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 uilc cc pa apjp scaf-129429-02 internal_revenue_service national_office significant service_center advice memorandum for associate area_counsel - salt lake city small_business self-employed cc sb slc from subject ashton p trice senior technician reviewer cc pa apjp form_1041 and application of internal_revenue_code i r c sec_6702 this service_center advice responds to your memorandum dated date in accordance with sec_6110 this service_center advice should not be cited as precedent issue sec_1 whether form sec_1041 by which purported trusts claim refunds in the amount of social_security_taxes paid_by the trust’s fiduciary are valid returns under sec_6011 whether form sec_1041 by which purported trusts claim refunds in the amount of social_security_taxes paid_by the trust’s fiduciary are subject_to the frivolous_return penalty under sec_6702 what assessment and collection procedures should the service use to recover erroneous refunds based on form sec_1041 that claim refunds in the amount of social_security_taxes withheld from the purported fiduciary’s lifetime earnings conclusion sec_1 the service should treat these form sec_1041 as valid returns under sec_6011 unless entries on the returns or attached correspondence negate the intent to file the service may assess the frivolous_return penalty under sec_6702 against individuals who file form sec_1041 claiming refunds in the amount of social_security_taxes paid if the service determines that the trusts are shams scaf-129429-2 sec_6201 authorizes the service to summarily assess the erroneously refunded or credited amount of income_tax withholdings claimed on the form_1041 once assessed the service may avail itself of all of the administrative and judicial collection remedies available under the code to recover an erroneous refund facts some individuals file form sec_1041 titled u s income_tax return for estates and trusts claiming a refund of all social_security_taxes paid during their lifetimes the promoters of this scheme instruct individuals to request a lifetime earnings statement from the social_security administration and to request an employer_identification_number ein from the service as a basis for preparing the claim the promoter prepares a form_1041 based on the lifetime earnings statement and the ein and charges the individual a preparation fee the individual’s name followed by the word trust is listed as the name of the trust taxpayer on the form_1041 the individual filing the claim is listed as fiduciary of the trust the amount of the individual’s lifetime earnings subject_to social_security_tax is listed on the form_1041 on the line titled total income the trust then takes a deduction equal to the amount reported as total income on the line titled fiduciary fees after a deduction for exemptions the form_1041 reports negative taxable_income and zero tax_liability the trust then reports the lifetime social_security_tax withholding as federal_income_tax withheld on line 24e of the form_1041 since the form_1041 shows no tax_liability the trust requests a refund for the amount equal to the individual’s fiduciary’s lifetime social_security withholdings generally the individual signs the form_1041 as the fiduciary trustee of the trust law and analysi sec_1 handling of form sec_1041 a validity of form sec_1041 the courts have extensively interpreted the sec_6011 return requirement under that precedent we think that the service should treat these form sec_1041 as valid returns triggering the statute_of_limitations on assessment in 293_us_172 the supreme court stated that p erfect accuracy or completeness is not necessary to rescue a return from nullity if it purports to be a return is sworn to as such and evinces an honest and genuine endeavor to satisfy the law see also 464_us_386 280_us_453 the lower courts have subsequently synthesized the criteria enunciated by the supreme court into the following four-part test for determining whether a defective or incomplete document is a valid_return first there must be sufficient data to calculate tax_liability second the document must purport to be a return third there must be an honest and reasonable attempt to satisfy the requirements of the tax law and fourth the taxpayer must scaf-129429-2 execute the return under penalties of perjury 82_tc_766 aff’d per curiam 793_f2d_139 6th cir this generally accepted formulation of the criteria for determining a valid_return is known as the substantial compliance standard if a defective or incomplete document meets the substantial compliance standard the document is a valid_return for purposes of the statute_of_limitations on assessment and for purposes of determining whether the failure_to_file_penalty of sec_6651 applies apart from the so-called tax_protester cases there is little authority for determining what constitutes an honest and reasonable attempt to satisfy the requirements of the tax law see eg 618_f2d_280 5th cir zeros and constitutional objections 627_f2d_830 7th cir 426_f2d_519 10th cir beard supra 78_tc_558 and sochia v commissioner tcmemo_1998_294 courts however have been reluctant to declare defective or incomplete returns as nullities in the absence of protester language or other statements negating the intent to file cases such as badaracco steines v commissioner tcmemo_1991_588 frivolous schedule c claiming dollar_figure billion loss and nicolaisen v commissioner tcmemo_1985_120 are typical in badaracco the taxpayer filed returns that were fraudulent but which contained no tax_protester arguments or alterations to the official return form despite the fraudulent nature of the returns the supreme court declared them valid for purposes of starting the statute_of_limitations noting that a lthough those returns in fact were not honest the holding in zellerbach does not render them nullities badaracco u s pincite therefore despite the fact that a return may erroneously fraudulently or frivolously claim a refund for the taxpayer’s lifetime social_security_tax withholdings it is considered a valid_return for purposes of starting the statute_of_limitations on assessment under the circumstances we think that a reviewing court would conclude that the form sec_1041 are valid returns under sec_6011 and the judicial substantial compliance standard the documents do not contain overt constitutional objections to the income_tax and are not otherwise characterized by traditional tax_protester arguments individuals filing these fraudulent_returns claims apparently do not make statements negating the intent to file see processing of form sec_1041 below we therefore recommend that the service treat the form sec_1041 as returns within the meaning of sec_6011 b processing of form sec_1041 we suggest that the service take appropriate steps to adjust the accounts of the affected taxpayers whether or not the service has erroneously issued the requested refunds in each case where the service has not issued a refund the service presumably entered the appropriate freeze code on the taxpayer’s account to ensure that the claimed overpayment was not refunded we recommend that the service reverse the scaf-129429-2 reported prepayment_credits withholding on the account this action would bring the taxpayer’s account into balance since the reported tax_liability on the return was zero and the prepayment_credits after the reversal are zero also as noted above the filing of an original return reflecting an overpayment constitutes a claim_for_refund until the service disallows the claim the limitations_period for filing suit in district_court or claims_court remains open therefore we recommend that the service issue a formal notice of claim disallowance as provided by sec_6532 to start the limitations_period running once the notice of claim disallowance is issued the taxpayer has two years to challenge the claim disallowance in court occasionally entries on a return or attached statements or correspondence might be inconsistent with one of the four factors of the substantial compliance standard cited in beard for example in 114_tc_136 the tax_court found that an attached disclaimer negated the jurat and that the substantial compliance standard was not met if a service employee finds correspondence or attachments included with returns that could affect whether a form_1041 is a valid_return the employee should seek legal advice frivolous_return penalties prior to the enactment of sec_6702 congress was concerned with the rapid growth in deliberate defiance of the tax laws by tax protesters the service had big_number protester returns under examination as of date congress recognized that many of those protesters were induced to file protester returns through the criminal conduct of others congress also recognized that promoters and advisors frequently emphasized the lack of any penalty when sufficient tax had been withheld from wages and encouraged others to play the audit_lottery sec_6702 was enacted because congress believed that an immediately assessable penalty on the filing of protester returns would help deter the filing of such returns and would demonstrate the government’s determination to maintain the integrity of the income_tax system sec_6702 imposes an immediately assessable penalty of dollar_figure on any individual who files a document which purports to be a return of income_tax if the document fails to contain information from which the substantial correctness of the amount of tax_shown_on_the_return can be judged or contains information that on its face indicates that the amount of tax_shown_on_the_return is substantially incorrect and such conduct arises from a position which is frivolous or from a desire which appears on the face of the purported return to delay or impede administration of the federal_income_tax laws a individual in order to assess the frivolous_return penalty under sec_6702 an individual must file the document in question the returns in question purport to be returns filed by trusts not individuals sec_6702 does not apply to returns that trusts file even if scaf-129429-2 those returns are clearly frivolous accordingly the service should not assert the sec_6702 penalty unless the trust is a sham if the trust is a sham the service should disregard it and treat the return as if filed by an individual while the information on the face of a form_1041 may make one question the validity of the trust that information alone does not establish that the trust is a sham even a valid trust can file a frivolous_return therefore we believe that the service should investigate the trusts listed on the form sec_1041 and establish that they are in fact shams that are disregarded for federal tax purposes before assessing a frivolous_return penalty against the individual using the sham b purports to be a return of tax imposed by subtitle a another requirement for proper assessment of the sec_6702 penalty is that the individual file what purports to be a return of tax imposed by subtitle a under the facts related the document being filed is a form_1041 u s income_tax return for estates and trusts income taxes on estates and trusts are imposed by subtitle a of the code see sec_641 et seq furthermore line 24e of the form_1041 claims that federal_income_tax has been withheld and the amount withheld is the amount that should be refunded in full thus we conclude that the form sec_1041 being filed are what purport to be returns of tax imposed by subtitle a sec_6702 we recognize that the underlying rationale for the filing of the form_1041 may be that individuals are seeking to recover social_security_taxes that have been withheld from their lifetime earnings furthermore social_security_taxes are not taxes imposed by subtitle a they are imposed by subtitle c thus one might argue that sec_6702 does not apply because the form sec_1041 in question are actually claims for refund of social_security_taxes and not returns of tax imposed by subtitle a such an argument however ignores the fact that nothing filed with the form sec_1041 states the underlying rationale on which individuals file the returns the documents as filed clearly purport to be income_tax returns under sec_6702 purported returns are subject_to the frivolous_return penalty see 737_f2d_751 8th cir c contains information that on its face indicates the self-assessment is substantially incorrect it is our understanding that the form sec_1041 contain information that facially indicates that the self-assessments are substantially incorrect these returns list the amount of we have found no case in which a_trust was treated as a sham for purposes of assessing a penalty under sec_6702 we believe however that the analysis of what constitutes a sham trust for purposes of determining a deficiency against an individual would be equally applicable with respect to determining when it is appropriate to assess the sec_6702 penalty against an individual filing an income_tax return purported trust scaf-129429-2 the taxpayers’ lifetime earnings subject_to social_security_taxes as the total income typically the returns fail to identify the source or type of income that constitutes the total income although the return requests this information the return then claims there were fiduciary fees in the exact amount as the total income after claiming deductions for exemptions reporting a negative taxable_income and zero tax_liability the taxpayers report the amount of lifetime social_security_tax withholdings as income_tax withholdings on the returns and claim refunds for that amount such a combination of line item entries and highly unlikely amounts indicates that the self-assessment is substantially incorrect for purposes of sec_6702 d frivolous position sec_6702 also requires that the taxpayer’s position for providing the substantially incorrect information on the return be due to a frivolous position or a desire which appears on the face of the return to impede tax_administration sec_6702 we believe that it is patently frivolous to contend that total income represents fiduciary fees furthermore the substance of the taxpayers’ refund claims are an attempt by individual taxpayers to obtain refunds of their personal lifetime social_security_tax withholdings using the vehicle of a form_1041 trust return the internal_revenue_code provides for no such procedure and contains no statutory authority for obtaining a refund of taxpayer’s personal lifetime social_security_tax withholdings accordingly we conclude that this element of the frivolous_return penalty is satisfied as discussed in section 2a individual above if the service determines that the purported trust is a sham we believe that the frivolous_return penalty may be asserted against the individual standing behind the sham trust that files the form_1041 post-assessment collection including erroneous refund suits it is our understanding that the taxpayers report their lifetime social_security_tax withholdings on line 24e titled federal_income_tax withheld based on this reporting position we will examine whether sec_6201 provides authority for the service to make a summary_assessment sec_6201 provides the service with the authority to make an assessment i f on any return or claim_for_refund of income taxes under subtitle a there is an overstatement of the credit for income_tax withheld at the source or of the amount_paid as estimated income_tax to the extent that the forms at issue claim an amount that equals the total social_security_tax withheld on line 24e of the form_1041 as federal_income_tax withheld which constitutes an income_tax withheld at the source then the amount is properly subject_to the summary_assessment process provided for by sec_6201 given that conclusion we see no need to address the applicability of notice_of_deficiency procedures once assessed the liability may be collected in the same manner as a tax within the ten-year collection statute the service may avail itself of all of the administrative ie levy and judicial ie lien foreclosure suit erroneous refund_suit collection remedies scaf-129429-2 available under the code the service must ensure however that proper statutory and administrative procedures are followed and that the trusts are advised of their rights and provided with all of the required notices one possible remedy for administratively recovering the erroneous refunds issued as a result of the fraudulent form sec_1041 would be jeopardy_levy the general requirements set forth in sec_6330 and sec_6331 do not apply if the service finds that collection of the tax is in jeopardy sec_6330 and sec_6331 instead the service can issue a notice_and_demand for immediate payment and can immediately levy upon the taxpayer’s property in order for the service to make a finding that collection of the tax is in jeopardy the service must show that the taxpayer is or appears to be designing quickly to depart from the united_states the taxpayer is or appears to be designing quickly to place his her or its property beyond the reach of the government either by removing it from the united_states by concealing it by dissipating it or by transferring it to other persons the taxpayer is in danger of becoming insolvent 949_fsupp_473 n d tex the service would not be able to make a jeopardy_levy merely on the basis that the refund was paid as a result of a fraudulent claim or that the fraudulent scheme was being promoted by a third-party individual rather the service would need to conduct some initial investigation to determine first whether the trusts are legitimate and second which if any of the jeopardy criteria exist even if the trusts at issue are legitimate jeopardy may exist if they are transferring or dissipating assets more than likely these trusts are being set up for the sole purpose of receiving the refunds and the refunds are being transferred to other parties such as the trustee or the trustee’s family if that is true then the service could make a determination that collection is in jeopardy because the trust is transferring its assets to third parties or is in danger of becoming insolvent the determination that collection of tax is in jeopardy must be made on a case-by-case basis and the service cannot assume that what is happening with one of these trusts is true with respect to all generally a bankruptcy or a receivership proceeding alone is not sufficient to warrant a jeopardy_levy while evidence of an imminent or actual bankruptcy may be one of the factors in determining whether the taxpayer’s financial solvency is or appears to be imperiled courts generally require more see eg 934_fsupp_341 n d ca cousins v united_states u s t c n d fla given this case law it is our view that bankruptcy or receivership without more does not establish financial insolvency for jeopardy purposes if the trusts are shams that may support making assessments against the individual owners of the trusts filing nominee liens and levying on trust assets however this would not necessarily support a jeopardy_levy against the individual trust owner’s property unless the trust is part of a scheme to dissipate the assets of the individual owner of the trust scaf-129429-2 assuming that the service can satisfy the requirements for making a determination that collection is in jeopardy certain procedures must be followed these procedures are required by the code and the internal_revenue_manual first the internal_revenue_service restructuring and reform act of rra section amended sec_7429 to require that the chief_counsel or_his_delegate personally approve in writing all jeopardy and termination assessments and jeopardy levies prior to the assessment or levy therefore the appropriate counsel official must give prior approval to jeopardy_levy second section a b provides that within five days of making the jeopardy_levy the service must provide the taxpayer with a written_statement of the information upon which the service relied in making the jeopardy_levy this means that the written_statement must specifically describe which of the jeopardy criteria mentioned above the service relied on neither the code nor the regulations prescribe how the written_statement is to be sent ie by certified or regular mail or by personal delivery however irm notice_of_levy handbook sec_3_5 instructs service personnel to try to give pattern_letter p to the taxpayer in person and if personal delivery is not practical to send it to the taxpayer’s last_known_address by certified mail pattern_letter p contains all of the information that the taxpayer is entitled to including the reason for making the jeopardy_levy a description of the taxpayer’s rights to administrative and judicial review under sec_7429 and notice of the taxpayer’s right to administrative and judicial review under sec_6330 if the service determines that a jeopardy_levy is not appropriate in all or some of these cases the service may initiate erroneous refund suits against the trusts or its nominees under sec_7405 regardless of what other remedies are available to the service to recover an erroneous refund the service may always file an erroneous refund_suit pursuant to sec_7405 sec_6532 sets forth the applicable_period of limitations the section provides in relevant part as follows a suit under sec_7405 may be brought at any time within years from the making of the refund if it appears that any part of the refund was induced by fraud or misrepresentation of a material fact sec_6532 the five-year limitations_period begins to run from the date the taxpayer receives the erroneous refund 519_us_79 the government bears the burden_of_proof on all of the elements of the erroneous refund 272_f2d_387 9th cir united_states v moreno u s t c s d fla thus the service has the burden of interest on an erroneous refund accrues at the underpayment rate from the date of the payment of the refund sec_6602 the sec_6404 abatement provision is not applicable here because the erroneous refunds at issue were caused by the taxpayer trust or a related_party trustee sec_6404 scaf-129429-2 showing that the refund was erroneous and the amount of the refund if the taxpayer raises the statute_of_limitations as a defense the service will also have to show that the applicable statute_of_limitations has not expired neither sec_6532 or sec_7405 nor the regulations thereunder define the term fraud or misrepresentation of a material fact see sec_301_6532-3 webster’s third new international dictionary however defines fraud as an intentional misrepresentation concealment or nondisclosure for the purpose of inducing another to part with some valuable thing a false representation of a matter of fact by words or conduct webster’s third new international dictionary third edition hence in order to show that an erroneous refund was induced by fraud the service will have to show that the taxpayer made false representations concealed information or failed to disclose important facts with the intent of obtaining funds to which he or she was not entitled 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 if you have questions please contact


internal_revenue_service number release date index number ----------------------------- ----------------------------------- --------------------------------------------------- -------------------------------- department of the treasury washington dc third party communication date of communication month dd yyyy person to contact -------------------------- id no ------------- telephone number --------------------- refer reply to cc intl b02 plr-117002-11 date date legend taxpayer domestic sub foreign sub de barge country a country b state a state b state c e f g h -------------------------------------------------------------------------------------------- ---------------------- -------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------- ----------------------- ----------------------- ----------------------- ---------------- ---------------------- ----------- ------------- ------------- -------- ----- -------- ----- ----- dear ------------- this letter_ruling responds to a letter dated date submitted by your authorized representative requesting rulings under sec_956 of the internal_revenue_code with respect to a combination barge the information provided in that request and subsequent correspondence is summarized below summary of facts the facts as represented are as follows plr-117002-11 taxpayer and its subsidiaries are marine contractors that provide manned diving pipe lay and pipe burial platform installation and platform and pipeline salvage services to a diverse customer base in the offshore oil and natural_gas industry taxpayer’s common_stock is traded on the new york stock exchange taxpayer is the common parent of a group of affiliated corporations that includes domestic sub a state a corporation for u s federal_income_tax purposes domestic sub owns all of the equity interests of foreign sub a country a company that is a controlled_foreign_corporation within the meaning of sec_957 foreign sub owns all of the equity interests of de a country a company that is treated as a disregarded_entity for u s federal_income_tax purposes de owns the barge a combination barge that has two cranes affixed to its deck a main crane with an e-foot boom and a load capacity of f standard tons and a utility crane with a g-foot boom and a load capacity of h standard tons the barge is a flat-bottom surface-floating barge that is not self-propelled the barge can be used in the construction of offshore platforms and other production facilities as well as for laying large diameter pipelines on the ocean floor the barge is a foreign-flagged vessel that is documented under the laws of country b as currently documented the barge will be allowed to perform pipeline work and certain sub-sea construction work in the u s gulf of mexico the barge will be prohibited from engaging in coastwise trade ie the transportation of personnel and cargo between two points within the united_states because the barge does not qualify for a coastwise endorsement the marine safety office of the u s coast guard may require that the barge undergo an annual inspection the barge will also be subject_to the u s coast guard’s notice of arrival requirements before entering a u s port and will have to satisfy certain customs obligations taxpayer represents that there is no requirement that the barge register or file any other documentation with the u s coast guard or any other agency in order to work in the u s gulf of mexico except for any filings that may be necessary for permits etc for the work itself the barge will be used in connection with one or more of the following activities the proposed uses a laying and installing oil_and_gas pipelines on the seabed b installing and repairing offshore platforms and other production facilities c decommissioning operations including pipeline abandonment well plug and abandonment and platform and production facilities removal and d salvage operations the barge will perform the proposed uses for third parties unrelated to taxpayer these third parties are engaged in the exploration for and production of oil_and_gas and include national and independent producers the proposed uses of the barge will occur in waters off the coast of the united_states having a depth of not more than big_number feet the proposed location plr-117002-11 after the barge completes the proposed uses the barge will be stored at a harbor located in state b or state c to be repaired or actively marketed for use on the continental shelf of the united_states continental shelf however the barge may also be simultaneously marketed for use elsewhere given the volatile nature of the oil_and_gas industry it is not clear at this time whether there will be sufficient job opportunities to use or market the barge for use exclusively on the continental shelf upon obtaining a suitable bid for work on the continental shelf or elsewhere the barge will be transported to the new worksite law and analysis sec_956 of the code was enacted to require an income inclusion by u s shareholders of a controlled_foreign_corporation cfc that invests certain earnings_and_profits in united_states_property on the grounds that the investment is substantially the equivalent of a dividend being paid to them s rep no 1962_3_cb_703 under sec_951 each u s shareholder as defined in sec_951 of a cfc as defined in sec_957 must include in its gross_income for its taxable_year in which or with which the taxable_year of the cfc ends the amount determined under sec_956 with respect to such shareholder for such year but only to the extent not excluded from gross_income under sec_959 the amount determined under sec_956 with respect to a u s shareholder of a cfc for any taxable_year is the lesser_of the excess if any of the shareholder's pro_rata share of the average amounts of u s property held directly or indirectly by the cfc as of the close of each quarter of such taxable_year over the amount of earnings_and_profits of the cfc described in sec_959 with respect to such shareholder or the shareholder's pro_rata share of the applicable_earnings of the cfc in general the amount taken into account with respect to any u s property for this purpose is the adjusted_basis of such property as determined for purposes of computing earnings_and_profits reduced by any liability to which the property is subject see sec_956 sec_956 defines u s property to generally include tangible_property located in the united_states however sec_956 excludes from the definition of u s property any movable property other than a vessel_or_aircraft that is used for the purpose of exploring for developing removing or transporting resources from ocean waters or under such waters when used on the continental shelf the legislative_history to sec_956 describes the exclusion as applying to certain oil_and_gas exploration equipment including barges that are used for oil exploration and exploitation activities on the continental shelf s rep no pincite plr-117002-11 for purposes of sec_956 sec_1_956-2 excludes from the definition of u s property movable drilling rigs or barges and other movable exploration and exploitation equipment other than a vessel or an aircraft when used on the continental shelf as defined in sec_638 in the exploration for development removal or transportation of natural_resources from or under ocean waters the regulation states that property used on the continental shelf includes property located in the united_states that is being constructed or is in storage or in transit within the united_states for use on the continental shelf the regulation also states that in general the type of property that qualifies for the exception includes any movable property that would be entitled to the now former investment_credit under former sec_48 without reference to former sec_49 and sec_50 if used outside the united_states in certain geographical areas of the western hemisphere therefore the barge will qualify for the exclusion from the definition of u s property found in sec_956 if it a constitutes movable property other than a vessel that would have been entitled to the investment_credit under former sec_48 and b is used on the continental shelf in the exploration for development removal or transportation of natural_resources a movable property other than a vessel former sec_48 was added by sec_104 of the revenue act of pub_l_no 85_stat_502 1972_1_cb_443 to provide that any property other than a vessel or an aircraft of a u_s_person used in international or territorial waters for the purpose of exploring for developing removing or transporting resources from ocean waters or deposits under such waters was eligible for the investment_credit this provision was added to allow equipment such as drilling equipment rigs and barges used by u s persons in foreign drilling operations off the outer_continental_shelf ocs to be eligible for the investment_credit s rep no 1972_1_cb_559 former sec_48 was amended by a of the tax reduction act of pub_l_no 89_stat_62 1975_1_cb_545 to replace territorial waters with territorial waters within the northern_portion_of_the_western_hemisphere in revrul_73_145 1973_1_cb_35 the service concluded that certain types of offshore drilling rigs were eligible for the investment_credit under former sec_48 the rigs were to be used for the drilling of oil_and_gas wells predominantly in waters outside the territorial waters of the united_states and also were not documented under the laws of the united_states one of the classes of rigs in revrul_73_145 was a combination derrick pipe-logging construction barge of which there were two types described as follows these are constructed in two types the semi-submersible type is constructed in the same general manner as a semi-submersible plr-117002-11 drilling barge on which is mounted instead of a drilling rig a heavy lift crane used in constructing offshore platforms and other production facilities the barge also contains equipment necessary for the laying of large diameter pipelines on the ocean floor the second type is the surface floating barge which performs the same functions as a semi-submersible barge but is constructed with a flat bottom and works in a floating rather than submerged position this unit is likewise not self-propelled revrul_73_145 the barge is similar to the second type of combination derrick pipe-logging construction barge described in revrul_73_145 that the service concluded was eligible for the investment_credit under former sec_48 both barges are flat-bottom surface-floating barges that are not self-propelled consequently both barges must be towed to the drilling location affixed to the decks of both barges are cranes to be used in constructing offshore platforms and other production facilities in addition both barges may be used to install large diameter pipelines on the ocean floor further both barges are not documented under the laws of the united_states taxpayer represents that the barge is not required to register with the u s coast guard in order to work in the u s gulf of mexico if the barge is or becomes registered enrolled or licensed under the laws of the united_states by the u s coast guard then the barge is or becomes a vessel documented under the laws of the united_states and therefore is or becomes eligible for the investment_credit under former sec_48 instead of former sec_48 see sec_1 g iii b used on the continental shelf in the exploration for development removal or transportation of natural_resources continental shelf sec_638 addressing continental_shelf_areas provides that for purposes of applying chapter of the code which includes sec_956 with respect to mines oil_and_gas wells and other natural deposits the term united_states when used in a geographical sense includes the seabed and subsoil of those submarine areas that are adjacent to the territorial waters of the united_states and over which the united_states has exclusive rights in accordance with international law with respect to the exploration for and exploitation of natural_resources sec_1_638-1 clarifies that for purposes of applying sec_638 persons property or activities that are engaged in or related to the exploration for or exploitation of mines oil_and_gas wells or other natural deposits need not be physically upon plr-117002-11 connected or attached to the seabed or subsoil to be deemed to be within the united_states sec_7701 provides that the term united_states when used in a geographical sense includes only the states and the district of columbia however the service has ruled that sec_638 expands this definition to include the continental shelf including the ocs with respect to activities involving the exploration for and exploitation of natural_resources the house report to the submerged lands act of codified pincite u s c describes continental shelves generally and the continental shelf of the united_states in particular as follows continental shelves have been defined as those slightly submerged portions of the continents that surround all the continental areas of the earth they are a part of the same continental mass that forms the lands above water they are that part of the continent temporarily measured in geological time overlapped by the oceans the outer boundary of each shelf is marked by a sharp increase in the slope of the sea floor it is the point where the continental mass drops off steeply toward the ocean deeps generally this abrupt drop occurs where the water reaches a depth of fathoms or feet and for convenience this depth is used as a rule_of thumb in defining the outer limits of the shelf along the atlantic coast the maximum distance from the shore to the outer edge of the shelf i sec_250 miles and the average distance is about miles in the gulf of mexico the maximum distance is miles and the average is about miles the total area of the shelf off the united_states is estimated to contain about big_number square miles or an area larger than new york new jersey pennsylvania ohio indiana illinois and kentucky combined the area of the shelf off alaska is estimated to contain big_number square miles an area almost as large as alaska itself that part of the shelf which lies within historic state boundaries or miles in most cases is estimated to contain about big_number square miles or less than percent of the total area of the shelf h_r rep no pincite revrul_77_197 1977_1_cb_344 considers the applicability of an excise_tax to transportation between the united_states_mainland and a fixed offshore drilling site located in international waters approximately miles beyond the 3-nautical-mile boundary of alaska the revenue_ruling notes that under sec_3 and a of plr-117002-11 the outer_continental_shelf lands act prior to amendment codified pincite u s c sec_1332 and sec_1333 the jurisdiction and laws of the united_states extend to the outer_continental_shelf and to all artificial islands and fixed structures erected thereon for natural_resources exploitation to the same extent as if the ocs were an area of exclusive federal jurisdiction located within a state revrul_77_197 concludes that the continental shelf and fixed structures erected thereon are therefore a part of the united_states within the scope of sec_7701 of the code and that the offshore drilling site is a part of the united_states for purposes of that section even though the site is located in international waters revrul_81_257 1981_2_cb_214 considers the same situation as in revrul_77_197 except that the offshore sites are semi-submersible drilling rigs and other floating drilling rigs not erected upon or bottomed upon the seabed instead of a fixed drilling site importantly the outer_continental_shelf lands act u s c sec_1331 et seq was amended in date by replacing the phrase and fixed structures with and all installations and other devices permanently or temporarily attached to the seabed outer_continental_shelf lands act amendments of pub_l_no section a revrul_81_257 states that the amendment was not intended to change existing law but to clarify that federal_law is to be applicable to all activities on all devices in contact with the seabed for exploration development and production citing to h_r conf_rep no pincite the ruling states that such activities include activities on drilling ships and semi-submersible drilling rigs when they are connected to the seabed by drillstring pipes or other appurtenances on the ocs citing to h_r conf_rep no pincite the ruling thus concludes that when semi-submersible and other floating drilling rigs are engaged in oil_and_gas activities on the ocs and are therefore temporarily attached to the seabed they are considered a part of the united_states within the scope of sec_7701 of the code see also gcm wl date proposed uses as mentioned above the proposed uses of the barge include a installing oil_and_gas pipelines on the seabed b installing and repairing offshore platforms and other production facilities c decommissioning operations including pipeline abandonment well plug and abandonment and platform and production facilities removal and d salvage operations as described above sec_956 excludes from the definition of u s property any movable property other than a vessel_or_aircraft that is used for the purpose of exploring for developing removing or transporting resources from ocean waters or under such waters when used on the continental shelf plr-117002-11 taxpayer requests a ruling that decommissioning and salvage operations constitute exploring for developing removing or transporting resources for purposes of sec_956 activities such as the repair and removal of underwater oil and natural_gas pipelines inspection maintenance repair and removal of production platforms plugging of wellheads and the salvage of pipeline and production related equipment are necessary for the accomplishment of natural_resources exploration and development although these activities do not constitute the actual drilling of oil_and_gas wells such repair and remediation of oil_and_gas infrastructure are an essential component of the exploration for and exploitation of natural_resources furthermore such decommissioning and salvage operations are required_by_law pursuant to subpart q of part title of the code_of_federal_regulations at the end of the useful_life of an oil or gas well the lessor and owner of operating rights with respect to the well are jointly obligated to plug the well and remove platforms and other facilities constructed in connection with the well see c f_r sec_250 et seq when drilling facilities are no longer useful for operations the lessor or owner must undertake the following activities i permanently plug all wells ii remove all platforms and other facilities iii decommission all pipelines iv clear the seafloor of all obstructions created by the lease and pipeline right-of-way operations and v conduct all decommissioning activities in a manner that is safe does not unreasonably interfere with other uses of the ocs and does not cause undue or serious harm or damage to the human marine or coastal environment c f_r sec_250 because taxpayer’s proposed uses are an essential component of the safe exploration for and development of natural_resources we conclude that they constitute exploring for developing removing or transporting resources for purposes of sec_956 furthermore the barge will not be treated as u s property when the proposed uses are conducted in the proposed location storage and transit as described above sec_1_956-2 states that property used on the continental shelf includes property located in the united_states that is being constructed or is in storage or in transit within the united_states for use on the continental shelf therefore while the barge is stored at a harbor located on the coast of state b or state c and is being repaired for use on the continental shelf the barge will qualify for the exclusion from the definition of u s property under sec_956 similarly while the barge is stored at a harbor located on the coast of state b or state c and is being actively marketed for use on the continental shelf whether or not the barge is plr-117002-11 also being marketed for use elsewhere the barge will qualify for the exclusion from the definition of u s property under sec_956 in addition the barge will not constitute u s property within the meaning of sec_956 while the barge is located in the united_states and is in transit - after either completing a job on the continental shelf or being stored at a harbor located on the coast of state b or state c - for use on the continental shelf or in a foreign_country if the barge is in transit for use on the continental shelf then the barge will fall within the exception under sec_1_956-2 if instead the barge is in transit to a job in a foreign_country after completing a job on the continental shelf then the moment it leaves the territorial waters of the united_states it will not be tangible_property located in the united_states within the meaning of sec_956 and therefore will not constitute u s property rulings based solely on the information submitted and representations made we rule as follows the barge constitutes any movable property other than a vessel_or_aircraft for purposes of sec_956 the proposed uses of the barge in the proposed location constitute exploring for developing removing or transporting natural_resources from ocean waters or under such waters on the continental shelf of the united_states for purposes of sec_956 the barge will not constitute u s property within the meaning of sec_956 for the period during which the barge is stored at a harbor located on the coast of state b or state c and is being a repaired for use in the proposed location or b actively marketed for use in the proposed location even if it is simultaneously marketed for use outside the united_states the barge will not constitute u s property within the meaning of sec_956 for the period during which the barge is located in the united_states and is in transit to or from the proposed location or to a foreign_country either a after completing a job in the proposed location or b after completing a job in the proposed location and then being actively marketed for use in the proposed location even if it is simultaneously marketed for use outside the united_states while stored at a harbor located on the coast of state b or state c plr-117002-11 caveats except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any item discussed or referenced in this letter including the tax consequences of the proposed uses under other provisions of the code or the regulations the rulings contained in this letter are based upon facts and representations submitted by the taxpayer and accompanied by a penalties of perjury statement executed by an appropriate party this office has not verified any of the material submitted in support of the request for rulings verification of the information representations and other data may be required as part of the audit process procedural matters this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely jeffery g mitchell chief branch office of associate chief_counsel international


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-100441-05 date date ---------------------------------------------------------- -------------------------------------- ------------------------------------------------ --------- ------------- legend reciprocal ----------------------------------------------------------- attorney-in-fact aif aif parent state a state b year year year year dollar_figurel dollar_figurem dollar_figuren dollar_figureo dollar_figurep --------------- --------------- --------------- --------------- ------------- ------- ------- ------- ------- plr-100441-05 dear ------------- this letter is in response to the ruling_request filed on behalf of reciprocal dated date and supplementary submissions you request the commissioner’s consent to a revocation by reciprocal of an election made under sec_835 of the internal_revenue_code formerly e for the taxable_year ending date reciprocal represents that it writes medical professional liability insurance for physicians in state a and state b and is wholly owned by its subscriber physicians reciprocal was incorporated in state a in year since reciprocal’s inception in year aif has been reciprocal’s exclusive manager effective for the year tax_year reciprocal made an election under sec_835 to be subject_to the limitation provided in sec_835 reciprocal has continued to be subject_to the provisions of sec_835 pursuant to its election for all years from year up to and including -------- reciprocal now seeks to revoke the election beginning with the taxable_year ending december ------- reciprocal represents that aif fully manages the affairs of reciprocal under the direction of reciprocal’s subscriber board_of directors that is subject_to the direction of reciprocal’s board aif sells and issues policies investigates settles and defends claims and otherwise manages reciprocal’s affairs in consideration for performing these services aif receives a percentage based on reciprocal’s earned premium as well as a portion of reciprocal’s profits reciprocal states that aif pays salaries and personnel related expenses rent and office operation costs data processing costs and many other operating_expenses of reciprocal reciprocal represents that it pays all claims claim expenses peer review expenses directors’ fees and expenses legal actuarial and auditing expenses its taxes outside agent commissions and certain other specific expenses reciprocal represents that aif is a wholly-owned subsidiary of aif parent aif joins in the filing of a consolidated federal_income_tax return with aif parent and other eligible affiliates pursuant to its election under sec_835 reciprocal reduces its deduction for amounts paid to the aif by an amount equal to the excess of such amounts over the deductions of the aif allocable to such income effectively this election allows reciprocal to replicate the tax_determination of a consolidation of reciprocal and aif that would be otherwise unavailable due to reciprocal’s status as a mutual_insurance_company double_taxation is avoided by sec_835 which allows reciprocal credit on its tax_return for income taxes actually paid_by aif because aif computes its income taxes as part of a consolidated_group aif’s actual tax_liability is affected by its affiliates’ income and loss when an aif participates in a consolidated_return the tax_credit allowed its reciprocal bears the same relationship to the income_tax paid_by the aif’s consolidated_group as the taxable_income received by the aif from the reciprocal bears to the taxable_income of the aif’s plr-100441-05 consolidated_group the tax_credit allowed to the reciprocal however is limited to the total amount of tax paid_by the aif’s consolidated_group thus if an aif’s consolidated tax_return shows no tax due because of a net_operating_loss the reciprocal would not be allowed any credit this is true even where aif standing alone had income even when a reciprocal is not allowed a credit for taxes actually paid_by the aif the reciprocal is still required under sec_835 to reduce its deduction for amounts paid to its aif in other words a reciprocal must still apply the provisions of sec_835 unless and until the commissioner consents to the revocation of reciprocal’s election to be treated under sec_835 section as originally enacted also allowed a reciprocal to set_aside a larger portion of income in the protection against loss account pal by allowing the reciprocal to take into its income the profit of its aif on its management fee additions to the pal account however were repealed in reciprocal represents that it does not have any balance in the pal account for taxable_year year reciprocal had taxable_income of dollar_figurel reciprocal’s taxable_income for year included both income earned by reciprocal as well as income of dollar_figurem from aif attributed to reciprocal under sec_835 because aif’s parent paid no tax for year reciprocal did not get a credit under sec_835 to reduce its tax_liability thus reciprocal paid additional taxes of dollar_figuren which i sec_34 of the amount of dollar_figurem for taxable_year year reciprocal estimates that it will include in its taxable_income dollar_figureo from aif attributable to reciprocal under sec_835 reciprocal believes that aif’s parent will have no taxable_income for year and accordingly reciprocal_will not get any_tax credit pursuant to sec_835 consequently reciprocal asserts that its tax_liability will be increased by dollar_figurep of dollar_figureo for year reciprocal’s tax_liability due to its sec_835 election for year and year is significantly greater than it would have been had reciprocal not computed its taxes under that section such result was not intended for elections under sec_835 sec_1_826-1 of the treasury regulations provides that reciprocal’s sec_835 election is binding for the taxable_year for which made and all succeeding taxable years unless the commissioner consents to a revocation of such election whether revocation will be permitted will depend upon the facts and circumstances of each particular case consent is hereby granted to revoke the election made under sec_835 the revocation is effective for reciprocal’s taxable_year ending date reciprocal represents that it will not make an election under sec_835 to be subject_to the limitation provided in sec_835 for any of the first five taxable years following the year to which this consent relates the ruling contained in this letter is based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed plr-100441-05 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 this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative a copy of this letter must be attached to any income_tax return to which it is relevant sincerely s donald j drees jr acting chief branch office of associate chief_counsel financial institutions products