internal_revenue_service number release date index numbers -------------------------- ------------------------------------ --------------------- ---------------------------------------- -------------------------------- department of the treasury washington dc third party communication date of communication month dd yyyy person to contact -------------------------- id no ------------- telephone number --------------------- refer reply to cc corp b02 plr-125807-08 date october legend company ------------------------------------------------------------------------------------- ----------------------------------------------------------------------------- ----------------------- entity a entity a1 entity a2 entity b entity b1 entity c entity c1 entity d entity d1 entity d2 entity e entity e1 ------------------------------ ------------------------------------------------- ----------------------------------------------- --------------------------------------------- --------------------------------------------------------------- ----------------------------------------------- --------------------------------------------------------- ---------------------------------------------------------- ------------------------- --------------------------------------------------------------- ------------------------------------------------- --------------------------------------------------------------- -------- plr-125807-08 entity e2 entity f entity f1 entity f2 entity g entity g1 entity h securities firm a b c d e f g h i j k l m n --------------------------------------------------------------- ---------------------- ----------------------------------------------------- -------------------------------- --------------------------------- ------------- ----------------------------------------------------------- ---------------------------------------- -------------------------------------- ---- ----- --------------- --------------- --------------- -------- ----------------- --------------- --------------- -------------- ---- --------------- --------------- -------------- plr-125807-08 o p q r s t u v w x y z aa bb cc dd ee ff gg petition date effective date type -------------- -------------- -------------- -------------- -------------- ----------- -------------- -------------- -------------- -------------- -------------- -------------- ----------- -------------- -------------- ----------------- -------------- -------------- ---- ---------------------- ------------------------- ------------- plr-125807-08 date date date date dear ------------------ ---------------------- ------------------ ----------------------- -------------------------- this letter responds to your date letter requesting rulings as to company's ability to rely on information contained in a series of securities_and_exchange_commission sec filings for purposes of determining shifts in ownership under sec_382 of the internal_revenue_code the information submitted in that request and in subsequent correspondence is summarized below summary of facts company a publicly traded corporation is the common parent of an affiliated_group_of_corporations which files a consolidated federal_income_tax return company is also a loss_corporation within the meaning of sec_382 of the code and sec_1 a of the income_tax regulations on the petition date the former parent of company and a of its domestic subsidiaries collectively the debtors filed voluntary petitions for relief under chapter of the u s bankruptcy code from the petition date until the debtors emerged from bankruptcy on the effective date the debtors operated their businesses as debtors-in- possession in accordance with the bankruptcy code as of the effective date and pursuant to the debtors’ plan_of_reorganization the plan company’s former parent issued b shares of common equity to company which was a wholly-owned subsidiary at the time all other equity interests in the former parent of company were cancelled as of the effective date and company became the new parent of the former parent and group company then issued new common_stock to the various creditor constituencies as required by the plan on the effective date and pursuant to the plan company issued approximately c shares of common_stock to its creditors other than type creditors and employees in satisfaction of the type creditor claims company issued d shares of common_stock to a_trust the trust which qualified under g of the bankruptcy code the trust received its shares on date a date after the effective date after a contingency was resolved in its favor plr-125807-08 on date company’s former parent and securities firm executed an equity commitment agreement the equity commitment agreement that contemplated a rights offering in which holders of certain claims against the debtors would be offered the right to purchase on the effective date up to their pro_rata share of e shares of company common_stock at a purchase_price of dollar_figuref per share the equity commitment agreement provided for the purchase by securities firm of a number of shares of company common_stock equal to e less the number of shares of company common_stock purchased pursuant to a rights offering the rights offering securities firm in turn entered into a syndication agreement the syndication agreement with certain parties pursuant to which those parties were obligated to purchase their pro_rata share of company common_stock that securities firm was obligated to purchase pursuant to the equity commitment agreement no shares of company common_stock were acquired in the rights offering but some were acquired pursuant to the syndication agreement as described below as of the effective date and after the issuance of company common_stock to its creditors and the exercise of rights and obligations under the equity commitment agreement and syndication agreement described above company had g c e shares of common_stock outstanding company also issued warrants to acquire company common_stock to certain creditors at various strike prices shortly after the debtors’ emergence from bankruptcy six entities filed schedules 13d and 13g with the sec reporting ownership of company stock as of the effective date ownership of company common_stock as of the effective date facts related to the entities and their sec filings are set forth below for this purpose a 5-percent_shareholder generally means any person holding percent or more of the stock of a loss_corporation at any time during the testing_period see sec_382 and sec_1_382-2t entity a schedule 13d entity a filed a schedule 13d effective as of the effective date which reported that beneficial_ownership of h shares of company stock belonged to two entities for which entity a acted as investment adviser- entity a1 and entity a2 the entity a schedule 13d did not affirm the existence of a group within the meaning of d of the securities exchange act of the exchange act u s c sec_78a et seq entity a1 reported ownership of i shares of company stock which reflects a combination of the following company stock acquired by entity a1 directly in exchange for its debt in company a purchase by entity a1 of company stock pursuant to the syndication agreement warrants to purchase company stock that became exercisable on the effective date and expire on date but none of which have yet been exercised and shares that could have been but were not purchased pursuant to a collar arrangement entity a1’s reported ownership of i shares of plr-125807-08 company stock represents ownership of more than percent of company common_stock outstanding as of the effective date entity a2 reported ownership of j shares of company stock according to entity a’s schedule 13d entity a2 purchased j shares of company common_stock pursuant to the syndication agreement on the effective date entity a2’s reported ownership of j shares of company stock represents ownership of k percent less than percent of company common_stock outstanding as of the effective date entity b entity b certain investment funds managed by it and its owners filed a schedule 13g effective as of the effective date which reported collective ownership of l shares of company stock of the l shares m shares were reported as owned by entity b1 the entity b schedule 13g did not provide additional details regarding the reported share ownership but it did not affirm the existence of a group within the meaning of d of the exchange act through its due diligence procedures however company determined that the number of shares reported as owned by entity b1 on the schedule 13g reflected n shares of company common_stock and o warrants to acquire company common_stock the n shares actually owned represent ownership of more than percent of company common_stock outstanding as of the effective date entity c entity c certain investment funds managed by it and its owners filed a schedule 13g effective as of the effective date which reported collective ownership of p shares of company stock the entity c schedule 13g did not affirm the existence of a group within the meaning of d of the exchange act through its due diligence procedures company determined that entity c1 owned q of the shares reported as owned by entity c on the schedule 13g and that the remaining shares were owned by certain of entity c’s affiliated funds the shares owned by entity c1 represent ownership of more than percent of company common_stock outstanding as of the effective date entity d entity d and its owners filed a schedule 13g effective as of the effective date which reported collective ownership of r shares of company stock the entity d schedule 13g did not affirm the existence of a group within the meaning of d of the exchange act through its due diligence procedures company determined that entity d1 owned s of the shares reported as owned by entity d on the schedule 13g and that the remaining shares were owned by entity d2 the shares owned by entity d1 and entity d2 when viewed separately represent ownership of less than percent of company common_stock outstanding as of the effective date entity e entity e certain investment funds managed by it and its owners filed a schedule 13d effective as of the effective date which reported ownership of t shares of company stock by entity e1 and entity e2 investment funds advised by entity e or its affiliates the entity e schedule 13d did not affirm the existence of a group within the meaning of d of the exchange act according to entity e’s schedule 13d on the effective date entity e1 and entity e2 collectively acquired an additional u plr-125807-08 shares of company common_stock through the syndication agreement through its due diligence procedures company determined that entity e1 beneficially owned at least v shares which represents more than percent of company common_stock outstanding as of the effective date also through its due diligence procedures company determined that entity e2 beneficially owned at least w shares which represents less than percent of company common_stock outstanding as of the effective date entity f entity f certain investment funds managed by it and its affiliates and owners filed a schedule 13g effective as of the effective date which reported collective ownership of x shares of company stock the entity f schedule 13g did not affirm the existence of a group within the meaning of d of the exchange act according to entity f’s schedule 13g included in its reported share ownership are options to acquire y shares of company common_stock specifically entity f1 a domestic investment fund managed by an entity f affiliate owns z shares of company stock and options to acquire aa shares of company common_stock entity f2 an offshore investment fund managed by entity f owns bb shares of company common_stock and holds options to acquire cc shares of company common_stock after reducing their reported ownership by the number of options held and whether viewed separately or in the aggregate entity f1 and entity f2’s shares of company stock represent ownership of less than percent of company common_stock outstanding as of the effective date ownership of company common_stock after the effective date the above-named filers of schedules 13d and 13g made subsequent amendments and other filings with the sec that are not material for purposes of this letter_ruling certain other entities filed their initial schedules 13d and 13g with respect to company common_stock after the effective date type creditor trust the type creditor trust the trust filed a schedule 13d reporting ownership of d shares of company common_stock the d shares were issued to the trust on date and as of that date and after the issuance of shares to the trust company had dd shares outstanding the shares held by the trust represent ownership of more than percent of company common_stock outstanding as of date entity g entity g and its owner filed a schedule 13g reporting ownership as of date of ee shares of company common_stock by entity g1 a wholly-owned subsidiary of entity g and an investment adviser registered under the investment_company act of the shares reported as owned by entity g1 represent more these shares were placed in escrow pending regulatory approval of the transaction citing prop sec_1_468b-8 company treated entity e1 and entity e2 as the tax owner of their respective amount of shares acquired through the syndication agreement as of the effective date no ruling has been requested or given regarding the federal_income_tax treatment of this transaction plr-125807-08 than percent of company common_stock outstanding as of date according to the schedule 13g however no one person including entity g1 is the beneficial_owner of more than percent of company common_stock specifically according to item of the schedule 13g v arious persons have the right to receive or the power to direct the receipt of dividends from or the proceeds from the sale of company common_stock no one person’s interest in the company common_stock is more than percent of the total outstanding company common_stock the entity g1 schedule 13g did not affirm the existence of a group within the meaning of d of the exchange act entity h entity h filed a schedule 13g reporting ownership as of date of ff shares of company common_stock the shares reported as owned by entity h represent more than percent of company common_stock outstanding as of date according to the schedule 13g however the shares are not actually owned by entity h but by one or more open-end investment companies or other managed accounts which pursuant to investment management contracts are managed by entity h through its due diligence procedures company determined that approximately gg investment companies managed by entity h beneficially own the reported shares and that no single investment company’s ownership represents ownership of more than percent of company common_stock outstanding as of date the entity h schedule 13g did not affirm the existence of a group within the meaning of d of the exchange act company’s due diligence procedures company uses a stock surveillance company to help it identify persons who control large blocks of company common_stock the stock surveillance company uses a variety of techniques to identify persons holding large blocks of company common_stock including but not limited to i tracing large trades of company common_stock to the stock deposit corporation custodial accounts for which the stock surveillance company knows from past experience the identity of the persons who control those accounts ii direct contact with large institutional investors and iii a review of schedule 13f portfolio lists filed with the sec by institutional investors the stock surveillance company attempts to identify the persons who have voting authority on company common_stock regardless of whether such persons are the true or economic owners of the stock the information obtained by the stock surveillance company does not identify all of the owners of company common_stock and because the stock surveillance company makes certain assumptions regarding the identity of the persons who control the custodial accounts the information is not percent reliable additionally if persons desired to acquire company common_stock without being detected by the stock surveillance company they may be able to do so in addition to engaging a stock surveillance company company has one of its employees dedicated to tracking ownership of its common_stock and also has engaged a law firm to track schedule 13d 13g and other sec filings with respect to its common_stock finally ownership questionnaires are sent to the significant shareholders of plr-125807-08 company’s common_stock for purposes of including shareholder ownership information in company’s sec filings representations the following representations have been made with respect to this request for letter_ruling a company has had only one class common of stock outstanding since the effective date and its common_stock is publicly traded b company is a loss_corporation as defined in sec_382 c company emerged from protection under chapter of the u s bankruptcy code with a net_operating_loss carryforward d as a result of the implementation of the plan company’s emergence from protection under chapter of the u s bankruptcy code resulted in company experiencing an ownership_change within the meaning of sec_382 on the effective date e except as noted herein company has no knowledge of the ownership of percent or more of the outstanding company stock by specific fund clients of any investment advisers filing schedules 13d or 13g with respect to company stock the existence of any group of persons who have or had a formal or informal understanding amongst themselves to make a coordinated acquisition of company stock using investments made by or through any investment advisers filing schedules 13d or 13g with respect to company stock and their fund clients any sec filings affirming that any investment advisers’ fund clients filing schedules 13d or 13g with respect to company stock should be treated as a group an entity or individual through application of the attribution_rules of sec_318 as modified by sec_382 that own sec_5 percent or more by vote or value of company stock when such individual or entity’s direct ownership of company stock is combined with its ownership of company stock acquired by or through any investment advisers filing schedules 13d or 13g with respect to company stock and their fund clients or any activities performed by any investment advisers filing schedules 13d or 13g with respect to company stock that would be outside the scope of an investment adviser f company will continue to retain the same or a similar stock surveillance service as that described herein or will utilize such other surveillance service or methods as may become available that is reasonably expected to provide at least the same level of stock ownership information as would be available if instead company retained the service currently used rulings plr-125807-08 based solely on the information and representations set forth above we rule as follows a person who has the right to dividends and proceeds from the sale of stock economic ownership is the owner of company stock for sec_382 purposes economic owner thus an investment adviser that has the power to acquire hold vote and dispose_of the stock file schedules 13d or 13g with respect to company stock communicate with company management regarding company’s operations management or capital structure or communicate with adviser clients or prospective clients but does not have economic ownership of the stock is not the economic owner of the stock if the information reported on a schedule 13d or 13g does not establish that a person is the economic owner of percent or more of company stock within the meaning of sec_1_382-2 and sec_1_382-2t company can rely on the schedule and the absence of other schedules 13d and 13g to determine that no such person is the economic owner of percent or more of company stock unless company has actual knowledge that an owner of the stock is an economic owner of percent or more of company stock see sec_1_382-2t if company has actual knowledge that all or a portion of the holdings of company stock reported on a schedule 13d or 13g are not in fact stock for purposes of sec_382 company may disregard the schedule 13d or 13g characterization of the portion of such holdings that is not properly treated as stock for such purposes see sec_1_382-2 sec_1_382-4 and sec_1_382-2t for purposes of this ruling actual knowledge may come from the contents of a schedule 13d or 13g filing itself or from outside of such filing such as knowledge based on information about a person as a result of research and information requests made by company or its agents if an investment adviser files a schedule 13d or 13g that reports ownership on behalf of two or more economic owners of shares representing in the aggregate more than percent of company stock but does not affirm the existence of a group within the meaning of d of the exchange act and the economic owners do not individually file a schedule 13d or 13g that affirms the existence of a group company can rely on the absence of the filing of a schedule 13d or 13g by the economic owners to determine that the economic owners are not members of a group that constitutes an entity within the meaning of sec_1_382-3 unless company has actual knowledge that the economic owners constitute such an entity two or more economic owners of company stock will not constitute an entity within the meaning of sec_1_382-3 merely because a one or more directors or employees of the investment adviser are also directors and or employees of the economic owners or b the investment adviser has authority to undertake any of the following activities with respect to company stock owned by the economic owners plr-125807-08 i ii iii iv v vi voting the shares of company stock acquiring or disposing of the shares of stock including batch trading of shares of the stock or cross trading involving the stock using a common custodian to hold the stock filing schedules 13d or 13g with respect to the stock unless a schedule 13d or 13g filed with the sec states that the economic owners are acting in concert or otherwise engaged in a coordinated acquisition of shares of company stock communicating with company’s management regarding company operations management or capital structure adhering to an investment adviser’s general policies for voting_securities such as voting in favor of cumulative voting financially reasonable golden_parachutes one-share-one-vote management cash incentives and pre-emptive rights and voting against greenmail poison pills supermajority voting blank check preferred_stock which leaves certain terms open to the board_of director’s approval without requiring shareholder vote and super-dilutive stock_options which cause a higher than usual dilutive effect on a company’s stock or vii communications by an investment adviser with clients or prospective clients a relating to the employment of the investment adviser b explaining the investment adviser’s investment philosophy c reporting on the investment adviser’s investment performance d analyzing the relative investment potential of securities or e similar transactions company will not be deemed to know that any of the economic owners constitute an entity within the meaning of sec_1_382-3 merely by reason of knowing that the investment adviser and one or more of the economic owners have overlapping directors or employees or that an investment adviser has undertaken or has the authority to undertake one or more of the activities described in ruling above with respect to company stock owned by the economic owners caveats we express no opinion about the tax treatment of the transactions under other provisions of the code and regulations or the tax treatment of any conditions existing at the time of or effects resulting from the transactions that are not specifically covered by the above rulings the rulings contained in this letter are based on facts and plr-125807-08 representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party this office has not verified any of the materials submitted in the support of the request for rulings verification of the information representations and other data may be required as part of the audit process procedural statements this ruling letter is directed only to the taxpayers who requested it sec_6110 provides that it may not be used or cited as precedent a copy of this letter must be attached to any income_tax return to which it is relevant alternatively any taxpayer filing its return electronically may satisfy this requirement by attaching a statement to the return that provides the date and control number of this letter_ruling in accordance with the power_of_attorney on file in this office a copy of this ruling letter will be sent to your authorized representative sincerely ___________________________ gerald b fleming senior technician reviewer branch office of associate chief_counsel corporate


tcmemo_1997_483 united_states tax_court irene eisenberg petitioner v commissioner of internal revenue respondent docket no filed date martin a stoll for petitioner drita tonuzi for respondent memorandum opinion hamblen judge this matter is before the court on the parties' cross-motions for summary_judgment pursuant to rule both parties submitted memoranda in support of their respective positions 1unless otherwise indicated all section references are to the internal_revenue_code as in effect for the years at issue and rule references are to the tax_court rules_of_practice and procedure respondent determined deficiencies in petitioner's federal gift_taxes for the taxable years and in the amounts of dollar_figure dollar_figure and dollar_figure respectively the deficiencies are attributable to respondent's disallowance of petitioner's valuations of closely held corporate stock respondent and petitioner have both alleged in their respective motions that there are no genuine issues as to material facts and that a decision may be rendered as a matter of law we agree with their allegations consequently the case herein is ripe for summary_judgment the sole issue for decision is whether in determining the federal gift_tax value of her stock in a corporation on the basis of the net asset value method of valuation petitioner may take into account the full amount of the capital_gain taxes attributable to the built-in_gain on the corporation's sole asset at certain stock transfer dates background at the time of the filing of the petition in this case irene eisenberg petitioner resided in new york new york on date avenue n realty corp the corporation was organized under the laws of the state of new york from its inception petitioner held all issued and outstanding common_stock of the corporation which comprised big_number shares the corporation made an election effective on date to be treated as a subchapter_s_corporation subsequently on date the corporation's s election was revoked during the years at issue the corporation was a subchapter_c_corporation for federal tax purposes the principal asset of the corporation other than cash was a building in brooklyn new york the property which was leased to third parties the corporation received income from the rents generated from the lease appurtenant to the property during the years at issue prior to and during the years at issue the corporation's only income was from the active trade_or_business of renting the property on date the first transfer date petitioner made gifts of shares of stock in the corporation as follows shares to her son joseph eisenberg shares to her granddaughter joanne b bayer and shares to her grandson david blum subsequently on date the second transfer date and on date the third transfer date petitioner gave as gift sec_275 shares and shares of stock in the corporation respectively to her son joseph eisenberg the fair_market_value of the stock after a 25-percent minority discount was dollar_figure per share on the first transfer date dollar_figure per share on the second transfer date and dollar_figure per share on the third transfer date on the first second and third transfer dates the property's adjusted_basis was dollar_figure dollar_figure and dollar_figure respectively at the time of the first transfer the fair_market_value of the property was dollar_figure at the time of the second and third transfers the fair_market_value of the property was dollar_figure the corporation however did not possess a plan to liquidate sell or distribute the property in conjunction with the stock transfers on or about date date and date respondent received petitioner's timely filed federal gift_tax returns form_709 for the taxable years and respectively respondent issued a statutory_notice_of_deficiency to petitioner on july on august and date respondent and petitioner respectively filed motions for summary_judgment with this court 2subsequently on date petitioner amended her petition in this matter petitioner stated that the inclusion of certain taxes is necessary for the computation of the unified_credit utilized by petitioner with respect to her form sec_709 for the years at issue specifically petitioner sought to incorporate in this matter certain taxes imposed by the state of new york to decrease the value of the corporate stock on date respondent filed an answer to petitioner's amendment to her petition in light of our disposition of this case we do not address this issue discussion3 rule provides for summary_judgment on legal issues in controversies where there is no genuine issue of material fact 98_tc_518 affd 17_f3d_965 7th cir 85_tc_527 79_tc_340 the burden is on the moving party to show that it is entitled to summary_judgment and that the matter may be decided on the basis of the documents before this court 78_tc_412 71_tc_587 63_tc_462 summary_judgment is intended to expedite litigation and avoid unnecessary and expensive trials 90_tc_678 sec_2501 imposes generally a tax on gifts of property by an individual the gift is measured by the value of the property passing from the donor if the gift is made in property the property's value at the date of the gift is considered the amount_of_the_gift sec_2512 fair_market_value is determined to be the price at which the property would change hands between a willing buyer and a willing seller neither party 3both parties have presented objections to individual stipulations on the grounds of relevance we find them to be without merit and or irrelevant to the decision of this case consequently we do not address these matters being under any compulsion to buy or to sell and both having a reasonable knowledge of the relevant facts 411_us_546 sec_25_2512-1 gift_tax regs here the parties have agreed that the net asset value method is appropriate for the valuation of the stock of the corporation they are also in agreement as to the fair_market_value of the property in question and the valuation of the shares as reported on petitioner's federal gift_tax returns the parties further agree that the corporation would have recognized capital_gains in the amount of dollar_figure dollar_figure and dollar_figure for the taxable years and respectively if the property had been disposed of in a taxable disposition built-in capital_gain however the parties diverge on whether in arriving at the corporation's net asset value adjustments should be made to reflect costs that would potentially be incurred if its assets were liquidated petitioner contends that for gift_tax purposes she is entitled to take into account the full amount of capital_gain taxes to reduce the fair_market_value of the stock of the corporation simply put petitioner argues that a willing purchaser of the corporate stock would have discounted the otherwise applicable fair_market_value because of the income_tax_liability inherent in the aforementioned property the parties have stipulated the amounts that would have been realized in the years under consideration if a sale of the property had actually taken place in that regard petitioner computed the capital_gain tax reductions as though the corporation had sold the property in a taxable disposition on the transfer dates respondent on the other hand argues that petitioner is not entitled to reduce the fair_market_value of the corporate stock to account for potential capital_gain taxes since there was no liquidation distribution or sale of the stock at the transfer dates this court has repeatedly held that no reduction in the value of closely held stock to reflect potential capital_gains is warranted where the evidence fails to establish that a liquidation of the corporation or sale of the corporation's assets is likely to occur 87_tc_78 79_tc_938 4in particular petitioner claimed reductions based upon the assumption that the potential capital_gains would be subject_to federal_income_tax new york state franchise tax on business corporations and new york city general corporation tax in the aggregate amounts of dollar_figure dollar_figure and dollar_figure for the taxable years and respectively petitioner subsequently amended her petition seeking to increase these taxes to dollar_figure dollar_figure and dollar_figure for the taxable years and respectively see supra note 5petitioner states that if we decide against her motion for summary_judgment then she reserves the right to present additional evidence to determine the full amount of taxes that may indeed be taken into account our holding in this regard renders this issue moot see supra note 72_tc_1062 69_tc_222 9_tc_162 moreover we have also held that a discount to asset values for the lost use of money is inappropriate because it fails to recognize that the underlying assets will themselves appreciate most likely at a rate similar to that applied as a discount estate of andrews v commissioner supra pincite the seminal case estate of cruikshank v commissioner supra held that potential capital_gain taxes were not includable in the computation for a discount in the valuation of certain corporate shares in that case the taxpayer held stock in a closely_held_corporation which was an investment holding_company the parties agreed that the corporation should be appraised on the basis of the value of its underlying assets the issue presented was whether the value of the underlying assets should be reduced by amounts of commissions and stamp and capital_gain taxes which would become payable if the assets were sold we stated 6see also estate of gray v commissioner tcmemo_1997_ estate of luton v commissioner tcmemo_1994_539 estate of ford v commissioner tcmemo_1993_580 affd 53_f3d_924 8th cir estate of mctighe v commissioner tcmemo_1977_410 estate of thalheimer v commissioner tcmemo_1974_203 affd on this issue and remanded without published opinion 532_f2d_751 4th cir gallun v commissioner tcmemo_1974_284 the costs of disposal like broker's commissions are not a proper deduction estate of henry e huntington b t a still less do we think a hypothetical and supposititious liability for taxes on sales not made nor projected to be a necessary impairment of existing value we need not assume that conversion into cash is the only use available to an owner for property which we know would cost him market_value to replace id pincite subsequently in estate of piper v commissioner supra the issue for our consideration was the valuation of the stock of two investment companies for gift_tax purposes the taxpayer sought to discount the value of the stock for potential capital_gain taxes at the corporate level we rejected such an approach holding we consider such a discount unwarranted under the net asset valuation technique employed herein where there is no evidence that a liquidation of the investment companies was planned or that it could not have been accomplished without incurring a capital_gains_tax at the corporate level id pincite as we aptly stated in ward v commissioner supra pincite quoting estate of cruikshank v commissioner supra pincite 'we need not assume that conversion into cash is the only use available to an owner for property which we know would cost him market_value to replace ' consequently taxpayers may not obtain a valuation discount for estate and gift_tax purposes based on an event that may not transpire hence when liquidation is only speculative the valuation of assets should not take these costs into account because it is unlikely they will ever be incurred estate of andrews v commissioner supra pincite emphasis added in sum the primary reason for disallowing a discount for capital_gain taxes in this situation is that the tax_liability itself is deemed to be speculative specifically in the above cases there was a failure to show the requisite likelihood that the beneficiaries would liquidate the corporation or sell the underlying assets and incur the tax and other expenses further there was no showing that a hypothetical willing buyer would desire to purchase the stock with the view toward liquidating the corporation or selling the assets such that the potential tax_liability would be of material and significant concern petitioner contends that estate of piper v commissioner supra pincite and estate of luton v commissioner t c memo 7in 87_tc_78 this court summarized its position as follows there is no evidence that the liquidation of the entire corporation is imminent or even contemplated under such circumstances we need not assume that conversion into cash is the only use available to an owner for property which we know would cost him market_value to replace 9_tc_162 a hypothetical willing buyer of the shares in an arm's-length sale could expect no reduction in price for sales expenses and taxes that he might incur in a subsequent sale of either the shares or the corporation's underlying assets when liquidation is only speculative such costs are not to be taken into account estate of andrews v commissioner t c pincite 72_tc_1062 estate of cruikshank v commissioner supra fn ref omitted among other cases represent the denial of a discount for potential capital_gain taxes was based in part on the possibility that the taxes could be avoided by liquidating the corporation in that regard petitioner argues that those cases have lost their vitality as a result of the date enactment of the tax_reform_act_of_1986 tra publaw_99_514 100_stat_2269 specifically petitioner contends that the amendments made by the tra to sec_336 and sec_337 repealed the general_utilities_doctrine petitioner states that prior to the effective date of tra the corporation could have liquidated completely and distributed the property and cash to her or to any other individual or entity without recognizing the built-in_gain further petitioner asserts that subsequent to the effective date of tra she does not possess the ability to completely liquidate the corporation without the recognition of the built-in_gain see eg sec_336 and sec_337 as a result petitioner argues that it is now a virtual certainty that if the 8the general_utilities_doctrine originated in 296_us_200 the holding of that opinion allowed a corporation to avoid recognition of gain on the distribution of appreciated_property to its shareholders in congress codified the general_utilities_doctrine in sec_311 pursuant to the tax_reform_act_of_1986 tra publaw_99_514 c 100_stat_2085 corporations are now required to recognize gain on the distribution of appreciated_property except in certain limited circumstances sec_311 sec_336 as amended by tra sec_631 c_corporation is liquidated capital_gain taxes will be imposed at the corporate level moreover petitioner states that any willing buyer of the corporate stock having reasonable knowledge of the applicability of the capital_gain taxes would reduce the price paid for the stock by the full amount of the tax sec_25_2512-1 gift_tax regs thus petitioner argues that this change in the law justifies the allowance of a discount for potential taxes in contrast respondent counters that a hypothetical buyer possesses the option of avoiding the imposition of any capital_gain taxes through the purchase of corporate stock and the continuation of the business of leasing the property in question through the corporate form thus respondent asserts that any individual or entity may indefinitely defer taxes additionally respondent argues that there are several transactions in which the corporation may transfer the property to a new corporation in exchange for the new corporation's stock and thus avoid the recognition of gain see eg sec_351 and sec_355 we agree with respondent that a discount for capital_gain taxes does not apply here as noted we have held that a discount for potential costs of sale or liquidation whether in the nature of selling_expenses or income taxes that might be incurred is inappropriate where the sale or liquidation is itself speculative in this instance both parties have stipulated that there was no plan_of_liquidation accordingly it is inapposite to apply a discount for potential capital_gain taxes when the recognition event itself is purely speculative for the foregoing reasons we will grant respondent's motion for summary_judgment and deny petitioner's motion for summary_judgment an appropriate order and decision will be entered for respondent


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc psi 7-plr-110852-00 date date re sec_29 request for a ruling credit for producing fuel from a nonconventional source legend p x y z a b c d site e site f state g state h date date date date date dollar_figurew dollar_figurex dear this letter responds to a letter dated date and subsequent correspondence submitted on behalf of p by its authorized representative requesting rulings under sec_29 of the internal_revenue_code facts the facts as represented by p and p’s authorized representative are as follows p is a limited_partnership that owns a synthetic_fuel facility facility designed to plr-110852-00 produce a solid synthetic_fuel derived from coal feedstock x a limited_partnership owns a percent limited_partner interest in p y owns a percent limited_partner interest in p and z owns percent general_partner interest in p pursuant to the transaction described below a own sec_66 percent limited_partner interest in x and b owns a percent limited_partner and percent general_partner interest in x the partners of p have made and will continue to make periodic cash capital contributions to p to pay its operating costs in accordance with their respective ownership interests effective on date a acquired a percent limited_partner interest in x from b in consideration for the limited_partner interest in x b received i cash payments of dollar_figurew ii fixed payment note in the principal_amount of dollar_figurex payable over time and iii a contingent payment note based on sec_29 credits allocated to a b also granted to a the option to acquire an additional percent limited_partner interest in x a will make monthly contributions to x to fund its share of net operating and capital costs incurred by p p represents that based on the expected production level of the facility on date the net present_value of the cash and the consideration payable to b under the fixed note will exceed percent of the total consideration payable to b for the limited_partner interests on date b entered into two separate construction contracts with d pursuant to which d agreed to provide the equipment and services necessary to construct install and place into service two facilities on date d and b agreed to combine the two separate construction contracts to build a two-line facility rather than two one-line facilities p represents that the decision was made to improve the operating efficiency of the facilities and to reduce maintenance rather than to increase the production output the facility includes moveable equipment designed to convert coal fines material into synthetic_fuel the construction_contract provides for a fixed price and a completion date the construction_contract does not provide for the payment of liquidated_damages p has provided an opinion of counsel that the construction_contract as amended constituted a binding written contract under applicable state laws prior to date the facility was constructed at the site f in state h and was in control of x p represents that the facility was placed_in_service within the meaning of sec_29 before date while the facility was operational on date p represents that the poor quality of available coal feedstocks at the site f reduced the profitability of synthetic_fuel production following the difficulties encountered in obtaining sufficient coal fines in site f x discussed with y moving the facility to the site e in state g the facility was disassembled and moved to the site e which is owned by y the test burns at site e were successful and x and y decided to form p to pursue the further operation of the facility x contributed the facility to p pursuant to the limited_partnership agreement entered plr-110852-00 into as of date pursuant to the partnership_agreement p paid to b a fee for its services in developing the facility and also reimbursed it for the costs incurred in moving setting up and operating the facility for test purposes at the present location at site e_p entered into an agreement with c for the operation and maintenance of the facility c is subject_to the direction and control of p which has the sole authority to set production levels and make other strategic decisions c is paid a fixed fee for general administration duties and a graduated fixed fee per ton of synthetic_fuel produced for operation and management duties p will pay all operating costs pursuant to a coal feedstock supply agreement y has agreed to sell coal feedstock to p if y is unable to provide sufficient coal supply to satisfy p’s requirements p can purchase its feedstock from other suppliers p also entered into a synthetic fuels sales agreement with y where y agreed to purchase a certain amount of the synthetic_fuel produced at the facility each year p has represented that all sales of synthetic_fuel will be to unrelated persons p has supplied a detailed description of the process employed in the facility for the production of synthetic_fuel as described the facility and the process implemented in the facility meet the requirements of revproc_2001_34 2001_22_irb_1293 recognized experts in coal and chemical analysis have performed numerous tests on the fuel produced from coal using the process including specified reagents that will be used at the facility and have submitted reports in which the experts conclude that significant chemical changes take place with the application of the process to the coal under the limited_partnership agreement of p all items of income gain loss deduction and credit including the sec_29 credit of p are allocated and any distributions made in proportion to the members’ ownership interests ruling requests sec_29 allows a credit for qualified_fuels sold by the taxpayer to an unrelated_person during the taxable_year the production of which is attributable to the taxpayer the credit for the taxable_year is an amount equal to dollar_figure adjusted for inflation multiplied by the barrel-of-oil_equivalent of qualified_fuels sold sec_29 defines qualified_fuels to include liquid gaseous or solid synthetic fuels produced from coal including lignite including such fuels when used as feedstocks in revrul_86_100 1986_2_cb_3 the internal_revenue_service ruled that the definition of the term synthetic_fuel under sec_48 and its regulations are relevant to the interpretation of the term under sec_29 former sec_48 plr-110852-00 provided a credit for the cost of equipment used for converting an alternate_substance into a synthetic liquid gaseous or solid fuel revrul_86_100 notes that both sec_29 and former sec_48 contain almost identical language and have the same overall congressional intent namely to encourage energy conservation and aid development of domestic energy production under sec_1_48-9 of the income_tax regulations a synthetic_fuel differs significantly in chemical composition as opposed to physical composition from the alternate_substance used to produce it coal is an alternate_substance under sec_1_48-9 based on the representations of p and p’s authorized representative including the test results submitted by p we agree that the fuel produced in the facility using the process and reagents described in p’s ruling_request and subsequent correspondence will result in a significant chemical change to the coal transforming the coal into a solid synthetic_fuel from coal because p owns the facility and operates and maintains the facility through its agent we conclude p will be entitled to the sec_29 credit for the production of the qualified_fuel from the facility that is sold to an unrelated_person ruling_request sec_29 and f provide that sec_29 applies with respect to qualified_fuels which are produced in a facility placed_in_service after date and before date and which are sold before date sec_29 modifies sec_29 in the case of a facility producing qualified_fuels described in sec_29 sec_29 provides that for purposes of sec_29 a facility shall be treated as placed_in_service before date if the facility is placed_in_service before date pursuant to a binding written contract in effect before date sec_29 provides that if the facility is originally placed_in_service after date sec_29 shall be applied by substituting date for date a contract is binding only if it is enforceable under local law against a taxpayer and does not limit damages to a specified amount eg by use of a liquidated_damages provision a contract provision limiting damages to an amount equal to at least five percent of the total_contract_price for example should be treated as not limiting damages the construction_contract executed prior to date includes such essential features as a description of the facility to be constructed a completion date and a maximum price in addition the contract does not limit damages to a specified amount p provided an opinion of counsel that the contract is binding under applicable state law prior to date therefore we conclude that the facility was constructed pursuant to a binding written contract for purposes of sec_29 ruling requests sec_29 and f of the code provide that sec_29 applies with respect plr-110852-00 to qualified_fuels which are produced in a facility placed_in_service after date and before date and which are sold before date sec_29 of the code modifies sec_29 in the case of a facility producing qualified_fuels described in sec_29 which qualified_fuels include solid synthetic fuels produced from coal or lignite sec_29 provides that for purposes of sec_29 such a facility is to be treated as placed_in_service before date if the facility is placed_in_service before date pursuant to a binding written contract in effect before date sec_29 provides that if the facility is originally placed_in_service after date sec_29 is to be applied by substituting for the date therein date to qualify for the sec_29 credit p’s facility must be placed_in_service before date pursuant to a binding written contract in effect before date while sec_29 does not define placed_in_service the term has been defined for purposes of the deduction for depreciation and the investment_tax_credit property is placed_in_service in the taxable_year the property is placed in a condition or state of readiness and availability for a specifically assigned function sec_1_167_a_-11 and sec_1_46-3 of the regulations placed_in_service has consistently been construed as having the same meaning for purposes of the deduction for depreciation and the investment_tax_credit see revrul_76_256 1976_2_cb_46 revrul_94_31 1994_1_cb_16 concerns sec_45 which provides a credit for electricity produced from certain renewable resources including wind the credit is based on the amount of electricity produced_by_the_taxpayer at a qualified_facility during the 10-year period beginning on the date the facility was originally placed_in_service and sold by the taxpayer to an unrelated_person during the taxable_year revrul_94_31 holds that for purposes of sec_45 a facility qualifies as originally placed_in_service even though it contains some used_property provided the fair_market_value of the used_property is not more than percent of the facility’s total value the cost of the new property plus the value of the used_property revrul_94_31 concerns a factual context similar to the present situation consistent with the holding in revrul_94_31 if p’s facility was placed_in_service prior to date within the meaning of sec_29 relocation of p’s facility after date or replacement of parts of the facility after that date will not result in a new placed_in_service_date for the facility for purposes sec_29 if the fair_market_value of the original property is more than percent of the facility’s total fair_market_value at the time of relocation or replacement when property is placed_in_service is a factual determination and we express no opinion on when p’s facility was placed_in_service ruling_request the sec_29 credit has always been a time sensitive credit in that eligibility for the credit is determined when facilities or wells producing qualified_fuels are placed in plr-110852-00 service and when the qualifying fuels are produced and sold to unrelated persons for example the sec_44d credit as originally enacted in the crude_oil windfall profit tax act of was generally available for the production and sale of alternative fuels after date and before date from facility placed_in_service after date and before date on property which first began production after date the sec_29 credit has been extended by congress four times the placed-in-service deadline and the period for claiming the sec_29 credit were extended in the technical_and_miscellaneous_revenue_act_of_1988 for placed_in_service omnibus budget reconciliation act of for placed_in_service and for the end of the credit_period energy policy act of for placed_in_service and for the end of the credit_period and small_business job protection act of date for placed_in_service it is clear from the legislative_history of sec_44d that congress intended the credit to apply to facilities placed_in_service after and that the placed-in-service deadline in sec_29 must be read as applying to when the facility is first placed_in_service within the applicable dates the placed-in-service deadlines contained in sec_29 and sec_29 focus on the facility and not the owner of the facility the legislative_history of sec_44d clearly shows that congress wanted to encourage the production of new alternative fuels from facilities first placed_in_service after and not provide tax incentive for production capacity in service before sec_29 demonstrates that congress knows how to preclude transferees of facilities from claiming the sec_29 credit that provision provides that extension of the period for placing facilities in service after does not apply to any facility that produces coke or coke gas unless the original_use of the facility commences with the taxpayer accordingly the determination of whether a facility has satisfied the placed-in-service deadline under either sec_29 or sec_29 is made by reference to when the facility is first placed_in_service not when the facility is transferred or sold to a different taxpayer therefore if p’s facility was placed_in_service prior to date within the meaning of sec_29 the sale of the facility after date will not result in a new placed_in_service_date for the facility for purposes of sec_29 for the new owner when property is placed_in_service is a factual determination and we express no opinion on when p’s facility was placed_in_service ruling_request under sec_7701 the term taxpayer means any person subject_to any internal revenue tax sec_7701 provides that the term person includes an individual trust estate partnership_association company or corporation plr-110852-00 sec_702 provides that each partner determines the partner’s income_tax by taking into account separately the partner’s distributive_share of the partnership’s other items of income gain loss deduction or credit to the extent provided by regulations prescribed by the secretary under sec_1_702-1 the distributive_share is determined as provided in sec_704 and sec_1_704-1 sec_704 provides that a partner’s distributive_share of income gain loss deduction or credit is except as otherwise provided in chapter of subtitle a of title_26 determined by the partnership_agreement sec_704 provides that a partner’s distributive_share of income gain loss deduction or credit or item thereof is determined in accordance with the partner’s interest in the partnership determined by taking into account all facts and circumstances if i the partnership_agreement does not provide for the partner’s distributive_share of income gain loss deduction or credit or item thereof or ii the allocation to a partner under the agreement of income gain loss deduction or credit or item thereof lacks substantial economic_effect under sec_1_704-1 allocations of tax_credits and tax_credit recapture except for sec_38 property are not reflected by adjustments to the partners’ capital accounts thus these allocations cannot have economic_effect under sec_1_704-1 and the tax_credits and tax_credit recapture must be allocated in accordance with the partners’ interests in the partnership as of the time the tax_credit or tax_credit recapture arises if a partnership expenditure whether or not deductible that gives rise to a tax_credit in a partnership taxable_year also gives rise to valid allocations of partnership loss or deduction or other downward capital_account adjustments for the year then the partners’ interests in the partnership regarding the credit or the cost giving rise to it are in the same proportion as the partners’ respective distributive shares of the loss or deduction and adjustments see sec_1_704-1 example identical principles apply in determining the partners’ interests in the partnership regarding tax_credits that arise from receipts of the partnership whether or not taxable based on the information submitted and the representations made we conclude that the sec_29 credit attributable to p may be passed through to and allocated to the partners of p in accordance with each partner’s interest in p when the credit arises for the sec_29 credit a partner’s interest in p is determined based on a valid allocation of the receipts from the sale of the sec_29 qualified_fuel we express no opinion however regarding what constitutes a valid allocation ruling_request sec_708 provides that a partnership shall be considered as terminated if within a twelve-month period there is a sale_or_exchange of percent or more of the total interest in partnership capital and profits plr-110852-00 sec_1_708-1 provides that if a partnership is terminated by a sale_or_exchange of an interest the following is deemed to occur the partnership contributes all of its assets and liabilities to a new partnership in exchange for an interest in the new partnership and immediately thereafter the terminated partnership distributes interests in the new partnership to the purchasing partner and the other remaining partners in proportion to their respective interests in the terminated partnership in liquidation of the terminated partnership either for the continuation of the business by the new partnership or for its dissolution and winding up sec_1_708-1 applies to terminations of partnerships under sec_708 occurring on or after date as discussed above the placed-in-service deadline in sec_29 and sec_29 must be read as applying to when the facility is first placed_in_service within the applicable dates the placed-in-service deadlines contained in sec_29 and sec_29 focus on the facility and not the taxpayer owning the facility accordingly the determination of whether a facility has satisfied the placed-in-service deadline under sec_29 and sec_29 is made by reference to when the facility is first placed_in_service not when the facility is placed_in_service by a transferee taxpayer therefore we conclude that a termination of p under sec_708 will not preclude the reconstituted partnership from claiming the sec_29 credit on the production and sale of synthetic_fuel to unrelated persons conclusions accordingly based on the representations of p and p’s authorized representative we conclude as follows the synthetic_fuel produced by the facility is a solid synthetic_fuel produced from coal feedstock and constitutes a qualified_fuel as defined in sec_29 the production of the qualified_fuel from the facility will be attributable solely to p entitling p to the sec_29 credit for qualified_fuel sold to unrelated persons the contract for construction of the facility constitutes a binding written contract in effect before date for purposes of sec_29 g a if the facility was placed_in_service prior to date within the meaning of sec_29 relocation of the facility after date or replacement of parts of the facility after that date will not result in a new placed_in_service_date for the facility for purposes of sec_29 provided the fair_market_value of the original property is more than percent of the facility’s total fair_market_value at the time of relocation or replacement we express no opinion on when p’s facility was placed_in_service the facility is placed_in_service for purposes of sec_29 on the date the plr-110852-00 facility was first placed in a condition or state of readiness and availability to produce qualified_fuel as provided in regulations sec_1_46-3 and sec_1 a - e i we express no opinion on when the facility was placed_in_service if the facility was placed_in_service prior to date within the meaning of sec_29 the sale of the facility after date will not result in a new placed_in_service_date for the facility for purposes of sec_29 for the new owner we express no opinion on when p’s facility was placed_in_service the sec_29 credit attributable to p may be allocated to the partners of p in accordance with the partners’ interests in p when the credit arises for the sec_29 credit a partner’s interest in p is determined based on a valid allocation of the receipts from the sale of the sec_29 qualified_fuel and a termination of p under sec_708 will not preclude the reconstituted partnership from claiming the sec_29 credit on the production and sale of synthetic_fuel to unrelated persons except as specifically ruled upon above we express no opinion concerning the federal_income_tax consequences of the transaction described above specifically we express no opinion on when p’s facility was placed_in_service for purposes of sec_29 this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent temporary or final regulations pertaining to one or more of the issues addressed in this ruling have not yet been adopted therefore this ruling may be modified or revoked by the adoption of temporary or final regulations to the extent the regulations are inconsistent with any conclusion in this ruling see section dollar_figure of revproc_2001_1 2001_1_irb_1 however when the criteria in section dollar_figure of revproc_2001_1 are satisfied a ruling is not revoked or modified retroactively except in rare or unusual circumstances in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to p sincerely yours joseph h makurath senior technical reviewer branch office of assistant chief_counsel passthroughs and special industries enclosure copy for sec_6110 purposes cc


internal_revenue_service number release date index numbers ----------------------------------------- ------------------------------------------------------------ ------------------ -------------------------------------------------- ---------------------------------------- --------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact -------------------- id no ----------------- telephone number --------------------- refer reply to cc corp b03 plr-122772-18 date date ty -------------------------- legend taxpayer -------------------------------------------------------- ----------------------------------------------------------------------- year ------- fund -------------------------------------------------------- ------------------------------------------------- fund -------------------------------------------------------- ------------------------------------------------------------ state a date ------------- ------------------ c corporations contributors ---------------------------------------------- --------------------------- ------------------------------------------------------------------------------------------ -------------------------------------------------------- -------------------------------------------------------------------------- -------------------------------------------------------- -------------------------------------------------------------- plr-122772-18 -------------------------------------------------------- ----------------------------------------------- -------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------- -------------------------------------------------------- b ------ subsidiary reit ---------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------------- -------------------------------------------------------- company official ---------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------- --------------------------------------- tax professional ------------------------------------------------------- tax professional -------------------------------------------- dear ------------------ this letter responds to a letter dated date submitted on behalf of taxpayer requesting an extension of time under sec_301_9100-1 and sec_301_9100-3 of the procedure and administration regulations to file an election taxpayer is requesting an extension of time to file a deemed sale election under sec_1_337_d_-7 of the income_tax regulations the election that was required to be filed with its federal_income_tax return for the year taxable_year additional information was submitted in a letter dated date the information submitted is summarized below fund and fund limited_partnerships under state a law were formed to invest in real_estate fund and fund may be referred to as the funds fund and fund are classified as partnerships for federal_income_tax purposes taxpayer is a limited_partnership under state a law that is classified as a partnership for federal_income_tax purposes taxpayer is jointly owned by the funds c_corporation contributors own interests approximately b percent in the funds on date taxpayer contributed various appreciated assets to subsidiary reit a state a limited_liability_company that has elected to be taxed as a real_estate_investment_trust reit under sec_856 of the internal_revenue_code the code plr-122772-18 a deemed sale election under sec_1_337_d_-7 to recognize gain and loss upon the contribution of the assets to subsidiary reit was required to be attached to taxpayer’s return for the taxable_year in which the deemed sale occurred under the rules as in effect on the date of the deemed sale however for various reasons the election was not filed subsequently this request was submitted under sec_301_9100-3 for an extension of time to file the election the period of limitations on assessment under sec_6501 of the code has not expired for taxpayer’s taxable_year for which it desires to make the election or for any taxable years that would be affected by the election had it been timely filed taxpayer has represented that it is not seeking to alter a return position for which an accuracy related penalty has been or could be imposed under sec_6662 at the time of the request for relief and the new position requires or permits a regulatory election for which relief is requested all cites to regulations under sec_1_337_d_-7 are to those regulations in effect on the date of the transaction sec_1_337_d_-7 provides in relevant part that if property owned by a c_corporation becomes the property of a ric or a reit in a conversion_transaction as defined in sec_1_337_d_-7 then sec_1374 treatment will apply as described in sec_1_337_d_-7 unless the c_corporation elects deemed sale treatment with respect to the conversion_transaction sec_1_337_d_-7 defines a c_corporation as a corporation that is not an s_corporation a ric or a reit sec_1_337_d_-7 defines the term conversion_transaction to mean the qualification of a c_corporation as a ric or a reit or the transfer of property owned by a c_corporation to a ric or a reit sec_1_337_d_-7 provides that a deemed sale election is made by a c_corporation or a partnership to which the principles of sec_1_337_d_-7 apply under sec_1_337_d_-7 by attaching a statement as described therein to its return for the taxable_year in which the deemed sale occurs sec_1_337_d_-7 provides that the principles of sec_1_337_d_-7 apply to property transferred by a partnership to a ric or a reit to the extent of any gain_or_loss in the converted property that would be allocated directly or indirectly through one or more partnerships to a c_corporation if the partnership sold the converted property to an unrelated party at fair_market_value on the deemed sale date as defined in sec_1 d - c under sec_301_9100-1 the commissioner has discretion to grant a reasonable extension of time to make a regulatory election or a statutory election but no more than plr-122772-18 six months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make a regulatory election sec_301_9100-1 sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides extensions of time for making regulatory elections that do not meet the requirements of sec_301_9100-2 requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-3 in this case the time for filing the election is fixed by the regulations ie sec_1 d - c therefore the commissioner has discretionary authority under sec_301_9100-3 to grant an extension of time for taxpayer to file the election provided taxpayer establishes that it acted reasonably and in good_faith that the requirements of sec_301_9100-1 and sec_301_9100-3 are satisfied and that granting relief will not prejudice the interests of the government information representations and affidavits submitted by taxpayer company official tax professional and tax professional explain the circumstances that resulted in the failure to timely file the election the information establishes that taxpayer reasonably relied on a qualified_tax professional who failed to make or advise taxpayer to make the election and that the request for relief was filed before the failure to make the election was discovered by the internal_revenue_service see sec_301 b i and v based on the facts and information submitted including the affidavits submitted and the representations that have been made we conclude that taxpayer has shown that it acted reasonably and in good_faith the requirements of sec_301_9100-1 and sec_301_9100-3 are satisfied and granting relief will not prejudice the interests of the government accordingly an extension of time is granted under sec_301_9100-3 until days from the date on this letter for taxpayer to file the election the above extension of time is conditioned on taxpayer’s its members or partners and their members or partners tax_liability if any being not lower in the aggregate for all years to which the election applies than it would have been if the election had been made timely taking into account the time_value_of_money no opinion is expressed as to any_tax liability for the years involved a determination thereof will be made by the director’s office upon audit of the federal_income_tax returns involved in addition no opinion is expressed as to the federal_income_tax effect if any if it is determined that any_tax liability is lower sec_301_9100-3 plr-122772-18 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 further we express no opinion as to the tax consequences of filing the election late under the provisions of any other section of the code and regulations or as to the tax treatment of any conditions existing at the time of or resulting from filing the election late that are not specifically set forth in the above ruling specifically no opinion is provided concerning taxpayer’s status as a partnership or subsidiary reit 1’s qualification as a reit under subchapter_m of the code for purposes of granting relief under sec_301_9100-3 we relied on certain information and affidavits provided by taxpayer company official tax professional and tax professional under penalties of perjury however the director should verify all essential facts moreover notwithstanding that the extension is granted under sec_301_9100-3 to file the election any penalties and interest that would otherwise be applicable still apply the ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be sued or cited as precedent a copy of this letter must be attached to any income_tax return to which it is relevant alternatively taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their returns that provides the date on and control number plr-122772-18 of the letter_ruling pursuant to a power_of_attorney on file with this office copies of this letter are being sent to your authorized representatives sincerely ___________________ ken cohen senior technician reviewer branch office of associate chief_counsel corporate


internal_revenue_service number release date index numbers ------------------------------------------------- ---------------------------------- ----------------------------- ------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ---------------------- id no ----------------- telephone number --------------------- refer reply to cc psi b03 plr-138165-14 date april legend x --------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------- ----------------------- country -------- date ----------------------- dear -------------- this letter responds to a letter dated date and subsequent correspondence submitted on behalf of x by its authorized representatives requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations to file an election under sec_301_7701-3 to be classified as a partnership for federal tax purposes facts the information submitted states that x was organized on date under the laws of country x represents that it is a foreign_entity eligible to elect to be classified as a partnership for federal tax purposes however x failed to timely file form_8832 entity classification election electing to be a partnership effective date 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 plr-138165-14 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 eligible_entity with a single owner can elect to be classified as an association or to be disregarded as an entity separate from its owner sec_301_7701-3 provides that except as provided in sec_301 b unless a foreign eligible_entity elects otherwise the 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 that an eligible_entity may elect to be classified other than as provided under sec_301_7701-3 by filing form_8832 with the service_center designated on form_8832 under sec_301_7701-3 the election will be effective on the date specified by the entity on form_8832 or on the date filed if no such date is specified the effective date specified on form_8832 cannot be more than days prior to the date on which the election is filed sec_301_9100-1 provides that the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code code except subtitles e g h and i sec_301_9100-1 provides that the term regulatory election includes an election whose due_date is prescribed by a regulation published in the federal_register sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make the election sec_301_9100-2 provides the rules governing automatic extensions of time for making certain elections sec_301_9100-3 provides the standards the commissioner will use to determine whether to grant an extension of time for regulatory elections that do not meet the requirements of sec_301_9100-2 under sec_301_9100-3 a request for relief will be granted when the taxpayer provides the 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 information submitted and the representations made we conclude that x has satisfied the requirements of sec_301_9100-1 and sec_301_9100-3 as a result we grant x an extension of time of days from the date of this letter to file form_8832 with the appropriate service_center to elect to be classified as a partnership effective date a copy of this letter should be attached to the form_8832 plr-138165-14 this ruling is contingent on x and the owners of x filing within days from the date of this letter all required federal_income_tax and information returns including amended returns consistent with the requested relief being effective date these returns may include but are not limited to form_8865 return of u s persons with respect to certain foreign_partnerships a copy of this letter should be attached to any such returns except as expressly provided herein we express or imply no opinion concerning the federal tax consequences of the facts discussed above under any other provision of the code 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 under a power_of_attorney on file with this office we are sending a copy of this letter to your authorized representatives 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 ruling_request it is subject_to verification on examination sincerely associate chief_counsel passthroughs special industries by ________________________________________ mary beth carchia senior technician reviewer branch office of the associate chief_counsel passthroughs 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 third party communication none date of communication not applicable_person to contact ---------------------- id no ------------- telephone number --------------------- refer reply to cc corp plr-117432-10 date date legend foreign parent us parent subsidiary subsidiary department security_agreement business a ------------------------------------- --------------------------------- ----------------------- --------------------------------------------------- ------------------------------------------------------ ----------------------- ------------------------------------------------------------------------------------ ---------- ------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------ -------------------------------------------------------------- ------------------------------ ------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------ ------------ plr-117432-10 state x state y country z year a year b dear ------------ ------------- -------------------------- ------------- ------- ---------------------------------------------------- this letter responds to your request for rulings dated date submitted by your authorized representatives on behalf of us parent the information submitted for consideration is summarized below the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination summary of facts us parent a state x corporation is the common parent of an affiliated_group_of_corporations that join in filing a consolidated_return the us parent group us parent is a wholly owned subsidiary of foreign parent a publicly traded country z entity us parent owns all of the issued and outstanding_stock of subsidiary voting common_stock a state x corporation subsidiary purchased all of the outstanding_stock of subsidiary voting common_stock a state y corporation in year a us parent and its direct and indirect subsidiaries including subsidiary filed consolidated_returns prior to the acquisition of subsidiary subsidiary was included in the us parent group’s consolidated_return for year a as well as for year b subsidiary is engaged in business a in order to perform certain contracts subsidiary requires facility security clearance s granted by the department because of the indirect foreign ownership of stock in subsidiary the department requires that subsidiary be effectively insulated from foreign ownership control or influence in order to maintain those clearances to create a security measure designed to insulate subsidiary from any foreign control or influence that might arise from foreign parent’s indirect ownership of stock in plr-117432-10 subsidiary foreign parent us parent subsidiary subsidiary and the department have entered into the security_agreement pursuant to the security_agreement subsidiary appoints the board_of directors the board_of subsidiary subject_to limited approval rights held by the department the board must be composed of at least two members without prior relationships with subsidiary or any entities subsidiary either controls or is controlled by except as otherwise allowed by the department the outside directors at least one officer of subsidiary the officer director s and at least one representative of subsidiary the inside director s the outside director s are required to be resident united_states citizens have or be eligible for the requisite security clearance and be approved by the department as satisfying the appropriate department security requirements and the applicable provisions of the security_agreement in addition outside director s may not be removed without notice to the department the officer director s are required to be resident united_states citizens and have or be eligible for the requisite personnel security clearance the inside directors must not have personnel security clearances are required to be formally excluded from access to classified information and must be equal to or fewer in number than the sum of outside directors and officer director s subsidiary as the sole stockholder of subsidiary may remove any member of subsidiary 1’s board for any reason permitted by the provisions of applicable state law or subsidiary 1’s certificate of incorporation or bylaws however the removal of an outside director generally is not effective until prior notice is given no objection is raised by the department and a qualified_successor has been nominated by subsidiary and approved by the department in the event of a vacancy on the board subsidiary has the right to fill the vacancy the board retains all of their rights powers and responsibilities conferred or imposed under applicable statutes and regulations and by subsidiary’s charter and bylaws subject_to certain terms and conditions set forth in the security_agreement described below with respect to actions by the board a majority of the members including at least one outside director and at least one inside director is necessary to constitute a quorum pursuant to the security_agreement the board is not permitted to take certain major corporate actions without subsidiary’s express written approval these include the sale lease or other_disposition of any of the property assets or business of subsidiary or the purchase of any property or assets by subsidiary that is other than in the ordinary course of business the merger consolidation reorganization dissolution or liquidation of subsidiary the filing by subsidiary of any petition under the federal bankruptcy code or any applicable bankruptcy law or other acts of similar character plr-117432-10 and the initiation of action to terminate the security_agreement with certain limitations during the period subsidiary 1’s stock is subject_to the security_agreement subsidiary retains all economic rights in the stock of subsidiary nothing in the security_agreement limits restricts or otherwise diminishes the economic rights of subsidiary or any successor shareholder in the stock of subsidiary subsidiary and subsidiary have the right to petition the department to terminate the security_agreement at any time and for any reason the department may refuse to terminate the security_agreement only when continuation is necessary in the interest of the national security of the united_states the security_agreement is subject_to termination by the department at any time under the following circumstances in the event of a sale of the business of subsidiary or the stock of subsidiary to a company or person not under foreign ownership control or influence the security_agreement is no longer needed to maintain subsidiary 1’s facility security clearance s the continuation of the facility security clearance s for subsidiary are no longer necessary or there has been a breach of the security_agreement that requires it to be terminated or the department otherwise determines that termination is in the national interest unless renewed the security_agreement terminates automatically ten years from the date of execution rulings based solely on the information and representations set forth above and in your submission we rule as follows during the period in which the security_agreement is in place subsidiary’s ownership of the stock of subsidiary constitutes beneficial and therefore direct ownership for purposes of sec_1504 the security_agreement does not prevent subsidiary from being a member of the affiliated_group within the meaning of sec_1504 of which us parent is the common parent or prevent subsidiary from filing a consolidated federal_income_tax return with such affiliated_group procedural statements 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 plr-117432-10 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 a copy of this letter must be attached to any income_tax return to which it is relevant alternatively taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of the letter_ruling in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely richard m heinecke assistant to the branch chief branch office of associate chief_counsel corporate