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 corp b04 plr-118721-05 date date --------------------------------------- -------------------------------- -------------------------- ------------------------ legend parent -------------------------------------------------------------------- subsidiaries -------------------------------------------------------------------- -------------------------------------------------------------------- -------------------------------------------------------------------- -------------------------------------------------------------------- -------------------------------------------------------------------- -------------------------------------------------------------------- -------------------------------------------------------------------- -------------------------------------------------------------------- -------------------------------------------------------------------- ------------------ --------------------------- ----------------------------- ----------------------------- ------------------------------ ---------------------------------------- ---------------------------------- ------------------------ plr-118721-05 -------------------------------------------------------------------- -------------------------------------------------------------------- -------------------------------------------------------------------- -------------------------------------------------------------------- -------------------------------------------------------------------- -------------------------------------------------------------------- --------------------------- ---------------------------- ------------------------------- ------------------------------------------------- ------------------------------------------- -------------------------------------------------------------------- -------------------------------- -------------------------------------------------------------------- ---------------------------- ----------------------------- -------------------------------------------------------------------- ------------------------ -------------------------------------------------------------------- -------------------------------------------------------------------- -------------------------------------------------------------------- first acquirer second acquirer ----------------------------------------------------------- year date a -------------------- ----------------- ------- --------------------------------- ------------------------------------------------------------------------ ------------------------- -------------------------- --------------------------- --------------------------- plr-118721-05 date b date c date d date e x company official ----------------------------------------------------------------------------- ----------------------------------------------------------------------- tax professional ------------------------------------------------------------- ------------------------------------------------------------------------------------- dear ----------------- ----------------------------- -------------------- ---- this letter responds to a letter dated date submitted on behalf of parent requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations to file an election parent is requesting an extension to elect under sec_1_1502-75 to file a consolidated federal_income_tax return with its includible subsidiaries the election in a letter dated date parent requested that the commissioner waive the application of sec_1504 this letter_ruling does not address parent’s request that the commissioner waive the application of sec_1504 this letter_ruling only addresses parent’s request for an extension of time to file a consolidated_return the information submitted is summarized below parent was the common parent of an affiliated_group that included subsidiaries parent and subsidiaries the former group filed a consolidated federal_income_tax return beginning in year on date a first acquirer purchased all outstanding shares in parent the former group thus ceased to exist parent and subsidiaries each filed separate federal_income_tax returns for the taxable years between date a the date that the former group ceased to exist and date b on date b second acquirer purchased x of the outstanding shares of parent parent thus again became the common parent of an affiliated_group the new group with the new group including members of the former group plr-118721-05 new group intended to file a consolidated_return an election under sec_1 a for new group to file a consolidated_return for the taxable_year ending on date c was due on date d however for various reasons a valid election was not filed the period of assessment under sec_6501 has not expired and will not expire until at least date e for parent and subsidiaries for the taxable_year ending on date c and for any subsequent years sec_1_1502-75 provides that a group which did not file a consolidated_return for the immediately preceding_taxable_year may file a consolidated_return in lieu of separate returns for the taxable_year provided that each corporation which has been a member of the group during any part of the taxable_year for which the consolidated_return is to be filed consents to the regulations under sec_1502 if a group wishes to exercise its privilege of filing a consolidated_return such consolidated_return must be filed not later than the last day prescribed by law including extensions of time for filing the common parent’s return under sec_301_9100-1 the commissioner has discretion to 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 through provide the standards the commissioner will use to determine whether to grant an extension of time to make a regulatory election sec_301_9100-1 sec_301_9100-2 provides automatic extensions of time for making certain elections 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 in this case the time for filing the election is fixed by sec_1_1502-75 of the income_tax regulations therefore the commissioner has discretionary authority under sec_301_9100-3 to grant an extension of time for parent and subsidiaries to file the election provided parent and subsidiaries show that they acted reasonably and in good_faith the requirements of sec_301_9100-1 and sec_301_9100-3 are satisfied and granting relief will not prejudice the interests of the government information affidavits and representations submitted by parent company official and tax professional explain the circumstances that resulted in the failure to timely file the election the information establishes that parent reasonably relied on a qualified_tax professional who failed to make or advise parent to make the election the request for relief was filed before the failure to make the election was discovered by the internal_revenue_service and that the government will not be prejudiced if relief is granted see sec_301_9100-3 and v plr-118721-05 based on the facts and information submitted including the representations made we conclude that parent and subsidiaries have shown that they acted reasonably and in good_faith the requirements of sec_301_9100-1 and sec_301_9100-3 are satisfied and granting relief will not prejudice the interests of the government accordingly provided parent and subsidiaries qualify substantively to file a consolidated_return for the taxable_year ending on date c taking into account the application of sec_1504 and any waiver of its application under sec_1504 an extension of time is granted under sec_301_9100-3 until days from the date on this letter for parent and subsidiaries to file the election by filing a consolidated_return for the taxable_year ending on date c and attaching a form_1122 for each of the subsidiaries the above extension of time is conditioned on parent's and subsidiaries' tax_liability if any being not lower in the aggregate for the taxable_year for which the election applies and all subsequent years than it would have been if the election had been timely made taking into account the time_value_of_money no opinion is expressed as to parent's and subsidiaries' tax_liability for the years involved a determination thereof will be made by the director's office upon audit of the federal_income_tax returns involved further no opinion is expressed as to the federal_income_tax effect if any if it is determined that the taxpayers' liability is lower sec_301_9100-3 the code provides that it may not be used or cited as precedent letter is being sent to your authorized representative relevant this ruling is directed only to the taxpayer requesting it sec_6110 of in accordance with the power_of_attorney on file with this office a copy of this a copy of this letter must be attached to any income_tax return to which it is sincerely ___________________ ken cohen senior technician reviewer branch office of associate chief_counsel corporate cc


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-138604-07 date date internal_revenue_service number release date index number ---------------------------- ---------------------------------------------- --------------------------- -------------------------------- --------------------------------- ------------ ------------------- --------------------------- legend x --------------------------------------------------- state d1 d2 a ---------------------------------------------------- trust ------------------------------------------------------ d3 b ---------------------------------------------------- year year d4 ------------------ ------------------ ------- ------- ----------------------------- --------------------------------------------------------------------------- --------------------------------------------------------------- plr-138604-07 dear --------------- this responds to the letter dated date and related correspondence submitted on behalf of x requesting relief under ' f of the internal_revenue_code acode for an inadvertent termination of an s_corporation_election facts the information submitted states that x was incorporated under the laws of state and has been an s_corporation for federal tax purposes since d1 on d2 a a shareholder of x transferred her interest in x to trust a grantor_trust on d3 a passed away a’s surviving_spouse b became the trustee and beneficiary of trust although x and its shareholders never intended the s election of x to terminate b was not aware of the necessity of filing a qualified_subchapter_s_trust qsst election and therefore did not file a qsst election on behalf of trust further even though the trust agreement requires that trust be administered in conformity with qsst rules b was not aware of the requirement and consequently distributed trust income to someone other than himself as the current income_beneficiary of trust in year and year upon the discovery of the errors x and its shareholders took corrective action x and its shareholders have also agreed to make any adjustments the commissioner may require consistent with the continuing treatment of x as an s_corporation on and after d4 law and analysis sec_1361 defines an s_corporation as a small_business_corporation for which an election under sec_1362 is in effect for the taxable_year sec_1361 provides that a small_business_corporation cannot have as a shareholder a person other than an estate a_trust described in sec_1361 or an organization described in sec_1361 who is not an individual sec_1361 provides that a_trust all of which is treated under subpart e of part i of subchapter_j of chapter as owned by an individual who is a citizen or resident_of_the_united_states may be an s_corporation shareholder sec_1361 provides that for purposes of sec_1361 a_trust which was described in sec_1361 immediately before the death of the deemed plr-138604-07 owner and which continues in existence after such death may be an s_corporation shareholder but only for the two year period beginning on the day of the deemed owner’s death sec_1361 provides that a qsst whose beneficiary makes an election under ' d will be treated as a_trust described in ' c a i thereby an eligible shareholder of an s_corporation and the qsst s beneficiary will be treated as the owner for purposes of ' a of that portion of the qsst s s_corporation stock to which the election under ' d applies sec_1361 defines the term aqualified subchapter_s_trust as a_trust - a the terms of which require that i during the life of the current income_beneficiary there shall be only income_beneficiary of the trust ii any corpus distributed during the life of the current income_beneficiary may be distributed only to such beneficiary iii the income_interest of the current income_beneficiary in the trust shall terminate on the earlier of such beneficiary s death or the termination of the trust and iv upon the termination of the trust during the life of the current beneficiary the trust shall distribute all its assets to such beneficiary and b all of the income within the meaning of ' b of which is distributed or required to be distributed currently to individual who is a citizen or resident_of_the_united_states sec_1362 provides that an election under ' a shall be terminated whenever at any time on or after the first day of the taxable_year for which the corporation is an s_corporation the corporation ceases to be a small_business_corporation the termination is effective on and after the day of cessation ' d b sec_1362 provides that if an election under sec_1362 by any corporation a was not effective for the taxable_year for which made determined without regard to sec_1362 by reason of a failure to meet the requirements of sec_1361 or to obtain shareholder consent or b was terminated under sec_1362 or in such ineffectiveness or termination were inadvertent no later than a reasonable period of time after discovery of the circumstances resulting in the termination steps were taken - the secretary determines the circumstances resulting that plr-138604-07 a so that the corporation is a small_business_corporation or b to acquire the required shareholder consents and the corporation and each person who was a shareholder of the corporation at any time during the period specified pursuant to this subsection agrees to make such adjustments consistent with the treatment of the corporation as an s_corporation as may be required by the secretary with respect to such period then notwithstanding the circumstances resulting in such termination such corporation shall be treated as an s_corporation during the period specified by the secretary conclusion based solely on the facts submitted and the representations made we conclude that x s s election terminated on d4 upon the expiration of the two-year period following the death of a we also conclude that the termination constituted an ainadvertent termination within the meaning of ' f further we conclude that pursuant to ' f x will be treated as continuing to be an s_corporation from d4 and thereafter assuming x s s election is valid and not otherwise terminated under ' d this ruling is contingent upon x and all its shareholders treating x as having been an s_corporation and trust as a qsst for the period beginning d4 and thereafter within days from the date of this letter the beneficiary of trust must elect to treat trust as a qsst effective d4 with the appropriate service_center copies of this letter should be attached to the elections if these conditions are not met then this ruling is null and void except as specifically set forth above no opinion is expressed or implied concerning the federal tax consequences of the above-described facts under any other provision of the code including whether x was otherwise a valid s_corporation or whether trust was otherwise a valid qsst this ruling is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent plr-138604-07 in accordance with the power_of_attorney on file with this office a copy of this letter_ruling will be sent to your authorized representative sincerely enclosures copy of this letter copy for ' purposes s dianna k miosi chief branch office of the associate chief_counsel passthroughs and special industries


department of the treasury internal_revenue_service washington d c may cc dom fs corp tl-n-1512-97 number release date uilc internal_revenue_service national_office field_service_advice memorandum for assistant district_counsel from deborah butler assistant chief_counsel field service cc dom fs subject substance over form this field_service_advice is a reconsideration of a previous field_service_advice issued on october field_service_advice is not binding on examination or appeals and is not a final case determination this document is not to be cited as precedent legend a b c cc l o date a date b tl-n-1512-97 date c date d date e y p issue whether litigating hazards exist in arguing that a’s sale of the assets to b is in substance a distribution of those assets from b to a followed by a capital_contribution from cc to b in light of the tax court’s opinion in 111_tc_315 conclusion facts background this case involves a transaction in which a may attempt to effectively claim the losses on the sales of the distributed assets twice once in selling the b stock since a’s stock basis in b would not be reduced by losses on the sale of the distributed assets and a second time in later selling the distributed assets since sec_267 provided that a increased its basis in the distributed assets by the amount of the losses that b recognized on b’s sale of the distributed assets to a facts -- in general a the parent_corporation of a consolidated_group wholly owned a subsidiary b c a corporation unrelated to a wanted to acquire b but objected to purchasing certain unwanted assets held by b and its subsidiaries b was engaged in the p business and state regulatory rules required b to maintain certain surplus balances these state regulatory rules which restricted b’s ability to make distributions precluded b from making an outright distribution of the distributed assets to a a c and cc a subsidiary of c reached an agreement on date d for a to sell its stock in b to cc -- without the distributed assets -- with economic_effect as of date c this stock purchase agreement between a c and cc contemplated that b and tl-n-1512-97 its subsidiaries hereinafter referred to as just b were to sell the distributed assets to a before date a and a was to sell its stock in b on date b while the agreement actually provided that a was either to sell the distributed assets or transfer the distributed assets not only did state regulatory rules restrict b’s ability to distribute the distributed assets as previously indicated but the sales agreement to sell the b stock also provided that b could not distribute amounts that b received in selling the distributed assets to a the sales agreement also required b to have the permission of c to pay a distribution and indicated that b could not make a distribution to the extent it could lower b’s o ratings a c and cc structured the deal by agreeing to a base purchase_price for the b stock this base purchase_price reflected the value of the b stock without the distributed assets a c and cc then agreed to further increase this base purchase_price by amounts arising from b’s sale rather than distribution of the distributed assets excess purchase_price or excess purchase_price amount in form b was to sell these distributed assets to a and consequently b was to hold the cash proceeds from these sales of the distributed assets which were then to factor into the amount of the excess purchase_price that cc would pay to b or in other words cc would pay an excess purchase_price to essentially purchase the cash proceeds that b received from a in selling the distributed assets to a cc also agreed to pay a interest on these cash proceeds held by b although b was to sell the distributed assets to a a did not have sufficient cash to purchase the distributed assets consequently a negotiated short-term loans on date e to make the purchases according to the credit agreements for these loans a received the loans on the condition that a use the loan proceeds solely to acquire the distributed assets or to refinance certain distributed assets purchased and to repay these loans on the date on which b was sold to cc the credit agreement also required b to retain liquid_assets equal to the outstanding debt balance between date d and date b b sold distributed assets having a value of y to a the sales of the distributed assets would not have occurred but for the agreement for the sale of a’s stock in b to cc a also requested permission from the state to resell the distributed assets to b in the event the sale to cc was not consummated law and analysis where the substance of a transaction does not coincide with the form chosen by the parties the transaction should be taxed in accordance with its substance 293_us_465 the substance over form inquiry involves determining whether the labels of the transaction match the economic tl-n-1512-97 substance of the transaction as a whole 104_tc_75 the meaning of a transaction may be more than its separate parts and the transaction must be viewed in light of the particular circumstances gregory v commissioner 69_f2d_809 2d cir aff’d 293_us_465 a transaction can be recharacterized where the form of the transaction does not match its substance and does not reflect the real rights and obligations of the parties see 88_tc_906 in order to recharacterize the transaction there must be a logically plausible alternative explanation that accounts for all the results of the transaction the explanation may combine steps but if it invents new ones courts have refused to apply the step_transaction_doctrine 90_tc_171 even if alternative explanations are available to account for the results of a transaction a court will not disregard the form of a transaction if it accounts for the transaction at least as well as alternative explanations esmark supra in 111_tc_315 turner broadcasting system inc turner broadcasting acquired mgm ua entertainment co mgm stock at the same time mgm sold all of its stock in its wholly owned subsidiary united artists corp ua to tracinda corporation tracinda at a loss before this transaction tracinda owned a controlling_interest in the mgm stock tracinda paid for the ua stock with the cash it received from turner broadcasting in the mgm stock purchase mgm used some of the money received from tracinda to pay off bank debt when turner broadcasting acquired the mgm stock mgm loaned turner broadcasting approximately million dollars the government argued that the transaction’s substance was a distribution of ua stock in redemption of mgm stock followed by a capital_contribution from turner broadcasting to mgm equivalent to the value of ua the portion of mgm stock equal in value to the ua stock was redeemed by mgm in exchange for the ua stock the tax_court held in favor of the petitioners and ruled that the form they adopted should determine their tax consequences the tax_court held that the loss was recognized by mgm and was available to the turner broadcasting group the service will continue to analyze when a transaction will be taxed in accordance with its substance and not its form tl-n-1512-97 case development hazards and other considerations if you continue to pursue the substance over form issue further case development is needed in determining however we caution that even if this case is further developed along these lines our offices may determine the substance over form argument should not be pursued we anticipate that the taxpayer will oppose a substance over form argument by arguing that state regulatory rules restricted the amount of dividends b was allowed to distribute the taxpayer will also argue that state regulatory rules required b to maintain certain surplus requirements and that the transactions were structured accordingly we could counter this argument by contending assuming proper factual development that it is not unusual for temporary default with respect to these surplus requirements assuming the surplus requirements are paid back within a short_period of time the taxpayer may then argue that temporary default status requires permission from a state_agency and that approval from the state_agency would have complicated and possibly delayed the transactions companies to be in a moreover the taxpayer will argue that even if alternative explanations are available to account for the results of a transaction a court will not disregard the form of the transaction if the taxpayer’s explanation accounts for the transaction at least as well as alternative explanations the taxpayer may argue that its explanation for tl-n-1512-97 structuring the asset transfer as a sale is as good as any explanation that the government could bring forward although a may have planned the transaction in an attempt to obtain the two tax losses a also had a valid business_purpose for purchasing the unwanted distributed assets from b in turner broadcasting the tax_court rejected the government’s argument that turner broadcasting should be treated as making a capital_contribution to mgm equal in value to the ua stock in order to recharacterize the transaction the government must have a logically plausible alternative explanation that accounts for all the results of the transaction the explanation may combine steps but if it invents new ones courts have refused to apply the step_transaction_doctrine 90_tc_171 in the instant case treating cc’s excess purchase_price as a capital_contribution to b arguably adds a step in the instant case however the transaction created two losses for a a effectively claimed the equivalent of a double deduction which a arguably should not be allowed see ilfeld co v hernandez 292_us_62 where the court held appropriate adjustments need to be made to stock basis to prevent double deductions also the loans a took out to purchase the distributed assets were outstanding for less than three weeks in duration and were arguably transitory and illusory a was arguably never at risk for the loans the loan amounts were used only to purchase distributable assets b was required to have liquid_assets equal to the value of the loan the loan would be paid from the proceeds of the sale of the b stock to cc and cc reimbursed a for the interest amounts a paid in holding the loan proceeds the procurement of the loans and the sale of the stock all took place within three weeks of one another as discussed above however the taxpayer will argue that state regulatory rules required it to structure the transaction in this form and that the government is adding a meaningless step to the transaction the capital_contribution from cc to b tl-n-1512-97 earnings_and_profits we recommend that you consider an alternative argument involving a reduction in earnings_and_profits b’s loss on the sale of its assets to a is denied or precluded to b under sec_267 under sec_1_267_f_-1t c the loss even though unrecognized reduces b’s earnings_and_profits thereby causing a to reduce its basis in the stock of b by the amount of the loss pursuant to sec_1_1502-32 a similar theory has been advanced in the examination of at least one other case the case was ultimately settled without litigation earnings_and_profits are computed on a member by member basis arguably b’s precluded loss on the sale of its assets to a should individually affect b’s computation of its earnings_and_profits sec_267 and the temporary regulations thereunder provide the income_tax treatment for this transaction the temporary regulations incorporate certain rules applicable to controlled groups not filing a consolidated_return these rules provide that a deferred loss will never be restored if at the time the selling member ceases to be a member of both the affiliated_group and the controlled_group the property is still owned by another member temp_reg sec_1_267_f_-1t c if a deferred loss is precluded under temp_reg sec_1_267_f_-1t c the temporary regulations under sec_267 provide that the basis of such property in the owning member should be increased by the amount of the selling member’s unrestored deferred loss at the time the selling member leaves the controlled_group temp_reg sec_1 f - 1t c applying the law to the facts of this case when b sells the unwanted assets to a at a loss the loss is deferred under sec_267 and sec_1_1502-13 when the stock of b is sold outside the consolidated_group b is not allowed its loss on the sale of the unwanted assets to a instead b’s loss on the sale of its unwanted assets to a is permanently denied to b under temp_reg sec_1 f - 2t d and f -1t c a’s basis in the unwanted assets received from b is however increased by the amount of the permanently denied loss on the sale of the b assets to a temp_reg sec_1 f -2t d and f -1t c b joined a in filing a consolidated_return for the year in which the distributed assets were sold thus the provisions of temp_reg sec_1_267_f_-1t do not seem applicable to the transaction temp_reg sec_1_267_f_-1t a the 1t regulations are however made applicable to the transaction by temp_reg sec_1 f - 2t d tl-n-1512-97 the taxpayer may counter that sec_1_1502-33 does not require b to adjust its earnings_and_profits to account for the loss on the sale of its assets to a because that loss was not restored under sec_1_1502-13 therefore no reduction to a’s basis in its b stock to reflect the loss in b’s earnings_and_profits is required by sec_1_1502-32 this interpretation of sec_1_1502-33 should be rejected because if b is not required to reduce its earnings_and_profits by the amount of the disallowed loss there is a duplication of a loss for earnings_and_profits purposes in effect a is able to deduct the same economic loss twice for earnings_and_profits purposes once on the sale of the b stock by virtue of the fact that the amount received for the stock reflects the economic loss from the sale of the underlying asset and again when it sells the assets purchased from b as a result of the step up in basis for the amount of the disallowed loss to b under temp_reg sec_1 f -2t d and f -1 t c moreover such an argument misconstrues sec_1_1502-33 and sec_1_1502-13 and the proper function of earnings_and_profits sec_1 a and assume that there will be an eventual restoration event when the loss will be restored and the earnings_and_profits will be adjusted since no restoration event would ever take place in this case there is no reason to delay the adjustment in earnings_and_profits thus arguably sec_1_1502-33 does not address the situation where the gain_or_loss is permanently precluded as in the case of a transaction to which temp_reg sec_1_267_f_-1t c apply it is therefore appropriate to look to the general rules of e_p sec_312 and the regulations thereunder to determine how b should adjust its earnings_and_profits to reflect the loss disallowed to b under sec_1_1502-80 the code or other law shall be applicable to a consolidated_group to the extent the regulations do not exclude its application generally gain_or_loss realized increases or decreases earnings_and_profits to the extent such gain_or_loss was recognized in computing taxable_income sec_1_312-7 and 193_f2d_827 1st cir furthermore an economic loss that is never allowed for income_tax purposes may nevertheless reduce earnings_and_profits see sec_1 b sec_1_312-7 provides that a recognized loss even though not allowed as a deduction for example by reason of the operation of sec_267 and sec_1211 and corresponding provisions of prior revenue laws may result in a decrease in earnings_and_profits by the amount of the disallowed loss under sec_1_312-7 b must reduce its earnings_and_profits at the time of tl-n-1512-97 sale by the amount of its loss on the sale of its unwanted assets to a because for earnings_and_profits purposes that loss becomes an economic loss that will never be allowed for income_tax purposes as to b at the time of the sale by virtue of temp_reg sec_1 f -2t d and f -1t c accordingly a must reduce its basis in the stock of b by the amount of the precluded loss to b under sec_1_1502-32 although this loss is deferred within the group in the basis of the unwanted assets in the hands of a b must compute its earnings_and_profits on a separate member basis taking into account the loss b is not allowed the taxpayer may argue that sec_1_1502-33 provides that there are no adjustments to earnings_and_profits until there is a restoration event under sec_1_1502-13 although b’s leaving the consolidated_group would normally constitute a restoration event under sec_1_1502-13 sec_1 f -2t d provides that such event does not result in the restoration of the deferred loss thus since no restoration event has occurred no adjustment is to be made to the earnings_and_profits of b under sec_1_1502-33 even though this result arguably conflicts with the sec_312 regulations when there is a conflict between a consolidated_return regulation and another regulation the consolidated_return regulation must prevail sec_1_1502-80 additionally the taxpayer may argue that under sec_1_267_f_-1t c which applies to controlled groups that do not file a consolidated_return or sec_1_1502-33 which applies to consolidated groups b is not required to reduce its earnings_and_profits to account for the loss on the sale of the assets to a under sec_1_267_f_-1t c or sec_1_1502-33 the proper time to reflect a deferred loss in earnings_and_profits is the time the deferred loss is restored note that we believe sec_1_267_f_-1t c does not apply to the transaction in the instant case sec_1_1502-33 applies because the transaction involves a consolidated_group the taxpayer may argue that when b ceases to be a member of the group sec_1_267_f_-1t c provide that the deferred loss is never restored to b and because the loss is never restored to b the loss is never reflected in b’s earnings_and_profits although we believe this is a possible reading of the regulations we believe the better reading of the regulations is as discussed below that b must reduce its earnings_and_profits by the amount of loss permanently denied to b not only is this the better reading of the regulations but it is also the interpretation of the regulations that comports with the underlying economic realities of the transaction see iu international corp v united_states ustc big_number fed cir in which the court construed regulations to comport with underlying economic realities of the transaction tl-n-1512-97 in adopting this reading of the regulations there is no conflict between the sec_312 and consolidated_return_regulations under sec_1_1502-33 gain_or_loss on an intercompany_transaction shall be reflected in the earnings_and_profits of a member for its taxable_year in which such gain_or_loss is taken into account under sec_1_1502-13 sec_1_267_f_-1t c provides however that if a selling member of property for which loss has been deferred ceases to be a member while the property is still owned by another member then for purposes of this section sec_1_1502-13 shall not apply to restore that deferred loss and that loss shall never be restored to the selling member as a result the rules under sec_1_1502-13 and sec_1_1502-33 that apply to a deferred loss that will be taken into account or restored do not apply to this situation or another way to view the operation of these rules is that the mandate under sec_1 267-1t c that b’s loss is no longer allowed or restored to b means that at the time b ceased being a member of the group because a sold b’s stock there was no longer a deferred_intercompany_transaction or a deferred loss between b and a for b or a to take into account therefore sec_1_1502-33 and sec_1_1502-13 do not apply in this case accordingly no conflict exists between sec_1_1502-33 and sec_1_312-7 the taxpayer may also challenge the argument that b should be required to reduce its earnings_and_profits on the sale of its assets to a because a will also be required to reduce its earnings_and_profits when it sells the assets received from b at a loss the taxpayer may argue that it is not appropriate for both a and b to reduce their earnings_and_profits because there has only been one economic loss we would argue that at the time a increased its basis in the assets received from b by the amount of a’s unrestored loss a should increase its earnings_and_profits by the amount of b’s unrestored loss this increase creates a parity between the tax basis and earnings_and_profits basis of a’s assets as well as the more general_rule of parity between the recognition of income for tax and e_p purposes this result can be derived in part from 193_f2d_827 1st cir which holds that a corporation does not increase its earnings_and_profits on the receipt of certain income where there is a corresponding downward adjustment to the basis of that corporation's remaining we believe that where a corporation increases its basis in an asset or decreases its basis in an asset for income_tax purposes it must increase its e_p or decrease its e_p by that amount our rationale behind this rule involves a theory of how e_p generally works however this theory is beyond the scope of this fsa request we request that you seek further guidance from us concerning our position that a tax basis increase increases e_p if you pursue the argument set forth above tl-n-1512-97 assets the deduction and basis increase in this case are not occurring to the same corporation accordingly neither corporation has a corresponding adjustment at the time of the sale of b therefore at the time of the sale b will have a reduction of e_p as a result of the deduction and a will have an increase in e_p as a result of the basis increase the increase in earnings_and_profits to a as a result of the basis increase will negate a’s decrease in earnings_and_profits when a sells the assets received from b at a loss in other words there will only be one tax loss the tax loss to a on the sale of the assets as a result of the increased basis to match the one economic loss to b as a result of b's reduction of e_p when it is disallowed the loss in summary we believe an argument should be made that b’s loss on the sale of its assets to a that was precluded under sec_267 sec_1 f - 1t c reduces b’s earnings_and_profits thereby causing a to reduce its basis in the stock of b by the amount of the precluded loss pursuant to sec_1_1502-32 as already discussed please forward the form_872 consent form for the tax_year at issue in this case to our office if you have any further questions please call cc regional_counsel cc ner assistant regional_counsel lc cc ner 3while the facts of this case are the converse of the facts in bangor and aroostook r r a permitted deduction with a corresponding basis increase the rationale is still applicable


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 intl b03 plr-152500-12 date date legend ------------- taxpayer state x taxable_year ------- business y -------------------------------------------------------------------------- -------------- --------------------------------------------------------------------- dear --------------- this is in response to your letter dated date that you submitted on behalf of taxpayer requesting a ruling that taxpayer be permitted to change to the tax_book_value_method of asset valuation for purposes of apportioning interest_expense for the taxable_year and for all subsequent taxable years the ruling contained in this letter is based upon information and representations submitted by taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the ruling_request it is subject_to verification on examination taxpayer is a domestic_corporation organized under the laws of state x taxpayer a calendar_year taxpayer uses the accrual_method as its overall_method_of_accounting taxpayer is the common parent of a group of affiliated corporations that files a consolidated u s federal_income_tax return taxpayer through its domestic subsidiaries and controlled_foreign_corporations conducts business y taxpayer used the fair_market_value_method for the five years preceding the taxable_year sec_864 provides that all allocations and apportionments of interest_expense shall be made on the basis of assets rather than gross_income sec_1_861-8 through and temp sec_1_861-8t through 861-13t set forth the plr-152500-12 rules specific to the allocation and apportionment of interest_expense temp sec_1_861-9t provides that a taxpayer may elect to determine the value of its assets on the basis of either tax book_value or the fair_market_value of its assets temp sec_1_861-8t provides that once a taxpayer uses the fair_market_value_method the taxpayer and all related_persons must continue to use such method unless expressly authorized by the commissioner to change methods based solely on the information submitted and the representations made taxpayer may use the tax_book_value_method of asset valuation for purposes of apportioning interest_expense pursuant to temp sec_1_861-8t and sec_1 9t g ii for taxable_year f and for all subsequent taxable years and for all operative sections of the code including sec_199 and sec_904 pursuant to sec_1 f except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item described or referenced in this letter this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent taxpayer must attach a statement to its return that provides the date and control number of this letter_ruling sincerely richard l chewning senior counsel branch office of the associate chief_counsel international cc


internal_revenue_service number release date index number ------------------------ ---------------------------------- ---------------------------- ------------------------------------------- -------------------------------------------- in re ---------------------------- -------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------ id no ------------------ telephone number ---------------------- refer reply to cc ita b03 plr-143168-12 date date legend date ----------------------- taxpayer ---------------------------- company --------------- state a ----------------- b --------------- c --------------------------------------------------------------------------------------- state b -------------- year ------- d -------------------------- e ------------------------------------- f ---------------------- g ------------------------------------------------- h ----------------------------- plr-143168-12 j ------------------------------------------------- k -------------- l --------------- year ------- m ----------------- n -------------------------------------------------------- o --------------- dear -------------- this is in response to your representative’s letter dated date submitted on behalf of taxpayer requesting a ruling that the gross_receipts from license fees received by the company under its third party licensing arrangements are excluded from the definition of royalties under sec_165 of the internal_revenue_code facts taxpayer a state a corporation is the common parent of a u s consolidated tax group taxpayer develops manufactures and markets b products for the c markets company is a state b corporation and since year a wholly-owned subsidiary of taxpayer company is a d company that ------------------------------------------------------------ --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- ---------------------------------------------------------- since its incorporation company’s business has focused on research_and_development company conducted proprietary research through its own scientists and through collaborative arrangements with scientists at universities worldwide company employed scientists with expertise in ------------------------------------------------------------------- plr-143168-12 --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------- under company’s historic_business model once company discovered and or developed a e through its research_and_development activities it applied for patent protection the e discovered and or developed by company were further developed and if successful commercialized through licensing or joint ventures with major f companies which have greater resources than company particularly in the areas of regulatory approval mass-production and marketing under these licensing arrangements company undertook research programs with the goal of developing commercially viable products in general company would develop a e through pre-clinical research after obtaining promising data from laboratory studies in the pre-clinical research a g would be submitted to the j or foreign equivalent under the licensing or collaboration agreements company would assist in the performance of clinical trials successful clinical trials would lead to submitting an h with the j in order to bring the k to market under the terms of a typical licensing agreement company received an up-front payment as consideration for the value created from company’s research_and_development activities and milestone_payments as the k progressed through the j approval process once the drug was approved by the j and then introduced to the market company received additional payments either based on fixed amounts or as a percentage of the sales of the new product these additional payments along with the up-front payment and the milestone_payments constitute the license fees at issue in this ruling_request the fee arrangement under the licensing agreements is consistent with the general practices in the d industry company used license fees to fund research for other projects including it’s flagship product l in year questions about the safety of l caused sales to fall dramatically in response company undertook one of the largest clinical trials in m to explore concerns raised about l although the trial demonstrated the safety of l its sales never recovered and company is in the process of discontinuing business operations when company finally ceases business activities taxpayer represents that it expects that the stock of company will be wholly worthless ruling requested plr-143168-12 company’s gross_receipts from the license fees under its third party licensing arrangements are excluded from the definition of royalties within the meaning of sec_165 of the code law and analysis sec_165 of the code allows as a deduction any loss sustained during the year and not_compensated_for_by_insurance_or_otherwise sec_165 of the code provides the general_rule that if any security which is a capital_asset becomes worthless during the tax_year the resulting loss is treated as a loss from the sale_or_exchange of a capital_asset sec_165 defines a security to include a share of stock in a corporation sec_165 of the code provides an exception to the general capital_loss rule and allows a parent that is a domestic_corporation to claim an ordinary_loss for worthless securities of an affiliated_corporation see also sec_1_165-5 of the income_tax regulations under sec_165 a corporation is treated as affiliated with the parent only if-- a the parent owns directly stock in the corporation meeting the requirements of sec_1504 ie at least percent of the voting power and value of the corporation's stock ownership test and b more than percent of the aggregate of the corporation’s gross_receipts for all taxable years has been from sources other than royalties rents except rents derived from rental of properties to employees of the corporation in the ordinary course of its operating business dividends interest except interest received on deferred purchase_price of operating_assets sold annuities and gains from sales or exchanges of stocks and securities gross_receipts_test see also sec_1_165-5 which provides that the gross_receipts_test applies for all the taxable years during which the subsidiary has been in existence the gross_receipts_test was designed to determine whether a subsidiary is an operating company for which an ordinary_loss may be allowed or a holding_or_investment_company for which an ordinary_loss is not allowed the revenue act of pub_l_no sec_123 56_stat_798 added sec_23 the predecessor to sec_165 to provide for an ordinary_loss for worthless_stock instead of capital_loss treatment of certain affiliated corporations the legislative_history indicates the purpose of sec_23 was to allow a parent_corporation to claim an ordinary_loss deduction for the stock of its subsidiary if it becomes worthless regardless of whether the parent and subsidiary file a consolidated_return or not s rep no 77th cong 2d sess plr-143168-12 1942_2_cb_504 sec_23 included an ownership test and a gross_income changed in to gross_receipts_test shortly after its enactment sec_23 was amended by congress to provide that certain rents and interest earned by an operating company rents derived from rental of properties to employees of the corporation in the ordinary course of its operating business and interest received on the deferred purchase_price of operating_assets sold were to be treated as operating income rather than passive_income in applying the gross_income_test see pub_l_no sec_112 58_stat_21 s rep no 91st cong 2d sess 1971_1_cb_617 s rep no 77th cong 2d sess 1942_2_cb_504 cong rec s121-122 daily ed date statement of sen davis in introducing the amendment senator davis noted that congress’ intent in enacting the gross_income_test was to permit the loss as an ordinary_loss only when the subsidiary was an operating company as opposed to an investment or holding_company the intent of the change as explained by senator davis was to exclude certain rents and interest derived by a company that was solely an operating company from the scope of passive_income in accordance with the intent of congress the rent and interest from the sources described were viewed as incidental to the operating activities of the company and as arising from a direct result of its activities as an operating company cong rec s pincite thus the legislative_history of sec_165 supports the argument that congress intended to permit ordinary_loss treatment where the subsidiary is an operating company rather than an investment or holding_company and that the terms rent and interest refer to income derived from a passive source in revrul_88_65 1988_2_cb_32 the service relied upon this legislative_history in part in distinguishing between receipts from passive investment activities and receipts derived in the ordinary course of conducting an operating business under this ruling amounts received under short- term automobile and truck leases do not constitute rents for purposes of sec_165 because the leasing subsidiary performed significant services in connection with the leases under the facts of this case taxpayer represents that when the company ceases business activities and becomes wholly worthless within the meaning of sec_165 the ownership test of sec_165 will be satisfied because taxpayer has directly owned all of the stock of company since year and will continue to own the stock until it becomes wholly worthless taxpayer requests a ruling that in applying the gross_receipts_test of sec_165 when the stock of company becomes wholly worthless under sec_165 gross_receipts from the license fees are excluded from the definition of royalties a literal reading of the gross_receipts_test requires that more than percent of the aggregate of a subsidiary’s gross_receipts be from sources other than disqualifying plr-143168-12 specifically enumerated sources of income such as royalties however the legislative_history to the gross_receipts_test suggests congress intended to permit ordinary_loss treatment where the subsidiary is an operating company rather than an investment or holding_company taxpayer represents that company has been actively engaged in a trade_or_business since its incorporation specifically company has used its own employees to conduct proprietary research with the goal of developing e for the treatment of n under company’s historical business model company discovers and or develops e through its proprietary research and then enters into licensing agreements with major d companies for collaboration in the further development of e in pre-clinical trials and various phases of clinical trials for purposes of obtaining j approval the license fees received by company funded its continued operations and helped support future research thus taxpayer argues unlike the situation where a passive investor merely acquires and licenses intangible_property for royalties company performed substantial services and remained actively involved in the research_and_development of the product under licensing arrangements in exchange for its significant research_and_development activities for the product the company has received license fees in the form of up-front fees milestone_payments and post-j approval fees either based on a fixed amount or a percentage of the sales of the products under the licensing arrangements taxpayer also argues that the active or passive analysis of revrul_88_65 applies to the license fees of company because company performed substantial services and remained actively involved in the research_and_development of o under the licensing arrangements based on the facts submitted and the representations made we conclude that the license fees earned by company are fees attributable to the company’s significant business activities in the research_and_development of f products for j approval and arise as a direct result of its activities as an operating d company thus company’s gross_receipts from the license fees should be excluded from the definition of royalties within the meaning of sec_165 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 the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party this office has not verified any of the materials submitted in support of the request for rulings verification of the information representations and other data may be required as part of the audit or examination process plr-143168-12 this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent a copy of this letter must be attached to any income_tax return to which it is relevant alternatively taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of the letter_ruling in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely robert m casey senior technician reviewer branch income_tax accounting


internal_revenue_service department of the treasury te_ge exempt_organizations examinations release number release date uil code date date l a egend oo taxpayer organization's name n ein ta taxpayer_advocate office y tax_year taxpayer certified mail - return receipt requested dear taxpayer_identification_number n form_990 tax_year s ended y person to contact id number contact numbers telephone fax we have enclosed a copy of our report of examination explaining why we believe revocation of your exempt status under sec_501 of the internal_revenue_code code is necessary if you accept our findings take no further action we will issue a final revocation letter if you do not agree with our proposed revocation you must submit to us a written request for appeals_office consideration within days from the date of this letter to protest our decision your protest should include a statement of the facts the applicable law and arguments in support of your position an appeals officer will review your case the appeals_office is independent of the director eo examinations the appeals_office resolves most disputes informally and promptly the enclosed publication the examination process and publication exempt_organizations appeal procedures for unagreed issues explain how to appeal an internal_revenue_service irs decision publication also includes information on your rights as a taxpayer and the irs collection process you may also request that we refer this matter for technical_advice as explained in publication if we issue a determination_letter to you based on technical_advice no further administrative appeal is available to you within the irs regarding the issue that was the subject of the technical_advice letter rev catalog number 34809f if we do not hear from you within days from the date of this letter we will process your case based on the recommendations shown in the report of examination if you do not protest this proposed determination within days from the date of this letter the irs will consider it to be a failure to exhaust your available administrative remedies sec_7428 of the code provides in part a declaratory_judgment or decree under this section shall not be issued in any proceeding unless the tax_court the claims_court or the district_court of the united_states for the district of columbia determines that the organization involved has exhausted its administrative remedies within the internal_revenue_service we will then issue a final revocation letter we will also notify the appropriate state officials of the revocation in accordance with sec_6104 of the code you have the right to contact the office_of_the_taxpayer_advocate taxpayer_advocate assistance is not a substitute for established irs procedures such as the formal appeals process the taxpayer_advocate cannot reverse a legally correct_tax determination or extend the time fixed by law that you have to file a petition in a united_states court the taxpayer_advocate can however see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling you may call toll-free and ask for taxpayer_advocate assistance if you prefer you may contact your local taxpayer_advocate at ta if you have any questions please call the contact person at the telephone number shown in the heading of this letter if you write please provide a telephone number and the most convenient time to call if we need to contact you thank you for your cooperation sincerely marsha a ramirez director eo examinations enclosures publication publication report of examination letter rev catalog number 34809f department of the treasury - internal_revenue_service form 886a name of taxpayer schedule no or exhibit year period ended explanation of items taxpayer y legion taxpayer organization’s name city city’s name n ein y year period ended ex exemption date s state ix incorporation date ma mailing address wa website address da dissolution date p president of organization o officer _bm board member rd revocation date issue whether taxpayer qualifies for exemption under sec_501 of the internal_revenue_code facts taxpayer n was recognized as an organization exempt under sec_501 of the internal_revenue_code on ex the articles of incorporation that were filed by taxpayer along with their form_1023 application_for recognition of exemption provided that the organization was incorporated in the s on ix the organization’s mailing address as on file with the internal_revenue_service irs was ma the website for the s secretary of state shows wa additionally the s secretary of state’s website provides that the organization was administratively dissolved on da per contact with the s secretary of state it was determined that being administratively dissolved by the secretary of state is not a final dissolution and that the organization can be reinstated at any time by filing articles of reinstatement and paying a nominal fee the internal revenue service’s records show that taxpayer has not filed form_990 since they were recognized for exemption in ex according to information received before the beginning of the examination the organization had income of dollar_figure the tax_year ended y but did not file the form_990 the information also provided that the organization employed an executive director but did not pay in the employment_tax withholdings or file form sec_941 during the year based on this information the during form 886-a crev department of the treasury - internal_revenue_service page -1- department of the treasury - internal_revenue_service form 886a name of taxpayer schedule no or exhibit year period ended explanation of items taxpayer y organization would have been required to file form_990 for the above period and therefore the organization was selected for examination to determine if the organization had income of more than dollar_figure if they should have paid in withholdings and if they were required to file both forms and on date the phone number listed for the organization was called to set up the examination but the number was no longer in service the agent then obtained a phone number for the president that was listed on the s secretary of state’s website p the last president of the organization was contacted and informed of the examination of the form_990 for the tax period ended y she provided that the organization had terminated around the end of but was not sure of the exact date immediately provide the information needed to determine whether the organization dissolved properly p did not know if the organization filed articles of dissolution and could not a discussion was held with p concerning the amount of income during y but she was unable to recall the amount of income the organization received p also said that she didn’t think that she would be able to provide many books_and_records for the year under exam because after the organization terminated they no longer have the books_and_records p was contacted by phone again on date she said that she had not been able to obtain any records for the organization so far on date an information_document_request idr requesting the specific information necessary to terminate the organization on irs records was issued the information was due back on date no response to this idr has been received from the taxpayer the agent called p multiple times between date and date with no response on date a phone call was made to p’s number but the person who answered the phone said that it was not her number and they did not know who she was to determine that the correct number had been dialed the number was called again but the same individual answered on date idrs were prepared and sent with letter by certified mail to all of the officers listed on the s secretary of state’s website including p there was no response from p one of the letters was returned as undeliverable the third officer o called on date she said that she was not an officer during the year under exam and hadn't been a member of the board for several years before that the names of several individuals who she thought were involved with the organization during y on date a third party contact letter was sent out to the last_known_address of the organization after waiting days follow up on several contacts was made the individuals were not able to provide any information that would help the examination move forward one of the individuals however provided a phone number for p which was not previously available o provided form 886-a rev department of the treasury - internal_revenue_service page -2- form_886 a name of taxpayer schedule no or exhibit year period ended explanation of items department of the treasury - internal_revenue_service taxpayer y p was contacted at the phone number received on date she said that she had given the information to bm who was a board member during the examination period to review and thought that bm had sent in the information she said she would check with bm to find out if the information was sent on date p was contacted to see what she found out about the information she said the bm had not sent the information but that she would be sending it by date p was contacted again on date she provided that the information was put in the mail on date as of date the information was still not received several attempts were made to contact p but only her voicemail was reached and she never returned the phone calls on date the examiner sent by certified mail a written notice the demand letter to the exempt_organization requesting the form_990 for the tax period ending y to be filed with the area office within days of the date of the demand letter the demand letter informed the exempt_organization of the dollar_figure per day dollar_figure per day for organizations having gross_receipts exceeding dollar_figure for the subject tax_year penalty imposed by sec_6652 c and solicited a written_statement explaining the cause for late filing because the exempt_organization is exempt under sec_501 and the form_990 is required by sec_6043 the demand letter also notified the exempt_organization that if it fails without reasonable_cause to file the form_990 its exempt status will be revoked because it failed to establish it is observing the conditions required for continuation of exempt status the letter was sent to p because that was the only valid address available for the organization on date the letter was returned because it was unclaimed by p previous certified letters were sent to p at the same address and she signed for them after receiving the certified letter back on date the agent attempted to contact the organization again by mail on date the 90-day letter was sent again to p but by regular mail as of date no response has been received from the taxpayer regarding the 90-day demand letter dated date exhibit a provides copies of internal_revenue_service correspondence requesting the exempt_organization to file the form_990 for the tax period ending y law sec_6001 of the code provides that every person liable for any_tax imposed by the code or for the collection thereof shall keep adequate_records as the secretary_of_the_treasury or_his_delegate may from time to time prescribe form 886-acev department of the treasury - internal_revenue_service page -3- department of the treasury - internal_revenue_service form_8 a name of taxpayet schedule no or exhibit year period ended explanation of items taxpayer y sec_6033 of the code provides except as provided in sec_6033 every organization exempt from tax under sec_501 shall file an annual return stating specifically the items of gross_income receipts and disbursements and such other information for the purposes of carrying out the internal revenue laws as the secretary may by forms or regulations prescribe and keep such records render under oath such statements make such other returns and comply with such rules and regulations as the secretary may from time to time prescribe sec_1_6001-1 of the regulations in conjunction with sec_1_6001-1 provides that every organization exempt from tax under sec_501 of the code and subject_to the tax imposed by sec_511 on its unrelated_business_income must keep such permanent books or accounts or records including inventories as are sufficient to establish the amount of gross_income deduction credits or other matters required to be shown by such person in any return of such tax such organization shall also keep such books_and_records as are required to substantiate the information required by sec_6033 sec_1_6001-1 of the regulations states that the books_or_records required by this section shall be kept at all times available for inspection by authorized internal revenue officers or employees and shall be retained as long as the contents thereof may be material in the administration of any internal revenue law sec_1_6033-1 of the regulations provides that every organization which has established its right to exemption from tax whether or not it is required to file an annual return of information shall submit such additional information as may be required by the district_director for the purpose of enabling him to inquire further into its exempt status and to administer the provisions of subchapter_f sec_501 and the following chapter of the code and sec_6033 revrul_59_95 1959_1_cb_627 concerns an exempt_organization that was requested to produce a financial statement and statement of its operations for a certain year however its records were so incomplete that the organization was unable to furnish such statements the service held that the failure or inability to file the required information_return or otherwise to comply with the provisions of sec_6033 of the code and the regulations which implement it may result in the termination of the exempt status of an organization previously held exempt on the grounds that the organization has not established that it is observing the conditions required for the continuation of exempt status in accordance with the above cited provisions of the code and regulations under sec_6001 and sec_6033 organizations recognized as exempt from federal_income_tax must meet certain reporting requirements these requirements relate to the filing of a complete and accurate annual information and other required federal tax forms form 886-acrev department of the treasury - internal_revenue_service page -4- form 886a department of the treasury - internal_revenue_service name of taxpayer taxpayer y explanation of items schedule no or exhibit year period ended and the retention of records sufficient to determine whether such entity is operated for the purposes for which it was granted tax-exempt status and to determine its liability for any unrelated_business_income_tax taxpayer’s position taxpayer was sent a letter dated date requesting that they file a form_990 for the tax period ended y no response has been received from the taxpayer regarding the above stated letter government's position taxpayer has not filed form_990 for the tax period ended y as required under sec_6033 of the code additionally the organization does not have adequate_records to sufficiently establish the amount of gross_income deduction credits or other matters required to be shown under sec_6001 of the code and sec_1 of the regulations conclusion it is the irs's position that taxpayer failed to meet the reporting requirements under sec_6001 and sec_6033 to be recognized as exempt from federal_income_tax under c of the internal_revenue_code accordingly the organization's exempt status is revoked effective rd form_1120 returns should be filed for all tax periods after rd form 886-a ev department of the treasury - internal_revenue_service page -5-


internal_revenue_service number release date index number ---------------------------- ---------------------- --------------------------------------- -------------------------------- legend 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 corp b05 plr-145851-08 date april parent ----------------------- --------------------------------------------------------------------- purchaser -------------------------------- ------------------------------------------------ ------------------------ target --------------------------------------------------------------------- --------------------------- foreign target -------------------------------------------------------------------------- --------------------------------------------- seller countrya a datea dateb datec -------------------------- ----------- -------------- --------------------- -------------------------- --------------------- ----------------------- parent official ------------------------------------------------------------------- dear ------------ plr-145851-08 this letter responds to a letter dated date requesting on behalf of parent an extension of time under sec_301_9100-1 through of the procedure and administration regulations to file an election the extension is being requested for parent to file a sec_338 election under sec_338 of the internal_revenue_code sometimes hereinafter referred to as the election with respect to purchaser’s acquisition of the stock of foreign target on datea additional information was received in subsequent correspondence the material information submitted is summarized below parent is a domestic_corporation and the common parent of an affiliated_group that filed a consolidated federal_income_tax return that included purchaser for the taxable_year that included datea purchaser is wholly owned by parent seller is a subchapter_s_corporation seller owned all the stock of target a qualified_subchapter_s_subsidiary qsub foreign target a countrya corporation was wholly owned by target foreign target was a controlled_foreign_corporation during the taxable_year that included the acquisition_date on datea purchaser acquired all the stock in target in exchange for dollar_figurea cash subject_to adjustments because target was a qsub purchaser’s acquisition of the stock of target is treated for federal_income_tax purposes as an acquisition of target’s assets which included the stock of foreign target it is represented that purchaser’s acquisition of the stock of foreign target qualified as a qualified_stock_purchase as defined in sec_338 parent intended to treat the acquisition of foreign target as an asset acquisition the election for foreign target was due on dateb but for various reasons a valid election was not filed subsequent to dateb it was discovered that a valid election had not been filed thereafter this request was submitted under sec_301_9100-3 for an extension of time to file a valid election the period of limitations on assessment under sec_6501 of the code has not expired for parent’s consolidated group’s taxable_year in which the acquisition occurred the taxable_year for which the election should have been filed or for any taxable years that would have been affected by the election had it been timely filed the period of limitations on assessment for parent’s consolidated group’s taxable_year that included datea will expire no earlier than datec sec_338 permits certain stock purchases to be treated as asset acquisitions if the purchasing_corporation makes or is treated as having made a sec_338 election and the acquisition is a qualified_stock_purchase plr-145851-08 under sec_301_9100-1 the commissioner has discretion to 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 describes the commissioner’s authority to grant an extension of time to make a regulatory election sec_301_9100-1 defines the term regulatory election sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides extensions of time for making 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 sec_301_9100-3 in this case the time for filing the election is fixed by the regulations ie sec_1_338-2 therefore the commissioner has discretionary authority under sec_301_9100-3 to grant an extension of time for parent to file the election provided parent shows that it acted reasonably and in good_faith the requirements of sec_301_9100-1 and sec_301_9100-3 are satisfied and granting relief will not prejudice the interests of the government information affidavits and representations submitted by parent and parent official explain the circumstances that resulted in the failure to timely file the election the information establishes that the request for relief was filed before the failure to make the election was discovered by the internal_revenue_service see sec_301 b i based on the facts and information submitted including the representations made we conclude that parent has shown that it acted reasonably and in good_faith in failing to timely file the election the requirements of sec_301_9100-1 and sec_301_9100-3 are satisfied and granting relief will not prejudice the interests of the government accordingly we grant an extension of time under sec_301_9100-3 until days from the date on this letter for parent to file the election with respect to the acquisition of the stock of foreign target within days from the date on this letter parent must file the election on form_8023 in accord with sec_1_338-2 and the instructions to the form a copy of this letter must be attached to the form_8023 within days of the date on this letter all relevant parties must file or amend as applicable all returns and amended returns if any necessary to report the transaction as a sec_338 transaction for the taxable_year in which the transaction was consummated and for any other affected_taxable_year a copy of this plr-145851-08 letter and a copy of the form must be attached to any_tax return to which it is relevant alternatively taxpayers filing their returns electronically may satisfy the requirement of attaching a copy of this letter by attaching a statement to their return that provides the date and control number plr-145851-08 of this ruling letter the above extension of time is conditioned on the tax_liability if any of parent’s consolidated_group being not lower in the aggregate for all years to which the election applies than it would have been if the election had been timely made taking into account the time_value_of_money no opinion is expressed as to the amount of tax_liability for the years involved a determination thereof will be made upon audit of the federal_income_tax returns involved further no opinion is expressed as to the federal_income_tax effect if any if it is determined that the amount of tax_liability is lower sec_301_9100-3 caveat we express no opinion as to whether the acquisition of foreign target stock qualifies as a qualified_stock_purchase under sec_338 any_tax consequences arising from the election or any other tax consequences of the transaction in addition we express no opinion as to the tax effects or any other tax consequences of filing the election late under the provisions of any other section of the code and regulations or as to the tax treatment of any conditions existing at the time of or effects resulting from filing the election late that are not specifically set forth in the above ruling notwithstanding that an extension is granted under sec_301_9100-3 to file the election penalties and interest that would otherwise be applicable if any continue to apply the rulings contained in this letter are based upon information representations and affidavits submitted by parent and parent official with all submissions accompanied by a penalties of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings all of this material is subject_to verification on examination procedural statements this ruling letter is directed only to the taxpayer s who requested it sec_6110 of the code provides that it may not be used or cited as precedent plr-145851-08 pursuant to a power_of_attorney on file in this matter a copy of this letter is being sent to your authorized representatives sincerely _ken cohen_________ ken cohen acting chief branch office of associate chief_counsel corporate


internal_revenue_service number release date index number department of the treasury p o box ben franklin station washington dc person to contact telephone number refer reply to cc it a date date plr-152599-01 taxpayers con org old ranch new ranch family group no family group no family group no statex citation x dear this responds to the letter written in your behalf dated date requesting a ruling on the proper treatment of an exchange under sec_1031 of the internal_revenue_code of a perpetual conservation_easement pce in real_property for a fee interest in other real_estate that will also be burdened with a pce upon receipt these are the applicable facts taxpayers are members along with other persons of family group no the persons comprising family group no along with the entities comprising family group no and family group no are co-owners of the fee interest in old ranch in state x family group no operates a cattle ranching business on old ranch through a limited_liability_company llc family group nos and lease their respective undivided interests in old ranch to llc for grazing of cattle in addition the co-owners of old ranch including taxpayers have formed a general_partnership gp under state law to perform routine maintenance on old ranch however gp does not hold any interest in old ranch and will not own any interest in property to be received in the planned exchange all of old ranch consisting of approximately big_number acres is used for cattle ranching purposes except for approximately acres used for personal residences of some of the co-owners taxpayers and other co-owners wish to engage in a like-kind_exchange with conorg a sec_501 organization under an agreement entered into by taxpayers and the other co-owners with conorg taxpayers and the other co-owners will convey a pce on the old ranch to conorg in exchange for the fee estate of new ranch in state x which will also be burdened with a pce when received by taxpayers and the other co-owners the planned transaction will be a simultaneous two-sided exchange ie involving no accommodation parties third party sellers of replacement_property or third party buyers of relinquished_property following the exchange new ranch will be held by taxpayers and the other co-owners in the exact same proportions as the interests they now hold and will retain in old ranch burdened with the pce the state x civil code provides at citation x that the purpose of a conservation_easement is to retain land predominately in its natural scenic historical agricultural forested or open space condition citation x provides that a conservation_easement is an interest_in_real_property voluntarily created and freely transferable in whole or in part for the purposes stated in citation x by any lawful method for the transfer of interest_in_real_property in state x citation x further provides that a conservation_easement shall be perpetual in duration and shall constitute an interest_in_real_property notwithstanding the fact that it is negative in character sec_1031 of the code provides generally that no gain_or_loss shall be recognized on the exchange of property held for productive use in a trade_or_business or for investment if such property is exchanged solely for property of like_kind which is to be held either for productive use in a trade_or_business or for investment sec_1031 states that if an exchange would be within the provisions of sec_1031 if it were not for the fact that the property received in exchange consists not only of property permitted by such provisions to be received without the recognition of gain but also of other_property or money then the gain if any to the recipient shall be recognized but in an amount not in excess of the sum of such money and the fair_market_value of such other_property sec_1_1031_a_-1 of the income_tax regulations provides that as used in sec_1031 the words like_kind have reference to the nature or character of the property and not to its grade or quality one kind or class of property may not under that section be exchanged for property of a different kind or class the fact that any real_estate involved is improved or unimproved is not material for that fact relates only to the grade or quality of the property and not to its kind or class unproductive real_estate held by one other than a dealer for future use or future realization of the increment in value is held for investment and not primarily for sale sec_1_1031_a_-1 of the regulations as an example provides that no gain_or_loss is recognized if a taxpayer who is not a dealer in real_estate exchanges city real_estate for a ranch or farm or exchanges a leasehold of a fee with years or more to run for real_estate or exchanges improved real_estate for unimproved_real_estate revrul_55_749 1955_2_cb_295 holds that where under applicable state law water rights are considered real_property rights the exchange of perpetual water rights for a fee interest in land constitutes a nontaxable_exchange of property of like_kind within the meaning of sec_1031 revrul_72_549 1972_2_cb_472 holds that an easement and right-of-way which were permanent granted to an electric power company were properties of like_kind with real_property with nominal improvements and real_property improved with an apartment building under the regulations cited the types of real_estate interests that are within the same kind or class as fee interests in real_estate is broad both revenue rulings cited demonstrate that perpetual easements in the form of water rights and right-of-ways are of the same kind or class of property to which a fee interest in real_estate belongs the pce at issue is also an easement under state x law a pce is an interest in real_estate which like a fee is of a perpetual nature therefore based upon the above authorities and the facts and representations submitted and assuming the proposed pce is by virtue of state law an interest_in_real_property taxpayers’ exchange of a pce in real_property under sec_1031 for a fee interest in other real_estate that is also subject_to a pce will qualify as a tax deferred_exchange of like-kind_property provided that the properties are held for productive use in a trade_or_business or for investment if taxpayers receive money or other nonlike- kind property in the exchange gain will be recognized to the extent of the such money received and the fair_market_value of such other_property also taxpayers and each of the co-owners must recognize whatever gain is realized with respect to the fair_market_value of the replacement_property received attributable to the transfer of the pce as to that portion of the old ranch used for residential purposes and not for use in a trade_or_business or for investment no determination is made by this letter as to whether the described transaction otherwise qualifies for deferral of gain realized under sec_1031 except as specifically ruled above no opinion is expressed as to the federal tax treatment of the transaction under any other provisions of the code and the income_tax regulations that may be applicable or under any other general principles of federal income_taxation no opinion is expressed as to the tax treatment of any conditions existing at the time of or effects resulting from the transaction that are not specifically covered by the above ruling under the power_of_attorney form_2848 on file with this office we are sending this original letter to you and a copy to your representative stated on line of the form this ruling is directed only to the taxpayer s who requested it sec_6110 of the code provides that it may not be cited as precedent sincerely yours robert m casey acting chief branch office of associate chief_counsel income_tax accounting cc


t c memo united_states tax_court william c witzel and gene e witzel petitioners v commissioner of internal revenue respondent docket no filed date wayne a cooper for petitioners john walsh for respondent memorandum opinion vasquez judge respondent determined a deficiency of dollar_figure in petitioners' federal_income_tax after concessions ’ the sole issue for decision is whether discharge_of_indebtedness cod income excluded under sec_108 from the gross_income of an s_corporation passes through to the shareholder of the s_corporation as an item_of_income under sec_1366 a and consequently increases the basis of the shareholder's stock in the s_corporation under sec_1367 the parties submitted this case fully stipulated rule the stipulation of facts and the exhibits attached thereto are incorporated herein by this reference at the time they filed the petition petitioners resided in sandwich illinois background at all relevant times petitioner’ was the sole shareholder of water products co of illinois inc water products an s_corporation in water products declared bankruptcy under chapter of the bankruptcy code in water products realized cod income under sec_61l a in the amount of dollar_figure as a result of its ' petitioners concede that respondent's adjustments to their itemized_deductions deduction for exemptions and alternative_minimum_tax are correct if the court concludes petitioners are not entitled to increase the basis in their s_corporation stock all section references are to the internal_revenue_code in effect for the year in issue and all rule references are to the tax_court rules_of_practice and procedure references to petitioner are to william c witzel bankruptcy water products excluded the cod income from its gross_income in petitioner had suspended losses under sec_1366 from water products in the amount of dollar_figure anda zero basis in his water products stock before considering the effect of the excluded cod income for petitioners filed a joint federal_income_tax return on the return petitioners increased the basis in the water products stock by the amount of the excluded cod income dollar_figure as a result of the increased basis in petitioners deducted suspended losses of dollar_figure discussion petitioners argue that they were entitled to increase their basis in water products stock by their share of the excluded cod income in 110_tc_114 we held that cod income excluded by sec_108 did not pass through to an s_corporation shareholder under sec_1366 a therefore the s_corporation shareholder could not increase his basis in the stock under sec_1367 a petitioners do not distinguish this case from nelson petitioners however contend that in nelson we failed to consider the following legal issues the reduction of tax_attributes dictated by sec_108 is an alternative to taxation and does not mean that excluded cod income is not tax- exempt congress' intent to treat all shareholders in s_corporations similarly under sec_108 and the dissimilarity in treatment between sec_103 exclusion of state bond interest from gross_income and sec_108 we disagree with petitioners in nelson we addressed all of these arguments in detail nelson v commissioner supra pincite we shall follow our recent court-reviewed opinion we therefore conclude that petitioners may not increase their basis in the stock by the amount of the excluded cod income to reflect the foregoing decision will be entered for respondent


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc psi plr-106371-02 date date legend corporation shareholders date dear correspondence requesting a ruling under sec_1362 of the internal_revenue_code this letter responds to a letter dated date and subsequent facts corporation was incorporated on date corporation intended to be taxed as an s_corporation but failed to file timely a form_2553 election by a small_business_corporation plr-106371-02 applicable law sec_1362 generally provides that a small_business_corporation may elect to be an s_corporation for federal tax purposes sec_1362 governs the timeliness of such an election as well as its effective date generally if an election to be treated as an s_corporation is made within the first two and one-half months of a corporation’s taxable_year then the corporation will be treated as an s_corporation beginning in the year in which the election was made if the election is made after the first two and one-half months of a corporation’s taxable_year then the corporation will not be treated as having made an effective election to be treated as an s_corporation for federal tax purposes until the following taxable_year sec_1362 provides that if an election to be treated as an s_corporation for federal tax purposes is either made untimely or not made at all and the secretary determines that there was reasonable_cause for the failure to make a timely election then the secretary may treat the corporation as having made a timely election conclusion based on the facts submitted and representations made we conclude that corporation has established reasonable_cause for failing to make a timely election to be an s_corporation accordingly provided corporation files a completed form_2553 effective date with the appropriate service_center within days from the date of this letter such election will be treated as timely made a copy of this letter should be attached to the form_2553 and is enclosed for that purpose plr-106371-02 except as specifically set forth above we express or imply no opinion concerning the federal tax consequences of the facts described above under any other provision of the internal_revenue_code specifically we express or imply no opinion concerning whether corporation is an s_corporation for federal tax purposes this ruling is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file with this office a copy of this letter is being forwarded to your representative sincerely yours s jeanne m sullivan senior technician reviewer branch office of associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes cc