internal_revenue_service number release date index number --------------------------- ---------------------------------------------------- --------------------------------- ------------------------------ ------------------------- ---------------------------- department of the treasury washington dc person to contact ------------------------ id no ------------- telephone number --------------------- refer reply to cc psi b05 - plr-152483-03 date date legend ------------------------------------------------- --------------------------------- ------------------------------ ------------------------- --------------------------- --------------------------------- ------------------------------ ------------------------- --------------- ------------------ ------------------------- -------------------------------- ------------------------------ ----------------------------------------------- ------------------------------------------------------------------------ --------------------------------------------- ------------------------------ taxpayer parent a parent b subsidiary generator administration iso substation a substation b plr-152483-03 state city address impact study facility study system facilities agreement amendment tariff date date date year b c d ---------------- --------------------- ------------------------------- ----------------------------- ------------------------------------------------------------------------------------ -------------------- ------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------ ------- ------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------ ----------------------------- ------------------------------------------------------------------------------------ --------------------------------------------------------------------- ------------------------------------------------------------------------------------ ----------------------------------- -------------------------- ------------------------------- --------------------------- --------- ------- ------------ ----------------- dear ------------- this letter responds to taxpayer’s authorized representative’s letter dated date submitted on behalf of taxpayer requesting a letter_ruling concerning whether the transfer of an intertie by generator to taxpayer will be a nonshareholder contribution_to_capital excludable from income under ' a of the internal_revenue_code taxpayer represents that the facts are as follows plr-152483-03 facts taxpayer is a corporation organized under the laws of state taxpayer’s primary business is the generation and transmission of electricity taxpayer is a wholly owned subsidiary of parent a a state corporation parent a is a registered_holding_company under the public_utility holding_company act of as amended taxpayer is a member of the consolidated_group for federal_income_tax purposes of which parent a is the common parent generator is a stand-alone generator sag wholly owned by subsidiary a wholly owned subsidiary of parent b generator is constructing a b mw natural gas- fired power generator facility facility within taxpayer’s service area at address taxpayer’s service area includes the c square-mile area of central coastal and southern state excluding city and certain other cities pursuant to the federal energy regulatory commission ferc order no regulated public_utilities such as taxpayer must allow sags to interconnect to the transmission grid so that the sags can sell or wheel power over the transmission grid for delivery to customers or other intermediaries collectively customers generator intends to interconnect the facility with the transmission system owned by administration by interconnecting a new substation that generator intends to have constructed substation a with administration’s substation b taxpayer also interconnects with administration’s transmission systems at substation b pursuant to generator’s request taxpayer performed a study under the terms of the impact study dated date to determine the impacts of generator’s interconnection with administration on taxpayer’s system and to determine the measures needed to mitigate those impacts the results of the impact study found that the interconnection of the facility with administration would adversely impact taxpayer’s transmission system and that network upgrades would be required to mitigate such impact the result of the impact study also indicated the need to perform a facilities study to determine the facilities equipment modifications or additions that may be required in order to permit the interconnection of the facility to administration taxpayer subsequently performed and completed the facility study dated date the facility study specified the facilities equipment modifications and additions required to interconnect the facility to administration’s transmission system taxpayer required generator to pay for the required design engineering and construction costs for all transmission lines substations modifications and network system upgrades intertie specified in the facility study and the systems facilities agreement sfa dated date necessary to safely and reliably interconnect the facility in order to permit the sale of power produced by the facility to generator’s customers plr-152483-03 taxpayer designed engineered constructed and owned the intertie and was reimbursed for all related costs and expenses by generator the estimated cost of the intertie totaled dollar_figured the facility is anticipated to commence commercial operations in year and physically interconnect to administration’s grid at that time the electricity produced at the facility will be primarily sold or wheeled to customers in the wholesale power market ownership and title to the electricity produced by the facility and sold to generator’s customers will be transferred to its customers prior to the transmission of the electricity onto administration’s transmission grid specifically title to the electricity will pass to the customers at the bus located on the facility side of the point of interconnection at substation a that is title to the electricity will pass to generator’s customers prior to the transmission of the electricity onto administration’s or taxpayer’s transmission grids additionally administration was interconnected to taxpayer’s transmission grid by a dual-use interconnection that allows electricity to flow back in the direction of administration however at the time the intertie was deemed transferred to taxpayer generator reasonably projected that no more than percent of the projected total power that flows over this interconnection would flow in the direction of the facility during the first ten taxable years of operation beginning with the year in which the intertie is placed_in_service the deemed transfer of the intertie was made pursuant to the sfa the sfa has a 30-year term subject_to certain termination provisions taxpayer did not include the costs of the intertie in the regulatory rate base upon which its rates are determined under standard cost-based rate regulation generator represents that it capitalized the cost of the intertie as an intangible asset recovering such costs using the straight-line method_of_depreciation over a useful_life of years generator as the sole project sponsor of the intertie may be eligible to receive from the iso firm transmission rights wheeling revenues and congestion revenues attributable to the increased incremental transmission capacity provided by the intertie system upgrade rights under the iso tariff the iso a quasi-governmental authority controls and manages the grid and entitlements thereto and is entirely independent of both generator and taxpayer furthermore the iso acts as the authority that issues the rights and interests in any system upgrades to the iso transmission system pursuant to the amendment the iso requested and was granted the authority to issue to generator the system upgrade rights the system upgrade rights are assets owned by generator independent of taxpayer moreover the system upgrade rights were never rights owned or ever held plr-152483-03 by taxpayer pursuant to the amendment taxpayer was never in receipt of the system upgrade rights nor did taxpayer have a right to demand them from the iso or from generator taxpayer further represents that the characteristics described below are present with respect to the deemed transfer of the intertie by generator to taxpayer first the intertie paid for by generator will become a permanent part of taxpayer’s transmission system second the payment by generator for the costs of the design engineering and construction of the intertie was not compensation_for services provided by taxpayer to generator rather the payment by generator to taxpayer was necessary to permit the facility to safely interconnect to administration and for generator to sell power produced by the facility to its customers third the construction of the intertie and the subsequent payment for the costs of design engineering and construction was a bargained for exchange because taxpayer and generator negotiated and entered into the necessary agreements willingly and at arms length fourth the intertie will foreseeably result in a benefit to taxpayer commensurate with its value because the intertie is part of taxpayer’s transmission system fifth the intertie will be used by taxpayer in its transmission business to produce income rulings requested taxpayer requests the service to rule that the deemed transfer of the intertie by generator to taxpayer is not a contribution_in_aid_of_construction ciac under ' b and is excludable from taxpayer s gross_income as a nonshareholder contribution_to_capital under ' a law and analysis sec_61 and ' of the income_tax regulations provide that gross_income means all income from whatever source derived unless excluded by law sec_118 provides that in the case of a corporation gross_income does not include any contribution_to_the_capital_of_the_taxpayer sec_118 as amended by ' a of the tax_reform_act_of_1986 the act and ' a of the small_business job protection act of provides that for purposes of subsection a except as provided in subsection c the term acontribution to the capital of the taxpayer does not include any ciac or any other contribution as a customer or potential customer sec_1_118-1 of the income_tax regulations provides in part that ' also applies to contributions to capital made by persons other than shareholders for example the exclusion applies to the value of land or other_property contributed to a corporation by a governmental_unit or by a civic group for the purpose of enabling the corporation to expand its operating facilities however the exclusion does not apply to plr-152483-03 any money or property transferred to the corporation in consideration for goods or services rendered or to subsidies paid to induce the taxpayer to limit production the legislative_history to ' indicates that the exclusion_from_gross_income for nonshareholder contributions to capital of a corporation was intended to apply to those contributions that are neither gifts because the contributor expects to derive indirect benefits nor payments for future services because the anticipated future_benefits are too intangible the legislative_history also indicates that the provision was intended to codify the existing law that had developed through administrative and court decisions on the subject h_r rep no 83rd cong 2d sess s rep no 83d cong 2d sess notice_88_129 1988_2_cb_541 as modified and amended by notice_90_60 1990_2_cb_345 and notice_2001_82 2001_52_irb_619 provides specific guidance with respect to the treatment of transfers of property to regulated public_utilities by qualifying small power producers and qualifying cogenerators collectively qualifying facilities as defined in sec_3 of the federal power act as amended by section of the public_utilities regulatory policies act of purpa the amendment of ' b by the act was intended to require utilities to include in income the value of any ciacs made to encourage the provision of services by a utility to a customer see h_r rep no 99th cong 2d sess conference_report in a ciac transaction the purpose of the contribution of property to the utility is to facilitate the sale of power by the utility to a customer in contrast the purpose of the contribution by a qualifying_facility to a utility is to permit the sale of power by the qualifying_facility to the utility accordingly the fact that the amendments to ' b render ciac transactions taxable to the utility does not require a similar conclusion with respect to transfers from qualifying facilities to utilities notice_88_129 provides in part that with respect to transfers made by a qualifying_facility to a utility exclusively in connection with the sale of electricity by the qualifying_facility to the utility a utility will not realize income upon transfer of an intertie by a qualifying_facility an intertie may include new connecting and transmission facilities or modifications upgrades or relocations of a utility s existing transmission network the possibility that an intertie may be used to transmit power to a utility that will in turn transmit the power across its transmission network for sale by the qualifying_facility to another utility wheeling will not cause the contribution to be treated as a ciac further the notice provides in part that a transfer from a qualifying_facility to a utility will not be treated as a qualifying_facility transfer qf transfer under this notice to the extent the intertie is included in the utility s rate base moreover a transfer of an plr-152483-03 intertie to a utility will not be treated as a qf transfer under this notice if the term of the power purchase contract is less than ten years notice_88_129 also provides in part that a utility that constructs an intertie in exchange for a cash payment from a qualifying_facility pursuant to a purpa contract will be deemed to construct the property under contract and will recognize income from the construction in the same manner as any other taxpayer constructing similar_property under contract subsequent to the construction of the property the qualifying_facility will be deemed to transfer the property to the utility in a qf transfer that will be treated in exactly the same manner as an in-kind qf transfer notice_2001_82 amplifies and modifies notice_88_129 notice_2001_82 extends the safe_harbor provisions of notice_88_129 to include transfers of interties from non- qualifying facilities and transfers of interties used exclusively or in part to transmit power over the utility s transmission grid for sale to consumers or intermediaries wheeling the notice requires that ownership of the electricity wheeled passes to the purchaser prior to its transmission on the utility s transmission grid this ownership requirement is deemed satisfied if title passes at the busbar on the generator s end of the intertie further notice_2001_82 provides that a long-term interconnection agreement in lieu of a long-term power purchase contract may be used to satisfy the safe_harbor provisions of notice_88_129 in wheeling transactions finally notice_2001_82 requires that the generator must capitalize the cost of the property transferred as an intangible asset and recovered using the straight-line method over a useful_life of years in the instant case the deemed transfer of the intertie is subject_to the guidance set forth in notice_88_129 notice_90_60 and notice_2001_82 for the following reasons the facility is a stand-alone generator as contemplated under notice_2001_82 generator and taxpayer have entered into a long-term interconnection agreement the intertie will be used in connection with the transmission of electricity for sale to third parties wheeling the cost of the intertie will not be included in taxpayer s rate base the intertie is a dual-use intertie however it is projected that during the first ten taxable years of the facility no more than percent of the projected total power flows over the intertie will flow to generator it is represented that generator will not own the electricity prior to its transmission on taxpayer s transmission grid and the cost of the intertie will be capitalized by generator as an intangible asset and recovered using the straight-line method over a useful_life of years thus we conclude that the deemed transfer of the intertie by generator to taxpayer meets the safe_harbor requirements of notice_88_129 as amended and modified by notice_90_60 and notice_2001_82 next we must decide whether the contribution qualifies as a contribution_to_capital under ' a plr-152483-03 the legislative_history of ' provides in part as follows this ' in effect places in the code the court decisions on the subject it deals with cases where a contribution is made to a corporation by a governmental_unit chamber of commerce or other association of individuals having no proprietary interest in the corporation in many such cases because the contributor expects to derive indirect benefits the contribution cannot be called a gift yet the anticipated future_benefits may also be so intangible as to not warrant treating the contribution as a payment for future services s rep no 83d cong 2d sess in 319_us_98 the court held that payments by prospective customers to an electric utility company to cover the cost of extending the utility s facilities to their homes were part of the price of service rather than contributions to capital the case concerned customers payments to a utility company for the estimated cost of constructing service facilities primary power lines that the utility company otherwise was not obligated to provide the customers intended no contribution to the company s capital later in 339_us_583 the court held that money and property contributions by community groups to induce a shoe company to locate or expand its factory operations in the contributing communities were nonshareholder contributions to capital the court reasoned that when the motivation of the contributors is to benefit the community at large and the contributors do not anticipate any direct benefit from their contributions the contributions are nonshareholder contributions to capital id pincite finally in 412_us_401 the court in determining whether a taxpayer was entitled to depreciate the cost of certain facilities that had been funded by the federal government held that the governmental subsidies were not contributions to the taxpayer s capital the court recognized that the holding in detroit edison co had been qualified by its decision in brown shoe co the court in chicago burlington quincy railroad co found that the distinguishing characteristic between those two cases was the differing purpose motivating the respective transfers in brown shoe co the only expectation of the contributors was that such contributions might prove advantageous to the community at large thus in brown shoe co since the transfers were made with the purpose not of receiving direct services or recompense but only of obtaining advantage for the general community the result was a contribution_to_capital plr-152483-03 the court in chicago burlington quincy railroad co also stated that there were other characteristics of a nonshareholder contribution_to_capital implicit in detroit edison co and brown shoe co from these two cases the court distilled some of the characteristics of a nonshareholder contribution_to_capital under both the and codes first the payment must become a permanent part of the transferee s working_capital structure second it may not be compensation such as a direct payment for a specific quantifiable service provided for the transferor by the transferee third it must be bargained for fourth the asset transferred foreseeably must benefit the transferee in an amount commensurate with its value fifth the asset ordinarily if not always will be employed in or contribute to the production of additional income and its value assured in that respect chicago burlington quincy railroad co u s pincite the deemed transfer of the intertie by generator to taxpayer possesses the characteristics of a nonshareholder contribution_to_capital as described in chicago burlington quincy railroad co first the intertie paid for by generator will become a permanent part of taxpayer’s transmission system second the payment by generator for the costs of the design engineering and construction of the intertie was not compensation_for services provided by taxpayer to generator rather the payment by generator to taxpayer was necessary to permit the facility to safely interconnect to administration and for generator to sell power produced by the facility to its customers third the construction of the intertie and the subsequent payment for the costs of design engineering and construction was a bargained for exchange because taxpayer and generator negotiated and entered into the necessary agreements willingly and at arms length fourth the intertie will foreseeably result in a benefit to taxpayer commensurate with its value because the intertie is part of taxpayer’s transmission system fifth the intertie will be used by taxpayer in its transmission business to produce income therefore taxpayer s receipt from generator of the intertie is a contribution_to_capital under ' a accordingly based solely on the foregoing analysis and the representations made by taxpayer and transferor we rule that the deemed transfer of the intertie by generator to taxpayer is not a ciac under ' b and is excludable from the gross_income of taxpayer as a nonshareholder contribution_to_capital under ' a except as specifically set forth above no opinion is expressed or implied concerning the federal_income_tax consequences of the above described facts under any other provision of the code or regulations specifically no opinion is expressed or implied as to whether taxpayer s representation that less than percent of the total projected power flows over the intertie from taxpayer to generator is a reasonable projection for purposes of the percent test in notice_88_129 in accordance with the power_of_attorney on file with this request we are sending copies of this letter_ruling to taxpayer’s first and second authorized representatives plr-152483-03 this ruling is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent sincerely enclosure copy cc susan j reaman chief branch office of associate chief_counsel passthroughs and special industries


t c memo united_states tax_court william c reichenbach petitioner v commissioner of internal revenue respondent docket no filed date william c reichenbach pro_se lynn m brimer for respondent memorandum findings_of_fact and opinion laro judge on date respondent issued a notice_of_deficiency to petitioner based on his failure_to_file federal_income_tax returns for and and report income from the receipt of wages gain from the sale of property and taxable_distributions from qualified_retirement_plans respondent determined deficiencies and additions to tax as follows year deficiency dollar_figure big_number additions to tax sec sec_6651 dollar_figure big_number dollar_figure big_number petitioner petitioned the court on date to redetermine respondent's determination of these deficiencies and additions to tax we must decide whether petitioner is liable for the deficiencies determined by respondent whether petitioner is liable for the additions to tax determined by respondent under sec_6651 whether petitioner is liable for the additions to tax determined by respondent under sec_6654 and whether petitioner is liable for a penalty under sec_6673 we hold for respondent on all issues we also hold that petitioner is liable for a penalty under sec_6673 and require him to pay to the united_states a penalty of dollar_figure unless otherwise stated section references are to the internal_revenue_code in effect for the years in issue and rule references are to the tax_court rules_of_practice and procedure dollar amounts are rounded to the nearest dollar findings_of_fact some of the facts have been stipulated and are so found the stipulation of facts and the attached exhibits are incorporated herein by this reference petitioner resided in lake michigan when he petitioned the court during and petitioner was employed by and received wages from general motors corp totaling dollar_figure and dollar_figure respectively on date petitioner sold property located in essexville michigan for dollar_figure petitioner had purchased this property in or around for dollar_figure during petitioner received two distributions from qualified_retirement_plans dollar_figure from his individual_retirement_account maintained by merrill lynch and dollar_figure from general motors hourly-rate employees' pension_trust during and petitioner did not file federal_income_tax returns or make any estimated_tax payments petitioner had dollar_figure and dollar_figure respectively in federal income taxes withheld from his wages respondent determined that petitioner should have reported income as follows for dollar_figure in wages and dollar_figure in net capital_gains for dollar_figure in wages and dollar_figure in taxable at the end of petitioner wa sec_58 years old see sec_72 the notice_of_deficiency identifies petitioner's net continued distributions respondent also determined that petitioner was liable for additional tax under sec_72 after an adjustment for the standard_deduction of a married-filing-separate individual respondent calculated petitioner's and tax_liabilities at dollar_figure and dollar_figure respectively respondent credits petitioner for dollar_figure and dollar_figure in federal income taxes withheld for and respectively to be applied against the determined deficiencies opinion as an initial matter petitioner moved during trial to have his case dismissed for lack of jurisdiction he contends that the court lacks jurisdiction to hear cases involving withholding taxes and that withholding taxes are in issue in this case we disagree petitioner failed to file federal_income_tax returns and report income petitioner's federal_income_tax liabilities are in issue respondent issued a valid notice_of_deficiency and petitioner filed a timely petition with the court consequently the court has jurisdiction over this case and we shall deny petitioner's motion see sec_6212 sec_6213 and sec_6214 see also 98_tc_613 83_tc_626 continued capital_gain as dollar_figure based on petitioner's sale of property at a sale price of dollar_figure and a basis of dollar_figure respondent now concedes that petitioner's basis in the property is dollar_figure and that his net_capital_gain is dollar_figure as to all issues respondent's determinations are presumed correct and the burden is on petitioner to show that the determinations are wrong rule a 290_us_111 i respondent's deficiency determination the first issue for decision is whether petitioner is liable for the deficiencies determined by respondent respondent's deficiency determinations are based on petitioner's receipt of wages gain from the sale of property taxable_distributions from qualified_retirement_plans and the sec_72 10-percent additional tax for early distributions from qualified_retirement_plans instead of attempting to challenge the merits of respondent's determinations petitioner raises numerous tax_protester arguments we shall not address petitioner's assertions as to the validity of the federal_income_tax system with somber reasoning and copious citation of precedent to do so might suggest that these arguments have some colorable merit 737_f2d_1417 5th cir sec_61 defines an individual's gross_income as all income from whatever source derived respondent determined that compensation_for services gains derived from dealings in among other things petitioner makes the following arguments that wages are not taxable_income and that the forms w-2 show only employment_taxes withheld and not any kind of tax owed by him property and distributions from qualified_retirement_plan sec_5 were includable in petitioner's gross_income for the years in issue and that the distributions from qualified_retirement_plans were subject_to additional tax under sec_72 petitioner presented neither evidence nor argument that showed error in respondent's determinations consequently with the one modification to reflect respondent's concession as to petitioner's increased basis in the property sold we sustain the deficiencies determined by respondent ii sec_6651 -- failure_to_file respondent determined that petitioner is liable for additions to tax under sec_6651 sec_6651 imposes an addition_to_tax for failure_to_file a return timely unless the taxpayer shows that the failure was due to reasonable_cause and not willful neglect see 86_tc_1253 a failure_to_file timely is due to reasonable_cause if the taxpayer exercised ordinary business care and prudence and nevertheless was unable to file the return at trial petitioner testified that he had an additional dollar_figure basis in the property due to a corresponding payment made to his ex-wife as part of their divorce settlement petitioner submitted no documentation or additional evidence in support of his claim and we do not find his testimony credible therefore petitioner realized gain in the amount of dollar_figure and because petitioner has failed to show any exemption from the recognition of that gain it is fully includable in his gross_income for see sec_61 sec_1034 sec_1221 see sec_72 sec_402 sec_408 within the prescribed time sec_301_6651-1 proced admin regs willful neglect means a conscious intentional failure or reckless indifference 469_us_241 petitioner admittedly filed no returns for and although the amount of income he received required him to do so see sec_6012 we find that petitioner's failure_to_file was not due to reasonable_cause we sustain respondent's determination on this issue iii sec_6654 -- failure to pay estimated income_tax respondent determined that petitioner underpaid his estimated income_tax and is liable for additions to tax under sec_6654 where payments of tax either through withholding or by making estimated_tax payments do not equal the percentage of the total liability required under the statute imposition of the addition_to_tax under sec_6654 is automatic absent a showing that the taxpayer has met one of the exceptions contained therein see 91_tc_874 tillman v commissioner tcmemo_1996_8 because petitioner has not shown that any one of the exceptions applies we sustain respondent's determination on this issue iv section 6673--penalty awarded by court we decide sua sponte to impose a penalty upon petitioner under sec_6673 sec_6673 authorizes the court to require a taxpayer to pay to the united_states a penalty not in excess of dollar_figure whenever it appears that proceedings have been instituted or maintained by the taxpayer primarily for delay or that the taxpayer's position in such proceeding is frivolous or groundless a position is frivolous if it is contrary to established law and unsupported by a reasoned colorable argument for change in the law 791_f2d_68 7th cir petitioner persisted in maintaining his frivolous arguments throughout this proceeding even after being warned by the court and after having received notice from the court in a prior case on the basis of the record we conclude that the proceedings herein were instituted primarily for delay and that petitioner's position is both frivolous and groundless accordingly we exercise our discretion and award a penalty to the united_states under sec_6673 in the amount of dollar_figure see coulter v commissioner 82_tc_580 82_tc_403 we have reviewed petitioner's other arguments and find them to be without merit to reflect the foregoing petitioner was before this court in reichenbach v commissioner tcmemo_1995_369 affd without published opinion 99_f3d_1139 6th cir in that case we found petitioner's shopworn tax-protester type arguments to be without merit an appropriate order will be issued and decision will be entered under rule


department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division date loy kc contact person asw sec_57 ein identification_number telephone number ted by dear sir or madam this is in response to a letter dated date which requested certain rulings with respect to a proposed transfer of all of the assets of b to c d and e b and c are exempt under sec_501 of the internal_revenue_code and are classified as private_foundations under sec_509 we have determined that d and e are tax-exempt under sec_501 of the code and are classified as private_foundations under sec_509 in separate correspondence the charitable interests and management strategies of the trustees of b have diverged in recent years and they currently are interested in supporting different charities and adopting different management strategies in order to resolve these differences the directors of b have proposed to reorganize by transferring percent of its assets to c percent to d and percent to e to as the spin-off distributions for the purpose of this ruling_request these proposed asset transfers are referred b currently has outstanding pledges in the amount of x these pledges will be paid_by date after the pledges have been paid b will distribute its remaining assets in a final distribution to c d and e in equal shares and undergo a voluntary termination of its private_foundation_status under sec_507 of the code for the purpose of this ruling_request these distributions are referred to as the final distributions d and e would be effectively controlled by the same trustees who controlled b following the transfer c b has never notified the service in the past that it intends to terminate its private_foundation_status nor has b ever received notification that its status as a private_foundation has been terminated furthermore b has not committed willful repeated acts or failures to act or a willful and flagrant act or failure to act giving rise to liability for tax under chapter sec_501 of the code provides for the exemption from federal_income_tax of organizations organized and operated exclusively for charitable purposes no part of the net_earnings of which inures to the benefit of any private_shareholder_or_individual sec_507 of the code and the regulations to sec_507 sets forth rules applicable to terminating foundations the internal_revenue_service in revrul_2002_28 2002_20_irb_941 copy attached has issued guidance on the filing obligations and tax issues that arise when a private_foundation transfers all of its assets to one or more other private_foundations under sec_507 of the code the rev_rul presents three situations in which a private_foundation transfers all of its assets to one or more private_foundations in situation one the foundation under a plan of dissolution distributes all of its remaining assets in equal shares to three other private_foundations in situation two the trustees of a private_foundation trust create a not-for-profit corporation to carry on the trust’s charitable activities which the trustees have determined can be more effectively accomplished by operating in corporate form all of the trust’s assets and liabilities are transferred to the not-for-profit corporation in situation three two private_foundations transfer all of their assets and liabilities to a newly formed private_foundation in the rev_rul the service has ruled that a private_foundation that transfers all of its assets to one or more private_foundations in a transfer described in sec_507 is not required to notify the manager exempt_organizations determinations tax exempt government entities that it plans to terminate its private_foundation_status under sec_507 the ruling further states that if the private_foundation does not provide notice and does not terminate it is not subject_to termination_tax under sec_507 if the private_foundation provides notice and terminates then it is subject_to the tax however if the private_foundation has no assets on the day it provides notice the sec_507 tax will be zero the rev_rul gives detailed information as to the applicability of the excise_taxes imposed by sections of the code the ruling further provides that a private_foundation that has disposed of all its assets and terminates its private_foundation_status must file a form pf for the tax_year of the disposition and must comply with any expenditure_responsibility reporting obligations on the return a private_foundation that has disposed of all its assets and does not terminate its private_foundation_status must file a form_990-pf for the tax_year of the disposition and must comply with any expenditure_responsibility reporting obligations on the return but does not need to file returns in the following tax years if it has no assets and does not engage in any activities activities in later years it must resume filing form_990-pf for those years if the private_foundation receives additional assets or resumes our evaluation of the facts and circumstances in your ruling_request indicates that the transfer of b’s assets to c d and e would be similar to the facts and circumstances described in situation one of the rev_rul under the facts described the foundations would not be subject_to tax under sec_507 and sections of the code accordingly based on the information furnished and the code and regulations as interpreted in revrul_2002_28 we rule as follows that both the spin-off distributions and final distributions will qualify insofar as b is concerned as transfers of assets described in sec_507 of the code and will neither result in the termination of b's private_foundation_status under sec_507 nor subject b to the tax imposed by sec_507 that c d and e will not be treated as newly created organizations as a result of b's spin-off distributions or final distributions that neither the spin-off distributions the final distributions nor the combination of the spin-off distributions and the final distributions will constitute either a willful flagrant act or failure to act or one of a series of willful repeated acts or failures to act giving rise to liability for tax under chapter of the code that neither the spin-off distributions nor the final distributions will be a taxable_expenditure by b under sec_4945 of the code and that b will not be required to exercise expenditure_responsibility under sec_4945 and sec_4945 with respect to such transfers that b and its disqualified persons will neither be deemed to have engaged in an act of self-dealing under sec_4941 of the code nor be subject_to any_tax under sec_4941 through of the code as a result of the formation of d and e and the spin-off distributions and the final distributions that the spin-off distributions and the final distributions may be counted toward satisfaction of b's minimum distribution_requirements under sec_4942 of the code to the extent the transfers meet the requirements of sec_4942 that the legal accounting and other expenses_incurred by b c d and e in connection with this ruling_request and effectuating the spin-off distributions and the final distributions will not constitute taxable_expenditures pursuant to sec_4945 and will not be considered qualifying distributions under sec_4942 that the spin-off distributions and final distributions will not result in the imposition of any other taxes under the code that the spin-off distributions and the final distributions will not affect the tax-exempt status under sec_501 of the code of b c d and e that at such time as b makes its final distributions and notifies the service at least one day after the final distributions that it intends to terminate its private_foundation_status under sec_507 of the code b's status as a private_foundation will be terminated and no tax will be due pursuant to sec_507 of the code or any other provision of the code because b will have no assets as of its notice of termination that at such time as b makes its final distributions and notifies the service that it intends to terminate its private_foundation_status under sec_507 of the code neither the preparation and or filing of any final accounting or other documents required by state law in winding up dissolution and termination of b will result in imposition of tax under sec_507 of the code or any other provision of the code we are informing the te_ge office of this action please keep a copy of this ruling in your organization’s permanent records this ruling is directed only to the organization that requested it sec_61 k of the code provides that it may not be used or cited as precedent if you have any questions about this ruling please contact the person whose name and telephone number are shown in the heading of this letter sincerely fie aor ia v to gerald v sack manager exempt_organizations technical group


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 ita plr-107391-12 date date re request for extension of time to make the election not to deduct the additional first year depreciation legend taxpayer year year ------------------------------------------------------------------------------------------ ---------------------- ------- ------- dear ---------------- this letter responds to a letter dated date and supplemental correspondence submitted by taxpayer requesting an extension of time pursuant to sec_301_9100-3 of the procedure and administration regulations to make an election not to deduct the additional first year depreciation under sec_168 of the internal_revenue_code for all classes of qualified_property placed_in_service by taxpayer during the taxable years year and year taxpayer represents that the facts are as follows facts taxpayer is an s_corporation that files form_1120s u s income_tax return for an s_corporation on a calendar-year basis taxpayer’s overall_method_of_accounting is the accrual_method taxpayer’s principal operations consist of the sale leasing and service of diesel engines and diesel engine powered generators and also the sale of related parts primarily to companies in the construction industry and customers in need of alternative power sources in connection with its normal business operations taxpayer acquires plr-107391-12 tangible_personal_property eligible for the additional first year depreciation deduction under sec_168 taxpayer timely filed its form_1120s for the taxable years year and year on these returns taxpayer did not claim the additional first year depreciation for all classes of qualified_property placed_in_service by taxpayer during the taxable years year and year however taxpayer inadvertently failed to attach to its form_1120s for the taxable years year and year the election statement not to deduct the additional first year depreciation for all classes of qualified_property placed_in_service during these taxable years the accounting firm that was retained by taxpayer to prepare its form_1120s for the taxable years year and year failed to inform taxpayer of the election statement subsequent to filing its form_1120s for the taxable years at issue taxpayer’s return preparer discovered that the election statement was not attached to taxpayer’s form_1120s for such taxable years ruling requested taxpayer requests an extension of time pursuant to sec_301_9100-3 to make the election not to deduct the additional first year depreciation under sec_168 for all classes of qualified_property placed_in_service in taxable years year and year law and analysis sec_168 provides a 50-percent additional first year depreciation deduction for qualified_property i acquired after date and before date or acquired generally after date and ii placed_in_service before date or date for qualified_property described in sec_168 or c sec_168 provides a 100-percent additional first year deprecation deduction for qualified_property acquired after date and generally before date and placed_in_service before date or date for qualified_property described in sec_168 or c sec_168 provides that a taxpayer may elect not to deduct the percent additional first year depreciation or the 100-percent additional first year depreciation for any class of property placed_in_service during the taxable_year the term class of property is defined in sec_1_168_k_-1 of the income_tax regulations as meaning in general each class of property described in sec_168 for example year property see section dollar_figure of revproc_2008_54 2008_2_cb_722 and section dollar_figure of revproc_2011_26 2011_1_cb_664 rules similar to the rules in sec_1_168_k_-1 for qualified_property or for 30-percent additional first year depreciation deduction apply for purposes of sec_168 as currently in effect plr-107391-12 sec_1_168_k_-1 provides that the election not to deduct additional first year depreciation must be made by the due_date including extensions of the federal tax_return for the taxable_year in which the property is placed_in_service by the taxpayer sec_1_168_k_-1 provides that the election not to deduct additional first year depreciation must be made in the manner prescribed on form_4562 depreciation and amortization and its instructions the instructions to form_4562 for the taxable years year and year provide that the election not to deduct the additional first year depreciation is made by attaching a statement to the taxpayer's timely filed tax_return indicating that the taxpayer is electing not to deduct the additional first year depreciation and the class of property for which the taxpayer is making the election under sec_301_9100-1 the commissioner has discretion to grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make a regulatory election sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make an election sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides extensions of time for making elections that do not meet the requirements of sec_301_9100-2 sec_301_9100-3 provides that requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and the grant of relief will not prejudice the interests of the government conclusions based solely on the facts and representations submitted we conclude that the requirements of sec_301_9100-1 and sec_301_9100-3 have been satisfied accordingly taxpayer is granted calendar days from the date of this letter to make the election not to deduct the additional first year depreciation under sec_168 for all classes of property placed_in_service during taxable years year and year that qualify for the additional first year depreciation deduction taxpayer must make this election by filing amended federal tax returns for taxable years year and year with a statement indicating that taxpayer is electing not to deduct the additional first year depreciation for all classes of property placed_in_service during that taxable_year except as specifically set forth above we express no opinion concerning the federal tax consequences of the facts described above under any other provisions of the code including other subsections of sec_168 specifically no opinion is expressed or implied on whether any item of depreciable_property placed_in_service by taxpayer during year or year is eligible for the additional first year depreciation deduction plr-107391-12 this letter_ruling is directed only to taxpayer sec_6110 provides that it may not be used or cited as precedent in accordance with the power_of_attorney we are sending a copy of this letter to taxpayer’s authorized representative we are also sending a copy of this letter to the appropriate industry director lb_i sincerely kathleen reed kathleen reed chief branch office of associate chief_counsel income_tax and accounting enclosures copy of this letter copy for sec_6110 purposes


t c memo united_states tax_court donald and yvonne clayton petitioners v commissioner of internal revenue respondent docket no 17704-05l filed date terri a merriam jaret r coles asher b bearman and jennifer a gellner for petitioners thomas n tomashek and gregory m hahn for respondent memorandum findings_of_fact and opinion laro judge petitioners petitioned the court under sec_6330 to review the determination of respondent’s office of appeals appeals sustaining a proposed levy relating to dollar_figure of federal income taxes owed by petitioners for through petitioners argue that appeals was required to accept their offer of dollar_figure to compromise what they estimate is their approximately dollar_figure federal_income_tax liability for through we decide whether appeals abused its discretion in rejecting that offer we hold it did not findings of fact4 the parties filed with the court stipulations of fact and accompanying exhibits the stipulated facts are found accordingly when the petition was filed petitioners resided in benton city washington unless otherwise indicated section references are to the applicable versions of the internal_revenue_code dollar amounts are rounded while the proposed levy related only to through petitioners offered to compromise their liability for through as well petitioners also dispute respondent’s determination that they are liable for increased interest under sec_6621 this interest relates to deficiencies attributable to computational adjustments see secs a and a made following the court’s decision in shorthorn genetic engg ltd v commissioner tcmemo_1996_515 as to this dispute the parties have agreed to be bound by a final_decision in ertz v commissioner docket no 20336-04l which involves a similar issue following a trial of this case the court ordered each party to file an opening brief of no more than pages petitioners filed a 25-page opening brief that attempts to circumvent the court’s order by incorporating lengthy arguments made in their 40-page pretrial memorandum and paragraphs of stipulated facts to the extent that an argument or proposed finding of fact is not specifically set forth in petitioners’ opening brief we decline to consider it beginning in petitioners’ federal_income_tax returns claimed losses and credits from their involvement in various partnerships organized and operated by walter j hoyt iii hoyt the partnerships were shorthorn genetic engineering timeshare breeding services timeshare breeding services j v timeshare breeding services and shorthorn genetic engineering hoyt was each partnership’s general_partner and tax_matters_partner and the partnerships were all subject_to the unified_audit and litigation procedures of the tax equity and fiscal responsibility act of publaw_97_248 96_stat_648 hoyt was convicted on criminal charges relating to the promotion of these partnerships petitioners’ claim to the losses and credits resulted in the underreporting of their through taxable_income on date respondent mailed to petitioners a form cp-90 final notice_of_intent_to_levy and notice of your right to a hearing the notice informed petitioners that respondent proposed to levy on their property to collect federal income taxes that they owed for through the notice advised petitioners that they were entitled to a hearing with appeals to review the propriety of the proposed levy on date petitioners asked appeals for the referenced hearing on date linda cochran cochran a settlement officer in appeals held the hearing with petitioners’ counsel cochran and petitioners’ counsel discussed two issues the first issue concerned petitioners’ intent to offer to compromise their through federal_income_tax liability to promote effective tax_administration petitioners contended that appeals should accept their offer as a matter of economic hardship equity and public policy petitioners stated that it took a long time to resolve the hoyt partnership cases and noted that hoyt had been convicted on the criminal charges the second issue concerned an interest abatement case under sec_6404 that petitioners had pending in this court that case related to the same years at issue here petitioners claimed that the proposed levy should be rejected because that case was pending on date petitioners tendered to cochran on form_656 offer_in_compromise a written offer to pay dollar_figure to compromise their estimated approximately dollar_figure liability the offer was limited to a claim of effective tax_administration because petitioners had sufficient assets to pay the liability in full petitioners supplemented their offer with a completed form 433-a collection information statement for wage earners and self-employed individuals four letters totaling approximately pages and volumes of documents the form 433-a reported that petitioners were and years old at the time of the hearing petitioners owned assets with a total current value of dollar_figure inclusive of the following assets current value cash in accounts dollar_figure cash on hand vehicles chevy pickup big_number dolphin motor home big_number dodge grand caravan big_number real_estate big_number retirement account big_number big_number the form 433-a reported that petitioners’ debt consisted of dollar_figure owed as to the dolphin motor home dollar_figure owed as to the real_estate and dollar_figure owed on credit cards the form 433-a reported the following monthly items of income and expense items of income amount husband’s pension dollar_figure wife’s pension big_number items of expense amount food clothing and miscellaneous dollar_figure housing big_number transportation medical expense sec_528 taxes income debt secured_by motor home other expense big_number big_number form 433-a states that each asset reported on the form should be valued at its current value defined on the form as the amount you could sell the asset for today cochran determined that petitioners’ net realizable equity in their cash was the dollar_figure reported in their bank accounts and that petitioners’ net realizable equity in their real_estate and vehicles was the same as the reported values as reduced by the related liabilities except she reduced the reported value of each vehicle by percent to reflect their quick sale values as to the retirement account cochran noted that petitioners’ representative had informed her that the value of the account was reported pincite percent less than the actual value in order to reflect taxes and concluded that the full value of the retirement account was dollar_figure alternatively cochran determined the value of the retirement account was dollar_figure after subtracting from the dollar_figure a withdrawal of dollar_figure to pay petitioners’ dollar_figure proposed offer and related taxes pincite percent cochran summarized petitioners’ assets and liabilities as follows cochran was told by petitioners that they had ascertained the value of each vehicle by using its trade-in value and considering its condition to be fair we are unable to determine the specifics underlying cochran’s calculation of the dollar_figure fair quick net market sale realizable assets value value encumbrance equity cash dollar_figure -- -- big_number -- big_number retirement account big_number big_number -- vehicles chevy pickup big_number big_number -- big_number dolphin motor home big_number big_number big_number -0- dodge grand caravan big_number big_number -- big_number real_estate big_number -- big_number big_number big_number big_number big_number big_number big_number petitioners’ net realizable equity in their home is actually dollar_figure this slight mathematical error is not significant to the overall calculation cochran increased petitioners’ reported income by dollar_figure per month to reflect the monthly portion of dollar_figure in wages that petitioners reported on their form_1040 u s individual_income_tax_return dollar_figure dollar_figure cochran also adjusted some of petitioners’ reported expenses first she disallowed dollar_figure of the reported dollar_figure in monthly food clothing and miscellaneous expenses to reflect her application of respondent’s guidelines ie the national standard to petitioners’ reported monthly income of dollar_figure and petitioners’ household size of two individuals second she disallowed dollar_figure of the reported household expenses to reflect her application of local guidelines to petitioners’ circumstances third she disallowed the reported dollar_figure monthly expense for the motor home because the expense was not a basic living expense within the meaning of internal_revenue_manual irm sec_5 she also noted that petitioners had two other vehicles finally she reduced petitioners’ other expense of dollar_figure to dollar_figure noting that petitioners had not substantiated the dollar_figure but that dollar_figure represented the average amount of attorney’s fees paid_by petitioners in the preceding months cochran concluded that petitioners’ monthly income was dollar_figure reported income of dollar_figure dollar_figure that petitioners’ monthly expenses totaled dollar_figure reported amount of dollar_figure - dollar_figure - dollar_figure - dollar_figure - dollar_figure dollar_figure and that petitioners had had no monthly excess income or future income potential cochran also observed that petitioners received in a dollar_figure taxable_distribution from an individual_retirement_account cochran noted that petitioners’ monthly allowable expenses of dollar_figure exceeded their monthly income of dollar_figure by dollar_figure and allotted dollar_figure dollar_figure x of the dollar_figure distribution to the payment of petitioners’ necessary living_expenses cochran considered the balance of the distribution dollar_figure to be a dissipation of assets and factored that balance into petitioners’ reasonable collection potential cochran concluded that petitioners’ net realizable equity in their assets was either dollar_figure or dollar_figure and that their reasonable collection potential was either dollar_figure or dollar_figure on date appeals issued petitioners a notice_of_determination sustaining the subject levy proposed by respondent to collect petitioners’ federal_income_tax liability the notice concludes that petitioners’ dollar_figure offer-in-compromise is not an appropriate collection alternative to the proposed levy the notice citing irm sec_5 and states that petitioners’ offer does not meet the commissioner’s guidelines for consideration as an offer-in-compromise to promote effective tax_administration on the basis of economic hardship equity or public policy as to petitioners’ offer-in-compromise to promote effective tax_administration due to economic hardship the notice states considered under economic hardship the taxpayers have the ability to pay all assessed amounts and still have assets with equity remaining worth over dollar_figure the amount being offered by the taxpayers represents of the taxpayers’ reasonable collection potential the taxpayers’ ages and medical conditions were considered but were insufficient to overlook the taxpayers’ substantial equity in their assets the taxpayers have sufficient equity in their assets to pay the tax amounts owed and still meet their necessary living_expenses for the foreseeable future the taxpayers therefore failed to document economic hardship in accordance with internal_revenue_manual as to petitioners’ offer-in-compromise to promote effective tax_administration based on equity and public policy the notice states when considered under public policy or equity grounds the taxpayers’ effective tax_administration offer proposal fails to meet the criteria for such consideration under internal_revenue_manual and therefore cannot be considered the notice further states as to cochran’s balancing of efficient collection with the legitimate concerns of taxpayers that the taxpayers’ concerns about the proposed collection action generally fall within two areas pending litigation the interest abatement case and a viable collection alternative in the form of their dollar_figure offer_in_compromise the settlement officer has balanced the taxpayers’ first area of concern by confirming that the taxpayers’ interest abatement case has been decided in tax_court with the decision being that the taxpayers have conceded the interest abatement issue for the years and with respect to the taxpayers’ second area of concern the settlement officer has evaluated the taxpayers’ dollar_figure offer to compromise the underlying liabilities as a collection alternative to the proposed levy action based on that evaluation the taxpayers’ offer of dollar_figure could not be recommended for acceptance and therefore cannot be considered as a collection alternative in all other respects the proposed levy action regarding the taxpayers represents the only efficient means for collection of the liability at issue in this case the notice states that petitioners have neither offered an argument nor cited any authority to permit appeals to deviate from the provisions of the irm as to petitioners’ claim at the hearing for an interest abatement cochran ascertained that petitioners had filed the case in this court seeking an abatement of interest under sec_6404 for the same years at issue here she also learned that the parties to that case had on date filed with this court a stipulated decision through which petitioners conceded they were not entitled to their requested interest abatement cochran determined that petitioners were not entitled in this case to their claim for an abatement of interest either under sec_6404 or as part of an offer-in-compromise opinion this case is another in a long list of cases brought in this court involving respondent’s proposal to levy on the assets of a partner in a hoyt partnership to collect federal income taxes attributable to the partner’s participation in the partnership petitioners argue that appeals was required to let them pay dollar_figure to compromise what they estimate is their approximately dollar_figure federal_income_tax liability for through where an underlying tax_liability is not at issue in a case invoking our jurisdiction under sec_6330 we review the determination of appeals for abuse_of_discretion see 114_tc_604 see also barnes v commissioner tcmemo_2006_150 we reject the determination of appeals only if the determination was arbitrary capricious or without sound basis in fact or law see 126_tc_237 125_tc_301 where as here we decide the propriety of appeals’s rejection of an offer-in-compromise we review the reasoning underlying that rejection to decide whether the rejection was arbitrary capricious or without sound basis in fact or law we do not substitute our judgment for that of appeals and we do not decide independently the amount that we believe would be an acceptable offer-in-compromise see murphy v commissioner supra pincite see also barnes v commissioner supra fowler v commissioner tcmemo_2004_163 fargo v commissioner tcmemo_2004_13 affd 447_f3d_706 9th cir nor do we usually consider arguments issues or other matters raised for the first time at trial but we limit ourselves to matter brought to the attention of appeals see murphy v commissioner supra pincite 118_tc_488 e vidence that a taxpayer might have presented at the sec_6330 hearing but chose not to is not admissible in a trial conducted pursuant to sec_6330 because it is not relevant to the question of whether the appeals officer abused her discretion murphy v commissioner supra pincite sec_6330 allows a taxpayer to offer to compromise a federal tax debt as a collection alternative to a proposed levy sec_7122 authorizes the commissioner to prescribe guidelines to determine when a taxpayer’s offer-in- compromise should be accepted the applicable regulations sec_301_7122-1 proced admin regs list three grounds on which the commissioner may accept an offer-in-compromise of a federal tax debt these grounds are doubt as to liability doubt as to collectibility and to promote effective tax_administration sec_301_7122-1 and proced admin regs in 125_tc_301 the court declined to include in the record external evidence relating to facts not presented to appeals the court distinguished 123_tc_85 revd 439_f3d_455 8th cir and held that the external evidence was inadmissible in that it was not relevant to the issue of whether appeals abused its discretion in a memorandum that petitioners filed with the court on date pursuant to an order of the court directing petitioners to explain the relevancy of any external evidence that they desired to include in the record of this case petitioners made no claim that they had offered any of the external evidence to cochran instead as we read petitioners’ memorandum in the light of the record as a whole petitioners wanted to include the external evidence in the record of this case to prove that cochran abused her discretion by not considering facts and documents that they had consciously decided not to give to her consistent with murphy v commissioner supra we sustained respondent’s relevancy objections to the external evidence accord barnes v commissioner tcmemo_2006_150 petitioners argue that respondent was required to compromise their tax_liability to promote effective tax_administration the commissioner may compromise a tax_liability to promote effective tax_administration when collection of the full liability will create economic hardship and the compromise would not undermine compliance with the tax laws by taxpayers in general see sec_301_7122-1 iii proced admin regs if a taxpayer does not qualify for effective tax_administration compromise on grounds of economic hardship the regulations also allow the commissioner to compromise a tax_liability to promote effective tax_administration when the taxpayer identifies compelling considerations of public policy or equity see sec_301 b ii proced admin regs cochran determined that petitioners’ reasonable collection potential was either dollar_figure or dollar_figure under either calculation petitioners can afford to pay their estimated approximately dollar_figure tax_liability and therefore only qualify for an offer-in-compromise to promote effective tax_administration see sec_301_7122-1 proced admin regs cf 447_f3d_706 9th cir taxpayers made an offer-in-compromise to promote effective tax_administration where they had sufficient assets to pay their tax_liability in full cochran considered all of the evidence submitted to her by petitioners and applied the guidelines for evaluating an offer-in-compromise to promote effective tax_administration cochran determined that petitioners’ offer was unacceptable because they were able to pay more than the dollar_figure that they offered to compromise their tax_liability cochran’s determination to reject petitioners’ offer-in-compromise was not arbitrary capricious or without a sound basis in fact or law and it was not abusive or unfair to petitioners cochran’s determination was based on a reasonable application of the guidelines which we decline to second-guess see 124_tc_165 affd 454_f3d_782 8th cir barnes v commissioner supra petitioners make seven arguments in advocating a contrary result first petitioners argue that cochran’s rejection of their offer-in-compromise conflicts with the congressional committee reports underlying the enactment of sec_7122 according to petitioners their case is a longstanding case and those reports require that respondent resolve such cases by forgiving interest and penalties that otherwise apply we disagree with petitioners’ reading and application of the legislative_history underlying sec_7122 petitioners’ argument on this point is essentially the same argument that was considered and rejected by the court_of_appeals for the ninth circuit in fargo v commissioner f 3d pincite we do likewise here for the same reasons stated in that opinion accord barnes v commissioner tcmemo_2006_150 we add that petitioners’ counsel participated in the appeal in fargo v commissioner supra as counsel for the amici while petitioners in their brief suggest that the court_of_appeals for the ninth circuit knowingly wrote its opinion in fargo in such a way as to distinguish that case from the cases of counsel’s similarly situated clients eg petitioners and otherwise to allow those clients to receive an abatement of their liability attributable to partnerships such as those here we do not read the opinion of the court_of_appeals for the ninth circuit in fargo to support that conclusion second petitioners argue that cochran inadequately considered their unique facts and circumstances we disagree cochran reviewed and considered all information given to her by petitioners on the basis of the facts and circumstances of petitioners’ case as they had been presented to her cochran determined that petitioners’ offer did not meet the applicable guidelines for acceptance of an offer-in-compromise to promote effective tax_administration based on economic hardship or public policy or equity grounds we find no abuse_of_discretion in that determination petitioners take exception to the fact that the notice_of_determination does not list either petitioners’ age or their employment status speculating from this fact that cochran did not adequately take into account their special circumstances petitioners also assert that cochran failed to take their special circumstances into account because they assert she did not reflect that they both have significant medical conditions and that their medical_expenses will increase in later years petitioners’ assertions and speculation are without merit we do not believe that appeals must specifically list in the notice_of_determination every single fact that it considered in arriving at the determination see barnes v commissioner supra nor do we find that cochran inadequately considered the information actually given to her by petitioners cochran allowed the full amount of medical_expenses that petitioners submitted on their form 433-a while petitioners argue that cochran abused her discretion by not allowing additional medical_expenses that they claim they will incur in future years on account of their age we disagree petitioners’ claim to these expenses is too speculative in that it is based not on their specific situation but on their reading of government studies on the relationship between health costs and the elderly in general we do not believe that appeals abused its discretion in not allowing petitioners’ proffered anticipated future medical costs see fargo v commissioner f 3d pincite it is not an abuse_of_discretion to disregard claimed medical_expenses that are speculative or not related to the taxpayer third petitioners argue that cochran did not adequately take into account the economic hardship they claim they will suffer by having to pay more than dollar_figure as to their tax_liability we disagree sec_301_6343-1 proced admin regs states that economic hardship occurs when a taxpayer is unable to pay his or her reasonable basic living_expenses sec_301_7122-1 proced admin regs sets forth factors to consider in evaluating whether collection of a tax_liability would cause economic hardship as well as some illustrative examples one of the examples involves a taxpayer who provides fulltime care to a dependent_child with a serious longterm illness a second example involves a taxpayer who would lack adequate means to pay his basic living_expenses were his only asset to be liquidated a third example involves a disabled taxpayer with a fixed income and a modest home specially equipped to accommodate his disability and who is unable to borrow against his home because of his disability see sec_301_7122-1 examples and proced admin regs none of these examples bears any resemblance to this case but instead describe more dire circumstances speltz v commissioner f 3d pincite nor have petitioners articulated with any specificity the purported economic hardship they will suffer if they are not allowed to compromise their liability for dollar_figure petitioners have given us no reason to disagree with the essence of cochran’s determination that petitioners’ health does not render them incapable of earning a living nor have we reason to conclude that petitioners’ financial resources will be exhausted providing for care and support during the course of the condition dollar_figure sec_301_7122-1 c i a proced admin regs we also are mindful that any decision by cochran to accept petitioners’ offer-in-compromise to promote effective tax_administration must be viewed against the backdrop of sec_301_7122-1 proced admin regs that section requires that cochran deny petitioners’ offer if her acceptance of it would undermine voluntary compliance with tax laws by taxpayers in general thus even if we were to assume arguendo that petitioners would suffer economic hardship a finding that we also note that the court_of_appeals for the ninth circuit in 447_f3d_706 9th cir affg tcmemo_2004_13 dismissed a similar claim of economic hardship advanced by the taxpayers there although those taxpayers had more assets than petitioners the court emphasized that a finding of economic hardship is within the discretion of appeals under the facts at hand we find no abuse_of_discretion in cochran’s determination that petitioners would suffer no economic hardship were they required to pay more than their dollar_figure offer we emphasize we do not make we would not find that cochran’s rejection of petitioners’ offer was an abuse_of_discretion because we conclude below in our discussion of petitioners’ fourth argument that her acceptance of that offer would have undermined voluntary compliance with tax laws by taxpayers in general the prospect that acceptance of an offer will undermine compliance with the tax laws militates against its acceptance see revproc_2003_71 2003_2_cb_517 irm sec_5 see also barnes v commissioner tcmemo_2006_150 fourth petitioners argue that public policy demands that their offer-in-compromise be accepted because they were victims of fraud we disagree while the regulations do not set forth a specific standard for evaluating an offer-in-compromise based on claims of public policy or equity the regulations contain two illustrative examples see sec_301_7122-1 examples and proced admin regs the first example describes a taxpayer who is seriously ill and unable to file income_tax returns for several years the second example describes a taxpayer who received erroneous advice from the commissioner as to the tax effect of the taxpayer’s actions neither example bears any resemblance to this case see speltz v commissioner f 3d pincite unlike the exceptional circumstances exemplified in the regulations petitioners’ situation is neither unique nor exceptional in that petitioners’ situation mirrors that of numerous taxpayers who claimed tax_shelter deductions in the 1980s and 1990s obtained the tax advantages promptly forgot about their investment and now realize that paying their taxes will require a change_of lifestyledollar_figure see barnes v commissioner supra we also agree with a claim by respondent that compromising petitioners’ case on grounds of public policy or equity would not promote effective tax_administration while petitioners portray themselves as victims of hoyt’s alleged fraud and respondent’s alleged delay in dealing with hoyt they take no responsibility for their tax predicament we cannot agree that acceptance by respondent of petitioners’ dollar_figure offer to satisfy their approximately dollar_figure tax_liability would enhance voluntary compliance by other taxpayers a compromise on that basis would place the government in the unenviable role of an insurer against poor business decisions by taxpayers reducing the incentive for taxpayers to investigate thoroughly the consequences of of course the examples in the regulations are not meant to be exhaustive and petitioners have a more sympathetic case than the taxpayers in fargo v commissioner f 3d pincite for whom the court_of_appeals for the ninth circuit noted that no evidence was presented to suggest that taxpayers were the subject of fraud or deception such considerations however have not kept this court from finding investors in hoyt’s shelters to be culpable of negligence most recently in keller v commissioner tcmemo_2006_131 nor prevented the courts of appeals for the sixth and tenth circuits from affirming our decisions to that effect in 440_f3d_375 6th cir affg tcmemo_2004_279 and 439_f3d_1243 10th cir affg tcmemo_2004_275 transactions into which they enter it would be particularly inappropriate for the government to play that role here where the transaction at issue is participation in a tax_shelter reducing the risks of participating in tax_shelters would encourage more taxpayers to run those risks thus undermining rather than enhancing compliance with the tax lawsdollar_figure fifth petitioners argue that cochran failed to balance efficient collection with the legitimate concern that collection be no more intrusive than necessary we disagree cochran thoroughly considered this issue on the basis of the information and proposed collection alternative given to her by petitioners she concluded that the proposed levy action regarding the taxpayers represents the only efficient means for collection of the liability at issue in this case while petitioners assert that cochran did not consider all of the facts and circumstances of this case including whether the circumstances of a particular case warrant acceptance of an amount that might not nor does the fact that petitioners’ case may be longstanding overcome the detrimental impact on voluntary compliance that could result from respondent’s accepting petitioners’ offer-in-compromise an example in irm sec_5 implicitly addresses the longstanding issue there the taxpayer invested in a tax_shelter in thereby incurring tax_liabilities for through he failed to accept a settlement offer by respondent that would have eliminated a substantial portion of his interest and penalties although the example which is similar to petitioners’ case in several respects would qualify as a longstanding case by petitioners’ standards the offer was not acceptable because accepting it would undermine compliance with the tax laws otherwise be acceptable under the secretary’s policies and procedures sec_301_7122-1 proced admin regs we find to the contrary cochran thoroughly considered petitioners’ arguments for accepting their offer-in-compromise and she rejected the offer only after concluding that petitioners could pay more of their tax_liability than the dollar_figure they offered cf irm sec_5 dollar_figure when hardship criteria are identified but the taxpayer does not offer an acceptable amount the offer should not be recommended for acceptance sixth petitioners argue that cochran inappropriately failed to consider whether they qualified for an abatement of interest for reasons other than those described in sec_6404 we disagree while cochran declined to accept petitioners’ request to reject the proposed levy because their interest abatement case had been resolved we find nothing to suggest that cochran believed that petitioners’ sole remedy for interest abatement in this case rested on the rules of sec_6404 in fact regardless of the rules of sec_6404 and the stipulated decision cochran obviously would have abated interest in this case had she agreed to let petitioners compromise their approximately dollar_figure liability by paying less than the amount of interest included within that liability seventh petitioners argue that cochran erred in not allowing their counsel additional time to submit documents for her consideration and by not informing petitioners of the contents of the notice_of_determination before it was issued we disagree on both counts we do not believe that cochran abused her discretion by rejecting petitioners’ offer-in-compromise simply because she may have established a due_date for submission of information see barnes v commissioner tcmemo_2006_150 by their own admission petitioners’ counsel failed to meet many of cochran’s deadlines before cochran extended them because petitioners’ counsel was pressed by other business from their acceptance of many cases involving other partners of the hoyt partnerships nor do we believe that cochran abused her discretion by rejecting petitioners’ offer-in-compromise simply because she may not have discussed with petitioners the contents of the notice_of_determination and given them a chance to dispute it before issuing the notice_of_determination to them id cf fargo v commissioner f 3d pincite holding that appeals has no duty to negotiate with a taxpayer before rejecting the taxpayer’s offer-in-compromise in this regard we also disagree with petitioners that cochran had an affirmative duty to attempt unilaterally to find additional facts in support of their case as soon as she came to the conclusion that their offer-in- compromise should be denied see barnes v commissioner supra we hold that appeals did not abuse its discretion in rejecting petitioners’ dollar_figure offer-in-compromise in so holding we express no opinion as to the amount of any compromise that petitioners could or should be required to pay or that respondent is required to accept the only issue before us is whether appeals abused its discretion in refusing to accept petitioners' specific offer-in-compromise in the amount of dollar_figure see speltz v commissioner t c pincite we have considered all arguments made by petitioners for a contrary holding and have found those arguments not discussed herein to be without merit an appropriate order will be issued


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 fip b01 plr-115789-15 date date legend taxpayer initial lenders ---------------------------------------------------------- --------------------------------------------------------------------------------- ---------------------------------------------------------------- administrative agent ------------------ lenders voting participants --------------------------------------------------------------------------------- --------------------------------------------------------------------------------- ------------------ --------------------------------------------------------------------------------- --------------------------------------------------------------------------------- --------------------------------------------------------------------------------- --------------------------------------------------------------------------------- --------------------------------------------------------------------------------- ------------------------------------------------------------------------- date date a b c d -------------------------- --------------------------- -------------- ----------------- ---------------- --- plr-115789-15 dear ------------ this is in reply to a letter dated date requesting a ruling that the patronage_dividends described below do not constitute gross_income to taxpayer for purposes of sec_856 or sec_856 facts taxpayer is a domestic_corporation whose common_stock is publicly traded taxpayer elected to be treated as a real_estate_investment_trust reit beginning with its taxable_year ending date taxpayer is a calendar_year taxpayer that uses an overall accrual_method of accounting taxpayer’s primary business is to own and manage timberland properties the lenders are subchapter_t cooperatives owned by the patrons who borrow from them the lenders make distributions to their patrons in the form of patronage_dividends the amounts of patronage_dividends are based on the quantity or value of business done with the patron taxpayer entered into a seven year credit agreement dated date the credit agreement with the initial lenders to borrow dollar_figurea from the initial lenders prior to closing the credit agreement one of the initial lenders assigned dollar_figureb of its commitment under the credit agreement to the administrative agent and administrative agent together with the initial lenders became the lenders under the credit agreement administrative agent sold participating shares in its share of the loan under the credit agreement to the voting participants in the cumulative amount of dollar_figurec taxpayer receives annual patronage_dividends from the lenders and not from any voting participants the terms of which are set by each lender in its respective bylaws and other relevant documents the patronage_dividends received specifically by taxpayer with respect to amounts borrowed under the credit agreement are patronage_dividends the amount of any patronage_dividend depends on the amount borrowed and the time such amount is outstanding administrative agent pays part of its patronage_dividends in the form of equity per its bylaws administrative agent targets d of its total patronage_dividends to be paid in equity until the target equity percentage has been met by the patron in this case the taxpayer representations the following representations are made by taxpayer plr-115789-15 a b c taxpayer has used the proceeds of the credit agreement to pay off a mortgage of an affiliate secured_by real_estate_assets described in sec_856 the patronage_dividends will be patronage_dividends within the meaning of sec_1388 and will be included on the tax_return of taxpayer as gross_income for financial_accounting purposes taxpayer will treat the patronage_dividends as a reduction in the interest_expense related to borrowings under the credit agreement law and analysis sec_856 provides that in order for a corporation to qualify as a reit at least percent of the corporation's gross_income excluding gross_income from prohibited_transactions must be derived from sources that include dividends interest rents_from_real_property and gain from the sale_or_other_disposition of stock securities and real_property other than property in which the corporation is a dealer sec_856 provides that in order for a corporation to qualify as a reit at least percent of the corporation's gross_income excluding gross_income from prohibited_transactions must be derived from rents_from_real_property interest on obligations secured_by real_property gain from the sale_or_other_disposition of real_property other than property in which the corporation is a dealer dividends from reit stock and gain from the sale of reit stock abatements and refunds of taxes on real_property income and gain derived from foreclosure_property commitment_fees to make loans secured_by mortgages on real_property or to purchase or lease real_property gain from certain_sales or other dispositions of real_estate_assets and qualified_temporary_investment_income sec_856 provides that to the extent necessary to carry out the purposes of part ii of subchapter_m of the code the secretary is authorized to determine solely for purposes of such part i whether any item_of_income or gain which does not otherwise qualify under sec_856 or c may be considered as not constituting gross_income for purposes of sec_856 or c or ii whether any item_of_income or gain which otherwise constitutes gross_income not qualifying under sec_856 or c may be considered as gross_income which qualifies under sec_856 or c sec_301 provides that except as otherwise provided in chapter of subtitle a of the code which chapter includes sec_301 sec_316 sec_317 sec_856 and sec_1388 a distribution_of_property as defined in sec_317 made by a corporation to a shareholder with respect to its stock shall be treated in the manner provided in sec_301 plr-115789-15 sec_301 provides in part that in the case of a distribution to which sec_301 applies that portion of the distribution which is a dividend as defined in sec_316 shall be included in gross_income sec_316 provides that for purposes of subtitle a which subtitle includes sec_856 and sec_1388 the term dividend means any distribution_of_property made by a corporation to its shareholders out of its earnings_and_profits accumulated after date or out of its earnings_and_profits of the taxable_year computed as of the close of the taxable_year without diminution by reason of any distributions made during the taxable_year without regard to the amount of the earnings_and_profits at the time the distribution was made sec_316 provides in the flush language that except as otherwise provided in subtitle a every distribution is made out of earnings_and_profits to the extent thereof and from the most recently accumulated_earnings_and_profits it provides further that to the extent that any distribution is under any provision of subchapter_c of chapter of subtitle a treated as a distribution_of_property to which sec_301 applies such distribution shall be treated as a distribution_of_property for purposes of this subsection sec_1388 provides that for purposes of subchapter_t the term patronage_dividend means an amount_paid to a patron by an organization to which part i of subchapter_t applies on the basis of quantity or value of business done with or for such patron under an obligation of such organization to pay such amount which obligation existed before the organization received the amount so paid and which is determined by reference to the net_earnings of the organization from business done with or for its patrons for this purpose net_earnings shall not be reduced by amounts paid during the year as dividends on capital stock or other proprietary capital interests of the organization to the extent that the articles of incorporation or bylaws of such organization or other contract with patrons provide that such dividends are in addition to amounts otherwise payable to patrons which are derived from business done with or for patrons during the taxable_year sec_1388 further provides that the term patronage_dividend does not include any amount_paid to a patron to the extent that a such amount is out of earnings other than from business done with or for patrons or b such amount is out of earnings from business done with or for other patrons to whom no amounts are paid or to whom smaller amounts are paid with respect to substantially identical transactions sec_1385 provides that except as otherwise provided each person shall include in gross_income the amount of any patronage_dividend which is paid in money a qualified_written_notice_of_allocation or other_property except a nonqualified_written_notice_of_allocation and which is received by him during the taxable_year from an organization described in sec_1381 plr-115789-15 the legislative_history underlying the tax treatment of reits indicates that a central concern behind the gross_income restrictions is that a reit's gross_income should largely be composed of passive_income for example h_r rep no 86th cong 2d sess pincite 1960_2_cb_819 pincite states o ne of the principal purposes of your committee in imposing restrictions on types of income of a qualifying real_estate_investment_trust is to be sure the bulk of its income is from passive_income sources and not from the active_conduct_of_a_trade_or_business patronage_dividends paid_by a subchapter_t cooperative are a return of earnings to its cooperative patrons based on the amount of business that the patron transacts with the cooperative the patronage_dividends paid_by a subchapter_t financing cooperative effectively reduce the costs that its patrons incur to borrow funds from the cooperative the amounts paid_by lenders as patronage_dividends represent earnings that the cooperatives are able to refund to taxpayer based on the average amounts that taxpayer borrowed from lenders during the prior year thus while taxpayer must include patronage_dividend income in its gross_income under sec_1385 the patronage_dividends effectively reduce taxpayer's interest_expense paid during the prior year under the facts of the instant case exclusion of the patronage_dividends from gross_income for purposes of sec_856 and c does not interfere with congressional policy objectives in enacting the income tests under those provisions conclusion accordingly pursuant to sec_856 we conclude that the patronage_dividends included in taxpayer's gross_income under sec_1385 are excluded from its gross_income for purposes of sec_856 and c except as specifically ruled upon above no opinion is expressed concerning any federal_income_tax consequences related to the facts herein under any other provisions of the code specifically we do not rule whether taxpayer qualifies as a reit under part ii of subchapter_m of chapter of the code additionally we are not ruling on the tax treatment of the credit agreement and whether the agreement is a loan for federal_income_tax purposes this ruling is directed only to the taxpayer requesting it taxpayer should attach a copy of this ruling to each tax_return to which it applies sec_6110 of the code provides that it may not be used or cited as precedent the rulings contained in this letter are based upon information and representations submitted by the taxpayer under a penalties 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-115789-15 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 ___________________________ steven harrison chief branch office of associate chief_counsel financial institutions products cc