t c memo united_states tax_court margaret hancock petitioner v commissioner of internal revenue respondent docket no filed date john f daniels iii for petitioner doreen m susi for respondent memorandum findings_of_fact and opinion colvin judge respondent determined deficiencies in petitioner's federal income taxes of dollar_figure for and dollar_figure for after concessions the sole issue for decision is whether petitioner's losses from the sale of residential lots of dollar_figure in and dollar_figure in were capital losses as respondent -2 - contends or ordinary losses as petitioner contends to prevail petitioner must show that she held the lots for sale to customers in the ordinary course of her trade_or_business see sec_1221 we hold that petitioner's losses were ordinary losses unless otherwise indicated section references are to the internal_revenue_code in effect for the years in issue rule references are to the tax_court rules_of_practice and procedure findings_of_fact some of the facts have been stipulated and are so found a petitioner petitioner lived in scottsdale arizona when she filed the petition in this case she was and years old during the years at issue her husband j w hancock hancock or her husband wa sec_75 years old when he died on date petitioner has two sons trevor hancock and mark hancock who are real_estate brokers and developers petitioner's nephew greg hancock is also a real_estate developer b petitioner's involvement in real_estate petitioner began working with her husband in the real_estate business in or in california petitioner and her husband moved to arizona in the 1960's they formed a publicly traded company called j w hancock inc petitioner managed its day-to-day operations the company subdivided and developed land -3- for residential and commercial construction petitioner and her husband owned percent of the stock in j w hancock inc the real_estate market declined in the 1960's petitioner and her husband surrendered their stock in j w hancock inc they kept nine lots in phoenix arizona and built one house at a time cc j w hancock enterprises inc incorporation petitioner and her husband incorporated j w hancock enterprises inc hancock enterprises on date from to hancock enterprises developed real_estate in the phoenix area petitioner was the executive vice president of hancock enterprises petitioner and her husband established the j w hancock and margaret e hancock trust the trust on date hancock was the trustee the trust owned the stock of hancock enterprises operation of hancock enterprises hancock enterprises operated under the name of camelot homes camelot hancock enterprises bought large tracts of land subdivided and rezoned the tracts made improvements such as roads and sidewalks and delivered sewer and water lines to the property petitioner and her husband jointly ran hancock enterprises petitioner designed houses developed floor plans worked with subcontractors to compute sale prices ran the sales office sold houses supervised assistants created sales brochures met with accountants at toback co to discuss financing engaged in public relations and handled customer complaints hancock handled the acquisition of property and obtained acquisition and development loans after hancock obtained the initial loans petitioner met with the banks and arranged for construction and operating loans hancock enterprises built five to seven model homes in each of its subdivisions and had salespeople in the model homes it sold the model homes when it no longer needed them hancock enterprises built all the homes except the model homes for specific buyers hancock enterprises developed the summer shadows and camelot village subdivisions in or the playa del sur subdivision in and the estate la colina estate los arboles and paradise village north subdivisions in in and hancock enterprises was offering lots for sale in at least five subdivisions until the 1980's hancock enterprises sold all of the model homes after it completed a subdivision beginning in the 1980's -5- hancock enterprises sometimes held back 1ie did not sell some lots that were harder to sell from each subdivision accountants and bookkeeper toback co c p a 's toback were the accountants for hancock enterprises john j gorman jr gorman began handling the hancock enterprises account in toback prepared all of the hancock enterprises returns from to and prepared petitioner's individual tax returns from to petitioner worked closely with toback's accountants including gorman she met with gorman nearly monthly from to her husband met with gorman once or twice from until he died in date hancock enterprises stopped building houses in or and began selling its lots because interest rates were and percent it laid off its superintendents foremen and architects hancock enterprises had about lots when it stopped building homes building industry in phoenix the homebuilding market in phoenix peaked around the number of building permits issued in phoenix declined from then until residential real_estate prices also declined after high interest rates caused some buyers to abandon their deposits on lots hancock enterprises' buyers canceled contracts for three lots in the summer shadows subdivision - because buyers could not get financing due to the high interest rates the larger builders in phoenix bought down mortgage interest rates from to percent for their home buyers but hancock enterprises could not afford to do that after hancock enterprises stopped building houses petitioner and her husband explored other development activities in they considered the possibility of building big_number low- cost houses for the government of ecuador about that time hancock enterprises sold some lots to repay its loans in hancock enterprises owed about dollar_figure million to the banks and dollar_figure to petitioner and her husband in the city of phoenix proposed to build a freeway near summer shadows this made it harder for petitioner to sell lots in summer shadows petitioner later sold those lots when the city of phoenix built the freeway about blocks from summer shadows the phoenix real_estate market improved from to liquidation of hancock enterprises petitioner became the trustee of the trust after her husband died on date the parties agree that petitioner's basis in hancock enterprises' stock stepped up to the date of death value under sec_1014 b hancock enterprises made a bulk_sale of six playa del sur lots in for dollar_figure per lot _7- petitioner's counsel john pattullo advised her for tax purposes to liguidate hancock enterprises and distribute its assets to the trust on date hancock enterprises owned lots from subdivisions it had developed on that date hancock enterprises adopted a plan_of_liquidation under sec_337 as then in effect filed final corporate tax returns and distributed the remaining lots to the trust after the liquidation the trust owned the lots d lots petitioner sold from to petitioner's sales efforts selling lots was petitioner's primary activity from to petitioner maintained liability insurance and paid property taxes on the lots at all times she met with people who wanted to build houses on the lots some prospective buyers who were interested in buying lots contacted petitioner she reduced the price of some lots she put for sale signs on some lots she attended some homebuilders' meetings and used her contacts in the real_estate industry to help sell the lots petitioner listed some of the lots for sale with trevor hancock from to he listed those lots on the multiple listing service mls two of petitioner's properties were listed on the mls in and three in one in -8- and five in petitioner paid real_estate commissions of dollar_figure in dollar_figure in dollar_figure in and dollar_figure in after petitioner sometimes worked in an office at mark hancock's place of business she paid no rent to him she had no other real_estate office petitioner has not subdivided or rezoned any property made offsite improvements or installed water and sewer lines on any property since she liquidated hancock enterprises from through the years in issue petitioner had no advertising expenses after she received the lots in liquidation petitioner regularly met with gorman to discuss whether to acquire more property sales of lots from to petitioner sold of the lots that she had acquired in the liquidation as follows number of sale economic tax_year lots sold cost_basis price gain loss dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure none --- --- --- -- -- big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number total big_number big_number big_number big_number big_number ' the record contains no evidence that petitioner listed_property for sale with any realtor from to petitioner sold three of these lots to trevor hancock one lot per year in and for a total of dollar_figure petitioner and hancock enterprises' investment in these three lots was dollar_figure but petitioner had a basis in the three lots totaling dollar_figure petitioner used the sale proceeds from the lots to repay loans she and her husband used to obtain the lots repay herself the dollar_figure that hancock enterprises owed her and pay land taxes associated with the lots in and petitioner bought five lots and sold them soon after she had acquired them she bought one lot in and sold it in she bought four lots in she sold one of those in two in and one in in she owned only one lot be other hancock real_estate venture sec_1 the mark hancock corp mark hancock began to operate his own real_estate business in he started building houses in or he operated the mark hancock real_estate development corp mark hancock corp from the 1980's through the years in issue after and through the years in issue the mark hancock corp used the trade_name camelot homes the camelot homes operated by the mark hancock corp represents to the public that it is the second generation of the camelot homes operated by petitioner and her husband the mark hancock corp developed several subdivisions during the 1980's and 1990's in date hancock enterprises deeded two lots in the playa del sur subdivision to petitioner which she immediately sold to mark hancock he paid dollar_figure for the two lots the mark hancock corp built houses on those lots at a date not specified in the record greg hancock corp greg hancock corp developed subdivisions with about lots in lots in and about lots in f petitioner's tax returns hancock enterprises treated the lots it held when it was liguidated as inventory on its books petitioner reported the amounts realized from the sale of lots in as gross_receipts on a schedule c attached to the trust's tax_return she treated her adjusted_basis as the cost_of_goods_sold and deducted several other expenses petitioner reported sales of lots as sales of inventory on the schedules c attached to her returns for to she reported the amounts she realized from those sales as gross_receipts and her adjusted_basis as cost_of_goods_sold and she deducted several other expenses petitioner reported on schedules c for and that she was in the real_estate development business --11- g statements by petitioner's representatives respondent's revenue_agent patricia burson burson met with petitioner's representatives howard kesselman kesselman and carrie ransil ransil during the audit at the time kesselman was a consultant for and not an employee of toback and ransil had been employed by toback for month at the audit kesselman and ransil told burson that hancock enterprises sometimes held back lots from subdivisions for petitioner and her husband for investment ransil had not met petitioner and was unfamiliar with petitioner's operations at the time of the audit opinion petitioner contends that the eight lots she sold in and were held_for_sale to customers in the ordinary course of her trade_or_business and thus that the tax losses from her sales of those lots that resulted because of the step-up_in_basis under sec_1014 at her husband's death are ordinary losses under sec_1221 respondent contends that petitioner did not hold the eight lots for sale to customers and that the sales were not in the ordinary course of a trade_or_business and thus petitioner's losses are capital losses a whether petitioner held lots for sale to customers in the ordinary course of her trade or busine sec_1 sec_1221 sec_1221 excludes from classification as a capital asset--- --12 - stock_in_trade of the taxpayer or other_property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable_year or property held by the taxpayer primarily_for_sale_to_customers in the ordinary_course_of_his_trade_or_business sec_1221 differentiates between the 'profits and losses arising from the everyday operation of a business' and ‘the realization of appreciation in value accrued over a substantial period of time' mallat v riddell 383_us_569 quoting 350_us_46 and 364_us_130 tp rimarily means principally or of first importance id whether property is held by a taxpayer 'primarily for sale to customers in the ordinary course of business' is a guestion of fact 78_tc_234 quoting sec_1221 and sec_1231 b courts consider numerous factors in deciding this issue and no one factor controls see 526_f2d_409 5th cir petitioner bears the burden of proving that her property was held for the purpose she contends see rule a 290_us_111 the following factors indicate whether property is held primarily_for_sale_to_customers in the ordinary course of a trade_or_business a the frequency and substantiality of sales b the nature of the taxpayer's business c the purpose for which the taxpayer acquired and held the property before sale d the time and effort the taxpayer habitually devoted to the sales e the extent to which the taxpayer improved the property and f the length of time the property was held see 705_f2d_1418 5th cir 417_f2d_905 5th cir 227_f2d_265 5th cir revg tcmemo_1954_177 223_f2d_709 5th cir revg 22_tc_533 97_tc_308 affd without published opinion 21_f3d_427 6th cir 89_tc_467 we will apply the factors that are relevant to this case application of factors the frequency and substantiality of sales is the most important factor see 615_f2d_171 5th cir biedenharn realty co v united_states supra pincite 74_tc_187 petitioner's sales were frequent regular and substantial during the years in issue petitioner sold lots in in in in in in in in and in she sold eight lots during the years in issue respondent argues that petitioner's failure to sell more than eight lots during the years in issue shows she did not hold the lots as inventory we disagree the sale of eight lots was substantial in light of the fact that at the start of the years in issue petitioner had only of the lots left see 322_f2d_122 5th cir taxpayer's sales declined from in the first year to in the second year because at the start of the years in issue he had only of the original lots left to sell affg in part and revg in part 38_tc_153 respondent contends that the fact that petitioner sold more lots when the real_estate market improved in shows that she held the lots for investment rather than for sale we disagree petitioner began to sell lots in soon after hancock enterprises distributed them to her despite the fact that residential real_estate prices declined after she sold of her lots before which shows that she was not merely waiting for the market to rebound respondent points out that some of the sales were to petitioner's sons and argues that those were not sales in the ordinary course of business we disagree petitioner made a large economic profit on the sales to her sons the fact that respondent does not contend that sec_267 applies to the lot petitioner sold to trevor hancock in parties to a transfer are related does not mean the transfer was not in the ordinary course of business if the parties act at arm's length see 10_tc_915 petitioner's sales were substantial during the years at issue sales of dollar_figure in and dollar_figure in with an economic profit of dollar_figure in and dollar_figure in see lewellen v commissioner tcmemo_1981_581 sale of lots over a 12-year period coupled with sales of dollar_figure during the years at issue suggests that the lots were held primarily_for_sale_to_customers in the ordinary course of business respondent contends that the fact that petitioner had large tax losses from the sale of the lots from to shows that she was not in the trade_or_business of real_estate because she would have abandoned the business to avoid having those tax losses respondent also contends that petitioner could have sold the lots if she had lowered their prices we disagree petitioner derived economic profit of dollar_figure from selling of the lots from to she did not sell them primarily to generate tax losses if petitioner had abandoned her efforts to sell the lots or sold them for less she either would have been left with unsold lots or had smaller economic profit and larger tax losses -1 respondent contends that petitioner intended to hold the lots for investment until the real_estate market improved and that petitioner was not in the business of selling or developing real_estate because she was not developing properties and was not looking for development opportunities we disagree petitioner began selling the lots as soon as she received them from hancock enterprises this suggests that she was not holding them for investment the fact that sales occur in the course of a liquidation neither compels nor forecloses a finding that property was held primarily for sale in the ordinary course of a trade_or_business see 120_f2d_607 9th cir affg 41_bta_652 and 41_bta_1020 van bibber v commissioner tcmemo_1985_344 we disagree with respondent's contention that petitioner did not hold the lots for sale because she was not in the real_estate development business even if petitioner was not developing real_estate she was in the business of selling lots to customers respondent contends that petitioner did not devote much time or effort to selling her lots and that she did not advertise or use real_estate agents or salespeople respondent also contends that the fact that petitioner borrowed office space at mark's place of business shows that she was not operating a real_estate business we disagree petitioner sold the lots by putting for sale signs on some of the lots and using her real_estate contacts she also paid real_estate commissions of about dollar_figure from to petitioner begin selling lots in and sold percent of them before when the market rebounded percent of them before the years in issue and all but one of them in less than years the fact that petitioner sold the lots without using an outside agent without having her own real_estate sales office and without incurring advertising expenses or broker's fees suggests that petitioner devoted enough time and effort to selling the lots see united_states v winthrop f 2d pincite in which the u s court_of_appeals for the fifth circuit stated while advertising solicitation and staff are the usual components of a business they are not a necessary element in either the concept or the pragmatics of selling here it is evident that the taxpayer was guite successful in selling the lots without the assistance of these usual props it is not necessary that customers be actively and fervently and frenetically sought respondent contends that the fact that petitioner did not improve the lots she received from hancock enterprises shows that she held them for investment we disagree petitioner and her husband's corporation hancock enterprises fully developed the lots before petitioner acquired them petitioner paid real_estate_taxes maintained liability insurance and made sure that the lots were kept clean the grass was cut and the shrubs were --18- maintained see 34_tc_675 the taxpayer held property for investment even though he did not develop it before he sold it respondent contends that the fact that petitioner had held the lots since suggests that she held them primarily for investment we disagree a long holding_period suggests property was held for investment alone however it does not establish that a taxpayer held property for investment see suburban realty co v united_states f 2d pincite the taxpayer's primary purpose for holding_real_estate up to years was for sale to customers united_states v winthrop supra pincite the taxpayer held lots up to years for sale to customers walsh v commissioner tcmemo_1994_293 income from the sale of a parcel of acres a taxpayer had held for years was ordinary_income affd without published opinion 8th cir date tollis v commissioner tcmemo_1993_63 the taxpayer's proceeds from the sale of parcels of real_property over an 8-year period were ordinary_income his decision to retire from the real_estate business did not convert the parcels into capital assets affd without published opinion 46_f3d_1132 6th cir herndon v commissioner t c memo respondent does not contend that we should consider the fact that hancock enterprises held the lots from to in deciding if petitioner held them for sale to customers -1 q- lots that were held for over years by the taxpayer were held_for_sale in the ordinary course of business respondent's other contentions burson testified that petitioner's representatives ransil and kesselman told burson during the audit of petitioner that hancock enterprises kept some lots in each of its subdivisions for petitioner and her husband to hold for investment respondent contends that this shows petitioner held the lots for investment we disagree at the time of the audit kesselman was not an employee of toback and ransil had worked only month for toback and had not yet met petitioner neither was fully familiar with her operations respondent contends that petitioner's testimony that she could not sell the lots in the late 1980's is not credible because her son and her nephew were developing property in phoenix during those years the record does not contain enough information for us to evaluate respondent's assertion respondent contends that the fact that mark hancock began doing business in the name of camelot homes shows that petitioner was no longer in the real_estate business we disagree first mark hancock had been in the homebuilding business since the late 1970's the fact that he began operating under the name camelot homes when hancock enterprises liguidated in does not seem significant to us because hancock enterprises had stopped building homes around or second the fact that mark hancock used the camelot homes name does not show whether petitioner was still in the trade_or_business of selling lots to customers respondent contends that the fact that petitioner and her husband held the lots for sale to customers through hancock enterprises does not mean she held them for sale to customers in and because a hancock enterprises began to hold the lots as an investment when it abandoned its plans to develop them around and decided to hold them until market conditions improved and because b hancock enterprises' holding purpose is irrelevant in deciding petitioner's holding purpose we disagree first hancock enterprises did not abandon its efforts to sell its lots hancock enterprises had about lots when it stopped building homes in or but it had only lots when it liquidated at the end of this shows that hancock enterprises actively sold lots after it stopped building homes see suburban realty co v united_states supra pincite the court did not view the fact that the taxpayer stopped its development activities and had fewer sales several years before the years at issue as establishing that the taxpayer changed its holding purpose second we may consider the holding purpose of hancock enterprises in deciding why petitioner held the lots see 571_f2d_1092 9th cir in deciding the purpose for which the taxpayer held property the court considered the holding purpose of the taxpayer's shareholders' father from whom the shareholders inherited the property revg tcmemo_1975_14 b conclusion we conclude that petitioner held the eight lots she sold during the years in issue for sale to customers in the ordinary course of her trade_or_business petitioner's sales were frequent regular and substantial in the years in issue she devoted a sufficient amount of time and effort to selling the lots she began to sell the lots when she received them from the corporation the fact that petitioner held some of the lots for a substantial period of time before she sold them does not in itself establish that she held the lots for investment to reflect the foregoing and concessions decision will be entered under rule


department of the treasury washington dc person to contact --------------------- id no ------------- telephone number --------------------- refer reply to cc psi b1 - plr-129170-03 date nov ------------------ ----------------------- ---------------------------------------------------------------- ----------------------- internal_revenue_service number release date index number -------------------------------- --------------------------- --------------------------------- ---------------------------- legend x x1 ------------------ ------------ ------------- d1 country state dear ------------------- this responds to your letter dated date submitted on behalf of x requesting a ruling that it be granted an extension of time under ' of the procedure and administration regulations to file an election under ' c to treat x1 as a disregarded_entity for federal tax purposes according to the facts submitted x is as a state corporation x1 is a country entity x acquired x1 on d1 x1 inadvertently failed to timely file an election to be disregarded as an entity separate from x for federal tax purposes law and analysis sec_301_7701-3 provides guidance on the classification of a foreign eligible_entity for federal tax purposes generally a foreign eligible_entity is treated as an association_taxable_as_a_corporation if all members have limited_liability unless the entity makes an election to be treated otherwise if a foreign eligible_entity has only one owner it may elect to be treated as a disregarded_entity pursuant to the rules in ' c sec_301 7701b3 c provides that an entity classification election must be filed on form_8832 entity classification election and can be effective up to days prior to the date the form is filed or up to months after the date on which the form is filed under ' c the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the code except subtitles e g h and i sec_301_9100-1 defines the term aregulatory election as including an election with a deadline prescribed by a regulation published in the internal_revenue_bulletin sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make an election ' a 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 ' requests for relief under ' will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government ' a conclusion based solely on the facts submitted and the representations made the requirements of ' have been satisfied as a result x1 is granted an extension of time of sixty days from the date of this letter to elect to be treated as a disregarded_entity for federal tax purposes effective as of d1 the election should be made by filing a properly executed form_8832 with the appropriate service_center a copy of this letter should be attached to the election except as expressly set forth above no opinion is expressed or implied concerning the tax consequences of the transactions described above under any other provision of the internal_revenue_code this ruling is directed only to the taxpayer requesting it sec_6110 of the internal_revenue_code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to the taxpayer sincerely s heather c maloy heather c maloy associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for ' purposes cc -


t c summary opinion united_states tax_court gaetano p drago petitioner v commissioner of internal revenue respondent docket no 10573-07s filed date robert j scott for petitioner gary j merken for respondent jacobs judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect at the time the petition was filed pursuant to sec_7463 the decision to be entered is not reviewable by any other court and this opinion shall not be treated as precedent for any other case unless otherwise indicated subsequent section references are to the internal_revenue_code in effect for the year in issue and all rule references are to the tax_court rules_of_practice and procedure respondent determined a dollar_figure deficiency in petitioner’s federal_income_tax the issues for decision are whether petitioner is entitled to dependency_exemption deductions for his two minor children whether petitioner is entitled to a nonrefundable child_tax_credit and a refundable additional_child_tax_credit with respect to each of his children and whether petitioner is entitled to head_of_household filing_status background this case was submitted fully stipulated pursuant to rule the stipulation of facts and the attached exhibits are incorporated herein by this reference petitioner resided in new jersey at the time he filed his petition petitioner has two children from a marriage which was dissolved by a judgment of the superior court of new jersey chancery division on date the divorce decree as part of the divorce decree the new jersey superior court granted joint legal custody of the two children to petitioner and his former spouse and ordered that the children were to reside with petitioner’s former spouse and ordered petitioner to pay child_support the divorce decree further provided c personal exemptions for children of the marriage defendant petitioner’s former spouse agrees to sign an irs form_8332 at the same time that she signs this agreement waiving the right as primary residential custodial_parent of the children to claim them as her personal exemptions for federal and state_income_tax purposes which waiver shall be for and for each tax_year thereafter for so long as plaintiff petitioner may be entitled to claim the children as his personal exemptions under the internal_revenue_code the parties stipulated that from through petitioner was always current with his support payments for his children and that such payments amounted to percent of their support and petitioner’s former spouse contributed the remaining percent of support for the children petitioner timely filed a form_1040 u s individual_income_tax_return for on which he reported his filing_status as head_of_household petitioner’s return was prepared with the assistance of a professional tax_return_preparer petitioner claimed dependency_exemption deductions for his two children as well as child tax_credits and an additional_child_tax_credit for those children 1petitioner’s former spouse was designated the residential parent and as such was responsible for the day-to-day decision- making on behalf of the children all major parenting decisions were to be jointly made and governed by the standard of ‘the best interests of the children ’ petitioner’s former spouse did not execute a form_8332 release of claim to exemption for child of divorced or separated parents or similar declaration stating that she would not claim the dependency_exemption deduction for either of the two children for rather as indicated by respondent’s records petitioner’s former spouse claimed petitioner’s two children as dependents on her federal_income_tax return she also claimed child tax_credits with respect to those children for respondent determined that petitioner is not eligible for the dependency_exemption deductions claimed for the minor children or for the child tax_credits or the additional child tax_credits claimed for those children and petitioner is not entitled to the claimed head_of_household filing_status discussion a taxpayer may claim a dependency_exemption deduction for a child as long as the child meets the statutory definition of a dependent sec_151 the term dependent means a qualifying_child or qualifying_relative sec_152 sec_152 provides that a qualifying_child means with respect to any taxpayer for any taxable_year an individual who is a child of the taxpayer or a descendant of such child or is a brother sister stepbrother stepsister of the taxpayer or a descendant of any such relative has the same principal_place_of_abode as the taxpayer for more than one-half of such taxable_year has not attained the age of as of the close of the calendar_year in which the taxable_year of the taxpayer continued special rules determine which parent may claim a child as a dependent where the parents are divorced or separated see sec_152 before the custodial_parent generally was treated as the parent that provided more than half of the support for each child and was entitled to the dependency_exemption deduction the noncustodial_parent however was entitled to the dependency_exemption deduction if he or she provided dollar_figure or more for the support of the child and the custodial_parent did not clearly establish by a preponderance_of_the_evidence that he continued begins or is a student who has not attained the age of as of the close of such calendar_year with a special rule for disabled individuals and has not provided over one-half of such individual’s own support for the calendar_year in which the taxable_year of the taxpayer begins sec_152 provides that a qualifying_relative means with respect to any taxpayer for any taxable_year an individual who is a child or a descendant of a child a brother sister stepbrother or stepsister the father or mother or an ancestor of either a stepfather or stepmother a son or daughter of a brother or sister of the taxpayer a brother or sister of the father or mother of the taxpayer a son-in-law daughter-in-law father-in-law mother-in-law brother-in-law or sister-in-law or an individual other than an individual who at any time during the taxable_year was the spouse determined without regard to sec_7703 of the taxpayer who for the taxable_year of the taxpayer has the same principal_place_of_abode as the taxpayer and is a member of the taxpayer’s household whose gross_income for the calendar_year in which such taxable_year begins is less than the exemption_amount as defined in sec_151 with respect to whom the taxpayer provides over one-half of the individual’s support for the calendar_year in which such taxable_year begins and who is not a qualifying_child of such taxpayer or of any other taxpayer for any taxable_year beginning in the calendar_year in which such taxable_year begins or she provided more than the noncustodial_parent see sec_152 before amendment by the deficit_reduction_act_of_1984 defra publaw_98_369 98_stat_799 in many situations these rules put the internal_revenue_service in the middle of conflicts between parents that were often subjective and presented difficult problems of proof and substantiation h rept part pincite congress amended sec_152 to provide that for tax years beginning date the dependency_exemption deduction is to be given to the custodial_parent unless that parent waives the right to claim it id pincite absent a written declaration that meets the requirements of sec_152 in the case of a child whose parents are divorced or separated and together provide over half of the support for the child the child is generally treated as being the qualifying_child or qualifying_relative of the custodial_parent and that parent is entitled to the dependency_exemption deduction under sec_152 custody is determined by the most recent divorce or custody decree sec_1_152-4 income_tax regs this court has rejected claims that a provision allocating personal exemptions in the divorce decree is sufficient to entitle a taxpayer to those exemptions pursuant to sec_152 114_tc_184 we have stated that sec_152 clearly and unambiguously requires the custodial_parent to sign a written declaration releasing the dependency_exemption for his or her child to the noncustodial_parent id in the case at hand the divorce decree granted primary physical custody of petitioner’s children to petitioner’s former spouse petitioner’s former spouse had custody of the children for the greater part of she did not execute a form_8332 or similar written declaration stating that she would not claim the children as dependents for and thus petitioner did not and sec_152 was amended effective for tax years beginning after date to provide that a child could be the qualifying_child of a noncustodial_parent if a decree of divorce provides that the noncustodial_parent shall be entitled to any deduction allowable under sec_151 or the custodial_parent will sign a written declaration in such manner and form as the secretary may prescribe that such parent will not claim such child as a dependent for such taxable_year see the working families tax relief act of publaw_108_311 sec 118_stat_1169 this provision might have afforded petitioner relief but it was eliminated by retroactive amendments that restored the defra waiver requirement of sec_152 see gulf_opportunity_zone act of publaw_109_135 119_stat_2632 could not attach to his tax_return the required release of dependency_exemption claim for children of divorced parents on the contrary petitioner’s former spouse claimed the children as dependents on her federal_income_tax return and claimed child tax_credits with respect to the children even though such was evidently in violation of the divorce decree consequently we are required to hold that for tax_year petitioner is not entitled to dependency_exemption deductions for the two children from his previous marriage petitioner claimed child tax_credits and additional child tax_credits for the two children he claimed as dependents sec_24 authorizes a child_tax_credit with respect to each qualifying_child of the taxpayer the term qualifying_child for purposes of the child_tax_credit is defined in sec_24 and as defined therein is more restrictive than the definition set forth in sec_152 a qualifying_child for purposes of the child_tax_credit means a qualifying_child as defined in sec_152 who has not attained the age of as of the close of the taxable_year sec_24 the child_tax_credit is a nonrefundable personal credit that was added to the internal_revenue_code by the taxpayer_relief_act_of_1997 publaw_105_34 111_stat_796 with a provision for a refundable_credit the additional_child_tax_credit for families with three or more children for tax years beginning after date the additional_child_tax_credit provision was amended to remove the restriction that only families with three or more children are entitled to claim the additional credit see sec_24 economic_growth_and_tax_relief_reconciliation_act_of_2001 publaw_107_16 sec c e 115_stat_46 a child of separated or divorced parents will be treated as the qualifying_child of the noncustodial_parent only if the requirements of sec_152 relating to the written declaration by the custodial_parent are met sec_152 e because petitioner did not attach the written declaration to his return petitioner’s children are not qualifying children with respect to him for therefore petitioner is not entitled to claim child tax_credits with respect to his children moreover petitioner is not entitled to claim additional child tax_credits because the children did not qualify for child tax_credits finally we must determine whether petitioner is entitled to head_of_household filing_status sec_1 imposes a special tax_rate on an individual filing a federal_income_tax return as head_of_household as relevant here sec_2 defines head of a household as an individual taxpayer who is unmarried at the close of the taxable_year and maintains as his home a household which constitutes for more than one-half of the taxable_year the principal_place_of_abode of a qualifying_child of the taxpayer determined without regard to sec_152 sec_2 because petitioner’s children did not reside with him for more than one-half of the taxable_year neither are they qualifying children nor did petitioner maintain a household which constituted their principal_place_of_abode for more than one-half of the year accordingly petitioner is not entitled to head_of_household filing_status for to reflect the foregoing decision will be entered for respondent


internal_revenue_service number release date index number ---------------------- -------------------------------- -------------------------- ----------------------------------------- -------------------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ---------------------------- id no -------------- ---------------------------------------------------- telephone number --------------------- refer reply to cc corp plr-146192-07 date date legend ------------------------------------------------ ---------------------------------------- ---------------------------- parent ---------------------------------------------------------------------- ----------------------------------------------------------- sec_1 ------------------------------------------------------------------------ ----------------------------------------------------------- sec_2 ------------------------------------------------------------------- ----------------------------------------------------------- sec_3 ------------------------------------------------------------------- ----------------------------------------------------------- sec_4 --------------------------------------------------------------- ----------------------------------------------------------- sec_5 --------------------------------------------------------------- ----------------------------------------------------------- ------------------- ------------------------------------- -------------------------------------- -------------------------------------------------------------------------------- ------------------------ -------------------------- ----------------------------------------- ------------------------------------------- plr-146192-07 s6 ---------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------- ----------------------------------------------------------- s7 ---------------------------------------------------------------------- ----------------------------------------------------------- s8 ---------------------------------------------------------------------- ----------------------------------------------------------- s9 ----------------------------------------------------------------------------------- ----------------------------------------------------------- distributing ---------------------------------------------------------------------- ----------------------------------------------------------- distributing ------------------------------------------------------------------- ----------------------------------------------------------- partnership -------------------------------------------------------------------------------- ----------------------------------------------------------- business a business b ------------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------- business c a b state a state b ---------------------------------------------------------------- -------------------------------------------------------- ------------------------------------------- ------------------- ------------------ ------------ --- -- -------------------------------------------------------------------------------- --------------- --------- plr-146192-07 state c state d dear ------------ this letter responds to your date letter requesting rulings as to the federal_income_tax consequences of a series of proposed transactions the information submitted in that request and in later correspondence is summarized below the rulings contained in this letter are based on facts and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party this office has not verified any of the materials submitted in support of the request for rulings verification of the information representations and other data may be required as part of the audit process in particular this office has not reviewed any information pertaining to and has made no determination regarding whether any distribution described below i satisfies the business_purpose requirement of sec_1_355-2 of the income_tax regulations ii is used principally as a device for the distribution of the earnings_and_profits of a distributing or controlled_corporation or both see sec_355 of the internal_revenue_code and sec_1_355-2 or iii is part of a plan or series of related transactions pursuant to which one or more persons will acquire directly or indirectly stock representing a 50-percent_or_greater_interest in a distributing or controlled_corporation see sec_355 and sec_1_355-7 summary of facts parent is a publicly traded domestic_corporation and the common parent of an sec_1 owns all of the outstanding_stock of sec_3 and sec_4 each of which is a domestic affiliated_group_of_corporations that files a consolidated federal_income_tax return parent owns all of the outstanding_stock of sec_1 and sec_2 each of which is a domestic_corporation corporation and a of the outstanding interests in partnership a domestic limited_partnership sec_3 owns the remaining b of the outstanding interests in partnership which is a domestic_corporation sec_2 also owns all of the outstanding interests in s6 a domestic limited_liability_company that is disregarded as an entity separate from its owner for federal tax purposes sec_2 owns all of the outstanding_stock of sec_5 s7 s8 and distributing each of distributing owns all of the outstanding_stock of distributing a domestic plr-146192-07 corporation distributing owns all of the outstanding interests in s9 a domestic limited_liability_company that is disregarded as an entity separate from its owner for federal tax purposes distributing is engaged directly in business a and business b in addition distributing is engaged in business c directly and through its ownership of all of the outstanding interests in s9 parent has submitted financial information indicating that each of business a business b and business c has had gross_receipts and operating_expenses representing the active_conduct_of_a_trade_or_business for each of the past five years efficiency and achieve savings by consolidating the businesses of several of the entities described above in a single company the management of parent has determined that the parent group can increase proposed transactions to accomplish the stated business_purpose the following series of transactions have been proposed the proposed transactions i ii sec_3 will merge with and into sec_1 under state a and state b law with sec_1 surviving the liquidation under state c and state b law s7 will transfer all of its assets to sec_1 in constructive exchange for sec_1 stock and sec_1’s assumption of s7’s liabilities followed by s7’s constructive distribution of sec_1 stock to sec_2 in complete dissolution of s7 merger iii under state c and state b law s8 will transfer all of its assets to sec_1 in constructive exchange for sec_1 stock and sec_1’s assumption of s8’s liabilities followed by s8’s constructive distribution of sec_1 stock to sec_2 in complete dissolution of s8 merger iv distributing will form a new domestic_corporation controlled under state a law and transfer thereto all of its business c assets including all of the equity interests in s9 in exchange for all of the controlled stock and the assumption by controlled of liabilities related to business c the contribution distributing will distribute all of its stock in controlled to distributing distribution v vi distributing will distribute all of its stock in controlled to sec_2 distribution plr-146192-07 vii under state a and state b law controlled will transfer all of its assets to sec_1 in constructive exchange for sec_1 stock and sec_1’s assumption of controlled’s liabilities followed by controlled’s constructive distribution of sec_1 stock to sec_2 in complete dissolution of controlled merger viii parent will transfer all of the stock of sec_2 to sec_1 in constructive ix x xi exchange solely for sec_1 voting common_stock sec_2 will convert under state a law from a corporation to a limited_liability_company that will be disregarded as an entity separate from its owner sec_1 for federal tax purposes under sec_301_7701-3 together with step viii the combination s9 will elect to be treated as a corporation for federal tax purposes with sec_1 becoming the sole shareholder of the new corporation the s9 incorporation s6 will elect to be treated as a corporation for federal tax purposes with sec_1 becoming the sole shareholder of the new corporation the s6 incorporation xii under state d law sec_4 will transfer all of its assets to sec_5 in constructive exchange for sec_5 stock and sec_5’s assumption of sec_4’s liabilities followed by sec_4’s constructive distribution of sec_5 stock to sec_1 in complete dissolution of sec_4 merger representations the liquidation the following representations are made with respect to the liquidation described above in step i 1a sec_1 on the date of adoption of the plan_of_liquidation and at all times until the final liquidating_distribution is completed will own percent of the single outstanding class of sec_3 stock 1b no shares of sec_3 stock will have been redeemed during the three years preceding the adoption of the plan of complete_liquidation of sec_3 plr-146192-07 1c all distributions from sec_3 to sec_1 pursuant to the plan of complete_liquidation will be made within a single taxable_year of sec_3 1d as soon as the first liquidating_distribution has been made sec_3 will cease to be a going concern and its activities will be limited to winding up its affairs paying its debts and distributing its remaining assets to sec_1 1e sec_3 will retain no assets following the final liquidating_distribution 1f sec_3 will not have acquired assets in any nontaxable_transaction at any time except for acquisitions occurring more than three years prior to the date of adoption of the plan_of_liquidation 1g no assets of sec_3 have been or will be disposed of by either sec_3 or sec_1 except for dispositions in the ordinary course of business and dispositions occurring more than three years prior to adoption of the plan_of_liquidation 1h the liquidation of sec_3 will not be preceded or followed by the reincorporation transfer or sale of all or a part of the business_assets of sec_3 to another corporation that i is the alter ego of sec_3 and ii directly or indirectly will be owned more than percent in value by persons holding directly or indirectly more than percent in value of the stock of sec_3 for purposes of this representation ownership will be determined by application of the constructive_ownership rules of sec_318 as modified by sec_304 1i prior to the adoption of the plan_of_liquidation no assets of sec_3 will have been distributed in_kind transferred or sold to sec_1 except for i transactions occurring in the normal course of business and ii transactions occurring more than three years prior to adoption of the plan_of_liquidation 1j sec_3 will report all earned_income represented by assets that will be distributed to sec_1 such as receivables being reported on a cash_basis unfinished construction contracts commissions due etc 1k the fair_market_value of the assets of sec_3 will exceed its liabilities both at the date of adoption of the plan of complete_liquidation and immediately prior to the time the first liquidating_distribution is made plr-146192-07 1l there is no intercorporate debt existing between sec_1 and sec_3 and none has been cancelled forgiven or discounted except for transactions that occurred more than three years prior to the date of adoption of the plan_of_liquidation 1m sec_1 is not an organization that is exempt from federal_income_tax under sec_501 or any other provision of the code 1n all other transactions undertaken contemporaneously with in anticipation of in conjunction with or in any way related to the liquidation have been fully disclosed merger the following representations are made with respect to merger described above in step ii 2a merger will be effected pursuant to the laws of state c and state b as a result of the operation of such laws all of the assets and liabilities of s7 will become the assets and liabilities of sec_1 2b the fair_market_value of the sec_1 stock constructively received by sec_2 in merger will be approximately equal to the fair_market_value of the s7 stock surrendered in the exchange 2c at least percent of the proprietary interest in s7 will be exchanged constructively for sec_1 stock and will be preserved within the meaning of sec_1_368-1 2d except as described herein neither sec_1 nor any person related within the meaning of sec_1_368-1 to sec_1 has any plan or intention to redeem or otherwise acquire any shares of the sec_1 stock constructively issued in merger at any time after or in connection with merger or has any plan or intention to cause any other person or entity to acquire any such stock 2e sec_1 has no plan or intention to sell or otherwise dispose_of any of the assets of s7 acquired in merger except for dispositions made in the ordinary course of business or transfers described in sec_368 or sec_1_368-2 plr-146192-07 2f the liabilities of s7 assumed within the meaning of sec_357 by sec_1 will have been incurred by s7 in the ordinary course of business and will be associated with the assets being transferred 2g following merger sec_1 will continue the historic_business of s7 or use a significant portion of s7's historic_business_assets in a business within the meaning of sec_1_368-1 2h except for expenses that are solely and directly related within the meaning of revrul_73_54 c b to merger all of which will be paid_by sec_1 each party will pay its respective expenses if any incurred in connection with merger 2i at the time of merger there will be no intercorporate indebtedness existing between sec_1 and s7 that was issued acquired or will be settled at a discount 2j no two parties to merger are investment companies as defined in sec_368 and iv 2k s7 is not under the jurisdiction of a court in a title_11_or_similar_case 2l within the meaning of sec_368 the total fair_market_value of the assets transferred to sec_1 by s7 will exceed the sum of i the amount of liabilities assumed as determined under sec_357 by sec_1 in connection with merger ii the amount of liabilities owed to sec_1 by s7 that are discharged or extinguished in connection with merger and iii the amount of any money and the fair_market_value of any other_property other than stock permitted to be received under sec_361 without the recognition of gain received by s7 in connection with merger the fair_market_value of the assets of sec_1 will exceed the amount of sec_1’s liabilities immediately after merger merger the following representations are made with respect to merger described above in step iii 3a merger will be effected pursuant to the laws of state c and state b as a result of the operation of such laws all of the assets and liabilities of s8 will become the assets and liabilities of sec_1 plr-146192-07 3b the fair_market_value of the sec_1 stock constructively received by sec_2 in merger will be approximately equal to the fair_market_value of the s8 stock surrendered in the exchange 3c at least percent of the proprietary interest in s8 will be exchanged constructively for sec_1 stock and will be preserved within the meaning of sec_1_368-1 3d except as described herein neither sec_1 nor any person related within the meaning of sec_1_368-1 to sec_1 has any plan or intention to redeem or otherwise acquire any shares of the sec_1 stock constructively issued in merger at any time after or in connection with merger or has any plan or intention to cause any other person or entity to acquire any such stock 3e sec_1 has no plan or intention to sell or otherwise dispose_of any of the assets of s8 acquired in merger except for dispositions made in the ordinary course of business or transfers described in sec_368 or sec_1_368-2 3f the liabilities of s8 assumed within the meaning of sec_357 by sec_1 will have been incurred by s8 in the ordinary course of business and will be associated with the assets being transferred 3g following merger sec_1 will continue the historic_business of s8 or use a significant portion of s8's historic_business_assets in a business within the meaning of sec_1_368-1 3h except for expenses that are solely and directly related within the meaning of revrul_73_54 c b to merger all of which will be paid_by sec_1 each party will pay its respective expenses if any incurred in connection with merger 3i at the time of merger there will be no intercorporate indebtedness existing between sec_1 and s8 that was issued acquired or will be settled at a discount 3j no two parties to merger are investment companies as defined in sec_368 and iv 3k s8 is not under the jurisdiction of a court in a title_11_or_similar_case within the meaning of sec_368 plr-146192-07 3l the total fair_market_value of the assets transferred to sec_1 by s8 will exceed the sum of i the amount of liabilities assumed as determined under sec_357 by sec_1 in connection with merger ii the amount of liabilities owed to sec_1 by s8 that are discharged or extinguished in connection with merger and iii the amount of any money and the fair_market_value of any other_property other than stock permitted to be received under sec_361 without the recognition of gain received by s8 in connection with merger the fair_market_value of the assets of sec_1 will exceed the amount of sec_1’s liabilities immediately after merger the contribution and distribution the following representations are made with respect to the contribution and distribution described above in steps iv-v 4a no part of the consideration to be distributed by distributing will be received by a shareholder as a creditor employee or in any capacity other than that of a shareholder of distributing in distribution distributing will distribute percent of the equity interests in controlled to distributing 4b 4c except for expenses that are solely and directly related within the meaning of revrul_73_54 c b to distribution all of which will be paid_by sec_1 each party will pay its respective expenses if any incurred in connection with distribution 4d the five years of financial information submitted on behalf of business c of distributing is representative of its present operations and with regard to such business there have been no substantial operational changes since the date of the last financial statements submitted neither this business nor control of an entity conducting this business was acquired during the five-year period ending on the date of distribution in a transaction in which gain_or_loss was recognized in whole or in part except in connection with transfers between members of the affiliated_group as defined in sec_1504 determined without regard to sec_1504 of which parent was the parent plr-146192-07 4e the five years of financial information submitted on behalf of business a and business b of distributing is representative of their present operations and with regard to such businesses there have been no substantial operational changes since the date of the last financial statements submitted neither these businesses nor control of an entity conducting these businesses was acquired during the five-year period ending on the date of distribution in a transaction in which gain_or_loss was recognized in whole or in part except in connection with transfers between members of the affiliated_group as defined in sec_1504 determined without regard to sec_1504 of which parent was the parent 4f following distribution the distributing separate_affiliated_group sag within the meaning of sec_355 will continue the active_conduct of business a and business b independently and with their separate employees 4g following the proposed transactions the sec_1 sag will continue the active_conduct of its combined business including business c independently and with its separate employees 4h distribution is not being used principally as a device for the distribution of the earnings_and_profits of distributing or controlled or both the total adjusted_basis and the fair_market_value of the assets transferred to controlled by distributing each will equal or exceed the sum of the liabilities assumed within the meaning of sec_357 by controlled the total fair_market_value of the assets transferred to controlled in the contribution will exceed the sum of i the amount of any liabilities assumed as determined under sec_357 by controlled in the exchange ii the amount of any liabilities owed to controlled by distributing that are discharged or extinguished in connection with the exchange and iii the amount of cash and the fair_market_value of any other_property other than stock and securities permitted to be received under sec_361 without recognition of gain received by distributing in the exchange the fair_market_value of the assets of controlled will exceed the amount of controlled's liabilities immediately after the contribution 4i 4j plr-146192-07 4k the total fair_market_value of the assets transferred to controlled by distributing in the contribution will equal or exceed the aggregate adjusted_basis of the transferred assets the liabilities assumed within the meaning of sec_357 by controlled in the contribution will have been incurred in the ordinary course of business and will be associated with the assets being transferred 4l 4m distribution is being carried out for the following corporate business purposes to implement changes in management of the distributing business and to facilitate the consolidation of companies described herein and to avoid an unnecessary material increase in i state taxes on dividends and ii state capital stock and franchise_taxes distribution is motivated in whole or substantial part by these corporate business purposes these corporate business purposes cannot be achieved through a nontaxable_transaction that would not involve the distribution of controlled and that would be neither impractical nor unduly expensive 4n no intercorporate debt will exist between distributing and controlled at the time of or subsequent to distribution 4o payments made in connection with all continuing transactions if any between distributing and controlled or sec_1 will be for fair_market_value based on terms and conditions arrived at by the parties bargaining at arm's length 4p no two parties to the transaction are investment companies as defined in sec_368 and iv 4q for purposes of sec_355 immediately after distribution no person determined after applying the aggregation rules of sec_355 will hold stock possessing percent or more of the total combined voting power of all classes of distributing stock entitled to vote or percent or more of the total value of shares of all classes of distributing stock that was acquired by purchase as defined in sec_355 and during the five-year period determined after applying sec_355 ending on the date of distribution plr-146192-07 4r for purposes of sec_355 immediately after distribution no person determined after applying the aggregation rules of sec_355 will hold stock possessing percent or more of the total combined voting power of all classes of controlled stock entitled to vote or percent or more of the total value of shares of all classes of controlled stock that was either i acquired by purchase as defined in sec_355 and during the five-year period determined after applying sec_355 ending on the date of distribution or ii attributable to distributions on distributing stock that was acquired by purchase as defined in sec_355 and during the five-year period determined after applying sec_355 ending on the date of distribution 4t 4s distribution is not part of a plan or series of related transactions within the meaning of sec_1_355-7 pursuant to which one or more persons will acquire directly or indirectly stock representing a percent or greater interest within the meaning of sec_355 in either distributing or controlled including any predecessor or successor of distributing or controlled immediately after distribution either i no person will hold a percent or greater interest within the meaning of sec_355 in the stock of distributing or controlled who did not hold such an interest immediately before distribution or ii neither distributing nor controlled will be a disqualified_investment_corporation within the meaning of sec_355 immediately before distribution items of income gain loss deduction and credit will be taken into account as required by the applicable intercompany_transaction regulations 4u 4v at the time of distribution no member of the group will have an excess_loss_account in the controlled stock or in the stock of any controlled subsidiary distribution the following representations are made with respect to distribution described above in step vi 5a no part of the consideration to be distributed by distributing will be received by a shareholder as a creditor employee or in any capacity other than that of a shareholder of distributing plr-146192-07 5b in distribution distributing will distribute percent of the equity interests in controlled to sec_2 5c except for expenses that are solely and directly related within the meaning of revrul_73_54 c b to distribution all of which will be paid_by sec_1 each party will pay its respective expenses if any incurred in connection with distribution 5d the five years of financial information submitted on behalf of business c of distributing is representative of its present operations and with regard to such business there have been no substantial operational changes since the date of the last financial statements submitted neither this business nor control of an entity conducting this business was acquired during the five-year period ending on the date of distribution in a transaction in which gain_or_loss was recognized in whole or in part except in connection with transfers between members of the affiliated_group as defined in sec_1504 determined without regard to sec_1504 of which parent was the parent 5e the five years of financial information submitted on behalf of business a and business b of distributing a member of the distributing sag is representative of their present operations and with regard to such businesses there have been no substantial operational changes since the date of the last financial statements submitted neither these businesses nor control of an entity conducting these businesses was acquired during the five-year period ending on the date of distribution in a transaction in which gain_or_loss was recognized in whole or in part except in connection with transfers between members of the affiliated_group as defined in sec_1504 determined without regard to sec_1504 of which parent was the parent 5f following distribution the distributing sag will continue the active_conduct of business a and business b independently and with their separate employees 5g following the proposed transactions the sec_1 sag will continue the active_conduct of its combined business including business c independently and with its separate employees plr-146192-07 5h distribution is not being used principally as a device for the distribution of the earnings_and_profits of distributing or controlled or both 5i distribution is being carried out for the following corporate business purposes to implement changes in management of the distributing business and to facilitate the consolidation of companies described herein and to avoid an unnecessary material increase in i state taxes on dividends and ii state capital stock and franchise_taxes distribution is motivated in whole or substantial part by these corporate business purposes these corporate business purposes cannot be achieved through a nontaxable_transaction that would not involve the distribution of controlled and that would be neither impractical nor unduly expensive 5j no intercorporate debt will exist between distributing and controlled at the time of or subsequent to distribution 5k payments made in connection with all continuing transactions if any between distributing and controlled or sec_1 will be for fair_market_value based on terms and conditions arrived at by the parties bargaining at arm's length for purposes of sec_355 immediately after distribution no person determined after applying the aggregation rules of sec_355 will hold stock possessing percent or more of the total combined voting power of all classes of distributing stock entitled to vote or percent or more of the total value of shares of all classes of distributing stock that was acquired by purchase as defined in sec_355 and during the five-year period determined after applying sec_355 ending on the date of distribution 5l plr-146192-07 5m for purposes of sec_355 immediately after distribution no person determined after applying the aggregation rules of sec_355 will hold stock possessing percent or more of the total combined voting power of all classes of controlled stock entitled to vote or percent or more of the total value of shares of all classes of controlled stock that was either i acquired by purchase as defined in sec_355 and during the five-year period determined after applying sec_355 ending on the date of distribution or ii attributable to distributions on distributing stock that was acquired by purchase as defined in sec_355 and during the five-year period determined after applying sec_355 ending on the date of distribution 5o 5n distribution is not part of a plan or series of related transactions within the meaning of sec_1_355-7 pursuant to which one or more persons will acquire directly or indirectly stock representing a percent or greater interest within the meaning of sec_355 in either distributing or controlled including any predecessor or successor of distributing or controlled immediately after distribution either i no person will hold a percent or greater interest within the meaning of sec_355 in the stock of distributing or controlled who did not hold such an interest immediately before distribution or ii neither distributing nor controlled will be a disqualified_investment_corporation within the meaning of sec_355 immediately before distribution items of income gain loss deduction and credit will be taken into account as required by the applicable intercompany_transaction regulations 5p 5q at the time of distribution no member of the group will have an excess_loss_account in the controlled stock or in the stock of any controlled subsidiary the following representations are made with respect to merger described above in step vii merger plr-146192-07 6a merger will be effected pursuant to the laws of state a and state b as a result of the operation of such laws all of the assets and liabilities of controlled will become the assets and liabilities of sec_1 6b the fair_market_value of the sec_1 stock constructively received by sec_2 in merger will be approximately equal to the fair_market_value of the controlled stock surrendered in the exchange 6c at least percent of the proprietary interest in controlled will be exchanged constructively for sec_1 stock and will be preserved within the meaning of sec_1_368-1 6d except as described herein neither sec_1 nor any person related within the meaning of sec_1_368-1 to sec_1 has any plan or intention to redeem or otherwise acquire any shares of the sec_1 stock constructively issued in merger at any time after or in connection with merger or has any plan or intention to cause any other person or entity to acquire any such stock 6e sec_1 has no plan or intention to sell or otherwise dispose_of any of the assets of controlled acquired in merger except for dispositions made in the ordinary course of business or transfers described in sec_368 or sec_1_368-2 6f the liabilities of controlled assumed within the meaning of sec_357 by sec_1 will have been incurred by controlled in the ordinary course of business and will be associated with the assets transferred 6g following merger sec_1 will continue the historic_business of controlled or use a significant portion of controlled's historic_business_assets in a business within the meaning of sec_1_368-1 6h except for expenses that are solely and directly related within the meaning of revrul_73_54 c b to merger all of which will be paid_by sec_1 each party will pay its respective expenses if any incurred in connection with merger 6i at the time of merger there will be no intercorporate indebtedness existing between sec_1 and controlled that was issued acquired or will be settled at a discount plr-146192-07 sec_368 and iv 6j no two parties to merger are investment companies as defined in 6k controlled is not under the jurisdiction of a court in a title or 6l similar case within the meaning of sec_368 the total fair_market_value of the assets transferred to sec_1 by controlled will exceed the sum of i the amount of liabilities assumed as determined under sec_357 by sec_1 in connection with merger ii the amount of liabilities owed to sec_1 by controlled that are discharged or extinguished in connection with merger and iii the amount of any money and the fair_market_value of any other_property other than stock permitted to be received under sec_361 without the recognition of gain received by controlled in connection with merger the fair_market_value of the assets of sec_1 will exceed the amount of sec_1’s liabilities immediately after merger the combination the following representations are made with respect to the combination described above in steps viii - ix 7a the fair_market_value of the stock of sec_1 constructively received by parent in the combination will be approximately equal to the fair_market_value of the stock of sec_2 deemed to be surrendered in the combination 7b at least percent of the proprietary interest in sec_2 will be exchanged constructively for sec_1 common_stock and will be preserved within the meaning of sec_1_368-1 7c sec_1 will acquire at least percent of the fair_market_value of the net assets and at least percent of the fair_market_value of the gross assets held by sec_2 immediately prior to the combination for purposes of this representation amounts paid_by sec_2 to dissenters amounts paid_by sec_2 to shareholders who receive cash or other_property amounts used by sec_2 to pay its reorganization expenses and all redemptions and distributions except for regular normal dividends made by sec_2 immediately preceding the transfer will be included as assets of sec_2 held immediately prior to the combination plr-146192-07 7d after the combination parent will be in control of sec_1 within the meaning of sec_368 7e neither sec_1 nor any person related to sec_1 within the meaning of sec_1_368-1 has any plan or intention to reacquire any of its stock constructively issued in the combination 7f sec_1 has no plan or intention to sell or otherwise dispose_of any of the assets of s7 s8 distributing distributing or controlled except for dispositions made in the ordinary course of business or transfers described in sec_368 or sec_1_368-2 7g the liabilities of sec_2 to be assumed within the meaning of sec_357 by sec_1 will have been incurred by sec_2 in the ordinary course of business and will be associated with the assets being transferred 7h following the combination sec_1 will continue the historic businesses of s7 s8 distributing distributing and controlled such businesses in the aggregate constituting at least percent of the total value of sec_2 at the time of the combination or use a significant portion of sec_2’s direct and indirect historic_business_assets in a business within the meaning of sec_1_368-1 7i at the time of the combination sec_1 will not have outstanding any warrants options convertible securities or any other type of right pursuant to which any person could acquire stock in sec_1 that if exercised or converted would affect parent’s acquisition or retention of control of sec_1 as defined in sec_368 7j except for expenses that are solely and directly related within the meaning of revrul_73_54 c b to the combination all of which will be paid_by sec_1 each party will pay its respective expenses if any incurred in connection with the combination 7k at the time of the combination there will be no intercorporate indebtedness existing between sec_1 and sec_2 that was issued acquired or will be settled at a discount 7l no two parties to the combination are investment companies as defined in sec_368 and iv plr-146192-07 7m the fair_market_value of the assets of sec_2 transferred to sec_1 will exceed the sum of the liabilities of sec_2 assumed as determined under sec_357 by sec_1 7n sec_2 is not under the jurisdiction of a court in a title_11_or_similar_case within the meaning of sec_368 rulings the liquidation based solely on the information submitted and the representations set forth above we rule as follows on the liquidation no gain_or_loss will be recognized by sec_1 on the receipt of all of the assets and assumption of the liabilities of sec_3 in the liquidation sec_332 no gain_or_loss will be recognized by sec_3 on the distribution of its assets and liabilities to sec_1 in the liquidation sec_337 sec_1's basis in each asset received from sec_3 in the liquidation will equal the basis of such asset in the hands of sec_3 immediately before the liquidation sec_334 sec_1's holding_period in each asset received from sec_3 in the liquidation will include the period during which that asset was held by sec_3 sec_1223 sec_1 will succeed to and take into account the items of sec_3 described in sec_381 subject_to the conditions and limitations specified in sec_381 sec_382 sec_383 and sec_384 and the regulations thereunder sec_381 and sec_1_381_a_-1 except to the extent sec_3's earnings_and_profits are reflected in sec_1's earnings_and_profits sec_1 will succeed to and take into account the earnings_and_profits or deficit in earnings_and_profits of sec_3 as of the date of the liquidation sec_381 sec_1_381_c_2_-1 and sec_1_1502-33 any deficit in the earnings_and_profits of sec_3 can be used only to offset earnings_and_profits accumulated after the date of the liquidation sec_381 merger plr-146192-07 above we rule as follows on merger based solely on the information submitted and the representations set forth provided merger qualifies as a statutory merger in accordance with applicable state law merger as described above will qualify as a reorganization under sec_368 s7 and sec_1 each will be a_party_to_a_reorganization within the meaning of sec_368 no gain_or_loss will be recognized by s7 on the transfer of all of its assets to sec_1 in exchange constructively for sec_1 stock and sec_1's assumption of s7's liabilities in merger sec_357 and sec_361 no gain_or_loss will be recognized by sec_1 on its receipt of all of s7's assets in exchange constructively for sec_1 stock and sec_1's assumption of s7's liabilities in merger sec_1032 no gain_or_loss will be recognized by s7 on its constructive distribution of the sec_1 stock constructively received in merger sec_361 the basis of each asset received by sec_1 in merger will equal the basis of that asset in the hands of s7 immediately before merger sec_362 the holding_period of each asset received by sec_1 in merger will include the period during which s7 held such asset sec_1223 no gain_or_loss will be recognized by sec_2 on the constructive exchange of its s7 stock for sec_1 stock in merger sec_354 the basis of the sec_1 stock constructively received by sec_2 will be the same as the basis of the s7 stock surrendered in exchange therefor sec_358 the holding_period of the sec_1 stock constructively received by sec_2 in merger will include the holding_period of the s7 stock surrendered in exchange therefor sec_1223 based solely on the information submitted and the representations set forth merger above we rule as follows on merger plr-146192-07 provided merger qualifies as a statutory merger in accordance with applicable state law merger as described above will qualify as a reorganization under sec_368 s8 and sec_1 each will be a_party_to_a_reorganization within the meaning of sec_368 no gain_or_loss will be recognized by s8 on the transfer of all of its assets to sec_1 in exchange constructively for sec_1 stock and sec_1's assumption of s8's liabilities in merger sec_357 and sec_361 no gain_or_loss will be recognized by sec_1 on its receipt of all of s8's assets in exchange constructively for sec_1 stock and sec_1's assumption of s8's liabilities in merger sec_1032 no gain_or_loss will be recognized by s8 on its constructive distribution of the sec_1 stock constructively received in merger sec_361 the basis of each asset received by sec_1 in merger will equal the basis of that asset in the hands of s8 immediately before merger sec_362 the holding_period of each asset received by sec_1 in merger will include the period during which s8 held such asset sec_1223 no gain_or_loss will be recognized by sec_2 on the constructive exchange of its s8 stock for sec_1 stock in merger sec_354 the basis of the sec_1 stock constructively received by sec_2 will be the same as the basis of the s8 stock surrendered in exchange therefor sec_358 the holding_period of the sec_1 stock constructively received by sec_2 in merger will include the holding_period of the s8 stock surrendered in exchange therefor sec_1223 the contribution and distribution based solely on the information submitted and the representations set forth above we rule as follows on the contribution and distribution the contribution followed by distribution will be a reorganization under sec_368 distributing and controlled each will be a_party_to_a_reorganization within the meaning of sec_368 plr-146192-07 no gain_or_loss will be recognized by distributing on the contribution sec_357 and sec_361 no gain_or_loss will be recognized by controlled on the contribution sec_1032 the basis of each asset received by controlled in the contribution will equal the basis of that asset in the hands of distributing immediately before the contribution sec_362 the holding_period of each asset received by controlled in the contribution will include the period during which distributing held the asset sec_1223 no gain_or_loss will be recognized by and no amount otherwise will be included in the income of distributing as a result of distribution sec_355 no gain_or_loss will be recognized by distributing as a result of distribution sec_361 the aggregate basis of the distributing shares and the controlled shares in the hands of distributing after distribution will be the same as the basis of the distributing shares in the hands of distributing immediately before distribution sec_358 and sec_1_358-1 such basis will be allocated between the distributing shares and the controlled shares in proportion to the fair_market_value of each in accordance with sec_1_358-2 sec_358 and sec_358 the holding_period of the controlled shares received by distributing in distribution will include the holding_period of the distributing shares with respect to which distribution will be made provided that such distributing shares are held as capital assets on the date of distribution sec_1223 as provided in sec_312 proper allocation of earnings_and_profits between distributing and controlled will be made under sec_1_312-10 and sec_1_1502-33 based solely on the information submitted and the representations set forth distribution above we rule as follows on distribution plr-146192-07 no gain_or_loss will be recognized by and no amount otherwise will be included in the income of sec_2 as a result of distribution sec_355 no gain_or_loss will be recognized by distributing as a result of distribution sec_355 the aggregate basis of the distributing shares and the controlled shares in the hands of sec_2 after distribution will be the same as the basis of the distributing shares in the hands of sec_2 immediately before distribution sec_358 and sec_1_358-1 such basis will be allocated between the distributing shares and the controlled shares in proportion to the fair_market_value of each in accordance with sec_1_358-2 sec_358 and sec_358 the holding_period of the controlled shares received by sec_2 in distribution will include the holding_period of the distributing shares with respect to which distribution will be made provided that such distributing shares are held as capital assets on the date of distribution sec_1223 as provided in sec_312 proper allocation of earnings_and_profits between distributing and controlled will be made under sec_1_312-10 and sec_1_1502-33 based solely on the information submitted and the representations set forth merger above we rule as follows on merger provided merger qualifies as a statutory merger in accordance with applicable state law merger as described above will qualify as a reorganization under sec_368 merger will not be disqualified by reason of the s9 incorporation sec_368 controlled and sec_1 each will be a_party_to_a_reorganization within the meaning of sec_368 no gain_or_loss will be recognized by controlled on the transfer of all of its assets to sec_1 in exchange constructively for sec_1 stock and sec_1's assumption of controlled's liabilities in merger sec_357 and sec_361 plr-146192-07 no gain_or_loss will be recognized by sec_1 on its receipt of all of controlled's assets in exchange constructively for sec_1 stock and sec_1's assumption of controlled's liabilities in merger sec_1032 no gain_or_loss will be recognized by controlled on its constructive distribution of the sec_1 stock constructively received in merger sec_361 the basis of each asset received by sec_1 in merger will equal the basis of that asset in the hands of controlled immediately before merger sec_362 the holding_period of each asset received by sec_1 in merger will include the period during which controlled held such asset sec_1223 no gain_or_loss will be recognized by sec_2 on the constructive exchange of its controlled stock for sec_1 stock in merger sec_354 the basis of the sec_1 stock constructively received by sec_2 will be the same as the basis of the controlled stock surrendered in exchange therefor sec_358 the holding_period of the sec_1 stock constructively received by sec_2 in merger will include the holding_period of the controlled stock surrendered in exchange therefor sec_1223 based solely on the information submitted and the representations set forth the combination above we rule as follows on the combination for federal_income_tax purposes the transfer by parent of all of the stock of sec_2 to sec_1 followed by sec_2's conversion to a limited_liability_company will be treated as the transfer by sec_2 of all of its assets to sec_1 solely in constructive exchange for sec_1 common_stock and sec_1's assumption of the liabilities of sec_2 followed by sec_2's constructive distribution of sec_1 stock to parent in complete_liquidation of sec_2 rev_rul c b plr-146192-07 the transfer by sec_2 of all of its assets to sec_1 in constructive exchange for sec_1 common_stock and sec_1's assumption of sec_2's liabilities followed by sec_2's constructive distribution of sec_1 stock to parent in complete_liquidation of sec_2 will qualify as a reorganization under sec_368 the combination will not be disqualified by reason of the s6 incorporation sec_1_368-2 sec_2 and sec_1 each will be a_party_to_a_reorganization within the meaning of sec_368 no gain_or_loss will be recognized by sec_2 on the transfer of all of its assets to sec_1 in exchange constructively for sec_1 stock and sec_1's assumption of sec_2's liabilities in the combination sec_357 and sec_361 no gain_or_loss will be recognized by sec_1 on its receipt of all of sec_2's assets in exchange constructively for sec_1 stock and sec_1's assumption of sec_2's liabilities in the combination sec_1032 no gain_or_loss will be recognized by sec_2 on its constructive distribution of the sec_1 stock constructively received in the combination sec_361 the basis of each asset received by sec_1 in the combination will equal the basis of that asset in the hands of sec_2 immediately before the combination sec_362 the holding_period of each asset received by sec_1 in the combination will include the period during which sec_2 held such asset sec_1223 no gain_or_loss will be recognized by parent on the deemed exchange of its sec_2 stock constructively for sec_1 stock in the combination sec_354 the basis of the sec_1 stock constructively received by parent will be the same as the basis of the sec_2 stock deemed to be surrendered in exchange therefor sec_358 the holding_period of the sec_1 stock constructively received by parent in the combination will include the holding_period of the sec_2 stock deemed to be surrendered in exchange therefor sec_1223 caveat sec_57 plr-146192-07 no opinion was requested and therefore no opinion was expressed as to the federal_income_tax treatment of steps x - xii in addition no opinion is expressed about the tax treatment of the proposed transactions under other provisions of the code or regulations or on the tax treatment of any conditions existing at the time of or effects resulting from the proposed transactions that are not specifically covered by the above rulings in particular no opinion is expressed regarding i whether distribution and distribution satisfy the business_purpose requirement of sec_1_355-2 ii whether the proposed transactions are used principally as a device for the distribution of the earnings_and_profits of any distributing_corporation or controlled_corporation or both see sec_355 and sec_1_355-2 and iii whether any distribution described above and any acquisition or acquisitions are part of a plan or series of related transactions under sec_355 procedural statements this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent a copy of this ruling letter should be attached to the federal_income_tax return of each taxpayer involved for the taxable_year in which the transaction covered by this ruling letter is consummated alternatively taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of the letter_ruling in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely gerald b fleming senior technician reviewer branch corporate