department of the treasury internal_revenue_service washington d c date oct contact person uniform issue list contact number tt ope cot rw dear sir or madam this is in reply to your rulings request of date on x's proposed transfer of all of its assets to y pursuant to sec_507 of the internal_revenue_code x and y are exempt from federal_income_tax under sec_501 of the code and are private_foundations under sec_509 of the code x and y are effectively controlled by the same persons x after its transfer x notify the service of its intent to terminate its will transfer all of its assets to y terminate its private_foundation_status pursuant to sec_507 of the code and will dissolve x has no expenditure_responsibility grants outstanding under sec_4945 of the code you request the following rulings the transfer of all of x's assets to y will constitute a transfer described in sec_507 b of the code will not cause y to be treated as a newly created organization will not terminate x's private_foundation_status and will not cause the imposition of a termination_tax under sec_507 of the code the transfer of ail of x's assets to y will not affect either organization's exemption under sec_2 c of the code upon the transfer of all of x's assets to y y will succeed to x's aggregate tax_benefit under sec_507 d of the code upon the transfer of all of x's assets to y y will be treated as if it were x for purposes of chapter of the code sec_4940 et seq and chapter subchapter_f part il of the code sec_507 through upon the transfer of all of x's assets to y y will be responsible for any liabilities under chapter of the code to the extent that x does not satisfy those liabilities the transfer of all of x's assets to y will not constitute a taxable_expenditure under sec_4945 of the code and y to comply with the information reporting requirements of sec_4945 either for the tax_year in which the transfer is meade not be required to exercise expenditure_responsibility or will the legal accounting and other necessary expenses_incurred to implement the transfer if reasonable in amount will be paid to accomplish a purpose described in sec_170 or c b of the code thus under sec_53 a -3 a i of the foundation excise_tax regulations the expenses if reasonable will constitute qualifying distributions under sec_4942 of the code and not taxable_expenditures under sec_4945 of the code as to x or y x will not be required to comply with the record-keeping requirements of sec_4942 b of the will not be required to file any_tax code because of its transfer of information statement or returns under sec_6033 of the code for any_tax year subsequent to its tax_year in which the transfer is completed its assets to also x all y of the transfer of all of x's assets to y will not constitute an act of self-dealing under sec_4941 of the code or an investment that jeopardizes charitable purposes under sec_4944 of the code the transfer of all of x's assets to y will not trigger any gross_investment_income or capital_gain_net_income under sec_4940 of the code the tax bases and holding periods of the assets transferred by x will carry over to y for purposes of sec_4940 of the code following the transfer of all of x's assets to y x may retain its calendar tax_year and also its cash basis method_of_accounting for form_990-pf reporting purposes when x transfers its assets to y x's undistributed_income under sec_4942 of the code if any should be distributed by y on or before the end of this tax_year the same date that was required by sec_4942 of the code for x after x transfers all of its assets to y x's excess qualifying distributions carryover under sec_4942 of the code if any may be used by y to reduce y's distributable_amount under sec_4942 of the code after x transfers ail of its assets to y x's excise_tax liability under sec_4940 of the code for its final tax_year may be subject_to satisfaction by y and any refund to which x is entitled may be used by y to offset its sec_4940 excise_tax no taxes under chapter of the code will be imposed on x or y for y's payment of any excise_tax liability of x x will for purposes of its final form_990-pf return compute its minimum_investment_return by multiplying the fair_market_value of its assets held during its last tax_year other than those assets excluded by prorating percentage determined by multiplying five percent by a fraction whose numerator will be the number of days in its tax_year up to and including the date of transfer and whose denominator will be either or the number of days in the full tax_year of x a -2 c and regulations sections the by of a y will compute its minimum_investment_return with respect to the assets received from x for y's tax_year in which the transfer ogcurs by multiplying the fair_market_value of each asset that y receives from x other than those assets excluded by sec_53_4942_a_-2 c and of the regulations by a fraction whose numerator will be the number of days in y’s tax_year that y holds the asset and whose denominator will be either or the number of days in the full tax_year of y x's distributable_amount for the period in its assets is completed using the minimum_investment_return as computed above will be added to y's distributable_amount as computed above for y's tax_year in which the assets transfer is completed this combined distributable_amount will be in y's distributable_amount for its tax_year in which the assets transfer is completed its tax_year through the date when the transfer of a he under sec_4940 e of the code the amount of qualifying distributions made and the assets for each of the five tax years in the base_period and for the tax_year for which the sec_4940 calculation is made will be adjusted by increasing the amount of y's qualifying distributions and assets for each such year by the qualifying distributions made by x during its tax_year and the assets of x for its tax_year which ends within y's tax_year tf x notifies the internal_revenue_service at least one day after all of its net assets are transferred to y that x intends to terminate its private_foundation_status that notice will be effective to terminate the private_foundation_status of x under sec_507 of the code this ruling_request and the provisions of this letter do not constitute notice of an intent to terminate the private_foundation_status of x if the value of the net assets of x equals zero at the time x notifies the service that x intends to terminate its private_foundation_status and dissolves x will not be liable for any termination_tax under sec_507 of the code sec_501 of the code provides for the exemption from federal_income_tax of nonprofit_organizations organized and operated exclusively for charitable and or the other exempt purposes stated in that section sec_509 a of the code describes organizations exempt from federal_income_tax under sec_501 c of the code that are private_foundations subject_to the provisions of chapter of the code sec_507 of the code and sec_1_507-1 of the regulations provide that a private_foundation may voluntarily terminate its private_foundation_status by submitting to the commissioner a statement of its intention to terminate its private_foundation_status and by paying the termination_tax imposed under sec_507 sec_507 c of the code imposes an excise_tax on a private_foundation which voluntarily terminates its status as a private_foundation under sec_507 of the code this sec_507 tax is equal to the lower_of a the aggregate tax_benefit that has resulted from the foundation's exemption from federal_income_tax under sec_501 c of the code or b the value of the net assets of the foundation sec_507 of the code concerns the transfer of assets by one private fourdation to one or more other private_foundations and provides that each transferee private_foundation shall not be treated as a newly created organization sec_1_507-3 c of the regulations indicates that a transfer under sec_507 of the code includes a transfer of assets from one private_foundation to one or more other private_foundations pursuant to any reorganization including a significant disposition of or more of the transferor foundation's assets sec_1_507-3 of the regulations indicates that in a transfer of assets from one private_foundation to one or more private_foundations pursuant to a reorganization each transferee private_foundation shall not be treated as a newly created organization but shall succeed to the transferor's aggregate tax benefits under sec_507 of the code sec_507 of the code provides in general that the aggregate tax benefits of an exempt_private_foundation refer to the value of its exemption from federal_income_tax and the deductions taken by its donors during its existence do f sec_1_507-1 of the regulations provides that a private_foundation which transfers all of its assets is not required to file annual information returns required by sec_6033 of the code for its tax years after the tax_year of its transfer when it has no assets or activities sec_1_507-3 a of the regulations indicates that a transferor private_foundation is required to meet its charitable distribution_requirements under sec_4942 of the code even for any taxable_year in which it makes a sec_507 transfer of its assets to another private_foundation sec_1_507-3 of the regulations provides that certain tax provisions listed therein will carry over to any transferee private_foundation that is given a sec_507 transfer of assets from a transferor private_foundation sec_1_507-3 a i of the regulations indicates that if a transferor private_foundation transfers assets to a private_foundation effectively controlled directly or indirectly by the same person or persons who effectively control the transferor private_foundation the transferee foundation will be treated as if it were the transferor foundation for purposes of sec_4940 through and sec_507 through of the code the transferee is treated as the transferor in the proportion which the fair_market_value of the transferor's assets that were transferred bears to the fair_market_value of all of the assets of the transferor immediately before the transfer revrul_78_387 1978_2_cb_270 concerns a private_foundation that transferred all of its assets to another private_foundation that was effectively controlled by the same persons in accordance with sec_1_507-3 i of the regulations the transferee foundation is treated as the transferor foundation and thus the transferee can use its transferor's excess qualifying distributions carryover if any under sec_4942 i of the code to reduce the transferee's distributable_amount under sec_4942 of the code by the amount if any of its transferor's excess qualifying distributions carryover under sec_4942 of the code sec_1_507-4 of the regulations provides that the tax on termination of private_foundation_status under sec_507 of the code does not apply to a transfer of assets pursuant to sec_507 b of the code sec_1_507-1 b and d of the regulations provide that a transferor foundation's not constitute any termination of the transfer of assets under sec_507 of the code will transferor foundation's status as a private_foundation sec_4940 of the code imposes excise_tax on certain investment_income of a private_foundation sec_4940 of the code reduces the excise_tax imposed by sec_4940 of the code if the private_foundation increases its average percentage_payout beyond that of sec_4940 e of the code defines a private foundation's base_period as the five tax years preceding the tax_year being tested sec_4940 of the code provides that in the case of a successor private_foundation sec_4940 of the code will be applied by taking into account the experience of its predecessor private_foundation its base_period sec_4941 of the code imposes excise_tax on an act of self-dealing between a private_foundation - and any of its disqualified persons under sec_4946 of the code sec_53_4946-1 a of the foundation and similar excise_taxes regulations provides that for purposes of self-dealing under sec_4941 of the code an exempt_organization under sec_501 c of the code is not a disqualified_person sec_4942 of the code provides that a private_foundation must expend qualifying distributions under sec_4942 of the code that are for the direct active_conduct of exempt purposes under sec_53 a i of the regulations such qualifying distributions can include the reasonable administrative expenses that are incurred in conduct of an exempt_purpose under sec_170 b of the code sec_4942 g a of the code provides that a private_foundation does not make any qualifying_distribution under sec_4942 of an organization controlled by the transferor or by one or more of the transferor's disqualified persons or ii a private_foundation that is not an operating_foundation under sec_4942 of the code the code where its distribution is a contribution to i sec_4942 of the code provides that a transferor private_foundation in order to have a qualifying_distribution for its grant to another private_foundation must have adequate_records as required by sec_4942 of the code to show that the transferee foundation in fact subsequently made a qualifying_distribution that is equal to the amount of the transfer received and that is paid out of the transferee's own corpus within the meaning of sec_4942 of the cede the transferee's qualifying_distribution must be expended before the close of the transferee's first tax_year after the transferee's tax_year in which it received the transfer sec_4944 of the code imposes excise_tax on a private foundation's making of any investment that jeopardizes the conduct of its exempt purposes sec_4945 of the code imposes tax upon a private foundation's making of any taxable_expenditure under sec_4945 of the code sec_4945 of the code requires that in order to avoid making a taxable_expenditure a transferor private_foundation must exercise expenditure_responsibility under sec_4945 on its grants to another private_foundation sec_4945 d of the code provides that a taxable_expenditure includes any amount expended by a private_foundation for purposes other than exempt purposes under sec_170 c b sec_4945 of the code defines expenditure_responsibility in terms of a grantor private_foundation requiring proper reports from a grantee private_foundation on the grantee's uses of a grant sec_53_4945-6 and sec_1_507-3 of the regulations allow a private_foundation to make sec_507 transfers of its assets to organizations exempt under sec_501 ci3 of the code including private_foundations without the transfers being taxable_expenditures under sec_4945 analysis x will transfer ail of its assets to y your requested rulings are discussed below se under sec_1_507-3 of the regulations a transfer under sec_507 of the code includes a transfer of assets from one private_foundation to another private_foundation pursuant to any reorganization or liquidation including a significant disposition of or more of the transferor foundation's assets because x will transfer all of its assets x's transfer will be a significant disposition of its assets under sec_1_507-3 of the regulations and thus will be a transfer under sec_507 of the code under sec_1_507-3 a of the regulations the transfer of x's assets to orsanin patan eangiderad porch created y pursuant to section tice under sec_1_507-3 of the regulations x's transfer of its assets under sec_507 of the code to y will not terminate x's private_foundation_status under sec_509 of the code under sec_1_507-4 of the regulations x's transfer of its assets under sec_507 b of the code to y will not result in termination_tax under sec_507 c of the code under sec_1 -1 b of the regulations exempt charity x can donate all of its assets to exempt charity y without adversely affecting the exemptions from federal_income_tax under sec_501 of the code of either x or y under sec_1_507-3 i of the regulations upon x's transfer of all of its assets to y y will succeed to x's aggregate tax benefits under sec_507 of the code under sec_1_507-3 i of the regulations transferee y will be treated as its transferor x for purposes of chapter of the code and for chapter subchapter_f part ll of the code under sec_1_507-3 of the regulations upon x's transfer of all of its assets to y transferee y will be responsible for any liabilities under chapter of the code of its transferor x to the extent that x does not satisfy such liabilities under sec_53_4945-6 c of the regulations a private_foundation can make a transfer of its assets pursuant to sec_507 of the code to exempt_organizations under sec_501 c of the code including private_foundations without the transfer being a taxable_expenditure under sec_4945 of the code thus x's transfer of assets to y will not be a taxable_expenditure under sec_4945 of the code and will not subject x to tax under that section sec_1_507-3 of the regulations provides that where a private_foundation transfers all of its assets to an exempt_organization under sec_501 of the code pursuant to sec_507 of the code it has no expenditure_responsibility requirement under sec_4945 of the code thus x will not have to exercise expenditure_responsibility under sec_4945 of the code with respect to x's transfer of will have to satisfy any information reporting requirements under sec_4945 of the code for x's tax_year in which its transfer is made that regulation further provides that x its assets to all of y under section dollar_figure42 a -d1ai i of the regulations a private foundation's payment of administrative expenses as part of a charitable effort may constitute a qualifying_distribution under sec_53_4945-6 b of the regulations a private foundation's payment of reasonable costs for services rendered is not a taxable_expenditure under sec_4945 of the code thus the legai accounting and other necessary expenses_incurred to implement x's transfer to y if reasonable in amount will be paid to accomplish exempt purposes will be qualifying distributions under sec_4942 of the code and will not be taxable_expenditures under sec_4945 of the code as to x and y under sec_1_507-3 a of the regulations x's record-keeping requirement if any under sec_4942 g b of the code will not apply after x transfers all of its assets to y under sec_1_507-1 b of the regulations x will not be required to file any returns under sec_6033 of the code for any_tax year subsequent to the tax_year in which it transfers all of its assets to y when x will have no assets under sec_4941 of the code x's transfer of assets to y will not be an act of self-dealing because the transfer wil be for exempt purposes to an organization exempt from federal_income_tax under section c of the code which is not a disqualified_person for purposes of sec_4941 pursuant to sec_53_4946-1 a of the regulations under sec_4944 of the code x's transfer of assets to y is made for exempt purposes and will not be a jeopardizing investment or result in tax under that section under sec_4940 of the code x's transfer of its assets to y will not result in any income under sec_4940 of the code under sec_1_507-3 of the regulations the tax bases and holding periods of x's assets transferred to y will carry over to y for purposes of sec_4940 of the code x and y each use a calendar tax_year and a cash_basis method_of_accounting for purposes of form_990-pf return of private_foundation will not adversely affect y's retention of its calendar tax_year or y's cash_basis method_of_accounting for purposes of y's annual return form_990-pf x's transfer of its assets to y under sec_1_507-3 a i of the regulations the transferee y will be treated as its transferor x so that x's undistributed_income under sec_4942 of the code if not already distributed by x must be taken into account by y in its such requirements as the successor to its transferor x as in revrul_78_387 cited above after x transfers all x's excess qualifying_distribution carryover if any under sec_4942 i of the code may be used by y to reduce y's distributable_amount under sec_4942 of the code its assets to y of under sec_1_507-3 a i of the regulations transferee y will be treated as its transferor x after x's transfer of all of its assets to y pursuant to sec_507 b of the code thus after x transfers all its assets to y x's excise_tax liability under sec_4940 of the code for its final tax_year may be of satisfied by y to offset its excise_tax under is entitled may be used by y and any refund to which x tye re bee meare a fb oa be al gay ser caget or koa wo bee under sec_53 a -2 c vii of the regulations a private foundation's computation of its minimum_investment_return takes into account as a reducing factor any situation where an asset is held for less than the foundation's entire tax_year this applies to computing the minimum_investment_return of each private_foundation x and y a similar rule applies to short tax years under sec_53 a - c shiii of the regutations under sec_1_507-3 i of the regulations the transferee y will be treated as its transferor x so that x's minimum_investment_return and distributable_amount under sec_4942 of the code if not already met by x must be taken into account in y's such requirements as the successor to transferor x sec_4940 e of the code provides that in the case of a successor private_foundation sec_4940 of the code will be applied by taking into account the experience of its predecessor private_foundation thus transferee y can take into account the experience of its predecessor transferor x including x's qualifying distributions and assets for purposes of y's computations under sec_4940 of the code under sec_507 of the code when x notifies the internal_revenue_service at least one day after it transfers all of its net assets to y of its intent to voluntarily terminate its private_foundation_status pursuant to sec_507 x will thus terminate its private_foundation_status pursuant to that sec_507 under sec_507 of the code the value of x's assets after it has transferred all of its assets to y its private_foundation_status pursuant to thus x's voluntary notice of termination of will be zero sec_507 will not result in tax under sec_507 of the code accordingly we rule that _ x's transfer of all of its assets to y will be a transfer within sec_507 b of the code will not cause y to be treated as a newly created organization will not terminate x's private_foundation_status under sec_509 of the code and will not cause the imposition of termination_tax under sec_507 of the code x's transfer of all of itsassets to y will not adversely affect the exemptions of x and y from federal_income_tax under sec_501 c of the code upon x's transfer of all of its assets to y y will succeed to x's aggregate tax benefits under sec_507 d of the code upon x's transfer of all of its assets to y y will be treated as if it were x for purposes of chapter of the code sec_4940 through of the code and chapter subchapter_f part i of the code sec_507 thraugh of the code upon x's transfer of all nf its assets to y y willbe responsible fae oe satebties under chanter x's transfer of all of its assets to y will not be a taxable_expenditure under sec_4945 of the code and x will not be required to exercise expenditure_responsibility under sec_4945 of the code with respect to the transfer however x will have to satisfy the information reporting requirements imposed by sec_4945 of the code for the tax_year in which the transfer is made y the legal accounting and other necessary expenses_incurred to implement the transfer of all of if reasonable in amount will be paid to accomplish a purpose described in section x's assets to c or c b of the code thus under sec_53_4942_a_-3 i of the regulations the expenses if reasonable will be qualifying distributions under sec_4942 of the code and will not be taxable_expenditures under sec_4945 of the code as to x or y x will not be required to comply with the record-keeping requirements of sec_4942 of also x will not be required to file any_tax the code because x will transfer of all of its assets to y returns under sec_6033 of the code for any_tax year subsequent to its tax_year in which x's transfer is completed x's transfer of all of its assets to y will not be an act of self-dealing under sec_4941 of the code or a jeopardizing investment under sec_4944 of the code x's transfer of all of its assats to y will not be any gross_investment_income or capital_gain_net_income under sec_4940 of the code the tax bases and holding periods of the assets transferred by x will carry over to y for purposes of sec_4940 of the code following x's transfer of all of its assets to y y may retain its calendar tax_year and also its cash_basis method_of_accounting for form_990-pf reporting purposes when x transfers all of its assets to y x's undistributed_income under sec_4942 of the code if any should be distributed by y on or before the end of the same tax_year that was required by sec_4942 of the code for x after x transfers all of its assets to y x's excess qualifying distributions carryover under sec_4942 of the code if any may be used by y to reduce y's own distributable_amount under sec_4942 of the code after x transfers all of its assets to y x's excise_tax liability under sec_4940 of the code for its final tax_year may be satisfied by y and any refund to which x is entitled may be used by y to offset its excise_tax under sec_4940 of the code no taxes under chapter of the code will be imposed on x or y for y's payment of any such excise_tax liability of x x will for purposes of its final form_990-pf return compute its minimum_investment_return by multiplying the fair_market_value of its assets held during its last tax_year other than those assets excluded by sec_53_4942_a_-2 and of the regulations by a prorating percentage determined by multiplying five percent by a fraction whose numerator will be the number of days in x's tax_year up to and including the date of transfer and whose denominator will be the or days in the full tax_year of x y will compute its minimum_investment_return with respect to the assets received from x for y's tax_year in which the transfer occurs by multiplying the fair_market_value of each asset that y receives from x of the regulations by a prorating percentage determined by multiplying five percent by a fraction whose numerator will be the number of days in y's tax_year that y holds the asset and whose denominator will be the or number of days in the full tax_year of y other than those assets excluded by sec_53_4942_a_-2 c and x's distributable_amount for the period in its tax_year through the date when x's transfer of assets is completed using x's minimum_investment_return as computed above will be added to y's distributable smount as camputed above for y's tax_year in which the transfer of assets is completed this combined under sec_4940 of the code the amount of qualifying distributions made and the assets for each of the five tax years in the base_period and for the tax_year for which the calculation under sec_4940 of the code is made will be adjusted by increasing the amount of y's qualifying distributions and assets for each such tax_year by the qualifying distributions and assets of x for x's tax_year ending within y's tax_year if x notifies the internal_revenue_service at least one day after it transfers all of its net assets to y of its intent to voluntarily terminate its private_foundation_status pursuant to sec_507 of the code x will terminate its private_foundation_status pursuant to that sec_507 of the code if the value of the net assets of x equals zero at the time when x notifies the service of its intent to terminate its private_foundation_status pursuant to sec_507 of the code and dissolves x will not be liable for any termination_tax under sec_507 of the code this ruling_request will not be construed by the service as any notice by x or y to voluntarily terminate its private_foundation_status pursuant to sec_507 of the code because this letter could help to resolve any questions please keep it in your permanent records and include a copy in your annual return form_990-pf this ruling fetter is directed only to the organizations that requested it sec_6110 j of the code provides that it may not be used or cited as precedent sincerely garland a carter chief exempt_organizations technical branch ary


department of the treasury int ernal revenue service washington d c date o f f i c e o f c h i e f c o u n s e l number release date cc corp br6 spro-105569-00 uilc internal_revenue_service national_office technical assistance memorandum for district_counsel brooklyn cc ner brk attn andrew mandell from associate chief_counsel corporate cc corp subject lease_stripping transactions disclosure statement this writing may contain privileged information any unauthorized disclosure of this writing may have an adverse effect on privileges such as the attorney client privilege if disclosure becomes necessary please contact this office for our views this chief_counsel_advice responds to your memorandum dated date in accordance with sec_6110 chief_counsel_advice may not be used or cited as precedent in your incoming memorandum you requested guidance on several issues arising in transactions detected by the lease_stripping isp your question concerning the application of sec_482 was addressed separately by cc intl their response is attached the attached memorandum assumes for purposes of the sec_482 analysis that the series of transactions described therein qualify as successive sec_351 exchanges and that the transferor_corporation properly receives inflated basis stock of the transferee corporation this assumption does not alter the position taken in our date memorandum to you which details the necessary analysis to be undertaken in order to determine whether a particular transaction actually qualifies for sec_351 treatment as well as how to determine the correct basis of the transferee corporation stock spro-105569-00 this writing may contain privileged information any unauthorized disclosure of this writing may undermine our ability to protect the privileged information if disclosure is determined to be necessary please contact this office for our views prior to any disclosure assistant chief_counsel corporate by alfred c bishop branch chief cc corp spro-105569-00 internal_revenue_service memorandum cc intl br5 mmcahn date date to from arturo estrada cc dom fs corp paul epstein cc intl br5 subject lease_stripping transactions introduction you have requested assistance regarding the application of sec_482 to a later stage of a lease_strip transaction the information provided describes a hypothetical_transaction that does not identify specific participants by name we understand that the facts of each case may differ slightly conclusion sec_482 is implicated when a partnership partnership transferred its high basis low fair_market_value stock in a subsidiary of corporation x to company a in a sec_351 transaction followed by company a selling the subsidiary’s stock at its fair_market_value to company b which is controlled by the promoter of the overall transaction these transactions were part of a preconceived plan to allow company a to shelter a large capital_gain sec_482 is implicated since partnership and the promoter who indirectly owned the remainder of company a’s stock acted in concert or with a common goal or purpose within the meaning of sec_1_482-1 in transferring property to a corporation which they together both controlled with the intent to shift the tax loss to company a although partnership transferred the subsidiary’s stock as part of a nontaxable_transaction in which the transferee takes a carryover_basis in the stock sec_482 permits the commissioner to allocate the built in loss on the stock back to partnership since the transfer was effected solely for tax_avoidance purposes discussion facts spro-105569-00 in the early stage of the transaction at issue in date there was a lease_strip transaction at the conclusion of which partnership owned shares of preferred_stock in a subsidiary of whose shares purportedly had a high basis of dollar_figure million and low fair_market_value of dollar_figure the subsidiary received dollar_figure million from c ltd in payment of nonrecourse notes which it held the subsidiary had previously assumed partnership’s liability to pay rent on the equipment which corporation x the end user placed_in_service in its trade_or_business we assume consistently with other similar transactions we have evaluated that partnership’s majority interest is held by a foreign_person that is not subject_to tax on gains in the united_states or otherwise by a tax neutral entity company a is an unrelated corporation the stock of which is owned by five individuals who have decided to sell their interests in company a company a owns assets with a fair_market_value of dollar_figure million and an adjusted_basis of dollar_figure million company a has a built in gain with respect to its assets of dollar_figure million which may affect the sale price of the shares to the five individuals in order for the company a’s five shareholders to sell their shares of company a without decreasing the sales_price to account for the tax_liability with respect to built in gains the promoter structured the following transaction on date the promoters formed a partnership and contributed dollar_figure in exchange for a partnership_interest the partnership formed company a acquisition corp aac contributing the dollar_figure in exchange for all its outstanding_stock aac then borrowed dollar_figure million from an unrelated bank and purchased all the stock of company a for dollar_figure million aac was then merged into company a at the end of this series of transactions the interim results to the overall transaction are as follows company a’s original shareholders received dollar_figure million for their stock in company a the promoters own all the stock of company a and company a is saddled with dollar_figure million of debt to the unrelated bank also on date partnership then entered into a sec_351 transaction with company a in which it transfer sec_75 shares of the corporation x subsidiary’s preferred_stock in exchange for shares of company a’s common_stock apparently the promoters also contributed_property so that the transaction would qualify under sec_351 although not stated in the facts submitted to us we assume that partnership through its shares of company a’s common_stock owns only a nominal interest in company a’s voting rights and fair_market_value on date company a sold its assets other than the corporation x subsidiary stock to an unrelated corporation for dollar_figure million the fair_market_value of its spro-105569-00 assets company a recognized a capital_gain of dollar_figure million dollar_figure million was used to pay off its liability to the bank and the remaining dollar_figure million was used to pay fees and other liabilities on date company a then sold the corporation x subsidiary stock for dollar_figure and claimed a capital_loss in the amount of dollar_figure ie dollar_figure its purported basis in the shares of the corporation x subsidiary preferred_stock and dollar_figure its amount_realized for the shares we analyze whether sec_482 can be applied to this transaction for purposes of this discussion we assume that partnership’s basis in it sec_150 shares of the corporation x subsidiary’s preferred_stock is dollar_figure and that the partnership’s transfer of shares of the corporation x subsidiary’s preferred_stock to company a otherwise qualifies as a sec_351 transaction law and analysis a sec_482 -- generally sec_482 provides the following in any case of two or more organizations trades_or_businesses owned or controlled directly or indirectly by the same interests the secretary may distribute apportion or allocate gross_income deductions between or among such organizations if he determines that such distribution apportionment or allocation is necessary in order to prevent evasion of taxes or clearly to reflect the income of any of such organizations emphasis added thus in order for sec_482 to apply to a transaction the transaction must be between two or more entities owned or controlled by the same interests accordingly the first issue is whether for purposes of sec_482 the parties ie partnership promoters and company a are controlled by the same interests notwithstanding that partnership only owned shares of company a’s common_stock we then discuss whether sec_482 can be applied to this transaction notwithstanding an otherwise valid sec_351 transaction which would dictate that company a’s basis in the the corporation x subsidiary preferred_stock was approximately dollar_figure million and that company a should recognize its loss in the amount of the difference of adjusted_basis and fair_market_value it is unclear why the purchaser would pay dollar_figure million more than the value of the assets spro-105569-00 b legal standard for control there are alternative sets of regulations covering different periods that potentially apply to control issues under sec_482 because you have requested information on how sec_482 may generally apply to lease_stripping transactions this analysis includes discussion and citation of both current and prior regulations the regulations apply to taxable years beginning on or before date the regulations apply to taxable years beginning after date and the regulations apply to taxable years beginning after date unless an election is made to apply them to all prior open years sec_1_482-1t sec_1_482-1 apparently only the regulations are applicable to the current pattern that we discuss in this memorandum since the taxable_year at issue is however similar transactions may involve years for which the or regulations are applicable consequently we will refer to each set of regulations and to the extent necessary distinguish between the regulations by referring to their year of promulgation in parenthesis when a specific set of regulations is referred to the sec_482 regulations define control to include any kind of control direct or indirect whether legally enforceable and however exercisable or exercised sec_1_482-1 1968_1_cb_218 sec_1_482-1t 1993_1_cb_90 sec_1_482-1 1994_2_cb_93 see also 1_bta_624 acq 1925_1_cb_2 c ontrol not arising or flowing from legally enforceable means may be just as effective in evading taxation as if found on the most formal and readily enforceable legal instrument the regulations also state that i t is the reality of control that is decisive rather than a rigid focus on record ownership of the entities at issue id accord 42_tc_114 aff’d 358_f2d_342 6th cir cert_denied 385_us_899 17_tc_231 aff’d 202_f2d_873 5th cir cert_denied 346_us_819 acq in part and nonacq in part 1952_2_cb_2 revrul_65_142 1965_1_cb_223 372_f2d_415 4th cir aff’g tcmemo_1966_015 cert_denied 389_us_841 moreover the regulations provide that a presumption of control arises if income or deductions have been arbitrarily shifted sec_1_482-1 see 598_f2d_1382 5th cir rev’g a f t r 2d ria n d tex holding that based on sec_1_482-1 the service properly argued that proof of income_shifting between two corporations establishes a presumption of common_control accord 294_f2d_82 5th cir aff’g 32_tc_390 acq 1959_2_cb_4 referring to reg sec_29 the and regulations also contain this presumption and add that control may exist as a result of the actions of two or more taxpayers acting in concert with a common goal or purpose sec_1 spro-105569-00 1t g sec_1_482-1 accord dhl corp v commissioner tcmemo_1998_461 w hen the interests controlling one entity and those controlling another have a common interest in shifting income from the former to the latter entities may be considered commonly controlled in determining whether the control requirement under the regulations is satisfied thus under the regulations joint legal ownership or overlapping ownership is not required for unrelated corporations to come within the purview of sec_482 if income_or_deduction shifting is present or if there is common goal to shift income or deductions but see 5_tc_558 acq c b acq withdrawn and substituted for nonacq revrul_65_142 1965_1_cb_223 54_tc_912 rev’d in relevant part 453_f2d_1144 2nd cir cert_denied 407_us_934 reh’g denied 409_us_899 nonacq 1975_2_cb_3 nonacquiescence relates to tax_court opinion only as the second circuit adopted an interpretation of control that is consistent with and sec_482 regulations where the service seeks to establish common_control due to the presence of an artificial shifting_of_income and deductions it is the service’s burden to prove the applicability of sec_482 by establishing a shifting_of_income and deductions dallas ceramic co pincite c legal standard for same interests if control is found to exist the service may allocate income and deductions among members of the controlled_group sec_1_482-1 sec_1_482-1t sec_1_482-1 a controlled_group or controlled_taxpayer is defined to mean the entities owned or controlled by the same interests and includes the taxpayer that owns or controls other taxpayers sec_1_482-1 sec_1_482-1t sec_1 i unlike the term control the phrase same interests is not defined in the sec_482 regulations case law as well as the legislative_history of sec_482 provide guidance however sec_482 was enacted to prevent the artificial shifting_of_income between controlled taxpayers to avoid federal taxes and thereby milk a taxable entity ie placing deductions in one entity and income related to those deductions in another entity 598_f2d_1375 5th cir citing h rept no 70th cong 1st sess c b part s rept no 70th cong 1st sess c b part see also h rept no and s rept no 67th cong 1st sess in using the term same interests congress intended to include more than the same persons or the same individuals brittingham pincite 366_f2d_890 5th cir aff’g 43_tc_540 cert_denied 386_us_1016 2_bta_229 see also spro-105569-00 lxi-part cong rec statement of sen king referring to the same forces controlling a number of corporations different persons with a common goal or purpose for artificially shifting income can constitute the same interests for the purposes of the statute south texas rice warehouse pincite see also brittingham pincite citing ach t c pincite the phrase same interests should not be narrowly construed to frustrate the intent of sec_482 appeal of rishell phonograph co pincite if the same interests’ was intended to mean only the same persons ’ it would have been easy for congress by using the latter term to have avoided all ambiguity accord grenada indus supra thus it is not necessary that the same person or persons own or control each controlled business before sec_482 can be applied but there must be a common design for the shifting_of_income in order for different entities to constitute the same interests indeed this definition of same interest is identical to the definition of control and the presumption relating thereto in the regulations and case law thus if there is a common design for shifting income or deductions then the requirements for control and same interests will be met see hall v commissioner supra t c pincite an arbitrary shifting_of_income coupled with the ability to direct the actions of an entity establishes control for the purposes of sec_482 -- whether or not ownership exists d invoking sec_482 in the sec_351 transfer of high basis stock this transaction the transfer of built in loss property in a purported sec_351 transaction involves partnership contributing its preferred_stock in the corporation x subsidiary to company a as part of a sec_351 transaction in this transaction partnership transfers stock in which it claims to have a high basis in a manner so that company a takes the partnership’s high basis in the stock as a carryover_basis we believe sec_482 may be applied to this transaction the control element is met since partnership acting in concert with other shareholders of company a engaged in a sec_351 transaction so that the built in loss inherent in the stock of the corporation x subsidiary is transferred to company a see sec_1_482-1 in a similar situation the second circuit in 453_f2d_1144 2d cir rev’g 54_tc_913 held that sec_482 may be applied in a situation where two totally unrelated parties mccurdy and forman each owned of another corporation midtown sec_482 was invoked concerning transactions between the two parent corporations and midtown to the extent that mccurdy and forman together controlled midtown and concerning the loans at issue acted in concert when dealing with midtown but see b forman company inc v commissioner 54_tc_913 rev’d 453_f2d_1144 2d cir 5_tc_558 lastly a presumption of control arises under the facts at issue in that the built in spro-105569-00 loss which had been suffered to the extent that basis of the shares of the corporation x subsidiary exceeded their fair_market_value by partnership was arbitrarily shifted to company a see sec_1_482-1 assuming the secretary has proven that the parties are controlled by the same interests he may distribute apportion or allocate deductions between or among such organizations trades_or_businesses if he determines that such distribution apportionment or allocation is necessary in order to prevent evasion of taxes or clearly to reflect the income of any such organizations trades_or_businesses sec_482 generally the commissioner’s determinations under sec_482 must be sustained absent an abuse_of_discretion 88_tc_252 the taxpayer must meet a heavier than normal burden_of_proof and demonstrate that commissioner’s determinations are arbitrary capricious or unreasonable in order for the courts to set_aside the commissioner’s determinations id e sec_482's role in nonrecognition transactions we next discuss the interaction of sec_482 and sec_351 pursuant to his authority to make allocations under sec_482 if necessary to prevent the avoidance of tax or to clearly reflect income the commissioner may allocate to the transferor with respect to a nonrecognition_transaction the built in loss from a sale of property which had previously been transferred in a nonrecognition_transaction sec_1 d sec_1_482-1t sec_1_482-1 courts have sustained the commissioner’s reallocation of gain_or_loss on taxable dispositions to the transferor with respect to the previous nontaxable transfer of the property under sec_351 or sec_311 as then in effect when the sole or primary purpose of the transfer was to avoid taxation eg when the transferee was better able to use the loss absorb the capital_gain or use the deduction for charitable_contributions ruddick corp v united_states cl_ct u s t c p on remand from 643_f2d_168 ct_cl aff’d 732_f2d_168 fed cir commissioner’s reallocation of capital_gain to the subsidiary -transferor was sustained when a wholly owned subsidiary distributed appreciated stock to its parent in a tax free distribution under sec_311 as then in effect so that the parent could offset the capital_gain from the disposition of the stock with its net_operating_loss 556_f2d_889 8th cir commissioner’s reallocation of charitable_contribution_deduction to the wholly owned subsidiary was sustained when the subsidiary distributed the appreciated stock to the parent_corporation and the parent contributed the stock to a charitable_organization so that the parent_corporation could make use of the charitable deduction 137_f2d_600 3d cir sustaining spro-105569-00 commissioner’s reallocation of capital_loss to the parent_corporation when the parent_corporation contributed built in loss stock to its wholly owned subsidiary in a transaction tax free under the predecessor of current sec_351 so that ten months later upon sale of the stock the subsidiary can make use of the capital_loss deduction 67_tc_1022 in this regard it is particularly noteworthy that in southern bancorp v commissioner the commissioner’s allocation of gain to the distributing bank subsidiary was sustained notwithstanding that the court noted that the dividend had a business_purpose since the primary purpose for the dividend was tax_avoidance in southern bancorporation a bank under sec_581 distributed appreciated u s treasury notes as a dividend to its nonbank parent and a few days later the parent sold the notes and realized capital_gain had the subsidiary sold the treasury notes it would have realized ordinary gain although the court recognized that admittedly the payment of a dividend had a business_purpose to provide the parent_corporation with the funds necessary to carry on its business t c pincite the court sustained the commissioner’s reallocation since the subsidiary’s primary business_purpose for distributing the treasury notes as a dividend_in_kind was tax_avoidance id see also 643_f2d_747 ct_cl pincite stating that the tax_evasion prong of sec_482 was applied when a significant element of tax_avoidance existed and conversely that sec_482 should not be applied in nonrecognition transactions in which no tax_avoidance was present but see 84_tc_996 aff’d in part rev’d in part 856_f2d_855 7th cir pincite stating the tax_evasion prong of sec_482 as situations when the sole purpose of the nonrecognition transfer was for tax_avoidance 88_tc_252 same accordingly under the cases and principles cited when partnership transferred its corporation x subsidiary stock to company a in a sec_351 transaction and company a subsequently sold the stock the built in loss may be allocated to partnership assuming the purpose of the transaction was solely or primarily for tax_avoidance we have no information as to company a’s purported business_purpose if any for acquiring the preferred_stock of the subsidiary of x corporation as stated above we argue that sec_482 may be invoked assuming company a’s sole or primary purpose in acquiring the subsidiary’s preferred_stock was to realize the built in capital_loss inherent in the stock some cases state that sec_482 may only be invoked in a nonrecognition_transaction when the taxpayer’s sole purpose for the transaction was tax_avoidance 84_tc_996 aff’d in part rev’d in part 856_f2d_855 7th cir pincite 88_tc_252 as discussed above 67_tc_1022 held that sec_482 also may be applied in a nonrecognition_transaction when the primary purpose of the transaction is tax_avoidance although the taxpayer may also have a nontax business_purpose for the transaction spro-105569-00 it should be noted that both eli lilly and co and g d searle are distinguishable from the situation in this case because both eli lilly and co and g d searle involve situations when taxpayers’ investments in puerto rico were encouraged by congress and the particular assets which were transferred in sec_351 transactions were not disposed of in addition the courts stated that substantial nontax business purposes existed for the transfers _______________________________ paul s epstein senior technical reviewer branch office of associate chief_counsel international


internal_revenue_service number release date index number -------------------------- attn ----------------------------------------------------- -------------------------------------- --------------------------- ------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact --------------- id no ---------- telephone number fax number -------------------- -------------------- refer reply to cc ita b6 plr-128761-15 date december legend parent --------------- taxpayer1 ---------------------------- ------- - ------------------------------------- ------ ---------------- taxpayer2 -------------------------------------------------------------------- ------------------------------------------ ----------------------------------------------------------------------- products ------------------------------------------------------------------------------------------------------------------- ----------- activities year1 year2 year3 year4 b ---------------------------------- ---------------------------------------------- ------ ------ ------ ------------------------- plr-128761-15 c d ---------------------- --------------- operation sec_1 --------------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------- operation sec_2 ------------------------------------------------------- llc1 --------------------------------------------------------------------- -------------------------------------------------------- llc2 -------------------------------------------------------------------- --------------------------------------- llc3 -------------------------------------------------------------------- -------------------------------------------------- corp -------------------------------------------------------------------- --------------------------------- date1 --------------------- dear ---------------- this letter is in reply to a private_letter_ruling request dated date filed by parent on behalf of taxpayer1 and taxpayer2 requesting an extension of time under sec_301_9100-1 of the procedure and administration regulations to file form sec_970 application to use lifo inventory_method to use the last-in_first-out lifo inventory_method of accounting effective for year1 parent is a designer and manufacturer of products prior to year1 parent used the lifo_method of accounting for inventory used in activities in year2 parent underwent a restructuring of its domestic and international operations the restructuring b and c advised parent concerning the planning and implementation of the restructuring d prepared the federal_income_tax returns and audited parent’s financial statements for all relevant years to this request prior to year3 parent did not have full-time in-house tax resources and relied exclusively on the advice and expertise of b c and d for tax matters plr-128761-15 parent represents that the restructuring was designed to be a set of transactions with several new subsidiaries formed and capitalized that qualified as tax-free exchanges under sec_351 of the internal_revenue_code under the restructuring parent created taxpayer1 and taxpayer2 taxpayer1 was formed to hold parent’s operation sec_1 taxpayer2 was formed to hold parent’s operation sec_2 taxpayer2 has three single member limited_liability companies treated as disregarded entities for federal_income_tax purposes and one corporation llc1 llc2 llc3 and corp the operating agreements for taxpayer1 and taxpayer2 became effective on date1 as part of the restructuring parent contributed its lifo inventory to taxpayer1 llc1 and llc2 for federal_income_tax purposes taxpayer1 llc1 and llc2 continued to identify the contributed inventory using the identical lifo inventory_method that had been used by parent however with the parent’s consolidated form_1120 us corporation income_tax return for year1 parent did not file the required form sec_970 for taxpayer1 or taxpayer2 parent was required by sec_1_472-3 of the income_tax regulations to file form sec_970 on behalf of taxpayer1 and taxpayer2 for year1 in order to continue to account for the contributed inventory on a lifo basis after the restructuring parent represents that taxpayer1 and taxpayer2 used the lifo inventory_method described in sec_472 for year1 and used the lifo inventory_method for all subsequent tax years to year1 parent also represents that the relevant lifo inventory for taxpayer1 llc1 and llc2 was accounted for on the lifo_method for financial statement purposes for year1 and all subsequent fiscal years b and c did not advise parent that form sec_970 were required to be filed to continue the lifo treatment for inventory contributed to taxpayer1 llc1 and llc2 pursuant to the restructuring further d did not prepare form sec_970 that were required to be filed with parent’s federal_income_tax return for year1 parent recently discovered that form sec_970 had not been filed for year1 for taxpayer1 and taxpayer2 when parent determined that the form sec_970 had not been filed for taxpayer1 and taxpayer2 d advised parent to file this request parent promptly filed this request on behalf of taxpayer1 and taxpayer2 for an extension of time to file the form sec_970 to be effective for year1 and all subsequent tax years sec_472 provides that a taxpayer may use the lifo_method in inventorying goods specified in an application to use such method filed at such time and in such manner as the secretary may prescribe sec_1_472-3 provides that the lifo inventory_method may be adopted and used only if the taxpayer files with its income_tax return for the tax_year as of the close of plr-128761-15 which the method is first to be used a statement of its election to use such inventory_method the statement is to be made on form_970 sec_301_9100-1 provides that the commissioner has discretion to grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make certain regulatory elections sec_301_9100-1 defines a regulatory election as an election whose due_date is prescribed by a regulation published in the federal_register or a revenue_ruling revenue_procedure notice or announcement published in the internal_revenue_bulletin sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides extensions of time for making elections that do not meet the requirements of sec_301_9100-2 requests for relief under sec_301_9100-3 will be granted when a taxpayer provides evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government see sec_301_9100-3 sec_301_9100-3 provides that a taxpayer is deemed to have acted reasonably and in good_faith if the taxpayer i requests relief before the failure to make the regulatory election is discovered by the internal_revenue_service ii failed to make the election because of intervening events beyond the taxpayer’s control iii failed to make the election because after exercising reasonable diligence the taxpayer was unaware of the necessity for the election iv reasonably relied on the written advice of the service or v reasonably relied on a qualified_tax professional including a tax professional employed by the taxpayer and the tax professional failed to make or advise the taxpayer to make the election sec_301_9100-3 provides that a taxpayer is deemed not to have acted reasonably and in good_faith if the taxpayer i seeks to alter a return position for which an accuracy-related_penalty was or could be imposed under sec_6662 at the time the taxpayer requests relief and the new position requires or permits a regulatory election for which relief is requested ii was informed in all material respects of the required election and related tax consequences and chose not to file the election or iii uses hindsight in requesting relief sec_301_9100-3 provides that the interests of the government are prejudiced if granting relief would result in the taxpayer having a lower tax_liability in the aggregate for all tax years affected by the election than the taxpayer would have had if the election had been timely made taking into account the time_value_of_money the section also provides that if the tax consequences of more than one taxpayer are affected by the election the government’s interests are prejudiced if extending the time for making the election may result in the affected taxpayers in the aggregate having a lower tax plr-128761-15 liability than if the election had been timely made further sec_301_9100-3 provides in part that the interests of the government are ordinarily prejudiced if the tax_year in which the regulatory election should have been made or any_tax years that would have been affected by the election had it been timely made are closed by the period of limitations on assessment under sec_6501 before the taxpayer’s receipt of a ruling granting relief under this section the requested election is a regulatory election as defined under sec_301_9100-1 because the due_date of the election is prescribed in sec_1_472-3 parent’s request is analyzed under the requirements of sec_301_9100-3 because the automatic provisions of sec_301_9100-2 are not applicable on the basis of the facts representations and affidavits submitted we conclude that the requirements of sec_301_9100-3 have been satisfied accordingly we hereby grant an extension of time for parent to file the missing form sec_970 on behalf of taxpayer1 and taxpayer2 this extension shall be for a period of days from the date of this ruling please attach a copy of this ruling to each form_970 filed pursuant to this private_letter_ruling request the ruling contained in this letter is based upon information and representations submitted by parent and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the materials submitted in support of the request for a ruling such material is subject_to verification on examination 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 specifically we express no opinion as to whether parent taxpayer1 or taxpayer2 through llc1 and llc2 have correctly used the lifo inventory_method we also have no opinion as to the restructuring of parent that occurred in year1 specifically whether the restructuring qualified as a tax-free_exchange under sec_351 further we have no opinion as to the correctness of the use of the lifo inventory_method by any entity that may have obtained inventory in the restructuring that occurred during year1 other than taxpayer1 llc1 and llc2 this ruling is directed only to parent who requested it sec_6110 provides that it may not be used or cited as precedent plr-128761-15 in accordance with the power_of_attorney on file with this office copies of this letter are being sent to parent’s authorized representatives sincerely cheryl l oseekey senior counsel branch office of associate chief_counsel income_tax accounting enclosure copy for sec_6110 purposes cc


department of the treasury internal_revenue_service washington d c date cc dom fs p si number release date uilc internal_revenue_service national_office field_service_advice memorandum for district_counsel from deborah a butler assistant chief_counsel field service cc dom fs subject transactions between partner and partnership this field_service_advice responds to your memorandum dated 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 r s t u v w dollar_figure issues whether a payment by the limited_liability_company to a partner is treated a sec_1 a sale_or_exchange under sec_707 whether the anti-abuse regulations promulgated under sec_701 apply to the transaction conclusion the payment by the limited_liability_company to the partner is treated as a sale_or_exchange under sec_707 allowing the limited_liability_company a cost_basis in the assets considered purchased the anti-abuse regulations promulgated under sec_701 do not apply to the transaction facts r a not-for-profit corporation owns and operates a hospital and clinic r planned to expand and remodel its existing facilities and construct new facilities the cost of such expansion remodeling and construction was estimated to be dollar_figurew over t years in order to carry out the expansion remodeling and construction r and s a corporation agreed to form a limited_liability_company which would be taxed as a partnership wherein r would contribute certain of its assets in exchange for a u percent interest and s would contribute cash in exchange for a v percent interest subsequent to the contributions to capital to adjust the capital accounts so that r would own a u percent interest and s would own a v percent interest the limited_liability_company made an adjusting payment to r the limited_liability_company filed a form_8594 asset acquisition statement under sec_1060 reporting the amount of the payment to r as a disguised sale under sec_707 and claimed a cost_basis in the assets to the extent of the payment law and analysis in general no gain_or_loss is recognized upon the contribution of property to a partnership in exchange for a partnership_interest sec_721 accordingly under the general_rule r and s do not recognize gain upon the contribution of assets and cash to the limited_liability_company in exchange for an interest in the limited_liability_company in general the partnership’s basis in property contributed to the partnership by a partner is the adjusted_basis of the property to the contributing_partner at the time of the contribution sec_723 accordingly under the general_rule the limited_liability company’s basis in the assets contributed by r is r's adjusted_basis in the assets prior to contribution transaction between a partner and the partnership if a partner engages in a transaction with a partnership other than in his capacity as a member of the partnership the transaction is considered as occurring between the partnership and one who is not a partner sec_707 such transactions include the sale of property by the partner to the partnership sec_1 a if a partner transfers property to a partnership there is a related direct or indirect allocation and distribution to such partner and the transfer and distribution when viewed together are properly characterized as a transaction occurring between the partnership and a partner acting other than in his capacity as a member of the partnership such distribution shall be treated as occurring between the partnership and one who is not a partner sec_707 sec_1_707-3 a transfer of property by a partner to a partnership and a transfer of money by the partnership to the partner constitute a sale of property in whole or in part by the partner to the partnership if based on all the facts and circumstances the transfer of money or other consideration would not have been made but for the transfer of property and in cases in which the transfers are not made simultaneously the subsequent transfer is not dependent on the entrepreneurial risks of the partnership operations sec_1_707-3 the weight to be given each of the facts and circumstances will depend on the particular case sec_1_707-3 the following facts and circumstances may tend to prove the existence of a sale that the timing and amount of a subsequent transfer are determinable with reasonable certainty at the time of an earlier transfer that the transferor has a legally enforceable right to the subsequent transfer that the partner's right to receive the transfer of money or other consideration is secured in any manner taking into account the period during which it is secure that any person has made or is legally obligated to make contributions to the partnership in order to permit the partnership to make the transfer of money or other consideration that any person has loaned or has agreed to loan the partnership the money or other consideration required to enable the partnership to make the transfer taking into account whether any such lending obligation is subject_to contingencies related to the results of partnership operations that the partnership has incurred or is obligated to incur debt to acquire the money or other consideration necessary to permit it to make the transfer taking into account the likelihood that the partnership will be able to incur that debt that the partnership holds money or other liquid_assets beyond the reasonable_needs_of_the_business that are expected to be available to make the transfer that partnership_distributions allocations or control of partnership operations is designed to effect an exchange of the burdens and benefits of ownership of property that the transfer of money or other consideration by the partnership to the partner is disproportionately large in relationship to the partner's general and continuing interest in partnership profits and that the partner has no obligation to return or repay the money or other consideration to the partnership or has such an obligation but it is likely to become due at such a distant point in the future that the present_value of that obligation is small in relation to the amount of money or other consideration transferred by the partnership to the partner sec_1_707-3 through x if within a two-year period a partner transfers property to a partnership and the partnership transfers money or other consideration to the partner the transfers are presumed to be a sale of the property to the partnership unless the facts and circumstances clearly establish that the transfers do not constitute a sale sec_1_707-3 r transferred the assets to the limited_liability_company and there was a subsequent distribution of cash to r because the transaction occurred within a two-year period the transfer is presumed to be a sale of the property to the partnership no facts were presented which would clearly establish that the transfer did not constitute a sale accordingly r is considered to have sold a portion of the contributed assets to the limited_liability_company in exchange for cash r must realize gain to the extent the amount_realized exceeds the adjusted tax basis sec_1_707-3 ex to the extent permitted by sec_501 the gain is exempt from taxation sec_501 c the limited_liability_company has a cost_basis in the assets which are treated as having been purchased from r pursuant to sec_707 sec_1012 sec_1_707-3 anti-abuse regulations the partnership provisions of subchapter_k are intended to permit taxpayers to conduct joint business activities through a flexible economic arrangement without incurring any entity-level tax sec_1_701-2 to come within the intent of subchapter_k the partnership must be bona_fide and each partnership transaction or series of related transactions must be entered into for a substantial business_purpose the form of each partnership transaction must be respected under substance over form principles in general the tax consequences under subchapter_k to each partner of partnership operations and of transactions between the partner and the partnership must accurately reflect the partners’ economic agreement and clearly reflect the partner’s income sec_1_701-2 through if a partnership is formed_or_availed_of in connection with a transaction a principal purpose of which is to reduce substantially the present_value of the partners’ aggregate federal tax_liability in a manner that is inconsistent with the intent of subchapter_k the commissioner can recast the transaction for federal tax purposes as appropriate to achieve tax results that are consistent with the intent of subchapter_k in light of the applicable statutory and regulatory provisions and the pertinent facts and circumstances sec_1_701-2 whether a partnership was formed_or_availed_of with a principal purpose to reduce substantially the present_value of the partners’ aggregate federal tax_liability in a manner inconsistent with the intent of subchapter_k is determined based on all of the facts and circumstances including a comparison of the purported business_purpose for a transaction and the claimed tax benefits resulting from the transaction sec_1_701-2 the factors which are considered include the following the present_value of the partners’ aggregate federal tax_liability is substantially less than had the partners owned the partnership’s assets and conducted the partnership’s activities directly the present_value of the partners’ aggregate federal tax_liability is substantially less than would be the case if purportedly separate transactions that are designed to achieve a particular end result are integrated and treated as steps in a single transaction one or more partners who are necessary to achieve the claimed tax results either have a nominal interest in the partnership are substantially protected from any risk of loss from the partnership’s activities or have little or no participation in the profits from the partnership’s activities other than a preferred_return that is in the nature of a payment for_the_use_of capital substantially_all of the partners are related to one another partnership items are allocated in compliance with the literal language of sec_1_704-1 and sec_1_704-2 but with results that are inconsistent with the purpose of sec_704 and those regulations the benefits_and_burdens_of_ownership of property nominally contributed to the partnership are in substantial part retained by the contributing_partner or the benefits_and_burdens_of_ownership of partnership property are in substantial part shifted to the distributee partner before or after the property is actually distributed to the distributee partner sec_1_701-2 through based on the pertinent facts and circumstances the limited_liability_company was formed_or_availed_of in connection with the expansion remodeling and construction of the hospital and clinic the principal purpose of the transaction was not to reduce substantially the present_value of the partners’ aggregate federal tax_liability in a manner that is inconsistent with the intent of subchapter_k accordingly the commissioner cannot rely on the anti-abuse regulations set forth in sec_1_701-2 to recast the transaction for federal tax purposes case development hazards and other considerations please call if you have any further questions by patrick putzi special counsel natural_resources passthroughs special industries branch field service division


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 fip b04 plr-109523-10 date august taxpayer --------------------------------------------- ---------------------------- former parent --------------------------------------------------- state parent --------- ---------------------------------------------------- date date firm director professional ---------------------------- ---------------------------- ------------------------- ----------------------- -------------------------- -------------------- dear ---------------- this is in response to the request dated date that parent submitted on taxpayer’s behalf for a ruling granting an extension of time for making an election under sec_831 of the internal_revenue_code the request is made in accordance with and seeks relief pursuant to sec_301_9100-3 of the procedure and administration regulations facts taxpayer represents as follows taxpayer is a property and casualty insurance provider registered in state parent files a consolidated federal_income_tax return which includes taxpayer’s operations taxpayer is wholly-owned by parent prior to date taxpayer was a member of a consolidated_group of which former parent was the parent on date former parent and an unrelated venture capital plr-109523-10 group merged creating parent parent then became the parent of the consolidated_group of which taxpayer is a member the merger caused taxpayer to have a short fiscal_year ending on date director is the individual primarily responsible for coordinating with parent's and taxpayer's outside tax advisors the first time the director became aware that taxpayer was eligible to make the sec_831 election was date when professional at firm informed director that taxpayer was eligible to make the election but had never done so taxpayer further represents that taxpayer is requesting relief before the failure to make the election was discovered by the irs taxpayer is not seeking to alter a return position for which an accuracy- related penalty has been or could be imposed under sec_6662 taxpayer was not informed in all material respects of its qualification to make the election and the related tax consequences but chose not to file the election taxpayer is not using hindsight in requesting relief facts have not changed since the due_date for making the election that make the election advantageous to the taxpayer and granting taxpayer's request to make the election will not prejudice the interests of the government taxpayer qualifies as an insurance_company for federal_income_tax purposes taxpayer requests that it be granted an extension of time under sec_301_9100-3 to make the election under sec_831 of the code to be taxable only on its investment_income law generally insurance_companies other than life_insurance_companies are taxable under sec_831 however an eligible company may pay an alternative_tax provided in sec_831 based on its taxable_income investment_income if it so elects sec_831 sec_831 does not contain a due_date the election under sec_831 is listed in sec_301_9100-8 of the regulations as f of the technical and plr-109523-10 miscellaneous act of and is available for taxable years beginning after date sec_301_9100-8 prescribes the time and manner for making the election under sec_831 of the code that section provides that the election must be made by the later of- a the due_date taking into account any extensions of time to file obtained by the taxpayer of the tax_return for the first taxable_year for which the election was effective or b date under sec_301_9100-1 the commissioner may grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make a regulatory election or a statutory election but not more than months except in the case of a taxpayer who is abroad under all the subtitles of the code except subtitles e g h and i sec_831 is part of subtitle a sec_301_9100-2 provides an automatic_extension of time for making certain elections and is inapplicable here sec_301_9100-3 provides in pertinent part that requests for extensions of time for regulatory elections that do not meet the requirements of sec_301_9100-2 must be made under the rules of sec_301_9100-3 requests for relief subject_to sec_301_9100-3 will be granted when the taxpayer provides the evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and the grant of relief will not prejudice the interest of the government a taxpayer is deemed to have acted reasonably and in good_faith under sec_301_9100-3 if the taxpayer i requests relief under this section before the failure to make the regulatory election is discovered by the internal_revenue_service ii failed to make the election because of intervening events beyond the taxpayer's control iii failed to make the election because after exercising reasonable diligence taking into account the taxpayer's experience and the complexity of the return or issue the taxpayer was unaware of the necessity for the election iv reasonably relied upon the written advice of the internal_revenue_service or v reasonably relied on a qualified_tax professional including a tax professional employed by the taxpayer and the tax professional failed to make or advise the taxpayer to make the election sec_301_9100-3 however states that a taxpayer will be deemed not to have acted in good_faith if the taxpayer i seeks to alter a return position for which an accuracy-related_penalty has been or could be imposed under sec_6662 at the time the taxpayer requests relief taking into account any qualified_amended_return filed within the meaning of sec_1_6664-2 of this chapter and the new position requires or permits a regulatory election for which relief is requested ii was informed in all plr-109523-10 material respects of the required election and related tax consequences but chose not to file the election or iii uses hindsight in requesting relief if specific facts have changed since the due_date for making the election that make the election advantageous to a taxpayer the irs will not ordinarily grant relief in such a case the irs will grant relief only when the taxpayer provides strong_proof that the taxpayer's decision to seek relief did not involve hindsight sec_301_9100-3 provides in pertinent part that the commissioner will grant a reasonable extension of time to make a regulatory election only when the interests of the government will not be prejudiced by granting the relief the interests of the government are prejudiced if granting relief would result in a taxpayer having a lower tax_liability in the aggregate for all taxable years affected by the election than the taxpayer would have had if the election had been timely made taking into account the time_value_of_money the interests of the government are also ordinarily prejudiced if the taxable_year in which the regulatory election should have been made or any taxable years that would have been affected by the election had it been timely made are closed by the period of limitations on assessment under sec_6501 before the taxpayer's receipt of a ruling granting relief under this section based solely upon the facts submitted and the representations made taxpayer is granted an extension of days from the date of this letter to make the election allowed by sec_831 on a return for the first open taxable_year 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 no opinion is expressed whether taxpayer otherwise meets the requirements of sec_831 and whether any additions to tax interest or other penalties apply this letter is based upon information and representations submitted by taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party this office has not verified any of the material so submitted and it is subject_to verification on examination this ruling is directed only to taxpayer sec_6110 of the code provides that it may not be used or cited as precedent a copy of this letter should be attached to the tax_return for the year for which the election is made pursuant to a power_of_attorney on file in this office a copy of this ruling is being furnished to your authorized representative sincerely s plr-109523-10 donald j drees jr senior technician reviewer branch office of associate chief_counsel financial institutions and products


internal_revenue_service number release date index number ---------------------------------- ----------------------------------- --------------------------- ---------------------------- -legend x department of the treasury washington dc person to contact ----------------------- id no ------------- telephone number --------------------- refer reply to cc psi b02 plr-140108-07 date january ----------------------------- -------------------------- ---------- ---------------------- this responds to a letter dated date and additional a ----------------------- ------------------------------------------ state d1 dear ----------- correspondence submitted on behalf of x requesting a ruling under sec_1362 of the internal_revenue_code the information submitted states that x was incorporated in state on d1 a the sole shareholder of x intended for x to be an s_corporation effective d1 however no form_2553 election by a small_business_corporation was timely filed for x any taxable_year after the date prescribed by sec_1362 for making such election for such taxable_year or no such election is made for any taxable_year and b the secretary determines that there was reasonable_cause for the failure to timely make such election the secretary may treat such an election as timely made for such taxable_year sec_1362 provides that if -- a an election under sec_1362 is made for except as specifically set forth above no opinion is expressed concerning the this ruling is directed only to the taxpayer who requested it sec_6110 based solely on the facts and the representations submitted we conclude that x plr-140108-07 has established reasonable_cause for failing to make a timely election to be an s_corporation effective d1 accordingly provided that x makes an election to be an s_corporation by filing a completed form_2553 with the appropriate service_center effective d1 within days following the date of this letter then such election will be treated as timely made for x’s taxable_year beginning d1 a copy of this letter should be attached to the form_2553 federal tax consequences of the facts described above under any other provision of the code including whether x was or is a small_business_corporation under sec_1361 provides that it may not be used or cited as precedent being forwarded to x’s authorized representative enclosures j thomas hines chief branch associate chief_counsel passthroughs and special industries pursuant to a power_of_attorney on file with this office a copy of this letter is copy of this letter copy for sec_6110 purposes sincerely