internal_revenue_service number release date index numbers -------------------------- ---------------------------- ---------------------------------- -------------------------------------- ------------------------------ 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 b04 plr-122375-13 date date distributing ----------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------- ------------------------------------- distributing ----------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------- -------------------------------------- controlled 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----------------------------------------------- ---------------------------------------------------------------------------------------------------------------- plr-122375-13 dre ----------------------------------------------------- ---------- ---------------------------------------------------------------------------------------------------------------- dre ---------------------------------------------------------------------------------------------------------------- --------------------------------- business a business a-1 business b business c business plan other parties services system ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ -------------------------------------------- ------------------------------------------------- ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ --------------- ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ --------------------------- ------------------------------------------------------ --------------------------- ---------------------------------- ----------------------------------- ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ ---------------------- asset z -------------------------- plr-122375-13 asset aa asset bb asset cc asset dd asset ee asset ff asset gg asset hh asset ii asset jj asset ll type nn type oo date date date date state a ----------------------------- ---------------------- ------------------------------ -------------------- ------------------------------ -------------- -------------- ------------ ------------------------------- ---------------------- ------------------------------------------------------ ------------------ ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ -------- ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ ------------------- ----------------------- ----------------------- --------------------------- -------------- plr-122375-13 state b state c state d state e state f state g state h state i state j state k state l tranche a debt tranche b debt note note note ------- ---------- --------- -------------- --------------------- --------------- ------- -------------- --------------- -------------- ----------- ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ -------- ------------------------------------------------------ ------------------------------------------------------ -------- ----------------------------------------------------- ------------------------------------------------------ ------------------------------------------------------ ------------------------------------ ------------------------------------------------------ -------------------------------------------------- plr-122375-13 note note note note dollar_figurea dollar_figureb dollar_figurec dollar_figured e f g h i j k l m n dollar_figureo ------------------------------------------------------ ---------------------------------------- ----------------------------------------------------- ------------------------------------------------------ ----------------------------------------------------- ------------------------------------------------------ --------- ----------------------------------------------------- ------------------------------------------------------ ------------------- ---------------------- ------------------- ---------------------- ------------ ---------- -- ---- ---- ---- ---- ---- -- -- ------------------------------------------------------ --------------------------------------- plr-122375-13 p dollar_figurer dollar_figures t u v w cost rr problem rights uu rights vv -- ---------------------- ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ ------------------- ---- -- ---- ------------------------------------------------------ ------------------------------------------------------ ------ ---------------------------------------- ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ ----------- ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ -------------------- ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ ------------------------------- plr-122375-13 rights ww ----------------------------------------------------- ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ ---------- escrow llc ---------------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------- -------------------------------------- dear -------------- we respond to your date request for rulings submitted by your authorized representatives on certain u s federal_income_tax consequences of a series of proposed and partially completed transactions collectively as defined below the transactions the information submitted in that letter 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 penalties-of-perjury statement executed by an appropriate party while this office has not verified any of the materials submitted in support of the request for rulings it is subject_to verification upon examination in particular this office has not reviewed any information pertaining to and has made no determination regarding whether the transactions i satisfy the business_purpose requirement of sec_1 b of the income_tax regulations ii are used principally as a device for the distribution of the earnings_and_profits of the distributing_corporation or the controlled_corporation or both see sec_355 of the internal_revenue_code code and sec_1_355-2 or iii are part of a plan or series of related transactions pursuant to which one or more persons will acquire directly or indirectly stock representing a percent or greater interest in the distributing_corporation or the controlled_corporation see sec_355 and sec_1_355-7 summary of facts plr-122375-13 distributing is a publicly traded holding_company and the common parent of an affiliated_group_of_corporations that files a consolidated u s federal_income_tax return the distributing group distributing has a single class of common_stock outstanding the distributing common_stock that trades on exchange distributing wholly owns distributing which was previously the common parent of the distributing group distributing had a single class of common_stock outstanding the distributing common_stock that traded on exchange on date distributing formed distributing on date distributing formed merger sub on date merger sub merged into distributing with distributing becoming a wholly owned subsidiary of distributing the merger and each share of distributing common_stock converted into the right to receive a share of distributing common_stock as a result of the merger distributing became the common parent of the distributing group as of date distributing had outstanding dollar_figurea in tranche a debt dollar_figureb in tranche b senior secured credit facilities including but not limited to the tranche b debt dollar_figurec in a revolving line of credit under its senior secured line of credit the revolver and dollar_figured of senior unsecured notes including but not limited to note note note note note note and note collectively the notes the distributing group engages in business a including business a-1 business b and business c before the occurrence of any step relating to the transactions set forth below the distributing group was structured as follows distributing directly and indirectly through its subsidiaries engages in business a business b and business c distributing directly wholly owned among other subsidiaries sub sub sub sub sub sub sub sub sub sub sub sub sub sub and llc each of which was or was treated as a domestic_corporation for u s federal tax purposes distributing also directly wholly owned dre an entity that was disregarded from its sole owner for u s federal tax purposes a disregarded_entity distributing also directly wholly owned sub a domestic_corporation through its ownership of dre a disregarded_entity distributing also directly owned e percent of the sole class of stock of sub a domestic_corporation the remaining f percent of the stock of sub was owned by sub sub directly wholly owned sub sub and sub each a domestic_corporation llc directly wholly owned sub a domestic_corporation sub directly wholly owned sub a domestic_corporation sub directly wholly owned sub which in turn directly owned sub sub sub sub sub sub sub and sub each a domestic_corporation sub directly wholly owned sub sub sub and sub each a domestic_corporation sub directly wholly owned sub and sub each a domestic_corporation sub directly wholly owned sub a domestic_corporation sub directly wholly owned sub sub and sub each a domestic_corporation sub directly wholly owned sub sub plr-122375-13 and sub each a domestic_corporation sub directly wholly owned sub sub and sub each a domestic_corporation sub directly wholly owned sub a domestic_corporation and sub directly wholly owned sub and sub each a domestic_corporation sub directly wholly owned sub and sub each a domestic_corporation through its ownership of dre a disregarded_entity sub directly wholly owned sub and sub each a domestic_corporation and sub directly wholly owned sub sub and sub each a domestic_corporation sub directly wholly owned sub a domestic_corporation and sub directly wholly owned sub and sub each a domestic_corporation sub directly wholly owned domestic sub distributing directly and indirectly through its subsidiaries owns system which it leases to third parties in business c and which it utilizes in business a and business b business b utilizes system to offer services to consumers in certain locations before the occurrence of any of the steps of the transactions each of sub sub sub sub sub sub sub sub sub sub sub sub sub sub sub sub sub sub sub sub sub sub sub sub and sub were engaged in and held assets related to business b system is comprised mainly of assets z aa bb cc dd ee ff gg and hh collectively the distribution assets including asset ii the taxpayer has not requested any rulings with regard to asset jj that is also a component of system the distribution assets are subject_to certain easements the easements held by distributing or other parties distributing also holds asset ll and enters into type oo agreements collectively the rights distributing also enters into certain type nn agreements with respect to asset bb the agreements each of the easements the rights and the agreements provides the holder with certain rights regarding certain of the distribution assets the easements are typically acquired for an unlimited or indefinite period of time whereas the agreements and the rights are generally for a fixed period of time in exchange for consideration the agreements typically have terms of k to l years with automatic renewal terms thereafter the asset ll rights are usually for a term of w type oo agreements are typically for m to k years with n-year renewal terms thereafter the holder of a right or an agreement generally is required to pay its proportionate share of cost rr and to maintain the distribution assets located at the site in recent years distributing has shifted more of its focus to business a thus as part of the transactions distributing will transfer business b and business c to controlled its recently-formed and wholly-owned state a subsidiary management of distributing has determined that separating business b and business c from business a will serve the following corporate business purposes i provide distributing distributing and controlled with increased flexibility to pursue the business plan and acquisition strategy including alternatives that are unlikely to be available absent the distributions ii enable controlled to issue equity on meaningfully more favorable plr-122375-13 terms in connection with investments and acquisitions which management believes is critical to the success of the business plan with less dilution to existing shareholders iii meaningfully enhance the ability of the corporation to raise capital for business c by issuing equity on more favorable terms than would be possible absent the distributions in the public markets to institutional investors that invest in real_estate_investment_trusts reits iv reduce the actual or perceived competition for capital resources within the distributing group v meaningfully enhance each of distributing 1’s distributing 2’s and controlled’s ability to attract and retain qualified management and vi allow business c to optimize its leverage and enhance business a’s credit profile providing the distributing group with greater financial and strategic flexibility collectively the corporate business purposes as part of the transactions after the external distribution as defined below controlled will make an election to be treated as a reit the reit election and together with controlled sub its recently formed wholly owned state a subsidiary will jointly elect to treat controlled sub as a taxable_reit_subsidiary within the meaning of sec_856 effective on the first day of controlled’s first taxable_year as a reit the first reit taxable_year controlled will retain business c and controlled sub will hold business b in connection with the reit election prior to the end of the first reit taxable_year controlled intends to distribute to its shareholders with respect to their controlled stock all of its earnings_and_profits e_p that were or will be accumulated by controlled for all taxable periods ending prior to the first reit taxable_year as required by sec_857 the purging distribution the purging distribution will take the form of cash and controlled common_stock controlled also currently intends to make cash and stock distributions in the two years following the effective date of the reit election the other distributions and together with the purging distribution the reit distributions when controlled makes the reit distributions it intends to allow each controlled shareholder to elect to receive the shareholder’s distribution in either cash or controlled shares of equivalent value subject_to a limitation on the amount of cash to be distributed in the aggregate to all shareholders the cash limitation if a shareholder fails to make a valid election by the election deadline that shareholder will be deemed to have made an election to be determined by controlled at controlled’s sole discretion to the extent necessary controlled will issue cash in lieu of fractional shares of its stock although controlled has not yet determined the amount of the cash limitation it will not be less than percent of each reit distribution declaration without regard to any cash that may be paid in lieu of fractional shares if the total number of shares for which an election to receive a distribution in cash is made would result in the payment of cash in an aggregate amount that is less than or equal to the cash limitation then all shareholders electing to receive cash will receive cash on all such shares if too many shareholders elect to receive cash each plr-122375-13 shareholder electing to receive cash will receive a pro_rata amount of cash corresponding to the shareholder’s respective entitlement under the reit distribution declaration but in no event will any shareholder electing to receive cash receive less than percent of the shareholder’s entire entitlement under the distribution declaration in cash the calculation of the number of shares to be received by any shareholder will be determined over a period of up to two weeks ending as close as practicable to the payment_date of the reit distribution based on a formula using market prices that is designed to equate in value the number of shares to be received with the amount of cash that could be received instead after the external distributions as defined below controlled will lease the distribution assets to either distributing or distributing under a triple-net lease the lease with a g to t year term in the aggregate the lease will provide for a fixed annual rent of approximately dollar_figureo for the first m years thereafter the rent will increase under the lease on an annual basis at a rent escalator that has yet to be determined by the parties all amounts received under the lease will be for_the_use_of the distribution assets the lease will provide distributing or distributing as relevant with the right to renew for as many as u p-year terms which renewal will be priced at the then fair_market_value for such lease after the external distributions controlled will also acquire develop and lease similar assets to unrelated tenants to avoid problem distributing will enter into certain agreements under which it will irrevocably assign all of the benefits and burdens of the easements the rights and the agreements through assignment and assumption agreements the assignment agreements to controlled the assignment agreements will provide for rights uu vv and ww for administrative convenience and to avail itself of economies of scale with respect to employment costs certain employees may perform services for both controlled and controlled sub following the transactions for example distributing expects that controlled’s collective human resources legal accounting and other administrative departments will be located in either controlled or controlled sub and the personnel in those departments will provide services to both controlled and controlled sub pursuant to an employee sharing_agreement the esa under the esa the employer whether controlled or controlled sub will loan or advance the shared employees to the service_recipient to the extent those employees spend time performing services for the service_recipient the service_recipient will reimburse the employer for the service recipient’s allocable share of the employee’s costs including salaries benefits and other compensation costs associated with payroll administration and allocable overhead costs including but not limited to office supplies furniture and equipment the amount of the reimbursements will be computed periodically and will be determined on the basis of the relative amount of time plr-122375-13 the employees spend performing services on behalf of the employer versus the service_recipient or pursuant to another reasonable allocation method controlled and controlled sub also expect to co-occupy the corporate offices of controlled following the transactions controlled and controlled sub will co-own or co- lease and co-occupy the offices but only one or the other will be listed as the primary owner or lessee as applicable of the space with respect to the shared space controlled and controlled sub will enter into a space sharing_agreement the ssa and together with the esa the cost sharing arrangements that will provide that each party pays its allocable share of costs associated with the shared space on a cost reimbursement basis based upon the use of the space and its elements reimbursed costs may include but are not limited to utilities taxes mortgage expense rents and building maintenance and improvement expenses distributing and controlled will enter into certain agreements in connection with the implementation of the transactions that are intended to include i a separation and distribution agreement ii a tax_matters_agreement the tax_matters_agreement iii a transition services agreement the transition services agreement and iv an employee matters agreement collectively the transaction agreements the transactions for what are represented to be valid corporate business purposes distributing has proposed the following series of proposed and partially completed transactions the transactions first internal restructuring on date the following transactions occurred although not necessarily in the order enumerated collectively the first internal restructuring i ii iii iv dre merged into distributing and thereafter sub merged into its parent distributing the sub liquidation llc merged into distributing the llc liquidation and thereafter sub merged into its parent distributing the sub liquidation each of sub sub and sub merged into its parent distributing the sub liquidation the sub liquidation and the sub liquidation respectively sub merged into its parent sub the sub liquidation and thereafter sub merged into its parent distributing the sub liquidation v sub merged into its parent sub the sub liquidation plr-122375-13 vi dre merged into its parent sub and thereafter each of sub and sub merged into its parent sub the sub liquidation and the sub liquidation respectively subsequently sub merged into its parent sub the sub liquidation after which sub merged into its parent sub the sub liquidation second internal restructuring distributing will complete the following steps in the following order to align the various assets and entities relating to business a business b and business c collectively the second internal restructuring following the first internal restructuring and the second internal restructuring all of the assets related to business b and business c will be treated as directly owned by distributing for u s federal_income_tax purposes vii viii ix x xi xii sub will merge into a newly-formed state a corporation wholly owned by its parent distributing immediately thereafter the state a corporation will convert under state a law into a limited_liability_company that is disregarded as separate from distributing for u s federal tax purposes the sub liquidation each of sub and sub will convert under state b law into a limited_liability_company that is disregarded as separate from distributing for u s federal tax purposes the sub liquidation and the sub liquidation respectively sub will convert under state c law into a limited_liability_company that is disregarded as separate from distributing for u s federal tax purposes the sub liquidation each of sub and sub will convert under state d law into a limited_liability_company that is disregarded as separate from distributing for u s federal tax purposes the sub liquidation and the sub liquidation respectively sub will convert under state f law into a limited_liability_company that is disregarded as separate from distributing for u s federal tax purposes the sub liquidation sub will convert under state a law into a limited_liability_company that is disregarded as separate from distributing for u s federal tax purposes the sub liquidation xiii sub will merge into distributing the sub liquidation plr-122375-13 xiv xv sub will convert under state a law into a limited_liability_company that is disregarded as separate from distributing for u s federal tax purposes the sub liquidation sub will convert under state e law into a limited_liability_company that is disregarded as separate from distributing for u s federal tax purposes the sub liquidation xvi sub will contribute certain business b assets and business b to llc a newly formed state a limited_liability_company that is disregarded as separate from sub for u s federal tax purposes immediately thereafter sub will distribute all of the member interests in llc to distributing xvii each of sub sub sub sub sub sub and sub will distribute its business b assets to distributing xviii sub will convert under state a law into a limited_liability_company that is disregarded as separate from distributing for u s federal tax purposes xix sub will convert under state a law into a limited_liability_company that is disregarded as separate from distributing for u s federal tax purposes the sub liquidation and subsequently sub will distribute assets related to business b to sub xx sub will merge into sub an entity that will be disregarded as separate from its parent distributing the sub liquidation xxi sub will merge into a newly formed state a corporation that is wholly owned by its parent sub a disregarded_entity that is wholly owned by distributing immediately thereafter the state a corporation will convert under state a law into a limited_liability_company that is disregarded as separate from distributing for u s federal tax purposes the sub liquidation xxii sub will merge into a newly formed state a corporation that is wholly owned by its parent sub a disregarded_entity that is wholly owned by distributing immediately thereafter the state a corporation will convert under state a law into a limited_liability_company that is disregarded as separate from distributing for u s federal tax purposes the sub liquidation xxiii sub will merge into a newly formed state a corporation that is wholly owned by its parent sub a disregarded_entity that is wholly owned plr-122375-13 by distributing immediately thereafter the state a corporation will convert under state a law into a limited_liability_company that is disregarded as separate from distributing for u s federal tax purposes the sub liquidation xxiv sub will contribute certain assets related to business b and business c to llc a newly formed state a limited_liability_company that is disregarded as separate from sub for u s federal tax purposes subsequently sub will distribute all of the member interests in llc to sub an entity that will be disregarded as separate from its parent distributing for u s federal tax purposes xxv sub will convert under state f law into a limited_liability_company that is disregarded as separate from distributing for u s federal tax purposes the sub liquidation xxvi sub will convert under state a law into a limited_liability_company that is disregarded as separate from distributing for u s federal tax purposes the sub liquidation subsequently sub will distribute certain assets related to business b to sub xxvii each of sub sub and sub will convert under state g law into a limited_liability_company that is disregarded as separate from distributing for u s federal tax purposes the sub liquidation sub liquidation and sub liquidation respectively xxviii sub will convert under state h law into a limited_liability_company that is disregarded as separate from distributing for u s federal tax purposes the sub liquidation xxix sub will convert under state i law into a limited_liability_company that is disregarded as separate from distributing for u s federal tax purposes the sub liquidation xxx sub will convert under state j law into a limited_liability_company that is disregarded as separate from distributing for u s federal tax purposes the sub liquidation xxxi sub will convert under state i law into a limited_liability_company that is disregarded as separate from distributing for u s federal tax purposes the sub liquidation xxxii sub will convert under state a law into a limited_liability_company that is disregarded as separate from distributing for u s federal tax purposes plr-122375-13 xxxiii sub will convert under state a law into a limited_liability_company that is disregarded as separate from distributing for u s federal tax purposes xxxiv sub and sub will each convert under state a law into a limited_liability_company that is disregarded as separate from distributing for u s federal tax purposes xxxv sub will merge into a newly formed state a corporation that is wholly owned by its parent sub immediately thereafter the newly formed state a corporation will convert under state a law into a limited_liability_company that is disregarded as separate from distributing for u s federal tax purposes the sub liquidation xxxvi sub will convert under state c law into a limited_liability_company that is disregarded as separate from distributing for u s federal tax purposes the sub liquidation xxxvii sub will convert under state l law into a limited_liability_company that is disregarded as separate from distributing for u s federal tax purposes the sub liquidation xxxviii sub and sub will each merge into sub the sub liquidation and the sub liquidation xxxix sub will convert under state c law into a limited_liability_company that is disregarded as separate from distributing for u s federal tax purposes the sub liquidation xxxx sub will convert under state k law into a limited_liability_company that is disregarded as separate from distributing for u s federal tax purposes the sub liquidation debt exchange xxxxi one or more investment banks individually an investment bank and collectively the investment banks intend to solicit non-binding orders from third-party investors for debt securities and loans under a term_loan facility to be issued by controlled with a currently estimated face_amount of up to approximately dollar_figurer the controlled securities xxxxii at least days prior to the closing date of the distributions each investment bank acting as principal for its own account will acquire in the marketplace some or all of the tranche a debt the tranche b debt the revolver and the notes the exchange debt plr-122375-13 xxxxiii no sooner than five days after acquiring the exchange debt and at least nine days prior to the distributions defined below distributing expects that the investment banks will enter into an exchange_agreement with distributing pursuant to which the parties will agree to exchange an amount of exchange debt for up to a currently estimated aggregate dollar_figurer face_amount of controlled securities less a specified spread the debt exchange the exchange ratio for the debt exchange will be negotiated between distributing and the investment banks bargaining at arms’ length no earlier than the time they enter into the exchange_agreement each investment bank expects to obtain binding commitments at such time from third-party investors who will agree to purchase the controlled securities from each investment bank following the debt exchange the contribution and the distributions xxxxiv distributing will contribute all of the assets and liabilities comprising business b and business c to controlled as part of this contribution distributing will transfer membership interests in limited_liability companies that are disregarded from it for u s federal tax purposes and that hold the distribution assets and business b distributing may also cause limited_liability companies that are disregarded as separate from it to directly transfer assets to controlled as described earlier distributing will also irrevocably assign the easements the rights and the agreements through the assignment agreements to controlled xxxxv in exchange for the assignments and the contributions of business b and business c the contributed assets distributing will receive all of the common_stock of controlled dollar_figures in cash that controlled expects to borrow from unrelated third-parties the controlled cash and the controlled securities the contribution in order to address certain issues under distributing 1’s debt covenants escrow llc a disregarded_entity formed by controlled will borrow from third parties the proceeds of which will be held in an escrow account and pledged to the lenders until the conditions to the distributions defined below have been satisfied in the event that the distributions do not occur the proceeds will be used to fund a mandatory redemption of distributing 1’s existing debt upon satisfaction of all of the conditions to the distributions the proceeds of the borrowing will be released from the escrow account and escrow llc will distribute the proceeds to controlled who in turn will distribute them to distributing in connection with the contribution immediately following completion of the distributions escrow llc will be merged into controlled xxxxvi controlled will contribute business b to controlled sub in exchange for plr-122375-13 controlled sub stock xxxxvii distributing and the investment banks will consummate the debt exchange xxxxviii distributing will distribute all of the stock of controlled to distributing the internal distribution xxxxix distributing will distribute all of the stock of controlled pro_rata to the holders of the distributing common_stock the external distribution and together with the internal distribution the distributions xxxxx as promptly as practicable after the distributions but in no event later than one year after the distributions distributing will use the controlled cash received in the contribution to repay existing tranche b debt the notes or other existing debt and or to distribute to distributing for the repurchase of shares of common_stock the elections xxxxxi controlled will make the reit election by electing to become a reit as of the first day of its taxable_year beginning the day after the distributions occur and controlled will elect jointly with controlled sub to have controlled sub treated as a taxable_reit_subsidiary within the meaning of sec_856 effective on the first day of controlled’s first taxable_year as a reit xxxxxii in accordance with sec_857 controlled will declare a dividend in an amount equal to the purging distribution within the last three months of the calendar_year in which controlled makes the reit election the purging distribution will be paid no later than january 31st of the following calendar_year representations the liquidations the following representations have been made with respect to each of the sub liquidation the sub liquidation the sub liquidation the sub liquidation the sub liquidation the sub liquidation the sub liquidation the sub liquidation the sub liquidation the sub liquidation the sub liquidation the sub liquidation the sub liquidation the sub liquidation the sub liquidation the sub liquidation the sub liquidation the sub liquidation the sub liquidation the sub liquidation the sub liquidation the sub liquidation the sub liquidation the sub liquidation the sub liquidation the sub plr-122375-13 liquidation the sub liquidation the sub liquidation the sub liquidation the sub liquidation the sub liquidation the sub liquidation the sub liquidation the sub liquidation the sub liquidation the sub liquidation the sub liquidation the sub liquidation the sub liquidation the sub liquidation the sub liquidation the sub liquidation the sub liquidation the sub liquidation and the llc liquidation each a liquidation for purposes of these representations each liquidating corporation is referred to as liquidating subsidiary and each parent_corporation of such liquidating subsidiary is referred to as parent a except with respect to transactions comprising steps of the transactions and transfers in the ordinary course of business the liquidation of each liquidating subsidiary will not be preceded or followed by the reincorporation in or transfer or sale to a recipient corporation recipient of any of the businesses or assets of such liquidating subsidiary if persons holding directly or indirectly more than percent in value of the liquidating subsidiary stock also hold directly or indirectly more than percent in value of the stock in recipient for purposes of this representation and in each place that it appears herein ownership will be determined immediately after the external distribution and by application of the constructive_ownership rules of sec_318 as modified by sec_304 b parent on the date of adoption of each plan_of_liquidation and at all times thereafter until the completion of the final liquidation will own percent of the single outstanding class of stock of each liquidating subsidiary for purposes of this representation each plan_of_liquidation is considered to be adopted by parent immediately prior to such liquidation c no shares of stock of any liquidating subsidiary will have been redeemed during the three years preceding the date of the transactions d all distributions from each liquidating subsidiary to its parent pursuant to the plan of complete_liquidation will be made within a single taxable_year of such liquidating subsidiary e as of the effective date of each liquidation each liquidating subsidiary will cease to be an entity that is separate from its parent for u s federal tax purposes f for u s federal tax purposes no liquidating subsidiary as a corporation will retain any assets following its liquidation g no liquidating subsidiary will have acquired assets in any nontaxable_transaction at any time except for acquisitions occurring more than three plr-122375-13 years prior to the transactions h except with respect to transfers made pursuant to the steps of the transactions no assets of any liquidating subsidiary have been or will be disposed of by its parent except for dispositions in the ordinary course of business and dispositions occurring more than three years prior to adoption of the plan_of_liquidation i j k each liquidating subsidiary will report all earned_income represented by assets that will be deemed distributed to its parent such as receivables being reported on a cash_basis unfinished construction contracts commissions due etc the fair_market_value of the assets of each liquidating subsidiary will exceed its liabilities both at the date of the adoption of the plan of complete_liquidation and immediately prior to the time the liquidation occurs there is no intercorporate debt existing between any liquidating subsidiary and its parent 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 liquidation plan l parent is not an organization that is exempt from u s federal tax under sec_501 or any other provision of the code m all other transactions undertaken contemporaneously with in anticipation of in conjunction with or in any way related to the liquidations have been fully disclosed n in each liquidation the assets of the liquidating subsidiary that relate to business b and that will ultimately be contributed to controlled sub will make up less than percent of the fair_market_value of the total assets previously held by such liquidating subsidiary the contribution and the distributions the following representations have been made with respect to the internal distribution and the external distribution each such distribution is referred to as a distribution and the corporation that will distribute the stock of controlled in each such distribution is referred to as the distributing_corporation o with the exception of the controlled securities to be held by distributing prior to the debt exchange the indebtedness if any owed by controlled to the distributing_corporation after the distribution will not constitute plr-122375-13 stock_or_securities p no part of the consideration to be distributed by the distributing_corporation with respect to the distributing corporation’s stock will be received by any shareholder of the distributing_corporation as a creditor employee or in any capacity other than that of a shareholder of the distributing_corporation q r s t the distributing_corporation and controlled will treat all members of their respective separate affiliated groups as defined in sec_355 the sag as one corporation in determining whether the requirements of sec_355 regarding the active_conduct_of_a_trade_or_business are satisfied the five years of financial information submitted on behalf of business a-1 conducted by dre is representative of the present business operations of dre and with regard to such business there have been no substantial operational changes since the date of the last financial statements submitted the five years of financial information submitted on behalf of business b is representative of the present business operations of business b and with regard to such business there have been no substantial operational changes since the date of the last financial statements submitted following the distribution and except as contemplated by the transition services agreement the distributing_corporation sag and the controlled sag will continue the active_conduct of their respective businesses independently and with their separate employees u neither the distributing_corporation nor any member of the distributing_corporation sag acquired_business a-1 or control of any entity conducting business a-1 during the five-year period ending on the date of the distribution in a transaction in which gain_or_loss was recognized or treated as recognized under sec_1_355-3 of the proposed_regulations in whole or in part excluding acquisitions that constitute an expansion of business a-1 throughout the five-year period ending on the date of the distribution the distributing_corporation and or members of the distributing_corporation sag will have been the principal_owner s of the goodwill and significant assets of business a-1 and will continue to be the principal_owner s following the distribution v neither the distributing_corporation nor any member of the distributing_corporation sag acquired_business b or control of any entity conducting business b during the five-year period ending on the date of the plr-122375-13 distribution in a transaction in which gain_or_loss was recognized or treated as recognized under sec_1_355-3 of the proposed_regulations in whole or in part excluding acquisitions that constitute an expansion of business b throughout the five-year period ending on the date of the distribution the distributing_corporation and or members of the distributing_corporation sag will have been the principal_owner s of the goodwill and significant assets of business b and controlled or members of the controlled sag will be the principal_owner s following the distribution w the distributions are being carried out for one or more of the following corporate business purposes i to provide distributing distributing and controlled with increased flexibility to pursue the business plan and acquisition strategy including alternatives that are unlikely to be available absent the distributions ii to enable controlled to issue equity on meaningfully more favorable terms in connection with investments and acquisitions which management believes is critical to the success of the business plan with less dilution to existing shareholders iii to meaningfully enhance the ability of business c to raise capital by issuing equity on more favorable terms than would be possible absent the distributions in the public markets to institutional investors that invest in reits iv to reduce the actual and perceived competition for capital resources within the distributing group v to meaningfully enhance each of distributing and distributing and controlled’s ability to attract and retain qualified management and vi to allow business c to optimize its leverage and enhance business a’s credit profile providing the distributing group with greater financial and strategic flexibility the distributions are motivated in whole or substantial part by one or more of these corporate business purposes x y the distribution is not being used principally as a device for the distribution of the earnings_and_profits of the distributing_corporation or controlled immediately after the distribution i any person that holds a percent or greater interest within the meaning of sec_355 in any disqualified_investment_corporation within the meaning of sec_355 will have held such an interest in such corporation immediately before the transaction or ii neither the distributing_corporation nor controlled will be a disqualified_investment_corporation for purposes of sec_355 z for purposes of sec_355 immediately after the distribution no person determined after applying sec_355 will hold stock possessing percent or more of the total combined voting power of all plr-122375-13 classes of stock of the distributing_corporation entitled to vote or percent or more of the total value of shares of all classes of stock of the distributing_corporation 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 the distribution aa for purposes of sec_355 immediately after the distribution no person determined after applying 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 the distribution or ii attributable to distributions on distributing_corporation 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 the distribution bb the external 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 the distributing_corporation or controlled including any predecessor or successor of any such corporation cc 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 i any liabilities assumed within the meaning of sec_357 by controlled and ii the total of any money and the fair_market_value of any other_property within the meaning of sec_361 received by distributing dd the liabilities if any to be assumed within the meaning of sec_357 by controlled in the contribution were incurred in the ordinary course of business and are associated with the assets being transferred ee except for the controlled securities no indebtedness will exist between distributing and controlled at the time of or subsequent to the internal distribution except for obligations arising in the ordinary course of business or obligations arising pursuant to the transaction agreements ff immediately before the distribution items of income gain loss deduction and credit will be taken into account as required by the applicable intercompany_transaction regulations see sec_1_1502-13 and sec_1 as in effect before the publication of t d 1995_2_cb_147 and as currently in effect sec_1_1502-13 as published in t d any plr-122375-13 excess_loss_account the distributing_corporation may have in the controlled stock will be included in income immediately before the distribution to the extent required by the regulations see sec_1 gg except for certain payments that will be made in connection with the tax_matters_agreement and certain services agreements that are transitional in nature payments made in connection with any continuing transactions between the distributing_corporation and its subsidiaries and controlled and its subsidiaries following the distribution will be for fair_market_value based on terms and conditions arrived at by the parties bargaining at arm’s length hh no property will be transferred by distributing to controlled for which an investment_credit allowed under sec_46 will be or has been claimed ii pursuant to the plan_of_reorganization distributing will use the controlled cash received in the contribution to repay existing tranche b debt notes other existing debt and or to distribute to distributing for the repurchase of shares of common_stock such proceeds will be held in a segregated account until they are used as described above jj the tranche a debt the tranche b debt and the notes the specified exchange debt to be used in the debt exchange were not issued in anticipation of the external distribution other representations kk unless required_by_law or loss of other rights neither distributing presently nor controlled following the distributions has or will have the intent to remove the distribution assets prior to the end of the economic useful_life of the distribution assets ll the distribution assets were designed and constructed to remain in place for the entirety of the economic useful lives of the distribution assets mm asset jj and any personal_property leased as part of the distribution assets will not exceed v percent of the aggregate fair_market_value of both the real_property and personal_property attributable to the distribution assets nn in the event controlled and controlled sub share office or facility space each of controlled and controlled sub will bear its proportional amount of the costs for such space through a cost-sharing arrangement plr-122375-13 oo reimbursements for shared personnel equipment and space will be at cost and will be deducted or capitalized as applicable by the party bearing such costs under the cost-sharing arrangement the reimbursed party under a cost-sharing arrangement will not deduct or capitalize the costs of shared personnel or space for which it receives reimbursement pp neither controlled nor controlled sub will be in the business of receiving compensation from other persons for services or use of property of the types that will be shared qq rent attributable to any personal_property leased in connection with the distribution assets will not exceed v percent of the total rent of both the real_property and personal_property included in the system rr the distribution assets are passive and include no machinery or equipment that produces any products or commodities ss the distribution assets have economic useful lives of approximately h to i years tt the distribution assets have never been moved to a new location and a substantial part of the distribution assets cannot be moved without prohibitive expense and damage to the system although parties mm or parties who control a right of way occasionally require distributing to build and or move certain distribution assets this only affects approximately j percent of the system each year such projects typically involve installing new distribution assets in a new location and abandoning the old if parties mm so require distributing completes removal and disposal of the old components in rare instances an asset bb can be reused in a new location components otherwise are removed only for replacement rather than use at another location at the end of their useful_life uu controlled will be the substantive owner of the easements the rights and the agreements vv no portion of the rent paid_by distributing will be based on distributing 2’s net_income or profit within the meaning of sec_856 ww with regard to the esa the employer will not deduct or capitalize the costs reimbursed by the service_recipient rather the service_recipient will deduct or capitalize those costs as appropriate xx with regard to the ssa neither party will deduct or capitalize any costs that are reimbursed by the other party rather each party will deduct or plr-122375-13 capitalize its share of the costs as appropriate the reimbursement under the cost sharing arrangements will be solely for the associated costs both direct and indirect with no mark-up the allocation of general and administrative overhead expenses under the cost sharing arrangements will be made on an equitable basis consistent with an arm’s length standard neither controlled nor controlled sub will be in the business of receiving compensation from others for services or use of property of the types that will be reimbursed under the cost_sharing_arrangement rulings based solely on the information submitted and the representations set forth above we rule as follows regarding the transactions the liquidations for purposes of rulings below with respect to each liquidation each liquidating corporation is referred to as a liquidating subsidiary and each parent_corporation of such liquidating subsidiary is referred to as parent with respect to each of the liquidations we rule as follows the liquidation will qualify as a complete_liquidation under sec_332 sec_332 and sec_1_332-2 no gain_or_loss will be recognized by parent on its receipt of the liquidating subsidiary’s assets and the assumption of the liquidating subsidiary’s liabilities sec_332 no gain_or_loss will be recognized by the liquidating subsidiary on the distribution of its assets to and the assumption of its liabilities by its parent sec_336 and sec_337 parent’s basis in each asset received from the liquidating subsidiary in the liquidation will be the same as the basis of that asset in the hands of the liquidating subsidiary immediately before the liquidation sec_334 parent’s holding_period in each asset received from the liquidating subsidiary in the liquidation will include the period during which that asset was held by the liquidating subsidiary sec_1223 parent will succeed to and take into account as of the close of the effective date of the liquidation the items of the liquidating subsidiary described in sec_381 subject_to the conditions and limitations specified in sec_381 sec_382 sec_383 and sec_384 and the regulations plr-122375-13 thereunder sec_381 and sec_1_381_a_-1 the excess_loss_account if any of parent with respect to the stock of the liquidating subsidiary will not be recognized as a result of the liquidation the contribution internal distribution and debt exchange the contribution including the receipt by distributing of the controlled cash and the controlled securities together with the distribution of the controlled stock in the internal distribution will qualify as a reorganization within the meaning of sec_368 distributing and controlled each will be a_party_to_a_reorganization within the meaning of sec_368 provided that the controlled securities are transferred in the debt exchange and the controlled cash is dispensed of as described in step xxxxx and representation ii above distributing will not recognize any gain_or_loss on the contribution including the receipt by distributing of the controlled stock the controlled securities the controlled cash and the assumption of any liabilities sec_361 sec_361 and sec_357 controlled will not recognize gain_or_loss on the contribution sec_1032 controlled’s basis in each asset received in the contribution will be the same as the basis of that asset in the hands of distributing immediately before the contribution sec_362 controlled’s holding_period in each asset received in the contribution will include the period during which distributing held the asset sec_1223 distributing will not recognize gain_or_loss on the distribution of its controlled stock in the internal distribution sec_361 provided that the controlled securities are transferred in the debt exchange distributing will not recognize any income gain loss or deduction with respect to the transfer of the controlled securities solely in exchange for the specified exchange debt in the debt exchange sec_361 no gain_or_loss will be recognized by and no amount will be included in the income of distributing upon its receipt of the controlled stock in the internal distribution sec_355 distributing 2’s basis in the distributing common_stock and controlled plr-122375-13 stock immediately after the internal distribution will equal its basis in its distributing common_stock immediately before the internal distribution allocated between the distributing common_stock and the controlled stock in proportion to the fair_market_value of each immediately following the internal distribution in accordance with sec_1_358-2 sec_358 b and c distributing 2’s holding_period in the controlled stock received from distributing in the internal distribution will include the holding_period of the distributing common_stock with respect to which the internal distribution is made provided that the distributing common_stock is held as a capital_asset on the date of the internal distribution sec_1223 earnings_and_profits if any will be allocated between distributing and controlled in accordance with sec_312 and sec_1_312-10 and sec_1_1502-33 except for purposes of sec_355 any post-distribution payments made by distributing or any of its affiliates to controlled or any of its affiliates or vice versa that i have arisen or will arise with respect to a taxable_period ending on or before the date of the internal distribution or for a taxable_period beginning on or before and ending after the date of the internal distribution and ii will not have become fixed and ascertainable until after the internal distribution will be treated as occurring immediately before the internal distribution see 344_us_6 revrul_83_73 c b the external distribution no gain_or_loss will be recognized by distributing on the external distribution sec_355 no gain_or_loss will be recognized by and no amount will be included in the income of the distributing shareholders upon their receipt of the controlled stock in the external distribution sec_355 each distributing shareholder’s basis in the distributing common_stock and controlled stock including any fractional share interest in controlled to which the shareholder may be entitled immediately after the external distribution will equal the basis of the distributing common_stock that the shareholder held immediately before the external distribution allocated between the distributing common_stock and the controlled stock in proportion to the fair_market_value of each immediately following the external distribution in accordance with sec_1 plr-122375-13 a iv sec_358 b and c each distributing shareholder’s holding_period in the controlled stock received in the external distribution including any fractional share interest in controlled to which the shareholder may be entitled will include the holding_period of the distributing common_stock with respect to which the external distribution is made provided that the shareholder holds such distributing common_stock as a capital_asset on the date of the external distribution sec_1223 earnings_and_profits if any will be allocated between distributing and controlled in accordance with sec_312 and sec_1_312-10 and sec_1_1502-33 other rulings the distribution assets including assets z aa bb cc dd ee ff gg hh and ii will constitute real_property for purposes of sec_856 and sec_856 the easements the rights and the agreements are interests_in_real_property and each will qualify under sec_856 as a real_estate asset and assuming controlled is the owner of the easements the rights and the agreements the amounts derived by controlled under the agreements will be considered rents_from_real_property within the meaning of sec_856 payments received by controlled under the lease will be treated as rents_from_real_property under sec_856 any amounts received by controlled or controlled sub as reimbursements under a cost-sharing arrangement will not be included in the reimbursed party’s gross_income including for purposes of sec_856 and to the extent controlled is the reimbursed party also the reimbursed party will not be entitled to a deduction for any expenses that are later reimbursed all of the cash and controlled stock to be distributed in the purging distribution or other distributions by controlled to holders of controlled stock will be treated as a distribution_of_property with respect to its stock to which sec_301 and sec_305 apply provided a controlled elects to be taxed as and qualifies as a reit as of the first reit taxable_year and b the purging distribution occurs during the first reit taxable_year and the other distributions occur thereafter the amount of the distribution of stock shall be considered to equal the amount of cash that could have been received instead of such stock sec_1_305-1 and sec_1_305-2 plr-122375-13 example of the income_tax regulations the purging distribution will not be deductible by controlled caveats we express no opinion about the federal_income_tax treatment of the transactions under other provisions of the code and regulations or the tax treatment of any conditions existing at the time of or effects resulting from the transactions that are not specifically covered by the above rulings rulings concerning the purging distribution and other distributions are void and we do not express any opinion on the tax consequences of the purging distribution and the other distributions if the purging distribution is not completed by the end of the first reit taxable_year and the other distributions thereafter in particular we express no opinion regarding a b c d e f g whether the transactions i satisfy the business_purpose requirement of sec_1 b ii are used principally as a device for the distribution of the earnings_and_profits of the distributing_corporation or the controlled_corporation or both see sec_355 and sec_1_355-2 or iii are part of a plan or series of related transactions pursuant to which one or more persons will acquire directly or indirectly stock representing a percent or greater interest in the distributing_corporation or the controlled_corporation see sec_355 and sec_1_355-7 whether controlled otherwise qualifies as a reit under part ii of subchapter_m of chapter of the code whether any asset not listed above as part of the distribution assets or included in the easements the rights and the agreements will qualify as a real_estate asset who is the owner of the easements the rights and the agreements following their assignments as described herein whether asset jj that is a part of distributing 1’s system will qualify as real_estate_assets under sec_856 whether any amounts paid to controlled by controlled sub as rents will clearly reflect income for purposes of sec_857 and the federal_income_tax treatment of the merger or the transactions described in steps xvi xvii xviii xxiv xxxii xxxiii xxxiv and xxxxvi procedural matters plr-122375-13 this ruling letter is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent a copy of this ruling letter must be attached to any income_tax return to which it is relevant 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 this ruling letter under a power_of_attorney on file in this office we are sending a copy of this ruling letter to your authorized representatives sincerely ___________________________________ filiz a serbes chief branch office of associate chief_counsel corporate


number release date id office uilc cca_2010041207521641 ---------- from ------------------- sent monday date am to ----------------------- cc ------------------------- subject re chief_counsel notice cc-2010-002 ------ we would rely on our statutory authority to offset pursuant to code sec_6402 although the tp made the remittance after petitioning but prior to the date the tax_court filed its decision the logic of section dollar_figure of revproc_2005_18 post stat-notice remittances would still control that section provides that if the taxpayer has no other outstanding liabilities an undesignated remittance made by the taxpayer after the date that the tax_court files its decision in an amount that is greater than the amount of the deficiency determined by the tax_court plus any interest that has accrued on that amount at the remittance date will be treated as a deposit but only to the extent the amount of the remittance exceeds the amount of the deficiency determined by the tax_court plus interest this excess_amount will be treated as a deposit until sufficient information is obtained by the service to apply the remittance to an outstanding liability or to determine that the amount of the remittance should be returned to the taxpayer the amount that is less than or equal to the amount of the deficiency plus interest will be applied as a payment therefore we properly exercised our offset authority the tp is not entitled to request the return of his excess deposit because he had other outstanding liabilities does this clarify if not feel free to give me a call


internal_revenue_service number release date index number ---------------------------- ---------------------------- ----------------------------- ty -------------- legend 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 ita b02 plr-107175-15 date date taxpayer corporation state date date date date date date year year year year year year a b c d e f g h i j k l ------------------------ ------------------------------- ------------ ----------------------- ------------------ ------------------ ------------------- ------------------ -------------------------------------- ------ ------ ------ ------ ------ ------ ---------------------------------- --- -------------------- ------------------ ------------------- -------------------- --------------------- ----------- ---------- ---------- ---------- ------ plr-107175-15 ---------- -------- -------- ----- ------ --------------------------------------------------------------------------------- m n o p q r ----------------------------------------------------------------- s ----------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------- ---------------------------------------------------------- t u v -------------------------------------------------------------------------------- ------------- ------------- ---- dear ---------------- this is in response to your request for a private_letter_ruling dated date you requested a ruling that legal expenditures consisting of compensatory_damages punitive_damages and all related legal expenses paid in year year and year that resulted from a lawsuit against you as the managing shareholder of a corporation are deductible under sec_162 of the internal_revenue_code by letter dated date you agreed that the ruling would only address the expenditures_for the year and year tax years facts taxpayer is an individual taxpayer is a shareholder in several closely held corporations that own and operate a in state taxpayer personally or jointly manages the finances of all the closely held corporations that operate a taxpayer has been in the business of operating a for b years taxpayer was also a shareholder in a corporation that owned c and another that owned an d in year taxpayer e and f formed a closely_held_corporation called corporation a subchapter_s_corporation for federal tax purposes to purchase and operate a a in date the corporation purchased a g located in h state taxpayer contributed dollar_figurei for j percent of the stock e contributed dollar_figurek for l percent of the stock and f contributed dollar_figurem for n percent of the stock the shareholders agreed that taxpayer was to manage the corporation and receive a management fee of o percent of the net profits the distribution of the remaining net profits was allocated based on the ownership percentages from date through date e consistently received monthly distribution checks from taxpayer e only received p monthly checks in year and q in year when e inquired after not receiving any distribution checks from date taxpayer told e that r there were several meetings and many letters and e-mails in which e asked taxpayer plr-107175-15 for the corporation’s financial records e eventually received some of the records but they did not explain why corporation was losing money e filed a lawsuit in year against taxpayer asserting causes of action including fraud breach of fiduciary duty and breach of contract the allegations in the complaint included that taxpayer s the lawsuit also named as defendants other entities controlled by taxpayer the jury found taxpayer liable for breach of fiduciary duty and fraud the jury also awarded e punitive_damages the trial_court denied the liability claims against the entities named as defendants the court awarded costs to e and denied costs to taxpayer the final judgment against taxpayer was for dollar_figuret consisting of compensatory and punitive_damages and prejudgment_interest plus costs of dollar_figureu and postjudgment interest of v percent per annum taxpayer filed an appeal and the appellate court affirmed the trial court’s judgment in year taxpayer paid e amounts ordered by the judgment of the trial_court in addition taxpayer paid legal fees in year and year to his accounting consultants and expert at trial as well as to attorneys he retained to defend him in the lawsuit at the trial_court and during his appeal law and analysis sec_162 of the internal_revenue_code provides that there is allowed as a deduction all the ordinary and necessary expenses paid_or_incurred during the taxable_year in carrying on any trade_or_business sec_1_162-1 of the income_tax regulations provides that deductible expenses include the ordinary and necessary expenditures directly connected with or pertaining to the taxpayer’s trade_or_business sec_263 provides that no deduction shall be allowed for any amount_paid out for new buildings or for permanent improvements or betterments made to increase the value of any property or estate sec_1_263_a_-4 provides that a taxpayer must capitalize an amount_paid to another party to acquire any intangible including an ownership_interest in a corporation partnership or other entity from that party in a purchase or similar transaction to qualify as a deduction allowable under sec_162 an expenditure must satisfy a five part test it must be paid_or_incurred during the taxable_year be for carrying_on_a_trade_or_business be an expense be necessary and be ordinary 403_us_345 thus personal expenditures incurred outside of a taxpayer’s trade_or_business are not deductible under sec_162 in addition capital expenditures under sec_263 are not deductible even though a particular taxpayer may incur an expense only once in the lifetime of its business the expense may qualify as ordinary and necessary if it is appropriate and helpful in carrying on that business is commonly and frequently incurred in the type of business conducted by the taxpayer and is not a capital_expenditure see 383_us_687 308_us_488 290_us_111 plr-107175-15 the supreme court in welch discussed the meaning of the term ordinary the court stated ordinary in this context does not mean that the payments must be habitual or normal in the sense that the same taxpayer will have to make them often a lawsuit affecting the safety of a business may happen once in a lifetime the counsel fees may be so heavy that repetition is unlikely none the less the expense is an ordinary one because we know from experience that payments for such a purpose whether the amount is large or small are the common and accepted means of defense against attack welch u s pincite the supreme court in welch also explained that the term necessary under sec_162 imposes the requirement that the expense be appropriate and helpful for the taxpayer’s business id pincite if litigation arises from a capital_transaction then the costs and legal fees associated with the litigation are characterized as acquisition costs and must be capitalized under sec_263 see 397_us_572 a payment will be a deduction under sec_162 as a trade_or_business expense only if it is not a personal_expenditure or a capital_expenditure the controlling test to distinguish business_expenses from personal or capital expenditures is the origin of the claim woodward v commissioner u s pincite 427_f2d_429 7th cir the origin_of_the_claim_test was first set forth by the supreme court in 372_us_39 in gilmore the court held the origin and character of the claim with respect to which an expense was incurred rather than its potential consequences upon the fortunes of the taxpayer is the controlling basic test of whether the expense was business or personal and hence whether it is deductible or not although the supreme court in gilmore considered whether an expense was business or personal the origin_of_the_claim_test has also been applied to distinguish between business and capital expenditures in anchor coupling the court held that the origin and character of the claim with respect to which a settlement is made rather than its potential consequences on the business operation of the taxpayer is the controlling test of whether a settlement payment constitutes a deductible expense or a nondeductible capital outlay anchor coupling f 2d pincite see also woodward v commissioner u s pincite 397_us_580 the tax_court has described the origin of the claim rule as follows quite plainly the origin-of-the-claim rule does not contemplate a mechanical search for the first in the chain of events which led to the litigation but rather requires an examination of all the facts the inquiry is directed to the ascertainment of the kind of transaction out of which the litigation arose consideration must be given to the issues involved the nature and objectives of the litigation the plr-107175-15 defenses asserted the purpose for which the claimed deductions were expended the background of the litigation and all the facts pertaining to the controversy 59_tc_708 acq 1973_2_cb_1 see also scallen v commissioner tcmemo_1987_412 aff’d 877_f2d_1364 8th cir applying origin of claim rule tax_court held that settlement payments relating to suit against partner for his alleged failure to properly carry out his duties as sole general managing partner in liquidation of partnership were deductible as business_expenses courts have held that it is ordinary and necessary to defend claims arising from a taxpayer’s trade_or_business 276_us_145 in kornhauser amounts petitioner paid in defense of a suit for an accounting brought by a former partner were held deductible as expenses_incurred in connection with the conduct of petitioner’s partnership business id pincite see also 5_tc_150 acq c b settlement payment by majority shareholder president and director of corporation relating to settlement of a lawsuit for mismanagement of corporate affairs held deductible as it proximately related to his business activity revrul_78_210 1978_1_cb_39 amounts paid for judgments and legal fees arising from alleged negligent acts of physician employees were deductible by medical association as sec_162 expenses where the contract provided that the association would hold the employees harmless from claims for negligent actions generally amounts paid in settlement of lawsuits are currently deductible if the acts which gave rise to the litigation were performed in the ordinary conduct of the taxpayer’s business see eg 27_tc_960 aff’d 256_f2d_764 2d cir acq c b xxiv allowing petitioner to deduct amounts paid in settlement of legal proceedings charging petitioner with mismanagement in the liquidation of assets 17_tc_675 acq 1952_1_cb_1 settlement payment arising from shareholder suit for damages against principal officer for mismanagement of corporate affairs held deductible as an ordinary and necessary business_expense directly connected to and proximately resulting from his business activity revrul_79_208 1979_2_cb_79 permitting taxpayer to deduct payments to settle lawsuit and obtain a release from breach of contract claims under a franchise agreement similarly amounts paid for legal expenses in connection with litigation are allowed as business_expenses where such litigation is directly connected to or proximately results from the conduct of a taxpayer’s business see eg 22_bta_375 acq c b holding that legal fees incurred by taxpayer to settle a shareholder’s claim of misrepresentation in the conduct of business are deductible as business_expenses d’angelo v commissioner tcmemo_2003_295 petitioner entitled to a sec_162 deduction for legal fees paid in defending suits alleging breach of fiduciary duty mismanagement and breach of contract in his capacity as an officer partner and shareholder of entities in which he had an ownership_interest plr-107175-15 in revrul_80_211 1980_2_cb_57 the taxpayer was sued civilly for breach of contract and fraud relating to the ordinary conduct of its trade_or_business a judgment was rendered that included punitive_damages the ruling allowed the taxpayer to deduct amounts paid as punitive_damages under sec_162 as an ordinary and necessary business_expense because the acts that gave rise to the civil suit were performed in the ordinary course of the taxpayer’s business in the instant case taxpayer’s payments to satisfy the final judgment awarded against him including legal fees and costs are ordinary and necessary expenditures under the origin_of_the_claim_test e’s claims against taxpayer clearly had their origin in the conduct of taxpayer’s trade_or_business taxpayer’s activities that gave rise to the lawsuit did not result in the acquisition of a capital_asset did not perfect or defend title to an existing asset and did not create a separate and distinct asset taxpayer did not receive a long-term benefit from the payments an examination of all the facts indicates that the litigation payments were business_expenses and not personal expenditures or capital expenditures ruling thus based solely on the facts and representations submitted we conclude that legal expenditures consisting of compensatory_damages punitive_damages and all other_amounts ordered by the judgment of the trial_court as well as taxpayer’s legal fees described above that taxpayer paid in year and year that resulted from a lawsuit by e against taxpayer as the managing shareholder of corporation are deductible under sec_162 provided that taxpayer has not been reimbursed for any of the payments by insurance or similar compensation caveats 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 no opinion is expressed as to the federal tax treatment of the transaction under any other provisions of the internal_revenue_code and the treasury regulations that may be applicable or under any other general principles of federal income_taxation this letter_ruling is only applicable to matters under our jurisdiction see revproc_2015_1 2015_1_irb_1 sec_1 no opinion is expressed as to the tax treatment of any conditions existing at the time of or effects resulting from the transaction that are not specifically covered by the above ruling 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 must be attached to any income_tax return to which it is relevant 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 the rulings contained in this letter are based upon information and representations submitted by taxpayer and accompanied by a penalty of perjury statement executed by plr-107175-15 an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination enclosed is a copy of this letter_ruling showing the deletions proposed to be made in the letter when it is disclosed under sec_6110 pursuant to a power_of_attorney on file with this office a copy of this letter_ruling is being sent to taxpayer’s authorized representative sincerely ______________________________ norma c rotunno senior technician reviewer branch office of the associate chief_counsel income_tax accounting cc- enc copy for sec_6110 purposes