internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc psi b1-plr-124844-02 date june legend x y1 d1 property property property dear this letter responds to a letter that you submitted on behalf of x dated date requesting rulings under sec_1362 and sec_1375 of the internal_revenue_code according to the information submitted x was incorporated in y1 and elected under sec_1362 to be an s_corporation on d1 x has accumulated_earnings_and_profits x is in the business of providing minorities with opportunities to acquire and develop properties in the communications industry to diversity its investments x wants to invest in entities that engage in the exploration and production of oil_and_gas x intends to invest in property property and property which are publicly traded limited_partnerships ptps engaged in the business of purchasing gathering transporting trading storing and reselling crude_oil and refined petroleum products cc psi b1-plr-124844-02 x represents that the ptps in which it seeks to invest meet the qualifying_income exception under sec_7704 to the publicly_traded_partnership requirements under sec_7704 x also represents that the normal flowthrough provisions of subchapter_k apply to the ptps’ partners because the ptps are not electing to be excluded from any part of subchapter_k under sec_761 or to be treated as electing large partnerships under sec_771 sec_1361 defines an s_corporation as a small_business_corporation for which an election under sec_1362 is in effect for the taxable_year sec_1362 provides that an election under sec_1362 terminates whenever the corporation has accumulated_earnings_and_profits at the close of each of three consecutive taxable years and has gross_receipts for each of such taxable years more than percent of which are passive_investment_income any termination under this paragraph shall be effective on and after the first day of the first taxable_year beginning after the third consecutive taxable_year referred to above except as otherwise provided in sec_1362 sec_1362 provides that the term passive_investment_income means gross_receipts derived from royalties rents dividends interest annuities and sales or exchanges of stock_or_securities sec_1_1362-2 of the income_tax regulations provides that rents does not include rents derived in the active trade_or_business of renting property rents received by a corporation are derived in an active trade_or_business of renting property only if based on all the facts and circumstances the corporation provides significant services or incurs substantial costs in the rental business generally significant services are not rendered and substantial costs are not incurred in connection with net leases whether significant services are performed or substantial costs are incurred in the rental business is determined based upon all the facts and circumstances including but not limited to the number of persons employed to provide the services and the types and amounts of costs and expenses_incurred other than depreciation sec_1375 provides that a tax is imposed on the income of an s_corporation for any_tax year in which the corporation has accumulated_earnings_and_profits at the close of that year and gross_receipts more than percent of which are passive_investment_income sec_702 of the code provides that in determining income_tax_liability each partner shall take into account separately his distributive_share of the partnership's items of income gain loss deduction and credit to the extent provided by regulations sec_1_702-1 provides that each partner must take into account separately his distributive_share of any partnership_item that would result in an income cc psi b1-plr-124844-02 tax_liability for that partner different from that which would result if that partner did not take the item into account separately sec_702 provides that the character of any item_of_income gain loss deduction or credit included in a partner’s distributive_share under sec_702 through shall be determined as if the item were realized directly from the source from which realized by the partnership or incurred in the same manner as incurred by the partnership except as provided in sec_7704 sec_7704 of the code provides that a ptp shall be treated as a corporation for federal_income_tax purposes sec_7704 provides that the term ptp means any partnership if interests in that partnership are traded on an established_securities_market or are readily_tradable on a secondary market or the substantial equivalent thereof sec_7704 provides that sec_7704 shall not apply to a ptp for any_tax year if the partnership meets the gross_income requirements of sec_7704 for that year and each preceding tax_year beginning after date during which the partnership or any predecessor was in existence sec_7704 provides that a partnership meets the gross_income requirement for any_tax year if at least percent of the partnership’s gross_income for that year consists of qualifying_income sec_7704 provides that income and gains derived from the exploration development mining or production processing refining transportation including pipelines transporting gas oil or products thereof or marketing of any mineral_or_natural_resource including fertilizer geothermal_energy and timber is qualifying_income for the purposes of this section mineral_or_natural_resource means any product of a character with respect to which a deduction for depletion is allowable under sec_611 but is not a product described in sec_613 b a or b revrul_71_455 1971_2_cb_318 deals with an s_corporation that operates a business in a joint_venture with another corporation in the tax_year at issue the total business_expenses exceeded gross_receipts the revenue_ruling holds that in applying the passive_investment_income limitations the s_corporation should include its distributive_share of the joint venture’s gross_receipts and not its share of the venture’s loss in accordance with sec_702 the character of these gross_receipts were not converted into passive_investment_income upon their allocation to the s_corporation x’s distributive shares of gross_receipts from the ptps if separately taken into account might affect its federal_income_tax liability under sec_1362 the status of x as an s_corporation could depend upon the character of its distributive shares of gross_receipts from the ptps thus pursuant to sec_1_702-1 x cc psi b1-plr-124844-02 must take into account separately its distributive shares of the gross_receipts from the ptps the character of these partnership receipts for x will be the same as the character of the partnership receipts for the ptps in accordance with sec_702 based solely on the facts and representations submitted we conclude that x’s distributive_share of the gross_receipts of the ptps in which it intends to invest will be included in its gross_receipts for purposes of sec_1362 and sec_1375 and x's distributive shares of the ptp's gross_receipts attributable to the purchasing gathering transporting trading storing and reselling crude_oil and refined petroleum products will not constitute passive_investment_income as defined by sec_1362 except as specifically set forth above we express no opinion as to the federal tax consequences of the transaction described above under any other provision of the code specifically we express no opinion on whether x is eligible to be an s_corporation further the passive_investment_income rules of sec_1362 are completely independent of the passive_activity rules of sec_469 unless an exception under sec_469 applies the rental_activity remains passive for purposes of sec_469 this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to x's authorized representative s david r haglund sincerely david r haglund senior technician reviewer branch office of the associate chief_counsel passthroughs and special industries enclosures copy for sec_6110 purposes copy of this letter cc


internal_revenue_service number release date index number ------------------------------ --------------------------------- ------------------ ----------------------- - department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------------ id no ------------- telephone number --------------------- refer reply to cc tege eb qp2 plr-143256-04 date february ---------------------- legend city x ------------------------------ ein ---------------- state y ----------- city x eligible_plan -------------------------------------------------------------- ----------------------------------------------------------------------- trust ------------------------------------------------------------------------- dear ------------- this responds to a letter dated date and subsequent correspondence submitted by your authorized representative requesting a ruling concerning whether the eligible_plan established and adopted by city x constitutes an eligible deferred_compensation plans within the meaning of sec_457 of the internal_revenue_code_of_1986 as amended code and the income_tax regulations regulations thereunder city x is represented to be an eligible_employer within the meaning of sec_457 of the code and has adopted the city x eligible_plan for its employees the city x eligible_plan provides that a participant's election to defer compensation not yet earned under the plan must be filed prior to the beginning of the month in which his or her participation_agreement becomes effective the plan provides for a maximum amount that may be deferred by a participant in any taxable_year and also provides for a catch-up computation for amounts deferred for one or more of the participant's last three taxable years ending before he or she attains normal_retirement_age under the plan in addition the plan also provides for the age plus catch-up_contributions described in sec_414 however the plan also provides that a participant can only utilize one of these two catch-up contribution provisions plr-143256-04 during a single year the amounts that may be deferred under the annual maximum limitation and the catch-up provisions are within the limitations of sec_457 including the sec_457 coordinated deferral provision with certain limitations a participant beneficiary or alternate_payee may elect the manner in which his her deferred amounts will be distributed the manner and time of benefit payout must meet the distribution_requirements of sec_401 and sec_457 of the code the city x eligible_plan provides that amounts of compensation deferred thereunder are to be transferred to and invested in a_trust described in sec_457 for the exclusive benefit of the participants and their beneficiaries all amounts deferred under the city x eligible_plan must be transferred to the trust within an administratively reasonable_time period the rights of any participant or beneficiary to payments pursuant to the plan are generally nonassignable and not subject_to pledge transfer or encumbrance the city x eligible_plan has provisions regarding the circumstances involved with multiple sec_457 plans of the same employer including treating all such plans as a single_plan and specific language for the coordination of deferral limits the correction of any excess_deferrals and the limits on normal_retirement_age the city x eligible_plan further provides that all amounts of compensation the city x eligible_plan permits transfers between the plan and other eligible governmental sec_457 plans the plan sets forth the requirements of paragraphs and of sec_1_457-10 of the regulations which must be satisfied before a transfer can be made to or from the plan deferred pursuant to the plan all property and rights purchased with such amounts and all income attributable to such amounts property or rights shall be held in trust for the exclusive benefit of participants and beneficiaries under the plan the trust was established pursuant to a written_agreement that is represented to be a valid trust under the laws of state y relation orders that satisfy the requirements of sec_414 the rights of any participant or beneficiary under the plan shall not be subject_to the rights of their creditors and shall be exempt from execution attachment prior assignment or any other judicial relief or order for the benefit of creditors or other third persons impossible prior to the satisfaction of all liabilities with respect to participants and their beneficiaries for any part of the assets and income of the trust to be used for or diverted to purposes other than the exclusive benefit of participants and their beneficiaries the terms of the trust used in connection with the city x eligible_plan make it except as provided in the city x eligible_plan concerning approved domestic sec_457 of the code provides that for a sec_457 plan to be an sec_457 of the code prescribes that an eligible deferred_compensation plr-143256-04 sec_457 of the code provides rules for the deferral of compensation by an individual participant in an eligible_deferred_compensation_plan as defined in sec_457 sec_457 of the code provides that in the case of a participant in an eligible_deferred_compensation_plan any amount of compensation deferred under the plan and any income attributable to the amounts so deferred shall be includible in gross_income only for the taxable_year in which such compensation or other income is paid or otherwise made available to the participant or beneficiary plan must meet the distribution_requirements of sec_457 eligible_plan the plan must have distribution_requirements providing that under the plan amounts will not be made available to participants or beneficiaries earlier than i the calendar_year in which the participant attains age ii when the participant has a severance_from_employment with the employer or iii when the participant is faced with an unforeseeable_emergency as determined under treasury regulations however sec_401 generally allows plans to postpone the required_beginning_date until april of the calendar_year following the later of the calendar_year in which the employee retires or in which he attains age a basic requirement prescribed by sec_457 is that an eligible sec_457 plan must meet the sec_457 distribution_requirements described above in order to retain its tax- deferred eligible status a sec_457 plan would violate these provisions of sec_457 and the regulations thereunder if the participant or anyone else received a distribution earlier than the earliest date established in sec_457 sec_457 provides that the total amount payable to a participant under the plan will not be treated as made available merely because the participant may elect to receive such amount or the plan may distribute such amount without the participant's consent if i such amount does not exceed dollar_figure and ii such amount may be distributed only if -- i no amount has been deferred under the plan with respect to such participant during the 2-year period ending on the date of the distribution and ii there has been no prior distribution under the plan to such participant under this option emergency as a severe financial hardship of the participant or beneficiary resulting from an illness or accident of the participant or beneficiary the participant’s or beneficiary’s spouse or the participant’s or beneficiary’s dependent as defined in sec_152 loss of the participant's or beneficiary’s property due to casualty including the need to rebuild a home following damage to a home not otherwise covered by homeowner’s sec_1_457-6 of the income_tax regulations define an unforeseeable sec_457 provides that a_trust described in sec_457 shall be sec_457 provides that a plan maintained by an eligible governmental plr-143256-04 insurance eg as a result of a natural disaster or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the participant or the beneficiary employer shall not be treated as an eligible_deferred_compensation_plan unless all assets and rights purchased with such deferred_compensation amounts and all income attributable to such amounts property or rights of the plan are held in trust for the exclusive benefit of participants and their beneficiaries treated as an organization exempt from tax under sec_501 sec_457 provides that the amounts in the trust are treated as includible in the gross_income of participants and beneficiaries only to the extent and at the time provided in sec_457 under the terms of the plan and trust the trustee must hold all of the sec_457 plan assets for the exclusive benefit of the participants and their beneficiaries and all amounts deferred under the plan must be transferred to a_trust meeting the requirements of sec_457 of the code within an administratively reasonable_time period gross_income any portion of the entire amount payable to such participant solely by reason of the transfer of such portion from one eligible_deferred_compensation_plan to another eligible_deferred_compensation_plan sec_1_457-10 of the regulations provide that an eligible governmental_plan may provide for the transfer of amounts deferred by a participant or beneficiary to another eligible governmental_plan if the conditions in paragraphs b or of sec_1_457-10 are met and such transfer of assets is not between an eligible governmental_plan and a tax-exempt entity’s eligible_plan sec_1_457-10 of the regulations further provides that upon the transfer of any amount between eligible plans under paragraphs b through b of sec_1_457-10 if the participant is performing services for the entity maintaining the receiving plan such amount is subject_to the restrictions of sec_1_457-6 relating to when distributions are permitted to be made to a participant under an eligible_plan in the receiving plan in the same manner as if the transferred amount had originally been deferred under the receiving plan based upon the facts summarized above and provided that the city x eligible_plan is amended as stated in the letter submitted by your authorized representative dated date we conclude as follows sec_457 provides that a participant shall not be required to include in the amounts of compensation deferred under the city x eligible_plan the city x eligible_plan constitutes an eligible_deferred_compensation_plan plr-143256-04 within the meaning of sec_457 of the code and the income_tax regulations thereunder including any income attributable to the deferred_compensation will be includible in gross_income of the recipient only for the taxable_year or years in which such amounts are paid to a participant or a participant’s beneficiary in accordance with the terms of the plan the trust established with respect to the plan under sec_457 of the code is treated under sec_457 as a_trust exempt from taxation under sec_501 the city x eligible_plan provisions permitting transfers between the city x eligible_plan and any other eligible governmental b plan pursuant to treasury regulations will not cause any amount to be includible in the participant’s gross_income under sec_457 of the code amounts deferred under any deferred_compensation plan other than the above described city x eligible_plan if the amended and restated city x eligible_plan is significantly modified this ruling will not necessarily remain applicable this ruling is directed only to city x and applies only if the city x eligible_plan submitted on ------------ --------------------------------------------------------------------------------------------------------------------- ------- is revised in accordance with the modifications submitted on ---------------------------- ------------------------------------------------------------------------------------------------------------------- sec_6110 of the code provides that this ruling may not be used or cited as precedent no opinion is expressed concerning the timing of the inclusion in income of sincerely robert d patchell branch chief qualified_plans branch employee_benefits tax exempt government entities enclosure


number release date internal_revenue_service index number r --------------------------------------------- ---------------------------- ------------------------------ ---------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------- id no ------------- telephone number --------------------- refer reply to cc psi b06 plr-168537-02 date date re request for private_letter_ruling regarding normalization re request for private_letter_ruling regarding normalization parent ----------------------------------------------------------------------------------------------- ----------------------------- --------------------------------------------- --------------------- --------------------------------------------------------------------------- --------------------------------------------------------------- -------------------------- ------------------------- -------------------------------- ------------ ----------------------- --------------------------- ---------------------------- ------------------ ------------------ ---------------------- ------------------- taxpayer state act a b c d e f g h i j k x dear -------------- information submitted on behalf of taxpayer for a determination as to the normalization requirements under former sec_46 of the internal_revenue_code e of the tax_reform_act_of_1986 vol c b the act and accelerated_depreciation under former sec_167 and sec_168 and sec_168 for the accumulated deferred investment_tax_credit aditc excess deferred federal income taxes edfit and accumulated deferred federal income taxes adfit associated with certain generation assets that were sold by taxpayer an adverse conference was held date this letter responds to a letter dated date and supplemental taxpayer represents that the facts are as follows taxpayer is engaged as a public_utility in the generation transmission taxpayer elected under former code sec_46 to amortize its aditc in plr-168537-02 facts distribution and sale of electricity to customers in state taxpayer is subject_to the regulatory jurisdiction of a with regards to its terms and conditions of service including the rates it can charge for the provision of service taxpayer is a member_of_an_affiliated_group headed by parent and files a consolidated federal_income_tax return with parent reduction of the tax expense component of its cost of service no faster than ratably and its regulated rate base is not reduced by its aditc balance taxpayer also uses a normalization method_of_accounting for purposes of claiming accelerated_depreciation with respect to public_utility_property in accordance with former sec_167 and sec_168 and with sec_168 moreover taxpayer has normalized its edfit in accordance with e of the act and revproc_88_12 1988_1_cb_637 customers in state must be given the opportunity to purchase electricity from electric power suppliers of their choosing and that to implement retail choice each utility must unbundled its rates so as to provide separate charges on its bills to customers for its generation services for its transmission and distribution services and for other discrete services it provides to customers however electric utilities’ transmission and distribution services were not deregulated under the act and the taxpayer’s rates for these services continue to be subject_to cost of service regulation by a the act recognized that the movement to a competitive market for electric generation would leave utilities in state with stranded costs ie generation-related and other supply- related costs that traditionally would have been recoverable in a regulated environment but that might no longer be recoverable after deregulation when the utilities’ rates for electric generation must be set at levels competitive with the rates charged by other generation suppliers not burdened with similar costs in b state enacted act act provided that effective c all retail electric the act authorized a to permit each public_utility the opportunity to recovery its stranded costs including generation plant stranded costs and stranded costs related to the buydown or buyout of long-term power purchase contracts with non-utility generators on d a issued an order to taxpayer authorizing the issuance and sale of up to dollar_figurex aggregate principal_amount of transition bonds to securitize the recovery_of a portion of subsidiary’s bondable stranded costs repayment of the bonds is accomplished through the imposition of a usage-based non-bypassable transition bond charge tbc that the taxpayer may collect from all of its customers throughout a limited period determined by a plr-168537-02 in e taxpayer entered into purchase agreements to sell its interests in nuclear generation facilities on f a approved the sale of the interests in the nuclear facilities however due to regulatory delays associated with the sale of nuclear facilities on g the purchase agreements were amended with the buyers becoming responsible for the operating costs and risk of loss with respect to the nuclear facilities in return the buyers received of the output associated with the nuclear facilities on h taxpayer closed the sale of the nuclear facilities taxpayer has reflected the deferred tax_attributes associated with the nuclear facilities on its regulatory books of account as follows aditc dollar_figurei edfit dollar_figurej and adfit dollar_figurek as of c a has provided in its order of f that it will reduce taxpayer’s stranded costs associated with the nuclear facilities by the adfit the edfit and the adfit and directing taxpayer to file for a letter_ruling with the irs regarding the treatment of the federal tax benefits associated with the divested assets with final_determination of net_proceeds and stranded costs to await the outcome of the ruling rulings requested taxpayer requests the internal_revenue_service to rule on four issues do the nuclear facilities cease to be public_utility_property with respect to taxpayer on date c date g or date h whether taxpayer will violate the requirements of the depreciation normalization rules set forth in former code sec_167 and code sec_168 if it decreases the stranded cost of the nuclear facilities by the adfit associated with such interest thereby flowing the adfit through to taxpayer’s ratepayers whether taxpayer will violate the requirements of the depreciation normalization rules set forth in section e of the tax_reform_act_of_1986 tra if it decreases the stranded costs of the nuclear facilities by the edfit associated with such interest thereby flowing the edfit through to taxpayer’s ratepayers whether taxpayer will violate the requirements of the investment_tax_credit normalization rules set forth in former code sec_46 if it decreases the stranded costs of the nuclear facilities by the aditc associated with such interest thereby flowing the aditc through to taxpayer’s ratepayers with respect to the three normalization issues the first determination involves the plr-168537-02 law and analysis with respect to the date the nuclear facilities cease to be public_utility_property with respect to taxpayer taxpayer states the as of c when the act was effective the nuclear facilities were operating under a order of a providing that while the nuclear facilities were used to provide basic generation service the price for such output would be set on a rate base rate of return basis on date g taxpayer states it effectively removed the nuclear facilities from its regulatory books of account as providers of basic generation service and as a result no longer provided power associated with the nuclear facilities based upon a rate of return basis pursuant to section dollar_figure of revproc_2006_1 irb the service ordinarily will not rule on matters that are significantly factual the issue of the date property ceases to be public_utility_property is at least in part a question of who is the owner and who bears the burdens and benefits of ownership therefore we decline to rule on this question proper normalization treatment by taxpayer an elector under former sec_46 of its aditc relating to sales of its generating assets elector may flow through the investment_tax_credit to cost of service however former sec_46 provides that no investment_tax_credit is available if the taxpayer's cost of service for ratemaking purposes or in its regulated books of account is reduced by more than a ratable portion of the credit determined under former sec_46 and allowable by sec_38 also under former sec_46 no investment_tax_credit is available if the base to which the taxpayer's rate of return for ratemaking purposes is applied is reduced by reason of any portion of the credit determined under former sec_46 and allowable by sec_38 sec_1_46-6 provides that the cost of service or rate base is also considered to have been reduced by reason of all or a portion of a credit if such reduction is made in an indirect manner in determining whether a ratemaking decision is intended to achieve this effect consideration is given to all the relevant facts and circumstances of each case including but not limited to the record of the proceeding the regulatory body’s orders and opinions including any dissenting views and the anticipated effect of the ratemaking decision on the company’s revenues in comparison to a direct reduction to cost of service or rate base by reason of the investment tax_credits available to the regulated company under former sec_46 the period of time used in computing depreciation expense for purposes of reflecting operating results in the taxpayer's regulated books of account shall be used under sec_1_46-6 of the income_tax regulations ratable for purposes of former sec_46 provides that for purposes of determining ratable portions former sec_46 provides an election for ratable flow through under which an plr-168537-02 former sec_46 is determined by considering the period of time actually used in computing the taxpayer's regulated depreciation expense for the property for which a credit is allowed regulated depreciation expense is the depreciation expense for the property used by a regulatory body for purposes of establishing the taxpayer's cost of service for ratemaking purposes such period of time shall be expressed in units of years or shorter periods units of production or machine hours and shall be determined in accordance with the individual useful_life or composite or other group asset account system actually used in computing the taxpayer's regulated depreciation expense a method of reducing is ratable if the amount to reduce cost of service is allocated ratably in proportion to the number of such units thus for example assume that the regulated depreciation expense is computed under the straight_line method by applying a composite annual percentage rate to original cost as defined for purposes of computing regulated depreciation expense if cost of service is reduced annually by an amount computed by applying a composite annual percentage rate to the amount of the credit cost of service is reduced by a ratable portion if such composite annual percentage rate were revised for purposes of computing depreciation expense beginning with a particular accounting_period the computation of ratable portion must also be revised beginning with such period a composite annual percentage rate is determined solely by reference to the period of time actually used by the taxpayer in computing its regulated depreciation expense without reduction for salvage or other items such as over and under accruals cost of service for ratemaking is reduced by more than a ratable portion of the investment_tax_credit depends upon correlating the credit with the regulatory depreciable useful_life actually used for the property that generated the credit that the correlation must remain constant and current is illustrated by the requirement that the ratable portion must be adjusted to reflect correspondingly any revision to the composite annual percentage rate applied for purposes of computing regulated depreciation expense for computing the regulated depreciation expense there could no longer be any correlation between the property and the credit in that event the requirements of former sec_46 are violated if any portion of the credit is used to reduce the taxpayer's cost of service result the asset for which regulated depreciation expense is computed is no longer available consequently no portion of the related unamortized aditc remaining at the date of sale may be returned to ratepayers by amortizing those aditc amounts over the period taxpayer recovers stranded costs from its ratepayers or by decreasing the net_loss from the sale of the nuclear facilities by those aditc amounts the method prescribed by sec_1_46-6 for determining whether the taxpayer's should the property for which the aditc is allowed become no longer available in this case taxpayer has sold the assets that generated the aditc and as a the second determination involves the proper normalization treatment by under sec_168 if the amount allowable as a deduction under sec_168 in order to use a normalization method_of_accounting sec_168 requires sec_168 provides that the depreciation deduction determined under plr-168537-02 taxpayer of its adfit and edfit relating to the sale of its nuclear facilities sec_168 shall not apply to any public_utility_property within the meaning of sec_168 if the taxpayer does not use a normalization method_of_accounting the taxpayer in computing its tax expense for establishing its cost of service for ratemaking purposes and reflecting operating results in its regulated books of account to use a method_of_depreciation with respect to public_utility_property that is the same as and a depreciation period for such property that is not shorter than the method and period used to compute its depreciation expense for such purposes differs from the amount that would be allowable as a deduction under sec_167 using the method period first and last year convention and salvage_value used to compute regulated tax expense under sec_168 the taxpayer must make adjustments to a reserve to reflect the deferral of taxes resulting from such difference will not be satisfied is if the taxpayer for ratemaking purposes uses a procedure or adjustment which is inconsistent with such requirements under sec_168 such inconsistent procedures and adjustments include the use of an estimate or projection of the taxpayer's tax expense depreciation expense or reserve for deferred taxes under sec_168 unless such estimate or projection is also used for ratemaking purposes with respect to all three of these items and with respect to the rate base accelerated methods for depreciation if they used a normalization method_of_accounting a normalization method_of_accounting was defined in former sec_167 in a manner consistent with that found in sec_168 sec_1_167_l_-1 provides that the normalization requirements for public_utility_property pertain only to the deferral of federal_income_tax liability resulting from the use of an accelerated method_of_depreciation for computing the allowance for depreciation under sec_167 and the use of straight-line_depreciation for computing tax expense and depreciation expense for purposes of establishing cost of services and for reflecting operating results in regulated books of account these regulations do not pertain to other book-tax timing differences with respect to state income taxes f i c a taxes construction costs or any other taxes and items property should reflect the total amount of the deferral of federal_income_tax liability sec_168 provides that one way the requirements of sec_168 sec_1_167_l_-1 provides that the reserve established for public_utility former sec_167 generally provided that public_utilities were entitled to use section e of the act provides another way in which a normalization method plr-168537-02 resulting from the taxpayer's use of different depreciation methods for tax and ratemaking purposes sec_1_167_l_-1 provides that the amount of federal_income_tax liability deferred as a result of the use of different depreciation methods for tax and ratemaking purposes is the excess computed without regard to credits of the amount the tax_liability would have been had the depreciation method for ratemaking purposes been used over the amount of the actual tax_liability this amount shall be taken into account for the taxable_year in which the different methods of depreciation are used sec_1_167_l_-1 provides that the taxpayer must credit this amount of deferred taxes to a reserve for deferred taxes a depreciation_reserve or other reserve_account this regulation further provides that the aggregate amount allocable to deferred taxes shall not be reduced except to reflect the amount for any taxable_year by which federal income taxes are greater by reason of the prior use of different methods of depreciation under sec_1_167_l_-1 or to reflect asset retirements or the expiration of the period of depreciation used in determining the allowance for depreciation under sec_167 of accounting is not being used for public_utility_property shall not be treated as being used with respect to any public_utility_property for purposes of sec_167 or sec_168 if the taxpayer in computing its cost of service for ratemaking purposes and reflecting operating results in its regulated books of account reduces the excess_tax_reserve more rapidly or to a greater extent than this reserve would be reduced under the average rate assumption method aram excess of i the reserve for deferred taxes as described in former sec_167 or sec_168 as in effect on the day before the date of the enactment of the act over ii the amount that would be the balance in this reserve if the amount of the reserve were determined by assuming that the corporate rate reductions provided in the act were in effect for all prior periods under this method aram is the method under which the excess in the reserve for deferred taxes is reduced over the remaining lives of the property as used in its regulated books of account that gave rise to the reserve for deferred taxes under the section e of the act provides that a normalization method_of_accounting section e b of the act defines the aram and explains the calculations the term excess_tax_reserve is defined in e a of the act as the plr-168537-02 aram if timing differences for the property reverse the amount of the adjustment to the reserve for the deferred taxes is calculated by multiplying i the ratio of the aggregate deferred taxes for the property to the aggregate timing differences for the property as of the beginning of the period in question by ii the amount of the timing differences that reverse during this period revproc_88_12 1988_1_cb_637 provides further guidance as to the application of the aram to the excess_tax_reserve section dollar_figure of revproc_88_12 provides that under the aram excess tax_reserves pertaining to a particular vintage or vintage_account are not flowed through to ratepayers until such time as the timing differences in the particular vintage_account reverse moreover it is a violation of e of the act for taxpayers to adopt any accounting treatment that directly or indirectly circumvents the rule set forth in the previous sentence section dollar_figure also provides that e of the act does not modify the normalization requirements of former sec_167 or of sec_168 sec_3 and dollar_figure of revproc_88_12 provide that a taxpayer who lacks for a public_utility to use accelerated_depreciation in determining its federal sufficient vintage_account data necessary to apply the aram can use the reverse south georgia method in general a taxpayer uses that method if it a computes the excess_tax_reserve on all public_utility_property included in the plant account on the basis of the weighted average life or composite rate used to compute depreciation for regulatory purposes and b reduces the excess_tax_reserve ratably over the remaining regulatory life of the property income_tax_liability e of the act requires that normalization_accounting be used to reduce the excess_tax_reserve in calculating the rates to be charged the utility's customers and in maintaining the regulated books of account under e of the act the immediate flow through of the excess_tax_reserve to the utility's customers is prohibited instead the excess_tax_reserve is to be reduced and flowed through to cost of service no more rapidly that this reserve would be reduced under the aram or where appropriate the reverse south georgia method reduced and flowed through to the utility's customers in setting rates it does not require the utility to flow through the excess_tax_reserve to its customers but permits the utility to do so provided the reduction to cost of service is not more rapidly than would be under the aram thus e of the act imposes a limitation on when the excess_tax_reserve may be returned to the utility's customers in the form of reduced rates section e of the act limits the rate at which the excess_tax_reserve may be in the present case taxpayer has sold the aforementioned public_utility_property plr-168537-02 retirements of public_utility_property subject_to the normalization requirements of sec_168 are reflected in adjustments to taxpayer's deferred tax reserve as well as its excess_tax_reserve see sec_1_167_l_-1 and revproc_88_12 c b pincite as a result of the sale these reserves cease to exist a violation of the depreciation normalization rules will occur if there is any return to ratepayers after the sale date of the unamortized adfit or edfit attributable to accelerated_depreciation on public_utility_property that is sold further both aram and the reverse south georgia method rely on mechanisms requiring a regulatory life once the asset is sold the regulatory life ceases to exist hence in each of the three normalization rulings requested by taxpayer there conclusions would be a normalization violation if the remaining unamortized aditc edfit and adfit balances or a proportionate part thereof existing at the date of sale are returned to ratepayers by amortizing those amounts over the period taxpayer recovers stranded costs from its ratepayers or by decreasing the net_loss from the sale of the nuclear generating assets by those amounts because taxpayer has sold the assets that generated the aditc the asset for which regulated depreciation expense is computed is no longer available consequently no portion of the related unamortized aditc remaining at the date of sale may be returned to ratepayers by amortizing those aditc amounts over the period taxpayer recovers stranded costs from its ratepayers or by decreasing the net_loss from the sale of the nuclear generating assets by those aditc amounts additionally the unamortized adfit and edfit associated with the sold generating assets ceases to exist at the date of sale consequently a violation of the depreciation normalization rules will occur if there is any return to ratepayers after the sale date of those unamortized edfit and adfit amounts attributable to accelerated_depreciation on public_utility_property ceased to be public_utility_property due to the factual nature of the inquiry the service declines to rule on the effective date the nuclear generating assets plr-168537-02 this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent sincerely in accordance with the power_of_attorney we are sending a copy of this letter to taxpayer’s authorized representatives we are also sending a copy of this letter to the industry director natural_resources and construction lm nrc enclosures copy copy for return charles b ramsey chief branch office of associate chief_counsel passthroughs and special industries


department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division release number release date date date legend b individual c individual d individual e state f date g dollar amount h dollar amount j dollar amount dear contact person identification_number contact number fax number employer_identification_number vil we have considered your request for recognition of an unusual grant under income_tax regulations sec_1_170a-9 and related provisions based on the information provided we have concluded that the proposed grant does not constitute an unusual grant under sec_1_170a-9 and related provisions of the regulations the basis for our conclusion is set forth below facts you were formed as a nonprofit public benefit corporation in e on f you operate a low cost spay and neuter clinic for the public and provide educational materials regarding the health and care of dogs and cats you charge for these services including receiving insurance reimbursement and are also supported through donations and unrelated income you applied for and were recognized as exempt from federal_income_tax under internal_revenue_code sec_501 when your advance_ruling period ended you were classified as a private_foundation subsequently you requested termination of your private_foundation_status under b b we determined you were reasonably expected to terminate your private_foundation_status and are currently treated as a public charity described in sec_509 for an advance period of months you determined you could better fulfill your charitable purpose if you were to also operate an animal shelter accept stray dogs and cats and operate an adoption center to do so however you would need a significantly larger facility b is your incorporator initial agent for service of process a substantial_contributor pursuant to sec_507 and a disqualified_person pursuant to sec_4946 b has offered to contribute approximately g dollars per year for four years or until sufficient funds are raised to allow you to complete construction of an additional facility pursuant to appropriate design plans and construction bids the grant would pay for construction costs of a multi-purpose animal shelter adoption center over the past ten years b has given over j dollars to you in donations including funds allowing the purchase of your current facility you consider b to be a continual supporter and contributor you also provided copies of form 990pf which show b as a substantial_contributor to you for a continued period since your inception you have a governing body consisting of five directors and three officers the directors are unrelated to b however c your chairman and president is b’s spouse d your executive director a full time compensated employee is c’s daughter you have submitted documentation requesting recognition that the proposed grant from b be classified as an unusual grant under sec_1_170a-9 and related provisions of the regulations law sec_1_170a-9 and sec_1_509_a_-3 of the regulations set forth the criteria for an unusual grant sec_1_170a-9 of the regulations states that for purposes of applying the percent limitation described in subdivision i of this subparagraph to determine whether the percent-of-support test in subparagraph of this paragraph or the percent-of-support limitation in subparagraph i of this paragraph is satisfied one or more contributions may be excluded from both the numerator and the denominator of the applicable percent-of-support fraction if such contributions meet the requirements of subdivision iii of this subparagraph the exclusion provided by this subdivision is generally intended to apply to substantial contributions or bequests from disinterested parties which contributions or bequests are attracted by reason of the publicly supported nature of the organization a and b are unusual or unexpected with respect to the amount thereof and c would by reason of their size adversely affect the status of the organization as normally being publicly supported for the applicable_period described in subparagraph or of this paragraph sec_1_509_a_-3 of the regulations states that in determining whether a particular contribution may be excluded under subdivision ii of this subparagraph all pertinent facts and circumstances will be taken into consideration no single factor will necessarily be determinative such factors may include e whether the contribution was made by any person or persons standing in a relationship to such person which is described in internal_revenue_code sec_4946 through g who created the organization previously contributed a substantial part of its support or endowment or stood in a position of authority such as a foundation_manager within the meaning of sec_4946 with respect to the organization a contribution made by a person other than those persons described in this subdivision will ordinarily be given more favorable consideration than a contribution made by a person described in this subdivision e whether the contribution was a bequest or an inter_vivos transfer a bequest will ordinarily be given more favorable consideration than an inter_vivos transfer e e whether the contribution was in the form of cash readily marketable_securities or assets which further the exempt purposes of the organization such as a gift of a painting to a museum except in the case of a new organization whether prior to the receipt of the particular contribution the organization a has carried on an actual program of public solicitation and exempt_activities and b has been able to attract a significant amount of public support e whether the organization may reasonably be expected to attract a significant amount of public support subsequent to the particular contribution in this connection continued reliance on unusual grants to fund an organization's current operating_expenses as opposed to providing new endowment funds may be evidence that the organization cannot reasonably be expected to attract future support from the general_public e whether prior to the year in which the particular contribution was received the organization met the one-third support_test described in subparagraph of this paragraph without the benefit of any exclusions of unusual grants pursuant to subparagraph of this paragraph e whether neither the contributor nor any person standing in a relationship to such contributor which is described in sec_4946 through g continues directly or indirectly to exercise control_over the organization e whether the organization has a representative governing body as described in income_tax regulations sec_1_509_a_-3 and e whether material restrictions or conditions within the meaning of income_tax regulations sec_1_507-2 have been imposed by the transferor upon the transferee in connection with such transfer application of law we have determined the proposed grant from b does not constitute an unusual grant within the meaning of sec_1_170a-9 and related provisions of the regulations while the proposed grant may adversely affect your public charity status it is not attracted by reason of your publicly supported nature and is not unusual or unexpected with respect to the amount thereof the following factors are present e e e e e you received multiple grants totaling over j dollars from b from to date the purpose of the proposed grant is to support the construction of your animal shelter adoption center this is the same purpose as the initial contributions received from b to establish your animal clinic given the forms 990pf provided the overwhelming majority of your total support since inception will have come from b cis one of your officers she is also b’s spouse dis your executive director she is also c’s daughter the proposed grant is not attracted by reason of your publicly supported nature but rather by your historical relationship with b the contributions previously received from b detail this relationship and together they demonstrate a stream of funds from b to you furthermore the proposed h dollars grant is not unusual or unexpected with respect to the amount since you have previously received a series of contributions from b such as funding when you were initially formed and to aid in the establishment of your current animal clinic in addition after reviewing the factors detailed in sec_1_509_a_-3 of the regulations we have determined the proposed grant from does not constitute an unusual grant e the grant is being made by b a substantial_contributor throughout your existence and a disqualified_person pursuant to sec_4946 when determining unusual grant classification contributions received from those who have previously not contributed a substantial part of an organization's support e e e e e e are given more favorable consideration than contributions from organizations who have previously substantially contributed the grant would be classified as an inter_vivos contribution the grant is in the form of cash which will be used to further your exempt purposes you received a determination_letter approving your sec_501 status on date review of your previously filed forms 990-pf shows that while you have received public support the majority of your funds since inception have been received from b in addition while you have been in existence you have not always attracted a significant amount of public support as evidenced by your private_foundation_status review of previously filed forms 990pf you submitted shows that you did not always met the one-third support_test without the benefit of any exclusions of unusual grants you are currently in a 60-month advance_ruling period to terminate your private_foundation_status under sec_507 of the code one of your officers is b’s spouse your executive director is b’s stepdaughter this illustrates a relationship between you and b the grant from b is contingent on two conditions first b has offered to contribute to your building fund until sufficient funds are raised to allow you to complete construction second the grant must be classified as an unusual grant so that your a status is not adversely affected to allow b a charitable_contribution_deduction to the extend of of his contribution_base with respect to such contributions applicant’s position you agreed b has been a substantial_contributor since inception you also agreed that his past contributions enabled you to become established and allowed you to acquire your current facility you believe that greater emphasis should be on the unusual nature of the gift and on your stability as a publically supported clinic over the past five years you contend that the grant is unusual because its purpose is to build a proposed new second facility in a new area not to support the operating budget of the current facility you contend that five years of a stable publically supported operation is sufficient to distinguish this grant from prior donations made by b you believe that there is some point in time at which a history of stable publically supported operations will separate a new donation from the prior operating history of reliance on a few donors including in particular b you stated five years is a sufficient period service’s response to applicant’s position while any initial grant could be considered unusual and or unexpected subsequent grants from the same individual are logically more usual and more expected b has shown a history of providing support in significant amounts to the point where the proposed grant of the given amount is not unusual the factor listed in sec_1_509_a_-3 of the regulations pertains to whether a contribution was made by any person who created the organization previously contributed a substantial part of its support or endowment or stood in a position of authority such as a foundation_manager with respect to the organization b has been a substantial_contributor to you throughout your existence and has a continuing relationship with you since inception the factor listed in sec_1_509_a_-3 of the regulations pertains to whether the organization has carried on an actual program of public solicitation and exempt_activities and has been able to attract a significant amount of public support since inception you have not always attracted significant amount of public support you are currently in a 60-month advance_ruling period to terminate your private_foundation_status under sec_507 of the code if you receive the proposed grant the overwhelming majority of your total support since inception will have come from b conclusion based on the facts described above we have determined that the proposed grant from b does not constitute an unusual grant within the meaning of sec_1_170a-9 and sec_1_509_a_-3 and of the regulations b is a disqualified_person a regular substantial_contributor and the grant would not be considered unusual or unexpected we have sent a copy of this letter to your representative as indicated in your power_of_attorney please keep a copy of this letter in your permanent records if you have any questions regarding this matter please contact the person whose name and telephone number appear in the heading of this letter sincerely lois g lerner director exempt_organizations


internal_revenue_service department of the treasury number release date index no p o box ben franklin station washington dc person to contact telephone number refer reply to cc dom p si plr-105112-99 re legend date grandparent grandparent 1’s will son son’s will beneficiary trust a trustee date date date corporation dear this is in response to your letter dated date in which you requested a ruling regarding the application of the generation-skipping_transfer gst tax provisions of chapter of the internal_revenue_code specifically you requested a ruling that the exempt status of trust a for gst tax purposes would not be affected by the following i the trustee’s consent to corporation’s s election on behalf of trust a ii the trustee’s execution of an electing_small_business_trust election on behalf of trust a and iii the trustee’s execution of the shareholder agreement on behalf of trust a according to your submission grandparent died testate on date pursuant to the terms of grandparent 1's will four separate residuary trusts of equal value were created for the benefit of grandparent 1's four children and their respective descendants including son article section c of grandparent 1's will provides the terms of the four trusts generally upon the death of a child the trust estate of such child as then constituted is to be held in trust for the benefit of or distributed to or in plr-105112-99 trust for the benefit of any one or more of such child’s descendants in such amount and in such manner and upon such terms and conditions as such child shall appoint by his or her last will specifically referring to the power_of_appointment conferred upon him or her article section d of grandparent 1's will provides that any trust created pursuant to the terms of the will shall terminate no later than twenty-one years after the death of the last survivor of grandparent and all beneficiaries under the will living at the date of grandparent 1's death son died testate on date in his will son exercised the testamentary_power_of_appointment granted to him under article section c of grandparent 1's will by directing trustee to divide the property into three trusts of equal value including trust a for the benefit of beneficiary and her descendants pursuant to the article sec_4 of son’s will which provides the terms of the three trusts the trustee is to pay to the beneficiary for whom the trust is named and his or her descendants or any one or more of them from time to time living such part or all of the income and principal of the trust even though exhausting the trust at such time or times and in such equal or unequal proportions among them as the trustee believes desirable for the best interests and welfare of such beneficiary and his or her descendants in that order and as a group considering the desirability of supplementing their respective incomes or assets and all other circumstances and factors the trustee believes pertinent any undistributed_income of a_trust shall be accumulated and from time to time added to principal article sec_4 of son’s will provides that if a beneficiary living at or born after son’s death for whom a_trust is named dies before the complete distribution of the trust then on the death of such beneficiary or on the division date if he or she then is deceased the principal of the trust and all accrued or undistributed_income shall be distributed to or for the benefit of such of son’s descendants then living or thereafter born in such proportions and subject_to such trusts powers and conditions as such beneficiary may provide and appoint by will article sec_4 provides that on the death of a beneficiary for whom a_trust is named or on the division date if he or she then is deceased any principal of the trust not effectively disposed of shall be allocated per stirpes among the then living descendants of the beneficiary if any if there are no such descendants the trust estate or the part not effectively appointed shall be distributed per stirpes among the then living descendants of the nearest lineal ancestor of the plr-105112-99 beneficiary who also was a descendant of son and of whom one or more descendants then are living or if none per stirpes among son’s then living descendants each share allocated to a beneficiary for whom a_trust then held is named shall be added to that trust and each share allocated to any other beneficiary shall be retained in trust as a separate trust named for him or her article sec_4 of son’s will provides that despite any other provisions of son’s will on the day next preceding the end of twenty-one years after the death of the last to die of the descendants of grandparent living on date the trustee shall distribute any property then held in a_trust to the beneficiary for whom the trust is named the primary asset of trust a is stock in corporation a c_corporation the corporation’s board_of directors proposes to elect to treat corporation as a small_business_corporation an s_corporation trustee proposes to consent to the s election in order to convert corporation to an s_corporation each of its shareholders must be eligible to hold s_corporation stock as of the first day of the year for which the election is to take effect trustee proposes to make an election under sec_1361 to treat trust a as an electing_small_business_trust so that it can qualify as an eligible s_corporation shareholder in an effort to ensure the continuing qualification of corporation as an s_corporation trustee intends to enter into a shareholder agreement with corporation and corporation’s other shareholders to protect the s election under the sec_3 of the proposed shareholder agreement no shareholder may transfer and no person may acquire the legal or beneficial_ownership of any share if such transfer or acquisition would cause the s status of the corporation to terminate specifically no transfer may be made to any person that is not eligible to be a shareholder of an s_corporation under the applicable provisions of the code as in effect at the time of the purported transfer in addition no shareholder may affirmatively transfer shares to a person if the transfer would cause the corporation to exceed the maximum number of persons who are allowable s_corporation shareholders sec_3 of the proposed shareholder agreement provides that no shareholder shall make any transfer of shares to any trust having multiple beneficiaries or amend any trust that owns shares to increase the number of beneficiaries unless all such beneficiaries are persons eligible to be transferees pursuant to sec_3 and immediately after such transfer or amendment the number of shareholders the corporation is deemed to have for purposes of sec_1361 would not exceed the maximum number of persons plr-105112-99 who are allowable s_corporation shareholders pursuant to that section notwithstanding any other provision of the shareholder agreement the shareholders and the corporation acknowledge and agree in sec_3 that none of the following shall be prohibited by the terms of this shareholder agreement i the addition of a_trust beneficiary due to the birth of an additional descendant of grandparent ii the exercise of a power_of_appointment granted to a beneficiary pursuant to the terms of any irrevocable_trust that is in existence on the date of the agreement and that owns shares iii the transfer of shares to any person in whose favor a power_of_appointment described in ii above is exercised or iv the distribution of shares to a a beneficiary of any irrevocable_trust that is in existence on the date of the agreement and that owns shares pursuant to the terms thereof or b to the beneficiary of any trust created pursuant to the exercise of a power_of_appointment described in ii above even if such addition exercise or distribution shall cause the termination of the corporation’s s election sec_3 provides that prior to any transfer or other_disposition of shares if the corporation in its discretion so requires an opinion of counsel to the corporation must first be received by the corporation the cost of which shall be borne by the shareholder whose shares are to be transferred or disposed of that the transferee is i eligible to be a shareholder of an s_corporation in accordance with the applicable_requirements of the code or ii that the transfer otherwise is allowable pursuant to the provisions of the shareholder agreement in addition to the other requirements of sec_3 of the shareholder agreement sec_3 provides that no transfer of shares including without limitation transfers pursuant to sec_3 shall be permitted and no purported transfer shall be effective until a permitted transferee has executed a supplemental signature page to the shareholder agreement all parties agree that upon execution and acceptance of a supplemental signature page the shareholder agreement shall be amended and the transferee shall have the rights and obligations of a shareholder under the agreement sec_3 of the shareholder agreement provides that shareholders possessing of the total voting power of all outstanding shares may at any time and from time to time agree in writing to authorize or ratify any transfer of shares which would otherwise not be permitted by the shareholder agreement in which event the transfer shall be deemed for all purposes to comply with the shareholder agreement notwithstanding any other provision of the agreement plr-105112-99 under sec_3 if a transfer of shares is required to be made pursuant to sec_3 iii or iv to a transferee who is not already a shareholder and who has not previously executed or currently refuses to execute a supplemental signature page to the shareholder agreement a non- consenting transferee certain procedures will apply the shareholders may allow the transfer of shares to the non- consenting transferee pursuant to the procedure set forth in sec_3 otherwise the shares that otherwise would be transferred to the non-consenting transferee shall instead be redeemed by the corporation for a price equal to the fair_market_value of the shares as of the valuation_date pursuant to sec_5 of the proposed shareholder agreement any purported transfer in violation of the shareholder agreement shall not affect the beneficial or legal ownership of shares section of the agreement states that subject_to any limitations on dividends or other distributions imposed by statute the corporation shall make pro_rata dividend distributions of money based on ownership of shares to pay the federal state and local income_tax on the income and gain of the corporation net of any_tax benefits produced for the shareholders by the corporation’s losses deductions and credits for the current_year and for each prior year during which the corporation’s s election was in effect that passes through to the shareholders under the applicable provisions of the code in respect of each taxable_year or portion thereof of the corporation for which its s election is in effect section of the proposed shareholder agreement provides that the corporation shall a not issue more than one class of shares b use its best efforts to avoid a termination of its s election and c in the event of a termination of the s election use its best efforts to distribute to each shareholder such shareholder’s net share of the corporation’s undistributed_taxable_income for all taxable years for which the s election was in effect to the extent permitted by law and consistent with the obligations of the corporation to creditors agreements to which the corporation is a party and other business considerations within the period when such a distribution will be considered a non-dividend distribution under sec_1371 section of the proposed shareholder agreement states that if the corporation’s status as an s_corporation is terminated inadvertently and the corporation wishes to obtain a ruling under sec_1362 each shareholder agrees to make any adjustments required pursuant to sec_1362 and approved by the corporation’s board_of directors a shareholder’s obligation to make such adjustments shall continue after the shareholder has plr-105112-99 ceased to own shares in the corporation and after the shareholder agreement has terminated except as directed by the shareholder agreement the existing trustee will continue to serve in the same manner as it previously served in addition trust a will continue to be administered in accordance with the terms and conditions set forth in son’s will sec_2601 imposes a tax on every generation-skipping_transfer sec_26_2601-1 of the generation-skipping_transfer_tax regulations provides that the gst tax applies to any generation-skipping_transfer made after date sec_26_2601-1 provides an exception to this rule for any distributions from a_trust that was irrevocable on date however this exception does not apply to a pro_rata portion of any generation-skipping_transfer under an irrevocable_trust where additions were made to the trust after date in addition a modification to a_trust that results in a change in the quality value or timing of any beneficial_interest provided for under the trust instrument will cause the trust to lose its exempt status sec_26_2601-1 provides that except as provided under sec_26_2601-1 where any portion of a_trust remains in the trust after the post-date release exercise or lapse of a power_of_appointment over that portion of the trust and the release exercise or lapse is treated to any extent as a taxable transfer under chapter or chapter the value of the entire portion of the trust subject_to the power that was released exercised or lapsed is treated as if that portion had been withdrawn and immediately retransferred to the trust at the time of the release exercise or lapse sec_26_2601-1 provides a special rule for certain powers of appointment this section provides that the release exercise or lapse of a power_of_appointment other than a general_power_of_appointment as defined in sec_2041 will not be treated as an addition to a_trust if- such power_of_appointment was created in an irrevocable_trust that is not subject_to chapter under sec_26_2601-1 and in the case of an exercise such power_of_appointment is not exercised in a manner that may postpone or suspend the vesting absolute ownership or power of alienation of an interest in property for a period measured from the date of creation of the trust extending beyond any life in being at the date of creation of the trust plus a period of years plr-105112-99 sec_2041 provides that the term general_power_of_appointment means a power that is exercisable in favor of the individual possessing the power his estate his creditors or the creditors of his estate in this case trust a was created pursuant to the exercise after date of son’s limited_power_of_appointment because the exercise of son’s limited power satisfies the requirements of sec_26_2601-1 property passing to the trust pursuant to son’s exercise is not considered a post- date addition to the trust further it is represented that there have been no additions constructive or otherwise to trust a after that date based on the representations made and the facts submitted we conclude that there is no change in the quality value or timing of any beneficial_interest in trust a resulting from the following i the trustee’s consent to corporation’s proposed s election ii the trustee’s election to treat trust a as an electing_small_business_trust and iii the trustee’s execution of the proposed shareholder agreement therefore items i - iii above will not cause trust a to lose its exempt status with respect to the gst tax provided that there are no additions constructive or otherwise to trust a after date distributions from trust a to skip persons will not be subject_to the gst tax except as specifically ruled herein we express no opinion as to the consequences of this transaction under the cited provisions of the code or under any other provisions of the code specifically we express no opinion on whether trust a will qualify as an electing_small_business_trust within the meaning of sec_1361 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 assistant chief_counsel passthroughs and special industries by george masnik chief branch enclosure copy for sec_6110 purposes


t c summary opinion united_states tax_court estate of cicero ioan limberea deceased liudmila caraman executrix and liudmila caraman petitioners v commissioner of internal revenue respondent docket no 11216-11s filed date cicero ioan limberea and liudmila caraman pro sese rachel l paul for respondent summary opinion guy special_trial_judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect when the mr limberea appeared and testified when this case was called for trial he passed away a few months after the trial and ms caraman was appointed to serve as executrix of his estate which is now subject_to probate in the commonwealth of virginia petition was filed pursuant to sec_7463 the decision to be entered is not reviewable by any other court and this opinion shall not be treated as precedent for any other case respondent determined deficiencies in decedent and ms caraman’s federal_income_tax and accuracy-related_penalties for the years and in the amounts as follows year deficiency dollar_figure big_number penalty sec_6662 dollar_figure cicero ioan limberea decedent or mr limberea and liudmila caraman ms caraman were husband and wife during the years in issue and they filed a timely petition for redetermination with the court pursuant to sec_6213 at the time the petition was filed they resided in virginia section references are to the internal_revenue_code code as amended and in effect for the years in issue and rule references are to the tax_court rules_of_practice and procedure all monetary amounts are rounded to the nearest dollar after concessions the issues remaining in dispute are whether decedent and ms caraman are entitled to a deduction of dollar_figure for various expenses reported on schedule c profit or loss from business for the taxable_year received miscellaneous income of dollar_figure during the taxable_year and are liable for accuracy-related_penalties under sec_6662 for the taxable years and background some of the facts have been stipulated and are so found the stipulation of facts and the accompanying exhibits are incorporated herein by this reference i mr limberea’s employment during mr limberea was a certified_public_accountant c p a and earned a bachelor’s degree and a master’s degree on date mr limberea was hired as the director of accounting policy and research for the consumer finance group at american decedent and ms caraman concede that they failed to report other income of dollar_figure interest_income of dollar_figure and qualified dividends of dollar_figure for the taxable_year failed to report interest_income of dollar_figure qualified dividends of dollar_figure ordinary dividends of dollar_figure a state tax_refund of dollar_figure and unemployment_compensation of dollar_figure for the taxable_year and are not entitled to a deduction of dollar_figure for unreimbursed employee business_expenses as reported on schedule a itemized_deductions for the taxable_year to the extent not discussed herein other issues are computational and flow from our decision in this case international group aig in new york new york mr limberea was hired as an at-will employee by david fabricant vice president and controller of aig’s consumer finance group both parties expected the employment relationship to continue indefinitely mr fabricant supervised mr limberea during the period january through date aig paid mr limberea an annual base salary of dollar_figure and a sign-on bonus of dollar_figure the bonus was intended in part to offset moving_expenses if mr limberea decided to move his family from virginia where they were residing at the time to new york mr limberea elected not to move his family to new york instead he worked in aig’s offices in new york and rented a hotel room on staten island where he stayed during the week mr limberea commuted back to his home in virginia on the weekends aig issued mr limberea a corporate credit card consistent with aig policy mr limberea was required to provide aig with receipts for business_expenses charged to the card and if he paid any aig business_expenses from his own funds he was obliged to request reimbursement from aig and provide receipts or invoices to substantiate those expenditures it was aig’s policy to reimburse an employee for properly substantiated business_expenses even after the employee left the firm’s employment aig reimbursed mr limberea for membership dues that he paid to the american institute of certified public accountants aicpa during aig also reimbursed mr limberea for certain meals and entertainment_expenses foreign_travel expenses and cellular phone service fees incurred during aig did not require mr limberea to maintain professional malpractice insurance or a home_office as a condition of his employment aig decided to close its consumer finance group in the latter half of mr limberea’s employment with aig ended on date ii mr limberea’s employment during during mr limberea was employed by old mutual business services inc and he received a form 1099-misc miscellaneous income reporting income of dollar_figure for mr limberea recalled that this income related to shares of stock in a corporation he identified as delphi that were transferred to his ameritrade brokerage account during he did not include the value of it appears that mr limberea may have been referring to delphi corp an international automobile parts manufacturer the shares in his and ms caraman’s taxable_income for however because he believed that the shares were worthless by the end of that year iii joint tax returns for and decedent and ms caraman timely filed joint federal_income_tax returns for and they attached a schedule c to their tax_return for for a business identified as ltg risk international llc ltg the schedule c identified ms caraman as the proprietor of ltg reported gross_receipts of dollar_figure and claimed a deduction of dollar_figure for various expenses listed below expense amount supplies legal professional depreciation and sec_179 business use of home other utilities meals and entertainment repairs and maintenance insurance other than health commissions and fees advertising travel car and truck total dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number the dollar_figure listed above for business use of home is derived from two forms expenses for business use of your home attached to the return both forms listed ms caraman as proprietor and indicated that the home was used for consulting financial work one form_8829 related to decedent and ms caraman’s home in virginia the record does not reflect the location of the property that was the subject of the second form_8829 second property the forms indicated that of the virginia home and of the second property were used regularly and exclusively for business purposes iv tax_return preparation mr limberea used turbotax a software program to prepare the joint returns for and there is no evidence that decedent or ms caraman consulted with a tax professional before signing their returns and submitting them to the internal_revenue_service irs v mr limberea’s testimony mr limberea’s testimony at trial was evasive vague and inconsistent although he did not offer any evidence to substantiate the claim mr limberea believed that unidentified persons conspired to deny him reimbursement for valid business_expenses that he incurred on behalf of aig the record includes decedent and ms caraman’s monthly checking account statements for including handwritten notations attributing certain payments for phone electric trash disposal an alarm system insurance and homeowners_association fees to ltg other larger payments are identified as expenses related to foreign_travel and c p a insurance discussion as a general_rule the commissioner’s determination of a taxpayer’s liability in a notice_of_deficiency is presumed correct and the taxpayer bears the burden of proving that the determination is incorrect rule a 290_us_111 as discussed in detail below decedent and ms caraman have not complied with the code’s substantiation requirements nor have they maintained all required records therefore the burden_of_proof as to any relevant factual issue does not shift to respondent under sec_7491 see sec_7491 and 116_tc_438 deductions are a matter of legislative grace and the taxpayer bears the burden of proving entitlement to any deduction claimed rule a 503_us_79 292_us_435 a taxpayer must substantiate deductions by keeping and producing adequate_records that enable the commissioner to determine the taxpayer’s correct_tax liability sec_6001 65_tc_87 aff’d per curiam 540_f2d_821 5th cir 43_tc_824 a taxpayer claiming a deduction on a federal_income_tax return must demonstrate that the deduction is allowable pursuant to a statutory provision and must further substantiate that the expense to which the deduction relates has been paid_or_incurred sec_6001 hradesky v commissioner t c pincite under sec_162 a deduction is allowed for ordinary and necessary expenses paid_or_incurred during the taxable_year in carrying on any trade_or_business the determination of whether an expenditure satisfies the requirements for deductibility under sec_162 is a question of fact see 320_us_467 a deduction normally is not available for personal living or family_expenses sec_262 the term trade_or_business includes performing services as an employee 54_tc_374 however an employee expense is not ordinary and necessary if the employee is entitled to reimbursement from his or her employer see 24_tc_21 noz v commissioner tcmemo_2012_272 when a taxpayer establishes that he or she paid_or_incurred a deductible expense but fails to establish the amount of the deduction the court normally may estimate the amount allowable as a deduction 39_f2d_540 2d cir 85_tc_731 there must be sufficient evidence in the record however to permit the court to conclude that a deductible expense was paid_or_incurred in at least the amount allowed 245_f2d_559 5th cir sec_274 prescribes strict substantiation requirements for deductions for expenses related to travel including meals_and_lodging entertainment gifts and with respect to listed_property 50_tc_823 aff’d per curiam 412_f2d_201 2d cir sec_1_274-5t temporary income_tax regs fed reg date as relevant here the term listed_property includes passenger automobiles sec_280f to satisfy the requirements of sec_274 a taxpayer generally must maintain records and documentary_evidence which in combination are sufficient to establish the amount date and time and business_purpose of each separate expenditure or business use of listed_property sec_1_274-5t temporary income_tax regs fed reg date the court may not use the rule in 39_f2d_540 2d cir to estimate expenses subject_to sec_274 50_tc_823 aff’d per curiam 412_f2d_201 2d cir sec_1_274-5t continued i schedule c expenses--2008 a travel_expenses and legal and professional services mr limberea testified that unspecified portions of the deductions for travel_expenses and legal and professional services claimed on schedule c were related to his employment with aig consequently he was required to report those expenses on schedule a as unreimbursed employee_expenses rather than on schedule c further to be eligible to deduct unreimbursed employee business_expenses he was obliged to show that he was not entitled to reimbursement from aig see 788_f2d_1406 9th cir aff’g tcmemo_1984_533 79_tc_1 solomon v commissioner tcmemo_2011_91 in any event mr limberea failed to produce any documentation such as bills receipts or invoices to substantiate that he paid any expenses for travel and legal and professional services associated with his work for aig during or that aig denied reimbursement for any such expenses see podems v commissioner t c pincite the court is not bound to accept a taxpayer’s continued temporary income_tax regs fed reg date the record reflects that aig reimbursed mr limberea for his aicpa membership dues self-serving unverified and undocumented testimony 112_tc_183 the record likewise is devoid of any documentation such as bills receipts or invoices to substantiate that either ms caraman or mr limberea paid_or_incurred any expenses for travel and legal and professional services associated with work for ltg during consistent with the foregoing we sustain respondent’s determination disallowing deductions claimed for travel_expenses and legal and professional services b supplies repairs and maintenance commissions and fees advertising and other expenses decedent and ms caraman claimed deductions for supplies repairs and maintenance commissions and fees advertising and other expenses consisting of printing costs books magazines and postage they did not present any receipts canceled checks or similar records to substantiate these expenses and there is no evidence in the record that would allow us to estimate the amounts of any allowable deductions see vanicek v commissioner t c pincite consequently respondent’s determination disallowing these deductions is sustained c insurance decedent and ms caraman claimed a deduction for professional malpractice insurance mr limberea was not required to maintain professional malpractice insurance as a condition of his employment with aig moreover there is no evidence such as receipts canceled checks or insurance records substantiating the expense accordingly respondents’ determination disallowing the deduction for insurance expenses is sustained d meals and entertainment and vehicle expenses decedent and ms caraman claimed deductions for meals and entertainment_expenses and vehicle expenses the record reflects that aig reimbursed mr limberea for certain meals and entertainment_expenses and travel_expenses there is no documentation such as bills receipts or mileage logs showing the amount time and place and business_purpose for any additional expenses for meals and entertainment or vehicle expenses see sec_274 consequently respondent’s inasmuch as mr limberea’s employment with aig was indefinite as opposed to temporary no deduction is allowed for the cost of mr limberea’s weekend trips from new york to virginia during in short those trips did not amount to traveling expenses while away from home within the meaning of sec_162 see 55_tc_783 49_tc_557 determination disallowing the deductions claimed for meals and entertainment and vehicle expenses is sustained e business use of home decedent and ms caraman claimed a deduction for two home_office spaces during specifically they claimed that they used square feet of their big_number square-foot home in virginia as an office and square feet of an unidentified second property as an office sec_280a sets forth the general_rule that an individual taxpayer or an s_corporation is not permitted to claim a deduction with respect to the use of a dwelling_unit which is used during the taxable_year by the taxpayer as a residence sec_280a prescribes an exception to the general_rule of subsection a as follows sec_280a exceptions for certain business or rental use limitations on deductions for such use -- certain business use --subsection a shall not apply to any item to the extent such item is allocable to a portion of the dwelling_unit which is exclusively used on a regular basis-- a as the principal_place_of_business for any trade_or_business of the taxpayer b as a place of business which is used by patients clients or customers in meeting or dealing with the taxpayer in the normal course of his trade_or_business or c in the case of a separate structure which is not attached to the dwelling_unit in connection with the taxpayer’s trade_or_business in the case of an employee the proceeding sentence shall apply only if the exclusive use referred to in the preceding sentence is for the convenience of his employer for purposes of subparagraph a the term principal_place_of_business includes a place of business which is used by the taxpayer for the administrative or management activities of any trade_or_business of the taxpayer if there is no other fixed location of such trade_or_business where the taxpayer conducts substantial administrative or management activities of such trade_or_business in sum sec_280a permits a deduction for expenses that are allocable to a portion of a dwelling_unit which is exclusively used on a regular basis as the principal_place_of_business for any trade_or_business of the taxpayer 125_tc_271 if the taxpayer is an employee however a deduction is available only if inter alia the home_office is maintained for the convenience_of_the_employer 94_tc_348 an employee cannot maintain a home_office purely as a matter of personal convenience comfort or economy 66_tc_515 aff’d 591_f2d_1273 9th cir there is no evidence that any space in either the virginia home or the second property was used exclusively and on a regular basis as ltg’s principal_place_of_business nor has there been any showing that mr limberea used a specific space at either property to perform his duties for or as a condition of his employment with aig see 82_tc_318 on the record presented respondent’s determination is sustained and the deductions claimed for business use of home are disallowed f depreciation decedent and ms caraman claimed a deduction for depreciation sec_167 allows a depreciation deduction for exhaustion wear_and_tear and obsolescence of property if the taxpayer uses such property in a trade_or_business or other income-producing activity sec_1_167_a_-1 income_tax regs sec_168 provides the general_rule that the depreciation deduction authorized by sec_167 for any tangible_property shall be determined by using the applicable_depreciation_method the applicable_recovery_period and the applicable convention there is no evidence in the record of an expenditure in respect of a depreciable asset or the method used to calculate the depreciation deduction therefore respondent’s determination is sustained and the depreciation deduction is disallowed g utilities decedent and ms caraman claimed a deduction for utility expenses the record includes the couple’s monthly checking account statements for including handwritten notations attributing certain payments for phone electric trash disposal and homeowners_association fees to ltg there has been no showing that the utility bills are anything other than nondeductible personal expenses sec_262 accordingly respondent’s determination disallowing the deduction claimed for utility expenses is sustained ii miscellaneous income--2009 decedent and ms caraman failed to include in taxable_income dollar_figure reported to respondent on form 1099-misc for mr limberea recalled that an undisclosed number of shares of stock in a corporation he referred to as delphi were transferred to his ameritrade brokerage account but he did not include the value of the shares in income because he believed the shares were worthless by the end of under the circumstances we consider mr limberea to have conceded that he received income in the amount set forth in the form 1099-misc see sec_61 while asserting that he realized a capital_loss for the taxable_year under sec_165 however he failed to offer any evidence showing that the shares of stock transferred to his brokerage account were indeed worthless at the end of see eg 38_bta_1270 the taxpayer must show an absence of both potential and liquid value by yearend in order to sustain a worthless_stock loss aff’d 112_f2d_320 7th cir respondent’s determination that decedent and ms caraman failed to report income of dollar_figure for the taxable_year is sustained and we hold that they are not entitled to a worthless_stock loss for iii sec_6662 accuracy-related_penalties sec_6662 and b imposes a penalty equal to of the amount of any underpayment attributable to negligence or disregard of rules or regulations the term negligence includes any failure to make a reasonable attempt to comply with tax laws and disregard includes any careless reckless or intentional disregard of rules or regulations sec_6662 negligence also includes any failure to keep adequate books_and_records or to substantiate items sec_165 provides the general_rule that if any security which is a capital_asset becomes worthless during the taxable_year the loss resulting therefrom shall be treated as a loss from the sale_or_exchange of a capital_asset on the last day of the taxable_year properly sec_1_6662-3 income_tax regs see 139_tc_19 sec_6664 provides an exception to the imposition of the accuracy- related penalty if the taxpayer establishes that there was reasonable_cause for and the taxpayer acted in good_faith with respect to the underpayment sec_1 a income_tax regs the determination of whether the taxpayer acted with reasonable_cause and in good_faith is made on a case-by-case basis taking into account the pertinent facts and circumstances sec_1_6664-4 income_tax regs the commissioner bears the initial burden of production sec_7491 if the commissioner satisfies his burden the taxpayer then bears the ultimate burden of persuasion higbee v commissioner t c pincite respondent has discharged his burden of production under sec_7491 by showing that decedent and ms caraman failed to keep adequate books_and_records and they failed to properly substantiate their claimed expenses see sec_1_6662-3 income_tax regs mr limberea prepared the tax returns in question using a software program and neither he nor ms caraman consulted with a tax professional before submitting the returns to the irs the record reflects that they failed to report numerous items of income over a two-year period and they failed to maintain the books_and_records necessary to substantiate their claimed deductions considering all the circumstances including the fact that mr limberea was a c p a we are unable to conclude that either he or ms caraman acted with reasonable_cause and in good_faith in respect of the preparation and filing of their tax returns for the years in issue as a result we sustain the accuracy-related_penalties that respondent determined under sec_6662 for and to reflect the foregoing decision will be entered for respondent