t c no united_states tax_court estate of doris f kahn deceased lasalle bank n a trustee and executor petitioner v commissioner of internal revenue respondent docket no filed date the estate filed form_706 u s estate and generation-skipping_transfer_tax return estate_tax_return r issued a notice_of_deficiency that inter alia asserted increases to the gross_estate by disallowing a reduction in value of p’s individual_retirement_accounts iras by the expected federal_income_tax liability resulting from the distribution of the iras’ assets to the beneficiaries under sec_408 i r c income_tax_liability this matter is before us on p’s motion for partial summary_judgment under rule a contesting r’s disallowance of the reduction in the value of the iras r filed a cross- motion for summary_judgment in response to p’s motion held in computing the gross_estate value the value of the assets held in the iras is not reduced by the anticipated income_tax_liability following the distribution of the iras a hypothetical sale between a willing buyer and a willing seller would not trigger the tax_liability of distributing the assets in the iras because the subject matter of a hypothetical sale would be the underlying assets of the iras marketable_securities not the iras themselves further sec_691 i r c addresses the potential double tax issue accordingly the valuation of the iras should depend on their respective net aggregate asset values held further a discount for lack of marketability is not warranted because the assets in the iras are publicly_traded_securities payment of the tax upon the distribution of the assets in the ira is not a prerequisite to making the assets in the iras marketable thus there is no basis for a discount jonathan e strouse for petitioner jason w anderson and laurie a nasky for respondent opinion goeke judge this matter is before the court on cross- motions for summary_judgment under rule a respondent issued a notice_of_deficiency in the federal estate_tax of the estate of decedent doris f kahn the estate determining among other adjustments that the estate had undervalued two iras on the estate’s form_706 united_states estate and generation-skipping_transfer_tax return the issue before us is whether the estate may reduce the value of the two iras included in the gross_estate by the anticipated income_tax 1all rule references are to the tax_court rules_of_practice and procedure and all section references are to the internal_revenue_code in effect as of the date of the decedent’s death unless otherwise indicated liability that would be incurred by the designated_beneficiary upon distribution of the iras we hold that the estate may not reduce the value of the iras the following is a summary of the relevant facts that are not in dispute they are stated solely for purposes of deciding the pending cross-motions for summary_judgment and are not findings_of_fact for this case see lakewood associates v commissioner tcmemo_1995_552 citing fed r civ p a background doris f kahn decedent died testate on date the valuation_date at the time of death decedent resided in glencoe illinois the trustee and executor of the decedent’s estate lasalle bank n a had its office in chicago illinois at the time the petition was filed at the time of her death decedent owned two iras--a harris bank ira and a rothschild ira both ira trust agreements provide that the interests in the iras themselves are not transferable however both iras allow the underlying marketable_securities to be sold the harris ira 2the rothschild ira agreement provides sec_5 7b neither the account_holder nor the trustee shall have the right to amend_or_terminate this trust in such a manner as would cause or permit all or part of the entire_interest of the account_holder to be diverted for purposes other than their exclusive benefit or that of their beneficiary no account_holder shall have the right to sell assign discount or pledge as collateral for a loan any asset of this trust continued contained marketable_securities with a net asset value nav of dollar_figure and the rothschild ira contained marketable_securities with a nav of dollar_figure on the estate’s original form_706 the estate reduced the nav of the harris ira by percent to dollar_figure to reflect the anticipated income_tax_liability from the distribution of its assets to the continued sec_5 5h the brokerage firm named in the application is designated by the account_holder with authority to provide the trustee with instructions via confirmations or otherwise implementing his or her directions to the brokerage firm to purchase and sell securities for his or her account thus although the account_holder cannot personally sell the securities he may do so through the brokerage firm and trustee the harris ira agreement provides neither the grantor nor any beneficiary may borrow trust property from the trust or pledge it for security for a loan margin accounts and transactions on margins are prohibited for the trust no interest in the trust shall be assignable by the voluntary or involuntary act of any person or by operation of law or be liable in any way for any debts marital or support obligations judgments or other obligations of any person except as otherwise provided by law no person may engage in any transaction with respect to the trust which is a prohibited_transaction within the meaning of code sec_4975 the trustee shall have the following powers d to purchase sell assign or exchange any trust property and to grant and exercise options with respect to trust property here again although the ira itself cannot be sold the trustee has the power to sell the underlying assets beneficiaries the estate did not report the value of the rothschild ira on the original tax_return on the amended estate_tax_return the estate reduced the value of the rothschild ira by percent to dollar_figure to reflect the income_tax_liability upon the distribution of its assets to the beneficiaries respondent determined in the notice_of_deficiency an estate_tax of dollar_figure the estate’s motion for partial summary_judgment was filed on date and on date respondent’s cross-motion for summary_judgment was filed seeking summary adjudication on the following issues whether the value of each ira is less than the value of the navs and whether the estate properly deducted amounts not paid for estimated federal_income_tax liabilities of decedent the estate filed a reply in opposition to respondent’s cross-motion for summary_judgment however the estate did not address the second issue regarding the validity of the estate’s deduction we therefore consider this issue to be conceded by the estate 3the only portion of the deficiency that is in dispute is the amount attributable to the valuation of the iras in the form 886-a explanation of adjustments respondent determined that the value of the harris ira should be increased from dollar_figure to dollar_figure to more accurately reflect the fair_market_value of this asset at the date of death under sec_2031 and sec_2039 of the internal_revenue_code further respondent determined that the value of the rothschild ira should be reported at dollar_figure the rothschild ira was omitted from the original federal estate_tax_return the parties have stipulated the settlement of the remaining issues pertaining to the notice_of_deficiency that the estate raised in its petition respondent also submitted a reply memorandum in opposition to the estate’s motion for partial summary_judgment discussion summary_judgment is intended to expedite litigation and avoid unnecessary and expensive trials fla peach corp v commissioner 90_tc_678 either party may move for summary_judgment upon all or any part of the legal issues in controversy a decision may be rendered by way of summary_judgment if the pleadings answers to interrogatories depositions admissions and any other acceptable materials together with the affidavits if any show that there is no genuine issue as to any material fact and that a decision may be rendered as a matter of law rule b 98_tc_518 affd 17_f3d_965 7th cir 90_tc_753 85_tc_527 this case is ripe for summary_judgment because both parties agree on all of the relevant facts and a decision may be rendered as a matter of law sec_2001 imposes a federal tax on the transfer of the taxable_estate of every decedent who is a citizen or resident_of_the_united_states a deceased taxpayer’s gross_estate includes the fair_market_value of any interest the decedent held in property see sec_2031 sec_2033 sec_20_2031-1 estate_tax regs 411_us_546 fair_market_value reflects the price that the property would change hands between a willing buyer and a willing seller neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts united_states v cartwright supra pincite sec_20_2031-1 estate_tax regs fair_market_value is an objective test that relies on a hypothetical buyer and seller see 658_f2d_999 5th cir 475_f2d_591 346_f2d_213 5th cir 79_tc_938 the willing buyer and the willing seller are hypothetical persons rather than specific individuals or entities and the individual characteristics of these hypothetical persons are not necessarily the same as the individual characteristics of the actual seller or the actual buyer estate of bright v united_states supra pincite6 110_tc_530 citing 706_f2d_1424 7th cir the hypothetical willing buyer and willing seller are presumed to be dedicated to achieving the maximum economic advantage estate of curry v united_states supra pincite 94_tc_193 i estate_tax consequences applicable to iras an ira is a_trust created for the exclusive benefit of an individual or his beneficiaries sec_408 h an ira can hold various types of assets including stocks bonds mutual funds and certificates of deposit ira owners may withdraw the assets in their iras however there is a 10-percent additional tax on early_withdrawals subject_to statutory restrictions see sec_72 iras are exempt from income_taxation as long as they do not cease to exist as an ira sec_408 distributions from iras are included in the recipient gross_income of the distributee sec_408 hence earnings from assets held in an ira are not subject_to taxation in the ira when earned but rather are subject_to taxation when distributions are made this fact does not change when the ira is inherited from the decedent see sec_408 ira owners can designate beneficiaries to inherit iras in the event that the owner dies before receiving distributions of the owner’s entire_interest in 4the estate makes the argument that neither the code or regulations contains the requirement that the buyer and seller be hypothetical however the weight of authority clearly contradicts the estate’s assertion the ira_distributions to beneficiaries of a decedent are includable in the gross_income of the beneficiaries sec_408 sec_691 the portion of a lump-sum_distribution to a decedent’s beneficiary from an ira is in the beneficiary’s hands income_in_respect_of_a_decedent ird in an amount equal to the excess of the account balance at the date of death over any nondeductible_contributions by the decedent to the account such amount is included in the beneficiary’s gross_income the year in which it is received sec_691 the portion of the lump-sum_distribution to the beneficiary in excess of the entire balance including unrealized_appreciation accrued income and nondeductible_contributions in the ira at the owner's death is not income_in_respect_of_a_decedent such amount is taxable to the beneficiary under sec_408 and sec_72 see revrul_92_47 1992_1_cb_198 in the taxable_year the distribution is received sec_691 provides that the character of the income in the hands of either the estate or decedent’s beneficiary is the same as if decedent had such amount if an ira owner dies before distributions were required to begin the owner’s interest in the ira generally must be distributed to the beneficiary within years of decedent’s death sec_401 if an ira owner dies after distributions were required to begin the ira assets generally must be distributed to the beneficiary of the ira at least as rapidly as under the method of distribution to the owner sec_401 an ira account owned by a decedent at death is considered part of the decedent's_estate for federal estate_tax purposes sec_2039 as such the estate must pay an estate_tax on the value of the ira id in addition an income_tax will be assessed against the beneficiaries of the accounts when the accounts are distributed see sec_408 sec_691 to compensate at least partially for this potential double_taxation congress enacted sec_691 which grants the recipient of an item of ird an income_tax deduction equal to the amount of federal estate_tax attributable to that item of ird estate of 391_f3d_621 5th cir citing sec_691 affg 300_fsupp2d_474 s d tex therefore decedent’s beneficiaries will be allowed a deduction in the amount of federal estate_tax paid on the items of ird included in the distributions to them from the ira the deduction is allowed in the same year the income is recognized--that is when the ira is actually distributed see sec_691 ii the estate’s arguments that income_tax_liability should be taken into account in the valuation of the iras the estate contends that the application of the willing buyer-willing seller test mandates a reduction in the fair_market_value of the iras to reflect the tax_liability associated with their distribution the logic of the estate’s argument is that the iras themselves are not transferable and therefore are unmarketable according to the estate the only way that the owner of the iras could create an asset that a willing seller could sell and a willing buyer could buy is to distribute the underlying assets in the iras and to pay the income_tax_liability resulting from the distribution upon distribution the beneficiary must pay income_tax therefore according to the estate the income_tax_liability the beneficiary must pay on distribution of the assets in the iras is a cost necessary to render the assets marketable and this cost must be taken into account in the valuation of the iras in support of its argument the estate cites caselaw from three different areas of estate valuation that allow a reduction in value of the assets in an estate for costs necessary to render an estate’s assets marketable or that have otherwise considered the tax impact of a disposition of the estate’s assets in other contexts the first line of cases allows consideration of a future tax detriment or a future tax_benefit to the assets in the estate the second line of cases allows a marketability discount in connection with assets that are either unmarketable or face significant marketability restrictions the third line of cases allows for a reduction in value to reflect the cost of making an asset marketable such as the costs associated with rezoning and decontamination of real_property the estate contends that each line of cases is analogous to the estate’s circumstances and therefore provides authority to resolve the matter in favor of the estate a cases allowing consideration of future tax detriments or benefits built-in capital_gains cases the estate relies on 110_tc_530 and its progeny5 to support the proposition that the value of the iras should be reduced by the income_tax_liability resulting from their distribution in estate of davis the donor held shares of a closely_held_corporation the corporation held assets which had appreciated and could not readily be sold without payment of federal_income_tax the internal_revenue_service argued that the gift_tax value of the donor’s interest in the corporation should not be adjusted or 5see eg estate of 301_f3d_339 5th cir revg tcmemo_2000_12 267_f3d_366 5th cir revg tcmemo_1999_43 155_f3d_50 2d cir revg tcmemo_1997_483 prior to courts generally held that an estate could not reduce the value of closely held stock by the capital_gains_tax potential the repeal of the general_utilities_doctrine by the tax_reform_act_of_1986 publaw_99_514 100_stat_2085 dealing with corporate liquidations prompted courts to reconsider the settled law and allow estates to take capital_gains_tax attributable to closely held corporate stock into account 296_us_200 see dunn v commissioner supra estate of jameson v commissioner supra eisenberg v commissioner supra 110_tc_530 discounted for built-in capital_gains_tax with respect to the underlying assets this court however agreed with the donor’s estate that the value of the stock must be discounted to allow for the tax_liability that would be paid upon selling the assets in the corporation this court concluded that even though no liquidation of the corporation or sale of its assets was planned or contemplated on the valuation_date a hypothetical willing seller and a hypothetical willing buyer would not have agreed on that date on a price for each of the blocks of stock in question that took no account of the corporation’s built-in capital_gains_tax id pincite similarly in 155_f3d_50 2d cir revg tcmemo_1997_ the court_of_appeals for the second circuit held that the donor may consider the potential future capital_gains_tax liability resulting from corporate_liquidation when valuing a gift of corporate stock in applying the willing buyer-willing seller test the court reasoned that ‘the potential transaction is to be analyzed from the viewpoint of a hypothetical buyer whose only goal is to maximize his advantage c ourts may not permit the positing of transactions which are unlikely and plainly contrary to the economic_interest of a hypothetical buyer ’ id pincite quoting estate of curry v united_states f 2d pincite9 here the estate argues that it has a stronger case than the taxpayer in estate of davis because in that case unlike this case the taxpayer’s asset--the stock--could be marketed without paying the income_tax_liability associated with the sale of the underlying assets the estate contends that it is not merely likely it is legally certain that the ira could not be sold at all nor could the underlying assets be sold by petitioner except by distributing the assets and paying the tax on that distribution the second portion of this statement is simply not true the ira trust agreements provide that the account_holder may not sell their ira interest however the agreements specifically provide that the underlying assets in the iras may be sold see supra note because it is legally certain that the iras cannot be sold the subject of a hypothetical sale between a willing seller and a willing buyer would not be the iras themselves but their underlying assets which are marketable_securities the sale of the underlying marketable_securities in the iras is not comparable to the sale of closely held stock because in the case of closely held stock the capital_gains_tax potential associated with the potential liquidation of the corporation survives the transfer to an unrelated third party the survival of the capital_gains_tax liability is exactly why a hypothetical buyer would take it into account see estate of smith v united_states f 3d pincite because the tax burden associated with distributing the assets in the iras will never be transferred to a hypothetical buyer we find that the reasoning of estate of davis v commissioner supra inapplicable to this case b cases where future tax_benefit taken into account estate of algerine smith-value of sec_1341 deduction taken into account in valuing claim against estate in estate of algerine 198_f3d_515 5th cir revg 108_tc_412 the court_of_appeals for the fifth circuit addressed whether to consider the impact of an income_tax benefit in valuing a claim_against_an_estate for the purpose of the estate_tax deduction under sec_2053 the estate owned a royalty interest in exxon the u s government had obtained a multibillion dollar judgment against exxon and the company asserted that it had the right to recoup some of the royalty payments it made to the estate and others to pay that judgment exxon sued the royalty owners and the district_court ruled on a motion for summary_judgment determining that the royalty owners were liable to exxon the court then referred the 6300_fsupp2d_474 s d tex affd 391_f3d_621 5th cir is discussed at length infra sec iii 7for the sake of avoiding confusion we are providing a method to differentiate this estate of smith from the estate of smith cited in this section and further discussed infra sec iii calculation of damages to a special master exxon claimed that it was owed a total of dollar_figure million by the estate exxon settled with the estate months after decedent died for dollar_figure the commissioner determined a deficiency asserting that the estate was allowed to deduct only the amount_paid in settlement because exxon’s claim was pending at the time of decedent’s death and therefore the amount of the decedent’s liability on that claim was then uncertain the tax_court agreed with the commissioner’s conclusion see 108_tc_412 the court_of_appeals in reversing vacating and remanding the tax court’s original decision concluded that the estate was entitled to deduct more than the settlement amount but that the estate was not permitted to deduct the full amount that was being claimed by exxon at decedent's death further the court_of_appeals determined that the income_tax relief afforded by sec_1341 upon the payment of the settlement amount should offset the dollar_figure million claim in calculating the amount of the deduction applying the willing buyer-willing seller test the court_of_appeals stated that we perceive no reason why this standard willing buyer-willing seller test should presume that the participants in the hypothetical_transaction would not account for the net tax effect--including the section benefit--that would flow from a judgment against the hypothetical estate estate of algerine smith v commissioner f 3d pincite the estate’s reliance on this case is misplaced because in estate of algerine smith the tax_benefit from the sec_1341 deduction was inextricably intertwined with the payment of the claim against the estate id thus the willing buyer-willing seller test would offset the amount of the benefit against the value of the claim however in this case there is no contingent tax_liability or tax_benefit to take into account when determining the value a willing buyer would pay for the assets in the iras therefore this example of accounting for tax consequences in valuing assets in an estate is distinguishable from the present valuation issue a hypothetical buyer would not consider the income_tax_liability of the beneficiary of the iras because it is the beneficiary rather than the buyer who would pay that tax estate of smith v united_states f 3d pincite discussed infra lack of marketability discount cases a closely held corporate stock the estate’s attempt to introduce a lack of marketability discount reveals the most fundamental flaw in its argument in 110_tc_530 the discount for the capital_gains_tax liability was part of a general lack of marketability discount shares in a nonpublic corporation suffer from lack of marketability because of the absence of a private_placement market and the fact that floatation costs would have to be incurred if the corporation were to offer its stock publicly estate of andrews v commissioner t c pincite however there are no such barriers to the disposition of assets held within the iras the assets in the iras are traded on established markets and exchanges unlike stock in a closely_held_corporation although the iras themselves are not marketable the underlying securities of the ira are indeed marketable neither the distribution of the assets in the iras nor the payment of the tax upon distribution is a prerequisite to the marketability of the assets as the estate implies therefore a lack of marketability discount is not warranted if we were to follow the estate’s line of reasoning then in any circumstance where a seller recognizes gain on the disposition of an asset the fair_market_value of an asset would be reduced to reflect taxes attributable to the gain further as this court observed in 69_tc_222 a similar case discussed further infra the broad ramifications of such an argument-- demonstrate its frailty for instance under that approach every determination of fair_market_value for estate_tax purposes would require consideration of possible income_tax consequences as well as a myriad of other factors that are peculiar to the individual decedent his estate or his beneficiaries consideration would have to be given in a case such as the instant one for example as to when the estate is likely to distribute the asset to the beneficiaries and thereafter to each beneficiary's unused capital_loss carryovers his possible tax planning to reduce future taxes on the gain included in each installment his tax_bracket both currently and in the future his marital status and other factors the willing buyer-willing seller test though it may not be perfect provides a more reasonable standard for determining value and it must be followed fn ref omitted by following the estate’s line of reasoning we would have to consider intricacies in every valuation case that would eliminate the hypothetical element of the willing buyer-willing seller test the decision in 706_f2d_1424 7th cir summarizes the consequence if courts and administrative bodies determining valuation consistently took the subjective circumstances of the seller into account to hold otherwise would be to command future judges to wade into the thicket of personal and corporate idiosyncrasies and non-market motives as part of their valuation quest thus doing great damage to the uniformity stability and predictability of tax law administration id pincite here we must decline the opportunity that the estate has given us to eschew this important concept underlying the willing buyer-willing seller test b lottery cases the estate cites several cases in the area of estate asset valuation that examine the issue of whether unassignable lottery payments remaining in decedent’s estate at death should receive a marketability discount in 262_f3d_1028 9th cir the taxpayer had won a state lottery and died prior to receiving all the payments the taxpayer was precluded by state law from assigning those payments the united_states argued that the annuity rules of sec_2039 should apply and therefore the stream of payments should be valued under the tables set forth in sec_7520 the estate argued that because of the lack of marketability of the payments a lack of marketability discount should be allowed the court_of_appeals for the ninth circuit upheld the district_court ruling and explained we have long recognized that restrictions on alienability reduce value shackleford v united_states supra pincite citing 624_f2d_884 9th cir 885_f2d_561 9th cir affg 69_tc_234 the court_of_appeals compared the situation with stock subject_to resale restrictions that prevented it from being sold freely in a public market shackleford v united_states supra pincite the estate also cites a similar lottery case 342_f3d_85 2d cir revg 116_tc_142 where this court held on facts similar to shackleford that the taxpayer could not take the marketability discount the court_of_appeals for the second circuit reversed the tax_court and allowed the marketability discount in allowing a marketability discount the court_of_appeals reasoned that the right to transfer is ‘one of the most essential sticks in the bundle of rights that are commonly characterized as property ’ and that an asset subject_to marketability restrictions is as a rule worth less than an identical item that is not so burdened id pincite quoting shackleford v united_states supra pincite the estate’s analogy fails to recognize a fundamental difference between the installment payments in a lottery prize and securities in an ira lottery payments are classified as annuities 116_tc_142 revd on other grounds 342_f3d_85 2d cir the restriction on marketability in both shackleford and gribauskas applied to each constituent payment within the entire prize iras however are trusts composed of marketable assets see sec_408 h as we have already discussed the underlying assets of the iras are publicly_traded_securities that have no such marketability restrictions therefore shackleford and gribauskas do not support a marketability discount in this case cases that allow a reduction in value to reflect the cost of making an asset more marketable the estate cites two cases addressing the issue of valuing land that is either subject_to unfavorable zoning or contaminated in 88_tc_1197 this court allowed valuation methods that required a reduction in the value of the decedent’s property to reflect unfavorable zoning associated with the property and the potential litigation costs associated with obtaining zoning in estate of necastro v commissioner tcmemo_1994_352 this court held that contaminated property could be discounted to account for the cost to clean the property the estate characterizes these cases as instances where this court regularly allows discount for costs necessary to render an estate’s assets marketable the estate’s characterization of the holdings in these cases is misplaced first the valuation concerns associated with real_property are markedly different from those associated with securities for tangible_property the fair_market_value of property should reflect the highest_and_best_use to which such property could be put on the date of valuation see 87_tc_892 in the case of real_property the highest_and_best_use of the land may need to take 8although agreeing with the premise that these principles should be taken into account in valuation this court ultimately found that the expert in 88_tc_1197 failed to consider the reasonable probability of obtaining zoning at the time of decedent’s death into account costs associated with zoning or decontamination this analysis is inapplicable to marketable_securities because they have no higher or better use therefore there is no cost associated with making the securities more marketable summary the estate has attempted to convince us that nontransferable iras are similar in nature to unassignable lottery payments stock in a closely_held_corporation stock that is subject_to resale restrictions contaminated land and land that needs to be rezoned to reflect the highest_and_best_use we have distinguished all of these cases based on the same common denominator--the fact that the built-in capital_gains liability and or marketability restriction of the listed assets will still remain in the hands of a hypothetical buyer while in our case the hypothetical sale of marketable_securities will not transfer any built-in tax_liability or marketability restriction to a willing buyer the main problem with all of the arguments based on the above-cited cases is that the estate is trying to draw a parallel where one does not exist by comparing this situation to situations where a reduction in value is appropriate because a willing buyer would have to assume whatever burden was associated with that property--paying taxes zoning costs lack of control lack of marketability or resale restrictions in this case a willing buyer would be obtaining the securities free and clear of any burden we have taken note of the fact that the iras themselves are not marketable therefore in determining their value under the willing buyer-willing seller test we must take into account what would actually be sold--the securities in davis v commissioner 110_tc_530 and 155_f3d_50 2d cir vacating tcmemo_1997_483 the interest in the entity was the subject of the hypothetical sale therefore the courts in those cases rightfully considered the tax_liabilities and marketability restrictions accompanying those interests here however we look through into the underlying assets of the entity because the assets are what would actually be sold not the interest in the iras further the distribution of the iras is not a prerequisite to selling the securities any_tax liability that the beneficiary would pay upon the distribution of the iras would not be passed onto a willing buyer because the buyer would not purchase the iras as an entity because of their transferability restrictions rather a willing buyer would purchase the constituent assets of the iras therefore unlike all of the cases the estate cites the tax_liability is no longer a factor further the lack of marketability is no longer a factor because a hypothetical sale would not examine what a willing buyer would pay for the unmarketable interest in the iras but instead would consider what a willing buyer would pay for the underlying marketable_securities therefore any reduction in value for built-in tax_liability or lack of marketability is unwarranted iii the estate’s iras should not be entitled to any kind of discount we find that all of the cases cited by the estate to be distinguishable from this case and that the differences in our case justify a rejection of the estate’s proposed discount of the iras further we reject the estate’s characterization of the tax_liability that a beneficiary must pay upon distribution of the iras as a cost to make the underlying assets marketable we agree with the court_of_appeals for the fifth circuit’s reasoning in estate of 391_f3d_621 5th cir which concludes that the application of the willing buyer-willing seller test does not allow the estate to reduce the value of its retirement accounts by the income_tax_liability further we continue to follow the reasoning in our decision of estate of robinson v commissioner t c pincite which holds that it is improper for this court to ameliorate the potential double_taxation that will occur because congress has already provided such relief by enacting sec_691 a estate of smith v united states9 we think the better reasoning lies in estate of smith v 9see 300_fsupp2d_474 s d texas affd 391_f3d_621 5th cir united_states 391_f3d_621 5th cir affg 300_fsupp2d_474 s d tex in estate of smith the court_of_appeals for the fifth circuit affirming the district_court held that the proper valuation of certain retirement accounts included in a decedent’s gross_estate reflects the value of the securities held in decedent’s retirement accounts as determined by reference to applicable securities rates on the date of decedent’s death but does not include a discount for the income_tax_liability to the beneficiaries id pincite in estate of smith as in this case the underlying securities of the retirement accounts were readily marketable while the retirement accounts were not because of restrictions like those applicable to the iras in this case just as the estate did in this case the taxpayer in estate of smith supported its argument for the reduction in value of the retirement accounts by analogy to opinions that allowed estates possessing closely held corporate stock to reduce the value by the potential capital_gains taxdollar_figure applying the willing buyer-willing seller test the district_court reasoned that while the retirement accounts may generate a tax_liability for the beneficiaries a hypothetical willing buyer would not take the tax_liability into consideration when purchasing the underlying securities but would simply pay the value of the securities as determined by applicable securities exchange prices the 10this line of cases and petitioner’s analysis were discussed supra sec ii district_court determined that the cases involving closely held corporate stock were inapplicable to the instant dispute and that the specific issue before the court appears to be one of first impression 300_fsupp2d_474 s d tex affd 391_f3d_621 5th cir the estate argued that the retirement accounts were more than simply a collection of the assets contained within them and that due consideration must be paid to the accounts themselves the district_court rejected this argument concluding that the accounts are equivalent to the assets contained within them and the potential tax to be incurred by the seller while significant to the seller would not affect that sales_price of the securities and would not factor into negotiations between the hypothetical buyer and seller id pincite emphasis added the district_court observed that while there is a market for publicly_traded_securities such as those contained in the retirement accounts there is no market for retirement accounts themselvesdollar_figure therefore the court concluded that it is not 11although on the trial_court level the estate pointed out the fact that there was no market for the retirement accounts the estate did not go as far to argue that a lack of marketability discount should be applied on appeal the estate argued for the lack of marketability discount but the court_of_appeals refused to consider the argument because the estate raised it for the first time on appeal see estate of 391_f3d_621 5th cir we have set forth our reasons for finding that a lack of marketability discount is unwarranted in supra sec ii reasonable to apply the willing buyer willing seller test to the retirement accounts in the hands of the decedent as the estate suggests id the district_court concluded that a willing buyer would pay the value of the securities as determined by applicable securities exchange rates and a willing seller would accept the same on appeal the court_of_appeals for the fifth circuit agreed with the district court’s reasoning and further opined that ‘there is no support in the law or regulations for the estate's approach which is designed to arrive at the value of the transfer as between the individual decedent and his estate or beneficiaries ’ estate of smith v united_states f 3d pincite quoting 69_tc_222 further the court_of_appeals determined that the estate failed to recognize that the willing buyer-willing seller test is an objective one and t hus the hypothetical parties are not the estate and the beneficiaries of the retirement accounts id pincite the court_of_appeals again rejected the estate’s analogy to cases involving closely held corporate stock first the court observed that those cases were distinguishable because the type of asset involved was completely different second the court made the crucial point that deflated the taxpayer’s argument while the stock considered in the above cases would have built-in capital_gains even in the hands of a hypothetical buyer the retirement accounts at issue here would not constitute income_in_respect_of_a_decedent in the hands of a hypothetical buyer income_in_respect_of_a_decedent can only be recognized by the estate the person who acquires the right to receive the income by reason of the decedent's death or the person who acquires the right to receive the income by bequest devise or inheritance sec_691 thus a hypothetical buyer could not buy income_in_respect_of_a_decedent and there would be no income_tax imposed on a hypothetical buyer upon the liquidation of the accounts id pincite we think that this distinction is the reason that all of petitioner’s arguments in this case are meritless the tax or marketability burden on the iras must be borne by the seller because the iras cannot legally be sold and therefore their inherent tax_liability and marketability restrictions cannot be passed on to a hypothetical buyer therefore there is no reason a hypothetical buyer would seek to adjust the price of the marketable_securities that are ultimately being purchased by the same token a hypothetical seller would not accept a downward adjustment in the value of the securities for a tax_liability that does not survive the transfer of ownership of the assets a hypothetical buyer would not purchase the iras because they are not transferable the buyer would purchase the iras’ marketable_securities and would obtain a tax basis in the assets equal to the buyer’s cost see sec_1012 the buyer would only have taxable gain on the disposition of the marketable_securities to the extent they appreciated in value subsequent to the time of acquisition therefore the buyer would be willing to pay the full fair_market_value for the securities without any discount we agree with the fifth circuit that correctly applying the willing buyer-willing seller test demonstrates that a hypothetical buyer would not consider the income_tax_liability to a beneficiary on the income_in_respect_of_a_decedent since he is not the beneficiary and thus would not be paying the income_tax estate of smith v united_states f 2d pincite the estate argues that estate of smith was decided under a different theory ie that the case did not consider the marketability discount argument the estate also contends that the reasoning in estate of smith fails to understand the nature of ira accounts we have already independently considered and rejected the marketability discount theory further the estate’s argument that in general the tax consequences of distributing the iras should be taken into account under the willing buyer-willing seller test was the exact argument considered by the court in estate of smith finally the estate’s assertion that estate of smith fails to understand the nature of iras is contradicted by the estate’s misstatements of the nature of iras b sec_691 the fifth circuit_court of appeals as are we was convinced of the relevance of our holding in estate of robinson v commissioner t c pincite in particular the reasoning utilizing sec_691 in estate of robinson this court examined the issue of whether to discount the value of installment notes in decedent’s estate for future income taxes that the beneficiaries of those notes would pay on the income_in_respect_of_a_decedent included in future installments we determined that the statutory scheme in sec_691 obviated the need to give the taxpayer any further relief id pincite sec_691 provides that all items of gross_income in respect of a decedent shall be included in the gross_income for the taxable_year when received sec_691 provides that such income in the hands of the person acquiring a right to it from decedent will be treated in the same manner as it would have been in the hands of decedent we noted that if the statute stopped here installment notes transmitted by a decedent at his death would be included in decedent’s estate at the fair_market_value provided under sec_2031 and sec_2033 and each portion of the future installment payments which represented taxable gain would be subject_to an income_tax in the year of receipt id pincite however we further observed that sec_691 grants some relief from the double_taxation by providing that the recipient of income_in_respect_of_a_decedent may deduct that portion of the estate_tax levied on decedent’s estate which is attributable to the inclusion of the right to such income in decedent's_estate we concluded therefore in estate of robinson v commissioner supra pincite congress has focused on the fact that an installment_obligation which includes income_in_respect_of_a_decedent is subject_to estate_tax as part of the gross_estate to the extent the element of taxable gain included therein is also subject_to the income_tax congress has chosen to ameliorate the impact of this double_taxation by allowing an income_tax deduction for the estate_tax attributable to the taxable gain there is no foundation in the code for supplementing this congressional income_tax relief by the estate_tax relief which petitioner here seeks we believe this reasoning is applicable to the instant issue sec_691 provides some relief to the estate from the potential double income taxdollar_figure although the estate argues that there is no legislative_history on point the legislative intent is clear from the resulting relief from double income_taxation in estate of 391_f3d_621 5th cir the court noted that congress has not provided similar relief in cases of closely held corporate stock with capital_gains potential in cases involving closely held stock with built-in capital_gains the capital_gains_tax potential survives the transfer of the stock to an unrelated party and congress has not granted any relief from that secondary tax id pincite not only does this observation highlight the fundamental 12we note that the sec_691 deduction does not provide complete relief against the double_taxation that is frequently encountered by income_in_respect_of_a_decedent because this section provides a deduction rather than a credit its value is limited to the highest marginal income_tax bracket of the recipient however such discrepancy was a congressional choice and is not in our discretion to alter difference between transferring closely held corporate stock and stocks in an ira account that the estate consistently ignores but it also provides further confirmation of why we should not intervene where congress has already provided the necessary means to reach a reasonable result the estate argues that it is illogical to value the iras as though they were equivalent to the value of the underlying assets to illustrate this point the estate compares three assets with identical underlying assets a traditional_ira a securities account and a roth_ira the estate argues that these three values should not have equal fair_market_value for federal estate_tax purposes because valuing these assets at the same amount would subject them to the same estate_tax when the ira results in income_tax to a beneficiary and the securities account and roth_ira would not subject a decedent’s beneficiary to taxdollar_figure we believe that our analysis of the willing buyer-willing seller test and explanation of the purpose of sec_691 diminishes the importance of the difference between the tax consequences relating to these assets hypothetical buyers and sellers would agree on the same price for each of these items-- the amount of the account balances we have already illustrated that a hypothetical buyer would not take into account the tax 13see sec_1014 sec_408a consequences of distributing the assets in the iras because the buyer would be purchasing the securities not the iras themselves unlike the other cases the estate has cited the tax_liability associated with the distribution of the iras would not be passed on to the buyer in addition sec_691 provides relief from the double_taxation that would be imposed on the benficiaries of the iras in this case in conclusion the series of comparisons that the estate has crafted to convince us that it is entitled to a reduction in the value of its iras for the income_tax consequences to the beneficiaries is unconvincing the correct result in this case is to value the iras based on their respective account balances on the date of decedent’s death consistent with the preceding discussion we conclude that petitioner’s motion for partial summary_judgment will be denied and respondent’s cross-motion for summary_judgment will be granted to reflect the foregoing decision will be entered under rule


internal_revenue_service department of the treasury number release date index numbers washington dc person to contact telephone number refer reply to cc dom corp 1-plr-104741-03 date date legend company state a business a a b c d m n date date date date date decedent plr-104741-03 state b estate daughter son revocable_trust terminating trust e v ev a av h i j p t fa fat dear this letter revokes and replaces private_letter_ruling plr-114698- issued on date to daughter as trustee of the estate a private letter plr-104741-03 ruling found to be in error or not in accord with the current views of the service may be revoked or modified revproc_2003_1 sec_12 company is a state a corporation engaged in business a on date the date of death of decedent company had outstanding a shares of voting common_stock b shares of nonvoting common_stock c shares cumulative voting preferred_stock which became nonvoting at decedent’s death and d shares of nonvoting preferred_stock on date over half of the voting common_stock was held by decedent’s daughter daughter over half of both the voting and nonvoting preferred_stock m shares voting and n shares nonvoting was held by a revocable_trust revocable_trust all the other stock in company is held by or for the benefit of decedent’s children and grandchildren and or persons married to the children decedent a state b resident died on date survived by daughter son and three grandchildren on decedent’s form_706 united_states estate and generation skipping transfer_tax return the executor of decedent’s estate estate elected to deduct the value of decedent’s qualified family-owned business interests qfobi under sec_2057 of the internal_revenue_code and claimed the maximum allowable dollar_figure deduction decedent’s qfobi consisted of the company stock m shares of voting preferred and n shares of nonvoting preferred held by decedent indirectly through revocable_trust by a letter dated date the internal_revenue_service accepted decedent’s estate_tax_return revocable_trust was established on date through an agreement between decedent as grantor and decedent and his wife as trustees on date decedent amended and restated revocable_trust in its entirety with revocable_trust being established for the benefit of decedent daughter and other descendants of decedent pursuant to article vi section d of revocable_trust the property passing under articles iii and iv bears the excess costs including funeral and estate administration_expenses death taxes pre-residuary gifts and certain other charges on decedent’s death revocable_trust ceased to be revocable daughter and an independent_trustee are the two trustees of this trust on date decedent executed a will article ii of decedent’s will provides that decedent’s tangible_personal_property is to be distributed in accordance with any memoranda signed and dated by decedent which disposes of any of decedent’s tangible_personal_property except as otherwise devised decedent gives and devises his tangible_personal_property along with any insurance policies relating thereto to daughter if she survives decedent article iii of decedent’s will provides that decedent’s residuary_estate is to be distributed to the then serving trustees of the revocable_trust article v section b of decedent’s will provides that any estate legacy succession inheritance transfer excise including any excise_tax imposed under sec_4980a and other similar taxes including any generation-skipping_transfer_tax imposed by reason of decedent’s death together with any interest and penalties plr-104741-03 thereon referred to therein as death taxes are to be paid as follows all death taxes other than any generation-skipping_transfer_tax imposed upon or with respect to property which passes i under the will or ii to or under the revocable_trust is to be paid out of decedent’s general estate as an administration expense without proration or apportionment against any recipient thereof and without any statutory rights to recover any amounts so paid all other death taxes are to be prorated and apportioned in the manner provided by law article v section c of decedent’s will provides that funeral medical and administration_expenses are to be paid out of his general estate article v section d of the will provides that decedent’s residuary_estate is to consist of all of decedent’s property wherever located except any property over which decedent had a power_of_appointment it being decedent’s intention not to exercise any such power by the disposition of the residuary_estate remaining after payment of all debts funeral and administration_expenses and death taxes as provided in this article any pre-residuary gifts and any other charges payable out of the principal of decedent’s general estate article v section e of the will provides that if the assets of decedent’s general estate exclusive of residential_real_property and tangible_personal_property are insufficient or too illiquid to pay decedent’s funeral and administration_expenses or any death taxes required by this article to be paid out of decedent’s general estate as an administration expense decedent’s personal representative is to make a written request to the trustees of the revocable_trust to distribute to decedent’s personal representative or pay directly from the principal of that trust such amount as may be necessary to pay such expenses and death taxes article ii of the revocable_trust as amended provides for the administration of the trust upon decedent’s death with the trust then termed the terminating trust article ii section b of the revocable_trust provides that if the terminating trust contains any stock of company then such stock is to be disposed of as follows the trustees are to distribute the company voting preferred_stock as follows a if son survives decedent then the voting preferred_stock is to be held by trustees in a separate trust pursuant to article iii of the agreement the trustees are to distribute the company nonvoting preferred_stock pursuant to article iv of the agreement article ii section c provides that the balance of the terminating trust remaining after the distributions directed under the preceding sections of article ii referred to in the agreement as decedent’s residuary_estate is to be disposed of pursuant to article v of the agreement article iii of the revocable_trust provides for the establishment of a separate trust for the benefit of son son’s descendants and son’s wife upon the death of the last to die of son and son’s wife the trustees are to distribute the principal of this trust together with all accrued or collected but undistributed_income to daughter if she is then living if daughter is not then living then the trust assets are to be distributed pursuant to a special_power_of_appointment exercised by daughter article iv of the revocable_trust provides for the establishment of a separate trust to be funded with a fractional share of the property allocated to article iv the plr-104741-03 numerator of which equals decedent’s unused gst_exemption see sec_2631 dealing with the generation-skipping_transfer_tax_exemption and the denominator of which equals the value of the property allocated to this article as finally determined for federal estate_tax purposes the trustees may pay or apply all or any part of the net_income and principal thereof to or for the benefit of daughter and daughter’s descendants in such proportions as the trustees in their discretion consider advisable for any eligible beneficiary’s maintenance in health and reasonable comfort education or support in such eligible beneficiary’s accustomed manner of living if daughter survives decedent then upon daughter’s death the trustees are to distribute the remaining trust assets pursuant to a special_power_of_appointment exercised by daughter article v of the revocable_trust provides for the disposition of decedent’s residuary_estate section a of this article provides that the trustees are to pay decedent’s debts death taxes and expenses as provided by article vi section b of article v provides for the distribution of the balance of decedent’s residuary_estate as follows if daughter or any of her descendants survive decedent an equal share is to be disposed of pursuant to article iv and one equal share is to be distributed to son if son survives decedent or if he does not survive decedent to son’s descendants who survive decedent per stirpes article vi section a of revocable_trust provides that upon decedent’s death the trustees are to pay to or on behalf of decedent’s executor out of the principal of the residuary_estate such amounts as the personal representative requests in writing for decedent’s funeral_expenses the expenses of administering decedent’s estate and any estate legacy succession inheritance transfer excise including any excise_tax imposed under sec_4980a and other similar taxes including any generation- skipping transfer_tax imposed by reason of decedent’s death together with any interest and penalties thereon referred to in this article as death taxes that are required by decedent’s will to be paid out of decedent’s general estate as an administration expense article vi section d of revocable_trust provides that to the extent that decedent’s residuary_estate is not sufficient to pay all of the expenses and death taxes as provided in article vi sections a and b then the amount of such expenses and death taxes described in article vi sections a and b which are not paid from decedent’s residuary_estate excess costs are to be paid as follows the property passing under articles iii and iv of this agreement is to bear a proportionate share of the excess costs the proportionate share of the excess costs payable from the property passing under each such article is to equal a fraction of the excess costs the numerator of which is the fair_market_value of the property passing under such article as finally determined for federal estate_tax purposes and the denominator of which is the fair_market_value of the property passing under both articles iii and iv as finally determined for federal estate_tax purposes the excess costs payable out of the property passing under article iv of this agreement is to be paid first from the property passing under article iv section b and then to the extent that the property passing plr-104741-03 under article iv section b is not sufficient to pay all of the excess costs payable out of the property passing under article iv from the property passing under article iv section a terminating trust which was created under article ii of revocable_trust became the holder of the m shares of voting preferred_stock and n shares of nonvoting preferred_stock following the death of decedent the m shares of voting preferred_stock and n shares of nonvoting preferred_stock held by revocable_trust prior to decedent’s death which were included in decedent’s taxable_estate were valued at dollar_figuree and dollar_figurev a total of dollar_figureev on decedent’s form_706 on audit of the form_706 the value of the m shares of voting preferred_stock was increased from dollar_figuree to dollar_figurea thus the total audit value of the company stock included in decedent’s estate dollar_figurea plus dollar_figurev was dollar_figureav the value of decedent’s gross_estate is dollar_figureh the amount allowable as a deduction to estate under sec_2053 and sec_2054 is dollar_figurei the value of the gross_estate less the deductions h minus i is dollar_figurej the dollar_figureav value of the company stock included in estate is p percent of the dollar_figurej total value of the gross_estate less deductions the federal and state b estate inheritance legacy and succession taxes imposed because of decedent’s death totaled dollar_figuret the amount of funeral and administrative expenses totaled dollar_figurefa together the dollar_figurefa expenses and dollar_figuret taxes totaled dollar_figurefat it is now proposed that company will redeem shares of voting and nonvoting preferred_stock from terminating trust in an amount approximately equally to dollar_figurefat in connection with the proposed transaction the following representations have been made a b c the amount to be paid in redemption of the company stock will not exceed the sum of the federal and state b death taxes including interest collected as part of such taxes imposed because of decedent’s death plus the amount of funeral and administration_expenses allowed as deductions to estate under sec_2053 all death taxes and funeral and administrative expenses were paid_by the trustees of terminating trust under article ii of the revocable_trust the total of i the funeral and administrative expenses allowable as sec_2053 deductions plus ii the federal and state b death taxes imposed as a result of decedent’s death is dollar_figurefat the fair_market_value of company’s stock included in decedent’s gross_estate for federal estate_tax purposes exceed sec_35 percent of the gross_estate over the amounts allowable as deductions under sec_2053 and plr-104741-03 d e f g h i j k l the interest of terminating trust in company will be directly reduced by the redemption used to pay the funeral_expenses administration_expenses and death taxes in the proposed redemption terminating trust will receive cash which will be approximately equal to the fair_market_value of the stock in company surrendered in exchange therefor company and terminating trust will each pay their own expenses_incurred in the transaction no shareholder of company is or will be obligated to purchase any of the company stock that will be redeemed terminating trust will not transfer any property to company other than stock in company the proposed redemption will be the first redemption of any stock included in estate there is no plan to issue additional stock in company and there are no outstanding warrants or options to purchase stock in company nor are there any outstanding debentures or obligations that are convertible into stock in company there is no plan or intention to issue any options warrants debentures or other obligations that may be convertible into company stock or which would be considered to be company stock there are no declared but unpaid dividends or funds set apart for dividends on any company stock the redemption will be completed prior to date so that it will occur in the period subsequent to decedent’s death that is specified in sec_303 sec_2057 provides generally that for purposes of the tax imposed by sec_2001 in the case of an estate of a decedent to which this section applies the value of the taxable_estate shall be determined by deducting from the value of the gross_estate the adjusted_value of the qualified family-owned business interests qfobi of the decedent sec_2057 provides that the deduction allowed by this section shall not exceed dollar_figure sec_2057 provides generally that there is imposed an additional estate_tax if within years after the date of the decedent’s death and before the date of the qualified heir’s death a the material_participation requirements described in plr-104741-03 sec_2032a are not met with respect to the qfobi which was acquired or passed_from_the_decedent b the qualified_heir disposes of any portion of a qfobi other than by a disposition to a member of the qualified heir’s family or through a qualified_conservation_contribution under sec_170 c the qualified_heir loses united_states citizenship within the meaning of sec_877 or with respect to whom an event described in sec_877 or b occurs and such heir does not comply with the requirements of sec_2057 or d the principal_place_of_business of a trade_or_business of the qfobi ceases to be located in the united_states sec_2057 provides that for purposes of sec_2057 rules similar to the rules in sec_6166 c and d relating to acceleration of payment shall apply sec_6166 provides that if i any portion of an interest_in_a_closely_held_business which qualifies under sec_6166 is distributed sold exchanged or otherwise_disposed_of or money and other_property attributable to such an interest is withdrawn from such trade_or_business and ii the aggregate of such distributions sales exchanges or other dispositions and withdrawals equals or exceed sec_50 percent of the value of such interest then the extension of time for payment of tax provided in sec_6166 shall cease to apply and the unpaid portion of the tax payable in installments shall be paid upon notice_and_demand from the secretary sec_6166 provides that in the case of a distribution_in_redemption_of_stock to which sec_303 or so much of sec_304 as relates to sec_303 applies i the redemption of such stock and the withdrawal of money and other_property distributed in such redemption shall not be treated as a distribution or withdrawal for purposes of sec_6166 and ii for purposes of sec_6166 the value of the interest in the closely_held_business shall be considered to be such value reduced by the value of the stock redeemed this paragraph shall apply only if on or before the date prescribed by sec_6166 for the payment of the first installment which becomes due after the date of the distribution or if earlier on or before the day which i sec_1 year after the date of the distribution there is paid an amount of the tax imposed by sec_2001 not less than the amount of money and other_property distributed sec_6166 provides that in the case of a distribution_in_redemption_of_stock to which sec_303 or so much of sec_304 as relates to sec_303 applies the redemption of such stock and the withdrawal of money and other_property distributed in such redemption shall not be treated as a distribution or withdrawal for purposes of determining whether the extension of time for payment of tax shall cease to apply in applying rules similar to sec_6166 to sec_2057 a distribution_in_redemption_of_stock to which sec_303 applies is not a disposition that would trigger additional estate_tax with respect to the qfobi the reduction in the value of the interest pursuant to sec_6166 is applicable in determining whether subsequent distributions sales exchanges or other dispositions and withdrawals exceed percent of the value of the interest under sec_6166 and does plr-104741-03 not affect the determination of whether the estate is initially eligible for the extension of time to pay under sec_6166 similarly in the context of qfobi the sec_303 redemption does not affect the initial determination of whether the estate is eligible to make the qfobi election accordingly a distribution_in_redemption_of_stock to which sec_303 applies shall not be treated as a disposition of any portion of a qualified_family-owned_business_interest under sec_2057 provided the proposed redemption satisfies the requirements of sec_303 the proposed redemption will not result in the imposition of an additional estate_tax under sec_2057 based solely on the information submitted and the representations set forth above we hold as follows the proposed distribution of cash by company in redemption of a portion of the company stock held by terminating trust as described above constitutes a distribution in full payment in exchange for the company stock redeemed as provided in sec_303 to the extent that the amount received does not exceed the sum specified in sec_303 and provided that the requirements set forth in sec_303 are satisfied as provided in sec_1001 gain will be recognized by terminating trust measured by the difference between the redemption price and the adjusted_basis of the stock surrendered as determined under sec_1011 provided sec_341 relating to collapsible_corporations is not applicable and provided also that the stock is a capital_asset in the hands of terminating trust the gain if any will constitute capital_gain subject_to the provisions and limitations of subchapter_p of chapter the distribution_in_redemption_of_stock to which sec_303 applies will not be treated as a disposition of any portion of a qualified_family-owned_business_interest under sec_2057 provided the proposed redemption satisfies the requirements of sec_303 the proposed redemption will not result in the imposition of an additional estate_tax under sec_2057 the above rulings are effective to the extent that the amount distributed by company equals the fair_market_value of the stock redeemed no opinion is expressed as to the tax effect of the amount if any by which the distribution by company exceeds or is less than the fair_market_value of the stock redeemed a determination of the fair_market_value of the stock redeemed is reserved until the income_tax returns of the taxpayers concerned have been filed for the year the transaction is consummated in addition no opinion is expressed about the tax treatment of the transaction under other provisions of the code and regulations or about the tax treatment of any conditions existing at the time of or effect resulting from the transaction that are not specifically covered by the above rulings plr-104741-03 this ruling is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent a copy of this letter should be attached to the federal_income_tax returns of the taxpayer involved for the taxable_year in which the transaction covered by this ruling letter is consummated pursuant to a power_of_attorney on file in this office a copy of this letter is being sent to your authorized representative sincerely yours by mark s jennings mark s jennings branch chief branch office of associate chief_counsel corporate enclosure copy for sec_6110 purposes


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 b06 plr-124132-18 date date internal_revenue_service number release date index number -------------------------- ---------------------------------- ------------------------------- --------------------------------------- -------------------------- re ------------------------------------- legend --------------------------------------------- ------------------------------------------------------- --------------- ---------------------------------- ---------------------------------------------------- parent --------------------------------------------------- company --------------------------------------------------- taxpayer --------------------------------------------------- division commission a commission b state a state b state c a b c bill bill bill sec_1 sec_2 sec_3 date -------------------------------- ----------- ------- ------- --------------- ---- ------------ ----------- ------------ ------------- ----------------------------------------------------- ----------------------------------------------- ----------------------------------------------- ---------------------- plr-124132-18 year year ------- ------- dear --------------- this is in response to your request for a ruling submitted by your authorized representative concerning the federal_income_tax consequences of the transaction and facts you have described below taxpayer a corporation formed under the laws of state a is a regulated electric utility that services retail electric customers in portions of state b and five other states division is a division of taxpayer that provides electric service in state b division is subject_to the regulatory jurisdiction of commission a and commission b as to the terms and conditions of service including the rates it can charge for the provision of service in general both regulators establish division’s rates based on its costs to provide its regulated electric service including a return on its investment in the regulated business taxpayer employs an accrual_method of accounting and reports on a calendar_year basis taxpayer is an indirect wholly owned subsidiary of company company is a state c_corporation it is a holding_company that conducts various regulated and non-regulated energy-related businesses through subsidiaries and affiliates company is b owned by parent parent is the parent of an affiliated_group_of_corporations that files a federal consolidated_income_tax_return this group includes taxpayer in year state b enacted bill this legislation added sec_1 to the state b code in year state b enacted bill this legislation added numerous sections to the state b code most pertinent to this request is sec_2 in pertinent part these provisions allow a utility customer to identify a renewable energy facility and negotiate the terms and conditions including the price under which it would be willing to purchase power from the facility assuming the quantity of energy involved meets the requirements of the statute the customer may request that the utility that serves it enter into two back-to-back power purchase agreements ppas the first ppa wholesale ppa is an agreement between the utility and the owner of the facility whereby the owner agrees to provide the utility with and the utility agrees to take the quantity of energy from the facility agreed upon between the customer and the owner of the facility under the terms and conditions the customer and the resource negotiated the second ppa retail ppa is between the utility and the customer contract customer whereby the utility agrees to provide the customer with and the customer agrees to take the energy purchased by the utility pursuant to the wholesale ppa at the utility’s cost the retail ppa is subject_to the jurisdiction of commission a the provisions added by bill and bill the bills require that if requested the utility must enter into these two ppas plr-124132-18 additionally the utility can charge the contract customer for all reasonable identifiable costs associated with the provision of the energy including transportation billing administrative and other services as determined by commission a the provisions of the bills also require the wholesale ppa to provide that if the utility’s contract customer defaults on its obligation to take energy under the retail ppa the utility ceases to be obligated to take power under the wholesale ppa the provisions of the bills require commission a to approve contracts that meet the requirements of the statute a facility the costs of which have been included in a utility’s regulated rates is excluded from the operation of these provisions on date the governor of state b signed into law bill which added sec_3 sec_3 specifically confirms that qualified utilities utilities that service more than c retail customers in state b are permitted to acquire and own solar resources referred to in the statutory provisions added by bill specifically sec_3 provides in part that a qualified utility may apply to commission a to acquire a solar electric generating facility to service a contract customer using rate recovery based on a competitive market price the application shall include a proposed solicitation process for the energy resource and the criteria proposed to be used to evaluate the responses upon completion of an approved solicitation process the utility may seek approval for acquisition of the energy resource that won the bid commission a may approve the acquisition with rate recovery based on a competitive market price only if it determines that the utility’s bid for the resource is the lowest cost ownership option for the utility if the utility acquires a facility it must enter into a ppa with its contract customer that incorporates the terms and conditions the customer negotiated with the prior owner of the project this ppa is subject_to commission a’s jurisdiction under the program established by statute any of division’s large customers may identify a solar_energy resource resource from which it is willing to purchase electricity this resource may be identified through a request for proposal rfp process it conducts itself or which is conducted by division at the behest of the customer the results of which are meant to identify the lowest cost ownership option for the utility after satisfying other non-price criteria enumerated by the customer and division non- price criteria will include but not necessarily be limited to items such as credit quality of the resource owner ability to deliver a completed resource in a timely manner access to transmission without undue transmission upgrade costs and ability to demonstrate that the resource owner has negotiated a purchase option with division once the lowest cost ownership option has been verified the terms and conditions for the sale and purchase of power are negotiated between the proposed customer and the owner of the resource under sec_3 division is permitted to apply to commission a to acquire the resource the administrative steps in the acquisition process are those outlined above in the description of bill once division’s application is approved it must charge its contract customer for energy at the rate that was negotiated between that customer and the owner of the resource from whom division acquired it plus reasonable non-energy costs plr-124132-18 the taxpayer has requested us to rule that that portion of any solar electric generating facility owned by taxpayer the electric output from which is charged to participating state b customers based on rates established under the contract customer program described above on a bilaterally negotiated in lieu of a cost of service basis will not be public_utility_property within the meaning of sec_46 sec_168 and the regulations promulgated thereunder sec_168 of the internal_revenue_code code provides that the depreciation deduction determined under sec_168 shall not apply to any public_utility_property within the meaning of sec_168 if the taxpayer does not use a normalization method_of_accounting sec_168 of the code defines in part public_utility_property as property used predominantly in the trade_or_business of the furnishing or sale of electrical energy if the rates for such furnishing or sale as the case may be have been established or approved by a state or political_subdivision thereof prior to the revenue reconciliation act of the definition of public_utility_property was contained in sec_167 and sec_168 which defined public_utility_property by means of a cross reference to sec_167 the definition of public_utility_property is unchanged sec_1_167_l_-1 provides that under sec_167 property is public_utility_property during any period in which it is used predominantly in a sec_167 public_utility activity the term sec_167 public_utility activity means in part the trade_or_business of the furnishing or sale of electrical energy if the rates for such furnishing or sale as the case may be are regulated ie have been established or approved by a regulatory body described in sec_167 the term regulatory body described in sec_167 means a state including the district of columbia or political_subdivision thereof any agency_or_instrumentality of the united_states or a public service or public_utility commission or other body of any state or political_subdivision thereof similar to such a commission the term established or approved includes the filing of a schedule of rates with a regulatory body which has the power to approve such rates though such body has taken no action on the filed schedule or generally leaves undisturbed rates filed by the taxpayer the definitions of public_utility_property contained in sec_168 and former sec_46 are essentially identical sec_1_167_l_-1 restates the statutory definition providing that property will be considered public_utility_property if it is used predominantly in a public_utility activity and the rates are regulated sec_1 l - b provides that rates are regulated for such purposes if they are established or approved by a regulatory body the terms established or approved are further defined to include the filing of a schedule of rates with the regulatory body which has the power to approve such rates even though the body has taken no action on the filed schedule or generally leaves undisturbed rates filed the regulations under former sec_46 specifically sec_1_46-3 contain an expanded definition of regulated rates this expanded definition embodies the notion of plr-124132-18 rates established or approved on a rate of return basis in addition there is an expressed reference to rate of return in sec_1_167_l_-1 the operative rules for normalizing timing differences relating to use of different methods and periods of depreciation are only logical in the context of rate of return regulation the normalization method which must be used for public_utility_property to be eligible for the depreciation allowance available under sec_168 is defined in terms of the method the taxpayer uses in computing its tax expense for purposes of establishing its cost of service for ratemaking purposes and reflecting operating results in its regulated books of account therefore for purposes of application of the normalization rules the definition of public_utility_property is the same for purposes of the investment_tax_credit and depreciation thus the key factors in determining whether property is public_utility_property are that the property must be used predominantly in the trade_or_business of the furnishing or sale of inter alia electrical energy the rates for such furnishing or sale must be established or approved by a state or political_subdivision thereof any agency_or_instrumentality of the united_states or by a public service or public_utility commission or similar body of any state or political_subdivision thereof and the rates so established or approved must be determined on a rate-of-return basis as indicated above under normal circumstances retail sales come within the pricing jurisdiction of commission a however the provisions of the bills over-ride the power of division a to prescribe and or alter the terms and conditions of the arrangement negotiated between the contract customer and the original resource owner thus as to the retail ppa the third public_utility_property qualification requirement regulatory cost-based pricing jurisdiction is lacking however even if commission a were construed to have pricing jurisdiction it does not have the power to impose prices based on division’s costs in the exercise of that jurisdiction the only ability it has is to consider the terms of the deal negotiated between the contract customer and the original resource owner thus any pricing ultimately approved by commission a will not be based on its authority to impose rates based on division’s cost of service accordingly we conclude that that portion of any solar electric generating facility owned by taxpayer the electric output from which is charged to participating state b customers based on rates established under the contract customer program described above on a bilaterally negotiated in lieu of a cost of service basis will not be public_utility_property within the meaning of sec_46 sec_168 and the regulations promulgated thereunder plr-124132-18 except as specifically determined above no opinion is expressed or implied concerning the federal_income_tax consequences of the matters described above under any other provisions of the code including other subsections of sec_168 specifically no opinion is expressed concerning whether the contract to sell electricity constitutes a service_contract under sec_7701 in addition no opinion is expressed concerning whether the taxpayer is the owner of the facility generating electricity for federal_income_tax purposes further no opinion is expressed or implied on the classification of the property under sec_168 except as provided in sec_168 section dollar_figure of revproc_87_56 1987_2_cb_674 provides however that asset classes in revproc_87_56 include property described in such asset classes without regard to whether a taxpayer is a regulated_public_utility or an unregulated company sincerely peter c friedman senior technician reviewer branch office of associate chief_counsel passthroughs special industries cc