internal_revenue_service number release date index number ------------------------ -------------------------------------- ----------------------- ---------------------- -------------------------------------- legend legend 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 corp b04 plr-125132-06 date date ----------------------------------------------- sub ------------------------------------------------------------------- ----------------------------------------------------------- sub ------------------------------------------------------------------- -------------------------------------------------- ------------------------------------------- lp ------------------------------------------------------------------------------------------ ----------------------------------------------------------- b acquisitions -------------------------------------------------- --------------------------------------------------- ---------------------------------------------------------------------- ----------------------------------- ---------------- -------------- ------------- p q s plr-125132-06 state a ------------- dear ------------------ this letter responds to your date request that we supplement our letter_ruling dated date plr-100049-06 the original letter_ruling the information submitted in your date letter and subsequent correspondence is summarized below capitalized terms not defined in this ruling have the meanings assigned to them in the original letter_ruling 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 this office has not verified any of the material submitted in support of the request for rulings verification of the information representations and other data may be required as part of the audit process moreover no information provided by the taxpayer has been reviewed and no determination has been made regarding whether the proposed transaction i satisfies the business_purpose requirement of sec_1_355-2 of the income_tax regulations ii is used principally as a device for the distribution of any earnings_and_profits of the distributing_corporation or the controlled_corporation or both see sec_355 of the internal_revenue_code the code and sec_1_355-2 and iii is part of a plan or series of related transactions pursuant to which one or more persons will acquire directly or indirectly stock representing a 50-percent_or_greater_interest in the distributing_corporation or the controlled_corporation see sec_355 and sec_1_355-7 summary of facts the original letter_ruling addressed certain federal_income_tax consequences of a transfer by distributing of the stock of subsidiaries conducting business a to controlled solely in exchange for controlled common_stock cash in the form of a special dividend and controlled securities the contribution followed by the pro_rata distribution of all the shares of controlled common_stock to holders of distributing common_stock the external distribution and the subsequent merger of controlled with and into merger partner the merger the original letter_ruling held that the contribution followed by the external distribution qualified as a reorganization under sec_355 and sec_368 of the code and that the merger qualified as a reorganization under sec_368 of the code distributing now expects that the special dividend will equal approximately dollar_figurep and that the controlled securities will have a face_amount of approximately dollar_figureq as described in the original letter_ruling distributing has commercial paper and notes outstanding none of which were issued in anticipation of the external distribution the plr-125132-06 amount of notes outstanding is dollar_figurer and not dollar_figureb as set forth in the request for the original letter_ruling distributing intends to transfer all of the controlled securities to the investment banks in exchange for commercial paper and notes that the investment banks acting as principals for their own accounts will have acquired in the marketplace at least days prior to the external distribution distributing previously expected the investment banks to acquire approximately dollar_figurej of commercial paper and notes with a face_amount of approximately dollar_figurek less the face_amount of commercial paper so acquired in order to add flexibility with respect to the debt exchange distributing now expects the investment banks to acquire some combination of commercial paper and notes such that the commercial paper may represent anywhere from zero to dollar_figurea with the balance of debt to be exchanged in the debt exchange consisting of notes finally while distributing had expected the controlled securities to bear interest at a rate designed to render the securities worth their face_amount distributing now anticipates due to current market conditions that the controlled securities may be worth less than their face_amount when they are issued although any such discount is not expected to exceed a de_minimis amount within the meaning of sec_1273 and sec_1278 proposed transaction distributing intends to engage in certain pre-distribution restructuring steps before the contribution the external distribution and the merger the steps of the pre- distribution restructuring as modified the proposed transaction are as follows i ii distributing will contribute certain business a assets to sub distributing will contribute all of the stock of sub to sub iii sub will contribute all of the stock of sub to sub iv sub will sell certain business b assets to sub which will contribute such assets to a newly formed partnership all of the interests in which will be owned by sub and one of its subsidiaries v sub and sub each inactive corporations will liquidate in transactions intended to qualify as liquidations under sec_332 and sec_337 vi sub will transfer all of its interest in lp and certain real_estate to sub for no consideration for federal_income_tax purposes distributing will treat the transfer as a distribution of such assets from sub to sub followed by successive contributions of such assets by sub to sub and by sub to sub vii sub will distribute all of the stock of sub to distributing in a transaction intended to qualify as a distribution under sec_355 internal distribution viii distributing will contribute all of the stock of sub to sub plr-125132-06 ix sub will contribute certain business a assets to a newly formed wholly owned subsidiary sub in a transaction intended to qualify as a reorganization under sec_368 contribution and will distribute all of the stock of sub to distributing in a transaction intended to qualify as a distribution under sec_355 internal distribution x distributing will contribute all of the stock of sub to sub and immediately thereafter sub will cause sub to convert into a state a limited_liability_company that will be disregarded as an entity separate from its owner for federal_income_tax purposes under sec_301_7701-3 xi sub will contribute all of its interest in lp to its direct wholly owned subsidiary sub which owns the remaining interests in lp2 and lp will liquidate under state law sub will distribute the stock of sub and another subsidiary to sub these steps will be disregarded for federal_income_tax purposes and sub will merge with and into sub xii as part of the contribution distributing will transfer to controlled the existing accounts_receivable and payable between distributing and various subsidiaries conducting business a which accounts have generally arisen in the ordinary course of business representations in connection with its request for a supplemental ruling distributing affirms the statements and representations made in the original letter_ruling as amended as follows c distributing will elect not to apply the transitional rule_of sec_355 therefore distributing and controlled will treat all members of its respective separate_affiliated_group as defined in sec_355 hereafter sag as one corporation in determining whether it meets the requirements of sec_355 regarding the active_conduct_of_a_trade_or_business d the five years of financial information submitted on behalf of the business conducted by sub a member of the distributing sag is representative of the present business operations of sub and with regard to such business there have been no substantial operational changes since the date of the last financial statements submitted other than the b acquisitions e the five years of financial information submitted on behalf of the business conducted by sub a member of the controlled sag is representative of the present business operations of sub and with regard to such business there have been no substantial operational changes since the date of the last financial statements submitted plr-125132-06 representations f and g are deleted h following the distribution the distributing sag and the controlled sag will continue the active_conduct of their respective businesses independently and with their separate employees distributing makes the following additional representations with respect to internal distribution a any indebtedness owed by sub to sub after internal distribution will not constitute stock_or_securities b no part of the consideration to be distributed by sub with respect to its stock will be received by distributing as a creditor employee or in any capacity other than that of a shareholder of sub c sub will elect not to apply the transitional rule_of sec_355 therefore sub and sub will treat all members of its respective sag as one corporation in determining whether it meets the requirements of sec_355 regarding the active_conduct_of_a_trade_or_business d the five years of financial information submitted on behalf of the business conducted by sub a member of the sub sag is representative of the present business operations of sub and with regard to such business there have been no substantial operational changes since the date of the last financial statements submitted e the five years of financial information submitted on behalf of the business conducted by sub a member of the sub sag is representative of the present business operations of sub and with regard to such business there have been no substantial operational changes since the date of the last financial statements submitted f following internal distribution the sub sag and the sub sag will continue the active_conduct of their respective businesses independently and with their separate employees g internal distribution is being carried out for the corporate business_purpose of facilitating the external distribution internal distribution is motivated in whole or substantial part by this corporate business_purpose h internal distribution is not used principally as a device for the distribution of the earnings_and_profits of sub or sub or both i no indebtedness between sub and its subsidiaries and sub and its subsidiaries has been or will be cancelled in connection with internal distribution plr-125132-06 other than the settlement of open intercompany account balances attributable to the normal business operations of distributing and its subsidiaries prior to internal distribution j no intercorporate debt will exist between sub and its subsidiaries and sub and its subsidiaries at the time of or subsequent to internal distribution except for payables arising under the transitional agreements or in the ordinary course of business k payments made in connection with any continuing transactions between sub and its subsidiaries and sub and its subsidiaries following internal distribution will be for fair_market_value based on terms and conditions arrived at by the parties bargaining at arm's length l no two parties to internal distribution are investment companies as defined in sec_368 and iv m for purposes of sec_355 immediately after internal distribution no person determined after applying sec_355 will hold stock possessing percent or more of the total combined voting power of all classes of sub stock entitled to vote or percent or more of the total value of shares of all classes of sub stock that was acquired by purchase as defined in sec_355 and during the five-year period determined after applying sec_355 ending on the date of internal distribution n for purposes of sec_355 immediately after internal distribution no person determined after applying sec_355 will hold stock possessing percent or more of the total combined voting power of all classes of sub stock entitled to vote or percent or more of the total value of shares of all classes of sub stock that was either acquired by purchase as defined in sec_355 and during the five- year period determined after applying sec_355 ending on the date of internal distribution or attributable to distributions on sub stock that was acquired by purchase as defined in sec_355 and during the five-year period determined after applying sec_355 ending on the date of internal distribution o the merger may be part of a plan or series of related transactions within the meaning of sec_1_355-7 that includes internal distribution taking the merger into account internal distribution is not part of a plan or series of related transactions within the meaning of sec_1_355-7 pursuant to which one or more persons will acquire directly or indirectly stock representing a percent or greater interest within the meaning of sec_355 in sub or sub including any predecessor or successor of any such corporation distributing makes the following additional representations with respect to contribution and internal distribution plr-125132-06 p any indebtedness owed by sub to sub after internal distribution will not constitute stock_or_securities q no part of the consideration to be distributed by sub with respect to its stock will be received by distributing as a creditor employee or in any capacity other than that of a shareholder of sub r the total adjusted_basis and the fair_market_value of the assets contributed to sub by sub each will equal or exceed the sum of i any liabilities assumed within the meaning of sec_357 by sub and ii the total of any money and the fair_market_value of any other_property within the meaning of sec_361 received by sub s any liabilities assumed within the meaning of sec_357 by sub were incurred in the ordinary course of business and are associated with the assets being transferred t the five years of financial information submitted on behalf of sub is representative of the present operations of that corporation and with regard to such corporation there have been no substantial operational changes since the date of the last financial statements submitted other than the acquisition of assets in connection with the b acquisitions u the five years of financial information submitted on behalf of sub is representative of the present operations of that corporation and with regard to such corporation there have been no substantial operational changes since the date of the last financial statements submitted v following internal distribution sub and sub will continue the active_conduct of their respective businesses independently and with their separate employees w internal distribution is being carried out for the corporate business_purpose of facilitating the external distribution internal distribution is motivated in whole or substantial part by this corporate business_purpose x internal distribution is not used principally as a device for the distribution of the earnings_and_profits of sub or sub or both y no indebtedness between sub and its subsidiaries and sub and its subsidiaries has been or will be cancelled in connection with internal distribution z no intercorporate debt will exist between sub and its subsidiaries and sub and its subsidiaries at the time of or subsequent to internal distribution plr-125132-06 except for payables arising under the transitional agreements or in the ordinary course of business aa no property will be transferred by sub to sub for which an investment_credit allowed under sec_47 will be claimed bb payments made in connection with any continuing transactions between sub and its subsidiaries and sub and its subsidiaries following internal distribution will be for fair_market_value based on terms and conditions arrived at by the parties bargaining at arm's length cc no two parties to internal distribution are investment companies as defined in sec_368 and iv dd for purposes of sec_355 immediately after internal distribution no person determined after applying sec_355 will hold stock possessing percent or more of the total combined voting power of all classes of sub stock entitled to vote or percent or more of the total value of shares of all classes of sub stock that was acquired by purchase as defined in sec_355 and during the five-year period determined after applying sec_355 ending on the date of internal distribution ee for purposes of sec_355 immediately after internal distribution no person determined after applying sec_355 will hold stock possessing percent or more of the total combined voting power of all classes of sub stock entitled to vote or percent or more of the total value of shares of all classes of sub stock that was either acquired by purchase as defined in sec_355 and during the five- year period determined after sec_355 ending on the date of internal distribution or attributable to distributions on sub stock that was acquired by purchase as defined in sec_355 and during the five-year period determined after applying sec_355 ending on the date of internal distribution ff the merger may be part of a plan or series of related transactions within the meaning of sec_1_355-7 that includes internal distribution taking the merger into account internal distribution is not part of a plan or series of related transactions within the meaning of sec_1_355-7 pursuant to which one or more persons will acquire directly or indirectly stock representing a percent or greater interest within the meaning of sec_355 in sub or sub including any predecessor or successor of any such corporation gg the total fair_market_value of the assets transferred in contribution will equal or exceed the aggregate adjusted_basis of those assets rulings sub will not recognize any gain_or_loss on internal distribution distributing will not recognize any gain_or_loss and will not include any the holding_period of the sub stock will include the holding_period of the aggregate basis of the sub and sub stock held by distributing based solely on the information and representations submitted with the original plr-125132-06 and supplemental requests we reaffirm the rulings set forth in the original letter_ruling and rule as follows on internal distribution1 sec_355 amount in income upon receipt of the stock of sub sec_355 after internal distribution will be the same as the basis in the sub stock held by distributing immediately prior to the distribution allocated in proportion to the fair market values of sub and sub stock in accordance with sec_1_358-2 and sec_358 the sub stock with respect to which the distribution of the sub stock is made provided that the sub stock is held as a capital_asset on the date of internal distribution sec_1223 accordance with sec_312 as follows on contribution and internal distribution reorganization within the meaning of sec_368 and sub and sub will each be a_party_to_a_reorganization within the meaning of sec_368 in income on contribution sec_361 and sec_357 in income on contribution sec_1032 in income on internal distribution sec_361 amount in income upon its receipt of the stock of sub sec_355 distributing after internal distribution will be the same as the basis in the sub stock based solely on the information submitted and the representations made we rule distributing will not recognize any gain_or_loss and will not include any sub will not recognize any gain_or_loss and will not include any amount sub will not recognize any gain_or_loss and will not include any amount sub will not recognize any gain_or_loss and will not include any amount the aggregate basis of the sub and the sub stock held by earnings_and_profits will be allocated between sub and sub in contribution followed by internal distribution will qualify as a the holding_period of the sub stock will include the holding_period of plr-125132-06 held by distributing immediately prior to the distribution allocated in proportion to the fair market values of the sub and sub stock in accordance with sec_1_358-2 and sec_358 the sub stock with respect to which the distribution of the sub stock is made provided that the sub stock is held as a capital_asset on the date of internal distribution sec_1223 sub 19’s basis in each asset received from sub will equal the basis of that asset in the hands of sub immediately before contribution sec_362 and e will include the period during which sub1 held that asset sec_1223 accordance with sec_312 earnings_and_profits will be allocated between sub and sub in sub 19’s holding_period in each asset received from sub in contribution caveats no opinion is expressed about the tax treatment of the proposed transaction under other provisions of the code or the regulations or the tax treatment of any conditions existing at the time of or effects resulting from the proposed transaction that are not specifically covered by the above rulings in particular no opinion is expressed regarding whether internal distribution or internal distribution satisfies the business_purpose requirement of sec_1_355-2 ii whether the proposed transaction is used principally as a device for the distribution of earnings_and_profits of any distributing_corporation or any controlled_corporation see sec_355 and sec_1_355-2 and iii whether the distributions and an acquisition or acquisitions are part of a plan or series of related transactions under sec_355 procedural statements this supplemental ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent a copy of the original letter_ruling and this supplemental ruling must be attached to any income_tax return to which it is relevant alternatively taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their returns that provides the date and control number of the letter rulings in accordance with the power_of_attorney on file with this office a copy of this plr-125132-06 supplemental ruling will be sent to your authorized representative cc sincerely __________________________ richard k passales senior counsel branch office of associate chief_counsel corporate


internal_revenue_service number release date index number ------------------------------------------------------ ------------------------ ---------------------------------------------------- ------------------------------------- department of the treasury washington dc person to contact ------------------------- id no ------------- telephone number --------------------- refer reply to cc psi b05 - plr-127879-04 date date taxpayer buyer building city general_partner gp1 legend --------------------------------------------------------------------------------------------- ---------------- ---------------------------------------------------- ------------------------------------ ----------------------- ------------------------------------------------------------------------------------ ----------------------------------------------- ----------------------------------------- ----------------------- ------------------------------------------------------ ------------------------------------------------------------------ ---------------------------------------------- --------------------------------------- --------------------- ---------------------------------------------------------------------------- ---------------------------------------------------- ------------------------------------ ----------------------- ---------------------------------------------- ------------------------------------------ ------------------------------------ ------------------------------------- ------------------------ ---------------------------------------------------------------------- --------------------------------------------------------------------------------------------- plr-127879-04 gp2 --------------------- --------------------------- --------------------------------- ------------------------------------ ----------------------- limited_partner lp1 lp2 lp3 original buyer ---------------------------------------------------- ------------------------------------ ----------------------- ------------------ ---------------------------------------------------- ------------------------------------ ----------------------- ---------------------------------------------- -------------------------------- ---------------------------- ------------------------ ------------------------------------- -------------------------------- ---------------------------- ----------------------- ----------------------------------------------- ---------------------------------------- ----------------------- a b -------------------------- --------------------- state ------------- c ---------------------- ------------------------------------------------------------------------------ plr-127879-04 d ----- e f g ---------------------- ------------------------- ---------------- state ---------------- h x xx xxx i j ----------------------- -------------- --------- -------------- ----------------------- -------------------------- year ------- k ----------------- month ---------------- l m -------------- ----------- xxxx --------------- n o s p q -------- ---------------------- --------------- -------------------------- -- plr-127879-04 r --------------- t ------ state -------- u v w y z --------------------- ------------------ ---------------------- -------------------------- --------------------- year ------- state ------------------ dear ------------- this letter responds to your letter dated date and subsequent submission on behalf of taxpayer requesting a ruling that for purposes of sec_42 of the internal_revenue_code there is a period of years between the date on which building is expected to be acquired and the date building was last placed_in_service the internal_revenue_service office that will have examination jurisdiction over taxpayer is located in city the relevant facts as represented in these submissions are set forth below facts on a taxpayer and original buyer entered into a purchase and sale agreement in which taxpayer agreed to sell and original buyer agreed to buy all right title and interest of taxpayer in building subject_to certain terms and conditions on b original buyer assigned to buyer all of original buyer’s rights title and interest to and under the sale agreement buyer intends to convert building into a low-income_housing project and to rehabilitate own and manage building so that it will qualify for low-income_housing credits under sec_42 consequently buyer agreed to consummate the purchase of building contingent upon taxpayer receiving a favorable ruling from the internal_revenue_service that for purposes of sec_42 there is a period of at least plr-127879-04 years between the date building is expected to be acquired by buyer and the date building was last placed_in_service taxpayer is a state limited_partnership formed for the purpose of developing owning and operating building at least since c taxpayer has owned building in fee simple absolute and operates and rents building’s d apartments to various tenants for rental income on e gp1 and gp2 each held a 5-percent partnership_interest in taxpayer and served as taxpayer’s co-general partners gp1 also was designated as taxpayer’s tax_matters_partner on f gp1 and gp2 formed general_partner and became its only shareholders and two of its three directors among the assets that gp1 and gp2 transferred to general_partner at the time of formation was their aggregate percent of general_partnership interest in taxpayer consequently on g gp1 and gp2 withdrew from serving as co-general partners of taxpayer and general_partner was appointed as the sole general_partner and tax_matters_partner of taxpayer thus since g general_partner has been the general_partner and tax_matters_partner of taxpayer the remaining percent of partnership_interest in taxpayer was held on e by lp1 as a limited_partner lp1 was a state limited_partnership formed for the purpose of acquiring among other things all of the limited_partnership_interest in taxpayer by purchase agreement dated h lp1 agreed to purchase all of the limited_partnership_interest in taxpayer for dollar_figurex at the time of the closing of the h purchase agreement and in consideration for the 99-percent limited_partnership_interest in taxpayer lp1 paid dollar_figurexx and issued to all prior holders of the limited_partnership_interest in taxpayer a non-recourse negotiable note in the principal_amount of dollar_figurexxx payments of principal and interest under the note were secured in part by lp1’s newly acquired 99-percent limited_partnership_interest in taxpayer the note’s original maturity_date was i however the note’s maturity_date was extended twice ultimately to j in addition the note was amended to name gp1 and gp2 as the note’s sole payees in year gp1 and gp2 formed limited_partner and became its only shareholders and directors pursuant to a consolidation agreement dated as of k among the assets that gp1 and gp2 transferred to limited_partner was the note for dollar_figurexxx thus as of k limited_partner became the note’s sole payee in month in an initial_public_offering of its common_stock limited_partner sold to the public l shares of its common_stock at the same time gp1 and gp2 also sold a cumulative m shares of limited partner’s common_stock the net_proceeds after deducting for all offering expenses that limited_partner received as a result of this offering was approximately dollar_figurexxxx upon the completion of the offering gp1 and gp2 plr-127879-04 remained the owners in the aggregate of an approximately n percent interest of limited partner’s then outstanding_stock and the shares of limited_partner were traded on the nasdaq national market on j when the note for dollar_figurexxx matured lp1 defaulted on its payment obligation under the note consequently limited_partner foreclosed on the note and in full satisfaction thereof took possession of lp1’s 99-percent limited_partnership_interest in taxpayer effective as of o immediately thereafter on the same day limited_partner sold and assigned to lp2 the 99-percent limited_partnership_interest in taxpayer pursuant to a sale and assignment agreement between lp2 and limited_partner dated as of o in addition to acquiring from limited_partner the 99-percent limited_partnership_interest in taxpayer lp2 acquired from limited_partner various interests in seven other partnerships otherwise unrelated to taxpayer for a total aggregate purchase_price of dollar_figures thus as of o lp2 owned a 99-percent limited_partnership_interest in and was the sole limited_partner of taxpayer on its form_1065 u s return of partnership income for the taxable_year ended p taxpayer made an election under sec_754 and sec_1_754-1 of the income_tax regulations to adjust the basis of its property pursuant to sec_734 and sec_743 at the time that lp2 acquired from limited_partner the 99-percent limited_partnership_interest in taxpayer lp2 was a shareholder in limited_partner owning less than a q percent interest of limited partner’s then outstanding_stock lp2 also held various debt instruments issued by limited_partner in an aggregate amount exceeding dollar_figurer was in a joint_venture with limited_partner in connection with the ownership of t senior living communities located in state and was a limited_partner directly or by attribution in various other partnerships organized by limited_partner or predecessors of limited_partner on u limited_partner filed with the united_states bankruptcy court for the district of state a voluntary petition for protection under chapter of title of the united_states_code this bankruptcy case lasted almost years during which limited_partner entered into settlement agreements with various claim holders some of the settlement agreements were intended to minimize significant additional professional fees and delays in limited partner’s ability to make distributions to its creditors and various agreements were placed under seal by an order of the united_states bankruptcy court subsequent to its bankruptcy filing limited_partner started to negotiate with lp2 the terms of a settlement agreement between them upon the death of lp2 on v the negotiations continued with lp3 the estate of lp2 on w limited_partner and lp3 reached a settlement agreement that was approved by the united_states bankruptcy court on y under the settlement agreement lp3 agreed among other things to transfer to limited_partner the 99-percent limited_partnership_interest in taxpayer the actual transfer was consummated as of z when lp3 transferred the 99-percent limited plr-127879-04 partnership_interest in taxpayer to a wholly-owned second tier limited_liability_company of limited_partner that is disregarded as an entity separate from its owner pursuant to sec_301_7701-3 thus as of z limited_partner has been for federal_income_tax purposes the sole limited_partner of taxpayer taxpayer also makes the following representations concerning building buyer intends to acquire building from taxpayer by a purchase as defined in sec_179 taxpayer is not a person whose relationship to original buyer and or buyer would result pursuant to sec_179 in the disallowance of losses under sec_267 neither original buyer nor buyer are members with taxpayer in the same controlled_group within the meaning of sec_179 building was not previously placed_in_service by either original buyer or buyer or by any person who was a related_person with respect to original buyer or buyer as of the time previously placed_in_service buyer intends to incur rehabilitation_expenditures within the meaning of sec_42 in an amount that exceeds the minimum rehabilitation threshold with respect to building there has been no transfer other than the transfers described in the above facts building has been continuously occupied and used in a trade_or_business at all times at least since year building has not been the subject of non qualified substantial_improvement within the meaning of sec_42 buyer has applied to the state housing finance authority for an allocation of low-income_housing tax_credits with respect to building and within the last years taxpayer’s partnership_agreement has not been amended to change the relative interest of the partners in the partnership ruling requested taxpayer requests the service to rule that for purposes of sec_42 there is a period of at least years between the date that building is expected to be acquired by buyer and the date building was last placed_in_service plr-127879-04 law and analysis sec_38 provides for a general_business_credit against tax that includes the amount of the current_year_business_credit sec_38 provides that the amount of the current_year_business_credit includes the low-income_housing_credit determined under sec_42 sec_42 provides that the amount of the low-income_housing_credit for any taxable_year in a 10-year compliance_period is an amount equal to the applicable_percentage of the qualified_basis of each qualified_low-income_building sec_42 provides in part that the term aapplicable percentage means the appropriate percentage prescribed by the secretary for the month applicable under ' b a i or ii sec_42 provides that the percentages prescribed by the secretary for any month shall be the percentages that will yield over a 10-year period amounts of credit that have a present_value equal to i percent of the qualified_basis of new buildings that are not federally_subsidized for the taxable_year 70-percent present_value credit and ii percent of the qualified_basis of new buildings that are federally_subsidized for the taxable_year and existing buildings percent present_value credit building for any taxable_year is an amount equal to the i applicable_fraction determined as of the close of the taxable_year of ii the eligible_basis of the building determined under sec_42 sec_42 provides that the qualified_basis of any qualified low-income sec_42 provides that the eligible_basis of an existing_building is i in the case of a building that meets the requirements of sec_42 its adjusted_basis as of the close of the first year of the credit_period and ii zero in any other case sec_42 provides that a building meets the requirements of sec_42 if i the building is acquired by purchase as defined in sec_179 ii there is a period of at least years between the date of its acquisition by the taxpayer and the later of i the date the building was last placed_in_service or ii the date of the most recent nonqualified_substantial_improvement of the building iii the building was not previously placed_in_service by the taxpayer or by any person who was a related_person with respect to the taxpayer as of the time previously placed_in_service and iv except as provided in sec_42 a credit is allowable under sec_42 by reason of sec_42 with respect to the building sec_42 provides that for purposes of determining when a building was last placed_in_service under sec_42 there shall not be taken into account any placement in service in connection with the acquisition of the building in a transaction in which the basis of the building in the hands of the person acquiring it is determined in whole or in part by reference to the adjusted_basis of such building in the hands of the person from whom acquired plr-127879-04 sec_708 provides that a partnership shall be considered as continuing if it is not terminated sec_708 provides that for purposes of ' a a partnership shall be considered terminated if within a 12-month_period there is a sale_or_exchange of percent or more of the total interest in partnership capital and profits sec_1_708-1 provides that upon the death of one partner in a member partnership the partnership shall not be considered as terminated if the estate or other successor_in_interest of the deceased partner continues to share in the profits or losses of the partnership business sec_1_708-1 provides that if a partnership is terminated by a sale_or_exchange of an interest the following is deemed to occur the partnership contributes all of its assets and liabilities to a new partnership in exchange for an interest in the new partnership and immediately thereafter the terminated partnership distributes interests in the new partnership to the purchasing partner and the other remaining partners in proportion to their respective interests in the terminated partnership in liquidation of the terminated partnership either for the continuation of the business by the new partnership or for its dissolution and winding up sec_1_708-1 provides that if a partnership is terminated by a sale_or_exchange of an interest in the partnership a sec_754 election including a sec_754 election made by the terminated partnership on its final return that is in effect for the taxable_year of the terminated partnership in which the sale occurs applies with respect to the incoming partner therefore the bases of partnership assets are adjusted pursuant to sec_743 and sec_755 prior to their deemed contribution to the new partnership sec_723 provides that the basis_of_property contributed to a partnership by a partner shall be the adjusted_basis of such property to the contributing_partner at the time of the contribution increased by the amount if any of gain recognized under sec_721 to the contributing_partner at such time sec_754 provides that if a partnership files an election in accordance with regulations prescribed by the secretary the basis of partnership property is adjusted in the case of a distribution_of_property in the manner provided in sec_734 and in the case of a transfer of partnership_interest in the manner provided in sec_743 such an election shall apply with respect to all distributions of property by the partnership and to all transfers of interest in the partnership during the taxable_year with respect to which the election was filed and all subsequent taxable years sec_743 provides that in the case of a transfer of an interest in a partnership by sale_or_exchange or upon the death of a partner a partnership with respect to which an election under sec_754 is in effect shall increase the adjusted_basis of the partnership property by the excess of the basis to the transferee partner of the transferee partner’s interest in the partnership over the transferee partner’s plr-127879-04 proportionate share of the adjusted_basis of the partnership property or decrease the adjusted_basis of the partnership property by the excess of the transferee partner’s proportionate share of the adjusted_basis of the partnership property over the basis of the transferee partner’s interest in the partnership specified transfers under the preceding described facts there are four specified transfers of percent limited_partnership interests that taxpayer seeks to assure will not be taken into account for purposes of determining under sec_42 when building was last placed into service the four specified transfers include the o transfer from lp1 to limited_partner the o transfer via sale by limited_partner to lp2 the transfer by lp2 to lp3 following the death of lp2 and the transfer by lp3 to limited_partner pursuant to the settlement agreement approved by the united_states bankruptcy court on o limited_partner acquired lp1’s 99-percent limited_partnership_interest in taxpayer by means of foreclosure this resulted in a technical_termination of taxpayer under sec_708 as a result and pursuant to sec_1_708-1 taxpayer was deemed to have contributed building to a new partnership ie new partnership in exchange for an interest in new partnership and immediately thereafter distributed its interest in new partnership to general_partner and limited_partner in proportion to their respective interests in taxpayer in liquidation of taxpayer for the continuation of building’s operation by new partnership in addition pursuant to sec_1_708-1 because an election was in effect under sec_754 with respect to the o transfer from lp1 to limited_partner of lp1’s 99-percent limited_partnership_interest in taxpayer the adjusted_basis of building was adjusted under sec_743 while still in the hands of lp1 and prior to the deemed contribution by taxpayer of building to new partnership as a result of taxpayer’s deemed contribution of building to new partnership under sec_723 the adjusted_basis of building in the hands of new partnership was the same carryover_basis as the adjusted_basis of building in the hands of taxpayer this satisfies the exception of sec_42 with the result that the transfer of lp1’s percent limited_partnership_interest in taxpayer to limited_partner is not taken into account for purposes of determining under sec_42 when building was last placed into service immediately following the above transfer that resulted in the sec_708 termination of taxpayer and also on o limited_partner sold its 99-percent limited_partnership_interest in new partnership to lp2 this resulted in a technical_termination of new partnership under sec_708 as a result and pursuant to sec_1_708-1 new partnership was deemed to have contributed building to a new partnership ie new partnership in exchange for an interest in new partnership and immediately thereafter distributed its interest in new partnership to general_partner and lp2 in proportion to their respective interests in new partnership in liquidation of new partnership for the continuation of building’s operation by new partnership in addition pursuant to sec_1_708-1 because an election was in plr-127879-04 effect under sec_754 with respect to the o transfer from limited_partner to lp2 of the percent limited_partnership_interest in new partnership the adjusted_basis of building was adjusted under sec_743 while still in the hands of new partnership and prior to the deemed contribution by new partnership of building to new partnership as a result of new partnership 1’s contribution of building to new partnership under sec_723 the adjusted_basis of building in the hands of new partnership was the same carryover_basis as the adjusted_basis of building in the hands of new partnership this satisfies the exception of sec_42 with the result that the sale by limited_partner to lp2 of its 99-percent limited_partnership_interest in new partnership is not taken into account for purposes of determining under sec_42 when building was last placed into service on v lp2 died lp2’s 99-percent limited_partnership_interest in new partnership was transferred to lp2’s estate lp3 lp3 continued to share in the profits and or losses of new partnership with a 99-percent limited_partnership_interest while general_partner continued to maintain a percent interest in new partnership under sec_1_708-1 new partnership is not considered as terminated as a result of the transfer from lp2 to lp3 of its 99-percent limited_partnership_interest in new partnership also the transfer of lp2 to lp3 of its 99-percent limited_partnership_interest in new partnership is not a sale_or_exchange for purposes of sec_1_708-1 accordingly the transfer of the 99-percent limited_partnership_interest is not taken into account for purposes of determining under sec_42 when building was last placed into service on z pursuant to a settlement agreement approved by the united_states bankruptcy court lp3 transferred its 99-percent limited_partnership_interest in new partnership to a wholly-owned second tier limited_liability_company of limited_partner that taxpayer represents is disregarded as an entity separate from its owner pursuant to sec_301_7701-3 thus as of z limited_partner became for federal_income_tax purposes the sole limited_partner of new partnership this resulted in a technical_termination of new partnership under sec_708 as a result and pursuant to sec_1_708-1 new partnership was deemed to have contributed building to a new partnership ie new partnership in exchange for an interest in new partnership and immediately thereafter distributed its interest in new partnership to general_partner and limited_partner in proportion to their respective interests in new partnership in liquidation of new partnership for the continuation of building’s operation by new partnership as a result under sec_723 the adjusted_basis of building in the hands of new partnership was the same carryover_basis as the adjusted_basis of building in the hands of new partnership this satisfies the exception of sec_42 with the result that the transfer by lp3 to limited_partner of its 99-percent limited_partnership_interest in new partnership is not taken into account for purposes of determining under sec_42 when building was last placed into service plr-127879-04 based solely upon the above facts and taxpayer’s representations we rule that as regards the four specified transfers described above for purposes of sec_42 there is a period of at least years between the date that building is expected to be acquired by buyer and the date building was last placed_in_service no opinion is expressed or implied regarding the application of any other provision in the code or regulations specifically no opinion is expressed or implied regarding whether taxpayer's costs of acquisition and rehabilitation of the building will otherwise qualify for the low-income_housing_credit under sec_42 this ruling is directed only to the taxpayer which requested it sec_6110 provides that it may not be used or cited as precedent a copy of this letter should be filed with the federal_income_tax return for taxpayer and its partners for the first taxable_year in which the low-income_housing_credit for building is claimed s susan reaman sincerely yours susan reaman chief branch office of associate chief_counsel passthroughs and special industries enclosure copy cc


internal_revenue_service department of the treasury index number washington dc number release date person to contact telephone number refer reply to cc dom p si plr-112524-99 date august legend x state d1 d2 this responds to the letter dated date submitted on behalf of x requesting relief under sec_1362 of the internal_revenue_code facts x was incorporated under state law on d1 x’s shareholder intended that x be a subchapter_s_corporation effective d2 however an s_corporation_election under sec_1362 was not timely filed s_corporation sec_1362 provides that a small_business_corporation may elect to be an law and analysis sec_1362 provides the rule on when an s election will be effective if an s election is made within the first two and one-half months of a corporation’s taxable_year then that corporation will be treated as an s_corporation for the year in which the election is made if an s election is made after the first two and one-half months of a corporation’s taxable_year then that corporation will not be treated as an s_corporation cc dom p si plr-112524-99 until the taxable_year after the year in which the s election is made sec_1362 provides that if an election under sec_1362 is made for any taxable_year after the date prescribed for making such election for such taxable_year and the secretary determines that there was reasonable_cause for the failure to timely make the election then the secretary may treat the election as timely made for such taxable_year x’s s_corporation_election was not filed timely for the election to be effective as of d2 nevertheless x has established reasonable_cause for not making a timely election and is entitled to relief under sec_1362 conclusion based solely on the facts submitted and representations made and assuming that x otherwise qualifies as a subchapter_s_corporation as of d2 we conclude that x will be recognized as an s_corporation effective as of d2 x should file a completed form_2553 with a copy of this ruling attached reflecting its election of subchapter_s_corporation status as of d2 with the applicable service_center within days of the date of this letter the form_2553 submitted with the ruling_request is returned herewith except as specifically set forth above no opinion is expressed concerning the federal tax consequences of the facts described above under any other provision of the code specifically no opinion is expressed concerning whether x otherwise satisfies the s_corporation eligibility requirements this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent pursuant to the power_of_attorney on file with this office a copy of this ruling is being sent to x signed dianna k miosi sincerely dianna k miosi chief branch office of the assistant chief_counsel passthroughs and special industries


internal_revenue_service number release date index number ------------------------- ----------------------------------------- --------------------------------------------- ------------------------------------------------------- ------------------------ ---------------------------------------------- legend department of the treasury washington dc third party communication date of communication month dd yyyy person to contact --------------- id no ------------- telephone number -------------------- refer reply to cc tege eo2 plr-157717-06 date date fund -------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- - ------------------------------- ------------------------- -------------------------------------------------------------------------------- corporation -------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------- city act -------------------------------------------------------------------------------- ---------------------------------------------- -------------------------- ---------------------------- ------------ state dear --------------- income of fund is excludable from gross_income under sec_115 of the internal_revenue_code and that contributions to fund are deductible by donors under sec_170 of the code this is in reply to your letter of date requesting rulings that the plr-157717-06 facts corporation is a municipal authority established by city it was incorporated as a nonprofit corporation pursuant to act for the purpose of promoting industry and developing trade in city to accomplish this purpose corporation is empowered by act to acquire enlarge improve expand own lease and dispose_of properties promote industry and develop trade by encouraging manufacturing industrial commercial and research enterprises to locate in state or to enlarge and expand existing enterprises or both and further the use of the agricultural products and natural_resources of state corporation is governed by a board_of seven directors the directors are elected by the governing body of city subject_to certain restrictions the seven directors are chosen from the membership of the chamber of commerce of city city proposes to amend the bylaws of corporation to provide that the governing body of city has the power to remove a director with or without cause corporation receives only very limited financial support from city pursuant to act corporation has the power to issue bonds for the purpose of carrying out development projects corporation receives income from bond proceeds the lease or sale of any of its economic development projects and investment_income corporation is a nonprofit corporation and no part of its net_earnings remaining after the payment of its expenses shall inure to the benefit of any individual firm or corporation upon the dissolution of corporation by its board title to all funds and properties owned by it at the time of the dissolution will vest in city city is a political_subdivision of state act specifically authorizes corporation to create an endowment trust fund for the purpose of receiving private contributions to be used by corporation for its development projects this increased funding will allow corporation to increase its economic development activities the charter document for fund is a_trust agreement entered into between corporation and a trustee selected by corporation the fund’s trust agreement provides that the principal and income in fund may only be used to attract new industry to city and to promote the expansion of enterprises already located in city fund’s investment program is supervised by an investment committee appointed by the board_of corporation the fund_manager is also appointed by corporation pursuant to act the fund_manager reports no less than every six months to the board_of corporation and to the investment committee of fund corporation proposes to amend the fund’s trust agreement to provide that the board_of corporation can remove a member of fund’s investment committee at any time with or without cause fund’s trust agreement also provides that the board_of corporation can revoke or amend the trust agreement or terminate fund at any time upon termination of fund any funds or other assets held by fund revert to corporation law and analysis sec_115 in revrul_77_261 1977_2_cb_45 income from an investment fund plr-157717-06 sec_115 of the code provides that gross_income does not include income derived from any public_utility or the exercise of any essential government function and accruing to a state or any political_subdivision thereof established under a written declaration of trust by a state for the temporary investment of cash balances of the state and its participating political subdivisions was excludable from gross_income for federal_income_tax purposes under sec_115 the ruling indicated that the statutory exclusion was intended to extend not to the income of a state or municipality resulting from its own participation in activities but rather to the income of a corporation or other entity engaged in the operation of a public_utility or the performance of some governmental function that accrued to either a state or municipality the ruling points out that it may be assumed that congress did not desire in any way to restrict a state’s participation in enterprises that might be useful in carrying out projects that are desirable from the standpoint of a state government and which are within the ambit of a sovereign properly to conduct in addition pursuant to sec_6012 and the underlying regulations the investment fund being classified as a corporation that is subject_to taxation under subtitle a of the code was required to file a federal_income_tax return each year in revrul_90_74 1990_2_cb_34 the service determined that the income of an organization formed funded and operated by political subdivisions to pool various risks casualty public liability workers’ compensation and employees’ health is excludable from gross_income under sec_115 of the code in revrul_90_74 private interests neither materially participate in the organization nor benefit more than incidentally from the organization by encouraging the development of local businesses corporation contributes to the economic development of city further by increasing the level of funding available to corporation for its economic development activities fund also contributes to the economic development of city stimulating economic development is an essential_governmental_function for purposes of sec_115 of city no part of fund’s income will be distributed to a private party other than as payment for goods or reasonable_compensation for services rendered upon dissolution fund’s assets will be distributed to corporation upon the dissolution of corporation its assets will be distributed to city in no case will the assets of fund be distributed to an entity that is not either a state a political_subdivision of state or an entity the income of which is excluded from gross_income under sec_115 of the code proposed amendments described above are made to fund’s trust agreement and the income of fund is to be used solely to promote the economic development based on the information and representations submitted and provided that the plr-157717-06 corporation’s bylaws we hold that the income of fund is derived from an essential_governmental_function and accrues to a state a political_subdivision of a state or to an entity the income of which is excludible from gross_income under sec_115 of the code sec_170 sec_170 provides subject_to certain limitations a deduction for any charitable_contribution as defined in sec_170 payment of which is made within the taxable_year sec_170 provides that the term charitable_contribution includes a contribution or a gift to or for_the_use_of a state a possession_of_the_united_states or any political_subdivision of any of the foregoing or the united_states or the district of columbia but only if the contribution or gift is made for exclusively public purposes revrul_75_359 1975_2_cb_79 holds that contributions and gifts to a wholly- owned instrumentality of a political_subdivision formed and operated exclusively for public purposes are deductible contributions for_the_use_of political subdivisions to the extent allowed under sec_170 under revrul_75_359 the criteria for identifying wholly- owned instrumentalities of states or political subdivisions are set forth in revrul_57_128 1957_1_cb_311 revrul_57_128 provides that the following factors are considered in determining whether an entity is an instrumentality of a state or political_subdivision whether it is used for a governmental purpose and performs a governmental function whether performance of its function is on behalf of one or more states or political subdivisions whether there are any private interests involved or whether the states or political subdivisions involved have the powers and interests of an owner whether control and supervision of the organization is vested in public authority or authorities if express or implied statutory or other authority is necessary for the creation and or use of such an instrumentality and whether such authority exists and the degree of financial autonomy and the source of its operating_expenses fund is used for a governmental purpose and performs a governmental function by supporting and furthering the purposes and functions of corporation corporation’s governmental function in turn is to promote industry develop trade and further the use of the agricultural products and natural and human resources of city and state fund will receive and use contributions from private sources on behalf of corporation and through corporation city a political_subdivision of state assets of fund may be used only to induce new businesses to locate in city and its environs and to foster the prosperity of existing businesses such uses are declared to be for a public purpose by act upon dissolution of fund its assets will be transferred to corporation any net_earnings of fund may be transferred by corporation only to city in addition no part of corporation’s net_earnings may inure to the benefit plr-157717-06 of any individual firm or corporation corporation’s net_earnings are paid over to city upon dissolution of corporation all assets will be transferred to city thus city has powers and interests of an owner of corporation and through corporation fund any private benefit inured from corporation’s activities including the uses of fund is occasioned through the general purpose of corporation to promote business activity in city fund is governed by an investment committee which is elected by corporation’s governing body with two members of the investment committee being members of corporation’s governing body upon amendment of fund’s trust agreement corporation will have the power to remove with or without cause at any time any member of the investment committee in addition the fund_manager must at least every six months report on every investment of fund to the investment committee and corporation’s governing body in turn city elects corporation’s governing body and upon amendment of corporation’s by-laws will have the power to remove with or without cause at any time any member of corporation’s governing body thus city will have control and supervision of corporation and through corporation control and supervision of fund express authority for the establishment of fund and corporation is contained in act although corporation is financially autonomous city will retain substantial control and supervision of corporation and fund through its power to elect and remove with or without cause at any time any member of corporation’s governing body accordingly corporation will be an instrumentality of city provided that corporation amends its by-laws so as to provide that city may remove with or without cause at any time any member of corporation’s governing body and fund will be an instrumentality of city by virtue of it being controlled by corporation and indirectly controlled by city provided that corporation amends fund’s trust agreement so as to provide that corporation may remove with or without cause at any time any member of the fund’s investment committee as of the effective date of such duly adopted amendments conclusions the income of fund is excludible from gross_income under sec_115 of the code fund is an instrumentality for purposes of sec_170 fund is eligible to receive deductible contributions or gifts made for exclusively public purposes to the extent allowed under sec_170 of the code this ruling letter is effective as of the date the proposed amendments to fund’s trust agreement and corporation’s by-laws described above are adopted plr-157717-06 except as specifically provided otherwise no opinion is expressed on the federal tax consequences of the arrangement described above under any other provision of the code this ruling is directed only to the taxpayer who requested it sec_6110 provides that this ruling may not be used or cited as precedent in accordance with the power_of_attorney on file with this office we are sending a sincerely copy of the letter to your authorized representative _______________________ enclosures cc copy of this letter copy for sec_6110 purposes david l marshall chief exempt_organizations branch division counsel associate chief_counsel tax exempt and government entities


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc tege eoeg teb-plr-122824-02 date date legend issuer city state organization laboratory agency agency institute bonds date date date dear this is in response to your request on behalf of the issuer for the following rulings the organization’s contracts with agency and agency both of which are agencies of the united_states will not result in private_business_use of the facility hereinafter defined to be financed with the proceeds of the bonds for purposes of sec_141 and sec_145 of the internal_revenue_code the code payments to the organization under the contracts with agency and agency will not cause the bonds to be federally guaranteed within the meaning of sec_149 of the code facts and representations the issuer is a public non-profit corporation created by the city under state law to induce various economic enterprises to locate or remain in state the organization is a non-profit membership corporation organized under state law and is recognized as a sec_501 organization the organization’s members consist of numerous national and regional colleges and universities in the unites states the organization is administered by a board_of directors elected by its members the organization was founded to promote access by faculty and students at colleges and universities to the scientific equipment and experience available at the federal government’s national laboratories and in particular the laboratory in the city other purposes specified in the organization’s charter include assisting in the development of research and educational programs at universities and colleges as well as supporting local state and federal governments in furtherance of its exempt purposes the organization contracts with certain federal government agencies including agency and agency collectively the agencies to perform various activities for such agencies a significant amount of these activities are performed at its campus-style complex the campus located in the city the campus is owned by the organization agency has facilities located in the city near the campus from a revenue standpoint two of the organization’s most significant contracts are with the agencies the contract with agency the agency contract provides that the organization will perform various activities for institute an organization affiliated with agency that maintains and advances agency 1's science and education capabilities the agency contract has a three-year term ending on date agency has an option to extend the contract for two years through date prior to date the organization intends to pursue renewals or extensions of the agency contract on similar terms and expects that the contract will be renewed the agency contract is a cost-reimbursement contract reimbursable costs include the real-estate costs the organization incurs performing activities under the agency contract the amount that the organization is reimbursed for such real- estate costs is determined by federal cost accounting standards the organization also receives a fixed fee that is payable monthly over the term of the agency contract and can annually earn an award based upon its performance agency has no obligation to make payments under the agency contract if the organization does not fulfill its obligations under the contract payments to the organization under the agency contract are subject_to agency 1's receipt of funds pursuant to annual appropriations under the agency contract the organization is required to perform certain activities in specific facilities of agency the institute or the organization certain other activities however may be performed at any location agency has no leasehold or possessory rights to the organization’s facilities under the agency contract likewise agency has no right to occupy or otherwise control any of the organization’s facilities pursuant to the agency contract under the contract with agency the agency contract the organization performs activities in furtherance of agency 2's graduate research program the original term of the agency contract was two years ending on date agency has exercised an option to renew the contract for three years prior to the end of this three- year period the organization intends to pursue additional renewals or extensions of the agency contract on similar terms and expects that the contract will be renewed as with the agency contract the agency contract is a cost-reimbursement contract the organization is reimbursed for the real-estate costs incurred in performing the agency contract such costs are reimbursed according to federal cost accounting standards the organization is also paid a fixed fee annually agency has no obligation to make payments if the organization does not fulfill its obligations under the agency contract payments to the organization under the agency contract are subject_to agency 2's receipt of funds pursuant to annual appropriations the organization may perform its obligations under the agency contract at any location agency has no leasehold or other possessory interest in the organization’s facilities and has no right to occupy or otherwise control any of the organization’s facilities under the agency contract the organization has determined that it has a need for additional office space on the campus to meet this need the organization intends to construct an additional building on the campus the facility because the facility will be located on the campus it will also be located near property of agency located in the city the facility will be owned by the organization and accordingly will not be depreciable by either of the agencies the issuer expects to issue the bonds and loan the proceeds to the organization to finance the cost of constructing and equipping the facility the bonds will be payable in part from the revenues of the facility however the payments the organization receives under the contracts that relate to activities performed at the facility are not determined based on the debt service on the bonds the organization expects to use a substantial amount of the space in the facility to perform its activities under the agency contract and the agency contract collectively the contracts as well as to perform general corporate work of the organization the organization expects that substantially more than percent of the facility will be used to perform activities under each of the contracts neither of the contracts require that the organization perform any activities at the facility in addition the organization represents that the activities that it expects to perform under the contracts at the facility can be performed at any of the organization’s facilities the facility will not be constructed to meet specific needs of the agencies neither agency nor agency will occupy any portion of the facility and all persons occupying the facility will be employees of the organization the organization will bear any risk of loss with respect to the facility the contracts do not impair the organization’s rights to use the facility for other purposes or to dispose_of the facility the organization represents that the activities it expects to perform at the facility under the contracts are in furtherance of its exempt purposes and none of the activities will constitute an unrelated_trade_or_business of the organization within the meaning sec_513 the organization represents that research within the meaning of sec_1_141-3 of the income_tax regulations will not be conducted at the facility law generally sec_103 provides that gross_income does not include interest on any state_or_local_bond sec_103 provides that this exclusion does not apply to any private_activity_bond unless it is a qualified_bond under sec_141 sec_141 provides that the term private_activity_bond means any bond issued as part of an issue which meets the private_business_use_test of sec_141 and the private_security_or_payment_test of sec_141 or which meets the private_loan_financing_test of sec_141 under sec_141 an issue meets the private_business_use_test if more than percent of the proceeds of the issue are to be used for any private_business_use private_business_use is defined in sec_141 as use directly or indirectly in a trade_or_business carried on by any person other than a governmental_unit for this purpose any activity carried on by a person other than a natural_person is treated as a trade_or_business sec_141 provides in general that an issue meets the private_security_or_payment_test if the payment of the principal of or the interest on more than percent of the proceeds of the issue is under the terms of the issue or any underlying arrangement directly or indirectly a secured_by any interest in property used or to be used for a private_business_use or payments in respect of such property or b to be derived from payments whether or not to the issuer in respect of property or borrowed money used or to be used for a private_business_use under sec_141 the term qualified_bond means any private_activity_bond if such bond is a qualified_501_c_3_bond sec_145 provides that the term qualified_501_c_3_bond means any private_activity_bond issued as part of an issue if all property which is to be provided by the net_proceeds of the issue is to be owned by a 501_c_3_organization or a governmental_unit and such bond would not be a private_activity_bond if respect businesses a c organizations were treated as governmental units with to their activities which do not constitute unrelated trades or determined by applying sec_513 and b paragraphs and of sec_141 are applied by substituting percent for percent each place it appears and by substituting net_proceeds for proceeds each place it appears sec_1_145-2 provides generally that sec_1_141-0 through apply to sec_145 sec_1_145-2 provides that in applying sec_1_141-0 through to sec_145 references to governmental persons include c organizations with respect to their activities that do not constitute unrelated trades_or_businesses under sec_513 references to percent and proceeds in the context of the private_business_use_test and the private_security_or_payment_test mean percent and net_proceeds and references to the private_business_use_test in sec_1_141-2 and sec_1_141-12 include the ownership test of sec_145 sec_1_141-3 provides rules relating to the definition of private_business_use sec_1_141-3 provides in part that the use of financed property is treated as the direct use of proceeds under sec_1_141-3 in determining whether an issue meets the private_business_use_test it is necessary to look to both the indirect and direct uses of proceeds under sec_1_141-3 both actual and beneficial use by a nongovernmental person may be treated as private_business_use a nongovernmental person is defined in sec_1_141-1 as a person other than a governmental person a governmental person is a state_or_local_governmental_unit as defined in sec_1_103-1 or any instrumentality thereof but does not include the united_states or any agency_or_instrumentality thereof sec_1_141-3 further provides that in most cases the private_business_use_test is met only if a nongovernmental person has special legal entitlements to use the financed property under an arrangement with the issuer in general a nongovernmental person is treated as a private business user of proceeds and financed property as a result of ownership actual or beneficial use of property pursuant to a lease or a management or incentive payment contract or certain other arrangements such as a take or pay or other output-type contract under sec_1_141-3 any other arrangement that conveys special legal entitlements for beneficial use of bond proceeds or of financed property that are comparable to ownership leases management contracts output contracts or research agreements results in private_business_use for example an arrangement that conveys priority rights to the use or capacity of a facility generally results in private_business_use in the case of financed property that is not available for use by the general_public sec_1_141-3 provides that private_business_use may be established solely on the basis of a special economic benefit to one or more nongovernmental persons even if those nongovernmental persons have no special legal entitlements to the use of the property in determining whether special economic benefit gives rise to private_business_use it is necessary to consider all of the facts and circumstances including one or more of the following factors a whether the financed property is functionally related or physically proximate to property_used_in_the_trade_or_business of a nongovernmental person b whether only a small number of nongovernmental persons receive the special economic benefit and c whether the cost of the financed property is treated as depreciable by any nongovernmental person under sec_1_141-3 use of financed property by nongovernmental persons in their trades_or_businesses is treated as general_public use only if the property is intended to be available and in fact is reasonably available for use on the same basis by natural persons not engaged in a trade_or_business an arrangement that conveys priority rights or other preferential benefits is not use on the same basis as the general_public sec_1_141-3 further provides that an arrangement is not treated as general_public use if the term of the arrangement is longer than days the circumstances under which a special economic benefit may result in private_business_use are illustrated in examples under sec_1_141-3 example for instance provides as follows city b issues obligations to finance construction of a specialized pollution_control_facility on land that it owns adjacent to a factory owned by corporation n b will own and operate the pollution_control_facility and n will have no special legal entitlements to use the facility b however reasonably expects that n will be the only user of the facility the facility will not be reasonably available for use on the same basis by natural persons not engaged in a trade_or_business under paragraph b ii because under all the facts and circumstances the facility is functionally related and is physically proximate to property used in n’s trade_or_business n derives a special economic benefit from the facility therefore n’s private_business_use may be established solely on the basis of that special economic benefit and n’s use is treated as private_business_use of the facility similarly example ii of sec_1_141-3 illustrates a situation where a bond- financed runway at a city-owned airport used only by private air carriers ie charter and commercial airlines but not general aviation operators who are natural persons not engaged in a trade_or_business may result in private_business_use despite the fact that the air carriers do not have special legal entitlements with respect to the runway because the runway is not available for use by the general_public based on the facts and circumstances including whether there are only a small number of lessee private air carriers the private_business_use_test may be met solely because the private air carriers receive a special economic benefit from the runway sec_149 provides that sec_103 does not apply to a state_or_local_bond that is federally guaranteed sec_149 provides that a bond is federally guaranteed if i the payment of debt service on the bond is guaranteed in whole or in part by the united_states or any agency_or_instrumentality thereof ii percent or more of the proceeds of the issue of which the bond is a part is to be used to make loans the payment of which is to be guaranteed in whole or in part by the united_states or any agency_or_instrumentality thereof or is to be directly or indirectly invested in federally insured deposits or accounts or iii the payment of debt service on the bond is otherwise indirectly guaranteed in whole or in part by the united_states or any agency_or_instrumentality thereof the prohibition under sec_149 applies not only to direct guarantees but also in circumstances where an underlying arrangement may result in the federal government indirectly guaranteeing debt service on an obligation congress intended that the determination of whether a federal guarantee exists be based on the underlying economic_substance of a transaction taking into account all facts and circumstances see h_r rep no pincite vol c b the house report the house report suggests that an indirect federal guarantee may arise where the federal government contracts to purchase the output of a bond-financed facility similarly where the federal government leases property there may be an indirect guarantee by the united_states a key element in determining whether a prohibited guarantee exists is whether there is a transfer of risk to the federal government see staff of joint comm on taxation 98th cong general explanation of the revenue provisions of the deficit_reduction_act_of_1984 pincite joint comm print analysis issue one as agencies of the united_states the agencies are nongovernmental persons for purposes of the private_business_use_test thus it must be determined whether the contracts result in private_business_use of the facility by either of the agencies for purposes of sec_141 and sec_145 the contracts do not convey special legal entitlements to the facility to agency or agency the terms of the contracts with the organization do not provide either of the agencies with an ownership leasehold or possessory interest in the facility the agencies will not have the right to occupy or otherwise control the use of the facility the contracts do not impair the organization’s right to use the facility for other corporate purposes or to dispose_of the facility moreover the organization is not required to use the facility to perform its legal obligations under either of the contracts in fact the activities that the organization expects to perform at the facility under the contracts can be performed at any of the organization’s facilities while the agencies may have rights with respect to the manner in which the organization performs certain activities that will be conducted in the facility those rights govern the agencies’ contractual relationship with the organization rather than rights that relate to the use of the facility although the contracts do not convey special legal entitlements to the facility it is expected that the entire facility will be used to perform activities under the contracts or for other corporate work of the organization the organization expects that if the contracts are renewed it will continue to use the facility to perform activities for the agencies if the contracts are not renewed the organization will use the facility for other corporate work and does not expect that the facility will be available for use on the same basis by natural persons not engaged in a trade_or_business thus the facility is not expected to be available for use by the general_public and we must determine whether the agencies receive a special economic benefit from the facility that gives rise to private_business_use to determine whether either of the agencies receive a special economic benefit that results in private_business_use it is necessary to consider all the facts and circumstances including whether the facility is functionally related or physically proximate to property used by the agencies in their trades_or_businesses whether only a small number of nongovernmental persons receive a special economic benefit from the facility and whether the cost of the facility is depreciable by any nongovernmental person the examples under sec_1_141-3 provide additional guidance to determine whether non-governmental persons receive a special economic benefit from bond- financed property that results in private_business_use example for instance illustrates a scenario where bonds are issued to finance a specialized pollution_control_facility the example concludes that the specialized pollution_control_facility is functionally related to the primary facility a factory because it is built to meet the specific needs of the factory and is integrally related to the factory ie the processing and disposal of pollution produced by the factory when these facts are coupled with the fact that the pollution_control_facility is on land adjacent to the factory and it is reasonably expected that the factory will be the only user of the pollution_control_facility the example concludes that the owner of the factory a nongovernmental person derives a special economic benefit from the pollution_control_facility that results in private_business_use similarly example ii of sec_1_141-3 illustrates a situation where a bond-financed runway at a city-owned airport used by private air carriers may result in private_business_use because of the special economic benefit that private air carriers receive from the runway as in example the bond-financed property the runway is built specifically to meet the needs of the private business users the air carriers and is integrally related to the primary facility the airport consequently there is a functional relationship between the runway and the airport that when combined with other factors may result in private_business_use in contrast to the examples provided in the regulations the facility is not functionally related to property used in the agencies’ trades_or_businesses the facility will not be constructed to meet specific needs of the agencies and is not integrally related to any property used in the agencies’ trade_or_business rather the facility is being constructed to meet the organization’s need for additional office space further the facility will not be constructed in such a manner that would limit the organization’s ability to use the facility for activities unrelated to the agencies the facility is not specifically needed for the organization’s performance under the contracts the activities under the contracts that are expected to be conducted in the facility may be performed in any of the organization’s facilities thus based on the facts and circumstances there is no functional relationship of the facility to property used in the agencies’ trades_or_businesses the location of the facility also does not support a finding of private_business_use as noted the facility will be constructed on the campus to meet the organization’s need for additional office space the facility will not be proximate to other_property used by agency although the proposed location for the facility may be near other_property used by agency the decision as to where to construct the facility is not based on the needs of agency moreover no facts have been presented suggesting that it is necessary for the facility to be located near agency in order for the organization to perform activities under the agency contract this can be contrasted with the examples under sec_1_141-3 that describe situations where there is a physical need for locating the bond-financed facility eg the pollution_control_facility or the runway near the nongovernmental person’s property therefore the proximity of the facility to other_property used by agency is not relevant under the facts and circumstances the number of nongovernmental persons benefitting from the facility also does not support a finding of private_business_use although a significant amount of the facility is expected to be used to perform activities under the contracts the organization is not limited to using the facility for activities related to the agencies unlike the bond-financed property described in the examples in sec_1_141-3 the design of the facility will not limit it to a specific use and thus will not limit the potential types of nongovernmental persons that may benefit from the facility moreover the terms of the contracts with the agencies do not limit the number of nongovernmental persons that may benefit from the facility because the contracts do not require any activities to be conducted at the facility thus the fact that a substantial amount of the organization’s activity at the facility is with respect to its contracts with the agencies is not relevant under the facts and circumstances finally the cost of the facility will not be depreciable by any nongovernmental person for purposes of sec_1_141-3 the facility will be owned by the organization and only the organization will be eligible to depreciate the cost of the facility considering all the facts and circumstances the agencies do not receive a special economic benefit from the facility that results in private_business_use issue two the determination of whether a federal guarantee exists is based on the underlying economic_substance of the transaction taking into account all facts and circumstances an underlying arrangement may result in the federal government indirectly guaranteeing debt service on an obligation based on the facts and circumstances the payments to the organization under the contracts will not cause the bonds to be federally guaranteed within the meaning of sec_149 although the revenues from the facility will consist primarily of amounts received from the agencies the mere fact that federal funds may be available to pay debt service on the bonds does not result in an indirect federal guarantee rather the question is whether the substance of the transaction ie the contractual relationships between the organization and the agencies results in a transfer of risk to the federal government to pay debt service on the bonds in the instant case there has been no transfer of risk to the federal government to pay debt service on the bonds there is no guaranteed stream of revenues from the agencies that is available to pay debt service on the bonds unlike a guarantee the agencies have no obligation to make payments of debt service upon a default on the bonds rather any payments from the agencies are subject_to the organization’s fulfillment of its obligations under the contracts moreover payments under the contracts are subject_to the agencies’ receipt of funds pursuant to annual appropriations thus there is no transfer of risk to the federal government to pay debt service on the bonds in the event of a default and the bonds will not be federally guaranteed within the meaning of sec_149 conclusions based on the information submitted and representations made we conclude that the organization’s contracts with the agencies will not result in private_business_use of the facility payments to the organization from the agencies under the contracts will not cause the bonds to be federally guaranteed within the meaning of sec_149 of the internal_revenue_code 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 this office has not verified any of the material submitted in support of the request for rulings except as specifically ruled above no opinion is expressed concerning this transaction under any other provision of the code or regulations thereunder including sec_103 and sec_141 through specifically no opinion is expressed concerning whether interest on the bonds is excludable from gross_income under sec_103 in addition no opinion is expressed concerning whether the activities discussed in this ruling constitute an unrelated_trade_or_business within the meaning sec_513 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 sincerely assistant chief_counsel exempt_organizations employment_tax government entities by bruce m serchuk senior technician reviewer tax exempt bond branch