department of the treasury int ernal revenue service washington d c o f f i c e o f c h i e f c o u n s e l date number release date uilc wta-n-137411-01 cc tege eoeg et2 internal_revenue_service national_office field_service_advice memorandum for michael l pupillo tege fslg from jerry e holmes chief employment_tax branch cc tege eoeg et2 subject household employer agent reporting this chief_counsel_advice responds to your memorandum dated date in accordance with sec_6110 this chief_counsel_advice should not be cited as precedent issue whether an authorized agent under sec_3504 of the internal_revenue_code agent filing returns reporting employment_taxes on wages paid to choreworkers should use the agent’s employer_identification_number ein on form sec_941 w-2 and w-3 conclusions an agent filing returns reporting employment_taxes on wages paid to choreworkers should list the agent’s ein on form sec_941 in box b of form_w-2 and in box e of form w-3 the employer welfare recipient’s ein should be reported in box h of form w-3 facts programs for providing support services for persons with disabilities are administered through the health and welfare agencies of various states and local governments of states which receive funds pursuant to titles xix and xx of the social_security act as amended under these programs workers are paid with funds from such state and local agencies to perform services in the homes of welfare recipients these workers commonly referred to as choreworkers are in some instances considered the employees of the welfare recipients for whom they perform services the state and local agencies serve as household employer agents under sec_3504 of the internal_revenue_code for the employer welfare recipients for the purpose of reporting and paying employment_taxes related to the services performed by the choreworkers advice has been requested as to the proper procedure for these agencies to report employment_taxes on form sec_941 w-2 and w-3 law and analysis under sec_3504 of the internal_revenue_code the code and the regulations thereunder in certain circumstances an authorized agent may perform all acts required of an employer under the code and regulations relating to taxes imposed on wages or compensation the procedures to be followed in applying for authorization to act as an agent to perform the acts required by an employer with regard to employment_taxes are set forth in revproc_70_6 1970_1_cb_420 the request for authorization to appoint an agent is made by completing form_2678 under section dollar_figure of revproc_70_6 an application_for authorization to act as an agent covering more than one employer must be accompanied by a properly executed form_2678 from each employer revproc_70_6 was amplified by revproc_80_4 1980_1_cb_581 section dollar_figure of revproc_80_4 states the large number of welfare recipient employers who receive in-home domestic services paid for with funds supplied by state and local governments makes it impractical to comply with the requirement that each employer submit a form_2678 accordingly the internal_revenue_service will not enforce the requirement that each employer must submit that form to the state_or_local_government section dollar_figure of revproc_80_4 states in order for a state or local welfare agency to secure the authorization to act as an agent under sec_3504 of the code for welfare recipient employers it is sufficient for the agency to include with its application to the service a reference to the document that the welfare recipient employers have filed or will file with the agency appointing the agency to act as a collection agent the state or local agency may include such appointment to act as an agent in the application form required to be signed and filed by welfare recipient employers in order to receive in-home domestic_service the execution of the application by a welfare recipient employer constitutes an authorization by the employer and becomes by reference a part of the agency’s application to the service when a state_or_local_government health and welfare agency assumes the responsibility for paying and reporting fica and futa taxes and any withheld income_tax the agency must report fica_taxes and withheld income taxes quarterly on form_941 and report futa taxes annually on form_940 notice_95_18 1995_1_cb_300 q a to facilitate proper processing state and local_government health and welfare agencies acting as agents pursuant to revproc_80_4 should obtain a separate ein for use in reporting employment_taxes notice_95_18 q a pursuant to revproc_70_6 a tax_return filed by an agent should contain the agent’s name and identifying number and the following statement should be attached to each return this return is filed under authorization granted in accordance with sec_3504 of the internal_revenue_code_of_1986 the instructions for forms w-2 and w-3 state generally an agent that has an approved form_2678 employer appointment of agent should enter his or her name as the employer in box c of form_w-2 each form_w-2 should reflect the ein of the agent in box b in addition the employer’s ein should be shown in box h of form w-3 sec_21 of the internal_revenue_manual irm states that in completing form_w-2 an agent should enter the agent’s ein in box b and the agent’s name and address and the notation agent for____ in box c sec_21 of the irm also states that the employer’s ein should be entered in box h of form w-3 you have requested advice regarding the procedures for properly using the fiscal agent identification_number on all employment_tax documents based on the foregoing we conclude that a state or local governmental health and welfare agency acting as an agent for a welfare recipient employer pursuant to sec_3504 of the code should use its ein number on form_941 and form_940 the following statement should be attached to each return this return is filed under authorization granted in accordance with sec_3504 of the internal_revenue_code_of_1986 the state or local agency acting as an agent should enter its ein in box b of form_w-2 and its name and address as employer acting as agent for____ in box c of form_w-2 the state or local welfare agency acting as an agent should enter its ein in box e of form w-3 and its name and address as employer acting as agent for____ in box f of form w-3 the identification_number of the welfare recipient employer should be entered in box h of form w-3 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 please call if you have any further questions jerry e holmes chief employment_tax branch office of the assistant chief_counsel exempt_organizations employment_tax government entities


internal_revenue_service national_office technical_advice_memorandum date third party communication none date of communication not applicable ------------------------------------------------ ------------------------ ---------------------------------------------- ---------------- --------------------------------- -------------------- number release date index uil no case-mis no ------------------------------------------------------------------------ --------------------------------------------- ---------------------------------- tam-119879-05 cc ita taxpayer's name taxpayer's address taxpayer's identification no year s involved date of conference legend taxpayer ------------------------------------------------ bbbb zzzz date date date date date date date date date aa bb cc ---------------------------------- -------------------------------- ----------------------- ----------------------- ----------------------- ----------------------- ----------------------- ----------------------- ------------------ ----------------------- ----------------------- -------------- ------------------------ ----------------------- tam-119879-05 dd ee ff gg hh ii jj kk ll mm nn oo pp qq rr ss tt uu vv ww ------------- ----------------- --------------------------------- -------- ------ ----------- --------------------- -------------------- --------------- ------- ------------------------------ ----------------------- ----------------------- ----------------------- -------------- --------------------------------------------------- ----------------- -------------------- ----------- ----------------- issues having elected to use the dollar-value last-in_first-out lifo_method under sec_1_472-8 of the income_tax regulations must taxpayer use the lifo_method to account for all items that fall within its dollar-value pools should the national_office revoke the letter_ruling that permits taxpayer’s bbbb segment to use a non-lifo method to account for some of the items that fall within its pools if yes is taxpayer entitled under sec_7805 of the internal_revenue_code to have this revocation applied without retroactive effect should the national_office revoke the automatic change in accounting_method obtained by taxpayer’s zzzz segment under section dollar_figure of the appendix of revproc_2002_9 2002_1_cb_327 ie change to ipic-method pools described in sec_1_472-8 and require taxpayer’s zzzz segment to revert to its former method of pooling if yes is taxpayer’s zzzz segment entitled under sec_7805 to have this revocation applied without retroactive effect conclusions the scope of taxpayer’s lifo election must extend to all items the fall within taxpayer’s pools tam-119879-05 the national_office should and does revoke taxpayer’s letter_ruling but taxpayer’s bbbb segment is entitled under sec_7805 to have the revocation of its letter_ruling applied without retroactive effect the national_office should and does revoke taxpayer’s automatic change in accounting_method but taxpayer’s zzzz segment is entitled under sec_7805 to have the revocation of its change in accounting_method applied without retroactive effect facts overview as a consolidated_group taxpayer operates several lines of business including a zzzz segment and a bbbb segment to identify the items in some of its inventories taxpayer uses the dollar-value lifo_method for these inventories taxpayer uses the inventory price index computation ipic_method to price its dollar-value pools taxpayer maintains ipic-method pools based on the product groupings established by the bureau of labor statistics bls specifically taxpayer’s zzzz segment maintains pools based on the 2-digit commodity codes in table of the producer price index ppi detailed report and taxpayer’s bbbb segment maintains pools based on the general expenditure categories in table of the consumer_price_index cpi detailed report to account for its non-lifo inventories taxpayer’s bbbb segment values items at cost or market whichever is lower lcm computed under the first-in_first-out fifo method see sec_1_471-4 taxpayer’s zzzz segment values items at approximate lcm retail lcm under the retail_inventory_method see sec_1_471-8 the two following sections contain a detailed history of taxpayer’s method changes zzzz segment effective for the tax_year ending date taxpayer elected to use the retail lifo_method to account for all the inventories of its zzzz segment see sec_1_472-1 taxpayer maintained pools based on the groups listed in department store inventory price indexes and used bls department store inventory price indexes dsip indexes to price these pools taxpayer used this method through the tax_year ending date effective for the tax_year ending date taxpayer obtained the commissioner’s consent to value at retail lcm all items that fall within pool pool and pool pool is maintained for department aa and department aa pool is maintained for department bb finally pool is maintained for department cc taxpayer has complied with the terms and conditions of the signed consent agreement effective for the tax_year ending date taxpayer obtained the commissioner’s consent to value at retail lcm all items that fall within pool pool pool and pool tam-119879-05 pool is maintained for department dd ee department ff and department gg pool is maintained for department hh department hh and department hh ii pool is maintained for department jj department jj department jj and department jj pool is maintained for department kk department ll and department mm taxpayer has complied with the terms and conditions of the signed consent agreement after implementing this change taxpayer still maintained pools for the lifo_inventories of departments also effective for the tax_year ending date taxpayer obtained automatic consent to change its lifo_method in three respects first for pool taxpayer ceased using an internal_index and began using the ipic_method based on the ppi detailed report second for pool sec_2 through taxpayer ceased using the dsip indexes and began using the ipic_method based on the ppi detailed report third taxpayer changed to ipic-method pools based on the 2-digit commodity code in table of the ppl detailed report with its tax_return for the year_of_change taxpayer included form_970 application to use lifo inventory_method and two supporting statements in the first supporting statement taxpayer elected to use the ipic_method for the following goods already on lifo and listed the departments whose inventories are covered by the election this list excluded those departments whose inventories are valued at lcm under the fifo method in the second supporting statement taxpayer asserted that it will not use the ipic_method for those departments for which it does not use the lifo_method as the result of the partial terminations of taxpayer’s lifo election and the change to ipic-method pools taxpayer uses two methods of valuing and accounting for items that fall within some of its pools specifically taxpayer values some of the items at approximate cost computed under the retail lifo_method and values the other items at retail lcm computed under the retail_method bbbb segment effective for the tax_year ending date taxpayer elected to use the dollar-value lifo_method but not the retail_method to account for the inventories of its bbbb segment taxpayer established seven pools based on the categories in table sec_3 and of the cpi detailed report pool ------------------------------- pool ---------- ---------- ---------------- pool ------------ pool --------------------------------- pool ----------- --------------------- pool ------------- and pool -------------------------------------------- ----------------------------------------------------------------------------------------------------------------- effective for the tax_year ending date taxpayer obtained the commissioner’s consent under former sec_1_472-8 t d c b to change its lifo_method in two respects first taxpayer ceased computing internal indexes and began using the ipic_method old ipic_method second taxpayer began maintaining seven pools based on the general expenditure categories in table of the cpi tam-119879-05 detailed report pool ----------------------------- pool ------------------------------------ ---------------------------------------------------------------------------------------------------------------- ---- ------------------------------- pool ------------------------------ pool ------------- ---------------------------------------------- pool -------------------------------------- pool -- -------------------------- and pool ----------------------------------------------------------------------------------------------------------- taxpayer has complied with the terms and conditions of the signed consent agreement effective for the tax_year ending date taxpayer obtained the commissioner’s consent to terminate its lifo election for five categories of items that fall within pool and to value these items at lcm computed under the fifo method the five categories of items are category aa category nn category oo category pp and category qq the cost of these five categories of items represents dollar_figure percent of pool 4’s total cost taxpayer has complied with the terms and conditions of the signed consent agreement in its form_3115 application_for change in accounting_method which was signed by taxpayer on date taxpayer listed its pools specifically after pool taxpayer listed pool which is denoted -- ----------------------------------- the categories of items that fall within pool are category rr category ss category ss and category ss also effective for the taxable_year ending date taxpayer obtained the commissioner’s consent to change its method of pooling in two respects first taxpayer created two new pools under sec_1_472-8 concerning customary business classifications of the taxpayer’s trade_or_business specifically taxpayer added pool 11------------------------------------and pool ---------------------------------- second taxpayer changed its existing pools because the bls revised the general expenditure categories of the cpi detailed report the only categories of pool that were affected by these changes were category tt and category uu category was separated from pool and combined with pool now ---------------- and category was separated from pool and combined with new pool besides the previous changes affecting pool category vv was separated from pool and added to new pool and category ww was separated from pool and added to new pool taxpayer has complied with the terms and conditions of the signed consent agreement in its second form_3115 which was signed by taxpayer on date taxpayer listed pool and pool as separate pools denoted ---------------------- ---------------the category of items that falls within pool is category and the categories of items that fall within pool are category category ss category and category thus taxpayer has four pools denoted other goods services effective for the tax_year ending date taxpayer obtained the commissioner’s consent to terminate its lifo election for all items in category ww taxpayer has complied with the terms and conditions of the signed consent agreement in its form_3115 taxpayer listed its pools specifically taxpayer listed pool which is denoted ------------------------------------- pool is a miscellaneous pool under former sec_1_472-8 the categories of items that fall within pool are tam-119879-05 category category category ss category category and category effective for the tax_year ending date taxpayer obtained automatic consent to change from the old ipic_method to the ipic_method under sec_1_472-8 as the result of the partial terminations of taxpayer’s lifo election and the use of ipic-method pools taxpayer uses two methods of valuing and accounting for items that fall within some of its pools specifically taxpayer values some of the items at cost computed under the lifo_method and values the other items at lcm computed under the fifo method law and analysis sec_472 provides that a taxpayer may use the method provided in sec_472 whether or not such method has been prescribed under sec_471 in inventorying goods specified in an application to use such method filed at such time and in such manner as the secretary may prescribe the change to and the use of such method shall be in accordance with such regulations as the secretary may prescribe as necessary in order that the use of such method may clearly reflect income sec_1_472-1 provides that any taxpayer permitted or required to take inventories pursuant to the provisions of sec_471 and pursuant to the provisions of sec_1_471-1 to inclusive may elect with respect to those goods specified in his application and properly subject_to inventory to compute his opening and closing inventories in accordance with the method provided by sec_472 this section and sec_1_472-2 sec_1_472-3 provides that as a condition to the taxpayer's use of the lifo inventory_method the commissioner may require that the method be used with respect to goods other than those specified in the taxpayer's statement of election if in the opinion of the commissioner the use of such method with respect to such other goods is essential to a clear_reflection_of_income sec_1_472-8 provides that any taxpayer may elect to determine the cost of his lifo_inventories under the so-called dollar-value lifo_method provided such method is used consistently and clearly reflects the income of the taxpayer in accordance with the rules of this section the dollar-value_method of valuing lifo_inventories is a method of determining cost by using base-year_cost expressed in terms of total dollars rather than the quantity and price of specific goods as the unit of measurement under such method the goods contained in the inventory are grouped into a pool or pools as described in paragraphs b and c of this section the term base-year_cost is the aggregate of the cost determined as of the beginning of the taxable_year for which the lifo_method is first adopted ie the base date of all items in a pool the taxable_year for which the lifo_method is first adopted with respect to tam-119879-05 any item in the pool is the base_year for that pool except as provided in paragraph g of this section liquidations and increments of items contained in the pool shall be reflected only in terms of a net liquidation or increment for the pool as a whole fluctuations may occur in quantities of various items within the pool new items which properly fall within the pool may be added and old items may disappear from the pool all without necessarily effecting a change in the dollar value of the pool as a whole an increment in the lifo inventory occurs when the end of the year inventory for any pool expressed in terms of base-year_cost is in excess of the beginning of the year inventory for that pool expressed in terms of base-year_cost in determining the inventory value for a pool the increment if any is adjusted for changing unit costs or values by reference to a percentage relative to base-year-cost determined for the pool as a whole sec_1_472-8 provides that a pool shall consist of all items entering into the entire inventory investment for a natural_business_unit of a business_enterprise unless the taxpayer elects to use the multiple_pooling method provided in sec_1 b thus if a business_enterprise is composed of only one natural_business_unit one pool shall be used for all of its inventories including raw materials goods in process and finished goods if however a business_enterprise is actually composed of more than one natural_business_unit more than one pool is required where similar types of goods are inventoried in two or more natural business units of the taxpayer the commissioner may apportion or allocate such goods among the various natural business units if he determines that such apportionment or allocation is necessary in order to clearly reflect the income of such taxpayer sec_1_472-8 provides in relevant part that a taxpayer may elect to establish multiple pools for inventory_items which are not within a natural_business_unit as to which the taxpayer has adopted the natural_business_unit method of pooling as provided in sec_1_472-8 each such pool shall ordinarily consist of a group of inventory_items which are substantially_similar the selection of pools in each case must also take into consideration such factors as the nature of the inventory_items subject_to the dollar-value lifo_method and the significance of such items to the taxpayer’s business operations where similar types of goods are inventoried in natural business units and multiple pools of the taxpayer the commissioner may apportion or allocate such goods among the natural business units and the multiple pools if he determines that such apportionment or allocation is necessary in order to clearly reflect the income of the taxpayer sec_1_472-8 provides in relevant part that items of inventory in the hands of wholesalers retailers jobbers and distributors shall be placed into pools by major lines types or classes of goods in determining such groupings customary business classifications of the particular trade in which the taxpayer is engaged is an important consideration an example of such customary business classification is the department in the department store tam-119879-05 sec_1_472-8 provides in relevant part that a retailer that elects to use the ipic_method for a trade_or_business may elect to establish dollar-value pools for those items accounted for using the ipic_method based on either the general expenditure categories ie major groups in table consumer_price_index for all urban consumers cpi-u u s city average detailed expenditure categories of the cpi detailed report or the 2-digit commodity codes ie major commodity groups in table producer price indexes and percent changes for commodity groupings and individual items not seasonally adjusted of the ppi detailed report revrul_76_282 1976_2_cb_137 holds that the taxpayer’s right to select the class or classes of goods to be covered by the lifo election or extension goes to the nature of the goods and not to their condition salability or other characteristics therefore when the lifo_method is elected or extended for a particular class of goods the election must include all goods within that class regardless of whether they are normal goods or goods that are unsalable at normal prices or unusable in the normal way section dollar_figure of revproc_97_27 1997_1_cb_680 provides that a taxpayer that changes to a method_of_accounting pursuant to this revenue_procedure may be required to change or modify that method_of_accounting for the following reasons the enactment of legislation a decision of the united_states supreme court the issuance of temporary or final regulations the issuance of a revenue_ruling revenue_procedure notice or other statement published in the internal_revenue_bulletin the issuance of written notice to the taxpayer that the change in method_of_accounting was granted in error or is not in accord with the current views of the service or a change in the material facts on which the consent was based section dollar_figure of revproc_97_27 provides that except in rare or unusual circumstances if a taxpayer that changes its method_of_accounting under this revenue_procedure is subsequently required under this section to change or modify that method_of_accounting the required change or modification will not be applied retroactively provided that the taxpayer complied with all the applicable provisions of the consent agreement and this revenue_procedure there has been no misstatement or omission of material facts there has been no change in the material facts on which the consent was based there has been no change in the applicable law and the taxpayer to whom consent was granted acted in good_faith in relying on the consent and applying the change or modification retroactively would be to the taxpayer's detriment section dollar_figure of revproc_97_27 provides that the district_director must apply a ruling obtained under this revenue_procedure in determining the taxpayer's liability unless the district_director recommends that the ruling should be modified or revoked the district_director will ascertain if the representations on which the ruling was based reflect an accurate statement of the material facts the amount of the sec_481 adjustment was properly determined the change in method_of_accounting was tam-119879-05 implemented as proposed in accordance with the terms and conditions of the consent agreement and this revenue_procedure there has been any change in the material facts on which the ruling was based during the period the method_of_accounting was used and there has been any change in the applicable law during the period the method_of_accounting was used section dollar_figure of revproc_97_27 provides that if the district_director recommends that the ruling other than the amount of the sec_481 adjustment should be modified or revoked the district_director will forward the matter to the national_office for consideration before any further action is taken such a referral to the national_office will be treated as a request for technical_advice and the provisions of revproc_97_2 or any successor will be followed section dollar_figure of revproc_2002_9 provides that if the director recommends that a change in method_of_accounting other than the sec_481 adjustment made in compliance with all the applicable provisions of this revenue_procedure should be modified or revoked the director will forward the matter to the national_office for consideration before any further action is taken such a referral to the national_office will be treated as a request for technical_advice and the provisions of revproc_2001_2 or any successor will be followed section a i of the appendix of revproc_2002_9 provides in relevant part that a taxpayer may change from the lifo inventory_method for all its lifo_inventories or for a pool or pools within its lifo inventory section dollar_figure of revproc_2005_2 2005_1_irb_86 provides generally that in the case of a tam or a team revoking or modifying a letter_ruling tam or team the tam or the team will be applied retroactively to the taxpayer for whom the letter_ruling was issued or to a taxpayer whose tax_liability was directly involved in a letter_ruling tam or team if there has been a misstatement or omission of controlling facts or the facts at the time of the transaction are materially different from the controlling facts on which the letter_ruling tam or team was based generally in all other circumstances a tam or a team revoking or modifying a letter_ruling or another tam or team will not be applied retroactively to the taxpayer for whom the letter_ruling tam or team was issued or to a taxpayer whose tax_liability was directly involved in the letter_ruling tam or team provided that there has been no change in the applicable law in the case of a letter_ruling it was originally issued for a proposed transaction and the taxpayer directly involved in the letter_ruling tam or team acted in good_faith in relying on the letter_ruling tam or team and revoking or modifying it retroactively would be to the taxpayer's detriment for example the tax_liability of each shareholder in a corporation is directly involved in a letter_ruling on the reorganization of the corporation the tax_liability of a member of an industry is not directly involved in a letter_ruling tam or team issued to another member and therefore the holding in a revocation or modification of a letter_ruling tam or team to one member of an industry may be retroactively applied to other tam-119879-05 members of the industry by the same reasoning a tax practitioner may not extend to one client the non-retroactive application of a revocation or modification of a letter_ruling tam or team previously issued to another client when a letter_ruling to a taxpayer or a tam or a team involving a taxpayer is modified or revoked with retroactive effect the notice to the taxpayer except in fraud cases sets forth the grounds on which the modification or revocation is being made and the reason why the modification or revocation is being applied retroactively issue having elected to use the dollar-value lifo_method under sec_1_472-8 must taxpayer use the lifo_method to account for all items that fall within its dollar-value pools discussion exam believes that taxpayer’s inventory_method does not clearly reflect income because taxpayer does not use the lifo_method to account for all items that fall within its ipic-method pools taxpayer instead values some of these items at either lcm computed under the fifo method bbbb segment or retail lcm computed under the retail_method zzzz segment the first effect of taxpayer’s inventory_method is to increase the inventory price index ipi of the affected pools because the falling cost of the items valued at lcm and retail lcm does not offset the rising cost of the other items in taxpayer’s pools in other words each pool’s inflation rate is overstated because the items whose replacement cost is falling are excluded the second effect of taxpayer’s inventory_method is to increase taxpayer’s cost_of_goods_sold and thus to reduce taxpayer’s taxable_income to ensure that taxpayer’s inventory_method clearly reflects income exam proposes to require under sec_1_472-3 taxpayer to use the lifo_method for all items that fall within taxpayer’s ipic-method pools in contrast taxpayer has offered three rationales to support its view that it is not required to use the lifo_method to account for all items that fall within its ipic-method pools first according to taxpayer no general_rule or concept prohibits taxpayer from using the lifo_method to account for some inventory_items and using the fifo method to account for the balance of its inventory_items second the ipic-method pooling regulations do not specifically require taxpayer to extend the scope of its lifo election to include all items that fall within its ipic-method pools third because taxpayer properly applies the rules governing ipic-method pools and because taxpayer’s lifo computations otherwise clearly reflect income exam does not have the authority to change taxpayer’s inventory_method we will discuss each of these rationales in turn to prove its first rationale taxpayer argues that the service sometimes requires a taxpayer to use the lifo and fifo methods for different items that fall within the same pool and cited tam date tam date and plr date as examples of those instances taxpayer contends that the rationale used in these rulings is simple clear and based on the principle of sec_472 namely that the scope of a taxpayer’s lifo election is limited to the tam-119879-05 items specified in the taxpayer’s form_970 next taxpayer argues that a taxpayer may limit the scope of its lifo election to some but not all of the costs of specified goods see sec_1_472-1 b ii we disagree first with taxpayer’s argument that the service sometimes requires a taxpayer to use the lifo and fifo methods for different items that fall within the same pool none of the rulings cited by taxpayer supports taxpayer’s argument in tam the national_office held that a taxpayer whose lifo election specified new automobiles had properly elected lifo for its new automobiles but had not properly elected lifo for its new trucks this taxpayer actually had used the lifo_method for both new automobiles and new trucks and had separately pooled those automobiles and trucks in accordance with 76_tc_708 acq 1984_2_cb_1 because automobiles and trucks are not includible in the same pool tam does not stand for the proposition that a taxpayer may use the lifo_method to account for some but not all of the items that fall within a pool in tam the national_office held that a manufacturer had not elected to adopt the lifo_method for the inventories of newly acquired division d the manufacturer acquired several businesses from through treated each acquisition as a separate division and generally filed a form_970 for each year that it acquired a new business the manufacturer acquired division c in and but did not file a form_970 for because the difference between division c’s inventories computed under the lifo and fifo methods was immaterial the manufacturer acquired division d in on the form_970 for the manufacturer indicated its intent to use the lifo_method to account for all the inventories of division c but did not mention the inventories of newly acquired division d because each acquired_business arguably was a separate trade_or_business under sec_446 and thus was permitted to have its own methods_of_accounting tam does not stand for the proposition that a taxpayer may use the lifo_method to account for some but not all of the items that fall within a pool finally in plr the national_office exercised its discretion under sec_301_9100-1 of the procedure and administration regulations to grant a taxpayer additional time to file a second form_970 the taxpayer actually used the lifo_method to account for its new machinery inventories and new b parts inventories even though the taxpayer failed to indicate on its form_970 that the lifo election extended to its new b parts inventories thus plr does not stand for the proposition that a taxpayer may use the lifo_method to account for some but not all of the items that fall within a pool we disagree second with taxpayer’s argument that its inventory_method is analogous to the raw-material-content method under sec_1_472-1 which permits a manufacturer to limit the scope of its lifo election to raw materials the raw_material_content of work-in-process and the raw_material_content of finished goods the raw- whether the automobile truck dealer was entitled to relief under sec_301_9100-1 because tam was not a ruling the national_office declined to state tam-119879-05 material-content method is an express exception to the general_rule that requires total product costing furthermore a taxpayer using the raw-material-content method must include in its pool all substantially_similar raw materials the raw_material_content of work-in-process and the raw_material_content of finished goods see sec_1 b ii thus a taxpayer may not value the raw_material_content of finished goods at lcm after excluding it from its raw-material-content pool to prove its second rationale taxpayer argues that the final regulations governing the ipic_method liberalized the rules concerning the scope of the ipic- method election because of criticism received from commentators taxpayer cites sec_1_472-8 which generally limits a taxpayer’s ipic-method election to a trade_or_business and sec_1_472-8 which provides in relevant part that a retailer that elects to use the ipic_method for a trade_or_business may elect to establish dollar-value pools for those items accounted for using the ipic_method we disagree with taxpayer’s interpretation of the new regulations first though sec_1_472-8 was drafted to be consistent with sec_446 which permits a taxpayer to use different methods_of_accounting for each trade_or_business sec_1 e ii does not override sec_1_472-2 which allows the service to extend the scope of a taxpayer’s lifo election to a different trade_or_business when necessary to clearly reflect the taxpayer’s income second the seemingly restrictive language in sec_1 c was drafted to permit resellers to use dsip pools for the part of their lifo_inventories that is covered by dsip indexes and to use ipic-method pools for the remainder of their lifo_inventories in other words this language was not drafted to limit the scope of a taxpayer’s lifo election to support its third rationale taxpayer argues that when computing each pool’s ipi for the taxable_year taxpayer uses only bls price indexes provided for the items it includes in the pool thus each pool’s ipi accurately reflects the inflation or deflation associated with the items that taxpayer included in the pool in addition taxpayer argues that sec_1_472-3 is inapplicable because taxpayer’s inventory_method clearly reflects income in taxpayer’s view its inventory_method clearly reflects income because taxpayer complied with the regulations governing ipic-method pools and properly computed each pool’s ipi we disagree with taxpayer’s analysis because it begs the question of whether the scope of taxpayer’s lifo election must include all items that fall within taxpayer’s ipic-method pools as indicated above the seemingly restrictive language in sec_1 c does not resolve this issue more important taxpayers using an impermissible method generally perform the required arithmetic computations properly but this fact does not convert an impermissible method into a permissible method for example in revrul_76_282 the service did not reject the taxpayer’s proposed lifo_method because of improper arithmetic computations thus the fact that taxpayer properly computed each pool’s ipi under its inventory_method cannot prevent the service from invoking sec_1_472-3 tam-119879-05 in our view the scope of a taxpayer’s lifo election must include all items that fall within its pools though sec_1_472-8 does not explicitly link the scope of the taxpayer’s lifo election and the method of pooling selected by the taxpayer linkage we believe that the lifo_method will not clearly reflect income without this linkage our belief is based on the history purpose and application of the dollar-value lifo_method and is consistent with our rule that permits a partial_termination of a lifo election on a pool- by-pool basis see eg section a i of the appendix of revproc_2002_9 under sec_1_472-8 the dollar-value lifo_method is a method of determining the cost of a pool of properly assigned goods the dollar-value lifo_method was created to remedy the most problematic aspect of using the specific-goods lifo_method namely the requirement to apply the specific-goods lifo_method to each inventory group which consists of very similar if not identical goods a taxpayer using the specific-goods lifo_method must analyze its inventories to determine which goods are very similar to each other must assign all very similar goods to a group and must separately account for each group but this classification process is problematic for both the taxpayer and the service because good a1 can be very similar to good a2 or to good b1 or both depending on the criterion or criteria used to determine similarity because pools under the dollar-value lifo_method generally are defined more broadly than groups under the specific-goods lifo_method the use of pools reduces this classification problem and enables taxpayers selling a large variety of goods to use the lifo_method furthermore the dollar-value lifo_method reduces the probability that the lifo cost of an item will be liquidated when the taxpayer’s inventory mix shifts to another item within the same class of goods a taxpayer using the dollar-value lifo_method treats all the goods that fall within a pool as fungible for inventory-accounting purposes instead of measuring changes in the number of units of specific goods in ending inventories the taxpayer computes for the pool as a whole the net change in inventory investment increment or decrement measured in base-year dollars thus the lifo cost of a pool will not necessarily change even though the taxpayer increases or decreases the quantity of the various goods that properly fall within the pool adds new items that properly fall within the pool or deletes old items from the pool furthermore because a taxpayer treats as fungible all goods that fall within a pool the taxpayer is not required to extend its lifo election each time it manufactures or acquires a new_item that falls within an existing pool we believe that the linkage requirement underlies the rules in sec_1_472-8 and c concerning dollar-value pools and revrul_76_282 which applies to taxpayers using either specific-goods lifo or dollar-value lifo furthermore we find nothing in this published guidance suggesting that ipic-method pools have been exempted from the linkage requirement sec_1_472-8 provides two explicit rules concerning the pools of a manufacturer’s natural_business_unit nbu first a manufacturer must include in its tam-119879-05 single nbu pool the entire inventory investment ie raw materials work-in-process and finished goods of its nbu this rule which reflects an inventory-investment concept prevents the manufacturer from distorting income by using the lifo_method to account for some but not all of the nbu’s inventory though this rule also permits the manufacturer to change the mix of items in an nbu pool as market conditions change substituting one item for another will not distort the manufacturer’s income because sec_1_472-8 defines nbu narrowly to ensure that the items manufactured by the nbu manufactured items have similar physical and cost characteristics second a manufacturer may not include in an nbu pool any items purchased for resale resale items the rule requiring resale goods to be accounted for as a separate inventory investment serves at least two important purposes first it prevents the distortion_of_income that results from commingling items having different cost characteristics ie resale items and manufactured items second it prevents a manufacturer from substituting resale items for manufactured items whenever the manufacturer believes the nbu is experiencing a decrement thus because resale items are not includible in nbu pools a manufacturer is not required to include resale items within the scope of its lifo election a manufacturer that wants to use the lifo_method for some but not all of the inventory investment of its nbu may elect to use multiple pools instead of a single nbu pool sec_1_472-8 provides that each pool of a manufacturer ordinarily shall consist of a group of items that are substantially_similar a manufacturer is given some latitude to determine which of its items are substantially_similar but must place its finished goods and work-in-process into pools classified by major classes or types of goods see sec_1_472-8 in addition a manufacturer may establish a miscellaneous pool for items that do not fall within its other pools provided the value of these items is relatively insignificant compared to the value of the manufacturer’s other inventory_items see sec_1_472-8 similarly because a reseller generally must assign items to pools by major lines types or classes of goods the reseller may use the lifo_method for some but not all of its inventory investment sec_1 c gives the reseller some latitude to consider customary business classifications of its particular trade eg a department in the case of a department store when determining these groups finally in revrul_76_282 the service held that a taxpayer’s right to select the class or classes of goods to be covered by the lifo election goes to the nature of the goods themselves thus when a taxpayer elects to use the lifo_method for a specific class of goods the scope of the taxpayer’s lifo election must extend to all goods that fall within that class including goods that are unsalable at normal prices or unusable in the normal way stated differently the taxpayer must use the lifo_method to account for its entire investment in the specific class of goods thus the holding in revrul_76_282 refutes the general principle taxpayer inferred from the raw-material-content method tam-119879-05 we believe that the inventory-investment concept applies to pools as well as to classes of goods thus when a taxpayer elects to use the lifo_method for a specific class of goods and assigns that class of goods to a specific pool under its method of pooling the scope of the taxpayer’s lifo election must extend to the taxpayer’s entire investment in the class or classes of goods that fall within that pool stated differently the taxpayer must use the lifo_method to account for its entire investment in the class or classes of goods that fall within its pool in conclusion we believe that a taxpayer using the dollar-value lifo_method elects to use the method for a pool of items rather than for the individual items assigned to that pool thus for the dollar-value lifo_method to clearly reflect income the method must be used for all items that fall within a taxpayer’s dollar-value pools for taxpayers using ipic-method pools the 2-digit commodity codes in table of the ppi detailed report and the general expenditure categories of table of the cpi detailed report are analogous to major lines types or classes of goods under sec_1_472-8 and to groups of inventory_items which are substantially_similar under sec_1 b i a because taxpayer excluded from the scope of its lifo election some of the items that fall within its ipic-method pools taxpayer’s inventory_method does not clearly reflect income thus exam may invoke sec_1_472-3 to extend the scope of taxpayer’s lifo election issue should the national_office revoke the letter_ruling that permits taxpayer’s bbbb segment to use a non-lifo method to account for some of the items that fall within its pools if yes is taxpayer entitled under sec_7805 to have this revocation applied without retroactive effect discussion we agree with exam that the national_office should revoke a letter_ruling that permits taxpayer’s bbbb segment to use a non-lifo method to account for some but not all of the items that fall within taxpayer’s ipic-method pools see section dollar_figure of revproc_97_27 but taxpayer clearly disclosed on a separate schedule submitted with its form_3115 that the proposed change in method will affect only items whose cost is dollar_figure percent of pool 4’s inventory thus because the letter_ruling was issued in error taxpayer is entitled under sec_7805 to have the revocation of its letter_ruling applied without retroactive effect see section dollar_figure of revproc_2005_2 accordingly the national_office hereby revokes taxpayer’s letter_ruling effective for the first taxable_year that begins after the date this tam is issued to taxpayer issue should the national_office revoke the automatic change in accounting_method obtained by taxpayer’s zzzz segment under section dollar_figure of the appendix of revproc_2002_9 and require taxpayer’s zzzz segment to revert to its former method of pooling if yes is taxpayer’s zzzz segment entitled under sec_7805 to have this revocation applied without retroactive effect tam-119879-05 discussion we agree with exam that the national_office should revoke the automatic change in accounting_method that permits taxpayer’s zzzz segment to use a non-lifo method to account for some but not all of the items that fall within taxpayer’s ipic-method pools see section dollar_figure of revproc_2002_9 but because taxpayer previously obtained the commissioner’s consent to terminate its lifo election for some but not all of the items in pool of of the bbbb segment taxpayer had a reasonable basis to assume that changing to ipic-method pools automatically without expanding the scope of its lifo election is permissible furthermore taxpayer did not withhold material facts thus taxpayer is entitled under sec_7805 to have the revocation of its method change applied without retroactive effect see section dollar_figure of revproc_2005_2 accordingly the national_office hereby revokes taxpayer’s automatic change in accounting_method effective for the first taxable_year that begins after the date this tam is issued to taxpayer caveat a copy of this technical_advice_memorandum is to be given to the taxpayer sec_6110 of the code provides that it may not be used or cited as precedent


internal_revenue_service number release date index number ----------------------------------------------- -------------------------------- ------------------------ --------------------------------- in re --------------------------------------------------- --------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ----------------------------- id no ------------- ----------------------------------------------------- telephone number --------------------- refer reply to cc psi b04 plr-153836-05 date september ---------------------- ---------------------- legend donor spouse trust --------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------------- trustee date child grandchild grandchild w year year year year year year year year year year year year year dear -------------- ------------------------------------------ ----------------- ---------------------- ----------------------------------- ---------------------------------- ----------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- this is in response to a letter dated date and prior correspondence plr-153836-05 from your authorized representative requesting an extension of time under sec_2642 of the internal_revenue_code and sec_301 of the procedure and administration regulations to make allocations of gst_exemption to a_trust facts benefit of child grandchild grandchild and other family members trustee a bank is the trustee of trust on date year donor and spouse created an irrevocable_trust trust for the under paragraph second sections k and l the trustee may pay to or apply for the benefit of child any amount from the net_income of trust that trustee deems advisable and any amount of principal the trustee deems advisable for child’s care support maintenance and education under paragraph third sections d and e at the death of the survivor of donor and spouse the trustee is directed to hold in trust dollar_figurew to benefit grandchild and dollar_figurew to benefit grandchild paragraph fourth which governs the trusts for grandchild and grandchild provides that the trustee pay the net_income to the beneficiary and any principal to the beneficiary for care support maintenance education purchasing a home and entering a business each grandchild may request in writing to withdraw one-third of her respective trust after attaining the age of thirty one-half of the trust at age thirty-five and the balance at age forty each grandchild has a limited_power_of_appointment to appoint any part or all of her trust to the issue of donor and spouse by referring to the power in her last will in default of such appointment the trust will be distributed to the grandchild’s surviving issue by right of representation in year sec_1 and donor and spouse made transfers to trust elected to gift- split and trustee filed form sec_709 united_states gift and generation-skipping_transfer_tax return to report these gifts however trustee failed to allocate donor’s and spouse’s gst_exemption to the transfers to trust on the returns in year donor died in year spouse made a transfer to trust and reported the gift on a form_709 however no allocation of spouse’s gst_exemption was made to that transfer spouse did not make any transfers to trust in years and in years and spouse made transfers to trust however no form sec_709 were filed to report the gifts to trust and accordingly no allocation of spouse’s gst_exemption was made to those transfers spouse made a transfer to trust in year and filed a form_709 but did not allocate spouse’s gst_exemption to the transfer spouse died in year plr-153836-05 in trustee’s affidavit trustee swore that she prepared year sec_1 through year form sec_709’s for donor and spouse and inadvertently did not allocate donor’s and spouse’s gst_exemption to the transfers to trust in addition trustee swore that she did not prepare returns for spouse in years through trustee swore that donor and spouse relied on trustee for advice related to tax returns and did not understand the implications of failing to allocate gst_exemption to the transfers to trust it is represented that no distributions have been made to grandchild and grandchild from her respective trust trustee requests an extension of time under sec_2642 and sec_301 to i allocate donor’s available gst_exemption to the portion of the year through year transfers to trust for which donor is the transferor and that donor’s allocations be made based on the value of the property as of the dates of the transfers to trust and ii allocate spouse’s available gst_exemption to the portion of grandchild trust and grandchild trust for which spouse is the transferor and that spouse’s allocations be made based on the value of the property as of the date the two trusts come into existence ie the date of spouse’s death law and analysis sec_2501 imposes a tax on the transfer of property by gift by an individual sec_2511 provides that the tax imposed by sec_2501 shall apply whether the transfer is in trust or otherwise whether the gift is direct or indirect and whether the property is real or personal tangible or intangible sec_2513 provides that a gift made by one spouse to any person other than his or her spouse shall for purposes of this chapter be considered as made one-half by one spouse and one-half by the other spouse but only if at the time of the gift each spouse is a citizen or resident_of_the_united_states sec_2601 imposes a tax on every generation-skipping_transfer gst a gst is defined under sec_2611 as a taxable_distribution a taxable_termination and a direct_skip sec_2631 provides that for purposes of determining the inclusion_ratio every individual shall be allowed a gst_exemption amount that may be allocated by such individual or his executor to any property with respect to which such individual is the transferor sec_2631 provides that any allocation under sec_2631 once made shall be irrevocable sec_2632 provides that any allocation by an individual of his or her gst_exemption under sec_2631 may be made at any time on or before the date prescribed for filing the estate_tax_return for such individual’s estate determined with regard to extensions regardless of whether such a return is required to be filed sec_26_2632-1 of the generation-skipping_transfer_tax regulations provides that an allocation of gst_exemption to property transferred during the plr-153836-05 transferor’s lifetime other than in a direct_skip is made on form_709 except as provided otherwise an allocation of gst_exemption is effective as of the date of any transfer as to which the form_709 on which it is made is a timely filed return sec_2642 provides that except as provided in sec_2642 if the allocation of the gst_exemption to any transfers of property is made on a gift_tax_return filed on or before the date prescribed by sec_6075 for such transfer the value of such property for purposes of sec_2642 shall be its value as finally determined for purposes of chapter within the meaning of sec_2001 sec_2642 provides generally that the secretary shall by regulation prescribe such circumstances and procedures under which extensions of time will be granted to make an allocation of gst_exemption described in sec_2642 or sec_2642 provides that in determining whether to grant relief under this paragraph the secretary shall take into account all relevant circumstances including evidence of intent contained in the trust instrument or instrument of transfer and such other factors as the secretary deems relevant for purposes of determining whether to grant relief the time for making the allocation or election shall be treated as if not expressly prescribed by statute notice_2001_50 2001_2_cb_189 provides that under sec_2642 the time for allocating gst_exemption to lifetime transfers and transfers at death the time for electing out of the automatic allocation rules and the time for electing to treat any trust as a gst_trust are to be treated as if not expressly prescribed by statute the notice further provides that taxpayers may seek an extension of time to make an allocation described in sec_2642 or b or an election described in sec_2632 or c under the provisions of sec_301_9100-3 sec_2652 provides that for purposes of chapter except as provided in sec_2653 the term transferor means in the case of any property subject_to the tax imposed by chapter the donor sec_2652 provides that if under sec_2513 one-half of a gift is treated as made by an individual and one-half of such gift is treated as made by the spouse of such individual such gift shall be so treated for purposes of this chapter accordingly in the case of a transfer with respect to which the donor’s spouse makes an election under sec_2513 to treat the gift as made one-half by the spouse the electing spouse is treated as the transferor of one-half of the entire value of the property transferred by the donor regardless of the interest the electing spouse is actually deemed to have transferred under sec_2513 sec_26_2652-1 the donor is treated as the transferor of one-half of the value of the entire property sec_2654 and provide that for purposes of chapter the portion of a_trust attributable to transfers from different transferors shall be treated as separate trusts and substantially separate and independent shares of different beneficiaries in a_trust shall be treated as separate trusts 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 plr-153836-05 to make a regulatory election or a statutory election but no more than months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-3 provides the standards used to determine whether to grant an extension of time to make an election whose due_date is prescribed by a regulation and not expressly provided by statute under sec_301_9100-1 a regulatory election includes an election whose due_date is prescribed by a notice published in the internal_revenue_bulletin in accordance with sec_2642 and notice_2001_50 taxpayers may seek an extension of time to make an allocation described in sec_2642 or b or an election described in sec_2632 or c under the provisions of sec_301_9100-3 requests for relief under 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 that granting relief will not prejudice the interests of the government sec_301_9100-3 provides that a taxpayer is deemed to have acted reasonably and in good_faith if the taxpayer 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 based upon the information provided and the representations made we conclude that the requirements of sec_301_9100-3 have been satisfied for the years in which donor and spouse elected to split_gifts year sec_1 through spouse is treated for gst purposes as the transferor of one-half of the entire value of the property transferred to trust by donor regardless of the interest spouse is actually deemed to have transferred under sec_2513 for gst purposes donor and spouse are each treated as the transferor of one-half of the value of the entire property transferred to the trust we rule that trustee is granted an extension of time of days from the date of this letter to allocate donor’s available gst_exemption to the portion of the year through transfers to trust for which donor is the transferor the allocations will be effective as of the date of the transfers to trust further we rule that trustee is granted an extension of time of days from the date of this letter to allocate spouse’s available gst_exemption to the portion of grandchild trust and grandchild trust for which spouse is the transferor the allocations will be effective as of the date grandchild trust and grandchild trust come into existence ie the date of spouse’s death trustee should make donor’s allocations on a supplemental form_709 and spouse’s allocations on a supplemental form_709 filed with the internal_revenue_service center cincinnati ohio a copy of this letter should be attached to the forms two copies are enclosed for this purpose 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 plr-153836-05 this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination enclosures sincerely william p o’shea associate chief_counsel passthroughs and special industries copy for sec_6110 purposes copies of this letter


internal_revenue_service department of the treasury number release date index number 468a 468a washington dc person to contact telephone number refer reply to cc psi plr-105291-00 date date re request for a revised schedule of ruling amounts taxpayer parent plant location commission district fund dear this letter responds to the request of taxpayer dated date for a revised schedule of ruling amounts in accordance with sec_1_468a-3 of the income_tax regulations taxpayer was previously granted a revised schedule of ruling amounts on date information for the schedule of ruling amounts was submitted on behalf of the taxpayer pursuant to sec_1_468a-3 taxpayer represents the facts and information relating to its request for a revised schedule of ruling amounts as follows taxpayer is percent owned by parent and files a consolidated federal_income_tax return with parent taxpayer has a direct ownership_interest of percent as a tenant-in-common with other electric utility companies in plant which is situated at location taxpayer is under the audit jurisdiction of the district_director of district plant’s operating license expires in taxpayer is subject_to the jurisdiction of commission plr-105291-00 which covers percent of the taxpayer’s total electric sales the estimated base cost for decommissioning the plant is based on an independent study and is premised on the prompt removal immediate dismantlement method commission in case no effective authorized nuclear decommissioning costs to be included in the taxpayer’s cost of service for ratemaking purposes for the plant in the amount of and estimated an after-tax rate of return on assets of percent the commission also determined the total estimated cost of decommissioning to be this base cost escalated using an estimated inflation rate of percent results in an estimated future decommissioning cost of these rates were estimated after taking into consideration the tax and investment changes made to sec_468a of the internal_revenue_code by section of the energy policy act of there are no proceedings pending before commission that may result in an increase or decrease in the amount of decommissioning costs for the plant to be included in taxpayer’s cost of service for ratemaking purposes the funding_period and level_funding limitation period for the plant extends from the estimated period for which the fund will be in effect is the estimated_useful_life of the plant is thus the taxpayer has calculated its qualifying percentage to be percent sec_468a of the internal_revenue_code provides that a taxpayer may elect to deduct the amount of payments made to a qualified nuclear decommissioning fund however sec_468a limits the amount_paid into the fund for any taxable_year to the lesser_of the amount of nuclear decommissioning costs allocable to the fund that is included in the taxpayer’s cost of service for ratemaking purposes for the taxable_year or the ruling_amount applicable to that year sec_468a of the code provides that no deduction shall be allowed for any payment to the nuclear decommissioning fund unless the taxpayer requests and receives from the secretary a schedule of ruling amounts the ruling_amount for any taxable_year is defined under sec_468a as the amount which the secretary determines to be necessary to fund that portion of nuclear decommissioning costs which bears the same ratio to the nuclear power plant as the period for which the fund is in effect bears to the estimated_useful_life of the plant this term is further defined to include the amount necessary to prevent excessive funding of nuclear decommissioning costs or funding of these costs at a rate more rapid than level_funding taking into account such discount rates as the secretary deems appropriate plr-105291-00 sec_468a of the code provides that a taxpayer shall be deemed to have made a payment to the nuclear decommissioning fund on the last day of the taxable_year if the payment is made on account of the taxable_year within 2½ months after the close of the taxable_year sec_1_468a-1 of the regulations provides that an eligible_taxpayer may elect to deduct nuclear decommissioning costs under sec_468a of the code an eligible_taxpayer as defined under sec_1_468a-1 is a taxpayer that has a qualifying interest in a nuclear power plant as defined under sec_1_468a-1 a qualifying interest is among other things a direct ownership_interest including an interest held as a tenant in common or joint tenant sec_1_468a-2 of the regulations provides that the maximum amount of cash payments made or deemed made to a nuclear decommissioning fund during any taxable_year shall not exceed the lesser_of i the cost of service amount applicable to the nuclear decommissioning fund for such taxable_year or ii the ruling_amount applicable to the nuclear decommissioning fund for such taxable_year sec_1_468a-3 of the regulations provides that in general a schedule of ruling amounts for a nuclear decommissioning fund is a ruling specifying annual payments that over the taxable years remaining in the funding_period as of the date the schedule first applies will result in a projected balance of the nuclear decommissioning fund as of the last day of the funding_period equal to and in no event more than the amount of decommissioning costs allocable to the fund sec_1_468a-3 of the regulations provides that each schedule of ruling amounts shall be based on the reasonable assumptions and determinations used by the applicable public_utility commission s in establishing or approving the amount of decommissioning costs to be included in the cost of service for ratemaking purposes taking into account amounts that are otherwise required to be included in the taxpayer's income under sec_88 of the code and the regulations thereunder each schedule of ruling amounts shall be based on the public_utility commission's reasonable assumptions concerning i the after-tax rate of return to be earned by the amounts collected for decommissioning ii the total estimated cost of decommissioning the nuclear power plant and iii the frequency of contributions to the nuclear decommissioning fund for a taxable_year sec_1_468a-3 of the regulations requires the internal_revenue_service to provide a schedule of ruling amounts that is identical to the schedule proposed by the taxpayer but no such schedule shall be provided by the service unless the taxpayer's proposed schedule is consistent with the principles and provisions of this section plr-105291-00 sec_1_468a-3 of the regulations provides that the ruling_amount specified in a schedule of ruling amounts for any taxable_year in the level_funding limitation period shall not be less than the ruling_amount specified in such schedule for any earlier taxable_year under sec_1_468a-3 the level_funding limitation period begins on the first day of the first taxable_year for which a deductible payment is made to the nuclear decommissioning fund and ends on the last day of the taxable_year that includes the estimated date on which the nuclear power plant will no longer be included in the taxpayer’s rate base for ratemaking purposes sec_1_468a-3 of the regulations provides that the funding_period for a nuclear decommissioning fund is the period that begins on the first day of the first taxable_year for which a deductible payment is made or deemed to be made to such nuclear decommissioning fund and ends the later of i the last day of the taxable_year that includes the estimated date on which decommissioning costs of the nuclear power plant to which the nuclear decommissioning fund relates will no longer be included in the taxpayer’s cost of service for ratemaking purposes or ii the last day of the taxable_year that includes the estimated date on which the nuclear power plant to which the nuclear decommissioning fund relates will no longer be included in the taxpayer’s rate base for ratemaking purposes sec_1_468a-3 of the regulations provides that the amount of decommissioning costs allocable to a nuclear decommissioning fund is the taxpayer’s share of the total estimated cost of decommissioning the nuclear power plant multiplied by the qualifying percentage sec_1_468a-3 of the regulations provides that in general the total estimated cost of decommissioning a nuclear power plant is the reasonably estimated cost of decommissioning used by the applicable public_utility commission in establishing or approving the amount of these costs to be included in cost of service for ratemaking purposes sec_1_468a-3 of the regulations provides that a taxpayer’s share of the total estimated cost of decommissioning a nuclear power plant equals the total estimated cost of decommissioning the plant multiplied by the taxpayer’s qualifying interest in the plant sec_1_468a-3 of the regulations provides that the qualifying percentage for any nuclear decommissioning fund is equal to the fraction the numerator of which is the number of taxable years in the estimated period for which the nuclear decommissioning fund is to be in effect and the denominator of which is the number of taxable years in the estimated_useful_life of the applicable nuclear power plant plr-105291-00 sec_1_468a-3 of the regulations provides that the estimated period for which a nuclear decommissioning fund is to be in effect begins on the later of the first day of the first taxable_year for which a deductible payment is made to the nuclear decommissioning fund or deemed made or the first day of the taxable_year that includes the date that the nuclear power plant begins commercial operations as determined by the applicable public_utility commission at the time the plant was first included in the taxpayer’s rate base and ends on the last day of the taxable_year that includes the estimated date on which the nuclear power plant will no longer be included in the taxpayer’s rate base for ratemaking purposes according to sec_1_468a-3 the estimated date on which the nuclear power plant will no longer be included in the taxpayer’s rate base for ratemaking purposes is determined under the ratemaking assumptions used by the applicable public_utility commission in establishing or approving rates during the first ratemaking proceeding in which the nuclear power plant was included in the taxpayer’s rate base sec_1_468a-3 of the regulations provides that the estimated_useful_life of a nuclear power plant begins on the first day of the taxable_year that includes the date that the plant begins commercial operations as determined by the applicable public_utility commission at the time the plant was first included in the taxpayer’s rate base and ends on the last day of the taxable_year that includes the estimated date on which the nuclear power plant will no longer be included in the taxpayer’s rate base for ratemaking purposes according to sec_1_468a-3 the estimated date on which the nuclear power plant will no longer be included in the taxpayer’s rate base for ratemaking purposes is determined under the ratemaking assumptions used by the applicable public_utility commission in establishing or approving rates during the first ratemaking proceeding in which the nuclear power plant was included in the taxpayer’s rate base sec_1_468a-3 of the regulations provides that if two or more public_utility commissions establish or approve rates for electric energy generated by a single nuclear power plant then the schedule of ruling amounts shall be separately determined pursuant to the rules of sec_1_468a-3 through e for each public_utility commission that has determined the amount of decommissioning costs to be included in the cost of service for ratemaking purposes for this plant under sec_1_468a-3 this separate determination shall be based on the reasonable assumptions and determinations used by the relevant public_utility commission and shall take into account only that portion of the total estimated cost of decommissioning that is properly allocable to the ratepayer whose rates are established or approved by the public_utility commission according to sec_1_468a-3 the ruling amounts for any taxable_year is the sum of the ruling amounts for such taxable_year determined under the separate schedules of ruling amounts plr-105291-00 sec_1_468a-3 of the regulations provides that the internal_revenue_service shall not provide a taxpayer with a schedule of ruling amounts for any nuclear decommissioning fund unless the public_utility commission that establishes or approves the rates for electric energy generated by the plant to which the nuclear decommissioning fund relates has determined the amount of decommissioning costs to be included in the taxpayer’s cost of service for ratemaking purposes and has disclosed the after-tax rate of return and any other assumptions and determinations used in establishing or approving the amount sec_1_468a-3 of the regulations enumerates the information required to be contained in a request for a schedule of ruling amounts filed by a taxpayer in order to receive a ruling_amount for any taxable_year sec_1_468a-3 of the regulations provides that a taxpayer is required to request a revised schedule of ruling amounts for a nuclear decommissioning fund if a any public_utility commission that establishes or approves rates for the furnishing or sale of electric energy generated by a nuclear power plant to which the nuclear decommissioning fund relates increases the proposed period over which decommissioning costs of the nuclear power plant will be included in cost of service for ratemaking purposes adjusts the estimated date on which the nuclear power plant will no longer be included in the taxpayer’s rate base for ratemaking purposes or reduces the amount of decommissioning costs to be included in cost of service for any taxable_year and b the taxpayer’s most recent request for a schedule of ruling amounts did not provide notice to the service of such action by the public_utility commission sec_1_468a-3 of the regulations provides that any taxpayer that has previously obtained a schedule of ruling amounts can request a revised schedule of ruling amounts such a request must be made in accordance with the rules of sec_1_468a-3 the internal_revenue_service shall not provide a revised schedule of ruling amounts applicable to a taxable_year in response to a request for a schedule of ruling amounts that is filed after the deemed payment deadline date for such taxable_year we have examined the representations and information submitted by the taxpayer in relation to the requirements set forth in the sec_468a of the code and the regulations thereunder based solely on these representations of the facts we reach the following conclusions taxpayer has a qualifying interest in the plant and is therefore an eligible_taxpayer under sec_1_468a-1 of the regulations plr-105291-00 commission has determined the amount of decommissioning costs to be included in the taxpayer’s cost of service for ratemaking purposes as required by sec_1_468a-3 of the regulations taxpayer as owner of the plant has calculated its share of the total decommissioning costs under sec_1_468a-3 of the regulations taxpayer has determined that pursuant to sec_1_468a-3 of the regulations the qualifying percentage is percent taxpayer has proposed a schedule of ruling amounts which meets the requirements of sec_1_468a-3 and of the regulations the annual payments specified in the proposed schedule of ruling amounts are based on the reasonable assumptions and determinations used by commission and will result in a projected fund balance at the end of the funding_period equal to or less than the amount of decommissioning costs allocable to the fund the maximum amount of cash payments made or deemed made to the fund during any taxable_year is restricted to the lesser amount of the decommissioning costs applicable to the fund or the ruling_amount applicable to the fund as set forth under sec_1_468a-2 of the regulations based on the above determinations we conclude that the taxpayer’s proposed schedule of ruling amounts satisfies the requirements of sec_468a of the code approved schedule of ruling amounts taxable years through year total plr-105291-00 approval of the schedule of ruling amounts is contingent on there being no change in the facts and circumstances known or assumed at the time this ruling is issued if any of the events described in sec_1_468a-3 of the regulations occur in future years the taxpayer must request a review and revision of the schedule of ruling amounts generally the taxpayer is required to file such a request on or before the deemed payment deadline date for the first taxable_year in which the rates reflecting such action became effective when no such event occurs the taxpayer must file a request for a revised schedule of ruling amounts on or before the deemed payment deadline of the tenth taxable_year following the close of the tax_year in which the most recent schedule of ruling amounts was received the approved schedule of ruling amounts is relevant only to those payments made to the fund payments allocable to any funds other than the fund cannot qualify for purposes of the deduction under the provisions of sec_468a of the code as stated above payments made to the fund can qualify only to the extent that they do not exceed the lesser_of the decommissioning costs applicable to the fund or the ruling amounts applicable to the fund in the taxable_year this letter_ruling is directed only to the taxpayer who requested it sec_6110 of the code provides that this ruling may not be used or cited as precedent pursuant to sec_1_468a-7 of the regulations a copy of this letter must be attached with the required election statement to the taxpayer’s federal_income_tax return for each taxable_year in which the taxpayer claims a deduction for payments made to the fund in accordance with the power_of_attorney a copy of this letter_ruling is being sent to your authorized legal representatives we are also sending a copy of the letter_ruling to the district_director of district sincerely yours peter c friedman assistant to the chief branch office of the associate chief_counsel passthroughs and special industries enclosure copy


internal_revenue_service number info release date index number ----------------------------- ----------------------------------- ---------------- --------------------------------- re --------------------------------------------- department of the treasury washington dc person to contact ------------------- id no ------------- telephone number --------------------- refer reply to cc psi b01 - genin-163354-03 date feb dear ----------------- we are answering correspondence submitted by you for the above named taxpayer with regard to revocation of an s election although we are unable to respond to your request as submitted this letter provides information relating to your request according to the facts provided by you the company captioned above currently has a valid s election we believe you wish to revoke the company s s election by filing a revocation effective as of date sec_1362 of the internal_revenue_code provides that an election to be an s_corporation under sec_1362 my be terminated by revocation this election may be revoked only if the shareholders holding more than one-half of the shares of stock of the corporation on the day on which the revocation is made consent to the revocation under ' d c a revocation made during the taxable_year and on or before the 15th day of the 3rd month thereof shall be effective on the 1st date of such taxable_year and a revocation made during the taxable_year but after such 15th day shall be effective on the 1st day of the following taxable_year under ' d d if the revocation specifies a date for revocation which is on or after the day on which the revocation is made the revocation shall be effective on and after the date so specified more specifically under ' b ii of the income_tax regulations if a corporation specifies a date for revocation and the date is expressed in terms of a stated day month and year that is on or after the date the revocation is filed the revocation is effective on or after the date so specified retroactively if a taxpayer believes that he she has previously revoked their s status proof of a timely filed revocation must be presented to the appropriate service_center in the case of a revocation to be effective date the revocation must have been postmarked by thus a revocation of an election to be treated as an s_corporation cannot be made genin-163354-03 date at the latest if no proof can be provided there cannot be a revocation of the s election retroactively and the taxpayer will continue to be treated as an s_corporation until a timely filed revocation is filed for the next available tax_year relief through the private_letter_ruling process is not available for an earlier date please keep this letter with your tax records we hope that the above information proves helpful s dianna k miosi sincerely yours dianna k miosi chief branch associate chief_counsel passthroughs and special industries


t c memo united_states tax_court matthew and janice leonard petitioners v commissioner of internal revenue respondent docket no filed date matthew leonard and janice leonard pro sese bryan e sladek for respondent memorandum opinion vasquez judge respondent determined the following deficiencies in additions to and penalties on petitioners' federal income taxes matthew leonard year deficiency dollar_figure big_number additions to tax sec_6654 sec_6651 dollar_figure dollar_figure janice leonard year deficiency dollar_figure additions to tax sec_6651 sec_6654 dollar_figure --- dollar_figure matthew and janice leonard year deficiency dollar_figure big_number penalty sec_6662 dollar_figure big_number unless otherwise indicated all section references are to the internal_revenue_code in effect for the years in issue and all rule references are to the tax_court rules_of_practice and procedure the issues for decision are whether petitioners are liable for the deficiencies determined by respondent whether petitioners are liable for additions to tax for failing to file federal_income_tax returns for and whether petitioners are liable for additions to tax for failing to make estimated federal_income_tax payments for and whether petitioners are liable for accuracy-related_penalties for and and whether petitioners engaged in behavior that warrants the imposition of a penalty pursuant to sec_6673 background some of the facts have been stipulated and are so found the stipulation of facts and the attached exhibits are incorporated herein by this reference petitioners matthew and janice leonard husband and wife resided in west sacramento california at the time they filed their petition during and mr leonard worked as a firefighter a welder and a contractor customers paid for mr leonard's services by checks made payable to republic project federation republic or other trust sec_1 which allegedly constituted republic petitioners filed fiduciary income_tax returns on form_1041 for republic for and for in lieu of a form_1041 petitioners filed a document for republic entitled beneficiaries tax report for petitioners did not file individual federal_income_tax returns for and petitioners filed joint federal_income_tax returns for and on these returns petitioners reported income only from trustee's fees relating to republic respondent determined that republic was a sham trust and the money paid to republic is taxable_income to petitioners discussion a fundamental principle of tax law is that income is taxed to the person who earns it 337_us_733 281_us_111 an assignment_of_income to a_trust is ineffective to shift the tax we use the words trust and trustee for convenience only our use of these terms is not meant to indicate any conclusion about the substance of the transactions at issue burden from the taxpayer to a_trust when the taxpayer controls the earning of the income 621_f2d_1318 8th cir affg tcmemo_1979_164 the commissioner is not required to apply the tax laws in accordance with the form a taxpayer employs where that form is a sham or inconsistent with economic reality 308_us_473 where an entity is created that has no real economic_effect and which affects no cognizable economic relationships the substance of a transaction involving this entity will control_over its form 731_f2d_1417 9th cir affg 79_tc_714 73_tc_1235 these principles apply even though an entity may have been properly formed and have a separate existence under applicable local law zmuda v commissioner t c pincite petitioners argue that republic is a bona_fide trust they have not introduced any evidence however that rebuts respondent's determination that republic is a sham accordingly we hold that republic shall not be respected as a_trust for federal_income_tax purposes and the money paid to republic is taxable_income to petitioners see rule a we must next determine whether this income which is taxable wholly to petitioners is community_property income under respondent in the separate notices of deficiency sent to each petitioner in and determined that mr continued california law earned_income of a spouse is community_property income unless the spouses have an agreement to the contrary cal fam code sec west community_property income is attributable percent to each spouse see 282_us_101 petitioners have failed to produce any evidence that the income they earned ie the money paid to republic was not community_property income we conclude that under california law this income must be allocated percent to each petitioner respondent determined that petitioners are liable for additions to tax under sec_6651 sec_6651 imposes an addition_to_tax for failure_to_file a return on the date prescribed determined with regard to any extension of time for filing unless the taxpayer can establish that such failure is due to reasonable_cause and not due to willful neglect the taxpayer has the burden of proving the addition is improper continued leonard earned and is taxable on percent of the income reported as earned by republic manufacturing an alleged sub- entity of republic that mrs leonard earned and is taxable on percent of the income reported as earned by lionheart enterprises and lionheart horse farms alleged subentities of republic and that percent of the net_income earned by each petitioner from republic manufacturing lionheart enterprises and lionheart horse farms is taxable_income to the nonearning spouse respondent took these inconsistent positions to protect respondent's rights under california law because petitioners were uncooperative married nonfilers on brief however respondent argues that all the earned_income should be allocated percent to each petitioner in accordance with california community_property law rule a 469_us_241 petitioners offered no credible_evidence showing that they filed returns in and or that their failure_to_file was due to reasonable_cause and not due to willful neglect accordingly we hold that petitioners are liable for the additions to tax under sec_6651 respondent also determined that petitioners are liable for additions to tax under sec_6654 for failing to make estimated_tax payments and penalties under sec_6662 for negligence or disregard of rules or regulations petitioners did not offer any evidence relating to these issues therefore we hold that petitioners are liable for the additions to tax under sec_6654 and penalties under sec_6662 see rule a finally we consider whether petitioners have engaged in behavior that warrants the imposition of a penalty pursuant to sec_6673 sec_6673 authorizes this court to penalize a taxpayer for taking frivolous positions or instituting proceedings primarily for delay petitioners received a warning that respondent would move for a penalty under sec_6673 petitioners filed numerous frivolous motions with the court their conduct throughout this proceeding has convinced us that they instituted and maintained this proceeding primarily for for example petitioners filed a motion that was entitled petitioners closing motion for irs to do something delay furthermore petitioners devoted much of their briefs to shopworn arguments characteristic of the tax-protester rhetoric that has been universally rejected by this and other courts we will not painstakingly address petitioners' assertions with somber reasoning and copious citation of precedent to do so might suggest that these arguments have some colorable merit 737_f2d_1417 5th cir petitioners have wasted the time and resources of this court accordingly we shall impose a penalty of dollar_figure pursuant to sec_6673 to reflect the foregoing decision will be entered under rule