t c no united_states tax_court nicole rose corp formerly quintron corporation petitioner v commissioner of internal revenue respondent docket no filed date held approximately dollar_figure million in claimed ordinary business_expense deductions are disallowed because they relate to transactions lacking in business_purpose and in economic_substance stanley c ruchelman harold l adrion and sandra gale behrle for petitioner lewis r mandel and andrew j mandell for respondent - - swift judge for petitioner’s taxable years ending date and respondent determined deficiencies in petitioner’s federal income taxes and accuracy- related penalties as follows accuracy-related_penalty year deficiency sec_6662 a dollar_figure dollar_figure big_number big_number big_number unless otherwise indicated all section references are to the internal_revenue_code in effect for the years in issue and all rule references are to the tax_court rules_of_practice and procedure the primary issue for decision is whether the transfer of petitioner’s interests in multilayered leases of computer equipment and related trusts had business_purpose and economic_substance and should be recognized for federal_income_tax purposes and whether petitioner should be entitled to the dollar_figure million in claimed ordinary business_expense deductions relating thereto findings_of_fact some of the facts have been stipulated and are so found at the time the petition was filed petitioner’s principal_place_of_business was located in jericho new york in quintron corp quintron a virginia corporation entered into negotiations with loral aerospace corp loral a delaware corporation for the sale to loral of quintron stock or for the sale to loral of quintron’s assets quintron was engaged in the design manufacture sale and service of aircraft flight simulators and other electronic equipment lloral was a major defense contractor and was engaged in the design manufacture sale and service of communications and satellite equipment representatives of quintron wanted loral to purchase from quintron’s shareholders their stock in quintron representatives of loral wanted loral to purchase the assets of quintron in representatives of intercontinental pacific group inc ipg a california corporation and the parent_corporation of qtn acquisition inc qtn suggested that with ipg’s and qtn’s participation as a type of intermediary or facilitator in the transaction the stock in quintron could be sold and loral could purchase quintron’s assets the controlling shareholder of ipg was douglas wolf wolf after further negotiations in september of qtn until that point in time a dormant shell corporation and a subsidiary of ipg purchased from the shareholders of quintron for dollar_figure in cash their stock in quintron qin financed this stock purchase through a bank loan wolf was a lawyer and organized ipg to purchase and sell leased equipment q4e- upon purchase of the stock in quintron qtn was merged into quintron and quintron thereafter remained as the surviving corporation and was controlled by ipg a major benefit to ipg and to qtn of retaining quintron as the surviving corporation after the merger between quintron and qtn was that quintron had significant taxable_income in and prior years against which claimed carryback losses arising from the claimed ordinary deductions relating to the transactions at issue herein could be applied in an attempt to produce large tax refunds for the successor_corporation to quintron and even though as stated otn in prior years had been a dormant shell corporation by prearrangement and simultaneously with the above stock purchase transaction quintron the stock of which was now controlled by ipg sold to loral the assets of quintron quintron’s sale price for the assets was approximately dollar_figure million in cash plus the assumption by loral of certain liabilities of quintron expenses of dollar_figure were incurred by qtn and quintron in connection with the stock purchase and asset sale transactions in spite of the transactions involving the purchase of its stock by qtn qtn’s merger with quintron and the sale of asset sec_2 after the merger of otn into quintron ipg owned directly or indirectly more than percent of the stock in quintron the parties do not explain why the only assets of quintron that were sold to loral consisted of dollar_figure million in goodwill dollar_figure million in trade receivables and dollar_figure in other assets presumably quintron had operating_assets that were the basis of quintron’s manufacturing and sales business what happened to such operating asset sec_1s not explained in the record - - to loral and in spite of quintron’s name change on date to nicole rose corp for convenience generally hereinafter we refer to quintron as petitioner the dollar_figure million received on the sale of assets to loral was used by petitioner to pay off most of the bank loan obtained to purchase the stock in quintron upon the sale of assets to loral due to petitioner’s low carryover tax bases in the assets petitioner would be required to recognize on its federal_income_tax return approximately dollar_figure million in income ’ the above dollar_figure million in income that petitioner would have to report on its federal_income_tax return relating to petitioner’s sale of assets explains the transactions that were entered into in order to produce the claimed dollar_figure million in ordinary federal_income_tax deductions that are at issue herein petitioner qtn ipg other entities controlled by wolf and other domestic and foreign entities planned and participated in a series of complicated tax-oriented transactions involving the establishment and transfer of petitioner’s interests in certain leases of computer egquipment and related trusts we first explain the background and history relating to the leased equipment we then seek to explain the complicated tax- oriented maneuvers that petitioner and others entered into in ‘ because the stock in quintron was purchased by qtn followed by qtn’s merger into quintron quintron’s tax bases in the assets were not prior to the sale to loral adjusted to fair_market_value -- - order to produce the claimed dollar_figure million tax deductions relating thereto background relating to leases in n v brussels airport terminal co brussels airport a belgium corporation which financed developed and managed the brussels belgium airport purchased from abn amro bank n v abn a commercial dutch bank certain computer equipment and leased the equipment back to abn which was the end user of the equipment brussels airport financed the purchase of also in and later years in addition to the series of computer equipment_leasing transactions transfers and payments into trust relating to what we refer to generally as the brussels airport package of leased equipment that are specifically described in our findings_of_fact two other series of transactions were entered into involving petitioner entities controlled by ipg other domestic entities and two foreign entities namely n v reilly chemicals s a reilly and reibelco s a reibelco that also involved computer equipment_leasing transactions transfers and payments into trusts and that generated large ordinary tax deductions claimed by petitioner that were disallowed by respondent and that are at issue herein at the time of trial however none of the documentation relating to the reilly and to the reibelco transactions could be located by petitioner because the nature and purpose of the reilly and reibelco transactions for which no documentation is available are in all relevant respects similar to the transactions involving the brussels airport leased equipment described in our findings_of_fact for which documentation is available petitioner and respondent have stipulated that the resolution of the claimed tax deductions in issue relating to the brussels airport leased equipment will also control the resolution of the tax issues relating to the reilly and reibelco transactions in order properly to reflect the amounts involved that are the basis for petitioner’s claimed dollar_figure million tax deductions in our findings and opinion we generally use dollar amounts that reflect cumulative numbers and cumulative dollar amounts for the three series of transactions ie our findings and opinion generally reflect cumulative dollar amounts for the combined brussels airport reilly and reibelco transactions the equipment with a loan from pierson heldring pierson n v pierson a subsidiary of abn pierson loan the initial term of the leaseback of the equipment from brussels airport to abn the brussels leaseback extended from date to date under the brussels leaseback abn had the option to extend the brussels leaseback for up to additional years because of similarities in the amounts due under the brussels leaseback and the pierson loan abn was to make lease payments due under the brussels leaseback directly to pierson and the lease payments were then to be applied by pierson in satisfaction of the payments due on the pierson loan one year later on date abn assigned to atrium finis atrium an equipment_leasing and financing partnership organized under the laws of the united kingdom all of its interest as lessee under the remaining 6-year term of the 7-year brussels leaseback abn however simultaneously leased back from atrium for approximately years until date use of the equipment covered by the brussels leaseback and abn retained an option to extend this leaseback for an additional years until date the atrium sublease on date abn prepaid to atrium approximately dollar_figure million reflecting generally lease payments scheduled to be paid to atrium by abn over the course of the 3-year atrium --- - sublease this dollar_figure million taking into account the time_value_of_money apparently corresponded generally to approximately percent of the total lease payments to be paid during the remaining 6-year term of the brussels leaseback by prearrangement with receipt from abn of the dollar_figure million in prepaid lease payments the dollar_figure million was transferred into a_trust fund the trust fund to secure pierson’s right to receive the lease payments due under the remaining 6-year term of the brussels leaseback under the date assignment to atrium of abn’s interest in the brussels leaseback even though pierson was secured for the lease payments due from atrium under the brussels leaseback atrium was stated to be nominally obligated on the lease payments due thereunder which as stated were to be paid directly to pierson as lender pierson however had no recourse to atrium on the pierson loan pierson’s recourse thereon was limited to the equipment covered by the brussels leaseback and to the dollar_figure million that was transferred into the trust fund as creditor on brussels airport’s purchase of the equipment from abn and as the entity to whom the abn end-user lease payments ultimately were due to be paid under the brussels leaseback the beneficiary of the trust fund was pierson even though pierson however was the beneficiary of the trust fund --- - and was to receive distributions from the dollar_figure million trust fund over the course of the remaining term of the brussels leaseback pierson also was the trustee of the trust fund and as such from the date date on which the funds were transferred into the trust fund pierson had possession of the dollar_figure million under the terms of the trust fund in and atrium was required to make additional payments into the trust fund of approximately dollar_figure million relating to the remaining percent of the total payments to be paid during the remaining year term of the brussels leaseback residual_value certificate transfer of interest in the trust fund and cancellation of petitioner’s lease interest from march of through september of abn atrium wolf on behalf of qtn and petitioner and other parties negotiated a modification or a restructuring to some of the terms relating to the payments due under the brussels leaseback under the atrium sublease and under the trust fund the additional dollar_figure million that atrium in later years would have been required to pay under the trust fund was reduced to dollar_figure abn effectively obligated itself to continue leasing the equipment during the 4-year renewal_period of the atrium sublease and the scheduled lease payments to be due from abn during the 4-year period were restructured -- - as restructured as of date the lease payments to be paid to atrium during the 4-year renewal_period were set forth and described in what was referred to as a residual_value certificate rvc under the terms of the rvc abn would be required to pay atrium on date and on date an unspecified amount equal to percent of the fair_market_value of the leased equipment as of the two respective payment due dates in excess of specified base amounts of dollar_figure million on the first date and dollar_figure million on the second date in other words if the fair_market_value of the leased equipment as of the specified dates did not exceed the stated base amounts for the equipment no payments would be due from abn under the rvc also under the terms of the rvc abn expressly disclaimed any warranty or representation regarding the present or future value of the equipment in connection with abn’s atrium’s and ultimately petitioner’s participation and acceptance of the terms of the rvc no appraisal was obtained of the fair_market_value of the leased equipment as of date and abn atrium and petitioner relied on an incomplete and outdated appraisal of the leased equipment made in no credible effort was made to establish as of september of that the base amounts specified in the rvc were reasonable and that the rvc had any foreseeable value on date through a series of sec_351 transfers involving a number of entities related to and controlled generally by wolf and through which atrium ultimately received stock in a corporation related to petitioner atrium transferred to petitioner atrium’s remaining interests and obligations relating to the underlying brussels leaseback the atrium sublease and the trust fund the interests transferred to petitioner included the potential right to receive the unspecified payments from abn under the rvc and the stated obligation to make the restructured additional dollar_figure payment into the trust fund this transfer to petitioner was the first direct step in the plan to generate the multi-million dollar ordinary tax deductions that petitioner sought to use as an offset against among other income the dollar_figure million that petitioner would be required to recognize on its u s_corporation income_tax return form_1120 as a result of the sale to loral of quintron’s assets as the second direct prearranged step in the plan to generate for petitioner the above-referenced multi-million dollar tax deduction also on date simultaneously with petitioner’s receipt from atrium of the above interests relating for convenience we do not specifically identify each and every entity related to and generally controlled by wolf which participated in the various transactions involving the transfer of the leases and the interest in the trust fund to the brussels leaseback the atrium sublease and the trust fund petitioner transferred to b v handelsmaatschappij wildervank wildervank a dutch bank based in the netherlands petitioner’s interests in the brussels leaseback and in the trust fund dollar_figure in cash and shares of stock in cove enterprises inc cove an unrelated corporation petitioner’s interest in the rvc was not transferred to wildervank and was retained by petitioner in exchange for the above transfers to wildervank wildervank assumed all of petitioner’s purported lease obligations relating to the brussels leaseback and the trust fund on date the balance of the funds held in trust by the trust fund was approximately dollar_figure million on or about date abn informed petitioner that no payment would be made to petitioner under the rvc petitioner made no effort to establish the value of the leased equipment or otherwise to question why no payment would be made to it under the rvc on date petitioner was liquidated and went out of business on its federal_corporation income_tax return reflecting a taxable_year ending date petitioner reported income in the amount of approximately dollar_figure million relating to the sale of assets to loral and petitioner claimed - - an ordinary business_expense deduction of dollar_figure relating to the transfer to wildervank of dollar_figure in cash a capital_loss of dollar_figure relating to the transfer to wildervank of the shares of cove common_stock and an ordinary business_expense deduction of dollar_figure relating to the transfer to wildervank of its interests in the brussels leaseback and in the trust fund ’ petitioner’s approximate dollar_figure million claimed ordinary business_expense deductions offset the dollar_figure million in income that petitioner was required to report on the sale of assets to loral and also resulted in petitioner’s reporting for a claimed net_operating_loss of dollar_figure petitioner elected to carry back from to and to the dollar_figure claimed net_operating_loss to offset quintron’s reported income for those years and based thereon respondent issued refunds to petitioner for and in the respective amounts of dollar_figure and dollar_figure in respondent’s notice_of_deficiency to petitioner for and respondent disallowed petitioner’s claimed dollar_figure and dollar_figure ordinary business_expense deductions relating to the above transactions petitioner claimed on its petitioner’s tax_return_preparer howard b teig c p a received dollar_figure for his involvement in the above transactions and for his preparation of petitioner’s federal_income_tax return -- federal_income_tax return and respondent disallowed petitioner’s dollar_figure claimed net_operating_loss_carryback deduction to and to respondent did not disallow the dollar_figure claimed capital_loss relating to petitioner’s transfer to wildervank of the cove common_stock opinion taxpayers have a legal right to structure transactions to minimize their tax obligations 293_us_465 a transaction however entered into solely for tax_avoidance without economic commercial or legal effect other than expected tax benefits constitutes an economic sham without effect for federal_income_tax purposes 435_us_561 933_f2d_143 2d cir affg tcmemo_1990_205 81_tc_184 affd in part and revd in part 752_f2d_89 4th cir whether we respect a taxpayer’s characterization of a transaction depends upon whether the characterization represents and is supported by a bona_fide transaction with economic_substance compelled or encouraged by business or regulatory realities and not shaped solely or primarily by tax_avoidance features that have meaningless labels attached frank lyon co -- - v united_states supra pincite 254_f3d_1313 11th cir affg 113_tc_254 ups of am inc v commissioner 254_f3d_1014 11th cir revg tcmemo_1999_268 157_f3d_231 3d cir affg in part revg in part dismissing in part and remanding tcmemo_1997_ our inquiry as to whether a transaction has sufficient economic_substance to be recognized for federal_income_tax purposes turns on the subjective business_purpose and on the objective economic_substance of the transaction 862_f2d_1486 11th cir affg 87_tc_1087 in ups of am inc v commissioner tcmemo_1999_268 we held that the restructure of certain insurance premiums lacked business_purpose and economic_substance and should be disregarded for federal_income_tax purposes on appeal the court_of_appeals for the eleventh circuit reversed ups of am inc v commissioner 254_f3d_1014 11th cir in the context of an ongoing viable business the court_of_appeals articulated business_purpose broadly as follows a transaction has a business_purpose when we are talking about a going concern like ups as long as it figures in a bona_fide profit-seeking business id pincite -- - under any version of the business_purpose and economic_substance test the transactions before us must be regarded as lacking in business_purpose and economic_substance additionally we note that prior to the date transactions qtn was a dormant shell corporation controlled by wolf not a going concern petitioner contends that it is entitled to the dollar_figure million claimed ordinary business_expense deductions relating to its transfer to wildervank of its interest in the trust fund and the dollar_figure in cash petitioner’s apparent theory of deductibility is that the value of petitioner’s interest in the trust fund was equal to the dollar_figure million balance in the trust fund and therefore that when petitioner transferred to wildervank its interest in the trust fund plus the dollar_figure in cash the transfer should be treated as a payment by petitioner to wildervank of dollar_figure million in exchange for the cancellation of petitioner’s obligation on an onerous lease in support petitioner cites case authority and respondent’s rulings for the proposition that payments extinguishing lease obligations may gualify as ordinary and necessary business_expense deductions 313_us_28 195_f2d_176 9th cir affg a memorandum opinion of this court 74_f2d_727 2d cir affg 27_bta_480 revrul_69_511 1969_2_cb_23 revrul_68_112 1968_1_cb_62 petitioner claims that the rvc it received and retained had significant value that petitioner had the opportunity to realize significant profit from the rvc and that this profit potential explains and supports petitioner’s participation in a legitimate for-profit transaction respondent claims that the transfer to wildervank of petitioner’s interests in the brussels leaseback in the trust fund and in the dollar_figure in cash in exchange for wildervank’s assumption of petitioner’s obligations relating to the brussels leaseback and the trust fund lacked business_purpose and economic_substance and should be disregarded we agree with respondent the record establishes that no credible business_purpose and that no viable economic_substance existed for the transfer to wildervank of petitioner’s interests in the brussels leaseback in the trust fund and in the dollar_figure in cash the complicated nature of these transactions fails to mask the lack of business_purpose and economic_substance in key aspects of the transactions and the tax_avoidance objectives thereof in september of when it participated in these transactions petitioner never had any genuine obligation with respect to the brussels leaseback and the trust fund even petitioner’s payment of the dollar_figure in cash we regard as not -- - supported by a valid business_purpose and economic_substance that payment is tainted by petitioner’s sole tax motivation for participating in these transactions petitioner’s only purpose for transferring to wildervank its interests in the brussels leaseback and in the trust fund was to create the claimed tax deductions as respondent’s expert testified at trial independent of the production of claimed tax deductions there was no purpose to and no substance for the transfer to wildervank of petitioner’s interests in the brussels leaseback and in the trust fund as respondent’s expert testified the rvc had no value in fact due to incomplete information a significant portion of the underlying equipment to which the rvc related was not capable of being valued the testimony at trial and the report of the expert who was used in late and early at the time of the original brussels leaseback were significantly inadequate the expert and his report reflect incomplete information on the type of equipment the manufacturer of the equipment the extent of the equipment the model of the equipment and the original market introduction date of the equipment in his calculations the expert used a beginning life for the equipment that corresponded with the brussels leaseback even though the expert knew that the type of equipment involved in the leaseback had been introduced into the market a number of years prior thereto the expert utilized the same methodology for valuation that he used and that we specifically rejected in smoot v commissioner tcmemo_1991_268 although we criticize petitioner’s expert witness who also was used in and in connection with the brussels leaseback we do not suggest any lack of business_purpose or economic_substance in the brussels leaseback the atrium sublease or the trust fund about which we have inadequate information which involved generally non-u s taxpayers and with respect to which no u s tax issue has been raised our focus our findings and our conclusions relate to petitioner’s interest in and the transfer of its interest in the trust fund and in the value of the rvc and whether a business_purpose and economic_substance were associated with petitioner’s participation in these specific latter transactions the report and the testimony of petitioner’s trial expert witness in addition to relying on and perpetuating errors made by petitioner’s first expert witness were riddled with additional significant errors and inaccuracies many items of equipment were omitted from his report and values were used for some of the equipment that was included in his report that were higher than the original cost figures for the equipment petitioner’s experts were not credible - - petitioner’s actions or lack thereof corroborate that petitioner never regarded the rvc as having any value in prior to receiving the rvc petitioner never obtained an independent appraisal of the equipment and in when petitioner was notified that a payment would not be made under the rvc petitioner did nothing to establish the value of the equipment and to verify that under the rvc petitioner had no right to receive a payment from abn the various transfers prior to relating to the brussels leaseback the atrium sublease and the trust fund created essentially a circular flow of funds with the net result that once the dollar_figure million was transferred into the trust fund by abn pierson was obligated to pay itself pierson’s only recourse for the payments under the brussels leaseback was from the equipment and from the funds held in the trust fund because the dollar_figure million transferred into the trust fund represented security for pierson as lender on the brussels leaseback and because of pierson’s status as trustee on and as beneficiary of the trust fund petitioner had no legitimate interest of value in the trust fund and no legitimate obligations associated therewith petitioner’s claimed dollar_figure million tax deductions relating to interests held for less than a day in the brussels leaseback and in the trust fund constitute merely a tax ploy a sham without business_purpose and without economic_substance --- - petitioner’s case and ruling authority involving the tax treatment of payments to cancel legitimate and economically viable lease obligations are not applicable further from petitioner’s perspective no nontax profit potential was associated with petitioner’s role as facilitator in connection with the purchase of the quintron stock and the sale of assets to loral as a result thereof due only to the low tax bases in the assets petitioner was required to report more than dollar_figure million in paper taxable_income petitioner paid dollar_figure for the stock of quintron and then sold to loral the assets of quintron for dollar_figure retaining five accounts_receivable with a balance of dollar_figure assuming the retained accounts_receivable were fully collected by petitioner producing a gross_profit of dollar_figure on the prearranged and simultaneous stock purchase and asset sale transactions petitioner’s dollar_figure in expenses more than consumed any gross_profit petitioner’s participation in the purchase of quintron stock and in the asset sale to loral is explained by petitioner’s manufacture of the dollar_figure million claimed tax deductions which if allowed would effectively offset the tax cost associated with petitioner’s sale of assets and which would produce to petitioner refunds of dollar_figure in taxes quintron not petitioner had paid in prior years again from petitioner’s perspective claimed -- - tax benefits provide the only credible explanation for petitioner’s participation the evidence is clear that petitioner had no valid business_purpose for the transfer to wildervank of its interests in the trust fund and in the brussels leaseback and for the transfer to wildervank of the dollar_figure in cash other than claimed tax benefits petitioner received nothing of value the transactions lacked business_purpose and economic_substance and the transactions are to be disregarded for federal_income_tax purposes petitioner argues that because of a shift in respondent’s argument the burden_of_proof should be shifted to respondent rule our findings and conclusions herein are based on the evidence and are made without reliance on the burden_of_proof other arguments made by petitioner have been considered and are without merit sec_6662 imposes a penalty of percent on underpayments of tax attributable to negligence or to disregard of the rules or the regulations for purposes of sec_6662 negligence constitutes a failure to make a reasonable attempt to comply with the internal_revenue_code sec_6662 the accuracy-related_penalty under sec_6662 will not apply to any part of petitioner’s underpayments of tax if with regard to that part of the underpayments petitioner establishes - - reasonable_cause and if petitioner acted in good_faith sec_6664 c the participation of highly paid professionals provides petitioner no protection excuse justification or immunity from the penalties in issue petitioner participated in a clear and obvious scheme to reap the benefits of claimed ordinary business_expense deductions that had no business_purpose and no economic_substance the facts and circumstances of this case reflect no reasonable_cause and no good_faith for petitioner’s participation in the transactions before us petitioner is liable for the accuracy-related_penalties under sec_6662 to reflect the foregoing 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 corp bo6-plr-152087-02 date date legend distributing controlled busine sec_1 busine sec_2 state a date shareholder a a b c d e dear this letter responds to your date request for rulings regarding certain federal_income_tax consequences of a proposed transaction the information submitted in that request and in later correspondences dated date date date and december is summarized below plr-152087-02 distributing was incorporated as a subchapter_c_corporation in state a on date distributing directly conducts busine sec_1 and busine sec_2 distributing ha sec_2 classes of common_stock issued and outstanding those classes are voting common_stock class i common_stock and class ii common_stock the class ii shares are only issued to state a busine sec_1 agents and may only be sold back to distributing by those agent shareholders distributing currently has a shares of class i common_stock issued and outstanding this stock is owned by b shareholders of these shareholders shareholder a own sec_5 or more of such stock distributing currently has c shares of class ii common_stock issued and outstanding the class ii common_stock is owned by d shareholders who are all unrelated no shareholder own sec_5 percent or more of the class ii common_stock the class ii common_stock constitutes less than e of the total vote and value of the distributing common_stock issued and outstanding financial information has been received indicating that distributing has had gross_receipts and operating_expenses representing the active_conduct_of_a_trade_or_business for each of the past five years distributing wishes to reduce the cumbersome and expensive multiple state regulatory burden on busine sec_2 caused by distributing being involved in busine sec_1 in addition distributing management believes that the close relationship between busine sec_1 and busine sec_2 continuously puts busine sec_2 at a disadvantage with respect to competition the taxpayers have shown that a separation of busine sec_1 from busine sec_2 will eliminate the above mentioned burdens as well as result in other significant cost savings accordingly the taxpayer has proposed the following transaction i ii distributing will form controlled as a state a corporation distributing will transfer to controlled all of the assets and liabilities of busine sec_2 and certain investment_assets in exchange for voting controlled stock distributing will then hold all of the stock of controlled iii distributing will distribute all of the controlled voting_stock pro_rata to the class i common_stock shareholders of distributing iv no securities other than stock of controlled are being exchanged in the transaction the taxpayers have made the following representations in connection with the proposed transaction plr-152087-02 a b c d e f g no part of the consideration to be distributed by the distributing_corporation will be received by a shareholder as a creditor employee or in any capacity other than that of a shareholder of the corporation the years of financial information submitted on behalf of the distributing_corporation is representative of the corporation’s present operation and with regard to such corporation there have been no substantial operational changes since the date of the last financial statements submitted the distribution of the stock or stock and securities of the controlled_corporation is carried out for the following corporate business purposes to reduce the cumbersome and expensive regulatory burden on busine sec_2 caused by busine sec_1 being subject_to multiple state regulatory oversight to eliminate the close relationship between busine sec_1 and busine sec_2 that has continuously put busine sec_2 at a disadvantage with respect to competition there is no plan or intention by the shareholders or security holders of the distributing_corporation to sell exchange transfer by gift or otherwise dispose_of any of their stock in or securities of either the distributing or controlled_corporation after the transaction except for class ii common_stock such stock constitutes less than e of the total vote and value of the distributing common_stock issued and outstanding which distributing may purchase from the busine sec_1 agents upon their leaving distributing there is no plan or intention by either the distributing_corporation or the controlled_corporation directly or through any subsidiary_corporation to purchase any of its outstanding_stock after the transaction other than through stock purchases meeting the requirements of sec_4 b of revproc_96_30 there is no plan or intention to liquidate either the distributing or controlled_corporation to merge either corporation with any other corporation or to sell or otherwise dispose_of the assets of either corporation after the transaction except in the ordinary course of business for purposes of sec_355 immediately after the distribution no person determined after applying sec_355 will hold stock possessing percent or more of the total combined voting power of all classes of distributing stock entitled to vote or percent or more of the total value of shares of all classes of distributing stock that was acquired by purchase as defined in sec_355 and during the five-year period determined after applying sec_355 ending on the distribution date h for purposes of sec_355 immediately after the distribution no person plr-152087-02 determined after applying sec_355 will hold stock possessing percent or more of the total combined voting power of all classes of controlled stock entitled to vote or percent or more of the total value of shares of all classes of controlled stock that was either i acquired by purchase as defined in sec_355 and during the five-year period determined after applying sec_355 ending on the distribution date or ii attributable to distributions on distributing stock that was acquired by purchase as defined in sec_355 and during the five-year period determined after applying sec_355 ending on the distribution date the distribution is not a part of a plan or series of related transactions within the meaning of sec_355 pursuant to which one or more persons will acquire directly or indirectly stock possessing fifty percent or more of the total combined voting power of all classes of stock of either distributing or controlled or stock possessing fifty percent or more of the total value of all classes of stock of either distributing or controlled the total adjusted bases and the fair_market_value of the assets transferred to the controlled_corporation by the distributing_corporation each equals or exceeds the sum of the liabilities assumed by the controlled_corporation as determined under sec_357 the liabilities assumed in the transaction as determined under sec_357 were incurred in the ordinary course of business and are associated with the assets being transferred the distributing_corporation neither accumulated its receivables nor made extraordinary payment of its payables in anticipation of the transaction immediately before the distribution items of income gain loss deduction and credit will be taken into account as required by the applicable intercompany_transaction regulations see sec_1_1502-13 and sec_1 as in effect before the publication of t d 1995_32_irb_6 and as currently in effect sec_1_1502-13 as published by t d further distributing does not have an excess_loss_account with respect to controlled stock payments made in connection with all continuing transactions if any between the distributing and controlled_corporation will be for fair_market_value based on terms and conditions arrived at by the parties bargaining at arm’s length no intercorporate debt will exist between the distributing_corporation and the controlled_corporation at the time of or subsequent to the distribution of the controlled_corporation stock i j k l m n o plr-152087-02 p q r s t no two parties to the transaction are investment companies as defined in sec_368 and iv the gross assets of the trades_or_businesses that will be relied upon by distributing and controlled to satisfy the active_trade_or_business_requirement of sec_355 will in the aggregate have a fair_market_value that is not less than five percent of the total fair_market_value of the gross assets of the company directly operating such trades_or_businesses the distributing_corporation is not an s_corporation within the meaning of sec_1361 and there is no plan or intention by the distributing or controlled_corporation to make an s_corporation_election pursuant to sec_1362 following the transaction the distributing and controlled_corporation will each continue the active_conduct of its business independently and with its separate employees the indebtedness owed by the controlled_corporation to the distributing_corporation after the distribution of the controlled_corporation stock will not constitute stock_or_securities based solely on the information submitted and the representations made we have concluded that the transfer by distributing of busine sec_2 assets as well as investment_assets to controlled in exchange for all of the controlled stock and the assumption by controlled of certain liabilities associated with the busine sec_2 assets transferred followed by the pro_rata distribution by distributing of all the controlled stock to the distributing shareholders will constitute a reorganization within the meaning of sec_368 of the internal_revenue_code distributing and controlled will each be a party to the reorganization within the meaning of sec_368 no gain_or_loss will be recognized by distributing upon its receipt of controlled stock in exchange for the transfer of assets to and the assumption_of_liabilities by controlled sec_361 and b and sec_357 no gain_or_loss will be recognized by controlled upon its receipt of assets in exchange for its issuance of shares of controlled stock sec_1032 controlled’s basis in the assets received from distributing will equal the basis of such asset in the hands of distributing immediately prior to the transfer sec_362 plr-152087-02 the holding_period of each asset received by controlled from distributing will include the period during which distributing held such asset sec_1223 distributing will not recognize gain_or_loss upon the distribution of the stock in controlled to the distributing shareholders sec_361 no gain_or_loss will be recognized to and no amounts will be included in the income of the distributing shareholders upon their receipt of controlled stock sec_355 the aggregate basis of the distributing stock and the controlled stock in the hands of the distributing shareholders after the distribution will equal the aggregate adjusted_basis of the distributing stock held immediately before the distribution allocated in proportion to the fair_market_value of each under sec_1_358-2 the holding_period of the controlled stock received by the distributing shareholders will in each instance include the holding_period of the distributing stock with respect to which the distribution will be made provided that the distributing stock is held as a capital_asset on the day of the distribution sec_1223 as provided in sec_312 proper allocation of earnings_and_profits between distributing and controlled will be made in accordance with sec_1_312-10 and sec_1_1502-33 we express no opinion about the tax treatment of the transaction under any other section of the code or regulations or the tax treatment of any conditions existing at the time of or effects resulting from the transaction that are not specifically covered in the above rulings 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 the ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited a s precedent a copy of this ruling letter should be attached to the federal_income_tax return of each taxpayer involved for the taxable_year in which the transaction is consummated plr-152087-02 in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to the taxpayer sincerely yours reginald mombrun assistant to the branch chief branch office of associate chief_counsel corporate


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-100990-18 date date legend x ---------------------------------------------------- ------------------------------------------ y ----------------------------------------------------- ---------------------- date date date date state --------------------------- --------------------------- ------------------------ ----------------------- -------------- dear -------------- this responds to a letter dated date submitted on behalf of x by x’s authorized representative requesting relief under sec_1362 of the internal_revenue_code the code for an inadvertent invalid s election facts plr-100990-18 according to the information submitted and representations made within x was incorporated on date and made an s election effective date under the laws of state on or around date shares of x were transferred to y an ineligible shareholder thus causing x’s s election to terminate on date x and its shareholders took corrective action transferring the x shares from y to eligible shareholders x represents that the termination of its s election was inadvertent and was not motivated by tax_avoidance or retroactive tax planning x also represents that x and its shareholders agree to make any adjustments required as a condition of obtaining relief under the inadvertent_termination_rule as provided under sec_1362 of the code that may be required by the secretary x and its shareholders represent that they have filed all returns consistently x with being 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 defines a small_business_corporation as a domestic_corporation which is not an ineligible_corporation which does not a have more than shareholders b 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 c have a nonresident_alien as a shareholder and d have more than class of stock sec_1362 provides that an election under sec_1362 shall be terminated whenever at any time on or after the 1st day of the taxable_year for 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 was not effective for the taxable_year for which made by reason of a failure to meet the requirements of sec_1361 the secretary determines that the circumstances resulting in the ineffectiveness were inadvertent no later than a reasonable period of time after the discovery of the circumstances resulting in the ineffectiveness steps were taken so that the corporation for which the election was made is a small_business_corporation and the corporation for which the election was made and each person who was a shareholder in such corporation at any time during the period specified by sec_1362 agrees to makes 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 the ineffectiveness the corporation is treated as an s_corporation during the period specified by the secretary plr-100990-18 conclusion based solely on the facts submitted and the representations made we conclude that the termination of x’s s_corporation_election was inadvertent within the meaning of sec_1362 therefore x will be treated as an s_corporation effective date and thereafter provided x’s s_corporation_election is not otherwise terminated under sec_1362 except as specifically ruled upon above we express or imply no opinion concerning the federal tax consequences of the facts of this case under any other provision of the code specifically we express or imply no opinion regarding x’s eligibility to be an s_corporation this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent pursuant to the power_of_attorney on file with this office we are sending a copy of this letter to your authorized representative sincerely laura c fields laura c fields senior technician reviewer office of the associate chief_counsel passthroughs special industries enclosures copy of this letter copy of this letter for sec_6110 purposes cc


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc corp b05 - plr-123491-00 date date in re acquiring acquiring sub target state a business x business y date date date this letter is in reply to your letter dated date requesting rulings about the federal_income_tax consequences of a partially completed transaction the information submitted is summarized below acquiring is a state a corporation engaged in business x acquiring is a publicly traded corporation with common and preferred_stock authorized and common_stock outstanding acquiring is the common parent of a consolidated_group that files its consolidated_returns on a calendar_year basis using the accrual_method of accounting acquiring sub was a state a corporation organized by acquiring solely for the purpose of acquiring target acquiring sub conducted no business or operations except those necessary to facilitate the transaction before the transactions described below acquiring owned all of the stock of acquiring sub plr-123491-00 target is a state a corporation engaged in business y prior to the transaction described below target was a publicly traded corporation target had common and preferred_stock authorized and common_stock outstanding on date pursuant to discussions which commenced in date the management of acquiring and target entered into an agreement to combine the businesses of the two companies while management would have preferred to merge target directly into acquiring this type of combination was not possible because target had significant contracts and agreements with certain customers and business partners which could not be assigned prior to the combination due to time constraints accordingly on date pursuant to state law and in accordance with a plan_of_reorganization acquiring sub merged with and into target the acquisition merger target survived the merger and target shareholders received acquiring voting common_stock in exchange for their target stock the taxpayers represent that the acquisition merger viewed independently of the proposed upstream_merger qualified as a reorganization under sec_368 and sec_368 of the internal_revenue_code because the necessary contract assignments either have been or will shortly be obtained acquiring proposes to liquidate target with and into acquiring by upstream_merger the upstream_merger the taxpayers represent that the upstream_merger will qualify as a statutory merger under applicable state law and viewed independently of the acquisition merger would qualify under sec_332 the taxpayers further represent that if the acquisition merger had not occurred and target had merged directly into acquiring such merger would have qualified as a reorganization under sec_368 pursuant to sec_3 of revproc_2001_3 i r b big_number the internal_revenue_service will not rule as to whether a proposed transaction qualifies under sec_368 including a transaction that qualifies under sec_368 by reason of sec_368 or sec_368 however the service has the discretion to rule on significant subissues that must be resolved to determine whether a transaction qualifies under sec_368 accordingly based on the information submitted and the representations made and provided that i the acquisition merger and the upstream_merger are treated as steps in an integrated_plan pursuant to the step-transaction doctrine and ii the acquisition merger and the upstream_merger qualify as statutory mergers under applicable state law we hold as follows for federal_income_tax purposes the acquisition merger and the upstream_merger will be treated as if acquiring directly acquired the target assets in exchange for acquiring stock and acquiring’s assumption of target liabilities through a statutory merger as that term is used in sec_368 see revrul_67_274 1967_2_cb_141 and revrul_72_405 1972_2_cb_217 we express no opinion regarding whether the acquisition merger and the plr-123491-00 upstream_merger are steps in an integrated_plan or whether the acquisition merger and the upstream_merger qualify as reorganizations under sec_368 we express no opinion about the tax treatment of the transaction under other provisions of the code and regulations or about the tax treatment of any conditions existing at the time of or effects resulting from the transaction that are not specifically covered by the above rulings this ruling is directed only to the taxpayers on whose behalf it was requested sec_6110 provides that it may not be used or cited as precedent each affected taxpayer should attach a copy of this letter to its federal_income_tax return for the taxable_year in which the transaction covered by this ruling letter is consummated we have sent copies of this letter to the taxpayer representatives as designated on the power_of_attorney on file in this office sincerely yours associate chief_counsel corporate by chief branch