internal_revenue_service department of the treasury number release date index nos washington dc person to contact telephone number refer reply to cc fip b03 plr-118335-03 date date legend company a company b operating partnership law firm accounting firm state x foreign_country y date date date date date plr-118335-03 date year year a dear this responds to a letter dated date submitted on behalf of company a and company b requesting an extension of time under sec_301_9100-1 of the procedure and administration regulations to make an election under sec_856 of the internal_revenue_code to treat company b as a taxable_reit_subsidiary of company a facts company a a state x corporation has elected to be taxed as a real_estate_investment_trust reit and has operated in a manner intended to maintain reit status since its inception on date company a is the sole managing general_partner of operating partnership and substantially_all of company a’s assets are held by and its operations are conducted through operating partnership as of date company a owned a percent of operating partnership through its general_partner interest on date company a formed company b as a vehicle to invest with a joint_venture partner in properties located in foreign_country y company b is wholly owned by operating partnership therefore company a indirectly owned a percent of company b as of date law firm has provided legal services to company a since year accounting firm has provided auditing and tax consulting services to company a since year a partner at a local accounting concern accountant has prepared all business tax returns elections and other tax filings for company a since year in date company a hired a tax director to manage company a’s domestic tax compliance in date company a decided to replace accountant and at that time accounting firm was engaged to prepare all business tax returns elections and other tax filings for company a when company decided to expand operations to foreign_country y the decision was made to own and operate all business operations in foreign_country y through a separate corporate entity that would qualify as a taxable_reit_subsidiary trs company a has represented that at the time of company b’s formation company a’s plr-118335-03 general counsel had discussed with accounting firm and law firm that in the general counsel’s opinion for company a to maintain its reit status it would be necessary for company a and company b to make a joint election for company b to be treated as a trs as of the date of its incorporation both accounting firm and law firm believed that as with other tax elections and filings accountant would be instructed by company a to prepare the trs election and that accountant would ensure that such election would be filed in a timely manner to ensure that the trs election would be effective as of the date of company b’s incorporation company a has represented that it believed however that the trs election would be prepared when company b was incorporated consequently company a did not instruct accountant to prepare the trs election company a has represented that because accountant did not participate in the discussions regarding the structure of the business operations in foreign_country y accountant was unaware that company b had been formed therefore accountant did not prepare the trs election while accounting firm was performing for company a its year-end reit testing and completing the checklist for reit qualifications for year it made inquiries to document that company a and company b had filed a form_8875 to elect to treat company b as a taxable_reit_subsidiary of company a after searching their files company a law firm and accounting firm could find no evidence that a form_8875 had been submitted furthermore accountant informed company a that accountant had not prepared a trs election on behalf of company a and company b because accountant was unaware of the existence of company b thus company a and company b submitted a private_letter_ruling request under sec_301_9100-1 of the regulations requesting an extension of time to file the form_8875 to elect to treat company b as a taxable_reit_subsidiary of company a and filed the form_8875 on date law and analysis the ticket to work and work incentives improvement act of p l included a change for tax years beginning after date to the reit provisions of sec_856 this change allows a reit to form a taxable_reit_subsidiary that can perform activities that otherwise would result in impermissible_tenant_service_income the election under sec_856 is made on form_8875 taxable_reit_subsidiary election officers of both the reit and the taxable_reit_subsidiary must jointly sign the form which is filed with the irs service_center in ogden ut sec_856 of the code provides that a reit and a corporation other than a reit may jointly elect to treat such corporation as a taxable_reit_subsidiary to be eligible for treatment as a taxable_reit_subsidiary sec_856 provides that the reit must directly or indirectly own stock in the corporation and the reit and the corporation must jointly elect such treatment the election is irrevocable once made plr-118335-03 unless both the reit and the subsidiary consent to its revocation in addition sec_856 specifically provides that the election and any revocation thereof may be made without the consent of the secretary in announcement i r b the service announced the availability of new form_8875 taxable_reit_subsidiary election according to the announcement this form is to be used for tax years beginning after for eligible entities to elect treatment as a taxable_reit_subsidiary the instructions to form_8875 provide that the subsidiary and the reit can make the election at any time during the tax_year however the effective date of the election depends upon when the form_8875 is filed the instructions further provide that the effective date on the form cannot be more than months and days prior to the date of filing the election or months after the date of filing the election if no date is specified on the form the election is effective on the date the form is filed with the service sec_301_9100-1 provides that the commissioner has discretion to grant a reasonable extension of time to make a regulatory election defined in sec_301_9100-1 as an election whose due_date is prescribed by regulations or by a revenue_ruling a revenue_procedure a notice or an announcement published in the internal_revenue_bulletin or a statutory election but no more than months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-3 through c i sets forth rules that the internal_revenue_service generally will use to determine whether under the particular facts and circumstances of each situation the commissioner will grant an extension of time for regulatory elections that do not meet the requirements of sec_301_9100-2 sec_301_9100-3 provides that subject_to paragraphs b i through iii of sec_301_9100-3 when a taxpayer applies for relief under this section before the failure to make the regulatory election is discovered by the service the taxpayer will be deemed to have acted reasonably and in good_faith and sec_301_9100-3 provides that the interests of the government are prejudiced if granting relief would result in the taxpayer having a lower tax_liability in the aggregate for all years to which the regulatory election applies than the taxpayer would have had if the election had been timely made taking into account the time_value_of_money conclusion based on the information submitted and representations made we conclude that company a and company b have satisfied the requirements for granting a reasonable extension of time to elect under sec_856 to treat company b as a taxable_reit_subsidiary of company a accordingly the form_8875 filed by company a and company b on date will be treated as timely filed to treat company b as a taxable_reit_subsidiary of company a as of date plr-118335-03 this ruling is limited to the timeliness of the filing of the form_8875 this ruling’s application is limited to the facts representations code sections and regulations cited herein no opinion is expressed with regard to whether company a qualifies as a reit under subchapter_m of the code no opinion is expressed with regard to whether the tax_liability of company a and company b is not lower in the aggregate for all years to which the election applies than such tax_liability would have been if the election had been timely made taking into account the time_value_of_money upon audit of the federal_income_tax returns involved the director’s office will determine such tax_liability for the years involved if the director’s office determines that such tax_liability is lower that office will determine the federal_income_tax effect this ruling is directed only to the taxpayer who requested it 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 a copy of this letter is being sent to your authorized representative sincerely yours ________________________ alice m bennett chief branch office of associate chief_counsel financial institutions products enclosures copy of this letter copy for sec_6110 purposes cc


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 b04 plr-115250-09 date september ------------------------ ------------------------- son son taxpayer ---------------------- spouse ----------------------- ------- year ----------------------------------------- firm year trust trust ------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------- dear ---------------- this responds to the letter dated date submitted on your behalf requesting an extension of time under sec_2642 of the internal_revenue_code and sec_301_9100-1 and sec_301_9100-3 of the procedure and administration regulations to make allocations of generation-skipping_transfer gst_exemption to two trusts facts the facts submitted and the representations made are as follows son and son are the children of taxpayer and spouse in year taxpayer established trust for the benefit of son and son 1’s issue also in year taxpayer established trust for the benefit of son and son 2’s issue the trusts provide for distributions of income and principal based on an ascertainable_standard for the benefit of the son for whom the trust is named and his spouse and issue during the lifetime of the respective son and the spouse of the respective son on the death of the last to die of the son and that son’s spouse the trust accumulated income and principal is to be paid to that son’s issue by right of representation plr-115250-09 taxpayer and spouse each made transfers to trust and trust in year taxpayer and spouse retained the services of firm to prepare their united_states gift and generation-skipping_transfer_tax returns form sec_709 firm was aware of the intention of taxpayer and spouse to allocate gst_exemption to the transfers so that each trust would have an inclusion_ratio of zero both form sec_709 were timely filed however the returns as filed did not correctly report the amount of the gifts made by each donor and failed to allocate the gst_exemption of taxpayer and spouse to the trusts on their respective form sec_709 spouse died in year the failure to allocate gst_exemption to the transfers to trust and trust was discovered by firm in connection with preparing spouse’s form_706 united_states estate and generation-skipping_transfer_tax return to date no taxable_distributions taxable terminations or any other events have occurred with respect to the trusts that would give rise to a gst tax_liability on the part of either trust or any of its beneficiaries taxpayer now requests an extension of time under sec_2642 and sec_301_9100-3 to allocate taxpayer’s gst_exemption to the transfers made to trust and trust in year and requests a ruling that the gst_exemption allocated to the transfers will be effective as of the date of the transfers law and analysis sec_2601 imposes a tax on every gst a gst is defined under sec_2611 as a taxable_distribution a taxable_termination and a direct_skip sec_2602 provides that the amount of the tax is the taxable_amount multiplied by the applicable_rate sec_2641 defines applicable_rate as the product of the maximum_federal_estate_tax_rate and the inclusion_ratio with respect to the transfer sec_2642 provides the method for determining the inclusion_ratio under sec_2642 the inclusion_ratio with respect to any property transferred in a generation- skipping transfer is generally defined as the excess of over the applicable_fraction the applicable_fraction as defined in sec_2642 is a fraction the numerator of which is the amount of gst_exemption under sec_2631 allocated to the trust or to property transferred in a direct_skip and the denominator of which is the value of the property transferred to the trust or involved in the direct_skip under sec_2631 in effect at the time of the transfer for purposes of determining the inclusion_ratio every individual shall be allowed a gst_exemption equal to dollar_figure for the year at issue that may be allocated by such individual or his executor to any property with respect to which such individual is the transferor sec_2631 provides that any allocation under sec_2631 once made shall be irrevocable plr-115250-09 sec_2632 provides that any allocation by an individual of his or her gst_exemption under sec_2631 may be made at any time on or before the date prescribed for filing the estate_tax_return for such individual's estate determined with regard to extensions regardless of whether such a return is required to be filed sec_26_2632-1 of the generation-skipping_transfer_tax regulations in effect at the time of the transfer provides that an allocation of gst_exemption to property transferred during the transferor's lifetime other than in a direct_skip is made on form_709 sec_2642 provides that the secretary shall by regulation prescribe such circumstances and procedures under which extensions of time will be granted to make an allocation of gst_exemption described in sec_2642 or and an election under sec_2632 or c such regulations shall include procedures for requesting comparable relief with respect to transfers made before the date of the enactment of this paragraph sec_2642 provides that in determining whether to grant relief under this paragraph the secretary shall take into account all relevant circumstances including evidence of intent contained in the trust instrument or instrument of transfer and such other factors as the secretary deems relevant for purposes of determining whether to grant relief under this paragraph the time for making the allocation or election shall be treated as if not expressly prescribed by statute notice_2001_50 2001_2_cb_189 provides that under sec_2642 the time for allocating the gst_exemption to lifetime transfers and transfers at death the time for electing out of the automatic allocation rules and the time for electing to treat any trust as a gst_trust are to be treated as if not expressly prescribed by statute the notice further provides that taxpayers may seek an extension of time to make an allocation described in sec_2642 or b or an election described in sec_2632 or c under the provisions of sec_301_9100-3 of the procedure and administration regulations sec_301_9100-1 provides that the commissioner has discretion to grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except in subtitles e g h and i sec_301_9100-3 provides that in general requests for extensions of time for regulatory elections that do not meet the requirements of sec_301_9100-2 must be made under the rules of sec_301_9100-3 under sec_301_9100-1 a regulatory election includes an election whose due_date is prescribed by a notice published in the internal_revenue_bulletin in accordance with plr-115250-09 sec_2642 and notice_2001_50 taxpayers may seek an extension of time to make an election described in sec_2642 or b or an election described in sec_2632 or c under the provisions of sec_301_9100-3 requests for relief under sec_301_9100-3 will be granted when the taxpayer provides the evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-3 provides that a taxpayer is deemed to have acted reasonably and in good_faith if the taxpayer reasonably relied on a qualified_tax professional including a tax professional employed by the taxpayer and the tax professional failed to make or to advise the taxpayer to make the election based on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-3 have been satisfied therefore taxpayer is granted an extension of time of sixty days from the date of this letter to allocate taxpayer’s available gst_exemption with respect to the transfers taxpayer made to trust and trust in year although the allocations will be treated as being affirmatively made on the date of the transfers we are specifically not ruling on whether any transfer made by taxpayer is subject_to an estate_tax_inclusion_period under sec_2642 and accordingly we are not ruling on the effective date of the allocations in addition we are specifically not ruling on the transfer_tax value of the year transfers to trust and trust to be used in determining the inclusion_ratio of each trust under sec_2642 the allocations should be made on a form_709 for the year in which the transfers were made and the form_709 should be filed with the internal_revenue_service center cincinnati ohio a copy of this letter should be attached to the returns 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 or implied as to the value for federal transfer_tax purposes of the transfers by taxpayer and spouse to trust and trust finally no opinion is expressed or implied as to whether the transfers by taxpayer and spouse are properly characterized as an indirect transfer by taxpayer and spouse of the underlying asset the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination plr-115250-09 this ruling is directed only to the taxpayer requesting it 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 a copy of this letter is being sent to your authorized representative sincerely curt g wilson associate chief_counsel passthroughs special industries enclosure copy for sec_6110 purposes


office_of_chief_counsel internal_revenue_service memorandum number release date cc tege eoeg et1 postn-163331-04 uilc date date to director submission processing cincinnati oh attn entity unit from office of division counsel associate chief_counsel tax exempt government entities ------------------------------------------- subject railroad_retirement_tax_act status in accordance with the coordination procedure established between the service and the railroad retirement board rrb the rrb has provided us with its opinion that the following business became an employer under the railroad retirement act and the railroad unemployment insurance act effective ------------------------- --------------------------------------------------- ------------------------------------------- ------------------------------------------------------- we have reviewed the opinion of the rrb and based upon the information submitted to us by the rrb we also conclude that --------------------------------------------became an employer under the railroad_retirement_tax_act effective ------------------------- please take the appropriate action regarding this business janine cook


gf the treasur’ nepartment a internal_revenue_service washington d c aug -7 uniform issue list se tep rats al ar - tax exemft and government entities division legend ira x account d amount a date date date company a dear this is in response to a request you submitted on date in which you request a waiver of the 60-day rollover requirement contained in sec_408 d of the internal_revenue_code the code the following facts and representations have been submitted under penalty of perjury in support of the ruling requested you assert that your failure to accomplish a rollover of amount a within the 60-day period prescribed by sec_408 d of the code was due to the failure of amount a to be deposited into an ira per your instructions you have documented that you have not used amount a for any other purposes you are years old you had an individual_retirement_arrangement ira ira x which was maintained by company a you telephoned company a on date to change the beneficiary of ira x as a result of this call company a mailed you a form for your signature you signed and returned the form to company a you believed instead that by signing this form you would only be changing the beneficiary of ira x on date amount a was transferred from ira x to account d anon-ira account an action you assert you did not request or intend account d is also maintained by in order page company a you assert that this transaction did not reflect your intent that amount a remain in an ira at all times you assert that you became aware that a taxable_distribution of amount a from ira x had taken place on date when you received a form 1099-r from company a date is outside the statutory 60-day window provided for rollovers you were unable to execute a timely rollover of amount a due to the expiration of the 60-day period based on the facts and representations you request a ruling that the internal_revenue_service waive the 60-day rollover requirement with respect to the distribution of amount a contained in sec_408 d of the code in this instance sec_408 d of the code provides that except as otherwise provided in sec_408 d any amount_paid or distributed out of an ira shall be included in gross_income by the payee or distributee as the case may be in the manner provided under sec_72 of the code sec_408 d of the code defines and provides the rules applicable to ira_rollovers sec_408 d a of the code provides that sec_408 d of the code does not apply to any amount_paid or distributed out of an ira to the individual for whose benefit the ira is maintained if-- i the entire amount received including money and any other_property is paid into an ira for the benefit of such individual not later than the day after the day on which the individual receives the payment or distribution or ii the entire amount received including money and any other_property is paid into an eligible_retirement_plan other than an ira for the benefit of such individual not later than the day after the date on which the payment or distribution is received except that the maximum amount which may be paid into such plan may not exceed the portion of the amount received which is includible in gross_income determined without regard to sec_408 d sec_408 d b of the code provides that sec_408 d does not apply to any amount described in sec_408 d a i received by an individual from an ira if at any time during the 1-year period ending on the day of such receipt such individual received any other amount described in sec_408 d a i from an ira which was not includible in gross_income because of the application of sec_408 qd sec_408 d e of the code provides that the rollover provisions of sec_408 d do not apply to any amount required to be distributed under sec_408 a page sec_408 d i of the code provides that the secretary may waive the 60-day requirement under sec_408 d a of the code where the failure to waive such requirement would be against equity or good conscience including casualty disaster or other events beyond the reasonable control of the individual subject_to such requirement only distributions that occurred after date are eligible for the waiver under sec_408 d i of the code revproc_2003_16 r b date provides that in determining whether to grant a waiver of the 60-day rollover requirement pursuant to sec_408 d i of the code the service will consider all relevant facts and circumstances including errors committed by a financial_institution inability to complete a rollover due to death disability hospitalization incarceration restrictions imposed by a foreign_country or postal error the use of the amount distributed for example in the case of payment by check whether the check was cashed and the time elapsed since the distribution occurred the information presented and documentation you submitted is consistent with your assertion that your failure to accomplish a timely rollover was due to the failure of amount a to be deposited into an ira per your instructions therefore pursuant to sec_408 d i of the code the service hereby waives the 60-day rollover requirement with respect to the distribution of amount a less amounts described below from ira x you are granted a period of days from the issuance of this letter_ruling to contribute amount a into a rollover ira provided all other requirements of sec_408 d of the code except the 60-day requirement are met with respect to such contribution amount a less amounts described below will be considered a rollover_contribution within the meaning of sec_408 d of the code no opinion is expressed as to the tax treatment of the transaction described herein under the provisions of any other section of either the code or regulations which may be applicable thereto this letter expresses no opinion as to whether ira x satisfied the requirements of sec_408 of the code sec_408 d e of the code provides that the rollover provisions of sec_408 d do not apply to any amount required to be distributed under sec_408 a this letter is directed only to the taxpayer who requested it sec_6110 k of the code provides that it may not be used or cited as precedent if you wish to inquire about this ruling please address all correspondence to se t ep ra t3 oo yours if v4 rances v sloan n mahager employee_plans ‘technical group enclosures deleted copy of ruling letter notice of intention to disclose


internal_revenue_service number release date index number ------------------------ ----------------------------- -------------------------------- ------------------------- -------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ----------------------- id no ------------- telephone number --------------------- refer reply to cc corp b04 plr-144663-09 date date legend parent distributing controlled sub sub sub ---------------------------------------------------- ---------------------------------------------------- ----------------------- ---------------------------------------------------- ---------------------------- ---------------------------------------------------- ---------------------------------------------------- ---------------------------- ---------------------------------------------------- ---------------------------------------------------- ---------------------------------------------------- ----------------------- ---------------------------------------------------- ---------------------------------------------------- ---------------------------------------------------- ----------------------- ---------------------------------------------------- ---------------------------------------------------- plr-144663-09 sub sub sub sub sub sub sub a country a business x business y ---------------------------------------------------- ---------------------------------------------------- ------------------------ ---------------------------------------------------- ---------------------------------------------------- ---------------------------------------------------- ---------------------------------------------------- ----------------------- ---------------------------------------------------- ----------------------------- ---------------------------------------------------- ---------------------------------------------------- -------------------- ---------------------------------------------------- -------------------- ---------------------------------------------------- ----------------------- ---------------------------------------------------- ---------------------------- ---------------------------------------------------- ----------------------------- ------ --------- ---------------------------------------------------- ---------------------------------------------------- ---------------------------------------------------- ---------------------------------------------------- ---------------------------------------------------- - ---------------------------------------------------- ---------------------------------------------------- ---------------------------------------------------- --------- plr-144663-09 agency ------------------------------------------ certain legal requirements ---------------------------------------------------- ----------------- date -------------------- dear ----------------- this letter responds to your date request for rulings as to the federal_income_tax consequences of a partially completed and proposed transaction the proposed transaction the information provided 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 penalty of perjury statement executed by an appropriate party this office has not verified any of the materials submitted in support of the request for rulings verification of the information representations and other data may be required as part of the audit process in particular this office has not reviewed any information pertaining to and has made no determination regarding whether the proposed transaction i satisfies the business_purpose requirement of sec_1_355-2 of the income_tax regulations ii is being 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 as amended the code and sec_1_355-2 or iii is part of a plan or series of related transactions pursuant to which one or more persons will acquire directly or indirectly stock representing a 50-percent_or_greater_interest in the distributing_corporation or the controlled_corporation see sec_355 and sec_1_355-7 summary of facts parent is the common parent of an affiliated_group whose includible corporations join in the filing of a consolidated federal_income_tax return the parent group in relevant part parent owns all of the voting_stock of sub and sub sub owns all of the voting_stock of sub while parent owns all of the nonvoting_stock of sub sub owns more than a percent greater than of the stock of distributing which is incorporated in country a and is a controlled_foreign_corporation within the meaning of plr-144663-09 sec_957 distributing owns more than a percent of the stock of controlled also a corporation incorporated in country a and a controlled_foreign_corporation within the meaning of sec_957 sub owns all of the stock of sub sub owns all of the stock of sub sub sub sub sub and sub each of sub through sub is classified as a corporation for federal_income_tax purposes under sec_301_7701-2 and sec_301_7701-3 distributing and the members of its separate_affiliated_group as defined in sec_355 the distributing sag directly engage in business x controlled and the members of its separate_affiliated_group as defined in sec_355 the controlled sag directly engage in business y financial information has been submitted indicating that business x and business y each has had gross_receipts and operating_expenses representing the active_conduct_of_a_trade_or_business for each of the past five years parent is regulated by agency as a result parent and certain of its subsidiaries including sub are required to comply with certain legal regulations which limit sub 2’s ability to ------------------------------------ parent has determined that the proposed transaction will serve the corporate business_purpose of increasing sub 2’s --------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------- the corporate business_purpose ---------------------------------------currently reflected in sub 3’s indirect ownership of controlled proposed transaction to achieve the business purposes described above the parent group has undertaken and proposes to undertake the following steps i ii iii on date distributing contributed its assets related to business y as well as the operational employees of business y to controlled the contributed assets in exchange for additional shares of controlled stock and the assumption_of_liabilities associated with the contributed assets the contribution distributing will sell all of its shares of controlled stock to sub in exchange for a receivable from sub as soon as practicable after step ii following the completion of an audit confirming the existence of sufficient distributable reserves and as part of an overall plan_of_reorganization distributing will distribute the entire sub receivable received in step ii to sub together with step ii the plr-144663-09 distribution the form of the distribution is structured to conform to the corporate laws of country a iv v sub will contribute the shares of controlled stock received from distributing in step ii to sub in a transaction intended to qualify as a sec_351 transaction sub will sell the shares of sub stock received in exchange for the shares of controlled stock in step iv to sub for cash equal to the fair_market_value of the sub shares in an intercompany_transaction within the meaning of sec_1_1502-13 in connection with the proposed transaction distributing and controlled will enter into certain intercompany arrangements for continuing services pursuant to such arrangements distributing will continue to provide to controlled common support services distributing will also continue to provide certain business x services to controlled representations the taxpayer has made the following representations in connection with the proposed transaction a b c d e the indebtedness if any owed by controlled to distributing after the distribution will not constitute stock_or_securities no part of the consideration to be distributed in the distribution will be received by sub as a creditor employee or in any capacity other than that of a shareholder of distributing the five years of financial information submitted on behalf of business x as conducted by the distributing sag represents the present business operations 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 y as conducted by the controlled sag represents the present business operations and with regard to such business there have been no substantial operational changes since the date of the last financial statements submitted the distributing sag neither acquired_business x nor acquired control of an entity conducting business x 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 in whole or in part throughout the five-year period ending on the date of the distribution the distributing sag has been the plr-144663-09 f g h i j k principal_owner of the goodwill and significant assets of business x and will continue to be the principal_owner following the distribution the controlled sag neither acquired_business y nor acquired control of an entity conducting business y 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 in whole or in part throughout the five-year period ending on the date of the distribution the controlled sag has been the principal_owner of the goodwill and significant assets of business y and the controlled sag will continue to be the principal_owner following the distribution following the distribution the distributing sag will continue the active_conduct of business x and the controlled sag will continue the active_conduct of business y independently and with their separate employees except as provided in the continuing arrangements the distribution will be carried out for the corporate business_purpose the distribution is motivated in whole or in substantial part by the corporate business_purpose the distribution is not being used principally as a device for the distribution of the earnings_and_profits of distributing or controlled or both 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 distributing stock entitled to vote or percent or more of the total value of shares of all classes of distributing stock that was acquired by purchase as defined in sec_355 and during the five-year period determined after applying sec_355 ending on the date of the distribution 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 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 plr-144663-09 l m n o p q r the distribution is not part of a plan or series of related transactions within the meaning of sec_355 pursuant to which one or more persons will acquire directly or indirectly stock possessing percent or more of the total combined voting power of all classes of stock of either distributing or controlled or stock possessing percent or more of the total value of all classes of stock of either distributing or controlled the total fair_market_value of the assets that distributing will transfer to controlled in the contribution will exceed the sum of i the total liabilities if any assumed within the meaning of sec_357 by controlled ii the amount of liabilities if any owed to controlled by distributing that are discharged or extinguished in the exchange and iii the amount of cash and the fair_market_value of the property if any other than stock and securities permitted to be received under sec_361 without the recognition of gain received by distributing from controlled in the exchange the fair_market_value of the assets of controlled will exceed the amount of its liabilities immediately after the distribution the total adjusted bases and the fair_market_value of the assets transferred to controlled by distributing in the contribution will equal or exceed the sum of i any liabilities assumed within the meaning of sec_357 by controlled and ii the total amount of money and other_property within the meaning of sec_361 received by distributing and transferred by it to its creditors and shareholders in connection with the plan_of_reorganization the liabilities assumed within the meaning of sec_357 by controlled in the contribution and the liabilities to which the transferred assets are subject were incurred in the ordinary course of business and are associated with the transferred assets except for indebtedness created in the ordinary course of business no intercorporate debt will exist between distributing and controlled at the time of or subsequent to the distribution payments made in connection with all continuing transactions between distributing and controlled will be for fair_market_value based on terms and conditions arrived at by the parties bargaining at arm’s length no two parties to the transaction are investment companies as defined in sec_368 and iv immediately after the distribution taking into account sec_355 neither distributing nor controlled will be a disqualified_investment_corporation within the meaning of sec_355 plr-144663-09 s t u v w x y z distributing and controlled and their respective shareholders will each pay their own expenses if any incurred in connection with the proposed transaction immediately after the sale of the shares of controlled stock to sub distributing will have sufficient distributable reserves available to distribute the receivable back to sub the contribution by distributing to controlled of the contributed assets in exchange for additional shares of controlled was not an exchange described in sec_1_367_b_-4 sec_1_367_b_-4 or sec_1_367_b_-4 distributing and controlled were controlled_foreign_corporations within the meaning of sec_957 immediately before and after the contribution sub was a sec_1248 shareholder within the meaning of sec_1_367_b_-2 with respect to each of distributing and controlled immediately before and after the contribution distributing and controlled were not passive foreign investment companies pfics within the meaning of sec_1297 immediately before or after the contribution distributing did not hold any united_states real_property interests as defined in sec_897 immediately before or after the contribution distributing and controlled will be controlled_foreign_corporations within the meaning of sec_957 immediately before and after the distribution aa sub will be a sec_1248 shareholder within the meaning of sec_1_367_b_-2 with respect to each of distributing and controlled immediately before and after the distribution bb distributing and controlled will not be pfics within the meaning of sec_1297 immediately before or after the distribution cc controlled will not hold any united_states real_property interests as defined in sec_897 immediately before or after the distribution based solely on the information submitted we rule as follows rulings plr-144663-09 step i step ii and step iii of the proposed transaction will be treated as if distributing contributed the contributed assets to controlled in exchange for additional shares of controlled stock and the assumption_of_liabilities associated with the contributed assets and then distributed the controlled shares to sub rev_rul c b the contribution together with the distribution will be a reorganization within the meaning of sec_368 distributing and controlled will each be a_party_to_a_reorganization within the meaning of sec_368 distributing will recognize no gain_or_loss in the contribution sec_357 and sec_361 controlled will recognize no gain_or_loss in the contribution sec_1032 controlled’s basis in each asset received in the contribution will be equal to the basis of the asset in the hands of distributing immediately prior to its transfer 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 recognize no gain_or_loss in the distribution sec_361 sub will recognize no gain_or_loss and otherwise will recognize no amount in income upon its receipt of controlled stock in the distribution sec_355 however any distribution by distributing to sub in excess of the sub receivable will be subject_to the provisions of sec_301 see revrul_83_142 c b sub 3’s aggregate basis in the distributing and controlled stock will equal the aggregate basis of the stock of distributing held by sub immediately before the distribution allocated between the distributing stock and the controlled stock in proportion to the fair_market_value of each under sec_1_358-2 sub 3’s holding_period in the controlled stock received will include the holding_period of the distributing stock with respect to which the distribution is made provided that such distributing stock is held as a capital_asset on the date of the 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 plr-144663-09 the contribution will be an exchange to which sec_1_367_b_-1 and -4 a apply no amount will be included in income as a deemed_dividend equal to the sec_1248 amount under sec_367 as a result of the contribution the distribution will be an exchange to which sec_1_367_b_-1 sec_1_367_b_-5 and sec_1_367_b_-5 apply if sub 3’s postdistribution amount as defined in sec_1_367_b_-5 with respect to distributing or controlled is less than its predistribution amount as defined in sec_1_367_b_-5 with respect to distributing or controlled sub 3’s basis in such stock immediately after the distribution must be reduced by the amount of the difference however sub 3’s basis in such stock must not be reduced below zero and to the extent the foregoing reduction would reduce its basis below zero sub must instead include such amount in income as a deemed_dividend from such corporation if sub reduces the basis in the stock of distributing or controlled or has an inclusion with respect to such stock sub must increase its basis in the stock of the other corporation to the extent provided in sec_1_367_b_-5 caveats we express no opinion about the tax treatment of the proposed transaction under other provisions of the code and regulations or about the tax treatment of any conditions existing at the time of or effects resulting from the proposed transaction that are not specifically covered by the above rulings in particular we express no opinion regarding the following i ii whether the proposed transaction satisfies the business_purpose requirement of sec_1_355-2 whether the proposed transaction is being used principally as a device for the distribution of the earnings_and_profits of distributing or controlled or both see sec_355 and sec_1_355-2 iii whether any distribution described above and an acquisition or acquisitions are part of a plan or series of related transactions under sec_355 iv v the tax consequences of steps iv and v of the proposed transaction to the extent not otherwise specifically ruled upon above the adjustments to earnings_and_profits or deficits in earnings_and_profits if any in any of the transactions to which sec_367 or b apply plr-144663-09 vi to the extent not otherwise specifically ruled upon above any other consequences under sec_367 with respect to any transaction described in this letter_ruling vii whether any or all of the above-referenced foreign_corporations are pfics within the meaning of sec_1297 if it is determined that any such corporations are pfics no opinion is expressed with respect to the application of sec_1291 through to the proposed transactions in particular in a transaction in which gain is not otherwise recognized regulations under sec_1291 may require gain recognition notwithstanding any other provisions of the code procedural statements this ruling 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 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 letter_ruling in accordance with a power_of_attorney on file in this office a copy of this letter_ruling is being sent to your authorized representative sincerely __________________ richard k passales senior counsel branch office of associate chief_counsel corporate cc


tcmemo_2014_177 united_states tax_court delbert m bunch and ernestine l bunch petitioners v commissioner of internal revenue respondent docket no filed date ps claimed a deduction for a bad_debt_loss on their schedule a itemized_deductions ps subsequently filed a form 1040x amended u s individual_income_tax_return and characterized the claimed bad_debt_loss as a theft_loss on their schedule c profit or loss from business r determined that ps were not eligible for a theft_loss or bad_debt_loss deduction for the tax_year and issued a notice_of_deficiency disallowing a current deduction for the claimed loss held ps are unable to deduct their loss as a theft_loss for the tax_year held further ps are unable to deduct their loss as a bad_debt_loss for the tax_year delbert m bunch and ernestine l bunch pro sese wesley j wong for respondent memorandum findings_of_fact and opinion wherry judge this case is before the court on a petition for redetermination of a deficiency in income_tax respondent determined for petitioners’ tax_year on or before date petitioners filed a joint federal_income_tax return for the tax_year on date petitioners filed a form 1040x amended u s individual_income_tax_return for the tax_year on date respondent issued to petitioners a notice_of_deficiency for the tax_year disallowing a deduction for petitioners’ claimed bad_debt_loss of dollar_figure in the notice respondent also determined that petitioners were not allowed to deduct the loss of dollar_figure as a theft_loss the only issues for decision are whether petitioners may claim a bad_debt deduction of dollar_figure for the tax_year and if not whether petitioners may claim a theft_loss of dollar_figure for the tax_year unless otherwise indicated all section references are to the internal_revenue_code_of_1986 as amended and in effect for the taxable_year at issue all rule references are to the tax_court rules_of_practice and procedure we round all dollar amounts to the nearest dollar this amount is dollar_figure reduced to reflect statutory limitations of dollar_figure and of adjusted_gross_income see sec_165 h findings_of_fact according to their federal_income_tax return petitioner delbert m bunch is a broker and petitioner ernestine l bunch a consultant at the time the petition was filed mr and mrs bunch resided in las vegas nevada loan to mortgage co in petitioners discovered an opportunity in a newspaper advertisement to invest in u s a commercial mortgage co mortgage co mortgage co raised money from investors and made loans to developers for the construction of real_estate in date mortgage co created the diversified trust deed fund diversified fund an unregistered investment fund joseph d milanowski then mortgage co ’s president was actively involved in the diversified fund on date petitioners and some of their family members loaned mortgage co dollar_figure million of which petitioners contributed dollar_figure in exchange for a promissory note note according to the note petitioners and their colenders were to be paid interest at a rate of per annum with the principal due one year after the final interest payment the note provided that the loan was secured_by one or more collateral assignments of deeds of trust the note contained an acceleration clause which stated that u pon the occurrence of an event of default lender may declare the entire principal balance of the note then outstanding to be due and payable immediately mr milanowski signed the note on mortgage co ’s behalf in his capacity as its president in several loans in mortgage co ’s portfolio apparently went into default petitioners were not aware of these defaults they never received any monthly or quarterly statements with respect to their loans they never knew what mortgage co did with the principal from their note petitioners and their family members received their regular_interest payments according to the note until date mortgage co ’s bankruptcy proceeding on date mortgage co filed for bankruptcy under chapter of the united_states bankruptcy code according to its bankruptcy petition mortgage co had dollar_figure-dollar_figure million in assets and dollar_figure-dollar_figure million in outstanding liabilities at the time of filing when mr milanowski pleaded guilty to wire fraud on date in connection with the diversified fund his plea agreement with the united_states stated more specifically that as of date when it filed for bankruptcy mortgage co had approximately dollar_figure million in assets under its management on date mr bunch and a group of unsecured nonpriority claimants related to him filed a proof_of_claim for dollar_figure against mortgage co in the u s bankruptcy court for the district of nevada bankruptcy court petitioners allege they filed the proof_of_claim in order to prove their loss and get tax refunds nearly three years later on date the bankruptcy court allowed petitioners’ claim against mortgage co as a general unsecured claim in the amount of dollar_figure the claim’s allowance occurred before a dollar_figure million interim distribution to creditors approved by the bankruptcy court on date petitioners received at least one distribution from mortgage co ’s bankruptcy_estate though the record does not clearly establish its timing in a disclosure statement submitted to the court mortgage co estimated that it would have sufficient funds to pay -33 of all general unsecured claims after payments to higher priority creditors and at a meeting petitioners were advised that they could expect to recover around dollar_figure of their loaned funds in date the chapter bankruptcy trustee reported that the first interim distribution in late had covered of allowed unsecured claims on a pro_rata basis and that a second interim distribution in date had raised the aggregate percentage to see second motion to extend the usacm liquidating trust’s scheduled termination date pincite in re usa commercial mortgage co no bk-s-06-10725-lbr bankr d nev date a court may take judicial_notice of appropriate adjudicative facts at any stage in a proceeding whether or not the parties request it see fed r evid c f see also 116_f3d_422 9th cir observing that a court may take judicial_notice sua sponte in general the court may take notice of facts that are capable of accurate and ready determination by resort to sources whose accuracy cannot reasonably be questioned fed r evid b as we do here a court may take judicial_notice of pleadings and court orders filed in related proceedings see 99_f3d_289 n 9th cir ample precedent exists for our reliance on electronic versions available through the official web site of the u s bankruptcy court for the district of nevada see eg 266_fedappx_392 6th cir holding that court could take judicial_notice of information on the inmate locator which enables the public to track the location of federal inmates is maintained by the federal bureau of prisons and is accessed through the agency’s web site to discover that appellant had been released since the filing of his appeal and conclude that there remained no actual injury which the court could redress with a favorable decision and thus dismiss the appeal as moot 330_f3d_919 7th cir holding that district_court erred when it refused to take judicial_notice of information on official web site of federal_agency that maintained medical records on retired military personnel the fact of which was appropriate for judicial_notice because it is not subject_to reasonable dispute 609_fsupp2d_895 ndollar_figure d ariz plaintiffs place a great deal of credence in federal agency’s website but they did not request that the court take judicial_notice of that website in the exercise of its discretion however as fed r evid c allows the court will take judicial_notice of that website we emphasize however that we take judicial_notice of the trustee’s report only for the fact of its content and not for the truth of that content at trial neither party introduced documentary_evidence to substantiate whether mr and mrs bunch in fact benefited from the interim distributions the trustee describes donald r walker a member of the unsecured creditors’ committee committee for mortgage co ’s bankruptcy proceeding testified that the committee learned of the loss in the latter part of just before the bankruptcy plan was confirmed during the committee discussed bringing criminal charges against mr milanowski and attorneys for some creditors communicated with the federal bureau of investigation fbi about prosecuting him mr bunch testified that petitioners learned of mortgage co ’s bankruptcy and that their loaned funds had been lost or stolen in through a meeting with mr milanowski and examination of mortgage co ’s tax returns and financial statements he also testified however that mr milanowski did not reveal during the meeting that mortgage co had fraudulently misrepresented its assets and liabilities in its bankruptcy filings and that petitioners learned only later that mortgage co ’s reported financials were untrue tax returns petitioners filed a form_1040 u s individual_income_tax_return for taxable_year they claimed a bad_debt deduction of dollar_figure on their form 1040x they changed their claimed bad_debt deduction of dollar_figure to a theft_loss deduction of dollar_figure on date respondent issued petitioners a notice_of_deficiency for taxable_year determining a deficiency in income_tax of dollar_figure opinion petitioners sought to deduct the unrecovered funds they had advanced to mortgage co first as a bad_debt_loss and later as a theft_loss we examine both alternatives either way deductions are a matter of legislative grace and petitioners bear the burden of proving that they are entitled to the deduction claimed rule a see also 503_us_79 308_us_488 292_us_435 although sec_7491 may shift the burden_of_proof in specified circumstances petitioners did not argue and in any event have not established that they meet the prerequisites under sec_7491 and for such a shift i bad_debt deduction an individual taxpayer is entitled to a deduction for a debt business or nonbusiness that becomes wholly worthless during the taxable_year see sec_166 sec_1_166-5 income_tax regs the distinction between a business_bad_debt and a nonbusiness_bad_debt is important because business bad_debts offset ordinary_income dollar for dollar see sec_166 d a while a nonbusiness_bad_debt is treated as a loss arising from the sale_or_exchange of a capital_asset held for not more than one year see sec_166 sec_1 a income_tax regs the distinction between business and nonbusiness_bad_debt matters for a second reason as well for an individual taxpayer a deduction may also be allowed for a business_bad_debt that is only partially worthless to the extent it is charged off during the taxable_year sec_166 d business_debts are defined in sec_166 as those created or acquired in connection with a trade_or_business of the taxpayer or a debt the loss from the worthlessness of which is incurred in the taxpayer’s trade_or_business petitioners’ evidence does not show that the debt at issue here is a business debt rather they were merely investors in mortgage co therefore the debt was a nonbusiness_debt see 373_us_193 because petitioners’ loan to mortgage co was a nonbusiness_debt petitioners must establish that the debt was wholly worthless within the meaning of sec_166 as of the close of in order to be entitled to a deduction for that year there is no standard test for determining worthlessness whether and when a debt becomes worthless depends on all the facts and circumstances 14_tc_1282 in general the year of worthlessness must be established by identifiable events constituting reasonable grounds for abandoning any hope of recovery 77_tc_582 a creditor’s determination that there is no hope of recovery_of a debt due and owing must be made in the exercise of sound business judgment and based upon information that is as complete as is reasonably obtainable regarding the debtor’s financial condition or ability to satisfy the debt but the creditor need not be an incorrigible optimist see 54_tc_239 on date petitioners filed a proof_of_claim in the bankruptcy court against mortgage co a proof_of_claim is a written_statement setting forth a creditor’s claim fed r bankr p a an executed proof_of_claim that is correctly filed constitutes prima facie evidence of the validity and amount of the claim id para f once a creditor files a proof_of_claim and the claim is accepted or allowed by the bankruptcy court the creditor becomes entitled to participate in any distribution from the bankruptcy_estate to the extent of that creditor’s rights relative to those of other creditors in the bankruptcy see u s c sec_502 a providing that creditor’s claim proof of which is filed is deemed allowed absent objection by a party in interest and for distribution of bankruptcy_estate in payment of allowed claims petitioners allege they filed the proof_of_claim in order to prove their loss and get tax refunds even if we were to accept that the proof_of_claim established the amount of petitioners’ loss the document does not establish that petitioners had no hope of recovery in on the contrary it tends to establish the reverse by filing a proof_of_claim in mortgage co ’s bankruptcy petitioners took the requisite step to secure a place in the order of distribution from the bankruptcy_estate and thereby increased their odds of recovering at least some of the loaned funds moreover in there was no clear indication of what mortgage co ’s assets and liabilities were mortgage co asserted that it had excess_assets and the truth or falsity of this assertion was neither revealed in the bankruptcy proceeding nor otherwise known to petitioners until after further as of the end of the bankruptcy court had yet to allow or disallow petitioners’ claim so they could not know definitively what portion of their loss if any might be satisfied from the bankruptcy_estate hence the information reasonably obtainable by petitioners indicated they had some hope of at least a partial recovery as of date that hope would not have been vain three years later the bankruptcy court authorized partial repayment of unsecured creditors like petitioners by way of two interim distributions accordingly petitioners are not entitled to deduct a bad_debt_loss for because they could not establish by the end of the tax_year the amount of their loan that they were not going to recover from mortgage co ii the theft_loss deduction sec_165 permits a deduction against ordinary_income for any loss sustained during the taxable_year and not_compensated_for_by_insurance_or_otherwise for individuals the deduction is limited to losses_incurred in a trade_or_business losses_incurred in any transaction entered into for profit though not connected with a trade_or_business and losses of property not connected with a trade_or_business or a transaction entered into for profit if such losses arise from fire storm shipwreck or other_casualty or from theft sec_165 a taxpayer who like petitioners claims a loss deduction due to theft pursuant to sec_165 must prove two elements to properly substantiate a deduction first the taxpayer must prove that the loss is attributable to a theft that was established as such in the year for which the deduction is claimed and second because sec_165 allows the deduction for the year in which a loss is sustained the taxpayer must demonstrate that the loss was incurred in the year for which the deduction is claimed petitioners have not proven that--as of date--because of a theft they had no hope of recovering any of the funds they had loaned to mortgage co the term theft in sec_165 is a word of general and broad meaning that includes any criminal appropriation of another’s property such as theft by swindling false pretenses and other forms of guile 232_f2d_107 5th cir sec_1_165-8 income_tax regs whether a theft_loss has been established depends upon the law of the state where the alleged theft occurred 540_f2d_448 9th cir aff’g 61_tc_354 79_tc_846 63_tc_736 aff’d without published opinion 523_f2d_1053 5th cir a taxpayer must prove a theft occurred under applicable state law by only a preponderance_of_the_evidence see 16_tc_163 if the reasonable inferences from the evidence point to theft the proponent is entitled to prevail if the contrary be true and reasonable inferences point to another conclusion the proponent must fail in mr milanowski pleaded guilty to wire fraud however a criminal conviction is not necessary in order for a taxpayer to demonstrate a theft_loss see 34_tc_688 petitioners and mr walker testified that they discovered mortgage co ’s losses in additionally according to mr walker in the committee discussed bringing criminal charges against mr milanowski the committee had been talking with the fbi in about a criminal investigation of mr milanowski petitioners have not provided enough evidence to prove using only information available in that mr milanowski was a thief even under the lesser standard of preponderance_of_the_evidence even if the court were to accept that petitioners could have proven mr milanowski a thief in they would still need to prove that they sustained a theft_loss in generally a theft_loss is treated as sustained during the taxable_year in which the taxpayer discovers it sec_165 e however even after a theft_loss is discovered if a claim for reimbursement exists during the year of the loss with respect to which there is a reasonable prospect of at least some recovery then a theft_loss is treated as sustained only when it can be ascertained with reasonable certainty whether such reimbursement for the loss will be obtained and the amount thereof 128_f3d_1410 10th cir aff’g tcmemo_1995_342 sec_1_165-1 a as the court_of_appeals for the tenth circuit explained under the internal_revenue_code a theft_loss is not sustained at the time the theft actually occurs rather any loss arising from theft continued income_tax regs stated differently a reasonable_prospect_of_recovery will postpone the theft_loss deduction until such time as the prospect no longer exists continued shall be treated as sustained during the taxable_year in which the taxpayer discovers such loss sec_165 further the treasury regulations provide that even after a theft_loss is discovered if a claim for reimbursement exists during the year of the loss with respect to which there is a reasonable_prospect_of_recovery then a theft_loss is treated as sustained only when it can be ascertained with reasonable certainty whether or not such reimbursement for the loss will be obtained sec_1_165-1 sec_1 d accord sec_1_165-8 in essence this has been interpreted to mean that the existence of a claim of reimbursement with a reasonable_prospect_of_recovery will prevent a loss from being considered as sustained unless and until it is determined with reasonable certainty that such reimbursement will not be obtained see eg 433_f2d_640 3rd cir 128_f3d_1410 10th cir aff’g tcmemo_1995_342 petitioners specifically sought to deduct a theft_loss pursuant to sec_165 but sec_165 has two additional paragraphs as we have concluded see supra p petitioners’ loan to mortgage co was not connected to a trade_or_business so sec_165 would not apply because they made the loan as an investment a transaction entered into for profit unconnected with a trade_or_business sec_165 could potentially apply to deduct their loss pursuant to that provision however petitioners would still be obliged to establish that they sustained the loss in see sec_165 to do so they would need to show that the loss was fixed by identifiable events occurring in sec_1 d income_tax regs however as with a theft_loss where there exists a claim for reimbursement with respect to which there is a reasonable_prospect_of_recovery no portion of a loss claimed pursuant to sec_165 is treated as continued petitioners have the burden of proving they have sustained a theft_loss see rule a petitioners attempted to establish their loss by filing a proof_of_claim in mortgage co ’s bankruptcy proceeding for the reasons explained above petitioners have not shown that there was no reasonable_prospect_of_recovery as of the end of the tax_year in fact petitioners did recover at least some portion of their claimed loss though the record does not clearly establish whether this recovery occurred in and or in a subsequent year consequently neither the amount of the bad_debt nor the amount of the theft_loss was established by date and no deduction under either sec_165 or sec_166 is allowable for petitioners’ tax_year we have considered all remaining arguments the parties made and to the extent not addressed we conclude they are irrelevant moot or meritless continued having been sustained until it can be ascertained with reasonable certainty whether or not such reimbursement will be received sec_1_165-1 income_tax regs had petitioners sought to deduct their loss for the taxable_year pursuant to sec_165 rather than sec_165 we would accordingly follow a similar analysis to reflect the foregoing decision will be entered under rule


internal_revenue_service number release date index number r ---------------------------------------------------- ----------------------------------- -------------------------------- ---------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------------ id no ------------------ ---------------------------------------------------- telephone number ---------------------- refer reply to cc psi b06 plr-134943-12 date date legend ------------------------------------- ------------------------------------- taxpayer ------------------------------------------------------------ parent ------------------------------------------------------------ state a state b commission a commission b operator facility year a year b year c year d year e a date x date y director ----------- -------------- ---------------------------------------------------- ------------------------------------------------------- --------------------------------------------------------------------------------- ---------------------------------------------------------------- ------- ------- ------- ------- ------- ------------------- ----------------- ------------------ -------------------------------------------------------------------------------- ------------------------------------------------------------------------------------- -------------------------------------------------- dear -------------- this letter responds to the request dated date of taxpayer for a ruling on the consequences of taxpayer’s accounting and regulatory treatment of the investment_tax_credit itc plr-134943-12 the representations set out in your letter follow taxpayer is a regulated_public_utility incorporated in state a it is an indirect wholly-owned subsidiary of parent which is incorporated in state b taxpayer is included in the consolidated federal_income_tax return of parent taxpayer is principally engaged in the generation transmission distribution and sale of electricity in state a as well as the wholesale sales of electric energy and various transmission services at negotiated rates under the jurisdiction of commission b taxpayer is regulated with respect to the terms and conditions of service and most particularly regarding the rates it may charge for its services by commission a and commission b taxpayer is a member of operator an independent transmission system operator with respect to the jurisdiction of each of the commissions taxpayer’s rates are determined using a rate of return basis that allows taxpayer to earn a reasonable rate of return taxpayer has elected to account for its itc pursuant to former sec_46 taxpayer is constructing the facility taxpayer received an allocation of investment_tax_credit provided for under sec_48a of dollar_figurea taxpayer claimed the credit on its tax_return in year a and year b as the facility was being constructed it was anticipated at the time that the facility would be placed_in_service in year c taxpayer has not yet offset any of the credit_amount against its tax_liability due to limitations on use of the itc contained in sec_38 taxpayer has additional unamortized accumulated deferred itc relating to generation transmission and distribution assets placed_in_service prior to with respect to wholesale electric activities taxpayer negotiates rates with wholesale customers using a formula rate structure approved by commission b the formula is periodically updated resulting in changes to rates with respect to transmission activities formula rates have been employed by taxpayer since year d the tariff that taxpayer may charge its wholesale customers and third parties for their use of these transmission assets the open access transmission tariff oatt is regulated by commission b in establishing its oatt rates taxpayer uses a template approved by commission b that was developed by operator formula rates in general allow for self-executing adjustments to rates on an annual basis to reflect increases and decreases in costs and investments since the prior year they incorporate a calculation of both rate base and tax expense thus they reflect taxpayer’s aditc balance as well as the amount being amortized taxpayer’s rates were established using procedures consistent with former sec_46 meaning that taxpayer reduced the tax expense element of cost of service by no more than a ratable portion of its itc and that taxpayer did not reduce rate base by any portion of the aditc balance under this provision in no event can itc be reflected in the rate-setting process until the later of the placement in service of the asset which generated the credit or the use of the credit on a taxpayer’s tax_return plr-134943-12 taxpayer has determined that with respect to the sales of energy and other services under the jurisdiction of commission b the template taxpayer used to establish both its wholesale electric rates beginning in year e and its oatt rates beginning in year d reflected its aditc balance as a reduction in rate base further the amortization of taxpayer’s aditc balance was not reflected as a reduction in tax expense in addition beginning in year a taxpayer’s aditc balance was increased to reflect the itc claimed with respect to facility this also reduced_rate base in the calculation of rates for the activities under the jurisdiction of commission b here too the tax expense element of cost of service was not reduced on account of any amortization of taxpayer’s aditc balance the effect of taxpayer’s treatment of its aditc in the rate templates was a reduction in rates to wholesale customers the formula templates were completed by taxpayer’s regulatory personnel and they did not recognize the normalization issues raised personnel in taxpayer’s tax department became suspicious and reviewed the use of the templates by regulatory personnel once they became aware of the errors taxpayer corrected all relevant aspects of its rate filings prospectively beginning with the filings made on date x effective for rates in effect as of date y commission b did not specifically address or consider any of the rates or calculations at issue here in any order to taxpayer law and analysis former sec_46 of the code provides an election for ratable flow through under which an elector may flow through the investment_tax_credit to cost of service however former f a provides that no investment_tax_credit is available if the taxpayer's cost of service for ratemaking purposes or in its regulated books of account is reduced by more than a ratable portion of the credit determined under former a and allowable by sec_38 also under former sec_46 no investment_tax_credit is available if the base to which the taxpayer's rate of return for ratemaking purposes is applied is reduced by reason of any portion of the credit determined under former a and allowable by sec_38 former sec_46 of the code provides that for purposes of determining ratable portions under former sec_46 the period of time used in computing depreciation expense for purposes of reflecting operating results in the taxpayer's regulated books of account shall be used under sec_1_46-6 of the regulations ratable for purposes of former sec_46 of the code is determined by considering the period of time actually used in computing the taxpayer's regulated depreciation expense for the property for which a credit is allowed regulated depreciation expense is the depreciation expense for the property used by a regulatory body for purposes of establishing the taxpayer's cost of service for ratemaking purposes plr-134943-12 sec_1_46-6 provides that the itc is disallowed for any sec_46 property placed_in_service by a taxpayer before the date a final_decision of a regulatory body that is inconsistent with sec_1_46-6 is put into effect on or after such date and before the date a subsequent decision consistent with sec_1_46-6 is put into effect sec_1_46-6 provides that there is no disallowance of a credit before the first_final_inconsistent_determination is put into effect for the taxpayer’s sec_46 property sec_1_46-6 provides that inconsistent refers to a determination that is inconsistent with sec_46 or for example a determination to reduce the taxpayer’s cost of service by more than a ratable portion of the credit would be a determination that is inconsistent with sec_46 senate report no 94th cong 1st sess 1975_1_cb_590 provides in its explanation of the ratemaking treatment to be accorded the additional itc allowed public_utilities under the act that the additional itc is to be disallowed if the regulatory agency requires the flowing-through of a company’s additional itc at a rate faster than permitted or insists upon a greater rate base adjustment than is permitted but only after a final_determination is put into effect that report further provides that the rules provided under existing law with respect to determinations made by a regulatory body and the finality of its orders would apply to this provision senate report no 92nd cong 1st sess 1972_2_cb_559 provides in its explanation of amendments to the revenue act of dealing with the limitations on the ratemaking treatment of the itc under sec_46 and e that the committee hopes that the sanctions of disallowance of the itc will not have to be imposed for the periods during which taxpayer erroneously calculated the template and thus improperly reduced_rate base the practical effect of this error was to lower rates and thus to flow the itc to its customers more rapidly than if the template had been correctly applied this reduction was not the intent of either the taxpayer or commission b further taxpayer has acted upon discovery of these errors and adjusted its rates so that they now reflect the same amounts as if no errors had occurred we conclude that taxpayer’s actions as described above are not inconsistent with the requirements of former sec_46 finally commission b never specifically addressed these matters in a rate case involving taxpayer and so did not issue and order on these matters during this period in accord with the senate reports quoted above disallowance or recapture of the itc should be imposed only after a regulatory body has required or insisted upon such treatment by a utility because commission b did not insist on the errors discussed above no disallowance or recapture is required in this case plr-134943-12 except as specifically determined above no opinion is expressed or implied concerning the federal_income_tax consequences of the matters described above in particular orders concerning this matter finalized by either of the commissions after the date of this ruling are not necessarily subject_to the same analysis as those considered above this ruling is directed only to the taxpayer who requested it sec_6110 of the code provides it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative we are also sending a copy of this letter_ruling to the director sincerely peter c friedman senior technician reviewer branch passthroughs special industries cc