election under sec_41 of the internal_revenue_code the represented facts are as follows corporation is an accrual_method taxpayer with a date taxable_year corporation is the parent of a sec_41 controlled_group_of_corporations all the members of which are included in corporation’s consolidated_group from the inception of the credit_for_increasing_research_activities research_credit corporation utilized the standard method of calculating the research_credit under sec_41 for the taxable_year ending on x corporation elected to utilize the alternative_incremental_research_credit rules under sec_41 to calculate its research_credit for itself and on behalf of its sec_41 controlled_group_of_corporations corporation and its consolidated_group have continued to use the alternative_incremental_research_credit before the due_date for its return including extensions for the taxable_year ending on y corporation submitted a request for itself and on behalf of its sec_41 controlled_group to revoke its election to determine its research_credit under the alternative_incremental_research_credit rules of sec_41 for qualified_research_expenses paid_or_incurred on or after the taxable_year ending on y and all subsequent years plr-117286-03 for taxable years beginning after date taxpayers may elect to determine their research_credit under the alternative_incremental_research_credit rules of sec_41 sec_41 provides that any election under sec_41 shall apply for the taxable_year in which made and all succeeding taxable years unless revoked with the consent of the secretary based solely on the facts submitted and representations made we grant permission for corporation to revoke its election to determine its credit_for_increasing_research_activities under the alternative_incremental_research_credit rules of sec_41 for qualified_research_expenses paid_or_incurred during the taxable_year ending on y corporation and its sec_41 controlled_group should compute the research_credit for the taxable_year ending on y and all succeeding years using the general_rule of sec_41 provided that corporation does not make a new election to determine its credit_for_increasing_research_activities under the alternative_incremental_research_credit rules of sec_41 in a later year except as expressly provided herein we express or imply no opinion concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter further we express or imply no opinion concerning expenditures corporation or any member of its controlled_group treated as qualified_research_expenses this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with 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 the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination sincerely s brenda m stewart senior counsel office of associate chief_counsel passthroughs and special industries


t c memo united_states tax_court robert c gunther and jayne c gunther petitioners v commissioner of internal revenue respondent docket no filed date david d aughtry and patrick j mccann jr for petitioners william c bogardus and debra lynn reale for respondent memorandum opinion goeke judge this case is before the court on petitioners’ motion to restrain the assessment or collection of tax and respondent’s motion to dismiss the portion of this case relating to penalties under sec_6662 1unless otherwise indicated all section references are to the internal_revenue_code as amended and in effect at all relevant times and all rule continued on date respondent issued affected items notices of deficiency to petitioners following partnership-level proceedings under the unified_audit and litigation partnership procedures tefra the deficiency notices determined income_tax deficiencies for and of dollar_figure dollar_figure and dollar_figure respectively an accuracy-related_penalty under sec_6662 for of dollar_figure and gross_valuation_misstatement penalties under sec_6662 for and of dollar_figure dollar_figure and dollar_figure respectively both parties agree that we have jurisdiction to redetermine the income_tax deficiencies in this case respondent concedes that because we have jurisdiction over the tax deficiencies petitioners’ motion to restrain the collection of tax is appropriate however respondent believes that we lack jurisdiction to consider the penalties at issue and therefore we must dismiss as to the penalties and have no authority to restrain collection of the same petitioners argue partner-level determinations must be made regarding the income_tax deficiencies and penalties at issue thus they argue we have jurisdiction over the entirety of this case and respondent cannot assess or collect continued references are to the tax_court rules_of_practice and procedure any_tax deficiencies or penalties respondent agrees that partner-level determinations must be made regarding the income_tax deficiencies but he disputes our jurisdiction over the penalties he believes liability as to the penalties was established at the partner level during the tefra proceedings and therefore petitioners have no recourse with this court to contest them the issue for consideration is whether the adjustments in the notices of deficiency attributable to the tefra decision require partner-level determinations and thus give us jurisdiction over the case we hold that they do require partner- level determinations as related to the tax deficiencies but not the penalties and that we have jurisdiction only over the tax deficiencies at issue but not over the penalties accordingly we have jurisdiction to enjoin the assessment and collection of tax and will grant petitioners’ motion as it relates to the tax deficiencies we will also grant respondent’s motion to dismiss as to the penalties background petitioners resided in florida when the petition was timely filed on date respondent issued two forms notice of tax due on federal tax_return for and on date respondent issued two notices cp503 second reminder of unpaid taxes for and i arbitrage trading llc the deficiencies in this case arise from petitioners’ involvement with arbitrage trading llc arbitrage an entity subject_to tefra petitioners as owners of the robert and jayne gunther revocable_trust acquired a pair of currency options from aig international inc which they purportedly contributed along with dollar_figure in cash to arbitrage in exchange for a purported partnership_interest therein petitioners subsequently withdrew their interest in arbitrage in exchange for a liquidating_distribution of xerox stock 2the court received the petition on date one day after it was due however we may treat the petition as being filed on the date of mailing see sec_7502 rule c although the ups packaging in which the petition was mailed contained no postmark we are permitted to presume the mailing date by tracing back to the date a package of that kind would normally have been sent see sec_7502 sec_301_7502-1 proced admin regs notice_2015_38 2015_21_irb_984 designating ups next day air as a qualified private delivery service superseded by notice_2016_30 2016_18_irb_676 which became effective date after the petition was filed in this case thus because the package was mailed ups next day air we may presume it was mailed on date and treat it as filed as of that date partnership proceedings in the court of federal claims for arbitrage’s tax_year sustained respondent’s determination that arbitrage was a sham and properly disregarded for federal tax purposes arbitrage trading llc by and through robert c gunther as a trustee for the robert and jayne gunther revocable_trust v united_states docket no 06-202t date as a result respondent disregarded petitioners’ investment in arbitrage for ii income_tax deficiencies a tax_deficiency respondent determined a deficiency for petitioners’ tax_year as a result of the disallowance of a reported loss from the sale of the xerox stock purportedly distributed by arbitrage the inclusion of a constructive_dividend for the payment of legal accounting consulting and advisory fees related to arbitrage and computational adjustments to itemized_deductions and certain exemptions resulting from and b and tax deficiencies respondent determined deficiencies for petitioners’ and tax years as a result of the disallowance of a short-term_capital_loss carryforward representing a portion of the loss claimed on petitioners’ tax_return from the sale of the xerox stock purportedly distributed by arbitrage an increase in taxable_income from the disallowance of net_operating_loss carryforward from petitioners’ tax_year resulting from transactions related to arbitrage and computational adjustments to itemized_deductions resulting from and the penalties for and represent accuracy-related_penalties under sec_6662 and h the applicability of which was determined at the partnership level discussion the tax_court is a court of limited jurisdiction and we may exercise that jurisdiction only to the extent authorized by congress 85_tc_527 the court’s jurisdiction to redetermine a deficiency depends upon the issuance of a valid notice_of_deficiency and a timely filed petition id pincite see sec_6212 and sec_6213 rule a c sec_6213 generally restrains the assessment of deficiencies and the collection of the same unless a notice_of_deficiency is issued by the commissioner the prohibition on assessment and collection extends during the time a petition may be filed in this court during the pendency of any proceeding actually brought and until the decision of the court becomes final sec_6213 the court has jurisdiction to enjoin the assessment and the collection of a deficiency that the court has jurisdiction to redetermine id see meyer v commissioner 97_tc_555 we analyze the extent of our jurisdiction to enjoin the assessment or the collection of tax we will examine our jurisdiction over the tax deficiencies first and then turn to our jurisdiction over the penalties i jurisdiction over tax deficiencies neither party disputes our jurisdiction over the tax deficiencies in this case however because our jurisdiction flows directly from congress and cannot be waived we must determine it for ourselves 114_tc_268 the failure to question our jurisdiction is not a waiver of the right to do so for if we lack jurisdiction over an issue we do not and never did have the power to decide it aff’d 22_fedappx_837 9th cir partnerships do not pay tax rather items of partnership income loss deduction and credit are reflected on the partners’ individual tax returns see sec_701 and sec_702 the tefra_audit and litigation procedures under sec_6221 through apply to partnership items and allow for adjustments to partnership items in a tefra partnership-level proceeding such adjustments may result in adjustments to the tax_liabilities of individual partners however once the partnership items become final the commissioner must generally initiate further action at the partner level to adjust an individual partner’s tax_liability computational adjustments are changes in the tax_liability of a partner to properly reflect the treatment of a partnership_item whether those changes can be directly assessed without partner-level determinations or require partner-level determinations and proceedings see sec_6231 sec_301_6231_a_6_-1 proced admin regs the commissioner may make computational adjustments to reflect affected items--ie items affected by a partnership_item determined at the partnership level sec_6231 there are two kinds of computational adjustments ones to affected items that require partner-level determinations and ones to affected items that do not if an affected_item requires partner-level determinations it is subject_to the normal deficiency procedures under sec_6211 through and the commissioner must issue a notice_of_deficiency to the partner before assessing any_tax sec a sec_301_6231_a_6_-1 proced admin regs however if an affected_item requires no partner-level determinations the normal deficiency procedures do not apply and the commissioner may immediately assess the resulting tax_deficiency without issuing a notice_of_deficiency sec a and a i sec_301_6231_a_6_-1 proced admin regs where additional partner-level determinations are required and the commissioner must issue a notice_of_deficiency the taxpayer has a prepayment forum to challenge the commissioner’s determinations sec a a however if no partner-level determinations are required the taxpayer has no prepayment forum and must file a refund claim sec a c respondent argues that we have jurisdiction over the tax deficiencies in this case because factual determinations must be made at the partner level thus the commissioner was required to issue a notice_of_deficiency and the notices in this case are valid petitioners do not dispute this portion of respondent’s argument we agree with both parties respondent’s determinations are based on petitioners’ sale of stock received in liquidation of their purported interest in arbitrage generally when a partnership_interest is liquidated a partner’s basis in property other than money received from the partnership in a liquidating_distribution is equal to the partner’s outside_basis in the partnership sec_732 however where the partnership is a sham and disregarded for federal tax purposes the partner is treated as holding the partnership’s assets directly and his adjusted_basis in the assets is determined under sec_1012 keeter v commissioner t c memo at see also sec_1012 basis_of_property is generally its cost the partners of a sham_partnership do not have carryover bases under sec_732 in assets purportedly received in liquidation of their interests in the partnership nonetheless factual determinations regarding the partners’ cost bases in the assets under sec_1012 are required for example partner-level determinations must be made to determine petitioners’ holding_period for the stock the character of any gain_or_loss and whether the stock they sold in was the stock purportedly distributed by arbitrage see 655_f3d_1060 9th cir aff’g tcmemo_2009_104 129_tc_11 aff’d in relevant part remanded in part sub nom 581_f3d_297 6th cir keeter v commissioner at the adjustments to petitioners’ tax_liabilities require partner-level determinations consequently the normal deficiency procedures apply to those determinations and we have jurisdiction to redetermine the tax deficiencies we now must examine our jurisdiction over the penalties ii jurisdiction over penalties respondent asserts that we lack jurisdiction over the penalties he argues that the liability for the penalties was determined in the prior partnership-level tefra proceeding therefore he continues because liability for penalties is directly assessable at the partnership level no partner-level determinations are required we must dismiss the portion of this case relating to penalties for lack of jurisdiction and we have no authority to enjoin the assessment or collection of the penalties petitioners respond that under the supreme court’s holding in united_states v woods 571_us_31 penalties may be determined only provisionally at the partnership level and additional determinations are still required at the partner level we agree with respondent as we have explained affected items are items that relate to a partnership_item sec_6231 section a provides that normal deficiency procedures generally do not apply to the assessment or collection of computational adjustments however there is an exception where a computational adjustment is attributable to an affected_item that requires partner-level determinations sec a a i that exception applies to the tax_liabilities in this case which we have said require partner-level determinations however the plain language of that exception renders it inapplicable to penalties additions to tax and additional amounts that relate to adjustments to partnership items id see also sec_301_6231_a_6_-1 proced admin regs respondent urges that because there is no exception for penalties the general_rule applies and deficiency procedures are inapplicable in response petitioners point to the supreme court’s decision in woods as holding that penalty determinations at the partnership level are only provisional we do not believe woods stands for the proposition that petitioners suggest in woods the supreme court addressed a district court’s jurisdiction in partnership-level proceedings under tefra and the requirement for subsequent partner-level determinations as the supreme court explained once the adjustments to partnership items have become final the irs may undertake further proceedings at the partner level to make any resulting computational adjustments in the tax_liability of the individual partners most computational adjustments may be directly assessed against the partners bypassing deficiency proceedings and permitting the partners to challenge the assessments only in post- payment refund actions deficiency proceedings are still required however for certain computational adjustments woods u s pincite citations omitted the supreme court went on to explain that courts in partnership-level proceedings have jurisdiction to determine the applicability of any penalty that relates to a partnership_item id quoting sec_6226 thus the question the supreme court was deciding in woods was whether the valuation- misstatement penalty ‘relates to’ the determination that the partnerships were shams id in answering this question in the affirmative the supreme court noted that u nder tefra’s two-stage structure penalties for tax underpayment must be imposed at the partner level id pincite as the supreme court explained this renders the penalty determination at the partnership-level proceedings inherently provisional because it must be imposed at a later partner-level proceeding id pincite however the supreme court does not make the same leap that petitioners do in this case--ie that the later imposition of the provisional penalties must be done under normal deficiency proceedings the supreme court only notes that e ach partner remains free to raise in subsequent partner-level proceedings any reasons why the penalty may not be imposed on him specifically id pincite under section the appropriate venue for partners to raise subsequent challenges to the imposition of penalties is in a postpayment refund action sec c c c sec_301_6221-1 proced admin regs see also woods u s pincite m ost computational adjustments may be directly assessed against the partners bypassing deficiency proceedings and permitting the partners to challenge the assessments only in post-payment refund actions thus we find that we have no jurisdiction in this pre-payment forum to consider the penalties determined at the partnership level see also domulewicz v commissioner t c pincite petitioners must raise any defenses to the penalties in a refund action as we have no jurisdiction to 3the supreme court appears to acknowledge that its holding in united_states v woods 571_us_31 would allow the direct assessment of penalties without deficiency proceedings in a footnote the supreme court dismisses criticism from amici that its holding would allow a direct assessment of the penalty but require deficiency proceedings to assess the tax underpayment id pincite n however the supreme court does not scoff at the assumption that its holding would foreclose the direct assessment of penalties rather it suggests that there is no readily apparent reason deficiency proceedings would be required to assess the tax underpayment if it was dependent only on adjusting outside_basis in a sham_partnership id 4petitioners suggest that denying them a prepayment forum to dispute the penalties in this case would violate the fifth amendment’s due process requirement we do not agree congress has chosen to provide petitioners and other similarly situated taxpayers with only a postpayment refund forum such is its prerogative and does not violate the constitutional requirements of due process see 283_us_589 429_f2d_804 6th cir aff’g 52_tc_792 441_f2d_1101 9th cir additionally petitioners argue that mrs gunther’s innocent spouse claim under sec_6015 requires granting a prepayment opportunity to challenge the penalties in this case apart from a vague assertion in their petition that as a protective matter jayne is entitled to innocent spouse relief under sec_6015 we find no claim for innocent spouse relief by mrs gunther because we find that this conclusory statement does not satisfy our pleading requirements no innocent spouse claim has been pleaded and we will not consider this argument see rule b our decision does not consider the merits of any potential innocent spouse claim mrs gunther may have consider the penalties at issue we have no authority to enjoin their collection or assessment accordingly petitioners’ motion as it relates to the penalties will be denied and respondent’s motion to dismiss as to the penalties will be granted we have jurisdiction over the tax_liabilities at issue therefore petitioners’ motion to restrain the collection or assessment of the tax_liabilities will be granted in reaching our holdings we have considered all arguments made and to the extent not mentioned above we conclude they are moot irrelevant or without merit to reflect the foregoing an order will be issued granting petitioners’ motion in part and denying it in part and granting respondent’s motion