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 fip b04 plr-138536-15 date date legend taxpayer ------------------------------------------------------------------------------------------------- ------------------------------------ state a -------------- dear --------------- this is in reply to your letter dated date requesting consent to taxpayer’s revocation of its election under sec_831 of the internal_revenue_code effective for the taxable_year beginning january ------- facts taxpayer was formed to provide affordable fire insurance to farmers located in state a taxpayer continues to operate as a mutual_insurance_company with a mission of providing comprehensive property and casualty insurance products for farmers and homeowners at affordable rates taxpayer elected to be taxed only on its taxable_investment_income pursuant to sec_831 taxpayer is embarking on a growth initiative to increase its number of policyholders and its premium revenue taxpayer is taking several steps to do this initiative including appointing new insurance agents to gain access and exposure to new customers and markets taxpayer has been a direct_seller of its own insurance products previously and believes this change to appointing agents will allow it to grow and compete in the current insurance market this business change will require taxpayer to retain and generate sufficient capital to invest in these measures and ensure its future success plr-138536-15 law and analysis sec_831 imposes a tax for each taxable_year on the taxable_income of every insurance_company other than a life_insurance_company sec_831 provides an alternative_tax to the tax imposed by sec_831 for certain insurance_companies the alternative_tax for these companies is a tax computed for each year by multiplying the taxable_investment_income defined in sec_834 of the company for the taxable_year by the rates in sec_11 sec_831 provides that the alternative_tax applies to every insurance_company other than a life_insurance_company if i the company’s net written premiums or if greater direct written premiums do not exceed dollar_figure and ii the company elects the application of sec_831 the alternative_tax for the taxable_year sec_110 of the technical_and_miscellaneous_revenue_act_of_1988 added the flush paragraph following sec_831 which states the election under clause ii shall apply to the taxable_year for which made and for all subsequent taxable years for which the requirements of clause i are met such an election once made may be revoked only with the consent of the secretary this clarification reflects congress’ intent that the election not be used as a means of eliminating tax_liability eg by making the election only for the years the taxpayer does not have net operating losses the sec_831 election is tax simplification for small companies s rep no 100th congress 2d sess taxpayer represents that it is changing its current business model that will increase policyholders and premium income taxpayer will also change from direct marketing of its policies to using agents to market its policies taxpayer represents it is not revoking its election as a means of eliminating tax_liability conclusion consent is hereby granted to taxpayer to revoke its sec_831 election effective for tax_year ------- provided that taxpayer does not make an election under sec_831 to be taxed on only its investment_income for any of the first five years following the year to which the consent relates the ruling contained in this letter is based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party this office has not verified any of the material submitted in plr-138536-15 support of the request for rulings and it is subject_to verification on examination 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 s requesting it sec_6110 of the code provides that it may not be used or cited as precedent a copy of this letter must be attached to any federal_income_tax return to which it is relevant in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely rebecca l baxter senior technician reviewer branch office of associate chief_counsel financial institutions products


office_of_chief_counsel internal_revenue_service memorandum number release date cc ita b04 saiskow preno-118697-05 uilc date june to john chinnapongse associate area_counsel sbse sacramento from robert m brown associate chief_counsel income_tax and accounting subject california paid family leave you have requested our views regarding the tax consequences of family temporary disability insurance ftdi payments made under california’s paid family leave program specifically you have asked whether the amounts withheld from employees’ paychecks for ftdi are deductible under sec_164 of the internal_revenue_code and whether amounts paid to an individual under the program are includible in gross_income under sec_85 if a an individual does not itemize deductions on a federal_income_tax return or b an individual itemizes deductions on a federal_income_tax return facts effective date the state of california amended its state unemployment insurance code to include ftdi as a component of its disability insurance program ftdi payments are made to eligible individuals who are unable to work because they are caring for a seriously ill or injured family_member or bonding with a minor child within one year of the birth or placement of the child in connection with foster care or adoption thirteen million californians will be covered by this program preno-118697-05 ftdi payments will be paid from the state disability fund and will be funded entirely by employee contributions the payroll deductions are mandatory eligible individuals can receive up to weeks of ftdi payments in a 12-month_period an individual is not eligible to receive an ftdi payment for the same days the individual receives or is entitled to receive unemployment_compensation disability insurance or other cash benefits from the state any other state or the federal government issue are the amounts withheld from employees’ paychecks under this program deductible under sec_164 holding such amounts are deductible by the employee under sec_164 for the taxable_year in which paid_or_accrued but only if the employee’s deductions are itemized in computing taxable_income under sec_63 analysis sec_164 provides in part that state income taxes shall be allowed as a deduction for the taxable_year in which they are paid_or_accrued principles developed under federal_law not state interpretations or designations determine whether a payment falls within the meaning of terms ‘taxes’ and ‘income taxes’ as used in federal statutes see revrul_79_180 1979_1_cb_95 revrul_76_215 1976_1_cb_194 revrul_71_49 1971_1_cb_103 and revrul_61_152 1961_2_cb_42 the word ‘taxes’ has been defined as an enforced contribution exacted pursuant to legislative authority in the exercise of the taxing power and imposed and collected for the purpose of raising revenue to be used for public or governmental purposes and not as a payment for some privilege granted or service rendered see revrul_77_29 1977_1_cb_44 revrul_71_49 revrul_61_152 and revrul_58_141 1958_1_cb_101 further it is the position of the service that a tax must be paid to a government levying the tax to certain public corporations created by that government for a public purpose or to their agents see revrul_74_525 1974_2_cb_411 revrul_74_58 1974_1_cb_180 and revrul_71_49 in revrul_81_191 1981_2_cb_49 employees were required to contribute to the rhode island temporary disability insurance benefit fund pursuant to the rhode island temporary disability insurance act act the employer was required to withhold the amount of such contributions from the employees’ wages at the time the wages were paid if the employer failed to withhold the contributions of any employee within the preno-118697-05 time provided by the act the employer became solely liable for such contributions under the act revrul_81_191 holds that the contributions withheld from the wages of an employee are state ‘income taxes’ that are deductible by the employee under sec_164 provided that the employee itemizes deductions in computing taxable_income revrul_81_191 reasons that the employee contributions to the fund are ‘taxes’ because they are exacted pursuant to legislative authority in the exercise of the taxing power of the state and they are imposed and collected by the state for the purpose of raising revenue to be used for governmental functions that serve public purposes the ruling further reasons that the employee contributions to the fund are ‘income taxes’ because they are measured by wages paid during the calendar_year for similar results and rationale see revrul_81_192 1981_2_cb_50 new york revrul_81_193 1981_2_cb_52 new jersey and revrul_81_194 1981_2_cb_54 california in california the contributions under its ftdi program are taxes the law requires employers to withhold a portion of each employee’s wages at the time the wages are paid these withheld and contributed amounts are exacted pursuant to legislative authority in the exercise of the taxing power of the state of california and are imposed and collected for the purpose of raising revenue to be used for a governmental function that serves public purposes namely to allow individuals to take time off from work to care for a seriously ill child parent or domestic partner or to bond with a new child moreover the amounts withheld from the employees’ wages are ‘income taxes’ because they are measured by wages paid during the calendar_year see revrul_81_191 and 68_tc_670 consequently amounts withheld from the wages of an employee for contribution under this program are state income taxes and therefore shall be deductible by the employee under sec_164 for the taxable_year in which paid_or_accrued however such amounts are deductible by an employee only if the employee’s deductions are itemized in computing taxable_income under sec_63 if you have any questions about issue please contact erika reigle at issue are ftdi payments includible in gross_income under sec_85 if a an individual does not itemize deductions on a federal_income_tax return or b an individual itemizes deductions on a federal_income_tax return preno-118697-05 holding individuals who do not itemize deductions include only the amount in excess of their contributions in income individuals who itemize deductions include the full amount of the ftdi payment in income but take an income_tax deduction equal to the amount of their contributions analysis sec_85 provides that gross_income includes unemployment_compensation under sec_85 unemployment_compensation is defined as any amount received pursuant to a state or federal government program which is in the nature of unemployment_compensation sec_85 does not define in the nature of unemployment_compensation however the house report provides that unemployment_compensation programs are those designed to provide cash benefits on a regular basis to normally employed workers during limited periods of unemployment h_r rep pincite prior to enactment of sec_85 the service taxed unemployment_compensation benefits received under private plans but exempted those received under a governmental_plan as a social welfare_benefit in explaining the reason for the change the committee on ways and means stated unemployment_compensation paid under a government program should be includible in gross_income because such benefits are in substance a substitute for taxable wages h_r rep pincite the ftdi payments provide a substitute for taxable wages and are in the nature of unemployment_compensation this conclusion is not changed by the determination of how an individual prepares his or her individual_income_tax_return however based on sec_1_85-1 of the employment_tax regulations the amount an individual reports as gross_income is affected by whether or not the individual itemizes deductions sec_1_85-1 provides if a governmental unemployment_compensation program is funded by an employee contribution which is not deductible by the employee an amount_paid to such employee under the program is not to be considered unemployment_compensation until an amount equal to the total nondeductible_contributions paid_by the employee to such program has been paid to such employee thus in essence if an individual does not take an income_tax deduction equal to his or her contributions to the governmental_plan only amounts in excess of the individual’s basis in the fund are includible in gross_income conversely if an individual does deduct his or her contribution to the governmental_plan the entire amount of the payment is includible in gross_income this provides equal tax treatment to each category of filer those individuals who do not itemize deductions include only the amount in excess of their contributions in income those individuals who do itemize deductions include the full amount of the preno-118697-05 ftdi payment in income but take an income_tax deduction equal to the amount of their contributions thus the net result is that each individual is taxed on only the amount of the ftdi payment that is in excess of his or her contribution if you have any questions about this issue please contact -----------------at -------------- --- ------- we hope this information is helpful for any other questions please contact ----------- -- ------------at --------------------


internal_revenue_service department of the treasury number release date index numbers legend washington dc person to contact telephone number refer reply to cc psi plr-123123-02 date date estate executor a b dear this letter responds to a letter dated date submitted on behalf of the estate requesting an extension of time pursuant to sec_301_9100-1 through of the procedure and administration regulations for the estate to make an election under sec_663 of the internal_revenue_code facts the information submitted discloses that estate files its income_tax return on a fiscal_year basis the estate’s executor made a distribution in the amount of dollar_figurea distribution within days of the estate’s taxable_year ending b the executor intended to file a sec_663 election but due to inadvertence the sec_663 election for the taxable_year was not timely filed law analysis sec_663 provides that if within the first days of any taxable_year of an estate_or_trust an amount is properly paid or credited such amount shall be considered paid or credited on the last day of the preceding_taxable_year provided that the plr -123123-02 executor of the estate or the fiduciary of the trust so elects in such manner and at such time as the secretary prescribes by regulations sec_1 b - a of the income_tax regulations provides that if a_trust return is required to be filed for the taxable_year of the trust for which the election is made the election shall be made in the appropriate place on the return the election shall be made not later than the time prescribed by law for filing the return including extensions thereof the election shall become irrevocable after the last day prescribed for making it under sec_301_9100-1 the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the code except subtitles e g h and i sec_301_9100-1 defines the term regulatory election as including an election whose due_date is prescribed by a regulation published in the federal_register sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make a regulatory election sec_301_9100-1 sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides extensions of time for making elections that do not meet the requirements of sec_301_9100-2 requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-3 conclusion based on the facts submitted and representations made we conclude that the estate has satisfied the requirements of sec_301_9100-1 and sec_301_9100-3 consequently the estate is granted an extension of time of days from the date of this letter to make an election under sec_663 to treat the distribution as an amount that was properly paid or credited on b within the extension period the estate must file an amended income_tax return for its taxable_year ending b with the appropriate service_center with a copy of this letter attached a copy is enclosed for that purpose except as specifically set forth above we express or imply no opinion concerning the federal tax consequences of the facts described above under any other provision of the code specifically we express or imply no opinion concerning whether the estate is eligible to make the election pursuant to a power_of_attorney on file with this office a copy of this letter is being sent to the estate this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent sincerely s heather maloy associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes cc


internal_revenue_service national_office technical_advice_memorandum date number release date index no case mis no tam-107507-00 cc ita b5 taxpayer’s name taxpayer’s address taxpayer's identification no years involved date of conference date legend m n condominium association intermediary lessee property property property property property purchaser individually or collectively related_party taxpayer issue whether two multi-party exchange transactions to which the taxpayer was party will be denied sec_1031 nonrecognition treatment as exchanges which were part of a transaction or series of transactions structured to avoid the purposes of sec_1031 conclusion each of the taxpayer’s multi-party exchange transactions was part of a transaction series of transactions structured to avoid the purposes of sec_1031 accordingly sec_1031 nonrecognition treatment is denied each of the exchanges facts in the taxable_year involved the taxpayer owned investments in real_property and operated a number of different businesses the related_party operated a retail business through a number of stores it developed and or owned some of the real_property on which its stores were located the taxpayer owned m percent of the stock of related_party members of two families that owned the stock of the taxpayer owned n percent of the stock of the related_party taxpayer and the related_party were related parties within the meaning of sec_267 and sec_1031 exchange the taxpayer owned a fee simple in a high-rise residential_rental_property property based on its belief that there was an oversupply of residential units that would persist over the long-term the taxpayer decided to dispose_of property to avoid current recognition of taxable gain on the disposition the taxpayer intended to structure the disposition as a like-kind_exchange consistent with that objective the taxpayer executed a letter of intent for the purchase of two properties property and property from the related_party at mutually agreeable prices subject_to a four party exchange the taxpayer’s basis in property was less than percent of the amount_realized from the sale of the property the related_party had acquired a parcel of land for development in it subdivided the parcel into one large parcel property and two small parcels for commercial use property the small parcels were leased or held for lease to others a shopping center which included one of related party’s stores was developed on property to finance the development of property the related_party negotiated a borrowing agreement with its bank the agreement secured_by the related party’s real properties allowed related_party to borrow up to a specified maximum amount during the period subsequent to the related party’s business experienced heightened competition from well-capitalized local and national retailers during the period related_party closed two of its stores in at a time when its borrowing agreement with its bank was approaching its upper limit related_party negotiated a percent increase in the maximum level of funds available to it under the agreement the information provided included a statement that the related_party was having trouble servicing its debt that information also indicated that approximately percent of the total principal_amount of its bank debt was due in date percent in date and the balance in date based on concerns about the slowing economy increased competition and the continued growth of its bank debt related_party decided to sell property the owner of property had the right to restrict the amount of retail business of a specified type that could be conducted on an adjoining property that competes with the shopping center on property and specifically with related party’s store on property as majority shareholder of related_party the taxpayer indicated that it had an economic_interest in acquiring property in order to control the amount of competition for the related party’s store property was adjacent to another property on which the related_party had a store the two properties shared a parking lot in the past the arrangement for parking had been a source of difficulty between the ground lessee of property and the related_party the taxpayer as majority shareholder of related_party had an interest in acquiring property since the long-term plan for that property could significantly impact the operations of related party’s store on the adjacent property on date before the taxpayer listed_property for sale it executed a letter of intent to purchase property and property from the related_party the related_party intended to use the sales proceeds to pay down its debt the letter provided that the sale was subject_to a four-party exchange the taxpayer had a low basis in property and wanted to avoid gain recognition by use of a like-kind_exchange on date the taxpayer signed a contract to sell property to the purchaser purchaser contemplated conversion of the property to a condominium and sale of the units in as is condition the sales contract stated that the taxpayer intended to transfer property by means of a deferred_exchange under sec_1031 the contract provided that the closing on property would be simultaneous with the closing of the exchange transaction closing was to take place between date and date as evidence of a weakening residential rental market which prompted its interest in selling property the taxpayer noted that the occupancy rate of property dropped progressively from percent in date to percent in october percent in january percent in date and percent in date the information did not indicate whether the trend in the occupancy rates was representative of the occupancy rates for comparable rental properties in the area in which property was located it also did not indicate whether the occupancy rate was significantly impacted by the required notice to tenant sec_120 days in advance of the end of their leases of the intended conversion of the property to a condominium the information provided indicated that the purchaser intended to convert the property to condominium ownership in as is condition the purchaser’s obligations under the contract were contingent upon a due diligence period its ability to obtain financing for percent of the purchase_price within a specified period and receipt of satisfactory reports from various building engineers as a result of purchaser’s inability to obtain financing within the specified period and a weaker than anticipated response from the condo conversion notices the taxpayer and purchaser amended the sales contract to reflect a price reduction the price reduction was for an amount that represented approximately percent of the sales_price in the initial contract the contract as amended was also subject_to purchaser obtaining financing of percent of the purchase_price on specified terms within a specified period on date the taxpayer’s board_of directors approved the sale of property for the sales_price indicated in the amended sales contract in a date letter to the purchaser a lender indicated that it was willing to consider financing purchaser’s acquisition of property if the taxpayer would provide a limited guaranty of approximately percent of the principal_amount of the loan the principal_amount of the loan was to be for an amount dollar_figure in excess of the sales_price as amended of property on date the taxpayer and purchaser extended the closing date to date on date the taxpayer entered into an exchange_agreement with intermediary the contract for the sale of property was assigned to the intermediary on date taxpayer purchaser and the lender executed a limited guaranty whereby taxpayer guaranteed_payment of a portion of the financing to be provided to purchaser although the closing on property did not take place when on date when scheduled the closing date was not formally extended the closing took place on date the same date as the closings on the related party’s sales of property and property to the intermediary for transfer to the taxpayer as replacement properties the taxpayer did not recognize the gain realized on the sale of property the related_party reported the gain realized on the sale of property the loss sustained on the sale of property was deferred in accordance with the provisions of sec_267 exchange the taxpayer owned the fee in a parcel of land that was subject_to a long-term ground lease to lessee property the lessee’s leasehold interest was subject_to a sublease to the condominium association of the condominium constructed on the land on date the board_of directors of the condominium association contacted the taxpayer concerning the potential conversion of the condominium association’s leasehold interest to a fee the taxpayer advised the board_of directors of the condominium association that it would only negotiate with the lessee and not the condominium association or its members after a period of negotiation the taxpayer and the lessee reached an agreement which provided for sale of the taxpayer’s fee to the lessee the agreement was contingent upon the lessee obtaining a binding commitment from the condominium association to purchase the interest on terms acceptable to the lessee the agreement was also contingent upon the condominium association having a firm financing commitment in place the sales_price which was determined as if the fee were not encumbered by the ground lease approximated the assessed value of the fee for real_estate_taxes the agreement was subsequently amended to provide that the taxpayer’s obligation to sell its interest in the fee to the lessee was conditioned upon the taxpayer consummating a sec_1031 exchange in an date letter of intent addressed to the taxpayer lessee offered to purchase property in that letter lessee offered to cooperate with the taxpayer so that the taxpayer could effectuate a tax deferred_exchange the taxpayer had a low basis in property and wanted to avoid gain recognition by use of a like-kind_exchange the deadline for the condominium association’s provision to the lessee of a binding commitment to purchase the fee which the lessee was to acquire from the taxpayer was repeatedly extended from date to date to date and date similarly the original closing date of date was extended to date to date and date although the material does not provide specific reasons for each of the extensions it includes a general statement to the effect that the extensions were the result of the contract conditions not being satisfied on date the taxpayer the lessee and the condominium association executed an assignment assumption and release agreement substituting the condominium association for the lessee so that the taxpayer and the condominium association could negotiate and consummate any sale directly between each other under the terms of the agreement the condominium association could cancel the proposed purchase if by date it had not obtained an executed sale agreement acceptable to both parties a firm financing commitment to purchase the taxpayer’s interest and a binding commitment from a specified percentage of condominium unit owners to purchase the leased fee interest in the land from the condominium association despite the fact that the conditions specified in the assignment assumption and release agreement were not fulfilled by the date deadline and the absence of an extension of that deadline or the date closing date a sales contract was signed on date the taxpayer’s board_of directors approved the sale on date the contract contained conditions similar to those included in the assignment assumption and release agreement and specified date as the closing date the closing date was subsequently extended to date to allow the condominium association time to satisfy the conditions of the contract the additional time was not needed on date the taxpayer’s board_of directors approved the sale of property and related party’s board_of directors approved the sale of property the closing on the sale of property to the condominium association and the intermediary’s application of the sales proceeds and additional funds provided by the taxpayer to purchase property from related_party took place on date the taxpayer represents that it always intended to have a deferred_exchange and that a direct exchange was never considered the taxpayer had previously engaged in sec_1031 exchanges in and applicable law sec_1031 of the internal_revenue_code provides that no gain_or_loss is recognized on the exchange of property held for productive use in a trade_or_business or for investment if such property is exchanged solely for property of like_kind which is to be held either for productive use in a trade_or_business or for investment sec_1031 provides that the basis_of_property acquired in a like-kind_exchange is the same as that of the property exchanged decreased by the amount of any money received by the taxpayer and increased in the amount of gain or decreased in the amount of loss to the taxpayer that was recognized on such exchange sec_1_1031_k_-1 of the regulations establishes various safe harbors for deferred exchanges which provide that a taxpayer is not in actual or constructive receipt of money or other_property not of like-kind for purposes of sec_1031 one of the safe harbors listed in paragraph g is that for a qualified_intermediary sec_1_1031_k_-1 of the regulations defines a qualified_intermediary as a person who a is not the taxpayer or a disqualified_person and b enters into a written_agreement with the taxpayer the exchange_agreement and as required by the exchange_agreement acquires the relinquished_property from the taxpayer transfers the relinquished_property acquires the replacement_property and transfers the replacement_property to the taxpayer sec_1_1031_b_-2 of the regulations provides that in the case of simultaneous transfers of like-kind properties involving qualified intermediaries as defined in sec_1_1031_k_-1 the qualified_intermediary is not considered the agent of the taxpayer for purposes of sec_1031 in such a case the transfer and receipt of property by the taxpayer is treated as an exchange sec_1031 provides that if a taxpayer exchanges property with a related_person resulting in nonrecognition_of_gain_or_loss under this section with respect to the exchange determined without regard to this subsection and within two years of the date of the last transfer which was part of such exchange the related_person or the taxpayer disposes of the property received in the exchange there shall be no nonrecognition_of_gain_or_loss under sec_1031 any gain_or_loss required to be recognized by the taxpayer by reason of sec_1031 shall be taken into account as of the date such latter disposition occurs sec_1031 provides that for purposes of paragraph f there shall not be taken into account any disposition a after the earlier of the death of the taxpayer or the death of the related_person b in a compulsory or involuntary_conversion within the meaning of sec_1033a if the exchange occurred before the threat or imminence of such conversion or c with respect to which it is established to the satisfaction of the secretary that neither the exchange nor such disposition had as one of its principal purposes the avoidance of federal_income_tax sec_1031 provides that the term related_person means any person bearing a relationship to the taxpayer described in sec_267 or sec_707 sec_1031 provides that sec_1031 shall not apply to any exchange which is part of a transaction or series of transactions structured to avoid the purposes of sec_1031 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 sec_267 includes two corporations which are members of the same controlled_group as defined in subsection f as a relationship referred to sec_267 sec_267 provides that for purposes of sec_267 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 certain insurance_companies and e c stock owned by certain employees’ trusts described in sec_401 of sec_1563 sec_267 provides that in the case of any loss from the sale_or_exchange of property between members of the same controlled_group and to which subsection a applies subsection a and d shall not apply to such loss but 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 by regulations analysis examination proposed denial of nonrecognition treatment for the taxpayer’s multi-party exchanges based on the application of sec_1031 the multi-party exchanges facilitated the shifting of the taxpayer’s low basis in its relinquished_property property and property to the replacement_property propertie sec_2 and which had been owned by the related_party prior to the transactions that included the exchanges the transactions facilitated the taxpayer related_party controlled group’s reduction in its investment in real_property and application of amounts realized from the sale of the taxpayer’s relinquished_property to reduction of the related party’s bank debt the consequences of the transactions were those to which sec_1031 is specifically addressed ie basis shifting and cashing out of investments through transactions series of transactions which involve an exchange and related parties for the reasons set forth below we agree with examination’s determination the most frequently cited rationale for nonrecognition_of_gain_or_loss on exchange of like-kind properties is continuity of investment in circumstances where a taxpayer has not cashed-out an investment recognition of gain_or_loss is not appropriate see h_r rep no 101st cong 1st sess h_r rep no 101st cong 1st sess indicates that the committee was aware that related parties engaged in like-kind_exchanges of high basis property for low basis property in anticipation of the sale of the low basis property in order to reduce or avoid the recognition of gain on a subsequent sale of the low basis property the committee also took note of the fact that the installment_sale provisions addressed taxpayers’ use of related_party installment_sales of low basis property to avoid current recognition of income on a second_disposition of the property to an unrelated party sec_453 provides in general if any person disposes of property to a related_person the first_disposition and within two years of the first_disposition and before the person making the first_disposition receives all payments with respect to such disposition the related_person disposes of the property the second_disposition the amount_realized on the second_disposition shall be treated as received at the time of the second_disposition by the person making the first_disposition the effect of sec_453 is to treat the taxpayer and related_party as if they were a single economic unit if the amount of the payments received with respect to the second_disposition is in excess of the amount of the payments taken into account with respect to the first_disposition the excess is treated as if it were a payment with respect to the first_disposition the gain inherent in such excess is required to be recognized as the economic unit has cashed out that portion of its investment in the property which was sold continued availability of the installment_method for the related_party sale would facilitate tax_avoidance ie the taxpayer would defer the tax on the related_party installment_sale while a second_disposition for cash would result in no gain absent sec_453 the taxpayer could structure the installment_sale so no principal payments would be due and no income recognized until some distant future date the time value of the investment return on the tax savings could fund the eventual tax payment sec_1031 is patterned on sec_453 the committee believed a related_party exchange which was followed shortly thereafter by a disposition of the property received in the exchange should not be accorded nonrecognition treatment h_r rep no 101st cong 1st sess denial of nonrecognition treatment for the exchange involved in such transactions would eliminate the potential for basis shifting which facilitated nonrecognition of gain on the subsequent disposition of the property received in the exchange sec_1031 provides that certain dispositions will not be taken into account for purposes of sec_1031 the excepted dispositions include a a disposition after the earlier of the death of the taxpayer or the death of the related_person b a compulsory or involuntary_conversion within the meaning of sec_1033 if the exchange occurred before the threat or imminence of such conversion or c a disposition with respect to which it is established to the satisfaction of the secretary that neither the exchange nor such disposition had as one of its principal purposes the avoidance of federal_income_tax house conf_rep no 101st cong 1st sess indicates that the senate amendment was the same as the house bill except that the non-tax avoidance exception generally would apply to a transaction involving certain exchanges of undivided interests dispositions in nonrecognition transactions and transactions that do not involve the shifting of basis between properties the taxpayer advanced a number of arguments in support of the position that its two exchange transactions are entitled to nonrecognition treatment under sec_1031 first argument the application of sec_1031 is limited to circumstances in which an exchange described in sec_1031 and b and a sec_1031 disposition would have been feasible the taxpayer maintains that direct exchanges-subsequent sales similar to those described in h_r rep no 101st cong 1st sess were not feasible in its circumstances and consequently it and related_party were not the kind of related parties to whom the related_party rules were intended to apply the position advocated by the taxpayer would interpret sec_1031 as if it only applied to transactions structured to avoid a direct related_party exchange and then only if such transactions would have been feasible in circumstances which were the result of the taxpayer’s actions and planning by its express terms sec_1031 denies nonrecognition treatment to any exchange that is part of a transaction series of transactions structured to avoid the purposes of sec_1031 the focus of sec_1031 is avoidance of the purposes of sec_1031 rather than avoidance of a specific type of transaction the purpose of sec_1031 as indicated in the legislative_history is to deny nonrecognition treatment to any exchange other than the direct exchanges specifically addressed in sec_1031 that is part of a transaction series of transactions which involves related parties and is structured to avoid the purposes of sec_1031 eg denial of nonrecognition treatment for any exchange that is part of a transaction series of transactions that involve basis shifting cashing out of an investment reduction or avoidance of gain or acceleration of losses by its express terms sec_1031 denies sec_1031 nonrecognition treatment to any exchange which is part of a transaction structured to avoid the purposes of sec_1031 the exchange need not be a direct related_party exchange consequently a position that sec_1031 only applies in circumstances where a direct related_party exchange-subsequent sale would have been feasible would unwarrantedly restrict the application of sec_1031 on the basis of circumstances that have little if any relationship to the purposes of that section there is no authority for such a position even though the feasibility of a direct related_party exchange-subsequent sale is not a criterion for application of sec_1031 the information provided would not support a conclusion that such transactions were not feasible in the circumstances although the terms and conditions of a direct exchange may have differed from those agreed upon in anticipation of a deferred_exchange a direct exchange was possible the taxpayer asserts that deteriorating real_estate market conditions and various contingencies or escape clauses in the letters of intent and sales contracts for the relinquished properties increased the risks associated with the transactions unrelated purchasers of the properties might attempt to negotiate price reductions or withdraw from the purchase of the relinquished properties from the related_party after a direct exchange a direct exchange would have been perceived as an attempt to shift those perceived risks to the related_party and its bank which was also the taxpayer’s bank the transactions would have adversely affected both the taxpayer’s and related party’s banking relationships as well as the related party’s relationship with its minority shareholders the members of the taxpayer’s board_of directors who were also members of the related party’s board_of directors may have been subject_to conflict of interest charges if the transactions produced disappointing results based on these considerations the taxpayer argues that it and the related_party were precluded from acting as related parties and a single_taxpayer for those same reasons the taxpayer stated that a direct exchange-subsequent sale was not even considered a possibility had any such plan been suggested it would have been rejected the fact the sale of each of the taxpayer’s relinquished properties was interdependent with and conditioned upon the taxpayer consummating a like-kind_exchange and the simultaneous closings on sale and exchange transactions series of transactions belies the taxpayer’s position the taxpayer described each of the contractual agreements between the parties as a mutually interdependent part of an integrated_plan each transaction was contingent upon the successful completion of the other transactions direct exchanges-subsequent sales also could have been structured as mutually interdependent transactions with simultaneous closings if additional assurance of performance by the unrelated purchasers of the relinquished properties had been desired the related_party could have required the unrelated purchasers to provide such assurance the direct related_party exchanges-simultaneous dispositions need not have resulted in constructive receipt of the sales proceeds by the taxpayer the related_party could have been the seller of the taxpayer’s relinquished properties which it received in the direct exchange the related party’s sales could have been interdependent with and conditioned upon the direct exchange in the same manner that the taxpayer’s transfer of its relinquished properties to the intermediary and the intermediary sales of those properties were conditioned upon the taxpayer’s ability to consummate a like-kind_exchange the taxpayer could have had no right to sales proceeds so there would have been no issue concerning constructive receipt with respect to the taxpayer the information submitted does not provide any support for the taxpayer’s statement that direct related_party sales-subsequent dispositions would have adversely affected the relationship of either the taxpayer or the related_party with its bank s there is no evidence that the bank s had any input concerning the structure of the transactions mutually interdependent direct related_party exchanges-subsequent sales could have precluded shifting of risk from the taxpayer to the related_party and need not have adversely affected the related party’s relationship with its minority shareholders the agreement could have provided that the exchanges would be conditioned upon the sales and would not take place if the sales did not occur there would have been no risk shifting to the related_party or its minority shareholders although the taxpayer states that direct exchanges-subsequent sales would have presented additional risk because of the declining real_estate market the information provided does not establish a basis for a position that mutually interdependent direct exchanges-subsequent sales similar to those described above could not have been structured within the considerable period between initiation of negotiations and closing of the transactions that actually took place although the taxpayer stated that direct related_party exchanges-subsequent sales would have exposed individuals who were members of the boards of both the taxpayer and the related_party to potential conflict of interest charges such transactions would not appear to have presented any greater potential for such allegations than that posed by the actual transactions for the reasons indicated above mutually interdependent direct related_party exchanges-subsequent sales need not have shifted risk to the related_party or its minority shareholders the information provided indicates that the properties involved in the transactions were subject_to independent appraisals and that the transactions took account of the fair_market_value of the properties there is no reason to contest the taxpayer’s statement that direct exchanges- subsequent sales were not even considered by the parties the taxpayer is sophisticated in tax matters and had been involved in prior like-kind_exchanges given this knowledge it is almost certain that the taxpayer knew that direct exchanges- subsequent dispositions would have resulted in denial of nonrecognition treatment the related_party would have been denied nonrecognition treatment on the exchanges because the properties received in the exchange would have been sold rather than held for use in a trade_or_business or for investment the taxpayer would have been denied nonrecognition treatment for the exchanges by reason of sec_1031 the taxpayer also knew that the objective of avoiding current tax on the disposition of property and property was dependent upon avoiding the application of sec_1031 that knowledge and prior experience with like-kind_exchanges provides support for a position that the subject transactions were structured to avoid the purposes of sec_1031 such a position would be consistent with the taxpayer’s attribution of the structure of the subject transactions to tax planning and the description of each of the contractual agreements between the parties as a mutually interdependent part of an integrated_plan each transaction was contingent upon the successful completion of the other transactions there is no indication that the taxpayer ever contemplated acquisition of replacement_property other than the property of the related_party it executed a letter of intent for the purchase of some of the properties before negotiating the sale of its relinquished_property the taxpayer did not cite any authority in support of its position that criteria other than the relationship of the parties involved are relevant to application of a provision such as sec_1031 that provides specific treatment for related parties sec_1031 provides a definition of the term related_party for purposes of sec_1031 sec_1031 provides that for purposes of sec_1031 the term related_person means any person bearing a relationship to the taxpayer described in sec_267 or sec_707 even if the taxpayer had demonstrated circumstances that precluded it and the related_party from acting as related parties there is no authority that would support an exception from the related_party provisions the application of the related_party rules is not dependent upon parties acting as related parties sec_267 denies deduction of a loss sustained on a related_party sale regardless of the fact that the terms of sale were arms length congress imposed an absolute prohibition against deduction of losses on sale of property to a related_party because the property remained in the related group after the sale irrespective of whether the sale was bona_fide voluntary or involuntary or direct or indirect h_r 73d cong 2d sess c b part s rept 73d cong 2d sess c b part in order to implement congressional intent for an absolute prohibition of deduction of losses on related_party sales it is essential that no exceptions from the sec_267 attribution_rules be allowed the fact that sec_1031 provides for application of the attribution_rules of sec_267 and that sec_1031 provides specific exceptions from the treatment indicated by sec_1031 for direct related_party sales- subsequent exchanges evidences congressional intent that the exceptions be limited to those provided for in sec_1031 under the taxpayer’s view application of sec_1031 would require a preliminary determination whether a direct exchange-subsequent sale would have been feasible in the circumstances that existed at the time the transactions took place circumstances that to a significant extent were created by the taxpayer’s planning there is no authority for such a position such an interpretation would allow related parties to easily avoid the application of sec_1031 by using an agreement that solely provided for a deferred_exchange it would restrict the application of sec_1031 on the basis of an irrelevant criterion second argument the taxpayer’s multi-party exchanges are not subject_to sec_1031 since the application of that section is limited to circumstances that involve a direct or indirect related_party exchange the taxpayer’s exchange transactions involve related_party sales of replacement_property for its exchange transactions with the intermediary sec_1031 does not apply in the absence of a direct or indirect related_party exchange the taxpayer believes the senate_finance_committee report’s inclusion of an example which involves an indirect related_party exchange is indicative that the application of sec_1031 is limited to circumstances that involve a direct or indirect related_party exchange it maintains sec_1031 has no application to its multiparty exchanges because those transactions involved related_party sales ie the related party’s sales of property property and property to the taxpayer as replacement_property for its exchange transactions with the intermediary rather than direct or indirect related_party exchanges the focus of sec_1031 is any exchange which is part of a transaction series of transactions structured to avoid the purposes of sec_1031 rather than transactions structured to avoid a transaction or a specific type of transaction the purpose of sec_1031 as indicated in the legislative_history is to deny nonrecognition treatment to any exchange other than the direct exchanges specifically addressed in sec_1031 that is part of a transaction series of transactions which involves related parties and is structured to avoid the purposes of sec_1031 eg denial of nonrecognition treatment for any exchange that is part of a transaction series of transactions that involve basis shifting cashing out of an investment reduction or avoidance of gain or acceleration of losses by its express terms sec_1031 denies sec_1031 nonrecognition treatment to any exchange which is part of a transaction structured to avoid the purposes of sec_1031 the exchange need not be a direct related_party exchange the example in the senate_finance_committee report is indicative that reordering the sequence of transactions will not place the transactions beyond the scope of sec_1031 if the application of sec_1031 were limited to circumstances which involved a direct related_party exchange the provision would be meaningless since its application could be so easily circumvented by using an intermediary the use of an intermediary to avoid tax on a disposition of a taxpayer’s relinquished low basis property to an unrelated party and the intermediary’s application of the sales proceeds to purchase replacement_property from a related_party facilitates avoidance of the purposes of sec_1031 accordingly sec_1031 denies nonrecognition to any exchange involved in such transactions third argument the use of the intermediary in the taxpayer’s multiparty exchange transactions was required to avoid the taxpayer having constructive receipt of the sales proceeds from the relinquished properties sec_1_1031_b_-2 of the income_tax regulations provides that a qualified_intermediary is not considered the agent of the taxpayer for purposes of sec_1031 based on recognition of a qualified_intermediary as a participant in an exchange transaction rather than an agent of a participant and the intermediary’s purchase of replacement properties from the related_party the taxpayer’s transactions involved related_party sales rather than related_party exchanges subject_to sec_1031 structuring of a transaction which involves an exchange to justify the use of a qualified_intermediary will not place the transaction beyond the scope of sec_1031 if the transaction facilitate avoidance of the purposes of sec_1031 basis shifting or identical consequences between related parties tax free or tax deferred cashing out of an investment by a taxpayer or a related_party reduction or avoidance of tax acceleration of losses etc in such circumstances sec_1031 will apply to deny nonrecognition with respect to the exchange transaction the safe_harbor provisions of sec_1 b concerning qualified intermediaries will not cause a transaction series of transactions that is structured to avoid the purposes of sec_1031 to be beyond the scope of sec_1031 sec_1_1031_b_-2 specifically provides that the qualified_intermediary will not be considered the agent of the taxpayer for purposes of sec_1031 the characterization does not apply for purposes of sec_1031 fourth argument the taxpayer’s multiparty exchange transactions are not subject_to sec_1031 sec_1031 provides that the disposition of property received in a direct related_party exchange will not be taken into account for purposes of sec_1031 if neither the exchange nor the disposition had as one of its principal purposes the avoidance of federal_income_tax accordingly one of the purposes of sec_1031 is to disregard any disposition that does not involve tax_avoidance a disposition not taken into account for purposes of sec_1031 by reason of sec_1031 does not avoid the purposes of sec_1031 sec_1031 is not applicable to such a disposition since it does not avoid the purposes of sec_1031 sec_1031’s preservation of nonrecognition treatment for an exchange in circumstances which involve an excepted disposition is indicative that the phrase avoidance of federal_income_tax does not encompass tax_deferral pursuant to sec_1031 the taxpayer’s multiparty exchanges which provide tax_deferral pursuant to sec_1031 are not subject_to sec_1031 the argument does not consider the requirement of sec_1031 that a taxpayer must satisfy the service that tax_avoidance was not a principal purpose of both an exchange and disposition in order for a disposition not to be taken into account for purposes of sec_1031 by reason of sec_1031 if circumstances warranted a conclusion that tax_avoidance was one of the principal purposes for an exchange a disposition would not be excepted by sec_1031 from treatment as such for purposes of sec_1031 sec_1031 and address the consequences of a direct related_party exchange and a subsequent sale of the property received in the exchange the taxpayer’s multiparty exchanges are not within the scope of sec_1031 however even if the tax_avoidance standard of sec_1031 were applied to the taxpayer’s multiparty transactions the conclusion would be that the taxpayer has not established that tax_avoidance was not one of the principal purposes of the exchange and or the disposition of the taxpayer’s relinquished_property the use of a qualified_intermediary in circumstances involving the sale of a taxpayer’s relinquished_property and the intermediary’s application of the sales proceeds to purchase replacement_property from a related_party will generally be treated as facilitating cashing out of an investment the legislative_history of sec_1031 indicates that denial of nonrecognition treatment for an exchange that facilitates cashing out of an investment was one of the purposes for the enactment of the provision the taxpayer’s transactions were structured to alter the sequence of the transactions in an attempt to avoid the application of sec_1031 the example in the senate_finance_committee report indicates that such actions will not preclude the application of sec_1031 fifth argument sec_1031 must distinguish between cases such as taxpayer’s that are the result of tax planning and those that are the result of abusive tax_avoidance ie cases that would not qualify as sec_1031 exceptions sec_1031 has no application to the taxpayer’s exchange transactions because they were the result of tax planning an argument that the taxpayer’s transactions are the result of tax planning provides basis for application of sec_1031 to deny nonrecognition for taxpayer’s exchanges as part of a transaction or series of transactions structured to avoid the purposes of sec_1031 the structure of the subject transactions their intended results ie basis shifting cashing out an investment the interdependence of each of the transactions on each of the other transactions and the taxpayer’s statement that the transactions were the result of tax planning compel a conclusion that the transactions were structured to avoid the purposes of sec_1031 the structure of the transactions was driven by the intent of the taxpayer and the related_party to cash_out of some of the taxpayer’s investment in appreciated_property with a low basis without current tax consequence in a manner that would provide funds for reduction of the related party’s debt without the necessity of an additional capital_contribution by or loan from the taxpayer denial of nonrecognition treatment for an exchange that is part of transactions structured for such purposes is consistent with the intent of sec_1031 if tax planning were a basis for exception from anti-abuse provisions such as sec_1031 the provisions would have no impact as many tax abusive transactions evidence significant and ingenious planning a copy of this technical_advice_memorandum is to be given to the taxpayer sec_6110 of the code provides that it may not be used or cited as precedent - end -


internal_revenue_service department of the treasury washington dc person to contact telephone number refer reply to cc psi 5-plr-125775-01 date date legend number release date index number in re taxpayer state region corporation a corporation b division statute a statute b statute c act commission year year year date date a b dear this letter responds to your letter dated date and subsequent correspondence submitted on behalf of taxpayer requesting a letter_ruling concerning whether amounts contributed by state to taxpayer in connection with the plr-125775-01 development and construction of a natural_gas transmission and distribution system are nonshareholder contributions to capital excludable from income under sec_118 of the internal_revenue_code taxpayer represents that the facts are as follows facts taxpayer is a corporation organized under the laws of state for the purpose of owning and operating a natural_gas transmission and distribution system taxpayer is owned jointly by corporation a and corporation b taxpayer is under the audit jurisdiction of division major sections of region are unserved by natural_gas lack of natural_gas service has been a deterrent to attracting new businesses and investment to region the state legislature determined as a matter of public policy that state should find ways to encourage the development of natural_gas service in regions within state that are unserved the state legislature in statute a declared it to be the policy of state t o facilitate the construction of facilities in and the extension of natural_gas service to unserved areas in order to promote the public welfare throughout the state in furtherance of this policy state enacted legislation setting forth certain procedures to ensure the orderly expansion of natural_gas service statute b in year in year statute c encouraged the creation of expansion funds to finance the expansion of natural_gas service in year state enacted the act which authorizes the commission to fund natural_gas expansion projects by appropriations of the state general assembly or the proceeds from the sale of state general obligation bonds funding under the act is available to a existing natural_gas local distribution companies or b a person or gas district awarded a franchise for the construction of natural_gas facilities a natural_gas expansion project may qualify for funding under the act if it is economically infeasible the act defines the term economically infeasible as having a negative net present_value the net present_value is generally the difference between a the cost of the project and b the anticipated net revenue to be generated by the project during its useful_life each discounted to their present_value if an expansion project later becomes economically feasible the recipient of bond proceeds may be required to return the bond proceeds with interest taxpayer filed an application with the commission for an award of bond proceeds to pay for the economically infeasible portion of the cost of developing and constructing a natural_gas transmission and distribution system in region project the bond application contains an analysis of the project’s net present_value as required by the act and the commission’s regulations issued thereunder based on this analysis the project has a net negative present_value specifically the present_value of the total anticipated cost of the project exceeds the present_value of the anticipated net revenue plr-125775-01 generated over the useful_life of the project thus the project’s anticipated negative net present_value qualifies the project for funding under the act the commission awarded the bond proceeds to taxpayer by its orders of date and date pursuant to these orders bond proceeds in the total amount of dollar_figurea were made available for the development and construction of the project the total amount of bond proceeds represents the cost of the project that is economically infeasible based on the present_value of revenues that the project is anticipated to generate based on this rationale the commission determined that the project is economically infeasible because it has a negative net present_value in excess of dollar_figureb the bond proceeds are subject_to refund if the commission investigates the economic feasibility of the project and the project is determined to be economically feasible based on the present_value methodology while the act and commission rules set forth the requirement for refunding of bond proceeds it is extremely unlikely that a refunding could occur in order for the project to become economically feasible the present_value of the actual net_revenues generated by the project must exceed the anticipated revenues to the point of eliminating the existing negative net present_value of dollar_figureb taxpayer is not aware of any circumstances by which the net_revenues generated by the project could achieve this result the potential refunding of bond proceeds is an extremely remote contingency moreover the proposed rate structure for the project is not designed to achieve economic feasibility the rates that taxpayer will charge for natural_gas service are designed to pay for the operation and maintenance_costs of the project and the annual rate of return on the contribution thus under the rate structure proposed by taxpayer the project will not achieve economic feasibility taxpayer also represents that the bond proceeds will fund the project which will be owned and operated by taxpayer and therefore will become a permanent part of taxpayer’s working_capital structure the contribution of the bond proceeds by state to taxpayer is not compensation_for services the contribution is a bargained for exchange because the contribution will be used to fund the construction and development of the project the contribution will result in a benefit to taxpayer in an amount commensurate with its value the project will permit taxpayer to provide natural_gas service to region and taxpayer will be entitled to charge regulated rates plr-125775-01 for the provision of natural_gas services therefore the contribution will contribute to the production_of_income by taxpayer and the value of the contribution will be assured in that respect ruling requested taxpayer requests the service to rule that the amounts contributed by state to taxpayer for the development of the project will not be a contribution_in_aid_of_construction ciac under sec_118 and will constitute nonshareholder contributions to capital under sec_118 law and analysis sec_118 provides that in the case of a corporation gross_income does not include any contribution_to_the_capital_of_the_taxpayer sec_118 as amended by a of the tax_reform_act_of_1986 the act provides that for purposes of exclusion under sec_118 except as provided in sec_118 a contribution_to_the_capital_of_the_taxpayer does not include any ciac or any other contribution as a customer or potential customer sec_1_118-1 of the income_tax regulations provides in part that sec_118 applies to contributions to capital made by persons other than shareholders however the exclusion does not apply to any money or property transferred to the corporation in consideration for goods or services rendered or to subsidies paid to induce the taxpayer to limit production the legislative_history to sec_118 indicates that the exclusion_from_gross_income for nonshareholder contributions to capital of a corporation was intended to apply to those contributions that are neither gifts because the contributor expects to derive indirect benefits nor payments for future services because the anticipated future_benefits are too intangible the legislative_history also indicates that the provision was intended to codify the existing law that had developed through administrative and court decisions on the subject h_r rep no 83rd cong 2d sess s rep no 83rd cong 2d sess in general the amendment made by of the act to sec_118 was intended to require a regulated_public_utility to include in income the value of any ciac made to encourage the provision of services by the utility to a customer as a result under the act all ciacs even those received by a regulated_public_utility are includable in the gross_income of the receiving corporation the house ways_and_means_committee report house report states that property including money is a ciac rather than a contribution_to_capital if it is contributed to provide or encourage the provision of services to or for the benefit of the person making the contribution h_r rep no 99th cong 1st sess vol c b plr-125775-01 a utility is considered as having received property to encourage the provision of services if any one of the following conditions are met the receipt of the property is a prerequisite to the provision of the services the receipt of the property results in the provision of services earlier than would have been the case had the property not be received or the receipt of the property otherwise causes the transferor to be favored in any way the house report also states that the repeal of the special exclusion does not affect transfers of property that are not made for the provision of services including situations where it is clearly shown that the benefit of the public as a whole was the primary motivating factor in the transfers h_r rep no 99th cong 1st sess vol c b notice_87_82 1987_2_cb_389 provides additional guidance on the general treatment of ciacs notice_87_82 follows the language from the house report and states that a payment received by a utility that does not reasonably relate to the provision of services by the utility to or for the benefit of the person making the payment but rather relates to the benefit of the public at large is not a ciac in notice_87_82 an example of a payment benefitting the public at large is a relocation payment received by a utility under a government program to place utility lines underground in that situation the relocation is undertaken for either reasons of community aesthetics or in the interest of public safety and does not directly benefit particular customers of the utility the legislative_history of sec_118 provides in part as follows this sec_118 in effect places in the code the court decisions on the subject it deals with cases where a contribution is made to a corporation by a governmental_unit chamber of commerce or other association of individuals having no proprietary interest in the corporation in many such cases because the contributor expects to derive indirect benefits the contribution cannot be called a gift yet the anticipated future_benefits may also be so intangible as to not warrant treating the contribution as a payment for future services s rep no 83d cong 2d sess in 319_us_98 the court held that payments by prospective customers to an electric utility company to cover the cost of extending the utility’s facilities to their homes were part of the price of service rather than contributions to capital the case concerned customers’ payments to a utility company for the estimated cost of constructing service facilities primary power lines that the utility company otherwise was not obligated to provide the customers intended no contribution to the company’s capital later in 339_us_583 the court held that money and property contributions by community groups to induce a shoe company to locate or expand its factory operations in the contributing communities were nonshareholder contributions to capital the court reasoned that when the motivation of the contributors is to benefit the community at large and the contributors do not plr-125775-01 anticipate any direct benefit from their contributions the contributions are nonshareholder contributions to capital id pincite finally in 412_us_401 the court in determining whether a taxpayer was entitled to depreciate the cost of certain facilities that had been funded by the federal government held that the governmental subsidies were not contributions to the taxpayer’s capital the court recognized that the holding in detroit edison co had been qualified by its decision in brown shoe co the court in chicago b q r co found that the distinguishing characteristic between those two cases was the differing purpose motivating the respective transfers in brown shoe co the only expectation of the contributors was that such contributions might prove advantageous to the community at large thus in brown shoe co since the transfers were made with the purpose not of receiving direct services or recompense but only of obtaining advantage for the general community the result was a contribution_to_capital the court in chicago b q r co also stated that there were other characteristics of a nonshareholder contribution_to_capital implicit in detroit edison co and brown shoe co from these two cases the court distilled some of the characteristics of a nonshareholder contribution_to_capital under both the and codes first the payment must become a permanent part of the transferee’s working_capital structure second it may not be compensation such as a direct payment for a specific quantifiable service provided for the transferor by the transferee third it must be bargained for fourth the asset transferred foreseeably must benefit the transferee in an amount commensurate with its value fifth the asset ordinarily if not always will be employed in or contribute to the production of additional income and its value assured in that respect in the present case taxpayer was awarded bond proceeds in the total amount of dollar_figurea for the development and construction of the project pursuant to the commission’s authority under the act to fund natural_gas expansion projects the act was enacted in furtherance of the expressly stated policy of state under statute a to facilitate the expansion of natural_gas service to unserved areas in order to promote the public welfare throughout state it is clear that the funding of the project under the act advances this public policy accordingly we conclude that the contribution of the bond proceeds by state to taxpayer for the development and construction of the economically infeasible portion of the project falls within the public benefit exception described in brown shoe co and will not be treated as a ciac under sec_118 furthermore the contribution of the bond proceeds to taxpayer meets the five characteristics of a nonshareholder contribution_to_capital stated in chicago b q r co based solely on the foregoing analysis and the representations made by taxpayer we rule that the contribution of the bond proceeds by state to taxpayer is not a ciac under sec_118 and constitutes a nonshareholder contribution_to_capital under sec_118 plr-125775-01 in accordance with the power_of_attorney we are sending a copy of this letter to taxpayer and to taxpayer’s second authorized representative this ruling is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent sincerely walter h woo senior technician reviewer branch office of associate chief_counsel passthroughs and special industries cc


internal_revenue_service number release date index number 468a ------------------------------- --------------------------------------- -------------------------------- ---------------------------- ---------------------------------- ------------------------------ re ----------------------------------------------------------- --------------------------------------------------- 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 b6 plr-108669-10 date august --------------------------------------------------------------------------------- legend taxpayer ------------------------------------------------------------------------------------------------------------- -------------------------------------------------- parent --------------------------------------------------- plant ---------------------------------- location independent study -------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- -- --------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------ method commission a commission b commission c amount a date x year a year b year c year d year e year f year g ----------- -------------------------------------------- ----------------------------------------------------- ----------------------------------------------------------------- ----------------- --------------------------- ------- ------- ------- ------- ------- ------- ------- plr-108669-10 year h ba bats fv fvts x y p a b c d st ad fund director ------- ------------------- ------------------- --------------------- --------------------- ------------ ------------ -------- ---- ---- ------ ------ ----------------- ------------- ------------------------------------------- --------------------------------------------------------------------------------- --------------------------------------------------------------------------------- dear ---------------- this letter responds to your request dated date for an initial schedule of deduction amounts pursuant to sec_468a of the internal_revenue_code and sec_1_468a-8t of the temporary income_tax regulations and for a mandatory revised schedule of ruling amounts under sec_468a on date x taxpayer acquired ownership interests in plant together with the associated qualified nuclear decommissioning funds to reach p percent the service concluded that the acquisition satisfied the requirements of sec_468a and the regulations and that the qualified funds acquired by taxpayer maintained their qualified status in the hands of taxpayer the prior owners were granted schedules of ruling amounts most recently on date taxpayer represents the facts and information relating to its request for rulings as follows taxpayer is a wholly-owned subsidiary of parent parent files a consolidated federal_income_tax return with its affiliated corporations including taxpayer taxpayer has a direct ownership_interest of p percent in plant the estimated base cost for decommissioning plant is based on an independent study and the proposed method of decommissioning the plant is method the operating license for plant will expire in year g in the past several public_utility commissions have established or approved rates for the furnishing or sale of electricity generated by plant including commission a commission b for one of the prior owners of plant and commission c however no public_utility commission currently specifically authorizes plr-108669-10 taxpayer to currently include decommissioning costs in taxpayer’s cost of service for ratemaking purposes therefore the taxpayer has based the request for the revised schedule of ruling amounts on the independent study the estimated cost of dollar_figureba year a dollars was used as a base cost for decommissioning the plant of which taxpayer’s share p percent is dollar_figurebats the estimated cost of decommissioning the plant in year g dollars is dollar_figurefv of which taxpayer’s share is dollar_figurefvts it is estimated that substantial decommissioning costs will first be incurred in year b and that decommissioning will be substantially complete at the end of year c the methodology used to convert the year a dollars to year g dollars was by escalating the estimated costs at an inflation rate of x percent to year g the assumed after-tax rate of return to be earned by the amount collected for decommissioning is y percent the funding_period for the fund extends through year g the termination_date of the operating license regarding the request for a schedule of deduction amounts in a prior schedule of ruling amounts issued under sec_468a of the code as in effect prior to taxpayer represented that the funding_period for the plant extends from year f through year a and the level_funding limitation period for the plant extends from year f through year a the estimated period for which the fund will be in effect is a years year f through year g the estimated_useful_life of the plant is b years year e through year g thus percentage of the total estimated costs qualifying for deduction in the schedule of ruling amounts under prior_law was c percent sec_468a as amended by the energy tax incentives act of the act publaw_109_58 119_stat_594 allows an electing taxpayer to deduct payments made to a nuclear decommissioning reserve fund sec_468a limits the amount that may be paid into the nuclear decommissioning fund in any year to the ruling_amount applicable to that year prior to the changes made by the act the deduction was limited to the lesser_of the amount included in the utility’s cost of service for ratemaking purposes or the ruling_amount generally as a result only regulated utilities could take advantage of sec_468a the act amendment of sec_468a eliminated the cost-of-service limitation accordingly decommissioning costs of an unregulated nuclear power plant may now be funded by deductible contributions to a qualified nuclear decommissioning fund sec_468a provides that no deduction shall be allowed for any payment to the nuclear decommissioning fund unless the taxpayer requests and receives from the secretary a schedule of ruling amounts the ruling_amount for any_tax year is defined under sec_468a as the amount which the secretary determines to be necessary to fund the total nuclear decommissioning cost of that nuclear power plant over the estimated_useful_life of the plant this term is further defined to include the amount necessary to prevent excessive funding of nuclear decommissioning costs or plr-108669-10 funding of these costs at a rate more rapid than level_funding taking into account such discount rates as the secretary deems appropriate prior to the changes made by the act deductible contributions were limited to the amount necessary for an electing taxpayer to fund the plant’s post-1983 nuclear decommissioning costs determined as if decommissioning costs accrued ratably over the estimated_useful_life of the plant provided that the taxpayer elected to establish a fund in prior_law also did not allow a taxpayer electing to establish a fund later than to contribute to that fund any amount in excess of that amount necessary to fund the ratable portion of the plant’s nuclear decommissioning costs beginning in the year the fund is established sec_468a now allows a taxpayer to contribute to a nuclear decommissioning fund the entire cost of decommissioning the plant including both the pre-1984 amount that was denied under the law prior to the act as well as any amount attributable to any year after in which a taxpayer had not established a fund under sec_468a sec_468a provides that the deduction for the contribution of the previously-excluded amount is allowed ratably over the remaining useful_life of the nuclear plant sec_468a provides that a taxpayer shall be deemed to have made a payment to the nuclear decommissioning fund on the last day of a taxable_year if the payment is made on account of such taxable_year and is made within 2½ months after the close of the tax_year this section applies to payments made pursuant to either a schedule of ruling amounts or a schedule of deduction amounts sec_1_468a-1t a provides that an eligible_taxpayer may elect to deduct nuclear decommissioning costs under sec_468a of the code an eligible_taxpayer as defined under sec_1_468a-1t b of the regulations is a taxpayer that has a qualifying interest in any portion of a nuclear power plant a qualifying interest is among other things a direct ownership_interest sec_1_468a-2t b provides that the maximum amount of cash payments made or deemed made to a nuclear decommissioning fund during any_tax year shall not exceed the ruling_amount applicable to the nuclear decommissioning fund for such taxable_year the limitation on the amount of cash payments for purposes of sec_1 468a- 2t b does not apply to any special transfer permitted under sec_1_468a-8t sec_1_468a-3t a provides that in general a schedule of ruling amounts for a nuclear decommissioning fund is a ruling specifying annual payments that over the tax years remaining in the funding_period as of the date the schedule first applies will result in a projected balance of the nuclear decommissioning fund as of the last day of the funding_period equal to and in no event more than the amount of decommissioning costs allocable to the fund plr-108669-10 sec_1_468a-3t a provides that to the extent consistent with the principles and provisions of this section each schedule of ruling amounts shall be based on reasonable assumptions concerning the after-tax rate of return to be earned by the amounts collected for decommissioning the total estimated cost of decommissioning the nuclear plant and the frequency of contributions to a nuclear decommissioning fund for a taxable_year under sec_1_468a-3t a the internal_revenue_service shall provide a schedule of ruling amounts identical to the schedule proposed by the taxpayer but no such schedule shall be provided by the service unless the taxpayer's proposed schedule is consistent with the principles and provisions of that section sec_1_468a-3t a provides that the taxpayer bears the burden of demonstrating that the proposed schedule of ruling amounts is consistent with the principles of the regulations and that it is based on reasonable assumptions that section also provides additional guidance regarding how the service will determine whether a proposed schedule of ruling amounts is based on reasonable assumptions for example if a public_utility commission established or approved the currently applicable rates for the furnishing or sale by the taxpayer of electricity from the plant the taxpayer can generally satisfy this burden_of_proof by demonstrating that the schedule of ruling amounts is calculated using the assumptions used by the public_utility commission in its most recent order in addition a taxpayer that owns an interest in a deregulated nuclear plant may submit assumptions used by a public_utility commission that formerly had regulatory jurisdiction over the plant as support for the assumptions used in calculating the taxpayer’s proposed schedule of ruling amounts with the understanding that the assumptions used by the public_utility commission may be given less weight if they are out of date or were developed in a proceeding for a different taxpayer the use of other industry standards such as the assumptions underlying the taxpayer's most recent financial assurance filing with the nrc are described by the temporary regulations as an alternative means of demonstrating that the taxpayer has calculated its proposed schedule of ruling amounts on a reasonable basis sec_1_468a-3t a further provides that consistency with financial_accounting statements is not sufficient in the absence of other supporting evidence to meet the taxpayer’s burden_of_proof sec_1_468a-3t b provides that in general the ruling_amount for any_tax year in the funding_period shall not be less than the ruling_amount for any earlier tax_year under sec_1_468a-3t c the funding_period begins on the first day of the first tax_year for which a deductible payment is made to the nuclear decommissioning fund and ends on the last day of the taxable_year that includes the last day of the estimated_useful_life of the nuclear power plant to which the fund relates sec_1_468a-3t c provides rules for determining the estimated_useful_life of a nuclear plant for purposes of sec_468a in general under sec_1_468a-3t c i a if the plant was included in rate base for ratemaking purposes for a period prior to plr-108669-10 date the date used in the first such ratemaking proceeding as the estimated date on which the nuclear plant will no longer be included in the taxpayer’s rate base is the end of the estimated_useful_life of the nuclear plant sec_1_468a-3t c i b provides that if the nuclear plant is not described in sec_1_468a-3t c i a the last day of the estimated_useful_life of the nuclear plant is determined as of the date the plant is placed_in_service under sec_1_468a-3t c i c any reasonable method may be used in determining the estimated_useful_life of a nuclear power plant that is not described in sec_1_468a-3t c i a sec_1_468a-3t d provides that the amount of decommissioning costs allocable to a nuclear decommissioning fund is the taxpayer's share of the total estimated cost of decommissioning the nuclear power plant sec_1_468a-3t d provides that a taxpayer's share of the total estimated cost of decommissioning a nuclear power plant equals the total estimated cost of decommissioning such plant multiplied by the taxpayer's qualifying interest in the plant sec_1_468a-3t e enumerates the information required to be contained in a request for a schedule of ruling amounts filed by a taxpayer in order to receive a ruling_amount for any taxable_year sec_1_468a-3t f provides that any taxpayer that has previously obtained a schedule of ruling amounts can request a revised schedule of ruling amounts such a request must be made in accordance with the rules of sec_1_468a-3t e the internal_revenue_service shall not provide a revised schedule of ruling amounts applicable to a taxable_year in response to a request for a schedule of ruling amounts that is filed after the deemed payment deadline date for such taxable_year sec_1_468a-8t a provides that under the provisions of sec_468a as described above a taxpayer may make a special transfer of cash or property to the nuclear decommissioning fund this special transfer is not subject_to the sec_468a limitation the amount of the special transfer is the present_value of the pre-2005 nonqualifying percentage of the estimated future costs of decommissioning the nuclear plant that was disallowed under sec_468a prior to the act sec_1_468a-8t a defines the pre-2005 nonqualifying percentage as equal to percent reduced by the sum of the qualifying percentage used in determining the taxpayer’s last schedule of ruling amounts for the fund under sec_468a as it existed prior to the act and the percentage transferred in any previous special transfer sec_1_468a-8t a provides that the taxpayer is not required to transfer the entire amount eligible for the special transfer in one year but must take any prior special transfers into account in calculating the pre-2005 qualifying percentage further pursuant to sec_1_468a-8t c a taxpayer making a special transfer in more than one plr-108669-10 year must request a new schedule of deduction amounts in connection with each special transfer sec_1_468a-8t b provides that the deduction for the special transfer is allowed ratably over the remaining useful_life of the nuclear plant under sec_1 468a- 8t b iii the deduction for property contributed in a special transfer is limited to the lesser_of the fair_market_value of the property or the taxpayer’s basis in the property under sec_1_468a-8t b the taxpayer recognizes no gain_or_loss on the special transfer of property the taxpayer’s basis in the fund is not increased by reason of the special transfer of property and the fund’s basis in the property transferred in the special transfer is the same as the transferee’s basis in that property immediately prior to the special transfer sec_1_468a-8t c provides that taxpayer may not make a special transfer to a qualified nuclear decommissioning fund unless the taxpayer requests from the irs a schedule of deduction amounts in connection with such transfer a request for a schedule of deduction amounts may be made in connection with a request for a schedule of ruling amounts but in such case the calculations for both the schedule of ruling amounts and the schedule of deduction amounts must be separately_stated as stated above prior to the changes made by the act deductible contributions were limited to the lesser_of the amount necessary to fund the plant’s post-1983 nuclear decommissioning costs or the amount necessary to fund the plant’s decommissioning costs for that portion of the plant’s estimated_useful_life for which a fund had been established under that prior_law taxpayer was allowed to contribute c percent of the amounts necessary to fully decommission its share of the plant sec_468a allows a taxpayer to contribute to the nuclear decommissioning fund the pre- amount that was denied under the law prior to the act thus taxpayer is able to contribute the additional d percent of the amounts necessary to decommission its ownership share of plant we have examined the representations and information submitted by the taxpayer in relation to the requirements set forth in sec_468a and the regulations thereunder based solely upon these representations of the facts we conclude that the taxpayer may make a special transfer of dollar_figurest in year h and may ratably deduct the amount contributed for the year h through year g tax years as set forth below schedule of deduction amounts year each year year h - year g deduction amount dollar_figuread the special transfer amount stated above is the maximum amount permitted to be transferred to the fund under sec_468a if taxpayer transfers a lesser amount to plr-108669-10 the fund the taxpayer may deduct that lesser amount ratably over the period of years described above further in the event that taxpayer transfers a lesser amount for year h in order to make an additional special transfer in a later year including a special transfer of the difference between the special transfer amount stated above and the lesser amount transferred in year h taxpayer must request a new schedule of deduction amounts and in that request must take the year h transfer into account and recalculate the pre-2005 qualifying percentage in such request we note that if taxpayer elects to make a special transfer of property for all or a portion of this special transfer the amount of the deduction is the lesser_of the fair_market_value of the property transferred or the basis of the property in the hands of the taxpayer immediately prior to the transfer in either event the deduction of the taxpayer with respect to the property is limited to the taxpayer’s basis in the property we have examined the representations and information submitted by the taxpayer in relation to the requirements set forth in sec_468a and the regulations thereunder based solely upon these representations of the facts we reach the following conclusions pursuant to sec_1_468a-3t a taxpayer has met its burden of demonstrating that the proposed schedule of ruling amounts is consistent with the principles of the code and regulations and is based on reasonable assumptions taxpayer has a qualifying interest in the plant and is therefore an eligible_taxpayer under sec_1_468a-1t b of the regulations taxpayer as owner of the plant has calculated its share of the total decommissioning costs under sec_1_468a-3t d of the regulations the proposed schedule of ruling amounts was derived by following the assumptions contained in an independent commissioning study that taxpayer has represented is a standard type study used in the industry based on that representation taxpayer has demonstrated pursuant to sec_1_468a-3t a that the proposed schedule of ruling amounts is based on reasonable assumptions and is consistent with the principles of sec_468a and the regulations thereunder the maximum amount of cash payments made or deemed made to the fund during any_tax year is restricted to the ruling_amount applicable to the fund as set forth under sec_1_468a-2t b of the regulations based solely on the determinations above we conclude that the taxpayer’s proposed schedule of ruling amounts satisfies the requirements of sec_468a of the code plr-108669-10 we have approved the following revised schedule of ruling amounts the mandatory review date for this matter remains the same approved schedule of ruling amounts year each year year h - year d amount dollar_figureamount a if any of the events described in sec_1_468a-3t f occur in future years the taxpayer must request a review and revision of the schedule of ruling amounts generally the taxpayer is required to file such a request on or before the deemed payment deadline date for the first taxable_year in which the rates reflecting such action became effective when no such event occurs the taxpayer must file a request for a revised schedule of ruling amounts on or before the deemed payment deadline of the tenth taxable_year following the close of the tax_year in which the most recent schedule of ruling amounts was received except as specifically determined above no opinion is expressed or implied concerning the federal_income_tax consequences of the transaction described above specifically no determination is made whether the independent commissioning study conforms to industry standards and practices this ruling is directed only to the taxpayer who requested it sec_6110 of the code provides it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representatives we are also sending a copy of this letter_ruling to the director pursuant to sec_1_468a-7t a a copy of this letter must be attached with the required election statement to the taxpayer's federal_income_tax return for each tax_year in which the taxpayer claims a deduction for payments made to the fund sincerely peter c friedman senior technician reviewer branch passthroughs special industries