internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc psi 5-plr-143233-02 date date legend coop state a state b town corp a corp b corp c b c holdings plr-143233-02 holdings holdings sub dear this is in response to a request for rulings dated date submitted on behalf of coop by its authorized representative concerning the proper tax treatment of a transaction fully described below incorporated in pursuant to the state a cooperative statute coop is a rural telephone company operated on a cooperative non-profit basis for the mutual benefit of its members its headquarters is located in town and it serves access lines in a rural agricultural area from through coop was a tax exempt telephone cooperative claiming exemption under the provisions of sec_501 of the internal_revenue_code_of_1986 as amended the code coop failed the annual income test required for exemption in but reclaimed exemption for the period through again the cooperative periodically failed the income test in tax years and in tax_year it failed the percent member income test required for exemption and filed form_1120 u s_corporation income_tax return it intends to file a form_1120 for tax_year and has requested an extended due_date for filing the return of date while coop’s primary business_purpose is to provide to each of its approximate members local exchange telephone carrier service it also provides to members cable television service and dial-up internet service under its articles of incorporation article ii the cooperative is to operate a cooperative telecommunications system for the mutual benefit of its members further paragraph c of the article states all activities of this association shall be non-profit and cooperative in character and for the mutual benefit of its members moreover article v states the association is organized without capital stock and the property rights of members in the property of the association shall be equal plr-143233-02 article i of the amended bylaws of coop cooperative telephone company generally provide that any person firm association corporation or body politic may become a member of coop by subscribing to local exchange telephone service upon such terms as the board may or the bylaws shall from time to time prescribe memberships may not be transferred except as provided by the bylaws article ii section property interest of members states that in the case of dissolution after a all debts and liabilities of the cooperative shall have been paid b all capital furnished by members through patronage shall have been retired as provided in the by-laws and c the remaining property and assets of the cooperative shall be distributed among the members and former members in proportion which the aggregate patronage of each member and former member bears to the total patronage of all such members and such former members on the date of dissolution unless otherwise provided by law article iii sec_3_7 voting states that each member shall be entitled to one vote further sec_3_7 states the voting by proxy shall not be permitted article viii of coop’s bylaws non-profit operations proscribes the payment of interest on any patronage credits of the cooperative’s members instead sec_8_1 patron’s equity account of that article states in the furnishing of telecommunications and information service the cooperative’s operations shall be so conducted that all members will through their patronage furnish capital for the cooperative sec_8_1 also states the patron’s equity account in the cooperative is a part of the capital of the cooperative and shall consist of that portion of the net saving of the cooperative not returned in cash to patrons further sec_8_1 provides the cooperative shall establish a separate_account for each of its members and allocate to such patron’s account the portion of such members equity account to which such member is entitled plr-143233-02 section retirement of patron’s equity defines the terms under which member patronage equity may be redeemed it states if at any time prior to dissolution or liquidation the board shall determine that the financial condition of the cooperative will not be impaired thereby capital then credited to patrons’ accounts may be retired in full or in part any such retirements of capital shall be at the discretion and direction of the board as to kind timing method and type of assignment and distribution in early american telephone telegraph at t advised the independent telephone industry of the prospective availability of a new telephone service to subscribers at t’s new system was known as a data basis administration system dbas and it enabled its customers to use the then recently developed calling card service ccs also known as the auto bill calling service abc with that service customers wold be able to make credit card collect or third-party long distance calls without the assistance of an operator while at t offered this service to the over big_number independent telephone_companies it was not a viable option for the smallest independent companies including many rural telephone cooperative such as coop because of the data processing capital requirements that would be necessary to participate but at the same time it was clear to the small companies that they needed to offer the same type of services to their subscribers enjoyed by customers of larger telephone_companies therefore the smallest companies needed to identify a means by which they could participate in the new program based on these circumstances the b smallest companies joined together to form corp a for the purpose of aggregating their capital and achieving the economy of scale necessary to participate in the ccs service for that purpose corp a was organized on date as a state b corporation and authorized class a voting shares to be issued to participate each small company had to ensure that it had valid line numbers public station and credit card numbers and appropriate hardware and software available the number of corp a shares that each small telephone company had to purchase was determined by the number of main stations it serviced each participating telephone company in the corp a venture received one class a common_stock voting share and then class b common_stock nonvoting shares equal to the number of stations subscribers that the participant served corp a had the first right of refusal to repurchase all common_stock held by all of the participants should a sale be proposed profits if any would be distributed based on the total number of shares held which corresponded directly with the number of customers each participant had in many respects corp a began with rules of participation and governance very plr-143233-02 similar to a cooperative organization on date coop’s board_of directors authorized the management of the organization to participant in the corp a venture on date coop acquired one class a voting share and class b nonvoting shares of corp a at that point the cooperative’s total investment in corp a was dollar_figure by the summer of the data processing equipment was installed and by date full installation of all systems was complete and ready for operation from through corp a provided the b members the dbas and technology support necessary to have seamless participation with at t in its ccs services offered nationwide concurrent to the development of corp a several other organization evolved in corp a in which coop participated in corp a dropped certain services that it had originally provided to its members in response to that development coop along with other state a telephone_companies formed a new service bureau to perform the services dropped by corp a the new organization offered billing and collection accounts_receivable general ledger and specialized telephone revenue accounting services nevertheless coop used corp a and its successor organization continuously into for specific services including contract negotiations for billing and collections services monthly settlement under billing and collection contracts long distance clearing house services on date coop joined fifteen other small state a telephone_companies to form yet another partnership corp b the purpose of corp b was to invest the pooled capital of its participants in the charter series preferred_stock of corp c coop’s contribution to the partnership was dollar_figure corp c’s purpose was to develop an ss7 network a highly sophisticated digital information transport and database development mechanism then being introduced into the telephone industry by investing together these companies hoped to develop this leading technology that would have required capital_investment beyond any one company’s capability the ss7 network would provide a broad range of enhanced telephone services to the cooperative’s members plr-143233-02 the new switch represented a quantum leap in technology at the time in the following years corp a and corp c had a number of opportunities to work jointly on projects relating to the ss7 technology as well as database fraud management and wireless applications throughout the period from coop’s initial investment to the end of the cooperative utilized the services of corp c and its successor organization on date the members of corp a voted to have a two for one class a stock split as a result coop held two shares of class a stock and class b shares of corp a to achieve its business objectives in the marketplace corp a reorganized itself into a holding_company structure on date exchanging the original shares held by its participants for the same amount in holdings shares following that coop held two class a holdings shares and class b holdings shares those shares were dated date by the mid-1990s the prospects for local competition became evident to nearly all in the telecommunications industry congress had a variety of hearings concerning the coming competitive environment for these companies over the course of several years this effort culminated with the passage of the telecommunications act of in early february of that year the act authorized telecommunications competition at local levels for much of the united_states prior to and during the hearings and debate of the act holdings and corp c conducted discussions as to how the two organizations could work more closely ultimately it was concluded that a merger of the two entities was appropriate the merger was completed on date nearly coinciding with the passage of the telecommunications act resulting from the merger was holdings and its wholly-owned subsidiary sub based on this corp b shares in corp c were converted to shares in holdings the corp b partnership dissolved and the shares of holdings were transferred to the partners coop received big_number shares of holdings upon dissolution of corp b and big_number shares from the merger of holdings and corp c while coop did not object to the merger in it became concerned that the focus of the combined entity might be shifting from that of a service company for small companies to something else it was evident that management and seemingly a majority of the shareholders wanted holdings to pursue for-profit ventures beyond the original scope of corp a though uncomfortable with that trend coop really did not have any reasonable means to extricate itself from its investment since there was no outside market for the stock in holdings changed its name to holdings and on date the cooperative received a stock certificate for big_number shares of class a common_stock plr-143233-02 prior to holdings was not publicly traded and in date they had their first public offering for days during the time of the initial_public_offering a sales restriction was placed on the class a common_stock on date each share of holdings class a common_stock converted to four shares of publicly-traded common_stock and the selling restriction was lifted coop owned big_number shares after the conversion during the time of the initial_public_offering the board_of directors of the cooperative determined that it would be prudent to divest themselves of their holdings holdings the publicly traded stock had significantly increased in value from their original investment in corp a while still using the services of holdings they felt that the cooperative should not have such a large investment in a potentially volatile stock in addition the board still had abiding concerns about the direction of holdings and the fact that they had very little control_over this large publicly traded company during coop sold the following shares of holding common_stock number of shares date price share total realized since its substantial divestiture of its minority interest in holdings coop has been buying only those services that it requires from it the proceeds of the holdings stock sales have been used to make continuing upgrades of the telephone network effect repairs to its existing systems and support coop’s patronage redemption system based upon the information set forth herein coop requests the following ruling the amount_realized from coop’s sale of holdings stock during constitutes patronage-sourced income which may be excluded from coop’s gross_income when allocated to coop’s patrons by a true patronage_dividend code sec_501 contemplates that rural_cooperative telephone_companies may plr-143233-02 qualify as tax-exempt organizations as the telephone business has developed however very few rural telephone cooperatives now qualify for this exemption coop falls into this category and thus is a non-profit but taxable cooperative corporation subchapter_t of the code provides the statutory scheme for taxing most cooperatives rural telephone cooperatives however are not governed by subchapter_t because of the exclusion provided by code sec_1381 for rural telephone cooperatives when congress enacted subchapter_t in congress excluded rural telephone cooperatives in order to avoid over-regulating them and presumably to provide them with more flexible tax treatment because of the necessary services they provided to under-served parts of the country the underlying committee reports stated that cooperative corporations engaged in providing telephone service to persons in rural areas would continue to be treated the same as under prior_law see h_r rep no 87th cong 2d sess a127 s rep no 87th cong 2d sess see also revrul_83_135 1983_2_cb_149 sec_1382 and sec_1388 of subchapter_t placed new restrictions on the ability of cooperatives to deduct patronage_dividends that were allocated but not paid in many other ways however subchapter_t codified the law that existed prior to since its enactment in most of the development in the law regarding the taxation of cooperatives has occurred in cases under subchapter_t thus while the cases and rulings interpreting subchapter_t may not control the taxation of rural telephone cooperatives such as coop these authorities indicate the position of the service and the courts on many of the issues that do control the taxation of rural telephone cooperatives cooperatives are a unique form of business_entity which are democratically controlled by their patrons in cooperatives such as coop each member has one vote regardless of how much capital he or she contributed cooperatives are required to allocate their net margins from business done with or for their patrons back to such patrons in proportion to their patronage this return of patronage-sourced income is bound up with the basic concept of a cooperative rather than using their net_income to pay dividends to their shareholders as a regular_corporation would cooperatives pay patronage_dividends to their members based on the amount of business that the member does with the cooperative patronage_dividends are thus effectively price rebates for member-patrons see 995_f2d_101 7th cir the taxable_income of a cooperative is calculated in much the same manner as the taxable_income of a taxable corporation with one distinct difference the income of a cooperative that is attributable to business done with or for patrons is excluded from or deducted from the income of the cooperative when such income is allocated to the cooperative’s patrons at the time this patronage-sourced income is allocated in the case of cooperatives not subject_to subchapter_t or at the time it is distributed the cooperative’s patrons realize the income patronage-sourced income flows through the plr-143233-02 cooperative and is taxed only once in order for the amount_realized from the proposed sale of the holdings stock to be deductible to coop upon allocation the amount must be patronage-sourced income ie income derived from business carried on with or for coop’s patrons while neither the code nor the regulations provide a clear definition of patronage-sourced income the courts have in general held that if the income at issue is produced by a transaction which is directly related to the cooperative enterprise such that the transaction facilitates the cooperative’s marketing purchasing or service activities then the income is deemed to be patronage income farmland industries 78_tcm_846 acq aod citing 765_f2d_1102 675_f2d_988 88_tc_238 87_tc_435 in revrul_69_576 1962_2_cb_166 the service provided the following analysis of what it means for income to be patronage sourced the classification of an item_of_income as from either patronage or non- patronage sources is dependent on the relationship of the activity generating the income to the marketing purchasing or service activities of the cooperative if the income is produced by a transaction which actually facilitates the accomplishment of the cooperative’s marketing purchasing or service activities the income is from patronage sources however if the transaction producing the income does not actually facilitate the accomplishment of these activities but merely enhances the overall profitability of the cooperative being merely incidental to the cooperative’s operation the income is from non-patronage sources see also revrul_74_160 1974_1_cb_245 ruling that interest_income realized from loans made by the taxpayer was patronage source because the loans actually facilitated the accomplishment of taxpayer’s cooperative activities in that the loans enabled the taxpayer to obtain the necessary supplies for its operations the transaction that will generate income for coop is comprised of two parts the original decision to participate in the organization corp a and the currently proposed sale of holdings stock both elements of the transaction are directly related to coop’s cooperatives business and will facilitate coop’s ability to provide communications_services to its members coop actively participated in the formation and funding of corp a to insure that its members would have the same type of modern services that would be available to larger nationally recognized telephone_companies indeed it had no choice but to participate in that venture because it was too small to meet at t’s requirements for plr-143233-02 participation all of its transactions with corp a from the beginning of its participation in the company until the day it sold the final tranche of holdings stock were conducted exclusively for coop’s member patrons courts have ruled in several instances that income from corporations organized by cooperatives to conduct activities related to the cooperative business is patronage sourced in farmland industries the taxpayer a cooperative organized for the purpose of providing petroleum products to its patrons sought to have the proceeds from the disposition of its stock in three subsidiaries classified as patronage-sourced income in reaching its decision the court stated that its task was to determine whether each of the gains and losses at issue was realized in a transaction that was directly related to the cooperative enterprise or in one which generated incidental income that contributed to the overall profitability of the cooperative but did not actually facilitate the accomplishment of the cooperative’s marketing purchasing or servicing activities on behalf of its patrons t c m pincite emphasizing the need to focus on the ‘totality of the circumstances’ and to view the business environment to which the income producing transaction is related the tax_court analyzed the reasons behind both the organization of the subsidiaries and their eventual disposition id pincite first it looked at whether the taxpayer’s subsidiaries were organized to perform functions related to its cooperative enterprises the subsidiaries had been organized to explore for produce and transport crude_oil the court determined that all of the subsidiaries were organized to perform functions related to the taxpayer’s business and were not mere passive investments id pincite in other cases the direct relationship between the purpose of a cooperative business and its reasons for investing in a subsidiary were found to be dispositive on the question of whether income received from the subsidiary was patronage sourced for example in astoria plywood corp v united_states 1979wl d or the court found that the income derived by a plywood and veneer workers’ cooperative from the cancellation of a lease on a veneer plant was patronage sourced because the production of veneer was an integral part of the cooperative’s business in other words the reason the cooperative leased the property to begin with had nothing to do with investing in real_estate and everything to do with making veneer similarly in 410_fsupp_1100 d or the court held that the dividends received by a plywood workers’ cooperative from west coast adhesives a glue supplier which the cooperative helped to organize in order to supply its adhesive needs were patronage-sourced income since glue is essential for the manufacture of plywood and the arrangement to produce the glue was reasonably related to the business done with or for the cooperative’s patrons coop’s investment in corp a was directly related to its cooperative business investing in a company in order to provide modern telephone services is directly related to the business of a cooperative whose raison d’etre is to provide telephone service to its plr-143233-02 patrons in cf industries judge posner noted in his opinion that the court was not aware of any dramatic opportunities for tax_avoidance by use of the cooperative form f 2d pincite however the court implied that a cooperative would be gaining an unfair tax advantage for its members if it were investing in businesses unrelated to its cooperative purpose and in effect running a mutual_fund for its members on the side id judge posner indicated that one type of transaction would not pass the mutual_fund test a temporary investment by a cooperative in securities see id certainly if coop had taken its members’ capital and purchased a diversified portfolio of public company securities there can be no doubt that the proceeds from such a portfolio should not and would not be patronage sourced but coop did nothing of this sort it was an active_participant in a venture corp a that was directly related to its cooperative telecommunication business in fact investment in corp a was only open to companies that were in the telephone business the corp a investors were all rural telephone_companies corp a was not a passive investment of the type judge posner implies would be impermissible corp a was organized much like a cooperative its members were the smallest companies in the country each shareholder had only one vote on the affairs of the company corp a’s distribution of profits if any to its shareholders were based approximately on a participation basis for over a decade the arrangement between corp a and its shareholders was very successful and grew as more technology became available that could only be accessed through a larger organization however following the merger of holdings and corp c in it became apparent that the new company intended to depart from its original purpose of serving the b small telephone_companies following the statutorily prescribed lock-out period for such an issuance coop obtained its new stock and immediately proceeded with systematic liquidation of its minority interest which resulted in capital_gains accordingly based solely on the above we rule that the sale of the holdings stock will result in patronage sourced income which may be excluded from coop’s gross_income when allocated to coop’s patrons because coop does percent of its telephone business with patrons on a cooperative basis no allocation between patronage and nonpatronage is required plr-143233-02 this ruling is directed only to the taxpayers that requested it sec_6110 provides that it may not be used or cited as precedent in accordance with the power_of_attorney submitted with the ruling_request a copy of this letter is being sent to your authorized representative sincerely yours walter h woo senior technician reviewer branch office of associate chief_counsel passthroughs special industries cc


internal_revenue_service department of the treasury index number u i l no washington dc person to contact telephone number refer reply to cc dom p si plr-117228-99 date date number release date legend company state shareholder a this letter responds to a letter dated date requesting a ruling on behalf of company under sec_1362 of the internal_revenue_code the information submitted discloses that company was incorporated on a in state company has one shareholder shareholder it is represented that company has intended to be an s_corporation since its incorporation believing itself to be an s_corporation company has operated accordingly since a after the end of its taxable_year beginning on a however company discovered that its s election had not been timely filed company requests a ruling that its sec_1362 election will be treated as timely made for its taxable_year that begins on a sec_1362 provides that a small_business_corporation may elect to be an s_corporation plr-117228-99 sec_1362 explains when an s election will be effective generally if an s election is made within the first two and one half months of a corporation’s taxable_year then that corporation will be treated as an s_corporation for the year in which the election is made sec_1362 provides that if an s election is made after the first two and one half months of a corporation’s taxable_year then that corporation will not be treated as an s_corporation until the taxable_year following the year in which the s election is made sec_1362 provides that if 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 such election then the secretary may treat such an election as timely made for such taxable_year and sec_1362 shall not apply applying the relevant law to the facts submitted and representations made we rule that company's sec_1362 election will be treated as timely made for its taxable_year that begins on a however this ruling is contingent on company filing form_2553 election by a small_business_corporation with an effective date of a with the appropriate service_center within days from the date of this ruling a copy of this letter should be attached to the form_2553 except as specifically set forth above we express no opinion concerning the federal tax consequences of the foregoing facts specifically we express no opinion on whether company otherwise qualifies as an s_corporation this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent sincerely yours william p o’shea chief branch office of the assistant chief_counsel passthroughs and special industries enclosure copy for sec_6110 purposes


t utawal rev seine aug uniform issue list se t op pat taxpayer a ira x financial firm f amount d bear a this is in response to your date date and date letters submitted on your behalf by your authorized representative in which you request a waiver of the 60-day rollover requirement contained in sec_408 of the internal_revenue_code the code the following facts and representations have been submitted under penalty of perjury in support of the ruling requested on date taxpayer a received a distribution of amount d from his individual_retirement_account ira x to purchase a home it later became clear that taxpayer a would not be purchasing the home and taxpayer a returned the amount d check uncashed by way of a letter addressed to financial firm f dated date on date financial firm f wrote taxpayer a advising him that it had received his check on date that it would not reinvest amount d in ira x and that it would not cancel the date distribution financial firm f instead processed the transaction as a taxable transaction based on the facts and representations you request that the internal_revenue_service waive the 60-day rollover requirement with respect to the distribution of amount d because the failure to waive such requirement would be a hardship and against equity or good conscience sec_408 of the code provides that except as otherwise provided in sec_408 any amount_paid or distributed out of an ira shall be included in gross_income by the payee or distributee as the case may be in the manner provided under sec_72 of the code sec_408 of the code defines and provides the rules applicable to ira_rollovers sec_408 of the code provides that sec_408 of the code does not apply to any amount_paid or distributed out of an ira to the individual for whose benefit the ira is maintained if - the entire amount received including money and any other_property is paid into i an ira for the benefit of such individual not later than the 60th day after the dayon - which the individual receives the payment or distribution or the entire amount received including money and any other_property is paid into ii an eligible_retirement_plan other than an ira for the benefit of such individual not later than the 60th day after the date on which the payment or distribution is received except that the maximum amount which may be paid into such plan may not exceed the portion of the amount received which is includible in gross_income determined without regard to sec_408 sec_408 of the code provides that sec_408 does not apply to any amount described in sec_408 received by an individual from an ira if at any time during the 1-year period ending on the day of such receipt such individual received any other amount described in sec_408 from an ira which was not includible in gross_income because of the application of sec_408 sec_408 of the code provides a similar 60-day rollover period for partial rollovers code sec_408 provides in general that rules similar to the rules of sec_401 shall apply to the distribution of the entire_interest of an individual for whose benefit the trust is maintained code sec_408 provides that paragraph d shall not apply to any amount to the extent such amount is required to be distributed under subsection a sec_408 of the code provides that the secretary may waive the 60-day requirement under sec_408 and sec_408 of the code where the failure to waive such requirement would be against equity or good conscience including casualty disaster or other events beyond the reasonable control of the individual subject_to such requirement only distributions that occurred after date are eligible for the waiver under sec_408 of the code revproc_2003_16 r b date provides that in determining whether to grant a waiver of the 60-day rollover requirement pursuant to sec_408 the service will consider all relevant facts and circumstances including errors committed by a financial_institution inability to complete a rollover due to death disability hospitalization incarceration restrictions imposed by a foreign_country or postal error the use of the amount distributed for example in the case of payment by check whether the check was cashed and the time elapsed since the distribution occurred the information presented on behalf of taxpayer a indicates that taxpayer a received amount d by means of a check dated date and returned amount d on date which was exactly days after date and within the day rollover period measured from the date of his receipt of the check under the circumstances the service concludes that taxpayer a acted reasonably in returning the amount d check on date and in believing it would be delivered in sufficient time to be rolled over timely into ira x therefore pursuant to code sec_408 the service hereby waives the 60-day rollover requirement with respect to the distribution of amount d pursuant to this ruling letter taxpayer a is granted a period of days measured from the date of the issuance of this letter_ruling to make a rollover_contribution of an amount equal to amount d to another ira or iras described in code sec_408 provided ail other requirements of code sec_408 except the 60-day requirement are met with respect to such ira contribution the contribution will be considered a rollover_contribution within the meaning of code sec_408 no opinion is expressed as to the tax treatment of the transaction described herein under the provisions of any other section of either the code or regulations which may be applicable thereto this letter is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent a copy of this letter has been sent fo your authorized representative in accordance with a power_of_attorney on file in this office if you wish to inquire about this ruling please contac a -t mee case adcress aco se t ep ra ts sincerely yours frances v sloan manager employee_plans technicaf’group enclosures deleted copy of letter_ruling notice of intention to disclose


department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division jun t ep rate u i l xxxxxxxxxxxxxxx xxxxxxxxxxxxxxx xxxxxxxxxxxxxxx xxxxxxxxxxxxxxx legend taxpayer a xxxxxxxxxxxx plan x bank b amount d xxxxxxxxxxxx xxxxxxxxxxxx xxxxxxxxxxxx date date date date dear xxxxxxxx xxxxxxxxxxxx xxxxxxxxxxxx xxxxxxxxxxxx xxxxxxxxxxxx this letter is in response to your request dated date as supplemented by correspondence dated date date and date submitted on your behalf by your authorized representative in which you request a waiver of the day rollover requirement contained in sec_402 of the internal_revenue_code the code’ the following facts and representations have been submitted under penalty of perjury in support of the ruling requested taxpayer a received a distribution of amount d from plan x on date taxpayer a asserts that her failure to accomplish a rollover of amount d within the 60-day period prescribed by sec_402 of the code was due to her medical_condition taxpayer a was a participant in plan x taxpayer a represents that she was first diagnosed with cancer in on date taxpayer a was advised by her doctor that her test showed a recurrence and spreading of the cancer which was originally treated in taxpayer a further represents that recurrence and spreading of the disease required aggressive and frequent treatment although taxpayer a had no plans to retire she concluded early in the treatment program that she would not have the physical or mental strength to continue in her employment accordingly on date she resigned from her employment - and retired at the time of retirement taxpayer a elected a partial lump sum payment an option provided by plan x so that she could have some contingency cash available for her medica expenses taxpayer a represents that she sought advice about getting a lump sum payment from plan x’s benefit counselor but he did not advise taxpayer a about the tax consequences of the distribution taxpayer a was stressed and distracted by the very serious concerns for her health at the time she received the distribution from plan x and did not understand the 60-day rollover requirement it was only on date when taxpayer a’s father passed away and she discussed the distribution from plan x with her brother who told her about the 60-day rollover period taxpayer a requests a waiver of amount d and represents that amount d has not been used for any other purpose and remains in her account with bank b medical document from taxpayer a’s doctor shows that taxpayer a had been treated for her medical_condition prior to and during the 60-day rollover period based on the foregoing facts and representations you request that the internal_revenue_service service waive the 60-day rollover requirement contained in sec_402 of the code with respect to amount d sec_402 of the code provides that if any portion of the balance_to_the_credit of an employee in a qualified_trust is paid to the employee in an eligible_rollover_distribution and the distributee transfers any portion of the property received in such distribution to an eligible_retirement_plan and in the case of a distribution_of_property other than money the amount so transferred consists of the property distributed then such distribution to the extent transferred shall not be included in gross_income for the taxable_year in which paid sec_402 states that such rollover must be accomplished within days following the day on which the distributee received the property an individual_retirement_account ira constitutes one form of eligible_retirement_plan sec_402 of the code provides that an eligible_rollover_distribution shall not include any distribution to the extent such distribution is required under sec_401 of the code sec_402 of the code provides in relevant part that the secretary may waive the 60-day requirement under sec_402 where the failure to waive such requirement would be against equity or good conscience including casualty disaster or other events beyond the reasonable control of the individual subject_to such requirement only distributions that occurred after date are eligible for the waiver under sec_402 of the code sec_401 of the code provides the rules for governing direct transfers of eligible rollover distributions’ sec_1 a of the income_tax regulations question and answer-15 provides in relevant part that an eligible_rollover_distribution that is paid to an eligible_retirement_plan in a direct_rollover is a distribution and rollover and not a transfer of assets and liabilities revproc_2003_16 r b provides that in determining whether to grant a waiver of the 60-day rollover requirement pursuant to sec_402 the service will consider all relevant facts and circumstances including errors committed by a financial_institution inability to complete a rollover due to death disability hospitalization incarceration restrictions imposed by a foreign_country or postal error the use of the amount distributed for example in the case of payment by check whether the check was cashed and the time elapsed since the distribution occurred the information presented and documentation submitted by taxpayer a is consistent with her assertion that her failure to accomplish a rollover within the 60-day period was due to her medical_condition therefore pursuant to sec_402 of the code the service hereby waives the 60-day rollover requirement with respect to the distribution of amount d from plan x taxpayer a is granted a period of days from the issuance of this letter_ruling to contribute amount d into a rollover ira provided all other requirements of code sec_402 except the 60-day requirement are met with respect to such contribution the contribution of amount d will be considered a rollover_contribution within the meaning of sec_402 of the code this ruling does not authorize the rollover of amounts that are required to be distributed by sec_401 of the code no opinion is expressed as to the tax treatment of the transactions described herein under the provisions of any other section of either the code or regulations which may be applicable thereto this letter is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent a copy of this letter is being sent to your authorized representative pursuant to a power_of_attorney on file with this office if you have any questions concerning this letter please contact xxxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxx at xxxxxxxxxxxxxxx all correspondence should be addressed to se t ep ra t sincerely yours sherri m edelman manager employee_plans technical group cc enclosures xxxxxxxxxxxxkx deleted copy of letter_ruling notice of intention to disclose


department of the treasury int ernal revenue service washington d c o f f i c e o f c h i e f c o u n s e l date number release date cc corp b03 postf-144471-01 uilc internal_revenue_service national_office field_service_advice memorandum for associate area_counsel lmsb - atlanta retailers food pharmaceuticals and healthcare attn carolyn l rountree special litigation assistant lm rfph from acting associate chief_counsel corp cc corp subject this chief_counsel_advice responds to your memorandum dated date field_service_advice is not binding on examination or appeals and is not a final case determination in accordance with sec_6110 this chief_counsel_advice should not be cited as precedent legend seller sellersub purchaser purchasersub state a postf-144471-01 state b state c state d investment banker corporate officer state b agency year date date date date date date date date date date date q r s t postf-144471-01 v w x y z issue sec_1 should the distributions totaling dollar_figurez by sellersub to seller during year constitute dividends or a portion of the consideration paid to purchase seller’s stock in sellersub is seller entitled to a dividends received deduction for year for the distribution of dollar_figurez from sellersub under sec_243 of the code conclusion sec_1 the distributions may constitute a portion of the consideration paid to purchase seller’s stock in sellersub if the distribution is characterized as consideration paid for the sellersub stock seller is not entitled to a dividends received deduction facts seller a state a corporation is a publicly traded holding_company and the parent of a group of wholly owned subsidiary corporations involved in several lines of business including the insurance_business seller and its subsidiaries are accrual_method taxpayers who file returns on a calendar_year basis among seller’s subsidiaries is sellersub a state b corporation that is a domestic life and disability insurer seller acquired its stock in sellersub on date purchaser a state c_corporation is a holding_company that owns or manages assets and operates several insurance_companies among the subsidiaries of purchaser is purchasersub a state d corporation during date representatives of seller met with individuals at investment banker to discuss the possibility of selling sellersub to purchaser in an all cash postf-144471-01 transaction for dollar_figureq corporate officer of seller stated at that meeting that he would accept no price lower than dollar_figureq the seller representatives met with purchaser representatives soon thereafter and the seller representatives proposed the sale of sellersub to purchaser for dollar_figureq the purchaser representatives agreed to the purchase on date the parties entered into an exclusivity agreement that gave purchaser days to conduct due diligence in a meeting on date seller’s board_of directors reviewed the proposed agreement at that meeting the board unanimously authorized seller to enter into an agreement with purchaser and purchasersub in which seller would sell its stock in sellersub to purchaser and purchasersub in a stock purchase agreement dated date seller agreed to sell its stock all r issued and outstanding capital shares in sellersub to purchaser and purchasersub for dollar_figureq in cash subject_to several conditions including approval of the state b agency the agreement required sellersub to sell or transfer to seller its interest in certain investment_assets unwanted assets and hold an amount of cash or equivalents equal to the fair_market_value of the unwanted assets the parties jointly issued a press release on that date describing the sale for dollar_figureq and seller filed papers with the securities_and_exchange_commission outlining the same terms of the sale on date seller and sellersub’s boards of directors formally decided that sellersub would recapitalize and pay dividends to seller by date sellersub declared an dollar_figures dividend to seller payable on date that consisted of certain investment_assets sellersub also declared a dollar_figuret dividend to seller payable on date the sellersub board also authorized the issuance of an additional v shares of common capital stock and the sale of w shares to purchaser in exchange for dollar_figurex the shares sold to purchaser represented an over percent ownership_interest in sellersub seller retained a call option on those shares whereby seller could force purchasersub to sell the newly issued stock back to seller further purchase agreements were executed on date that modified the earlier agreements the new purchase agreements reduced the price purchasersub was to pay seller for the remaining sellersub stock from dollar_figureq to dollar_figurey the revised agreements also stated that seller would cause sellersub to distribute the unwanted assets to seller as a dividend having a fair_market_value up to dollar_figurez if the state b agency did not approve of the dividend or if for any other reason sellersub failed to make the full distribution purchasersub would reimburse seller to whatever extent dollar_figurez exceeds the amount distributed the state b agency approved the dollar_figuret dividend on date subject_to approval for sellersub’s sale of the w shares of stock to purchaser for dollar_figurex and contingent on such sale the state b agency approved the sale of sellersub to purchasersub on date postf-144471-01 law and analysis characterization of the distribution whether the distribution in question should be characterized as a dividend or part of the consideration paid for the sellersub stock depends on the legal characterization of the factual circumstances surrounding the transaction there are many cases that address the question before us but that reach opposite conclusions based on the facts of each case the two leading cases are 430_f2d_1185 5th cir and 624_f2d_1328 5th cir in waterman the court_of_appeals ruled that the form of a transaction and intent of the parties is less important than the true substance and effect of the parties’ agreement when judging whether a dividend is part of the sale price the parties reached agreement on a sale price of dollar_figure million for the stock of two corporations in hopes of receiving tax favorable treatment from the government the seller declared a dividend of dollar_figure million in the form of a promissory note and then sold the stock of the corporations to purchaser for dollar_figure in cash however as part of the agreement the purchaser loaned the corporations dollar_figure million after the sale was completed in order to pay the note issued in lieu of the cash dividend the court concluded that the dividend was in fact part of a pre-arranged plan to sell the stock and that the distribution was a mere conduit for the payment of the purchase_price waterman pincite there were several critical facts that led the court to this determination first the purchaser originally offered dollar_figure million for the stock of the corporations and the seller intended to sell the stock for that price but with dollar_figure million disguised as a dividend the distribution was financed by money supplied by the stock purchaser and not by the seller in other words the purchaser ultimately paid the entire purchase_price not just dollar_figure the fact that the distribution was made pre-sale and in the form of a promissory note rather than in cash conflicts with the nature of a dividend being a distribution of earnings_and_profits in the context of a corporation-shareholder relationship finally the court was convinced that the dividend would never had been paid but for the impending sale of the corporation stock tsn dealt with similar factual circumstances but reached an opposite conclusion in tsn the purchaser of the corporation’s stock reached an agreement with the seller that the purchase_price would be reduced automatically when certain assets consisting primarily of capital stock in small public companies trading infrequently and in small quantities in the over-the-counter market were removed from the corporation’s ownership by the closing date of the sale pursuant to the agreement the seller declared a dividend worth about dollar_figure million primarily postf-144471-01 in the form of capital stock in the small public companies prior to the closing date the purchaser then purchased the stock of the corporation for approximately dollar_figure after the purchase the purchaser contributed to the capital of the corporation dollar_figure million in bonds assets significantly different in nature than those distributed and purchased dollar_figure of additional capital stock in the corporation prior to the sale and dividend the corporation was worth approximately dollar_figure million and afterwards was worth dollar_figure million the court_of_appeals found that the facts of tsn distinguishable from those of waterman the purchaser in tsn made it clear that they did not want the distributed assets in the corporation after closing had valid business purposes for not wanting them and would not pay for them once the assets were distributed they remained in the hands of the selling shareholders unlike waterman the assets that the purchaser contributed to the corporation after the sale were not later transferred to the selling shareholders the mere fact that the dividend was part of the purchase agreement does not make the dividend a conduit for the transfer of consideration waterman and tsn discuss many factors that are considered in determining whether a purported dividend should be respected as such or should be treated as part of the purchase_price although the case before us contains elements of waterman and tsn and falls somewhere between them we believe that the field’s position that it is more similar to waterman than tsn is supported by the facts and could be further supported by facts further developed as outlined below it is our view of the cases in this area that the most important factor in deciding whether the dividend should be characterized as such or as part of the consideration paid for the stock is whether the purchaser truly did not want the distributed assets in tsn it was clear that for valid business reasons the purchaser did not want the infrequently traded stock of the small companies similarly in 14_tc_1410 another case which respected the form of a distribution as a dividend it was clear that the purchaser did not want to acquire certain assets of the acquired_corporation most specifically a contingent payment owed to the corporation as was the case in tsn sellersub is distributing assets to seller that were unwanted by purchasersub and purchaser it is unclear whether seller has retained the distributed assets however unlike in tsn coffey and other similar cases it is by no means clear whether the purchaser truly didn’t want the unwanted assets or whether seller merely concocted this plan to distribute the unwanted assets after the sale was already agreed to in order to derive significant tax benefits unlike the assets in tsn and coffey the unwanted assets distributed were by no means unique and in fact appear to be investment_assets of a very similar nature and quality to other assets of sellersub which were not postf-144471-01 distributed we have no evidence from purchaser that it did not want to acquire these assets in fact the stock purchase agreement provides evidence to the contrary sec_5 d of the stock purchase agreement states if the state b agency does not approve or if sellersub does not make a distribution to seller as dividends of unwanted assets having a fair_market_value of dollar_figurez or if sellersub for any other reason does not make aggregate permitted dividends to seller of dollar_figurez then purchaser will reimburse seller at the closing for the undistributed amount emphasis added this quoted passage appears to be strong evidence of the willingness of purchaser to buy such assets and that it was merely seller’s desire that prevented purchaser from buying such assets similarly seller’s initial agreement to sell such assets shows that the seller had no real desire to keep those assets either the state b agency approved the dividend contingent upon purchaser in effect replacing the assets distributed by sellersub seller did not necessarily want to keep the unwanted assets and purchaser was not opposed to acquiring such assets therefore it appears that the only reason that the transaction was structured as done rather than as a straightforward sale of the sellersub stock was as a tax planning device seller and purchaser agreed on a price of dollar_figureq and publicly stated that the sale of the sellersub stock was for that amount it is clear that the dividend would not have occurred but for the contemplated sale it also appears that purchasersub supplied the funds through the first purchase of sellersub stock that eventually became the source for the bulk of the dollar_figurez dividend this inference is buttressed by the fact that purchasersub promised to reimburse seller to whatever extent dollar_figurez exceeded the actual amount distributed however contrary to the facts in waterman sellersub distributed assets not cash to seller which undermines the supposition that purchasersub the purchaser supplied the funds to support the dividend we do note however that the distributed assets appear to be readily marketable and in fact may have been disposed of by seller thus this difference from waterman may not be very significant what is clear is that in the end purchasersub expended dollar_figureq to acquire all the stock of sellersub in two separate steps we suggest that the facts of this case be further developed in order to determine whether the distributions should be properly classified as a dividend or as consideration paid for the sellersub stock it would be particularly helpful to determine postf-144471-01 the veracity of the business_purpose alleged by purchaser and or purchasersub regarding the unwanted assets ie whether purchaser truly did not want the unwanted assets the nature of the assets distributed by sellersub as compared to the nature of the assets contributed by purchasersub to sellersub and or acquired with the assets contributed whether seller has retained the assets distributed to it by sellersub and sellersub’s continued status as an insurance_company for both state and federal tax law purposes after the sale dividends received deduction if the distribution is characterized as part of the consideration paid for the sellersub stock seller is not entitled to a dividends received deduction since no dividend occurred if upon further analysis it is determined that the distribution should be characterized as a dividend please contact the office of associate chief_counsel financial institutions and products for guidance this writing may contain privileged information any unauthorized disclosure of this writing may have an adverse effect on privileges such as the attorney client privilege if disclosure becomes necessary please contact this office for our views please call if you have any further questions by ______________________________ senior technician reviewer branch


cca_2018041713174320 id uilc number release date from sent tuesday date pm to cc bcc subject fw counsel opinion-rba collection -- postn-112136-18 good morning we took a look at this case and both judgment and commitment orders and although the cases have separate docket numbers we would recommend treating them as a single consolidated case for the purposes of usc i and irm after consulting with tax_division we think that the judge considers the cases to be linked see pp ----------------------------- order which mentions the term of incarceration and the restitution that was ordered in the tax case also the tax case included a charge for --- -------------------- and the restitution order for the non-government victims came from a --- ------------------------------------ given the case linkage we think the safe course of action is to assume that usc i and irm which was modeled from usc i prevents the irs from recovering until the third-party non-federal victims have been fully compensated therefore we do not think the irs should pursue collection from the taxpayer at this time please let us know if you have any questions and would like to discuss thanks ------- ------------- -------------------


office_of_chief_counsel internal_revenue_service memorandum number release date cc pa apjp b02 mscooper postn-128106-05 uilc date date to david j mungo associate area_counsel denver large mid-size business carol p nachman special counsel administrative provisions judicial practice procedure administration from subject sec_6501 and forward contracts this chief_counsel_advice responds to your request for assistance this advice may not be used or cited as precedent legend llc x member a member b member c member d year date date date date date date date date corporation -------------------------- ------------------- ---------------------- --------------------- --------------------- ------- -------------------- --------------------------- --------------------------- --------------------------- ----------------------- ----------------------- -------------------------- --------------------- ---------------------------------- postn-128106-05 broker f accountant e dollar_figurex dollar_figurev dollar_figurey dollar_figurez dollar_figurea dollar_figureb dollar_figurec ----------------- ---------------------- ------------ --------------- --------------- --------------- ---------------- --------------- --------------- issue whether llc x adequately disclosed on its year return the amount omitted from gross_income within the meaning of sec_6501 to avoid the extended year statute_of_limitations for a tefra partnership under section c conclusion llc x did not adequately disclose on its year return the omitted income within the meaning of sec_6501 therefore the 6-year statute_of_limitations for assessment under section c applies and llc x’s year tax_year is open for examination facts on date member a formed llc x for the purpose of engaging primarily in investment activities members a and b each held a percent interest in llc x members c and d the remaining members of llc x each held percent interests on date member a contributed big_number shares of corporation common_stock to llc x by delivering the shares to a broker f brokerage account established by llc x the other members of llc x also contributed a total of big_number shares of corporation stock to the brokerage account on date the four members of llc x transferred their interest in llc x to individual annuity trusts crts members a and b each retained a percent interest in llc x the crt trust agreements designated the respective individuals as the noncharitable beneficiaries and different charities and schools as charitable beneficiaries the crts had a term of two years and paid an annuity of percent of the initial net fair_market_value of the trust assets valued as of date on date sec_3 and broker f and llc x executed three prepaid forward contracts for the sale of shares of capital stock in certain companies on a forward basis sec_1259 defines a forward_contract as a contract to deliver a substantially fixed amount of property including cash for a substantially fixed price a prepaid forward postn-128106-05 contract is one in which the purchaser prepays the sales_price upon the execution of the contract the prepaid forward contracts specifically outlined the representations warranties and agreements for a prepaid equity forward transaction between broker f and llc x with respect to the common_stock of corporation llc x received prepayment proceeds from the sale of the forward contracts in the amount of dollar_figure percent of corporation’s fair_market_value on the trade dates broker f disbursed a total of dollar_figurev as prepayment proceeds to llc in year the maturity dates for the contracts were on date on date appraisers affiliated with accountant e established the total value of the combined crts’ percent interests in llc x as dollar_figurey as of date for the period of date through date llc x made total distributions of dollar_figurez to all of the members’ crts in year the crts in turn made distributions of dollar_figurex to the four members llc x filed its year return on date in year llc x was treated as a partnership for federal tax purposes its year return was identified on its face as an initial return the balance_sheet portion of the return contained no balance_sheet for the beginning of the year the principal business activity of the taxpayer was described as finance and insurance and its principal product or service was listed as other financial investment activities schedule k-1s attached to llc x’s year return included among others k-1s identifying -- as llc members -- the member a annuity_trust the member b annuity_trust the member c annuity_trust and the member d annuity_trust in its year return llc x did not report any gross_income on the balance_sheet for the close of the year schedule l the taxpayer reported other current_assets in the amount of dollar_figurea other liabilities in the amount of dollar_figurev the amount of the prepayment proceeds received for the forward contracts and partner’s capital accounts in the amount of dollar_figureb in its other liabilities schedule attached to its year return llc x listed a forward sale contract of dollar_figurev the agent adjusted llc x’s year return in accordance with revrul_2003_7 and pursuant to advice from area_counsel on a similar case for federal tax purposes llc x’s execution of the forward contracts is treated as constructive sales deemed to have occurred in year on the dates that llc x executed the three prepaid forward contracts with broker f llc x’s position is that such proceeds are not taxable when received because the forward_contract remains open until settlement that is until delivery of the stock the 3-year period under section a for assessing any_tax with respect to any person that is attributable to any partnership_item or affected_item on llc’s year return is closed should it be determined that llc x has not adequately disclosed the transaction giving rise to the proceeds from the prepaid forward contracts the 6-year period under section c would still be open postn-128106-05 law and analysis sec_6501 provides that tax must generally be assessed within years after the return was filed whether or not such return was filed on or after the date prescribed as an exception to the general_rule sec_6501 provides a 6-year statute_of_limitations if the taxpayer omits_from_gross_income an amount properly includible therein that is in excess of percent of the amount of gross_income stated in the return sec_6501 sec_6501 states that i n determining the amount omitted from gross_income there shall not be taken into account any amount which is omitted from gross_income stated in the return if such amount is disclosed in the return or in a statement attached to the return in a manner adequate to apprise the secretary of the nature and amount of such item sec_6501 in its year return llc x did not report any gross_income according to the agent however llc x should have reported on its year return a long-term_capital_gain of dollar_figurec for the prepayment proceeds received from the execution of the forward contracts thus llc x omitted from gross_income an amount in excess of percent of the amount of gross_income stated in the return it thus must be determined whether llc x adequately disclosed the amount omitted from gross_income to avoid the 6-year statute_of_limitations whether llc x‘s listing of the forward sale contract as a liability adequately disclosed the omitted income is a factual question 64_tc_460 acq 1976_3_cb_3 the service has the initial burden to establish the percent omission from gross_income but the taxpayer has the burden to establish that the return contains an adequate_disclosure see hines v commissioner tcmemo_1989_17 aff’d without opinion 893_f2d_1330 3d cir while the 6-year period under section c applies here we look to the law as developed under sec_6501 to apply that tefra provision see 114_tc_533 appeal dismissed and remanded 249_f2d_175 3d cir discussing the interplay between sections and adequate_disclosure the tax_court has described the test of whether a taxpayer has adequately disclosed an omitted item as follows the proper application of the rule is whether an adjustment might be apparent from the face of the return to the elusive ‘reasonable man ’ hines v commissioner tcmemo_1989_17 aff’d without opinion 893_f2d_1330 3d cir section a provides that the period for assessing tax which is attributable to any partnership_item or affected_item shall not expire before years after the later of the date the partnership files its return or the last day for filing the return for such year determined without regard to extensions if a partnership omits_from_gross_income an amount in excess of percent of the amount of gross_income stated on its partnership return then section a is applied by substituting years for years i r c c postn-128106-05 see also university country club inc t c pincite the tax_court explains further as follows the statement must however be sufficiently detailed to apprise the commissioner and her agents as to the nature and amount of the transaction so that decision as to whether to select the return for audit may be a reasonably informed one 98_tc_341 aff’d in part and rev’d in part on another issue 998_f2d_567 8th cir 88_tc_1020 in addition we believe that 273_f3d_402 1st cir is particularly applicable to the subject case cc f western operations shows that the return must give a revenue_agent a reason to investigate further regarding the omitted income it is not enough that a taxpayer may string together a series of inferences that could have led to the discovery of omitted income in cc f western operations the partnership omitted from the form_1065 items of gross_income arising from being relieved of a share of partnership liabilities upon the sale of several partnership interests cc f western o attached the schedule_k-1 of the partnerships which showed its share of their liabilities the court however found that nothing in cc f western’s form_1065 indicated the allocation of debt or other sales terms rejecting cc f western’s contention that if the service had combined the amounts reported on the twelve k-1’s attached to the return the court said in the end the safe_harbor provision of sec_6501 has to be read in light of its purpose namely to give the taxpayer the shorter limitations_period where the taxpayer omitted a particular income item from its calculations but disclosed it in substance the chain of inferences relied upon by western is simply too thin and doubtful to meet this requirement cc f western operations f 3d pincite an example of a return providing a reason to investigate further regarding the omitted income is shown in university country club inc in that case the service determined that receipts from the sale of class b stock represented taxable_income to petitioner because in substance the stock was a license for the privilege of using petitioner’s facilities that taxpayer treated the receipts as nontaxable contributions to capital from the sale of that stock the taxpayer attached a balance_sheet that showed a capital stock account comprised of two classes of common_stock and a capital surplus account a reconciliation schedule of the capital surplus account showed the account to be comprised of general membership for pool and golf the tax_court found that reporting the dollar value of class b stock on the balance_sheet of the initial return rather than classifying the proceeds from the sale of stock as income is a type of disclosure described by the supreme court university country club inc t c pincite postn-128106-05 it has been said that t he touchstone in cases of this type is whether respondent has been furnished with a ‘clue’ as to the existence of the error 54_tc_1336 aff’d per curiam f 2d 8th cir the origin of this clue test is 357_us_28 and it is routinely referenced in opinions of the tax_court and other courts see eg 64_tc_460 rhone-poulenc t c pincite the first circuit in cc f western operations however rejected the notion that colony established an independent clue test based on statutory language the first circuit speculated that post-1953 judicial decisions had erroneously incorporated that ideology out of an i mpulse to create a sense of continuity between colony and sec_6501's adequate_disclosure test id the court further indicated that the adequate_disclosure standard in sec_6501 establishes a much stiffer test than a mere clue id cc f western operations represents the best statement of our current view of the law here llc x failed to report as gross_income the proceeds received in year from the forward sale contracts llc x instead reported the proceeds on schedule l as a liability of dollar_figurev and directed the irs to review the attached statement statement described the dollar_figurev amount as a current_liability attributable to a forward sale contract llc x however did not indicate anywhere on the return that the forward sale contract was prepaid that is that it had in fact already received the proceeds thus the irs was not made aware from the return of any connection between the specific transaction and the crts nor did llc x give the agent any other reason to further investigate the nature of the forward sale contracts by omitting any reference to prepayment proceeds llc x failed to disclose in substance the particular omitted income item see cc f western operations f 3d pincite the 6-year statute_of_limitations under section c thus applies because llc x did not adequately disclose the amount omitted from gross_income within the meaning of sec_6501 case development hazards and other considerations --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- ------------ this writing may contain privileged information any unauthorized disclosure of this writing may undermine our ability to protect the privileged information if disclosure is determined to be necessary please contact this office for our views postn-128106-05 please call if you have any further questions


internal_revenue_service number release date index number ------------------------------------------ -------------------------- -------------------------------------- --------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ---------------------- id no ------------- telephone number --------------------- refer reply to cc psi b03 plr-128488-10 date november legend company ----------------------------------------------------------- ------------------------------------------- subsidiary ----------------------------------------------------------- ------------------------------------------------------- ------------- -------------------- ----------- ----------------------- ------------------- state individual country a b dear ---------- we received a letter dated date and subsequent correspondence submitted on behalf of company by its authorized representative requesting a ruling under sec_1362 of the internal_revenue_code code this letter responds to that request facts plr-128488-10 company is a state corporation that elected to be an s_corporation effective a company wholly owns subsidiary a state limited_liability_company treated as a disregarded_entity for federal tax purposes company started an equity incentive plan plan under which key employees of company and subsidiary are awarded participation units entitling the holder to a lump sum payment upon the occurrence of certain events under the plan if an employee holds a certain number of participation units the employee is entitled to both cash and company stock on b one of subsidiary’s employees individual a citizen of country became entitled under the plan to receive cash and company stock before any shares of company stock were transferred to individual however company became aware of individual’s ineligibility as a shareholder under a shareholders’ agreement between company and its shareholders company is prohibited from making any transfer of company stock that would terminate its s_corporation_election without certain approval company represents that the circumstances resulting in the possible termination of company’s s_corporation_election were inadvertent and were not motivated by tax_avoidance company and its shareholders have agreed to make such adjustments consistent with the treatment of company as an s_corporation as may be required by the service law and analysis sec_1361 provides that for purposes of title_26 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 for purposes of subchapter_s 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_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 sec_1362 provides that any termination shall be effective on and after the date of cessation sec_1362 provides in part that if an election under sec_1362 was terminated under sec_1362 or the secretary determines that the plr-128488-10 circumstances resulting in such termination were inadvertent no later than a reasonable period of time after discovery of the circumstances resulting in such 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 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 termination the corporation shall be treated as an s_corporation during the period specified by the secretary conclusions based solely on the facts submitted and the representations made we conclude that company's s_corporation_election may have terminated due to an ineligible shareholder in addition we conclude that the possible termination was inadvertent within the meaning of sec_1362 accordingly company will continue to be treated as an s_corporation from b and thereafter provided company's s_corporation_election is not otherwise terminated under sec_1362 however this ruling is contingent on company and its shareholders treating company as having been an s_corporation from b and thereafter accordingly company's shareholders must include their pro_rata shares of the separately_stated and nonseparately computed items of income or loss of company under sec_1366 make any adjustments to stock basis under sec_1367 and take into account any distributions made by company to shareholders under sec_1368 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 specifically we express or imply no opinion regarding whether company is otherwise eligible to be treated as an s_corporation this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent plr-128488-10 under a power_of_attorney on file with this office we are sending a copy of this letter to company’s authorized representative sincerely s mary beth carchia senior technician reviewer branch office of the associate chief_counsel passthroughs special industries 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 b06 plr-104761-17 date date --------------------------------------------------------------------------------- ---------------------------------------------------- ---------- ------------------------------------------- ------------------------------------------------------- -------------------------------------- ----------- ----------- ---------- ------------------------- ------------------------------------------------- legend taxpayer parent state commission a commission b operator date date date form director dear ------------- this letter responds to parent’s request made on behalf of taxpayer dated date for a ruling on the application of the normalization rules of the internal_revenue_code code to certain accounting and regulatory procedures as described below the representations set out in your letter follow taxpayer a wholly-owned subsidiary of parent is an investor-owned regulated utility incorporated in state taxpayer is a member of parent’s consolidated_group that files a consolidated federal_income_tax return on a calendar_year basis using an accrual_method of accounting taxpayer is engaged in the purchase transmission distribution and sale of electric energy in state it is subject_to regulation by commission a and commission b with respect to terms and conditions of services including the rates it may charge for its plr-104761-17 services both commissions establish taxpayer’s rates based on its costs including a provision for a return on the capital employed by taxpayer in its regulated business taxpayer’s electric transmission lines located in state are integrated into operator a regional transmission operator as a transmission-owning member of operator taxpayer is able to include in operator’s tariff a rate that allows it to recover the costs it incurs with respect to the transmission facilities it makes available to operator the rate-setting mechanism used by taxpayer is a formula rate approved by commission b the formula rate is established in two parts a basic rate and a true-up by date of each year taxpayer files with commission b to update its formula rate the new rate takes effect on date of the same year and remains in effect for one year until date of the following year the data used in calculating the basic rate portion of the updated rate is for the most part taken from the historical test year which ended on the last day of the immediately preceding calendar_year as reflected in taxpayer’s form for that period all elements of rate base including plant in service accumulated depreciation and accumulated deferred federal income taxes adfit use at least initially end of historical calendar test year balances depreciation expense and all other operation and maintenance_expenses reflected in the calculation are also historical calendar test year expense amounts one element of the calculation is then modified a projection is made of plant additions expected to be placed_in_service during the calendar_year in which the rates are being set the cost of these additions is weighted to reflect the number of months each addition will be in service during the calendar_year this weighted amount is added to rate base thus this component of the rate provides a return on the equity reflected in the projected plant additions being included in rate base no modification is made to the balances of the depreciation expense or deferred taxes due to these projected plant additions the basic rate is a revenue requirement calculated based on the historical calendar_year test period data so modified the true-up component of taxpayer’s formula rate is calculated by comparing a revenue requirement computed based on taxpayer’s most recent form to the revenue requirement originally calculated for the prior test period any difference both over- or under-recoveries plus interest is incorporated into the formula rate as the true-up component of that rate among other things this component corrects any over- or under-recovery of equity return arising from the prior year’s projection of plant additions based on actual plant additions during the year taxpayer has claimed and continues to claim accelerated_depreciation on all of its public_utility_property to the full extent those deductions are available under the code taxpayer normalizes the federal income taxes deferred as a result of its claiming these deductions in accordance with the normalization rules as a consequence taxpayer has a substantial balance of adfit that is attributable to the accelerated_depreciation reflected on its regulated books of account in its formula rate template taxpayer plr-104761-17 reflects its adfit balance as appropriately allocated to the jurisdiction as a reduction in its computation of rate base in calculating both its basic rate and its true-up the adfit balance by which taxpayer reduces rate base is the end of period balance ie the ending balance as reflected in taxpayer’s form for the calendar_year immediately preceding the year in which rates are being updated because adfit is not projected in either component taxpayer neither averages nor applies the proration methodology to the adfit balance in either calculation taxpayer requests that we rule as follows taxpayer’s projection of plant additions for inclusion in rate base in conjunction with the use of historical adfit and depreciation expense in computing its basic rate is not a violation of the consistency rule if the service rules adversely with respect to requested ruling provided that taxpayer takes the necessary corrective action at the next form filing following the effective date of any related tariff changes approved by commission b any failure by taxpayer to comply with the consistency rule in connection with its formula rate at any time prior to the taxpayer taking the necessary corrective action was not a violation of the normalization rules and if the service rules adversely with respect to requested ruling incorporating projected adfit on a prorated basis depreciation expense and tax expense relating to the projected additions included in the formula rate calculation going forward will satisfy the consistency rule law and analysis requested ruling former sec_167 generally provided that public_utilities were entitled to use accelerated methods of depreciation if they used a normalization method_of_accounting a normalization method_of_accounting was defined in former sec_167 in a manner consistent with that found in sec_168 sec_1 -1 a of the income_tax regulations provides that the normalization requirements for public_utility_property pertain only to the deferral of federal_income_tax liability resulting from the use of an accelerated method_of_depreciation for computing the allowance for depreciation under sec_167 and the use of straight-line_depreciation for computing tax expense and depreciation expense for purposes of establishing cost of services and for reflecting operating results in regulated books of account these regulations do not pertain to other book-tax timing differences with respect to state income taxes f i c a taxes construction costs or any other taxes and items plr-104761-17 sec_168 provides that the depreciation deduction determined under sec_168 shall not apply to any public_utility_property within the meaning of sec_168 if the taxpayer does not use a normalization method_of_accounting in order to use a normalization method_of_accounting sec_168 requires that a taxpayer in computing its tax expense for establishing its cost of service for ratemaking purposes and reflecting operating results in its regulated books of account use a method_of_depreciation with respect to public_utility_property that is the same as and a depreciation period for such property that is not shorter than the method and period used to compute its depreciation expense for such purposes under sec_168 if the amount allowable as a deduction under sec_168 differs from the amount that would be allowable as a deduction under sec_167 using the method period first and last year convention and salvage_value used to compute regulated tax expense under sec_168 the taxpayer must make adjustments to a reserve to reflect the deferral of taxes resulting from such difference sec_168 provides that one way the requirements of sec_168 will not be satisfied is if the taxpayer for ratemaking purposes uses a procedure or adjustment which is inconsistent with such requirements under sec_168 such inconsistent procedures and adjustments include the use of an estimate or projection of the taxpayer’s tax expense depreciation expense or reserve for deferred taxes under sec_168 unless such estimate or projection is also used for ratemaking purposes with respect to all three of these items and with respect to the rate base in order to satisfy the requirements of sec_168 there must be consistency in the treatment of costs for rate base regulated depreciation expense tax expense and deferred tax revenue purposes in this case all elements of rate base including plant in service accumulated depreciation and adfit use at least initially end of historical calendar test year balances depreciation expense and all other operation and maintenance_expenses reflected in the calculation are also historical calendar_year test year expense amounts taxpayer uses a projection of plant additions that will be placed_in_service during the calendar_year in which rates are being set to compute a weighted amount that is added to rate base the addition of the projected plant additions to rate base provides a return on the equity reflected in these projected plant additions no modification is made to depreciation expense or deferred taxes as a result of these expected additions to taxpayer’s equity taxpayer’s tax expense depreciation expense and adfit are all calculated in a consistent fashion therefore taxpayer is not in violation of the consistency rule because of the conclusion reached above taxpayer is also not in violation of the normalization rules accordingly taxpayer’s requested issue sec_2 and are moot and plr-104761-17 will not be considered further conclusion sec_1 taxpayer’s projection of plant additions for inclusion in rate base in conjunction with the use of historical adfit and depreciation expense in computing its basic rate is not a violation of the consistency rule this issue is moot as discussed above this issue is moot as discussed above except as specifically determined above no opinion is expressed or implied concerning the federal_income_tax consequences of the matters described above this ruling is directed only to the taxpayer who requested it sec_6110 of the code provides 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 we are also sending a copy of this letter_ruling to the director sincerely patrick s kirwan chief branch office of the associate chief_counsel passthroughs special industries cc


internal_revenue_service number release date index number -------------------- --------------------- -------------------------------------------- ---------------------------------- department of the treasury washington dc third party communication date of communication not applicable_person to contact --------------------id no ---------------- telephone number ---------------------- refer reply to cc ita b01 plr-126685-16 date date --------------------------------------------------------------------- taxpayer ------------------------------------------ date1 date2 a b c d e -------------------- ----------------- -------------------- ------------------------------ ---------------------------------- ---------------- ------------------------ dear this letter responds to your letter dated date submitted by taxpayer requesting an extension of time under sec_301_9100-1 and sec_301_9100-3 of the procedure and administration regulations to make the election described in sec_4 of revproc_2011_29 2011_18_irb_746 which includes attaching statements to taxpayer’s original federal_income_tax return for taxable_year ended date1 facts taxpayer is a wholly-owned subsidiary of a and has a principal_place_of_business in b taxpayer is engaged in the business of operating a website that provides articles links and directories for individuals and professionals in the eldercare industry taxpayer uses an accrual_method of accounting taxpayer was a standalone corporation that was wholly acquired on date2 by a the transaction pursuant to the transaction c a wholly-owned subsidiary of a plr-126685-16 merged into taxpayer with taxpayer continuing as the surviving corporation and as a direct wholly-owned subsidiary of a in the process of investigating or otherwise pursuing the transaction taxpayer incurred certain transaction costs which included payments to certain professional advisors for legal accounting and consultative services some of those costs related to payments by taxpayer to a professional financial advisor due only upon successful closing of the transaction success-based fees taxpayer paid the professional financial advisor success-based fees in the amount of d upon closing of the transaction taxpayer engaged e to prepare taxpayer’s federal_income_tax return for the short taxable_year ended date1 taxpayer relied upon e to prepare its u s federal_income_tax returns and to advise it as to all statements and other information that should be included in its u s federal_income_tax returns e determined that the success-based_fee paid_by taxpayer to the professional financial advisor upon closing of the transaction satisfied the requirements of revproc_2011_29 and that the transaction qualified as a covered transaction under the requirements of sec_1 a - e of the income_tax regulations accordingly on taxpayer’s timely filed federal_income_tax return for the taxable_year ended date1 prepared by e taxpayer capitalized under sec_263 of the internal_revenue_code percent of the success-based fees related to the transaction and deducted the remaining percent consistent with taxpayer’s intent to make the election provided in revproc_2011_29 however in reliance on e taxpayer failed to attach the mandatory statements identifying the transactions and setting forth this allocation as required by sec_4 of revproc_2011_29 law sec_263 of the internal_revenue_code and sec_1_263_a_-2 of the income_tax regulations provide that no deduction shall be allowed for any amount_paid out for property having a useful_life substantially beyond the taxable_year in the case of an acquisition or reorganization of a business_entity costs that are incurred in the process of acquisition and that produce significant long-term benefits must be capitalized 503_us_79 112_sct_1039 117_led_226 397_us_572 90_sct_1302 25_led_577 under sec_1_263_a_-5 a taxpayer must capitalize an amount_paid to facilitate the business acquisition or reorganization transactions described in sec_1_263_a_-5 in general an amount is paid to facilitate a transaction described in sec_1_263_a_-5 if the amount is paid in the process of investigating or otherwise pursuing the transaction whether an amount is paid in the process of investigating or otherwise pursuing the plr-126685-16 transaction is determined based on all of the facts and circumstances see sec_1 a - b sec_1_263_a_-5 provides that an amount_paid that is contingent on the successful closing of a transaction described in sec_1 a - a ie a success-based_fee is presumed to facilitate the transaction a taxpayer may rebut this presumption by maintaining sufficient documentation to establish that a portion of the fee is allocable to activities that do not facilitate the transaction section dollar_figure of revproc_2011_29 provides a safe_harbor election for taxpayers that pay or incur success-based fees for services performed in the process of investigating or otherwise pursuing a covered transaction described in sec_1 a - e in lieu of maintaining the documentation required by sec_1_263_a_-5 a taxpayer may elect to allocate a success-based_fee between activities that facilitate the transaction and activities that do not facilitate the transaction provided the taxpayer treats percent of the amount of the success-based_fee as an amount that does not facilitate the transaction and capitalizes the remaining percent as an amount that does facilitate the transaction in addition the taxpayer must attach a statement to its original federal_income_tax return for the taxable_year the success-based_fee is paid_or_incurred stating that the taxpayer is electing the safe_harbor identifying the transaction and stating the success-based_fee amounts that are deducted and capitalized sec_301_9100-1 provides that the commissioner has discretion to grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make certain regulatory elections sec_301_9100-1 defines a regulatory election as an election whose due_date is prescribed by a regulation published in the federal_register or a revenue_ruling revenue_procedure notice or announcement published in the internal_revenue_bulletin sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make an election sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides extensions of time for making elections that do not meet the requirements of sec_301_9100-2 sec_301_9100-3 provides that requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government see also sec_301_9100-3 and c conclusion plr-126685-16 based solely on the facts and representations submitted we conclude that taxpayer acted reasonably and in good_faith and granting relief will not prejudice the interests of the government accordingly the requirements of sec_301_9100-1 and sec_301_9100-3 have been met taxpayer is granted an extension of days from the date of this ruling to file its mandatory statements as required by section dollar_figure of revproc_2011_29 stating that it is electing the safe_harbor for success-based fees identifying the transaction and stating the success-based_fee amounts that are deducted and capitalized the rulings contained in this letter are based upon information and representations submitted by 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 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 including whether taxpayer properly included the correct costs as success-based fees subject_to the retroactive election or whether taxpayer’s transactions were within the scope of revproc_2011_29 this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent a copy of this ruling should be attached to taxpayer’s federal tax returns for the tax years affected alternatively taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of the letter_ruling in accordance with the provisions of the power_of_attorney currently on file with this office a copy of this letter is being sent to your authorized representatives sincerely tajuana nelson hyde tajuana nelson hyde senior technician reviewer branch office of associate chief_counsel income_tax and accounting