uil nos cc dom fi p plr-112804-99 plr-114658-99 plr-114659-99 plr-114660-99 january legend flp llc trust trust trust policy policy policy policy state date date l t l u q dear this is in response to your letter dated date and additional submissions on behalf of flp h w and trust referred to collectively as taxpayers requesting rulings concerning the income and estate_tax consequences resulting from the formation of flp and the transfer of policies insuring the lives of h and w to flp facts in h created trust w h’s spouse and y a nonadverse_party within the mearjng of sec_672 of the internal_revenue_code are the trustees of trust under the trust instrument the trust income and corpus may in the discretion of y be used to pay premiums on policies insuring the life of h trust currently holds only one asset policy an insurance_policy on the life of h under the provisions of trust y may sell or assign any insurance policies owned by trust in h created trust y and z two nonadverse parties within the meaning of sec_672 of the code are the trustees of trust trust currently holds policy and policy two second-to-die policies each insuring the joint lives of h and w trust 2's only other asset is policy insuring the joint lives of h and w taxpayers represent that policy has little cash_value and will soon lapse the trustees may sell or assign any insurance policies owned by trust under the provisions of trust in h created trust for the benefit of h's issue w and y are the trustees taxpayers represent that as of date the assets of trust consisted of of trust cash and marketable_securities having a value of approximately dollar_figurei real_estate having a value of approximately dollar_figurej that was subject_to a mortgage in the amount of approximately dollar_figurep and promissory notes with a combined principal balance of dollar_figurec the promissory notes evidence loans made by trust to trust and trust under the terms of the loan agreements and promissory notes the loans are payable within three months of written demand by the lender interest on the loans is determined with reference to the short-term interest rate established under sec_1274 of the code and interest is payable on december of each year that the loans are outstanding further the loan documents state that the loans are unsecured obligations trust and trust used the proceeds of the loans from trust to pay insurance premiums on the life_insurance policies owned by the trusts in h loaned dollar_figureh to trust trust gave h a promissory note evidencing the loan the terms of the loan and promissory note are the same in all material respects as the loans and promissory notes with respect to the borrowing by trust and trust from trust trust 1's promissory note to h states that h’s loan to trust d7 is an unsecured obligation trust used the proceeds of h's loan to pay insurance premiums on policy in connection with the assumption taxpayers represent that in taxpayers represent that on date trust h and w formed llc pursuant to the limited_liability act of state ’ taxpayers represent that the following contributions were made to llc within an approximately two week period commencing on date in exchange for all of the class b membership units in llc representing an n ownership_interest in llc trust contributed cash and marketable_securities comprising a particular custodial_account held by a bank having a value of approximately dollar_figurek real_estate having a value of approximately dollar_figurej and llc assumed a liability of trust in the amount of approximately dollar_figurep prior to its assumption by llc the liability was attached to the real_estate order to avoid state transfer_taxes upon trust 3's contribution of the realty to llc the parties entered into a substitution of collateral_agreement replacing the real_estate as collateral for the liability with the cash and securities of the custodial_account thus after their transfer to llc the cash and securities of the custodial_account were subject_to a liability of approximately dollar_figurep and the real_estate was not subject_to any liability exchange for class a membershy units in llc taxpayers represeni that h and w each contributed cash in the amount of dollar_figureq interest in llc class a members have the authority and power to conduct and control the business affairs and operations of llc while the class b members have limited rights to participate in the conduct and control of the business affairs and operations of llc h and w each received an m ownership taxpayers represent that under the operating_agreement of llc the in taxpayers represent that also on date trust h and w formed flp pursuant to the revised_uniform_limited_partnership_act of state and that the ' the stated general purpose of llc is any and ail lawful purposes for profit income and gain including but not limited to the purchase acquisition subdivision improvement development construction lease management sale and mortgage of llc property the stated business_purpose of llc is to make profits increase wealth manage and preserve assets of the x family members preserve x family harmony maintain control of x family assets continue ownership of x family assets and restrict the rights of persons not members of the x family from acquiring any interest in x family assets and among other things provide flexibility in business planning not available through trusts or other business entities the stated general purpose of flp is to engage in ail businesses permitted under the revised_uniform_limited_partnership_act of state including but not limited to acquisition and investment in real or personal_property of any kind including stocks bonds notes evidences of indebtedness of any person domestic or foreign insurance policies general or limited_partnership interests membership interests in any limited 27g following contributions in exchange for partnership interests were made to flp within an approximately two week period commencing on date trust contributed cash and marketable_securities having a value of approximately dollar_figurea its n interest in llc having a value of approximately dollar_figureb and the promissory notes from trust and trust having a combined face value of approximately dollar_figurec in exchange for an n limited_partnership_interest in flp h contributed cash in the amount of dollar_figureg and the promissory note from trust with face_amount dollar_figureh the sum of the cash and the face_amount of the note contributed by h was dollar_figured w contributed cash of dollar_figured to flp in exchange for their contributions h and w each received an m general_partnership interest in flp the flp partnership_agreement provides that the general partners control the management and investment decisions of the partnership however under the flp partnership_agreement if the j artnership owns a life_insurance_policy or interest therein insuring the life of any partner or the joint lives of any partner or possesses any incident_of_ownership with respect to such policy or policies the insured partner has in the case of a single life policy or the insured partners have in the case of a joint life policy no right or power to exercise or to otherwise participate in the exercise of any of the incideiis of ownership with respect to such poiicy or policies tne exercisé of any incident_of_ownership in any such policy is to be exercised only by a majority of the partners including limited partners other than the insured partner in the case of a single life policy or the insured partners in the case of a joint life policy in addition w in the capacity of co-trustee of trust is not permitted to participate in the exercise of any incident_of_ownership or in any decision of the partnership regarding any policy insuring w's life flp plans to demand payment on the promissory notes trust and trust each propose to satisfy their respective loan obligations by transferring policie sec_1 and to flp taxpayers represent that policy will not be so transferred taxpayers represent that the proposed transfers of life_insurance policies by trust and trust to flp will discharge debt obligations that are enforceable under state law and that are valid debt obligations for federal_income_tax purposes the policies will be transferred for an amount equal to the value of the respective trust's interest in the policy or policies as determined under sec_25_2512-6 of the gift_tax regulations specifically the policies will be valued by taking the sum of the interpolated_terminal_reserve_value of each policy at the date of the proposed transfer as obtained from the issuing liability company or any other_securities the stated business_purpose of flp is to make profits increase wealth manage and preserve assets of the x family members preserve x family harmony maintain control of x family assets continue ownership of x family assets and restrict the rights of persons not members of the x family from acquiring any interest in x family assets and among other things provide flexibility tn business planning not available through trusts or other business entities ao 7s insurance_company and the proportionate amount of the premium last paid before the date of the proposed transfer that covers the period extending beyond the date of the proposed transfer taxpayers represent that the life_insurance policies to be transferred to flp will have sufficient value to fully discharge the debt obligations of trust and trust if the interpolated_terminal_reserve_value plus the proportionate premium amount extending beyond the proposed date of transfer of the policies is greater than the balance due under the notes then taxpayers represent the trusts will withdraw an amount of cash_value from the policies such that the interpolated_terminal_reserve_value plus the proportionate premium amount extending beyond the proposed transfer date of the policies will equal the balance due under the notes taxpayers also represent that as the new owner of the transferred policies flp will designate itself as the beneficiary of the policies and pay all policy premiums taxpayers assert that the proposed transfers of the life_insurance policies to flp will accomplish several business purposes first neither trust nor trust has sufficient income to pay the full amount of the premiums on the policies they respectively own on the other hand it is anticipated that flp will have sufficient cash --yecaipts to pay policy premiums second 4ransfening the policies to flp will enable trust and trust to satisfy their outstanding loan obligations third flp’s acquisition of the policies will provide additional diversification of flp’s investments consolidation of the x family’s assets and additional assets to flp on the death of the insureds thereby enhancing the value of flp for family purposes after the planned transfer of the life_insurance policies to flp taxpayers represent that flp’s assets will consist of the following marketable_securities having an approximate value of dollar_figurea an n interest in llc having an approximate value of dollar_figureb three life_insurance policies having an approximate value of dollar_figuree and approximately dollar_figuref in cash additionally taxpayers make the following additional representations no election will be filed for flp to be treated as other than its default federal tax classification a partnership under sec_301_7701-3 of the procedure and administration regulations the cash_value of the three insurance policies that will be transferred to flp will represent less than percent of flp’s assets other than the contributions described above neither trust h nor w has made or intends to make any additional contributions to llc currently no negative balance exists in any member's account in llc and no action is intended to be taken by llc that would result in the creation of a negative balance in any member's capital_account no other members have been admitted to llc since its inception and there is no current plan or intent to admit other members there have been no non-pro rata contributions to flp since its inception and no contributions are currently intended neither trust h nor w has received or intends to receive additional limited_partnership units as a result of additional capital contributions either deemed to be contributed by gift of another partner or otherwise there is no plan or intent to make ary additional transfers to either flp or llc by any transferor law and analysis sec_761 and a of the code provide that the ierm partnership includes a syndicate group pool joint_venture or other unincorporated organization through or by means of which any business financial operation or venture is carried on and which is not within the meaning of the code a_trust estate or corporation under sec_301_7701-3 of the procedure and administration regulations unless it elects otherwise a domestic eligible_entity formed after date with two or more members is treated as a partnership for federal tax purposes the term partner means a member of a partnership sec_761 and sec_7701 sec_721 of the code provides that no gain_or_loss shall be recognized to a partnership or to any of its partners in the case of a contribution of property to the partnership in exchange for an interest in the partnership sec_721 of the code provides that sec_721 shall not apply to gain realized on a transfer of property to a partnership that would be treated as an investment_company within the meaning of sec_351 if the partnership were incorporated sec_1_351-1 of the income_tax regulations provides that a transfer to an investment_company will occur when i the transfer results directly or indirectly in diversification of the transferors' interest and ii the transferee is a a regulated_investment_company ric b a real_estate_investment_trust reit or c a corporation more than percent of the value of whose assets excluding cash and non-convertible debt obligations from consideration are held for investment and are readily marketable_stock or securities or interests in rics or reits oo sec_1002 of the taxpayer_relief_act_of_1997 pub_l_no 111_stat_788 tra97 amended sec_351 of the code for transfers after date in taxable years ending after such date subject_to certain transitional relief provisions sec_1002 of tra97 is intended to expand the types of assets considered in determining whether a transfer is to a transferee described in sec_1_351-1 thus under traq7 the definition of readily marketable_stock and securities now includes i money ii stock and other equity interests in a corporation evidences of indebtedness options forward or futures contracts notional_principal_contracts and derivatives iii foreign_currency iv interests in rics reits a common_trust_fund a publicly_traded_partnership or similar equity_interest which pursuant to its terms is readily convertible into or exchangeable for any of the preceding assets v certain precious metals vi interests in any entity whose assets are substantially those previously described or vii eny other asset so designated by the secretary sec_1_351-1 of the regulations states that the determination of whether a corporation is an investment_company shall ordinarily be made by reference to the circumstances in existence immediately_after_the_transfer in question however where circumstances thangé thereaiter pursuant to a plarin existence ai ine ume of transfer this determination shall be made by reference to the later circumstances sec_1_351-1 of the regulations provides that for purposes of sec_1 c ii c stock in subsidiary corporations is disregarded and the parent_corporation is deemed to own its ratable share of its subsidiaries’ assets for these purposes a corporation is considered a subsidiary if the parent own sec_50 or more of i the combined voting power of all classes of stock entitled to vote or ii the total value of shares of all classes of stock outstanding sec_101 of the code provides that except as otherwise provided in sec_101 sec_101 and sec_101 gross_income does not include amounts received under a life_insurance_contract if such amounts are paid_by reason of the death of the insured sec_101 of the code provides generally that if a life_insurance_contract or any interest therein is transferred for a valuable consideration the exclusion_from_gross_income provided by sec_101 is limited to an amount equal to the sum of the actual value of the consideration and the premiums and other_amounts subsequently paid_by the transferee the term transfer for a valuable consideration is defined for purposes of sec_101 of the code in sec_1_101-1 of the regulations as any absolute transfer for value of a right to receive all or a part of the proceeds of a life_insurance_policy an exception to the general_rule of sec_101 of the code is provided in sec_101 when the life_insurance_contract is transferred to the insured to a partner of the insured to a partnership in which the insured is a partner or to a corporation in which the insured is a shareholder or officer sec_101 will not affect the application of sec_101 to amounts received by the beneficiaries in these cases the general_rule of sec_2042 of the code provides that the value of the decedent's gross_estate includes the proceeds of ail life_insurance policies on the decedent's life receivable by beneficiaries other than the decedent's executor to the extent that the decedent possessed at death any incidents_of_ownership exercisable either alone or in conjunction with any other person sec_20_2042-1 of the estate_tax regula‘ions provides that the term incidents_of_ownership is not limited in its meaning to ownership of the policy in the technical legal sense generally the term has reference to the right of the insured or the insured’s estate to the economic benefits of the policy thus it includes the power to change the beneficiary to surrender or cancel the policy to assign the policy to revoke an assignment to pledge the policy fora loan or to obtain from the insurer a loan against the surrender_value of the policy partnership rulings taxpayers have requested a ruling that flp is a partnership for federal tax purposes taxpayers also request a ruling that no gain will be recognized under sec_721 of the code as a result of the transfer of assets to flp by trust h and win exchange for partnership interests in flp based solely on the facts submitted and representations made we conclude that flp will be treated as a partnership for federal tax purposes and that trust h and w will be treated as partners in flp for federal tax purposes under sec_351 of the code real_estate is not an asset listed in the definition of immediately after the transfers to flp the value of the readily marketable_securities real_estate in flp comprises more than percent of the total value of flp’s assets thus in this case treating flp as incorporated flp does not qualify as an investment_company under sec_1_351-1 due to the large asset value of the real_estate contributed accordingly we have determined treating flp as incorporated that the transfers by the partners to flp should not be treated as transfers to an investment_company within the meaning of sec_351 thus based solely on the facts submitted and representations made we conclude that no gain will be recognized under sec_721 as a result of the transfer of assets to flp by trust h and w in exchange for partnership interests in flp transfer-for value ruling taxpayers represent that the proposed transfers of life_insurance policies by trust and trust to flp for an amount equal to the value of the respective trust's interest in the policy or policies as determined under sec_25_2512-6 of the gift_tax regulations will discharge debt obligations that are enforceable under state law and that are valid debt obligations for federal_income_tax purposes thus the proposed transfers of life_insurance policies will be transfers for a valuable consideration as defined in sec_1_101-1 of the regulations the transferee of the proposed transfers will be flp a partnership for federal tax purposes further all of the insureds under the policies to be transferred will be partners of flp at the time the policies are transferred thus based on the facts submitted and representations made the proposed transfers of policie sec_1 and to flp will satisfy the requirements of sec_101 of the code and will not affect the application of sec_101 to amounts that flp will receive under these contracts upon the deaths of h and w estate_tax ruling taxpayers have requested a ruling that the proposed transfers of insurance policies to flp will not result in either h or w possessing incidents_of_ownership under sec_2042 of the code in any of the policies by reason of their respective general_partnership interests in flp incidents_of_ownership are measured by a general legal power to exercise ownership without regard to the owner's ability to exercise it at a particular moment 380_us_678 see also 6_f3d_321 cir 54_tc_1590 acqg 1971_2_cb_1 the very phrase ‘incidents of ownership’ connotes something partial minor or even fractional in scope it speaks more of possibility than of probability 355_f2d_7 cir when the insured cannot initiate the acts associated with the incidents_of_ownership but can only consent to or veto the exercise of the incidents_of_ownership by another the courts have held that the veto power itself constitutes an incident_of_ownership over the policy where the insured must consent before the actions of others effectively alter a revocable_trust the insured holds incidents_of_ownership in a life_insurance_policy held by the trust see estate of karagheusian v 233_f2d_197 2d cir in the instant case under the flp partnership_agreement the general partners control the management and investment decisions of the partnership however an insured partner whether limited or general is prohibited from participating in the further w as trustee of trust which holds a limited_partnership exercise of any incident_of_ownership with respect to a partnership-held policy insuring his or her life interest in flp will be precluded from exercising any incident_of_ownership over the policies insuring w's life thus neither h nor w in their capacity as general partners will be able to exercise any incidents_of_ownership with respect to a policy held by flp that insures their respective lives or their joint lives based solely on the facts submitted and representations made we conclude that h and w will not possess any incidents_of_ownership under sec_2042 of the code with respect to policie sec_1 and by reason of their general_partnership interests in flp conclusion sec_1 flp will be treated as a partnership for federal tax purposes trust h and w will be treated as partners in flp for federal tax purposes no gain will be recognized under sec_721 of the code as a result of the transfer of assets to flp by trust h and w in exchange for partnership interests in flp the proposed transfers of policie sec_1 and to flp will satisfy the requirements of sec_101 of the code and will not affect the application of sec_101 to amounts that flp will receive under these contracts upon the deaths of h and w hand w will not possess any incidents_of_ownership under sec_2042 of the code with respect to policie sec_1 and by reason of their general_partnership interests in flp caveat sec_1 except as specifically set forth above no opinion is expressed or implied concerning the federal tax consequences of the proposed transaction under any other provision of the code or regulations specifically no opinion is expressed or implied concerning flp’s federal tax classification as a partnership if flp disposes of its interest in llc specifically no opinion is expressed or implied concerning whether policie sec_1 and are life_insurance contracts as defined in sec_7702 of the code or are flexible premium life_insurance contracts issued before date that meet the requirements set forth in sec_101 of the code specifically no opinion is expressed or implied regarding the federal gift_tax consequences of the transactions set forth in this ruling_request specifically no opinion is expressed or implied concerning the validity for federal tax purposes of any of the loans or promissory notes referenced above further no opinion is expressed or implied regarding the applicability of and sec_7872 of the code to the purported loans specifically no opinion is expressed or implied regarding whether h the grantor should be treated as the owner of any portion of trust under subpart e of subchapter_j of chapter of the code the rulings contained in this letter are based upon information and representations submitted by the taxpayers and accompanied by penalty of perjury statements executed by the taxpayers 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 a copy of this letter must be attached to any federal tax_return to which it is relevant this ruling is directed only to the taxpayers requesting it sec_61 k of the code provides that it may not be used or cited as precedent sincerely yours assistant chief_counsel financial institutions and products by s donald j drees jr senior technician reviewer branch ppr


may uniform issue list clit ep ka ntf attention legend trust a_trust agreement a individual b individual c state s amount e amount h amount d amount f amount g company n company m amount ira x ira y page dear this is in response to correspondence dated date as supplemented by correspondence dated date and january february and date submitted on behalf of trust a by its authorized representative in which a waiver of the 60-day rollover requirement contained in sec_408 of the internal_revenue_code the code is requested this correspondence was also supplemented by telephone conferences held on january and date the following facts and representations have been submitted under penalty of perjury in support of the ruling requested trust a was created under the provisions of trust agreement a dated date upon the death of individual b a is a grantor_trust and is irrevocable individual b died on date individual b was married to individual c at the time of his death the current sole trustee of trust agreement a and trust a is individual c it has been represented on your behalf that trust it has been represented on your behalf that individual c as sole trustee of trust agreement a has the sole power and authority to allocate assets of trust agreement a between trust a and the other sub-trusts created thereunder it has also been represented on your behalf that individual c has the unfettered right under state s law to distribute the assets of trust a to herself as beneficiary or for her benefit without regard to the interests of any remainder beneficiary prior to his death on or about date individual b established an individual_retirement_account ira ira y with company m on the same date individual b named trust agreement a as the sole primary beneficiary of his ira individual b maintained said ira y at his death tt trust a established ira x a beneficiary-directed individual_retirement_account with company m and amount d was transferred to ira x from ira y originally established by individual b during date the minimum_required_distribution of amount e was subsequently distributed from ira x to trust a on in order to implement this ira x in img and idual interest amounts totaling amount f were transferred to in fs trust a engaged company n to manage ira x arrangement company n and company m both advised the trustee of trust a that a new ira needed to be established with company m a company m account representative advised said trustee that an institutional account was required in order to grant company n investment discretion with respect to ira x the company m account representative also assured the trustee of trust a that he would implement the establishment of the new ira and supervise the transfer of assets from ira x to the new ira the trustee of trust a was requested to complete and sign the new account agreement and application_for brokerage account form the trustee of trust a signed this form on or abou company m with respect to the period ee showing the account titled individual c trustee trust a inherited ira and reflecting cash transfers totaling amount g from ira x to the new ira on the trustee received an investment report from te through residual and i page interest amounts totaling amount h were transferred to the new ira in june and date o it tn trustee of trust a requested that the company m account representative distribute the required_minimum_distribution for calendar_year from the new ira the trustee was then orally advised by the company m account representative that the new ira was not properly coded by company m to allow the issuance of form 1099-r for the requested distribution the company m account representative determined that the amount minimum_required_distribution could be transferred back to ira x in order to assure that a form 1099-r could be issued for the required_distribution on amount was transferred in cash from the new ira to ira x and in turn amount was then distributed from ira x to trust a in company m issued form 1099-r showing the distribution of amount to trust a in carly the trust a trustee began reviewing tax-related information relating to the preparation of her b income_tax returns at that time she noticed that a form 1099-int had been issued with respect to the new ira and questioned her company m account representative about this she was then advised for the first time that the new ira had been improperly established as a_trust account and not as an ira until this time the trustee of trust a was unaware that the trust account was not an ira ang it has been represented that the company n account within company m occurred more than one year after the date of any other distribution from ira x that was rolled over into any ira and no other amount that was distributed from any other ira within this one-year period was rolled over into ira x in addition the funds on deposit in the company n account within company m were not used by trust a in any way except to fund the required_minimum_distribution for ee distribution from ira x to the based on the facts and representations the following rulings were requested the proceeds of the company n account may be transferred to individual c in order for her to roll over such proceeds to an ira established in her own name and that such ira will not be deemed to be an inherited ira within the meaning of sec_408 of the code none of the proceeds of the company n account will be includible in the gross_income of either individual c or trust a except to the extent such to make required minimum distributions in the years fiend proceeds were applied the service waives the 60-day rollover requirement contained in sec_408 of the code in this instance with respect to your ruling requests sec_408 of the code provides that except as otherwise provided in sec_408 any amount_paid or distributed out of an ira shall be included in gross_income by the payee or distributee as the case may be in the manner provided under sec_72 of the code sec_408 of the code defines and provides the rules applicable to ira_rollovers page sec_408 of the code provides that sec_408 of the code does not apply to any amount_paid or distributed out of an ira to the individual for whose benefit the ira is maintained if- i ii the entire amount received including money and any other_property is paid into an ira for the benefit of such individual not later than the 60th day after the day on which the individual receives the payment or distribution or the entire amount received including money and any other_property is paid into an eligible_retirement_plan other than an ira for the benefit of such individual not later than the 60th day after the date on which the payment or distribution is received except that the maximum amount which may be paid into such plan may not exceed the portion of the amount received which is includible in gross_income determined without regard to sec_408 sec_408 of the code provides that sec_408 does not apply to any amount described in sec_408 received by an individual from an ira if at any time during the one-year period ending on the day of such receipt such individual received any other amount described in sec_408 from an ira which was not includible in gross_income because of the application of sec_408 sec_408 of the code provides in summary that the rollover rules of sec_408 do not apply to inherited iras sec_408 of the code provides that the term inherited ira means an ira obtained by an individual other than the ira owner’s spouse as a result of the death of the ira owner thus under circumstances that conform with the requirements of code sec_408 a surviving_spouse who acquires a decedent’s ira after and as a result of the death of an ira owner will be able to roll over the decedent’s ira into an ira set up and maintained in the name of the surviving_spouse sec_408 of the code provides that the secretary may waive the 60-day requirement under sec_408 of the code where failure to waive such requirement would be against equity or good conscience including casualty disaster or other events beyond the reasonable control of the individual subject_to such requirement only distributions that occurred after date are eligible for the waiver under sec_408 of the code with respect to your ruling requests final income_tax regulations under code sec_401 and sec_408 were published in the federal_register pincite federal_register date and in the internal_revenue_bulletin pincite r b date the preamble to the final regulations in relevant part provides that the regulations apply for determining required minimum distributions for calendar years beginning after date sec_1_401_a_9_-4 q a-3 a of the regulations provides that only individuals may be designated beneficiaries for purposes of sec_401 of the code a person that is not an individual such as an employee’s estate may not be a designated_beneficiary further sec_1_401_a_9_-4 q a-5 a provides in pertinent part that a_trust is nota page designated_beneficiary even if the trust is named as a beneficiary consequently trust a is not a designated_beneficiary of individual b’s ira even though the trust was named by individual b as the beneficiary of his ira however sec_1_401_a_9_-4 q a-5 a of the regulations further provides that if the requirements of paragraph b of q a-5 are met and the required_documentation as described in q a-6 b required minimum distributions after death is provided to the plan_administrator by the trustee of the trust the beneficiaries of the trust will be treated as having been designated as beneficiaries of the employee under the plan for purposes of code sec_401 if these requirements are met the trust is a see-through trust and is a named beneficiary of the ira as of the date of the ira owner’s death and the beneficiaries of the trust with respect to the trust’s interest in the ira may be considered designated beneficiaries for purposes of determining the distribution period for payment of benefits from the ira under sec_401 of the code sec_1_408-8 of the final regulations q a-5 provides that a surviving_spouse of an ira owner may elect to treat the spouse's entire_interest as a beneficiary in an individual's ira as the spouse's own ira must be the sole beneficiary of the ira and have an unlimited right to withdraw amounts from the ira if a_trust is named as beneficiary of the ira this requirement is not satisfied even if the spouse is the sole beneficiary of the trust in order to make this election the spouse the preamble to the final regulations provides in relevant part that a surviving_spouse who actually receives a distribution from an ira is permitted to roll that distribution over into his her own ira even if the spouse is not the sole beneficiary of the deceased's ira as long as the rollover is accomplished within the requisite 60-day period a rollover may be accomplished even if ira assets pass through a_trust revproc_2003_16 2003_4_irb_359 date provides that in determining whether to grant a waiver of the 60-day rollover requirement pursuant to sec_408 of the code the service will consider all relevant facts and circumstances including errors committed by a financial_institution inability to complete a rollover due to death disability hospitalization incarceration restrictions imposed by a foreign_country or postal error the use of the amount distributed for example in the case of payment by check whether the check was cashed and the time elapsed since the distribution occurred revrul_85_13 1985_1_cb_184 concludes that if a grantor is treated as the owner of the entire trust the grantor is considered to be the owner of the trust assets for federal_income_tax purposes the reason for attributing items of income deduction and credit to the grantor under sec_671 is that by exercising dominion and control_over a_trust either by retaining a power over or an interest in the trust or by dealing with the trust property for the grantor’s benefit the grantor has treated the property as though it were the grantor’s property in this case individual b named trust agreement a as the beneficiary of his ira ira y generally if the proceeds of a decedent’s ira are payable to a_trust and are paid to the trustee of the trust who then pays them to the decedent's surviving_spouse as the beneficiary of the trust the surviving_spouse shall be treated as having received the ira proceeds from the trust and not from the decedent accordingly such surviving_spouse in general shall not be eligible to roll over the distributed ira proceeds into her own ira page however the general_rule will not apply in a case where the surviving_spouse is the sole trustee of the decedent's trust and has the sole authority and discretion under trust language to pay the ira proceeds to herself the surviving_spouse may then receive the ira proceeds and roll over the amounts into an ira set up and maintained in her name in this case upon the death of individual b individual c became the sole trustee of trust agreement a with the authority to allocate trust agreement a assets in any way in which she deemed appropriate including allocating them to trust a once allocated to trust a as sole trustee individual c could then have paid the allocated ira assets to herself as sole beneficiary of trust a if she had done so individual c as the individual who would have made every decision leading up to trust a’s interest in individual b’s ira being paid to herself would have been treated as having acquired individual b’s ira from individual b and not from trust a based on the above the service will treat individual c individual b’s surviving_spouse as a spouse who would have been eligible to roll over the above described ira y interest into an ira set up and maintained in her name therefore with respect to the first ruling_request we conclude that the proceeds of the company n account not to exceed the limits found below are eligible to be transferred pending resolution of your additional ruling requests to individual c in order for her to roll over such proceeds to an ira established in her own name and that such ira will not be deemed to be an inherited ira within the meaning of sec_408 of the code however a new ira was not established by company m contrary to information given by the company m account representative therefore because of these errors committed by a financial_institution amount g was not transferred into an ira with respect to the second and third rulings requested the information presented demonstrates that the trustee of trust agreement a and trust a relied upon the advice of companies m and n to establish a new ira and was assured by the company m account representative that he would implement the establishment of the new ira and supervise the transfer of assets from ira x to the new ira__in addition received an investment report from company m for through showing the account titled individual c trustee trust a inherited ira and cash transfers totaling amount g from ira x to this new account made oni and thus with respect to the third ruling_request except as noted below pursuant to sec_408 of the code the service hereby waives the 60-day rollover requirement with respect to the distribution of amount g individual c is granted a period of days from the issuance of this ruling letter to contribute amount g into a rollover ira provided all other requirements of sec_408 of the code except the 60-day requirement are met with respect to such contributions amount g will be considered a rollover_contribution within the meaning of sec_408 of the code furthermore based on the above and based on our response to your third ruling_request with respect to the second ruling_request we conclude that if a rollover is accomplished into a rollover ira none of the proceeds of the company n account totaling amount g and gains and losses allocated thereto will be includible in the gross_income of either individual c or trust a with respect to either calendar_year l or the page year of rollover except to the extent such - were applied to make required minimum distributions in the years and in accordance with sec_408 of the code this ruling does not authorize the rollover of amounts that were required to be distributed by sec_401 of the code made applicable to an ira pursuant to code sec_408 no opinion is expressed as to the tax treatment of the transaction described herein under the provisions of any other section of either the code or regulations which may be applicable thereto this letter expresses no opinion as to whether the iras described herein satisfied the requirements of sec_408 of the code this letter is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file with this office a copy of this letter_ruling is being sent to your authorized representative if you wish to inquire about this ruling please contact please address all correspondence to se t ep ra t3 sincerely yours goarg v slow employee_plans technical gro enclosures deleted copy of ruling letter notice of intention to disclose


internal_revenue_service national_office technical_advice_memorandum date number release date third party contact index uil no case mis no tam-114540-02 cc psi b7 taxpayer's name taxpayer's address taxpayer's identification no years involved date of conference legend taxpayer location plant x y issue are natural_gas liquids that are removed from a gas stream in a gas plant before the gas is first sold eligible for the credit provided in sec_29 of the internal_revenue_code as gas_produced_from_a_tight_formation tam-114540-02 conclusion natural_gas liquids that are removed from a gas stream in a gas plant before the gas is first sold are not eligible for the sec_29 credit as gas_produced_from_a_tight_formation facts taxpayer holds interests in a number of gas wells in location that produce mostly from two formations one of which is a designated tight formation the gas from these wells is transported to taxpayer’s plant near location at the plant condensate is removed from the gas stream before the inlet meter of the plant from the remaining gas stream the natural_gas liquids ngls also are removed and sold in liquid form through an intrastate liquid pipeline the remaining dry gas stream is sold in gaseous form at the tailgate of the plant to various purchasers in the interstate gas market on its federal_income_tax returns for its x through y tax years taxpayer claimed the sec_29 credit for the entire gas stream produced from its wells the entire gas stream included those hydrocarbons which were sold as dry gas at the tailgate of the plant mostly methane and the ngls sold in liquid form mostly ethane and propane law and analysis sec_29 provides a credit for the taxable_year for qualified_fuel sold by the taxpayer to an unrelated_person during the taxable_year the production of which is attributable to the taxpayer sec_29 defines the term qualified_fuels to include gas_produced_from_a_tight_formation sec_29 provides that except as provided in sec_29 the determination of whether any gas is produced from geopressured brine devonian_shale coal_seams_or_a_tight_formation shall be made in accordance with sec_503 of the natural_gas policy act of sec_29 provides that the term gas_produced_from_a_tight_formation only includes gas from a tight formation -- i which as of date was committed or dedicated to interstate commerce as defined in sec_2 of the natural_gas policy act of as in effect on the date of the enactment of this clause or ii which is produced from a well drilled after such date of enactment tam-114540-02 the legislative_history underlying sec_29 and its statutory language show that the credit for gas_produced_from_a_tight_formation is closely tied to the intent and policies of the natural_gas policy act of ngpa prior to sec_29 provided that gas_produced_from_a_tight_formation included only i gas the price of which was regulated by the united_states and ii gas for which the maximum lawful price applicable under the ngpa was at least percent of the then applicable price under sec_103 of the ngpa thus only gas that was regulated under the ngpa was eligible for the sec_29 credit as gas from a tight formation the ngpa which was passed on date gave the federal energy regulatory commission ferc the authority to regulate ceiling prices of first sales of various types of gas one such type of gas was high-cost gas which was defined in sec_107 of the ngpa as gas below big_number feet gas_from_geopressured_brine gas from devonian_shale and gas produced under such other conditions as the commission determined to present extraordinary risks or costs it was under this last category that ferc defined the term tight formation and promulgated regulations allowing gas from a tight formation to receive the higher ceiling prices of high-cost gas the ngpa provided for the phased deregulation of natural_gas various categories of gas were deregulated over a period of time only sec_103 wells committed or dedicated to interstate commerce remained regulated throughout the life of the ngpa the wellhead decontrol act of pub_l_no 103_stat_157 provided for the permanent decontrol of all first-sales gas prices effective date thus under the wellhead decontrol act all previously regulated gas was deregulated as of date in ferc issued order no which provided that regulated tight formation gas produced from wells drilled after date would no longer qualify for an incentive price under the ngpa as a result of this order tight formation gas produced from wells drilled after date was not eligible for the sec_29 credit because it was no longer regulated gas the cumulative effect of the legislation and the ferc order was that as of date the sec_29 credit was no longer available to gas produced from tight formations in response congress amended sec_29 as part of the omnibus budget reconciliation act of pub_l_no 104_stat_1388 congress noted in the legislative_history underlying sec_29 that a s a cumulative result of various legislative and regulatory actions that have occurred since sec_29 credit was enacted the credit presently is not and no longer will be available for any such gas as of january h_r rep no 101st cong 2d sess the senate report underlying sec_29 states as follows tam-114540-02 specifically the bill treats as qualifying tight formation gas any gas_produced_from_a_tight_formation which is produced from a well drilled after date or which as of date was committed or dedicated to interstate commerce within the meaning of sec_2 of the natural_gas policy act of as in effect on the date of enactment of this bill wells producing gas that was not committed or dedicated to interstate commerce as of date and thus was subject_to decontrol under provisions of the natural_gas policy act of will not qualify for the credit under the bill cong rec s15674 date see also h_r rep no 101st cong 2d sess conference_report the legislative_history under the amendment to sec_29 indicates that the purpose of the amendment was to reinstate the credit for gas that was eligible for the credit prior to deregulation the senate report described the reasons for the new provisions as follows the committee does not believe that under the current economic environment provision of the credit to tight formation gas should be linked to a requirement that the price for such gas be subject_to federal regulation the committee believes that reinstatement of the production credit for tight formation gas is desirable in order to accelerate increase in natural_gas production emphasis added under the bill gas produced from certain tight formations is reinstated as qualifying for the sec_29 credit and any requirement that such gas be regulated for price incentives is repealed emphasis added cong rec s15674 date the legislative_history does not indicate any intention to expand the scope of the credit to cover additional fuels or broaden the definition of existing ones therefore only gas that qualified as gas from a tight formation under former sec_29 qualifies as gas from a tight formation under current sec_29 accordingly whether the ngls in this case are eligible for the credit as gas_produced_from_a_tight_formation depends on whether they were subject_to regulation under the ngpa the ngpa provided for the regulation of ceiling prices of first sales of various types of natural_gas the ngpa however did not provide a detailed definition of the term natural_gas sec_2 of the ngpa simply provided that the term natural_gas means either natural_gas unmixed or any mixture of natural and artificial gas ferc regulatory orders interpreting the ngpa however shed light on what commodities were not considered to be gas for purposes of the ngpa tam-114540-02 ferc order no for example implemented sec_110 of the ngpa which provided that the price for the first sale of natural_gas was not considered to have exceeded the maximum lawful price applicable to the first sale of the natural_gas if the first sale price exceeded the maximum lawful price to the extent necessary to recover production-related costs order no states as follows all of this suggests that costs which attend the production of natural_gas can be broken down into three categories costs necessary to bring the gas out of the ground and to the wellhead the costs of finding the gas of drilling and providing facilities and the costs of maintaining production_costs which go to the production and handling including separation storage and transportation of nongas commodities like oil and natural_gas liquids emphasis added in implementing the natural_gas act we find that oil and liquids are not included in the definition of natural_gas this was true in pipeline rate cases where the issue is one of jurisdiction and it was true after the inauguration of producer rate regulation given this history and given the view that whatever else our jurisdiction under the ngpa may go to it does not go to setting prices for oil and natural_gas liquid production fed reg therefore under the ngpa the ngls were not considered gas but rather non-gas commodities outside the jurisdiction of the ngpa we note as well that the purpose of the ngpa was to regulate prices of first sales of gas the concept of the ngpa’s first sale requires that the sec_29 credit be calculated based on the btu value of the gas at the point of sale not at the point of production the first sale of gas in this case was made at the tailgate of the plant and included only the dry gas although the ngls were produced as gas at the wellhead they were subsequently separated and sold as liquids which were outside the jurisdiction of the ngpa accordingly we conclude that the ngls that are removed from a gas stream in a gas plant before the first sale of gas are not eligible for the sec_29 credit as a gas from tight formation caveat s a copy of this technical_advice_memorandum is to be given to the taxpayer s sec_6110 of the code provides that it may not be used or cited as precedent


internal_revenue_service number release date index number ------------------------------------------------------ ------------------------------------------ --------------------------- -------------------------------- ---------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------------ id no ------------------ ---------------------------------------------------- telephone number --------------------- refer reply to cc psi b1 plr-141004-08 date date legend x ------------------------------------------------ ------------------------------------------------------- country date ---------------- ----------------------- dear ------------- this letter responds to a letter dated date requesting an extension of time pursuant to sec_301_9100-3 of the procedure and administration regulations to file an election to treat x as an entity disregarded as separate from its owner for federal tax purposes under sec_301_7701-3 facts according to the information submitted x is an entity organized under the laws of country x intended to make an election to be treated as a disregarded_entity effective date however due to an oversight form_8832 entity classification election was not timely filed law and analysis sec_301_7701-3 provides that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes an eligible_entity with a single owner can elect either to be classified as an association and thus a corporation under sec_301_7701-2 or to be disregarded as an entity separate from its owner plr-141004-08 sec_301_7701-3 provides guidance on the classification of a foreign eligible_entity for federal tax purposes generally unless the entity makes an election to be treated otherwise a foreign eligible_entity is treated as an association_taxable_as_a_corporation if all members have limited_liability if a foreign eligible_entity has only one owner it may elect to be treated as a disregarded_entity pursuant to the rules in sec_301_7701-3 if a foreign eligible_entity has more than one owner it may elect to be treated as a partnership pursuant to the rules in sec_301_7701-3 sec_301_7701-3 further provides that an entity classification election must be filed on form_8832 entity classification election and can be effective up to days prior to the date the form is filed or up to months after the date on which the form is filed under sec_301_9100-1 the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the code except subtitles e g h and i sec_301_9100-1 defines the term regulatory election as including an election with a deadline prescribed by a regulation published in the federal_register sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make an election sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides extensions of time for making elections that do not meet the requirements of sec_301_9100-2 requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-3 conclusion based solely upon the information submitted we conclude that the requirements of sec_301_9100-1 and sec_301_9100-3 have been satisfied as a result an extension of days from the date of this letter is granted to elect to treat x as a disregarded_entity for federal tax purposes effective date the entity classification election should be made by filing form_8832 with the appropriate service_center a copy of this letter should be attached to the form_8832 a copy is enclosed for that purpose plr-141004-08 except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer s requesting it sec_6110 of the internal_revenue_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 representatives sincerely curtis g wilson curtis g wilson deputy associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes cc


internal_revenue_service number release date index number ------------------------------ ------------------------------------------- ---------------------- ------------------------------------------- ------------------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------- id no ------------- telephone number --------------------- refer reply to cc psi b01 plr-136154-09 date date legend x d1 country ---------------------------------------------------------------------- ---------------------- ------------ dear ------------------- this responds to a letter dated date submitted on behalf of x requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations to file an election under sec_301_7701-3 to be treated as a disregarded_entity for federal tax purposes facts according to the information submitted x was formed on d1 under the laws of country x intended to be treated as a disregarded_entity for federal tax purposes effective d1 however x inadvertently failed to timely file form_8832 entity classification election to be treated as a disregarded_entity for federal tax purposes law and analysis sec_301_7701-3 provides in part that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes an eligible_entity with at least two members can elect to be classified as either an association or a partnership and an eligible_entity with a single owner can elect to be classified as an association or to be plr-136154-09 disregarded as an entity separate from its owner sec_301_7701-3 provides guidance on the classification of a foreign eligible_entity for federal tax purposes generally a foreign eligible_entity is treated as an association if all members have limited_liability unless the entity makes an election to be treated otherwise a foreign eligible_entity with a single member having limited_liability may elect to be treated as a disregarded_entity pursuant to the rules of sec_301_7701-3 sec_301_7701-3 provides that an entity classification election must be filed on form_8832 and can be effective up to days prior to the date the form is filed or up to months after the date the form is filed under sec_301_9100-1 the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-1 defines the term regulatory election as including an election whose due_date is prescribed by a regulation published in the federal_register sec_301_9100-1 through provide the standards that the commissioner will use to determine whether to grant an extension of time to make an election sec_301_9100-1 sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides rules for requesting extensions of time for regulatory elections that do not meet the requirements of sec_301_9100-2 requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government conclusion based solely on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-3 have been satisfied as a result x is granted an extension of time of days from the date of this letter to make an election to be treated as a disregarded_entity for federal tax purposes effective d1 x should make the election by filing a properly executed form_8832 with the appropriate service_center a copy of this letter should be attached to the form 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 plr-136154-09 this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representatives sincerely curt g wilson curt g wilson associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes


t c summary opinion united_states tax_court thad marshall pugh petitioner v commissioner of internal revenue respondent docket no 13462-16s filed date peter a lowy for petitioner lewis a booth ii for respondent summary opinion carluzzo chief special_trial_judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect when the petition was filed pursuant to sec_7463 the decision to be entered is not 1mr lowy’s appearance was entered on the day of trial as a result of his participation in a pro bono program sponsored by the american bar association 2unless otherwise indicated section references are to the internal revenue continued reviewable by any other court and this opinion shall not be treated as precedent for any other case in a notice_of_deficiency notice dated date respondent determined deficiencies in petitioner’ sec_2010 and sec_2011 federal_income_tax and imposed additions to tax under sec_6651and after significant concessions by both parties the issues for decision for each year are whether petitioner is entitled to deductions for mortgage interest and legal fees claimed on schedules c profit or loss from business included with his untimely and apparently unprocessed federal_income_tax returns background some of the facts have been stipulated and are so found when the petition was filed petitioner resided in texas during each year in issue petitioner who holds a bachelor of science degree in electrical engineering was the sole_proprietor of pi integrated systems pi at continued code of as amended in effect for the years in issue and rule references are to the tax_court rules_of_practice and procedure 3all of the adjustments made in the notice have been resolved between the parties the issues that remain in dispute arise from deductions claimed on the untimely federal_income_tax returns submitted to respondent one after the notice was issued all times relevant pi was engaged in the business of software development pi had few employees during the years in issue and the business was conducted from an office in petitioner’s house in earlier years things looked good and petitioner had a plan to expand the business in business sometimes things do not go as planned in and petitioner purchased two vacant lots one adjacent to land he already owned and the other directly across the street properties he had to borrow money to do so and he paid interest on those loans during each of the years in issue later he purchased two steel buildings disassembled them and stored some of the components on one of the properties his plan was to re- assemble the buildings on the properties as shown on a site plan prepared by an architect in petitioner intended that the reassembled buildings would serve as pi’s headquarters circumstances however did not cooperate before petitioner’s plan could be put into effect pi lost a major customer revenues sharply decreased and later some of its employees left to work for other employers as of the date of trial the properties some of which were sold remained undeveloped and some of the components of the steel buildings were sold as scrap metal petitioner submitted and federal_income_tax returns to respondent long after each was due each included a schedule c for pi and each schedule c included numerous deductions we need to focus on only two deductions for each year a deduction for mortgage interest and a deduction for legal fees respondent allowed most of the deductions claimed for legal fees the deductions for mortgage interest have been disallowed discussion as we have observed in countless opinions deductions are a matter of legislative grace and the taxpayer bears the burden of proving entitlement to any claimed deduction rule a 503_us_79 292_us_435 a taxpayer claiming entitlement to a deduction must demonstrate that the deduction is allowable pursuant to some statutory provision and must further substantiate that the expense to which the deduction relates has been paid_or_incurred see sec_6001 65_tc_87 aff’d 540_f2d_821 5th cir sec_1_6001-1 income_tax regs 4petitioner does not claim and the record does not show that the provisions of sec_7491 are applicable and we proceed as though they are not mortgage interest sec_163 provides there shall be allowed as a deduction all interest_paid or accrued within the taxable_year on indebtedness this general_rule is simple and seemingly should resolve the dispute between the parties on the point it is undisputed that the interest as shown on the schedules c was paid on the indebtedness created by the acquisition of the properties but the simple general_rule in subsection a is followed by no less than other subsections some including multiple paragraphs subparagraphs clauses and subclauses that establish a variety of limitations and exceptions to the general_rule we need to concern ourselves with only some of the exceptions the first is subsection d according to respondent the interest deductions here in dispute are limited by sec_163 that provides that a taxpayer other than a corporation may deduct investment_interest only to the extent of investment_income for purposes of sec_163 and in general investment_interest means interest that is paid_or_accrued on indebtedness properly allocable to property_held_for_investment sec_163 according to respondent because the properties were never actually used in petitioner’s trade_or_business the properties must be treated as property_held_for_investment because petitioner does not claim to have enjoyed any investment_income during either year in issue respondent argues that petitioner is not entitled to deduct any of the interest_paid in connection with the indebtedness that burdens the properties but property_held_for_investment is specifically defined in sec_163 and the properties do not fit within that definition consequently the interest_paid to finance the acquisition of the properties is not treated as investment_interest and petitioner’s entitlement to deductions for that interest is not as respondent argues it is subject_to limitation under sec_163 that does not however end the matter another exception to the general_rule that must be taken into account is sec_163 that provides that a taxpayer other than a corporation is not entitled to a deduction for personal_interest for purposes of sec_163 and as relevant here interest_paid or accrued on indebtedness properly allocable to a trade_or_business is excluded from the exception sec_163 as respondent notes the properties were not actually used in petitioner’s trade_or_business during the years in issue nevertheless we are satisfied that the properties were certainly allocable to that business consequently the interest_paid in connection with the indebtedness on the properties is not treated as personal_interest respondent does not suggest that any of the other exceptions or limitations to the general_rule set forth in sec_163 are applicable and we are satisfied that none are that being so we find that petitioner is entitled to the deduction claimed for mortgage interest for each of the years in issue we further find that because the deduction for each year is allocable to petitioner’s trade_or_business the deduction is properly taken into account in the computation of petitioner’s adjusted_gross_income see sec_62 legal fees respondent has already allowed all but small portions of the deductions claimed for legal fees on the schedules c included with the untimely returns no explanation has been provided that shows why some portions were allowed and others not but more significantly petitioner has not established the nature of the legal services how the legal services relate to his trade_or_business or the amounts actually paid_or_incurred for those legal services given the small amounts involved we can understand the parties’ failure to address the items but that small amounts remain in dispute does not relieve petitioner of his burden to prove entitlement to all of the deductions claimed the parties stipulated the proper deduction for legal fees and expenses for each year nevertheless both proceeded as though the small amount that respondent has not allowed for each year remains in dispute we will follow their lead and ignore the stipulation however there is really not much for us to do because petitioner has failed to establish the nature of the legal services involved how those services relate to his trade_or_business or the amounts actually paid_or_incurred for those services he is not entitled to a deduction for legal fees in excess of the amount already allowed by respondent for each year in issue to reflect the foregoing and the concessions of the parties decision will be entered under rule


t c memo united_states tax_court utilicorp united inc subsidiaries f k a missouri public service co petitioner v commissioner of internal revenue respondent docket no filed date s a subsidiary of p purchased certain of the assets of a reconstructed hydroelectric power facility and immediately leased those assets back to the seller r determined that s should have allocated a portion of the asset purchase_price to goodwill or going_concern_value p contends that a reallocation is inappropriate because s acquired no going_concern_value or goodwill held p has proven that the fair_market_value of the listed assets acquired by s which did not include going_concern_value or goodwill equaled or exceeded the price paid for them therefore s need not allocate any portion of that purchase_price to goodwill or going_concern_value james g kreissman michael h simonson and naftali z dembitzer for petitioner peter j graziano and pamela l cohen for respondent memorandum findings_of_fact and opinion halpern judge petitioner utilicorp united inc petitioner is the common parent_corporation of an affiliated_group_of_corporations making a consolidated_return of income the affiliated_group respondent has determined deficiencies of dollar_figure and dollar_figure in the consolidated federal taxable_income of the affiliated_group for the group’s and taxable calendar years respectively the only issue remaining for decision is the depreciable basis of certain assets respondent has determined that one member of the affiliated_group utilicorp inc utilco improperly included in the depreciable basis of certain property the nondepreciable cost of goodwill or going_concern_value unless otherwise noted 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 findings_of_fact introduction some facts have been stipulated and are so found the stipulations of fact filed by the parties and accompanying exhibits are incorporated herein by this reference petitioner is a delaware corporation with its principal_place_of_business in kansas city missouri on date utilco entered into a sale-leaseback transaction with a minnesota limited_partnership topsham hydro partners limited_partnership thp thp owned a hydroelectric facility in topsham and brunswick maine on the androscoggin river at the pejepscot mill dam the hydroelectric facility utilco purchased an undivided 50-percent interest in certain assets including real_property constituting the hydroelectric facility the undivided_interest and immediately thereafter leased the undivided_interest back to thp chrysler capital corp chrysler capital simultaneously purchased and leased back the remaining undivided_interest history of the facility androscoggin water power company the pejepscot mill dam originally was owned by a maine corporation the androscoggin water power co awp in awp obtained a license from the federal energy regulatory commission ferc to construct a hydroelectric generating facility at the dam in furtherance of that project among other actions awp entered into contracts for reconstruction of the site the construction contracts and negotiated a power purchase agreement with central maine power co cmp construction contracts the construction contracts included an agreement with cianbro corp cianbro for general construction and the installation of equipment an agreement with allis-chalmers corp allis-chalmers for a turbine generator and related equipment and an agreement with acres international corp acres for design and engineering services none of the construction contracts entitles awp to a complete and working hydroelectric generating facility in particular acres was only responsible for preliminary engineering of the facility determining the total project cost final design of the facility including the creation of detailed construction drawings and management of the construction process acres was not obligated to deliver to awp a functional facility acres did not function as a general contractor for the construction of the facility the only warranties provided by allis-chalmers and cianbro were that the work that those companies performed would conform to the requirements of their respective contracts and would be free from defects in design workmanship materials and or performance cianbro and allis-chalmers did not guarantee each other's work the prices charged by allis-chalmers and cianbro were not fixed and were subject_to increases or decreases in the event those contractors were required to make changes in the amount of work that they had to perform power purchase agreement awp and cmp entered into the power purchase agreement on date and amended it on date as so amended the power purchase agreement pursuant to the power purchase agreement cmp agreed to purchase the electrical output of the hydroelectric facility for years and obtained an option to purchase such output for an additional years the power purchase agreement expressly provided that it would terminate if cmp did not receive electricity from the hydroelectric facility by date the rates provided by the power purchase agreement were market rates thp acquires awp and completes the hydroelectric facility thp was formed in in date thp acquired all of the shares of stock of awp for dollar_figure million at that time awp had sold no electricity and had no paid employees awp assigned its rights and obligations under the power purchase agreement and the construction contracts to thp the power purchase agreement was not significant to thp’s decision to purchase awp since the power purchase agreement was a market rate contract and there was a risk that it might expire before construction of the hydroelectric facility was completed awp's ferc license was transferred to thp on date awp was liquidated and its assets distributed to thp in date thp commenced reconstruction of the hydroelectric facility over the next years thp made substantial alterations to the properties acquired from awp during that period thp assumed various construction risks including labor strikes unforeseen delays and costs and physical damage personnel employed by thp managed the completion of construction thp paid a total of dollar_figure million to acquire the stock in awp and to complete the reconstruction of the hydroelectric facility the hydroelectric facility was synchronized with cmp and thp began furnishing electric power to cmp on date utilco acquisition and lease purchase of undivided_interest on date utilco purchased the undivided_interest from thp for dollar_figure utilco immediately leased the undivided_interest back to thp for a 15-year term pursuant to project lease agreement no dated date the project lease under the terms of the project lease thp has at the end of that 15-year term the option of either extending the lease_term or repurchasing the undivided_interest utilco effected its purchase and lease of the undivided_interest through the meridian trust co which pursuant to a_trust agreement purchased the undivided_interest on behalf of utilco hereafter we shall disregard meridian’s role and consider utilco as owning directly the undivided_interest the bill of sale the document evidencing the purchase of the undivided_interest by utilco was warranty deed and bill of sale no dated date the bill of sale the bill of sale sets forth with particularity the assets that were acquired by utilco pursuant to the bill of sale the bill of sale assets the bill of sale assets consist of the land upon which the hydroelectric facility was constructed the flowage rights appurtenant to that land certain easements appurtenant to that land excluding the previously referenced flowage rights the structures located on that land and the equipment comprising the hydroelectric facility ferc license the ferc license was not specifically identified in the bill of sale or the schedules attached thereto as an asset to be transferred to utilco ferc requires that owners of hydroelectric facilities become colicensees for such facilities regardless of whether those owners perform significant services with respect to the ownership or management of the facility on date ferc issued an order transferring the license for the hydroelectric facility from thp alone to thp utilco and chrysler capital as colicensees operating_agreement as part of the sale-leaseback utilco entered into an operating_agreement with thp security for lease payments the bill of sale does not provide for a sale by thp of its interest in the power purchase agreement or the construction contracts thp assigned its rights under the power purchase agreement and the construction contracts to utilco to secure the payment of rents by thp under the project lease purchase_price allocation in making its purchase_price allocation utilco allocated the dollar_figure purchase_price among the bill of sale assets after consummating its purchase of the undivided_interest utilco calculated its investment_tax_credit business energy tax_credit and depreciation for the taxable_year using that purchase_price allocation because utilco could not use all of its general_business_credit in the taxable_year a portion of that credit was carried back to the taxable_year utilco did not record any goodwill or going_concern_value on its books as a result of the acquisition of the undivided_interest expert testimony petitioner's expert petitioner presented the expert testimony of david c moody vice president of stone webster management consultants inc mr moody is licensed in the state of maine as a professional engineer and as a real_estate appraiser mr moody is experienced in the appraisal of all kinds of utility properties including hydroelectric plants mr moody has opinions as to the market values of the bill of sale assets and an undivided 50-percent interest therein he is of the opinion that as of date the market values of the bill of sale assets and of an undivided 50-percent interest therein were dollar_figure and dollar_figure respectively mr moody arrived at his opinions by determining the reproduction cost of the bill of sale assets to be dollar_figure he also applied an earnings analysis to the income stream that the bill of sale assets in conjunction with certain other assets of thp could have been expected to produce he determined that the present_value of such income stream was dollar_figure mr moody determined the reproduction cost of the bill of sale assets as follows cost of awp stock new_construction subtotal dollar_figure big_number big_number turnkey fee other cost sec_1 big_number big_number total construction costs big_number developer's profit big_number total cost indicator dollar_figure 1construction interest financing and legal costs administrative and general costs and contingency costs mr moody applied his earnings analysis by considering an estimate of annual net operating income which was adjusted for income_tax considerations and then discounted to present_value using an after-tax discount rate of dollar_figure percent mr moody reconciled the difference in result between his two valuation approaches by assigning virtually all of the excess under his earnings analysis to certain business_assets such as the right to receive payments under the power purchase agreement retained by thp respondent's expert respondent presented the expert testimony of richard h knoll senior consultant business valuation services inc mr knoll is experienced in the valuation of assets operating entities and proprietary technologies in the fields of petroleum refining chemical processing food processing pharmaceuticals and related fields mr knoll is licensed as an engineer in the state of illinois mr knoll has opinions as to the market values of utilco's undivided 50-percent interest in all of the assets that he believed were acquired by utilco and chrysler capital and only the tangible assets acquired by utilco and chrysler capital he is of the opinion that the market values of such interests at date were dollar_figure and dollar_figure respectively in part mr knoll arrived at his opinions by determining the replacement cost of the real and personal_property purchased by thp he determined replacement cost by adding to the actual cost of that property an entrepreneurial profit of percent a 13-percent allowance for entrepreneurial profit was considered reasonable by mr knoll because it represented the weighted- average cost of capital of utilco at the time of the sale- leaseback_transaction mr knoll determined that the acquisition_cost rehabilitation cost of a interest to thp was approximately dollar_figure mr knoll also applied an income approach which involved determining the present_value of utilco's after tax cash flows including residual_value using a discount rate of percent taking into account that present_value he determined that the value of utilco's undivided 50-percent interest in all of the assets that he believed were acquired by utilco and chrysler capital was dollar_figure as of date in arriving at his opinion that the market_value of utilco's undivided_interest was dollar_figure mr knoll assumed that utilco enjoyed some negotiating advantage over thp mr knoll assumed that the difference between the dollar_figure value of utilco's undivided_interest and his determination of the tangible asset value using the cost approach dollar_figure was due to utilco's acquisition of intangible assets mr knoll concluded the fair_market_value of the project largely relates to its proposed power sale under the prenegotiated ppa power purchase agreement the leasing of the facility under the participation_agreement the guarantee of tax savings under the tax indemnity agreement guaranteed use of the ferc license guaranteed use of the required easements near the facility and going_concern_value in addition to the tangible value associated with the facility's personal_property and operating_assets in pertinent part mr knoll’s total project cost allocation was as follows personal_property dollar_figure real_estate improvements big_number real estate-unimproved big_number total tangibles big_number intangibles flowage rights easement permits licenses collateralization of power purchase agreement participation_agreement tax indemnity agreement project lease security deposit agreement other intangibles total intangibles big_number fair_market_value of total assets big_number mr knoll was unable to ascribe any particular value to any intangible asset in his opinion it is nearly impossible to quantify a single element of intangible value i introduction opinion petitioner has assigned error to respondent’s determination that the purchase_price paid_by utilco for its undivided 50-percent interest the undivided_interest in certain of the assets constituting the hydroelectric facility located at the pejepscot mill dam on the androscoggin river in the state of maine the hydroelectric facility should in part be reallocated to either goodwill or going_concern_value at trial respondent conceded that if there was any goodwill it was very small or nothing we accept that statement as a concession by respondent that utilco did not acquire goodwill thus we shall limit our inquiry to the question of whether utilco acquired going_concern_value also at trial the parties agreed that the court as an initial matter should determine the fair_market_value of the assets listed in warranty deed and bill of sale no the bill of sale assets we have found that utilco acquired an undivided 50-percent interest in the bill of sale assets going_concern_value is not one of the bill of sale assets respondent concedes that if the fair_market_value of the bill of sale assets was at least dollar_figure then utilco acquired no going_concern_value as set forth below we find that the value of the bill of sale assets was dollar_figure accordingly we find that utilco where assets are purchased and the fair_market_value of assets other than goodwill or going_concern_value equals or exceeds the purchase_price goodwill or going_concern_value is not generally attributable to the purchase_price see eg 92_tc_1314 91_tc_463 affd 919_f2d_1492 11th cir sec_1060 provides special_allocation rules for certain asset acquisitions under the residual_method described in sec_1_1060-1t d temporary income_tax regs fed reg date consideration is first allocated among cash and other items including both tangible and intangible_property but not intangibles in the nature of goodwill and going_concern_value before being allocated to goodwill and going_concern_value acquired no going_concern_value and we sustain petitioner’s assignment of error ii testimony a reliance on expert testimony both petitioner and respondent rely heavily if not exclusively on expert testimony to establish fair_market_value as its expert witness as to valuation petitioner called david c moody as her expert witness as to valuation respondent called richard h knoll messrs moody and knoll each provided a written report which were both admitted into evidence like the parties we rely heavily on expert testimony in making our finding as to the value of the bill of sale assets we found mr moody to be convincing and we agree with his conclusion as to the value of the bill of sale assets we had difficulty with the testimony of mr knoll who in any event did not have an opinion as to the amount of going_concern_value allegedly acquired by utilco we were not persuaded by his testimony and do not accept his conclusions as to value we shall set forth some of our reasons for agreeing with mr moody and disagreeing with mr knoll b david c moody mr moody is licensed in the state of maine as an engineer and as a real_estate appraiser he is experienced in the appraisal of electric and water utility properties including hydroelectric plants like mr knoll mr moody rejected a comparable sales approach as inappropriate to the circumstances in this case and relied on both a cost and earnings approach to determine value he identified the properties that he was appraising as the bill of sale assets he determined the reproduction cost of the bill of sale assets to be dollar_figure but taking into account the results of his income analysis concluded that the fair_market_value of the hydroelectric facility was dollar_figure we are not troubled by that discrepancy mr moody did not assign any value to going_concern_value respondent’s criticism of mr moody’s opinions focuses on his determination that the reproduction cost of the bill of sale assets was dollar_figure respondent quarrels with inclusion of a percent turnkey fee of dollar_figure and a percent developer’s profit of dollar_figure apparently respondent does not disagree that the remaining acquisition and construction costs of the bill of sale assets were dollar_figure indeed respondent’s expert mr knoll was of the opinion that the overall construction price paid_by thp was dollar_figure in his report mr moody states that although thp had contracted for construction of the facility it was not guaranteed a complete working hydroelectric facility at the completion of construction he states that the owners bore the risk of nonperformance of the various contractors as well as the cost of unforeseen difficulties such as bad weather floods subsurface geotechnical problems or start-up problems mr moody states that those risks could have been alleviated by hiring an overseer of the entire process who would be in charge of delivering a completed operating facility he refers to that risk of delivering a completed operating facility as the turnkey risk and he states that contractors who take on a turnkey risk charge a premium which is typically percent if thp bore a turnkey risk in connection with construction of the facility then the addition of a turnkey premium in determining the value of the bill of sale assets is appropriate see 499_f2d_677 turnkey premium appropriate in valuing a fully operational plant received on dissolution of a corporation we have found that none of the construction contracts entitled awp or its successor by assignment thp to a complete and working hydroelectric generating facility awp and then its assignee thp bore the ultimate risk that the facility would not function when completed notwithstanding respondent’s argument to the contrary we are persuaded that thp bore a turnkey risk in connection with the construction of the facility and we so find we must determine whether the inclusion of the 15-percent turnkey premium in mr moody’s valuation of the bill of sale assets was appropriate in determining an appropriate turnkey fee mr moody consulted employees of stone webster engineering corp that corporation enters into turnkey contracts to build hydroelectric power facilities based on those conversations mr moody concluded that contractors that enter into agreements to deliver fully functional hydroelectric power facilities typically charge a turnkey premium equal to 15-percent of the funds expended in constructing the facility in question respondent asserts that a 15-percent turnkey fee is excessive respondent supports that assertion with mr knoll's testimony mr knoll's experience with turnkey contracts however is limited to three turnkey contracts involving the construction of assets to be used in the petrochemical industry mr knoll apparently has no experience in determining appropriate turnkey fees applicable to contracts calling for the construction of assets to be used in the hydroelectric power industry we find that mr moody was a more credible witness than mr knoll we have no reason to believe that mr moody overstated the turnkey fee and we accept his determination and calculation of that fee respondent questions the amount of rather than the necessity of a developer’s profit allowance indeed mr knoll factors into his own analysis a developer’s profit of percent respondent also argues that mr moody erred by including both a turnkey fee and a developer’s profit in computing the reproduction cost of the facility respondent cites no authority prohibiting both a turnkey fee and a developer’s profit and petitioner has convinced us that the two address different economic risks the turnkey risk is the risk inherent in promising a working facility the developer’s profit represents the risk inherent in constructing a facility that cannot be sold for the price asked by the developer insofar as the turnkey fee and the developer's profit address different components of reproduction cost we see no logical reason why they cannot coexist we are persuaded that in the instant case the turnkey fee and the developer's profit figure represent different components of the reproduction cost of the bill of sale assets and that it was appropriate for mr moody to include both of those figures in the reproduction cost of those assets we now turn to mr moody's computation of the developer’s profit in calculating a developer's profit mr moody looked to conditions encountered by persons selling hydroelectric generating assets in the northeastern united_states in date mr moody determined that an appropriate range for a developer's profit was to percent mr moody applied a developer's profit of percent we do not believe that mr moody overstated the developer's profit and we accept his calculation of that profit figure c richard k knoll mr knoll’s written report is coauthored by martin d hanan neither mr knoll nor mr hanan is licensed as an appraiser mr knoll testified that his recent professional focus has been in the valuation of intangible assets and intellectual_property we conclude that mr knoll has limited experience in valuing hydroelectric_generating_facilities mr knoll’s valuation is not limited to the bill of sale assets and his written report is inconsistent in describing exactly what his valuation assignment was eg undivided_interest in the topsham hydroelectric project undivided_interest in the sale leaseback_transaction undivided_interest in the assets purchased by utilco moreover mr knoll has no opinion as to the value of the bill of sale assets per se he is of the opinion that the market_value of utilco’s undivided percent interest in the tangible assets acquired by utilco and chrysler capital was dollar_figure he has not explained how he squares that figure with the statement in his report that the acquisition_cost rehabilitation cost of a interest to thp was approximately dollar_figure we are troubled that mr knoll’s calculation of entrepreneurial profit is idiosyncratic mr knoll considered a 13-percent allowance for entrepreneurial profit reasonable because it represented the weighted-average cost of capital of utilco at the time of the sale-leaseback transaction he testified that if utilco's weighted-average cost of capital changed that would change his estimate of the appropriate percentage of entrepreneurial profit he testified that if there were a different buyer with a different cost of capital that might change his entrepreneurial profit allowance in neither his written report nor his oral testimony did mr knoll state that he performed any market analysis or interviewed any developers to determine the expectations of profit required to undertake a project such as the hydroelectric facility although mr knoll is of the opinion that at least a portion of the difference between utilco’s purchase_price of dollar_figure and the dollar_figure acquisition_cost rehabilitation cost is attributable to going_concern_value he has no opinion as to what that portion is except as an inseparable portion of the value of a package of at least nine intangibles including flowage rights and easements his opinion that utilco acquired going_concern_value is of no help to us because he is unable to distinguish the going_concern_value from the value of other intangible assets such as flowage rights and easements that are specifically set forth as bill of sale assets mr knoll testified in rebuttal to mr moody his rebuttal testimony failed to persuade us that mr moody made any error in arriving at his opinion as to the fair_market_value of the bill of sale assets iii conclusion we find that the fair_market_value of the bill of sale assets was dollar_figure as a result we conclude that utilco acquired no going_concern_value we sustain petitioner’s assignment of error decision will be entered under rule