t c memo united_states tax_court richard a cole m d inc petitioner v commissioner of internal revenue respondent docket no filed date richard a cole for petitioner louise r forbes for respondent memorandum findings_of_fact and opinion colvin judge respondent determined deficiencies in petitioner's federal_income_tax and additions to tax as follows additions to tax sec sec sec fy1 deficiency b a b b dollar_figure dollar_figure big_number big_number dollar_figure big_number -- petitioner's fiscal_year ended on date and its fiscal_year ended on date sec_6653 for fiscal_year fifty percent of the interest due on dollar_figure the issues for decision are whether respondent's evidence ie certain of petitioner's business records is inadmissible because of petitioner's contention that it was obtained from an illegal search and seizure we hold that the evidence is admissible whether petitioner had unreported income from its medical practice of dollar_figure for fiscal_year and dollar_figure for fiscal_year we hold that it did whether petitioner had unreported interest_income of dollar_figure for fiscal_year and dollar_figure for fiscal_year we hold that it did whether petitioner may carry forward a net_operating_loss of dollar_figure for fiscal_year we hold that it may not whether petitioner is liable for fraud under sec_6653 for fiscal years and we hold that it is whether petitioner is liable for additions to tax for substantial_understatement_of_income_tax under sec_6661 for fiscal years and we hold that it is 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 i findings_of_fact some of the facts have been stipulated and are so found a petitioner incorporation of richard a cole m d inc richard a cole dr cole received his undergraduate degree from tufts university and his medical degree from johns hopkins medical school during the years in issue dr cole was a practicing physician who specialized in endocrinology richard a cole m d inc petitioner is a pennsylvania corporation incorporated by dr cole on date dr cole was petitioner's president and sole shareholder in fiscal years and petitioner was in the business of providing medical services during fiscal years and petitioner's bank accounts during the tax years at issue petitioner maintained accounts at marine bank northwest mutual_savings_bank and mellon bank petitioner received interest_income of dollar_figure in fiscal_year and dollar_figure in fiscal_year on its marine savings bank savings account the stipulated facts were deemed established for purposes of this case see par i-e below petitioner's business receipts kathryn hale ms hale was petitioner's office manager for the years at issue ms hale began working for dr cole and petitioner in at that time she was the only employee she answered phones made appointments took dictation pulled charts and filed ms hale stopped working for dr cole and petitioner in date during those years dr cole hired additional employees such as donna king-deck ms king-deck and trish henderson ms henderson and ms hale became the office manager petitioner received cash and checks daily in fiscal years and from patients who received medical services from dr cole petitioner's business receipts were recorded each day on day sheets for the years at issue and totaled for each day month and year ms hale was responsible during the years at issue for billing handling patients' insurance collecting payments and maintaining the day sheets ms hale usually made the entries on the day sheets occasionally dr cole ms king- deck or ms henderson made entries on the day sheets the day sheets included the patient's name the service provided the fee for that service and whether the patient paid_by cash or check receipts were totaled daily and carried forward the day sheet for the last day of the month showed the monthly total of business receipts dr cole had access to the day sheets and could review them at any time ms hale assembled petitioner's daily receipts and gave them to dr cole to deposit each day dr cole or his wife deposited the receipts ms hale made the deposits when dr cole was on vacation petitioner's receipts for june july and date were deposited in its accounts at northwest mutual_savings_bank or mellon bank petitioner's receipts from date to date were deposited in its account at marine bank petitioner's receipts totaled dollar_figure in fiscal_year and dollar_figure in fiscal_year around date dr cole asked ms hale for the yearly total and a monthly breakdown of petitioner's gross_receipts for fiscal_year she told him that petitioner's gross_receipts for fiscal_year were dollar_figure b petitioner's tax returns carl lindblad mr lindblad prepared petitioner's tax returns since it was incorporated including its and returns mr lindblad never saw petitioner's corporate books_and_records mr lindblad prepared petitioner's tax_return on the basis of a phone conversation with dr cole and a handwritten summary of petitioner's gross_receipts and interest and a list of its expenses that dr cole sent him dr cole's summary showed that petitioner had gross_receipts of dollar_figure and interest of dollar_figure he later told mr lindblad that petitioner's gross_receipts were dollar_figure mr lindblad prepared petitioner's return and sent it to dr cole to sign and file petitioner reported on its return that it had gross_receipts of dollar_figure interest of dollar_figure and a net_operating_loss of dollar_figure in date dr cole sent mr lindblad a summary of petitioner's gross_receipts and deductions for fiscal_year dr cole's summary showed that petitioner had gross_receipts of dollar_figure on the basis of that information mr lindblad prepared petitioner's tax_return and sent it to dr cole to sign and file petitioner reported on its return that it had gross_receipts of dollar_figure zero interest and a net_operating_loss carryforward of dollar_figure dr cole reviewed signed and filed petitioner's and corporate_income_tax returns forms after he received them from mr lindblad mr lindblad prepared the returns on the cash_basis method_of_accounting c petitioner's indictment and plea agreement in date petitioner and dr cole were indicted by a grand jury on counts including distributing methamphetamine a controlled substance committing mail fraud by causing false and fraudulent claims to be processed by patients' insurance_companies and third-party payers and violating sec_7201 income_tax evasion and filing false tax returns petitioner and dr cole were indicted under sec_7201 for attempting to evade and defeat income_tax due and owing by the corporation for fiscal years and by signing and filing false u s corporate_income_tax returns for fiscal years and and under sec_7206 for filing false u s corporate_income_tax returns for fiscal years and the indictment alleged that petitioner knowingly failed to report gross_receipts from its medical practice dr cole was represented by attorney f lee bailey mr bailey on date dr cole signed a plea agreement in which he and petitioner pled guilty to counts in the indictment including distributing a controlled substance mail fraud and willfully attempting to evade and defeat the income_tax due and owing by petitioner for fiscal_year under sec_7201 bailey also signed the plea agreement the plea agreement stated that the criminal_investigation_division cid could release to the irs examination_division the special_agent's_report and accompanying exhibits including petitioner's bank records and day sheets by signing the plea agreement dr cole agreed that the irs examination_division could use the information contained in the special_agent's_report and accompanying exhibits to determine any civil tax deficiencies on date the u s district_court for the western district of pennsylvania entered judgment against dr cole and petitioner pursuant to dr cole's guilty plea dr cole was sentenced and ordered to make restitution the u s court_of_appeals for the third circuit affirmed petitioner's and dr cole's convictions without published opinion united_states v cole 8_f3d_813 3d cir dr cole contends that on date he filed a motion to vacate his criminal conviction under u s c section the u s district_court for the western district of pennsylvania dismissed the motion dr cole further contends that on date he filed an appeal that he claims was not docketed until date the court_of_appeals for the third circuit dismissed the appeal as untimely on date he appealed the dismissal but the appeal was not docketed in date dr cole filed a motion to reopen the appeal the court_of_appeals for the third circuit denied his motion on date dr cole filed a petition for extraordinary writ of habeas corpus the u s supreme court denied his petition on date on date he filed a petition for rehearing d notice_of_deficiency respondent sent a notice_of_deficiency dated date to petitioner for fiscal years and respondent determined that petitioner had unreported receipts of dollar_figure for fiscal_year and dollar_figure for fiscal_year had unreported interest_income of dollar_figure for fiscal_year and dollar_figure for fiscal_year and was not entitled to carry forward a net_operating_loss of dollar_figure to fiscal_year and that petitioner was liable for additions to tax for fraud and substantial_understatement for fiscal years and e the stipulation of facts on date respondent pursuant to rule f moved to compel stipulation and attached a proposed stipulation of facts and related exhibits on date petitioner's response was filed in it petitioner alleged that respondent's proposed stipulation was based on records that were obtained from an illegal search and seizure from its office and objected to these records' being used in this case on date we overruled petitioner's objection and ordered petitioner to supplement its response and respond substantively to the order to show cause petitioner did not do so on date we ordered that the facts and evidence stated in respondent's proposed stipulation of facts be deemed established for purposes of this case dr cole testified for petitioner ii opinion a procedural issues petitioner argues that its plea of guilty in the prior criminal case was not voluntary because its counsel coerced the guilty plea we disagree petitioner offered no evidence or explanation to support its claim that its counsel coerced the guilty plea petitioner points out that respondent used the day sheets to determine the deficiencies in issue and contends that the government got those records from an illegal search and seizure in its office petitioner contends that its counsel in the criminal case failed to raise the illegal search and seizure issue petitioner contends that the day sheets should be excluded from evidence here we disagree petitioner agreed as part of the plea in his criminal case to allow the cid to release to the irs examination_division the special_agent's_report and petitioner's bank records and day sheets petitioner waived its right to object to the use of these records by signing the plea agreement b unreported receipts respondent determined that petitioner had unreported receipts of dollar_figure for fiscal_year and dollar_figure for fiscal_year petitioner's receipts totaled dollar_figure in fiscal_year and dollar_figure in fiscal_year yet it reported that it had gross_receipts of only dollar_figure for and dollar_figure for dr cole said at trial that there may have been errors in petitioner's books petitioner contends that the day sheets are unreliable because ms hale prepared them and alleges that ms hale made fraudulent entries to petitioner's records we disagree ms hale testified credibly that she prepared petitioner's day sheets daily and totaled the receipts daily monthly and yearly petitioner offered no evidence that the day sheets ms hale prepared are unreliable or that she made fraudulent entries to petitioner's books we find that the day sheets were reliable at trial dr cole sought to attack ms hale's credibility because she applied for unemployment benefits for which the state of massachusetts ruled she was not eligible we disagree there was nothing about that episode that makes her testimony here less credible dr cole sought to attack the reliability of the day sheets because petitioner's office manager discovered in date undeposited checks of dollar_figure in a file cabinet used by ms hale that dr cole alleges ms hale should have deposited ms hale testified credibly that she had no knowledge of the checks petitioner offered no evidence concerning the dates of the undeposited checks and when they were received we disagree with petitioner's contention that the day sheets are unreliable respondent's determination is presumed to be correct and petitioner bears the burden of proving otherwise rule a 290_us_111 petitioner has not proven that it did not have unreported income from its medical practice of dollar_figure in fiscal_year and dollar_figure in fiscal_year we sustain respondent's determination c unreported interest_income petitioner received interest_income of dollar_figure in fiscal_year and dollar_figure in fiscal_year petitioner reported that it received interest_income of dollar_figure for fiscal_year and zero interest_income for fiscal_year petitioner does not deny that it received the interest_income at issue we conclude that petitioner had unreported interest_income of dollar_figure for fiscal_year and dollar_figure for fiscal_year d net_operating_loss sec_172 allows a taxpayer to deduct net operating losses petitioner reported that it had a net_operating_loss of dollar_figure for fiscal_year and a net_operating_loss carryforward of dollar_figure for fiscal_year respondent determined that petitioner did not have a net_operating_loss for fiscal_year and that petitioner had no carryforward to fiscal_year because respondent's adjustments to petitioner's gross_receipts eliminated the claimed net_operating_loss because of our holdings that petitioner had unreported gross_receipts and unreported interest_income for petitioner did not have a net_operating_loss and thus we sustain respondent's determination on this issue e fraud respondent determined that petitioner is liable for additions to tax for fraud for fiscal years and respondent has the burden of proving fraud by clear_and_convincing evidence sec_7454 rule b the existence of fraud is a question of fact to be decided by consideration of the entire record 94_tc_654 67_tc_181 affd without published opinion 578_f2d_1383 8th cir petitioner is collaterally estopped to deny fraud for fiscal_year petitioner pled guilty to income_tax evasion under sec_7201 for fiscal_year a guilty plea is an admission of all the elements of the criminal charge 394_us_459 petitioner's conviction as a result of a guilty plea of criminal_tax_evasion under sec_7201 for fiscal_year collaterally estops it from denying that some part of the deficiency in its income_tax for fiscal_year was due to fraud for purposes of sec_6653 because the elements of criminal_tax_evasion under sec_7201 are virtually identical to the elements of civil tax_fraud under sec_6653 465_f2d_299 7th cir affg tcmemo_1970_274 56_tc_213 43_tc_50 affd 360_f2d_358 4th cir fraud for fiscal_year petitioner's fraudulent intent may be established by the acts of its sole shareholder dr cole who completely dominated its activity see 96_tc_858 corporate fraud found from fraudulent intent of corporate officers affd 959_f2d_16 2d cir 21_tc_191 affd 216_f2d_693 1st cir moore v commissioner tcmemo_1977_275 affd 619_f2d_619 6th cir cf 384_f2d_229 and ndollar_figure 3d cir fraud of a sole shareholder may be attributed to the corporation however a corporation was not subject_to fraud penalties where an innocent stockholder owned one-half of the corporation revg 46_tc_622 courts have developed several objective indicators or badges_of_fraud 91_tc_874 the badges_of_fraud present in this case are dr cole's a giving of false information to petitioner's tax_return_preparer b failure to use books_and_records and c large understatements of income a giving false information to petitioner's tax_return_preparer dr cole concealed petitioner's total gross_receipts from mr lindblad by giving him inaccurate summaries and no supporting documents such as the day sheets and bank statements dr cole asked ms hale in date for petitioner's gross_receipts for fiscal_year she told him they were dollar_figure yet he told mr lindblad in date that petitioner's gross_receipts were only dollar_figure the fact that dr cole gave false information to the corporate return preparer is a badge of fraud 781_f2d_1566 11th cir affg per curiam tcmemo_1985_63 67_tc_143 b failure to use books_or_records dr cole had access to petitioner's day sheets and bank statements the fact that dr cole did not use these records in preparing petitioner's returns is a badge of fraud spill v commissioner tcmemo_1989_213 fraud is even more apparent where taxpayer kept records but disregarded them in preparing tax_return c large understatements of income dr cole caused petitioner to not report its income accurately for the years in issue petitioner knowingly failed to report a significant amount of income for fiscal years and this is a badge of fraud 796_f2d_303 9th cir affg tcmemo_1984_601 conclusion--fraud petitioner knowingly understated its income by dollar_figure for fiscal_year and dollar_figure for fiscal_year we conclude that petitioner is liable for the additions to tax for fraud for fiscal years and f substantial_understatement the next issue for decision is whether petitioner is liable for the addition_to_tax for substantial_understatement_of_income_tax under sec_6661 for fiscal years and sec_6661 imposes an addition_to_tax equal to percent of the amount of any underpayment attributable to a substantial_understatement_of_income_tax if a taxpayer has substantial_authority for the tax treatment of any item on the return the understatement is reduced by the amount attributable to it sec_6661 similarly the amount of the understatement is reduced for any item adequately disclosed either on the taxpayer's return or in a statement attached to the return sec_6661 petitioner bears the burden of proving that the addition_to_tax under sec_6661 does not apply rule a 92_tc_501 petitioner has offered no evidence or argument that it is not liable for the addition_to_tax under sec_6661 we conclude that petitioner is liable for the sec_6661 addition_to_tax for fiscal years and decision will be entered for respondent


internal_revenue_service department of the treasury index number washington dc person to contact number release date telephone number refer reply to cc dom p si 1-plr-103507-99 date date legend a b c d1 state country this responds to a letter dated date and prior correspondence submitted on behalf of b requesting an extension of time pursuant to sec_301_9100-3 of the procedure and administration regulations to file an election for c to be disregarded as an entity separate from its owner for federal tax purposes under sec_301_7701-3 facts a is a u s_corporation which owns all of the stock of b a u s_corporation formed under the laws of state b owns all of the stock of c a public company formed under the laws of country on d1 b is not liable for any of the debts or liabilities of c c represents that it intended to make an election to be disregarded as an entity separate from its owner but that it did not make the election due to a miscommunication cc dom p si 1-plr-103507-99 with its accountants law and analysis sec_301_7701-3 provides that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes an eligible_entity with a single owner can elect to be classified as an association or to be disregarded as an entity separate from its owner sec_301_7701-3 provides that unless the entity elects otherwise a foreign eligible_entity is an association if all its members have limited_liability under sec_301_7701-3 a foreign eligible_entity with a single owner who has limited_liability can elect to be classified as a disregarded_entity by filing a form_8832 to be valid an election must generally be signed by each member of the electing entity or any officer manager or member of the electing entity who is authorized under local law or the entity’s organizational documents to make the election and who represents to having such authorization under penalties of perjury see sec_301_7701-3 the effective date specified on form_8832 can not be more than days prior nor more than months after the date on which the election is filed sec_301_7701-3 sec_301_9100-1 of the procedure and administration regulations provides that the commissioner has discretion to grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make a regulatory election sec_301_9100-1 defines a regulatory election as an election whose due_date is prescribed by a regulation published in the federal_register or a revenue_ruling revenue_procedure notice or announcement published in the internal_revenue_service bulletin sec_301_9100-1 through provide standards the commissioner will use to determine whether to grant an extension of time to make an election sec_301 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 sec_301_9100-2 requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-3 conclusion based solely on the facts submitted and representations made we conclude that the requirements of sec_301_9100-1 and sec_301_9100-3 have been satisfied as a result b is cc dom p si 1-plr-103507-99 granted an extension of time to make the election to have c treated as disregarded as an entity separate from its owner for federal tax purposes effective d1 until days following the date of this letter the election should be made by following the procedure set forth in form_8832 and a copy of this letter should be attached to the election except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter specifically no opinion is expressed regarding the limitations set forth in sec_1503 and the regulations thereunder on x’s consolidated group’s ability to deduct the loss from c this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative signed paul f kugler sincerely paul f kugler assistant chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes


department of the treasury employer_identification_number contact person - id number contact telephone number uil internal_revenue_service p o box cincinnati oh release number release date date date legend b program c_corporation x dollars amount dear you asked for advance approval of your employer-related scholarship grant procedures under internal_revenue_code sec_4945 this approval is required because you are a private_foundation that is exempt from federal_income_tax you requested approval of your scholarship program to fund the education of certain qualifying students our determination we approved your procedures for awarding employer-related scholarships based on the information you submitted and assuming you will conduct your program as proposed we determined that your procedures for awarding employer-related scholarships meet the requirements of code sec_4945 as a result expenditures you make under these procedures won't be taxable also awards made under these procedures are scholarship or fellowship grants and are not taxable to the recipients if they use them for qualified_tuition_and_related_expenses subject_to the limitations provided in code sec_117 description of your request your letter indicates you will operate an employer-related scholarship program called b you plan to offer b to deserving students both abroad and in the united_states to continue their education your chairman is the founder of c a for-profit corporation along with his wife they are funding this program the fund provides scholarships for deserving students including current and former employees of c and their families substantial contributors your letter catalog number 58264e managers officers directors as well as their family members are ineligible to participate in the program you plan to award ten scholarships in amounts up to x dollars each you hope to scale up to twenty or more scholarships per year depending on the availability of funding the particular needs of each recipient and the overall success of the program b is advertised through c’s website and through foreign and international websites that have a potential of drawing a wide audience an application must be submitted individuals eligible must attend a top college or university the applicant must have a distinguished academic record and demonstrate the ability to serve as a leader in his or her community three letters of recommendation must be submitted and financial need will be considered an essay must be submitted regarding personal goals and interests in leadership development your scholarship committee uses a detailed rubric to rate the applicants the scholarships are renewable to seek renewal an application must be submitted and the applicant must show the use of monies awarded maintain full-time university or college enrollment maintain a minimum gpa or its foreign equivalent and demonstrate leadership development the number of grants will be determined annually by your board it will depend on the number of applicants and your philanthropic priorities you have not yet granted any scholarships and you are still in the process of finalizing your selection committee you represent that in the beginning recipients will most likely be limited to employees or former employees of c and their families while c may provide funding for the program c is not a disqualified_person with relation to you neither c nor executives of c will control how the scholarship program is operated c will not be able to use b as an inducement to their employees to continue employment it is expected that the number of scholarship recipients who are children of employees working for c shall not exceed either percent of the number of employee families who i were eligible ii applied for such grants and iii were considered by the selection committee in selecting the recipients or percent or the number of employee families who can be shown to be eligible for grants whether or not they submitted an application in that year similarly you expect that the number of awards to c’s employees will not exceed percent of the number of employees who i were eligible ii were applicants for such grants and iii were considered by the selection committee in selecting the recipients of the grants in that year in the future as the program grows it is expected that scholarships will be available for deserving students that are not affiliated with c you represent that one of your founders will serve on the selection committee along with three members of a local charity and a family friend who has no business relationship with the founders you or c representatives of c will not be included on the selection letter catalog number 58264e committee as the scholarship program grows it is expected that scholarships will be available for deserving students that are not affiliated with c you have no plans to limit the scholarships to c employees or their children the scholarships are also available to former employees of c and their children thereby eliminating the potential for any disguised compensation to current employees of c c does not and will not use the scholarship program as a recruiting tool for potential employees since it has no control_over the selection of scholarship recipients and scholarships are available to students pursuing any degree ranging from mathematics to the arts at a top university or college you will check the ofac list of specially designated nationals and blocked persons for names of individuals and entities with whom you are dealing to determine if they are included on the list you will comply with all statues executive orders and regulations that restrict or prohibit persons from engaging in transactions and dealings with designated countries entities or individuals or otherwise engaging in activities in violation of economic sanctions administered by ofac if necessary you will acquire from ofac the appropriate license and registration where necessary you represent you will complete the following arrange to receive and review grantee reports annually and upon completion of the purpose for which the grant was awarded investigate diversion of funds from their intended purposes take all reasonable and appropriate steps to recover the diverted funds ensure other grant funds held by a grantee are used for their intended purposes and withhold further payments to grantees until you obtain grantees’ assurances that future diversions will not occur and that grantees will take extraordinary precautions to prevent future diversions from occurring you represent that you will maintain all records relating to individual grants including information obtained to evaluate grantees identify whether a grantee is a disqualified_person establish the amount and purposes of each grant and establish that you undertook the supervision and investigation of grants described above basis for our determination the law imposes certain excise_taxes on the taxable_expenditures of private_foundations code sec_4945 a taxable_expenditure is any amount a private_foundation pays as a grant to an individual for travel study or other similar purposes however a grant that meets all of the following requirements of code sec_4945 is not a taxable_expenditure the foundation awards the grant on an objective and nondiscriminatory basis the irs approves in advance the procedure for awarding the grant the grant is a scholarship or fellowship subject_to code sec_117 the grant is to be used for study at an educational_organization described in code sec_170 revproc_76_47 1976_2_cb_670 provides guidelines to determine whether grants a private_foundation makes under an employer-related program to employees or letter catalog number 58264e children of employees are scholarship or fellowship grants subject_to the provisions of code sec_117 if the program satisfies the seven conditions in sections dollar_figure through dollar_figure of revproc_76_47 and meets the applicable_percentage tests described in section dollar_figure of revproc_76_47 we will assume the grants are subject_to the provisions of code sec_117 you represented that your grant program will meet the requirements of either the percent or percent percentage_test in revproc_76_47 these tests require that e e e the number of grants awarded to employees’ children in any year won't exceed percent of the number of employees’ children who were eligible for grants were applicants for grants and were considered by the selection committee for grants or the number of grants awarded to employees’ children in any year won’t exceed percent of the number of employees’ children who were eligible for grants whether or not they submitted an application or the number of grants awarded to employees in any year won't exceed percent of the number of employees who were eligible for grants were applicants for grants and were considered by the selection committee for grants you further represented that you will include only children who meet the eligibility standards described in revproc_85_51 1985_2_cb_717 when applying the percent test applicable to employees’ children in determining how many employee children are eligible for a scholarship under the percent test a private_foundation may include only those children who submit a written_statement or who meet the foundation's eligibility requirements they must also satisfy certain enrollment conditions you represented that your procedures for awarding grants under this program will meet the requirements of revproc_76_47 in particular e e e an independent selection committee whose members are separate from you your creator and the employer will select individual grant recipients you will not use grants to recruit employees nor will you end a grant if the employee leaves the employer you will not limit the recipient to a course of study that would particularly benefit you or the employer other conditions that apply to this determination e this determination only covers the grant program described above this approval will apply to succeeding grant programs only if their standards and procedures don't differ significantly from those described in your original request letter catalog number 58264e e e e e e e this determination is in effect as long as your procedures comply with sections dollar_figure through dollar_figure of revproc_76_47 and with either of the percentage tests of sec_4 if you establish another program covering the same individuals that program must also meet the percentage_test this determination applies only to you it may not be cited as a precedent you cannot rely on the conclusions in this letter if the facts you provided have changed substantially you must report any significant changes to your program to the cincinnati office of exempt_organizations at internal_revenue_service exempt_organizations determinations p o box cincinnati oh you cannot award grants to your creators officers directors trustees foundation managers or members of selection committees or their relatives all funds distributed to individuals must be made on a charitable basis and further the purposes of your organization you cannot award grants for a purpose that is inconsistent with code sec_170 you should keep adequate_records and case histories so that you can substantiate your grant distributions with the irs if necessary we've sent a copy of this letter to your representative as indicated in your power_of_attorney please keep a copy of this letter in your records if you have questions please contact the person listed at the top of this letter sincerely stephen a martin director exempt_organizations rulings and agreements letter catalog number 58264e


internal_revenue_service department of the treasury index numbers washington d c number release date contact person telephone number legend cc dom fi p plr-118549-99 date april in reference to parent company company product state a b c d e f g h i j k l m n o p q r s t u v w x dear this responds to the letter dated date and to the supplemental letters submitted to the internal_revenue_service on behalf of parent by its representative that november 18th letter requested rulings that company and company hereinafter sometimes the companies both of which are members of the affiliated_group of which parent is the parent company will be treated with respect to the product service contracts they sell as issuing insurance contracts for federal_income_tax purposes will be treated as insurance_companies for federal_income_tax purposes and are entitled to deduct currently premiums_paid to affiliated insurance_companies in connection with the transactions described below the supplemental letters provided additional information to the internal_revenue_service in connection with that request parent is a publicly traded state corporation and the parent company of an affiliated_group that includes the companies several licensed insurance_companies and a holding_company owning the stock of several license insurance_companies parent’s principal business activity is the manufacture and sale of products parent sells its products primarily through a network of independently owned and operated a’s a’s frequently make available to retail buyers the opportunity to purchase product service contracts for protection against mechanical breakdown or failure of certain covered parts these contracts are purchased by retail product purchasers for the purpose of supplementing the manufacturer’s base factory warranties they extend mechanical breakdown protection to the retail buyer beyond the manufacturer’s base warranty in terms of time b and repair coverage parent historically has offered product service_contract programs for c’s to sell to these product service contracts have been offered under retail product purchasers the brand names d e and f the d program covers new and used product manufactured by parent except for g products which are covered by the e f contracts are contracts purchased by retail purchasers of new and used products manufactured by a competitor because of the various state regulatory requirements parent’s product service contracts are structured in various forms these include d service contracts under which parent is the obligor e service contracts under which g is the obligor f service contracts under which a parent affiliate is the obligor and f service contracts under which the c is the obligor although variations to these basic programs exist all the plans essentially fall into one of these categories the plans have various levels of coverage depending on the coverage level desired by the retail customer for example the h contract covers the i and related failures the j covers the h and other major components of the product ie i k l m and n and certain o items and the p contract covers almost all parts of the product all plans include q and most include r coverage within certain limits if a covered part needs to be repaired the customer may have it repaired at any participating c or repair facility pursuant to an arrangement with the c or facility the obligor of the particular plan agrees to reimburse the c or other repair facility for repairs performed to a retail customer’s product under any of the parent product service contracts c participation in the d e and f programs is entirely voluntary in connection with its arrangement with parent the c retains an amount generally equivalent to the difference between the selling_price to the retail customer and the cost amount charged to the c by the contract issuer in response to the changing regulatory environment and competitive market and to consolidate the management of and accounting and billing for the mechanical parent product service contracts are also sold through direct mail campaigns the national association of insurance commissioners developed a model_act with respect to extended warranty service contracts under the act third-party obligors may issue service contracts and these contracts are not state regulated specifically as insurance products adoption of the model_act by states thus allows third-party obligors to issue contracts in the state without regulation as actual insurance_companies breakdown product service_contract business parent recently created companie sec_1 and to transact the product service_contract business as third-party obligors in those states which permit third-party obligor arrangements and do not regulate the product service contracts as insurance parent indicates that it is structuring the transactions in order to separate its product service_contract business which is a financial service business from its manufacturing and other operations it indicates that by moving its product service_contract business into separate corporations accounting for the revenues and expenses of that business will be simplified and parent will be better able to focus certain risks and responsibilities associated with that business for example the transactions should serve to shift and isolate liabilities under the product service contracts in companie sec_1 and further laws in certain states allow the product service_contract business to be carried on in entities such as companie sec_1 and whose products are regulated as service contracts and not as insurance parent seeks to take advantage of these laws parent does not wish to place the product service_contract business in its existing insurance_company subsidiaries because that business would then be considered mechanical breakdown insurance that would be subject_to additional regulation under such regulation an individual state could regulate the rates charged and the forms to be used in that state the additional regulation also could require the licensing of adjusters and agents which would substantially impact the ability to compete in the marketplace with other companies selling product service contracts companies such as companie sec_1 and are not subject_to such stringent requirements under a third-party obligor arrangement third parties that are neither the manufacturer nor seller of products issue and sell the product service contracts thus companie sec_1 and will not be the manufacturer supplier or seller of the products and will not make any repairs but will merely promise to indemnify the customer for any insured loss eg repair and other related expenses that the customer suffered as a result of the breakdown or failure of mechanical parts covered by the product service_contract companie sec_1 and will issue and sell d e and f service_contract sec_3 to retail customers through the parent a network in the same manner that the current product service contracts are sold accordingly the cs will retain an amount generally equivalent to the difference between the selling_price to the retail customer and the c cost amount charged to the c by company or the contract entered into between company and company and the retail customer will provide the customer with the form of the contracts issued by companie sec_1 and will be the same as the contracts currently issued under the d e and f programs except that companie sec_1 and will be the administrators and the only obligors companie sec_1 and will not issue contracts that are sold through direct mail protection on the identical to the protection offered under the current d e and f product service contracts thus the customer may continue to have the repaired at any participating c or repair facility and company or company would be obligated to reimburse such facility on behalf of the customer for any repairs performed on a covered part in part to comply with certain state law requirements companie sec_1 and will purchase an indemnification insurance agreement from a licensed property and casualty insurance_company under the indemnification agreement the insurers will indemnify companie sec_1 and for of the losses on repairs made pursuant to the product service contracts companie sec_1 and however will in all cases remain directly liable to the retail buyers of the product service contracts companie sec_1 and will retain administrative responsibility for the contracts they issue for each contract they issue they will pay an amount to parent or a parent subsidiary for_the_use_of the relevant company’s billing systems and for that relevant company’s role in collecting the premiums due for the product service contracts in addition for each product service_contract issued company or company will incur administrative expenses and certain expenses attributable to the cs companie sec_1 and will be party to an intercompany services and facilities contract with v under which v will agree to furnish personnel supplies equipment services and facilities needed by companie sec_1 and in accordance with regulation of the insurance department companie sec_1 and will be charged cost for any personnel services etc that they receive in accordance with the intercompany agreement it is expected that companie sec_1 and will utilize the intercompany agreement to obtain the services of t’s processing center for processing new business and payment of claims of v’s actuarial department for pricing the product service contracts of w’s marketing department for marketing the product service contracts and of other t personnel for developing contracts ensuring regulatory compliance and other miscellaneous activities for tax purposes company and will include the full amount of the contract consideration paid_by the customers in written premiums and will claim deductions for the unearned portions of those amounts as well as for the amounts retained by the cs both company and company companies will reduce their written premiums by amounts paid to s and u for reinsurance companie sec_1 and were initially organized with capital of dollar_figure the board_of v a member of the parent affiliated_group has specifically authorized further capital company will purchase an insurance indemnification agreement from s a licensed insurance_company that is a wholly owned subsidiary of t which is a member of the parent affiliated_group company will purchase a similar insurance indemnification agreement from u another licensed insurance_company that is wholly owned by t up to x for each company as necessary to implement each of their business plans with respect to the transactions described herein parent represents the following a none of the product service contracts issued by companie sec_1 and will cover the payment of costs for which parent is liable under the base manufacturer’s warranty b parent will own of companie sec_1 and through one or more members of the parent affiliated_group c other than a c who might own an insignificant percentage of parent’s publicly traded stock none of the stock of company or company will be owned directly or indirectly by any c and d substantially_all of the business of each of companie sec_1 and will consist of entering into product service contracts administering those contracts obtaining reinsurance for its liabilities under those contracts and investing an amount of capital that is necessary and appropriate to support its liabilities under those contracts applicable law and rationale whether an entity is an insurance_company for federal_income_tax purposes depends on the character of the business it actually does in the taxable_year sec_1_831-3 of the regulations states that for purposes of sec_831 and sec_832 the term_insurance company means only those companies qualifying as insurance_companies under former sec_1_801-1 now sec_1_801-3 of the regulations sec_1_801-3 of the regulations states that the term_insurance company means a company whose primary and predominant business activity during the taxable_year is the issuing of insurance or annuity_contracts or the reinsuring of risks underwritten by insurance_companies sec_832 provides in part that the term premiums earned means an amount computed by deducting premiums_paid for reinsurance from the amount of gross premiums written on insurance contracts during the taxable_year whether an entity is an insurance_company for federal_income_tax purposes depends on the character of the business it actually does in the taxable_year if an entity is primarily engaged in the issuance of insurance or annuity_contracts or the reinsuring of risks underwritten by insurance_companies then the entity is subject_to tax as an insurance_company regardless of its classification under state law sec_1_831-3 and sec_1_801-3 of the regulations revrul_83_172 1983_2_cb_106 revrul_71_404 1971_2_cb_260 see also 285_us_182 102_f2d_89 5th cir neither the internal_revenue_code nor the regulations thereunder define the terms insurance or insurance_contract the accepted definition of insurance for federal_income_tax purposes relates back to 312_us_531 in which the supreme court stated that h istorically and commonly insurance involves risk shifting and risk distributing id pincite case law has defined an insurance_contract as a contract whereby for an adequate_consideration one party undertakes to indemnify another against loss arising from certain specified contingencies or perils i t is contractual security against possible anticipated loss 199_f2d_508 7th cir in addition the risk transferred must be risk of economic loss 66_tc_1068 aff’d 572_f2d_1190 7th cir cert_denied 439_us_835 risk shifting occurs when a person facing the possibility of an economic loss transfers some or all of the financial consequences of the loss to the insurer if the insured has shifted its risk to the insurer then a loss by the insured does not affect the insured because the loss is offset by the insurance proceeds see revrul_92_93 1992_2_cb_45 permitting a parent company to deduct the premiums_paid to the insurance subsidiary for group-term_life_insurance on an employee of the parent risk_distribution incorporates the statistical phenomenon known as the law of large numbers 811_f2d_1297 9th cir when additional statistically independent risk exposures are insured an insurance company’s potential total loss increases as does the uncertainty regarding the amount of that loss as uncertainty regarding the company’s total loss increases however there is an increase in the predictability of the insurance company’s average loss total loss divided by the number of exposure units that is when the sample number increases the probability density function of the average loss tends to be more concentrated around the mean due to this increase in predictability there is a downward trend in the amount of capital a company needs per risk unit to remain at a given level of solvency see revrul_89_61 1989_1_cb_75 based on the description of the product service contracts we conclude those contracts are insurance contracts and not prepaid service contracts unlike prepaid service contracts the product service contracts are aleatory contracts under which company or company for a fixed price is obligated to indemnify a contractholder for the economic loss arising from the failure of a system or a part during the contract period because the obligor does not provide any repair services the contracts are not prepaid service contracts further by accepting a large number of risks companie sec_1 and will distribute the risk of loss under the product service contracts so as to make the average loss more predictable based on the facts and representations as stated above it is held that for federal_income_tax purposes i the product service contracts issued by companie sec_1 and are insurance contracts ii company and company each will be an insurance_company within the meaning of sec_831 and the regulations thereunder so long as its primary and predominant business consists of entering into service contracts administering those product service contracts and investing an amount of capital that is necessary and appropriate to support its liabilities under those contracts and iii company and company will be entitled to deduct as current reinsurance premiums the premiums_paid to s and u for policies indemnifying them against loss with respect to benefits payable under the product service contracts parent states that company and company include in their gross premiums written the entire amount customers pay to the cs in connection with their acquisition of the product service contracts and that companie sec_1 and treat as a commission expense an amount equal to the amount the cs retain no ruling has been requested and no opinion is expressed regarding whether company and company 2’s gross premiums written include the entire amount the customers pay to the cs in connection with their acquisition of the product service contracts or whether any amount is deductible as a commission expense further no opinion is expressed as to the tax treatment of the transactions discussed herein under the provisions of any other section of the code and regulations which may also be applicable or to the tax treatment of any conditions existing at the time of or effects resulting from the transaction which are not specifically covered by the above holdings 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 letter should be attached to taxpayer’s next tax federal_income_tax sincerely yours assistant chief_counsel financial institutions and products by donald j drees jr senior technician reviewer branch return


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 tege eoeg teb presp-149269-06 date date dear -------------- pursuant to sec_54 of the internal_revenue_code the code and notice_2005_98 2005_52_irb_1211 and after review of your application submitted on date including supplements thereto we have determined that the project described in appendix a attached hereto is qualified for purposes of sec_54 and will be owned by one or more qualified borrowers we allocate authority to ----------------------------------- ----------------------------------------------------------------------------------------------------------------- the issuer a qualified issuer under sec_54 to issue up to dollar_figure----------- of clean renewable energy bonds crebs bonds issued pursuant to this allocation must be designated by the issuer as bonds for purposes of sec_54 for the project described in appendix a up to the amount allocated for each project described in appendix a bonds so designated must be issued on or before date please be aware that in order for bonds to be crebs the applicable_requirements of the code including without limitation sec_54 notice_2005_98 and notice_2006_7 2006_10_irb_559 must be met please note that creb proceeds may be used to reimburse capital expenditures paid_by qualified borrowers for qualified projects only if the provisions of sec_54 are met if you have any questions with respect to this allocation please contact --------------------- -------- or -----------------------------of the office of division counsel associate chief_counsel tax-exempt and government entities on --------------------- not a toll-free call except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter for purposes of the renewable_electricity_production_credit under sec_45 of the code no inference may be drawn from this allocation that any project listed in appendix presp-149269-06 a is a qualified_facility or that electricity to be produced at such project s is electricity from a qualified_energy resource at a qualified_facility within the meaning of sec_45 this determination is directed only to the applicant named above sec_6110 of the code provides that it may not be used or cited as precedent a copy of this letter must be attached to any form 8038-g information_return for tax- exempt governmental obligations filed for bonds issued pursuant to this allocation the allocation contained in this letter is based upon information and representations submitted by the applicant for the creb allocation and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the application_for an allocation it is subject_to verification on examination sincerely assistant chief_counsel exempt_organizations employment_tax government entities tax exempt government entities by timothy l jones senior counsel tax-exempt_bonds branch presp-149269-06 borrower name appendix a project type project location ------------------------------ wind facility --------- -------------------------------- ----------------------------- ---------------------------------- amount allocated dollar_figure----------- ------------------------------------------------ ------------------------------------------------- -------------------------- -------------------------------------------- ---------------------------


t c summary opinion united_states tax_court precision pine timber inc petitioner v commissioner of internal revenue respondent docket no 11951-00s filed date lorin d porter an officer for petitioner charles b burnett for respondent dean special_trial_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 unless otherwise indicated subsequent section references are to the internal_revenue_code in effect for the years in issue and all rule references are to the tax_court rules_of_practice and procedure the decision to be entered is not reviewable by any other court and this opinion should not be cited as authority - - respondent determined deficiencies of dollar_figure and dollar_figure in petitioner's federal income taxes for fiscal years ending fye date and respectively the sole issue for decision is whether for fye date petitioner properly deducted losses on its covenants not to compete the decision on the loss deductions determines petitioner's entitlement to a deduction for a net_operating_loss_carryback to fye date some of the facts have been stipulated and are so found the exhibits received into evidence are incorporated herein by reference at the time the petition in this case was filed petitioner's corporate offices were located in heber arizona background petitioner operates as a commercial logging business in northern arizona the viability of the logging industry depends on the availability of harvestable timber to ensure an adequate supply of timber petitioner began to purchase assets and timber sales contracts’ from its competitors in date petitioner leased real_property including a sawmill for logging activities from parker lumber company parker the parker lease agreement included a covenant ' for purposes of this opinion a timber sales contract is a contract between a landowner and a logging company which establishes the right of the company to harvest timber on a specified piece of land and what the company was obligated to do for that timber not to compete for a period of years the parties allocated dollar_figure of the contract_price to the covenant in date petitioner purchased two timber sales contracts and some equipment from reidhead lumber company reidhead the reidhead sales agreement included a covenant_not_to_compete for a period of years the parties allocated dollar_figure of the contract_price to the covenant in date petitioner purchased assets related to a sawmill operation in payson arizona including two timber sales contracts and some equipment from kaibab industries kaibab the kaibab purchase agreement included a covenant_not_to_compete for a period ending date the agreement did not make any specific allocations of the contract_price petitioner however filed a form_8594 asset acquisition statement with its federal_income_tax return for fye date which allocated dollar_figure of the contract_price to the covenant kaibab also filed a form_8594 but allocated dollar_figure of the contract_price to the covenant in the mexican spotted owl was added to the list of endangered species protected under the endangered species act u s c secs in the united_states district_court for the district of arizona issued a prohibitory injunction banning logging operations in northern arizona and new mexico to protect the mexican spotted owl's habitat - prior to the listing of the mexican spotted owl petitioner operated three sawmills in arizona at one point there were approximately private sector mills operating in arizona at the time of trial petitioner claimed that it was the only operating mill in arizona and that they were operating ona shoestring budget petitioner attributes the collapse of the arizona logging industry to the listing of the mexican spotted owl as an endangered species and the issuance of the prohibitory injunction the primary sources of timber in northern arizona are controlled by the u s forest service usfs which is vested with specific regulatory powers since the injunction the usfs has effectively ceased issuing new timber sales contracts since the injunction was first issued in there has been essentially no logging in arizona while the injunction at times has allowed for minimal logging there have been no changes in the usfs regulatory scheme for fye date petitioner deducted dollar_figure as the combined balance of the unamortized value of the three covenants not to compete the deduction allowed a net_operating_loss to be carried back to fye date resulting in additional tax savings in that year respondent disallowed the entire deduction and the net_operating_loss_carryback - - discussion respondent's position is that petitioner is not justified in taking loss deductions relating to the unamortized balance of the noncompetition agreements respondent believes that the injunction issued by the u s district_court of arizona did not interfere with the noncompetition agreements and the correct_tax treatment was to continue to ratably deduct the values of the noncompetition agreements over their respective lives petitioner argues that the downturn in the local logging industry due to the mexican spotted owl's addition to the endangered species list and the ensuing injunction issued by the district_court makes the noncompetition agreements economically useless because of reasonably foreseeable economic changes due to legislative or regulatory action petitioner argues that it is entitled to its loss deductions in fye date and the loss carryback to fye date pursuant to sec_167 and its governing regulations specifically petitioner cite sec_1_167_a_-9 income_tax regs as authority for its deductions respondent argues that sec_1_167_a_-8 income_tax regs controls the outcome of this case respondent argues that because petitioner alleges that the obsolescence in this case was sudden the penultimate sentence of a -9 income_tax regs shifts the analysis to sec_1_167_a_-8 income_tax regs basing his position on abco oil corp v commissioner t c memo - - respondent argues that the requirements of sec_1_167_a_-8 income_tax regs are not met under the facts of this case deductions are a matter of legislative grace they are allowable only if there is clear statutory authority providing therefor 292_us_435 generally sec_167 allows a taxpayer to take depreciation_deductions for property used in its trade_or_business the term property includes intangibles such as covenants not to compete and the rules for the allowance of amortization deductions for intangibles are set forth in sec_1_167_a_-3 income_tax regs 91_tc_463 affd per curiam 919_f2d_1492 11th cir to conclude that an intangible asset is amortizable it must have a determinable value anda limited useful_life 507_us_546 n because a covenant_not_to_compete is an intangible asset with a limited useful_life it may be amortized over the course of its life warsaw photographic sec_197 amortization of goodwill and certain other intangibles generally applies with respect to property acquired after date see omnibus_budget_reconciliation_act_of_1993 publaw_103_66 sec g 107_stat_540 see also 110_tc_62 ndollar_figure affd without published opinion 194_f3d_1324 11th cir - jj - associates inc v commissioner 84_tc_21 o'dell co v commissioner 611t c because each of petitioner's covenants not to compete was entered into prior to the effective date of current sec_197 we must apply the law as in effect for property acquired prior to date sec_1_167_a_-9 income_tax regs provides that the depreciation allowance includes an allowance for normal obsolescence if the taxpayer shows that the estimated_useful_life previously used should be shortened by reason of obsolescence greater than had been assumed in computing the useful_life a change to the new and shorter life will be permitted extraordinary_obsolescence however refers to the sudden loss or termination of the usefulness of depreciable_property caused by some unexpected and unforeseen external force extraordinary_obsolescence results in either the shortening of previously determined useful_life if the obsolescence occurs over a period greater than taxable_year or ina loss if the useful_life is completely and suddenly terminated within taxable_year 52_tc_682 affd 429_f2d_1 10th cir sec_1_167_a_-8 -9 income_tax regs sec_1_167_a_-9 income_tax regs applies in situations where a taxpayer seeks to shorten the useful_life of an --- - amortizable asset due to any of a variety of factors including legislative or regulatory action the regulation is controlling only when assets become obsolete over a period of time greater than year id assuming that petitioner's noncompetition agreements became obsolete as a result of a sudden event the prohibitory injunction the court must look elsewhere for guidance when an amortizable asset becomes obsolete within taxable_year a taxpayer may be entitled to a loss deduction 323_f2d_166 9th cir affg in part and revg in part 37_tc_559 52_f2d_1071 9th cir coors porcelain co v commissioner supra pincite the appropriate statutory provision for the allowance of a loss deduction for extraordinary_obsolescence of a depreciable asset occurring within year is sec_165 see sec_1_165-1 income_tax regs generally sec_1_167_a_-8 income_tax regs provides the rules governing the recognition amount and basis for gain_or_loss resulting from the sudden termination of the usefulness of depreciable assets coors porcelain co v commissioner supra pincite sec_1_165-2 and sec_1_167_a_-8 -9 income_tax regs sec_165 allows a deduction for any loss sustained during the taxable_year and not_compensated_for_by_insurance_or_otherwise to be allowable as a deduction under sec_165 --- - a loss must be evidenced by a closed and completed transaction fixed by identifiable events and actually sustained during the taxable_year 950_f2d_209 5th cir affg per curiam 935_f2d_703 revg and remanding 93_tc_553 sec_1_165-1 d income_tax regs substance and not mere form shall govern in determining a deductible loss see 499_us_554 326_us_287 sec_165 allows as a deduction any loss sustained during a single taxable_year from any security which has become worthless during that year for other assets sec_1 a - income_tax regs typically reguires that the asset be retired taxpayers however are entitled to a loss deduction for assets which are not securities that have not been retired but have become worthless during the tax_year in question 950_f2d_209 5th cir taxpayers are entitled to loss deductions for depreciable intangible assets such as licenses and noncompetition agreements see estate of wood v commissioner 823_f2d_1553 9th cir affg tcmemo_1985_517 oak harbor freight lines inc v commissioner tcmemo_1999_291 taxpayers are entitled to take loss deductions under sec_165 not only for assets that the taxpayer has abandoned with or without their having become -- - worthless but also for assets that have become worthless with or without having been abandoned echols v commissioner supra pincite n whether the noncompetition agreements became worthless during fye date is a question of fact see boehm v commissioner supra pincite the general requirement that losses be deducted in the year in which they are sustained calls for a practical not a legal test see 280_us_445 in echols v commissioner supra pincite the court stated the test for worthlessness is a combination of subjective and objective indicia a subjective determination by the taxpayer of the fact and the year of worthlessness to him and the existence of objective factors reflecting completed transaction s and identifiable_event s in the year in question--not limited however to transactions and events that rise to the level of divestiture of title or legal abandonment see also 77_tc_310 there is no requirement that a taxpayer relinguish title in order to establish a loss if such loss is reasonably certain in fact and ascertainable in amount affd per curiam 693_f2d_124 lith cir to determine whether a taxpayer is eligible for a loss deduction pursuant to sec_1_165-1 income_tax regs the focus of this court's analysis must be on objective events confirming the taxpayer's subjective determination that the asset was in fact worthless in the year the losses were claimed echols v commissioner supra pincite closed and completed transactions and identifiable events are not limited to divestitures of title or abandonment the taxpayer need not be a party to the events or transactions and the events or transactions need not directly involve the asset in guestion id pincite the requirement of worthlessness is a de_minimis_rule that the taxpayer does not have to prove that a given asset is absolutely positively without any value whatsoever 935_f2d_703 n 5th cir revg and remanding 93_tc_553 a taxpayer must make a reasonable showing that the asset was in fact valueless to him at the time selected by the taxpayer--not that its fair_market_value necessarily fell to or below zero in that year id pincite we decide this case without regard to the burden_of_proof accordingly we need not decide whether sec_7491 is applicable in this case see 116_tc_438 respondent's position appears to be that no objective factors reflect completed transactions and identifiable events that establish worthlessness of the covenants not to compete in fye date the court disagrees in a j indus inc v united st503_f2d_660 9th cir the court concluded that the subjective judgment of the taxpayer as to whether the business_assets of the taxpayer will in the future have value is entitled to great weight and a court is not justified in substituting its business judgment for a reasonable well-founded judgment of the taxpayer the first prong of the worthlessness test requires that the court determine whether the taxpayer made a subjective determination that the asset in question was worthless in the tax_year in question id the addition of the mexican spotted owl to the endangered species list created circumstances which made the continuation of logging in northern arizona economically unfeasible when the district_court issued its injunction petitioner determined that no additional timber sales contracts would be issued consequently petitioner concluded that the injunction had effectively eliminated competition in the arizona logging industry once the injunction took effect arizona's timber supply was essentially cut off without an adequate supply of timber the arizona logging industry collapsed once petitioner concluded that competition and supply had been judicially eliminated it determined that its covenants not to compete were worthless it is the practical worthlessness of - - the covenants and not the bare possibility of what might happen in the uncertain future that is the important factor lucas v american code co supra 396_f2d_956 the tax laws do not require a taxpayer to be an incorrigible optimist 274_us_398 for the tax_year of the injunction petitioner's corporate tax_return for fye date reflected this subjective determination by reporting the unamortized amounts as a loss the court is satisfied that petitioner made the subjective determination that its covenants not to compete were worthless in fye date and that it no longer assigned any value to them the second prong of the worthlessness test requires taxpayers to show a closed and completed transaction and an identifiable_event evidencing the destruction of an asset's value assets may not be considered worthless even when they have no liguidated value if there is a reasonable hope and expectation that they will become valuable in the future see 42_bta_1103 but such hope and expectation may be foreclosed by the happening of certain events such as the bankruptcy cessation from doing business or liquidation of the corporation or the appointment of a receiver for it 38_bta_1270 affd 112_f2d_320 7th cir these events are considered identifiable because they would be known by everyone interested in the business of the corporation the essential element for tax purposes is that a particular event destroyed the potential value of the asset id in as a result of the mexican spotted owl's addition to the endangered species list the u s district_court of arizona issued a prohibitory injunction banning logging in areas serving as the owl's habitat once the injunction was issued there were no additional timber sales contracts to compete for and logging companies were unable to continue work on their existing contracts in there was no reasonable hope or expectation that the injunction on logging would be lifted within the period remaining on the noncompetition agreements because there was no reason to assume that the owl would be removed from the endangered species list it was objectively reasonable to assume that petitioner's covenants not to compete were worthless because the ban on logging which included the geographical areas covered by the noncompetition agreements made it legally impossible for any of the covenantees to compete as a result reidhead parker and kaibab were unable to reenter the logging industry because no new logging contracts were being issued the functional elimination -- - of arizona's logging industry rendered worthless most industry specific intangible assets after the issuance of the injunction petitioner was unable to derive any benefit from the covenants not to compete no outside party would have purchased the noncompetition agreements or assigned any value to the covenants on the purchase of petitioner's assets any remaining value of the noncompetition agreements terminated upon the issuance of the prohibitory injunction the injunction served as a death knell to any individual or company seeking to enter or reenter the arizona logging industry furthermore respondent offered no evidence to show that the covenants not to compete retained any value in short the covenants were not worth a hoot because the injunction issued by the district_court was effective in petitioner actually sustained losses on its covenants not to compete in see 945_f2d_224 7th cir loss realized in the year in which mineral lease expired affg t c memo 582_f2d_500 9th cir milk processors' acceptance of producers' cancellation of milk production contract was the identifiable_event the court is satisfied that the issuance of the injunction serves as a sufficient identifiable_event in fye date -- - to satisfy the objective portion of the worthlessness test thus the court finds that sufficient factors objectively support the worthlessness of petitioner's covenants not to compete see oak harbor freight lines inc v commissioner supra an act of congress rendered motor carrier authorities worthless because all rights associated with the authorities were eliminated asa result the court finds that all three of petitioner's covenants not to compete became worthless on the date the prohibitory injunction was issued respondent argues that abco oil corp v commissioner tcmemo_1990_40 controls the outcome of this case in abco oil corp the taxpayer purchased some of a competitor's assets and in a related but separate agreement the taxpayer entered into individual 5-year noncompetition agreements with three of the competitor's shareholders two of the three covenantees died before the end of the 5-year noncompetition period the taxpayer deducted the amounts it still owed to the deceased covenantees the taxpayer argued that the noncompetition agreements became worthless and that the deduction should be allowed pursuant to sec_1_167_a_-8 income_tax regs the court in abco oil corp held that the death of the covenantees did not make the covenants worthless rather the covenantees' deaths extended forever the duration of noncompetition id respondent argues that abco oil corp controls the decision in this case because of its factual similarities and because the result in this case depends on the law as it pertains to sec_1_167_a_-8 income_tax regs respondent's argument is flawed on both accounts the facts in abco oil corp are distinguishable from those here respondent's position seems to be that the death of the covenantees in abco oil corp is analogous to the district court's injunction in this case respondent argues that because petitioner and the three covenantees were still contractually bound by the agreements the covenants retained their current values in abco oil corp the taxpayer continued to make payments on the noncompetition agreements to the deceased covenantees for more than years after their deaths thus it was logical for the court in abco oil corp to conclude that the covenants were not worthless because no subjective determination of worthlessness was made by the taxpayer during the taxable_year in issue in this case the prohibitory injunction rendered petitioner's noncompetition agreements worthless in fye date petitioner was cognizant of its losses and promptly reported the losses on its corporate tax_return the facts in abco oil corp bear on a situation different from the one presented here and as a result the court's holding in abco oil corp is inapposite to the present case -- - for the reasons discussed above the court holds that petitioner's recognition of the loss on its covenants not to compete in fye date was proper modification of form_8594 petitioner at trial and in its trial memorandum posits that it incorrectly allocated dollar_figure to the covenant_not_to_compete in the kaibab agreement petitioner's position is that the amount allocated by the taxpayer to the noncompete agreement should be allocated to the timber contracts acquired from kaibab that is what we should have done you know petitioner was apparently unaware when it filed its form_8594 for the kaibab agreement that kaibab did not allocate any of the contract_price to the noncompete agreement it is unclear whether petitioner now seeks to modify its position as to its original allocation regardless of whether petitioner seeks to advance this argument it is clear that petitioner did not present this as an argument in the alternative assuming it now wishes to allocate dollar_figure to the covenant petitioner must satisfy this court that provisions of the internal_revenue_code the tax_court rules_of_practice and procedure or case law allow for such a modification respondent contends that this court must apply the rule in 378_f2d_771 3d cir vacating and remanding 44_tc_549 in danielson the court_of_appeals for the third circuit held that a party to a contract allocating part of the purchase_price to a covenant_not_to_compete can modify that agreement only by offering evidence that would be admissible in an action between the parties to alter the agreement or to show its unenforceability in throndson v commissioner 457_f2d_1022 9th cir affg 51_tc_306 the court_of_appeals for the ninth circuit did not decide whether the danielson_rule applied because there was no binding contract which is required to apply the danielson_rule therefore we do not apply it in cases appealable to the court_of_appeals for the ninth circuit see 92_tc_138 furthermore the danielson_rule does not apply in this case because the parties to the kaibab agreement did not specifically allocate any part of the purchase_price to the covenant_not_to_compete see 661_f2d_209 a taxpayer who files a form_8594 and follows the proper procedure for reporting the value of an asset pursuant to a purchase agreement must follow certain requirements to show an increase or decrease in the allocated value of the asset sec_1_1060-1t h temporary income_tax regs fed reg - - date the taxpayer is required to file a new form_8594 in the tax_year that such modification is properly taken into account id petitioner presented no evidence to show that a new form_8594 or anything substantially_similar was filed to reflect the desired changes in the allocation value petitioner's reasons for failure_to_file a new form_8594 are unclear without a new form_8594 or any other legal or factual justification allowing a modification we see no reason to allocate dollar_figure to the kaibab covenant_not_to_compete see hosp corp of am v commissioner tcmemo_1996_559 petitioner therefore 1s not entitled to change the value it allocated to the kaibab covenant_not_to_compete as a result the court holds that petitioner is entitled to recognize the losses on its covenants not to compete for fye date and to its deduction for a net_operating_loss_carryback for fye date reviewed and adopted as the report of the small_tax_case division decision will be entered for petitioner


internal_revenue_service number release date index number ----------------------------- ----------------------------------- ------------------------------- ------------------------------------------ ---------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact --------------------- id no ----------------- telephone number -------------------- refer reply to cc psi b07 plr-100740-16 date date legend x - --------------------------------------------------------- region ------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------ network --------------------------------------------------- dear ----- --------------- this letter responds to a letter dated date requesting a ruling under sec_4261 of the internal_revenue_code the facts submitted state that x is a federally designated organ procurement organization opo under u s c and a sec_501 organization x organizes the recovery preservation transportation and distribution of human organs and tissues for transplantation in region x works with numerous hospitals and transplant centers to coordinate organ transplants x responds to notifications from acute care hospitals in region of recent or imminent deaths following this notification x screens the potential donor and may send staff to the hospital to make a determination of the suitability of the donor's organs for transplant when a potential donor is identified x obtains the appropriate consent and takes responsibility for maintaining the donor body until the organs have been removed for transplant after x has made a determination that an organ is suitable for transplantation the organ is matched with an appropriate recipient though a system maintained by network the donated organs may be matched with a recipient inside or outside of region plr-100740-16 if an organ screened by x is matched with a recipient outside of region the opo from the recipient's region will generally arrange to send a transplant team to the hospital where the donor is located to remove the organ and return it to the transplant center in its region for the recipient's transplant surgery if an organ screened by x is matched with a recipient within region or if an organ screened by another opo is matched with a recipient within region x will arrange for a transplant team to travel to recover the organ and transport it to the transplant center within region x assembles the transplant team and arranges for them to travel to the donor hospital to recover the organ once the organ has been recovered it is preserved packaged and transported with the transplant team to a transplant center in region where the transplant surgery immediately commences in most cases the transplant team that recovers the organ includes the surgeon or surgeons who will perform the transplant surgery x staff also travels with the transplant team to assist with the recovery preservation packaging and transportation of the organ air travel is usually required to recover an organ and transport it to a transplant center flights must take place on very short notice at any time day or night and are therefore unscheduled the success of the surgery is dependent in part upon the speed at which the organ can be recovered and transported to the transplant site to facilitate this process x frequently charters fixed-wing aircraft having a maximum_certificated_takeoff_weight in excess of big_number pounds from a charter operator the charter operator either provides the flights directly or through a subcharter arrangement the flights are solely used to i transport the transplant team to the donor hospital ii transport the transplant team along with the recovered organ to a transplant center iii return the transplant team and any unused supplies back to their point of origin if different from the transplant center and iv return the aircraft to its home base in order to reposition it for the next emergency the aircraft is equipped with the medical equipment necessary to transport the organ to the transplant site such as specialized ice storage containers in some instances the flights may also be equipped with an organ pump in order to help maintain the function of the organ prior to transplantation x requests a ruling that its charter flight segments transporting the transplant team to organ recovery sites transporting the recovered organ s and the team to organ recipient sites returning the team and any unused supplies back to their point of origin and returning the aircraft to its home base in order to reposition it for the next emergency constitute air transportation described in sec_4261 and that any amount_paid by x relating to such flights is exempt from the taxes imposed under sec_4261 and sec_4271 sec_4261 imposes a percent tax on amounts paid for taxable_transportation of any person taxable_transportation is defined in sec_4262 to include transportation by air that begins and ends in the continental_united_states plr-100740-16 sec_4271 imposes a dollar_figure percent tax on amounts paid for the taxable_transportation of property such tax is imposed only on amounts paid to a person engaged in the business of transporting property by air for hire taxable_transportation is defined in sec_4272 as transportation by air which begins and ends in the united_states sec_4261 provides that no tax shall be imposed under sec_4261 or sec_4271 on any air transportation for the purpose of providing emergency medical services - by helicopter or by a fixed-wing aircraft equipped for and exclusively dedicated on that flight to acute care emergency medical services based on the facts submitted and representations made we conclude that x's charter flight segments that transport the transplant team to organ recovery sites transport the recovered organ s and the team to a transplant center return the team and any unused supplies back to their point of origin and return the aircraft to its home base to reposition it for the next emergency are equipped for and exclusively dedicated to acute care emergency medical services within the meaning of sec_4261 accordingly no tax will be imposed under sec_4261 or sec_4271 on amounts paid for such charter flight segments except as specifically set forth above no opinion is expressed or implied as to the federal tax consequences of the transaction described above under any other provision of the code this ruling is directed only to the taxpayer on whose behalf it was requested sec_6110 provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office copies of this letter are being sent to x's authorized representatives sincerely stephanie bland stephanie bland branch chief branch office of the associate chief_counsel passthroughs special industries cc