t c memo united_states tax_court patrick e catalano petitioner v commissioner of internal revenue respondent docket no filed date p a lawyer and owner of a law firm purchased a residence in which he financed in part by a nonrecourse loan secured_by a lien on the residence in p was named as a defendant in a number of law suits arising from his law practice and filed for ch bankruptcy protection in date the bankruptcy court released p’s residence from the automatic_stay imposed by the bankruptcy later that year the lender foreclosed on p’s residence held at the time of foreclosure p’s residence belonged to him not the bankruptcy_estate thus p is deemed to have paid all of the accrued and unpaid mortgage interest on the nonrecourse indebtedness held further p’s personal bankruptcy was proximately caused by liabilities arising from his law firm thus he may deduct an allocable portion of his bankruptcy fees as a business_expense under sec_162 sec_3 held further p is not liable for an accuracy-related_penalty under sec_6662 i r c because he acted with reasonable_cause and in good_faith - - patrick e catalano pro_se margaret s rigg for respondent memorandum findings_of_fact and opinion laro judge this is a proceeding for redetermination of a deficiency in income_tax and penalties for petitioner's tax_year as set forth below year deficiency sec_6662 penalty dollar_figure dollar_figure ' we must determine the following issues after concessions whether a deduction for mortgage interest of dollar_figure claimed by petitioner in connection with the foreclosure of his residence is allowable we hold he may deduct dollar_figure of this expense whether a deduction of dollar_figure claimed by petitioner for legal accounting and u s trustee's fees bankruptcy fees he paid in connection with his individual bankruptcy is allowable as an ordinary and necessary business_expense under sec_162 we hold he may deduct dollar_figure of this expense whether petitioner is liable for the accuracy-related_penalty under sec_6662 for substantial_understatement of tax_liability we hold he is not ‘petitioner concedes an adjustment in the amount of dollar_figure which disallowed a loss claimed for the rental of one of his boats unless otherwise indicated 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 dollar amounts are rounded to the nearest dollar findings_of_fact some of the facts are stipulated and are so found the stipulation of facts and exhibits submitted therewith are incorporated herein by this reference petitioner is an attorney who practiced law through his wholly owned corporation patrick eh catalano professional corp petitioner’s law firm during all relevant times the law firm had offices in san francisco and san diego california when petitioner filed his petition in this case he resided in san francisco california a foreclosure of petitioner’s residence in petitioner purchased a residential condominium in san francisco california petitioner’s residence for dollar_figure wells fargo bank wells fargo financed dollar_figure of the purchase_price secured_by a lien on petitioner’s residence petitioner ceased making payments of either interest or principal on the wells fargo note as of date in date petitioner and his law firm each filed a voluntary petition for bankruptcy under chapter in the u s bankruptcy court for the northern district of california bankruptcy court at the time petitioner filed his bankruptcy q4e- petition he owned two homes his san francisco residence and a second home in san diego california petitioner’s san diego home was sold by the bankruptcy_estate for an amount exceeding the outstanding mortgage on the property as a result of the filing of petitioner’s individual bankruptcy an automatic_stay was imposed against the property of the bankruptcy_estate in accordance with u s c sec_362 in date wells fargo moved the bankruptcy court for relief from the automatic_stay and requested permission to conduct a trustee’s sale of petitioner’s san francisco residence petitioner opposed the relief from stay on the ground that the property had a value substantially greater than the outstanding debt on date the bankruptcy court granted wells fargo’s motion for relief from the stay on date wells fargo filed a notice of default on the deed_of_trust on petitioner’s residence one day later petitioner listed his residence for sale with a broker and on date petitioner entered into a contract to sell the property subject_to the bankruptcy court’s approval sometime thereafter the buyer backed out of the sale on date wells fargo filed a notice of trustee's sale on date the trustee under the deed_of_trust conducted a trustee’s sale of petitioner’s residence the foreclosure at which wells fargo purchased the property with a bid of dollar_figure at foreclosure there remained an outstanding - - principal balance of dollar_figure on petitioner's mortgage ’ on date petitioner received a discharge and his bankruptcy was closed by final decree no federal_income_tax returns were ever filed for petitioner’s bankruptcy_estate for b bankruptcy fees petitioner reported a nonpassive loss in the amount of dollar_figure on schedule e supplemental income and loss of his federal_income_tax return attributable to his business_interest in macat automotive group macat macat was an s_corporation owned by petitioner at some time prior to that operated an automobile dealership macat ceased doing business in the last federal_income_tax return filed for macat was for its taxable_year the figure petitioner deducted as an macat loss represented legal accounting and u s trustee's fees bankruptcy fees petitioner claims he paid in the course of his individual bankruptcy proceedings in opinion issue l mortgage interest_deduction a entity entitled to deduction whether petitioner may deduct the interest_paid in the foreclosure of his residence requires that we first determine the debt at issue in this case was secured under a deed_of_trust however the terms mortgage and deed_of_trust will be used interchangeably herein as they were in the testimony at the trial and in the briefs -- - whether he or the bankruptcy_estate bore the tax consequences of the foreclosure respondent argues that petitioner’s residence was property of the bankruptcy_estate at the time of the foreclosure and thus any interest_paid in the foreclosure was deductible solely by the estate petitioner argues that the property was removed from the estate when the bankruptcy court granted wells fargo’s request for a relief from stay a bankruptcy_estate is created as a separate taxable entity upon the filing by an individual of a chapter bankruptcy petition see sec_1398 the estate comprises all legal and equitable interests of the debtor in property see u s c sec_541 ’ petitioner argues that his residence was effectively abandoned by the estate when the bankruptcy court granted wells fargo’s motion for a relief from stay both parties agree that the disposition of property abandoned by a trustee in bankruptcy will produce no tax consequences for the bankruptcy_estate see sec_1398 was added by sec a of the bankruptcy_tax_act_of_1980 publaw_96_589 94_stat_3389 and is applicable to bankruptcy cases commencing on or after date see bergman v commissioner tcmemo_1985_256 u s c sec_541 provides in relevant part a the commencement of a case under sec_301 sec_302 or sec_303 of this title creates an estate such estate is comprised of all the following property wherever located and by whomever held all legal or equitable interests of the debtor in property as of the commencement of the case in re olson 930_f2d_6 8th cir however respondent asserts that the lifting of the automatic_stay without more is not an abandonment some courts have indicated that a lifting of a stay in and of itself does not necessarily remove property from a bankruptcy_estate see in re b s livingston co bankr d n j in re nebel bankr bankr d neb in re cordry bankr d kan in re oakes bankr bankr n d ohio in re ridgemont apartment associates bankr bankr n d ga other courts indicate that granting relief from the automatic_stay is itself an abandonment or otherwise removes bankruptcy court jurisdiction over the subject property see in re olympia holding corp bankr n m d fla in re hood bankr bankr e d va affd bankr e d va in re griggs bankr bankr w d mo in re fisher bankr bankr m d n c petitioner’s argument is bolstered by the holding in 822_f2d_859 9th cir in wilson the bankruptcy court granted a lessor relief from the automatic_stay to commence state court proceedings to recover possession of property from a bankrupt lessee the lessee later petitioned the state court for relief from forfeiture of the lease after the petition was removed to the federal district --- - court the latter court dismissed the petition on the ground that the relief sought was within the exclusive jurisdiction of the bankruptcy court the court_of_appeals for the ninth circuit reversed holding that by lifting the automatic_stay the bankruptcy court relinquished any subject matter jurisdiction it had over the lessee’s right to seek reinstatement of the lease see id pincite venue for an appeal of the instant case would be the ninth circuit we hold that the relief from stay as to petitioner’s residence was an abandonment whereby the property effectively reverted to petitioner as a result petitioner and not the bankruptcy_estate must take into account the tax consequences of the foreclosure of petitioner’s residence b amount of interest deemed paid petitioner asserts that because the fair_market_value of his residence at the time of the foreclosure was higher than the principal and interest due he was deemed to have paid the accrued mortgage interest in the foreclosure sale respondent counters that the fair_market_value of petitioner’s residence was less than the outstanding mortgage principal and thus the foreclosure produced no proceeds that could be allocated to an interest payment moreover in granting the relief from stay in the present case the bankruptcy court rejected petitioner’s argument that his residence had equity which could be recovered by the estate see in re olympia holding corp bankr n m d fla a bankruptcy court loses jurisdiction over property upon the lifting of the stay when there is no possibility a surplus will remain --- - under the facts of this case both parties err by looking to the fair_market_value of the property to determine the amount of interest petitioner is deemed to have paid importantly respondent concedes that the wells fargo note was either nonrecourse or treated as nonrecourse under california law therefore as we shall explain fair_market_value is a neutral factor in the determination of the amount of interest petitioner is deemed to have paid in the foreclosure of his residence ’ a foreclosure sale in which the collateral is repossessed from the debtor constitutes a taxable sale_or_exchange by the debtor of the encumbered property see 311_us_504 estate of delman v commissioner t c the debtor’s gain_or_loss in the transaction is measured by the difference between the amount_realized in the disposition of the property and the debtor’s basis in the property see 331_us_1 when as here a debtor sells or disposes of property encumbered by a nonrecourse obligation the amount_realized by the debtor includes the full outstanding balance of the nonrecourse debt even if the liabilities exceed the fair_market_value of the property see 461_us_300 sec_1 ‘california is an antideficiency jurisdiction that prohibits lenders from seeking a judgment against borrowers with respect to a purchase_money_mortgage see calif civ proc code sec 580b west 74_tc_970 ‘we thus make no specific finding as to fair_market_value - c example income_tax regs moreover the amount_realized on the disposition of property subject_to nonrecourse debt may include both the principal balance and accrued interest see 856_f2d_1169 8th cir affg 86_tc_655 rejecting the government’s argument that interest should be included in the amount_realized only where such interest was included in the taxpayer’s depreciable cost_basis thus the amount petitioner realized upon the disposition of his residence in foreclosure included both the principal indebtedness and the interest that had accrued as of the foreclosure date the inclusion of the accrued interest in the amount_realized is determinative of whether petitioner is deemed to have paid the interest in foreclosure we have held that where a liability is extinguished in exchange for an asset the transaction is treated as if the transferor had sold the asset for cash_equivalent to the amount of the debt and had applied the cash to the payment of the debt unigue art manufacturing co v commissioner 8_tc_1341 citing 47_bta_84 because the amount petitioner realized in the foreclosure of his residence included both principal and accrued interest he is respondent makes no suggestion that this was not a genuine debt obligation see eg 544_f2d_1045 9th cir denying an interest_deduction with respect to an indebtedness that was not genuine affg 64_tc_752 appropriately deemed to have paid the interest in the disposition of his residence respondent contends that our holding in lackey v commissioner tcmemo_1977_213 requires that the fair_market_value of foreclosed property exceed the principal indebtedness before any amount can be allocated to interest in lackey the taxpayer claimed a deduction for interest_paid on the disposition in foreclosure of property he conceded had a value lower than the outstanding indebtedness the taxpayer argued that he was nevertheless entitled to an interest_deduction because state law required that partial payments on indebtedness be allocated first to interest and then to principal we denied the deduction based on precedent holding the interest first rule to be inapplicable where the debtor is insolvent respondent’s reliance on lackey is nevertheless misplaced because the case involved a recourse loan ’ and thus was governed by different principles of realization more relevant to our analysis is our holding in harris v commissioner tcmemo_1975_125 affd without published opinion 554_f2d_1068 9th cir which like the transaction at issue involved the deemed payment of interest in we stated in lackey v commissioner t c memo that there was little likelihood that the lender would receive any payments from petitioners other than the proceeds from the foreclosure sales emphasis added had the debt been nonrecourse the bank would have had no opportunity to seek payments other than from the proceeds of the foreclosure sales -- the foreclosure of property secured_by a nonrecourse loan the taxpayer in harris owned a one-half interest in an apartment building that he lost ina foreclosure sale in the months leading up to the foreclosure the holder of the second trust deed the lienholder had paid the outstanding interest and taxes to the holder of the first trust deed the lienholder later foreclosed on the property we permitted the taxpayer to deduct the full amount of interest and taxes paid_by the foreclosing lienholder we similarly hold that petitioner is entitled to the interest_deduction here cc deductible amount of qualified_residence_interest respondent asserts that petitioner is entitled to no interest_deduction because petitioner has failed to establish the amount of accrued interest as of the foreclosure date while petitioner has introduced no single document reflecting this amount it is nevertheless determinable from the record as a whole the adjustable rate rider to the deed_of_trust indicates that the interest rate wells fargo charged to petitioner was a flexible rate with a floor of dollar_figure percent and a ceiling of dollar_figure although harris v commissioner tcmemo_1975_125 affd without published opinion 554_f2d_1068 9th cir was decided prior to 461_us_300 harris applied a similar analysis by including the total amount of the outstanding nonrecourse indebtedness in the amount_realized by the debtor in the foreclosure - - percent ’ the notice of trustee’s sale dated date specifies that a principal sum of dollar_figure had been outstanding since date at the rate of per cent per annum in the absence of any evidence to the contrary we presume that this rate remained in effect during the entire period from date the date of default to date the foreclosure date ’ thus prior to the foreclosure interest accrued at an annual rate of percent for a total of days while the principal_amount of the debt upon which the interest accrued was dollar_figure for debts incurred after date sec_163 restricts the residential mortgage interest_deduction to interest_paid on dollar_figure million of acquisition_indebtedness see pau v commissioner tcmemo_1997_43 petitioner’s mortgage was incurred on date thus using simple interest we determine that a total of dollar_figure ie dollar_figure x dollar_figure x in deductible_interest accrued prior to the foreclosure ’ ‘the rate was linked to changes in the rate established for certain negotiable_certificates of deposit as quoted by the federal reserve bank of new york ‘2the adjustable rate rider provides for the interest rate to be re-indexed every months beginning date asa result there would have been no change in the interest rate between date the date of the notice of trustee’s sale and date the foreclosure date additionally the notice of trustee’s sale gives no indication of any change having occurred on either date or date respondent first raised the sec_163 limitation in his continued issue deductibility of bankruptcy fees petitioner contends that he may deduct the bankruptcy fees he paid as ordinary and necessary business_expenses under sec_162 because his bankruptcy was caused by a combination of the failure of macat and the lawsuits stemming from his legal practice ordinary and necessary expenses paid_or_incurred during the year in carrying_on_a_trade_or_business are deductible under sec_162 however personal living or family_expenses are disallowed under sec_262 whether an expense is a deductible trade_or_business expense or a nondeductible personal living or family expense depends on the origin of the claims giving rise to the fees see 372_us_39 continued posttrial brief petitioner concedes that the limitation is applicable in this case but contends that this issue was raised too late for it to be properly considered we disagree t he commissioner does not necessarily forfeit his right to rely ona theory by failing to raise it at the preferred times ‘the basic consideration is whether the taxpayer is surprised and disadvantaged ’ stewart v commissioner f 2d 9th cir quoting 478_f2d_731 8th cir petitioner was not surprised or disadvantaged by respondent’s tardiness respondent placed the deductibility of the mortgage interest at issue when he denied petitioner’s deduction additionally sec_163 is an express statutory limitation that is mechanically applied and there are no underlying facts in dispute see levy v commissioner tcmemo_1991_646 permitting the irs to challenge the taxpayer’s method of calculating its depreciation deduction even though issue was first raised in the commissioner’s posttrial brief -- - petitioner argues that our holding in cox v commissioner tcmemo_1981_552 is applicable here to allow him to deduct his bankruptcy fees under sec_162 we agree in cox we found that taxpayers’ bankruptcy had been proximately caused by their business liabilities where dollar_figure out of dollar_figure or more than percent of the taxpayers’ liabilities in bankruptcy were attributable to their business creditors we held that an allocable portion of the bankruptcy fees was deductible as an ordinary and necessary business_expense under sec_162 see also scofield v commissioner tcmemo_1997_547 permitting taxpayer to deduct bankruptcy legal expenses where the debts listed in his bankruptcy petition related almost exclusively to his corporation here dollar_figure out of dollar_figure or dollar_figure percent of petitioner’s liabilities in bankruptcy was business this figure represents five lawsuits relating to petitioner’s businesses in which he was personally named as a defendant the claimants were as follows carbon beach property venture dollar_figure florin meadows i ii dollar_figure john schueler dollar_figure frank l margie hammersley dollar_figure and milton john ullman dollar_figure 'petitioner’s bankruptcy schedules report total liabilities of dollar_figure we exclude the mortgages on petitioner’s two homes in the amounts of dollar_figure and dollar_figure from his personal debts because they were nonrecourse and or fully collateralized and thus a bankruptcy discharge would not have affected their collectibility we also exclude the full dollar_figure indebtedness on petitioner’s office building from his business_debts because he did not establish that the loan was recourse and undersecured -- - liabilities ’ therefore we similarly find that petitioner’s bankruptcy was proximately caused by his business liabilities having determined that petitioner’s bankruptcy was proximately caused by the failure of his business we turn to determining what portion of the bankruptcy fees is deductible respondent argues that any allocation of the bankruptcy fees between business and personal pursuits should be based on the time spent by the attorneys accountants and trustee dealing with each of the bankruptcy liabilities we disagree we set forth a reasonable method of allocation in cox v commissioner supra under which we allowed the taxpayer to deduct a percentage of the bankruptcy fees paid equal to the ratio that the claims of the taxpayer’s business creditors bore to the total claims we do the same here and allow petitioner to deduct dollar_figure percent of his substantiated bankruptcy fees because petitioner substantiated that he paid a total of dollar_figure in bankruptcy fees in ’ he may deduct dollar_figure of these fees under sec_162 ie dollar_figure x ‘petitioner also cites his prior loss of dollar_figure million in macat as an additional significant contributing factor to his personal bankruptcy because petitioner failed to establish the actual timing or amount of this loss we limit our consideration to the liabilities listed in the bankruptcy schedules petitioner points to the docket sheets for the bankruptcy court proceedings as evidence that he paid bankruptcy fees in excess of dollar_figure the docket sheets reflect only that the court approved payment of the fees out of the bankruptcy_estate not that petitioner personally paid them petitioner has established that he personally paid only dollar_figure issue sec_6662 penalty respondent determined that petitioner was liable for an accuracy-related_penalty under sec_6662 because he substantially understated his federal_income_tax see sec_6662 b sec_6662 imposes an accuracy-related_penalty equal to percent of an underpayment that is due to a substantial_understatement_of_income_tax petitioner will avoid this penalty if the record shows that his income_tax was not understated by the greater of percent of the tax required to be shown on the return or dollar_figure see sec_6662 a the accuracy-related_penalty of sec_6662 is not applicable to any portion of an underpayment to the extent that an individual has reasonable_cause for that portion and acts in good_faith with respect thereto see sec_6664 such a determination is made by taking into account all facts and circumstances including the experience and knowledge of the taxpayer and his or her reliance on a professional tax adviser see sec_1 b income_tax regs the record demonstrates that petitioner acted reasonably with respect to reporting his income for his accountant testified that petitioner consulted with him and supplied him with the information necessary to prepare his return the accountant advised petitioner on what he believed was the correct reporting position of the items reported in the return and -- - petitioner relied on and followed that advice petitioner’s reliance on the accountant to prepare a correct return was reasonable we hold for petitioner on this issue we have considered all arguments in this case and to the extent not discussed above find those arguments to be irrelevant or without merit to reflect the foregoing and concessions decision will be entered under rule


department of the treasury internal_revenue_service te_ge eo examinations commerce street dallas tx tax_exempt_and_government_entities_division number release date legend org organization name uil org address date xx date address address person to contact identification_number contact telephone number in reply refer to te_ge review staff ein last date for filing a petition with the tax_court september 20xx certified mail -- return receipt requested dear a final adverse determination_letter as to your exempt status under section this i sec_501 of the internal_revenue_code your exemption from federal_income_tax under sec_501 c of the code is hereby revoked effective january 20xx our adverse determination was made for the following reasons organizations described in sec_501 and exempt under sec_501 must be organized and operated exclusively for an exempt_purpose your organization did not engage in any charitable activities your organization is not a charitable_organization within the meaning of sec_1_501_c_3_-1 you have not established that you have operated exclusively for an exempt_purpose you failed to meet the requirements of sec_501 and sec_1 c -1 d in that you failed to establish that you were operated exclusively for an exempt_purpose contributions to your organization are no longer deductible under sec_170 of the internal_revenue_code you are required to file federal_income_tax returns on form_1120 these returns should be filed with the appropriate service_center for the year ending december 20xx and for all years thereafter processing of income_tax returns and assessment of any taxes due will not be delayed should a petition for declaratory_judgment be filed under sec_7428 of the internal_revenue_code if you decide to contest this determination in court you must initiate a suit for declaratory_judgment in the united_states tax_court the united_states claim court or the district_court of the united_states for the district of columbia before the day after the date this determination was mailed to you contact the clerk of the appropriate court for the rules for initiating suits for declaratory_judgment you also have the right to contact the office_of_the_taxpayer_advocate however you should first contact the person whose name and telephone number are shown above since this person can access your tax information and can help you get answers you can call and ask for taxpayer_advocate assistance or you can contact the taxpayer_advocate from the site where the tax_deficiency was determined by calling or you can contact the taxpayer_advocate nearest you by calling or writing to internal_revenue_service taxpayer_advocate assistance cannot be used as a substitute for established irs procedures formal appeals processes etc the taxpayer_advocate is not able to reverse legal or technically correct_tax determinations nor extend the time fixed by law that you have to file a petition in the united_states tax_court the taxpayer_advocate can however see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling we will notify the appropriate state officials of this action as required by sec_6104 of the internal_revenue_code if you have any questions please contact the person whose name and telephone number are shown in the heading of this letter sincerely youts marsha a ramirez director eo examinations tax_exempt_and_government_entities_division org address department of the treasury internal_revenue_service date taxpayer_identification_number form tax_year s ended person to contact id number contact numbers telephone fax certified mail - return receipt requested dear we have enclosed a copy of our report of examination explaining why we believe revocation of your exempt status under sec_501 of the internal_revenue_code code is necessary if you accept our findings take no further action we will issue a final revocation letter if you do not agree with our proposed revocation you must submit to us a written request for appeals_office consideration within days from the date of this letter to protest our decision your protest should include a statement of the facts the applicable law and arguments in support of your position an appeals officer will review your case the appeals_office is independent of the director eo examinations the appeals_office resolves most disputes informally and promptly the enclosed publication the examination process and publication exempt_organizations appeal procedures for unagreed issues explain how to appeal an internal_revenue_service irs decision publication also includes information on your rights as a taxpayer and the irs collection process you may also request that we refer this matter for technical_advice as explained in publication if we issue a determination_letter to you based on technical_advice no further administrative appeal is available to you within the irs regarding the issue that was the subject of the technical_advice letter catalog number 34809f if we do not hear from you within days from the date of this letter we will process your case based on the recommendations shown in the report of examination if you do not protest this proposed determination within days from the date of this letter the irs will consider it to be a failure to exhaust your available administrative remedies sec_7428 of the code provides in part a declaratory_judgment or decree under this section shall not be issued in any proceeding unless the tax_court the claims_court or the district_court of the united_states for the district of columbia determines that the organization involved has exhausted its administrative remedies within the internal_revenue_service we will then issue a final revocation letter we will also notify the appropriate state officials of the revocation in accordance with sec_6104 of the code you have the right to contact the office_of_the_taxpayer_advocate taxpayer_advocate assistance is not a substitute for established irs procedures such as the formal appeals process the taxpayer_advocate cannot reverse a legally correct_tax determination or extend the time fixed by law that you have to file a petition in a united_states court the taxpayer_advocate can however see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling you may call toll-free and ask for taxpayer_advocate assistance if you prefer you may contact your local taxpayer_advocate at if you have any questions please call the contact person at the telephone number shown in the heading of this letter the most convenient time to call if we need to contact you if you write please provide a telephone number and thank you for your cooperation enclosures publication publication report of examination sincerely marsha ramirez director eo examinations letter catalog number 34809f department of the treasury - internal_revenue_service form_886 a name of taxpayer org schedule no or exhibit year period ended explanation of items december 20xx legend org organization name xx date issue whether org continues to qualify for exemption as an organization described within internal_revenue_code c due to inactivity for several years including the year of examination facts this organization is presently recognized as a sec_501 tax-exempt_organization and established as a nonprofit corporation on december 20xx according to its articles of organization the primary purpose of the organization is to conduct scientific researches and to educate the public about the environment as aresult of our examination of your activities and financial records for the year ending december 20xx it was determined that your organization has been inactive for several years and that there have been no operations or financial activities conducted the organization has never opened a bank account as such org fails to meet the operational requirements for continued exemption under sec_501 law sec_501 of the code exempts from federal_income_tax organizations organized and operated exclusively for charitable educational and other exempt purposes provided that no part of the organization's net_earnings inures to the benefit of any private_shareholder_or_individual sec_1_501_c_3_-1 of the regulations provides that in order to be exempt as an organization described in sec_501 of the code the organization must be one that is both organized and operated exclusively for one or more of the purposes specified in that section sec_1_501_c_3_-1 of the regulations provides that an organization will be regarded as operated exclusively for one or more exempt purposes only if it engages primarily in activities which accomplish one or more of such exempt purposes specified in sec_501 revrul_59_95 1959_1_cb_627 provides that the failure of an organization to provide requested information about its financial status and operations may result in revocation of its exempt status on the grounds that the organization has not established that it is observing the conditions required for the continuation of exempt status form 886-acev department of the treasury - internal_revenue_service p page -1- department of the treasury - internal_revenue_service form 886a name of taxpayer org schedule no or exhibit year period ended explanation of items december 20xx legend org organization name xx date taxpayer's position the taxpayer declared that the organization has no operational activities during the exam process no financial records existed and never opened bank account for the organization due to lack of funds and donations government's position based on the facts of the examination the organization does not qualify for exemption since it is no longer conducting any activities conclusion the organization does not qualify for exemption under sec_501 and its tax exempt status should be revoked effective january 20xx contributions to your organization are no longer deductible under sec_170 of the internal_revenue_code form 886-acrev department of the treasury - internal_revenue_service page -2-


internal_revenue_service number release date index number ---------------------------------- --------------------------------------------- ---------------------------------- ------------ ---------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ---------------------- id no ----------------- telephone number -------------------- refer reply to cc fip b02 plr-141631-15 date june legend parent -------------------------------------------------- --------------------------------------------- entity -------------------------------------------------- ----------------------------------- subsidiary -------------------------------------------------- ------------------------------------------------- date date date date date date date property city advisor ---------------- ------------------- ------------------- -------------------------- --------------------- -------------------------- --------------------------- --------------------------- -------------------------- ----------------------------- plr-141631-15 state ------------- dear --------------- this ruling responds to a letter dated date and subsequent correspondence submitted on behalf of parent and subsidiary parent and subsidiary request an extension of time under sec_301_9100-1 and sec_301_9100-3 of the procedure and administration regulations to jointly make an election under sec_856 of the internal_revenue_code code to treat subsidiary as a taxable_reit_subsidiary trs of parent effective date facts parent is a limited_liability_company formed on date parent is the sole owner of entity entity was formed on date and is classified as a disregarded_entity for federal_income_tax purposes entity is the sole owner of subsidiary a limited_liability_company formed on date parent entity and subsidiary were formed under the laws of state on date parent indirectly acquired through entity the retail development property located in city subsidiary was formed to provide parking services to the property’s tenants parent and subsidiary each have not filed a federal_income_tax return for its initial taxable_year ended date parent intends to file its initial federal_income_tax return for the taxable_year ended date on a form 1120-reit u s income_tax return for real_estate_investment_trusts on which parent will elect to be treated as a real_estate_investment_trust reit under sec_856 of the code parent intended that a trs election be made for subsidiary upon its formation parent engaged advisor to provide federal_income_tax services for parent and subsidiary parent believed that the form_8832 entity classification election and form_8875 taxable_reit_subsidiary election for subsidiary were prepared and filed by advisor due to a miscommunication with advisor the forms were not filed advisor discovered the failure_to_file the forms in date which was more than months after subsidiary began operations on date a form_8832 was filed for subsidiary electing to be classified as an association_taxable_as_a_corporation effective date the form_8832 included a request for late classification relief to be effective on date the form_8875 should have been filed on or before date parent and subsidiary make the following additional representations in connection with their request for an extension of time the request for relief was filed before the failure to make the regulatory election was discovered by the internal_revenue_service service plr-141631-15 granting the relief requested will not result in parent and subsidiary having a lower tax_liability in the aggregate for all years to which the election applies than they would have had if the election had been timely made taking into account the time_value_of_money parent and subsidiary do not seek to alter a return position for which an accuracy- related penalty has been or could have been imposed under sec_6662 of the code at the time they requested relief and the new position requires or permits a regulatory election for which relief is requested being fully informed of the required regulatory election and related tax consequences parent and subsidiary did not choose to not file the election parent and subsidiary are not using hindsight in making the decision to seek the relief requested no specific facts have changed since the due_date for making the election that make the election advantageous to the taxpayers the period of limitations on assessment under sec_6501 has not expired for parent and subsidiary for the taxable_year in which the election should have been filed nor for any taxable_year s that would have been affected by the election had it been timely filed in addition affidavits on behalf of parent and subsidiary have been provided as required by sec_301_9100-3 of the procedure and administration regulations law and analysis sec_856 of the code provides that a reit and a corporation other than a reit may jointly elect to treat such corporation as a trs to be eligible for treatment as a trs sec_856 provides that the reit must directly or indirectly own stock in the corporation and the reit and the corporation must jointly elect such treatment the election is irrevocable once made unless both the reit and the subsidiary consent to its revocation in addition sec_856 specifically provides that the election and any revocation thereof may be made without the consent of the secretary in announcement 2001_1_cb_716 the service announced the availability of new form_8875 taxable_reit_subsidiary election according to the announcement this form is to be used for taxable years beginning after for eligible entities to elect treatment as a trs the instructions to form_8875 provide that the subsidiary and the reit can make the election at any time during the taxable_year however the effective date of the election depends on when the form_8875 is filed the instructions further provide that the effective date cannot be more than months and days prior to the date of filing the election or more than months after the date plr-141631-15 of filing the election if no date is specified on the form the election is effective on the date the form is filed with the service sec_301_9100-1 of the procedure and administration regulations provides that the commissioner has discretion to grant a reasonable extension of time to make a regulatory election or a statutory election but no more than months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-1 defines a regulatory election as an election whose due_date is prescribed by regulations or by a revenue_ruling revenue_procedure notice or announcement published in the internal_revenue_bulletin sec_301_9100-3 through c sets forth rules that the service generally will use to determine whether under the particular facts and circumstances of each situation the commissioner will grant an extension of time for regulatory elections that do not meet the requirements of sec_301_9100-2 sec_301_9100-3 provides that requests for relief subject_to this section will be granted when the taxpayer provides the evidence including affidavits described in sec_301_9100-3 to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and the grant of relief will not prejudice the interests of the government sec_301_9100-3 provides that a taxpayer is deemed to have acted reasonably and in good_faith if the taxpayer i requests relief under this section before the failure to make the regulatory election is discovered by the service ii failed to make the election because of intervening events beyond the taxpayer’s control iii failed to make the election because after exercising reasonable diligence taking into account the taxpayer’s experience and the complexity of the return or issue the taxpayer was unaware of the necessity for the election iv reasonably relied on the written advice of the service or v reasonably relied on a qualified_tax professional including a tax professional employed by the taxpayer and the tax professional failed to make or advise the taxpayer to make the election a taxpayer will be deemed to have not acted reasonably and in good_faith if the taxpayer i seeks to alter a return position for which an accuracy-related_penalty has been or could be imposed under sec_6662 at the time the taxpayer requests relief and the new position requires or permits a regulatory election for which relief is requested ii was informed in all material respects of the required election and related tax consequences but chose not to file the election or iii uses hindsight in requesting relief sec_301_9100-3 provides that a reasonable extension of time to make a regulatory election will be granted only when the interests of the government will not be prejudiced by the granting of relief sec_301_9100-3 provides that the interests of the government are prejudiced if granting relief would result in the taxpayer having a lower tax_liability in the aggregate for all taxable years affected by the election than the taxpayer would have had if the election had been timely made taking into account the time_value_of_money sec_301_9100-3 provides that the plr-141631-15 interests of the government are ordinarily prejudiced if the taxable_year in which the regulatory election should have been made or any taxable years that would have been affected by the election had it been timely made are closed by the period of limitations on assessment under sec_6501 before the taxpayer’s receipt of a ruling granting relief under this section conclusion based upon the facts and representations submitted we conclude that parent and subsidiary have shown good cause for granting a reasonable extension of time to elect under sec_856 to treat subsidiary as a trs of parent the extension of time to make the election i sec_90 days from the date of this letter this ruling is limited to the timeliness of the filing of form_8875 this ruling’s application is limited to the facts representations and code and regulation sections cited herein no opinion is expressed as to whether parent otherwise qualifies as a reit or whether subsidiary otherwise qualifies as a trs under subchapter_m of the code no opinion is expressed with regard to whether the tax_liability of parent and subsidiary is not lower in the aggregate for all years to which the election applies than such tax_liability would have been if the election had been timely made taking into account the time_value_of_money upon audit of the federal_income_tax returns involved the director’s office will determine such tax_liability for the years involved if the director’s office determines that such tax_liability is lower that office will determine the federal_income_tax effect except as specifically provided otherwise no opinion is expressed on the federal_income_tax consequences of the transaction described above this ruling is directed only to the taxpayers that requested it sec_6110 of the code provides that it may not be used or cited as precedent plr-141631-15 in accordance with the terms of a power_of_attorney on file in this office copies of this letter are being sent to your authorized representatives sincerely k scott brown___________________ k scott brown branch chief branch office of the associate chief_counsel financial institutions and products enclosures copy of this letter copy for sec_6110 purposes


internal_revenue_service number release date index number ------------------------------ ------------------------------------------- ---------------------------------- ---------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ----------------------- id no ------------- telephone number -------------------- refer reply to cc psi b03 plr-121756-07 date date legend x d1 d2 trust ------------------------------ ----------------------- ------------------- --------------------------- --------------------------------- ----------------------- 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 facts according to the information submitted x was incorporated on d1 and elected under sec_1362 to be an s_corporation effective d1 on d2 shares of x stock were transferred to trust trust is represented as being eligible to be an electing_small_business_trust esbt as of d2 however the trustee of trust failed to make a valid esbt election effective d2 consequently x's s_corporation_election terminated on d2 x represents that the failure_to_file the esbt election for trust was not motivated by tax_avoidance or retroactive tax planning x further represents that x and its plr-121756-07 shareholders have consistently treated x as an s_corporation at all times since d1 and that x's shareholders have consistently included their distributive shares of x's income on their respective federal_income_tax returns finally x and its shareholders agree to make any adjustments required by the secretary consistent with the treatment of x as an s_corporation law and analysis sec_1361 provides that the term s_corporation means with respect to any taxable_year a small_business_corporation for which an election under sec_1362 is in effect for such year sec_1361 provides that the term small_business_corporation means a domestic_corporation which is not an ineligible_corporation and which does not a have more than shareholders b have as a shareholder a person other than an estate a_trust described in sec_1361 or an organization described in sec_1361 who is not an individual c have a nonresident_alien as a shareholder and d have more than one class of stock sec_1361 provides that for the purposes of sec_1361 an esbt may be a shareholder in an s_corporation sec_1361 provides that except as provided in sec_1362 the term electing_small_business_trust means any trust if i such trust does not have as a beneficiary any person other than i an individual ii an estate iii an organization described in sec_170 or or iv an organization described in sec_170 which holds a contingent_interest in such trust and is not a potential_current_beneficiary ii no interest in such trust was acquired by purchase and iii an election under sec_1361 applies to such trust sec_1361 provides that an election under sec_1361 shall be made by the trustee any such election shall apply to the taxable_year of the trust for which made and all subsequent taxable years of such trust unless revoked with the consent of the secretary sec_1_1361-1 of the income_tax regulations provides that the trustee must make the esbt election by signing and filing with the service_center where the s_corporation files its income_tax return a statement meeting the requirements of sec_1_1361-1 sec_1_1361-1 provides that the election statement must include a the name address and taxpayer_identification_number of the trust the potential current beneficiaries and the s_corporation in which the trust currently owns stock b an identification of the election as an esbt election made under sec_1361 plr-121756-07 c the first date on which the trust owned stock in each s_corporation d the date on which the election is to become effective not earlier than days and two months before the date on which the election is filed and e representations signed by the trustee stating that the trust meets the requirements of sec_1361 and all potential current beneficiaries of the trust meet the shareholder requirements of sec_1361 sec_1_1361-1 provides that if a_trust makes a valid esbt election the trust will be treated as an esbt for purposes of chapter of the internal_revenue_code as of the effective date of the esbt election sec_1362 provides that an election under sec_1362 shall be terminated whenever at any time on or after the first day of the first taxable_year for which the corporation is an s_corporation such corporation ceases to be a small_business_corporation for s_corporation elections made and terminations occurring before date sec_1362 provides that if an election under sec_1362 by any corporation a was not effective for the taxable_year for which made determined without regard to sec_1362 by reason of a failure to meet the requirements of sec_1361 or to obtain shareholder consents or b was terminated under sec_1362 or the secretary determines that the circumstances resulting in such ineffectiveness or termination were inadvertent no later than a reasonable period of time after discovery of the circumstances resulting in such ineffectiveness or termination steps were taken a so that the corporation is a small_business_corporation or b to acquire the required shareholder consents and the corporation and each person who was a shareholder in the corporation at any time during the period specified pursuant to sec_1362 agrees to make such adjustments consistent with the treatment of the corporation as an s_corporation as may be required by the secretary with respect to such period then notwithstanding the circumstances resulting in such ineffectiveness or termination the corporation shall be treated as an s_corporation during the period specified by the secretary conclusion based solely on the facts submitted and the representations made we conclude that x's s_corporation_election terminated on d2 because of the failure_to_file an esbt election for trust and that the termination was inadvertent within the meaning of sec_1362 we further conclude that pursuant to the provisions of sec_1362 x will be treated as continuing to be an s_corporation from d2 and thereafter provided x's s_corporation_election was valid and provided that the election is not otherwise terminated under sec_1361 trust will be treated as an esbt from d2 provided that trust is otherwise eligible to be an esbt until its esbt status terminates plr-121756-07 this ruling is conditioned upon the trustee of trust filing a properly completed esbt election effective d2 with the appropriate service_center within days following the date of this letter a copy of this letter should be attached to the esbt election except as specifically set forth above no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter specifically no opinion is expressed or implied as to whether x otherwise qualifies as a subchapter_s_corporation under sec_1361 and whether trust meets the requirements to be an esbt under sec_1361 under a power_of_attorney on file with this office we are sending a copy of this letter to x’s authorized representative this ruling is directed only to the taxpayer requesting it pursuant to sec_6110 of the code this ruling may not be used or cited as precedent 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 leslie h finlow senior technician reviewer branch office of associate chief_counsel passthroughs special industries enclosures copy of this letter copy of this letter for sec_6110 purposes


number release date internal_revenue_service index number --------------------- ----------- ------------ ------------------------------------ ----------------- - department of the treasury washington dc person to contact ---------------------- id no --------------- telephone number --------------------- refer reply to cc intl - plr-119249-06 date date ------- ------- -------------- ----------------- ---------------------- ------------------------------------------- taxpayer ------------------------------------------------------------------------------------------ taxpayer ------------------------------------------------------------------------------------------ subsidiary ------------------------------------ -------------------------------------------------------------------------------------- month year year country law firm cpa firm dear -------------- this is in response to a letter dated date requesting an extension of time under sec_301_9100-3 for taxpayer on behalf of itself and on behalf of taxpayer to comply with the filing_requirements of sec_1_897-5t and sec_1_1445-5 with respect to the liquidation of taxpayer into taxpayer in year the information submitted for consideration is substantially as set forth below the ruling contained in this letter is predicated upon facts and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party this office has not verified any of the material submitted in support of the request for a ruling verification of the factual information representations and other data may be required as a part of the audit process ---------------------------------------- ---------------------------------- in re plr-119249-06 taxpayer is a holding_company a successor_in_interest to taxpayer with respect to the stock ownership of all of the issued and outstanding_stock of subsidiary a u s real_property holding corporation subsidiary was originally wholly owned by taxpayer which was in turn wholly-owned by taxpayer taxpayer and were foreign_corporations organized under the laws of country at the time of the transaction described below none of the shareholders of taxpayer are u s citizens or residents in month of year it was decided that having two companies organized in country was an unnecessary expense and taxpayer was liquidated into its sole shareholder taxpayer the liquidation would have qualified for tax-free treatment under sec_332 of the code if taxpayer and taxpayer had been domestic corporations at the time of the liquidation in year law firm was retained to review and comment on certain u s tax matters regarding subsidiary inc during the course of this review it was discovered that the internal_revenue_service was not notified of the liquidation of taxpayer into taxpayer it was also discovered that taxpayer did not file a tax_return for the year of the liquidation in which the transfer of stock in subsidiary inc was identified cpa firm had been retained for several years to review the books_and_records of subsidiary on an annual basis and to prepare annual tax returns for subsidiary cpa firm advised the management of taxpayer that a liquidation of a wholly owned subsidiary into its parent was generally a tax-free transaction but never advised management that a filing requirement existed where the corporation being liquidated was a foreign-owned foreign_corporation that owned u s real_property interests sec_301_9100-1 provides that an election includes an application_for relief in respect of tax and defines a regulatory election as an election whose due_date is prescribed by a regulation a revenue_ruling revenue_procedure notice or announcement sec_301_9100-1 provides that the commissioner has discretion to grant a taxpayer a reasonable extension of time under the rules set forth in sec_301_9100-3 to make a regulatory election under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-3 provides that requests for relief subject_to this section will be granted when the taxpayer provides the evidence including affidavits described in sec_301_9100-3 to establish to the satisfaction of the commissioner that in re plr-119249-06 the taxpayer acted reasonably and in good_faith and the grant of relief will not prejudice the interests of the government in the present situation the statements required by sec_1_897-5t and notice required under sec_1_1445-5 are regulatory elections as defined in sec_301_9100-1 therefore the commissioner has discretionary authority under sec_301_9100-1 to grant taxpayer an extension of time provided that taxpayer satisfies the rules set forth in sec_301_9100-3 based on the facts and information submitted we conclude that taxpayer satisfies sec_301_9100-3 accordingly taxpayer acting on behalf of itself and on behalf of taxpayer is granted an extension of time of days from the date of this ruling letter to file the statements required by sec_1_897-5t and the notice required under sec_1_1445-5 with respect the liquidating_distribution of subsidiary stock by taxpayer to its sole shareholder taxpayer the granting of an extension of time is not a determination that taxpayer is otherwise eligible to file the statements and notice described above sec_301 a this ruling does not relieve the transferee corporation of liability for the interest charge required under sec_1_1445-1 and a copy of this ruling letter should be associated with the statements and notice that are the subject of this ruling this ruling is directed only to the taxpayer who requested it pursuant to sec_6110 this ruling letter may not be used or cited as precedent no ruling has been requested and none is expressed as to the application of any other section of the code or regulations to the facts presented pursuant to a power_of_attorney on file in this office a copy of this ruling letter is being furnished to taxpayer’s authorized representative enclosure copy for purposes sincerely _______________ thomas d beem senior technical reviewer cc intl br4


internal_revenue_service number release date index number ----------------------------------- ---------------------------------------------------- ------------------- ----------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact -------------- id no ---------------- telephone number -------------------- refer reply to cc psi b01 plr-148841-13 date date legend x ------------------------------------------ ------------------------------------------- a -------------------- b -------------------------------------------- --------------------- trust1 -------------------------------------------- --------------------------------------------- trust2 ----------------------------------------- ------------------------------ d1 d2 d3 d4 ------------------------ --------------------- --------------------------- --------------------- state ------------- dear ------------------- plr-148841-13 this responds to a letter dated date submitted on behalf of x requesting inadvertent termination relief pursuant to sec_1362 of the internal_revenue_code the code facts according to the information submitted x was incorporated on d1 under the laws of state effective d2 x elected to be taxed as an s_corporation during a’s life a owned shares in x through trust1 a revocable_trust a died on d3 pursuant to the terms of trust1 after a’s death the x shares were transferred from trust1 to trust2 on d4 x represents that trust2 is eligible to elect to be a qualified_subchapter_s_trust qsst however a qsst election was not timely made for trust2 x represents that the circumstances resulting in the termination of x’s s_corporation_election were inadvertent x further represents that x and its shareholders have filed their income_tax returns consistent with having a valid s election in effect for all taxable years since x elected to be an s_corporation law and analysis sec_1361 provides that the term s_corporation means with respect to any taxable_year a small_business_corporation for which an election under sec_1362 is in effect for the year sec_1361 defines a small_business_corporation as a domestic_corporation which is not an ineligible_corporation and which does not a have more than shareholders b have as a shareholder a person other than an estate a_trust described in sec_1361 or an organization described in sec_1361 who is not an individual c have a nonresident_alien as a shareholder and d have more than class of stock sec_1361 provides that for purposes of sec_1361 a_trust all of which is treated under subpart e of part i of subchapter_j as owned by an individual who is a citizen or resident_of_the_united_states may be an s_corporation shareholder sec_1361 provides that a qsst whose beneficiary makes an election under paragraph d will be treated as a_trust described in sub sec_1361 and for purposes of sec_678 the beneficiary of the trust will be treated as the owner of that portion of the trust that consists of stock in an s_corporation with respect to which the election under paragraph d is made sec_1361 defines the term qualified_subchapter_s_trust as a_trust all of the income within the meaning of sec_643 of which is distributed or required to be plr-148841-13 distributed currently to one individual who is a citizen or resident_of_the_united_states in addition the terms of the trust must require that i during the lifetime of the current income_beneficiary there shall be only one income_beneficiary of the trust ii any corpus distributed during the life of the current income_beneficiary may be distributed only to such beneficiary iii the income_interest of the current income_beneficiary in the trust shall terminate on the earlier of such beneficiary's death or the termination of the trust and iv upon the termination of the trust during the life of the current income_beneficiary the trust shall distribute all of its assets to such beneficiary sec_1362 provides in part that if an election under sec_1362 by any corporation was terminated under sec_1362 the secretary determines that the circumstances resulting in the termination were inadvertent no later than a reasonable period of time after the discovery of the circumstances resulting in the termination steps were taken so that the corporation for which the termination occurred is a small_business_corporation and the corporation for which the termination occurred and each person who was a shareholder in such corporation at any time during the period of inadvertent termination of the s election agrees to makes such adjustments consistent with the treatment of the corporation as an s_corporation as may be required by the secretary with respect to such period then notwithstanding the circumstances resulting in the termination the corporation is treated as an s_corporation during the period specified by the secretary conclusion based solely on the facts submitted and representations made we conclude x’s s election terminated on d4 when trust2 became a shareholder we also conclude that the termination of x’s s_corporation_election was inadvertent within the meaning of sec_1362 accordingly under sec_1362 x will be treated as continuing to be an s_corporation from d4 and thereafter provided that x’s s election is valid and not otherwise terminated under sec_1362 this relief is contingent upon b filing a qsst election for trust2 effective d4 within days from the date of this letter a copy of this letter should be attached to the election except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter specifically no opinion is expressed or implied concerning the eligibility of x to be an s_corporation or trust2 to be a qsst this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent plr-148841-13 in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to the taxpayer’s authorized representative sincerely joy c spies joy c spies senior technician reviewer branch office of the associate chief_counsel passthroughs special industries enclosures copy of this letter copy of this letter for sec_6110 purposes cc


internal_revenue_service department of the treasury index number washington dc number release date person to contact telephone number refer reply to cc dom corp 1-plr-113612-99 date date re company investor trustee lp ric fund date c business l p q state x plr-113612-99 dear this letter is in reply to a letter from your authorized representatives dated date requesting rulings on a transaction completed on date c and a proposed transaction additional information was submitted in a letter dated date the information submitted for consideration is summarized below company is a publicly held state x corporation that acts as a holding_company for a group of direct and indirect wholly owned subsidiary corporations among other things company and its subsidiaries are engaged in business l company has only one class of stock outstanding its common_stock company as the common parent and its subsidiaries file a consolidated federal_income_tax return on a calendar_year basis as a consolidated_group the group the group has net operating losses carried over to its taxable_year it is a loss group within the meaning of sec_1_1502-91 most of the net operating losses did not arise in separate_return limitation years with respect to the group on date c investor purchased p shares of newly issued company common_stock and a warrant to purchase an additional p shares of newly issued company common_stock investor became a first_tier_entity of company through this cash purchase company has not filed a federal_income_tax return for the tax_year that includes date c prior to investor’s date c purchase ric fund trustee and lp each owned more than five percent of the outstanding company stock after date c only investor trustee and lp were five percent shareholders of company ric fund acquired its shares of company common_stock before the beginning of the three-year period that ends on the day of the submission of this ruling_request company has represented that ric fund has held the same number of shares of company common_stock at all times during such period and until investor’s purchase of company common_stock caused ric fund’s percentage ownership_interest in company to be reduced below five percent company has represented that no shareholder of ric fund owns or has ever owned five percent or more of the shares of company stock by reason of being a shareholder of ric fund trustee holds shares of company for the benefit of the holders of certain claims approved under the terms of a reorganization plan involving company and certain of its subsidiaries lp is a partnership for federal_income_tax purposes lp acquired its shares of company common_stock before the beginning of the three-year period that ends on the day of the submission of this letter one or more partners may have acquired or plr-113612-99 transferred their interests in lp during the same period although company has represented that none of the acquisitions or transfers caused a testing_date to occur within the meaning of sec_1_382-2 moreover no partner of lp owns or has ever owned five percent or more of the shares of company common_stock by reason of being a partner of lp by the terms of its partnership_agreement lp was due to dissolve early in however because of uncertainty about how a dissolution might affect a sec_382 ownership_change determination lp has not been permitted to distribute the shares it owns and dissolve company has represented it is not aware of any binding commitment that will require any of lp’s partners to dispose_of any company shares on receipt were lp to dissolve furthermore company is not aware that any two or more partners of lp have or will have any formal or informal understanding among themselves to make an additional acquisition of shares of company common_stock or will have such an understanding at the time of the dissolution of lp were it to dissolve the remaining company shares are held by public_group a direct_public_group within the meaning of sec_1_382-2t and sec_1_382-2t company’s corporate charter contains restrictions on the transferability of shares of its common_stock the charter transfer restrictions in general the charter restricts the ability of any record or beneficial direct or indirect holder of five percent or more of the shares of company common_stock however acquired including acquisition through exercise of rights to purchase shares granted by company to sell transfer pledge encumber or otherwise dispose_of any shares owned by it or to purchase acquire or otherwise receive any additional shares of common_stock the charter also restricts the ability of others to become 5-percent shareholders these restrictions will apply unless company and its tax counsel determine that such transaction will not result in an unreasonable risk of an ownership_change the company stock certificates contain a notation as to the existence of the charter transfer restrictions company intends to pursue strategic acquisitions of assets and target corporations in order to revitalize its historic_business and to expand into new businesses the expansion plan company has submitted documentation showing it is actively pursuing the expansion plan company intends to create a new series of warrants the abc warrants to efficiently and flexibly finance the expansion plan by adopting a warrant plan the abc warrant plan the abc warrant plan will incorporate the following provisions i company will have the power to issue a series of up to three call notices an a call a b call or a c call each call notice will set the terms and conditions plr-113612-99 ii iii iv v vi under which a shareholder can exercise the abc warrant and acquire additional company stock one abc warrant will be stapled to each share of company common_stock such that a transfer of ownership of the share will also transfer ownership of the abc warrant with respect to which it is issued each call notice will provide an abc warrant holder with a reasonable period of time in which to exercise its abc warrants all exercises related to a particular call will be effective as of a single date all abc warrant holders will be permitted to exercise at the same price for a particular call if company issues a call notice an abc warrant holder will be permitted to tender solely cash to company for the requisite number of shares of company common_stock with additional stapled abc warrants as described below an abc warrant holder will be free to exercise all or any portion of the abc warrants owned by such warrant holder which will be subject_to the particular call notice an abc warrant holder will be free to decline to participate in an earlier call without waiving rights to participate in later calls however an abc warrant holder forfeits rights to participate in a particular call with respect to a particular call once the time for electing to participate has expired also company will reserve the right to issue simultaneous calls a and b b and c or a b and c any share of company common_stock issued either pursuant to the exercise of any part of an abc warrant or otherwise will have the same material terms including the same rights regarding any unexpired part of the abc warrants as the stock upon which the original abc warrant was issued for example any stock issued as the result of an a call will have stapled rights allowing its holder to participate in future b and c calls any stock issued as the result of an ab or a b call will have stapled rights allowing its holder to participate in any future c call any stock issued as the result of an abc bc or c call will not have any abc warrant rights attached company will establish escrow protection mechanics to guard against an unreasonable risk of an ownership_change as a result of the exercise of any part of an abc warrant the escrow protection mechanics will be applied in conjunction with the charter transfer restrictions and will provide company with a means to help it to enforce those restrictions with regard to an exercise of the abc warrants under the escrow protection mechanics company will provide its electing abc warrant holders with sufficient information to permit each abc warrant holder to determine whether its exercise would result in its becoming a 5-percent_shareholder if exercise would result in an abc warrant holder becoming a 5-percent_shareholder the abc warrant holder would be obligated plr-113612-99 to inform company by a date certain the escrow agent for company may refuse to honor the abc warrant holder’s exercise to the extent such exercise might result in ownership of five percent or more of the shares of company stock vii company will also determine the appropriate level of participation by any abc warrant holder that it knows to be a record or beneficial direct or indirect holder of five percent or more of the shares of company common_stock in accordance with its charter transfer restrictions and the escrow protection mechanics such abc warrant holders may be restricted from exercising all or a portion of their abc warrants company intends to issue the a call of the abc warrants within one year of the date of this ruling letter at a price discounted from a specified closing trading price for a share of company stock furthermore company intends to issue the b call and c call of the abc warrants within two years of the date of the issuance of the a call but not later than three years from the date of this ruling letter company represents that the terms of the b call and c call will be substantially_similar to the terms of the a call company has received an opinion from state x counsel that the charter transfer restrictions are valid and binding on all present and future holders of company stock and enforceable under state x law furthermore state x counsel has reviewed a draft of the escrow protection mechanics and upon adoption of the abc warrant agreement is prepared to issue an opinion the escrow protection mechanics are enforceable under state x law company submitted the following representations a b the charter transfer restrictions on transferability that apply to the shares of company common_stock and the similar restrictions in the escrow protection mechanics that will apply to the call notices on any part of the abc warrants are or will be legal valid binding and enforceable against present and future holders of the shares or warrants under applicable state law except as such enforceability may be limited by bankruptcy and equitable principles company intends to vigorously challenge and pursue by all available means any attempts to violate the charter transfer restrictions or escrow protection mechanics no abc warrant or any part thereof will provide to its holder or to a person related to its holder with any right to participate in management of company or any right to influence management of company or with any other rights that ordinarily would be afforded to shareholders of company plr-113612-99 c the amount of shares of company common_stock to be issued as a result of a call notice on any part of the abc warrants will likely exceed the small issuance limitation set forth in sec_1_382-3 the call notice will provide a abc warrant holder with a reasonable period of time to decide whether to elect to exercise the abc warrant in this way company intends to assure that prior to exercise no abc warrant holder alone or in combination will have rights powers or control greater than any other abc warrant holder over the attributes of ownership of the stock that is to be received upon the exercise of the abc warrant the control_over company or the creation of income as those rights to ownership control and income are described in sec_1_382-4 d lp will continue to own and its public_group should be treated as continuing to own the same number of shares that it owns on the day of the submission of this letter until the day that the irs closes out its consideration of this ruling_request through issuance of a private_letter_ruling or otherwise based solely on the information submitted and the representations set forth above we hold as follows the reduction of ric fund’s ownership_interest in company to less than five percent as a result of investor’s purchase of company stock will cause the public_group of ric fund to be aggregated into public_group at the close of the testing_date on which such reduction takes place and on all subsequent testing dates on which the public_group of the ric fund continues to be treated as owning less than five percent of company common_stock sec_1_382-2t because company will have actual knowledge that ric fund and the public_group of ric fund will have owned all of the aggregated shares at all times since before the beginning of the testing_period ending on the testing_date on which such reduction occurs company will treat the resulting increase in the number of shares owned by public_group as if such shares had been owned by public_group at all times since before the beginning of such testing_period immediately after the reduction in percentage ownership of the ric fund referred to in ruling and for as long as the ric fund continues to own a direct ownership_interest in company of less than five percent the segregation_rules will not apply to any disposition of shares of company common_stock by ric fund sec_1_382-2t the public trading rule_of treas plr-113612-99 reg sec_1_382-2t will apply to any disposition or acquisition of shares by the ric fund that were aggregated into public_group as long as the ric fund continues to own directly or indirectly less than five percent of company because sec_1_382-2t treats any company common_stock owned by lp as being owned by lp's partners the distribution by lp of its shares of company common_stock to its partners in proportion to their partnership interests will not be considered an owner shift within the meaning of sec_1_382-2t and will not cause a testing_date to occur within the meaning of sec_1_382-2 a distribution of shares of company common_stock by the lp to its partners in proportion to their partnership interests will result in a segregation event with respect to the distributed shares of company common_stock sec_1_382-2t immediately after receiving the distribution of shares of company common_stock from lp the distributee partners of lp will be treated as public shareholders within the meaning of sec_1_382-2t and will be members of a direct_public_group of company public_group ii that is separate from public_group because company will have actual knowledge that lp and the public_group of lp will have owned all of the distributed shares at all times since before the three-year period ending on the day of the distribution company will treat the resulting increase in the number of shares owned by public_group ii as if such shares had been owned by public_group ii at all times since before the beginning of such three year period ending on the day of the distribution the public trading rule_of sec_1 2t e ii will apply to any disposition or acquisition of shares of company common_stock by any distributee partner who remains a public shareholder at the time of such disposition or acquisition so that a disposition of such shares will not result in a segregation event based solely on the information submitted and the representations set forth above we hold as follows with respect to the proposed issuance of the abc warrants provided that i company issues the a call of the abc warrants within one year of the date of this ruling letter as described above and ii if company issues the b call of the abc warrants such issuance will occur within two years of the date of the issuance of the a call as described above and iii if company issues the c call of the abc plr-113612-99 warrants such issuance will occur within two years of the date of the issuance of the a call as described above and iv prior to issuing any of the abc warrant calls company obtains an opinion from state x counsel that the escrow protection mechanics are valid and binding on all of the then current and future holders of company stock and enforceable under state x law no abc warrant or any part thereof the a call the b call or the c call will constitute an option within the meaning of sec_1_382-4 at any time prior to the time that a call notice is issued with respect to such part therefore no abc warrant or any part thereof will be subject_to the option attribution_rules of sec_1_382-4 nor will any abc warrant or any part thereof otherwise have any effect upon the computation of an ownership_change prior to the time that a call notice is issued with respect to such part the issuance by company of a call notice with regard to any part of the abc warrant will result in such part being treated as an option within the meaning of sec_1_382-4 which option will be treated as issued at the time of the issuance of such call notice for this purpose however the option will only consist of the part or parts of an abc warrant to which the call notice applies thus for example when company issues an a call an option will be treated as issued only with respect to the stock that may be acquired upon exercise of the a call but not stock that may be acquired if company were to subsequently issue a b call a c call or a bc call similarly if company thereafter issues a b call an option will be treated as issued only with respect to the stock that may be acquired on exercise of the b call an acquisition of shares of company common_stock under the terms of an option described in ruling will be an acquisition solely for cash for purposes of sec_1_382-3 no option described in ruling will be deemed exercised at the time of its issuance or transfer under sec_1_382-4 company will have actual knowledge for all purposes of sec_382 that are relevant to the determination of whether an ownership_change occurs that an option described in ruling issued to public_group and to any other direct_public_group that might arise prior to such issuance will continue to be owned by public_group and such other group if any to the extent that such option is not subsequently transferred to or acquired by any person plr-113612-99 including a 5-percent_shareholder an individual a first_tier_entity or a higher_tier_entity whose ownership_interest would have to be separately determined and therefore would not be included as part of a direct_public_group of company a separately determined shareholder company will have actual knowledge for all purposes of sec_382 that are relevant to the determination of whether an ownership_change occurs that the shares of its common_stock issued as a result of the exercise of an option described in ruling must have been issued to public_group to the extent that such shares are not issued to any person including a 5-percent_shareholder an individual a first_tier_entity or a higher_tier_entity whose ownership_interest would have to be separately determined and therefore would not be included as part of a direct_public_group of company a separately determined shareholder if company has more than one direct_public_group immediately prior to such issuance company will have actual knowledge that any shares not issued to a separately determined shareholder will be issued to each such direct_public_group pro_rata based upon the relative percentage ownership interests of each such direct_public_group in company immediately prior to the issuance provided that the escrow protection mechanics and the charter restrictions on the transferability of shares of company common_stock are enforceable and enforced pursuant to their terms a person who purports to acquire shares of company common_stock through the exercise of abc warrants will not be treated as having exercised the abc warrants and acquiring direct ownership of the underlying stock to the extent that such exercise of the abc warrants and exercise of shares would violate the provisions of the escrow protection mechanics or the charter of the escrow protection mechanics or the charter restrictions on the transferability of company’s common_stock we express no opinion about the tax treatment of the transaction under other provisions of the internal_revenue_code or the regulations or about the tax treatment of any conditions existing at the time of or effects resulting from the transaction that are not specifically covered by the above rulings temporary or final regulations pertaining to one or more of the issues addressed in this ruling letter have not yet been adopted therefore this ruling will be modified or revoked if adopted temporary or final regulations are inconsistent with any conclusions in the ruling see section dollar_figure of revproc_2000_1 2000_1_irb_4 january plr-113612-99 however when the criteria in section dollar_figure of revproc_2000_1 are satisfied a ruling is not revoked or modified retroactively except in rare or unusual circumstances this ruling letter has no effect on any earlier documents and 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 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 representative sincerely yours assistant chief_counsel corporate by mark s jennings acting chief branch