t c memo united_states tax_court estate of george a lehmann deceased walter g kealy jr personal representative petitioner v commissioner of internal revenue respondent docket no filed date james m kefauver and lawrence l bell for petitioner warren p simonsen and susan t mosley for respondent memorandum findings_of_fact and opinion hamblen judge respondent determined a deficiency in petitioner's federal estate_tax in the amount of dollar_figure petitioner is the estate of george a lehmann decedent the issue for decision is whether petitioner correctly valued the partnership interests in lkb associates for purposes of decedent's gross_estate unless otherwise indicated all section references are to the internal_revenue_code in effect as of the date of decedent's death and all rule references are to the tax_court rules_of_practice and procedure findings_of_fact some of the facts have been stipulated and are found accordingly the stipulation of facts and accompanying exhibits are incorporated herein by this reference the decedent died testate on date valuation_date decedent resided in montgomery county maryland at the time the petition was filed walter g kealy jr decedent's personal representative resided in gaithersburg maryland decedent and his sister marie louise kealy each owned as tenants in common one-half interest in the land located at l street in washington d c property on date they agreed to lease the property for years beginning as of date the lease required the lessee to construct any type of office building or commercial structure having a value of at least dollar_figure in excess of the value of the land but the agreement gave the lessee sole discretion in the design and subsequent demolition of the constructed structure during the first years of the lease_term thereafter the lease required the lessee to seek permission before making any structural changes the lease also permitted the lessee to sublet the property during and the lessee improved the property by constructing a hotel on the property decedent and marie louise kealy and the lessee amended the ground lease on date date date and date the ground lease included procedures for resolving any disputes arising between the landlords and the tenant providing in pertinent part the lessors and the lessee shall each appoint a disinterested real_estate appraiser not related to any of them by consanguinity or affinity and who shall have knowledge of the value of commercial real_estate in washington d c written notice of such appointments by each party shall be given to the other on or before the twentieth 20th day following the designated adjustments dates of the particular year and the two appraisers so appointed shall on or before the tenth 10th day thereafter appoint a third appraiser of like qualifications and non-interest who shall act as their chairman in the event that for any reason whether through failure to appoint appraisers or failure of the appraisers to act no report of the fair_market_value is made within the time or times respectively either party may apply to the american arbitration association or its successor for the appointment of an appraiser or appraisers to the end that the fair_market_value as contemplated by this lease shall be determined in the event of a refusal or failure by the american arbitration association or its successor to appoint an appraiser or appraisers either party may apply to the president or senior office of the washington real_estate board or its successor for the appointment of an appraiser no appraisal shall be invalid by reason of having been delayed or not having been made within the time or times respectively whenever an appraisal is so delayed it shall be effective and binding upon the parties as to the rentals to be paid_by the lessee to the lessors commencing on the adjustment date that a new rental basis shall begin according to the terms of the lease the cost of any such appraisal made under this paragraph shall be borne and paid_by the parties hereto whose neglect or default had made such appraisal necessary on date decedent and his sister formed lkb associates a limited_partnership organized under the laws of the district of columbia partnership after forming the partnership decedent and his sister conveyed the land subject_to the 99-year lease to the partnership during his lifetime decedent made gifts of partnership interests to various family members and to trusts of which family members were beneficiaries as of the valuation_date decedent owned a 1-percent general_partnership interest and a 965903-percent limited_partnership_interest decedent's interest the partnership_agreement granted the partners a right_of_first_refusal which required the selling partner to offer his or her interest to the other partners on the same terms before selling the interest to a third party the agreement provided in pertinent part the interest of any limited_partner may be assigned transferred sold exchanged or otherwise_disposed_of collectively referred to as assigned in whole or in part and each limited_partner shall have a right to substitute an assignee as a limited_partner in his place and stead without in either case the consent of the general partners unless such assignment would cause a termination of the partnership for federal_income_tax purposes but any such assignment shall not relieve the assigning partner of his obligations hereunder unless consented to by the other partners provided however that no such assignment to a person other than a person related by blood or marriage to marie louise kealy walter g kealy or george a lehmann shall be effective unless the interest assigned is first offered to the partners both collectively and individually on the same terms and conditions for a period of ninety days hereafter referred to as right_of_first_refusal the partnership_agreement granted the general partners sole discretion in setting the management fee that they were entitled to receive from the partnership historically the rate had been percent of the partnership's gross rental income in the general partners raised the fee from percent to percent of such income during a lawsuit was filed regarding the interpretation of certain terms of the ground lease to resolve the dispute the partnership and the lessee amended the terms of the lease on date to provide for inter alia periodic rent adjustments during the life of the lease fifth_amendment the lease and the fifth_amendment directed that the rent was to be adjusted every years beginning on date to an amount equal to a specified percentage per annum rental rate of the fair_market_value of the land on the first day of the 10-year period as if the land were not encumbered by the lease unencumbered land the fifth_amendment specified that the rental rates for the periods from date through date and from date through date were dollar_figure percent and percent respectively thereafter the partnership and the lessee were to negotiate the rental rate for each 10-year period beginning on date through the end of the lease but in any event the negotiated rate was not to be less than percent or more than percent the fifth_amendment also required the partnership and the lessee to set the fair_market_value of the unencumbered land as of the first day of the 10-year period adjustment date the fifth_amendment added additional procedures for resolving disputes providing in pertinent part if the parties are unable to agree on the rental rate to be applicable in the following period prior to any decennial rent adjustment date from and after date the appropriate p ercentage not less than or more than shall be determined by appraisers appointed to determine such rental rate consistent with the procedure for determining the fair_market_value of the unimproved land under the ground lease as of the valuation_date the principal assets of the partnership were the leased fee interest in the property and a cash balance of dollar_figure in addition as of that date the lessee maintained a 99-room hotel with an occupancy rate of percent in connection with the preparation of the estate_tax_return petitioner obtained a valuation of decedent's interest from p richard zitelman of the zitelman group inc zitelman determined that as of the valuation_date the fair_market_value of decedent's interest was dollar_figure petitioner included this amount in the gross_estate respondent determined the fair_market_value of the decedent's interest as of the date of death was dollar_figure subsequently respondent conceded dollar_figure of that adjustment opinion we must decide whether petitioner properly valued decedent's interest in the partnership for purposes of sec_2031 petitioner must prove that respondent's determination of value set forth in the notice_of_deficiency is incorrect rule a 290_us_111 88_tc_38 the parties agree that decedent's interest should be valued as a limited_partnership_interest notwithstanding the fact that decedent held a 1-percent general_partnership interest as of the valuation_date but do not agree upon the value of that interest or upon the method by which decedent's interest should be valued respondent's expert used the fractional discount method whereas petitioner's expert used the discounted cash-flow dcf method the parties primarily rely upon their experts' testimony and reports to support their respective positions expert testimony sometimes aids the court in determining valuation other times it does not see 92_tc_101 we evaluate such opinions in light of the demonstrated qualifications of the expert and all other evidence of value 94_tc_193 86_tc_547 85_tc_469 we are not bound however by the opinion of any expert witness when that opinion is contrary to our judgment estate of newhouse v commissioner supra pincite parker v commissioner supra pincite although we may accept the opinion of an expert in its entirety 74_tc_441 we also may be selective in the use of any portion of such an opinion parker v commissioner supra pincite consequently we will take into account expert opinion testimony to the extent that it aids us in arriving at the fair_market_value of the property the value of decedent's gross_estate is the fair_market_value of property includable in the gross_estate sec_2031 fair_market_value is defined as the price at which the property would change hands between a willing buyer and a willing seller neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts 411_us_546 estate of newhouse v commissioner supra pincite sec_20_2031-1 estate_tax regs because valuation is necessarily an approximation the figure at which the court arrives need not be one as to which there is specific testimony if it is within the range of figures that may properly be deduced from the evidence 538_f2d_927 2d cir affg tcmemo_1974_285 302_f2d_790 2d cir the willing buyer-willing seller standard generally is used in valuing transferred property united_states v cartwright supra the standard is an objective test using hypothetical buyers and sellers in the marketplace and is not a personalized one which envisions a particular buyer and seller 79_tc_938 71_tc_235 affd 644_f2d_1282 9th cir generally for estate_tax purposes property is valued at its fair_market_value based on its highest_and_best_use sec_2031 sec_20_2031-1 estate_tax regs a respondent's expert respondent relies upon the report and testimony of an expert richard l parli parli is a certified general real_property appraiser parli considered two methods of estimating the value of decedent's partial interest in the partnership the income discounting method and the fractional discounting method ultimately parli concluded that the fractional discounting method was the appropriate method because in his view land is not inherently income producing parli first determined the present_value of the rents due pursuant to the terms of the ground lease and from the partnership's reversionary_interest in the land and then calculated decedent's pro_rata share of those amounts under parli's calculations the present_value and decedent's pro_rata share were dollar_figure and dollar_figure respectively parli next considered factors affecting the value of decedent's pro_rata share including inter alia relative risk of the partnership's assets historical consistency of the partnership's earnings condition of the partnership's assets market growth potential portfolio diversification strength of management size of decedent's interest liquidity potential ability to influence management and relative ease of analyzing the partnership's assets parli assigned individual discounts for each factor and calculated an aggregate discount factor of percent based upon such a discount factor he assigned a value to decedent's interest of dollar_figure b petitioner's expert petitioner relies upon the report and testimony of its expert p richard zitelman zitelman is the president of the zitelman group a firm providing investment advisory and investment services zitelman also considered two methods of evaluating the fair_market_value of decedent's interest the liquidation method and the dcf method ultimately zitelman selected the dcf method because in his view a potential buyer of decedent's interest would be an individual or entity seeking long-term cash- flows but having no expectation of receiving the return of its invested capital under the dcf method zitelman estimated the fair_market_value of decedent's interest by calculating the present_value of decedent's pro_rata share of the partnership's expected net cash- flows he calculated the net_income due pursuant to the lease and the net reversionary_interest in the land for purposes of calculating the annual rent zitelman assumed that the fair_market_value of the unencumbered land as of the valuation_date and as of date was dollar_figure thereafter zitelman assumed the value increased annually at a rate of percent he also assumed the rental rate for the lease period of date through march was dollar_figure percent in estimating all of the expenses for except for the management fees and the franchise tax zitelman averaged the deductions reported upon the partnership's federal_income_tax returns for taxable years through see appendix a thereafter he treated the expenses as increasing at a rate of percent per year zitelman estimated the management fee as equal to percent of the gross rental income and the franchise tax expense as equal to the product of the estimated net_income and the tax_rates in effect as of the valuation_date zitelman made several assumptions regarding the rate of return a hypothetical buyer would demand he initially noted that as of the valuation_date the rate of return of 30-year treasury bonds was percent and assumed that the applicable discount rate would have to be at least between percent and percent zitelman assumed that the discount rate necessary to achieve an acceptable rate of return required that such a discount rate should be increased for each of the following perceived risks the partnership_agreement permits the general partners to make loans at a the prime rate to the partners for estate_taxes estate administrative expenses and medical_expenses or b the rate at which petitioner borrowed the funds there is a likelihood of a disagreement between the lessee and the partnership as to the future rental rates or the value of the property a potential buyer would have to invest substantial time energy aggravation and cost to evaluate decedent's interest the partnership_agreement granted the other partners a right_of_first_refusal and the potential buyer did not have control_over the partnership's management zitelman concluded that a hypothetical buyer would demand a purchase_price based upon a discount rate between percent and percent ultimately zitelman averaged the present values calculated based upon these rates and assigned a fair_market_value to decedent's interest in the partnership of dollar_figure the divergent methodologies of the experts that testified in this case reveal that the determination of the value of a minority interest in a partnership holding_real_estate is a matter of judgment to be resolved on the basis of the entire record see estate of lauder v commissioner tcmemo_1994_ parli failed to explain adequately how he derived the individual discounts rather parli summarily concluded that each individual discount is typical without providing any evidence eg comparables or market data establishing the basis of these conclusions giving due consideration to each of the expert reports and weighing all of the facts and circumstances presented we conclude that zitelman's methodology provides the most reliable basis for valuing the decedent's interest as of the valuation_date the value of any interest_in_real_property that has an income stream can be estimated by the dcf method see estate of bennett v commissioner tcmemo_1993_34 estate of hatchett v commissioner tcmemo_1989_637 the evidence before the court shows that the property had a determinable income stream respondent concedes that the dcf method is an appropriate appraisal method in some contexts but argues that based upon parli's testimony the method is not appropriate when the current use of the property is not its highest_and_best_use respondent relies upon parli's view that the highest_and_best_use of the property is as office space rather than as a hotel respondent's contention ignores the fact that the property was encumbered by a long-term_lease the lessee possessing a leasehold interest occupies the land on which its particular hotel is located such an interest reduces the value of the partnership's interest in the land because the lessee's contractual right to occupy the land prevents the partnership from re-leasing the property at a higher rate or from demolishing the hotel and using the land for another perhaps more profitable purpose the lessee not the partnership has the option to use the land to construct an office building or to sublet the property at a profit consequently it is unrealistic to contend that the value of the partnership's interest in the land is equivalent to the value of the land at its highest_and_best_use as though the land were vacant see marks v commissioner tcmemo_1985_179 appraisal institute the appraisal of real_estate n 10th ed respondent's assertions fail to consider reality as it existed on 1petitioner does not argue that it made an election pursuant to sec_2032a sec_2032a permits an estate to elect to value qualified_real_property used for farming and small_business purposes on the basis of income capitalization rather than on the basis of highest_and_best_use sec_2032a 93_tc_242 affd 974_f2d_1525 9th cir 89_tc_265 affd 884_f2d_279 7th cir the valuation_date we are satisfied that the dcf method is a viable means of determining the value of decedent's interest although we accept that the dcf method is an appropriate approach in the instant case we have found weaknesses in zitelman's analysis the dcf method generally requires assumptions regarding the future revenue operating costs and trends see generally estate of cartwright v commissioner tcmemo_1996_286 but some of zitelman's assumptions are unreasonable we are not convinced that the perceived risks cited by zitelman would depress the hypothetical purchase_price as significantly as petitioner would have us believe zitelman correctly notes that the partnership_agreement permits the general partners to lend money to the estate of a deceased partner and obviously in making such loans the general partners would be motivated in part by their family ties to the deceased partner but the partnership_agreement also provides that the deceased partner's_interest_in_the_partnership must secure such a loan and the loan must be at the prime rate or the rate at which the partnership borrows the funds accordingly we do not see such lending as particularly jeopardizing the partnership's cash-flow nor do we find that the risk of future litigation over determining the rental rates or the fair market values of the unencumbered land substantially affected decedent's potential share of the cash-flows to a large extent the ground lease and the amendments eliminated these risks by setting forth a mechanism for settling such disputes through the use of appraisers similarly we disagree with zitelman's view that the hypothetical buyer would demand a higher rate of return because of the substantial amount of time energy aggravation and cost required to value decedent's interest although such an interest is not as easy to value as other investments such as a 30-year treasury bond or annuity the present_value of the cash- flows is nevertheless not so difficult or inconvenient to calculate as to justify a significant increase in such a rate of return the partnership principally owns only one income- producing asset zitelman's own analysis evidences the relative ease by which decedent's interest may be valued we are not convinced that the right_of_first_refusal significantly affected the value of decedent's interest the partnership_agreement does not provide a price or a formula for determining the fair_market_value of a transferred partnership_interest the absence of a fixed price clearly has a less dramatic effect than fixed-price restrictions see eg 134_f2d_578 1st cir revg 46_bta_337 55_tc_172 mandelbaum v commissioner tcmemo_1995_255 affd without published opinion 91_f3d_124 indeed a right_of_first_refusal without a fixed price does not limit the buyers to whom a seller could sell the interest or the price for the interest but merely governs the order in which prospective buyers must stand in line to purchase mandelbaum v commissioner supra given the fact that such a right actually protects and benefits the other partners the depressant effect if any upon the value of a privately held partnership_interest subject_to a right_of_first_refusal is not necessarily substantial overall from our perspective zitelman's report lacks a wholly objective analysis of the willing buyer willing seller standard consequently we do not find the report as compelling as petitioner suggests rather zitelman focuses exclusively upon the hypothetical willing buyer zitelman failed to consider whether a hypothetical seller would sell his or her interest in the partnership for dollar_figure the test of fair_market_value rests upon the concept of a hypothetical willing buyer and a hypothetical willing seller we find incredible the proposition that any partner limited or general would be willing to sell his or her interest for such a low amount as to generate an internal_rate_of_return of approximately percent to percent ignoring the views of a willing seller is contrary to this well-established rule id in this regard zitelman's failure to consider a hypothetical willing seller of an interest in the partnership weakens his analysis zitelman's assertion at trial that the fact the lessee is not a major hotel chain also depresses the value and accordingly increases the discount rates lacks merit in light of the lessee's other options for developing the property we do not see the financial success or lack thereof in the hotel business as a significant risk zitelman's calculations are also inaccurate first we found several errors in the calculations of the partnership's rental income zitelman ignored the appreciation in the fair_market_value of the unencumbered land between the valuation_date and date for purposes of calculating the expected rent due zitelman claimed to be treating the fair_market_value of the unencumbered land as appreciating at a rate of percent per year yet he estimated the value of that land as of the valuation_date to be dollar_figure and used that amount without adjustment for estimating the rental income for the period of date through date moreover zitelman calculated the net cash-flow to be received during the period after decedent's death through date but he failed to include any part of that cash-flow in the total values assigned to decedent's interest see appendix b in addition zitelman treated the net cash-flows arising from the lease as being received upon the last day of the year the lease agreement however specifically provides that the lessee is to pay the rent on the first of each month further the partnership had a cash balance of dollar_figure as of the valuation_date zitelman's analysis does not provide adequate support or explanation of treatment of that cash or his assumptions regarding the projected interest_income second we find zitelman's estimate of the expected expenses is likewise flawed for example zitelman assumed that the management fees equal percent of the gross rentals each year these fees however are subject_to the discretion of the general partners we see no reason to assume that the fee will always be percent rather than percent as it was in taxable years and zitelman included expense amounts and reductions in the expected cash-flows for which he offered no explanation we have disregarded those amounts zitelman's calculation of the franchise_taxes appears to be too low but the record does not provide adequate information by which to recalculate those amounts finally zitelman estimated the liquidation costs at the end of the lease_term in we find these amounts to be too speculative conjectural and remote see estate of bennett v commissioner tcmemo_1993_34 despite our concerns zitelman's analysis makes several valid conclusions with the weaknesses discussed above in mind we have estimated the value of decedent's interest by modifying zitelman's analysis see appendices c and d under our calculation we conclude that the value of decedent's interest as of the valuation_date was dollar_figure we have considered all of the other arguments made by the parties and to the extent we have not addressed them find them to be without merit to reflect the foregoing decision will be entered under rule reporter's note the appendices in lotus format have not been reproduced


internal_revenue_service department of the treasury index number 468b washington dc number release date person to contact telephone number refer reply to cc dom it a 1-plr-109947-99 date date legend operating fund settlement agreement litigation x product date date court state dear this letter responds to your request for a ruling on whether the operating fund is a qualified_settlement_fund under sec_1_468b-1 of the income_tax regulations and a ruling on whether the operating fund is a grantor_trust under subpart e part i subchapter_j chapter of the internal_revenue_code facts on date an amended and consolidated class action complaint was filed in the court the complaint alleged that x and other companies placed into the stream of commerce a defective product resulting in personal injury to class members the settlement class members and defendants including x entered into the settlement agreement to resolve claims related to the litigation on date the court granted initial approval of the settlement agreement the settlement agreement defines initial approval as the court’s conditional certification of the settlement class pursuant to fed r civ p c and rule e and entry of the orders provided for in the settlement agreement the settlement agreement provides for the establishment of four escrow funds the patient benefit fund the operating fund the litigation fund and the reserve fund the patient benefit fund will be used to pay product-related claims and other expenses pursuant to the settlement agreement the operating fund will be used to pay x’s operating_expenses except for those expenses paid from the litigation fund and the reserve fund the litigation fund will be used by x to pay expenses associated with other disputes the reserve fund will be used by defendants and related parties to pay expenses associated with product-related claims that are prosecuted or attempted to be prosecuted after the date of the settlement agreement the court appointed a special master trustee to administer the patient benefit fund and the operating fund the special master trustee was assigned duties and powers that include the following to administer the settlement proceeds in escrow and to advise the court whether the funds are invested in securities issued by the united_states or in securities backed by the full faith and credit of the united_states and upon such terms as the special master trustee with the approval of the court deems to be in the best interests of the class members consistent with the purposes of the settlement agreement according to representations by the special master trustee the operating fund qualifies as a_trust under state law the settlement agreement requires x and other defendants to contribute a stated amount to the patient benefit fund ten days after the initial approval of the settlement agreement the settlement agreement provides that this contribution and any reversions of other monies to the patient benefit fund from the operating fund the litigation fund and the reserve fund will be used to satisfy all product-related claims the settlement agreement also requires x to contribute a stated amount to the operating fund ten days after the initial approval of the settlement agreement between that date and the final approval of the settlement agreement the settlement agreement provides that x in its discretion may withdraw funds from the operating fund to meet its operating_expenses but only if it has first completely exhausted the funds retained by it to meet its general operating_expenses and only after it has obtained the approval of the special master trustee which approval shall not unreasonably be withheld the settlement agreement defines final approval as that time when all conditions precedent to the settlement shall have been satisfied and the order and final judgment approving the settlement agreement has been entered any appeals have been exhausted and no further appeal may be taken the settlement agreement provides that within ten days of final approval of the settlement agreement x will deposit the balance of the cash held by it into the operating fund and will file with the special master trustee a copy of its current budget and a report showing year-to-date expenditures against the budget in each year following the financial year in which final approval of the settlement agreement occurs x must prepare and submit to the special master trustee and counsel for the settlement class a budget for the next financial year which estimates the financial impact of x’s legally enforceable obligations for that financial year counsel for the settlement class may file with the special master trustee any objections they have to x’s budget the special master trustee shall have absolute discretion to resolve any dispute resulting from such an objection the settlement agreement provides that on the liquidation of x any funds remaining in the operating fund after payment of the expenses of liquidation shall revert to the patient benefit fund trust classification sec_301_7701-4 of the regulations on procedure and administration provides that in general the term trust as used in the code refers to an arrangement created either by a will or by an intervivos declaration whereby trustees take title to property for the purpose of protecting or conserving it for the beneficiaries under the ordinary rules applied in chancery or probate courts usually the beneficiaries of a_trust do no more than accept the benefits thereof and are not the voluntary planners or creators of the trust arrangement however the beneficiaries may be the persons who created the trust and the trust will be recognized as a_trust under the code if it was created for the purpose of protecting or conserving the trust property for beneficiaries who stand in the same relation to the trust as they would if the trust had been created by others for them generally speaking an arrangement will be treated as a_trust under the code if it can be shown that the purpose of the arrangement is to vest in trustees responsibility for the protection and conservation of property for beneficiaries who cannot share in the discharge of this responsibility and therefore are not associates in a joint enterprise for the conduct of business for profit sec_301_7701-6 of the regulations provides that the term fiduciary applies to a person who occupies a position of peculiar confidence toward others such as a trustee an executor or an administrator the operating fund is a_trust under sec_301_7701-4 of the regulations and the special master trustee is a fiduciary under sec_301_7701-6 of the regulations qualified_settlement_fund sec_1_468b-1 of the regulations provides that a qualified_settlement_fund is a fund account or trust that satisfies all the requirements of sec_1_468b-1 first sec_1_468b-1 requires that the fund account or trust is established pursuant to an order of or is approved by the united_states any state including the district of columbia territory possession or political_subdivision thereof or any agency_or_instrumentality including a court of law of any of the foregoing and is subject_to the continuing jurisdiction of that governmental authority second sec_1_468b-1 requires that the fund account or trust is established to resolve or satisfy one or more contested or uncontested claims that have resulted or may result from an event or related series of events that has occurred and that has given rise to at least one claim asserting liability i under the comprehensive environmental response compensation and liability act of or ii arising out of a tort breach of contract or violation of law or iii designated by the commissioner in a revenue_ruling or revenue_procedure third sec_1_468b-1 provides that the fund account or trust must be a_trust under applicable state law or its assets must be otherwise segregated from other assets of the transferor and related_persons the operating fund does not meet the requirement stated within sec_1_468b-1 although a portion of the operating fund may revert to the patient benefit fund on the liquidation of x and be used to satisfy product-related claims the principal purpose of the operating fund is to provide a fund for x to meet stated operating_expenses not to satisfy product-related claims grantor_trust sec_677 of the code provides that a grantor is treated as the owner of any portion of a_trust whose income is distributed to the grantor without the approval or consent of any adverse_party or in the discretion of the grantor or a nonadverse_party or both may be distributed to the grantor without the approval or consent of any adverse_party sec_1_677_a_-1 of the income_tax regulations provides in general that a grantor is treated as the owner of a portion of a_trust whose income is applied in discharge of a legal_obligation of the grantor or in the discretion of the grantor or a nonadverse_party or both may be applied in discharge of a legal_obligation of the grantor sec_671 of the code provides that when the grantor is treated as the owner of any portion of a_trust the grantor’s taxable_income deductions and credits include those items of the trust’s income deductions and credits attributable to the portion of the trust that the grantor is treated as owning sec_1_671-2 of the regulations provides that an item_of_income deduction or credit included in computing a grantor’s taxable_income deduction or credit is treated as if the grantor had received it or paid it directly sec_1_671-3 of the regulations provides that if the grantor is treated as the owner of an entire trust the grantor takes into account in computing income_tax_liability all items of income deduction and credit to which the grantor would have been entitled if the trust had not been in existence during the period the grantor is treated as the owner sec_1_671-2 of the regulations provides that the term grantor includes a corporation sec_672 a of the code defines an adverse_party as any person having a substantial_beneficial_interest in a_trust that would be adversely affected by the exercise or nonexercise of a power that the party possesses respecting the trust sec_672 defines a nonadverse_party as any person who is not an adverse_party sec_1_672_a_-1 of the regulations provides that a trustee is not an adverse_party merely because of his interest as trustee before final approval of the settlement agreement x may withdraw amounts from the operating fund to meet stated operating_expenses with the approval of the special master trustee which approval may not be unreasonably withheld after final approval x must submit annually its budget to the special master trustee and counsel for the settlement class counsel for the settlement class may object to items in the budget however the special master trustee has sole discretion to resolve any dispute resulting from such an objection the special master trustee is not an adverse_party under sec_672 of the code and sec_1_672_a_-1 of the regulations as all funds in the operating fund trust may be used to pay stated operating_expenses of x and on liquidation of x any remaining funds will revert to the patient benefit fund in the discharge of x’s legal_obligation x is treated as the owner of the entire operating fund under sec_677 of the code and sec_1_677_a_-1 of the regulations therefore the operating fund is a grantor_trust and the items of income deductions and credits attributable to the operating fund will be taken into account in computing x’s taxable_income deductions and credits under sec_671 of the code and accompanying regulations no opinion is expressed about the federal tax consequences of the formation or operation of the operating fund or any other issue under the provisions of any other section of the code 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 david b auclair senior technician reviewer branch office of assistant chief_counsel income_tax accounting enclosures copy of this letter copy of this letter with deletions for purposes


internal_revenue_service number release date index number ------------------------------------------------------- ------------------------------------ ------------------------------------------------ -------------------------------- ------------------------------------------------ department of the treasury washington dc third party communication none date of communication not applicable_person to contact --------------------- id no ---------------- telephone number -------------------- refer reply to cc psi b02 plr-110276-14 date may legend ------------------------------------ ------------------------------- ------------ ---------------- ---------------------------- ------ x state date decedent year dear ------------------ this responds to a letter dated date and subsequent correspondence submitted on behalf of x requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations for x to make an election under sec_754 of the internal_revenue_code the information submitted states that x was formed as a partnership in state on date decedent was a partner of x decedent died in year however at that time x’s tax advisors did not advise x of the availability of an election under sec_754 accordingly x inadvertently failed to timely file a sec_754 election for year sec_754 provides that if a partnership files an election in accordance with the regulations prescribed by the secretary the basis of the partnership property is adjusted in the case of a transfer of a partnership_interest in the manner provided in plr-110276-14 sec_743 such an election shall apply with respect to all distributions of property by the partnership and to all transfers of interests in the partnership during the taxable_year with respect to which the election was filed and all subsequent taxable years sec_1_754-1 b of the income_tax regulations provides that an election under sec_754 to adjust the basis of partnership property under sec_734 and sec_743 with respect to a distribution_of_property to a partner or a transfer of an interest in a partnership shall be made in a written_statement filed with the partnership return for the taxable_year during which the distribution or transfer occurs for the election to be valid the return must be filed not later than the time prescribed by sec_1 e including extensions therefore for filing the return for the taxable_year sec_301_9100-1 c provides that the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-1 b defines the item regulatory election as an election whose due_date is prescribed by a regulation published in the federal_register or a revenue_ruling revenue_procedure notice or announcement published in the internal_revenue_bulletin sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant and extension of time to make the election sec_301_9100-2 provides the rules governing automatic extensions of time for making certain elections sec_301_9100-3 provides the standards the commissioner will use to determine whether to grant an extension of time for regulatory elections that do not meet the requirements of sec_301_9100-3 under sec_301_9100-3 a request for relief 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 granting relief will not prejudice the interests of the government based solely on the information submitted and the representations made we conclude that the requirements of sec_301_9100-1 and sec_301_9100-3 have been satisfied as a result x is granted an extension of time of days from the date of this letter to make an election under sec_754 effective for the year taxable_year and thereafter x must calculate the adjustments under sec_734 and c and sec_1_755-1 as if x had timely made the sec_754 election and allocated the increase in basis among the properties held by x at that time the election should be made in a written_statement filed with the appropriate service_center for association with x’s year return a copy of this letter should be attached to the election plr-110276-14 except as specifically set forth above no opinion is expressed concerning the federal tax consequences of the facts described above under any other provision of the internal_revenue_code and the regulations thereunder this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office copy of this letter is being sent to x’s authorized representative sincerely associate chief_counsel passthroughs special industries by _______________________________ bradford poston senior counsel branch office of the associate chief_counsel passthroughs special industries cc


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc fip b02-plr-141250-01 date date legend trust b type c type d investments e f f program g g loan date x trust b f type d investment_trust b f first mortgage loan trust b f additional loan year type h obligation plr-141250-01 dear this is in response to a ruling_request submitted by your authorized representative dated date trust a requests rulings that the trust b f additional loan described herein secured_by partnership interests qualifies as a real_estate asset for purposes of sec_856 of the code the interest_income earned on the trust b f additional loan qualifies as interest on obligations secured_by mortgages on real_property or on interests_in_real_property for purposes of sec_856 of the code facts trust b is a real_estate_investment_trust a reit that invests directly in type c loans and mortgage-backed_securities a portion of the investments of trust b consists of type d investments a type d investment consists of an e mortgage-backed security mbs representing the securitized first mortgage loan on an underlying complex or a participation interest in a first mortgage loan on a complex originated under the f program the trust b first mortgage loan an additional loan to the borrower in the case of the e mbss or to the owner of the borrower in the case of the f first mortgage loan participation interest of the trust b first mortgage loan used to provide additional funds for the financing of the complex the trust b additional loan and a participation interest in the cash_flow from and appreciation of the complex that was conveyed to trust b through a subordinated promissory note the trust b subordinated promissory note and a subordinated mortgage on the property g insures the trust b first mortgage loan and payments of principal and interest on the e mbs are guaranteed by e amounts payable under the trust b additional loans and the trust b subordinated promissory notes are not insured or guaranteed trust b had an interest in an f type d investment that paid off in date x the trust b f type d investment the borrower under the trust b f first mortgage loan was a partnership the borrower under the trust b f additional loan was the majority partner of that partnership in year g issued a letter to all lenders involved in mortgage loan transactions insured by g the g memorandum providing requirements regarding certain insured loans such as the first mortgage loans described herein a type h obligation is defined in the g memorandum as a loan by a third-party source of loan funds such as trust b of additional funds over and above the amount of the g loan to the partner s or other principal s of the mortgagor to cover costs that are not financed with the proceeds of the g loan the g memorandum states that the obligation to repay such type h plr-141250-01 obligation funds is typically secured_by a pledge of the partners’ or the mortgagor’s other owners’ rights to cash and a pledge of the partnership_interest or other ownership interests of one or more of the partners or other owners of the mortgagor the trust b f additional loan constitutes type h obligation under the g memorandum the g memorandum permits type h obligations in connection with first mortgage loans insured by g only if such obligations are secured in conformance with the specific requirements of the g memorandum the provisions of the g memorandum applicable to type h obligations provide in part that a type h obligation cannot be secured_by the first mortgage insured by g and a type h obligation cannot be secured_by a second mortgage but may be collateralized by security agreements pledging the partners’ partnership interests or the other interests of the owners of the mortgagor and or the partners’ or other owners’ right to cash and the net_proceeds resulting from any payment event as a result of the restrictions imposed by the g memorandum the trust b f additional loan could not be secured_by a first mortgage or by a subordinated mortgage on the complex but were instead secured_by a pledge of the partnership interests in the borrower under the trust b f first mortgage loan all of the proceeds of the trust b f additional loan were contributed to the partnership that was the borrower under the trust b f first mortgage loan or otherwise used in connection with the complex such amounts were required in order to close the trust b f first mortgage loan and to fund certain escrow and reserve accounts pursuant to the trust b f additional loan agreement and under pledge and security agreements all of the partners granted a first priority security_interest in their partnership interests in the partnership and the proceeds therefrom as security for the obligations under the trust b f additional loan under the pledge and security_agreement the pledging parties agreed not to without written consent of trust b cause the disposition of the assets of the borrower under the trust b first mortgage loan outside of the ordinary course of business or cause any amendment to the partnership_agreement which would materially decrease the power or voting rights of general partners or cause the disposition of or the granting of a security_interest in their partnership_interest in addition under the agreements between g and the borrower under the trust b f first mortgage loan without g’s approval the partnership- borrower cannot transfer the interest of any general_partner and the partnership- borrower under the trust b first mortgage loan cannot convey transfer or encumber the property that is the subject of the trust b f first mortgage loan additionally a refinancing of the trust b first mortgage loan or the sale of the complex would result in the acceleration of the principal of and all interest due in respect of the trust b f additional loan plr-141250-01 upon a default under the trust b f additional loan trust b could have foreclosed on the partnership_interest of the borrowers and other pledging parties in the partnership that is the borrower under the trust b f first mortgage loan and could have disposed of and dealt with all the property of the partnership including the complex that is the subject of the trust b f first mortgage loan to satisfy the obligations of the borrowers under the trust b f additional loan in general in the event of a default absent fraud gross negligence or malfeasance with respect to the complex_trust b’s sole recourse was against the pledged partnership interests during the term of the trust b f additional loan at least percent of the assets of the borrower under the trust b f first mortgage loan consisted of real_property the provisions of an agreement entered into by the trust b first mortgage loan borrower did not allow the borrower to engage in any other business including the operation of any other similar project without g’s consent for so long as g’s insurance remains in effect further under the g memorandum no additional mortgages could have been placed on the complex and pursuant to the subordinated mortgage on the complex no inferior liens could have been placed on the complex without the prior consent of trust b additionally the agreements with respect to the trust b f first mortgage loan contained restrictions with respect to the incurrence of liabilities and generally only permit funds to be paid out from cash law and analysis sec_856 of the code provides that a_trust shall not be considered a real_estate_investment_trust for any taxable_year unless certain requirements are satisfied sec_856 of the code provides that at the close of each quarter of the taxable_year at least percent of the value of the trust’s total assets must be represented by real_estate_assets cash and cash items including receivables and government securities sec_856 of the code provides that the term real_estate_assets means real_property including interests_in_real_property and interests in mortgages on real_property and shares or transferable certificates of beneficial_interest in other real_estate_investment_trusts which meet the requirements of sec_856 through under sec_1_856-3 of the income_tax regulations the term value means with respect to securities for which market quotations are readily available the market_value of such securities and with respect to other_securities and assets fair value as determined in good_faith by the trustee of the real_estate_investment_trust sec_1_856-3 of the regulations provides that in the case of a real_estate_investment_trust which is a partner in a partnership the trust will be deemed to own its proportionate share of each of the assets of the partnership and will be deemed to be plr-141250-01 entitled to the income of the partnership attributable to such share for purposes of sec_856 the interest of a partner in the partnership’s assets will be determined in accordance with his capital interest in the partnership the character of such assets in the hands of the partner will be the same as the character of the assets to the partnership in revrul_77_459 1977_2_cb_239 a real_estate_investment_trust made a construction loan to a partnership and as security for the loan the partnership assigned its interest in an illinois land trust to the real_estate_investment_trust the partnership was the sole beneficiary of the land trust and the sole asset of the land trust was real_property in that instance the service concluded that the loan constituted a real_estate asset under sec_856 of the code sec_856 of the code provides that a_trust must derive at least percent of its gross_income from certain categories of income one of which is interest on obligations secured_by mortgages on real_property or on interests_in_real_property sec_856 of the code provides in part that the term_interest excludes any amount received or accrued directly or indirectly if the determination of such amount depends in whole or in part on the income or profits of any person except that any amount so received or accrued will not be excluded from the term_interest solely by reason of being based on a fixed percentage or percentage of receipts or sales sec_856 also provides a special rule with regard to qualified_rents sec_1_856-5 of the regulations provides that where a mortgage covers both real and other_property an apportionment of the interest_income must be made for purposes of the 75-percent requirement this provision would be applicable in the event that the underlying assets of a partnership is made up of real_estate_assets as well as other assets the regulations provide that for purposes of the 75-percent requirement if the loan value of the real_property is equal to or exceeds the amount of the loan then the entire_interest income shall be apportioned to the real_property if the amount of the loan exceeds the loan value of the real_property then the interest_income apportioned to the real_property is an amount equal to the interest_income multiplied by a fraction the numerator of which is the loan value of the real_property and the denominator of which is the amount of the loan the interest_income apportioned to the other_property is an amount equal to the excess of the total interest_income over the interest_income apportioned to the real_property sec_1_856-5 of the regulations provides in part that the loan value of the real_property is the fair_market_value of the property determined as of the date on which the commitment by the trust to make the loan becomes binding on the trust however in the case of a construction loan or other loan made for purposes of improving or developing real_property the loan value of the real_property is the fair_market_value of the land plus the reasonably estimated cost of the improvements or developments plr-141250-01 other than personal_property which will secure the loan and which are to be constructed from the loan proceeds of the loan the fair_market_value of the land and the reasonably estimated cost of improvements or developments shall be determined as of the date on which a commitment to make the loan becomes binding on the trust sec_1_856-3 of the regulations recognizes that if a real_estate_investment_trust is a partner in a partnership the real_estate_investment_trust will be considered to own the partnership’s real_estate_assets in the same proportion as its capital interest in the partnership based on the facts presented the principles of sec_1_856-3 of the regulations provide a sufficient nexus between the trust b f additional loan and the complex underlying the partnership interests used as security for the trust b f additional loan to qualify the trust b f additional loans as real_estate_assets under sec_856 of the code conclusions based on the facts and representations submitted we conclude as follows to the extent that the fair value of the pledged partnership interests’ share of the real_property included in the complex as of the date on which trust b entered into the trust b f additional loan with respect to such property and on the date of any additional borrowings was at least equal to the total aggregate amount of any and all loans secured_by the real_property as well as the amount of the trust b f additional loan the trust b f additional loan described herein qualifies as a real_estate asset for purposes of sec_856 of the code the interest_income earned on the trust b f additional loan qualifies as interest on obligations secured_by mortgages on real_property or on interests_in_real_property for purposes of sec_856 of the code to the extent that the pledged partnership interests’ share of the loan value of the real_property was at least equal to the total aggregate amount of any and all loans secured_by the real_property as well as the amount of the trust b f additional loan provided that the amount of such income does not depend in whole or in part on the income or profits of any person except as provided in sec_856 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 this ruling is directed only to the taxpayer s requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative plr-141250-01 a copy of this letter must be attached to any income_tax return to which it is relevant sincerely william e coppersmith chief branch office of office of associate chief_counsel financial institutions and products


internal_revenue_service department of the treasury index number washington dc number release date person to contact telephone number refer reply to cc intl br1-plr-122562-98 date date do ty re a country b date c year d date e date f dear a this is in response to a letter dated date f submitted on behalf of a requesting a ruling under sec_877 of the internal_revenue_code_of_1986 code that a’s renunciation of the status of lawful permanent resident of united_states did not have for one of its principal purposes the avoidance of u s taxes under subtitle a or subtitle b of the code1 the information submitted for consideration is substantially as set forth below the ruling contained in this letter is based upon information and representations submitted by the taxpayer and accompanied by a declaration executed by her under penalties of perjury that she has examined the ruling_request including accompanying documents and to the best of her knowledge and belief the request contains all the relevant facts relating to the request and such facts are true correct and complete this office has not verified any of the material submitted in support of the ruling_request and they are subject_to verification on examination a is a citizen of country b by birth as is her spouse she was born on date c a 1all section references are to the internal_revenue_code_of_1986 as amended plr-122562-98 obtained permanent resident status in the united_states in year d and relinquished it on date e as of the date she ceased to be permanent resident_of_the_united_states her net_worth was in excess of the threshold set by the statute for a rebuttable_presumption of tax_avoidance under sec_877 of the code sec_877 generally provides that a citizen who loses u s citizenship or a u s long- term resident who ceases to be taxed as a lawful permanent resident individuals who expatriate within the 10-year period immediately preceding the close of the taxable_year will be taxed under sec_877 and be subject_to the special rules of sec_877 for such taxable_year unless such loss did not have for one of its principal purposes the avoidance of u s taxes sec_2107 and sec_2501 provide special estate and gift_tax regimes respectively for individuals who expatriate with a principal purpose to avoid u s taxes a former citizen or former long-term_resident will be treated as having expatriated with a principal purpose to avoid u s taxes for purposes of sec_877 sec_2107 and sec_2501 if the individual’s average income_tax_liability or the individual’s net_worth on the date of expatriation exceeds certain thresholds see sec_877 sec_2107 and sec_2501 a former citizen whose net_worth or average tax_liability exceeds these thresholds however will not be presumed to have a principal purpose of tax_avoidance if that former citizen is described within certain statutory categories and submits a request for a ruling within one year of the date of loss of u s citizenship for the secretary’s determination as to whether such loss had for one of its principal purposes the avoidance of u s taxes see sec_877 sec_2107 and sec_2501 under notice_98_34 1998_27_irb_30 modifying notice_97_19 1997_1_cb_394 an eligible former long-term_resident whose net_worth or average tax_liability exceeds the applicable thresholds will not be presumed to have a principal purpose of tax_avoidance if that former resident is described within certain categories and submits a complete and good_faith request for a ruling as to whether such loss had for one of its principal purposes the avoidance of u s taxes notice_98_34 requires that certain information be submitted with a request for a ruling that an individual’s expatriation did not have for one of its principal purposes the avoidance of u s taxes a is eligible to request a ruling pursuant to notice_98_34 because she is covered by two categories of individuals eligible to submit ruling requests first within a reasonable period after her expatriation a became a resident fully liable to income_tax in country b the country where she was born second within a reasonable period after her expatriation a became a resident fully liable to income_tax in country b the country where her spouse was born plr-122562-98 a submitted all the information required by notice_98_34 including any additional information requested by the service after review of the original submission accordingly based solely on the information submitted and the representations made it is held that a has made a complete and good_faith submission in accordance with sec_877 and notice_98_34 therefore a will not be presumed to have as one of her principal purposes for expatriating the avoidance of u s taxes however because the information submitted does not clearly establish the existence or lack of a principal purpose to avoid taxes under subtitle a or b of the code no opinion is expressed as to whether a’s expatriation had for one of its principal purposes the avoidance of such taxes while this ruling rebuts the presumption of tax_avoidance under sec_877 it is not conclusive as to whether a subsequently may be found to have a principal purpose of tax_avoidance under sec_877 sec_2107 and sec_2501 based on all the facts and circumstances see sec_877 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 in addition no opinion is expressed as to a’s u s tax_liability for taxable periods prior to her relinquishment of the status of lawful permanent resident or for taxable periods after her relinquishment of the status of lawful permanent resident under any section of the code other than sec_877 sec_2107 and sec_2501 a copy of this letter must be attached to a’s u s income_tax return for the year in which a obtained the ruling whether or not a is otherwise required to file a return this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to a’s authorized representative yours truly w edward williams senior technical reviewer branch office of the associate chief_counsel international cc assistant_commissioner international international district operations op in d


internal_revenue_service number release date index numbers ----------------------------- -------------------------------------------- ----------------------- -------------------------------- ------------------------------------- --------------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ----------------- id no ------------ telephone number --------------------- refer reply to cc psi plr-122151-09 date date legend x --------------------------------------------------- --------------------------------------------- --------------------------- --------------------- --------- d1 d2 country dear ----------- this is in response to a letter dated date submitted on behalf of x requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations to file an election under sec_301_7701-3 to be treated as a disregarded_entity for federal tax purposes facts according to the information submitted x was formed on d1 under the laws of country x intended to be treated as a disregarded_entity for federal tax purposes effective d2 however x inadvertently failed to timely file form_8832 entity classification election to be treated as a disregarded_entity for federal tax purposes effective d2 plr-122151-09 law and analysis sec_301_7701-3 provides that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes an eligible_entity with a single owner can elect to be classified as an association or to be disregarded as an entity separate from its owner sec_301_7701-3 provides guidance on the classification of a foreign eligible_entity for federal tax purposes generally a foreign eligible_entity is treated as an association if all members have limited_liability unless the entity makes an election to be treated otherwise a foreign eligible_entity with a single owner having limited_liability may elect to be treated as a disregarded_entity pursuant to the rules of sec_301_7701-3 sec_301_7701-3 and iii provides that an entity classification election must be filed on form_8832 and can be effective up to days prior to the date the form is filed or up to months after the date the form is filed sec_301_7701-3 provides that an election under sec_301_7701-3 must be signed by - a each member of the electing entity who is an owner at the time the election is filed or b any officer manager or member of the electing entity who is authorized under local law or the entity’s organizational documents to make the election and who represents to having such authorization under penalties of perjury sec_301_7701-3 provides that if a purchasing_corporation makes an election under sec_338 regarding an acquired subsidiary an election under sec_301 c i for the acquired subsidiary can be effective no earlier than the day after the acquisition_date within the meaning of sec_338 under sec_301_9100-1 the commissioner may 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 section b defines the term regulatory election as including an election whose due_date is prescribed by a regulation published in the federal_register sec_301_9100-1 through provide the standards that the commissioner will use to determine whether to grant an extension of time to make an election sec_301_9100-1 sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides rules for requesting extensions of time for regulatory elections that do not meet the requirements of sec_301_9100-2 plr-122151-09 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 conclusion based solely on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-3 have been satisfied as a result x is granted an extension of time of days from the date of this letter to file a properly executed form_8832 effective d2 with the appropriate service_center to elect to be classified as a disregarded_entity a copy of this letter should be attached to the form_8832 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 this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely curt g wilson curt g wilson associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes


o f f i c e o f t h e c h i e f c o u n s e l number info release date uil 25c 25d the honorable john thune united_states senator south first street suite aberdeen sd department of the treasury i n t e r n a l r e v e n u e s e r v i c e w a s h i n g t o n d c april cc psi b06 conex-111089-10 attention ------------------ dear senator thune i am responding to your inquiry dated date on behalf of your constituent ------ ------------------------- -------------------asked about the tax_credits for a qualified_geothermal_heat_pump_property and energy-efficient windows homeowners can take a percent tax_credit on expenditures during a taxable_year for qualified_geothermal_heat_pump_property sec_25d of the internal_revenue_code the code qualified_geothermal_heat_pump_property means any equipment that uses the ground or ground water as a thermal energy source to heat the home or as a thermal energy sink to cool the home the equipment must also meet the requirements of the energy star program in effect at the time that the taxpayer made the expenditure for the equipment the labor costs for the onsite preparation assembly and original installation of the qualified_property and the labor costs for the piping or wiring to interconnect the property to the home are also eligible for the credit no cap exists on the amount of the credit allowed taxpayers residing in either a newly constructed home or an existing home are eligible for this tax_credit additionally homeowners can take a percent tax_credit on expenditures during a taxable_year for an energy_efficient_building_envelope_component such as a qualifying exterior window sec_25c of the code unlike the credit for geothermal heat pump property which is available for new_construction windows installed on a newly constructed home do not qualify for a tax_credit for an energy-efficient window to qualify for a credit a taxpayer must install the window on an existing home or on an addition or renovation to an existing home according to the law for the purpose of determining the taxable_year that a taxpayer may take these credits an expenditure for an item is made when the taxpayer completes the original installation of the item for an expenditure related to the conex-111089-10 construction or reconstruction of a structure the expenditure is made when the taxpayer begins using the structure sec_25d of the code if your constituent did not begin to use the newly constructed home until we will treat the expenditure as made in and she should take the credit for a qualified geothermal heat pump in that taxable_year because the tax_credit for windows is unavailable when the windows are installed on a newly constructed home your constituent is not eligible to take the tax_credit on her energy-efficient windows i hope this information is helpful if you or your constituent has any questions please contact ------------------------or me at -------------------- for further assistance sincerely charles b ramsey chief branch office of associate chief_counsel passthroughs special industries


internal_revenue_service number release date index number ---------------------- -------------------------------- ---------------- ----------------------------- ---------------------------- department of the treasury washington dc third party communication date of communication month dd yyyy person to contact ----------------------- id no ------------- telephone number --------------------- refer reply to cc ita b04 plr-128221-07 date date tin ---------------- year ------- dear --------------- this letter_ruling refers to taxpayer’s request that its form_1128 application to adopt change or retain a tax_year be considered timely filed under the authority in sec_301_9100-3 of the regulations on procedure and administration taxpayer filed a late form_1128 to change its accounting_period for federal_income_tax purposes from a taxable_year ending july to a taxable_year ending december effective december year revproc_2006_45 2006_45_irb_851 provides procedures for certain corporations to obtain automatic approval to change their annual_accounting_period under sec_442 of the internal_revenue_code a corporation complying with all the applicable provisions of this revenue_procedure has obtained the consent of the commissioner of the internal_revenue_service to change its annual_accounting_period section of revproc_2006_45 provides that a form_1128 filed pursuant to the revenue_procedure will be considered timely filed for purposes of sec_1_442-1 of the income_tax regulations only if it is filed on or before the time including extensions for filing the return for the short_period required to effect the change the information furnished indicates that taxpayer did not file its form_1128 by the due_date of the return for the short_period required to effect the change however taxpayer requested an extension of time to file its form_1128 under sec_301_9100-3 shortly the after the required time sec_301_9100-3 provides that requests for extensions of time for regulatory elections that do not meet the requirements of sec_301_9100-2 automatic extensions plr-128221-07 such as the instant case must be made under the rules of sec_301_9100-3 requests for relief subject_to 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 the granting of relief will not prejudice the interests of the government based on the facts and information submitted and the representations made we conclude that taxpayer has acted reasonably and in good_faith and that the granting of relief will not prejudice the interests of the government accordingly taxpayer has satisfied the requirements of the regulations for the granting of relief and taxpayer's late filed form_1128 requesting to change to december effective december year is considered timely filed because a change in accounting_period under revproc_2006_45 is under the jurisdiction of the director internal_revenue_service center where the taxpayer’s returns are filed we are returning your application so that you may forward it along with a copy of this letter to the director --------- service_center when you file your return this ruling is based upon facts and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party this office has not verified any of the material submitted in support of the request for a ruling however as part of an examination process the service may verify the factual information representations and other data submitted this ruling addresses the granting of sec_301_9100-3 relief only we express no opinion regarding the tax treatment of the instant transaction under the provisions of any other sections of the code or regulations that may be applicable or regarding the tax treatment of any conditions existing at the time of or effects resulting from the instant transaction specifically we express no opinion as to whether the taxpayer is permitted under the code and applicable regulations to change to the tax_year requested in the form_1128 or whether the change may be effected under revproc_2006_45 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 this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent enclosed is a copy of the letter_ruling showing the deletions proposed to be made when it is disclosed under sec_6110 the taxpayer’s application_for a change in accounting_period will be processed under revproc_2006_45 plr-128221-07 in accordance with the power_of_attorney on file with this office we are sending a copy of this letter to your authorized representative sincerely donna j welch senior technician reviewer branch income_tax accounting


internal_revenue_service number release date index number -------------------------- -------------------------------------- ------------------------------------------------ -------------------------------- ------------------------------ department of the treasury washington dc third party communication date of communication month dd yyyy person to contact ---------------- id no ------------- telephone number -------------------- refer reply to cc tege eoeg eo2 plr-151815-07 date date ---------- ----------------------------- legend state authority taxpayer board ------------------------------------------------------------------------------------------------------------- statute dear ------------ --------------------------------------------------- ------------------------------------------------ --------------------------------------------------------------------------------- this is in response to a letter dated date requesting a ruling that the income of trust is excludable from gross_income under sec_115 of the internal_revenue_code code facts taxpayer is incorporated as a non-proft non-stock corporation under the laws of state for the purpose of improving and operating public marine terminal and warehouse facilities the facilities are owned by authority a political_subdivision of state possessing the power of eminent_domain and police powers on date in response to a private_letter_ruling request the internal_revenue_service issued plr finding that taxpayer’s income is excludable from gross_income under sec_115 of the code taxpayer currently seeks a ruling to confirm that its income will be taxpayer is governed by a board_of directors consisting of seven members who taxpayer’s purpose is to benefit authority in fulfilling its statutory objectives of in plr-151815-07 excluded from gross_income under sec_115 after it modifies its business operations by expanding the number of longshoremen it hires directly rather than through outside entities part increasing commerce operating and maintaining ports port facilities and providing services to this end taxpayer carries out some of authority’s responsibilities including operation of terminals in a manner that is efficient and competitive with other marine terminal facilities taxpayer’s stated purpose in its articles of incorporation is to foster the development of commerce in state ports are appointed by authority the executive director of authority ex officio is a permanent member of board any director may be removed with or without cause at any time by authority an executive committee which includes the directory of authority is authorized to exercise all the powers of the board and to carry on the business of taxpayer when board is not in session taxpayer’s articles of incorporation provide that no part of the net_earnings of taxpayer may inure to the benefit of or be distributed to its directors officers or other private persons upon dissolution of taxpayer its net assets will be distributed to authority pursuant to statute of state direct hires who work directly for taxpayer and indirect hires who work for stevedoring companies direct hire employees provide shore-side labor for steamship lines such as loading and unloading cargo from ships and using expensive equipment indirect hire employees provide shipside services after the containers and other cargo have been loaded or unloaded by direct hire employees the division of labor has existed since taxpayer’s inception because of a historical reluctance by the stevedoring companies to operate authority’s expensive equipment both taxpayer and stevedoring companies because taxpayer does not control the cost of services provided by the stevedoring companies taxpayer has no control_over the total cost of handling cargo at state ports as such taxpayer cannot assure that the rates for services at state’s ports are competitive and foster authority’s mission other ports which hire shipside longshoremen directly rather than through stevedoring companies offer one bundled rate for facilities and services in order to offer a bundled rate taxpayer proposes to increase its hiring of shipside longshoremen directly rather than through indirect hires at the same time shipping lines that wish to continue contracting for shipside labor with stevedoring companies will be free to do so other than the increase in direct hire employees taxpayer proposes no other changes in its activities law and analysis steamships wanting to load and unload cargo at state’s ports must contract with cargo handling by longshoremen in state involves two classifications of workers plr-151815-07 sec_115 of the code provides that gross_income does not include income derived from the exercise of an essential_governmental_function and accruing to a state or a political_subdivision of a state in revrul_77_261 1977_2_cb_45 income from a fund established under a written declaration of trust by a state for the temporary investment of cash balances of the state and its political subdivisions is excludable from gross_income under sec_115 the ruling explains that the investment of positive cash balances by a state or political_subdivision thereof in order to receive yield on the funds until needed to meet expenses is a necessary incident of the power of the state or political_subdivision to collect taxes or other revenue for use in meeting governmental expenses in addition the ruling also provides that because the state and its participating political subdivisions have an unrestricted right to their proportionate share of the investment fund's income the fund's income accrues to them within the meaning of sec_115 revrul_77_261 points out that it may be assumed that congress did not desire in any way to restrict a state's participation in enterprises that might be useful in carrying out those projects desirable from the standpoint of the state government which on a broad consideration of the question may be the function of the sovereign to conduct revrul_90_74 1990_2_cb_34 holds that income of an organization formed operated and funded by political subdivisions of a state to pool their casualty risks is excluded from gross_income under sec_115 the ruling also holds that income of such an organization formed to pool risks in lieu of purchasing insurance to cover their public liability workers'_compensation or employees' health obligations is excluded under sec_115 if private interests do not except for incidental_benefits to employees of the participating state and political subdivisions participate in or benefit from the organizations the service previously concluded in plr that taxpayer’s income is excluded from gross_income under sec_115 of the code the service based its conclusion on the fact that authority a political_subdivision has substantial control_over the operation of the terminal facilities by taxpayer the establishment of fees and charges for use of the facilities and the amounts that taxpayer may expend from the revenue derived from the facilities staff members of authority and security personnel provided by authority are involved in the operation of the facilities by taxpayer authority has the right to receive taxpayer’s monthly income and upon dissolution of taxpayer its net assets will be distributed to authority taxpayer’s current proposal to increase the number of direct hire employees so that it may offer a bundled rate to clients and thereby remain competitive with other ports conforms with taxpayer’s purpose to benefit authority in fulfilling its statutory objectives of in part increasing commerce operating and maintaining ports port facilities and providing services based on the information and representations submitted we hold that the income except as otherwise specifically provided no opinion is expressed on the federal plr-151815-07 rulings of taxpayer is derived from the exercise of an essential_governmental_function and will accrue to a state or a political_subdivision thereof for the purposes of sec_115 accordingly taxpayer’s income is excludable from gross_income under sec_115 of the code tax consequences of any particular transaction provides that this ruling may not be used or cited as precedent letter to your representatives _______________________ this ruling is directed only to the taxpayer who requested it sec_6110 in accordance with a power_of_attorney on file we are sending a copy of this sincerely sylvia f hunt assistant chief exempt_organizations branch division counsel associate chief_counsel tax exempt and government entities copy of this letter copy for sec_6110 purposes enclosures cc