t c memo united_states tax_court peoplefeeders inc and subsidiaries petitioner v commissioner of internal revenue respondent docket no filed date held under the facts of this case the fact that respondent’s notice_of_deficiency indicated that petitioner’s taxable years ended on june of each year rather than on the actual last day of petitioner’s taxable years does not invalidate respondent’s notice_of_deficiency and does not deprive the court of subject matter jurisdiction held further petitioner’s claimed dollar_figure bad_debt deduction for petitioner's taxable_year and net_operating_loss carrybacks and carryforwards relating thereto are denied charles o cobb thomas m cryan and mark a krasner for petitioner robert j burbank and thomas c pliske for respondent memorandum findings_of_fact and opinion swift judge respondent determined deficiencies in petitioner’s consolidated federal income taxes in the respective amounts of dollar_figure dollar_figure dollar_figure dollar_figure and dollar_figure allegedly for petitioner's and taxable years unless otherwise indicated all section references are to the internal_revenue_code in effect for the years in issue and all rule references are to the tax_court rules_of_practice and procedure the issues for decision are whether deficiency determinations for petitioner's taxable years through were made in respondent’s notice_of_deficiency as respondent contends or whether deficiency determinations against petitioner for nonexistent years were made in respondent’s notice_of_deficiency as petitioner contends making respondent’s deficiency determinations defective and depriving the court of subject matter jurisdiction over petitioner's tax_liabilities and if the above issue is resolved in favor of respondent whether petitioner is entitled to a dollar_figure claimed bad_debt deduction for petitioner's taxable_year and net_operating_loss nol carrybacks and carryforwards relating thereto findings_of_fact some of the facts are stipulated and are so found at the time the petition was filed petitioner's principal_place_of_business was located in san diego california prior to date karl motsenbocker motsenbocker owned percent of the shares of stock in peoplefeeders inc a closely held california corporation that was the parent_corporation of a group of affiliated corporations that owned and operated a chain of pizza restaurants under the name of square pan pizza in the summer of jeffrey partrick partrick and three other individuals formed hppw restaurants inc hppw and on date hppw acquired for dollar_figure all of motsenbocker's shares of stock in peoplefeeders and motsenbocker's ownership_interest in a related partnership the dollar_figure purchase_price for the stock in peoplefeeders and for the related partnership_interest was reflected by and was to be paid as follows form of payment amount cash at closing s big_number promissory notes due_date big_number date big_number date big_number total dollar_figure interest accrued on the promissory notes at an annual rate of percent over the prime rate ’ t after date the interest rate on the date promissory note increased to percent over the prime rate and after date the interest rate on the third promissory continued upon hppw’s acquisition of the stock in peoplefeeders hppw became the parent_corporation of peoplefeeders and hppw changed its name to peoplefeeders the former peoplefeeders corporate entity changed its name to square pan pizza co of california inc square pan and remained parent to other subsidiary corporations that owned and operated restaurants hereinafter references to peoplefeeders and to square pan are to those parent and subsidiary corporate entities as they existed and operated after the date acquisition and name change_of the corporations on date peoplefeeders obtained a dollar_figure million loan from california commerce bank commerce bank reflected by a promissory note in favor of commerce bank payable in monthly installments of dollar_figure with interest pincite percent over prime and due in full on date on date using proceeds from the dollar_figure million commerce bank loan peoplefeeders paid motsenbocker the dollar_figure million due on that date relating to hppw's acquisition of motsenbocker's stock interest in peoplefeeders with regard both to the dollar_figure million debt obligation owed to motsenbocker and the dollar_figure million loan obtained from commerce bank the board_of directors of peoplefeeders formally acted on and approved such debt obligations promissory notes were issued continued note increased to percent over the prime rate - - by peoplefeeders in favor of motsenbocker and commerce bank relating thereto and the debt obligations were secured_by personal guarantees of partrick by corporate guarantees of square pan and the other subsidiaries and by collateralization of the operating_assets of square pan and the other subsidiaries as of early fall of square pan and the other subsidiaries owned and operated restaurants and other businesses namely a wholesale food supplier and a food concession at that time peoplefeeders did not separately own or operate any restaurants and peoplefeeders had no source_of_income from any business other than square pan in the fall of peoplefeeders purchased and began operating one arby's restaurant in peoplefeeders opened a pizza restaurant but it was unsuccessful and closed within a year in peoplefeeders opened another pizza restaurant but this restaurant also was unsuccessful and closed within a year intercompany bank account fach of the restaurants owned and operated by peoplefeeders by square pan and by the other related subsidiaries maintained separate bank accounts at different banks and cash receipts from operations of each restaurant were deposited daily into the separate bank accounts maintained by each restaurant three times a week the total cash receipts from all of the restaurants for the prior few days were withdrawn from the separate bank accounts maintained by each restaurant and were transferred into a single bank account maintained at commerce bank under the name of square pan this bank account will be referred to hereinafter as the intercompany bank account all of the business_expenses relating to peoplefeeders to square pan to the related subsidiaries as well as all of the business_expenses relating to the restaurants owned and operated by the various related corporate entities were paid_by checks drawn not on the separate bank accounts maintained by each restaurant but by checks drawn on the intercompany bank account payments made to motsenbocker and to commerce bank with regard to peoplefeeders' loan and debt obligations described above also were made by checks drawn on the intercompany bank account for the years in issue total cash receipts that peoplefeeders received and transferred into the intercompany bank account were sufficient in amount to cover peoplefeeders' total operating_expenses but they were not sufficient to cover the loan payments peoplefeeders owed to motsenbocker and to commerce bank accordingly the difference between the total cash receipts transferred by peoplefeeders into the intercompany bank account and the total of peoplefeeders’ expenses and loan payments that were paid out of the intercompany bank account increased each year from until date as follows peoplefeeders' expenses peoplefeeders' cash receipts and loan payments paid taxable transferred into intercompany out of intercompany year bank account bank account difference sdollar_figure dollar_figure sdollar_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 total dollar_figure dollar_figure dollar_figure books_and_records the record herein does not adequately reflect how at the time cash sales receipts were received by the various restaurants the cash receipts were recorded if at all on the books_and_records of peoplefeeders of square pan and of the other related corporate entities the evidence does not indicate that at the time cash receipts were received by the restaurants debit entries were made to a cash bookkeeping account nor that credit entries were made to a sales account the record however does establish that when cash receipts were transferred from the separate bank accounts of the restaurants into the intercompany bank account entries were made apparently for the first time in the books_and_records of peoplefeeders of square pan and of the other corporate subsidiaries again however the parties’ briefs and the limited portions of petitioner's books_and_records that were introduced into evidence herein are confusing incomplete and unclear as to specifically how the transfers of cash into and the payment of expenses out of the intercompany bank account were reflected on the books_and_records of peoplefeeders of square pan and of the other related entities we describe below our understanding and findings based on incomplete and confusing evidence of the bookkeeping entries of peoplefeeders and square pan relating to the transfer of cash receipts into and the payment of expenses and loan payments out of the intercompany bank account cash receipts transferred from peoplefeeders into the intercompany bank account were recorded as debits or as increases in cash in favor of peoplefeeders in what was referred to as peoplefeeders’ intercompany general ledger bookkeeping account no peoplefeeders’ intercompany general ledger account and as credits to what was referred to as square pan’s intercompany general ledger account no square pan’s intercompany general ledger account payments out of the intercompany bank account of peoplefeeders’ business_expenses and of peoplefeeders’ loan payments to motsenbocker and to commerce bank were recorded as credits to peoplefeeders’ intercompany general ledger account and apparently as debits to square pan’s intercompany general ledger account payments out of the intercompany bank account of peoplefeeders’ expenses and loan payments were never treated or specifically labeled in peoplefeeders’ or in square pan’s books_and_records as a loan from square pan and the cash receipts transferred into the intercompany bank account from peoplefeeders were never treated or specifically labeled in peoplefeeders’ or in square pan’s books_and_records as repayments of a loan from square pan also as discussed further below not until was the difference between the total of the cash receipts transferred by peoplefeeders into the intercompany bank account and the total of the expenses and loan payments paid on behalf of peoplefeeders out of the intercompany bank account treated in the minutes of peoplefeeders’ board_of directors meetings as a loan to peoplefeeders that difference was never reflected by a written promissory note from peoplefeeders in favor of square pan no interest was ever charged to peoplefeeders with regard to that difference that difference was never treated or specifically labeled in peoplefeeders’ or in square pan’s intercompany general ledger accounts as a loan or as a discrete credit balance private_placement memorandum sale of restaurants and board_of directors meeting in partrick attempted unsuccessfully to sell the stock in peoplefeeders through a private_placement in the related private_placement memorandum no indication or disclosure was made of any debt or loan obligation owed by peoplefeeders to square pan or to the other related entities over the course of through the majority of the square pan pizza restaurants was either sold or closed in - november of the remaining square pan pizza restaurants were sold to sbarro inc sbarro an unrelated entity the sale of these restaurants to sbarro resulted in a taxable gain to square pan of dollar_figure at the time of the sale to sbarro partrick discussed the dollar_figure taxable gain with representatives of arthur andersen co who informed partrick that deductions could be generated that would offset the dollar_figure taxable gain on date at a special meeting of the board_of directors of square pan the directors adopted a resolution that purported to treat the dollar_figure difference between peoplefeeders’ total cash receipts and peoplefeeders’ expenses and loan payments that had been paid out of the intercompany bank account as a dollar_figure debt obligation of peoplefeeders to square pan and that purported to cancel that debt obligation as uncollectible ’ in the resolution adopted by the board_of directors the stated reason for the cancellation of the purported dollar_figure debt obligation was that no repayments had ever been made by peoplefeeders on the purported debt obligation and that due to the financial condition of peoplefeeders there existed no prospect of collecting any part of the debt obligation the dollar_figure discrepancy between the dollar_figure difference and the dollar_figure purported bad_debt obligation is not explained in the record hereinafter we refer only to dollar_figure in december of partrick made a loan to peoplefeeders of approximately dollar_figure with an interest rate of percent over prime the principal_amount of this loan was payable on demand this loan from partrick to peoplefeeders was approved in advance by a resolution of peoplefeeders' board_of directors evidenced by a promissory note and secured_by peoplefeeders' assets petitioner's income_tax returns and respondent's audit for each of its taxable years peoplefeeders square pan and square pan’s subsidiaries filed consolidated corporate federal_income_tax returns on petitioner’s consolidated corporate federal_income_tax return the dollar_figure difference between peoplefeeders’ total cash receipts and the total expenses and loan payments paid out of the intercompany bank account on behalf of peoplefeeders was reflected on the balance_sheet attached to the tax_return as an intercompany receivable but also as an adjustment or a reduction to peoplefeeders' equity_investment in its subsidiaries on petitioner's consolidated corporate federal_income_tax return square pan claimed a dollar_figure bad_debt deduction relating to the alleged cancellation of the purported dollar_figure debt obligation owed by peoplefeeders to square pan on it sec_3 for under sec_1 d income_tax regs bad_debt deductions were allowed upon cancellation of worthless_debt obligations between affiliated corporate entities even though such entities filed consolidated federal corporate_income_tax returns this regulation was generally effective for bad_debt continued -- and consolidated corporate federal_income_tax returns petitioner claimed nol carrybacks and on its and consolidated corporate federal_income_tax returns petitioner claimed nol carryforwards relating to the dollar_figure bad_debt deduction claimed on the consolidated corporate federal_income_tax return also on the consolidated corporate federal_income_tax return relying on the insolvency_exception of sec_108 and peoplefeeders’ alleged insolvency peoplefeeders did not recognize any income relating to the cancellation of the purported dollar_figure debt obligation to square pan further on the consolidated corporate federal_income_tax return peoplefeeders took the position that under sec_108 no reduction in any_tax attributes specifically no reduction in the amount of the nol that was claimed on the tax_return relating to the claimed dollar_figure bad_debt deduction was required on petitioner's tax_return because the claimed bad_debt deduction and the related nol did not belong to peoplefeeders e on the ground that the claimed bad_debt deduction and the related nol constituted tax_attributes not of peoplefeeders but only of square pan continued deductions claimed prior to date and was removed for later years by amendments to the regulations as reflected in t d 1995_2_cb_147 because petitioner under sec_441 elected a week taxable_year petitioner's consolidated corporate federal_income_tax returns for each of through accurately reflected petitioner's taxable years beginning and ending on different dates in late june and july ie on the sunday nearest the last day of june of each year however as set forth below on the protest letter that petitioner mailed to respondent on the petition that petitioner mailed to the court and on the 30-day letters and on the notice_of_deficiency that respondent mailed to petitioner the dates for the ending of petitioner's through taxable years were indicated as june of each year the actual last day of each of petitioner's taxable years as reflected on petitioner's tax returns for each year is also set forth in the schedule below yearend date indicated on petitioner's respondent's taxable tax protest 30-day notice of year return letter petition letter deficiency july june june june june june june june june june june june june june june june june june june june july june june june june on audit of petitioner's taxable_year respondent disallowed petitioner's dollar_figure claimed bad_debt deduction and the related claimed nol_carryback and carryforwards to and on date with the trial herein scheduled for date petitioner in a motion to dismiss for lack of jurisdiction raised the issue that respondent’s notice_of_deficiency incorrectly indicated ending dates for petitioner’s taxable years that the notice_of_deficiency therefore was invalid and that the court lacks jurisdiction over petitioner’s actual through taxable years in making the above adjustments to petitioner’s consolidated income and expenses for each year respondent did not make any adjustment and respondent did not charge petitioner with any item_of_income or adjust any expense item relating to the or days that were reflected in the notice_of_deficiency and that were not part of petitioner’s through taxable years during respondent's audit of petitioner's through consolidated corporate federal_income_tax returns the accounting firm of arthur andersen represented petitioner petitioner's representatives from arthur andersen met with respondent discussed legal and factual issues and later prepared and filed the protest and the petition opinion validity of notice_of_deficiency litigation in this court requires as a jurisdictional prerequisite a valid notice_of_deficiency sec_6213 the notice must indicate the taxable_period involved or provide sufficient information that the taxpayer reasonably could not be misled as to the taxable_period involved 98_f2d_968 7th cir revg and remanding 33_bta_564 smith v commissioner tcmemo_1979_16 petitioner argues that because respondent's notice_of_deficiency indicates that tax deficiencies were determined against petitioner for taxable years ending on june of each year when in fact petitioner's taxable years ended on dates other than june respondent's deficiency determinations should be regarded as invalid further petitioner argues that because respondent never determined tax deficiencies for petitioner's correct through taxable years the court has no jurisdiction over any of such taxable years ’ respondent argues that the notice_of_deficiency at issue in this case was sufficiently accurate did not mislead petitioner and adequately informed petitioner that the tax deficiencies reflected therein related to petitioner's through taxable years we agree with respondent the june date indicated in respondent's notice_of_deficiency for the end of each of petitioner's through taxable years was an innocuous error and did not mislead petitioner in any way petitioner’s representatives understood for petitioner’s taxable_year which ended on june petitioner's jurisdictional argument is based on the allegation that respondent's notice_of_deficiency for petitioner's taxable_year implicitly treated petitioner's taxable_year as beginning on date when in fact it began on date -- - that the references in the notice_of_deficiency to petitioner's taxable years ending june were to petitioner's actual taxable years based on 52-to-53 week years that ended on the sunday nearest the last day of june of each year on petitioner's written protest letter and petition petitioner's representatives themselves indicated that petitioner's taxable years ended on june no evidence indicates that petitioner's representatives were at any time confused or misled over what taxable years were covered by respondent's notice_of_deficiency the record is clear that petitioner's representatives were not misled as to whose and which taxable years were in issue not until just prior to the trial of this case in did petitioner’s representatives allege that respondent's notice_of_deficiency did not relate to petitioner's taxable years any genuine lack of knowledge as to whose and which taxable years were covered by respondent's notice_of_deficiency would have been raised long before date if petitioner’s representatives genuinely believe respondent's notice_of_deficiency did not determine tax deficiencies for any of petitioner's taxable years why were written protests filed on behalf of petitioner in which the only challenges raised related to the substance of the adjustments reflected in the notice_of_deficiency we also note that in making adjustments to petitioner’s consolidated income and expenses respondent in the notice_of_deficiency did not make any income expense or other adjustment relating to the to days that were reflected in respondent's notice_of_deficiency but that technically were not part of petitioner’s taxable years we conclude that respondent's notice_of_deficiency is valid and determined deficiencies for petitioner's taxable years ending on date date date date and date and that petitioner's tax_liabilities for those years are properly before the court bad_debt deduction under sec_166 bad_debt deductions are allowed for loans that become worthless within the year under sec_1 166-l1 c income_tax regs bad_debt deductions are limited to loans that arise from genuine debtor-creditor relationships and that are based on valid and enforceable obligations to pay fixed or determinable sums of money generally a transfer of funds by a corporation to its shareholders may be treated as a loan if at the time of the transfer the parties intended that the shareholders repay the corporation the amount of funds transferred 962_f2d_1077 lst cir affg tcmemo_1990_636 93_f2d_921 8th cir affg 35_bta_701 miele v commissioner t c - - affd without published opinion 474_f2d_1338 3d cir petitioner bears the burden of proving that the amounts in guestion constitute loans rule a 290_us_111 courts typically determine whether the requisite intent to repay was present by examining objective evidence of the parties' intentions see eg 728_f2d_945 7th cir affg tcmemo_1983_98 505_f2d_873 n 5th cir the following list of factors is often set forth in analyzing whether transfers of funds between related corporations should be treated as loans as equity or as dividends whether the transfers of funds are evidenced by written promissory notes and are otherwise reflected on the taxpayer’s books_and_records as loans the presence or absence of stated maturity dates the source of payments the right to enforce payments of principal and interest participation in management a status equal to or inferior to that of regular corporate creditors the intent of the parties thin or adequate capitalization the identity of interest between shareholders and creditors repayments on the purported loans only out of profits and the ability of the purported debtor to obtain loans from outside lending institutions 827_f2d_1409 9th cir 748_f2d_1365 9th cir revg tcmemo_1983_120 a r lantz co v united st424_f2d_1330 9th cir o h kruse grain milling v commissi279_f2d_123 9th cir affg tcmemo_1959_110 because the control element suggests the opportunity to contrive a fictional debt transfers of funds between related corporations are subject_to particular scrutiny in re uneco inc 532_f2d_1204 8th cir transfers of funds between closely held corporations and shareholders are often characterized by informality but in order to qualify for loan treatment in such situations the transfer of large amounts of funds generally should have some formal indicia of a loan lewis v commissioner tcmemo_1985_563 where transfers of funds were made from a subsidiary_corporation to a parent_corporation through a centralized accounting system and where customary indicia of loans were not present the transfers were treated as constructive dividends and not as loans alterman foods inc v united_states supra petitioner argues that the shareholders of peoplefeeders intended for peoplefeeders to repay square pan the dollar_figure difference between peoplefeeders’ total cash receipts transferred into the intercompany bank account and the total expenses and loan payments paid on behalf of peoplefeeders out of the intercompany bank account and that the use of funds in the - - intercompany bank account to pay peoplefeeders' expenses and loan payments should give rise to bona_fide debt treatment of the claimed dollar_figure petitioner further argues that during its taxable_year the purported dollar_figure debt obligation owed by peoplefeeders to square pan became worthless that for the year in issue bad_debts between members of consolidated groups of taxpayers were deductible and that petitioner is entitled to a bad_debt deduction of dollar_figure for its taxable_year respondent argues that the payments out of the intercompany bank account of peoplefeeders’ expenses and loan payments did not have associated with them typical indicia of loans and that the evidence does not establish that it was intended for peoplefeeders to repay square pan any difference between cash receipts transferred into the intercompany bank account on behalf of peoplefeeders and expenses and loan payments paid out of the intercompany bank account on behalf of peoplefeeders respondent would treat that difference not as a genuine debt obligation of peoplefeeders to square pan but as a constructive_dividend from square pan to peoplefeeders the purported dollar_figure debt obligation of peoplefeeders to square pan was not evidenced by promissory notes or security agreements no maturity dates interest repayment terms or repayment amounts were agreed to the transfers of cash receipts from peoplefeeders to the intercompany bank account were not --- - regarded or treated as repayments of any debt obligation but rather simply as a process of placing all of the cash receipts of each of petitioner's related restaurants and corporate entities into a single cash pot for purposes of cash management credit enhancement and payment of bills such transfers into the account were contingent on the amount of cash receipts received from sales a feature not typically associated with the payment of genuine debt obligations in its brief petitioner refers to the ebb and flow of funds into and out of the intercompany bank account such ebb and flow in the transfer of cash between petitioner's related entities reflected the mere management of funds and cash-flow and an apparently efficient way for peoplefeeders to move funds between itself and related entities not the establishment of genuine debt obligations because of the absence of fixed maturity dates and repayment terms associated with the payment out of the intercompany bank account of peoplefeeders’ expenses and loan payments square pan had no means of establishing peoplefeeders' default and no basis for seeking to enforce repayment of alleged debt principal or payment of interest the evidence does not indicate that square pan ever requested repayment from peoplefeeders of the purported dollar_figure debt obligation and in the minutes of square pan's - date board_of directors' meeting it 1s represented that no repayment was ever made on this purported debt obligation the lack of a written promissory note of collateral of security of repayment terms and of interest among other things indicates that peoplefeeders and its officers and shareholders never intended for peoplefeeders to have a fixed repayment obligation to square pan or to the other related subsidiaries of the dollar_figure difference between cash receipts transferred into the intercompany bank account on behalf of peoplefeeders and expenses and loan payments paid out of the intercompany bank account on behalf of peoplefeeders square pan's identity as a wholly owned subsidiary of peoplefeeders indicates that the relationship between the two entities with regard to the dollar_figure difference did not constitute that of a creditor debtor but rather that it constituted that of a subsidiary parent and that the dollar_figure should not be treated as a bona_fide debt obligation between and with the operating_assets of square pan already secured in favor of the motsenbocker and commerce bank loans and with the failure in to raise funds through a private_placement memorandum peoplefeeders was not in a position to repay the difference in funds paid out on its behalf from the intercompany bank account the significant relevant factors indicate that the dollar_figure in guestion should not be treated as a genuine debt - - obligation of peoplefeeders petitioner is not entitled to the claimed dollar_figure bad_debt deduction and the related nol carrybacks and carryforwards we note that respondent makes two alternative arguments -- one factual and the other legal respondent’s alternative factual argument is that if the dollar_figure is to be regarded as a genuine debt obligation of peoplefeeders to square pan as petitioner contends in may of the full dollar_figure principal_amount of that debt obligation would constitute a loan receivable on the books of square pan and the value of the stock in square pan that peoplefeeders owned would reflect that dollar_figure receivable making peoplefeeders no longer insolvent and requiring peoplefeeders under sec_61 and a to recognize dollar_figure in discharge_of_indebtedness income respondent’s alternative legal argument is that if the dollar_figure is to be regarded as a genuine debt obligation of peoplefeeders to square pan if peoplefeeders is to be regarded as insolvent and if under the insolvency_exception of sec_108 peoplefeeders is to be allowed to exclude from income the dollar_figure discharge_of_indebtedness income petitioner’s consolidated_group of taxpayers filing the corporate federal_income_tax return would be required under sec_108 to reduce appropriate tax_attributes specifically the amount of the nol produced by the dollar_figure bad_debt deduction by the dollar_figure amount of the excluded discharge of -- - indebtedness income because of our holding on the threshold issue we need not decide respondent’s alternative arguments to reflect the foregoing an appropriate order will be issued and decision will be entered under rule


internal_revenue_service number release date index number 54aa ------------------------------------------- ------------------------------- ------------------------------------------ ----------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact -------------------------------- id no ---------- ------------------ telephone number ---------------------- refer reply to cc fip plr-148383-13 date date legend issuer issue issue issue issue date date date date date a ------------------------------------------- ------------------------------------------------------------------- ------------------------------------------------------------------- --------------------------------------------------- ------------------------------------------------------------------- ------------------------------------------------------------------- ------------------------------------------------------- ------------------------------------------------------------------- ------------------------------------------------------------------- ------------------------------------------------------------------- -------------------------------------- ------------------------------------------------------------------- ------------------------------------------------------------------- ------------------------------------------------------------------- ------------------------------------------ -------------------- ----------------- ---------------------- ------------------------ ---------------------------- ---------------- plr-148383-13 date dear -------------- ----------------------- this letter is in response to your request for rulings that the issuer can make certain proposed allocations related to issue issue and issue under sec_1_141-6 and sec_1_148-6 of the income_tax regulations as described below the expenditure of earnings that accrue subsequent to the project_period within the meaning of sec_1_141-1 from the investment of sale proceeds of issue and issue in a reasonably required reserve to pay principal and interest that is not a capital_expenditure non- capital interest on an issue will not cause issue and issue to fail to be qualified bonds within the meaning of sec_54aa and sec_1_148-6 may be applied to account for the expenditure of proceeds of issue and issue facts and representations the issuer makes the following representations the issuer has an undivided ownership_interest in an electric generating facility the issuer’s portion of this facility is referred to herein as the project the project was not placed_in_service before date to finance the project the issuer issued four issues of tax-advantaged bonds issue issued as tax-exempt_bonds on date issue issued as tax-exempt_bonds on date issue issued as direct pay build_america_bonds on date and issue issued as direct pay build_america_bonds on date issue issue and issue collectively the bonds the bonds are secured_by a parity reserve fund which consists in part of some sale proceeds of issue and issue the issuer represents that this parity reserve fund is a reasonably required reserve under sec_148 and sec_1_148-2 with respect to the bonds the issuer expects the total costs of the project to be lower than estimated as of the issue_date of issue by dollar_figurea and thus the issuer will have unspent proceeds in this amount the unspent amount prior to date the issuer had allocated its capital expenditures to proceeds of issue and the bonds such that an amount of proceeds of issue equal to the unspent amount was not allocated to any capital_expenditure the issuer proposes to revise its allocations of expenses to proceeds of the bonds as described in the issuer’s request for this ruling the proposed allocations no later than the date that is months after date and the date that is days after the fifth anniversary of the issue of the bonds to which it will allocate its expenditures at the time that each of the expenses comprising the proposed allocations was actually paid the issuer had on hand sufficient proceeds of the specific issue of the bonds to which the expense is allocated under the proposed allocations to pay the expense the issuer will allocate investments to proceeds of the bonds for arbitrage and rebate purposes in a manner that is consistent with the proposed allocations plr-148383-13 the issuer also proposes to deposit earnings that accrue subsequent to the project_period as defined in sec_1_141-1 from the investment of sale proceeds of issue and issue in a reasonably required reserve into a bona_fide debt service fund and use those earnings to pay principal or interest law and analysis revision of allocations sec_103 provides that except as provided in subsection b gross_income does not include interest on any state_or_local_bond sec_103 provides that subsection a shall not apply to any private_activity_bond which is not a qualified_bond within the meaning of sec_141 sec_103 provides that subsection a shall not apply to any arbitrage_bond within the meaning of sec_148 sec_141 provides that the term private_activity_bond means any bond issued as part of an issue which meets the private_business_use_test of sec_141 and the private_security_or_payment_test of sec_141 or meets the private_loan_financing_test of sec_141 sec_141 provides in general that an issue meets the private_business_use_test if more than percent of the proceeds of the issue are to be used for any private_business_use sec_148 provides that the term arbitrage_bond means any bond issued as part of an issue any portion of the proceeds of which are reasonably expected at the time of issuance of the bond to be used directly or indirectly to acquire higher_yielding_investments or to replace funds which were used directly or indirectly to acquire higher_yielding_investments further for purposes of sec_148 a bond shall be treated as an arbitrage_bond if the issuer intentionally uses any portion of the proceeds of the issue of which such bond is a part in a manner described in or sec_148 provides in part that a bond is an arbitrage_bond unless the issuer timely rebates to the united_states the excess of the amount earned on certain nonpurpose_investments over the amount that would be earned on those investments had those investments had a yield equal to the bond yield plus any income attributable to the excess sec_1_141-6 provides that for purposes of sec_1_141-1 through the provisions of sec_1_148-6 apply for purposes of allocating proceeds to expenditures thus allocations generally may be made using any reasonable consistently applied accounting_method and allocations under sec_141 and sec_148 must be consistent with each other plr-148383-13 sec_1_148-6 provides that an issuer may use any reasonable consistently applied accounting_method to account for gross_proceeds investments and expenditures of an issue however under sec_1_148-6 if an issuer fails to maintain books_and_records sufficient to establish the accounting_method for an issue and the allocation of the proceeds of that issue the accounting and allocation rules under sec_1_148-6 are applied using the specific tracing method sec_1_148-6 provides that an issuer must account for the allocation of proceeds to expenditures not later than months after the later of the date the expenditure is paid or the date the project if any that is financed by the issue is placed_in_service this allocation must be made in any event by the date days after the fifth anniversary of the issue_date or the date days after the retirement of the issue if earlier sec_54aa provides that for purposes of sec_54aa the term build_america_bond means any obligation other than a private_activity_bond if a the interest on such obligation would but for sec_54aa be excludable from gross_income under sec_103 b such obligation is issued before date and c the issuer makes an irrevocable election to have sec_54aa apply the issuer has requested that we rule on whether it can revise its allocations related to the bonds under sec_1_141-6 and sec_1_148-6 as provided in the proposed allocations the regulations under sec_141 and sec_148 apply to build_america_bonds as well as tax-exempt_bonds because sec_54aa defines a build_america_bond as other than a private_activity_bond and requires that but for sec_54aa the interest on build_america_bonds be excludable from gross_income under sec_103 accordingly build_america_bonds cannot be private_activity_bonds under sec_141 or arbitrage_bonds under sec_148 and are subject_to the regulations under those sections to the extent that the regulations do not conflict with sec_54aa by not requiring allocations to be determined when the expenditure is paid_or_incurred the arbitrage regulations acknowledge that day-to-day practicalities require some flexibility regarding the timing of an issuer’s allocations we conclude that these practicalities also require flexibility to change allocations so long as those changes are made within the time frame provided under sec_1_148-6 here at the time that each of the expenses described in the proposed allocations was actually paid the issuer had on hand sufficient proceeds of the specific issue of the bonds to which the expense is allocated under the proposed allocations to pay the expense the issuer will also allocate investments to proceeds of the bonds for arbitrage and rebate purposes in a manner that is consistent with the proposed allocations the issuer tentatively made the proposed allocations within the time frame provided in sec_1_148-6 the project was not placed_in_service before date which date is fewer than months prior to date the date on which the proposed allocations were made date occurred before the date that is days after the fifth plr-148383-13 anniversary of any of the issues of the bonds and none of the issues of the bonds have been retired we conclude that because the time frame provided in sec_1 d iii had not yet closed and because there were sufficient proceeds on hand when the expenditures were made issuer can make the proposed allocations under sec_1_141-6 and sec_1_148-6 earnings on sale proceeds of babs in reserve sec_54aa provides that if a taxpayer holds a build_america_bond bab on one or more interest payment dates of the bond during any taxable_year there shall be allowed as a credit against income_tax for the taxable_year an amount equal to the sum of the credits determined under sec_54aa with respect to such dates subject_to limitations under sec_54aa sec_54aa provides that the amount of the credit with respect to any interest payment_date for a build_america_bond i sec_35 percent of the amount of interest payable by the issuer with respect to such date sec_54aa provides a special rule for qualified bonds issued before date in the case of a qualified_bond issued before date in lieu of any credit allowed under sec_54aa with respect to such bond the issuer of such bond shall be allowed a credit as provided in sec_6431 sec_54aa provides that for purposes of sec_54aa the term qualified_bond means any bab issued as part of an issue if a percent of the excess of i the available project proceeds as defined in sec_54a of such issue over ii the amounts in a reasonably required reserve within the meaning of sec_150 with respect to such issue are to be used for capital expenditures and b the issuer makes an irrevocable election to have sec_54aa apply sec_54a provides that the term available project proceeds means a the excess of the proceeds from the sale of an issue over the issuance costs financed by the issue to the extent that such costs do not exceed percent of such proceeds and b the proceeds from any investment of the excess described in a sec_150 provides that the term net_proceeds means with respect to any issue the proceeds of such issue reduced by amounts in a reasonably required reserve or replacement fund sec_1_141-1 provides that for purposes of applying sec_1_141-1 through the term project_period means the period beginning on the issue_date and ending on the date that the project is placed_in_service plr-148383-13 sec_1_148-6 provides that except as otherwise provided in paragraph d or paragraph d proceeds of an issue may only be allocated to working_capital expenditures as of any date to the extent that those working_capital expenditures exceed available amounts as defined in paragraph d iii as of that date ie a proceeds-spent-last method sec_1_148-6 provides that the general_rule in paragraph d i does not apply to expenditures to pay principal or interest on an issue paid from investment earnings on a reserve or replacement fund that are deposited in a bona_fide debt service fund the issuer has requested that we rule on whether the expenditure of earnings that accrue subsequent to the project_period within the meaning of sec_1_141-1 from the investment of sale proceeds of issue and issue in a reasonably required reserve to pay principal and non-capital interest on an issue will not cause issue and issue to fail to be qualified bonds within the meaning of sec_54aa it has also requested that we rule on whether sec_1_148-6 may be applied to account for the expenditure of proceeds of issue and issue the plain language of sec_54aa does not answer the question of whether investment earnings on the sale proceeds of issue and issue in a reasonably required reserve may be used to pay principal and non-capital interest the answer turns on whether such investment earnings are included in available project proceeds under sec_54aa or in the amounts in a reasonably required reserve under sec_54aa although sec_54aa cross-references the definition of available project proceeds in sec_54a proceeds of bonds issued under sec_54a may not be used to fund a reasonably required reserve accordingly the definition of available project proceeds in sec_54a does not address investment earnings on sale proceeds deposited in a reasonably required reserve if earnings on sale proceeds of issue and issue in a reasonably required reserve are included in available project proceeds under sec_54aa then the issuer would be required to spend those earnings on capital expenditures long after the project is complete we conclude instead that the earnings on the sale proceeds of issue and issue in a reasonably required reserve that accrue after the end of the project_period as defined in sec_1_141-1 are not available project proceeds within the meaning of sec_54aa and therefore may be used to pay principal and non-capital interest without causing issue and issue to fail to be qualified bonds under sec_54aa as stated above issue and issue are build_america_bonds and therefore subject_to the regulations under sec_148 to the extent that the regulations do not conflict with sec_54aa for example any working_capital expenditures permitted under sec_54aa must be allocated for arbitrage purposes to the proceeds of issue and issue using a proceeds-spent-last method as provided in sec_1_148-6 we conclude that sec_1_148-6 applies to preclude application of the proceeds-spent-last method of allocation to the payment of principal or interest from plr-148383-13 earnings on sale proceeds of issue and issue in the reasonably required reserve that accrue after the end of the project_period and that are first deposited in a bona_fide debt service fund conclusion based strictly on the information submitted and representations made we conclude that the issuer can make the proposed allocations under sec_1_141-6 and sec_1 the expenditure of earnings that accrue subsequent to the project_period within the meaning of sec_1_141-1 from the investment of sale proceeds of issue and issue in a reasonably required reserve to pay principal and non-capital interest on an issue will not cause issue and issue to fail to be qualified bonds within the meaning of sec_54aa and sec_1_148-6 may be applied as provided above to account for the expenditure of proceeds of issue and issue except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter specifically we express no opinion on any allocations related to issue whether issue or issue are tax-exempt under sec_103 or whether issue or issue are build_america_bonds under sec_54aa 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 your authorized representative the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination sincerely s timothy l jones senior counsel financial institutions products


number release date office_of_chief_counsel internal_revenue_service memorandum cc pa dpl b01 sepowers ct-124821-04 uilc date august to richard a rappazzo area_counsel dallas criminal tax cc ct dal attn jeff j borchers general attorney houston criminal tax cc ct dal hou from david l fish senior technician reviewer disclosure and privacy law branch procedure administration cc pa dpl b01 ------------------------------------------------------------------------------------------ subject this chief_counsel_advice responds to your request for assistance dated date this advice may not be used or cited as precedent issues whether the service’s use of a private information source ---------------------------------- ------------------------------------- ------------- during a criminal investigation violates the right to financial privacy_act rfpa u s c if so whether applicable disclosure and privacy laws prevent the service from using ------------- as an investigative resource during a criminal investigation conclusion the service may use ------------- so long as it avoids requesting information through ------------- where the request could create a cause of action under rfpa against the service in federal courts within the tenth circuit and under the particular facts and circumstances of the case the disclosure is necessary to obtain information not otherwise reasonably available within the meaning of internal_revenue_code i r c sec_6103 and treas reg k -1t ct-124821-04 facts ------------- is a private organization ------------- is one of twenty-two financial_institution associations in the united_states one service that ------------- provides is the -------------- -------------------------------- ------------- members which are law enforcement agencies may submit queries to ------------- as to whether a specific individual or business taxpayer owns a checking account savings account or safe deposit box at ---------------- ------------affiliated financial institutions using the --------------------------------------- generally ------------- members send inquiries via a web-based interface however the service would use facsimile communications to send inquiries to ----------------------- ------ ---------------------------------because of disclosure and privacy concerns regarding the service’s use of ------------- a single query may substitute for more traditional information gathering methods such as interviewing employees of multiple financial institutions because ------------- maintains consolidated financial information from many financial institutions located in -------------------------- -------------- and ------------ ------------- in some instances the service may accomplish investigative results that may have been otherwise unattainable or accomplished through multiple face-to-face interviews internal_revenue_manual irm describes various investigative techniques for respective types of criminal investigations irm lists investigative activities which do not require authorization to identify an individual or entity without initiating an investigation the activities include clipping news articles accessing irs data bases maintaining liaison with other law enforcement agencies viewing tax information on the integrated data retrieval system idrs interviewing informants identifying individuals through vehicle license checks visually inspecting a home_office real_estate or property to identify an individual and recording results of the aforementioned activities after an individual or entity is identified the service may initiate a subject criminal investigation sci if an individual or entity is alleged to be in non-compliance with the laws enforced by the irs and the case has prosecution potential irm the object of a sci is to gather pertinent evidence to prove or disprove the existence of a violation of the laws enforced by the irs id pursuant to irm a sci must be authorized by a special_agent in charge sac or assistant special_agent in charge asac in title_26 investigations we understand ------------- would be used in the following manner the service would submit an inquiry to ------------- via facsimile only in circumstances that the service has initiated a sci on a specific individual or entity attempted and failed in it sec_1 the idrs system is the service’s primary resource for researching current taxpayer account information once a taxpayer’s account has been retrieved on idrs the locations of tax returns and other paper documents which are pertinent to account transactions can be determined only a sac can approve title or sci’s irm however in situations involving sensitive investigations the director of field operations must approve the sci irm ct-124821-04 attempt to gather information about the existence of financial_assets by using traditional investigative techniques such as researching the service’s idrs and searching the taxpayer’s trash for evidence of the existence of such financial_assets and determined that the taxpayer is not forthcoming or cooperative after attempting to gather the information from the taxpayer the special_agent may submit the taxpayer’s name address and if warranted taxpayer_identification_number the special_agent can usually obtain this information from the service’s records we understand that ------ ------------- would not be used indiscriminately rather it would be used only as an alternative method to gather information related to a specific sci after other traditional methods of information gathering were employed and failed after ------------- received an inquiry from the service ------------- would forward the search information via secure e-mail to individual risk officers at the affiliated financial institutions using search criteria defined by the irs special_agent for example a special_agent may narrow the search criteria to include only the affiliated financial institutions located within a defined geographic area of the taxpayer’s business or residence responses from the affiliated financial institutions if any would be returned directly to the special_agent the response times for the inquiries are usually within three work days responses are not routed back through ------------- the contents of the responses from the affiliated financial institutions include the type of account and the identity of the owner of the account law and analysi sec_4 right to financial privacy_act a financial_institution may maintain records that establish the existence of taxpayer assets which may be useful to government agencies for enforcement activities we understand that in some cases using only the name and address of an individual or entity would be insufficient to search ---------------- database searches including common last names for example would yield multiple false positive results the analysis herein was coordinated with branch of the office of the assistant chief_counsel collection bankruptcy summonses financial institutions are also subject_to the use and disclosure restrictions contained in the gramm-leach-bliley act glb pub_l_no we believe that disclosures by banks under the circumstances described in this memorandum would be permissible under certain law enforcement exceptions to the glb u s c sec_6802 to law enforcement agencies to the extent specifically permitted or required under other provisions of law and in accordance with rfpa and e to comply with a properly authorized civil criminal or regulatory investigation this position was informally coordinated with federal trade commission office of the general counsel personnel who concurred with our conclusion specific glb issues can be dealt with in the context of a particular case ct-124821-04 generally government agencies’ access to financial records6 is prohibited unless a particular statutory exception applies rfpa sec_3402 one of the exceptions to the general_rule is that there is no prohibition on the disclosure of financial records in accordance with procedures authorized by title_26 rfpa c it is the service’s position that its investigatory practice of first seeking information informally before compelling production with a summons is a procedure authorized by sec_7602 which fits within the exception of rfpa c therefore in general the service may informally solicit and receive information from financial institutions without running afoul of the privacy provisions in the rfpa however as explained more fully below the service cannot take this position in the tenth circuit or in any situation that could be governed by that circuit’s precedents because of the adverse decision in 922_f2d_573 10th cir in neece the court held that a bank’s voluntary disclosure of a customer’s financial records to the service without prior notice to the customer violated the rfpa the court reasoned that while sec_7602 - authorized the service to take several actions such as examining and summoning records it did not contain procedures within the meaning of the rfpa c instead the court reasoned that the procedures referred to in the rfpa were those codified in sec_7609 which require the service to notify the taxpayer and any other person identified in the description of summoned records and provide the taxpayer and any other notified person with an opportunity to challenge the summons in court neece remains viable in the tenth circuit despite the enactment of sec_7609 which provides n othing in sec_7609 shall be construed to limit the service’s ability to obtain information other than by summons through formal or informal procedures authorized by sec_7601 and sec_7602 the legislative_history does not expressly indicate that congress intended to overturn neece and the service does not take that position given the holding in neece we cannot recommend that the service send informal requests for information through ------------- to financial institutions that are governed by tenth circuit precedents states in the tenth circuit are wyoming utah colorado kansas oklahoma and new mexico ------------- has associated financial institutions in ---------------- and -------------- therefore no requests rfpa sec_3401 defines a financial record as information known to have been derived from any record held by a financial_institution pertaining to a customer’s relationship with the financial_institution the confirmed existence of an account or safe deposit box fits within this definition the neece court emphasized that by enacting sec_7609 and the rfpa congress intended for bank customers to be notified and to have an opportunity to object whenever the service or other federal agencies sought access to financial records however the court did not consider the treatment of third-party summonses excepted from notice requirements by sec_7609 however sec_7609 provides a powerful counterargument to the tenth circuit’s conclusion that sec_7602 provides no procedures within the meaning of rfpa c for informal information gathering internal_revenue_manual accord internal_revenue_manual summons use ct-124821-04 should be forwarded to financial institutions for information about accounts that may be maintained in those two states additionally the tenth circuit’s precedential influence extends beyond the geographical boundaries of wyoming utah colorado kansas oklahoma and new mexico because a rfpa cause of action may arise in any appropriate federal district_court u s c furthermore pursuant to u s c sec_1391 venue in any civil_action against a federal_agency may lie in any district in which the defendant resides the cause of action arose where any real_property involved in the action is situated or where the plaintiff resides if no real_property is involved therefore the service must not solicit information through --- ------------- if any of the following conditions exist the financial_institution is located in the tenth circuit the information concerns a taxpayer residing in the tenth circuit regardless of the location of the financial_institution or the service office or the service office is located in the tenth circuit regardless of the location of the financial_institution or the taxpayer’s residence the neece decision and our office’s recommendations do not eliminate all potential uses of the ------------- system ------------- has associated financial institutions in -------- and ------------- if for example the service’s ------------------------ office sends a request to ------------- for information about any -------- or ------------- bank accounts that may be owned by a taxpayer who resides in -------- or ------------- the neece decision should not be an impediment sec_6103 with regards to non-tenth circuit uses of ------------- in order to obtain taxpayers’ financial records from a financial_institution the service must necessarily disclose return_information a taxpayer’s name address and taxpayer_identification_number or any information collected by the service in connection with determining the existence or possible existence of tax_liability constitutes return_information under the internal_revenue_code sec_6103 generally sec_6103 provides that returns and return_information are confidential except as authorized by title_26 no officer_or_employee of the united_states shall disclose any return or return_information obtained by him in any manner in connection with his service id however sec_6103 in pertinent part states that an internal revenue_officer or employee may in connection with his official duties relating to any criminal tax investigation disclose return_information to the extent that such disclosure is necessary in obtaining information which is not otherwise reasonably available with respect to the enforcement of any provision of this title such disclosures shall be made only in such situations and under such conditions as the secretary may prescribe by regulation sec_6103 emphasis added pursuant to sec_301_6103_k_6_-1t an internal revenue employee in connection with official duties relating to any criminal investigation or enforcement activity under the internal revenue laws may disclose return_information of any ct-124821-04 taxpayer to the extent necessary to obtain information relating to such official duties or to accomplish properly any activity connected with such official duties including establishing or verifying misconduct or possible misconduct or other activity proscribed by the internal revenue laws or related statutes according to sec_301_6103_k_6_-1t c the definition of information not otherwise reasonably available is information that the irs employee reasonably believes under the facts and circumstances known to the employee at the time of a disclosure cannot be obtained in a sufficiently accurate or probative form or in a timely manner and without impairing the proper performance of the official duties described by the temporary regulations without making the disclosure the information sought by the service from ------------- in the proposed investigative activity relates to the official duties of the service employee inquiries must of course follow the regulations established for investigative disclosures under sec_6103 and respect the service’s privacy principles as with any other investigative disclosure of return_information in order to obtain information a disclosure of return_information via facsimile communication from the service to ------------- must be measured against the necessity test as provided by sec_6103 and sec_301_6103_k_6_-1t generally the disclosure of name address and if necessary taxpayer_identification_number by facsimile in order to obtain financial record information for investigative purposes is likely to meet the standards of the statute and regulation because ------------- --------------------------------------------------------------------------------------------------------------------- is being used as a supplemental tool to established investigatory practices whether the service employee may use ------------- in lieu of interviewing employees of multiple financial institutions within a given geographic area depends on the facts of each case for example if employing traditional methods would cause the same information to be not otherwise reasonably available because that information could not be obtained in a timely manner or the traditional_method would impair the proper performance of the service employee’s official duties disclosures of a taxpayer’s name address or taxpayer_identification_number by facsimile would be authorized authorization for sec_6103 disclosures are narrow and only that information necessary to obtain information should be disclosed the service’s inquiries to ----------- ------------- must be specific in nature and made on a case-by-case basis also the service employee making the inquiry must individually define a reasonable scope of the search for example the facts and circumstance of a case are as follows a sci exists in which the income of a specific taxpayer is at issue the service used traditional investigative methods that have failed the service has determined that the taxpayer is not forthcoming or cooperative investigators have reason to believe that the taxpayer is banking within the specific geographic area of ------------- or -------- and the taxpayer is not otherwise subject_to the jurisdiction of the tenth circuit there is no ct-124821-04 other indications of where the taxpayer may have a financial_account and the taxpayer may be a customer at any of --------------------affiliated financial institutions within the specific geographic area under these facts and circumstances the use of -- -------------- and the consequent disclosures would be authorized under sec_6103 as part of the criteria for the inquiry the service employee should request that the search be limited to certain financial institutions within a certain distance of the taxpayer’s residence or place of business the service employee should also provide appropriate contact information so that the responding risk officers at respective financial institutions can forward any responsive information directly to the service employee by phone or facsimile this writing may contain privileged information any unauthorized disclosure of this writing may undermine our ability to protect the privileged information if disclosure is determined to be necessary please contact this office for our views please call --------------------- at --------------------- if you have any further questions


internal_revenue_service national_office technical_advice_memorandum date number release date index no case mis no tam-108329-99 cc dom it a b7 taxpayer’s name taxpayer’s address taxpayer’s identification no years involved date of conference legend a_trust date issue whether per capita payments deposited in the trust are taxable to minor beneficiaries of the trust in the year s in which the payments are deposited or in a later year conclusion minor beneficiaries of the trust are in receipt of an economic benefit when the per capita payments are deposited in the trust by a therefore under sec_61 of the internal_revenue_code the payments are includible in the gross_income of the minor beneficiaries in the year they are deposited facts a is a federally recognized indian_tribe a conducts gaming operations on tribal lands pursuant to its self-determination powers and pursuant to federal common_law and the indian gaming regulatory act u s c sec_2701 et seq igra enacted by congress in igra was enacted to provide a statutory basis for the operation of gaming by indian tribes enabling tribes to achieve economic development tribal self- sufficiency and a strong government section b of igra provides that net_revenues from any class ii gaming activities conducted or licensed by any indian_tribe may be used to make per capita payments to members of the indian_tribe only if a the indian_tribe has prepared a plan to allocate revenues to uses authorized by section b b b the plan is approved by the secretary of the interior as adequate particularly with respect to uses described in section b b i or iii c the interests of minors and other legally incompetent persons who are entitled to receive any of the per capita payments are protected and preserved and the per capita payments are disbursed to the parents or legal guardian of such minors or legal incompetents in such amounts as may be necessary for the health education or welfare of the minor or other legally incompetent person under a plan approved by the secretary of the interior and the governing body of the indian_tribe and d the per capita payments are subject_to federal taxation and the tribes notify members of such tax_liability when payments are made in the instant situation a does not have an approved plan for per capita payments of its gaming revenues nor does a have any ordinances or other rules governing the determination of any aspect of per capita payments the amount of per capita payments and who will receive the payments are determined by a’s governing council a created the trust on date sec_1 of the trust agreement provides that a a relinquishes all power to alter amend or revoke the agreement in whole or in part b the significance of the irrevocability of this trust agreement has been fully explained to a by legal counsel c a intends to sever permanently any control_over assets transferred to the trust and understands that from and after the creation of this trust a will have no control_over the administration or disposition of the assets contained in the trust and d the provisions of sec_1 will apply to the initial contribution as well as to any subsequent contributions sec_3 of the trust provides that the purpose of the trust is to create and hold a sum of cash or cash equivalents for the benefit of the minor children enrolled in a with a lump sum distribution to be made to each minor on or before december in the year in which the minor attains the age of there can be no prior invasion of principal or income therefore a lump sum distribution will consist of principal contributions any addition to principal and any growth or accumulations determined on a pro_rata basis in the event that any minor beneficiary dies before attaining the age of the balance in the minor’s account will be distributed to the minor’s estate section of the trust provides that no interest in income or principal is assignable by or available to anyone having a claim against a minor beneficiary before actual payment to the minor law and analysis sec_61 defines gross_income as income from whatever source derived sec_451 and sec_1_451-1 of the income_tax regulations provide generally that gains profits and income are includible in gross_income for the taxable_year in which they are actually or constructively received by a taxpayer using the cash_receipts_and_disbursements_method of accounting under sec_1_451-2 income is constructively received by a taxpayer in the taxable_year during which it is credited to a taxpayer’s account set apart or otherwise made available so the taxpayer may draw upon it at any time or so that the taxpayer could have drawn upon it during the taxable_year if notice of intention to withdraw had been given however income is not constructively received if the taxpayer’s control of its receipt is subject_to substantial limitations or restrictions the doctrine_of constructive receipt requires a cash_basis taxpayer to recognize income when the taxpayer has an unqualified vested right to receive immediate payment ross v commissioner f 2d 1st cir 13_tc_178 in this case the minor beneficiaries of the trust are not in constructive receipt of per capita payments deposited in the trust because they do not have an unqualified vested right to receive immediate payment of per capita payments deposited in the trust or income earned by the trust in addition to the doctrine_of constructive receipt the facts of the case must be analyzed under the economic_benefit_doctrine in 16_tc_244 aff’d per curiam 194_f2d_541 6th cir the court held that an amount placed in trust to be paid out to the taxpayer in later years conferred an economic benefit on the taxpayer in the year the trust was funded in that case the taxpayer a corporation president voluntarily decreased his compensation in a later year when the corporation was sound financially a_trust was set up by the board_of directors for the benefit of the taxpayer in determining that funding the trust conferred an economic benefit on the taxpayer in the year the trust was established the court noted that the employer had made an irrevocable transfer to the trust the employer had relinquished all control the taxpayer had an absolute right to the funds that were to be applied for his sole benefit the funds were beyond the reach of the employer’s creditors the taxpayer’s right to the funds was not contingent and there were no restrictions on the taxpayer’s right to assign or otherwise dispose_of his interest the economic_benefit_doctrine also has been applied to require inclusion in income of prize winnings when they are irrevocably placed in a fund to be paid to the winner at a later date see 64_tc_245 67_tc_814 revrul_62_74 1962_1_cb_68 and revrul_67_203 1967_1_cb_105 see also anastasio for the proposition that the mere absence of a right to assign does not prevent a taxpayer from receiving an economic benefit finally revrul_83_25 1983_1_cb_116 holds that a minor received the economic benefit of a_trust when it was established by court order to receive damages awarded to the minor as a result of a personal injury suit under the terms of the trust the trustee was authorized to distribute funds necessary for the health education support or maintenance of the minor the trust was not subject_to revocation by the minor but was subject_to amendment modification or revocation by the court the trust was to terminate upon the minor reaching the age of at which time the trust would distribute all of its property to him if the minor died before reaching the age of the trust property would pass to the minor’s estate in the instant case the minor beneficiaries of the trust are in receipt of an economic benefit when the per capita payments are deposited in the trust by a therefore under sec_61 the payments are includible in the gross_income of the minor beneficiaries in the year they are deposited caveat s a copy of this technical_advice_memorandum is to be given to the taxpayer sec_6110 of the code provides that it may not be used or cited as precedent - end -


internal_revenue_service 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 ita b04 plr-150105-09 date date ty ------- legend legend applicant parent date holding bank-sub ------------------------------------------------------------------------------------------ -------------------------------- -------------------------- ------------------------------ ---------------------- dear ----------------- this responds to your request for a private_letter_ruling dated date on the eligibility of applicant to serve as a qualified_intermediary qi and as a trustee of a qualified_trust qt for like-kind_exchanges under sec_1031 of the internal_revenue_code including for exchanges in which it is a successor to a prior qi following a corporate_reorganization fact sec_1 general information applicant a national banking association and subsidiary of parent provides banking financial and trust services to its customers which include services as trustee to trusts for the benefit of its customers other subsidiaries of parent which also are banks and trust companies provide banking financial and trust services to their customers including services as trustees of trusts for the benefit of their customers one of the services provided by applicant is the facilitation of deferred like-kind_exchanges under sec_1031 of the code applicant serves as a qi as defined in sec_1_1031_k_-1 of the income_tax regulations for many of its customers plr-150105-09 combining of qi and trustee in one entity to accommodate the demand by customers for greater security in sec_1031 exchanges applicant proposes to structure exchanges to utilize qts as defined in sec_1_1031_k_-1 simultaneously with qis as defined in sec_1_1031_k_-1 the qts will hold the exchange_funds during the exchange_period applicant will serve as trustee for these qts and as qi in the same transactions qi merger effective on date parent acquired holding and thereafter dissolved it bank-sub a subsidiary of holding became a subsidiary of parent bank-sub is a national banking association that also serves as a qi in deferred like-kind_exchanges under sec_1031 parent plans to merge bank-sub into applicant pursuant to u s c sec_215a in a transaction intended to qualify as a tax-free reorganization under sec_368 of the code at the time of the reorganization bank-sub will be a party to numerous exchange agreements as qi in this capacity it will hold exchange proceeds resulting from the transfer of relinquished_property by its customers and for which replacement_property is not yet purchased in such cases as a result of the reorganization applicant will succeed to and become custodian of the exchange proceeds held by bank-sub under those exchange agreements applicant will also become a party to the exchange agreements as the successor to bank-sub in the reorganization by operation of u s c sec_215a rulings requested applicant requests rulings concerning whether applicant may simultaneously serve as a qi and as trustee of a qt for the same customer in a single transaction whether applicant’s service or the service by any member affiliate of the same controlled_group as applicant as trustee of a_trust for the benefit of a customer constitutes a routine financial and trust service that will not cause applicant to be a disqualified_person and whether applicant following the merger of bank-sub into applicant will be deemed the same qi as bank-sub with regard to pending like-kind_exchanges for which bank-sub was serving as qi before the merger applicable law sec_1031 of the code provides that no gain_or_loss shall be recognized on the exchange of property held for productive use in a trade_or_business or for investment if plr-150105-09 such property is exchanged solely for property of like_kind which is to be held either for productive use in a trade_or_business or for investment sec_1_1031_k_-1 of the regulations provides rules for the application of sec_1031 to deferred exchanges exchanges in which pursuant to an agreement the taxpayer transfers property held for productive use in a trade_or_business or for investment the relinquished_property and subsequently receives property to be held either for productive use in a trade_or_business or for investment the replacement_property if the taxpayer actually or constructively receives money or property which does not meet the requirements of sec_1031 in the full amount of the consideration for the relinquished_property the transaction will constitute a sale and not a deferred_exchange even though the taxpayer may ultimately receive like-kind replacement_property sec_1_1031_k_-1 provides several safe harbors the use of which will result in a determination that the taxpayer is not in constructive receipt of money or other_property for purposes of sec_1031 moreover more than one safe_harbor can be used in the same deferred_exchange but the terms and conditions of each must be separately satisfied see sec_1_1031_k_-1 sec_1_1031_k_-1 provides that in the case of a deferred_exchange the determination of whether the taxpayer is in actual or constructive receipt of money or other_property before the taxpayer actually receives like-kind replacement_property will be made without regard to the fact that the obligation of the taxpayer's transferee to transfer the replacement_property to the taxpayer is or may be secured_by cash or a cash_equivalent held in a qualified_escrow_account or in a qualified_trust sec_1_1031_k_-1 provides that a qualified_trust is a_trust wherein-- a the trustee is not the taxpayer or a disqualified_person as defined in sec_1_1031_k_-1 k except that the relationship between the taxpayer and the trustee created by the qualified_trust will not be considered a relationship under sec_267 and b the trust agreement expressly limits the taxpayer's rights to receive pledge borrow or otherwise obtain the benefits of the cash or cash_equivalent held by the trustee as provided in sec_1_1031_k_-1 sec_1_1031_k_-1 of the regulations provides that in the case of a taxpayer's transfer of relinquished_property involving a qualified_intermediary the qualified_intermediary is not considered the agent of the taxpayer for purposes of sec_1031 in such a case the taxpayer's transfer of relinquished_property and subsequent receipt of like-kind replacement_property is treated as an exchange and the determination of whether the taxpayer is in actual or constructive receipt of money or other_property before the taxpayer actually receives like-kind replacement_property is made as if the qualified_intermediary is not the agent of the taxpayer sec_1_1031_k_-1 applies only if the agreement between the taxpayer and the qualified_intermediary plr-150105-09 expressly limits the taxpayer's rights to receive pledge borrow or otherwise obtain the benefits of money or other_property held by the qualified_intermediary as provided in sec_1_1031_k_-1 sec_1_1031_k_-1 provides that a qualified_intermediary is a person who-- a is not the taxpayer or a disqualified_person as defined in sec_1_1031_k_-1 and b enters into a written_agreement with the taxpayer the exchange_agreement and as required by the exchange_agreement acquires the relinquished_property from the taxpayer transfers the relinquished_property acquires the replacement_property and transfers the replacement_property to the taxpayer sec_1_1031_k_-1 provides that a disqualified_person is a person described in sec_1_1031_k_-1 k or k sec_1_1031_k_-1 provides that the term disqualified_person includes a person who is the agent of the taxpayer at the time of the transaction for this purpose a person who has acted as the taxpayer's employee attorney accountant investment banker or broker or real_estate agent or broker within the 2-year period ending on the date of the transfer of the first of the relinquished properties is treated as an agent of the taxpayer at the time of the transaction however the performance of the following services are not taken into account-- i services for the taxpayer with respect to exchanges of property intended to qualify for nonrecognition_of_gain_or_loss under sec_1031 and ii routine financial title insurance escrow or trust services for the taxpayer by a financial_institution title insurance_company or escrow company sec_1_1031_k_-1 provides that a disqualified_person also includes a person that bears a relationship to the taxpayer described in either sec_267 or sec_707 determined by substituting in each section percent for percent each place it appears sec_1_1031_k_-1 provides that except as provided in sec_1_1031_k_-1 a disqualified_person includes any person bearing a relationship described in either sec_267 or sec_707 determined by substituting in each section percent for percent each place it appears to a person that is an agent as described in sec_1 k - k a fiduciary of a_trust and a beneficiary of such trust is a relationship described in sec_267 and sec_707 u s c sec_215a e provides that with respect to a corporate merger the corporate existence of each of the merging banks or banking associations participating in such merger shall be merged into and continued in the receiving association and such plr-150105-09 receiving association shall be deemed to be the same corporation as each bank or banking association participating in the merger all rights franchises and interests of the individual merging banks or banking associations in and to every type of property real personal and mixed and choses in action shall be transferred to and vested in the receiving association by virtue of such merger without any deed or other transfer the receiving association upon the merger and without any order or other action on the part of any court or otherwise shall hold and enjoy all rights of property franchises and interests including appointments designations and nominations and all other rights and interests as trustee executor administrator registrar of stocks and bonds guardian of estates assignee receiver and committee of estates of lunatics and in every other fiduciary capacity in the same manner and to the same extent as such rights franchises and interests were held or enjoyed by any one of the merging banks or banking associations at the time of the merger analysi sec_1 combined use of one entity as qi and as trustee of a qt in the same transaction at the request of customers applicant wishes to combine its services as qi and as trustee of qts more than one safe_harbor may be used in the same deferred_exchange provided that the terms and conditions of each are satisfied sec_1_1031_k_-1 for applicant to be the trustee of a qt it may not be a disqualified_person as defined in sec_1_1031_k_-1 and the trust agreement must expressly limit the exchanger’s rights to receive pledge borrow or otherwise obtain the benefits of the cash or cash_equivalent held by the trustee for applicant to be qi it may not be a disqualified_person as defined in sec_1_1031_k_-1 the exchange_agreement must expressly limit the exchanger’s rights to receive pledge borrow or otherwise obtain the benefits of the cash or cash_equivalent held by applicant as qi and as required by the exchange_agreement applicant as qi must acquire the relinquished_property from the exchange customer transfer the relinquished_property acquire the replacement_property and transfer the replacement_property to the exchange customer if all of these requirements are satisfied by applicant in a transaction it will be both the qi and the trustee of a qt in that transaction the fact that applicant serves in both capacities in the same transaction is not a disqualification of either safe_harbor and will not make applicant a disqualified_person the trustee function by banks as routine trust and financial services applicant represents that it provides banking financial and trust services to its customers including services as trustee of trusts for the benefit of its customers applicant serves as qi for many of these same customers in addition other subsidiaries of parent in the same controlled_group as applicant are also banks and trust companies these affiliated entities also provide banking financial and trust services to their customers including services as trustees of trusts for the benefit of plr-150105-09 their customers applicant is asking for a ruling that these relationships both between itself and its own customers as trustee and beneficiary and between affiliated entities and its exchange customers will not result in applicant’s classification as a disqualified_person service as a trustee by a bank or trust company constitutes a routine financial or trust service by a financial_institution within the meaning of sec_1_1031_k_-1 of the regulations under this regulation such services are not taken into account for purposes of classifying an entity as a disqualified_person therefore service by applicant as trustee for the benefit of a customer in an exchange transaction will not cause it to be treated as a disqualified_person with respect to a customer for the same reason applicant will not be considered a disqualified_person with respect to a customer merely because an entity in the same controlled_group as applicant performs trustee services for the customer status of a successor qi following a merger while an exchange is pending under sec_1_1031_k_-1 of the regulations when a taxpayer uses a qi to facilitate a like- kind exchange under sec_1031 the taxpayer is considered to have engaged in the exchange with the qi consequently the qi which is the transferee of the relinquished_property and the qi which is the transferor of the replacement_property must be the same person in the case of the merger of bank-sub into applicant under u s c sec_215a e every type of property and chose_in_action of bank-sub will be transferred to and vested in applicant by virtue of the merger without any deed or other transfer bank-sub’s rights and obligations under all of its contracts will continue in applicant and applicant will be deemed to be the same party as bank-sub under those contracts most important applicant shall hold and enjoy all rights of property franchises and interests including appointments designations and nominations and all other rights and interests as trustee executor administrator and in every other fiduciary capacity in the same manner and to the same extent as such rights franchises and interests were held or enjoyed by bank-sub as a merging bank at the time of the merger thus under u s c sec_215a e applicant is treated as the same person as bank-sub for purposes of pending like-kind_exchanges in which bank-sub served a qi under sec_1031 prior to the merger therefore applicant may serve as qi for like-kind_exchanges initiated by bank-sub prior to the merger and conclude the transaction as if it were the same qi ruling sec_1 applicant will not be a disqualified_person as defined in sec_1_1031_k_-1 of the regulations with regard to applicant’s service as a qi for a customer as a result of applicant also serving as a trustee of such customer’s qt plr-150105-09 banking and trust services as a trustee performed by applicant or by any bank or trust company that is a member of the same controlled_group as applicant as determined under sec_267 of the code substituting percent for percent where it appears will constitute routine financial and trust services by a financial_institution within the meaning of sec_1_1031_k_-1 thus the performance of such services by applicant or any other bank or trust company in the same controlled_group as applicant for its exchange customers will not cause applicant to be a disqualified_person within the meaning of sec_1_1031_k_-1 after the merger of bank-sub into applicant applicant will be regarded as the same person as bank-sub for purposes sec_1_1031_k_-1 with respect to exchanges for which bank-sub is serving as qi at the time of the merger accordingly for exchanges pending at the time of the merger for which bank-sub is serving as qi applicant will be considered the transferee of the relinquished_property caveats except as expressly provided herein we express or imply no opinion concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the applicant 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 your authorized representative s a copy of this letter must be attached to any income_tax return to which it is relevant alternatively taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of the letter_ruling the rulings contained in this letter are based upon information and representations submitted by the applicant and accompanied by a penalty of perjury statement plr-150105-09 executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination sincerely michael j montemurro branch chief branch income_tax accounting cc


t c memo united_states tax_court charles r cutler petitioner v commissioner of internal revenue respondent docket no filed date charles r cutler pro_se scott t welch for respondent memorandum opinion haines judge this case is before the court on respondent’s motion for summary_judgment filed pursuant to rule respondent argues that the factual allegations deemed 1all section references are to the internal_revenue_code as amended rule references are to the tax_court rules_of_practice and procedure amounts are rounded to the nearest dollar admitted by petitioner under rule c establish that petitioner is liable for a federal_income_tax deficiency of dollar_figure petitioner resided in kinder louisiana at the time the background petition was filed petitioner filed a form_1040 u s individual_income_tax_return for reporting as nontaxable a dollar_figure individual_retirement_account ira distribution on date respondent issued petitioner a notice_of_deficiency for determining that the dollar_figure ira distribution is taxable and that petitioner received an additional taxable ira distribution of dollar_figure petitioner filed a petition with the court claiming that an ira inherited from a parent was not taxable that the government owed him money related to a denied patent application and that he should not have to pay taxes because as a louisiana prison inmate he cannot vote for president of the united_states while inmates in maine can on date respondent filed with the court requests for admissions which had been served on petitioner the previous day petitioner failed to respond and pursuant to rule c each matter set forth in the requests for admissions was deemed admitted days after the date of service the following is a summary of the matters petitioner is deemed to have admitted petitioner’s father died in owning two iras with edward d jones co petitioner was a beneficiary of both iras in the event of his father’s death no nondeductible_contributions were made to either of the iras in after the death of his father petitioner received lump-sum_distributions from the iras of dollar_figure and dollar_figure petitioner reported the dollar_figure distribution on his return but listed it as nontaxable petitioner did not report the dollar_figure distribution on his return after the requests for admissions were deemed admitted respondent filed a motion for summary_judgment seeking judgment in respondent’s favor on all issues petitioner filed a timely response stating only that he respectfully objects to respondent’s motion for summary_judgment discussion summary_judgment is intended to expedite litigation and avoid unnecessary and expensive trials fla peach corp v commissioner 90_tc_678 the court may grant summary_judgment when there is no genuine issue of material fact and a decision may be rendered as a matter of law rule b 98_tc_518 affd 17_f3d_965 7th cir 90_tc_753 rule d states when a motion for summary_judgment is made and supported as provided in this rule an adverse_party may not rest upon the mere allegations or denials of such party's pleading but such party's response by affidavits or as otherwise provided in this rule must set forth specific facts showing that there is a genuine issue for trial if the adverse_party does not so respond then a decision if appropriate may be entered against such party the moving party bears the burden of proving that there is no genuine issue of material fact 85_tc_812 85_tc_527 the court will view any factual material and inferences in the light most favorable to the nonmoving party dahlstrom v commissioner supra pincite naftel v commissioner supra pincite summary_judgment is appropriate where the facts deemed admitted pursuant to rule c support a finding that there is no genuine issue as to any material fact 81_tc_644 based upon our review of the record we are satisfied that there is no genuine issue of material fact and that respondent is entitled to judgment as a matter of law the deficiencies in this case arise from petitioner’s mistaken belief that distributions made to a beneficiary of a decedent’s ira are not taxable a distribution to the beneficiary of a decedent’s ira is includable in the gross_income of the beneficiary sec_408 sec_691 125_tc_227 when such a distribution is made in a lump sum to the beneficiary the portion equal to the value of the ira on the date of the decedent’s death less any nondeductible_contributions made to the ira is income_in_respect_of_a_decedent ird under sec_691 estate of kahn v commissioner supra that portion is includable in the gross_income of the beneficiary in the year the distribution is received sec_691 estate of kahn v commissioner supra any balance of the distribution which represents appreciation and income accruing between the date of death and the date of the distribution is taxable to the beneficiary under sec_408 and sec_72 estate of kahn v commissioner supra the factual allegations deemed admitted by petitioner establish petitioner was the beneficiary of his deceased father’s iras petitioner received lump-sum_distributions from the iras during and no nondeductible_contributions were made to the iras therefore we hold that the ira sec_691 provides that items of gross_income in respect of a decedent that are not properly includable by the decedent in the year of his death or in a prior period are included in the gross_income for the taxable_year when received of the person who acquires the right to receive that amount sec_408 provides that distributions made from an ira are included in the gross_income of the distributee in the manner provided under sec_72 3the recipient of an item of ird such as the beneficiary of a decedent’s ira is allowed an income_tax deduction equal to the amount of federal estate_tax attributable to the ird sec_691 estate of 391_f3d_621 5th cir 125_tc_227 distributions were properly taxable to petitioner as determined by respondent petitioner’s claim with respect to the denied patent application is not properly before this court the tax_court is a court of limited jurisdiction and we may exercise that jurisdiction only to the extent authorized by congress naftel v commissioner supra pincite we do not have jurisdiction to consider claims related to a denied patent application as to petitioner’s arguments with respect to the denial of his right to vote the internal_revenue_code simply does not provide that an inmate denied the right to vote is exempt from taxation in the absence of any genuine dispute as to a material fact in this case we shall grant respondent’s motion for summary_judgment to reflect the foregoing an appropriate order and decision will be entered