internal_revenue_service number release date index number ---------------------------- --------------------------------------- ------------------------------------- -------------------------------------------- ------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ----------------------------- id no ------------- ----------------------------------------------------- telephone number --------------------- refer reply to cc psi b02 plr-105120-08 date date legend x ------------------------------------------ -------------------------------------- date ------------------------- state ------------- dear ---------------- this responds to a letter dated date and subsequent correspondence submitted on behalf of x requesting that the internal_revenue_service grant x an extension of time under sec_301_9100-3 of the procedure and administration regulations to elect under sec_301_7701-3 to be classified as an association_taxable_as_a_corporation for federal tax purposes the information submitted states that x is a limited_liability_company formed on date under the laws of state x inadvertently failed to file a form_8832 entity classification election electing to treat x as an association_taxable_as_a_corporation for federal tax purposes effective date sec_301_7701-2 generally provides that a business_entity is any entity recognized for federal tax purposes that is not properly classified as a_trust under plr-105120-08 sec_301_7701-4 or otherwise subject_to special treatment under the internal_revenue_code sec_301_7701-3 provides that an eligible_entity with at least two members may elect to be classified as either an association and thus a corporation under sec_301_7701-2 or as a partnership and an eligible_entity with a single owner can elect to be classified as an association or to be disregarded as an entity separate from its owner sec_301_7701-3 further provides that so long as a business_entity is not classified as a corporation under sec_301_7701-2 or an eligible_entity it may elect its classification for federal tax purposes sec_301_7701-3 provides that an eligible_entity may elect to be classified other than as provided under sec_301_7701-3 by filing form_8832 entity classification election the effective date of the election can not be more than seventy-five days prior to the date the form is filed and can not be more than twelve months after the date on which the election is filed sec_301_9100-1 provides that the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-1 defines the term regulatory election as an election whose due_date is prescribed by a regulation published in the federal_register or a revenue_ruling revenue_procedure notice or announcement published in the internal_revenue_bulletin sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make the election sec_301_9100-2 provides the rules governing automatic extensions of time for making certain elections sec_301_9100-3 provides the standards the commissioner will use to determine whether to grant an extension of time for regulatory elections that do not meet the requirements of sec_301_9100-2 under sec_301_9100-3 a request for relief will be granted when the taxpayer provides evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and granting relief will not prejudice the interests of the government based solely on the information submitted and the representations made we conclude that the requirements of sec_301_9100-3 have been satisfied as a result x is granted an extension of time of days from the date of this letter to file a form_8832 with the appropriate service_center to elect to be treated as an association_taxable_as_a_corporation for u s tax purposes effective date a copy of this letter should be attached to the form_8832 a copy is enclosed for that purpose plr-105120-08 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 this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file with this office a copy of this letter is being sent to x’s authorized representative sincerely william p o’shea associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes


internal_revenue_service department of the treasury significant index no washington dc person to contact telephone number refer reply to t ep ra t a1 date oct in re employer parent plan 401_k_plan this letter is in response to your letter dated date requesting rulings with respect to the applicable income and excise_tax on a reversion of surplus assets to the employer on account of the termination of the plan and a transfer of assets from the plan to the 401_k_plan the employer is incorporated under the laws of under the laws of parent are corporations exclusively engaged in the the parent owns the employer both the employer and the the parent is incorporated _ the parent merged two of its acquisitions to form the employer the in employer and the parent have represented that each has at all times been exempt from u s income_tax either by intemational treaty or by code sec_883 the employer has further represented that each of the two companies that were merged to form the employer has at all times been exempt from u s income_tax either by international treaty or by sec_883 neither the employer nor either of the two companies merged to form the employer has taken a deduction for any contribution to the plan because none of the entities pays united_states corporate_income_tax the employer has taken no other tax_benefit for these contributions the employer is the only employer that has maintained the plan the plan a defined_benefit_plan was originally established effective your authorized representative has stated that all plan participants are either citizens or residents of the united_states effective restated by one of the two companies that was to become the employer the employer filed a determination_letter request for the tax-qualified status of the plan upon its termination and the plan was terminated effective made lump sum distributions to those participants that elected to receive their benefit in that form for those who did not receive a lump sum distribution the employer used plan assets to purchase annuity_contracts _ the plan was amended and the employer has upon termination and the satisfaction of all the plan’s liabilities an amount of residual assets remains section termination of the plan shall be distributed to the employer if all liabilities under the plan to plan participants have been satisfied of the plan provides that any residual assets upon based on the foregoing the following rulings are requested if the employer determines to recover all or a portion of the excess_assets in accordance with sec_4980 the excise_tax imposed by sec_4980 will not apply to the reversion because the employer is a foreign_corporation not subject_to corporate income taxes imposed by subtitle a of the code and has not taken a deduction for any contribution to the plan if the employer determines to recover all or a portion of the excess_assets such amount will not be includible in the gross_income of the employer or any affiliate of the employer code sec_883 -provides that gross_income derived by a corporation organized in a foreign_country from the international operation of corporation’s gross_income and shall be exempt from taxation under this subtitle however to be eligible for this exemption the foreign_corporation must also satisfy certain ownership requirements found in sec_883 shall not be included in that code sec_4980 provides for a excise_tax on the amount of any employer_reversion from a qualified_plan sec_4980 as added by the omnibus budget reconciliation act of p l the act provides in general that the excise_tax under sec_4980 shall be increased to with respect to any employer_reversion from a qualified_plan unless the employer either establishes or maintains a qualified_replacement_plan or the plan provides for benefit increases which take effect immediately on the termination_date code sec_4980 provides that the term employer_reversion means the amount of cash and the fair_market_value of other_property received directly or indirectly by an employer from the qualified_plan code sec_4980 provides in pertinent part that the term qualified_plan does not include a plan maintained by an employer if such employer has at all times been exempt from tax under subtitle a of the code accordingly sec_4980 does not apply to a reversion by such an employer from such a plan the employer along with each of the two companies that were merged to form the employer is and has been at all times exempt from taxation pursuant to code sec_883 and has not taken a deduction for any contribution to the plan accordingly with respect to the first ruling_request pursuant to sec_4980 the excise_tax under sec_4980 does not apply to the amount of excess_assets the employer recovers after the termination of the plan as stated above the employer along with the two companies that were merged to form the employer is and has been exempt from taxation pursuant to code sec_883 also the employer has not taken a deduction for any contribution to the plan accordingly with respect to the second ruling_request any excess_assets recovered by the employer in connection with the termination of the plan will not be includible in the gross_income of the employer because we ruled favorably with respect to the first ruling_request the remaining ruling requests are moot this ruling letter is directed only to the taxpayer that requested it code sec_6110 provides that it may not be used or cited by others as precedent this ruling letter is conditioned on the employer's representations described above regarding the tax-exempt status of the employer the parent and the two companies that were merged to form the employer these rulings are based on the assumptions that the plan is qualified under sec_401 a and that its related trust is tax-exempt under sec_501 at ail times relevant to this tuling we have sent a copy of this letter to your authorized representative pursuant to form_2848 power_of_attorney on file with our office we have also sent a copy of this letter to the employee_plans area manager for the sincerely llinr pn james e holland jr manager employee_plans actuarial group tax_exempt_and_government_entities_division


t c memo united_states tax_court barry s friedberg and charlotte moss petitioners v commissioner of internal revenue respondent docket no filed date kathleen m pakenham for petitioners alex shlivko for respondent supplemental memorandum opinion wells judge respondent determined a deficiency of dollar_figure and a penalty pursuant to sec_6662 of dollar_figure with respect to petitioners’ this opinion supplements friedberg v commissioner tcmemo_2011_ unless otherwise indicated section references are to the internal revenue continued tax_year in a prior opinion filed date friedberg v commissioner tcmemo_2011_238 wl prior opinion we granted partial summary_judgment on the issue of whether the appraisal report prepared by michael ehrmann of jefferson lee appraisals inc and attached to petitioners’ joint federal_income_tax return ehrmann appraisal was a qualified_appraisal as defined in sec_1_170a-13 income_tax regs we held that the ehrmann appraisal was not a qualified_appraisal as it related to petitioners’ facade easement we further held that there remained issues of material fact regarding whether the ehrmann appraisal was a qualified_appraisal as it related to petitioners’ transfer of development rights petitioners move the court pursuant to rule to reconsider our prior opinion background many of the underlying facts are set out in detail in our prior opinion and are incorporated herein by reference we summarize the factual and procedural background briefly here and make additional findings as required for our ruling on petitioners’ motion for reconsideration the facts are based upon examination of continued code of as amended code and in effect at all relevant times and rule references are to the tax_court rules_of_practice and procedure we round all monetary amounts to the nearest dollar the pleadings moving papers responses and attachments including numerous affidavits supplied by petitioners petitioners are husband and wife who resided in new york at the time they filed their petition during mr friedberg purchased a residential townhouse in new york city on east 71st street between park avenue and lexington avenue subject property for dollar_figure and then paid approximately an additional dollar_figure million for extensive renovations the subject property is in manhattan’s upper east side historic_district on date the national park service determined that the subject property contributes to the significance of the upper east side historic_district and is a ‘certified historic structure’ for a charitable_contribution for conservation purposes in accordance with the tax treatment extension act of during the national architectural trust nat contacted mr friedberg to ask him to donate an easement on the subject property mr friedberg met with sean zalka a representative from nat to discuss donating a facade easement and development rights related to the subject property mr zalka then sent mr friedberg a spreadsheet that provided an estimate of the tax savings available to mr friedberg should he decide to donate to nat the facade easement and development rights for the subject property mr zalka’s spreadsheet read as follows the national architectural trust profile of estimated_tax benefit1 east 71st street development rights extinguished estimated fair_market_value dollar_figure dollar_figure big_number conservation_easement value of fmv dollar_figure big_number estimated development rights value see development rights analysis worksheet total estimated gross tax deduction dollar_figure big_number tax-deductible cash donations of gross tax deduction dollar_figure big_number appraisal lender subordination fee if applicable total estimated tax-deductible costs dollar_figure big_number dollar_figure big_number total estimated charitable_contribution tax deduction total estimated federal state and city income_tax savings tax_bracket dollar_figure big_number dollar_figure big_number total estimated cash savings dollar_figure big_number for illustrative purposes only please consult your tax advisor actual figure determined by appraisal typically of fmv for comparable properties after reviewing nat’s materials mr friedberg decided to donate to nat a facade easement and all of the development rights associated with the subject property mr friedberg followed nat’s recommendation and engaged michael ehrmann of jefferson lee appraisals inc based in pittsburgh to appraise the subject property mr ehrmann visited the subject property and conducted an inspection during date and subsequently prepared the ehrmann appraisal which states that it has been prepared for tax purposes in order to determine the loss of value due to a facade easement to be donated on the subject property the ehrmann appraisal includes a number of pages of background on the economic social cultural environmental and political forces that influence property values in new york city on the basis of the lot’s location in an r9x zoning district permitting a floor area ratio far of for residential property mr ehrmann calculated new york n y zoning resolution sec provides the following definition for floor area ratio floor area ratio is the total floor area on a zoning lot divided by the lot area of that zoning lot if two or more buildings are located on the same zoning lot the floor area ratio is the sum of their floor areas divided by the lot area for example a zoning lot of big_number square continued that the lot had a maximum development potential of dollar_figure square feet approximately big_number square feet of which was unused mr ehrmann wrote although the underlying zoning would permit expansion of the subject property up to the maximum development potential i believe that the new york city landmarks preservation commission which has authority over the upper east side historical sic district would block such an expansion however the subject owner clearly has the right to transfer see sic these development rights for use on neighboring blocks within the historical district furthermore i believe that developments utilizing transferable development rights tdr would be feasible in this area particularly along lexington avenue new york statutes define transfer of development rights tdr as the process by which development rights are transferred from one lot parcel or area of land in a sending district to another lot parcel or area of land in one or more receiving districts in many tdr programs the zoning provisions applicable to the sending district are amended to reduce the density at which land can be developed while losing their right to develop their properties at the formerly permitted densities property owners in the sending district are awarded development rights these development rights are regarded as severable from the land ownership and transferable by their owners continued feet with a building containing big_number square feet of floor area has a floor area ratio of and a zoning lot of big_number square feet with two buildings containing a total of big_number square feet of floor area also has a floor area ratio of respondent accepts those numbers as accurate for purposes of the parties’ cross motions for partial summary_judgment addressed in our prior opinion the ehrmann appraisal then describes different aspects of transferable development rights programs in general without any reference to the particular program implemented in new york city mr ehrmann found that the sales comparison approach was the most appropriate valuation method for estimating the market_value of the subject property before and after the donation he wrote in the following sections of this report i have estimated the market_value of the subject property both before and after donation of the proposed easement utilizing the sales comparison approach to value mr ehrmann used the following sales to estimate the before value of the subject property date address square price per adjusted historic sale price feet square foot dollar_figure sq ft district east 67th st dollar_figure big_number dollar_figure dollar_figure ye sec_3 park ave big_number big_number dollar_figure dollar_figure ye sec_1 east 72d st big_number big_number dollar_figure dollar_figure no east 73d st big_number big_number dollar_figure dollar_figure yes east 92d st big_number big_number dollar_figure dollar_figure no east 87th st big_number big_number dollar_figure dollar_figure no east 69th st big_number big_number dollar_figure dollar_figure ye sec_2 east 73d st big_number big_number dollar_figure dollar_figure ye sec_2 east 75th st big_number big_number dollar_figure dollar_figure yes mr ehrmann adjusted those sale prices to take into account differences between those properties and the subject property due to the following factors time of sale location condition of the property size and whether the property included a finished basement although the properties were subject_to different zoning mr ehrmann did not make any adjustments on that basis because he wrote i do not believe that the varying zones have an impact on subject value after making all of his adjustments mr ehrmann averaged the adjusted prices and arrived at dollar_figure per square foot which he rounded to dollar_figure and used as his estimate for the value of the subject property as of the appraisal date on the basis of the subject property’s gross floor area of big_number square feet mr ehrmann estimated that the subject property’s total value was dollar_figure in addition to estimating the subject property’s fair_market_value mr ehrmann sought to appraise the development rights that could be transferred to a nearby property s sic as tdrs to do so he identified five transfers involving development rights on the east side of manhattan three of the five transfers involved the sale of development rights by themselves the other two each involved the sale of an entire tract that included development rights previously acquired mr ehrmann calculated the price per far foot for each of the sales and then averaged those figures to reach an average of dollar_figure per far foot he then considered some general categories of adjustments including time location size zoning and historic restrictions with regard to historic restrictions he wrote the subject is part of the upper east side historic_district with significant historic restrictions none of the previous improvements on the comparable sites had a similar status furthermore there do not appear to be historically protected properties in the immediate vicinities of the tdr comparables as discussed previously the subject tdrs can only be utilized in a limited geographic area near the site however the tdrs transferred to the comparable properties do not appear to have had the same restriction i believe that the restrictions on the subject tdrs make these development rights somewhat less valuable than the apparently unrestricted rights purchased in the comparable transactions mr ehrmann’s comments reflect the fact that none of the other properties he considered was in a historic_district the average price per far foot of the comparable properties mr ehrmann reported on was dollar_figure however mr ehrmann estimated that the value of the unused development rights on the subject property was dollar_figure per far foot he explained his reasoning as follows i have identified five adjustment factors applicable to the tdr comparables three of the factors--time location and size of the tdr--support upward adjustments of a number of the comparable unit prices the two other factors--zoning and landmark limitations--support downward adjustments of all of the comparable unit prices tdr transactions are complex i have not made specific adjustments of each comparable for each adjustment factor discussed above however based on the overall adjustments i estimate that the value of the tdrs on the subject property as of dollar_figure per far foot mr ehrmann calculated that the total value of the unused development rights associated with the subject property was dollar_figure he then added that value to his before estimate of the value of the subject property to arrive at a total value for the subject property of dollar_figure the second half of the ehrmann appraisal provides an estimate of the value of the subject property after the facade easement in an introduction mr ehrmann explained that there are several reasons property values are negatively affected by facade easements one of the factors he listed was the loss of the right to develop the property up to the maximum density allowed under the subject zone other factors included potentially increased maintenance_costs loss of flexibility in changing exterior design and the inability of future owners to use the tax advantages from an easement contribution mr ehrmann noted the best measure of the impact of these elements on property values is the market place sic i have been able to identify a number of examples of the impact of easements on properties in both new orleans and washington two cities where facade easements have been most actively used mr ehrmann provided six examples of sales of eased properties in washington d c during the mid-1980s and two examples of transactions involving eased properties in new orleans during the mid-1990s mr ehrmann constructed the following table to summarize his research on sales of comparable properties involving facade easements property easement lo sec_1 increase in renovation costs the average facade easement loss of the six sales of eased properties ie propertie sec_1 through the washington d c sales was however mr ehrmann estimated that the facade easement on the subject property decreased its value by he provided the following analysis to explain his reasoning the comparable data shows estimated losses ranging from to the residential properties had losses ranging from to most of the examples that i have identified took place during the 1980s when the facade easement programs in both washington and new orleans were relatively new comparables and are based on recent market developments the subject property is a residential dwelling in excellent condition and degree of finish based on the comparable data with particular emphasis on eased property i estimate that the facade easement will result in a loss of value of of the value of the actual subject improvement before donation of the easement on the basis of his estimate of mr ehrmann calculated that the facade easement would reduce the value of the subject property by dollar_figure which he rounded to dollar_figure he stated that after the easement the unused development rights would have no value he therefore estimated that the after value of the subject property was dollar_figure mr ehrmann concluded that the loss in value due to the facade easement was dollar_figure petitioners timely filed their joint federal_income_tax return they deducted dollar_figure for the donation of the facade easement and development rights on the subject property petitioners appended form_8283 noncash charitable_contributions signed by mr ehrmann and by the president of nat petitioners also attached to their tax_return a copy of the ehrmann appraisal on or about date respondent mailed to petitioners’ last_known_address a statutory_notice_of_deficiency petitioners timely filed their petition with this court on date during date each party filed a motion for partial summary_judgment petitioners moved that inter alia the court grant summary_judgment that the ehrmann appraisal of the value of the easement was a qualified that figure reflects the value of both the facade easement and the development rights but mr ehrmann stated that it represented the estimated market_value of the loss due to the easement appraisal within the meaning of sec_1_170a-13 income_tax regs respondent moved that the court grant summary_judgment that petitioners are not entitled to a charitable_contribution_deduction related to their donation of the facade easement and development rights because inter alia petitioners failed to substantiate their deduction as required by section a of the deficit_reduction_act_of_1984 publaw_98_369 98_stat_691 defra and sec_1_170a-13 specifically we were asked to determine whether the ehrmann appraisal included the method of valuation and the specific basis for the valuation pursuant to sec_1_170a-13 and k income_tax regs on date we issued our prior opinion addressing the parties’ cross-motions for partial summary_judgment relying in part on scheidelman v commissioner tcmemo_2010_151 wl 682_f3d_189 2d cir we held that petitioners were not entitled to a deduction for the donation of the facade easement because the ehrmann appraisal was not a qualified_appraisal pursuant to sec_1_170a-13 income_tax regs with respect to its valuation of the facade easement accordingly we granted respondent’s motion for partial summary_judgment with respect to that issue however with respect to the valuation of the development rights we concluded that disputed issues of material fact remained as to whether the ehrmann appraisal was a qualified_appraisal accordingly we denied both parties’ motions for partial summary_judgment with respect to that issue on date the u s court_of_appeals for the second circuit vacated our decision in scheidelman i and remanded the case 682_f3d_189 2d cir scheidelman ii on date respondent deposed mr ehrmann in the presence of petitioners’ counsel during the deposition mr ehrmann stated that he had never appraised other transferrable development rights before issuing the ehrmann appraisal and that mr friedberg knew of this fact on date petitioners moved the court to reconsider our prior opinion because of the change in law governing the issues noted above on date respondent filed a response to petitioners’ motion for reconsideration discussion reconsideration under rule is intended to correct substantial errors of fact or law and allow the introduction of newly discovered evidence that the moving party could not have introduced by the exercise of due diligence in the prior proceeding see 131_tc_185 110_tc_440 we have broad discretion as to whether to grant a motion for reconsideration but will not do so unless the moving party can point to unusual circumstances or substantial error estate of quick v commissioner t c pincite see also 87_tc_164 reconsideration is not the appropriate forum for rehashing previously rejected legal arguments or tendering new legal theories to reach the end result desired by the moving party estate of quick v commissioner t c pincite however an intervening change_of controlling law may warrant our exercising that discretion see 709_f2d_782 2d cir see also alioto v commissioner tcmemo_2008_185 wl at we based our prior opinion in part on a similar legal analysis as that contained in scheidelman i the u s court_of_appeals for the second circuit vacated and remanded scheidelman i see 682_f3d_189 and absent stipulation to the contrary this case is appealable to that court in accordance with 54_tc_742 aff’d 445_f2d_985 10th cir we conclude that the decision by the court_of_appeals in scheidelman ii specifically alters the underlying law and therefore requires that we reconsider our prior opinion petitioners ask us to reconsider whether the ehrmann appraisal met the requirements of a qualified_appraisal pursuant to sec_1_170a-13 and k income_tax regs with respect to both the facade easement and the development rights we address each issue in turn i facade easement in our prior opinion we determined that mr ehrmann’s approach to valuing the subject property after the facade easement donation diverged significantly from the accepted comparable sales_method which was the method mr ehrmann claimed to apply we determined that mr ehrmann instead used sale and nonsale transactions of eased properties in locations other than new york city which is the site of the subject property to estimate a percentage diminution in value associated with a facade easement mr ehrmann then multiplied the before value of the subject property the calculation of which respondent did not contest by the percentage diminution that he purported to derive from the transactions noted above to estimate the loss in value on account of the facade easement in as we noted in our prior opinion in this case it appears that mr ehrmann arrived pincite the percentage of fair_market_value that nat had told mr continued scheidelman i we held that the mechanical application of a percentage diminution to the fair_market_value before donation of a facade easement does not constitute a method of valuation as contemplated under sec_1_170a-13 income_tax regs scheidelman i wl at accordingly our prior opinion in this case held consistent with our decision in scheidelman i that the ehrmann appraisal was not a qualified_appraisal with respect to the facade easement because it lacked a method and specific basis for the determined value the u s court_of_appeals for the second circuit vacated this court’s decision in scheidelman i and remanded the case see 682_f3d_189 concerning whether an appraisal includes the method of valuation as required by sec_1_170a-13 income_tax regs the court_of_appeals in scheidelman ii stated for the purpose of gauging compliance with the reporting requirement it is irrelevant that the commissioner believes the method employed was sloppy or inaccurate or haphazardly applied the regulation requires only that the appraiser identify the valuation method used it does not require that the method adopted be reliable by providing the information required by the regulation the appraiser enabled the commissioner to evaluate his methodology continued friedberg was typical for facade easements in spite of his research on comparable sales and not because of it id pincite fn ref omitted the court_of_appeals held that the commissioner’s interpretation that an unreliable method is no method at all goes beyond the wording of the regulation which imposes only a reporting requirement id n concerning whether an appraisal includes the specific basis for the valuation as required by sec_1_170a-13 income_tax regs the court_of_appeals stated that the purpose of that reporting regulation was to provide the commissioner with sufficient information to evaluate the claimed deduction and ‘deal more effectively with the prevalent use of overvaluations ’ id pincite quoting 109_tc_258 aff’d 166_f3d_332 4th cir the court_of_appeals held that the requirement of sec_1_170a-13 income_tax regs is fulfilled if the appraiser’s analysis is present even if the commissioner deems it to be unconvincing scheidelman ii f 3d pincite in their motion for reconsideration petitioners contend that the ehrmann appraisal included a method of valuation because it supplied enough information to enable the commissioner to evaluate his methodology and showed how he applied the method petitioners acknowledge that we previously concluded that mr ehrmann’s stated method was improperly applied and unreliable but contend that reliability is not a factor for purposes of determining whether the ehrmann appraisal is a qualified_appraisal respondent opposes petitioners’ motion for reconsideration with respect to the facade easement and contends that petitioners misstate the proper standard articulated by the court_of_appeals in scheidelman ii the ehrmann appraisal is not a qualified_appraisal even if we apply the standard that petitioners advocate and the ehrmann appraisal fails to include a specific basis for valuation we disagree with all three of respondent’s contentions respondent first contends that petitioners misstate the standard that the court should apply and that the proper standard is to determine whether the method of valuation stated in the appraisal is the method actually used by the respondent also contends that we did not rest our prior opinion entirely on the legal analysis contained in scheidelman v commissioner tcmemo_2010_151 wl 682_f3d_189 2d cir scheidelman ii pointing to our scarce citations of that case and that we instead relied on friedman v commissioner tcmemo_2010_45 wl and jacobson v commissioner tcmemo_1999_401 wl which the court_of_appeals for the second circuit approved respondent’s contention is without merit the court of appeals’ opinion in scheidelman ii vacated this court’s decision in scheidelman i with respect to the same analysis we used in this case in our prior opinion and distinguished both friedman and jacobson see scheidelman ii f 3d pincite stating that the appraisals in those cases failed altogether to ‘even indicate the valuation method used or the basis for the appraised values’ quoting friedman v commissioner wl at and ‘provided no methodology or rationale’ quoting jacobson v commissioner wl at pursuant to golsen v commissioner t c pincite the court of appeals’ opinion controls our analysis in the instant case appraiser we disagree in scheidelman ii f 3d pincite the court_of_appeals stated that the relevant question is whether the information provided enabled the commissioner to evaluate the appraiser’s methodology see also rothman v commissioner tcmemo_2012_218 wl at moreover the court_of_appeals clarified that it is irrelevant that the commissioner believes the method employed was sloppy or inaccurate or haphazardly applied scheidelman ii f 3d pincite emphasis added scheidelman ii is clear the regulations are a reporting requirement id pincite n thus pursuant to scheidelman ii any evaluation of accuracy is irrelevant for purposes of deciding whether the appraisal is qualified pursuant to sec_1_170a-13 income_tax regs respondent also contends that the ehrmann appraisal fails to enable respondent to evaluate mr ehrmann’s methodology respondent argues that the ehrmann appraisal merely set forth certain disconnected and meaningless steps that mr ehrmann took and that the value was arrived at in spite of his research while we note that we previously determined that n othing in mr ehrmann’s report supports his conclusion about the after value of the subject property friedberg v commissioner wl at we concede that reaching that determination first required us to evaluate mr ehrmann’s methodology although we continue to question whether the ehrmann appraisal is reliable or properly applied methodology to reach its conclusions we conclude that it provides sufficient information to enable respondent to evaluate mr ehrmann’s underlying methodology accordingly we conclude that the ehrmann appraisal includes a method of valuation as required by sec_1 170a- c ii j income_tax regs with respect to the facade easement regarding the requirements of sec_1_170a-13 income_tax regs respondent contends that the ehrmann appraisal did not provide a specific basis for the valuation because it lacked reasoned analysis and arrived at the value of the facade easement in spite of mr ehrmann’s research not because of it the court_of_appeals held that there is a specific basis for the valuation if the appraiser’s analysis is present even if the commissioner deems it unconvincing scheidelman ii f 3d pincite the commissioner may deem the appraiser’s ‘reasoned analysis’ unconvincing but it is incontestably there as we stated in our prior opinion the ehrmann appraisal compared eight different properties with facade easements for which mr ehrmann allegedly considered inter alia each property’s location size local_government laws and regulations use date of easement appreciation of value and improvements although we criticized and disagreed with mr ehrmann’s analysis it was incontestably there see id indeed respondent’s own argument concedes that the ehrmann appraisal contained some research and analysis because respondent concludes that value was determined in spite of that research accordingly we conclude that the ehrmann appraisal includes a specific basis for mr ehrmann’s valuation as required by sec_1_170a-13 income_tax regs with respect to the facade easement consequently pursuant to scheidelman ii we conclude that the ehrmann appraisal is a qualified_appraisal pursuant to sec_1_170a-13 income_tax regs with respect to petitioners’ facade easement however we specifically do not opine on the reliability and accuracy of the methodology and specific basis of valuation in the ehrmann appraisal a matter we leave to be decided at trial ii development rights in our prior opinion we determined that mr ehrmann’s method of using five comparable transactions involving development rights to estimate the value of the subject property’s unused development rights was inconsistent and contained mathematical errors and erroneous assumptions although we determined that mr ehrmann claimed to be applying the comparable sales_method to calculate a price per square foot of the development rights we were not convinced that the comparable sales transactions were truly comparable instead of comparing the purchase prices per square foot for additional development rights mr ehrmann compared prices per square foot of properties that included no additional development rights or averaged prices per square foot for both development rights attached to the property and additional development rights however we determined that the ehrmann appraisal nonetheless explained the method and specific basis of valuation with respect to the development rights because we questioned the ehrmann appraisal’s accuracy and reliability and whether it adequately evaluated the market demand for and transferability of development rights we held that issues of material fact remained regarding whether the ehrmann appraisal was a qualified_appraisal with respect to the development rights in their motion for reconsideration petitioners contend that our prior opinion concludes that the ehrmann appraisal included the method of valuation and specific basis for the valuation of the development rights petitioners contend that remaining issues of material fact which caused us to deny petitioners’ motion for summary_judgment with respect to this issue in our prior opinion are relevant this court did not discuss qualified appraisals of development rights in scheidelman i however the court_of_appeals for the second circuit’s analysis of sec_1_170a-13 and k income_tax regs applies as much to a valuation of development rights as it does to a valuation of a facade easement we do not deem it necessary to restate that analysis which we discussed above only to determining the value of the development rights and not to determining whether the ehrmann appraisal is qualified under the scheidelman ii analysis we agree with petitioners under scheidelman ii sec_1 170a- c ii j and k income_tax regs imposes only a reporting requirement and the taxpayer only needs to include sufficient information to allow the commissioner to evaluate the methodology and specific basis for valuation scheidelman ii f 3d pincite n in our prior opinion we stated that despite errors the ehrmann appraisal explained the method of valuation and the specific basis for the valuation of the development rights friedberg v commissioner wl at the remaining issues of material fact eg the effect of the market demand the transferability of the development rights and the accuracy and reliability of the ehrmann appraisal are relevant to our analysis of valuation but are irrelevant as to whether the ehrmann appraisal is qualified pursuant to sec_1_170a-13 income_tax regs see scheidelman ii f 3d pincite respondent does not object to petitioners’ motion for reconsideration with respect to whether the ehrmann appraisal is a qualified_appraisal of development rights but contends that we should consider additional factual developments that have arisen since our prior opinion and in result grant summary_judgment to respondent specifically respondent contends that at a deposition after our prior opinion mr ehrmann confirmed that he had never appraised other transferrable development rights before issuing the ehrmann appraisal and that mr friedberg knew of this fact consequently respondent contends that mr ehrmann was not a qualified_appraiser of transferable development rights pursuant to sec_1 170a- respondent contends that the ehrmann appraisal is not qualified because it assumed a highest_and_best_use for the development rights without adequately assessing the market demand for those rights with a market study we disagree we have previously held that when using the comparable sales_method the before value is arrived at by first determining the highest_and_best_use of the property in its current condition unrestricted by the easement 85_tc_677 however valuation is not a precise science and the fair_market_value of property on a given date is a question of fact to be resolved on the basis of the entire record kiva dunes conservation llc v commissioner tcmemo_2009_145 wl at like the other questions of fact noted above respondent’s contentions as to the defects of the ehrmann appraisal are irrelevant as to whether the ehrmann appraisal is a qualified_appraisal pursuant to sec_1_170a-13 income_tax regs c income_tax regs and therefore the ehrmann appraisal was not a qualified_appraisal we disagree pursuant to sec_1_170a-13 income_tax regs a qualified_appraiser is an individual who includes on the appraisal_summary a declaration that the individual either holds himself or herself out to the public as an appraiser or performs appraisals regularly the appraiser is qualified to make appraisals of the type of property being valued the appraiser is not excluded pursuant to sec_1_170a-13 income_tax regs a qualified_appraisal must be prepared signed and dated by a qualified_appraiser within the meaning of paragraph c of that section while we recognize that qualified_appraiser is now defined in sec_170 that section was not in effect at the time petitioners filed the return for their tax_year see pension_protection_act of pub_l_no sec c stat pincite effective for appraisals prepared with respect to returns filed after date pursuant to sec_1_170a-13 income_tax regs a fully completed appraisal_summary must be attached to the tax_return on which the deduction for contribution is first claimed the appraisal_summary which differs from a qualified_appraisal must comply with the requirements set forth in sec_1_170a-13 income_tax regs pursuant to sec_1_170a-13 income_tax regs the qualified_appraisal should include t he qualifications of the qualified_appraiser who signs the appraisal including the appraiser’s background experience education and membership if any in professional appraisal associations respondent makes no claim regarding whether mr ehrmann failed to report his qualifications pursuant continued from qualifying under sec_1_170a-13 income_tax regs and the appraiser understands that an intentionally false or fraudulent overstatement of the value of the property described in the qualified_appraisal or appraisal_summary may subject the appraiser to a civil penalty under sec_6701 for aiding_and_abetting an understatement_of_tax liability according to the plain language of the regulation an appraiser is a qualified_appraiser if he or she makes the requisite declaration that he or she is qualified to appraise the value of the contributed_property the regulation does not direct the commissioner to analyze the appraiser’s qualifications to determine whether he or she has sufficient education experience or other characteristics we conclude that the analysis of the court_of_appeals for the second circuit in scheidelman ii regarding the method and specific basis of valuation of a qualified_appraisal applies equally to the appraiser’s qualification for purposes of sec_1_170a-13 income continued to sec_1_170a-13 income_tax regs so we do not further address that issue pursuant to sec_1_170a-13 income_tax regs an individual is not a qualified_appraiser if the individual is inter alia the donor the donee any person employed by the donor or donee or an appraiser who is regularly used by the donor or donee and who does not perform most of his or her appraisals for other persons respondent makes no claim regarding whether mr ehrmann is excluded from qualifying as a qualified_appraiser pursuant to sec_1 170a- c iv income_tax regs so we do not further address that issue tax regs accordingly we conclude that sec_1_170a-13 income_tax regs is a reporting requirement ie an appraiser is qualified if the declaration is present regardless of whether it is unconvincing see scheidelman ii f 3d pincite accordingly respondent’s contention that mr ehrmann is not a qualified_appraiser is without merit respondent has conceded that mr ehrmann signed the appraisal_summary that contains the necessary declaration consequently mr ehrmann is a qualified_appraiser pursuant to sec_1_170a-13 income_tax regs and the ehrmann appraisal is a qualified_appraisal of the value of the development rights petitioners contributed iii conclusion upon due consideration of the foregoing we hold that petitioners are entitled to summary_judgment on the issue of whether the ehrmann appraisal is a qualified_appraisal pursuant to sec_1_170a-13 income_tax regs with respect to both the facade easement and the development rights consequently we reconsider our holding in our prior case that petitioners are not entitled to a however we note that we do not at this time opine on whether mr ehrmann’s qualifications are sufficient to qualify as an expert witness to testify in this court regarding the value of the development rights in this case or whether the ehrmann appraisal may be admitted as an expert report pursuant to rule g for that purpose charitable_contribution_deduction with respect to the facade easement however the other holdings of our prior opinion remain we have considered all arguments made and to the extent not specifically addressed herein conclude they have been previously addressed in our prior opinion in this case or are irrelevant moot or without merit to reflect the foregoing an appropriate order will be issued


internal_revenue_service number release date index number ---------------------------------------- ------------------------------------------------ --------------------------- ----------------------------- - department of the treasury washington dc third party communication none date of communication not applicable_person to contact -------------------------- id no ------------- telephone number --------------------- refer reply to cc psi b09 plr-129812-06 date march decedent state date date bank beneficiary dollar_figurea dollar_figureb charity charity charity state court dollar_figurec legend legend dear ------------ --------------------------- ---------- ---------------------- ------------------------- ----------------------------- -------------------------- --------- --------------- ---------------------------------- ---------------------------------------- --------------------------------------- ------------------------------------------------------------- ----------- this is in response to your authorized representative’s letter dated date and subsequent correspondence in which rulings were requested regarding the proposed reformation of a_trust under sec_2055 the facts presented and representations made are as follows decedent a resident of state died testate on date decedent’s last will and testament was admitted to probate on date bank qualified as executor under the will at the time of probate article four of decedent’s will provides that decedent’s residuary_estate shall be held in trust the residuary_trust for the benefit of beneficiary for a period of five years during the five year period the trustee is directed to pay to beneficiary an annuity in the amount of dollar_figurea per month at the end of the five year period or upon the plr-129812-06 death of beneficiary whichever occurs first the residuary_trust will terminate and the trustee shall distribute the remaining assets of the trust equally among three charitable organizations charity charity and charity at the time of decedent’s death the residue of decedent’s estate had a fair_market_value of approximately dollar_figureb the residuary_trust is not a charitable_remainder annuity or unitrust within the meaning of sec_664 thus the charitable_remainder interest does not currently qualify for an estate_tax charitable deduction under sec_2055 consequently bank plans to petition state court to modify the provisions of articles three and four of the will in order to qualify the charitable interests for an estate_tax charitable deduction under sec_2055 the proposed modification which will be effective as of the date of decedent’s death will reform the residuary_trust into a charitable_remainder_annuity_trust for a term of five years or until the death of beneficiary if she dies before the termination of the five year annuity period the trustee will pay an annual annuity amount equal to five percent of the initial net fair_market_value of the trust of the five percent annual annuity amount dollar_figurec will be distributed to beneficiary and the balance will be distributed equally among charity charity and charity upon the termination of the annuity period the remaining trust assets will be distributed equally among charity charity and charity based upon the foregoing your authorized representative has requested rulings i that the proposed modification of decedent’s will to establish a residuary charitable_remainder_annuity_trust constitutes a qualified_reformation under sec_2055 and ii that decedent’s estate will be entitled to a federal estate_tax charitable deduction for the value of the charitable interests in the charitable_remainder_annuity_trust sec_664 provides that for purposes of sec_664 a charitable_remainder_annuity_trust is a_trust a from which a sum certain which is not less than percent nor more than percent of the initial net fair_market_value of all property placed in trust is to be paid not less frequently than annually to one or more persons at least one of which is not an organization described in sec_170 and in the case of individuals only to an individual who is living at the time of creation of the trust for a term of years not in excess of years or for the life or lives of such individual or individuals b from which no amount other than the payments described in sec_664 and other than qualified gratuitous transfers described in sec_664 may be paid to or for_the_use_of any person other than an organization described in sec_170 c following termination of the payments described in sec_664 the remainder_interest in the trust is to be transferred to or for_the_use_of an organization described in sec_170 or is to be retained by the trust for such a use or to the extent the remainder_interest is in qualified_employer_securities as defined in sec_664 all or a part of such securities are to be transferred to an employee_stock_ownership_plan as defined in sec_4975 in a qualified_gratuitous_transfer as defined in sec_664 and d with respect to each contribution of property to the trust the value determined under sec_7520 of the plr-129812-06 remainder_interest passing to charity is at least percent of the initial net fair_market_value of all property placed in the trust sec_664 provides generally that if a_trust would but for a qualified_contingency meet the requirements of sec_664 or a then the trust shall be treated as meeting such requirements under sec_664 the term qualified_contingency means any provision of a_trust which provides that upon the happening of a contingency the payments described in sec_664 or a as the case may be will terminate not later than such payments would otherwise terminate under the trust finally under sec_664 for purposes of determining the amount of any charitable_contribution or the actuarial value of any interest a qualified_contingency is not to be taken into account sec_2001 imposes a tax on the transfer of the taxable_estate of every decedent who is a citizen or resident_of_the_united_states sec_2055 provides that for purposes of the tax imposed by sec_2001 the value of the taxable_estate shall be determined by deducting from the value of the gross_estate the amount of all bequests legacies devises or transfers to or for the use charitable religious scientific literary or educational organizations described in sec_2055 - a sec_2055 provides that where an interest in property other than an interest described in sec_170 passes or has passed_from_the_decedent to a person or for a use described in sec_2055 and an interest other than an interest which is extinguished upon the decedent's death in the same property passes or has passed for less than an adequate_and_full_consideration in money_or_money's_worth from the decedent to a person or for a use not described in sec_2055 no deduction shall be allowed under sec_2055 for the interest which passes or has passed to the person or for the use described in sec_2055 unless-- a in the case of a remainder_interest such interest is in a_trust which is a charitable_remainder_annuity_trust or a charitable_remainder_unitrust described in sec_664 or a pooled_income_fund described in sec_642 or b in the case of any other interest such interest is in the form of a guaranteed annuity or is a fixed percentage distributed yearly of the fair_market_value of the property to be determined yearly sec_2055 provides for the reformation of interests to comply with the requirements of sec_2055 sec_2055 provides that a deduction shall be allowed under sec_2055 in respect of any qualified_reformation sec_2055 provides that for purposes of sec_2055 the term qualified_reformation means a change_of a governing instrument by reformation amendment construction or otherwise which changes a reformable_interest into a qualified_interest but only if - i any difference between i the actuarial value determined as of plr-129812-06 the date of the decedent's death of the qualified_interest and ii the actuarial value as so determined of the reformable_interest does not exceed percent of the actuarial value as so determined of the reformable_interest ii in the case of-- i a charitable_remainder interest the nonremainder interest before and after the qualified_reformation terminated at the same time or ii any other interest the reformable_interest and the qualified_interest are for the same period and iii such change is effective as of the date of the decedent's death sec_2055 defines the term reformable_interest to mean any interest for which a deduction would be allowable under sec_2055 at the time of the decedent's death but for the split-interest rules of sec_2055 sec_2055 provides that the term reformable_interest does not include any interest unless before the remainder vests in possession all payments to persons other than an organization described in sec_2055 are expressed either in specified dollar amounts or a fixed percentage of the fair_market_value of the property sec_2055 provides that the restriction in sec_2055 does not apply to any interest if a judicial proceeding is commenced to change such interest into a qualified_interest not later than the 90th day after the last date including extensions for filing an estate_tax_return if an estate_tax_return is required to be filed sec_2055 provides that for purposes of sec_2055 the term qualified_interest means an interest for which a deduction is allowable under sec_2055 the charitable interest in the residuary_trust is a reformable_interest within the in this case under the terms of decedent’s will the residuary_trust has both charitable and non-charitable beneficiaries however because the residuary_trust does not meet the requirements of sec_664 the decedent’s estate is not entitled to an estate_tax charitable deduction under sec_2055 for the value of the interest in the residuary_trust that will pass to charity meaning of sec_2055 because it meets both requirements under sec_2055 first the charitable_remainder interest would have qualified for an estate_tax charitable deduction under sec_2055 but for the provisions of sec_2055 second all payments to beneficiary are expressed in specific dollar amounts as required under sec_2055 thus the value of the charitable interest in the residuary_trust is ascertainable at the date of decedent’s death and severable from the non-charitable interest in addition the proposed reformation satisfies the requirements of a qualified_reformation under sec_2055 because i the difference between the actuarial value determined as of the date of decedent’s death of the qualified_interest and the plr-129812-06 actuarial value as so determined of the reformable_interest does not exceed percent of the actuarial value as so determined of the reformable_interest ii the nonremainder interest terminates at the same time both before and after the reformation and iii the reformation is effective as of the date of decedent’s death provided that the residuary_trust as judicially reformed is a valid trust under applicable state law and satisfies the requirements of sec_664 b c and d and the applicable regulations and provided that all taxes and expenses payable by the estate must be paid out of the residue of the estate prior to the funding of the residuary_trust we conclude based on the facts submitted and representations made that the proposed reformation of the residuary_trust will be a qualified_reformation within the meaning of sec_2055 therefore an estate_tax charitable deduction will be allowable under sec_2055 for the present_value of the charitable_annuity interests and the charitable_remainder interests in the residuary_trust the value of the charitable interests shall be determined pursuant to sec_20_2055-2 in this regard we note that in determining the present_value of the charitable_remainder interest in the residuary_trust the qualified_contingency is not taken into account pursuant to the provisions of sec_664 except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination sincerely james f hogan acting branch chief branch passthroughs special industries enclosure copy for purposes


office_of_chief_counsel internal_revenue_service memorandum number release date cc corp bo6 postn-101162-06 third party communication none date of communication not applicable uilc date date to senior team coordinator large mid-size business from senior counsel cc corp b06 subject disallowance of losses under sec_267 legend parent ----------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------- --------------------- ------------------------------------------ ------------------------------------------------------------------------------------ llc1 ------------------------------------------------------------------------------- llc2 -------------------------------------------------------------------------------- lp ------------------------------------------------------------------------ inc --------------------------------------------------------------- bank bank sub --------------------------------------------------------------- ---------------------------------------------------- -------------------- -------------------- -------------------- postn-101162-06 --------- -------- -------- --------- --------- -------- -------- ---------- ------ ---- ---- ------ ------ ------ ------ ------ ------ ----- ----- -- -- ---- dollar_figurea dollar_figureb dollar_figurec dollar_figured dollar_figuree dollar_figuref dollar_figureg dollar_figureh i j k l m n o p q r s t u v postn-101162-06 this chief_counsel_advice responds to your request for assistance in accordance with sec_6110 this advice may not be used or cited as precedent issue whether sec_267 and the regulations thereunder disallow the loss that parent recognized on its transfer of distressed securities to its wholly owned subsidiary inc in exchange for inc stock where inc contributed the securities to a partnership related to inc and parent and parent sold some of the inc stock received in the exchange to unrelated bank sub conclusion parent’s loss is disallowed under sec_267 and the regulations thereunder facts parent formed llc1 a wholly-owned disregarded_entity by contributing dollar_figurea in distressed securitie sec_1 and dollar_figureb cash to llc1 parent also wholly-owned llc2 classified as a disregarded_entity parent transferred dollar_figurec in distressed securities and dollar_figured in cash to llc2 parent’s combined basis in the distressed securities it transferred is over dollar_figuree next llc1 and llc2 formed lp a delaware limited_partnership although lp is formed as a state law partnership it is a disregarded_entity for federal tax purposes since its partners are disregarded entities owned by the same corporation llc1 transferred the securities and dollar_figuref in cash it received from parent in exchange for a i limited_partnership_interest in lp llc1 transferred the remaining dollar_figureg for a j general_partnership interest in lp llc2 transferred the securities and cash it received from parent in exchange for a k limited_partnership_interest in lp llc2 then transferred its k limited_partnership_interest to inc its wholly owned delaware shell corporation llc1 also contributed its i limited_partnership_interest in lp to inc in exchange for two newly created classes of inc preferred_stock r shares of class a voting preferred_stock class a stock and s shares of class b non-voting preferred_stock class b stock llc1 retained a j general_partnership interest in lp when these contributions took place lp converted from a wholly-owned disregarded_entity to a partnership because inc is a separate taxable entity lastly llc1 sold the class a stock to a subsidiary of bank bank sub for dollar_figureh according to the taxpayer inc’s class a stock owned by bank sub has l of the voting power and represents m of the value of the total stock in inc inc’s common_stock owned by llc2 has l of the voting power and represents k -m of the value of the the documents actually refer to participation interests and participation securities etc the participation interests are intended to provide the economic and functional equivalent of direct ownership of specific securities including without limitation the full benefits_and_burdens_of_ownership of the securities the field has not challenged the taxpayer’s transfer of the participation interests as transfers of the securities for purposes of this memorandum we will refer to the transfers of the participation interests as the transfer of the securities postn-101162-06 total stock in inc inc’s class b stock owned by llc1 consists of approximately n - o of the value of the total stock in inc the only asset inc owns is a p limited_partnership_interest in lp the parties also structured put and call rights under which inc has the right to repurchase the class a stock after t years and bank sub has the right to sell the class a stock to inc after u years in any event inc must redeem the class a stock after v years bank sub’s amounts in liquidation and redemption are based on the amount of bank sub’s initial investment the amount of accrued but unpaid cumulative quarterly dividends and the participation amount based on a formula tied to m of the fair_market_value of the assets of inc to date the securities in lp have appreciated in value parent inc and bank sub also executed the stockholder’s agreement under which the parties agreed that for so long as bank sub is a stockholder of inc lp will be controlled by parent the transactions at issue occurred on the same date pursuant to binding contracts executed while parent owned all the stock in inc the service and the taxpayer agree that the transactions at issue should be viewed for tax purposes as follows parent sold its distressed securities to inc in exchange for inc stock inc contributed the securities to lp under sec_721 and parent sold class a stock to bank sub law and analysis sec_267 provides that no deduction shall be allowed in respect of any loss from the sale_or_exchange of property directly or indirectly between persons specified in any of the paragraphs of subsection b the preceding sentence shall not apply to any loss of the distributing_corporation or the distributee in the case of a distribution in complete_liquidation sec_267 provides in part that the persons referred to in subsection a are two corporations which are members of the same controlled_group as defined in subsection f a corporation and a partnership if the same persons own- a more than percent in value of the outstanding_stock of the corporation and b more than percent of the capital interest or the profits interest in the partnership sec_1_267_a_-1 provides that except in cases of distributions in corporate liquidations no deduction shall be allowed for losses arising from direct or indirect sales or exchanges of property between persons who on the date of the sale_or_exchange are within any one of the relationships specified in sec_267 see sec_1_267_b_-1 sec_267 provides that if in the case of a sale_or_exchange of property to the taxpayer a loss sustained by the transferor is not allowable to the transferor as a deduction by reason of subsection a or by reason of sec_24 of the internal_revenue_code_of_1939 and after date the taxpayer sells or there is a discrepancy in the facts between the documentation and the taxpayer’s presentation of the facts at least per the taxpayer’s memorandum indicating that the common_stock had approximately m of the value postn-101162-06 otherwise disposes of such property or of other_property the basis of which in his hands is determined directly or indirectly by reference to such property at a gain then such gain shall be recognized only to the extent that it exceeds so much of such loss as is properly allocable to the property sold or otherwise_disposed_of by the taxpayer sec_267 provides in part that for purposes of this section the term controlled_group has the meaning given to such term by sec_1563 except that- a more than percent shall be substituted for at least percent each place it appears in sec_1563 and b the determination shall be made without regard to subsections a and e c of sec_1563 and in the case of any loss from the sale_or_exchange of property which is between members of the same controlled_group and to which subsection a applies determined without regard to this paragraph but with regard to paragraph - a subsections a and d shall not apply to such loss but b such loss shall be deferred until the property is transferred outside such controlled_group and there would be recognition of loss under consolidated_return principles or until such other time as may be prescribed in regulations sec_1_267_f_-1 provides rules under sec_267 to defer losses and deductions from certain transactions between members of a controlled_group intercompany sales sec_1_267_f_-1 provides rules under sec_267 that apply to defer losses on intercompany sales between members of a controlled_group sec_1_267_f_-1 provides definitions and operating rules under which the definitions in b and the operating rules of j apply under this section with appropriate adjustments including the following sec_1_267_f_-1 provides that an intercompany sale is a sale exchange or other transfer of property between members of a controlled_group if it would be an intercompany_transaction under the principles sec_1_1502-13 determined by treating the references to a consolidated_group as references to a controlled_group and by disregarding whether any of the members join in filing consolidated_returns sec_1_267_f_-1 provides in part that corporations remain members of a controlled_group as long as they remain in a controlled_group relationship with each other and corporations become nonmembers with respect to each other when they cease to be in a controlled_group relationship with each other rather than by having a separate_return_year described in sec_1_1502-13 sec_1_267_f_-1 provides that if a transaction is engaged in or structured with a principal purpose to avoid the purposes of this section including for example by avoiding treatment as an intercompany sale or by distorting the timing of losses or deductions adjustments must be made to carry out the purposes of this section postn-101162-06 sec_1_1502-13 provides that in general an intercompany_transaction is a transaction between corporations that are members of the same consolidated_group immediately after the transaction sec_1_1502-13 provides that if a transaction is engaged in or structured with a principal purpose to avoid the purposes of this section including for example by avoiding treatment as an intercompany_transaction adjustments must be made to carry out the purposes of this section sec_1563 contains multiple definitions of a controlled_group_of_corporations including a parent-subsidiary group which is defined as one or more chains of corporations connected through stock ownership with a common parent_corporation if-- a 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 each of the corporations except the common parent_corporation is owned within the meaning of subsection d by one or more of the other corporations and b the common parent_corporation owns within the meaning of subsection d 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 at least one of the other corporations excluding in computing such voting power or value stock owned directly by such other corporations sec_1563 c a provides that for purposes of sec_1563 the term stock does not include nonvoting_stock which is limited and preferred as to dividends sec_1_267_f_-1 provides that under sec_267 s's loss or deduction from an intercompany sale is taken into account under the timing principles of sec_1_1502-13 intercompany_transactions between members of a consolidated_group treating the intercompany sale as an intercompany_transaction for this purpose i the matching and acceleration rules of sec_1_1502-13 and d the definitions and operating rules of sec_1_1502-13 and j and the simplifying rules of sec_1_1502-13 apply with the adjustments in paragraphs b and c of this section to reflect that this section-- a applies on a controlled_group basis rather than consolidated_group basis and b generally affects only the timing of a loss or deduction and not its attributes eg its source and character or the holding_period of property sec_1_267_f_-1 provides in part that under sec_267 s's losses and deductions are deferred until they are taken into account under the timing principles of the matching and acceleration rules of sec_1_1502-13 and d with appropriate adjustments for purposes of this section the adjustments to sec_1_1502-13 and d include the following iii transfer to a sec_267 or sec_707 related_person sec_1_267_f_-1 provides that to the extent s’s loss or deduction from an intercompany sale of property is taken into account under this section as a result of postn-101162-06 b’s transfer of the property to a nonmember that is a person related to any member immediately_after_the_transfer under sec_267 or sec_707 or as a result of s or b becoming a nonmember that is related to any member under sec_267 the loss or deduction is taken into account but allowed only to the extent of any income or gain taken into account as a result of the transfer the balance not allowed is treated as a loss referred to in sec_267 if it is from a sale_or_exchange by b rather than from a distribution sec_1_267_f_-1 ex provides as follows b timing under paragraph c iii of this section because the example sec_721 transfer to a related nonmember a facts s owns land with a basis of dollar_figure on january of year s sells the land to b for dollar_figure on july of year b transfers the land to a partnership in exchange for a interest in capital and profits in a transaction to which sec_721 applies p also owns a interest in the capital and profits of the partnership partnership is a nonmember that is a related_person under sec_267 and sec_707 s's dollar_figure loss is taken into account in year but only to the extent of any income or gain taken into account as a result of the transfer under sec_721 no gain_or_loss is taken into account as a result of the transfer to the partnership and thus none of s's loss is taken into account any subsequent gain recognized by the partnership with respect to the property is limited under sec_267 the results would be the same if the p group were a consolidated_group and s’s sale to b were also subject_to sec_1_1502-13 in the instant case parent’s sale of the securities to inc was an intercompany_transaction within the meaning of sec_1_1502-13 and an intercompany sale within the meaning of sec_1_267_f_-1 cf tracinda corporation and 111_tc_315 holding that sec_267 and the former regulations thereunder did not apply in the case of simultaneous sales by which mgm the seller left the group simultaneously with its sale of property and thus no longer owned the property sold concluding that the buyer tracinda and mgm were not members of the controlled_group immediately after the transaction viewing parent’s sale of the securities to inc as an intercompany_transaction and an intercompany sale is consistent with the purposes of sec_267 and the regulations thereunder under the facts of this case and the statutory and regulatory context governing the disallowance and deferral of losses under sec_267 it defeats the purposes of sec_267 to allow parent the loss on the sale under a taxpayer argument that parent and inc were not members of the same controlled_group immediately after the transaction within the meaning of sec_1_1502-13 and that the sale was not an intercompany_transaction or an intercompany sale in the context of the statute and regulations at issue and their intended purposes parent and inc were members of the same controlled_group at the time parent executed the binding contract to effect the sale of the securities to inc as well as immediately after the transaction in which parent sold the securities to inc postn-101162-06 additionally lp was a nonmember that was a related_person under sec_267 and sec_707 to parent and inc a sec_707 relationship exists between a partnership and a person where the person owns directly or indirectly more than of the capital interests or the profits interest in such partnership accordingly under sec_1_267_f_-1 parent’s loss on the sale of the securities to inc in the intercompany sale is treated upon inc’s transfer of the securities to lp as a disallowed loss that can only be used to offset any later gain on lp’s sale of the securities see also sec_1_267_f_-1 ex in other words under the sec_267 regulations the loss is treated as if the loss had occurred on a sale transacted directly between related_persons that is disallowed rather than deferred under sec_267 purpose of sec_267 the instant case is the specific type of case to which sec_267 and the regulations thereunder were intended to apply sec_267 and the regulations thereunder disallow or defer a loss on the sale of property between related parties where the seller retains control or ownership of the property sold see 17_tc_1030 aff’d 202_f2d_45 5th cir as the fifth circuit stated in moore in rejecting a taxpayer’s attempt to limit the application of the predecessor of sec_267 to a transaction what the statute aimed at and what it hit was the confection and carrying out as here of a sale at a loss taxwise when because of ownership or control there was no real sale and no real loss in the sense of a parting with real ownership and control of the property the subject of the transaction f 2d pincite the transactions at issue resulted in parent selling the securities at a loss to inc a related_person but retaining control of the securities as well as indirect ownership of approximately q by value of the securities through parent’s structured transfer of the securities to lp a related_person to parent and inc moreover the parties executed the stockholder’s agreement in which the parties including bank sub agreed that parent was to control lp after the sale of the class a stock to bank sub anti-avoidance rules under sec_1_267_f_-1 and sec_1_1502-13 even assuming arguendo that the instant case does not fall under sec_1_267_f_-1 we believe it falls under the anti-avoidance rules of sec_1_267_f_-1 and sec_1_1502-13 sec_1_267_f_-1 provides that if a transaction is engaged in or structured with a principal purpose to avoid the purposes of sec_267 including for example by avoiding treatment as an intercompany sale or by distorting the timing of losses or deductions adjustments must be made to carry out the purposes of sec_267 postn-101162-06 we believe the facts in the instant case present a strong set of facts in which to apply the anti-avoidance rules and the facts are even stronger than those set forth under sec_1_267_f_-1 ex in ex of those rules p owns all of the stock of s and b and the p group is a consolidated_group s has several historic assets including land with a basis of dollar_figure and value of dollar_figure the land is not essential to the operation of s’s business in year s sells the land to b for dollar_figure in year p transfers all of s's stock to newly formed x in exchange for a interest in x stock as part of a transaction to which sec_351 applies a principal purpose for p's transfer is to accelerate taking s's dollar_figure loss into account p has no plan or intention to dispose_of the x stock ex states that p's transfer accelerates a loss that otherwise would be deferred and an adjustment under the anti-avoidance rule_of sec_1_267_f_-1 is required thus s's loss is never taken into account additionally even if the sale between parent and inc is not otherwise an intercompany_transaction under the principles of sec_1_1502-13 we believe the sale should be treated as an intercompany_transaction under the anti-avoidance rules of sec_1_1502-13 for example sec_1_1502-13 ex provides an example in which members attempt to avoid intercompany_transaction treatment by having one member contribute property to a partnership that distributes that property to another member five and one-half years later the example indicates that the transactions will be recharacterized under anti-avoidance rules as an intercompany_transaction between the two members in the instant case the transactions are also structured in an attempt to avoid intercompany_transaction treatment and provide parent with a loss in avoidance of the sec_267 rules moreover parent will reacquire the class a stock in inc in t or u years or in any event in v years under the parties’ arrangement if parent’s sale of the securities to inc is treated as an intercompany_transaction under the anti-avoidance rules of sec_1_1502-13 parent’s loss on the sale of the securities to inc is disallowed under sec_1_267_f_-1 alternatively parent’s loss is disallowed under sec_1_267_f_-1 under sec_1_267_f_-1 adjustments must be made to carry out the purposes of sec_267 sale between related_persons for sec_267 purposes our understanding is that the taxpayer contends that parent and inc are not treated as members of the same group immediately after the transaction within the meaning of sec_1_1502-13 -- eg under step transaction principles in taxpayer’s view sec_267 does not apply to parent’s sale of the securities to inc because parent pre- arranged to sell the class a stock to bank sub after it sold the securities to inc and had inc transfer the securities to parent’s controlled_partnership however if the taxpayer construes immediately after the transaction to mean the time after which the sale of the class a stock to bank sub occurred then immediately after the transaction for this purpose must also mean the time after which the transfer of the securities to lp occurred thus even under this interpretation it seems appropriate that the loss should be disallowed under sec_267 that is parent owned the securities postn-101162-06 immediately before the transactions and lp a related_person to parent and inc under sec_267 and sec_707 owned the securities immediately after the transactions accordingly if parent’s loss is not otherwise disallowed under sec_1 f - c iii or under the anti-avoidance rules eg because the sale is not treated as an intercompany sale we believe the loss should still be disallowed under the anti- avoidance rules of sec_1_267_f_-1 by treating the loss for sec_267 purposes as if the loss had occurred on a sale transacted directly between related_persons in cases not applying to deferred losses from intercompany sales under sec_267 courts have held that the sec_267 related_party determination is made at the time of a binding contract see drake v commissioner 3_tc_33 aff’d 145_f2d_365 10th cir 40_tc_1028 aff’d 338_f2d_691 7th cir cf tracinda corporation and 111_tc_315 at the time of the binding contract to effect the sale parent is a related_person to inc under sec_267 and parent and inc are related_persons to lp under sec_267 and sec_707 treating the loss for sec_267 purposes as if the loss had occurred on a sale transacted directly between related_persons is consistent with sec_1_267_f_-1 which treats a deferred loss as a disallowed loss where the property is transferred to a nonmember related_person if parent or inc had directly sold the securities to lp the loss would have been disallowed under sec_267 and sec_707 moreover if the transaction were structured so that parent had sold the securities to inc and inc in turn then transferred the securities to lp without the accompanying sale of inc stock to bank sub the loss clearly would have been disallowed under sec_1_267_f_-1 accordingly if the loss is not disallowed under sec_1_267_f_-1 adjustments must be made under sec_1_267_f_-1 to ensure that parent does not avoid the application of these sections by interposing bank sub in the transactions where its principal purpose in doing so was to avoid the application and purpose of these sections attempt to circumvent the sec_267 rules on paper bank sub had of the voting power in inc stock however the facts indicate bank sub’ sec_50 voting power was illusory and designed to circumvent sec_267 cf 165_f3d_822 11th cir concluding that voting power must mean not only the power to elect a certain percentage of votes on the board_of directors but also the extent to which the directors and the board itself have the authority to manage the corporation’s business for example inc’s only asset was it sec_4 this approach is also consistent with sec_1_267_b_-1 sec_1_267_b_-1 provides in part that a ny transaction described in sec_267 between a partnership and a person other than a partner shall be considered as occurring between the other person and the members of the partnership separately therefore if the other person and a partner are within any one of the relationships specified in sec_267 no deduction with respect to such transactions between the other person and the partnership shall be allowed to the other person to the extent the related partner acquires an interest in any property sold or exchanged with the partnership by such other person at a loss postn-101162-06 p interest in lp and lp’s only assets were the securities and the cash transferred to it subsidiaries of parent which was the general_partner of lp and the majority shareholder of inc were the investment managers that were to control the investments in lp additionally bank sub executed the stockholder’s agreement with parent and inc under which the parties agreed that during the time that bank sub owned inc stock parent’s disregarded entities were to control the lp furthermore lp knew what it was going to do with the securities lp was to sell all the securities over a u-year period and place the money in government securities also bank sub’s class a stock constituted only about m of the total value of the stock in inc and bank sub was to receive a participation amount based on a formula tied to m of the value of inc’s assets consequently even though bank sub purportedly had l of the voting power of the stock in inc it is questionable whether bank sub‘s ownership of the class a stock in inc should prevent inc from being a controlled_group member for purposes of sec_1563 and sec_267 if bank sub’s class a stock had less than l of the voting power of the stock in inc so that parent’s stock in inc had more than l of the voting power of the stock in inc inc was clearly a controlled_group member for purposes of sec_1563 and sec_267 notwithstanding the sale of the class a stock to bank sub additionally even though parent structured the class b stock as nonvoting_stock that was limited and preferred as to dividends there is also an issue of whether the class b stock should be treated as stock for purposes of sec_1563 for example parent structured the class b stock to represent approximately n-o of the value of the stock in inc and parent owned all the common_stock in inc representing approximately k - m of the value of the stock in inc if the class b stock is treated as stock for purposes of sec_1563 inc was clearly a controlled_group member for purposes of sec_1563 and sec_267 notwithstanding the sale of the class a stock to bank sub overall under the facts of this case and the statutory and regulatory context governing the disallowance and deferral of losses under sec_267 it defeats the purposes of sec_267 to allow parent the loss on the sale of the securities postn-101162-06 taxpayer arguments the taxpayer argues that inc was not a member of the consolidated_group or controlled_group immediately after the transaction within the meaning of sec_1_1502-13 because at the time of parent’s exchange of the securities with inc parent had a binding contract to sell the class a stock to bank sub parent’s transfer of its distressed securities to inc in exchange for inc stock was not a sec_351 exchange because as a consequence of parent’s binding contract to sell the class a stock parent was not considered in control of inc immediately_after_the_exchange see eg 65_tc_1025 revrul_79_194 1979_1_cb_145 for purposes of sec_351 control as defined in sec_368 means the ownership of stock possessing at least percent of the total combined voting power of all classes of stock entitled to vote and at least percent of the total number of shares of all other classes of stock of the corporation however sec_351 and sec_267 have different purposes and even though a transferor’s binding contract to sell the transferee stock received in the exchange may cause the transferor to fail to control the transferee in applying sec_351 the transferor’s binding contract and later sale of the transferee stock may not cause the transferor to fail to control the property transferred in the exchange in applying sec_267 sec_351 provides rules that address whether a transaction is a tax-free_exchange under which a taxpayer recognizes no gain_or_loss on property transferred to a controlled_corporation whereas sec_267 provides rules that address whether a loss that is recognized on a sale of property should be allowed where a taxpayer recognizes a loss on property transferred to a corporation in a transaction that does not qualify under sec_351 the taxpayer does not obtain the loss unless sec_267 among other provisions allows the loss in providing nonrecognition treatment under sec_351 the underlying assumption is that the stock received in the exchange is substantially a continuation of the old investment_property transferred still unliquidated see eg sec_1_1002-1 there has been a mere change in the form of ownership of the transferor’s interest in the property since the transferor in the sec_351 exchange controls the corporation that now owns the property in disallowing a recognized loss under sec_267 the underlying assumption is that there has been no real sale and no real loss in the sense of a parting with real ownership and control of the property see moore supra where a taxpayer sells the property at a loss to a related_person and continues to control and indirectly own the property the focus of sec_351 is on whether the transferor controls the transferee corporation whereas the focus of sec_267 is on whether the seller through a related_party continues to control the property sold sec_267 is also concerned about losses created by sales structured between related persons-eg sec_482 is not easily applied postn-101162-06 in the instant case parent recognized a loss on its exchange of property for the inc stock because due to the binding contract to sell the class a stock to bank sub parent was not considered in control of inc immediately_after_the_exchange for purposes of sec_351 however parent retained control and indirect ownership of the property sold to inc in the exchange through its pre-arranged transfer of the property to its related partnership lp sec_267 and the regulations thereunder disallow parent’s loss certain other cases the taxpayer may also argue that the government’s position in the instant case is inconsistent with its positions in cases such as 422_f3d_1339 fed cir 347_f3d_173 6th cir 4_f3d_735 9th cir and 976_f2d_837 2nd cir we disagree in falconwood the federal_circuit interpreted the consolidated_return_regulations at issue to conclude that the consolidated_group remained in existence after the downstream_merger of the common parent and corporations remained connected through stock ownership with the surviving entity notwithstanding that the merger was part of a pre- arranged series of transactions that occurred on the same date that ended affiliation the government’s position in falconwood was that the initial downstream_merger could not be viewed in isolation but rather as part of a transaction as a whole under step transaction principles the government’s position in falconwood was based on the facts and the context of the regulation at issue and its intended purpose additionally in walt disney the ninth circuit held that the transfer of sec_38 property from one consolidated_group member to another group member as part of a d_reorganization in which the transferee member and thus the property left the group constituted a disposition under former sec_47 that generated itc recapture in that case the transfer of the property from the transferor member to the transferee member was part of a transaction in which the transferee member left the group through a distribution to the transferor’s shareholders under these facts and in the context of the statute and regulation at issue the transfers at issue were viewed the same as a direct transfer of the property to a third party if the transfers were not viewed this way a consolidated_group could easily circumvent the itc recapture requirement see f 3d pincite the government’s position in walt disney set forth in revrul_82_20 1982_1_cb_6 was that the transaction should be viewed as a whole and not as separate transactions because the transfer of the sec_38 property from one group member to the other member was a step in the planned transfer of the property outside the group as a result former sec_1_1502-3 relating to an exception for itc recapture for certain transfers of sec_38 property from one group member to another member did not apply the government’s position in walt disney was based on the facts and the context of the statute and regulation at issue and their intended purposes postn-101162-06 additionally the government’s positions in aeroquip-vickers and salomon which are cases similar to walt disney were also based on the facts and the context of the statute and regulation at issue and their intended purposes lastly the government’s position in the instant case is based on the facts and the context of the statute and regulations at issue and their intended purposes as discussed above it defeats the purposes of sec_267 to allow parent the loss under the facts of this case and the statutory and regulatory context governing the disallowance and deferral of losses under sec_267 case development hazards and other considerations --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- 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--------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------- -- postn-101162-06 this writing may contain privileged information any unauthorized disclosure of this writing may undermine our ability to protect the privileged information if disclosure is determined to be necessary please contact this office for our views please call --------------------- if you have any further questions sincerely _____________________________ mary e goode senior counsel branch office of associate chief_counsel corporate