office_of_chief_counsel internal_revenue_service memorandum cc ita b06 ------------------ presp-167260-03 uilc 263a date date to michael e lueck attorney cc lm hmt det from thomas luxner number release date branch chief branch income_tax accounting subject application of sec_1_263a-7 this chief_counsel_advice responds to your request for assistance dated date this advice may not be used or cited as precedent issue sec_1 whether a taxpayer that is changing its method_of_accounting for costs subject_to sec_263a of the internal_revenue_code with respect to non-inventory property may revalue such property using the 3-year average method described in sec_1 263a- c v of the income_tax regulations whether a taxpayer that is changing its method_of_accounting for costs subject_to sec_263a with respect to non-inventory property may use a 3-year average similar to the 3-year average method described in sec_1_263a-7 as a reasonable estimate and procedure when using the facts and circumstances method provided by sec_1_263a-7 whether a taxpayer that is changing its method_of_accounting for costs subject_to sec_263a with respect to non-inventory property may use the exception provided in sec_1_263a-7 conclusion sec_1 a taxpayer changing its method_of_accounting for costs subject_to sec_263a unicap with respect to non-inventory property is not permitted to use the year average method described in sec_1_263a-7 instead a taxpayer that presp-167260-03 changes its method_of_accounting for costs subject_to sec_263a with respect to non- inventory_property must use the facts and circumstances method described in sec_1_263a-7 a taxpayer changing its method_of_accounting for costs subject_to sec_263a with respect to non-inventory property may use a 3-year average similar to the 3-year average method described in sec_1_263a-7 as a reasonable estimate and procedure when using the facts and circumstances method provided certain conditions are satisfied the facts and circumstances method contemplates the use of reasonable estimates and procedures provided two requirements are met first the taxpayer must lack and be unable to reconstruct from its books_and_records actual financial and accounting data that is required to apply the capitalization_rules of sec_263a to the relevant facts and circumstances second the total_amounts of cost for which reasonable estimates and procedures are employed must not be significant in comparison to the total restated value including costs previously capitalized under the taxpayer’s former method of the items or costs for the period in question a taxpayer that is permitted to use reasonable estimates and procedures may use available information from more recent years to estimate the amount and nature of costs applicable to earlier years however the taxpayer must demonstrate to the satisfaction of the director that the years it is using are representative of its prior years and therefore reasonable a taxpayer changing its method_of_accounting for costs subject_to sec_263a with respect to non-inventory property may not use the exception provided by sec_1_263a-7 the exception provided by this section only applies to the revaluation of inventory fact sec_1 taxpayer produces self-constructed assets non-inventory property for use in its trade_or_business these self-constructed assets are subject_to sec_263a taxpayer accounts for these assets as fixed assets and recovers the costs to produce them over the recovery_period provided in sec_167 and sec_168 and the regulations thereunder taxpayer has requested consent to change its method_of_accounting for costs subject_to sec_263a with respect to such non-inventory property as part of its request the taxpayer has proposed to make a sec_481 adjustment taxpayer computed the proposed sec_481 adjustment using the 3-year average method described in sec_1_263a-7 law and analysis sec_1_263a-7 provides guidance to taxpayers changing their methods_of_accounting for costs subject_to sec_263a in particular this section provides guidance the above facts are hypothetical and have been assumed to further the analysis of the issues presented presp-167260-03 regarding how taxpayers are to revalue property on hand at the beginning of the taxable_year in which they change their method_of_accounting for costs subject_to sec_263a sec_1_263a-7 provides that when a taxpayer changes its method_of_accounting for costs subject_to sec_263a with respect to inventory_property the taxpayer generally must in computing its taxable_income for the year_of_change take into account a sec_481 adjustment the adjustment required by sec_481 relates to the revaluation of the taxpayer's inventory and is equal to the difference between the inventory as originally valued under the former method and the inventory as revalued using the new method the regulation further provides the following three methods to revalue inventory the facts and circumstances method the weighted average method and the 3-year average method the facts and circumstances method provided by sec_1_263a-7 may be used by any taxpayer changing its method_of_accounting for costs subject_to sec_263a with respect to inventory regardless of its inventory identification method a taxpayer changing its method_of_accounting for costs subject_to sec_263a with respect to inventory may use the weighted average method provided by sec_1 263a- c iv if it uses either the first-in_first-out fifo or the specific goods last-in first- out lifo inventory_method a taxpayer changing its method_of_accounting for costs subject_to sec_263a with respect to inventory may use the 3-year average method provided by sec_1_263a-7 if it uses the dollar-value lifo inventory_method sec_1_263a-7 provides that under the facts-and-circumstances method a taxpayer generally is required to revalue its inventories by applying the capitalization_rules of sec_263a and the regulations thereunder to its production and resale activities with the same degree of specificity as required of inventory manufacturers immediately prior to the effective date of unicap however this method permits a taxpayer to utilize reasonable estimates and procedures in valuing inventory if the taxpayer lacks and is unable to reconstruct from its books_and_records actual financial and accounting data and the total_amounts of costs for which reasonable estimates and procedures are employed are not significant in comparison to the total restated value of the items or costs for the period in question taxpayers permitted to use reasonable estimates and procedures under the facts and circumstances revaluation method may either use available information from more recent years to estimate the amount and nature of inventory costs applicable to earlier years or use available information with respect to comparable items produced or acquired during the same year in order to estimate the costs associated with other items sec_1_263a-7 provides that a taxpayer using the facts and circumstances method to revalue its inventory who is not permitted to use reasonable estimates and procedures because of the existence of a significant amount of costs is required to use the weighted average method or the 3-year average method specific goods lifo_method to account for their inventories may use the weighted average method to revalue their inventories this section further provides that the weighted average method is only available to a taxpayer if it lacks sufficient data to sec_1_263a-7 provides that taxpayers using the fifo method or the presp-167260-03 revalue its inventory costs under the facts and circumstances revaluation method moreover a taxpayer that is permitted to use the weighted average method may only use such method to revalue items or costs for which it lacks sufficient information to revalue under the facts and circumstances revaluation method particular items or costs must be revalued under the facts and circumstances revaluation method if sufficient information exists to use such method under the weighted average method an item in ending inventory is revalued using the weighted average percentage increase or decrease with respect to such item for the earliest subsequent taxable_year for which sufficient data is available with respect to an item for which no subsequent data exists such item is revalued using the weighted average percentage increase or decrease with respect to all reasonably comparable items in the taxpayer’s inventory for the same year or the earliest subsequent taxable_year for which sufficient data is available method to account for inventory may use the 3-year average method to revalue existing lifo layers when changing its method_of_accounting for costs subject_to sec_263a with respect to such inventory the 3-year average method is based on the average percentage change in the current costs of inventory for each lifo_pool based on the three most recent taxable years for which the taxpayer has sufficient information the 3-year average method is available to a dollar-value lifo taxpayer regardless of whether the taxpayer lacks sufficient data to revalue its inventory costs under the facts and circumstances revaluation method sec_1_263a-7 provides that a taxpayer using the dollar-value lifo sec_1_263a-7 provides that taxpayers that change their method_of_accounting for costs subject_to sec_263a with respect to non-inventory property must revalue the non-inventory property on hand at the beginning of the year_of_change and compute an adjustment under sec_481 the adjustment under sec_481 is equal to the difference between the adjusted_basis of the property as revalued using the taxpayer's new method and the adjusted_basis of the property as originally valued using the taxpayer's former method moreover the regulation provides that a taxpayer must revalue the non-inventory property using the facts and circumstances method provided for inventory changes ie sec_1_263a-7 revproc_2002_9 2002_1_cb_327 modified and clarified by announcement 2002_1_cb_561 modified and amplified by revproc_2002_19 2002_1_cb_696 and amplified clarified and modified by revproc_2002_54 2002_2_cb_432 provides the procedures by which a taxpayer may obtain automatic consent to change the methods_of_accounting described in the appendix of the revenue_procedure section of revproc_2002_9 2002_1_cb_327 provides that the director must apply a change in method_of_accounting made in compliance with all the applicable provisions of the revenue_procedure in determining the taxpayer’s liability unless the director recommends that the change in method_of_accounting be modified or revoked the director’s examination of whether the change in accounting_method is in compliance with the revenue_procedure includes whether the amount of the sec_481 presp-167260-03 adjustment was properly determined the director may adjust the taxpayer’s sec_481 adjustment if he determines that it has not been properly computed revproc_97_27 1997_1_cb_680 modified and amplified by revproc_2002_ 2002_1_cb_696 provides the general procedures under sec_446 and sec_1_446-1 for obtaining the consent of the commissioner to change a method_of_accounting sec_11 of revproc_97_27 provides that in determining the taxpayer’s liability in your request for advice you ask whether taxpayers may use the 3-year a taxpayer that changes its method_of_accounting for costs subject_to sec_263a the director will ascertain if the amount of the sec_481 adjustment was properly determined if the director determines that the sec_481 adjustment should be modified he is not required to forward such matter to the national_office for consideration average method described in sec_1_263a-7 to revalue non-inventory property alternatively you question whether taxpayers revaluing non-inventory property are entitled to use a 3-year average method because the facts and circumstances revaluation method permits the use of reasonable estimates and procedures you also question whether taxpayers revaluing non-inventory property that fail to satisfy the criteria to use reasonable estimates and procedures under the facts and circumstances revaluation method may use the exception provided in sec_1_263a-7 with respect to non-inventory property is not permitted to use the 3-year average method described in sec_1_263a-7 sec_1_263a-7 provides the rules for revaluing non-inventory property when a taxpayer changes its method_of_accounting for costs subject_to sec_263a with respect to non-inventory property this section provides that a taxpayer changing its method_of_accounting for costs subject_to sec_263a with respect to non-inventory property must use the facts and circumstances method described in sec_1_263a-7 not the 3-year average method provided by sec_1 263a- c v moreover sec_1_263a-7 clearly indicates that the 3-year average method is only applicable to a taxpayer that is changing its method_of_accounting for costs subject_to sec_263a with respect to inventory if the taxpayer uses the dollar-value lifo_method to account for such inventory accordingly the hypothetical taxpayer in this case may not use the 3-year average method provided by sec_1_263a-7 to revalue its non-inventory property respect to non-inventory property may use a 3-year average similar to the 3-year average method described in sec_1_263a-7 as a reasonable estimate and procedure in using the facts and circumstances method provided certain conditions are satisfied reasonable estimates and procedures to revalue inventory under the facts and circumstances revaluation method if the taxpayer lacks and is not able to reconstruct from its books_and_records actual financial and accounting data which is a taxpayer changing its method_of_accounting for costs subject_to sec_263a with sec_1_263a-7 provides that a taxpayer is permitted to use assuming arguendo that a taxpayer is permitted to use reasonable estimates and a taxpayer changing its method_of_accounting for costs subject_to sec_263a with presp-167260-03 required to apply the capitalization_rules of sec_263a to the relevant facts and circumstances surrounding a particular item or cost and the total_amounts for which reasonable estimates and procedures are employed are not significant in comparison to the total restated value including costs previously capitalized under the taxpayer’s former method of the items or costs for the period in question the request for advice does not provide any hypothetical facts to determine whether the total_amounts for which reasonable estimates and procedures are being employed are significant moreover such a determination is factual and therefore normally a proper determination for the examination function procedures under the facts and circumstances revaluation method the taxpayer would be required to demonstrate that the estimates and procedures it is using are reasonable for example if a taxpayer uses available information from its most recent taxable years to estimate the amount of non-inventory property costs applicable to earlier taxable years the taxpayer is required to demonstrate that the information from such taxable years is representative of its earlier taxable years the taxpayer’s use of its most recent taxable years to estimate the amount of non-inventory property costs applicable to its earlier taxable years would not be reasonable if the taxable years used are not representative of the taxpayer’s prior taxable years respect to non-inventory property may not use the exception provided by sec_1 263a- c iii b this section provides that a taxpayer that is unable to use the facts and circumstances revaluation method to revalue its inventory without using reasonable estimates and procedures and that is unable to use reasonable estimates and procedures because of the existence of significant amounts of costs that would require the use of reasonable estimates and procedures must revalue its inventory under either the weighted average method or the 3-year average method d are not permitted to use either the weighted average method provided by sec_1 263a- c iv or the 3-year average method provided by sec_1_263a-7 to make such revaluation instead sec_1_263a-7 specifically provides that a taxpayer changing its method_of_accounting for costs subject_to sec_263a with respect to non-inventory property must use the facts and circumstances revaluation method this section of the regulation does not provide any exceptions in other words the precise language of the section does not provide any indication that the exception provided by sec_1 263a- c iii b was meant to apply to the revaluation of non-inventory property instead a close reading indicates that such exception was meant to only apply to the revaluation of inventory conversely the regulation provides three methods to revalue inventory when a taxpayer changes its method_of_accounting for costs subject_to sec_263a with respect to inventory none of these methods for revaluing inventory refer to the revaluation of non-inventory property instead each method specifically limits its application to taxpayers that are required to revalue non-inventory property under sec_1 263a- the weighted average method and the 3-year average methods were provided presp-167260-03 inventory moreover two of the methods the weighted average method and the 3-year average method limit their application to taxpayers that are using a specified inventory_method ie fifo specific goods lifo or dollar-value lifo in particular the 3-year average method is only available to a taxpayer changing its method_of_accounting for costs subject_to sec_263a relating to inventory if the taxpayer uses the dollar-value lifo inventory_method thus the 3-year average method is not available to a taxpayer that uses either the fifo or the specific goods lifo methods to account for its inventory similarly the 3-year average method is not available to a taxpayer that is changing its method_of_accounting for costs subject_to sec_263a related to non-inventory property by the treasury_department upon the urging of congress to provide taxpayers with inventory estimation methods to compute their sec_481 adjustments the legislative_history of sec_263a clearly indicates that congress preferred that a taxpayer changing its method_of_accounting for costs subject_to sec_263a revalue its property on hand at the beginning of the year using a facts-and-circumstances method however congress realized that information to compute an accurate sec_481 adjustment using a facts-and- circumstances method may not be available where a taxpayer was holding inventory that was acquired or produced a number of years prior to the year_of_change see h_r rep no 99th cong 1st sess vol c b and s rep no 99th cong 2nd sess vol c b in particular congress was concerned that where a taxpayer is considered holding inventory_items that were either acquired for resale produced or manufactured a number of years prior to the effective date of sec_263a the taxpayer may not have available the necessary information to compute a sec_481 adjustment using the facts- and-circumstances approach moreover congress specifically recognized that taxpayers using the lifo_method might have difficulty in assembling sufficient data to restate inventory costs because the valuation of each year’s lifo_layer is dependent upon prior years cost data when the double extension method is used accordingly congress expected that the treasury_department would issue regulations or rulings that would permit taxpayers in these situations to estimate the amount of their revalued inventory using available data moreover the conference reports underlying the enactment of sec_263a specifically suggest that the treasury_department should permit the use of a weighted average method for taxpayers accounting for their inventories under the fifo or specific goods lifo methods and the use of a 3-year average method for taxpayers accounting for their inventories under the dollar-value lifo_method when a taxpayer was changing its method_of_accounting for costs subject_to sec_263a with respect to non-inventory property instead congress specifically provided that sec_263a would generally only apply to costs related to the production of self-constructed assets that were incurred after date see tax_reform_act_of_1986 sec_803 vol c b accordingly taxpayers are generally not required to re- compute the value of non-inventory property that was produced prior to such date on the other hand congress did not express such a desire to permit estimates under both revproc_2002_9 the automatic consent procedures for changes in presp-167260-03 therefore congress did not provide for_the_use_of estimates with regard to non- inventory_property accounting_method and revproc_97_27 the advance consent procedures for changes in accounting_method the director ascertains whether the amount of the sec_481 adjustment is proper and can make any necessary adjustments accordingly if a taxpayer uses estimates and procedures to compute a sec_481 adjustment with regard to a change in method_of_accounting for costs subject_to sec_263a for non- inventory_property when it is not permitted to do so the director may make an appropriate adjustment to the taxpayer’s sec_481 adjustment it may be appropriate for the director to modify the adjustment to reflect a cut-off_method if the taxpayer has not maintained sufficient records to compute a proper sec_481 adjustment compare for example sec_5 of revproc_2002_18 2002_1_cb_678 revproc_2002_18 provides procedures for changes in method_of_accounting imposed by the service this writing may contain privileged information any unauthorized disclosure of this writing may undermine our ability to protect the privileged information if disclosure is determined to be necessary please contact this office for our views please call if you have any further questions


internal_revenue_service department of the treasury washington dc person to contact telephone number refer reply to cc psi 7-plr-110045-00 date date number release index number legend a b c d f g h q r s t dear in a letter dated date you requested rulings regarding your purchase of oil_and_gas_properties you represented that a agreed to purchase certain interests in oil_and_gas producing properties and related production equipment from b production from the interests includes gas produced from the c formation which are qualified_fuels under sec_29 of the internal_revenue_code_of_1986 as amended a will claim the credit under sec_29 only with respect to production from wells which have been determined to produce qualified_fuel by the applicable regulatory authorities in accordance with the natural_gas policy act of as consideration for the subject interests a will pay b cash equal to d a will also be obligated to pay a dollar denominated production_payment and a time denominated production_payment retained by b the dollar denominated production_payment is payable solely out of q of the net_proceeds from the sale of hydrocarbons from the subject interests and will terminate when the total amount_paid equals r the time denominated production_payment entitles b to s of the net_proceeds less amounts paid to satisfy the dollar denominated production_payment the time denominated production_payment terminates on h in addition a is required to make payments to b equal to g of the value of the sec_29 credits generated by the plr-110045-00 subject interests recourse promissory note when the time denominated production_payment terminates the production from the subject interests is expected to equal f percent of the current at the time of creation of the production_payment estimate of the economically recoverable reserves in the subject interests when the production_payment was created the estimated present_value of the production from the subject interests after both of the production payments terminate was greater than of the present_value of the entire production stream from all the subject interests following termination of the production payments a will be entitled to of the income from production attributable to the subject interests as part of the assignment b reserved an interest the contingent_interest in any reserves that might exist after production of of the reserves currently estimated to exist b was granted options to re-acquire the subject interests for greater of dollar_figuret or fair_market_value during four different time windows or circumstances a entered into a management agreement with b for it will be compensated the agreement is typical of those in the industry the rulings requested are a has acquired the entire economic_interest of b in the transferred properties the production payments are properly characterized as purchase_money_mortgage loans under sec_636 of the code any sec_29 credit attributable to production from the properties after their sale to a is attributable to a sec_1_611-1 of the income_tax regulations provides that an economic_interest is possessed in every case in which the taxpayer has acquired by investment any interest in mineral in place and secures by any form of legal relationship income derived from the extraction of the mineral to which the taxpayer must look for a return of the taxpayer’s capital in 310_us_404 the taxpayer received payments which had to be satisfied out of any sale of the fee simple title of the land as well as production of the oil because the taxpayer was not looking entirely upon the oil production for a return on his investment the court found he did not have an economic_interest sec_1_614-1 provides that the term_interest means an economic_interest in a mineral deposit within the meaning of sec_1_611-1 the term includes working or operating interests royalties overriding royalties net profits interests and plr-110045-00 to the extent not treated as loans under sec_636 production payments sec_636 and sec_1_636-1 provide that a production_payment created and retained upon the transfer of the mineral_property burdened by the production_payment is treated as a purchase_money_mortgage loan on the burdened mineral_property sec_1_636-3 defines the term production_payment to mean a right to a specified share of the production from mineral in place if as and when produced or the proceeds from the production the right must be an economic_interest in the mineral in place it may burden more than one mineral_property and the burdened mineral_property need not be an operating_mineral_interest the right must have an expected economic life at the time of its creation of shorter duration than the economic life of one or more of the burdened mineral properties a right to mineral in place that can be required to be satisfied by other than the production of mineral from the burdened mineral_property is not an economic_interest in mineral in place a production_payment may be limited by a dollar amount a quantum of mineral or a period of time a right to mineral in place has an economic life of shorter duration than the economic life of a mineral_property burdened thereby if the right may not reasonably be expected to extend in substantial amounts over the entire productive life of the mineral_property sec_1_636-1 of the regulations states that the payer and payee shall determine their allowable deductions as if the production_payment were a loan and refers to sec_483 of the code sec_483 in turn refers to sec_1272 through for the treatment of original_issue_discount instruments sec_29 provides a credit for qualified_fuel as defined in sec_29 sold by the taxpayer to an unrelated_person during the taxable_year the production of which is attributable to the taxpayer a transaction will be classified as a sale_or_exchange of a mineral_interest in cases in which the owner of a continuing property interest assigns that interest and retains a non-continuing interest in production economic_interest that is an interest that is not coterminous with the productive life of the transferred property in this case b will retain production payments that are limited to a specified dollar amount and a specified time cut off based on a percentage of the reserves currently known to exist at the time the transaction is consummated if additional reserves are found to exist after all reserves currently known to exist have been produced b will acquire a contingent_interest which is a specified percentage of any such additional reserves the production payments are payable solely from production from the burdened properties and have economic lives of shorter duration than the economic lives of the burdened properties accordingly based on the information submitted and the representations made the production payments meet the requirements of sec_1 plr-110045-00 a and are treated as purchase_money_mortgage loans because the interest b retained in any additional reserves does not come into being unless and until the additional reserves not at present believed to exist are determined to exist it is not a continuing interest the recourse promissory note is to be paid from sources other than the subject properties following anderson because the recourse promissory note is payable from sources other than the subject properties the right to receive such payments does not constitute an economic_interest based solely on the representations made and the information submitted we conclude that a has acquired the entire economic_interest of b in the transferred properties the production payments are properly characterized as purchase_money_mortgage loans under sec_636 of the code any sec_29 credit attributable to production from the properties after their sale to a is attributable to a unless and until b reacquires the properties or the contingent_interest arises no opinion is expressed or implied regarding the determination of the buyer’s basis in the subject interests no opinion is expressed or implied regarding the determination of amounts attributable to the interest or principal pursuant to the production payments 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 a copy of this ruling should be attached to your tax_return filed for the year in which the transaction covered by this ruling was consummated a copy is enclosed for this purpose except as ruled above we express or imply no opinion as to the federal tax consequences of this transaction under any other provision of the code specifically we express or imply no opinion whether any fuel produced from the properties is qualified_fuel within the mean of sec_29 however we do point out that following true oil company v commissioner of internal revenue no 10th cir date production from any well which lacks a determination by a jurisdictional agency or review of such determination by ferc does not qualify for the credit under sec_29 sincerely joseph h makurath senior technician reviewer branch


t c summary opinion united_states tax_court joseph n perlman petitioner v commissioner of internal revenue respondent docket no 25769-09s filed date joseph n perlman pro_se james r bamberg for respondent panuthos chief special_trial_judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect when the petition was filed pursuant to sec_7463 the decision to be entered is not reviewable by any other court and this opinion shall not be treated as precedent for any other case unless otherwise indicated subsequent section references are to the internal_revenue_code and all rule references are to the tax_court rules_of_practice and procedure this case is before the court on petitioner’s request for judicial review of an internal_revenue_service irs determination to sustain a notice_of_intent_to_levy to collect petitioner’s federal_income_tax liability the sole issue for decision is whether the irs abused its discretion in determining that collection by levy may proceed at the time the petition was filed petitioner resided in background florida petitioner is a self-employed attorney petitioner filed a joint federal_income_tax return with his wife for reporting a tax of dollar_figure petitioner and his wife did not make estimated_tax payments for but had a withholding credit of dollar_figure and a refundable_credit of dollar_figure neither petitioner nor his wife made any payment with the return but they did make two payments in totaling dollar_figure 1respondent filed a motion for summary_judgment pursuant to rule petitioner filed a response to respondent’s motion and the court set the motion for hearing at trial at the trial session the court took the motion under advisement and proceeded with trial during trial the court heard testimony and received evidence therefore the court will deny respondent’s motion for summary_judgment the irs assessed the unpaid balance as well as additions to tax for failure to timely pay tax under sec_6651 and failure to make estimated_tax payments under sec_6654 on date the irs issued a final notice_of_intent_to_levy and notice of your right to a hearing for the tax_liability on date the irs received a form request for a collection_due_process or equivalent_hearing from petitioner on the form petitioner requested an installment_agreement or offer-in-compromise oic as collection alternatives along with the form petitioner provided certain financial information and documentation as well as a general explanation of his finances at the time of the request on date the irs issued a letter to petitioner acknowledging receipt of the request and scheduling a collection_due_process cdp hearing for date in the letter the irs requested an updated form 433-a collection information statement for wage earners and self-employed individuals and proof of petitioner’s estimated_tax payments for petitioner submitted an incomplete form 433-a which reflected investment accounts with fair market values totaling dollar_figure as well as bank accounts lines of credit three real properties a house an office and a condominium and leased vehicles as assets petitioner also provided a detailed summary of his business income and expenses as well as his social_security_benefits petitioner did not submit evidence regarding any estimated_tax payments or his living_expenses on date during the cdp hearing the settlement officer so informed petitioner that on the basis of the information provided petitioner had the ability to fully pay the liability petitioner agreed that he owed the underlying liability but stated that he had very little equity in his assets and could not fully pay the liability the so informed petitioner that expenses relating to the condominium would not be allowed during the evaluation of a proposed installment_agreement the so gave petitioner until date to provide evidence showing he made estimated_tax payments for and to provide information as to the current equity in his assets in his date response petitioner enclosed a check for dollar_figure which represented his only estimated_tax payment for months of bank statements various deed and property searches for his properties that listed initial mortgage amounts but omitted other mortgages and additional documentation as to the condominium mortgage petitioner did not provide the mortgage information or documents showing the current equity for the house or office nor did he provide a list of his living_expenses petitioner did not submit a form_656 offer_in_compromise or propose a payment schedule or amount for an installment_agreement while the so had not received a completed form 433-a the so determined that petitioner still had the ability to fully pay the liability on the basis of the updated information petitioner provided on date the irs issued a notice_of_determination sustaining the proposed levy on date petitioner timely filed a petition with the court disputing the notice_of_determination discussion we have jurisdiction under sec_6330 to review respondent’s determination that the notice_of_intent_to_levy was proper and that respondent may proceed to collect by levy in reviewing the commissioner’s decision to sustain collection actions where the validity of the underlying tax_liability is properly at issue the court reviews the commissioner’s determination of the underlying tax_liability de novo 114_tc_604 114_tc_176 the court reviews any other administrative determination regarding proposed collection actions for abuse_of_discretion sego v commissioner supra pincitethe pension_protection_act of publaw_109_280 120_stat_1019 amended sec_6330 and granted this court jurisdiction over all sec_6330 determinations made after date 129_tc_58 n goza v commissioner supra pincite an abuse_of_discretion occurs when the exercise of discretion is without sound basis in fact or law 125_tc_301 affd 469_f3d_27 1st cir the taxpayer has the burden of proving that the commissioner’s determination to sustain a proposed collection action is an abuse_of_discretion rule a at the collection hearing a taxpayer may raise any relevant issues relating to the unpaid tax or proposed levy including spousal defenses challenges to the appropriateness of the collection actions and offers of collection alternatives sec_6330 in addition he may challenge the existence or amount of the underlying tax_liability but only if he did not receive a notice_of_deficiency or otherwise have an opportunity to dispute such liability sec_6330 petitioner does not dispute the underlying liability but instead he asserts he was denied an opportunity to have an oic or an installment_agreement considered offer-in-compromise the secretary may compromise any civil or criminal case arising under the internal revenue laws sec_7122 murphy v commissioner supra pincite sec_7122 provides that the secretary shall prescribe guidelines for officers and employees of the internal_revenue_service to determine whether an offer-in- compromise is adequate and should be accepted to resolve a dispute taxpayers who wish to propose an oic must submit a form_656 see godwin v commissioner tcmemo_2003_289 affd 132_fedappx_785 11th cir we have consistently held that the commissioner has not abused his discretion for failing to consider an oic where a taxpayer failed to submit an offer to the appeals officer 124_tc_69 petitioner did not submit a form_656 complete financial information or any proposed settlement terms therefore the commissioner has not abused his discretion in failing to consider an oic or any less formal collection alternative installment_agreement sec_6159 gives the secretary discretionary authority to enter into written agreements with any taxpayer under which such taxpayer is allowed to make payment on any_tax in installment payments if the secretary determines that such agreement will facilitate full or partial collection of such liability the commissioner has the discretion to accept or reject an installment_agreement proposed by a taxpayer see sec_301_6159-1 proced admin regs we review the commissioner’s rejection of an installment_agreement for abuse_of_discretion see 123_tc_1 affd 412_f3d_819 7th cir although petitioner indicated his interest in an installment_agreement he did not propose any specific payment amounts or installment schedule additionally petitioner’s updated but incomplete information still reflected his ability to fully pay the liability when a hearing officer is unable or refuses to consider collection alternatives because of a taxpayer’s failure to provide financial information courts have held that there was no abuse_of_discretion schwersensky v commissioner tcmemo_2006_178 see also lance v commissioner tcmemo_2009_129 we conclude that respondent did not abuse his discretion in failing to consider an installment_agreement we have considered the parties’ arguments and to the extent not discussed herein we conclude the arguments are irrelevant moot or without merit to reflect the foregoing an appropriate order and decision will be entered for respondent


internal_revenue_service number release date index numbers ----------------------------- ------------------------------------- ------------------------ ------------------------------------------------------------ ------- --------------------------------------- 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 plr-112155-09 date date legend x --------------------------------------------------- -------------------------------------- d1 d2 country ------------------- ------------------- --------- dear --------------- this is in response to a letter dated date submitted on behalf of x requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations to file an election under sec_301_7701-3 to be treated as a disregarded_entity for federal tax purposes facts according to the information submitted x was formed on d1 under the laws of country x intended to be treated as a disregarded_entity for federal tax purposes effective d2 however x inadvertently failed to timely file form_8832 entity classification election to be treated as a disregarded_entity for federal tax purposes effective d2 plr-112155-09 law and analysis sec_301_7701-3 provides that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes an eligible_entity with a single owner can elect to be classified as an association or to be disregarded as an entity separate from its owner sec_301_7701-3 provides guidance on the classification of a foreign eligible_entity for federal tax purposes generally a foreign eligible_entity is treated as an association if all members have limited_liability unless the entity makes an election to be treated otherwise a foreign eligible_entity with a single owner having limited_liability may elect to be treated as a disregarded_entity pursuant to the rules of sec_301_7701-3 sec_301_7701-3 and iii provides that an entity classification election must be filed on form_8832 and can be effective up to days prior to the date the form is filed or up to months after the date the form is filed sec_301_7701-3 provides that an election under sec_301_7701-3 must be signed by - a each member of the electing entity who is an owner at the time the election is filed or b any officer manager or member of the electing entity who is authorized under local law or the entity’s organizational documents to make the election and who represents to having such authorization under penalties of perjury sec_301_7701-3 provides that if a purchasing_corporation makes an election under sec_338 regarding an acquired subsidiary an election under sec_301 c i for the acquired subsidiary can be effective no earlier than the day after the acquisition_date within the meaning of sec_338 under sec_301_9100-1 the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i section b defines the term regulatory election as including an election whose due_date is prescribed by a regulation published in the federal_register sec_301_9100-1 through provide the standards that the commissioner will use to determine whether to grant an extension of time to make an election sec_301_9100-1 sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides rules for requesting extensions of time for regulatory elections that do not meet the requirements of sec_301_9100-2 plr-112155-09 requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government conclusion based solely on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-3 have been satisfied as a result x is granted an extension of time of days from the date of this letter to file a properly executed form_8832 effective d2 with the appropriate service_center to elect to be classified as a disregarded_entity a copy of this letter should be attached to the form_8832 except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely curt g wilson curt g wilson associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes


internal_revenue_service number release date index number ------------------------------------------------------ ------------------------------- -------------------------------------- ----------------------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ---------------- id no ------------- telephone number -------------------- refer reply to cc psi br01 plr-142364-07 date date -------------------------------------------------------------------------------- b x a lp ---------------------------------- ------------------------------------ legend ----------------------------------------------------------- ------------------------------------------------------------------------------------------------------------ ----------------------------------------------------------- ------------------------------------------------------------ ------------------------------------------------------------ ------------------------------------------------------------ ------------------------------- ------------------------- ---------------------- ---------------------- ------------------ ----------------- year date state date date ------- c plr-142364-07 dear ---------------------- behalf of x requesting relief for an inadvertent termination under sec_1362 of the internal_revenue_code this letter responds to your request dated date submitted on facts based solely on the materials submitted and representations made within we understand the relevant facts to be as follows x was incorporated on date in accordance with the laws of state x elected to be treated as an s_corporation effective date on date based on the advice of counsel all of the shares of x were transferred to lp all of the partners of lp a b and c now deceased reported their pro-rata share of all income gain loss and deduction in the same amount as if they held stock in the s_corporation instead of lp in year the owners of lp engaged the services of a new accountant the account determined that the transfer of the shares of x to lp terminated x’s s election based on the accountant’s advice lp distributed all of its x stock to the partners of lp a and b in year motivated by tax_avoidance or retroactive tax planning further since date the partners of lp reported their pro-rata share of all income gain loss and deduction in the same amount as if they held the stock in the s_corporation x and its shareholders have agreed to make such adjustments as the service may require with respect to all periods since date x represents that the termination of x’s s election was inadvertent and was not law and analysis sec_1361 provides that a small_business_corporation means a sec_1361 defines a s_corporation as a small_business_corporation for which an election under sec_1362 is in effect for the taxable_year domestic_corporation that is not an ineligible_corporation and does not have 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 terminated whenever at any time on or after the first day of the first taxable_year for which a corporation is an s_corporation such corporation ceases to be a small_business_corporation a termination of an s_corporation_election under sec_1362 is effective on and after the date of cessation corporation was terminated under sec_1362 or the secretary determines that the circumstances resulting in such termination were inadvertent no sec_1362 provides that an election under sec_1362 shall be sec_1362 provides that if an election under sec_1362 by an plr-142364-07 later than a reasonable period of time after discovery of the event resulting in the ineffectiveness steps were taken 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 sec_1362 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 ineffectiveness the corporation shall be treated as an s_corporation during the period specified by the secretary conclusion based solely on the facts as presented in the materials submitted and the representations made within those materials we conclude that x’s s_corporation_election terminated on date when the shares of x were transferred to lp an ineligible shareholder we conclude however that this termination was inadvertent within the meaning of sec_1362 accordingly pursuant to the provisions of sec_1362 x will be treated as an s_corporation effective d3 and thereafter provided that x’s election to be an s_corporation was not otherwise invalid or terminated under sec_1362 concerning the federal tax consequences of the above described facts under any other provision of the code provides that it may not be used or cited as precedent will be sent to your authorized representatives this ruling is directed only to the taxpayer that requested it sec_6110 except as specifically set forth above no opinion is expressed or implied pursuant to the power_of_attorney on file with this office a copy of this latter ruling sincerely s dianna k miosi chief branch passthroughs special industries copy of this letter copy for sec_6110 purposes enclosures cc


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc p si 1-plr-111744-01 date date x w y z date date date this letter responds to a letter dated date written on behalf of x requesting a ruling that x be granted an extension of time in which to elect to treat its first tier subsidiaries w and y and its second tier subsidiary z as qualified subchapter_s subsidiaries qsubs facts according to the information submitted x was formed on date on the same date x incorporated its wholly owned subsidiary w on date the shareholders of y a corporation contributed their shares in y to x in exchange for x stock x elected to be treated as an s_corporation effective date from the date on which x elected to be treated as an s_corporation x intended to have w and y treated as qsubs however x inadvertently failed to timely file qsub elections for w and y plr-111744-01 on date y incorporated z from the date of incorporation of z x intended to treat z as a qsub however in the course of preparing to file a qsub election for z x discovered that because x had not filed a qsub election for y it was not possible for x to file a qsub election for z law and analysis sec_1361 defines the term qualified_subchapter_s_subsidiary as a domestic_corporation which is not an ineligible_corporation as defined in sec_1361 if an s_corporation holds percent of the stock of the corporation and that s_corporation elects to treat the subsidiary as a qsub the election is made by filing form_8869 under sec_301_9100-1 of the procedure and administration regulations the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the code except subtitles e g h and i if the taxpayer demonstrates to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and that granting the relief will not prejudice the interests of the government sec_301_9100-1 defines the term regulatory election as including an election whose deadline is prescribed by a notice published in the internal_revenue_bulletin sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make an election section provides automatic extensions of time for making certain elections but does not apply to qsub elections sec_301_9100-3 provides extensions of time for making elections that do not meet the requirements of sec_301_9100-2 requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government conclusions based solely on the facts submitted and the representations made the requirements of sec_301_9100-1 and sec_301_9100-3 have been satisfied as a result x is granted an extension of time of sixty days from the date of this letter to make an election to treat its wholly owned subsidiaries w and y as qsubs effective date in addition x is granted an extension of time of sixty days from the date of this letter to make an election to treat y’s wholly owned subsidiary z as a qsub effective date x should submit the properly completed forms to the relevant service_center a copy of this letter should be attached to each of the forms filed with the service_center plr-111744-01 except as specifically set forth above no opinion is expressed or implied concerning the federal tax consequences of the facts described above under any other provision of the code specifically no opinion is expressed concerning whether x is a valid s_corporation or whether its subsidiaries w y and z are valid qsubs this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent pursuant to the power_of_attorney on file with this office a copy of this letter is being sent to the taxpayer sincerely yours paul f kugler associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes