department of the treasury internal_revenue_service washington d c date cc dom fs corp tl-n-3698-98 number release date uilc internal_revenue_service national_office field_service_advice memorandum for district_counsel ------------------------ from subject attn ------------------------------------------------------------------- deborah a butler assistant chief_counsel field service cc dom fs net_operating_loss carryovers this field_service_advice responds to your memorandum dated date field_service_advice is not binding on examination or appeals and is not a final case determination this document is not to be cited as precedent legend corp1 corp2 corp3 corp4 corp5 corp6 corp7 tl-n-3698-98 partnership partnera partnerb name1 name2 name3 statea stateb busine sec_1 busine sec_2 busine sec_3 busine sec_4 asset1 year1 year2 year3 year4 year5 year6 year7 year8 year9 year10 date1 date2 tl-n-3698-98 date3 date4 date5 date6 date7 date8 date9 montha monthb dollar_figureaa dollar_figurebb dollar_figurecc dollar_figuredd dollar_figureee dollar_figureff dollar_figuregg x y z r s t u issue tl-n-3698-98 whether a dollar_figureaa net_operating_loss anol carryover of the corp2 and subsidiaries consolidated_return group can offset the year8 through year9 post-acquisition taxable_income of corp3 the survivor of a merger with the corp4 group s corp5 when corp4 s corp5 was not a member of corp2 s consolidated_return group during the pre-acquisition years and corp3 was a defunct empty shell corporation when it merged with corp5 conclusion under the facts presented by this case i r c ' would apply to disallow the use of the nol carryovers however there are litigating hazards and additional facts may bolster the argument as discussed facts prior to year5 corp2 was the common parent of an affiliated_group_of_corporations that filed consolidated_returns several members of the group including corp3 then known as name1 ran busine sec_1s and had been involved in busine sec_2 another member was engaged in busine sec_3 corp2 filed a bankruptcy petition in year2 and emerged from bankruptcy in year4 with a large deficit in retained earnings and large nol carryovers from year1 year2 and year3 in montha year5 corp2 s shareholders approved an increase in the number of authorized shares of common_stock from r to s shares at the same time the shareholders also granted an option to partnership to acquire t shares of the common_stock at a price of dollar_figurebb per share partnership exercised the option to acquire u million shares on date1 and at the same time made a tender offer for any and all of corp2 s outstanding common_stock at a price of dollar_figurecc per share the tender offer was completed on date2 and as of date3 partnership owned approximately x of corp2 s issued and outstanding shares subsequently partnership acquired additional shares of corp2 and by date4 owned y of corp2 s outstanding_stock at the time partnership acquired its interest in corp2 the corp2 group had total consolidated nols from year1 year2 and year3 of approximately dollar_figuredd in addition corp2 had a deficit in retained earnings_of approximately dollar_figureee after partnership exercised the option in year6 corp2 did not report any limitation under sec_382 before or after the amendments on the use of its pre-acquisition losses but treated those losses as subject_to the consolidated_return_change_of_ownership acrco rules of treas reg g and d partnership is a statea partnership constructively controlled by partnera and partnerb both of whom also constructively control corp1 an s_corporation tl-n-3698-98 on date9 corp2 acquired approximately z of the stock of corp4 in a friendly takeover that was the culmination of an open bidding process corp4 was a stateb corporation that was the common parent of an affiliated_group_of_corporations that filed consolidated_returns corp4 was a conglomerate whose principal assets comprised asset1 and busine sec_4 the acquisition was effected by having corp7 a newly formed subsidiary of corp6 a member of the corp2 group merge into corp4 with corp4 as the surviving corporation the former shareholders of corp4 received a cash payment of dollar_figureff per share subsequent to the acquisition of corp4 corp2 issued various debt securities and used the proceeds to retire debt incurred to acquire corp4 excess_proceeds from the securities issuance in the amount of approximately dollar_figuregg were distributed by corp2 because corp2 had no earnings_and_profits that distribution was treated as a return_of_capital under i r c ' c on date5 corp3 sold its busine sec_1 including all assets and the use of the name1 name to an unrelated purchaser after date6 corp3 which had no employees and no operating_assets changed its name to name2 on date7 corp5 a subsidiary of corp4 merged into corp3 with corp3 as the surviving corporation corp3 immediately changed its name to name3 at the time of the merger corp3 was a shell corporation corp5 was profitably engaged in busine sec_4 after the merger corp2 offset the group s crco losses against the income of corp3 ------------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------------ ----------------------------- law and analysis a sec_382 prior to i r c ' a denied the carryover of a corporation's net_operating_loss if the corporation experienced a change in the ownership of at least percentage points among its ten largest shareholders the change resulted from a purchase of the corporation's stock and the corporation failed to carry on a trade_or_business substantially the same as that conducted before any ownership_change business continuity requirement the test of whether the corporation continued to carry on substantially the same business was applied the agreement and plan of merger executed date8 is among corp4 corp1 and corp7 the agreement describes corp1 as aparent even though it has no direct ownership_interest in either corp2 or corp7 tl-n-3698-98 at the close of the taxable_year of the acquisition and the subsequent taxable_year i r c ' a a treas reg ' a - a the regulations under sec_382 for tax years beginning before provide that in determining whether a corporation has continued to carry on substantially the same business after an ownership_change all the facts and circumstances of the case are taken into account relevant factors to be taken into account include changes in the corporation's employees plant equipment product location customers and other items which are significant in determining whether or not there is or is not a continuity of the same_business_enterprise treas reg '1 a -1 h these factors shall be evaluated in light of the general objective of sec_382 to disallow net_operating_loss carryovers where there is a purchase of the stock of a corporation and its loss_carryovers are used to offset gains of a business unrelated to that which produced the losses id the tax_reform_act_of_1986 substantially revised sec_382 after the amendments i r c ' a generally limits the amount the a sec_382 limitation of a loss corporation's loss_carryovers and built-in losses that can be offset against the corporation's taxable_income in years after an ownership_change the sec_382 limitation is defined by i r c ' b as the loss corporation's value before the ownership_change multiplied by the applicable long-term tax-exempt_bond rate defined in i r c ' f a loss_corporation is defined by i r c ' k as a corporation with a net_operating_loss or net_unrealized_built-in_loss as defined by i r c ' h the pivotal event that triggers the operation of i r c ' after is an ownership_change which occurs under i r c ' g whenever immediately after i an owner shift involving a shareholder or ii any equity_structure_shift the percentage of stock of the loss_corporation owned by one or more shareholders has increased by more than percentage points over the lowest percentage of stock of the loss_corporation or any predecessor_corporation owned by such shareholders at any time during the testing_period as provided in i r c ' k c determinations of the percentage of stock held by any person is made on the basis of value under i r c ' i the testing_period is generally the three-year period ending on the day of any owner shift involving a shareholder or equity_structure_shift an owner shift involving a 5-percent_shareholder is any change in the respective ownership of stock of a corporation which affects the percentage of such stock owned by any person who is a shareholder before or after such change i r c ' g an equity_structure_shift is defined in i r c ' g to mean any reorganization within the meaning of i r c ' except for reorganizations described in subparagraph e or g of i r c ' a not meeting the requirements of i r c ' b or reorganizations described in subparagraph f of i r c ' a tl-n-3698-98 for an ownership_change to occur there must be an increase of percentage points by one or more shareholders the increase of each shareholder is determined separately comparing the shareholder's percentage of stock ownership immediately after the close of the testing_date with that shareholder's lowest percentage ownership during the testing_period all increases during the testing_period are aggregated to determine whether the percentage_point increase has occurred during the testing_period regardless of whether the changes result from related or unrelated transactions temp treas reg ' 382-2t c the amendments to sec_382 apply only with respect to ownership changes after date the transition rule provides that the testing_period for determining an ownership_change begins on the later of date or in the case of ownership_change that occurs after date and is not subject_to the amendments the first day following the date on which such ownership_change occurs see tax_reform_act_of_1986 publaw_99_514 ' f the legislative_history states that for purposes of this transition rule an option or other interest in a corporation is treated as exercised pursuant to sec_382 s rep no pincite in this case partnership acquired more than of the stock of corp2 on date1 when it exercised its option to acquire u shares of corp2 stock this would constitute an ownership_change under i r c ' g of the 1986_code however under the transition rule for the amendments the option granted to partnership in montha would be treated as exercised at that time accordingly the change_of_ownership occurred prior to meaning that the amendments are not applicable and the acquisition would be subject_to the unamended sec_382 under the code inasmuch as the facts indicate that partnership acquired the stock of corp2 in a cash purchase and acquired more than of the corp2 stock in monthb year6 the acquisition would be subject_to former sec_382 if corp2 failed to carry on a trade_or_business substantially the same as that conducted before the ownership_change at the end of the first two taxable years after the transaction however the available facts do not indicate that corp2 failed to satisfy that requirement accordingly former a would not prohibit the use of corp2 s preacquisition losses after its acquisition by partnership b consolidated_return_change_of_ownership a crco occurs during any taxable_year ayear of change_of the common parent for the taxable_year to which the tax attribute is carried if i the requisite increase in ownership of the common parent s stock occurs and ii the increase results from a purchase or a decrease in the amount of stock outstanding the required increase occurs if one or more of the persons described in former i r c ' a as it existed under the internal tl-n-3698-98 revenue code of b ie the ten persons who own the greatest percentage of the fair_market_value of such stock at the end of the taxable_year b own at least percentage points more of the fair_market_value of the outstanding_stock of the corporation than such person or persons owned at the beginning of the taxable_year or at the beginning of the preceding_taxable_year if the crco rules apply the corporations that were members of the group immediately preceding the first day of the taxable_year in which the crco occurs collectively constitute the aold members of the group treas reg ' g i after a crco the group s pre-acquisition consolidated nol carryovers are subject_to the limitation determined under treas reg ' d in particular the limitation amount of the pre-acquisition consolidated nol carryovers that may be included in the group s consolidated nol deduction for any post-acquisition consolidated_return_year is determined by recomputing the consolidated_taxable_income for the taxable_year without regard to the cnol deduction including only the items of income and deduction of the old members in the instant case as a result of acquiring more than of the stock of corp2 by cash purchase partnership s ownership_interest increased by more than percentage points in year6 consequently a crco occurred and the losses of the corp2 group from tax years year1 through year3 were subsequently subject_to the crco limitation of ' d c sec_269 under i r c ' a the service may disallow the deduction of nol carryovers in certain circumstances specifically i r c ' a provides a in general if b any person or persons acquire directly or indirectly control of a corporation or any corporation acquires directly or indirectly property of another corporation not controlled directly or indirectly immediately before such acquisition by such acquiring_corporation or its stockholders the basis of which property in the hands of the acquiring_corporation is determined by reference to the basis in the hands of the transferor_corporation and the principal purpose for which such acquisition was made is evasion or avoidance of federal_income_tax by securing the benefit of a deduction credit or other allowance which such person or corporation would not otherwise enjoy then the secretary may disallow such deduction tl-n-3698-98 for purposes of sec_269 person is defined in treas reg ' d to include any individual trust estate partnership_association company or corporation sec_269 defines control to mean the ownership of stock possessing at least percent of the total combined voting power of all classes of stock entitled to vote or at least percent of the total value of shares of all classes of stock of the corporation for purposes of determining control there are no applicable rules of attribution see brick milling co v commissioner tcmemo_1963_305 attribution_rules of i r c ' do not apply in determining control under i r c ' revrul_80_46 1980_1_cb_62 the concept of an acquisition of corporate control is interpreted broadly and may include the incorporation of a new corporation treas reg ' c borge v commissioner 405_f2d_573 2d cir as a guide to applying this rule treas reg ' a provides that i f the purpose to evade or avoid federal_income_tax exceeds in importance any other purpose it is the principal purpose determining the purpose for which an acquisition was made requires scrutiny of the entire circumstances of the transaction id moreover the principal purpose of the acquisition is determined as of the time of the transaction rather than as of some later date see 291_f2d_761 9th cir determining factor is the intention at the time of the acquisition in a situation where the requisite acquisition of property exists within the meaning of i r c ' a treas reg ' c provides the following example of a transaction which in the absence of evidence to the contrary is indicative that the principal purpose for acquiring the property was evasion or avoidance of tax a corporation acquires property having in its hands an aggregate carryover_basis which is materially greater than its aggregate fair_market_value at the time of such acquisition and utilizes the property to create tax-reducing losses or deductions although i r c ' a is applied more frequently in situations where a profitable corporation acquires a corporation with loss_carryovers it also applies to a loss_corporation that acquires a profitable corporation to obtain the benefit of its own carryovers see 446_f2d_690 5th cir cert_denied 404_us_942 see also 358_f2d_333 5th cir ' may apply where a loss_corporation acquires a profitable corporation in order to secure the benefit of a loss it would not otherwise have enjoyed briarcliff candy corp v commissioner tcmemo_1987_487 ' may apply where a loss_corporation acquires control of a profitable corporation tl-n-3698-98 in vulcan materials a loss_corporation discontinued its historic_business steel operations and sold all its assets for cash in and in the same year acquired by merger all the assets of two profitable corporations engaged in unrelated businesses chemicals and building materials coal and ice at the time of the merger the loss_corporation was a non-operating company with approximately dollar_figure million in liquid_assets and an nol of approximately dollar_figure million resulting from the sale of its assets the loss_corporation was the surviving corporation in the merger and its shareholders held percent of the stock of the surviving corporation with the shareholders of the two profitable corporations owning the remaining percent the internal_revenue_service determined that the principal purpose of the merger was the avoidance of tax ie to use the loss corporation's nol to offset future income of the surviving corporation accordingly the taxpayer's attempt to use the nol_carryover against taxable_income in was disallowed under i r c ' the taxpayer presented no evidence of the business_purpose of the merger and the fifth circuit concluded that the taxpayer failed to meet its burden of proving that the commissioner's determination was in error in scroll inc v commissioner tcmemo_1969_154 aff d 447_f2d_612 5th cir the taxpayer had substantial nol carryovers when it was acquired in approximately seven months after the effective date of the acquisition a profitable commonly owned corporation that was engaged in a separate and independent business was merged into it the taxpayer was the surviving corporation and its substantial pre-acquisition nol carryovers were set off against subsequent earnings_of the combined businesses the tax_court treated the acquisition of the taxpayer and the subsequent merger as interrelated steps in a single transaction in this case the merger of corp5 into corp3 had no apparent business_purpose since corp3 up to that time had no experience in the retailing business indeed at the time of the merger corp3 had no employees and conducted no business of any kind thus the obvious purpose of that merger was to astuff a new income generating business into an old member of the corp2 group in order to offset the corp2 group s crco nol carryovers against corp5 s income in this way corp2 and through it partnership was able to secure the benefit of the crco nol carryovers although this merger is thus tainted by the tax_avoidance purpose sec_269 does not apply inasmuch as corp3 and corp5 were commonly controlled immediately before the merger see i r c ' a applicable only to property acquired from corporation not controlled directly or indirectly immediately before the acquisition by the acquiring_corporation or its stockholders the available facts however suggest that partnership acquired corp2 principally for its large loss_carryovers neither partnership nor its alter ego corp1 were engaged in corp2 s businesses and the subsequent disposition of corp2 s businesses supports that view under the crco rules however partnership could obtain the benefit of corp2 s the libson_shops_doctrine tl-n-3698-98 preacquisition losses only to the extent the old members of the corp2 group had income accordingly the subsequent acquisition of corp4 and the merger of corp4 s profitable subsidiary corp5 into corp3 an inactive old member of the corp2 were essential parts of the overall plan to obtain the desired benefit from the corp2 group s crco losses viewed as steps of an integrated_plan to secure the benefit of corp2 s losses partnership acquisition of corp2 coupled with corp2 s acquisition of corp4 and the merger of corp5 into corp3 comes within the prohibition of sec_269 alternatively corp2 s acquisition of corp4 in conjunction with the subsequent merger of corp5 into corp3 is also within the scope of the sec_269 prohibition see vulcan materials supra f 2d pincite d in 353_us_382 the supreme court held that pre- merger nol carryovers could not be applied against post-merger income produced by a different business from the one which originally produced the carryovers that case involved the merger of commonly-owned operating corporations into another commonly owned corporation that provided management services to the other corporations before the merger after the merger each of the former corporations was operated as a branch of the surviving corporation the businesses of three of the absorbed corporations operated at losses both before and after the merger the surviving corporation sought to apply the pre-merger nol carryovers of the three absorbed corporations to its aggregate post- merger income the supreme court disallowed the carryovers asince the income against which the offset is claimed was not produced by substantially the same businesses which incurred the losses u s pincite although libson shops was decided in it involved tax years and which were governed by the internal_revenue_code_of_1939 the code contained no statutory provisions explicitly providing for the inheritance of a corporation s nol carryovers by a successor_corporation or for the disallowance of inherited nol carryovers where a change_of_ownership occurs however the taxpayer in libson shops would have prevailed under sec_381 and sec_382 of the code in revrul_58_603 1958_2_cb_147 the service announced that it would not apply the libson_shops_doctrine to the acquisition of a loss company s assets in a transaction described in sec_381 in revrul_63_40 1963_1_cb_46 the service announced that it would not apply libson shops if there was less than a shift in the benefits of the nol_carryover attributable to a discontinued business at the same time the service left open the possibility of contesting the availability of the carryover against income of a new activity where there is more than a minor change in stock ownership of a loss_corporation that acquires a new business_enterprise tl-n-3698-98 in 343_f2d_713 9th cir the ninth circuit held that the libson_shops_doctrine is not applicable to any case arising under the code the sixth circuit reached a similar conclusion in 375_f2d_351 6th cir cert_denied 389_us_901 in 793_f2d_864 7th cir the seventh circuit applied libson shops in the context of a carryback of nols but indicated that it viewed the regulatory scheme contained in sec_381 and sec_382 of the code as displacing the previously applicable judicial scheme for nol carryovers other courts have suggested but have not expressly held that the doctrine was replaced by the code see 451_f2d_80 8th cir 69_tc_1015 the service announced in technical information_release no date that it disagreed with the ninth circuit s holding in maxwell hardware and that it would continue to apply libson shops ain any loss carryover case under the code where there has been both a percent or more shift in the benefits of a loss carryover and a change in business as defined in sec_382 and the regulations thereunder in adopting the amendments to sec_382 congress declared that the libson_shops_doctrine would not apply to transactions subject_to the provisions of sec_382 as amended by the act see h_r conf_rep no at ii-194 the acquisition of corp2 in the instant case is not governed by the amendments to sec_382 and therefore falls under the code the position announced in t i r no supra arguably would permit application of the libson_shops_doctrine in this case since the ownership of corp2 changed in year6 and corp2 s business appears to have changed case development hazards and other considerations in our view the sec_269 argument discussed above has -------------- litigating hazards the fact that the various steps are each separated by ----------------------- makes it more difficult to establish that all the steps are part of a single_plan a stronger case could be made to show a tax_avoidance purpose if the steps were more proximate to each other here the acquisition of --------------- occurred in the --------------- timeframe but it was not until - ------ more than four years later that the final step of merging ------------------- into -------------- occurred although your memorandum relied on the application of the step_transaction_doctrine we do not recommend framing the argument in terms of that doctrine primarily because the steps are each separated by ------------------------ rather we believe that the integrated_plan analysis under the scroll which is not altogether different from a step transaction analysis may be a more effective way to frame the argument tl-n-3698-98 additional facts would ----------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------------ --------- another potential argument may be to focus on the fact the -------------- was an inactive shell corporation at the time of the merger with --------------- the available facts indicate that ---------- ---- sold all of its ---------- assets in -------------------and had no employees after ------------------- until --------------- was merged into it in ---------------------- if -------------- had no assets and conducted no business after ---------------- it may be possible to argue that -------------------- de_facto liquidated or de_facto dissolved at that time our position would be that when --------------- merged into -------------- more than -------------- later -------------- was not an aold member for purposes of the crco rules therefore the income of that post-merger entity would not be available to offset against the crco nol carryovers under the crco limitation the viability of this argument first depends on the facts in particular -------------------------------- ------------------------------------------------ materials accompanying your memorandum suggest that -------------- may have had cash or marketable_securities if -------------- held substantial cash or securities during its dormant period that fact may preclude making this argument even if ------------------------------------------------------------- there are litigating hazards associated with this argument because courts have been reluctant to hold that a corporation has de_facto dissolved or de_facto liquidated under similar facts see eg united_states v jackson oldsmobile inc f_supp m d ga aff d 371_f2d_808 5th cir 32_tc_1222 however the policies underlying the crco limitation may persuade a court to find that ---------------- was not an aold member for crco purposes because it de_facto dissolved or liquidated your memorandum mentioned possible application of i r c ' to reallocate income however given that the merger of --------------- into -------------- actually occurred and cannot be ignored we do not believe that sec_482 would apply in this context as suggested in your memorandum we considered whether an argument under the libson_shops_doctrine would be available in this case although the position announced in t i r no supra arguably would not preclude application of the libson_shops_doctrine in this case any litigation of this issue in the --------- bankruptcy court would be governed by tl-n-3698-98 the law of the ninth circuit because maxwell hardware is the applicable law in the ninth circuit we do not believe that the bankruptcy court would consider a libson shops analysis in such litigation similarly the discussion in national tea on the continuing vitality of the libson_shops_doctrine suggests that the seventh circuit to which any case involving --------- ------ would be appealable would likely consider that doctrine inapplicable to the loss_carryovers in this case finally we note that i r c ' may apply in this case sec_384 generally precludes the offset of preacquisition losses against built-in gains recognized after an acquisition of a gain_corporation if for example --------------- was a again corporation within the meaning of i r c ' d no built-in gains recognized during the five-year period after --------------- acquired --------- may be offset against any losses of the -------------------- group including the crco losses from periods before that acquisition we cannot determine from the available facts whether --------------- was a gain_corporation or had any recognized built-in gains and we merely point out sec_384 may be implicated if you have any questions concerning the application of sec_384 please contact us if you have any further questions please call deborah a butler assistant chief_counsel field service by steven j hankin special counsel corporate field service division cc regional_counsel cc ------- assistant regional_counsel lc ----------------


t c memo united_states tax_court barbara deaton petitioner v commissioner of internal revenue respondent ronny deaton petitioner v commissioner of internal revenue respondent docket nos 12375-01l 11121-02l filed date in date ps filed a request to extend the time for filing their federal_income_tax return and remitted dollar_figure therewith ps did not file their return until date reporting an overpayment of dollar_figure thereon on their returns also filed on date ps sought to apply that overpayment to their tax_liabilities r did not honor ps’ request on the ground that the amount ps sought to so apply had been paid in date which is outside the lookback period of sec_6511 i r c that is applicable to ps’ date request for credit r subsequently issued a notice_of_intent_to_levy with respect to ps’ taxable years and ps timely requested a collection_due_process_hearing r’s appeals_office sustained the proposed levy and issued a notice_of_determination to that effect to each of p-h and p-w held r’s appeals office’s determinations that ps’ date remittance was a payment rather than a deposit and that the amount ps sought to apply to their post-1993 tax_liabilities therefore had been paid outside the lookback period of sec_6511 i r c that is applicable to ps’ date request for credit are sustained held further r’s appeals office’s determination to allow the proposed levy to proceed is sustained lawrence r jones jr for petitioners marty j dama for respondent memorandum opinion halpern judge these cases are before the court to review determinations made by respondent’s appeals_office appeals that respondent may proceed to collect by levy unpaid income taxes assessed against petitioners for and we review those determinations pursuant to sec_6330 petitioners are husband and wife who made joint returns of income for the years in issue and for due to petitioner husband’s bankruptcy respondent made separate determinations to proceed with collection with respect to each petitioner and each petitioner filed a separate petition we have consolidated the two resulting cases the issues and arguments are the same in each case unless otherwise indicated all section references and references to the code are to the internal_revenue_code_of_1986 as amended and all rule references are to the tax_court rules_of_practice and procedure each petitioner’s sole assignment of error is that appeals erroneously characterized the remittance accompanying their filing extension request for as a payment rather than a deposit thereby precluding by operation of sec_6511 the use of the overpayment attributable to that remittance as a credit against their tax_liabilities background the parties filed a stipulation of facts and submitted these cases without trial pursuant to rule the stipulation of facts with accompanying exhibits is incorporated herein by this reference petitioners resided in winnsboro texas at the time the petitions were filed on or about date petitioners filed form_4868 application_for automatic_extension of time to file u s individual_income_tax_return with respect to their joint federal_income_tax return for the form the signature of tommy j chambers c p a appears on the preparer’s signature line of the form_4868 along with a request that any correspondence regarding the application be sent to gollob morgan peddy co p c in tyler texas as required by the form petitioners listed an expected tax_liability for of dollar_figure on the form_4868 petitioners also listed dollar_figure of withholding for withholding on the form resulting in a balance due of dollar_figure although the form did not require a remittance of the balance due as so computed as a condition to obtaining the extension petitioners submitted a check in the amount of dollar_figure with the form_4868 the remittance petitioners made no additional remittances in respect of their tax_liability petitioners did not file their federal_income_tax return the return until date on the return petitioners reported tax of dollar_figure total payments of dollar_figure consisting of the dollar_figure of withholding and the dollar_figure remittance and an overpayment of dollar_figure petitioners also filed their federal_income_tax returns the and returns respectively on date on the return petitioners treated the dollar_figure overpayment reported on the return as a payment in respect of their tax_liability on the return petitioners treated the remaining balance of that overpayment ie the amount of the overpayment for remaining after application thereof to their tax_liability as a payment in respect of their tax_liability on the return petitioners treated the remaining balance of the overpayment ie the amount of the overpayment for remaining after application thereof to their and tax_liabilities as a payment in respect of their tax_liability and requested that the resulting excess_amount be applied to their tax_liability shortly after receiving the returns in date respondent assessed the amounts reported as tax on those returns applied the withholding dollar_figure and the remittance dollar_figure to the assessment dollar_figure and contrary to petitioners’ instructions as expressed in their returns posted the remaining amount dollar_figure to excess collections on date respondent issued to petitioners a notice_of_intent_to_levy with respect to their taxable years petitioners timely filed form request for a collection_due_process_hearing with an attached letter from their c p a explaining their position the c p a letter the c p a letter bears the letterhead of mike wellman c p a with an address in longview texas the sole argument raised in the c p a letter in opposition to the proposed levy is that contrary to what petitioners understood respondent’s position to be the remittance was a deposit rather than a payment if accepted that argument would have the effect of negating the applicability of sec_6511 the provision which precludes the refund_or_credit of any amount_paid more than years plus the period of any filing extension prior to the date such credit or refund is claimed mr wellman’s signature also appears on the preparer’s signature line on each of the returns filed in date with the same address that appears on the c p a letter in support of petitioners’ argument the c p a letter describes their factual situation as follows in the taxpayer’s sic sold their business at the time they sold it they had no idea what their basis in it was much less the tax that might be due furthermore even before the return was due they were engaged in a lawsuit with the purchaser regarding the non-compete portion of the contract for sale it appeared that the ultimate outcome could result in the entire sale being voided not knowing what tax might be due or even if any_tax would be due the taxpayers made a dollar_figure payment with their extension in date this payment was not based on any estimate of the tax_liability it was made so that any interest and penalties could be avoided when the ultimate tax was calculated it was very much akin to a pre-payment of a proposed examination assessment - except that they had no idea the amount of the tax that may be due like many lawsuits this one remained in the courts for many years it was not until late that the texas supreme court finally decided the case in favor of the taxpayers since so much time had passed and due to poor record keeping and numerous other complicated transactions during it was not until late that the return could be completed it was not until the return was completed that the tax_liability was actually known until then it did not even rise to the level of a wild guess it was simply a deposit to avoid interest and penalties appeals sustained the proposed levy rejecting petitioners’ argument that they intended the remittance to constitute a deposit rather than a payment of tax as previously stated petitioners’ sole assignment of error is that appeals erroneously characterized the remittance as a payment rather than a deposit discussion i law a collection_due_process sec_6330 provides that the commissioner must notify a taxpayer of his right to request a hearing before the commissioner may collect unpaid federal taxes from such taxpayer by levy if the taxpayer requests such a hearing the appeals officer conducting the hearing must verify that the requirements of any applicable law or administrative procedure have been met sec_6330 the taxpayer requesting the hearing may raise any relevant issue relating to the unpaid tax or the proposed levy sec_6330 the taxpayer may also raise at the hearing challenges to the existence or amount of the underlying tax_liability if the taxpayer did not receive any statutory_notice_of_deficiency for or did not otherwise have an opportunity to dispute such tax_liability sec_6330 following the hearing the appeals officer must determine whether the proposed levy is to proceed taking into account the verification the appeals officer has made the issues raised by the taxpayer at the hearing and whether the proposed levy balances the need for the efficient collection_of_taxes with the legitimate concern of the taxpayer that any collection action be no more intrusive than necessary sec_6330 we have jurisdiction to review such determinations where we have jurisdiction over the type of tax involved in the case sec_6330 see 122_tc_287 where the underlying tax_liability is properly at issue we review the determination on a de novo basis e g 114_tc_176 where the underlying tax_liability is not properly at issue we review the determination for abuse_of_discretion id pincite b credit or refund of overpayment code provisions sec_6402 provides generally that the secretary may within the applicable_period of limitations credit a taxpayer’s overpayment against any other federal tax_liability of that taxpayer and refund any remaining balance sec_6511 provides that the general period of limitations for filing a claim for credit or refund ends years after the filing of the return in question or years after the payment of the tax whichever period expires later under the lookback rule_of sec_6511 if the claim is filed within the 3-year period of limitations the amount of the credit or refund is limited to the amount of tax paid_by the claimant during the 3-year period immediately preceding the filing of the claim extended by any period of extension for filing the return in question judicially created distinction between payments and deposits a in general i rosenman v united_states in 323_us_658 the supreme court recognized that not all taxpayer remittances to the internal_revenue_service irs constitute payments of tax in the context of the lookback rule_of the predecessor of sec_6511 the court held that the remittance before it made in connection with the procurement of a 2-month extension for filing an estate_tax_return was in the nature of a deposit that attained payment status only as the commissioner applied it in satisfaction of subsequently assessed amounts id pincite notably the transmittal letter accompanying the remittance stated in part as follows this payment is made under protest and duress and solely for the purpose of avoiding penalties and interest since it is contended by the executors that not all of this sum is legally or lawfully due id pincite ii judicial interpretations of rosenman most lower courts including this court have interpreted rosenman v united_states supra as sanctioning a facts and circumstances approach to determining whether a remittance in respect of a tax is a payment of tax or a deposit at least in situations where the code is silent on the issue e g 165_f3d_204 2d cir 141_f3d_1306 9th cir 100_tc_191 all discussing rosenman progeny under that approach courts generally seek to determine whether based on all of the relevant facts and circumstances associated with the remittance the remitter intended the remittance to satisfy what he or she regarded as an existing tax_liability see eg risman v commissioner supra pincite and cases cited therein such intent is generally considered to be lacking in the case of a random remittance eg one made without reference to a return and prior to any irs audit4 of an amount that bears no good_faith relationship to the remitter’s reasonably possible ultimate tax_liability see id pincite in contrast to the foregoing the court_of_appeals for the fifth circuit to which an appeal in these cases likely would go interpreted rosenman v united_states supra as establishing a generally applicable rule that a remittance in respect of a tax cannot become a payment of that tax for purposes of sec_6511 until the commissioner assesses the tax in question see 204_f2d_943 5th cir see also 618_f2d_357 5th cir following thomas harden v united_states aftr the commissioner has published guidelines for taxpayers seeking to make deposits in the audit context in revproc_84_58 1984_2_cb_501 2d ustc par big_number 5th cir following thomas and ford iii baral v united_states in 528_us_431 a sec_6511 case involving income_tax_withholding and a remittance of estimated_tax the supreme court rejected the interpretation of rosenman v united_states supra by the court_of_appeals for the fifth circuit as being at odds with the plain language of sec_6513 and sec_6513 provides that for purposes of sec_6511 or sec_6512 remittances of estimated income_tax in respect of a taxable_year are deemed paid on the deadline determined without regard to extensions for filing that year’s return sec_6513 contains a similar rule for income_tax_withholding in a footnote the court stated we need not address the proper treatment under sec_6511 of remittances that unlike withholding and estimated income_tax are not governed by a ‘deemed paid’ provision akin to sec_6513 baral v united_states supra pincite n thus in the context of remittances not described in sec_6513 the facts and circumstances approach to distinguishing between payments and deposits as developed under rosenman and its progeny retains its viability see vancanagan v united_states sec_6512 contains rules relating to overpayment determinations by the tax_court sec_6512 provides lookback rules in part by reference to sec_6511 231_f3d_1349 fed cir discussing rosenman and baral the court_of_appeals for the fifth circuit has not since baral addressed the payment deposit distinction b form_4868 remittances i background sec_6081 authorizes the secretary to grant extensions of time to file tax returns regulations promulgated under sec_6081 provide that an individual can obtain an automatic 4-month extension of time for filing his or her income_tax return by filing form_4868 application_for automatic_extension of time to file u s individual_income_tax_return sec_1_6081-4 income_tax regs such an application must show the full amount properly estimated as tax for the taxable_year sec_1 a income_tax regs ii risman v commissioner in risman v commissioner supra a case involving sec_6512 we rejected the commissioner’s argument that a remittance accompanying form_4868 form remittance is an amount_paid as estimated income_tax within the meaning of prior to its amendment in that regulation also required applicants to remit the balance due shown on form_4868 in order to obtain an extension the irs however eliminated that requirement for and subsequent taxable years in notice_93_22 1993_1_cb_305 see also t d 1996_1_cb_312 individuals may rely on notice_93_22 for taxable years ending on or after date and before date sec_6513 which by virtue of that status constitutes a payment as a matter of law in so doing we declined to follow 760_fsupp_186 d kan and batton v united_states aftr 2d ustc par d md in which the respective courts accepted that argument based on the reference to amount properly estimated as tax in sec_1_6081-4 income_tax regs in particular we stated we conclude that the language amount properly estimated as tax under sec_1_6081-4 income_tax regs is not synonymous with nor covered by the language regarding estimated_tax payments under sec_6015 and b the operative provision therefore of sec_6513 that deems any and all payments of estimated_taxes as paid as a matter of law as of the due_date of the related_income tax returns is not applicable to petitioners’ remittance under sec_1_6081-4 income_tax regs of the dollar_figure submitted with petitioners’ form_4868 extension request risman v commissioner supra pincite we looked instead to the in an earlier case the court_of_appeals for the tenth circuit had concluded without specific reference to the language of sec_1_6081-4 income_tax regs that sec_6513 applied to the form_4868 remittance at issue in that case 760_f2d_1072 10th cir we construed weigand as assuming without holding that a form_4868 remittance is a payment of estimated income_tax within the purview of sec_6513 100_tc_191 n the district_court in 760_fsupp_186 d kan which was appealable to the tenth circuit apparently had reached the same conclusion as it did not rely on weigand in its analysis former sec_6015 required individuals in certain circumstances to file annual declarations of estimated income_tax facts and circumstances of the case in concluding that the form_4868 remittance at issue constituted a deposit rather than a payment id pincite we based our rejection of the batton england analysis in part on other statutory language indicating that remittances of estimated income_tax as contemplated in sec_6513 are something quite different from taxpayers’ remittances of the total ‘amount properly estimated as tax’ in requesting extensions of time to file income_tax returns under sec_6081 risman v commissioner supra pincite for instance we observed that sec_6015 as in effect at the time of the taxpayers’ remittance provided that for all purposes of the code the term estimated_tax does not encompass the individual alternative_minimum_tax amt id conversely sec_1_6081-4 income_tax regs contains no such amt carve-out for purposes of determining the amount properly estimated as tax in the context of obtaining a filing extension id since our report in risman v commissioner supra four courts of appeals have concluded based at least in part on the application of sec_6513 that a form_4868 remittance is we also cited language in sec_6081 and former sec_6152 both as in effect at the time of the taxpayers’ remittance which taken together revealed a disconnect between a corporation’s payment of an amount properly estimated as its tax in the context of a filing extension request and its payment of estimated income_tax pursuant to former sec_6154 see risman v commissioner supra pincite a payment as a matter of law for purposes of the lookback rules of sec_6511 165_f3d_204 2d cir 183_f3d_1247 11th cir 141_f3d_1306 9th cir 86_f3d_609 6th cir affg t c memo 1993-dollar_figure ii arguments of the parties a respondent’s argument respondent’s principal argument is that by operation of sec_6513 petitioners’ remittance was a payment rather than a deposit as a matter of law with the result that pursuant to sec_6511 the overpayment for is not available as a credit against petitioners’ tax_liabilities in support of that argument respondent contends that our analysis in 100_tc_191 is obsolete in view of the fact that the additional statutory language we examined therein had been repealed by the time petitioners filed their form_4868 respondent also points to the weight of authority that is contrary to rismandollar_figure although we reached the same result in gabelman v commissioner tcmemo_1993_592 affd 86_f3d_609 6th cir as did the court_of_appeals for the sixth circuit on appeal we did so based on the facts and circumstances of the case consistent with risman v commissioner supra in addition to the four cases cited above respondent includes david v united_states aftr 2d ustc continued alternatively respondent contends that even under a facts and circumstances analysis the remittance was a payment rather than a deposit in that regard respondent rejects petitioners’ argument discussed below that the contemporaneous view of the court_of_appeals for the fifth circuit regarding pre- assessment remittances is relevant to these cases b petitioners’ argument petitioners argue that the proper characterization of a remittance to the irs as a payment of tax or a deposit depends on the facts and circumstances associated with the remittance moreover petitioners argue that the facts and circumstances surrounding the remittance establish their contemporaneous intent to treat the remittance as a mere deposit rather than a payment of tax on brief petitioners focus primarily on the fact that when they made the remittance they resided within the geographic jurisdiction of a court_of_appeals which at that time subscribed to the view that pre-assessment continued par big_number 1st cir and weigand v united_states supra among the court_of_appeals cases holding that form_4868 remittances are payments as a matter of law in david aftr 2d pincite the court_of_appeals for the first circuit specifically declined to decide that issue concluding instead that in the absence of any evidence to the contrary the taxpayer presumably intended his form_4868 remittance to discharge the liability in question thereby rendering the remittance a payment regarding the weigand case see supra note remittances are deposits as a matter of law in petitioners’ words under the legal landscape in the fifth circuit at the time which was part of the facts and circumstances any taxpayer remitting to the irs knew that barring some affirmative indication of payment prior to assessment the remittance was a deposit petitioners’ remittance prior to assessment without any indication that the remittance be treated as a payment rather than a deposit should govern fn ref omitted petitioners’ position is not the application of the per se rule that may indeed have been overruled in principle by baral but is simply the application of the facts and circumstances as petitioners found them at the time in order to determine whether the objective circumstances indicated petitioners’ intention to direct that the remittance be treated as a deposit iii analysis a respondent’s principal argument in risman v commissioner supra we considered and rejected respondent’s argument that by operation of sec_6513 a form_4868 remittance is a payment as a matter of law while the emerging weight of authority contrary to risman may under the appropriate circumstances warrant a reconsideration of our analysis therein we do not undertake that exercise today we do not do so because we can sustain respondent’s determination on the basis of his alternative argument that even under a facts and circumstances analysis the remittance was a payment rather than a deposit see vancanagan v united_states f 3d pincite3 any comprehensive review of risman must await the day when it would make a difference in the outcome of a case before us notwithstanding the foregoing we do revisit risman for the limited purpose of addressing and rejecting respondent’s technical argument that due to the repeal of the additional statutory language we examined in risman our analysis therein is no longer viable had our analysis rested solely on the specific wording of those provisions ie former sec_6015 and sec_6152 and sec_6081 see supra part i b b ii and note respondent’s argument might have some forcedollar_figure however quite apart from our analysis of those provisions we made the following general observations initially we note an obvious and significant difference between estimated_tax payments and a payment of the estimated total_tax liability with a form_4868 extension request estimated_tax is a form of prepaid tax which is submitted with a form 1040-es in quarterly installments throughout the taxable_year by the statutory due_date for the filing of a tax_return in this case date and at the time a taxpayer attempts to estimate his or her total federal_income_tax liability for purposes of obtaining an extension of time to file a tax_return under sec_6081 the date for making estimated_tax payments for the prior year has expired risman v commissioner supra pincite see also sec_6654 interest charge on calendar_year taxpayer’s underpayment of a even if our analysis had been so limited respondent does not suggest that congress repealed or amended those provisions in three separate pieces of legislation passed by three different congresses in order to clarify the scope of sec_6513 required_installment of estimated_tax ceases to accrue on april of the following year those observations in no way depend on the subsequently repealed statutory language we examined in risman b facts and circumstances analysi sec_1 relevance of existing fifth circuit precedent we first consider petitioners’ argument concerning the legal landscape in the fifth circuit as a matter of logic the legal landscape in the fifth circuit can be probative of petitioners’ intent regarding the remittance only if they were aware of that precedent when they made the remittance petitioners have made no allegation to that effect either in their administrative appeal or in connection with these proceedings nor does the record contain any evidence that would support such an allegationdollar_figure to the extent petitioners are suggesting that we should legally presume their awareness of that precedent for these purposes they do not cite nor are we aware of any authority for such a proposition we therefore conclude that absent any allegations or evidence that these petitioners as opposed to the generic any taxpayer remitting to the irs assuming arguendo that the requisite intent could be supplied by petitioners’ agents eg the c p a whose signature appears on the form petitioners have not alleged that any such agent acted on the basis of or was even aware of the fifth circuit position nor does the record contain any evidence that would support such an allegation referenced in their brief in fact knew that barring some affirmative indication of payment prior to assessment the remittance was a deposit under fifth circuit precedent at the time the existence of such precedent is not relevant to our determination of petitioners’ intent with regard to the remittance petitioners’ failure to develop the record petitioners apparently are content to rely solely on the representations of mr wellman contained in the c p a letter to establish their intent regarding the remittance there is no indication in the record that petitioners provided appeals with any evidence that would corroborate those representations nor do petitioners allege that appeals refused to consider any such evidencedollar_figure furthermore because petitioners chose with respondent’s acquiescence to submit these cases without trial pursuant to rule there is no pertinent evidence before us that was not before appealsdollar_figure petitioners’ exclusive reliance on the c p a letter is all the more puzzling considering the source there is no indication in her case memorandum for each petitioner respondent’s appeals officer states that petitioners did not present any documents to elaborate on the litigation involving the sale of their business accordingly since we reach the same result as did appeals our disposition of these cases does not depend on whether we review appeals’ determinations for abuse_of_discretion or on a de novo basis in the record that mr wellman the author of that letter was involved in any way with the filing of the form_4868 in date or was otherwise involved in petitioners’ affairs at that time had petitioners gone to trial they presumably could have elicited the testimony of mr chambers the c p a whose signature appears on the form regarding the circumstances that allegedly rendered their tax_liability inestimable as of date because petitioners chose not to do so we may presume that such testimony would have been unfavorable to them see eg 108_tc_147 citing 6_tc_1158 affd 162_f2d_513 10th cir relying on the c p a letter petitioners have failed to convince us that as of date their tax_liability was inestimable and the remittance was intended as a deposit inconsistencies between the c p a letter and petitioners’ return moreover the c p a letter itself does not square with information from petitioners’ return contained in the record for instance the return belies the assertion in the c p a letter that petitioners’ ignorance of their tax_liability in date was attributable to the sale of their business in and numerous other complicated transactions during the only sale referenced in the return is an installment_sale that occurred in and the return hardly attests to the occurrence of numerous other complicated transactions during dollar_figure furthermore the return belies the allegations in the c p a letter that the dollar_figure amount of the remittance was not based on any estimate of the tax_liability and did not even rise to the level of a wild guess as to the amount of that liability specifically if one calculates petitioners’ tentative tax without any basis offset to the capital_gain they reported for relating to the sale but otherwise in accordance with the schedule d tax worksheet attached to the return the resulting tentative_tax is approximately dollar_figure risman is factually distinguishable these cases are distinguishable from 100_tc_191 in which we concluded on the basis of the facts and circumstances of that case that the taxpayers’ remittance with their filing extension request was a deposit rather than a payment in risman v commissioner supra pincite- the commissioner initially treated the remittance as a petitioners reported on the return that they had received almost dollar_figure from that sale prior to the record does not reflect whether petitioners experienced similar difficulties calculating their tax_liabilities other than wages interest and gain from the sale the return lists other income of dollar_figure and a dollar_figure nonpassive loss from two s_corporations deposit and the taxpayers effectively confirmed their understanding of that treatment in writing approximately months later well before the commissioner recharacterized the remittance as a payment in his recordsdollar_figure in the instant case petitioners did not claim deposit status until approximately years after they made the remittance and they did so only in response to respondent’s commencement of collection activitydollar_figure furthermore in risman v commissioner supra pincite we found that the taxpayers arbitrarily chose the amount of the the commissioner apparently recharacterized the remittance as a payment solely on the theory that it was a payment as a matter of law see 100_tc_191 commissioner did not dispute that under a facts and circumstances analysis the remittance would be treated as a deposit a more analogous case is 231_f3d_1349 fed cir in that case the taxpayers sought to avoid dismissal of their refund_suit on the strength of an affidavit of the accountant who had prepared the form_4868 accompanying the remittance at issue in upholding the trial court’s dismissal the court_of_appeals_for_the_federal_circuit stated the accountant’s explanation of what he did and his characterization of the dollar_figure remittance as a deposit made more than ½ years after the extension application was filed and the remittance made is insufficient to raise any valid factual issue on whether the dollar_figure remittance was a deposit id pincite while we do not suggest that the noncontemporaneous statements of a taxpayer’s representative standing alone are never sufficient to corroborate that taxpayer’s claimed intent with regard to a remittance we do submit that such statements are particularly suspect where as is apparently the case here the representative did not represent the taxpayer in connection with the remittance remittance at issue as discussed above petitioners’ return suggests that they did not randomly choose the amount of the remittance conclusion for the reasons discussed above we sustain appeals’ conclusion that petitioners failed to establish their alleged intent that the remittance be regarded as a deposit rather than a payment iv conclusion we sustain appeals’ findings that the remittance was a payment rather than a deposit and that having been paid outside the lookback period of sec_6511 the portion of the remittance in excess of petitioners’ tax_liability may not be credited against petitioners’ tax_liabilities as petitioners have made no other assignments of error we sustain appeals’ determinations to allow the proposed levy to proceed to reflect the foregoing decisions will be entered for respondent


internal_revenue_service number release date index number 468a ---------------------------- ---------------------------------------------------- -------------------------- ---------------------------------- -------------- ----------------------- --------------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------------- id no ------------- telephone number --------------------- refer reply to cc psi b06 plr-114590-08 date september re schedule of deductions --------------------------------------------------------- legend taxpayer -------------------------- ein ---------------- company a -------------------------------------------- ein ---------------- company b ---------------------------------------------- ein ---------------- plant --------------------------------------------------------- location -------------------------------------------------------------- independent study --------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- method fund director ----------- ------------------------------------------- --------------------------------------------------------------------------------- --------------------------------------------------------------------------------- dear ------------ this letter responds to your request dated --------------------- for an initial schedule of deduction amounts pursuant to sec_1_468a-8t c of the income_tax regulations and a mandatory request for a revised schedule of ruling amounts pursuant to sec_468a of the internal_revenue_code and regulations sec_1 468a- 3t f iii for the fund taxpayer was previously granted schedules of ruling amounts most recently on ----------------------- taxpayer submitted supplemental information by letter on --------------------and ---------------------- information was submitted pursuant to sec_1_468a-3t e taxpayer represents the facts and information relating to its requests as follows plr-114590-08 taxpayer a corporation is a holding_company and the sole member of company a a single member limited_liability_company that is disregarded for federal_income_tax purposes company b the legal owner of the plant is a single-member limited_liability_company that is disregarded for federal_income_tax purposes and is wholly-owned by company a taxpayer files a consolidated federal_income_tax return with its affiliated companies taxpayer is the sole owner of the plant through company a and company b the plant is situated at location the estimated base cost for decommissioning plant is based on an independent study and the proposed method of decommissioning the plant is method based upon the assumptions derived from the independent study it is estimated that fund assets will earn an after-tax rate of return of ---- percent the total cost of decommissioning plant is estimated to be dollar_figure------------------ in ------- dollars this base cost of decommissioning plant is escalated at a ------ percent yearly rate resulting in a total future cost to taxpayer of decommissioning plant of dollar_figure------------------- in ------- through --------dollars under ratemaking assumptions used during the first proceeding before commission a the plant would no longer be included in rate base in ------- in the prior schedule of ruling amounts issued under sec_468a of the code as in effect prior to the estimated_useful_life of the plant is --- years --------------- and the estimated period for which the fund is to be in effect is --- years --------------- thus the percentage of the total estimated costs qualifying for deduction in the schedule of ruling amounts under prior_law was -------- percent sec_468a as amended by the energy tax incentives act of the act publaw_109_58 119_stat_594 allows an electing taxpayer to deduct payments made to a nuclear decommissioning reserve fund sec_468a limits the amount that may be paid into the nuclear decommissioning fund in any year to the ruling_amount applicable to that year prior to the changes made by the act the deduction was limited to the lesser_of the amount included in the utility’s cost of service for ratemaking purposes or the ruling_amount generally as a result only regulated utilities could take advantage of sec_468a the act amendment of sec_468a eliminated the cost-of-service limitation accordingly decommissioning costs of an unregulated nuclear power plant may now be funded by deductible contributions to a qualified nuclear decommissioning fund sec_468a provides that no deduction shall be allowed for any payment to the nuclear decommissioning fund unless the taxpayer requests and receives from the secretary a schedule of ruling amounts the ruling_amount for any_tax year is plr-114590-08 defined under sec_468a as the amount which the secretary determines to be necessary to fund the total nuclear decommissioning cost of that nuclear power plant over the estimated_useful_life of the plant this term is further defined to include the amount necessary to prevent excessive funding of nuclear decommissioning costs or funding of these costs at a rate more rapid than level_funding taking into account such discount rates as the secretary deems appropriate prior to the changes made by the act deductible contributions were limited to the amount necessary for an electing taxpayer to fund the plant’s post-1983 nuclear decommissioning costs determined as if decommissioning costs accrued ratably over the estimated_useful_life of the plant provided that the taxpayer elected to establish a fund in prior_law also did not allow a taxpayer electing to establish a fund later than to contribute to that fund any amount in excess of that amount necessary to fund the ratable portion of the plant’s nuclear decommissioning costs beginning in the year the fund is established sec_468a now allows a taxpayer to contribute to a nuclear decommissioning fund the entire cost of decommissioning the plant including both the pre-1984 amount that was denied under the law prior to the act as well as any amount attributable to any year after in which a taxpayer had not established a fund under sec_468a sec_468a provides that the deduction for the contribution of the previously-excluded amount is allowed ratably over the remaining useful_life of the nuclear plant sec_468a provides that a taxpayer shall be deemed to have made a payment to the nuclear decommissioning fund on the last day of a taxable_year if the payment is made on account of such taxable_year and is made within 2½ months after the close of the tax_year this section applies to payments made pursuant to either a schedule of ruling amounts or a schedule of deduction amounts sec_1_468a-1t a provides that an eligible_taxpayer may elect to deduct nuclear decommissioning costs under sec_468a of the code an eligible_taxpayer as defined under sec_1_468a-1t b of the regulations is a taxpayer that has a qualifying interest in any portion of a nuclear power plant a qualifying interest is among other things a direct ownership_interest sec_1_468a-2t b provides that the maximum amount of cash payments made or deemed made to a nuclear decommissioning fund during any_tax year shall not exceed the ruling_amount applicable to the nuclear decommissioning fund for such taxable_year the limitation on the amount of cash payments for purposes of sec_1 468a- 2t b does not apply to any special transfer permitted under sec_1_468a-8t sec_1_468a-3t a provides that in general a schedule of ruling amounts for a nuclear decommissioning fund is a ruling specifying annual payments that over plr-114590-08 the tax years remaining in the funding_period as of the date the schedule first applies will result in a projected balance of the nuclear decommissioning fund as of the last day of the funding_period equal to and in no event more than the amount of decommissioning costs allocable to the fund sec_1_468a-3t a provides that to the extent consistent with the principles and provisions of this section each schedule of ruling amounts shall be based on reasonable assumptions concerning the after-tax rate of return to be earned by the amounts collected for decommissioning the total estimated cost of decommissioning the nuclear plant and the frequency of contributions to a nuclear decommissioning fund for a taxable_year under sec_1_468a-3t a the internal_revenue_service shall provide a schedule of ruling amounts identical to the schedule proposed by the taxpayer but no such schedule shall be provided by the service unless the taxpayer's proposed schedule is consistent with the principles and provisions of that section sec_1_468a-3t a provides that the taxpayer bears the burden of demonstrating that the proposed schedule of ruling amounts is consistent with the principles of the regulations and that it is based on reasonable assumptions that section also provides additional guidance regarding how the service will determine whether a proposed schedule of ruling amounts is based on reasonable assumptions for example if a public_utility commission established or approved the currently applicable rates for the furnishing or sale by the taxpayer of electricity from the plant the taxpayer can generally satisfy this burden_of_proof by demonstrating that the schedule of ruling amounts is calculated using the assumptions used by the public_utility commission in its most recent order in addition a taxpayer that owns an interest in a deregulated nuclear plant may submit assumptions used by a public_utility commission that formerly had regulatory jurisdiction over the plant as support for the assumptions used in calculating the taxpayer’s proposed schedule of ruling amounts with the understanding that the assumptions used by the public_utility commission may be given less weight if they are out of date or were developed in a proceeding for a different taxpayer the use of other industry standards such as the assumptions underlying the taxpayer's most recent financial assurance filing with the nrc are described by the temporary regulations as an alternative means of demonstrating that the taxpayer has calculated its proposed schedule of ruling amounts on a reasonable basis sec_1_468a-3t a further provides that consistency with financial_accounting statements is not sufficient in the absence of other supporting evidence to meet the taxpayer’s burden_of_proof sec_1_468a-3t b provides that in general the ruling_amount for any_tax year in the funding_period shall not be less than the ruling_amount for any earlier tax_year under sec_1_468a-3t c the funding_period begins on the first day of the first tax_year for which a deductible payment is made to the nuclear decommissioning fund and ends on the last day of the taxable_year that includes the last day of the estimated_useful_life of the nuclear power plant to which the fund relates plr-114590-08 sec_1_468a-3t c provides rules for determining the estimated_useful_life of a nuclear plant for purposes of sec_468a in general under sec_1_468a-3t c i a if the plant was included in rate base for ratemaking purposes for a period prior to date the date used in the first such ratemaking proceeding as the estimated date on which the nuclear plant will no longer be included in the taxpayer’s rate base is the end of the estimated_useful_life of the nuclear plant sec_1_468a-3t c i b provides that if the nuclear plant is not described in sec_1_468a-3t c i a the last day of the estimated_useful_life of the nuclear plant is determined as of the date the plant is placed_in_service under sec_1_468a-3t c i c any reasonable method may be used in determining the estimated_useful_life of a nuclear power plant that is not described in sec_1_468a-3t c i a sec_1_468a-3t d provides that the amount of decommissioning costs allocable to a nuclear decommissioning fund is the taxpayer's share of the total estimated cost of decommissioning the nuclear power plant sec_1_468a-3t d provides that a taxpayer's share of the total estimated cost of decommissioning a nuclear power plant equals the total estimated cost of decommissioning such plant multiplied by the taxpayer's qualifying interest in the plant sec_1_468a-3t e enumerates the information required to be contained in a request for a schedule of ruling amounts filed by a taxpayer in order to receive a ruling_amount for any taxable_year sec_1_468a-3t f provides that any taxpayer that has previously obtained a schedule of ruling amounts can request a revised schedule of ruling amounts such a request must be made in accordance with the rules of sec_1_468a-3t e the internal_revenue_service shall not provide a revised schedule of ruling amounts applicable to a taxable_year in response to a request for a schedule of ruling amounts that is filed after the deemed payment deadline date for such taxable_year sec_1_468a-8t a provides that under the provisions of sec_468a as described above a taxpayer may make a special transfer of cash or property to the nuclear decommissioning fund this special transfer is not subject_to the sec_468a limitation the amount of the special transfer is the present_value of the pre-2005 nonqualifying percentage of the estimated future costs of decommissioning the nuclear plant that was disallowed under sec_468a prior to the act sec_1_468a-8t a defines the pre-2005 nonqualifying percentage as equal to percent reduced by the sum of the qualifying percentage used in determining the taxpayer’s last schedule of ruling amounts for the fund under sec_468a as it existed prior to the act and the percentage transferred in any previous special transfer plr-114590-08 sec_1_468a-8t a provides that the taxpayer is not required to transfer the entire amount eligible for the special transfer in one year but must take any prior special transfers into account in calculating the pre-2005 qualifying percentage further pursuant to sec_1_468a-8t c a taxpayer making a special transfer in more than one year must request a new schedule of deduction amounts in connection with each special transfer sec_1_468a-8t b provides that the deduction for the special transfer is allowed ratably over the remaining useful_life of the nuclear plant under sec_1 468a- 8t b iii the deduction for property contributed in a special transfer is limited to the lesser_of the fair_market_value of the property or the taxpayer’s basis in the property under sec_1_468a-8t b the taxpayer recognizes no gain_or_loss on the special transfer of property the taxpayer’s basis in the fund is not increased by reason of the special transfer of property and the fund’s basis in the property transferred in the special transfer is the same as the transferee’s basis in that property immediately prior to the special transfer sec_1_468a-8t c provides that taxpayer may not make a special transfer to a qualified nuclear decommissioning fund unless the taxpayer requests from the irs a schedule of deduction amounts in connection with such transfer a request for a schedule of deduction amounts may be made in connection with a request for a schedule of ruling amounts but in such case the calculations for both the schedule of ruling amounts and the schedule of deduction amounts must be separately_stated as stated above prior to the changes made by the act deductible contributions were limited to the lesser_of the amount necessary to fund the plant’s post-1983 nuclear decommissioning costs or the amount necessary to fund the plant’s decommissioning costs for that portion of the plant’s estimated_useful_life for which a fund had been established under that prior_law taxpayer was allowed to contribute --- -------- percent of the amounts necessary to fully decommission its share of the plant sec_468a allows a taxpayer to contribute to the nuclear decommissioning fund the pre-1984 amount that was denied under the law prior to the act taxpayer is able to contribute the additional -------- percent of the amounts necessary to decommission its ownership share of plant this special transfer occurred in ------- we have examined the representations and information submitted by the taxpayer in relation to the requirements set forth in sec_468a and the regulations thereunder based solely upon these representations of the facts we conclude that because the useful_life of the plant as defined by sec_1_468a-3t c ended in ------- taxpayer may make a special transfer of dollar_figure----------------- in ------- and may deduct the amount contributed in ------- as set forth below schedule of deduction amounts plr-114590-08 year ------- deduction amount dollar_figure------------------ the special transfer amount stated above is the maximum amount permitted to be transferred to the fund under sec_468a if taxpayer transfers a lesser amount to the fund the taxpayer may deduct that lesser amount ratably over the period of years described above further in the event that taxpayer transfers a lesser amount for ----- ------- in order to make an additional special transfer in a later year including a special transfer of the difference between the special transfer amount stated above and the lesser amount transferred in ------- taxpayer must request a new schedule of deduction amounts and in that request must take the ------- transfer into account and recalculate the pre-2005 qualifying percentage in such request we note that if taxpayer elects to make a special transfer of property for all or a portion of this special transfer the amount of the deduction is the lesser_of the fair_market_value of the property transferred or the basis of the property in the hands of the taxpayer immediately prior to the transfer in either event the deduction of the taxpayer with respect to the property is limited to the taxpayer’s basis in the property we have examined the representations and information submitted by the taxpayer in relation to the requirements set forth in sec_468a and the regulations thereunder based solely upon these representations of the facts we reach the following conclusions pursuant to sec_1_468a-3t a taxpayer has met its burden of demonstrating that the proposed schedule of ruling amounts is consistent with the principles of the code and regulations and is based on reasonable assumptions taxpayer has a qualifying interest in the plant and is therefore an eligible_taxpayer under sec_1_468a-1t b of the regulations taxpayer as owner of the plant has calculated its share of the total decommissioning costs under sec_1_468a-3t d of the regulations the proposed schedule of ruling amounts was derived by following the assumptions contained in an independent commissioning study that taxpayer has represented is a standard type study used in the industry based on that representation taxpayer has demonstrated pursuant to sec_1_468a-3t a that the proposed schedule of ruling amounts is based on reasonable assumptions and is consistent with the principles of sec_468a and the regulations thereunder plr-114590-08 the maximum amount of cash payments made or deemed made to the fund during any_tax year is restricted to the ruling_amount applicable to the fund as set forth under sec_1_468a-2t b of the regulations based solely on the determinations above we conclude that the taxpayer’s proposed schedule of ruling amounts satisfies the requirements of sec_468a of the code we have approved the following revised schedule of ruling amounts the mandatory review date for this matter remains the same approved schedule of ruling amounts year ------- deduction amount dollar_figure-- if any of the events described in sec_1_468a-3t f occur in future years the taxpayer must request a review and revision of the schedule of ruling amounts generally the taxpayer is required to file such a request on or before the deemed payment deadline date for the first taxable_year in which the rates reflecting such action became effective when no such event occurs the taxpayer must file a request for a revised schedule of ruling amounts on or before the deemed payment deadline of the tenth taxable_year following the close of the tax_year in which the most recent schedule of ruling amounts was received except as specifically determined above no opinion is expressed or implied concerning the federal_income_tax consequences of the transaction described above specifically no determination is made whether the independent commissioning study conforms to industry standards and practices this ruling is directed only to the taxpayer who requested it sec_6110 of the code provides it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representatives we are also sending a copy of this letter_ruling to the director pursuant to sec_1_468a-7t a a copy of this letter must be attached with the required election statement to the taxpayer's federal_income_tax return for each tax_year in which the taxpayer claims a deduction for payments made to the fund sincerely peter c friedman senior technician reviewer branch passthroughs special industries


internal_revenue_service department of the treasury index number number washington dc person to contact telephone number refer reply to cc dom p si br 1-plr-119981-98 date date legend x d1 d2 d3 d4 d5 d6 d7 y1 y2 trust1 trust2 trust3 trust4 trust5 trust6 this responds to your letter dated date written on behalf of x requesting a ruling that the termination of x’s s_corporation status was an inadvertent termination under sec_1362 of the internal_revenue_code facts x elected s_corporation status effective d1 at the time x elected s_corporation status x was owned by a and trust1 on d2 a transferred x stock to trust2 on d3 x transferred x stock to trust3 trust sec_1 and were established for the benefit of each of a’s minor children on d4 a established three additional trusts each for the benefit of one of his minor children trust sec_4 and the terms and conditions of trust sec_4 and are identical to those of trust sec_1 and respectively except for the provisions relating to successor trustees on d5 the trustees of trust sec_1 and distributed all of the x stock contained in those trusts to trust sec_4 and respectively x represents that trust sec_1 and collectively the trusts qualify as qualified subchapter_s trusts under sec_1361 and that each trust filed timely an election under sec_1361 to be treated as one during d6 a’s attorney discovered that none of the accounting_income of any of the trusts had been distributed to the beneficiaries since the trusts’ inception additionally a’s attorney learned that the trusts’ accountants filed fiduciary income_tax returns for the trusts consistent with the accumulation of the trusts’ income a’s attorney then advised a and x that the trusts’ status as qualified subchapter_s trusts and valid s_corporation shareholders had terminated as of d7 as a result of their failure to pay their income to the trusts’ beneficiaries thus x’s s_corporation status also terminated as of d7 because of the ineligible shareholders after discovering the error on or about d8 the trusts’ distributed all accumulated income to their respective beneficiaries around the same time the trusts also filed amended returns for the years y1 to y2 and amended individual returns for their respective beneficiaries consistent with the trusts acting as qualified subchapter_s trusts for the relevant time periods x also submitted this request for inadvertent termination relief x represents that the trusts’ failures to pay out the trusts’ incomes were inadvertent and not the result of tax_avoidance retroactive tax planning or an intention to revoke x’s s election moreover x and its shareholders a and the trusts agree to make any adjustments consistent with the treatment of x as an s_corporation that the secretary may require for the period of termination law and analysis sec_1361 defines an s_corporation as a small_business_corporation for which an election under sec_1362 is in effect sec_1361 defines small_business_corporation as a domestic_corporation that is not an ineligible_corporation and that does not a have more than shareholders b have as a shareholder a person other than an estate other than a_trust described in sec_1361 and other than an organization described in c who is not an individual c have a nonresident_alien as a shareholder and d have more than one class of stock sec_1361 provides that a_trust all of which is treated under subpart e of part i of subchapter_j of chapter as owned by an individual who is a citizen or resident_of_the_united_states may be a subchapter_s_corporation shareholder sec_1361 states that a qualified_subchapter_s_trust whose beneficiary makes an election under sec_1361 will be treated as a_trust described in sec_1361 and the trust’s beneficiary will be treated as the owner for purposes of sec_678 of that portion of the trust's s_corporation stock to which the election under sec_1361 applies for purposes of this subsection the term qualified_subchapter_s_trust means a_trust all of the income within the meaning of sec_643 of which is distributed or required to be distributed currently to individual who is a citizen or resident of the u s and the terms of which require that i during the life of the current income_beneficiary there is only income_beneficiary of the trust ii any corpus distributed during the life of the income_beneficiary must be distributed to that beneficiary iii the income_interest of the current income_beneficiary terminates on the earlier of the beneficiary’s death or the trust’s termination and iv upon the trust’s termination during the income beneficiary’s life the trust distributes all of its assets to the income_beneficiary under sec_1361 the beneficiary of a qualified_subchapter_s_trust may elect to have sec_1361 apply under sec_1361 this election will be effective up to days and two months before the date of the election under sec_1362 an election to be an s_corporation will be terminated whenever the corporation ceases to be a small_business_corporation sec_1362 provides that if an election under sec_1362 by any corporation was terminated under paragraph or of sec_1362 the secretary determines that the termination was inadvertent no later than a reasonable period of time after discovery of the event resulting in the termination steps were taken so that the corporation is once more a small_business_corporation and the corporation and each person who was a shareholder of the corporation at any time during the period specified pursuant to this subsection agrees to make such adjustments consistent with the treatment of the corporation as an s_corporation as may be required by the secretary with respect to such period then notwithstanding the terminating event such corporation is treated as continuing to be an s_corporation during the period specified by the secretary with respect to sec_1362 the committee reports to the subchapter_s_revision_act_of_1982 provide in part as follows if the internal_revenue_service determines that a corporation's subchapter_s_election is inadvertently terminated the service can waive the effect of the terminating event for any period if the corporation timely corrects the event and if the corporation and the shareholders agree to be treated as if the election had been in effect for such period the committee intends that the internal_revenue_service be reasonable in granting waivers so that corporations whose subchapter_s eligibility requirements have been inadvertently violated do not suffer the tax consequences of a termination if no tax_avoidance would result from the continued subchapter_s treatment in granting a waiver it is hoped that taxpayers and the government will work out agreements that protect the revenues without undue_hardship to taxpayers it is expected that the waiver may be made retroactive for all years or retroactive for the period in which the corporation again became eligible for subchapter_s treatment depending on the facts s rep no 97th cong 2d sess 1982_2_cb_718 h_r rep no 97th cong 2d sess 1982_2_cb_730 conclusions based solely on the facts submitted and representations set forth above we conclude that the termination of x’s subchapter_s_election as of d7 was inadvertent within the meaning of sec_1362 pursuant to sec_1362 x will be treated as continuing to be an s_corporation from d7 and thereafter unless x's election is otherwise terminated except as specifically set forth above no opinion is expressed concerning the federal tax consequences of the facts described above under any other provision of the code specifically no opinion is expressed on whether x’s original election to be an s_corporation was a valid election under sec_1362 or whether the trusts are qualified subchapter_s trusts within the meaning of sec_1361 this ruling is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file in this office a copy of this letter will be sent to x signed david r haglund sincerely david r haglund senior technician reviewer branch office of the assistant chief_counsel passthroughs and special industries enclosures