internal_revenue_service number release date index number 468a --------------------- -------------------------- -------------------------------------------- -------------------------------------- -------------------- -------------------------- ------------------------- ---------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ---------------- id no ------------- telephone number --------------------- refer reply to cc psi b06 plr-105323-05 date date in re taxpayer parent plant location commission a commission b commission c agency director fund a b c d e f g h i revised schedule of ruling amounts -------------------------------------------------------- ------------------------------------------------------------------------------------------- ----------------------- ------------------------------------------------------------------------------------------- ------------------------ -------------------------------------------------------- ---------------------------------------------- ----------------------------------------------- --------------------------------------------------------- ----------------------------------------------------- ---------------------------------------------------------------- ------------------------------------------------------------------------------------------- --------------------------------------------------------------- ------------------------------------------- ----- -------- -------- -------- ------ -------- ------------------ -------------- ----------------- plr-105323-05 j k l m n o p r s t u v w x y z aa bb cc dd ee ff gg hh ii jj kk ll dear --------------- ------- ------- ----------------- ------- --------------- ---------------- -------------- -------------- --------- ------- ------- ------- ------------------ ------- ------- ---- ------- ------- ---- ------- ---- ----------- ----------- ------ ------ ------ ------------------ this letter responds to taxpayer’s request dated date for a revised schedule of ruling_amount in accordance with sec_1_468a-3 of the income_tax regulations taxpayer was previously granted a revised schedule of ruling amounts on date the required information for the schedule of ruling amounts was submitted on behalf of taxpayer pursuant to sec_1_468a-3 as set forth more fully below taxpayer now seeks a revised schedule of ruling amounts because commission a and commission b decreased the decommissioning cost collections for plant and because ------------------------------------------------------------------------------------------ -------------------------------------------------- request for a revised schedule of ruling amounts taxpayer has represented the following facts and information relating to its plr-105323-05 taxpayer is under the audit jurisdiction of director taxpayer files a consolidated commission a in docket no g included dollar_figureh for decommissioning costs in taxpayer is subject_to the jurisdiction of commission a which covers b percent of federal_income_tax return with parent taxpayer owns a a percent interest in plant which is situated in location taxpayer’s total electric sales commission b which covers c percent of taxpayer’s total electric sales commission c which covers d percent of taxpayer’s total electric sales and agency which covers e percent of taxpayer’s total electric sales for a total of f percent these percentages may vary from year to year taxpayer has a contractual agreement to sell electric energy to agency commission c approved this agreement prior to its consummation as in the previous ruling agency is treated as if it is another jurisdiction taxpayer’s cost of service for ratemaking purposes in determining the decommissioning costs for plant commission a used an estimated cost of dollar_figurei j dollars as a base cost the estimated base cost for decommissioning the plant is based on an independent study and is premised on the prompt removal dismantlement method this estimated base cost escalated at jj percent per annum to the year of license expiration k results in an estimated future decommissioning cost of dollar_figurel k dollars the estimated year in which decommissioning costs will first be incurred is k and the estimated year in which the decommissioning of plant will be substantially complete is m costs associated with taxpayer’s four plants in total docket no g did however change the decommissioning costs associated with each plant including plant the estimated cost of decommissioning plant as approved by commission b in order no n in docket no o included dollar_figurep for decommissioning costs in taxpayer’s cost of service for ratemaking purposes in determining the decommissioning costs for plant commission b used an estimated cost of dollar_figurei j dollars as a base cost for decommissioning plant the estimated base cost for decommissioning plant is based on an independent study and is premised on the prompt removal dismantlement method this estimated base cost escalated at jj percent per annum to the year of license expiration k results in an estimated future decommissioning cost of dollar_figurel k dollars the estimated year in which decommissioning costs will first be incurred is k and the estimated year in which the decommissioning of plant will be substantially complete is m decommissioning costs associated with taxpayer’s four plants in total order no n in docket no o did however change the decommissioning costs associated with each plant including plant docket no g is a reallocation order that did not change the decommissioning order no n in docket no o is a reallocation order that did not change the plr-105323-05 there have been no changes related to agency since the prior schedule the cost of service for commission c has increased to dollar_figurer a total increase of dollar_figures due to new municipality contracts there are no proceedings before the commissions that may result in an increase or decrease in the amount of decommissioning costs for plant included in taxpayer’s cost of service the estimated date on which plant will no longer be included in taxpayer’s rate base for ratemaking purposes as determined under the ratemaking assumptions that were used to determine the latest rates approved by commission a and commission b is t and commission c and agency is u however the date was v in the first ratemaking proceedings before the commissions in which plant was included in taxpayer’s rate base the estimated_useful_life of plant was not adjusted by the commissions before w limitation for plant extend from x through y and for commission c and agency from x through k for commission a and commission b the estimated_useful_life of plant is z years aa through bb and for commission c and agency is cc years dd through bb the date plant began sustained and substantial generation of electricity for sale to customers was aa for commission a and commission b and was dd for commission c and agency the date plant was first included in taxpayer’s rate base by commission a and commission b was aa and was dd for commission c and agency the estimated period for which fund will be in effect is ee years x through bb therefore taxpayer has calculated the qualifying percentage for commission a and commission b to be ff and for commission c and agency to be gg the assumed after-tax rate of return to be earned by the assets of the fund is hh percent related to commission a and commission b and ii percent related to commission c and agency for commission a and commission b the funding_period and level_funding sec_468a provides that a taxpayer may elect to deduct the amount of sec_1_468a-2 of the regulations provides that the maximum amount of payments made to a qualified nuclear decommissioning fund however sec_468a limits the amount_paid into the fund for any_tax year to the lesser amount of the nuclear decommissioning costs allocable to the fund that is included in the taxpayer’s cost of service for ratemaking purposes for the tax_year or the ruling_amount applicable to this year cash payments made or deemed made to a nuclear decommissioning fund during any_tax year shall not exceed the lesser_of the cost of service amount applicable to the nuclear decommissioning fund for such tax_year or the ruling_amount applicable to the nuclear decommissioning fund for such tax_year ruling amounts for a nuclear decommissioning fund is a ruling specifying annual payments that over the tax years remaining in the funding_period as of the date the schedule first applies will result in a projected balance of the nuclear decommissioning sec_1_468a-3 of the regulations provides that in general a schedule of plr-105323-05 fund as of the last day of the funding_period equal to and in no event more than the amount of decommissioning costs allocable to the fund ------------------------------------------------------------------------------------------------------------ --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------- nevertheless sec_1_468a-3 requires taxpayer to submit a request for mandatory review and a revision of a schedule of ruling amounts since the public_utility commission that establishes or approves rates for the furnishing or sale of electric energy generated by a nuclear power plant to which the nuclear decommissioning fund relates has reduced the amount of decommissioning costs to be included in cost of service for any taxable_year ------------------------------------------------------------------------------------------------------------ --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------- approved revised schedule of ruling amounts taxable years ------- through ------- a b c total agency approval of the schedule of ruling amounts is contingent on there being no year -------------------------------------------------------------------------------------------- change in the facts and circumstances known or assumed at the time this ruling is issued if any of the events described in sec_1_468a-3 of the regulations occur in future years the taxpayer must request a review and revision of the schedule of ruling amounts under sec_1_468a-3 the taxpayer is required to file such a request on or before the deemed payment deadline date for the first taxable_year in which the rates reflecting such action became effective when no such event occurs the taxpayer must file a request for a revised schedule of ruling amounts on or before the deemed payment deadline of the tenth taxable_year following the close of the tax_year in which the most recent schedule of ruling amounts was received made to the fund payments allocable to any funds other than the fund cannot qualify for purposes of the deduction under the provisions of sec_468a of the code as the approved schedule of ruling amounts is relevant only to those payments except as specifically set forth above no opinion is expressed concerning the pursuant to sec_1_468a-7 of the regulations a copy of this letter must be plr-105323-05 stated above payments made to the fund can qualify only to the extent that they do not exceed the lesser_of the decommissioning costs applicable to the fund or the ruling amounts applicable to the fund in the taxable_year federal_income_tax consequences of the above described facts under any other provision of the code or regulations this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent attached with the required election statement to the taxpayer’s federal_income_tax return for each taxable_year in which the taxpayer claims a deduction for payments made to the fund we are sending a copy of this letter_ruling to the industry director natural_resources and construction lm nrc enclosures cc peter c friedman senior technician reviewer branch passthroughs and special industries copy of this letter copy for sec_6110 purposes sincerely yours


t c memo united_states tax_court chrysler corporation f k a chrysler holding corporation as successor by merger to chrysler motors corporation and its consolidated subsidiaries petitioner v commissioner of internal revenue respondent docket no filed date james p fuller ronald b schrotenboer kenneth b clark james c garahan and laura k zeigler for petitioner robin l herrell and nancy b herbert for respondent memorandum opinion laro judge respondent moves the court for partial summary_judgment see rule ' respondent determined deficiencies in petitioner’s and federal income taxes in the ‘unless otherwise indicated all section references are to the internal_revenue_code in effect for the years in issue all rule references are to the tax_court rules_of_practice and procedure - - amounts of dollar_figure dollar_figure and dollar_figure respectively in relevant part respondent determined that petitioner could not accrue a deduction of its estimated lifetime warranty expenses or a part thereof for vehicles that were sold during the corresponding year we must decide whether for federal_income_tax purposes all events necessary to determine petitioner’s liability for its warranty expenses have occurred when it sells its vehicles to its dealers in other words has petitioner satisfied the first prong of the all_events_test entitling it to deduct its estimated future warranty costs on the sale of such vehicles we hold that it has not the following statement of the background of this case is based on the parties’ joint statement of undisputed and disputed facts stipulation of facts---warranty issue and attached exhibits background petitioner’s principal_place_of_business was located in auburn hills michigan when the petition was filed petitioner keeps its books and computes its income for financial purposes and for federal_income_tax purposes using the accrual_method of accounting it uses a calendar_year as its taxable_year petitioner manufactures and sells automobiles and trucks vehicles petitioner generally sells the manufactured vehicles to dealers who resell the vehicles to retail customers a sale generally occurs when a vehicle is delivered to the carrier for shipment to the dealer at which time title passes from petitioner to the dealer petitioner provides written manufacturer's warranties to the retail purchasers of its new vehicles these warranties inform purchasers that the scope of the written warranty covers defects in their vehicles provided that the defects occur during normal use and within specified warranty periods the written warranties provide in part that petitioner will provide repair or replacement of defective parts or workmanship without charge generally the written warranties are of two types basic warranties and extended warranties basic warranties typically provide coverage for year from the warranty starting date the date of original retail delivery or original_use whichever occurs first extended warranties generally take effect when the basic warranty has expired petitioner's extended warranties freguently are valid for years from the warranty starting date or until the vehicle has big_number miles whichever occurs first in some instances the extended warranties have shorter periods such a sec_24 months or big_number miles before petitioner can provide the warranty service required the owner of a vehicle has to return the vehicle for service generally to the selling dealer petitioner’s dealers perform the service and then make a claim on petitioner for reimbursement in the event the vehicle owner is traveling or q4e- has moved the written warranties require the owner to seek warranty service from any chrysler corp dealer selling the same make of vehicle the warranties for model years through direct the owner to contact the nearest chrysler corp dealer if failure of a warranted part necessitates emergency service the warranties in part set forth procedures an owner could follow if unsatisfied with the dealer's response to the regquest for warranty service the owner can choose to discuss the matter with the selling dealer's management the customer relations department in the nearest chrysler zone office and or chrysler's customer relations department in detroit for model years through the written warranties added that the owner could in some cases take the matter to a chrysler corp customer satisfaction board and in other cases to the customer arbitration board the written vehicle warranties do not cover all problems that might arise with the vehicle during the applicable warranty periods coverage of repairs required as a result of fire accident abuse or negligence failure to properly operate the vehicle or alterations of the vehicle not recommended or approved by petitioner are expressly excluded also expressly excluded are repairs required due to lack of maintenance or improper maintenance the warranties for model years through do not cover damage from the environment such as - - damage from airborne fallout chemicals tree sap salt road hazards hail windstorms lightning floods and other acts of god in the warranties for all model years coverage is excluded for any vehicle which has an altered odometer reading in addition to the express contractual provisions of petitioner’s written warranties petitioner is obligated to comply with certain implied warranty provisions mandated by federal and state statutes the statutes applicable include the magnuson-moss federal warranty act u s c secs the clean air act of u s c sec_7521 a the ftc act u s c sec_41 and the uniform commercial code as adopted by various states and state lemon laws state lemon laws typically provide that if the manufacturer cannot fix the defective part to conform to the express warranty after a reasonable number of attempts and the nonconformity substantially impairs the vehicle’s value or use the manufacturer must replace the vehicle or refund the purchase_price petitioner enters into written agreements with its dealers requiring them to correct conditions covered by petitioner's warranties in order to obtain reimbursement from petitioner the agreements require the dealers to submit claims after repairs petitioner reimburses the dealers for providing warranty service provided that the dealers performed and recorded the services as outlined in petitioner's warranty policy -- - procedure manual warranty manual and submitted valid warranty claims the warranty manual provides detailed instructions to petitioner’s dealers which guide them in the administration of petitioner’s warranty liabilities it also contains the procedures for obtaining reimbursement for providing warranty service the warranty manual requires dealers to obtain authorization before proceeding with certain warranty repairs it also provides an appeal procedure for dealers to appeal claims when petitioner has paid less than the full amount of the claim or refused to pay in certain circumstances the warranty manual requires dealers to return defective parts or materials to petitioner the warranty manual warns dealers that petitioner has adjusted denied or charged back to the dealers a significant number of claims because improper packaging of the returned parts resulted in missing or mutilated material and or claims petitioner's corporate internal audit department periodically reviews warranty payments to dealers these reviews sometimes result in petitioner’s determining that the dealers have received warranty cost reimbursements to which they are not entitled petitioner charges the dealers for the amounts of such reimbursements discussion whether a business_expense has been incurred so as to - entitle an accrual--basis taxpayer to deduct it under sec_162 is governed by the all_events_test as set out in 269_us_422 in anderson the supreme court held that a taxpayer was entitled to deduct from its income a tax on profits from munitions sales that took place in although the tax would not be assessed and therefore would not formally be due until all the events had occurred in to fix the amount of the tax and to determine the taxpayer's liability to pay it the all_events_test is now embodied in sec_1_461-1 income_tax regs which provides under an accrual_method of accounting an expense is deductible for the taxable_year in which all the events have occurred which determine the fact of the liability and the amount thereof can be determined with reasonable accuracy see 481_us_239 thus under the regulations the all_events_test has two prongs each of which must be satisfied before accrual of an while it is not relevant to our decision of whether or not the first prong of the all_events_test has been met we note that the enactment of sec_461 provides that the all_events_test shall not be treated as met any earlier than when economic_performance occurs under sec_461 not only must both prongs of the all_events_test be met but additionally economic_performance must have occurred generally sec_461 applies to liabilities that would under the law in effect before the enactment of sec_461 be allowable as a deduction or otherwise incurred after date sec_1_461-4 income_tax regs - - expense is proper first all the events must have occurred which establish the fact of the liability second the amount must be capable of being determined with reasonable accuracy sec_1_461-1 income_tax regs accrual of deductions sec_1_446-1 income_tax regs accrual in general for the purpose of deciding this motion only the first prong of the test is relevant for the purpose of the first prong of the test the supreme court has stated that the liability must be final and definite in amount 321_us_281 fixed and absolute 291_us_193 in order to be deductible see also 77_f2d_324 2d cir the existence of an absolute liability is necessary absolute certainty that it will be discharged by payment is not affg a memorandum opinion of this court petitioner's deductions for anticipated warranty expenses in and were based on the theory that the last event necessary to establish petitioner's warranty liability was the sale of a vehicle to a dealer petitioner argues that the issue we must decide properly formulated is whether respondent has established with a sufficient record of undisputed facts that he is entitled to judgment as a matter of law that all events have not occurred by the end of the and taxable years respectively that determine the fact of petitioner’s warranty liability respondent bears the burden of proving his entitlement to a partial summary_judgment see rule b 79_tc_340 the factual materials presented and the inferences therefrom must be viewed in the light most favorable to the party opposing the motion see 398_us_144 369_us_654 petitioner argues respondent has not provided either evidence or explanation that shows petitioner’s statutory warranty liabilities are not fixed by statutes such as the u c c magnuson-moss and state lemon laws petitioner places reliance on 476_us_593 for the proposition that statutory liabilities satisfy the first prong of the all_events_test petitioner states it is well settled that if a liability is fixed by statute it is fixed under the first prong of the all_events_test we find petitioner’s reliance on united_states v hughes properties inc supra and other cases cited to be ‘petitioner uses the term statutory liability to refer to liabilities arising from statutes or regulations promulgated pursuant to a statute petitioner also cites 269_us_422 involved a statutory liability that arose upon the profitable sale of munitions 717_f2d_1304 9th cir 528_f2d_735 9th cir affg 60_tc_13 271_f2d_930 3d cir revg 29_tc_528 114_tc_293 a portion of the liability fixed by state regulations met the first prong ohio river continued misplaced in hughes properties the taxpayer was a nevada casino that was required by state statute to pay as a jackpot a certain percentage of the amounts gambled in progressive slot machines the taxpayer was required to keep a cash reserve sufficient to pay the guaranteed jackpots when won hughes properties at the conclusion of each fiscal_year entered the total of the progressive jackpot amounts shown on the payoff indicators as an accrued liability on its books from that total it subtracted the corresponding figure for the preceding year to produce the current tax year's increase in accrued liability on its federal_income_tax return this net figure was asserted to be an ordinary and necessary business_expense and deductible under sec_162 the court found that the all_events_test had been satisfied and the taxpayer was entitled to the deduction the court reasoned that the state statute made the amount shown on the payout indicators incapable of being reduced therefore the event creating liability was the last play of the machine before the end of the fiscal_year and that event occurred during the taxable_year we conclude that the cases cited by petitioner do not strictly stand for the proposition that if a liability is fixed continued collieries co v commissioner 77_tc_1369 court reviewed buckeye intl inc v commissioner tcmemo_1984_668 by statute that fact alone meets the first prong of the all_events_test rather we are of the opinion that the first prong of the all_events_test may be met when a statute has the effect of irrevocably setting aside a specific amount as if it were to be put into an escrow account by the close of the tax_year and to be paid at a future date in the instant case the applicable statutes do not so provide respondent relies on the analysis contained in the supreme court's opinion in 481_us_239 in general dynamics the taxpayer who self- insured its employee medical plan deducted estimated costs of medical_care under the plan the employer's liability was determinable the employees' medical needs had manifested themselves employees had determined to obtain treatment and treatment had occurred the only events that had not occurred were the employees’ filing claims for reimbursement before the end of the taxable_year the supreme court found that the all_events_test was not met until the filing of properly documented claims the filing of the claim was the last event needed to create the liability and therefore absolutely fix the taxpayer's liability under the first prong of the all_events_test see id pincite petitioner focuses on the fact that the liability in united_states v hughes properties inc supra was in part fixed by operation of statute and concludes from that that the first prong of the all_events_test is satisfied if a statute in part works to fix the liability we do not agree in both hughes properties and general dynamics the supreme court focused on the last event that created the liability in hughes properties the event creating liability was the last play of the machine before the end of the fiscal_year because the nevada statute fixed the amount of the irrevocable payout that play crystalized or fixed absolutely the taxpayer’s liability thus satisfying the first prong of the all_events_test in general dynamics the last event that created the liability was the employee filing the claim for reimbursement we are unable to find sufficient differences between the facts in general dynamics and those of the instant case to justify departing from the supreme court’s analysis here as in general dynamics the last event fixing liability does not occur before the presenting of a claim either a claim for warranty service by the customer through one of petitioner’s dealers or a claim for reimbursement made on petitioner by the dealer the supreme court stated it is fundamental to the all_events_test that although expenses may be deductible before they have become due and payable liability must first be firmly established this is consistent with our prior holdings that a taxpayer may not deduct a liability that is contingent see 280_us_445 or contested see 321_us_281 nor may a taxpayer deduct an estimate of an anticipated expense no matter how statistically certain if it is based on events that have not occurred by the close of the taxable_year 291_us_193 cf 367_us_687 id pincite emphasis added prior to the supreme court’s decision in hughes properties but consistent with its reasoning this court in 62_tc_786 affd 564_f2d_886 9th cir found that a statutory liability by itself was insufficient to fix liability for the purposes of the all_events_test the court found it was not the statute acting alone that caused the liability in that case the taxpayer was statutorily required to overhaul its aircraft after specified numbers of flight hours the court refused to allow deduction of a portion of the anticipated overhaul costs corresponding to the amount of flight hours logged in the taxable_year as petitioner was under no obligation to make any payment unless an overhaul was actually performed id pincite only if the taxpayer continued to use the aircraft would the point at which overhaul was required be reached while the court found that the possibility the aircraft might crash or be grounded was perhaps remote it recognized the more substantial possibility that the taxpayer's use of the aircraft could be cut short because of a sale of the aircraft see id pincite in contrast to hughes properties the statute did not require the equivalent of setting aside a specific reserve fund based on the hours flown during the fiscal_year thus even assuming arguendo that the basis of part of petitioner’s liability was fixed by statute ’ that fact alone is insufficient to satisfy the first prong of the all_events_test in the instant case we do not find it necessary to determine the exact point in time when the first prong of the all_events_test would be met for respondent to prevail on his motion it is necessary only that we determine that the first prong of the all_events_test has not been met when the vehicles are sold to the dealers we hold as was the case in united_states v general dynamics corp supra the last event in the fixing of liability occurs no sooner than when a claim is filed with petitioner by one of its dealers or by the retail customer in light of the decision in general dynamics we find unpersuasive petitioner’s arguments that the partial statutory nature of its warranty liability fixes the liability for warranty on the date of sale we also find that there are no genuine issues as to any material fact accordingly an appropriate order will be issued granting respondent’s motion for partial summary_judgment -for example petitioner relies on liability being fixed by operation of u c c sec under u c c sec 1b u l a a cause of action accrues when the breach occurs regardless of the aggrieved party's lack of knowledge of the breach a breach of warranty occurs when tender of delivery is made


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 b03 plr-112127-08 date september legend legend ----------- x ------------------ a ------------------------------------------- ---------------------------------------------- b ------------------------- c ------------------------------------------ ------------------------------ country ----------- country --------- d1 d2 --------------------- --------------------- dear ----- ------- this letter responds to a letter dated date and subsequent correspondence written on behalf of x requesting a ruling under sec_301_9100-3 of the procedure and administration regulations facts x was formed under the laws of country x represents that it is a foreign_entity eligible to elect to be classified as a disregarded_entity for federal tax purposes x was a wholly-owned subsidiary of a a country corporation b a country plr-112127-08 corporation acquired a through a subsidiary entity c on d1 upon b’s acquisition of a it was intended that x would be treated as a disregarded_entity effective d2 however due to inadvertence a form_8832 entity classification election to treat x as a disregarded_entity effective d2 was not timely filed law and analysis sec_301_7701-3 provides in part 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 as provided in sec_301_7701-3 an eligible_entity with at least two members can elect to be classified as either an association and thus a corporation under sec_301_7701-2 or a partnership and an eligible_entity with a single owner can elect to be classified as an entity separate from its owner sec_301_7701-3 provides in part that except as provided in sec_301_7701-3 unless the entity elects otherwise a foreign eligible_entity is a a partnership if it has two or more members and at least one member does not have limited_liability b an association if all members have limited_liability or c disregarded as an entity separate from its owner if it has a single owner that does not have limited_liability sec_301_7701-3 provides in part that an eligible_entity may elect to be classified other than as provided under sec_301_7701-3 or to change its classification by filing form_8832 entity classification election with the service_center designated on form_8832 sec_301_7701-3 provides that an election under sec_301_7701-3 will be effective on the date specified by the entity on form_8832 or on the date filed if no such date is specified on the election form the effective date specified on form_8832 can not be more than days prior to the date on which the election is filed and can not be more than months after the date on which the election is filed if an election specifies an effective date more than days prior to the date on which the election is filed it will be effective days prior to the date it was filed sec_301_9100-1 provides that the commissioner may grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make a regulatory election or a statutory election but not 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_9100-2 provides the standards the commissioner will use to determine whether to grant an automatic_extension of time for making certain elections plr-112127-08 sec_301_9100-3 provides the guidelines for granting extensions of time for making elections that do not meet the requirements of sec_301_9100-2 sec_301 a provides that requests for relief subject_to sec_301_9100-3 will be granted when the taxpayer provides evidence including affidavits described in sec_301_9100-3 to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and the grant of relief will not prejudice the interests of the government conclusion based solely on the facts submitted and the representations made we conclude that x has satisfied the requirements of sec_301 and sec_301_9100-3 as a result x is granted an extension of sixty days from the date of this letter to file a properly executed form_8832 with the appropriate service_center to elect to be classified as a disregarded_entity effective d2 a copy of this letter should be attached to the form_8832 except as specifically set forth above we express no opinion concerning the federal tax consequences of the above described facts under any other provision of the internal_revenue_code in accordance with a power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent sincerely s william p o’shea associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes cc


department of the treasury internal_revenue_service washington d c date number info release date uilc cc tege eoeg et1 genin-115359-02 memorandum for director internal_revenue_service center kansas city mo attn entity control from subject office of division counsel associate chief_counsel tax exempt and government entities cc tege eoeg et1 - genin-115359-02 railroad retirement act tax status in accordance with the coordination procedure established between the service and the railroad retirement board rrb the rrb has provided us with its opinion that the following business is not an employer under the railroad retirement act and the railroad unemployment insurance act we have reviewed the opinion of the rrb and based upon the information submitted to the rrb we also conclude that is not an employer under the railroad_retirement_tax_act please take the appropriate action regarding this business will e mcleod cc


t c summary opinion united_states tax_court diego francisco petitioner v commissioner of internal revenue respondent docket no 12938-02s filed date diego francisco pro_se huong t duong for respondent wolfe special_trial_judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect at the time that the petition was filed unless otherwise indicated all section references are to the internal_revenue_code in effect at relevant times and all rule references are to the tax_court rules_of_practice and procedure the decision to be entered is not reviewable by any other court and this opinion should not be cited as authority respondent determined a deficiency in petitioner’ sec_2001 federal_income_tax of dollar_figure the issues for decision are whether petitioner is entitled to head_of_household filing_status and whether petitioner is entitled to a claimed earned_income_credit of dollar_figure some of the facts have been stipulated and are so found we incorporate by this reference the parties’ stipulation of facts and the accompanying exhibits petitioner was a resident of los angeles california at the time he filed his petition in petitioner resided with yolanda margarita guzman ms guzman and their two children in a three-bedroom house owned by ms guzman’s parents petitioner and ms guzman were not married their children are named cesar mateo diego born on date and juliana maria diego born on date ms guzman’s parents her brother her sister and her sister’s husband and three children all resided in the same house with petitioner ms guzman and their two children on hi sec_2001 federal_income_tax return petitioner reported adjusted_gross_income agi of dollar_figure and computed his tax as a head_of_household he also claimed the following dependency_exemption deductions for ms guzman and their two children an additional_child_tax_credit of dollar_figure and an earned_income_credit of dollar_figure respondent disallowed petitioner’s claim to the dependency_exemption deductions the full amount of the additional_child_tax_credit the head_of_household filing_status and the full amount of the earned_income_credit respondent has since stipulated that petitioner is entitled to the three dependency_exemption deductions and the additional_child_tax_credit petitioner bears the burden of proving that respondent’s determination is incorrect rule a it is well established that the court is not bound to accept at face value the self-serving testimony of a taxpayer or his or her close relatives or intimates see eg 87_tc_74 additionally a taxpayer is required to maintain permanent books of account or records sufficient to establish the amount of his or her gross_income deductions credits or other matters required to be shown on his or her tax_return sec_6001 sec_1_6001-1 income_tax regs petitioner has failed to substantiate the claims set forth in his tax_return has failed to maintain books_and_records of his relevant activities and has failed to introduce credible_evidence to support his factual allegations sec_6001 sec_1_6001-1 income_tax regs the first issue for decision is whether petitioner is entitled to head_of_household filing_status sec_2 petitioner has not satisfied the requirements of sec_7491 consequently sec_7491 does not shift the burden_of_proof to respondent provides that a taxpayer may be considered a head_of_household if the taxpayer is not married at the close of the taxable_year and maintains as his or her home a household that constitutes for more than one-half of the taxable_year the principal place or abode as a member_of_the_household of a son or a daughter or a descendant of a son or a daughter or of certain other dependents of the taxpayer subject_to exceptions inapplicable here see sec_2 in addition the taxpayer must furnish over half the cost of maintaining the household for the taxable_year see sec_2 see also eg estate of fleming v commissioner tcmemo_1974_137 holding that the definition of a household is determined by all of the facts and circumstances of a particular case and is not determined solely by physical or tangible boundaries respondent contends that petitioner has not established that he maintained a household for purposes of sec_2 but that petitioner is part of a larger household established by ms guzman’s parents and therefore that petitioner does not qualify as a head_of_household and is subject_to tax at rates prescribed for single taxpayers petitioner contends that the space in ms guzman’s parents’ house really was a separate one- bedroom apartment that should itself be considered a household he also contends that he paid dollar_figure in cash per month as rent to ms guzman’s father julio guzman and otherwise supported his separate family we agree with respondent petitioner has failed to present persuasive evidence supporting his contentions at trial petitioner introduced a handmade diagram of the house that purportedly showed that the space occupied by petitioner ms guzman and their two children was physically separate from the rest of the house ms guzman testified that in addition to the bedroom she and petitioner and their children had their own kitchen area bathroom and separate entrance this diagram and testimony are self-serving and uncorroborated by any disinterested witnesses respondent argues that the diagram is inconsistent with municipal records concerning the premises particularly as to the number of bathrooms neither julio guzman nor any other member of his family except ms guzman who lived with petitioner or neighbor or friend appeared at trial to substantiate the self-serving evidence ms guzman provided for petitioner petitioner also presented a copy of an alleged lease agreement between petitioner and julio guzman as well as rent ms guzman explained that her parents could come into her area of the house at will but that she and petitioner did not have free access to the front of the house at all times the testimony indicates that the parents could lock the access to their portion of the house but that petitioner and ms guzman did not have a lock for privacy receipts allegedly signed by julio guzman for the monthly rent payments once again the alleged evidence produced by petitioner is self-serving uncorroborated and unauthenticated all the rent receipts appear to have been prepared and signed at the same time neither julio guzman nor his wife appeared at trial to verify that they received monthly rent payments from petitioner the supposed receipts on their face are not credible petitioner has failed to present persuasive evidence about julio guzman’s earnings or wealth petitioner selected the place of trial and there is no apparent reason why he did not arrange for julio guzman to appear and testify about the alleged receipts the layout of his home and other matters concerning the head_of_household issue the failure of a party to offer available testimony gives rise to the inference that it would have been unfavorable to his contentions 65_tc_182 47_tc_92 affd 392_f2d_409 5th cir 6_tc_1158 affd 162_f2d_513 10th cir under the circumstances of this case we hold that petitioner is not entitled to head_of_household filing_status the second issue for decision is whether petitioner is entitled to the claimed earned_income_credit sec_32 provides that an eligible_individual subject_to certain limitations may claim an earned_income_credit sec_32 defines an eligible_individual as including an individual who has a qualifying_child for the taxable_year a qualifying_child includes a taxpayer’s children or grandchildren among others who share the taxpayer’s principal_place_of_abode for more than one-half of the taxable_year and who meet certain age requirements sec_32 and b i i if more than one individual otherwise would be treated as eligible individuals with respect to the same qualifying_child for the same taxable_year only the individual with the highest modified agi for that taxable_year shall be allowed the earned_income_tax_credit sec_32 we held above that petitioner cannot claim head_of_household status because petitioner did not establish that he maintained a separate household instead the record reflects that petitioner shared the household with ms guzman’s extended family therefore either of ms guzman’s parents or other members of the household might be treated as eligible individuals for purposes of the earned_income_credit see sec_32 the inquiry then becomes whether petitioner had a higher agi than ms guzman’s parents or other eligible individuals living in the household petitioner has failed to introduce any evidence to demonstrate that he had a higher agi than either of ms guzman’s parents ms guzman testified not only that she did not know what her father’s income was for but also that she even was uncertain of what her father did for a living there is no testimony relating to the agi of ms guzman’s parents who owned the house in which petitioner lived or of anyone else in the family living in the household under the circumstances of this case we find that petitioner has not substantiated his contention and we therefore hold that he is not entitled to the claimed earned_income_credit again we note that we have no reason to doubt that petitioner could have arranged for ms guzman’s parents to testify or otherwise present evidence as to their agi petitioner failed to do so and we must conclude that this evidence would have been unfavorable to him see bresler v commissioner supra pollack v commissioner supra wichita terminal elevator co v commissioner supra this matter was heard in fresno california this court considered whether this matter might properly be continued to a date and time in los angeles where petitioner and petitioner’s family resided and this court hears cases regularly we were concerned that any potential witnesses if present would be better able to substantiate petitioner’s contentions than only petitioner and ms guzman petitioner nevertheless chose to proceed in the absence of any witnesses other than ms guzman accordingly petitioner’s contentions were unsupported and his evidence was unsubstantiated and unauthenticated he simply did not present credible_evidence to support his position respondent must be sustained on both issues presented for decision reviewed and adopted as the report of the small_tax_case division to reflect the foregoing decision will be entered under rule


department of the treasury internal_revenue_service washington d c oct oe tep o2- rkrkeerekerkrereer a rkrkekrekekrekekkeekekee rrr kkrekkekrakee krakekrereererere - krkkekerereererere ae rkkkkkkererkreeee - rkkkekkkekkkkkekrkk a rkrkerkkekkreekerere - err krekekrkeereerkekee me rkkkekkeekrkeekeekeeee ac rekkkkrakeekreekrkerere rk hrkkkekkereeererere ---ekrkkkekerekrekrererker tax_exempt_and_government_entities_division u i l krekererekkerer rreeereeererer rekeekeerereke kekekerekkekkr legend taxpayer a taxpayer b ira w ira x ira y ira z amount d amount e date d amount f amount g amount j amount k dear krrererererekkererrreke this is in response to your letter dated date as supplemented by correspondence dated date submitted on your behalf by your authorized reerrreererererererereererrekkk representative in which you request rulings as to whether the proposed method of calculating distributions from individual_retirement_arrangements iras owned by you will constitute a series of substantially equal period payments and will not be subject_to the percent additional tax imposed on premature distributions under code sec_72 and a make-up distribution from your individual_retirement_arrangements iras will not result in a modification to a series of substantially equal periodic_payment you are currently receiving the following facts and representations have been made in support of your ruling_request as of date taxpayer a owned four separate iras ira w ira x ira y and ira z with an aggregate value of amount d effective date taxpayer a aggregated the value of the four iras in order to commence to receive payments that constitute a substantially_equal_periodic_payments within the meaning code sec_72 taxpayer a selected the amortization_method using an interest rate equal that equal to the applicable federal_mid-term_rate and a single life expectancy of expectancy h as determined in sec_1_401_a_9_-9 q a-1 of the income_tax regulations regulations based on these factors taxpayer a’s annual distribution from his iras for was amount e in this case taxpayer a chose date d as his annual recalculation date for years through continued use of the single life expectancy table for determination of his life expectancy and an interest rate that was not more than percent of the applicable federal_mid-term_rate for the month of january or february the two months preceding the annual recalculation date as of date the aggregate value of taxpayer a’s iras was amount g and applying the above factors resulted in an annual distribution of amount k taxpayer a intends to perform the identical recalculation as described above on date d for and taxpayer a will attain age in taxpayer a represents that during the period of date through date he received a distribution from his iras in the amount of amount k thus correctly satisfying his annual distribution requirement under the methodology he selected to receive payments from his iras in date taxpayer a took a distribution from ira w in order to satisfy his first annual distribution payment however a mathematical error occurred which resulted in a distribution for in the amount of amount f which is less than amount e by amount j which is less than of one percent of amount e taxpayer a states that the error was not detected until late date taxpayer a proposes to correct the error made in the distribution amount in by having an amount equal to amount j krkekrererereeerereerkrererereere distributed from his iras in order to preserve the stream of payments as previously calculated based on the forgoing the taxpayers request the following rulings the failure to distributed the entire required_distribution amount for year will not be considered a modification to a series of substantially_equal_periodic_payments under code sec_72 that will result in the imposition of the percent additional tax under code sec_72 the method of determining periodic_payments as described herein constitutes a series of substantially_equal_periodic_payments under code sec_72 a iv code sec_408 provides that except as otherwise provided in sec_408 any amount_paid or distributed out of an ira shall be included in gross_income by the payee or distributee as the case may be in the manner provided under sec_72 code sec_72 provides rules for determining how amounts received as annuities endowments or life_insurance contracts and distributions from qualified_plans are to be taxed code sec_72 provides for the imposition of an additional percent tax on early distributions from qualified_plans including iras the additional tax is imposed on that portion of the distribution that is includible in gross_income code sec_72 t a iv provides that sec_72 shall not apply to distributions that are part of a series of substantially equal periodic_payment not less frequently than annually made for the life or life expectancy for the employee or joint or joint expectancies of such employee and his designated_beneficiary life code sec_72 imposes the additional limitation on distributions excepted from the percent tax by sec_72 that if the series of payments is subsequently modified other than by reason of death or disability before the later of the employee’s attainment of age then the taxpayer's tax for the first taxable_year in which such modification occurs shall be increased by an amount determined under regulations equal to the tax that would have been imposed except for the sec_72 exception plus interest for the deferral_period sec_1_401_a_9_-9 of the regulations provides tables that are to be used in connection with computations under sec_72 and the regulations thereunder kkrerkereeeerkrerekrerererereekere included in this section are table giving life expectancies for one life q a-1 and joint life and last survivor expectancies for two lives q a-3 in absence of regulations on code sec_72 this notice provides guidance notice_89_25 was published on date and provided guidance in the form of questions and answers on certain provisions of the tax_reform_act_of_1986 tra ‘86 with respect to the exception to the tax on premature distributions provided under sec_72 q a-12 of notice_89_25 provides three methods of determining substantially_equal_periodic_payments for purposes of sec_72 revrul_2002_62 2002_42_irb_710 which was published on date modifies q a-12 of notice_89_25 revrul_2002_62 provides among other things that payments are considered to be substantially_equal_periodic_payments within the meaning of code sec_72 if they are made in accordance with the required_minimum_distribution method the fixed amortization_method or the fixed annuitization method the three methods described in q a-12 of notice the fixed amortization_method provides that the annual payment for each year is determined by amortizating in level amounts the account balance over a specified number of years determined using the chosen life expectancy table and the chosen interest rate under this method the account balance the number from the chosen life expectancy table and the resulting annual payment are determined once for the first distribution year and the annual payment is the same amount in each succeeding year in this case taxpayer a has determined the annual payments from the iras using the fixed amortization_method as described in revrul_2002_62 except that rather than making a fixed annual payment taxpayer a will recalculate the annual distribution for each succeeding year taxpayer a will recalculate the amount of the annual payment for each year through for those years taxpayer a will recalculate the annual distribution based on the account balance of the iras on date d determine his life expectancy as of his respective age in each of those years using the single life table contained in sec_1_401_a_9_-9 q a-1 of the regulations and the interest rate equal to percent of the applicable federal_mid-term_rate for either of the two months immediately preceding date d the life expectancy and interest rate used are such that they so not result in the circumvention of the requirements of sec_72 and sec_72 of the code through the use of an unreasonable high interest rate or an unreasonable life expectancy taxpayer a represents that a mathematical error caused him to receive a distribution from his iras for distribution year that was less then the amount determined under the method he chose to commence receiving payments from his iras taxpayer a rarekekeekererereererererrerkeerere further represents that the error was not detected until late date taxpayer a proposes to receive a make-up distribution in in an amount of amount e that would satisfy his annual payment distribution requirement for as determined under the fixed amortization_method when this amount is added to the amount calculated for taxpayer a will receive an amount for calendar_year that will be more than the annual payment determined under the fixed amortization_method other than this make-up distribution which will be made in taxpayer a will continue to use the fixed amortization_method for calculating the annual payments from his iras based on the foregoing we conclude that the failure to distribute the entire required_annual_payment from the iras for the calendar_year and the subsequent make- up distribution for the year that will be made in calendar_year will not be considered a modification of a series of substantially_equal_periodic_payments under code sec_72 and therefore will not be subject_to the percent additional tax under on premature distributions under sec_72 we further conclude that the method as modified of determining periodic_payments results in substantially_equal_periodic_payments within the meaning of sec_72 of the code and such payments will not be subject_to the additional tax under sec_72 unless the requirements of sec_72 are not met these rulings assume that the above iras qualify under code sec_408 at all relevant times this letter is directed only to the taxpayer that requested it code sec_6110 provides that it may not be used or cited by others as precedent a copy of this letter has been sent to your authorized representative in accordance with a power_of_attorney on file in this office if you have any questions please contact se t ep ra t2 sincerely yours signed joyob b floyd joyce e floyd manager employee_plans technical group enclosures deleted copy of ruling letter notice of intention to disclose


internal_revenue_service number release date index number ------------------------------- ---------------------------------------- ------------------------ ----------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact -------------- id no ------------- telephone number --------------------- refer reply to cc psi plr-149911-07 date date legend company llc state d1 d2 d3 d4 a b c d -------------------------------- ----------------------- ----------------------- ------------------------ ----------------------- ---------- ------------------------- ---------------------- -------------- ---------------- ------------------ ------------------------- ------------------- ------------------------- ----------------- ------------------------- ---------------------- ------------------------- plr-149911-07 dear ------------ this letter responds to your letter dated date submitted on behalf of company requesting a ruling under sec_1362 of the internal_revenue_code facts company was incorporated on d1 under the laws of state and elected under sec_1362 to be an s_corporation effective on d1 on d2 a an individual shareholder in company sold all of his company stock to llc an ineligible s_corporation shareholder in d3 company learned that llc was an ineligible s_corporation shareholder and that its s_corporation_election had terminated on d2 subsequently on d4 llc transferred company stock to its members b c and d all of whom are individuals in proportion to their ownership interests in llc company and its shareholders represent that the termination of its s_corporation_election was inadvertent and unintended company was unaware that llc was an ineligible s_corporation shareholder company and its shareholders agree to make any adjustments consistent with the treatment of company as an s_corporation as may be required by the service law sec_1361 provides that the term s_corporation means with respect to any taxable_year a small_business_corporation for which an election under sec_1362 is in effect for such year sec_1361 provides in part that for purposes of subchapter_s the term small_business_corporation means a domestic_corporation that is not an ineligible_corporation and that does not among other requirements have as a shareholder a person other than an estate a_trust described in sec_1361 or an organization described in sec_1361 who is not an individual sec_1362 provides that an election under sec_1362 terminates whenever the corporation ceases to be a small_business_corporation sec_1362 provides that any termination under sec_1362 is effective on and after the date of cessation sec_1362 provides that if an election under sec_1362 by any corporation was terminated under sec_1362 or the secretary determines that the circumstances resulting in the termination were inadvertent no later than a plr-149911-07 reasonable period of time after discovery of the circumstances resulting in the termination steps were taken so that the corporation for which the termination occurred is a small_business_corporation and the corporation for which the termination occurred and each person who was a shareholder of the corporation at any time during the period specified pursuant to sec_1362 agrees to make the adjustments consistent with the treatment of the corporation as an s_corporation as may be required by the secretary with respect to such period then notwithstanding the circumstances resulting in the termination the corporation shall be treated as an s_corporation during the period specified by the secretary conclusion based on the facts and representations submitted by company we conclude that company’s s_corporation_election terminated on d2 when llc acquired company stock we also conclude that this termination was inadvertent within the meaning of sec_1362 consequently we rule that company will continue to be treated as an s_corporation from d2 and thereafter provided that company's s_corporation_election was valid and not otherwise terminated under sec_1362 during the termination period of d2 to d4 b c and d shall be treated as the owners of company stock in proportion to their ownership interests in llc accordingly the shareholders of company including b c and d in determining their respective income_tax liabilities during the termination period and thereafter must include their pro_rata share of the separately and nonseparately computed items of company under sec_1366 make any adjustments to stock basis under sec_1367 and take into account any distributions made by company under sec_1368 except for the specific ruling above no opinion is expressed or implied concerning the federal_income_tax consequences of the facts of this case under any other provision of the code specifically no opinion is expressed or implied regarding company's eligibility to be an s_corporation under a power_of_attorney on file with this office we are sending a copy of this letter to company plr-149911-07 this ruling is directed only to the taxpayer who requested it according to sec_6110 this ruling may not be used or cited as precedent sincerely s mary beth collins senior technician reviewer branch office of associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes cc


internal_revenue_service national_office technical_advice_memorandum june third party communication none date of communication not applicable number release date index nos control no tam-118359-98 -------------------- ----------------------------------------------- taxpayers' names taxpayers' address taxpayers' eins year involved date of conference legend x y taxpayers ------------------------------------ ------------------------ ---------------------------------- ----------------- --------------------- ------- ------------- ---------------------- ----------------------- ------------------------------------------------------------------ partnership --------------------------------------- state ------------ company --------------------------------------- issue is a recharacterization of the taxpayers' activities from nonpassive to passive for purposes of the passive_activity_loss and credit limit rules of sec_469 of the internal_revenue_code a change in a method_of_accounting for purposes of sec_446 and sec_481 tam-118359-98 conclusion the recharacterization of the taxpayers' activities from nonpassive to passive for purposes of the passive_activity_loss and credit limit rules of sec_469 is not a change in a method_of_accounting for purposes of sec_446 and sec_481 facts x owns a one percent general_partner interest and x and y collectively the taxpayers own a percent limited_partner interest through their living_trust in partnership a state limited_partnership partnership developed a nursing home in state and hired a management company company to operate the nursing home in exchange for a fee plus a portion of the profits the nursing home became fully operational in the taxpayers determined that they materially participated in the nursing home from through and therefore they treated the majority of the losses flowing from the partnership as not being subject_to the passive loss limitation rules under sec_469 treatment of the losses for the through tax years as nonpassive resulted in the losses either being carried back to prior years or offsetting other income in those years this treatment allowed the taxpayers to offset their ordinary_income with the losses from the nursing home on their tax returns from through taxpayers' tax_year is under examination an examiner has questioned whether the taxpayers were correct in deciding that their ownership of the nursing home was not a passive_activity in specifically questioned is whether the taxpayers were correct when they decided that they materially participated as defined in sec_469 in the nursing home activity in the examiner's position is that the taxpayers did not materially participate in the activity in and that the nursing home ownership was a passive_activity which resulted in the taxpayers being subject_to the passive_activity_loss and credit limit rules of sec_469 in the examiner has requested guidance with respect to whether a recharacterization of the taxpayers' activities from nonpassive to passive for purposes of sec_469 is a change in a method_of_accounting for purposes of sec_446 requiring the computation of an adjustment under sec_481 the taxpayers do not agree with the examiner's sec_469 position however the taxpayers and the examiner have agreed that only the change in a method_of_accounting issue would be submitted to the national_office for consideration both the taxpayers and the examiner have agreed that the national_office should assume for purposes of answering the change in a method_of_accounting issue that the examiner is correct in regard to the taxpayers' lack of material_participation in the nursing home activity thus for purposes of this technical_advice_memorandum the national_office will assume that the taxpayers did not materially participate in the nursing home activity tam-118359-98 in and were therefore subject_to the passive_activity_loss and credit limit rules of sec_469 in that year law and analysis sec_446 states the general_rule that taxable_income shall be computed under the method_of_accounting on the basis of which the taxpayer regularly computes income in keeping its books see sec_1_446-1 of the income_tax regulations sec_1_446-1 provides in pertinent part that the term method_of_accounting includes not only the over-all method_of_accounting of the taxpayer but also the accounting treatment of any item examples of such over-all methods are the cash_receipts_and_disbursements_method and an accrual_method sec_1_446-1 provides the rules governing the adoption or change_of a method_of_accounting see also revproc_97_27 1997_1_cb_680 which provides the general procedures for obtaining the consent of the commissioner of internal revenue to change a method_of_accounting for federal_income_tax purposes sec_1 e ii a states that a change in the method_of_accounting includes a change in the over-all plan of accounting for gross_income or deductions or a change in the treatment of any material_item used in such over-all 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 which involves the proper time for the inclusion of the item in income or the taking of a deduction sec_1_446-1 provides in pertinent part that a change in method_of_accounting does not include correction of mathematical or posting errors or errors in the computation of tax_liability also a change in method_of_accounting does not include adjustment of any item_of_income or deduction that does not involve the proper time for the inclusion of the item_of_income or the taking of a deduction a change in the method_of_accounting also does not include a change in treatment resulting from a change in underlying facts revproc_97_27 sec_2 explains that in determining whether a taxpayer's accounting practice for an item involves timing generally the relevant revrul_90_38 1990_1_cb_57 explains that the treatment of a material_item in the same way in determining the gross_income or deductions in two or more consecutively filed tax returns represents consistent treatment of that item for purposes of sec_1_446-1 however if a taxpayer treats an item properly in the first return that reflects the item it is not necessary for the taxpayer to treat the item consistently in two or more consecutive tax returns tam-118359-98 question is whether the practice permanently changes the amount of the taxpayer's lifetime income if the practice does not permanently affect the taxpayer's lifetime income but does or could change the tax_year in which the income is reported it involves timing and is therefore a method_of_accounting revproc_97_27 sec_2 states that a change in the characterization of an item may also constitute a change in method_of_accounting if the change has the effect of shifting income from one period to another sec_481 provides in pertinent part that when computing a taxpayer's taxable_income for any_tax year if such computation is under a method_of_accounting different from the method under which the taxpayer's taxable_income for the preceding tax_year was computed then there shall be taken into account those adjustments that are determined to be necessary solely by reason of the change in order to prevent amounts from being duplicated or omitted sec_469 generally defines passive_activity as any activity which involves the conduct_of_a_trade_or_business in which the taxpayer does not materially participate and any rental_activity sec_469 denies certain taxpayers the use of deductions arising from passive activities to offset income from personal services portfolio_income and income from a trade_or_business which is not a passive_activity nonpassive_income generally deductions arising from passive activities may only be used to offset the income arising from passive activities if in any_tax year a deduction arising from a passive_activity can not be fully used against the income from the passive_activity and the net_income from other passive activities the taxpayer is permitted to carryforward the unused portion of the deduction when the taxpayer disposes of its interest in the passive_activity in a fully taxable transaction with an unrelated party if any unused deduction from the disposed of activity remains after first being used to offset income from the disposition of the activity and net_income from other passive activities the taxpayer may apply the excess deduction to offset other income thus sec_469 divides certain taxpayers' activities into two categories--passive or not passive then sec_469 places special restrictions on the use of losses arising from activities characterized as passive for a number of years including the taxpayers have been required to determine whether the nursing home activity was a passive_activity subject_to the passive_activity_loss limit rules of sec_469 basically this has required that the taxpayers determine whether based on the facts for that year they materially participated in their nursing home activity if they materially participated the nursing home activity was not tam-118359-98 a passive_activity that year and any loss for that year would not be limited by sec_469 in contrast if they did not materially participate the nursing home activity was a passive_activity that year and any loss for that year could not be freely used to offset income because the determination of whether the nursing home activity is a passive_activity is based on each year's facts the taxpayers' nursing home activity could be considered passive in one year but not in the next year assuming that the examiner is correct that in the taxpayers did not materially participate in their nursing home activity and therefore the taxpayers' nursing home activity should be recharacterized from nonpassive to passive for purposes of sec_469 the issue to be decided by the national_office is whether this recharacterization is a change in a method_of_accounting under sec_446 this issue involves only the characterization of an activity as either nonpassive or passive each year the taxpayers review their facts and decide whether during that year they materially participated in their nursing home activity if the taxpayers did not materially participate their nursing home activity must be classified as passive under the sec_469 rules based on the facts present in one year the activity may be nonpassive in that year while in another year under the facts present in that year the activity may be passive under the argument advocated by the examiner each year that the activity changed from nonpassive to passive or vice versa the taxpayers would be required to file a form_3115 application_for change in accounting_method in each year_of_change the taxpayers would be required to compute an adjustment under sec_481 if for example a taxpayer materially participated in an activity in but did not in the examiner would have the taxpayer file a form_3115 for any amounts that were properly deducted in because the activity was nonpassive that would have been deferred had the activity been passive would be included in the computation under sec_481 similarly in the instant case the examiner believes that if the taxpayers did not materially participate in the examiner may bring into income in any amounts that were deducted in prior years that would not have been deductible in those years if the taxpayers had not materially participated in those years the examiner believes that this may be done by virtue of sec_481 without regard to whether the taxpayers materially participated in the nursing home activity in the prior years the examiner notes that this is because if a change from determining that a taxpayer materially participated in an activity to determining that it did not materially participate in the activity is a change in method_of_accounting sec_481 authorizes necessary adjustments to prevent amounts from being duplicated or omitted we do not believe that a determination of whether a taxpayer materially participates in an activity is a method_of_accounting in this case the taxpayers' determination of whether they materially participate in their nursing home activity does not determine into which period an item_of_income or deduction will be placed the tam-118359-98 taxpayers' determination does not involve the treatment of a material_item simply determining whether the taxpayers materially participated in their activity for purposes of classifying the activity as passive or not is not an item --it is not a recurring incidence of income or expense instead the taxpayers' determination establishes the character of their activity for that year--it is either passive or it is not passive once the character of the activity is determined then if the activity is passive the taxpayers must apply the statutorily mandated rules of sec_469 to any existing loss the issue involved in this technical_advice request is distinguishable from that addressed in 743_f2d_781 11th cir a case cited by the examiner in support for the conclusion that a method_of_accounting will be changed when the treatment of the taxpayers' activities is changed from nonpassive to passive under sec_469 as discussed in the examiner's submission the taxpayer in knight-ridder used a reserve_accounting method for its advertising revenue advertising customers that met certain criteria were entitled to a rebate of a portion of their advertising payment knight-ridder accrued advertising revenue as income and deducted an estimate of the amount that would be refunded under its rebate program knight-ridder was not obligated to pay and was therefore not entitled to deduct the advertising rebates until the advertiser met the rebate criteria the government proposed to change knight-ridder's method_of_accounting to the correct method knight-ridder agreed that its reporting was improper but argued that it was not a method_of_accounting subject_to the provisions of sec_446 and sec_481 knight- ridder argued that since it was deducting amounts that might never be deductible the proper time for the taking of deductions was not at issue the court concluded that knight-ridder's reserve_method of accounting would have reported excess_deductions as income when knight-ridder terminated its affairs thus the proper time for the taking of deductions was at issue in knight-ridder unlike the instant case the treatment of an item of expense the advertising rebates was at issue the instant case involves no item_of_income or expense but rather the factual determination of whether the taxpayers materially participated in an activity during a given year recently the united_states tax_court was presented with the argument that sec_469 was an accounting_method provision 110_tc_46 although the case was decided on other grounds the court gave some indication that it did not believe that sec_469 was an accounting_method provision for example the court stated- we note that although congress placed sec_469 in a part of the code entitled methods_of_accounting the legislative_history indicates that such treatment is not as significant as petitioner would have us believe the statute tam-118359-98 itself and the legislative_history treat sec_469 separately from the provisions dealing with accounting matters compare title v entitled tax_shelter limitations interest limitations which includes the provisions of sec_469 with title viii accounting provisions of the tax_reform_act_of_1986 publaw_99_514 100_stat_2085 h conf rept vol ii supra c b vol pincite id pincite similarly the court rejected the taxpayer's attempt to reinforce its method_of_accounting argument with language in the sec_469 regulations id pincite assuming that the taxpayers did not materially participate in the nursing home activity in the taxpayers mischaracterized their nursing home activity in when they failed to treat the nursing home activity as a passive_activity under sec_469 rules the taxpayers made an error in and the correction of this error is not a change in a method_of_accounting caveat a copy of this technical_advice_memorandum is to be given to the taxpayers sec_6110 provides that it may not be used or cited as precedent -end-


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 b01 plr-117920-11 date date legend legend x ----------------------------------------------------------- ------------------------------------ state d1 d2 year -------------- --------------------------- ---------------------- ------- dear --------------------- this responds to the letter dated date and related correspondence submitted on behalf of x requesting relief under sec_1362 of the internal_revenue_code code for an inadvertent termination of s election facts the information submitted states that x was incorporated under the laws of state on d1 x elected to be treated as an s_corporation effective d2 beginning in year x made disproportionate advances to its shareholders based on certain loan arrangements x determined that if the advances are viewed as disproportionate plr-117920-11 distributions x may have inadvertently created a second class of stock in violation of the one class of stock requirement under sec_1361 x represents that its governing provisions provide for one class of stock and that it did not intend to create a second class of stock or terminate its s election immediately after the discovery of the errors x and its shareholders took corrective actions x and its shareholders formalized the loan arrangements with written agreements the shareholders of x paid off a portion of loans plus interests to x pursuant to the formalized loan agreements and x paid off its loans to an entity to which the shareholders of x were indirect owners in addition x and its shareholders agree to make any adjustments required by the commissioner consistent with the treatment of x as an s_corporation law and analysis sec_1361 provides that the term s_corporation means with respect to any taxable_year a small_business_corporation for which an election under sec_1362 is in effect for the year sec_1361 provides that for purposes of subchapter_s the term small_business_corporation means a domestic_corporation that is not an ineligible_corporation and that does not among other things have more than one class of stock sec_1_1361-1 of the income_tax regulations provides that a corporation is generally treated as having only one class of stock if all outstanding shares of stock of the corporation confer identical rights to distribution and liquidation proceeds sec_1_1361-1 provides that the determination of whether all outstanding shares of stock confer identical rights to distribution and liquidation proceeds is made based on the corporate charter articles of incorporation bylaws applicable state law and binding agreements relating to distribution and liquidation proceeds collectively the governing provisions a commercial contractual agreement such as a lease employment agreement or loan agreement is not a binding agreement relating to distribution and liquidation proceeds and thus is not a governing provision unless a principal purpose of the agreement is to circumvent the one class of stock requirement although a corporation is not treated as having more than one class of stock so long as the governing provisions provide for identical distribution and liquidation rights any distributions including actual constructive or deemed distributions that differ in timing or amount are to be given appropriate tax effect in accordance with the facts and circumstances sec_1362 provides that an election under sec_1362 shall be terminated whenever at any time on or after the first day of the first taxable_year for plr-117920-11 which the corporation is an s_corporation such corporation ceases to be a small_business_corporation sec_1362 provides in part that if an election under sec_1362 by any corporation a was not effective for the taxable_year for which made determined without regard to sec_1362 by reason of a failure to meet the requirements of sec_1361 or to obtain shareholder consent or b was terminated under sec_1362 or the secretary determines that the circumstances resulting in such ineffectiveness or termination were inadvertent no later than a reasonable period of time after discovery of the circumstances resulting in the ineffectiveness or termination steps were taken - a so that the corporation is a small_business_corporation or b to acquire the required shareholder consents and the corporation and each person who was a shareholder of the corporation at any time during the period specified pursuant to this subsection agrees to make such adjustments consistent with the treatment of the corporation as an s_corporation as may be required by the secretary with respect to such period then notwithstanding the circumstances resulting in such ineffectiveness or termination such corporation shall be treated as an s_corporation during the period specified by the secretary sec_1_1362-4 provides that the commissioner may require any adjustments that are appropriate in general the adjustments required should be consistent with the treatment of the corporation as an s_corporation during the period specified by the commissioner conclusion based solely upon the facts submitted and the representations made we conclude that x’s s election may have terminated because x may have had more than one class of stock however we conclude that if x’s s election was terminated such a termination was inadvertent within the meaning of sec_1362 of the code further we conclude that the corrective actions taken by x and its shareholders does not create a second class of stock under sec_1361 consequently we rule that x will be treated as continuing to be an s_corporation for year and thereafter provided that x’s s election is not otherwise terminated under sec_1362 except as specifically ruled upon above no opinion is expressed or implied concerning the tax consequences of any facts discussed or referenced in this letter this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent plr-117920-11 in accordance with the power_of_attorney on file with this office copies of this letter_ruling will be sent to your authorized representatives sincerely david r haglund david r haglund chief branch office of associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes cc


internal_revenue_service number release date index number --------------------- ------------------------ ----------- ---------------------- department of the treasury washington dc person to contact ---------------------- id no --------------- telephone number --------------------- refer reply to cc intl br1 - plr-119651-04 date date ------ ty ------- --------------------- --------------------------- --------------------------- a ------------------------------------------------------------------------------ date b country c date d dear ------------------ this is in response to your letter received date requesting a ruling that your loss of lawful permanent resident status expatriation did not have for one of its principal purposes the avoidance of u s taxes under subtitle a or subtitle b of the code 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 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 a was born on date b in country c a came to the united_states for employment reasons and obtained a green card a is also a citizen of country c where he now lives on date d a relinquished his green card a is a resident for tax purposes in country c and will be fully liable for country c tax on the date of a's expatriation his net_worth exceeded the applicable_amount set forth in sec_877 plr-119651-04 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 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 u s citizen or former u s 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 exceed certain thresholds see sec_877 sec_2107 and sec_2501 a former u s 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_2_cb_29 modifying notice_97_19 1997_1_cb_394 a 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 he is a citizen and resident fully subject_to tax in country c the country in which he was born a submitted all of the information required to be submitted by notice_97_19 as modified by notice_98_34 accordingly based solely on the facts submitted and the representations made we conclude 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 under sec_877 to have had as one of his principal purposes for expatriating the avoidance of u s taxes we further conclude that a will not be treated under sec_877 as having had as one of his principal purposes for expatriating the avoidance of u s taxes plr-119651-04 because the information submitted clearly establishes the lack of a principal purpose to avoid taxes under subtitle a or b of the code 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 the taxable years prior to or after his expatriation under sections 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 _______________ m grace fleeman senior counsel cc intl br1 sincerely cc