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-111641-07 date date legend legend distributing controlled sub sub sub sub sub --------------------- ------------------------------- ----------------------- ------------------------------------- ------------------------------- ----------------------- --------------------------------------------------- ------------------------------- ----------------------- --------------------------------------------- ------------------------------- ----------------------- ------------------------------------------------- ------------------------------- ----------------------- --------------------------------------------------- ------------------------------- ----------------------- -------------------------------------------------------- ------------------------------- ----------------------- plr-111641-07 sub sub sub sub sub sub sub sub fsub fsub fsub --------------------------------------------------------- ------------------------------- ----------------------- --------------------------------------------------- ------------------------------- ----------------------- ------------------------------------------------------ ------------------------------- ----------------------- ----------------------------- ------------------------------ ----------------------- ---------------------------------------------- ------------------------------- ----------------------- ------------------- ------------------------------- ----------------------- ------------------------------------------- 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---------------------------------------------------- fsub fsub fsub fsub fsub fsub fnewco llc llc llc plr-111641-07 business a business b date a date b date c date d date e date f date g date h a b c d e f g h ------------------------------------------------ ------------------------------------------------------------- ------------------------------------------------------------- ------------------------------------------------------------- ------------------------------ ------------------------------------------------------------- ------------------------------------------------------------- ------------------------------------------------------------- ------------- ------- ------- - ------- ---------------------- --------------------- ------------------------- ------- ------- -------- -------- -------------- -------------- - ---- ---------- ---- -- plr-111641-07 i country a q -- --------------------- ------------ - the rulings contained in this letter are based on facts and representations this letter responds to your date letter requesting rulings on certain dear ------------------- federal_income_tax consequences of a series of proposed transactions the information submitted in that request and later correspondence is summarized below 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 process in particular this office has not reviewed any information pertaining to whether any distribution each described below i satisfies the business_purpose requirement of sec_1_355-2 ii is used principally as a device for the distribution of earnings_and_profits of the distributing_corporation or the controlled_corporation or both see sec_355 and sec_1_355-2 and iii is part of a plan or series of related transactions pursuant to which one or more persons will acquire directly or indirectly stock representing a 50-percent_or_greater_interest in any distributing_corporation or controlled_corporation see sec_355 and sec_1_355-7 summary of facts distributing is the common parent of an affiliated_group_of_corporations that files a consolidated federal_income_tax return distributing is a publicly traded domestic_corporation with a single class of common_stock outstanding distributing directly owns all of the outstanding interests in llc and llc each of which is a disregarded_entity for federal_income_tax purposes and all of the outstanding_stock of sub sub sub sub and sub distributing also owns all of the outstanding common_stock of sub and a less than of the outstanding common_stock of sub sub owns all the remaining b of the outstanding common_stock of sub sub owns all of the outstanding_stock of fsub and fsub fsub owns all of the outstanding_stock of fsub sub owns all of the outstanding_stock of fsub a disregarded_entity for llc owns all of the outstanding_stock of sub and sub sub owns all of plr-111641-07 federal_income_tax purposes fsub owns all of the outstanding_stock of fsub sub also own securities of fsub the equity securities that distributing has treated as equity of fsub for federal_income_tax purposes fsub owns all of the outstanding_stock of fsub and fsub and indirectly owns all of the outstanding_stock of fsub on date a fsub transferred to fsub all of the outstanding_stock of fsub a disregarded_entity for federal_income_tax purposes and then on date b also transferred cash to fsub the fsub transfers the outstanding_stock of controlled sub and sub from date c until date d controlled owned all the stock of sub which converted on date d to llc controlled continues to own all of the outstanding interests in llc a disregarded_entity for federal_income_tax purposes and all of the stock of sub distributing is engaged through its subsidiaries in several businesses including business a and business b distributing has submitted financial information indicating that each of business a and business b as conducted by fsub has had gross_receipts and operating_expenses representing the active_conduct_of_a_trade_or_business for each of the past five years may continue to hold after the distribution certain debt instruments of controlled as q q debt sub may also hold some stock of controlled as q after the distribution taken by the named defendants in the litigation beginning around date e the litigation will not go to trial until after the distribution as defined below and even if the litigation is settled before the distribution occurs it is possible that llc may receive some or all of the proceeds of any such settlement after the distribution in conjunction with the proposed transaction controlled will declare a dividend payable to sub the special dividend the special dividend will obligate controlled to pay sub an amount not to exceed a specified amount based on the outcome of the litigation consistent with its historical dividend practices controlled on date f paid a cash dividend of dollar_figurec to sub additionally before the distribution is consummated controlled will declare and pay one or more cash dividends to sub in an aggregate amount currently expected to be at least dollar_figured collectively the cash dividends business reasons including a to allow the management of each of distributing and controlled to focus its efforts on more closely aligned respective firm-wide strategic priorities b to increase the ability of controlled to pursue strategic transactions including by using its own equity as an acquisition currency c to enhance the ability of distributing desires to separate business b from its other businesses for several as part of distributing’s conduct of business a sub and fsub hold and llc has brought a lawsuit the litigation seeking damages for certain actions plr-111641-07 controlled to attract retain and properly incentivize key employees particularly through the use of its own equity and d to eliminate the possibility that distributing or controlled will be placed at a competitive disadvantage relative to its peers because potential clients and strategic partners view controlled or distributing respectively as a competitor proposed transaction ii v iii iv llc will distribute the stock of controlled to distributing fsub will create fnewco and contribute all of its assets which may sub will merge with and into llc with llc surviving the sub to effect the separation of business a and business b distributing has fsub will distribute all of its assets subject_to its liabilities to fsub in proposed the following series of transactions collectively the proposed transaction i merger llc will contribute the stock of sub preferred_stock of sub and certain other assets received from sub in the sub merger to sub the llc contribution a complete_liquidation of fsub under country a law the fsub liquidation include cash and liabilities associated with business b in exchange for all the shares of fnewco the fsub contribution cash in a transaction that is disregarded for federal_income_tax purposes vii fsub will contribute all of the stock of fsub and possibly cash to fnewco in exchange for shares of fnewco together with fsub contribution the fsub contribution viii fsub will distribute some of the stock of fnewco to fsub and the remainder of the stock of fnewco to sub in respect of the equity securities and fsub will then transfer the stock of fnewco it receives to sub the two transactions collectively the fsub internal distribution the sub internal distribution internal distribution fsub will transfer all of the stock of fnewco to fsub in exchange for sub will distribute all of the stock of fnewco to sub and distributing sub will distribute the stock of fnewco to distributing the sub vi ix x xi for state law purposes sub will merge with and into llc xiv distributing will distribute all of the stock of controlled pro_rata to xii distributing will contribute all of the stock of sub sub sub and in conjunction with the proposed transaction distributing and controlled will xiii controlled will contribute all of the stock of fnewco to sub controlled plr-111641-07 fnewco the contributed subsidiaries to controlled in exchange for additional shares of controlled common_stock and the special dividend the contribution pursuant to the plan_of_reorganization distributing will within one year of receipt of any cash paid after the distribution in respect of the special dividend special dividend cash a repay liabilities owed to creditors of distributing in accordance with sec_361 and or b distribute to distributing shareholders either by repurchases of distributing stock or by making a cash distributions may also contribute the stock of sub and sub to sub at a later time distributing’s shareholders the distribution enter into several agreements the transaction agreements relating to the separation of business b from distributing’s other businesses and certain continuing transactions between the companies including among others a tax-sharing agreement and an agreement for services during a transition_period which is generally not expected to exceed e months with compensation_generally based on allocated costs including corporate overhead transition services the transaction agreements will also include i agreements relating to post-distribution intercompany funding provided by distributing to controlled and its subsidiaries the intercompany funding arrangements which is not expected to exceed dollar_figuref will have a term not in excess of g months and will bear an arm’s length rate of interest and otherwise have arm’s length commercially reasonable terms for financings of this type ii an agreement with a term of g months pursuant to which funds belonging to certain clients of distributing may be placed on deposit with sub iii a license agreement pursuant to which controlled and its subsidiaries will be entitled to use on a royalty-free basis certain distributing trademarks in connection with business b for up to h years after the distribution iv certain subleases with respect to shared facilities on rental and other terms consistent with arm’s length commercially reasonable terms for agreements of this type v an agreement relating to the provision of certain services by subsidiaries of distributing and controlled to each other on an arm’s length basis for a period not to exceed e months and vi an agreement relating to the provision by distributing of certain business a services to controlled for a period of h years on terms consistent with arm’s length agreements between unrelated parties business into certain financial contracts the contracts with a subsidiary of in addition each of sub and llc has entered in the ordinary course of in connection with the distribution controlled and sub will enter into a plr-111641-07 distributing the contracts have arm’s length terms and have varying maturity dates ranging from date g to date h the contracts are expected to remain outstanding after the distribution in accordance with their terms committed credit facility the credit facility the lead arrangers on the credit facility will be unrelated financial institutions who will syndicate the commitments under the credit facility distributing or a subsidiary may participate in the syndicate on the same terms and conditions as other members of the syndicate which terms and conditions will be negotiated at arm’s length by the lead arrangers on behalf of the syndicate and will be customary commercial terms the term for any loan from distributing or a subsidiary that will be outstanding under the credit facility will be less than i years representations c a b distributing has no plan or intention to sell or otherwise dispose_of any of following the sub merger distributing will continue the historic_business distributing makes the following representations regarding the sub merger the assets of sub acquired in the sub merger except for i dispositions made in the ordinary course of business ii the llc contribution and iii the distribution the liabilities of sub assumed within the meaning of sec_357 by distributing were incurred by sub in the ordinary course of its business and are associated with the assets transferred of sub or use a significant portion of sub 7’s historic_business_assets in a business within the meaning of sec_1_368-1 was issued acquired or will be settled at a discount in sec_368 and iv within the meaning of sec_368 distributing will equal or exceed the sum of i the liabilities assumed as determined under sec_357 by distributing in connection with the sub merger and ii the amount no two parties to the sub merger are investment companies as defined sub is not under the jurisdiction of a court in a title_11_or_similar_case no intercorporate indebtedness exists between sub and distributing that the sub merger will be carried out to facilitate the distribution the total fair_market_value of the assets of sub transferred to g d h e f j l i k no shares of fsub stock will have been redeemed during the three distributing makes the following representations regarding the fsub fsub on the date of the adoption of the plan_of_liquidation and at all plr-111641-07 of liabilities if any owed by sub to distributing that are discharged or extinguished in the sub merger liquidation times until the final liquidating_distribution is completed will be the owner of at least percent of the single outstanding class of fsub stock years preceding the adoption of the plan of complete_liquidation of fsub fsub will adopt a plan_of_liquidation specifying that the final liquidating_distribution is to be completed within three years from the close of the taxable_year of fsub in which the first liquidating_distribution is made as soon as the first liquidating_distribution has been made fsub will cease to be a going concern and its activities will be limited to winding up its affairs paying its debts and distributing its remaining assets to its shareholder time except for acquisitions occurring more than three years prior to the date of adoption of the plan_of_liquidation and in the fsub transfers except for dispositions in the ordinary course of business dispositions occurring more than three years before the adoption of the plan_of_liquidation and transfers occurring as part of the proposed transaction will not be preceded or followed by the reincorporation in or transfer or sale to a recipient corporation recipient of any of the businesses or assets of fsub if persons holding directly or indirectly more than percent in value of the fsub stock also hold directly or indirectly more than percent of the stock in recipient for purposes of this representation ownership will be determined by application of the constructive_ownership rule_of sec_318 as modified by sec_304 in the fsub contribution approximately i of fsub 6’s gross assets by book_value will be transferred to fnewco fsub 8’s transfer of assets to fnewco in exchange for stock of fnewco is not an exchange described in sec_1_367_b_-4 sec_1_367_b_-4 or sec_1_367_b_-4 m fsub will retain no assets following the final liquidating_distribution no fsub assets have been or will be disposed of by fsub or fsub fsub will not have acquired assets in any nontaxable_transaction at any except for the fsub contribution the liquidation of fsub into fsub p o n t r s u q fsub will report all earned_income represented by assets that will be before the adoption of the plan_of_liquidation no fsub assets will have the fair_market_value of the assets of fsub will exceed its liabilities both plr-111641-07 been distributed in_kind transferred or sold to fsub except for i transactions occurring in the normal course of business and ii transfers occurring more than three years before adoption of the plan_of_liquidation distributed to its shareholders such as receivables being reported on a cash_basis unfinished construction contracts commissions due etc at the date of the adoption of the plan of complete_liquidation and immediately prior to the time the first liquidating_distribution is made there is no intercorporate debt existing between fsub and fsub and none has been cancelled forgiven or discounted except for transactions that occurred more than three years before the date of adoption of the liquidation plan or alternatively if such date is later except for transactions occurring before the date fsub initially acquired fsub under sec_501 or any other provision of the code all other transactions undertaken contemporaneously with in anticipation of in conjunction with or in any way related to the fsub liquidation have been fully disclosed w none of the property distributed by fsub to fsub has been used by fsub in the conduct of a u s trade_or_business within the ten-year period ending on the date of distribution contribution and fsub internal distribution or securities no part of the fnewco stock to be distributed by fsub will be received by sub as a creditor employee or in any capacity other than that of a shareholder of the corporation income_tax purposes distributing makes the following representations regarding the fsub indebtedness if any owed by fnewco to fsub will not constitute stock the equity securities of fsub owned by sub are equity for federal fsub is not an organization that is exempt from federal_income_tax z y v x cc the fsub internal distribution will be carried out for the purpose of ee the total fair_market_value of the assets transferred to fnewco in the aa with respect to business a and business b the five years of financial bb following the fsub internal distribution the fsub sag and fnewco dd the fsub internal distribution is not being used principally as a device plr-111641-07 information submitted on behalf of the fsub sag is representative of fsub sag’s present operations and with regard to such sag there have been no substantial operational changes since the date of the last financial statements submitted will continue the active_conduct of its business independently and with its separate employees or employees of affiliated corporations facilitating the distribution for the distribution of the earnings_and_profits of fsub or fnewco or both fsub contribution will exceed the sum of i the amount of liabilities if any assumed within the meaning of sec_357 by fnewco in connection with the exchange and ii the amount of liabilities if any owed to fnewco by fsub that are discharged or extinguished in connection with the exchange and iii the amount of the cash and the fair_market_value of any other_property other than stock and securities permitted to be received under sec_361 without the recognition of gain if any received by fsub in connection with the exchange the fair_market_value of the assets of fnewco will exceed the amount of its liabilities immediately_after_the_exchange assets transferred to fnewco by fsub each will equal or exceed the sum of i the liabilities assumed within the meaning of sec_357 by fnewco and ii the fair_market_value of any property within the meaning of sec_361 or any money transferred by fnewco to fsub5 that is distributed to the shareholders or the creditors of fsub to which the transferred assets are subject were incurred in the ordinary course of business and are associated with the assets being transferred contribution will be equal to or exceed the adjusted_basis of those assets other than i trade account indebtedness created in the ordinary course of business through continuing transactions at terms comparable to those which could be obtained in an arm’s length transaction ii payables for transition services and iii indebtedness arising under the intercompany funding arrangements and the credit facility no inter-corporate debt will exist between fsub and fnewco at the time of or after the fsub internal distribution hh the total fair_market_value of the assets transferred in the fsub the total adjusted_basis of the assets and the fair_market_value of the gg the liabilities assumed in the fsub internal distribution and the liabilities ff ii ll jj immediately after the fsub internal distribution as defined in mm for purposes of sec_355 immediately after the fsub internal kk no two parties to the fsub internal distribution are investment payments made in connection with all continuing transactions other than plr-111641-07 transition services if any between fsub and its affiliates and fnewco and its affiliates will be for fair_market_value based on terms and conditions arrived at by the parties bargaining at arm’s length companies as defined in sec_368 and iv sec_355 either no person will hold a 50-percent_or_greater_interest within the meaning of sec_355 in fsub or fnewco if any person holds a 50-percent_or_greater_interest within the meaning of sec_355 in any disqualified_investment_corporation within the meaning of sec_355 such person will have held such interest in such corporation immediately before the fsub internal distribution or fsub or fnewco will not be a disqualified_investment_corporation within the meaning of sec_355 distribution no person determined after applying the aggregation rules of sec_355 will hold stock possessing percent or more of the total combined voting power of all classes of fsub stock entitled to vote or percent or more of the total value of shares of all classes of fsub stock that was acquired by purchase as defined in sec_355 and during the five-year period determined after applying sec_355 ending on the date of the fsub internal distribution distribution no person determined after applying the aggregation rules of sec_355 will hold stock possessing percent or more of the total combined voting power of all classes of fnewco stock entitled to vote or percent or more of the total value of shares of all classes of fnewco stock that was either i acquired by purchase as defined in sec_355 and during the five year period determined after applying sec_355 ending on the date of the fsub internal distribution or ii attributable to distributions on fsub stock that was acquired by purchase as defined in sec_355 and during the five year period determined after applying sec_355 ending on the date of the fsub internal distribution oo the fsub internal distribution is not part of a plan or series of related transactions within the meaning of sec_1_355-7 pursuant to which one or more persons will acquire directly or indirectly stock representing a 50-percent_or_greater_interest within the meaning of sec_355 in fsub or fnewco including any predecessor or successor of any such corporation nn for purposes of sec_355 immediately after the fsub internal tt rr uu indebtedness if any owed by fnewco to sub will not constitute stock sub will be a sec_1248 shareholder within the meaning of sec_1_367_b_-2 fnewco will not hold any united_states real_property interests as defined qq fsub and fnewco will be controlled_foreign_corporations within the ss fsub and fnewco will not be passive foreign investment companies pp fsub 5’s transfer of assets to fnewco in exchange for stock of fnewco in distributing makes the following representations regarding the sub internal plr-111641-07 the fsub contribution is not an exchange described in sec_1_367_b_-4 sec_1 b -4 b i or sec_1_367_b_-4 meaning of sec_957 immediately before and after the distribution with respect to fsub and fnewco immediately before and after the distribution pfics within in the meaning of sec_1297 immediately before or after the distribution in sec_897 immediately before or after the distribution distribution or securities sub and distributing as a creditor employee or in any capacity other than that of a shareholder of the corporation ww the five years of financial information submitted on behalf of the sub sag with respect to business a is representative of sub sag’s present operations and with regard to such sag there have been no substantial operational changes since the date of the last financial statements submitted active_conduct of its business independently and with its separate employees or employees of affiliated corporations respect to business b as previously conducted by fsub is representative of fnewco’s present operations and with regard to fnewco there have been no substantial operational changes with respect to such business since the date of the last financial statements submitted zz following the sub internal distribution fnewco will continue the active_conduct of its business independently and with its separate employees or employees of affiliated corporations vv no part of the fnewco stock to be distributed by sub will be received by yy the five years of financial information submitted on behalf of fnewco with xx following the sub internal distribution the sub sag will continue the aaa the sub internal distribution will be carried out for the purpose of ddd immediately before the sub internal distribution items of income gain bbb the sub internal distribution is not being used principally as a device for plr-111641-07 facilitating the distribution the distribution of the earnings_and_profits of sub or fnewco or both ccc other than i trade account indebtedness created in the ordinary course of business through continuing transactions at terms comparable to those which could be obtained in an arm’s length transaction ii payables for transition services and iii indebtedness arising under the intercompany funding arrangements and the credit facility no inter-corporate debt will exist between sub and fnewco at the time of or after the sub internal distribution loss deduction and credit will be taken into account as required by the applicable intercompany_transaction regulations see sec_1_1502-13 and sec_1 as in effect before the publication of t d 1995_32_irb_6 and as currently in effect sec_1_1502-13 as published by t d further sub 6’s excess_loss_account with respect to the stock of fnewco if any will be included in income before the sub internal distribution see sec_1_1502-19 transition services if any between sub and its affiliates and fnewco and its affiliates will be for fair_market_value based on terms and conditions arrived at by the parties bargaining at arm’s length as defined in sec_368 and iv g either no person will hold a 50-percent_or_greater_interest within the meaning of sec_355 in sub or fnewco if any person holds a 50-percent_or_greater_interest within the meaning of sec_355 in any disqualified_investment_corporation within the meaning of sec_355 such person will have held such interest in such corporation immediately before the sub internal distribution or sub or fnewco will not be a disqualified_investment_corporation within the meaning of sec_355 no person determined after applying the aggregation rules of sec_355 will hold stock possessing percent or more of the total combined voting power of all classes of sub stock entitled to vote or percent or more of the total value of shares of all classes of sub stock that was acquired by purchase as defined in sec_355 and fff no two parties to the sub internal distribution are investment companies hhh for purposes of sec_355 immediately after the sub internal distribution eee payments made in connection with all continuing transactions other than ggg immediately after the sub internal distribution as defined in jjj iii the sub internal distribution is not part of a plan or series of related for purposes of sec_355 immediately after the sub internal distribution plr-111641-07 during the five-year period determined after applying sec_355 ending on the date of the sub internal distribution no person determined after applying the aggregation rules of sec_355 will hold stock possessing percent or more of the total combined voting power of all classes of fnewco stock entitled to vote or percent or more of the total value of shares of all classes of fnewco stock that was acquired by purchase as defined in sec_355 and during the five year period determined after applying sec_355 ending on the date of the sub internal distribution or ii attributable to distributions on sub stock that was acquired by purchase as defined in sec_355 and during the five year period determined after applying sec_355 ending on the date of the sub internal distribution transactions within the meaning of sec_1_355-7 pursuant to which one or more persons will acquire directly or indirectly stock representing a 50-percent_or_greater_interest within the meaning of sec_355 in sub or fnewco including any predecessor or successor of any such corporation sec_957 immediately before and after the distribution meaning of sec_1_367_b_-2 with respect to fnewco immediately before the distribution and sub and distributing will be sec_1248 shareholders with respect to fnewco immediately thereafter distribution certification provisions under sec_1_367_e_-1 in order to establish that sub and distributing are qualifying u s persons for purposes of applying sec_1_367_e_-1 procedures established under sec_1_367_b_-5 in order to establish that sub and distributing are corporations for purposes of applying sec_1_367_b_-5 distribution or securities ooo with regard to the distribution sub will comply with the reporting nnn with regard to the distribution sub will comply with the identification and ppp indebtedness if any owed by fnewco to sub will not constitute stock distributing makes the following representations regarding the sub internal kkk fnewco will be a controlled_foreign_corporation within the meaning of sub distributing and sub will be sec_1248 shareholders within the fnewco will not be a pfic immediately before or after the mmm lll qqq no part of the fnewco stock to be distributed by sub will be received by ttt the five years of financial information submitted on behalf of fnewco with rrr the five years of financial information submitted on behalf of the sub sss following the sub internal distribution the sub sag will continue the plr-111641-07 distributing as a creditor employee or in any capacity other than that of a shareholder of the corporation sag with respect to business a is representative of the sag’s present operations and with regard to such sag there have been no substantial operational changes since the date of the last financial statements submitted active_conduct of its business independently and with its separate employees or employees of affiliated corporations respect to business b as previously conducted by fsub is representative of fnewco’s present operations and with regard to fnewco there have been no substantial operational changes with respect to such business since the date of the last financial statements submitted uuu following the sub internal distribution fnewco will continue the active_conduct of its business independently and with its separate employees or employees of affiliated corporations facilitating the distribution the distribution of the earnings_and_profits of sub or fnewco or both xxx other than i trade account indebtedness created in the ordinary course of business through continuing transactions at terms comparable to those which could be obtained in an arm’s length transaction ii payables for transition services and iii indebtedness arising under the intercompany funding arrangements and the credit facility no inter-corporate debt will exist between sub and fnewco at the time of or after the sub internal distribution loss deduction and credit will be taken into account as required by the applicable intercompany_transaction regulations see sec_1_1502-13 and sec_1 as in effect before the publication of t d 1995_32_irb_6 and as currently in effect sec_1_1502-13 as published by t d further sub 5’s excess_loss_account with respect to the stock of fnewco if any will be included in income before the sub internal distribution see sec_1_1502-19 vvv the sub internal distribution will be carried out for the purpose of immediately before the sub internal distribution items of income gain www the sub internal distribution is not being used principally as a device for yyy bbbb immediately after the sub internal distribution as defined in zzz payments made in connection with all continuing transactions other than cccc for purposes of sec_355 immediately after the sub internal distribution aaaa no two parties to the sub internal distribution are investment companies plr-111641-07 transition services if any between sub and its affiliates and fnewco and its affiliates will be for fair_market_value based on terms and conditions arrived at by the parties bargaining at arm’s length as defined in sec_368 and iv sec_355 either no person will hold a 50-percent_or_greater_interest within the meaning of sec_355 in sub or fnewco if any person holds a 50-percent_or_greater_interest within the meaning of sec_355 in any disqualified_investment_corporation within the meaning of sec_355 such person will have held such interest in such corporation immediately before the sub internal distribution or sub or fnewco will not be a disqualified_investment_corporation within the meaning of sec_355 no person determined after applying the aggregation rules of sec_355 will hold stock possessing percent or more of the total combined voting power of all classes of sub stock entitled to vote or percent or more of the total value of shares of all classes of sub stock that was acquired by purchase as defined in sec_355 and during the five-year period determined after applying sec_355 ending on the date of the sub internal distribution no person determined after applying the aggregation rules of sec_355 will hold stock possessing percent or more of the total combined voting power of all classes of fnewco stock entitled to vote or percent or more of the total value of shares of all classes of fnewco stock that was acquired by purchase as defined in sec_355 and during the five year period determined after applying sec_355 ending on the date of the sub internal distribution or ii attributable to distributions on sub stock that was acquired by purchase as defined in sec_355 and during the five year period determined after applying sec_355 ending on the date of the sub internal distribution transactions within the meaning of sec_1_355-7 pursuant to which one or more persons will acquire directly or indirectly stock representing a 50-percent_or_greater_interest within the meaning of sec_355 in sub or fnewco including any predecessor or successor of any such corporation dddd for purposes of sec_355 immediately after the sub internal distribution eeee the sub internal distribution is not part of a plan or series of related jjjj with regard to the distribution sub will comply with the reporting ffff fnewco will be a controlled_foreign_corporation within the meaning of gggg each of distributing and sub will be a sec_1248 shareholder within the hhhh fnewco will not be a pfic immediately before or after the distribution distributing makes the following representations regarding the contribution and plr-111641-07 sec_957 immediately before and after the distribution meaning of sec_1_367_b_-2 with respect to fnewco immediately before the distribution and distributing will be a sec_1248 shareholder with respect to fnewco immediately thereafter iiii with regard to the distribution sub will comply with the identification and certification provisions under sec_1_367_e_-1 in order to establish that distributing is a qualifying u_s_person for purposes of applying sec_1_367_e_-1 procedures established under sec_1_367_b_-5 in order to establish that distributing is a corporation for purposes of applying sec_1_367_b_-5 distribution or their own expenses if any incurred in connection with the distribution stock_or_securities except for the q debt received by a shareholder as a creditor employee or in any capacity other than that of a shareholder of the corporation with respect to business a conducted by llc formerly sub is representative of llc 3’s present operations and with regard to llc there have been no substantial operational changes since the date of the last financial statements submitted active_conduct of its business independently and with its separate employees or employees of affiliated corporations with respect to business b conducted by controlled through llc is representative of llc 2’s present operations and with regard to llc there have been no substantial operational changes since the date of the last financial statements submitted kkkk distributing controlled and the distributing shareholders each will pay its nnnn the five years of financial information submitted on behalf of distributing pppp the five years of financial information submitted on behalf of controlled oooo following the distribution distributing through llc will continue the mmmm no part of the consideration to be distributed by distributing will be indebtedness if any owed by controlled to distributing will not constitute llll rrrr following the distribution controlled through llc will continue the ssss the distribution of the stock of controlled is primarily carried out for the qqqq controlled has continuously owned directly or indirectly percent of plr-111641-07 the interests of llc or percent of the stock of its predecessor sub for at least the five-year period ending on the date of distribution active_conduct of its business independently and with its separate employees or employees of affiliated corporations corporate business purposes of a allowing the management of distributing and controlled to focus its efforts on more closely aligned respective firm-wide strategic priorities b increasing the ability of controlled to pursue strategic transactions including by using its own equity as an acquisition currency c enhancing the ability of controlled to attract retain and properly incentivize key employees particularly through the use of its own equity and d eliminating the possibility that distributing or controlled will be placed at a competitive disadvantage relative to its peers because potential clients and strategic partners view controlled or distributing respectively as a competitor distribution of the earnings_and_profits of distributing or controlled or both uuuu the total fair_market_value of the assets transferred by distributing to controlled will each equal or exceed the sum of i the amount of liabilities if any assumed within the meaning of sec_357 by controlled in connection with the exchange ii the amount of liabilities if any owed to controlled by distributing that are discharged or extinguished in connection with the exchange and iii the amount of the cash and the fair_market_value of any other_property other than stock_or_securities permitted to be received under sec_361 without the recognition of gain received by distributing in the exchange the fair_market_value of the assets of controlled will exceed the amount of its liabilities immediately_after_the_exchange to controlled by distributing will each equal or exceed the sum i of the liabilities assumed within the meaning of sec_357 by controlled and ii the fair_market_value of any other_property within the meaning of sec_361 and the amount of any other money transferred by controlled to distributing that is distributed to the creditors of distributing pursuant to the plan_of_reorganization the contribution equals or exceeds the adjusted_basis of those assets tttt the distribution is not being used principally as a device for the the total fair_market_value of the assets transferred to controlled in vvvv the total adjusted_basis and the fair_market_value of the assets transferred wwww aaaaa for purposes of sec_355 immediately after the distribution no zzzz immediately after the distribution as defined in sec_355 either no plr-111641-07 xxxx the liabilities assumed by controlled in the transaction were incurred in the ordinary course of business and are associated with the assets being transferred yyyy other than i trade account indebtedness created in the ordinary course of business through continuing transactions at terms comparable to those which could be obtained in an arm’s length transaction ii payables for transition services and iii indebtedness arising under the intercompany funding arrangements and the credit facility and iv the q debt no inter-corporate debt will exist between distributing and controlled at the time of the distribution person will hold a 50-percent_or_greater_interest within the meaning of sec_355 in distributing or controlled if any person holds a 50-percent_or_greater_interest within the meaning of sec_355 in any disqualified_investment_corporation within the meaning of sec_355 such person will have held such interest in such corporation immediately before the distribution or distributing or controlled will not be a disqualified_investment_corporation within the meaning of sec_355 person determined after applying the aggregation rules of sec_355 will hold stock possessing percent or more of the total combined voting power of all classes of distributing stock entitled to vote or percent or more of the total value of shares of all classes of distributing stock that was acquired by purchase as defined in sec_355 and during the five-year period determined after applying sec_355 ending on the date of the distribution person determined after applying the aggregation rules of sec_355 will hold stock possessing percent or more of the total combined voting power of all classes of controlled stock entitled to vote or percent or more of the total value of shares of all classes of controlled stock that was either i acquired by purchase as defined in sec_355 and during the five year period determined after applying sec_355 ending on the date of distribution or ii attributable to distributions on the distributing common_stock that was acquired by purchase as defined in sec_355 and during the five year period determined after applying sec_355 ending on the date of the distribution transactions within the meaning of sec_1_355-7 pursuant to which one or more persons will acquire directly or indirectly stock representing a 50-percent_or_greater_interest within the meaning of sec_355 in distributing or controlled including any predecessor or successor of any such corporation for purposes of sec_355 immediately after the distribution no the distribution is not part of a plan or series of related bbbbb ccccc ddddd eeeee ggggg distributing’s past practice has been to cause controlled to immediately before the distribution items of income gain loss fffff no two parties to the distribution are investment companies as defined in plr-111641-07 deduction and credit will be taken into account as required by the applicable intercompany_transaction regulations see sec_1_1502-13 and sec_1 as in effect before the publication of t d 1995_32_irb_6 and as currently in effect sec_1_1502-13 as published by t d further distributing’s excess_loss_account with respect to the stock of controlled if any will be included in income before the distribution see sec_1_1502-19 payments made in connection with all continuing transactions other than transition services if any between distributing and its affiliates and controlled and its affiliates will be for fair_market_value based on terms and conditions arrived at by the parties bargaining at arm’s length sec_368 and iv distribute a substantial percentage of its earnings to the extent that such earnings exceed the capital needs of its business this past practice even in the absence of the distribution controlled would have distributed an amount equal to or greater than the amount of the cash dividends in respect of its earnings through the date of the distribution dividends prior to the distribution even if the distribution were being effected without the contribution of the contributed subsidiaries to controlled cash make distributions to its shareholders either by repurchasing shares of distributing common_stock or by making dividend distributions to holders of distributing common_stock and or repay liabilities owed to unrelated third-party creditors of distributing but not in excess of distributing’s basis in the controlled_subsidiaries reduced by the amount of liabilities assumed by controlled within the meaning of sec_357 and c that were not incurred in anticipation of the proposed transaction in an aggregate amount equal to the amount of special dividend cash received neither distributing nor controlled has been a u s real_property holding corporation usrphc as defined in sec_897 at any time during the five- year period ending on the date of the distribution the distribution lllll neither distributing nor controlled will be a usrphc immediately after jjjjj distributing will within one year of the receipt of any special dividend iiiii distributing would have caused controlled to distribute the cash the cash dividends have been and will be paid in accordance with hhhhh kkkkk plr-111641-07 rulings sub merger provided that the sub merger constitutes a statutory merger under no gain_or_loss will be recognized by distributing on the receipt of the no gain_or_loss will be recognized by sub on the transfer of its assets to based on the information submitted and representations made we rule as follows on the sub merger applicable law the sub merger will qualify as a reorganization within the meaning of sec_368 the sub merger will not be disqualified by reason of the llc contribution sec_368 distributing and sub will each be a_party_to_a_reorganization within the meaning of sec_368 distributing in exchange for distributing common_stock and the assumption by distributing of the liabilities in the sub merger sec_361 and sec_357 assets of sub acquired in exchange for the distributing common_stock and the assumption_of_liabilities by distributing in the sub merger sec_1032 the basis of such asset in the hands of sub immediately before the sub merger sec_362 the period during which sub held that asset sec_1223 date of the sub merger the items of sub described in sec_381 subject_to the conditions and limitations specified in sec_381 sec_382 sec_383 and sec_384 and the regulations thereunder sec_381 and sec_1 a or the deficit in earnings_and_profits of sub as of the date of the sub merger sec_381 sec_1_381_c_2_-1 and sec_1_1502-33 any deficit in the earnings_and_profits of distributing or sub will be used only to offset earnings_and_profits accumulated after the date of the sub merger sec_381 distributing’s holding_period in each asset received from sub will include distributing will succeed to and take into account the earnings_and_profits distributing’s basis in each asset received from sub will be the same as distributing will succeed to and take into account as of the close of the fsub liquidation follows on the fsub liquidation based on the information submitted and representations made we rule as the fsub liquidation will qualify as a complete_liquidation of fsub no gain_or_loss will be recognized by fsub on the fsub liquidation no gain_or_loss will be recognized by fsub on the distribution of its plr-111641-07 under sec_332 sec_332 assets to fsub d and a liquidation will equal the basis of that asset in the hands of fsub immediately before the fsub liquidation sec_334 liquidation will include the period during which that asset was held by fsub sec_1223 described in sec_381 subject_to the conditions and limitations specified in sec_381 sec_382 sec_383 and sec_384 and the regulations thereunder sec_381 and sec_1_381_a_-1 fsub 5’s basis in each asset received from fsub in the fsub fsub will succeed to and take into account the items of fsub fsub 5’s holding_period in each asset received from fsub in the fsub fsub contribution and the fsub internal distribution based on the information submitted and representations made we rule as fsub will not recognize any gain_or_loss on the fsub contribution follows on the fsub contribution and distribution the fsub contribution followed by the fsub internal distribution will constitute a reorganization within the meaning of sec_368 fsub and fnewco will each be a_party_to_a_reorganization within the meaning of sec_368 sec_361 and sec_357 sec_1032 fnewco’s basis in each asset transferred in the fsub contribution will be the same as the basis of that asset in the hands of fsub immediately before the transfer sec_362 contribution will include the period during which fsub held that asset sec_1223 fnewco will not recognize any gain_or_loss on the fsub contribution fnewco’s holding_period in each asset received from fsub in the fsub fsub will not recognize any gain_or_loss on the fsub internal the holding_period of the fnewco ordinary shares received by sub will sub will not recognize any gain_or_loss and no amount will be included the aggregate basis of the fsub ordinary shares the equity securities plr-111641-07 distribution sec_361 in income upon its receipt of the fnewco ordinary shares sec_355 and the fnewco ordinary shares in the hands of sub after the fsub internal distribution will be the same as its aggregate basis in the fsub ordinary shares and the equity securities immediately before the fsub internal distribution allocated between the fsub ordinary shares the equity securities and the fnewco ordinary shares in proportion to the fair_market_value of each in accordance with sec_1_358-2 and sec_358 include the holding_period of the fsub ordinary shares with respect to which the fnewco ordinary shares are distributed provided that such fsub ordinary shares are held as a capital_asset on the date of the fsub internal distribution sec_1223 accordance with sec_312 sec_1_367_b_-1 and sec_1_367_b_-4 apply the fsub internal distribution will be a distribution to which sec_1 b - c b -5 a b -5 c and b -5 f apply if sub 6’s post distribution amount as defined in sec_1_367_b_-5 with respect to fsub or fnewco is less than its predistribution amount as defined in sec_1_367_b_-5 with respect to fsub or fnewco sub 6’s basis in such stock immediately after the distribution must be reduced by the amount of the difference however sub 6’s basis in such stock must not be reduced below zero and to the extent the foregoing reduction would reduce its basis below zero sub must instead include such amount in income as a deemed_dividend from such corporation if sub reduces the basis in the stock of fsub or fnewco or has an inclusion with respect to such stock sub must increase its basis in the stock of the other corporation to the extent provided sec_1_367_b_-5 sec_1_367_b_-5 earnings_and_profits will be allocated between fsub and fnewco in the fsub contribution to fnewco will be an exchange to which sub internal distribution based on the information submitted and representations made we rule as follows on the sub internal distribution sub and distributing will not recognize any gain_or_loss and no amount will be included in income upon their receipt of the fnewco ordinary shares sec_355 sec_1248 will not apply to the sub internal distribution the basis of the fnewco ordinary shares in the hands of sub and sub will not recognize any gain_or_loss on the sub internal distribution plr-111641-07 sec_355 sec_1248 f notice_87_64 c b distributing immediately after the sub internal distribution shall be the lesser_of the adjusted_basis of such ordinary shares in the hands of sub or the substituted_basis allocated to fnewco’s ordinary shares in accordance with sec_1_358-2 sec_1248 notice_87_64 c b the holding_period of the fnewco ordinary shares received by sub and distributing shall be the greater of the holding_period of the fnewco ordinary shares in the hands of sub or the holding_period of the fnewco ordinary shares in the hands of sub and distributing sec_1248 notice_87_64 c b stock under sec_1_1248-2 or sec_1_1248-3 whichever is applicable which were accumulated in taxable years of such foreign_corporations beginning after date and during the periods that fnewco was a controlled_foreign_corporation shall be attributable to such stock sec_1223 sec_1_1248-1 accordance with sec_312 the earnings_and_profits of fnewco to the extent attributable to such earnings_and_profits will be allocated between sub and fnewco in sub internal distribution sub will not recognize any gain_or_loss on the sub internal distribution distributing will not recognize any gain_or_loss and no amount will be based on the information submitted and representations made we rule as follows on the sub internal distribution included in income upon its receipt of the fnewco ordinary shares sec_355 sec_355 the fnewco ordinary shares to distributing sec_1248 notice_87_64 c b sub internal distribution in the hands of distributing immediately after the sub sec_1248 shall not be applicable to the distribution by sub of the basis of the fnewco ordinary shares received by distributing in the the holding_period of the fnewco ordinary shares received by distributing plr-111641-07 internal distribution shall be the lesser_of the adjusted_basis of such ordinary shares in the hands of sub or the substituted_basis allocated to fnewco’s ordinary shares in accordance with sec_1_358-2 sec_1248 notice_87_64 c b in the sub internal distribution shall be the greater of the holding_period of the fnewco ordinary shares in the hands of sub or the holding_period of the fnewco ordinary shares in the hands of distributing sec_1248 notice_87_64 c b stock under sec_1_1248-2 or sec_1_1248-3 whichever is applicable which were accumulated in taxable years of such foreign_corporations beginning after date and during the periods that fnewco was a controlled_foreign_corporation shall be attributable to such stock sec_1223 sec_1_1248-1 accordance with sec_312 the earnings_and_profits of fnewco to the extent attributable to such earnings_and_profits will be allocated between sub and fnewco in contribution and distribution the contribution followed by the distribution will constitute a distributing will not recognize any gain_or_loss on the contribution based on the information submitted and representations made we rule as follows on the contribution and distribution reorganization within the meaning of sec_368 distributing and controlled will each be a_party_to_a_reorganization within the meaning of sec_368 sec_357 and sec_361 b same as the basis of that asset in the hands of distribution immediately before the transfer sec_362 controlled’s holding_period in each asset received from distributing in the contribution will include the period during which distributing held that asset sec_1223 distributing will recognize no gain_or_loss on the distribution sec_361 controlled’s basis in each asset transferred in the contribution will be the controlled will recognize no gain_or_loss on the contribution sec_1032 the distributing shareholders will recognize no gain_or_loss and no the holding_period of the controlled common_stock including fractional the aggregate basis of the distributing common_stock and the controlled plr-111641-07 amount will be included in the income upon their receipt of the controlled common_stock sec_355 common_stock including fractional share interests to which the shareholders may be entitled in the hands of the distributing shareholders after the distribution will be the same as their aggregate basis in the distributing common_stock immediately before the distribution allocated between the distributing common_stock and the controlled common_stock in proportion to the fair_market_value of each in accordance with sec_1 a sec_358 b and c if a distributing shareholder that purchased or acquired shares of distributing common_stock on different dates or at different prices is not able to identify which particular share of controlled common_stock is received with respect to a particular share of distributing common_stock the shareholder may designate which share of controlled common_stock is received with respect to a particular share of distributing common_stock provided the terms of the designation are consistent with the terms of the distribution share interests received by the distributing shareholders will include the holding_period of the distributing common_stock with respect to which the controlled common_stock is distributed provided that such distributing common_stock is held as a capital_asset on the date of distribution sec_1223 in accordance with sec_312 not become fixed or ascertainable until after the date of the sub merger and the distribution and that have not already been included in controlled’s income as of such date will be included in controlled’s gross_income payments made by controlled pursuant to the special dividend in respect of damages claimed in the litigation that i have arisen or will arise for a taxable_period ending on or before the distribution or for a taxable_period beginning before and ending after the distribution and ii will not become fixed and ascertainable until after the distribution will be treated as occurring before the distribution 344_us_6 sec_301 sec_1_1502-13 attributable to such stock under sec_1_1248-2 or sec_1_1248-3 whichever is applicable payments received by controlled with respect to the litigation that have the cash dividends will be treated as distributions to which sec_301 applies earnings_and_profits will be allocated between distributing and controlled upon the contribution the earnings_and_profits of fnewco to the extent plr-111641-07 which were accumulated in taxable years of such foreign_corporations beginning after date and during the periods that fnewco was a controlled_foreign_corporation shall be attributable to such stock sec_1223 sec_1_1248-1 profits of fnewco to the extent attributable to such stock under sec_1_1248-2 or sec_1 whichever is applicable which were accumulated in taxable years of such foreign_corporations beginning after date and during the periods that fnewco was a controlled_foreign_corporation shall be attributable to such stock sec_1_1248-1 upon controlled’s contribution of fnewco to sub the earnings and caveats i on whether any or all of the foreign_corporations involved in this additionally no opinion is expressed we express no opinion about the tax treatment of the proposed transactions under other provisions of the code and regulations or the tax treatment of an conditions existing at the time of or effects resulting from the proposed transactions that are not specifically covered by the above rulings in particular no opinion is given regarding whether the proposed transaction i satisfies the business_purpose requirement of sec_1_355-2 ii is used principally as a device for the distribution of earnings_and_profits of the distributing_corporation or the controlled_corporation or both see sec_355 and sec_1_355-2 and iii is part of a plan or series of related transactions pursuant to which one or more persons will acquire directly or indirectly stock representing a 50-percent_or_greater_interest in the distributing_corporation or the controlled_corporation transaction are pfics if it is determined that any or all of the foreign_corporations are pfics no opinion is expressed with respect to the application of sec_1291 through to the proposed transactions in particular in a transaction in which gain is not otherwise recognized regulations under sec_1291 may require gain recognition notwithstanding any other provision of the code thereunder to the taxpayer’s proposed restructuring transactions in particular no opinion is expressed about the application of sec_367 or sec_367 to any of the restructuring transactions or to the distribution furthermore no opinion is expressed about the adjustments to earnings_and_profits or deficits in earnings_and_profits if any in any of the transactions to which sec_367 or b applies thereunder to any dual_resident_corporation that is involved in a putative triggering event in connection with any of the transactions described above in particular no opinion is expressed regarding the application of the sec_1503 regulations to the distribution iiii regarding the applicability of sec_1503 and the regulations promulgated about the applicability of sec_367 and the regulations promulgated ii plr-111641-07 purposes agreements the fsub transfers or on the transfers described in step xiii iv on whether the equity securities are equity for federal_income_tax regarding the federal_income_tax consequences of the transaction v procedural statements this ruling letter is directed only to the taxpayer who requested it section a copy of this letter must be attached to any income_tax return to which it i sec_6110 provides that it may not be used or cited as precedent relevant alternatively a taxpayer filing its return electronically may satisfy this requirement by attaching a statement to the return that provides the date and control number of this letter_ruling letter will be sent to your authorized representative ___________________________ richard k passales senior counsel branch associate chief_counsel corporate in accordance with the power_of_attorney on file in this office a copy of this ruling sincerely


department of the treasury internal_revenue_service washington d c date number release date cc dom fs it a uilc internal_revenue_service national_office field_service_advice memorandum for from deborah a butler assistant chief_counsel cc dom fs subject timeliness of sec_121 election this field_service_advice responds to your request for advice which was processed on date 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 taxpayer year issue is an election to exclude gain on the sale of a principal_residence under cid sec_121 prior to its amendment by the taxpayer_relief_act_of_1997 timely if the taxpayer files a late return electing the exclusion after receiving a notice_of_deficiency and petitioning the united_states tax_court conclusion taxpayer’s election is timely under sec_6512 if a payment is made after the issuance of the deficiency_notice tl-13766-99 facts prior to changes made by the taxpayer_relief_act_of_1997 dollar_figurethe 1997_act taxpayers who sold a principal_residence and purchased a new principal_residence within two years could roll over all or part of the gain on the sale of the old residence under former sec_1034 under sec_121 prior to its amendment by the 1997_act a taxpayer who had attained the age of on the date of the sale also had a one-time election to exclude permanently a limited amount of gain on the sale of the taxpayer s principal_residence in your case taxpayer in year a year governed by former sec_121 sold his principal_residence and qualified to exclude the gain however originally he did not elect to exclude the gain in fact he filed no tax_return made no payments of tax and had no withholding or other prepayment_credits for the year he did not purchase a qualifying replacement_property under former sec_1034 six years later in response to a notice_of_deficiency taxpayer petitioned the tax_court and then filed a return electing the sec_121 exclusion discussion sec_121 as in effect prior to the 1997_act provided that the election to exclude gain from the sale_or_exchange of a principal_residence may be made at any time before the expiration of the period for making a claim for credit or refund of the tax imposed for the year in which the sale_or_exchange occurred under sec_6511 a claim for credit or refund must generally be filed within three years from the time the return was filed or two years from the time the tax was paid whichever is later if taxpayer had not filed a petition with the tax_court the election would have been timely just as the service has three years from the filing of a late return to make an assessment a taxpayer generally has three years from the filing of a late return or if longer two years from a payment to claim a refund see revrul_57_354 1957_2_cb_913 revrul_76_511 1976_2_cb_428 revrul_78_343 1978_2_cb_326 situation thus had taxpayer not filed a petition with the tax_court see also special report what to do if you haven’t filed your income_tax return irs digital daily website www irs treas gov hot tax-return96 html taxpayers had until date to file delinquent returns claiming refunds of prepayment_credits for the service does not follow the stricter 2-year rule set forth in 38_f3d_473 9th cir in dictum the supreme court recently agreed with the service’s reading of the statute see baral v united_states 120_sct_1006 date since cid baral had filed his delinquent_return on date and had earlier received a 4-month extension from the initial due_date the relevant look-back period under sec_6511 extended from date back to date ie three years tl-13766-99 he would have had three years from the time he filed his late return to make the sec_121 election alternatively if taxpayer had paid the deficiency he would have had two years from that time to make the sec_121 election and recover the payment the question is therefore whether the result should differ because taxpayer filed a petition with the tax_court at which point the relevant limitations_period on any refund is set by sec_6512 rather than sec_6511 sec_6512 provides generally that if a taxpayer files a petition with the tax_court no credit or refund of tax for that tax_year may be made except as to overpayments determined by the tax_court in making that determination certain limits are imposed by sec_6512 which provides in part that to be refundable the tax must have been paid a after the mailing of the notice_of_deficiency or b within the period which would be applicable under sec_6511 c or d if on the date of the mailing of the notice_of_deficiency a claim had been filed whether or not filed stating the grounds upon which the tax_court finds that there is an overpayment applying this provision to the present issue the first question is whether the limitations_period set by sec_6512 is part of the period for making a claim for credit or refund within the meaning of former sec_121 we conclude that it is although a claim as such is unnecessary once a case is in tax_court sec_6512 is closely correlated with sec_6511 and performs an analogous function see 516_us_235 moreover it would seem inconsistent with congressional intent to require taxpayers to forgo an otherwise allowable election in order to contest a deficiency in tax_court the remaining question therefore concerns the application of sec_121 and sec_6512 to the present case arguably taxpayer’s sec_121 election was timely under sec_6512 on the theory that a claim based on the sec_121 election would have been timely if it had been filed on the date of the deficiency_notice however since no payments were made prior to the issuance of the deficiency_notice in order for this reasoning to apply the claim arguably would have to be treated as having been filed within the 3-year period rather than the 2-year period in sec_6511 in the lundy case however the court held that when a taxpayer does not file a return plus four months tl-13766-99 until after a deficiency_notice is issued for sec_6512 purposes the taxpayer is not treated as having filed within the 3-year period in sec_6511 and only the 2-year look-back period applies although lundy was subsequently overruled by congress in favor of a 3-year look-back period for taxpayers in tax_court see sec_6512 last sentence taxpayer’s case is governed by prior_law while sec_6512 may not apply however under sec_6512 a refund_or_credit may be made of any amount that was paid after the mailing of the notice_of_deficiency therefore if taxpayer pays an amount of tax the refund period would be open under sec_6512 and taxpayer could make the sec_121 election case development hazards and other considerations deborah a butler by clifford m harbourt senior technician income_tax accounting branch field service division


t c memo united_states tax_court midwest stainless inc and robert a and mary j lechner petitioners v commissioner of internal revenue respondent docket no filed date after l incorporated his cash_method sole_proprietorship he received payments for its jobs in progress and paid the associated expenses in accordance with the advice of l’s accountant the receipts and payments were treated as those of the corporation for book and tax purposes and the corporation made a book entry on its accounting_records showing a receivable from l to the corporation in the amount of the receipts which the parties agree was valid debt thereafter l was indicted for failing to report income of the sole_proprietorship on his pre- incorporation personal income_tax returns l incurred and paid legal defense fees which in accordance with his accountant’s advice were deducted on the corporation’s returns and treated on the corporation’s accounting_records as reducing the receivable the parties have agreed that the corporation is not entitled to deduct the legal defense fees and that l is entitled to deduct them on his personal returns as schedule c expenses held the reduction of the receivable on the corporation’s books which reduced l’s debt to the corporation and increased his net_worth ina corresponding amount is a constructive_dividend to l alan l billings for petitioners j paul knap and george w bezold for respondent memorandum findings_of_fact and opinion beghe judge respondent determined that petitioners robert a and mary j lechner lechners and midwest stainless inc stainless had the following federal_income_tax deficiencies petitioners taxable years deficiencies lechners dollar_figure big_number stainless f y e date dollar_figure f y e date big_number stainless has conceded among other things that respondent properly disallowed a deduction claimed by stainless for its reduction of a debt owed by mr lechner its sole shareholder in reimbursement of his payments of legal fees incurred in defending against his indictment for filing false individual income_tax returns respondent has conceded that mr lechner was entitled to deduct those fees which he did not claim on his individual returns the sole issue remaining for decision is whether mr lechner’s debt to stainless was actually reduced so as to be included in his gross_income as a constructive_dividend we hold that mr lechner’s debt to stainless was reduced in such circumstances as to require the reduction to be so included findings_of_fact some of the facts have been stipulated and are so found the stipulations of fact and accompanying exhibits are incorporated herein by this reference the lechners are husband and wife at the time the petition was filed the lechners resided and stainless had its principal office at menomonie wisconsin mr lechner owned and operated a stainless steel fabricating business known as midwest stainless mechanical contractors as a sole_proprietorship the sole_proprietorship for or more years ending on date stainless was incorporated on date in a sec_351' exchange of the assets of the sole_proprietorship for stock of stainless at all times thereafter mr lechner has been the sole shareholder of stainless unless otherwise indicated all section references are to the internal_revenue_code in effect for and all rule references are to the tax_court rules_of_practice and procedure mr lechner filed an individual_income_tax_return for and stainless filed a corporation income_tax return for the fiscal_year ended date attached to each of those returns was a statement regarding the organization of stainless in a sec_351 exchange this statement recited that all assets of the sole_proprietorship including cash accounts and other receivables were transferred to stainless in exchange for its common_stock but that the only liability assumed was withheld payroll_taxes the sole_proprietorship and stainless during the taxable years in issue used the cash_method_of_accounting for income_tax purposes without objection from respondent mr lechner incurred dollar_figure of debt to stainless by depositing in his personal bank account gross_receipts of stainless attributable to payments after date for jobs in progress of the sole_proprietorship on date stainless accounted for the deposit by making a journal entry designated receivable from officer in its accounting_records showing that mr lechner owed stainless the amount deposited in his personal account no promissory notes were ever made representing this debt and no interest was charged on this debt after date mr lechner also made payments with funds from his personal bank account of expenses related to the jobs in progress and those payments reduced his outstanding debt to stainless in so handling the receipts and expenses after date mr lechner was acting in accordance with the advice of his certified_public_accountant kenneth e noble mr noble who also acted as a bookkeeper of stainless and made the journal entry described above mr noble believed that this was the appropriate way to handle the receivables receipts and the payables payments with respect to the jobs in progress because mr lechner had closed out the checking account of the sole_proprietorship and had opened a corporate checking account for stainless with an initial balance of only dollar_figure the lechners filed joint individual income_tax returns form sec_1040 for the years and each of these individual returns included a schedule c profit or loss from business for the sole_proprietorship mr lechner was indicted under sec_7206 for filing false individual income_tax returns form sec_1040 for the years and the principal false item alleged in the indictment was the failure to report all gross_receipts of the sole_proprietorship mr lechner pleaded guilty to and was convicted under sec_7206 of filing a false individual_income_tax_return for the year mr lechner was never charged with any criminal offense in connection with the corporation income_tax returns of stainless the effect of the creation of the receivable from officer account was to treat the dollar_figure as revenue of stainless which reported it as such for corporation income_tax purposes the payments of the expenses by mr lechner were treated as reducing the receivable and were reported by stainless as deductible expenses for corporation income_tax purposes in defending himself in the criminal tax case mr lechner paid dollar_figure between date and date to his attorneys hereinafter defense fees the defense fees were paid from mr lechner’s individual resources and not from funds of stainless after mr lechner paid the defense fees stainless deducted them on its corporation income_tax return for the fiscal_year ended date stainless did not reimburse mr lechner in cash or by check or in goods or services for his payments of the defense fees however stainless reduced the debt owed to it by mr lechner in the amount of the defense fees and made a journal entry in its books of account to reflect the reduction in the same way that it reduced the debt owed by mr lechner to reflect his payments of expenses attributable to jobs in progress of the sole_proprietorship the entry showed a reduction of dollar_figure in the amount of debt mr lechner owed stainless for corporate legal fees paid personally for the corporate fiscal_year ended date the dollar_figure debt reduction included dollar_figure personally paid_by mr lechner for defense fees in calendar_year and dollar_figure so paid in calendar_year in the notice_of_deficiency issued to the lechners for respondent added dollar_figure to mr lechner’s individual dividend income this amount reflects the dollar_figure reduction during of mr lechner’s debt to stainless referred to above and dollar_figure for other personal accounting and legal fees of mr lechner actually paid_by stainless in the parties agree that the dollar_figure referred to above is a constructive_dividend that should have been reported on the lechners’ joint individual tax_return ultimate finding of fact in mr lechner received an additional dollar_figure in gross_income from stainless as a constructive_dividend that took the form of a debt reduction opinion the apparent clarity and simplicity of the findings set forth above is belied by some missing links and skewed by one of respondent’s concessions which might be considered overly generous although not the one respondent has in mind the concession of respondent that respondent asserts on brief might have been overly generous is respondent’s concession that mr lechner is entitled to a schedule c deduction for his payment of the defense fees in his criminal case the concession continued nevertheless we wish to encourage parties in this court to stipulate facts to the greatest extent possible and to make mutual concessions that will simplify and shorten trials we will do the best we can with the record at hand to supply the missing links and to make inferences that properly give effect to the parties’ stipulations and concessions the factual setting in the cases at hand as well as the overall issues raised by the deficiency notices are similar to those we recently considered in hood v commissioner t c date court reviewed see also 703_f2d_154 5th cir revg per curiam tcmemo_1981_349 here however the parties’ concessions leave only one issue to be decided here as in hood and jack’s maintenance contractors an individual who had conducted business as sole_proprietor incorporated the business and was thereafter charged with tax crimes in failing to report income of the sole_proprietorship the corporations in hood and jack’s maintenance contractors paid the legal fees incurred by their individual shareholders in continued that the court thinks might have been overly generous is respondent’s concession that the corporation’s book entry setting up the receivable of dollar_figure evidenced a valid debt of mr lechner to stainless it’s a close call which we have accepted for the purpose of deciding the case at hand as the parties have presented it defending against the criminal charges and claimed the payments as deductions on their corporation income_tax returns in the case at hand mr lechner paid his own defense fees but claimed no deductions for the payments on his joint returns instead stainless made a journal entry on its accounting_records showing that mr lechner’s acknowledged debt to stainless was reduced by the amount of the defense fees and stainless deducted that amount on its corporation income_tax returns respondent’s deficiency notices disallowed the deduction claimed by stainless and treated the corresponding debt reduction shown on its books of account as constructive_dividend income to mr lechner stainless has conceded that it is not entitled to the deduction claimed on its return for the fiscal_year ended date and respondent has conceded that the lechners are entitled to deductions in corresponding amounts----which they did not claim--on their individual income_tax returns for the years in which the fees were paid mr lechner deposited to his own account dollar_figure of receipts that were attributable to work in progress of the sole_proprietorship as of the moment of incorporation against the background of the criminal charges against mr lechner for there is no dispute that at all relevant times stainless had sufficient earnings_and_profits to cover any constructive_dividend that might be determined -- - failing to report taxable_income of the sole_proprietorship for prior years the parties took pains to agree and to assure the court that there was nothing improper in mr lechner’s taking the receipts and paying the associated expenses we accept their assurances and impute no wrongdoing to mr lechner who appears merely to have been following the advice of his accountant mr noble at all times relevant to these proceedings what mr lechner and stainless did to make it right apparently on the assumption that the only proper way to handle the incorporation was for stainless to take over the receivables and payables arising from the sole proprietorship’s work in progress was to set up a corporate receivable from mr lechner in the amount of the receipts and to reduce that receivable when mr lechner paid the associated expenses the amount of the receivable reflected in the progress payments taken by mr lechner and its reduction by the associated expenses that he paid were reported by stainless as corporate income and expense ’ inasmuch as both the sole_proprietorship and the corporation used the cash_method_of_accounting this treatment appears to have been proper and consistent with the way the incorporation of a cash_basis business can be handled under sec_351 sec_357 and sec_358 see 490_f2d_1172 3d cir revrul_80_198 1980_2_cb_113 see also 68_tc_223 revrul_80_ 1980_2_cb_122 notwithstanding that the sole_proprietorship earned the receipts and incurred the liabilities continued the parties have stipulated that the journal entry evidenced the receivable as valid debt of mr lechner to stainless although in many cases we have found that corporate accounting entries setting up a receivable from a shareholder were equivocal and insufficient to create valid debt particularly in the absence of an accompanying note and interest payments see eg 52_tc_255 affd 422_f2d_198 5th cir the pattern of repayments and reductions of the receivable evidenced by mr lechner’s payment of the liabilities for the associated expenses supports the treatment continued to make the payments the transferee corporation if it also uses the cash_method is treated as a successor and allowed to report the receipts and payments on its own income_tax return if the receivables and payables were transferred to it in the sec_351 exchange however there is no intimation in the foregoing authorities that the receivables and payables must be so transferred an acceptable alternative would be for the transferor to retain and collect and pay the respective receivables and payables and to use the new corporation to make a fresh_start with new business we treat as of no account the discrepancy between the recital in the sec_351 statement that the only liability assumed by stainless was withheld payroll_taxes and its claiming of mr lechner’s payments of liabilities related to the work in progress as its deductible expenses if the journal entry had not been so stipulated mr lechner’s taking of the corporate receipts would have been treated as a constructive distribution to him in taxable as a dividend to the extent of corporate earnings_and_profits for the corporate fiscal_year in which it occurred and his payments of the expenses would have been treated as capital contributions to stainless of the receivable as valid debt we have accepted the parties’ stipulation to this effect with his accountant’s advice mr lechner and stainless treated his payments of his defense fees as payments of corporate expenses that reduced the receivable respondent and petitioners have agreed and made mutual concessions to the effect first that the corporate deduction of the defense fees is to be disallowed contributing to a corporation income_tax deficiency and second that mr lechner is to be allowed a schedule c deduction in a corresponding amount although he did not claim a deduction for the defense fees on his income_tax returns although respondent characterizes his concession as perhaps overly generous it is identical to the commissioner’s concession in hood v commissioner supra and appears to us to be appropriate however this concession of the unclaimed schedule c deduction to mr lechner will give him a personal tax windfall unless his individual deduction is offset by a constructive_dividend in the amount of the debt reduction evidenced by the corporate accounting entry reducing the stainless receivable from mr lechner as this court has recited numerous times see eg halpern v commissioner tcmemo_1982_31 the test for a constructive_dividend has two prongs first the corporation must have conferred an economic benefit on the shareholder without expectation of repayment see maqnon v commissioner 73_tc_980 and second the benefit conferred by the corporation must primarily advance the shareholder’s personal_interest as opposed to the business_interest of the corporation see jack’s maintenance contractors inc v commissioner f 2d pincite whether the corporate journal entry reducing the debt reflected by the receivable from officer account resulted in a constructive_dividend to mr lechner the individual shareholder does not turn on whether the reduction primarily benefited the corporation or the shareholder this is the second prong question addressed by hood and jack’s maintenance contractors stainless has conceded that it is not entitled to the deduction and thus that it received no primary benefit or at least that any benefit that it might have received is to be disregarded for tax purposes our sole guestion for decision is a first prong guestion whether the action by stainless in reducing the amount of the debt on its accounting_records conferred an economic benefit on mr lechner without expectation of repayment that constituted or evidenced a distribution to him or for his benefit that should be treated as a constructive_dividend respondent’s briefs characterize the distribution as cancellation of indebtedness because the deficiency_notice did not mention cancellation of indebtedness petitioners argue that respondent has raised a new issue this argument has no merit cancellation of indebtedness takes its tax significance from the context in which it occurs cancellation of indebtedness is just a means by which a benefit can be conferred or a constructive_payment made see 82_tc_638 when a corporation with earnings_and_profits cancels its shareholder’s debt to it cancellation of indebtedness is the means by which a constructive_dividend distribution to the shareholder can be accomplished see haber v commissioner supra schneller v commissioner tcmemo_1996_62 affd without published opinion 129_f3d_1265 6th cir estate of shapiro v commissioner tcmemo_1987_126 shephard v commissioner tcmemo_1963_294 affd per curiam 340_f2d_27 6th cir the notions of constructive_dividend and cancellation of indebtedness merge in their common elements the conferring of an economic benefit without expectation of repayment which constitutes the first prong of a constructive_dividend with the existence of a debt and its discharge see waterhouse v commissioner tcmemo_1994_467 which occurs when it becomes clear that the debt will not have to be repaid see 88_tc_435 the inquiry requires a practical assessment of the facts relating to the likelihood of repayment see id as they existed at the time the transaction -- - under review occurred ie at the time of the entry on the corporate books reducing the debt petitioners make two arguments with respect to economic benefit they argue that treating the accounting entry reducing mr lechner’s debt to stainless as a constructive_dividend would give dispositive effect to bookkeeping subtleties of the sort we deemed irrelevant in halpern v commissioner supra petitioners assert the need to show an actual corporate payment or other outlay to justify a finding that mr lechner received a constructive_dividend distribution we observe that the court in halpern v commissioner tcmemo_1982_31 made the comment about accounting subtleties in rejecting an individual shareholder’s argument that corporate bookkeeping entries treating as loans advances to him for travel and entertainment_expenses that he never substantiated or repaid should not be treated as dividends to him halpern contends that the corporation’s method of recording its expenses should not cause the corporation’s payment of a legitimate business_expense to result in a constructive_dividend to petitioner we feel however that such bookkeeping subtleties are irrelevant the question is whether halpern used the amount advanced for his personal benefit or for the benefit of the corporation without evidence that these expenses were for the benefit of his corporation we hold that its payment of these expenses resulted in halpern’s receiving constructive dividends in the amount of dollar_figure halpern v commissioner tcmemo_1982_31 43_tcm_346 t c m ria par big_number pincite- -- - with respect to the likelihood of repayment petitioners’ argument seems to be that the accounting entry reducing the receivable is equivocal and that it doesn’t have the effect of a payment or distribution because it might be reversed mr noble testified that if respondent’s dividend determination is not sustained by the court that is if petitioner wins his case the receivables ledger of stainless will be adjusted to add back the amount by which the receivable from officer account was reduced to reflect mr lechner’s payment of his defense fees which--mr noble originally advised--should be treated as corporate expenses petitioners’ argument that a constructive_dividend distribution requires corporate payment or outlay of funds also has no merit it ignores the circumstances in which the original debt was created when mr lechner deposited in his personal bank account receipts that---the parties agree--belonged to the corporation he received payments of corporate funds that would have been includable in his gross_income or at least treated as corporate_distributions to him at that earlier time but for mr noble’s corporate journal entry creating the receivable that treated the receipts as giving rise to what---the parties also agree--thereby became valid debt because the original payment to mr lechner was offset by the debt there was no increase in his net_worth and no distribution supporting a dividend to him at the earlier time when the debt was reduced in circumstances that the parties now agree did not include a repayment of the debt by mr lechner his net_worth correspondingly increased this increase in his net_worth which results from the reduction of his indebtedness to the corporation see sec_61 is the economic benefit that satisfies the first prong of the constructive_dividend test petitioners’ second argument is based on what they assert is the equivocal nature of the book entry reducing the receivable the creation of the debt in this case whose existence and intention to repay at inception the parties acknowledge was evidenced only by a journal entry on the corporate books we find that the subsequent reduction of the receivable by journal entry evidenced pro tanto the intention not to repay we acknowledge that this is not an open and shut proposition accounting entries can be equivocal as we have held numerous times in finding that accounting entries purporting to create a corporate receivable from a shareholder did not persuade us that valid debt had been created see eg haber v commissioner t c pincite respondent has requested the court to find that lechner understood that the debt had been reduced and he believed that he need not pay it petitioners’ requests for findings stress that the journal entries on the corporate books of account reducing the account receivable were -- - made by mr noble the accountant for stainless and mr lechner consistent with mr noble’s handling of similar items in his practice for the last thirty years and was consistent with standard and accepted accounting practice mr lechner disputes the irrevocability of the reduction of the receivable relying on mr noble’s testimony that if the court upholds mr lechner’s position the debt will be restored on the corporate books by an adjusting entry we have concluded that mr lechner’s state of mind whatever it may been is not determinative a case such as this should be decided by recourse to objective facts and circumstances see 57_tc_32 with due regard for the desirability of consistency in the dealings between shareholders and the closely held corporations that they control we are not persuaded by mr noble’s testimony--that the receivable will be adjusted upward if the court upholds mr lechner’s position--that the reduction of the receivable on the corporate books was not a corporate dividend distribution to mr lechner mr noble’s testimony flies in the face of the parties’ stipulation that the book entry reducing the receivable reduced the debt ’ ’ petitioners’ offer embodied in mr noble’s testimony which petitioners adopted on brief seems counterintuitive one would think that if the court were to hold that the debt continued in further response to petitioners’ argument based on mr noble’s testimony we would observe that our acceptance of this argument would compromise the integrity of corporate books_and_records as evidence of corporate action by encouraging wait and see game playing notwithstanding that all corporate action taken in this case was at the direction and advice of mr noble we have only his after-the-fact testimony about the corporate action that will be taken in response to a decision of the court that treats the reduction of the liability as a nullity there was no preexisting binding agreement between mr lechner and stainless regarding the circumstances if any in which the reduction of the debt on the corporate books would be reversed continued reduction created no constructive_dividend to mr lechner he and stainless would be content to leave well enough alone by not undoing the reduction of the receivable the offer implies that the reduction did increase mr lechner’s net_worth and that a retroactive restoration of the receivable would be necessary to prevent the increase from having occurred if the issue before the court had not been raised by respondent’s deficiency_notice to mr lechner there is no reason to believe that mr lechner would have voluntarily caused stainless to restore the receivable nor is there any procedure that we know of or would be interested in exploring under which a decision in mr lechner’s favor could be conditioned on the restoration of the receivable in these circumstances we accept and take at face value the stipulation of the parties that the receivable was reduced in an amount equal to the legal defense fees paid_by mr lechner only if the shareholder-employee enters into a binding repayment agreement with his corporation prior to the time of its payment to the employee for which the corporation claims a continued - - in the circumstances of this case we are loath to impute such an agreement we also doubt that such an agreement even if it occurred and was formally binding would change the result generated by giving effect at face value to the corporate book entry reducing the receivable cf 82_tc_239 we conclude that in mr lechner received an additional dollar_figure in gross_income from stainless as a constructive_dividend that took the form of a debt reduction which was evidenced by the journal entry reducing the receivable from officer account in the books_and_records of stainless to reflect the foregoing and the concessions of the parties decision will be entered under rule continued deduction will a repayment by the employee of an amount disallowed as a corporate deduction be allowed as a deduction of the amount previously included in his gross_income see 67_tc_286 49_tc_645 revrul_69_115 1969_1_cb_50