department of the treasury i n t e r n al r e v e n u e s e r v i c e w as h i n g t o n d c offic e of c h ief c o u n sel date number release date cc dom it a wta-n-108446-98 uilc memorandum for north central district group manager from deputy assistant chief_counsel income_tax accounting subject city of grand forks nd downtown commercial rehabilitation program this technical assistance responds to your memorandum dated date and to your subsequent facsimile inquiry of date you requested technical assistance on the tax treatment of loans received by business taxpayers under the business and industry disaster loan program old program and the business assistance loan grant program new program technical assistance does not relate to a specific case and is not binding on examination or appeals this document is not to be cited as precedent issues if none of the other tax principles discussed in this memorandum applies to a business that borrows money under the old or new program what are the federal_income_tax consequences to a business taxpayer of-- a a loan made under the old program and not refinanced under the new program b a loan made under the new program c a loan made under the old program and refinanced under the new program wta-n-108446-98 is sec_1033 of the internal_revenue_code pertaining to deferral of gain recognition in the event of an involuntary_conversion available to a taxpayer borrowing money under the old or the new program must a taxpayer borrowing money under the old or the new program take any income arising from the loan into account in determining the availability of a loss deduction under sec_165 is sec_118 pertaining to contributions to capital applicable to a corporate taxpayer borrowing money under the old or the new program does the city of grand forks have any information reporting obligations under the code with respect to loans under the old or the new program conclusions a a loan made under the old program is issued with bond_issuance_premium equal to percent of the stated principal_amount of the loan in general the business will take the full amount of the premium into income at maturity b a loan made under the new program is generally treated the same way as a loan made under the old program except that the bond_issuance_premium is equal to percent of the stated principal_amount of the loan c when a loan made under the old program is refinanced under the new program the loan is repurchased for a new loan and then retired as a result the business generally will have bond_issuance_premium income and discharge_of_indebtedness income at the time of the refinancing and deductions for unstated_interest over the term of the new loan although the amount of the loan forgiven under the old or new program is in general gross_income to the recipient taxpayers under sec_61 a loan recipient who incurred physical damage as a result of the flood may treat the amount of the loan forgiveness as received on account of the flood damage and elect in accordance with sec_1033 to defer recognition of gain to the extent the recipient expended an amount at least equal to the amount of the loan forgiveness to purchase qualified_replacement_property if the taxpayer makes such an election then under sec_1033 the basis of the replacement_property shall be the cost of such property decreased by the amount of gain not recognized only the amount of loan forgiveness income that is treated as having been received on account of the flood damage must be taken into account in determining whether a loss deduction is available to the taxpayer under sec_165 wta-n-108446-98 if in a prior taxable_year the taxpayer properly took a casualty_loss deduction for the flood damage the amount of loan forgiveness income that is received on account of flood damage is considered a recovery_of an amount previously deducted under sec_165 and must be included in the taxpayer’s income in the taxable_year received to the extent required by tax_benefit principles whether a government's contemplated forgiveness of loan principal to the extent not included in income under tax_benefit principles constitutes an excludible nonshareholder contribution_to_capital under sec_118 may vary from taxpayer to taxpayer depending on the facts and circumstances of the case we will be happy to provide further assistance if you need it in any specific case in general we note both that sec_118 applies only to corporate taxpayers and that sec_362 provides that a corporate taxpayer takes a zero basis in any property purchased with capital contributed by a nonshareholder the city of grand forks does not have any information reporting obligations under the code with respect to bond_premium income or discharge_of_indebtedness income of borrowers under the loan programs facts the city of grand forks nd city suffered extensive flood and fire damage in date the area encompassing the city subsequently was declared a presidential disaster_area public law 111_stat_158 appropriated to the united_states department of housing and urban development an additional_amount for community development block grants fund for use only for buyouts relocation long-term recovery and mitigation in communities affected by the flooding in the upper midwest and other disasters in fiscal_year the city received funds under this appropriation to assist in its recovery from the flood some of those funds were used to establish loan programs to provide financial assistance to grand forks businesses as described below under the first program known as the business and industry disaster assistance program loans were first made in june or july of the old program was closed in date and was replaced by the business assistance loan grant program eligibility for and terms of the old program the business and industry disaster assistance program old program was established to provide financial assistance to grand forks businesses directly affected by the flood business taxpayers that were located within the city limits of grand forks and suffered physical loss from the date flood were eligible under the old program to receive loans depending on the number of persons employed by the business the wta-n-108446-98 maximum amounts of the loans ranged from dollar_figure to dollar_figure the borrowed money was substantially unrestricted and could be used for a variety of business purposes including a building equipment inventory or working_capital loans made under the old program are issued for cash equal to their stated principal_amount the loans have a 3-year term they accrue interest pincite percent principal is payable at maturity however if the business is still located within the city limits of grand forks on the maturity_date of the loan old contingency percent of the stated principal_amount is forgiven eligibility for and terms of the new program the business assistance loan grant program new program replaces the old program the new program requires economic distress but not necessarily physical loss as a result of the flood a business is eligible for a loan under the new program if it is located within the city limits of grand forks it existed at the time of the flood under current ownership it submits information about employee income to support an aggregate percent low- to moderate-income requirement the owners of the business have their primary residences within approximately miles of grand forks the business provides financial information for example tax returns showing it is viable and self- sustaining and the business provides financial information for example sales_tax records showing economic distress resulting from the flood businesses that suffered a physical loss will be given priority over those that suffered only an economic loss some businesses that borrowed money under the new program had not borrowed money under the old program under the new program an eligible_business may borrow up to dollar_figure per employee with a maximum of dollar_figure of this dollar_figure the maximum that can come from community development block grant funds is dollar_figure percent of the total assistance an eligible_business could borrow a maximum of dollar_figure if it had or fewer full time equivalent fte employees a business with more than fte employees could borrow dollar_figure per fte employee up to a maximum of dollar_figure under the original terms of the old program loans under the old program accrued interest pincite percent compounded annually with payment of the interest deferred until maturity all accrued interest as well a sec_25 percent of the stated principal_amount would be forgiven upon satisfying the old contingency in september of the grand forks city council voted to forgive the interest on all of the loans under the old program even if the old contingency is not subsequently satisfied a business should not have taken a deduction for accrued interest for the period before september of wta-n-108446-98 loans originally made under the new program are issued for cash equal to their stated principal_amount the loans have a 15-year term they accrue interest pincite percent sixty percent of the stated principal_amount is payable in equal monthly payments over the last years of the loan’s term the remaining percent of the stated principal_amount is payable at maturity however if the business continues to satisfy the eligibility requirements for the new program on the 3-year anniversary of the issue_date of the loan new contingency the percent of the stated principal_amount payable at maturity is forgiven loans made under the old program and refinanced under the new program in september of the grand forks city council voted to permit refinancing under the new program of old loans upon their maturity if the old contingency is satisfied if the old contingency is not satisfied the business will not be eligible to refinance the loan upon refinancing an additional percent of the original stated principal_amount of the old loan will be forgiven and the business will be required to repay the remaining percent of the stated principal_amount in equal monthly payments beginning years after the refinancing date law and analysis what is the tax treatment of a loan made under the old program discussion of issue a a loan made under the old program is issued with bond_issuance_premium equal to percent of the stated principal_amount in general the business will take the full amount of the premium into income at maturity loans under the old program provide for multiple possible payment schedules the stated payment schedule consists of a single payment of percent of the loan’s stated principal_amount on the maturity_date this payment schedule applies if the old contingency is not satisfied an alternative payment schedule to the stated payment if the business ceases operations before the maturity_date of the loan the principal balance becomes due and payable immediately if the business ceases operations before the maturity_date of the new loan the principal balance becomes due and payable immediately for purposes of this memorandum we assume that the loans under both the old program and the new program are debt instruments for federal_income_tax purposes wta-n-108446-98 schedule consists of a single payment of percent of the loan’s stated principal_amount on the maturity_date this payment schedule applies if the old contingency is satisfied resulting in the forgiveness of percent of the loan’s stated principal_amount otherwise payable at maturity if a loan provides for multiple possible payment schedules the regulations attempt to select one of the payment schedules and use it to determine the yield and maturity of the loan the expected payment schedule sec_1_1272-1 of the income_tax regulations if the loan provides the borrower with an option that will cause an alternative payment schedule to apply the regulations assume that the borrower will exercise or decline to exercise the option in order to achieve the lowest possible yield for a loan under the old program the lowest possible yield is achieved for the payment schedule consisting of a single payment of percent of the loan’s stated principal_amount on the maturity_date thus the regulations select this payment schedule on the assumption that the business will remain within the city limits sec_1_1272-1 a loan is issued with bond_issuance_premium if its issue_price is greater than its stated_redemption_price_at_maturity the amount of the bond_issuance_premium is the excess of the issue_price over the stated_redemption_price_at_maturity sec_1_163-13 if the loan provides for multiple possible payment schedules and has an expected payment schedule under sec_1_1272-1 the expected payment schedule is used to determine whether the loan is issued with bond_issuance_premium sec_1 e the issue_price of a loan issued for cash is equal to the amount of the cash sec_1273 for a loan under the old program the issue_price is equal to percent of its stated principal_amount and based on its expected payment schedule the stated_redemption_price_at_maturity is equal to percent of its stated principal_amount thus the loan has bond_issuance_premium equal to percent of its stated principal_amount bond_issuance_premium is generally allocated over the term of the loan and taken into account by reducing the borrower’s deductions for qualified_stated_interest sec_1_163-13 for a loan under the old program however the expected payment schedule does not provide for any stated_interest payments thus allocated bond_issuance_premium is carried forward until retirement at which time the business takes it into account as ordinary_income sec_1_163-13 for a loan issued with bond_issuance_premium the allocation of the premium over the term of the loan under sec_1_163-13 produces matching reductions in the adjusted the stated_redemption_price_at_maturity for a loan is the sum of all payments on the loan other than qualified_stated_interest in general qualified_stated_interest is stated_interest that is unconditionally payable at least annually at a single fixed rate over the entire term of the loan sec_1_1273-1 and c wta-n-108446-98 issue_price of the loan under sec_1_1275-1 as a result for a loan under the old program the amount of bond_issuance_premium income at retirement is equal to the amount by which the adjusted_issue_price has been reduced below the original issue_price if the old contingency is satisfied the loan is retired at maturity for a price equal to its adjusted_issue_price and there is no income_or_deduction other than the bond_issuance_premium income there are two final points first sec_7872 does not apply to loans under the old program second the forgiveness of the interest on all of the loans under the old program by the city council in september of did not produce a deemed exchange of the original loans for modified loans under sec_1001 the following example illustrates the treatment of a loan made under the old program assume a business borrows dollar_figure under the old program and the stated principal_amount of the loan is dollar_figure if the old contingency is satisfied only dollar_figure will be due at maturity otherwise the full stated principal_amount of dollar_figure will be due at maturity if the old contingency is not satisfied the income from the bond_issuance_premium will be offset by an interest_deduction under sec_1_163-7 in an amount equal to the excess of the retirement price percent of the stated principal_amount over the adjusted_issue_price issue_price minus bond_issuance_premium thus the net_income and deduction equals dollar_figure sec_7872 recasts certain below-market loans into a combination of an at- market loan and an up-front cash payment however sec_7872 will not apply to loans under the old program unless they are determined to be tax_avoidance loans under sec_7872 the old program was established by the city of grand forks with federal funds to provide financial assistance to grand forks businesses affected by the flood therefore the interest arrangements of a loan under the new program are not structured with a principal purpose of avoiding federal tax and the loan is not a tax_avoidance loan for purposes of sec_7872 a deemed sec_1001 exchange would have produced income to the business when the interest was forgiven sec_1_1001-3 provides that a significant modification of a loan results in a deemed sec_1001 exchange there was a modification of the loans under the old program but it was not significant because there was no change in the yield there was no change in the yield because the payment schedules used in the comparison were the expected payment schedules of the original and modified loans and they were identical sec_1_1001-3 sec_1_1001-3 and sec_1_1001-3 wta-n-108446-98 under these facts the issue_price of the loan is dollar_figure the expected payment schedule consists of a single payment of dollar_figure on the maturity_date the stated_redemption_price_at_maturity is dollar_figure and the loan is issued with bond_issuance_premium equal to dollar_figure dollar_figure issue_price minus dollar_figure stated_redemption_price_at_maturity the business will take that dollar_figure of bond_issuance_premium into income at maturity if the old contingency is satisfied there are no further tax consequences if the old contingency is not satisfied the loan is retired at maturity for a price of dollar_figure which exceeds its adjusted_issue_price of dollar_figure by dollar_figure that excess is deductible as interest thus the net_income and deduction equals dollar_figure what is the tax treatment of a loan made under the new program discussion of issue b a loan made under the new program is generally treated the same way as a loan made under the old program except that the bond_issuance_premium is equal to percent of the stated principal_amount of the loan as under the old program loans under the new program provide for multiple possible payment schedules the stated payment schedule of a loan consists of equal monthly payments over the last years of the loan’s term and a payment of percent of the stated principal_amount on the maturity_date the amount of the monthly payments is equal to percent of the stated principal_amount divided by this payment schedule applies if the new contingency is not satisfied and the business continues to operate until maturity the expected payment schedule for the loan consists of the same equal monthly payments as in the stated payment schedule this payment schedule applies if the new contingency is satisfied resulting in the forgiveness of the percent of the stated principal_amount payable at maturity and the business continues to operate until maturitydollar_figure the following example illustrates the treatment of a loan originally made under the new program assume a business borrows dollar_figure under the new program and the stated principal_amount of the loan is dollar_figure if the new contingency is satisfied and the business continues to operate until maturity the for every date between the issue_date and the maturity_date there is also an alternative payment schedule that applies if the business ceases operations on that date wta-n-108446-98 business will make monthly payments of dollar_figure dollar_figure over the last years of the loan’s 15-year term if the new contingency is not satisfied and the business continues to operate until maturity the business will make monthly payments of dollar_figure over the last years of the term and a payment of dollar_figure at maturitydollar_figure under these facts the issue_price of the loan is dollar_figure the expected payment schedule consists of monthly payments of dollar_figure over the last years of the term the stated_redemption_price_at_maturity is dollar_figure and the loan is issued with bond_issuance_premium equal to dollar_figure dollar_figure issue_price minus dollar_figure stated_redemption_price_at_maturity the business will take that dollar_figure of bond_issuance_premium into income at maturity if the new contingency is satisfied and the business continues to operate until maturity there are no further tax consequences if the new contingency is not satisfied and the business continues to operate until maturity the loan is retired at maturity for a price of dollar_figure which exceeds its adjusted_issue_price of dollar_figure dollar_figure issue_price minus dollar_figure bond_issuance_premium minus dollar_figure of monthly principal payments by dollar_figure that excess is deductible as interest thus the net_income and deduction equals dollar_figure discussion of issue c what is the tax treatment of a loan made under the old program and refinanced under the new program when a loan made under the old program is refinanced under the new program the loan is repurchased for a new loan and then retired as a result the business generally will have bond_issuance_premium income and discharge_of_indebtedness income at the time of the refinancing and deductions for unstated_interest over the term of the new loan a loan under the old program old loan can be refinanced under the new program only on its original maturity_date and only if the old contingency is satisfied resulting in forgiveness of percent of its stated principal_amount if an old loan is refinanced resulting in a new loan an additional percent of the old loan’s stated principal if the business ceases operations before maturity the remaining payments become due and payable immediately adjusted_issue_price is decreased by the amount of payments other than qualified_stated_interest and allocated bond_issuance_premium sec_1_1275-1 wta-n-108446-98 amount is forgiven resulting in a stated principal_amount for the new loan equal to percent of the stated principal_amount of the old loan the term of the new loan i sec_12 years the stated payment schedule of the new loan consists of equal monthly payments over the last years of its term the amount of the monthly payments is equal to the stated principal_amount of the new loan divided by there is no stated interestdollar_figure the regulations view a refinancing as a modification of the old loan regardless of the form of the refinancing if the modification is significant the refinancing results in a taxable_exchange in which the new loan is issued for the old loan and the old loan is retired sec_1_1001-3 and sec_1_1001-3 the modification of the old loan is significant because it results in the material deferral of scheduled payments when the old loan is refinanced the percent portion of the stated principal_amount that would otherwise be payable at maturity after forgiveness is reduced by an additional percent and rescheduled into monthly payments that begin after an additional two years all of the payments due on the old loan are deferred for periods ranging from to years this deferral significantly exceeds the deferral protected by the safe-harbor in the regulations which is one and one-half years for loans under the old program therefore the deferral is material the modification is a significant modification and the refinancing results in a taxable_exchange for purposes of sec_1001 sec_1_1001-3 and sec_1_1001-3dollar_figure the regulations thus treat the refinancing as a transaction in which the old loan is repurchased through the issuance of the new loan and the old loan is retired because the new loan is issued for nonpublicly traded property the old loan its issue_price generally would be determined under sec_1274 however sec_1274 does not apply because the total payments due under the new loan are less than dollar_figure sec_1274 thus the issue_price of the new loan is equal to its stated_redemption_price_at_maturity sec_1273 the stated_redemption_price_at_maturity of the new loan is equal to its stated principal_amount percent of the stated principal_amount of the old loan if the business ceases operations prior to maturity the principal balance of the new loan becomes due and payable immediately the modification is also a significant modification under the change-in-yield rule in sec_1_1001-3 wta-n-108446-98 although sec_1274 will not apply to the new loan a portion of its stated principal_amount might be treated as unstated_interest under dollar_figure that portion is equal to the excess of the sum of the payments due under the new loan over the sum of the present values of those payments sec_1_483-2 the present_value of a payment is determined by discounting it from its due_date to the refinancing date using a discount rate that discount rate is the lowest long-term adjusted applicable_federal_rate afr for the month in which the refinancing occurs and for the two prior monthsdollar_figure sec_1_483-2 sec_1_483-3 sec_1_1274-4 the afrs including the adjusted afrs for each month are published in the internal_revenue_bulletin if a portion of the stated principal_amount of the new loan is treated as unstated_interest under sec_483 the business will be able to deduct the interest for federal_income_tax purposes assuming the interest is otherwise deductible the timing and amounts of the business’s interest deductions will be determined under sec_1_483-1 and sec_1_446-2 under sec_108 the business will have discharge_of_indebtedness income on the refinancing equal to percent of the old loan’s stated principal_amount plus the portion of the new loan’s issue_price that is treated as unstated_interest under sec_483 this amount is equal to the excess of the adjusted_issue_price of the old loan over the repurchase price sec_1_61-12 as explained in the discussion of issue a the adjusted_issue_price of the old loan at maturity will be equal to percent of the old loan’s stated principal_amount because of the downward adjustment for bond_issuance_premium the repurchase price is the issue_price of the new loan reduced by the portion that is treated as unstated_interest under sec_483 sec_1_61-12 and sec_108 the business will have bond_issuance_premium income on the retirement of the old loan equal to percent of the old loan’s stated principal_amount as explained in the discussion of issue a the old loan was issued with bond_issuance_premium equal to percent of its stated principal_amount because the refinancing will occur on the old loan’s maturity_date all of the bond_issuance_premium will have been allocated and carried forward the business will take the bond_issuance_premium into account as ordinary_income when the old loan is retired this portion might be zero for instance if the total payments due under the new loan are less than dollar_figure sec_1_483-1 the use of the adjusted afr for tax-exempt obligations is implied by the legislative_history of sec_1274 joint_committee on taxation staff general explanation of the revenue provisions of the deficit_reduction_act_of_1984 98th cong 2d sess wta-n-108446-98 the following example illustrates the treatment of an old loan refinanced under the new program a business borrows dollar_figure under the old program and the stated principal_amount of the old loan is dollar_figure the old contingency is satisfied as a result dollar_figure of the stated principal_amount of the old loan is forgiven the business refinances the old loan under the new program as a result an additional dollar_figure of the stated principal_amount of the old loan is forgiven thus the stated principal_amount for the new loan is dollar_figure the stated payment schedule of the new loan consists of monthly payments of dollar_figure beginning two years after the refinancing the portion of the stated principal_amount of the new loan that is treated as unstated_interest is dollar_figure assuming a long-term adjusted afr of dollar_figure percent compounded monthly17 under these facts the issue_price of the old loan is dollar_figure the expected payment schedule consists of a single payment of dollar_figure on the maturity_date the stated_redemption_price_at_maturity is dollar_figure the loan is issued with bond_issuance_premium equal to dollar_figure dollar_figure issue_price minus dollar_figure stated_redemption_price_at_maturity and the adjusted_issue_price on the refinancing date is dollar_figure dollar_figure issue_price minus dollar_figure bond_issuance_premium the issue_price of the new loan is dollar_figure the stated payment schedule consists of monthly payments of dollar_figure beginning years after the refinancing and the stated_redemption_price_at_maturity is dollar_figure on the refinancing the business recognizes bond_issuance_premium income of dollar_figure and discharge_of_indebtedness income computed as follows for purposes of sec_108 the issue_price of the new loan dollar_figure is reduced by the portion of the stated principal_amount of the new loan that is treated as unstated_interest under sec_483 dollar_figure resulting in a reduced issue_price of dollar_figure thus the business recognizes discharge_of_indebtedness income of dollar_figure dollar_figure adjusted_issue_price of the old loan minus dollar_figure reduced issue_price of new loan assuming the unstated_interest dollar_figure is deductible the business will deduct it as it accrues over the term of the new loan assuming the business uses an accrual_method of accounting or as payments are the afr in the example has been rounded to two decimal places the exact amount of dollar_figure of unstated_interest assumes an afr of percent compounded monthly wta-n-108446-98 made on the new loan assuming the business uses the cash_method_of_accounting the amount of unstated_interest that is deductible each year is determined under sec_1_446-2 discussion of questions - sec_1033 sec_165 sec_111 and sec_118 it is apparent from the analysis under question sec_1 -1 c that a borrower in satisfying either the old contingency or the new contingency realizes income this income -- which we refer to as loan forgiveness income -- generally consists of bond_issuance_premium income alone although loan forgiveness income also includes a component of discharge_of_indebtedness income in the case of a borrower under the old program who refinances under the new program having established that a borrower realizes loan forgiveness income upon the maturity_date of a borrower’s original loan assuming that the borrower satisfied the relevant contingency we now address the question whether any exclusion or nonrecognition provisions apply to the loan forgiveness income amount as is detailed below there are some circumstances in which the provisions of sec_1033 sec_165 or sec_118 as well as the tax_benefit_rule may apply to some or all of that amount discussion of question deferral under sec_1033 although the amount of loan forgiveness income is in general gross_income to the recipient taxpayers under sec_61 the deferral provisions of sec_1033 may apply to some or all of that amount under certain circumstances in particular we conclude that a loan recipient who incurred physical damage as a result of the flood may treat the amount of the loan forgiveness income as received on account of the flood damage and elect in accordance with sec_1033 to defer recognition of gain to the extent the recipient expended an amount at least equal to the amount of the loan forgiveness income to purchase qualified_replacement_property sec_1001 provides generally that gain_or_loss from the sale_or_other_disposition of property is measured by the difference between the amount_realized on the disposition and the property’s adjusted_basis sec_1001 provides generally for the current recognition of gains or losses sec_1033 which allows for the deferral of gain when property is compulsorily or involuntarily converted is a specific exception to the general_rule of sec_1001 for sec_1033 purposes an involuntary_conversion may be the result of the destruction of property in whole or in part the theft of property the seizure of property requisition or wta-n-108446-98 condemnation of property or the threat or imminence of requisition or condemnation of property floods and fires are instances of involuntary_conversions an involuntary_conversion may include a conversion into money sec_1033 provides that if property as a result of its destruction in whole or in part is involuntarily converted into money the gain if any shall be recognized except to the extent that the electing taxpayer within the period specified in sec_1033 purchases qualified_replacement_property property similar_or_related_in_service_or_use to the converted property in that event the gain shall be recognized only to the extent that the amount_realized upon such conversion regardless of whether such amount is received in one or more taxable years exceeds the cost of such other_property sec_1033 provides that if property is converted into money and the taxpayer purchases qualified_replacement_property and elects nonrecognition of gain under sec_1033 then the basis of the replacement_property shall be the cost of such property decreased by the amount of gain not recognized the city of grand forks established the old and new programs for the purpose of assisting businesses that sustained physical damage as a result of the april flood and fire one goal of both programs is to aid recovery from flood damage accordingly taxpayers who realize loan forgiveness income under the old or new program are eligible to defer recognition of the gain realized if they otherwise comply with the provisions of sec_1033 in order to qualify for full deferral under the provisions of sec_1033 the taxpayer must expend the amount of the forgiven principal on replacement_property that is similar_or_related_in_service_or_use to the converted property expenditures made to repair or replace damaged property are treated as amounts spent to purchase qualifying replacement_property generally there is no tracing requirement as to the source of funds spent to purchase qualified_replacement_property with respect to the application of sec_1033 thus if a taxpayer obtained a loan from another source such as the small_business administration sba and used the proceeds of that loan which is not income under sec_61 to purchase qualified_replacement_property it would be entitled to defer gain under sec_1033 with respect to the amount of the principal forgiven under the program to the extent of the cost of the replacement_property it is necessary however to ensure that amounts spent to purchase qualified_replacement_property are not counted twice in applying sec_1033 if the taxpayer also received insurance proceeds as a result of the flood which may be income under sec_61 and used those proceeds to purchase replacement_property that property would not also qualify as replacement_property for purposes of deferring the gain realized with respect to the loan forgiveness income rather the taxpayer would be required to purchase additional qualifying replacement_property in the amount of the loan forgiveness income in order to defer income_recognition with respect to it wta-n-108446-98 however the amount if any by which the taxpayer’s total recovery insurance proceeds loan forgiveness income grants etc exceeds its physical damage must be included in income under sec_61 income resulting from the recovery_of economic losses cannot be deferred under sec_1033 discussion of question application of sec_165 sec_165 permits a deduction for any loss sustained during the taxable_year and not_compensated_for_by_insurance_or_otherwise the point at which a loss is sustained is governed by sec_1_165-1 of the income_tax regulations which links the timing of a loss deduction with the possibility of reimbursement thus sec_1 d i provides that if a casualty or other event occurs which may result in a loss and in the year of such casualty or event there exists a claim for reimbursement with respect to which there is a reasonable_prospect_of_recovery no portion of the loss with respect to which reimbursement may be received is sustained for purposes of sec_165 until it can be ascertained with reasonable certainty whether or not such reimbursement will be received similarly sec_1_165-1 provides that the amount of insurance or other compensation received must be taken into account in determining the amount of loss actually sustained sec_1_165-1 links a loss deduction with the tax_benefit_rule of sec_111 in those circumstances in which a taxpayer deducts a loss in one year derives a tax_benefit from the deduction and receives reimbursement for that loss in a subsequent taxable_year the tax_benefit_rule ordinarily requires the recognition of gross_income in such cases because the receipt of the compensation is fundamentally inconsistent with the prior deduction 460_us_370 1983_1_cb_50 because the existence of compensation under sec_165 affects the extent and timing of a loss deduction and may trigger tax_benefit income we must determine whether the principal forgiven under the old and new programs is compensation to the borrowing businesses we conclude that it was to the extent of the business's physical damage the loans made under the old and new programs were intended at least in part to compensate those who have suffered casualty losses see generally 74_tc_725 money received from a_trust fund established to compensate individuals who had been defrauded by attorneys was compensatory within the meaning of sec_165 and thus reduced the allowable deduction statutory language insurance or otherwise construed by court as referring to payments that are structured to replace what was lost and that are similar to insurance revrul_71_160 1971_1_cb_75 taxpayer received compensation within the meaning of sec_165 to the extent that an sba loan was canceled pursuant to the subsequently enacted disaster relief act casualty_loss proper when taken because taxpayer could not have anticipated the debt_cancellation but tax_benefit income wta-n-108446-98 resulted from debt_cancellation 63_tc_21 decision cites and is consistent with rev_rul thus a taxpayer suffering damage from the flood and fire would have been precluded from taking a casualty_loss deduction to the extent it had a reasonable prospect of having income as a result of participating in the old program moreover a taxpayer who properly took a casualty_loss deduction either because it lacked a reasonable prospect of recovering compensation or because the prospective compensation was insufficient to reimburse the loss and who has income under the old or new or both programs must account for that income under tax_benefit principles the following example illustrates the interplay of sec_165 and sec_1033 in this case fmv of business prior to flood fmv of business after flood loss basis in business casualty_loss deduction lower_of loss or basis dollar_figure big_number dollar_figure dollar_figure dollar_figure compensatory income from programs dollar_figure tax_benefit income amount of previously-taken deduction dollar_figure gain potentially deferred under sec_1033 dollar_figure discussion of question can the loan forgiveness income amount be treated as a nonshareholder contribution_to_capital by corporate borrowers as previously noted sec_61 provides generally that gross_income means all income from whatever source derived unless excluded by law sec_118 provides that in the case of a corporation gross_income does not include any contribution to the capital of the taxpayerdollar_figure because some of the loan recipients under the old and new programs are corporations a question arises whether such recipients can treat the because sec_118 by its terms applies only to corporations businesses that operate as for example sole proprietorships or partnerships may not use the exclusion therein provided wta-n-108446-98 amount of forgiven principal as an excludible nonshareholder contribution_to_capital given the highly factual nature of contribution-to-capital cases we cannot provide a blanket answer to that question we can however provide general information which may be useful in determining the outcome of a specific case and we are available to discuss facts pertaining to particular taxpayers as needed the legislative_history of sec_118 provides in part as follows this sec_118 in effect places in the code the court decisions on the subject it deals with cases where a contribution is made to a corporation by a governmental_unit chamber of commerce or other association of individuals having no proprietary interest in the corporation in many such cases because the contributor expects to derive indirect benefits the contribution cannot be called a gift yet the anticipated future_benefits may also be so intangible as to not warrant treating the contribution as a payment for future services s rep no 83d cong 2d sess sec_1_118-1 provides in part that sec_118 also applies to contributions to capital made by persons other than shareholders for example the exclusion applies to the value of land or other_property contributed to a corporation by a governmental_unit or by a civic group for the purpose of inducing the corporation to locate its business in a particular community or for the purpose of enabling the corporation to expand its operating facilities however the exclusion does not apply to any money or property transferred to the corporation in consideration for goods or services rendered or to subsidies paid for the purpose of inducing the taxpayer to limit production much of the authority underlying the contribution_to_capital concept is found in decisions of the united_states supreme court for example in 319_us_98 the court determined that payments made by prospective customers to an electric utility company to cover the cost of extending the utility's facilities to their homes were not contributions to capital but rather were part of the price of service and thus were includible in the company's income in reaching its decision the court noted that the customers intended no contribution to the company's capital later the supreme court determined that payments to a corporation by community groups to induce the location of a factory in their community represented a contribution_to_capital 339_us_583 the court concluded that the contributions made by the citizens were made without anticipation of any direct service or recompense but rather with the expectation that the contribution would prove advantageous to the community at large id pincite the contract entered into by the community groups and the corporation provided that in exchange for a wta-n-108446-98 contribution of land and cash the corporation agreed to construct a factory operate it for at least years and meet a minimum payroll id pincite subsequently in 412_us_401 the supreme court in determining whether a taxpayer was entitled to depreciate the cost of certain facilities that had been funded by the federal government held that the governmental subsidies were not contributions to the taxpayer’s capital the court recognized in chicago b q r co that its holding in detroit edison co had been qualified by its decision in brown shoe co with the distinguishing characteristic between those two cases being the differing purposes motivating the respective transfers unlike detroit edison the only expectation of the contributors in brown shoe co was that their contributions might prove advantageous to the community at large as the court noted in chicago b q r co the transfers made in brown shoe co were contributions to the transferee’s capital rather than income to the transferee because the transfers were not for direct service or recompense but only for the purpose of obtaining an advantage for the general community in chicago b q r co the court also stated that other characteristics of a nonshareholder contribution_to_capital were implicit in detroit edison co and brown shoe co the court distilled from the two prior cases some of the characteristics of a nonshareholder contribution_to_capital it must become a permanent part of the transferee’s working_capital structure it may not be compensation such as a direct payment for a specific quantifiable service provided for the transferor by the transferee it must be bargained for the asset transferred must foreseeably result in benefit to the transferee in an amount commensurate with its value and the assets ordinarily if not always will be employed in or contribute to the production of additional income and its value assured in that respect as the foregoing indicates for a transfer to be a nonshareholder contribution to the capital of a corporation there must be both a proper motivation on the part of the transferor and requisite effects on the economic position of the transferee in the present situation it appears that the transferor motivation test will be met because the city of grand forks apparently is receiving a direct service or recompense in exchange for the forgiven principal whether the requisite economic effects on the transferee corporation exist is dependent on the facts of each particular case the loan proceeds must have been used to acquire capital assets to the extent of the forgiven principal wta-n-108446-98 sec_362 provides that the basis of any property acquired by a corporation is reduced to the extent of any nonshareholder contribution_to_capital thus if the amount of forgiven principal is treated as a nonshareholder contribution_to_capital under sec_118 that amount would not be included in the basis of the assets acquired the effect of sec_362 of course is to defer rather than permanently exclude the forgiven principal from income discussion of question information reporting as discussed elsewhere in this memorandum a borrower under either the old program the new program or both is required to include in gross_income bond_premium income discharge_of_indebtedness income or both unless some deferral provision applies specifically to the borrower’s situation this is true whether or not information reporting that is filing a return with the service and sending the taxpayer a statement containing the information included in that return is required of any person under the code with respect to the income although the code requires information reporting by payors of various kinds of income we do not believe any provision of the code requires the city to report amounts of bond_premium income borrowers realize upon satisfying the old or new contingency sec_6050p provides rules requiring an applicable_entity that discharges indebtedness of any person to file a return regarding the discharge and send the person a statement containing the information included in that return sec_6050p generally defines an applicable_entity to include various types of financial institutions such as banks and credit unions among others and federal executive judicial or legislative agencies this definition does not include state or local governmental entities sec_6050p is the only section requiring information reporting with respect to discharge_of_indebtedness no information reporting with respect to discharge_of_indebtedness is required of the city under sec_6050p however because it does not fall within the definition of an applicable_entity this technical assistance is advisory only and is intended to call attention to well- established principles of tax law that apply in the situation described taxpayers uncertain whether these principles or interpretations of tax law should apply to their situations should consider seeking a private_letter_ruling or if appropriate technical_advice procedures for issuing letter rulings and technical_advice are in revproc_99_1 1999_1_irb_6 and revproc_99_2 1999_1_irb_73 respectively


t c memo united_states tax_court richard a mcdowell petitioner v commissioner of internal revenue respondent docket no filed date gene m carlino for petitioner carmino j santaniello jr and bradford a johnson for respondent memorandum findings_of_fact and opinion dean special_trial_judge this case was heard pursuant to the provisions of sec_7443a of the code and rule sec_180 sec_181 and sec_182 1unless otherwise indicated all section references are to the internal_revenue_code in effect for the taxable_year in issue all rule references are to the tax_court rules_of_practice and procedure respondent determined a deficiency in petitioner's federal_income_tax of dollar_figure the sole issue for decision petitioner having conceded receiving unreported interest_income of dollar_figure is whether certain disability pension payments that he received in are includable in his gross_income for that year the facts in this case have been fully stipulated and are so found the stipulation of facts and the exhibits received into evidence are incorporated herein by reference petitioner resided in pawtucket rhode island at the time the petition was filed in this case findings_of_fact petitioner commenced employment as a firefighter with the city of pawtucket rhode island city in march of for the years through petitioner was a member of the international association of firefighters local no union in september of having responded to a chemical spill at a local jewelry manufacturer petitioner was exposed to anhydrous ammonia leaking from a defective storage tank the incident rendered petitioner totally disabled on date pursuant to city of pawtucket city ordinance chapter petitioner was awarded a disability pension in effect at the time of the award of the pension to petitioner was a collective bargaining agreement agreement between the city and the union containing disability provisions providing the same benefits as the city ordinance in accordance with the provisions of the collective bargaining agreement petitioner received annual disability pension payments equal to percent of his salary at the time of his retirement the disability pension ordinance of the city has been consistently applied to allow only those firefighters injured in the line of duty to receive a disability pension during the year petitioner received disability pension payments in the total amount of dollar_figure none of which was reported as gross_income on his federal_income_tax return for the year opinion respondent contends that petitioner may not exclude from gross_income amounts received under the disability pension_plan of the city because the city ordinance implementing the plan is neither a worker's compensation act nor in the nature of a worker's compensation act as required by statute it does not meet statutory requirements argues respondent because the wording of the ordinance does not specifically limit benefits to those who are disabled due to work-related injury or sickness respondent also argues that if petitioner received his disability payments pursuant to the agreement between the city and the union they are not excludable because the agreement is not a statute in the nature of a worker's compensation act petitioner counters respondent's contentions by maintaining that a petitioner does not rely on the agreement as a basis for excluding the pension disability payments from income b the city ordinance has been interpreted by the rhode island supreme court as in the nature of a worker's compensation act c the ordinance has been applied in a manner that is in the nature of a worker's compensation act and d the ordinance has been retroactively amended to clarify that it is in the nature of a worker's compensation act respondent's determinations are presumed correct and petitioner has the burden of proving otherwise rule a 290_us_111 furthermore every item of a person's gross_income is subject_to federal_income_tax unless there is a statute or some rule_of law that exempts the person or the item from gross_income 450_us_1 exemption under sec_104 an exclusion_from_gross_income can be found at sec_104 for amounts received under workmen's_compensation acts as compensation_for personal injuries or sickness sec_1_104-1 income_tax regs interprets sec_104 to exempt amounts received under a worker's compensation act or under a statute in the nature of a workmen's_compensation_act which provides compensation to employees for personal injuries or sickness incurred in the course of employment this exclusion has been strictly construed so as to conform with the general_rule that all income is taxable unless it is specifically excluded see 43_f3d_1446 fed cir 804_f2d_553 9th cir affg 82_tc_630 in the nature of workmen's_compensation petitioner does not here argue that sec_11 of the city ordinance is actually a worker's compensation statute petitioner instead contends that the ordinance is in the nature of a worker's compensation statute petitioner seems to agree with respondent that for an ordinance to be in the nature of a worker's compensation statute it must provide that only injuries that are work-related may be compensated petitioner and respondent are correct a statute will not be considered akin to a workers'_compensation act if it allows for disability payments for any reason other than on-the-job injuries 78_tc_864 affd 709_f2d_1206 8th cir accord take v commissioner supra clausse v commissioner tcmemo_1995_198 sec_11 of the city ordinance total and permanent disability provides in pertinent part that in addition to the foregoing retirement benefits any member who becomes totally and permanently disabled shall receive a benefit equal to sixty-six and two-thirds percent of the members sic pay at the time of his total and permanent disability sec_11a a of the city ordinance administration of disability payments provides that the determination of the disability from any cause shall be made upon the basis of reports on examinations made by three physicians interpretation of the ordinance petitioner argues that the rhode island supreme court has interpreted the ordinance as providing benefits only to those firefighters incurring duty-connected disabilities petitioner cites st germain v city of pawtucket a 2d r i as the basis for his position the issue in the case was whether a disabled city firefighter was covered by the general state statute that provides full pay for work-related injuries or by the state authorized but specific city ordinance providing for reduced pay for disabled firefighters in proceeding to decide that the general statute applied only to those various cities and towns that do not have their own pension plans the state supreme court described the city ordinance as follows in defendant passed chapter an ordinance that revised the existing pension_plan and provided in part that upon incurring a duty-connected disability a firefighter would receive a percentage of his pay for the duration of the disability or until he reached normal_retirement_age at which time he would be transferred to the retirement list and receive normal retirement benefits id pincite emphasis added it is this language that petitioner apparently relies upon for his characterization of the court's interpretation of the city ordinance while we find no basis upon which to disagree with the quoted description we disagree that it has the effect ascribed to it by petitioner the quoted description merely states that the ordinance covers duty-connected disability as we understand it there is no dispute between the parties that the city ordinance covers in part duty-connected disabilities the difficulty from petitioner's standpoint is that the language of the ordinance does not exclude from coverage non duty-connected injuries or sickness we find therefore that st germain v city of pawtucket id is not authority for determining that the city ordinance is in the nature of a worker's compensation act consistent application of the ordinance the parties have vaguely stipulated that the city ordinance has been consistently applied to grant benefits to firefighters only for disability due to work-related injury or sickness petitioner argues that the ordinance as applied in practice is therefore in the nature of a workmen's_compensation_act we also note that the parties have entered into two other ambiguous stipulations agreeing at the same time that petitioner was awarded a pension under the city's municipal pension_plan attaching a copy of the city ordinance and that he received pension payments in accordance with the provisions of a collective bargaining agreement between the city and the union petitioner argues in his brief that the agreement has no bearing on the determination of the present controversy we disagree with petitioner's assertion if petitioner received his disability benefits under the agreement rather than under the city ordinance it is clear that the payments were not received under a statute in the nature of a worker's compensation act 760_f2d_466 2d cir labor contract does not qualify as a statute within the meaning of sec_1_104-1 income_tax regs affg tcmemo_1984_525 covert v commissioner tcmemo_1990_598 whether petitioner received his payments under the city ordinance or under the union agreement is a question that also renders more doubtful the meaning of the parties' stipulation that the ordinance has been applied in practice to grant benefits only for work-related injuries or sickness we cannot be sure by whom the ordinance has been so applied union officials or city officials and if so which ones or in what manner such officials may have carried out the referred to practice assuming arguendo that the consistent application of the city ordinance was by an administrative body of the city the record is insufficient for us to determine whether such an application had the force and effect of law see 71_tc_560 beisler v commissioner tcmemo_1985_25 affd 787_f2d_1325 9th cir affd en_banc 814_f2d_1304 9th cir where administrative rules or regulations have the force and effect of law they will be found to be the equivalent of a statute for purposes of sec_1_104-1 income_tax regs interpreting sec_104 as explained in rutter v commissioner supra pincite a regulation like a statute is a rule_of general applicability promulgated by a public agency to govern conduct within the agency's jurisdiction a labor contract unlike a statute is an agreement between union and employer modifiable at any time we find the facts of this case similar to those of clemens v commissioner tcmemo_1989_205 there the taxpayer argued that his employer had a policy of paying benefits for work- related injuries and that he had received payments pursuant to the policy along with his own testimony the taxpayer offered as evidence statements of a witness who testified that the policy was outlined in a handbook and was included in the relevant collective bargaining agreement the court found the evidence insufficient to show that the past practice amounted to actions having the force and effect of law we find the record in this case insufficient to show that application or practice here arose to a level having the force and effect of law retroactive clarification of the city ordinance petitioner urges that our examination of the wording of the city ordinance include language added to the ordinance2 by an 2pawtucket city ordinance chapter has been renumbered the ordinance provisions with which we are concerned were chapter continued amendment city ordinance chapter no approved on date entitled an ordinance and amendment establishing a tax exempt plan for firefighters and policemen amendment the amendment adds to the total and permanent disability provision of the city ordinance the following language c the benefits established herein are in lieu of worker's compensation benefits which have not been available to the participants herein since the inception of the plan the amendment to the ordinance was made retroactive from date the date of enactment of the ordinance by city ordinance chapter no approved date petitioner argues that the amendment clarifies that the benefits of the ordinance are intended only for those injured in the line of duty as in the case of a workmen's_compensation_act respondent argues that petitioner's assertion is misplaced and in any event the amendment should not be given retroactive effect we need not decide here whether the retroactive_amendment is permissible even if the amendment were to be given retrospective effect it would not cause the ordinance to be a statute in the nature of a worker's compensation act the title of the amendment suggests that its purpose is to make city disability benefits tax exempt but it does not control continued sec_11 and sec_11a these provisions are now found at chapter of the city ordinance secs and the interpretation of the provision the title of an act may only aid interpretation by the court if there is doubt about the meaning of the text of the provision town of east greenwich v o'neil a 2d r i the title does not control when a court analyzes the plain meaning of a provision fiske v macgregor div of brunswick a 2d r i we find that the plain meaning of the amendment is that for disability claims of city firefighters and police the city ordinance applies in lieu of in place of or instead of worker's compensation benefits that workers injured while on duty must claim benefits under the ordinance and not worker's compensation is not the critical issue here however that workers injured or rendered ill for reasons unrelated to their work may on the face of the provision as written even with the amendment claim benefits under the ordinance is critical and fatal to any exemption under sec_104 see 879_fsupp_925 s d ind in lieu of language of state disability statute cannot change its nature conclusion although injured while on duty as a firefighter petitioner has failed to carry his burden_of_proof to show that he received disability payments under a worker's compensation statute or a statute in the nature of a worker's compensation statute we are unable to find erroneous respondent's determination that the disability payments received by petitioner are includable in gross_income in the year decision will be entered for respondent


internal_revenue_service department of the treasury index number number release date washington dc person to contact telephone number refer reply to cc dom p si -- plr-114246-99 date nov legend partnership state county project agency gen partner a gen partner b gen partner c ltd partner a ltd partner b a b c d e plr-114246-99 f g h i j k l m n o p q r s t u v w x z dear this letter responds to your letter dated date submitted on behalf of agency and partnership requesting a private_letter_ruling under sec_42 of the internal_revenue_code and sec_1_42-13 of the income_tax regulations to correct an administrative error in an allocation of the low-income_housing tax_credit dollar amounts plr-114246-99 agency and partnership represent that the facts are as follows facts partnership was formed for the purpose of acquiring constructing developing owning and operating a a-unit low-income_housing apartment complex known as project partnership was organized as a state limited_partnership on b partnership uses the accrual_method of accounting and has a year-end of november the original general partners of partnership were gen partner a and gen partner b the initial limited_partner was ltd partner a effective c ltd partner a withdrew as initial limited_partner gen partner c was admitted as a general_partner and ltd partner b was admitted as a limited_partner effective d gen partner a withdrew as a general_partner on f gen partner a submitted an application to agency for e credits for the project the project was designed to consist of a residential units in g buildings on h agency issued a reservation of e low-income_housing tax_credits in the amount of dollar_figurei according to partnership an allocation of dollar_figurei was insufficient to bridge the equity gap the project needed approximately dollar_figurej in credits agency issued the carryover allocation of e credits on l in the amount of dollar_figurei the carryover allocation agreement referenced the number of buildings as g and thus g building identification numbers bins were issued for the project according to agency and partnership agency issued the e allocation principally as a mechanism for assuring expedited review and award of credits when the state’s housing dollar ceiling for k became available in a letter dated m agency requested that partnership reactivate its application by submitting any revisions to the e application by letter dated n partnership notified agency that no revisions were necessary and that partnership was prepared to proceed on the basis of the e application in a letter dated o partnership returned the e credits partnership received a k allocation pursuant to a k carryover allocation dated p in the amount of dollar_figureq however the k carryover allocation agreement referenced only one bin for the project at that time partnership was under the impression that as the buildings were placed_in_service agency could take corrective action to issue form_8609 low-income_housing_credit allocation certification with a bin for each building partnership proceeded to construct project however during a blizzard in r county was declared a major disaster_area as a result of the blizzard only one building in the project was placed_in_service by s on t gen partner c sent a letter to the internal_revenue_service regarding relief under revproc_95_28 1995_1_cb_704 by letter dated u the service wrote to agency and informed agency that agency would not be precluded from issuing the relief requested agency informed partnership that agency would submit an amended form_8610 annual low-income_housing_credit agencies report simultaneously with issuing the form 8609s for the project all of the buildings in the project were placed_in_service by v plr-114246-99 on w partnership submitted a cost certification and breakdown of qualified_basis to agency on x agency sent a letter to partnership stating that in the course of reviewing the paperwork submitted in support of the request for the form 8609s agency discovered that only one bin for the project had been issued in connection with the above statement of facts agency represents that it intended to issue g bins to the project the number of buildings in the project was not material to the carryover allocation for the project and the fact that agency issued only one bin to the project would not have affected a the amount of credit allocated to the project b the ranking of the project in agency’s k allocation round or c any other aspect of the carryover allocation for the project ruling requested agency and partnership request permission pursuant to sec_42 to correct the administrative error by amending the k carryover allocation to provide for the additional bins on the amended carryover allocation agency will indicate that it is making the correction under sec_1_42-13 law and analysis under sec_42 state and local housing_credit agencies may correct administrative errors and omissions concerning allocations and recordkeeping within a reasonable period of time after their discovery sec_1_42-13 defines an administrative error or omission as a mistake that results in a document that inaccurately reflects the intent of the agency at the time the document is originally completed or if the mistake affects a taxpayer a document that inaccurately reflects the intent of the agency and the affected taxpayer at the time the document is originally completed sec_1_42-13 however provides that an administrative error or omission does not include a misinterpretation of the applicable rules and regulations under sec_42 in the present case agency committed an administrative error when the e application_for low-income_housing tax_credits that was the basis for the k allocation referenced g buildings but entered into a k carryover allocation agreement that referenced only one building this error was not a misinterpretation of the applicable rules and regulations under sec_42 however as a result of this error the k carryover allocation did not accurately reflect the intent of agency and partnership at the time the document was executed the intent of agency was to allocate the same amount of credit to the project notwithstanding the fact that agency issued only one bin for the project further the change does not affect the amount of housing_credit_dollar_amount allocated to the project the ranking of the project in agency’s k allocation round nor any other aspect of the carryover allocation for the project thus a correctable administrative error occurred in this situation plr-114246-99 under the represented facts the k carryover allocation is the credit allocating document under sec_1_42-13 the secretary must pre-approve a correction of an administrative error or omission if the correction is not made before the close of the calendar_year of the error or omission and the correction requires a numerical change to the credit_amount allocated for the building or project in the present case the correction would involve a numerical change to the credit_amount allocated to the one building that properly received a bin based solely on the representations and the relevant law and regulations set forth above we rule as follows partnership and agency committed an administrative error when it failed to identify the actual number of residential buildings in the project in the carryover allocation because of that administrative error the k carryover allocation inaccurately reflects the intent of agency and partnership when the k carryover allocation was executed agency and partnership requested to correct the administrative error within a reasonable period of time after becoming aware of the administrative error agency will assign z additional bins to accurately reflect that there are g residential buildings in the project and agency will allocate low-income_housing tax_credit to each of the g residential buildings in the project not exceeding dollar_figureq for the entire project to correct this administrative error agency must do the following amend the k carryover allocation to include bins for the z additional buildings in the project and to allocate the appropriate amount of low-income_housing tax_credit to each of the g buildings in the project not exceeding dollar_figureq for the entire project if possible the new bins should be in sequential order with the existing bin and the existing bin shall continue in effect on the amended k carryover allocation agency should indicate that it is making the correction under sec_1_42-13 and plr-114246-99 attach a copy of the amended k carryover allocation to an amended form_8610 annual low-income_housing_credit agencies report for k and file the amended form_8610 with the service when completing the amended form_8610 agency should follow the specific instructions on the form_8610 under the heading amended reports no opinion is expressed or implied regarding the application of any other provisions of the code or regulations specifically we express no opinion on whether the project qualifies for the low-income_housing tax_credit under sec_42 nor the validity of the project’s costs included in eligible_basis this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file a copy of this letter is being sent to partnership's authorized legal_representative sincerely yours s harold e burghart harold e burghart assistant to the branch chief branch office of assistant chief_counsel passthroughs and special industries enclosure copy


department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------------------ id no ------------ ---------------- telephone number -------------------- refer reply to cc psi b04 plr-128806-14 date october internal_revenue_service number release date index number -------------------- ------------------------------------- ------------------------------------- in re ------------------------------- legend decedent dear ------------- ------------------ this letter responds to your personal representative’s letter of date requesting an extension of time pursuant to sec_301_9100-3 of the procedure and administration regulations to file a form_8939 allocation of increase in basis for property_acquired_from_a_decedent to make an election under sec_1022 of the internal_revenue_code code sec_1022 election and to allocate basis to eligible_property transferred as a result of decedent’s death the facts and representations submitted are as follows decedent died in the executor for decedent’s estate retained a tax professional to advise him on estate_tax matters the executor of decedent’s estate is requesting an extension of time pursuant to sec_301_9100-3 to file the form_8939 to make the sec_1022 election and to allocate basis provided by sec_1022 to eligible_property transferred as a result of decedent’s death law and analysis sec_1022 provides that property_acquired_from_a_decedent who died after date is treated as transferred by gift and the basis of the person acquiring the property from such a decedent is the lesser_of the adjusted_basis of the decedent or the fair_market_value of the property at the date of the decedent's death sec_1022 provides in general that the basis_of_property under sec_1022 is increased by basis increase that is allocated to the property sec_1022 provides in general that basis increase is the portion of the aggregate basis increase that is allocated to the property plr-128806-14 sec_1022 and c provide that the aggregate basis increase is dollar_figure and that the aggregate basis increase is increased by-- i the sum of the amount of any capital_loss_carryover under sec_1212 and the amount of any net_operating_loss_carryover under sec_172 that would but for the decedent’s death be carried from the decedent’s last taxable_year to a later taxable_year of the decedent plus ii the sum of the amount of any losses that would have been allowable under sec_165 if the property acquired from the decedent had been sold at fair_market_value immediately before the decedent’s death sec_1022 provides that in the case of property that is qualified spousal property the basis of such property under sec_1022 as increased under sec_1022 is increased by spousal property basis increase allocated to the property sec_1022 provides in general that spousal property basis increase is the portion of the aggregate spousal property basis increase which is allocated to the property sec_1022 provides that the aggregate spousal property basis increase is dollar_figure sec_1022 provides in general that the basis_of_property acquired from a decedent may be increased under sec_1022 or c only if the property was owned by the decedent at the time of death sec_1022 describes property that is considered to be owned by the decedent at the time of death sec_1022 provides that the basis adjustments under sec_1022 and c shall not increase the basis of any interest in property above its fair_market_value in the hands of the decedent as of the date of the decedent’s death sec_1022 provides in general that the executor is to allocate the basis adjustments under sec_1022 and c on the return required by sec_6018 and that any allocation made may be changed only as provided by the secretary sec_1022 describes property that is considered to be acquired from the decedent for purposes of sec_1022 subtitle a of title v of the economic_growth_and_tax_relief_reconciliation_act_of_2001 p l stat enacted sec_2210 which made chapter the estate_tax inapplicable to the estate of any decedent who died in and chapter the generation skipping transfer gst tax inapplicable to generation-skipping transfers made in on date the tax relief unemployment insurance reauthorization and job creation act of truirjca p l stat became law and sec_301 of truirjca retroactively reinstated the estate and gst taxes however sec_301 of truirjca allows the executor of the estate of a decedent who died in to elect to apply the code as though sec_301 of plr-128806-14 truirjca did not apply with respect to chapter and for property acquired or passing from a decedent within the meaning of sec_1014 thus sec_301 of truirjca allows the executor of the estate of a decedent who died in to elect not to have the provisions of chapter apply to the decedent’s estate but rather to have the provisions of sec_1022 apply notice_2011_66 2011_35_irb_184 section i a provides that the executor of the estate of a decedent who died in makes the sec_1022 election by filing a form_8939 on or before date notice_2011_76 2011_40_irb_479 extended the due_date of the form_8939 and thus the election from date to date notice_2011_66 section i d provides that the internal_revenue_service will not grant extensions of time to file a form_8939 and will not accept a form_8939 filed after the due_date except in four limited circumstances provided in section i d under this section of notice_2011_66 an executor may apply for relief under sec_301_9100-3 based on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-3 have been satisfied therefore the executor of decedent’s estate is granted an extension of time of days from the date of this letter to make the sec_1022 election on a form_8939 and allocate additional basis to eligible_property as provided by sec_1022 a copy of this letter should be attached to the form_8939 except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative plr-128806-14 the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination sincerely leslie h finlow leslie h finlow senior technician reviewer branch passthroughs special industries enclosures copy for sec_6110 purposes cc