internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc corp - plr date date legend parent purchaser seller target date a date b date c date d y business x company official outside tax professional plr-108032-00 this responds to your letter dated date requesting on behalf of the taxpayers identified above an extension of time under sec_301_9100-1 through of the procedure and administration regulations to file an election parent as the common parent of the consolidated_group of which purchaser is a member and seller are requesting an extension to file a sec_338 election under sec_338 and sec_338 of the internal_revenue_code and sec_1_338_h_10_-1 of the income_tax regulations with respect to purchaser’s acquisition of the stock of target sometimes hereinafter referred to as the election on date b all citations in this letter to regulations under sec_338 are to the regulations as in effect for date b additional information was submitted in letters dated may and date the material information is summarized below parent is the common parent of a consolidated_group that has a calendar taxable_year and uses an accrual_method of accounting purchaser is a wholly owned subsidiary of parent and is included in parent’s group parent’s group includes approximately y subsidiaries and the group is engaged in business x prior to the acquisitions target was an s_corporation within the meaning of sec_1361 that was wholly owned by seller on date a parent and seller entered into a stock purchase agreement for parent to acquire all of seller’s stock of target for cash on date b parent assigned to purchaser and purchaser assumed all of parent’s rights and obligations under the stock purchase agreement seller consented to the assignment but parent remained obligated to seller under the stock purchase agreement also on date b purchaser acquired all of the stock of target from seller pursuant to the stock purchase agreement in a fully taxable_acquisition it is represented that parent is not and was not at all times relevant related to seller within the meaning of sec_338 purchaser’s acquisition of all of the outstanding_stock of target qualified as a qualified_stock_purchase as defined in sec_338 and seller will not report gain on the transaction under the installment_method of sec_453 following the acquisition new target was included in parent’s consolidated_return parent and seller intended to file the election the election was due on date c but for various reasons it was not filed on date d which is after the due_date for the election company official and outside tax professional discovered that the election was not filed the period of limitations on assessment under sec_6501 has not expired for parent’s seller’s or target’s taxable_year in which the acquisition sale was consummated the taxable_year in which the election should have been filed or for any taxable_year s that would have been affected by the election had it been timely filed plr-108032-00 sec_338 permits certain stock purchases to be treated as asset acquisitions if the purchasing_corporation makes or is treated as having made a sec_338 election under sec_338 and the acquisition is a qualified_stock_purchase sec_1_338-1 provides that a sec_338 election is an election to apply sec_338 to target sec_338 specifies the requirements for making a sec_338 election sec_338 defines a qualified_stock_purchase as any transaction or series of transactions in which stock meeting the requirements of sec_1504 of corporation is acquired by another corporation by purchase during the 12-month_acquisition_period sec_338 provides that the term purchase means any acquisition of stock but only if i the basis of the stock in the hands of the purchasing_corporation is not determined i in whole or in part by reference to the adjusted_basis of such stock in the hands of the person from whom acquired or ii under sec_1014 relating to property_acquired_from_a_decedent ii the stock is not acquired in an exchange to which sec_351 sec_354 sec_355 or sec_356 applies and is not acquired in any other transaction described in regulations in which the transferor does not recognize the entire amount of the gain_or_loss realized on the transaction and iii the stock is not acquired from a person the ownership of whose stock would under sec_318 other than paragraph thereof be attributed to the person acquiring such stock sec_338 permits the purchasing and selling corporations to elect jointly to treat the target_corporation as deemed to sell all of its assets and distribute the proceeds in complete_liquidation the sale of stock included in the qualified_stock_purchase generally is ignored a sec_338 election may be made for target only if it is a member of a selling_consolidated_group a member of a selling affiliated_group filing separate returns or an s_corporation sec_1_338_h_10_-1 gain_or_loss on the deemed sale is included in the consolidated_return of the selling group unless the target_corporation is a member of a selling affiliated_group filing separate returns or an s_corporation sec_1_338_h_10_-1 provides that a sec_338 election may be made for the target_corporation if the purchasing_corporation makes a qualified_stock_purchase of the target_corporation stock sec_1_338_h_10_-1 provides that if a sec_338 election is made for the target_corporation it is irrevocable sec_1_338_h_10_-1 provides that a sec_338 election is jointly made by a purchaser and the selling_consolidated_group or the selling affiliate or the s_corporation shareholders on form_8023 in accordance with the instructions to the form the regulations further provide that the election must be made not later than the 15th day of the ninth month beginning after the month in which the acquisition_date occurs the instructions to form_8023 provide that a sec_338 election must be made jointly by the purchasing_corporation and the common parent of the selling_consolidated_group or selling affiliate or s_corporation shareholders the instructions provide that the form must be signed by a person authorized to act on behalf of each corporation and if made for an s_corporation it must be signed by each s_corporation shareholder who sells target stock in the qualified_stock_purchase the instructions further provide that plr-108032-00 the signatures dates and titles if applicable of those persons must be provided in a signature attachment and they provide specific details as to the preparation of the signature attachment and its attachment to form_8023 sec_1_1502-77 provides that the common parent for all purposes other than for several purposes not relevant here shall be the sole agent for each subsidiary in the group duly authorized to act in its own name in all matters relating to the tax_liability for the consolidated_return_year see also form_8023 and the instructions thereto under sec_301_9100-1 the commissioner has discretion to grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-1 defines the term regulatory election as including an election whose due_date is prescribed by a regulation revenue_ruling revenue_procedure notice or announcement sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make a regulatory election sec_301_9100-1 sec_301_9100-2 provides automatic extensions of time for making certain elections requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-3 in this case the time for filing the election is fixed by the regulations ie sec_1_338_h_10_-1 therefore the commissioner has discretionary authority under sec_301_9100-1 to grant an extension of time for parent and seller to file the election provided parent and seller show they acted reasonably and in good_faith the requirements of sec_301_9100-1 and sec_301_9100-3 are satisfied and granting relief will not prejudice the interests of the government information affidavits and representations submitted by parent seller company official and outside tax professional explain the circumstances that resulted in the failure to timely file the valid election the information also establishes that tax professionals were responsible for the election that parent and seller relied on the tax professionals to timely make the election and that the government will not be prejudiced if relief is granted see sec_301_9100-3 based on the facts and information submitted including the representations made we conclude that parent and seller have shown they acted reasonably and in good_faith the requirements of sec_301_9100-1 and sec_301_9100-3 are satisfied and granting relief will not prejudice the interests of the government accordingly an extension of time is granted under sec_301_9100-1 until days from the date of plr-108032-00 issuance of this letter for parent and seller to file the election with respect to the acquisition of target as described above the above extension of time is conditioned on the filing within days of the issuance of this letter of all returns and amended returns if any necessary to report the transaction in accordance with the election and the taxpayers' parent’s purchaser’s seller’s and target’s tax_liability if any being not lower in the aggregate for all years to which the election applies than it would have been if the election had been timely made taking into account the time_value_of_money no opinion is expressed as to the taxpayers' tax_liability for the years involved a determination thereof will be made by the district director's office upon audit of the federal_income_tax returns involved further no opinion is expressed as to the federal_income_tax effect if any if it is determined that the taxpayers' liability is lower sec_301_9100-3 the above extension is also conditioned on i parent and seller signing the election and ii parent and seller treating the acquisition sale of the stock of target as a sec_338 transaction parent and seller must file the election in accordance with sec_1_338_h_10_-1 that is a new election on form_8023 must be executed on or after the date of this letter which grants an extension and filed in accordance with the instructions to the form a copy of this letter should be attached to the election form parent and seller must file or amend their returns as applicable for the year in which the transaction was consummated to report the acquisition sale as a sec_338 transaction and to attach thereto a copy of this letter and a copy of the election form however if parent and or seller have already reported the transaction as a sec_338 transaction then they must merely amend their returns to attach thereto a copy of the election and a copy of this letter pursuant to sec_1_338_h_10_-1 target’s s election is not terminated accordingly target is not required to file an s_short_year return ie a year that ended the day before the acquisition nor a one day short return as a non-affiliated c_corporation we express no opinion as to whether the acquisition sale of target’s stock qualifies as a qualified_stock_purchase under sec_338 whether the acquisition sale of target’s stock qualifies for sec_338 treatment or if sec_338 is applicable as to the amount and character of gain_or_loss if any recognized by target and thus by seller on target’s deemed asset sale and deemed liquidation in addition we express no opinion as to the tax consequences of filing the election late under the provisions of any other section of the code and regulations or as to the tax treatment of any conditions existing at the time of or resulting from filing the election late that are not specifically set forth in the above ruling for purposes of granting relief under sec_301_9100-1 we relied on certain statements and representations made by the taxpayers however the district_director s should verify all essential plr-108032-00 facts in addition notwithstanding that an extension is granted under sec_301_9100-1 to file the election penalties and interest that would otherwise be applicable if any continue to apply this letter is directed only to the taxpayer s who requested it sec_6110 provides that it may not be used or cited as precedent a copy of this letter is being sent to company official and parent’s authorized representative pursuant to the power_of_attorney on file in this office sincerely yours associate chief_counsel corporate by ken cohen acting chief branch


department of the treasury internal_revenue_service washington d c date cc dom fs it a number release date uilc internal_revenue_service national_office field_service_advice memorandum for district_counsel from deborah a butler assistant chief_counsel field service cc dom fs subject losses on certain tangible_property software subscriber membership base assembled workforce this field_service_advice responds to your memorandum dated date field_service_advice is not binding on examination or appeals and is not a final case determination this document is not to be cited as precedent legend corp x corp y corp z m insurance a insurance b insurance c state a year year firm a firm b tax_year tax_year tax period x software x percent a dollar_figurea dollar_figureb dollar_figurec dollar_figured line a line b line c line d entity a issues whether petitioner properly claimed losses with regard to subscriber-based intangible and assembled workforce whether petitioner properly claimed losses with respect to computer_software whether petitioner properly claimed losses with regard to certain tangible assets conclusions petitioner may not deduct claimed losses under sec_165 with regard to either their subscriber-based intangible and assembled workforce in addition petitioner is attempting to change its method_of_accounting without the permission of the commissioner petitioner may not deduct the claimed losses under sec_165 with respect to computer_software petitioner may not claim losses with regard to certain tangible assets facts petitioner corp x is an m entity subject_to regulation in state a to provide insurance a and related_services corp x uses the accrual_method of accounting and a calendar taxable_year corp y collectively with corp x the petitioners is a wholly owned subsidiary of petitioner and has been taxable since its inception corp y provides insurance b as well as insurance coverage similar to corp x except that it does not provide insurance c corp x and corp y merged into corp z in year the taxpayers offer group policies to employers and individual policies to individuals in addition they provide administrative services to certain other types of medical programs such as medicare corp x was formerly a tax exempt entity under sec_501 as were other m entities in congress ended the tax exemption for m entities for years starting after date in the tax_reform_act_of_1986 the act to ease the transition to taxable status congress adopted several transitional rules in sec_1012 of the act specifically act sec_1012 provides that for purposes of determining gain_or_loss the adjusted_basis of assets for m entities is equal to fair_market_value as of the first day of their first taxable_year after date the date of conversion to determine its fmv stepped-up_basis under the transitional rule petitioner hired two outside valuation firms to value certain of petitioner's tangible and intangible assets the valuation firms hired by petitioner are firm a who valued petitioner's tangible assets and firm b who valued petitioner's intangible assets ie subscriber membership base assembled workforce and software x based on these valuations and other computations performed by petitioner in connection with such valuations petitioner claims that it is entitled to additional loss deductions attributable to the sale retirement abandonment termination or worthlessness of certain of its tangible assets subscriber membership base assembled workforce and software x under sec_165 for the first time in its first amended petition petitioner claimed that it is entitled to deduct losses during tax_year sec_1 and attributable to the sale retirement abandonment termination or worthlessness of certain of its tangible and intangible assets petitioner did not claim similar abandonment_loss deductions on its federal_income_tax returns for tax period x with respect to the cost_basis of the intangible assets in this case petitioner did not capitalize the expenses_incurred in connection with the intangible assets the basis of such assets for purposes of petitioner's financial statements and annual statements to the state a was zero subscriber membership base subscribers are the individuals and employers contracting with petitioner for health insurance or other related_services petitioner's subscriber membership base on date consisted of thousands of group contracts within the following lines of business line a line b line c and line d firm b performed a valuation of petitioner's subscriber membership base intangible as of date firm b did not calculate the amount of petitioner's claimed subscriber base abandonment_loss deductions for tax_year sec_1 and petitioner calculated its claimed subscriber base abandonment_loss deductions for tax_year sec_1 and based on the per individual member fair_market_value for each of the four lines of businesses as determined by firm b firm b’s subscriber valuation report uses an income approach for its valuation firm b estimated the attrition rate of petitioner’s existing total membership base in the aggregate on date and forecasted the net cash flows from the projected declining number of members for all of the medical insurance product lines in the aggregate offered by petitioner to determine the rate at which petitioner’s subscribers terminate firm b allegedly performed a study of the attrition rate for all of petitioner’s subscribers in the aggregate a present_value was calculated based on the discounted net cash flows using a percent a discount rate the discount rate of percent a is allegedly derived from petitioner’s weighted average cost of capital this and other assumptions lead to a subscriber membership net_cash_flow fmv as of date in the aggregate amount of dollar_figurea firm b did not take into account the ages or life expectancies of any of petitioner’s individual subscribers thus firm b did not perform a lifing study of petitioner’s subscriber membership base second firm b’s report allocated the dollar_figurea aggregate subscriber membership base fmv among the lines of the membership base in proportion to each line's forecasted contribution to total gross margin finally the gross margin values allocated to each of the lines were then divided by the total number of members in each of the lines to arrive at a value for each of the lines of the membership base in terms of an average value per individual member as of date no detailed valuations were done on a per individual or per contract basis petitioner's claimed subscriber membership base partial abandonment_loss deductions for tax_year sec_1 and stem from the reduction in members with respect to petitioner's canceled group contracts in line sec_3 and only petitioner did not claim any abandonment losses in tax_year sec_1 and with respect to line sec_1 and because those contracts were not canceled during tax_year sec_1 and the terminations of petitioner's subscribers during tax_year sec_1 and allegedly resulted from normal and routine cancellations and nonrenewals that is employers dropped petitioner's group contract plans lost coverage because of nonpayment of premiums or changed plans we understand that the group contract terminations were not the result of petitioner's withdrawal from a line_of_business or the cancellation of a plan type or insurance product the partial subscriber base abandonment_loss deductions calculated and claimed by petitioner for tax_year sec_1 and are the product of the number of individual members within the alleged canceled group contracts for line sec_3 and multiplied by the average per member value of group subscribers within the line sec_3 and as determined by firm b petitioner has not been able to determine the extent if any to which groups or individuals within those groups that terminated their coverage in tax_year sec_1 or subsequently became a customer of petitioner again assembled workforce firm b valued petitioner’s assembled workforce intangible as of date in a report the report uses a cost to replace method to value petitioner’s assembled workforce firm b’s report indicates that a cost to replace is based on estimates of costs to recruit train and relocate a replacement workforce outside recruitment costs training costs costs of interviewing and recruiting time were estimated for four categories of employees executive management professional and clerical technical relocation costs were estimated for the executive category of employee only firm b did not apply an obsolescence factor to the estimated cost to replace petitioner’s assembled workforce firm b’s report places a fmv of dollar_figureb on petitioner’s assembled workforce in place as of date and determines a per employee replacement cost for each one of the categories of employees no value per individual employee was calculated the partial assembled workforce abandonment_loss deductions calculated and claimed by petitioner for tax_year sec_1 and are the product of the number of employees from each category who were hired prior to date and who allegedly left petitioner’s workforce during tax_year sec_1 and multiplied by the estimated per employee replacement cost for each category as determined by firm b petitioner is including employees of corp y within its valuation of and alleged partial abandonment of its assembled workforce software x petitioner’s software x is a combined medicare part a and b claims system medicare part a deals with settling hospital claims while medicare part b deals with physician claims according to petitioner year a the health care financing administration hcfa required petitioner to begin using certain standard software systems as a result petitioner claims that in year it began testing how to remove part a claims from software x and in year b converted to a new system for processing part a claims according to petitioner the conversion from software x part a to the new part a occurred over a weekend in tax_year petitioner claims that the software x part a system was not used after tax_year petitioner claims that the part b system of software x was converted in the same manner as the part a system of software x on the last weekend in tax_year petitioner claims that software x was not used after tax_year because it was completely replaced in tax_year with a new part b claims processing system hcfa funded paid for or reimbursed petitioner for all or at least a substantial portion of petitioner’s costs for converting from software x part a and part b to the new part a and part b petitioner received the part a and part b conversion funding payment or reimbursement from hcfa through petitioner’s submission of special budget requests to hcfa hcfa paid at least dollar_figurec to petitioner during tax_year and for petitioner’s medicare part a and part b software system conversion costs firm b valued petitioner’s software x intangible as of date in two separate reports the second report valued software x at dollar_figured both reports use a cost to replace method to value petitioner’s software x there also exists a question as to whether petitioner actually owned the software x in fee simple on date or whether petitioner merely had a perpetual nonexclusive license agreement with entity a to use the software x entity a developed maintained and enhanced many of the software systems utilized by petitioner during the early 1980s tangible assets the valuation report provides what is asserted to be the fair_market_value of certain of petitioner’s tangible assets as of date it lists over big_number separate tangible assets the types of tangible assets valued in the firm a report include petitioner’s leasehold improvements electronic data processing equipment copiers office furniture fixtures and equipment cleaning equipment eg vacuum cleaners communications equipment security systems and motor vehicles law and analysis background petitioners were formerly tax exempt entities under sec_501 as were other blue cross blue shield entities in congress ended the tax exemption for blue cross blue shield entities for years starting after date in the tax_reform_act_of_1986 the act sec_1012 of the act revoked the tax-exempt status of certain medical insurers and made the entities taxable under sec_833 as if they were stock insurance_companies under sec_1012 of the act the entities receive an adjusted_basis in their assets equal to their fair_market_value as of date for purposes of determining gain_or_loss the legislative_history of sec_1012 of the act states that the fair_market_value basis_adjustment is provided solely for the purpose of determining gain_or_loss on the sale_or_exchange of assets and not for depreciation or other purposes the conference_report clarifies that the basis_adjustment was provided because the conferees believed that the formerly tax-exempt organizations should not be taxed on unrealized_appreciation or depreciation that accrued during the period the organization was not generally subject_to income_taxation h_r conf rept 99th cong 2d sess ii-350 see also joint_committee on taxation staff general explanation of the tax_reform_act_of_1986 99th cong 2d sess sec_165 loss abandonment losses are deductible under sec_165 which allows any loss sustained during the taxable_year and not_compensated_for_by_insurance_or_otherwise the first issue is whether any abandonment_loss can be claimed on property valued at fair market under sec_1012 of the act given that the legislative_history arguably limits the basis_adjustment to the sale_or_exchange of assets that is an abandonment is not a sale_or_exchange see 97_tc_200 equity planning corp v commissioner tcmemo_1983_57 it is the position of the office_of_chief_counsel that the basis provided under sec_1012 of the act should be used for computing losses under sec_165 incurred by taxpayers subject_to sec_1012 of the act although it may not be cited as precedent this position is embodied in ltr the requirements for an abandonment_loss are found in the regulations under sec_165 specifically sec_1_165-2 allows a loss incurred in a business and arising from the sudden termination of the usefulness of any nondepreciable_property in a case where the business is discontinued or where the property is permanently discarded from use therein as a deduction under sec_165 for the taxable_year in which the loss is actually sustained sec_1_165-1 requires that to be allowable as a deduction under sec_165 a loss must be evidenced by closed and completed transactions and fixed by identifiable events normally an abandonment_loss requires an intention on the part of owner to abandon the asset and an affirmative act of abandonment a j industries inc v united st503_f2d_660 9th cir citron t c pincite 92_tc_1249 aff’d 909_f2d_1146 8th cir the fifth circuit has a special rule which allows a deduction for assets that are worthless that is an independent and separate ground for a deduction under sec_165 see 935_f2d_703 5th cir reh’g denied 950_f2d_209 5th cir under the worthlessness test set forth in echols f 2d pincite it is determined subjectively when it was that the taxpayers deemed their property to be worthless and then determined objectively whether the interest was valueless at that time subscriber and assembled workforce intangibles it is clear that intangible assets may be the subject of an abandonment_loss 351_f2d_619 ct_cl see 59_tc_220 acq 1973_2_cb_2 solar nitrogen chemicals inc v commissioner tcmemo_1978_486 the central issue in the present case is the resolution of whether subscribers or employees can be abandoned individually or whether the individual components must be treated as part of an indivisible whole ie the subscriber- based intangible or assembled workforce which itself is the only proper subject for an abandonment_loss there have been numerous cases holding that assets indistinguishable from the subscriber-based intangible and assembled workforce involved in the present case are single indivisible assets and not an aggregation of individual assets 550_f2d_548 9th cir customer list 519_f2d_781 9th cir customer list 420_f2d_266 6th cir contracts for vending machine locations 64_f2d_890 8th cir cert_denied 290_us_646 magazine subscription list 373_f2d_938 ct_cl customer list 97_tc_253 aff’d f 3d 4th cir cert_denied 513_us_821 workforce 58_tc_570 aff’d 507_f2d_723 9th cir insurance expirations 50_tc_428 acq on another issue c b xxiv 35_tc_720 aff’d 307_f2d_339 9th cir medical service contracts 33_tc_1038 aff’d 287_f2d_1 2d cir customer contracts 22_tc_1029 nonacq on another issue 1958_2_cb_9 customer list 12_bta_655 insurance policyholders illinois cereal mills inc v commissioner tcmemo_1983_469 aff’d 789_f2d_1234 7th cir cert_denied 479_us_995 customer list some of the cases cited directly have held that the loss of an individual component of the indivisible asset could not be separately deducted as a loss in particular taxpayers could not deduct amounts attributable to each customer they lost fullerton supra sunset fuel supra golden state towel supra tomlinson supra hodges supra thrifticheck supra anchor cleaning supra illinois cereal mills supra see skilken supra boe supra the facts of the present case are clearly distinguishable from the circumstances where the taxpayer abandons a portion the indivisible asset which has distinct transferrable value that is reasonably severable from the whole the pivotal case on this issue is 100_fsupp_803 n d cal where the taxpayer was permitted an abandonment_loss on a portion of a customer list that was attributable to a specific geographic area the taxpayer had purchased the customer lists of several laundry businesses in san francisco and oakland during world war ii the government seized the taxpayer’s san francisco plant for military purposes after the war the taxpayer had trouble reestablishing its business and abandoned its san francisco routes while it continued its operations in oakland the district_court recognized that a list of customers is not to be regarded as an aggregation of disconnected individual subscribers the customer lists were instead treated as unitary structures irrespective of incidental fluctuations or alterations metropolitan laundry f_supp pincite the court noted however that a taxpayer could dispose_of its business in a particular area or in respect to a particular product or service along with incidental goodwill without abandoning its entire business id pincite and so long as the business and the goodwill disposed of may be assigned a distinct transferable value the transaction may properly be recognized for tax purposes as a closed one id pincite the court found that the costs attributable to the abandoned san francisco customer lists met this test and were deductible similarly massey-ferguson held that the taxpayer could deduct the costs attributable to the abandonment of a line_of_business it had purchased from another party and operated at a distinct location even though the taxpayer continued to manufacture similar products under a different trade_name at another location see also parmelee transportation 199_fsupp_845 w d la we note that a workforce intangible would be subject_to the rationale of massey-ferguson petitioners in the present case have not abandoned a segment of their business that is in any way analogous to the facts of either metropolitan laundry or massey- ferguson the distinction between the facts similar to the present case and those found in metropolitan laundry has been explicitly recognized by the courts as stated in golden state towel f 2d pincite one cannot say that the plaintiff’s annual crop of terminated customers had a distinct transferable value as did the entire body of san francisco routes in the metropolitan laundry instance for whereas the one might well have constituted the subject matter for a sale had metropolitan so wished it cannot be imagined that the plaintiffs would have been able or desirous of selling to another their right to serve the periodically departing customers there was no market for a piecemeal sale of customers see skilken f 2d pincite no cessation of business in a geographic area of independent significance anchor cleaning t c pincite no abandonment or disposition of any identifiable segment of its business so long as the intangible asset is deemed to be a whole rather than the sum of any of its parts the ability to deduct any part of it as a loss under sec_165 rests ultimately on whether there has been a recognition event under facts like the present case courts have found that the loss of any individual component only reduces the value of the whole asset sunset fuel f 2d pincite manhattan co t c pincite thrifticheck t c pincite the mere diminution in value of property is not enough to establish an abandonment_loss 30_fedclaims_739 109_tc_450 aff’d in an unpublished opinion ustc sec_127 4th cir see 274_us_398 a diminution in value fails to satisfy the requirement under the regulations that a loss be evidenced by closed and completed transactions fixed by identifiable events sunset fuel f 2d pincite see s s white dental at id in addition no loss is allowed under sec_165 for the partial deduction of a capital_asset golden state towel f 2d pincite citing anchor cleaning and hillside dairy illinois cereal mills supra for the same reasons petitioners will not be able to claim a loss based on worthlessness under the rationale of echols because the mass asset is not wholly worthless and a partial deduction of the whole is not allowable based upon the above we conclude that petitioners may not take a deduction under sec_165 for the loss of individual subscribers or employees lost the deductions taken by corp y should clearly not be taken at fair_market_value since it is not subject_to sec_1012 of the act corp y’s intangibles would also be subject_to the mass_asset_rule software x because no loss is allowed under sec_165 for the partial deduction of a capital_asset software x must be a separate capital_asset in the hands of taxpayer in this regard the taxpayer must also own the property on which a loss is claimed 20_tc_236 vacated and rem’d ustc 2d cir green v commissioner tcmemo_1982_485 further the intention to abandon standing alone is not sufficient to establish a recognition event instead there must be an affirmative act of abandonment see brandies v commissioner 692_f2d_152 1st cir cert_denied 462_us_1106 261_f2d_176 9th cir citron t c pincite zurn v commissioner tcmemo_1996_386 as a result there is arguably an inherent requirement for an abandonment_loss that the taxpayer rather than some other party take the action to abandon permanently the property in question further an abandonment does not result simply from cessation of use beus at id citron at id thus participation in a government program which required the taxpayer to discontinue his dairy operation was not an abandonment where there was no showing of the irrevocable intent to abandon or never use the property again strandley v commissioner 99_tc_259 aff’d on another issue aftr 2d ria 9th cir similarly other cases have held that the actions of another party only affect the value of the property the taxpayer continues to hold see crst t c pincite 37_bta_576 aff’d 101_f2d_813 9th cir cert_denied 308_us_562 46_tc_835 as a result to get an abandonment_loss petitioner must show that it actually acted to abandon software x in tax_year and did not simply stop using it besides abandonment petitioner may show that software x was worthless in the tax_year under the test established in echols we do not believe petitioner has established worthlessness under echols further no loss may be claimed to the extent petitioner has or can be reimbursed sec_165 sec_1_165-1 and sec_1 d i here petitioner received reimbursement for the conversion the basis for determining the amount of the deduction for any loss shall be the adjusted_basis provided in sec_1011 for determining the loss from the sale_or_other_disposition of property sec_165 petitioner must verify its basis in the property which it has not done change in accounting_method - subscriber and assembled workforce intangibles we believe petitioners have made an unauthorized change in accounting_method because petitioners initially filed federal_income_tax returns treating the intangible assets at issue as single mass_assets petitioners must obtain permission to change a method from the secretary sec_446 the description of what constitutes a method_of_accounting is found under sec_1_446-1 initially there is no question a consistent but erroneous treatment of a material_item constitutes a method_of_accounting sec_1_446-1 see also 93_tc_500 and the cases cited therein in addition under sec_1_446-1 a change in method_of_accounting includes not only a change in the overall plan of accounting but the treatment of any material_item used in the overall plan although a method_of_accounting may exist under this definition without the necessity of a pattern of consistent treatment of an item in most instances a method_of_accounting is not established for an item without such consistent treatment a material_item is any item involving the proper time for the inclusion of the item in income or the taking of a deduction see 97_tc_120 see also 743_f2d_781 11th cir service position on the requirements for consistent application of a method is found in revproc_90_38 1990_1_cb_57 see sec_2 of revproc_97_27 i r b pincite if a taxpayer treats an item improperly in the first return that reflects the item the taxpayer must treat the item consistently in two or more taxable years before it has adopted a method revrul_90_38 c b pincite if the treatment is proper such consistency is not required thus the supreme court has held that once a permissible election of a method_of_accounting has been made it may not be changed after the time for filing the return has passed 304_us_191 we believe the treatment of the assets in the present case is analogous to electing to group assets into general asset accounts under sec_168 for the purposes of depreciating them as a single asset revproc_97_30 1997_1_cb_702 held that the grouping of assets under sec_168 was a method_of_accounting whether or not petitioners’ proposed treatment is deemed correct they may not employ the new method_of_accounting without obtaining consent retirement loss and extraordinary_obsolescence loss deductions for tangible depreciable assets cost_recovery property if accelerated_cost_recovery property other than a structural_component of a building is removed from service in a manner that does not constitute a sale exchange or abandonment for example where the property is transferred to a scrap or salvage pile the taxpayer is entitled to a deduction equal to the excess of the property's unrecovered adjusted tax basis over its scrap or salvage_value see prop sec_1 a because the retirement is not a sale_or_exchange the excess of the property's adjusted tax basis over its fair_market_value is an ordinary_loss and the adjusted_basis of the property is reduced to salvage_value under the accelerated_cost_recovery_system acrs and the modified accelerated_cost_recovery_system macrs assets in a mass or general_asset_account are treated for most purposes as a single asset accordingly no retirement loss is allowed with respect to the retirement_of_property included in such an account unless all property in the account has been disposed of through sale exchange abandonment or retirement see prop sec_1 h and i -1 e i but cf prop sec_1_168_i_-1 for an election to recognize a loss on macrs_property included in a general_asset_account where the disposition occurs in circumstances that would probably qualify as an abandonment rather than a retirement amounts received in payment for assets disposed of from a mass or general_asset_account including amounts received for salvage or scrap must be recognized as income see prop sec_1 h and i -1 e ii the abandonment or retirement of a structural_component of a building generally does not constitute a disposition accordingly no loss deduction is allowed on the retirement of such property the taxpayer continues to recover the cost of such property through acrs or macrs deductions see prop sec_1 l and b depreciable_property that is not acrs or macrs_property the conditions for deducting a retirement loss with respect to property which is not accelerated_cost_recovery property and is depreciated in a single asset account under sec_167 is substantially the same as for accelerated_cost_recovery property see prop sec_1_167_a_-1 where the property is not in a single asset account a retirement loss is only available if the retirement is an abnormal_retirement and the property is not being depreciated under the asset_depreciation_range_system sec_1_167_a_-8 defines normal and abnormal retirements as follows t he determination of whether a retirement is normal or abnormal shall be made in the light of all the facts and circumstances in general a retirement shall be considered a normal retirement unless the taxpayer can show that the withdrawal of the asset was due to a cause not contemplated in setting the applicable depreciation_rate for example a retirement is considered normal if made within the range of years taken into consideration in fixing the depreciation_rate and if the asset has reached a condition at which in the normal course of events the taxpayer customarily retires similar assets from use in the business on the other hand a retirement may be abnormal if the asset is withdrawn at an earlier time or under other circumstances as for example when the asset has been damaged by casualty or has lost its usefulness suddenly as the result of extraordinary_obsolescence in order to obtain an abnormal_retirement deduction the taxpayer must show that the asset was withdrawn from service for a reason not contemplated at the time the asset was placed_in_service and was withdrawn sooner than expected an abnormal_retirement can also result from extraordinary_obsolescence see sec_1_167_a_-8 an example of extraordinary_obsolescence is found in 103_tc_80 where the tax_court held that a taxpayer's building suffered extraordinary_obsolescence because due to the building's extensive structural defects the governing city authorities in corpus christi texas refused to grant the health permit that the taxpayer needed to operate the property as a restaurant and topless bar based on the above discussions regarding retirement loss deductions vs abnormal_retirement obsolescence loss deductions for tangible depreciable assets we believe that petitioner is not entitled to the claimed retirement loss deductions for tax_year sec_1 and with respect to its tangible assets case development hazards and other considerations by clifford m harbourt senior technician reviewer income_tax and accounting branch


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 b02 plr-104535-16 date date ty ------- legend taxpayer ------------------------------------------ ex-spouse ------------------------------------------- date -------------------- date -------------------- date --------------------- date --------------------------- date -------------------------- date ------------------- date -------------------- a ----- b ------------ c ---- d --------- a -------------------------------------------------------- b 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----------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------------ --------------------------------------------------------- plr-104535-16 c ----------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------------- ------------------- dear ------------- this is in response to your request for a private_letter_ruling which was received by the service on date you requested a ruling that certain payments your ex- spouse was ordered to pay you pursuant to a findings_of_fact conclusions of law order for judgment and judgment and decree where the parties’ marriage was dissolved do not constitute alimony payments within the meaning of sec_71 facts taxpayer is an individual taxpayer and ex-spouse were married on date1 a children were born of the marriage on date ex-spouse filed a proceeding to dissolve the marriage on date ex-spouse and taxpayer orally reached a settlement on the record before the court the court ordered ex-spouse’s counsel to submit findings_of_fact conclusions of law order for judgment and judgment and decree in conformity with the oral settlement on date the court for the a executed the findings_of_fact conclusions of law order for judgment and judgment and decree which was filed on the same day pursuant to the findings_of_fact conclusions of law order for judgment and judgment and decree the parties’ marriage was dissolved child custody visitation and support were determined property was awarded and spousal support was determined the section entitled spousal support reads as follows b ex-spouse was further ordered to maintain a life_insurance_policy in an amount sufficient to cover his maintenance and child_support_obligations in addition the court made the following finding of fact c law and analysis sec_71 provides that gross_income includes amounts received as alimony or separate_maintenance payments sec_71 defines the term alimony_or_separate_maintenance_payment as any payment in cash if-- a such payment is received by or on behalf of a spouse under_a_divorce_or_separation_instrument b the divorce_or_separation_instrument does not designate such payment as a payment which plr-104535-16 is not includible in gross_income under sec_71 and not allowable as a deduction under sec_215 c in the case of an individual legally_separated from his spouse under a decree of divorce or of separate_maintenance the payee spouse and the payor spouse are not members of the same household at the time such payment is made and d there is no liability to make such payment for any period after the death of the payee spouse and there is no liability to make any payment in cash or property as a substitute for such payment after the death of the payee spouse if a payment satisfies all of the factors set forth in sec_71 then it is alimony but if it fails to satisfy any one of the above factors it is not alimony rood v commissioner tcmemo_2012_122 if the divorce decree or other relevant document does not expressly state that the payment obligation terminates upon the death of the payee spouse the payment will qualify as alimony provided that the termination of the obligation would occur by operation of state law 102_f3d_842 6th cir see also notice_87_9 1987_1_cb_421 divorce_or_separation_instrument executed after date need not expressly state that the payor spouse’s liability ends upon payee’s death if termination would occur by operation of state law the mere fact that the documents may characterize a payment as alimony has no effect on the consequences of that payment for federal tax purposes hoover f 3d pincite sec_71 provides that sec_71 shall not apply to that part of any payment which the terms of the divorce_or_separation_instrument fix in terms of an amount of money or a part of the payment as a sum which is payable for the support of children of the payor spouse temp sec_1_71-1t q a-10 provides that assuming all the other requirements relating to the qualification of certain payments as alimony or separate_maintenance payments are met if the payor spouse is required to continue to make the payments after the death of the payee spouse then none of the payments before or after the death of the payee spouse qualify as alimony or separate_maintenance payments sec_1_71-1t q a-15 provides that a payment which under the terms of the divorce_or_separation_instrument is fixed or treated as fixed as payable for the support of a child of the payor spouse does not qualify as an alimony_or_separate_maintenance_payment thus such a payment is not deductible by the payor or includible in the income of the payee spouse sec_1_71-1t q a-16 provides that a payment is fixed as payable for the support of a child of the payor spouse if the divorce_or_separation_instrument specifically designates some sum or portion which sum or portion may fluctuate as payable for the support of a child of the payor spouse a payment will be treated as fixed as payable for the support of a child of the payor spouse if the payment is reduced a on the happening of a contingency relating to a child of the payor or b at a time which can clearly be associated with such a contingency a payment may be treated as fixed as plr-104535-16 payable for the support of a child of the payor spouse even if other separate payments specifically are designated as payable for the support of a child of the payor spouse sec_1_71-1t q a-17 provides that a contingency relates to a child of the payor if it depends on any event relating to that child regardless of whether such event is certain or likely to occur events that relate to the child of the payor include the following the child's attaining a specified age or income level dying marrying leaving school leaving the spouse's household or gaining employment in addition under sec_1_71-1t q a-18 where the payments are to be reduced not more than six months before or after the date the child is to attain the age of or the local age of majority such payments which would otherwise qualify as alimony or separate_maintenance payments will be presumed to be reduced at a time clearly associated with the happening of a contingency relating to a child of the payor minn stat dollar_figure subd defines maintenance as an award made in a dissolution or legal_separation proceeding of payments from the future income or earnings_of one spouse for the support or maintenance of the other minn stat discusses the requirements to be awarded maintenance including the grounds the amount and duration and reopening maintenance awards subd reads private agreements the parties may expressly preclude or limit modification of maintenance through a stipulation if the court makes specific findings that the stipulation is fair and equitable is supported by consideration described in the findings and that full disclosure of each party’s financial circumstances has occurred the stipulation must be made a part of the judgment and decree minn stat dollar_figure subd provides that unless otherwise agreed in writing or expressly provided in the decree the obligation to pay future maintenance is terminated upon the death of either party or the remarriage of the party receiving maintenance in karon v karon n w 2d minn the parties agreed the husband would pay maintenance to the wife and she would not pay maintenance to him and the court was divested from having any jurisdiction to award any other maintenance the supreme court of minnesota held that the court could not modify the original dissolution decree stipulations are carefully drawn compromises which affect property distribution as well as future income id pincite in telma v telma n w 2d minn the husband argued that his obligation to pay maintenance to his ex-wife should be terminated because of her remarriage in reliance on minn stat dollar_figure subd the parties’ agreement was that the ex-wife was to receive spousal support in the amount of dollar_figure per month for five years with the award to be terminated on the earlier of two stated contingencies - the expiration of the five year period or the ex-wife’s adjusted_gross_income exceeding dollar_figure per year id pincite the husband specifically waived any right to have the court modify his obligation to pay maintenance either as to amount or duration or termination the court held that while in gunderson v gunderson n w 2d minn it held that plr-104535-16 subd required that a marital dissolution clause decree expressly state that maintenance will continue beyond remarriage it did not foreclose the consideration of clear written expressions of the parties’ intention in this regard as ascertained from their agreement as a whole id pincite the court held the husband must continue to pay maintenance until the earlier of the two stated contingencies id pincite in young v young minn app lexi sec_1283 minn ct app the court in an unpublished opinion held that the husband’s spousal-maintenance obligation may not be terminated upon the ex-wife’s remarriage even though the maintenance provision does not state that maintenance will continue beyond remarriage because the parties agreed to divest the court of jurisdiction to modify the maintenance award and no event that permits termination under the judgment has occurred in butt v schmidt n w 2d minn the court looked at the requirements of karon and minn stat subd and held that four requirements must be met before a stipulation precluding or limiting maintenance modification divests the court of its jurisdiction over maintenance these requirements are the stipulation must include a contractual waiver of the parties’ rights to modify maintenance the stipulation must expressly divest the district_court of jurisdiction over maintenance the stipulation must be incorporated into the final judgment and decree and the court must make specific findings that the stipulation is fair and equitable is supported by consideration described in the findings and that full disclosure if each party’s financial circumstances has occurred in the instant case the court-ordered spousal maintenance payments of dollar_figureb per month do not meet the definition of alimony described in sec_71 although three of the four requirements for designating the payments as alimony are satisfied the requirement that the payments terminate on the death of the payee spouse is not satisfied even though the findings_of_fact conclusions of law order for judgment and judgment and decree does not expressly state that ex-spouse’s liability will not end upon taxpayer’s death the parties agreed the court would not have jurisdiction to consider modification of the award in accordance with karon young butt and minn stat subd therefore ex-spouse’s obligation to pay maintenance payments to taxpayer will continue for c months and would not be terminated upon her death see telma supra young supra accordingly the maintenance payments do not qualify as alimony under sec_71 because there are minor children it must also be determined if the payments could be child_support rather than spousal support under sec_1_71-1t q a there would be a presumption that the payments are child_support if they end within six months before or after the date the children turn or the three requirements that are satisfied are that the payment is received by a spouse pursuant to a divorce decree and the divorce decree does not designate the payment as not includible in gross_income under sec_71 and not allowable as a deduction under sec_215 and sec_3 taxpayer has represented that the payee spouse and the payor spouse were not members of the same household when the payments were made plr-104535-16 the local age of majority pursuant to the findings_of_fact conclusions of law order for judgment and judgment and decree the maintenance payments were payable over a c month period beginning on date the children will turn on date the maintenance payments will end on date approximately d months after the children reach age thus the spousal maintenance payments are not presumed to be child_support rulings based solely on the information submitted and the representations set forth above we rule that the payments of spousal support of dollar_figureb per month do not constitute alimony payments within the meaning of sec_71 caveats except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter no opinion is expressed as to the federal tax treatment of the transaction under any other provisions of the internal_revenue_code and the treasury regulations that may be applicable or under any other general principles of federal income_taxation this letter_ruling is only applicable to matters under our jurisdiction see revproc_2016_1 2016_1_irb_1 sec_1 no opinion is expressed as to the tax treatment of any conditions existing at the time of or effects resulting from the transaction that are not specifically covered by the above ruling this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent a copy of this letter must be attached to any income_tax return to which it is relevant alternatively taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of the letter_ruling the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination plr-104535-16 enclosed is a copy of this letter_ruling showing the deletions proposed to be made in the letter when it is disclosed under sec_6110 sincerely ___________________________ david m christensen assistant to the branch chief branch office of the associate chief_counsel income_tax accounting cc enc copy for sec_6110 purposes