internal_revenue_service number release date index number ----------------------------------- ------------------------------ ---------------------------------------- -------------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact -------------------- id no ------------- telephone number --------------------- refer reply to cc psi plr-135511-09 date january legend company -------------------------------------------------- --------------------------------------------------- state date1 year1 ------------- ---------------------- ------- agreement ---------------------------------------------------------------------- plan1 plan2 x y z ------------------------------------- ------------------------------------------ ------------------------------ ------------------------------------------------ ------------------------------------------------ dear ------------------ we received a letter dated date and subsequent correspondence written on behalf of company requesting a ruling under sec_1361 of the internal_revenue_code this letter responds to that request plr-135511-09 facts company was organized in year1 after several restructurings company incorporated in state company filed form_2553 election by a small_business_corporation effective date1 company has issued and outstanding shares of stock x y and z comprised of voting and non-voting common_stock company represents that all of the stock confers identical rights to distributions and liquidation proceeds under an agreement among company and its shareholders the agreement shares of x and y stock are transferable to third parties subject_to certain purchase rights of company and certain non-selling shareholders if a shareholder wants to transfer x or y stock to a person other than a permitted transferee as defined in the agreement the remaining shareholders of x and y stock and company are entitled to purchase or redeem the shares at a defined purchase_price under rights of first refusal in accordance with a prescribed set of priority rules and limitations company has the right to mandate the automatic redemption of company stock in the event a shareholder ceases to qualify as a valid s_corporation shareholder company adopted a stock_option plan plan1 with the intention that the plan not qualify as an incentive_stock_option plan under sec_422 plan1 provides that key employees and independent directors of the company may be given stock_options to purchase z stock these options vest over the prescribed term and upon vesting the employee may exercise the stock_option at a price equal to the book_value as determined under plan1 of the underlying shares of z stock as of the date of the grant of the option in addition the stock_options and the shares of z stock issued upon the exercise are nontransferable pursuant to the provisions of plan1 company may be required to redeem the z stock on specified dates for a redemption price equal to the book_value on certain valuation dates as determined under plan1 for redemption purposes under plan1 the book_value per share for z stock may not exceed the book_value per share of x stock company later adopted a restricted_stock_plan plan2 plan2 is a restricted_stock_plan in which certain key employees and independent directors are granted restricted z stock awards the awards of restricted z stock vest over a term of years and the shares are nontransferable pursuant to the provisions of plan2 company may be required to redeem the z stock on specified dates for a redemption price equal to the book_value on certain valuation dates as determined under plan2 for redemption purposes under plan2 the book_value per share for z stock may not exceed the book_value per share of x stock plr-135511-09 company represents that the agreement plan1 and plan2 were not created as a plan to circumvent the one class of stock requirement for s_corporations company further represents that for redemption purposes book_value is determined using generally_accepted_accounting_principles gaap law and analysis sec_1361 provides that the term s_corporation means with respect to any taxable_year a small_business_corporation for which an election under sec_1362 is in effect for the year sec_1361 provides that the term small_business_corporation means a domestic_corporation that among other things does not have more than one class of stock accordingly s_corporations may not have more than one class of stock sec_1_1361-1 of the income_tax regulations provides that for purposes of subchapter_s stock that is issued in_connection_with_the_performance_of_services within the meaning of sec_1_83-3 and that is substantially nonvested within the meaning of sec_1_83-3 is not treated as outstanding_stock of the corporation and the holder of that stock is not treated as a shareholder solely by reason of holding the stock unless the holder makes an election with respect to the stock under sec_83 sec_1_1361-1 provides that except as provided in sec_1_1361-1 relating to instruments obligations or arrangements treated as a second class of stock a corporation is treated as having only one class of stock if all outstanding shares of stock of the corporation confer identical rights to distribution and liquidation proceeds differences in voting rights among shares of stock of a corporation are disregarded in determining whether a corporation has more than one class of stock thus if all shares of stock of an s_corporation have identical rights to distribution and liquidation proceeds the corporation may have voting and nonvoting common_stock a class of stock that may vote only on certain issues irrevocable proxy agreements or groups of shares that differ with respect to rights to elect members of the board_of directors sec_1_1361-1 provides that the determination of whether all outstanding shares of stock confer identical rights to distribution and liquidation proceeds is made based on the corporate charter articles of incorporation bylaws applicable state law and binding agreements relating to distribution and liquidation proceeds collectively the governing provisions a commercial contractual agreement such as a lease employment agreement or loan agreement is not a binding agreement relating to distribution and liquidation proceeds and thus is not a governing provision unless a principal purpose of the agreement is to circumvent the one class of stock requirement of sec_1361 and sec_1_1361-1 plr-135511-09 sec_1_1361-1 provides that buy-sell agreements among shareholders agreements restricting the transferability of stock and redemption agreements are disregarded in determining whether a corporation's outstanding shares of stock confer identical distribution and liquidation rights unless a principal purpose of the agreement is to circumvent the one class of stock requirement of sec_1361 and sec_1_1361-1 and the agreement establishes a purchase_price that at the time the agreement is entered into is significantly in excess of or below the fair_market_value of the stock agreements that provide for the purchase or redemption of stock at book_value or at a price between fair_market_value and book_value are not considered to establish a price that is significantly in excess of or below the fair_market_value of the stock and thus are disregarded in determining whether the outstanding shares of stock confer identical rights sec_1_1361-1 provides that bona_fide agreements to redeem or purchase stock at the time of death divorce disability or termination of employment are disregarded in determining whether a corporation's shares of stock confer identical rights sec_1_1361-1 provides that a determination of book_value will be respected if the book_value is determined in accordance with generally_accepted_accounting_principles including permitted optional adjustments sec_1_1361-1 provides that except as otherwise provided in the paragraph a call option warrant or similar instrument collectively call option issued by a corporation is treated as a second class of stock of the corporation if taking into account all the facts and circumstances the call option is substantially certain to be exercised by the holder or a potential transferee and has a strike_price substantially below the fair_market_value of the underlying stock on the date that the call option is issued transferred by a person who is an eligible shareholder under sec_1_1361-1 to a person who is not an eligible shareholder under sec_1_1361-1 or materially modified sec_1_1361-1 provides that a call option that is issued to an individual who is either an employee or an independent_contractor in_connection_with_the_performance_of_services for the corporation or a related corporation and that is not excessive by reference to the services performed is not treated as a second class of stock for purposes of sec_1_1361-1 if the call option is nontransferable within the meaning of sec_1_83-3 and the call option does not have a readily_ascertainable_fair_market_value as defined in sec_1_83-7 at the time the option is issued conclusion plr-135511-09 based solely on the facts submitted and the representations made we conclude that the agreement plan1 and plan2 do not cause company to have more than one class of stock for purposes of sec_1361 except as specifically ruled upon above no opinion is expressed concerning the federal_income_tax consequences of the above-described facts under any other provision of the code specifically no opinion is expressed or implied concerning whether company's s_corporation_election was a valid election under sec_1362 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 a power_of_attorney on file with this office a copy of this letter is being sent to company's representative sincerely s tara p volungis senior technician reviewer branch office of the associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes


internal_revenue_service number release date index number ------------------------------- ------------------------------ ----------------------------------------------------------- -------------------------------- re ------------------------------------------- - - department of the treasury washington dc person to contact ------------------------- id no ------------- telephone number --------------------- refer reply to cc intl br3 - plr-137113-03 date date ---------------------- ------------------------- --------------------------- --------------------------- ----------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------- legend corp a corp b date date dear ----------------- this is in response to a letter dated ------------------ in which you as the authorized representative of corp a requested a private_letter_ruling on behalf of corp a that corp b and its pre-acquisition subsidiaries be permitted to change to the tax_book_value_method of asset valuation for purposes of apportioning interest_expense for the portion of corp a’s tax_year that begins on date and for subsequent tax years the ruling contained in this letter is based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the ruling_request it is subject_to verification on examination corp a is a domestic_corporation that is the common parent of an affiliated_group_of_corporations that file a consolidated federal_income_tax return on a calendar_year basis corp a’s stock is widely held and publicly traded corp a uses the tax_book_value_method of asset valuation as described in temp treas reg '1 861-9t g for purposes of apportioning interest_expense on date corp a completed the acquisition of all outstanding shares of stock of corp b prior to this date corp b was plr-137113-03 the common parent of an affiliated_group_of_corporations the corp b group that filed consolidated federal_income_tax returns on a calendar_year basis prior to its acquisition the corp b group had used the fair_market_value_method of asset valuation as described in temp treas reg '1 861-9t h for purposes of apportioning interest_expense as a result of the acquisition the corp b group will be included in corp a’s consolidated federal_income_tax return for the portion of corp a’s taxable_year that begins on date and for subsequent years sec_864 of the internal_revenue_code provides that all allocations and apportionments of interest_expense shall be made on the basis of assets rather than gross_income temp treas reg '1 861-9t sets forth the rules specific to the apportionment of interest_expense temp treas reg '1 861-9t g ii provides that a taxpayer may elect to determine the value of its assets on the basis of either the tax book_value or the fair_market_value of its assets temp treas reg '1 861-8t c provides that once a taxpayer uses the fair_market_value_method the taxpayer and all related_persons must continue to use such method unless expressly authorized by the commissioner to change methods temp treas reg '1 861-9t g iii provides that if the taxpayer elects the fair_market_value_method of asset valuation the taxpayer must establish the fair_market_value of its assets to the satisfaction of the commissioner otherwise the commissioner may determine the appropriate values or require the taxpayer to use the tax_book_value_method of apportionment temp treas reg '1 861-9t h sets forth the rules for determining the fair_market_value of the taxpayer’s assets under the fair_market_value_method corp a requests pursuant to temp treas reg 861-8t c and 9t g ii that the corp b group be permitted to use the tax_book_value_method of asset valuation for the portion of corp a’s tax_year that begins on date and for subsequent tax years corp a’s ruling_request states that it desires to use the tax_book_value_method because that method decreases complexity and avoids potential disagreements with the service with respect to the fair_market_value of assets avoids the cost of having fair_market_value studies performed and provides greater certainty of tax results for both the taxpayer and the service based solely on the information submitted the representations made and the reasons given for this request the corp b group may change from the fair_market_value_method of asset valuation for purposes of apportioning interest_expense to the tax book_value sincerely plr-137113-03 method pursuant to temp treas reg 861-8t c and 861-9t g ii for the portion of corp a’s tax_year that begins on date and for subsequent tax years except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent a copy of this letter must be attached to any income_tax return to which it is relevant in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to the taxpayer cc ------------------------------- ----------------- --------------------------------------------------------------------------------- -------------------------------------- -------------------------------------- ----------------------------------- ------------------------------------ ------------------------------------------------------ --------------------------------------------- ---------------------------- ----------------------------------------- --------------------------------- --------------------------------------- ----------------------------- anne o’connell devereaux senior technical reviewer branch office of the associate chief_counsel international plr-137113-03 ----------------------------- ---------------------------------------- ----------------------------- ------------------------------------------------- --------------------------------------------------------------------------------- -


internal_revenue_service number release date index number ------------------------------ -------------------- --------------------- -------------------------------------- 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 psi b03 plr-113528-06 date date ----------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------- -------------------------- ----------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------- -------------------------- ----------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------- --------------------------- ----------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------- --------------------------- ------ ---- ---- x a b c a b c plr-113528-06 date1 ---------------------- date2 --------------------------- state -------- dear --------------- we received a letter dated date and subsequent correspondence submitted on behalf of x by x’s authorized representative requesting rulings relating to x’s status as an s_corporation under sec_1361 and sec_1362 of the internal_revenue_code this letter responds to your request facts x elected to be treated as an s_corporation for federal tax purposes effective date1 a b and c are x’s only shareholders the shareholders own the following interests in x a owns a b owns b and c owns c x made disproportionate distributions to a b and c during the course of operations x represents that each share in x has identical rights to liquidation proceeds and distributions no provision exists in the governing documents regulations or by-laws that vary these rights x also represents that no other binding agreements exist that vary these rights in addition x represents that a corrective distribution was completed during the taxable_year ended date2 x further represents that this corrective distribution resulted in distributions proportionate to a b and c’s respective interests in x since its inception as an s_corporation finally x represents that it has intended to be an s_corporation since its election effective date1 a b and c each represent that they have not received a distribution that was not a nontaxable return_of_capital to the extent of x’s accumulated adjustment account or in excess of their stock basis a b and c each further represent that no distributions have been made that were dividends of accumulated_earnings_and_profits of x prior c_corporation earnings_and_profits or capital_gains finally a b and c each consent to make such adjustments consistent with the treatment of x as an s_corporation as may be required by the secretary law sec_1361 provides that the term s_corporation means with respect to any taxable_year a small_business_corporation for which an election under sec_1362 is in effect for such year plr-113528-06 sec_1361 provides that the term small_business_corporation means a domestic_corporation which is not an ineligible_corporation and which does not a have more than shareholders b have as a shareholder a person other than an estate a_trust described in sec_1361 or an organization described in sec_1361 who is not an individual c have a nonresident_alien as a shareholder and d have more than class of stock sec_1_1361-1 of the income_tax regulations provides that a corporation that has more than one class of stock does not qualify as a small_business_corporation except as provided in sec_1_1361-1 relating to instruments obligations or arrangements treated as a second class of stock a corporation is treated as having only one class of stock if all outstanding shares of stock of the corporation confer identical rights to distribution and liquidation proceeds differences in voting rights among shares of stock of a corporation are disregarded in determining whether a corporation has more than one class of stock thus if all shares of stock of an s_corporation have identical rights to distribution and liquidation proceeds the corporation may have voting and nonvoting common_stock a class of stock that may vote only on certain issues irrevocable proxy agreements or groups of shares that differ with respect to rights to elect members of the board_of directors sec_1_1361-1 provides that the determination of whether all outstanding shares of stock confer identical rights to distribution and liquidation proceeds is made based on the corporate charter articles of incorporation bylaws applicable state law and binding agreements relating to distribution and liquidation proceeds collectively the governing provisions a commercial contractual agreement such as a lease employment agreement or loan agreement is not a binding agreement relating to distribution and liquidation proceeds and thus is not a governing provision unless a principal purpose of the agreement is to circumvent the one class of stock requirement of sec_1361 and sec_1_1361-1 although a corporation is not treated as having more than one class of stock so long as the governing provisions provide for identical distribution and liquidation rights any distributions including actual constructive or deemed distributions that differ in timing or amount are to be given appropriate tax effect in accordance with the facts and circumstances sec_1_1361-1 provides that except as provided in sec_1_1361-1 and relating to restricted_stock deferred_compensation plans and straight_debt in determining whether all outstanding shares of stock confer identical rights to distribution and liquidation proceeds all outstanding shares of stock of a corporation are taken into account sec_1362 provides in part that a small_business_corporation may elect to be an s_corporation plr-113528-06 sec_1362 provides that an election under sec_1362 shall be terminated whenever at any time on or after the 1st day of the 1st taxable_year for which the corporation is an s_corporation such corporation ceases to be a small_business_corporation conclusions based solely on the facts submitted and representations made we conclude that the disproportionate distributions x made to a b and c did not create a second class of stock for purposes of sec_1361 thus we conclude that x’s s_corporation_election did not terminate under sec_1362 and that x will continue to be treated as an s_corporation beginning on date1 and thereafter provided x’s s_corporation_election was valid and was not otherwise terminated under sec_1362 this ruling is contingent on x making corrective distributions to a b and c so that each shareholder has received distributions proportionate to their interests in x from date1 and thereafter failure to make such corrective distributions will render this ruling void except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination sincerely s christine ellison branch chief branch office of the associate chief_counsel passthroughs special industries plr-113528-06 enclosures a copy of this letter a copy for sec_6110 purposes


internal_revenue_service number release date index number ------------------------- --------------------------- ----------------------------------- ----------------------------------------- ------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ----------------------- id no -------------- telephone number ---------------------- refer reply to cc ita b04 plr-129095-12 date date legend trust trust settlor a b dear ----------------- ------------------------- ein ----------------- ---------------------------- ein ----------------- ---------------------- -------------------------------- ssn ------------------ ---------------------------- ssn ------------------ this responds to trust 1’s and trust 2’s request dated date for rulings about whether certain proposed trust modifications result in gain_or_loss under sec_61 and sec_1001 of the internal_revenue_code you are the trustee of trust and trust facts settlor formed trust and trust in and each trust is irrevocable and provides for current discretionary distributions to sec_501 charitable organizations the discretion of the trustee is total both as to choice of charitable_beneficiary and as to amount of distribution plr-129095-12 article vi-a of each trust provides that the trustee has sole and absolute discretion to effect distributions of trust corpus and or income to any one or more of the beneficiaries the trustee may utilize any or all of the trust income or corpus and no precept of equality need apply in addition each trust contains the same spendthrift provision article viii-d of each trust provides that no beneficiary has any ascertainable proportionate actuarial or otherwise fixed or definable right to or interest in all or any portion of the trust fund each trust provides that on the death of settlor a and b settlor’s children will become additional discretionary beneficiaries of trust and trust trustee has petitioned the district_court of state to modify the trusts to include a and b as additional current discretionary beneficiaries other than the beneficiaries each trust will contain the same provisions for the distribution of income and principal sec_61 provides that gross_income includes gain derived from dealings in property sec_1001 provides that the gain from the sale_or_other_disposition of property is the excess of the amount_realized over the adjusted_basis provided in sec_1011 for determining gain and the loss is the excess of the adjusted_basis provided in sec_1011 for determining loss over the amount_realized under sec_1001 the entire amount of gain_or_loss must be recognized except as otherwise provided sec_1_1001-1 of the income_tax regulations provides that except as otherwise provided in subtitle a of the code the gain_or_loss realized from the exchange of property for cash or for other_property differing materially either in_kind or in extent is treated as income or loss sustained the addition of a and b as current discretionary beneficiaries increases the powers of the trustee to make discretionary distributions by enlarging the class of discretionary beneficiaries but discretion is still solely in the hands of the independent_trustee and no beneficiary can compel a distribution under the circumstances no discretionary beneficiary can be said to hold more than an expectancy in trust property which is the equivalent of their status prior to the proposed trust modification based on the information submitted and representations made we conclude that the modification of trust and trust will not result in the realization of gain_or_loss under sec_61 and sec_1001 to trust trust a or b except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter plr-129095-12 this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office copies of this letter are being sent to your authorized representatives a copy of this letter 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 return that provides the date and control number of the 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 while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination sincerely michael j montemurro branch chief income_tax accounting enclosure cc


t c memo united_states tax_court edward r stolz ii petitioner v commissioner of internal revenue respondent docket no filed date following disallowance by r of amounts deducted as business_expenses p entered into a stipulation agreeing to an additional tax of dollar_figure for the taxable_year p however challenged r’s determination of an addition_to_tax under sec_6651 i r c for failure to timely file and an accuracy-related_penalty under sec_6662 i r c on account of negligence and a substantial_understatement_of_income_tax p contended that any untimeliness and inaccuracies were excused by his reliance on a certified_public_accountant to prepare and file his return held on the facts reliance upon a professional tax adviser does not constitute reasonable_cause within the meaning of sec_665l1 a i r c for purposes of relieving p of liability for the delinquency addition_to_tax held further p failed to establish that correct information was provided to his tax preparer as is necessary for reliance upon an agent to be deemed reasonable_cause excusing p from liability for the sec_6662 i r c accuracy-related_penalty edward r stolz ii pro_se daniel j parent for respondent memorandum findings_of_fact and opinion nims judge respondent determined the following deficiencies additions to tax and accuracy-related_penalties with respect to petitioner’s federal income taxes for the taxable years and additions to tax penalty taxable_income tax sec sec sec year deficiency a a dollar_figure dollar_figure dollar_figure big_number dollar_figure big_number big_number after concessions the issues remaining for decision are whether petitioner is liable for the sec_6651 a addition_to_tax for failure to timely file an income_tax return for the taxable_year and whether petitioner is liable for the sec_6662 a accuracy-related_penalty on account of negligence or substantial_understatement_of_income_tax for the taxable_year unless otherwise indicated all section references are to sections of the internal_revenue_code in effect for the year in issue and all rule references are to the tax_court rules_of_practice and procedure - - findings_of_fact some of the facts have been stipulated and are so found the stipulations filed by the parties with accompanying exhibits are incorporated herein by this reference edward r stolz ii resided in sacramento california at the time of filing his petition in this case since the 1970s he has owned a radio station in sacramento and has operated the business as a sole_proprietorship the disallowance of deductions taken with respect to this business after an audit of petitioner’s and income_tax returns underlies the matter at hand prior to trial the parties entered into a stipulation of settled issues and signed a joint status report resolving the majority of the points in controversy as follows petitioner is not liable for any additional tax or penalties for tax_year petitioner is liable for additional tax of dollar_figure for tax_year the parties have been unable to resolve whether petitioner is liable for the delinquency penalty under sec_6651 and the accuracy-related_penalty under sec_6662 for tax_year the parties request that this case be set for trial to resolve the two remaining issues after recalculation based on these concessions the amounts remaining at issue are dollar_figure for the delinguency addition_to_tax and dollar_figure for the accuracy-related_penalty both with respect to timeliness of return petitioner’s income_tax return for was prepared by william d mcconnaughy a certified_public_accountant petitioner’s return was due taking into account extensions which had previously been granted on date mr mcconnaughy signed petitioner’s return as preparer on date on date petitioner went to mr mcconnaughy’s office signed his return and wrote a check for the dollar_figure shown on the return as the tax owing the return was then mailed to the internal_revenue_service in an envelope bearing two cent stamps and the return address of mcconnaughy accountancy corp however this envelope was returned to the mcconnaughy firm marked return to sender and postage due petitioner’s tax_return was subsequently received by the internal_revenue_service in a second mcconnaughy accountancy corp envelope bearing postage of cents affixed by a postal meter this envelope was postmarked in sacramento california on date the postal rate in effect for wa sec_32 cents for the first ounce and cents for each additional ounce the necessary postage for to ounces was therefore cents and for to ounces wa sec_78 cents petitioner’s return consisted of pages accuracy of return for purposes of preparing the return petitioner provided mr mcconnaughy with a hard copy of the records maintained by an in-house accounting software system used for his radio business petitioner also produced documentation such as receipts invoices bank statements and payroll ledgers when requested to do so by mr mcconnaughy petitioner did not examine or discuss the contents of the return when it was presented to him for signing on october petitioner’s return reported dollar_figure in business_expenses during the course of the subsequent audit of this return petitioner substantiated dollar_figure in business_expenses the parties agreed that petitioner was not entitled to deductions for the resulting dollar_figure difference and was liable for an additional dollar_figure in tax beyond the dollar_figure reported on the return the return lists no single item which accounts for this disparity discrepancies between amounts as reported on the return and as substantiated exist with respect to a number of the enumerated expense categories car and truck expenses total dollar_figure on the return and dollar_figure on the reconstruction the return lists dollar_figure for taxes and licenses the reconstruction includes a category for taxes and licenses of dollar_figure anda category for payroll_taxes of dollar_figure depreciation of - - dollar_figure was deducted on the return and depreciation of dollar_figure was allowed as a deduction based on the audit wages of dollar_figure are shown on the return payroll of dollar_figure is listed on the reconstruction rent of dollar_figure was reported rent of dollar_figure was included in the adjusted expense amounts only advertising expenses of dollar_figure correspond precisely in the two computations opinion we must decide whether petitioner is liable for either the delinquency addition_to_tax or the accuracy-related_penalty in connection with the filing and content of his federal_income_tax return or for both petitioner contends that the stipulations entered by the parties constitute a full settlement of all issues in exchange for the payment of an additional tax of dollar_figure for to determine supplemental sums under sec_6651 and sec_6662 is therefore in petitioner’s view a violation of the settlement agreement petitioner also asserts that his reliance ona certified_public_accountant to prepare and file his return establishes reasonable_cause excusing him from responsibility for any untimeliness or inaccuracies conversely respondent argues that petitioner’s alleged reliance on his tax preparer fails to satisfy the standard of reasonable_cause necessary to relieve petitioner from either the - delinquency addition or the accuracy-related_penalty hence respondent contends that petitioner is liable for these sums because his return was filed subsequent to the due_date and contained understatements which were both substantial and negligent we conclude that the stipulations entered by the parties do not preclude respondent from determining the additions or penalties at issue here we further agree with respondent that the untimeliness of and understatements in petitioner’s return are not excused by reliance on a tax preparer and justify imposing the delinquency addition and the accuracy-related_penalty general considerations as a threshold matter we first address petitioner’s contention that to determine any additional sums or penalties violates the stipulations entered by the parties this position however is not supported by the record the document in which petitioner agreed to the additional tax of dollar_figure for the joint status report signed by both parties on date expressly states that the parties have been unable to resolve whether petitioner is liable for the delinguency penalty under sec_6651 and the accuracy-related_penalty under sec_6662 for tax_year the status report then concludes the parties request that this case be set for trial to resolve --- - the two remaining issues this document therefore does not purport to settle all issues furthermore no subsequent documents disposing of the addition_to_tax and penalty questions have been filed respondent’s determinations thus cannot be construed as in violation of a fully stipulated settlement sec_665l1 a addition_to_tax sec_6651 provides in relevant part as follows sec_6651 failure_to_file tax_return or to pay tax a addition to the tax --in case of failure- to file any return required under authority of subchapter_a of chapter on the date prescribed therefor determined with regard to any extension of time for filing unless it is shown that such failure is due to reasonable_cause and not due to willful neglect there shall be added to the amount_required_to_be_shown_as_tax on such return percent of the amount of such tax if the failure is for not more than month with an additional percent for each additional month or fraction thereof during which such failure continues not exceeding percent in the aggregate the supreme court has characterized this section as imposing a civil penalty to ensure timely filing of tax returns and as placing on the taxpayer the heavy burden of proving both that the failure did not result from ‘willful neglect ’ and that the failure was ‘due to reasonable cause’ in order to escape the penalty 469_us_241 willful neglect denotes a conscious intentional failure or reckless indifference id reasonable_cause --- - correlates to ordinary business care and prudence id pincite n sec_301_6651-1 proced admin regs timely filing is further defined to mean timely mailing with a postmark on or before the prescribed filing_date and with sufficient postage prepaid see sec_7502 sec_301_7502-1 proced admin regs in addition to setting forth the general standard for applicability of sec_6651 the supreme court in united_states v boyle supra has also spoken definitively upon whether reliance on a professional tax preparer will satisfy this standard the court observed that whether the elements that constitute ‘reasonable cause’ are present in a given situation is a question of fact but what elements must be present to constitute ‘reasonable cause’ is a question of law id pincite n the taxpayer in boyle contended that failure to timely file because of a clerical oversight on the part of the attorney preparing the tax_return should be excused on the grounds of reasonable_cause see id faced with this situation the court stated the time has come for a rule with as ‘bright’ a line as can be drawn consistent with the statute and implementing regulations id pincite the supreme court then held that while it is reasonable for taxpayers to rely on substantive advice given by an accountant or attorney failure to make a timely filing of a tax_return is not excused by the taxpayer’s -- - reliance on an agent and such reliance is not ‘reasonable cause’ for a late filing under sec_6651 id pincite see also cooper v commissioner tcmemo_1997_494 radabaugh v commissioner tcmemo_1992_572 given this standard the failure on the part of petitioner here to ensure that his return was mailed with sufficient postage prepaid and postmarked by the date due_date renders him subject_to the sec_6651 addition_to_tax even if the return was stamped and mailed by the accountant as petitioner claims such reliance upon an agent for timely filing would not constitute reasonable_cause within the meaning of the statute furthermore nothing in the record supports petitioner’s related contention that postal service error is responsible for the untimeliness although petitioner asserts that cents was in fact sufficient postage he did not offer into evidence the actual weight of the original return and envelope the envelope in which the return was successfully sent bear sec_78 cents postage affixed by a postal meter petitioner has not shown that the return when weighed by the meter was not heavy enough to require cents sec_6662 accuracy-related_penalty subsection a of sec_6662 imposes an accuracy-related_penalty in the amount of percent of any underpayment that is attributable to causes specified in subsection b subsection b of sec_6662 then provides that among the causes justifying imposition of the penalty are negligence or disregard of rules or regulations and any substantial_understatement_of_income_tax negligence is defined in sec_6662 as any failure to make a reasonable attempt to comply with the provisions of this title and disregard as any careless reckless or intentional disregard case law similarly states that negligence is a lack of due care or the failure to do what a reasonable and ordinarily prudent person would do under the circumstances 89_tc_849 quoting marcello v commissioner 380_f2d_499 5th cir affg on this issue 43_tc_168 and t c memo affd 904_f2d_1011 5th cir affd 501_us_868 a substantial_understatement is declared by sec_6662 to exist where the amount of the understatement exceeds the greater of percent of the tax required to be shown on the return for the taxable_year or dollar_figure an exception to the sec_6662 penalty is set forth in sec_6664 and reads no penalty shall be imposed under this part with respect to any portion of an underpayment if it is shown that there was a reasonable_cause for such portion and that the taxpayer acted in good_faith with respect to such portion the taxpayer bears the burden of establishing that this reasonable_cause exception is applicable as respondent’s determination of an accuracy-related_penalty is presumed correct see rule a regulations interpreting sec_6664 state the determination of whether a taxpayer acted with reasonable_cause and in good_faith is made on a case- by-case basis taking into account all pertinent facts and circumstances generally the most important factor is the extent of the taxpayer’s effort to assess the taxpayer’s proper tax_liability sec_1_6664-4 b income_tax regs furthermore reliance upon the advice of an expert tax preparer may but does not necessarily demonstrate reasonable_cause and good_faith in the context of the sec_6662 a penalty see id see also freytag v commissioner supra pincite such reliance is not an absolute defense but it is a factor to be considered see freytag v commissioner supra pincite in order for this factor to be given dispositive weight the taxpayer claiming reliance on a professional such as an accountant must show at minimum that the accountant was supplied with correct information and the incorrect return was a result of the accountant’s error see eg 70_tc_158 59_tc_473 garcia v commissioner tcmemo_1998_ affd without published opinion 190_f3d_538 5th cir in addition this court has been unwilling to permit taxpayers to shift responsibility for inaccuracies to an agent in circumstances where even a cursory review of the returns would reveal substantial underreporting see eg 88_tc_654 63_tc_149 applying these principles to the case at hand we find that petitioner’s return contained a substantial_understatement and we need not reach the question of whether petitioner was also negligent petitioner reported a tax owing of dollar_figure and has stipulated to an additional tax of dollar_figure for the understatement therefore exceeds both percent of the total_tax percent of dollar_figure equals dollar_figure and dollar_figure although petitioner claims that the stipulation represents only a settlement and does not establish or represent his agreement to an understatement we are unable to see how petitioner can stipulate that he is liable for tax beyond that stated on his return without also conceding that tax was understated on the return turning then to whether reasonable_cause exists for this inaccuracy we conclude that petitioner has failed to prove facts necessary to render reliance on his accountant exculpatory petitioner testified that he provided hard copies of records maintained by his in-house accounting software and upon request copies of supporting documents he did not however offer either the hard copies or any underlying documents into evidence he also did not indicate which if any supporting documents were provided to mr mcconnaughy in connection with the return consequently petitioner has not established that correct information was supplied to his accountant or that the incorrect return resulted from mr mcconnaughy’s error in addition the fact that a majority of the substantiated expense amounts differ from those claimed on the return would seem to make the possibility that petitioner supplied insufficient or ambiguous data to the accountant more likely furthermore petitioner’s failure to examine or discuss with mr mcconnaughy the contents of the return weighs against finding his reliance reasonable he appears to have made only minimal efforts to self-assess his proper tax_liability we therefore conclude that petitioner has not established reasonable_cause for the inaccuracies in his return and is liable for the sec_6662 penalty respondent’s determinations are therefore sustained as to both the sec_6651 addition_to_tax and the sec_6662 accuracy-related_penalty to reflect the foregoing decision will be entered under rule


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 - plr-143656-03 date date ---------------------------------------- ------------------------------- ---------------------------- --------------------------- ------------------------- legend x ------------------------------------------ y ------------------------------------------ a ------------------------------------------ b ------------------------------------------ c ----------------------------------------- -- d ------------------------------------------ e ------------------------------------------ state d1 d2 d3 ---------------------- ---------------------- ------ ---------------------------- ----------------------------- ------------------------------- --------------------- ----------------- d4 d5 dear ----------------- this responds to a letter dated date and additional correspondence submitted on behalf of x requesting a ruling under ' f of the internal_revenue_code the represented facts are as follows x was incorporated under state law on d1 x filed an election to be treated as an s_corporation under ' for its taxable_year beginning d2 from d1 until d3 a was the sole shareholder of x on d3 a transferred his stock to b and y none of the parties involved in the transfer of stock were aware that y a c_corporation was an impermissible s_corporation shareholder on or around d4 x discovered that y was an impermissible shareholder on d6 y agreed to retroactively transfer its x stock to a c d and e as of d3 the date y had initially acquired the x stock x and its shareholders then requested inadvertent invalid election relief under ' f of the code x represents that there was no intent to knowingly make an invalid s election and that the events that resulted in the invalid election were not motivated by tax_avoidance or retroactive tax planning x and its shareholders agree to make any adjustments required by the secretary consistent with the treatment of x as an s_corporation sec_1361 provides that the term as corporation means with respect to any taxable_year a small_business_corporation for which an election under ' a is in effect for such year sec_1361 defines a small_business_corporation as a domestic_corporation which is not an ineligible_corporation and which does not a have more than shareholders b have as a shareholder a person other than an estate a_trust described in ' c or an organization described in ' c who is not an individual c have a nonresident_alien as a shareholder and d have more than one class of stock sec_1362 provides in relevant part that if an election under ' a by any corporation was not effective for the taxable_year for which made determined without regard to ' b by reason of a failure to meet the requirements of ' b or to obtain shareholder consents the secretary determines that the circumstances resulting in such termination were inadvertent no later than a reasonable period of time after discovery of the circumstances resulting in plr-143656-03 ineffectiveness steps were taken so that the corporation is once more a small_business_corporation and the corporation and each person who was a shareholder of the corporation at any time during the period specified pursuant to ' f agrees to make any adjustments consistent with the treatment of the corporation as an s_corporation as may be required by the secretary with respect to the period then notwithstanding the circumstances resulting in the ineffectiveness the corporation shall be treated as continuing to be an s_corporation during the period specified by the secretary based solely on the information submitted and the representations made we conclude that x s invalid subchapter_s_election as described above was inadvertent within the meaning of ' f therefore x will be treated as an s_corporation from d1 and thereafter provided that x s s election is not otherwise terminated under ' d a c d and e not y will not be treated as shareholders of x for the period from d3 and thereafter accordingly x s other shareholders in determining their federal tax_liability for that period must include their pro_rata share of the separately and nonseparately computed items of x as provided in ' make any adjustments to stock basis as provided in ' and take into account any distributions made by x to shareholders as provided ' this ruling shall be null and void if the requirements of this paragraph are not met except as specifically set forth above we express no opinion concerning the federal tax consequences of the above-described facts under any other provision of the code specifically no opinion is expressed on whether x is otherwise eligible to be treated as an s_corporation 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 a power_of_attorney on file with this office a copy of this letter is being forwarded to x enclosures copy of this letter copy for sec_6110 purposes sincerely carolyn hinchman gray senior counsel branch associate chief_counsel passthroughs and special industries


t c summary opinion united_states tax_court harold and doreen silk petitioners v commissioner of internal revenue respondent docket no 16009-02s filed date shawn a silk for petitioners frank n panza for respondent armen special_trial_judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect at the time that the petition was filed the decision to be entered is not reviewable by any other court and this opinion should not be cited as authority unless otherwise indicated all subsequent section references are to the internal_revenue_code in effect for the taxable years in issue all rule references are to the tax_court rules_of_practice and procedure respondent determined deficiencies in petitioners’ federal income taxes additions to tax and accuracy-related_penalties as follows year deficiency sec_6651 sec_6662 dollar_figure big_number dollar_figure dollar_figure --- dollar_figure dollar_figure dollar_figure after concessions by the parties the issue for decision by the court is whether petitioners properly elected under sec_172 to waive the carryback of a net_operating_loss nol from background some of the facts have been stipulated and they are so found at the time that the petition was filed petitioners resided in san francisco california during because of a downturn in the economy petitioners incurred significant financial losses with respect to their real_estate activities properties used by petitioners in their real_estate activities were subject_to possible foreclosure petitioners were also being sued by their financial_institution using tax software harold silk hereinafter referred to as petitioner prepared what at best may be described as a 10-page draft income_tax return for the taxable_year the so- called draft return petitioner allegedly mailed the so-called draft return together with a letter dated date to respondent petitioners no longer have a copy of the so-called draft return however at trial petitioners introduced a copy of the date letter that allegedly accompanied the so-called draft return petitioner’s date letter stated in part as follows our tax_return for the tax_year is being filed using turbotax software and the return is printed using the program the enclosed return is submitted although there appears to be a flaw in the program that prevents us from representing operating losses for and working these losses into the calculations for correctly determining our tax obligations but we know we have sustained significant operating losses during and are now attempting to accurately ascertain their value and declare our intention to carry forward those losses into future tax years when our data collection is complete an amended_return will be filed to correctly adjust our return s respondent did not receive either the so-called draft return or the date letter on or about date petitioners filed an application_for an extension of time to file their return the application was consistent with petitioners’ actions taken in prior taxable years respondent received petitioners’ application_for extension at trial petitioners introduced a receipt for certified mail the postal receipt indicating postage paid of cents and bearing a u s postal service stamp dated date on date petitioners jointly filed a form_1040 u s individual_income_tax_return for the taxable_year the return the return did not purport to be an amended tax_return on an attached form_8582 passive_activity_loss limitations petitioners reported a total passive_activity_loss of dollar_figure on line of the return petitioners claimed a rental real_estate loss in the amount of dollar_figure petitioners did not submit with the return an election to forgo the carryback period with respect to an nol and nothing on the return itself suggested that petitioners intended to make such an election petitioners jointly filed a form_1040 for the taxable_year the return on date on line of the return petitioners claimed a loss in the amount of dollar_figure a statement attached to the return indicated that such loss was an nol from a prior year in the notice_of_deficiency respondent disallowed the dollar_figure nol_carryover claimed by petitioners on their return respondent determined that petitioners had not elected under sec_172 to waive the carryback of the nol petitioners contend that the date letter allegedly mailed to respondent with the so-called draft return was a valid election to waive the carryback period discussion in general the determinations of the commissioner in a notice_of_deficiency are presumed correct and the burden is on the taxpayer to show that the determinations are incorrect rule a 290_us_111 sec_172 permits taxpayers to carry nol deductions from one taxable_year to another in general taxpayers who sustain nols must first carry such losses back years and if unabsorbed in the earlier years then the losses may be carried forward for as long a sec_15 years sec_172 and however taxpayers may elect to waive or relinquish the 3-year carryback period and only carry forward their nols sec_172 to make this election the statute expressly requires taxpayers to file an election relinquishing the carryback period by the return_due_date including any extensions of time for the petitioners concede that if no valid sec_172 election was made then their gross_income for the taxable years prior to would absorb the entire amount of the nol sec_7491 does not serve to place the burden_of_proof on respondent because petitioners failed to introduce credible_evidence of an election to waive the carryback of the nol see 116_tc_438 for purposes of this case involving a net_operating_loss and a taxable_year we consider sec_172 prior to its amendment by the taxpayer_relief_act_of_1997 publaw_105_34 and 111_stat_950 taxable_year in which the nol was incurred id see sec_301_9100-12t temporary proced admin regs fed reg date once made the election is irrevocable id the statute directs the secretary to prescribe the manner in which taxpayers shall make the election id the secretary promulgated the following regulation concerning a taxpayer’s election to waive nol carrybacks the election shall be made by a statement attached to the return or amended_return for the taxable_year the statement required when making an election pursuant to this section shall indicate the section under which the election is being made and shall set forth information to identify the election the period for which it applies and the taxpayer’s basis or entitlement for making the election sec_301 12t d temporary proced admin regs fed reg date redesignating sec temporary income_tax regs fed reg date the court analyzed these statutory and regulatory requirements under sec_172 in 83_tc_831 affd 783_f2d_1201 5th cir in young the court held that to be in substantial compliance with the election requirements as an absolute minimum the taxpayer must exhibit in some manner within the time prescribed by the statute his unequivocal agreement to accept both the benefits and burdens of the tax treatment afforded by that section id pincite petitioners contend that the postal receipt is evidence that the so-called draft return and the date letter were mailed to respondent and thus the election requirements under sec_172 were satisfied we are not persuaded that the postal receipt demonstrates that the so-called draft return and the date letter were mailed to and received by respondent first the postal receipt bears a date earlier than the date of the date letter second the postal receipt indicates postage paid of cents the postal rate in effect for wa sec_32 cents for the first ounce and cents for each additional ounce thus the postal receipt does not reflect the proper amount of postage necessary to mail the 10-page so-called draft return and the date letter third petitioner admitted that such letter may have been mailed to respondent with the so-called draft return with the extension application or independently of either document finally respondent did not receive either the so-called draft return or the date letter therefore we cannot accept petitioners’ claim that the postal receipt demonstrates that the so-called draft return and the date letter were ever mailed to or received by respondent on date petitioners filed the return however petitioners did not attach any statement to the we note that the postal receipt does support the fact that petitioners mailed to respondent their extension application on date even if we were to assume arguendo that the letter was attached to the extension application this would still be insufficient to satisfy the statutory and regulatory requirements under sec_172 return that indicated their intention to make an election under sec_172 to waive the nol_carryback period likewise nothing on the return itself suggested that petitioners intended to make such an election accordingly we hold that petitioners did not satisfy the requirements under sec_172 for making a valid election to waive the nol_carryback period we therefore sustain respondent’s disallowance of the nol_carryover claimed by petitioners on their return reviewed and adopted as the report of the small tax_division to reflect the foregoing decision will be entered under rule


third party communication none date of communication not applicable office_of_chief_counsel internal_revenue_service memorandum number release date cc corp b06 grglyer postu-120924-15 uilc date date to marvis a knospe associate area_counsel boston large business international from lawrence m axelrod special counsel corporate grid r glyer attorney branch corporate subject -------------------------------------------- this chief_counsel_advice responds to your request for assistance dated august in which you ask us to supplement the rationale provided in a field_attorney advice faa dated may postf-107867-14 this office reviewed the faa prior to its issuance this advice may not be used or cited as precedent legend fp taxpayer target date date date ---------------------------------------------------- ------------------------------------------------- ------------------------------------- -------------------------- ---------------------------- ------------------------ postu-120924-15 year year issue ---------------------------------- ------- whether we are able to supplement the rationale provided in the faa that taxpayer is not eligible to make an extended carryback election the extended carryback election as the parent of the taxpayer group for its year consolidated taxable_year pursuant to sec_172 because taxpayer is the successor to an entity target that received tarp proceeds which is not eligible to make that election conclusion we have supplemented the rationale provided in the faa tarp status is a sec_381 attribute of the target that carries over and becomes an attribute of taxpayer in the merger therefore it is as if the taxpayer received the tarp proceeds consequently taxpayer is prohibited from making the extended carryback election tarp status is not listed as an attribute in sec_381 however the legislative_history of sec_381 provides that analogous tax items not listed in sec_381 can nevertheless be treated as if they were listed therein because tarp status is analogous to some of the attributes listed in sec_381 it can be treated as one the legislative_history also states that taxpayers cannot avoid unfavorable attributes by undergoing a merger thus target should not be able to remove its tarp taint by merging into another corporation this action would frustrate congressional intent to disqualify a tarp recipient from making the extended carryback election finally in addition to the tax_attributes listed in sec_381 there are numerous statutory provisions the application of which require an acquiring_corporation to take into account the activities of a predecessor_corporation for example former sec_921 relating to qualification as a western_hemisphere_trade_corporation facts fp owns all of the stock of taxpayer taxpayer is a ------- holding_company that is the common parent of a consolidated_group the taxpayer group taxpayer’s relevant fiscal taxable_year is year which begins on date a date in ------- and ends on date a date in ------- on date a date in ------- that is within year fp acquired all of the stock of target in a taxable transaction a reverse subsidiary cash_merger target was a ------- holding_company that was the common parent of a consolidated_group the target group immediately after fp acquired target fp caused target to merge with and into taxpayer pursuant to sec_368 with taxpayer surviving the merger as postu-120924-15 a result the subsidiaries of target became subsidiaries of taxpayer see revrul_69_163 1969_1_cb_217 prior to the merger target was a calendar_year taxpayer in ------- the federal government acquired shares of preferred_stock and warrants in target in exchange for cash pursuant to the emergency economic stabilization act of tarp proceeds and target is sometimes hereinafter referred to as a tarp recipient as part of its acquisition of target fp acquired those shares and warrants from the federal government in exchange for cash in year taxpayer on behalf of the taxpayer group made the extended carryback election with respect to the consolidated_net_operating_loss cnol incurred in its year consolidated_return_year the taxpayer group’s cnol and received a tentative refund law and analysis law section of the worker homeownership and business assistance act of whbaa pub_l_no 123_stat_2984 amended sec_172 and sec_810 to allow taxpayers to elect to carry back an applicable net_operating_loss nol for a period of or years in lieu of the 2-year period provided by sec_172 sec_172 provides that the term applicable net_operating_loss means the taxpayer's nol for a taxable_year ending after date and beginning before date applicable_taxable_year sec_172 provides that the extended carryback election for an applicable nol may be made only with respect to taxable_year sec_172 provides that the extended carryback election shall be made in such manner as may be prescribed by the secretary and shall be made by the due_date including extensions of time for filing the return for the taxpayer’s last taxable_year beginning in the extended carryback election once made is irrevocable section f of the whbaa provides that the extended carryback election is not available to certain taxpayers including tarp recipients the extended carryback election does not apply to any taxpayer if a the federal government acquired before the date of the enactment of this act an equity_interest in the taxpayer pursuant to the emergency economic stabilization act of eesa pub_l_no or b the federal government acquired before such date of postu-120924-15 enactment any warrant or other right to acquire any equity_interest with respect to the taxpayer pursuant to such act a tarp recipient the federal_national_mortgage_association and the federal_home_loan_mortgage_corporation and any taxpayer which at any time in or was or is a member of the same affiliated_group as defined in sec_1504 without regard to subsection b thereof as a taxpayer described in paragraphs or footnote in the explanation of the staff of the joint_committee on taxation blue_book contains an example of a taxpayer with an nol in that in joins an affiliated_group with a member in which the federal government acquired an equity_interest pursuant to the emergency economic stabilization act of the example reads a taxpayer with an nol in that in joins an affiliated_group with a member in which the federal government has acquired an equity_interest pursuant to the emergency economic stabilization act of may not utilize the extended carryback rules under this provision with regard to the nol the taxpayer is required to amend prior filings to reflect the permitted carryback period jcx-44-09 see also cong rec s comment of senate_finance_committee chairman baucus that the technical explanation in the blue_book expresses the senate finance committee’s understanding and intent behind the legislation in the treasury_department and the irs promulgated temp sec_1_1502-21t through b v which contains rules relating to the election of the extended carryback period under sec_172 for consolidated groups temp sec_1_1502-21t provides that a consolidated_group may make an extended carryback election for a cnol arising in a taxable_year ending after date and beginning before date applicable cnol however no such election may be made for a taxpayer described in section f of the whbaa the extended carryback election applies to the entire applicable cnol except as otherwise provided in temp sec_1_1502-21t or in this paragraph b v temp sec_1_1502-21t provides that if a member of a consolidated_group became a member of another consolidated_group and the acquiring group makes an extended carryback election for the cnol for an eligible year applicable cnol the group may make an irrevocable election to relinquish the part of the applicable cnol attributable to that member for the portion of the carryback period during which the corporation was a member of another group election to waive the postu-120924-15 entire carryback period this election could thus operate to relinquish carryback for up to five taxable years temporary sec_1_1502-21t provides for a partial waiver of the pre-acquisition extended carryback period specifically if one or more members of a consolidated_group become members of another consolidated_group then with respect to the applicable cnol for which the acquiring group has made the extended carryback election the acquiring group may make an irrevocable election to relinquish for the portion of the applicable cnol attributable to the member the extended carryback period as defined in temp sec_1_1502-21t for taxable years during which the corporation was a member of another group election to waive the extended carryback period temporary sec_1_1502-21t contains an example in which t filed a separate_return for and t was acquired by x at the end of and for and t was a member of x’s consolidated_group at the end of x sold its t stock to the p consolidated_group and t was included on the p consolidated_return for for the p group sustained a cnol a portion of which was attributable to t under sec_1_1502-21 p elected a five-year carryback for the group’s cnol for and also elected pursuant to temp sec_1 21t b ii c to waive the portion of the cnol attributable to t for and when t was a member of the x group although t’s portion of the p group’s cnol for was not carried back to the consolidated_return years of the x group for and t’s portion was carried back to t’s and separate_return years temporary sec_1_1502-21t provides that if a member electing member of a consolidated_group makes the extended carryback election with regard to a loss from a separate_return_year ending before the electing member’s inclusion in a consolidated_group that extended carryback election will not disqualify the acquiring group from making an otherwise available extended carryback election with regard to an applicable cnol incurred in a consolidated_return_year that includes the electing member revproc_2009_52 2009_49_irb_744 provides the time and manner by which a taxpayer may make the extended carryback election section dollar_figure of the revenue_procedure restates the rule contained in section f of the whbaa that the extended carryback election is unavailable to a tarp recipient sec_4 of revproc_2009_52 provides that taxpayer includes an affiliated_group filing a consolidated_return and that applicable nol includes a cnol furthermore the common parent of a consolidated_group makes the extended carryback election for the group sec_4 and of revproc_2009_52 permit the extended carryback election to be made for a consolidated_group by attaching a statement to the original or amended consolidated_return for the taxable_year of the applicable cnol by attaching a statement to the taxpayer's amended consolidated_return applying the applicable cnol to the carryback_year or by attaching a statement to a claim for a tentative carryback postu-120924-15 adjustment on form_1139 sec_4 a i requires the taxpayer to represent on the extended carryback election statement that the taxpayer is not a tarp recipient and neither in nor an affiliate of a tarp recipient sec_4 b and b of revproc_2009_52 require the extended carryback election regardless of the manner in which made to be filed no later than the due_date including extensions for filing the return for the taxpayer's last taxable_year beginning in analysis the faa concluded that as a result of the merger taxpayer was a successor to target for purposes of applying the attribute carryover rules of sec_381 that is taxpayer succeeded to and was required to take into account all tax_attributes of target the faa asserted that one of the attributes to which taxpayer succeeded as a result of the merger was target’s status as a tarp recipient the following paragraph from the faa succinctly summarizes the argument tax_attributes carry over to the successor_corporation in situations where the reorganization is in the form of a statutory merger 306_us_522 in metropolitan edison the court noted that in a statutory merger the corporate personality of the transferor is drowned in that of the transferee id pincite see also 122_tc_324 the crucial finding in all of the rulings discussed above is that in any corporate amalgamation involving the attribute carryover rules of sec_381 the surviving or recipient corporation is viewed as if it had always conducted the business of the formerly separate corporation s whose assets are acquired by the surviving corporation here --------------- is the successor_corporation in the statutory merger with ----------- and succeeds to the tax_attributes of ---- ---------- summary of taxpayer’s position the taxpayer takes issue with the conclusion that tarp status is an attribute that carries over to a transferee corporation in a transaction to which sec_381 applies and advances a number of arguments in support of its position first the taxpayer argues that the attributes listed in sec_381 and analogous ones based on court cases and published or private rulings collectively the sec_381 attributes focus on specific tax_return items and do not support a drastic change to the acquiring corporation's own tax characteristics as a result of a merger second the taxpayer asserts that sec_381 attributes are found in the internal_revenue_code and that tarp status is not part of the code third the taxpayer maintains that a plain reading of the whbaa as interpreted by the blue_book does not support a successor postu-120924-15 rule taxpayer argues that eesa was intended to stabilize --------- and provide liquidity to the financial system taxpayer argues it was encouraged to acquire such a ------- target and yet is now being penalized for doing just that fourth the taxpayer notes that the service did not apply a successor rule in the following circumstance in an acquiring_corporation acquired the assets of a target_corporation in a sec_381 transaction the target_corporation had made the extended carryback election for and was not a tarp recipient and the acquiring_corporation was allowed to make the extended carryback election for even though a predecessor_corporation the target_corporation had made the extended carryback election in see notice_2010_58 2010_37_irb_326 q a in light of this prior application of the extended carryback election rules the taxpayer argues that the service should not be able to apply a successor rule to tarp status because any successor rules in the whbaa should be applied consistently the taxpayer asserts that imposing a successor rule in the case of a successor to a tarp recipient would be contrary to the broad legislative intent behind the enactment of eesa and the whbaa sec_381 notwithstanding the taxpayer assertions we continue to maintain that tarp status is a sec_381 attribute of a target_corporation that carries over to the successor_corporation in the merger sec_381 provides that in the case of certain reorganizations including a reorganization to which sec_368 applies the acquiring_corporation here taxpayer shall succeed to and take into account as of the close of the day of the merger the items of the transferor_corporation here target described in sec_381 subject_to the operating rules of sec_381 and the limitations imposed by sec_381 the taxpayer argues that because tarp status is not one of the items listed in that subsection that taint should not carry over to the acquiring_corporation however the legislative_history for sec_381 provides that notice_2010_58 2010_37_irb_326 q-20 if a corporate taxpayer makes the whbaa election and merges into another corporation in a later taxable_year is the acquiring_corporation that has not previously made a whbaa election allowed to make the whbaa election for a taxable_year of the acquiring_corporation ending after date and beginning before date a-20 yes postu-120924-15 the section is not intended to affect the carryover treatment of an item or tax attribute not specified in the section or the carryover treatment of items or tax_attributes in corporate transactions not described in subsection a no inference is to be drawn from the enactment of this section whether any item or tax attribute may be utilized by a successor or a predecessor_corporation under existing law s rep no 83d cong 2d sess thus for example a foreign_tax_credit carryover of a transferor_corporation is not an item listed in sec_381 however prior to being included in the code in sec_383 in now in sec_383 it had been considered a tax attribute to which an acquiring_corporation succeeds following a transaction to which sec_381 applies see revrul_68_350 1968_2_cb_159 modified by revrul_72_452 1972_2_cb_438 obsoleted by revrul_80_144 1980_1_cb_80 moreover congress made it clear that a corporation could not eliminate an unwanted tax attribute by merging into another corporation as stated also in the legislative_history the new rules enable the successor_corporation to step into the tax shoes of its predecessor_corporation without necessarily conforming to artificial legal requirements which now exist under court made law tax results of liquidations or reorganizations are thereby made to depend less upon the form of the transaction than upon the economic integration of two or more separate businesses into a unified business_enterprise at the same time the new provision makes it difficult to escape the tax consequences of the law by means of a legal artifice such as liquidation and reincorporation or merger into another corporation s rep no 83d cong 2d sess pincite taxpayer’s assertion that the attributes to which an acquiring_corporation succeeds are only the specific tax_return items listed in sec_381 and do not support a drastic change to the acquiring corporation's own tax characteristics as a result of a merger is not supported by the code for example for purposes of determining whether a corporation x qualified as a western_hemisphere_trade_corporation whtc under former sec_921 its gross_income for its current taxable_year and its two previous taxable years had to satisfy certain tests assume that an unrelated target_corporation y merged into x on date in a sec_381 transaction in determining whether x qualified as a whtc for calendar_year x would have had to take into account its gross_income for the entire taxable_year of which would include the gross_income attributable to the operations of y x’s gross_income for its two previous taxable years and y’s gross_income for its two previous taxable years postu-120924-15 in revrul_72_356 the irs concluded that the gross_income of a predecessor_corporation prior to a merger must be taken into account by the surviving corporation for purposes of determining whether the surviving corporation met the requirements for whtc status the revenue_ruling contained the following analysis in 4_tc_708 involving a merger the court held that the tax_liability of a predecessor_corporation paid_by the surviving corporation was a deduction from its net_income in determining its title 1a net_income under sec_406 of the revenue act of personal_holding_company_income under current law similarly in the 6_tc_1209 the court determined that interest on income_tax liabilities of predecessor corporations paid_by the successor_corporation was deductible by the successor_corporation in determining its income_tax likewise in commissioner v metropolitan edison co 306_us_522 the supreme court of the united_states found that the surviving corporations were entitled to deduct unamortized bond_discount and expenses_incurred in connection with bonds issued by the predecessor corporations and redeemed by the surviving corporations in these cases the surviving corporations took the respective items of the predecessor_corporation into account in determining the survivor’s tax_liability these cases argue for the proposition that attributes of the predecessor_corporation become elements of the corporate personality of the surviving entity and must be taken into account in determining the tax status of the surviving corporation for years subsequent to the merger the proposition is basically that a surviving corporation carries with it all those characteristics which the merged corporation had prior to the merger and that the history of the predecessor_corporation carries forward to the survivor corporation see also 233_f2d_493 cert_denied 353_us_983 in the hypothetical described above y’s gross_income history could affect for better or worse the ability of x to qualify for whtc for that is to use the taxpayer’s terminology that history could fundamentally alter x’s tax characteristics nevertheless y’s gross_income history for the previous two years must be taken into account similarly a corporation’s status as a tarp recipient cannot be purged by the corporation merging into an acquiring_corporation the acquiring corporation’s status as a successor to a tarp recipient may not directly affect its tax_liability for the year but it affects its ability to make an extended carryback election taxpayer’s contention that tax_attributes to which an acquiring_corporation succeeds in a transaction to which sec_381 applies are limited to those items found in sec_381 is contrary to the legislative_history case law and historic practice the absence of any specific language in eesa and whbaa regarding successors in transactions to 1972_2_cb_452 postu-120924-15 which sec_381 applies is far from unusual if taxpayer’s contention that specific language is necessary for sec_381 to apply to a tax attribute is correct it would negate the application of sec_381 to numerous tax_attributes such as the ones discussed above for which successor treatment is currently taken for granted as mentioned section f of the whbaa prohibits the making of the extended carryback election by any taxpayer that was a tarp recipient if the taxpayer is correct that tarp-recipient status is not a tax attribute to which a transferee succeeds in a sec_381 transaction then the making of the extended carryback election that is expressly prohibited by the statute could be easily avoided for example assume a foreign_corporation owns two calendar-year u s_corporations x and y x was a tarp recipient but y was not y paid a substantial amount of federal income taxes in years prior to but has sold off most of its assets and operates only a small_business at the beginning of it is anticipated that x will sustain substantial operating losses in the coming year for the purpose of avoiding the prohibition on extended carrybacks by tarp recipients x merges into y at the beginning of in a transaction qualifying under sec_381 as expected x’s former operations conducted by y during generate substantial losses and y makes an extended carryback election for its nol under the theory that x’s status as a tarp recipient does not taint y’s ability to make the extended carryback election allowing an extended carryback election under such circumstances would be clearly inconsistent with the express statutory rule prohibiting the making of the extended carryback election by tarp recipients finally taxpayer’s contention -- that the service’s allowance of a successor_corporation to make an extended carryback election when the predecessor_corporation had also made the extended carryback election in a prior year negates the application of tarp recipient status to the successor of a tarp recipient -- ignores the strong legislative prohibition on allowing the making of the extended carryback election by tarp recipients although the legislation generally limits the extended carryback election for an nol from only one taxable_year the regulations effectively allow those elections for more than one taxable_year under certain circumstances by contrast an extended carryback election by a tarp is per se verboten as mentioned above section f of the whbaa provides that the extended carryback election is not available to any taxpayer which at any time in or was or is a member of the same affiliated_group as defined in sec_1504 without regard to subsection b thereof as a tarp recipient in other words although the specifically temp sec_1_1502-21t example illustrates a case in which the x group which included subsidiary t made an extended carryback election for its cnol a portion of which was attributable to t at the end of p acquired all of the stock of t from x for the p group sustained a cnol a portion of which was attributable to t p made the extended carryback election for its cnol and did not make an election to relinquish any portion of the cnol attributable to t the example concludes that the extended carryback election by the x group for which includes a portion of the cnol attributable to t does not disqualify the p group from making the extended carryback election for its cnol postu-120924-15 statute and regulations tolerate under certain circumstances effective extended carryback elections of nols for more than one taxable_year they do not allow such an election under any circumstances by a tarp recipient or even by a corporation that was affiliated with a tarp recipient at any time in or therefore taxpayer’s argument -- that the allowance of an extended carryback election by a successor of a predecessor that made the extended carryback election in a prior year which predecessor by definition could not have been a tarp recipient supports its contention that tarp status is not a sec_381 attribute -- is without merit taxpayer contends that under ----------------------- law it was required to merge target into taxpayer immediately after target was acquired by fp but for this requirement taxpayer argues that target could have been contributed to taxpayer and become a subsidiary in taxpayer’s consolidated_group taxpayer argues that had target become a subsidiary it would have been able to carry back the full cnol of the group and should not be penalized for its forced compliance with ------------ law taxpayer is correct that sec_1_1502-21t generally provides that the extended carryback election applies to the entire applicable cnol however that regulation also provides that an extended carryback election may not be made by a tarp recipient the question is how this exception applies if a tarp recipient were a member of a consolidated_group otherwise eligible to make the extended carryback election contrary to taxpayer’s assertion for several reasons had target become a subsidiary in the taxpayer consolidated_group the portion of any cnol attributable to target would not have been eligible for an extended carryback election although a consolidated_group has a single consolidated_return_year each member has its own taxable_year see sec_1_1502-76 when the stock of an includible_corporation is acquired by a member of a consolidated_group the corporation’s taxable_year terminates at the end of the day of the acquisition and a new taxable_year begins on the following day as a member of the group sec_1_1502-76 provides that the returns for the years that end and begin with a corporation becoming or ceasing to be a member are separate tax years for all federal_income_tax purposes thus had target become a subsidiary of taxpayer’s consolidated_group on date a -- ------------------ it would have had a new taxable_year beginning on the day after date sec_172 provides that the term applicable net_operating_loss means the taxpayer's nol for an applicable_taxable_year consequently any portion of the taxpayer group’s cnol attributable to target for that consolidated_return would not have been an applicable cnol because it would have been incurred in a taxable_year beginning after ----------------------- moreover even if the fact that the loss was not incurred in a taxable_year beginning before ---------------------- were alone insufficient to disallow an extended carryback election for the target’s allocable portion of the group’s cnol the target’s prior receipt postu-120924-15 of tarp funds would disqualify the taxpayer from making an extended carryback election with respect to the target’s portion of the group’s cnol otherwise the taxpayer group would be able to carry back five years the portion of that cnol attributable to a tarp recipient contrary to the clear language of section f of the whbaa as interpreted by the blue_book under sec_1_1502-77 and sec_4 of revproc_2009_52 the common parent files the extended carryback election for the applicable cnol although a cnol is generally treated as a single tax attribute of a consolidated_group the supreme court in united dominion industries inc v united_states specifically held that the cnol is not treated as a single attribute when carried to a member’s separate_return_year accordingly the portion of the cnol that would have been attributable to target which was a tarp recipient would be disqualified from the extended carryback election we recognize that under our conclusion the taxpayer ends up with a worse tax result than it would have had if it had undertaken any of the alternative transactions discussed above no merger of target with the target stock owned by either fp or the taxpayer or a merger of target into a subsidiary of the taxpayer we also recognize that the taxpayer did not have a choice about the form of the transaction because as explained earlier for regulatory reasons it could not have undertaken any of those transactions nevertheless congress laid out a clear prohibition against a tarp recipient being able to make the extended carryback election - a prohibition that also applies to losses_incurred by any non-tarp recipients that were affiliated with a tarp recipient in or the taxpayers in those circumstances also did not have a choice in those cases the affiliated corporations were disqualified from making the extended carryback election and could not remove any pre-existing tarp taint the taxpayer having received the operating_assets of a tarp recipient in a transaction to which sec_381 applied should not be in a better position than those taxpayers case development hazards and other consideration sec_4 532_us_822 id pincite postu-120924-15 this writing may contain privileged information any unauthorized disclosure of this writing may undermine our ability to protect the privileged information if disclosure is determined to be necessary please contact this office for our views please call if you have any further questions robert h wellen associate chief_counsel corporate by __________________ lawrence m axelrod special counsel associate chief_counsel corporate


internal_revenue_service number release date index numbers department of the treasury washington dc ------------------------ ------------------------ ------------------------------ ------------------------------ person to contact ----------------------- id no ------------------- --------------------------------------------------- telephone number ---------------------- refer reply to cc psi b03 - plr-127692-17 date date x ------------------------ ------------------------------------------------------------ legend a -------------------------------------------------------------- ----------------- b -------------------------------------------------------------- --------------- state d1 d2 dear ------------- ------- --------------------------- ---------------------- this letter responds to a letter dated date submitted on behalf of x requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations to file an election under sec_301_7701-3 to be classified as a partnership for federal tax purposes facts plr-127692-17 the information submitted discloses that x is a state limited_liability_company that was formed on d1 x represents that its owners a and b intended x to be classified as a partnership for federal tax purposes effective d2 taxpayer further represents that it has filed its federal tax returns consistent with being classified as a partnership however x mistakenly filed a form_8832 entity classification election to be classified as an association_taxable_as_a_corporation law and analysis sec_301_7701-3 provides in part that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes as provided in sec_301_7701-3 an eligible_entity with at least two members can elect to be classified as either an association and thus a corporation under sec_301_7701-2 or a partnership and an eligible_entity with a single owner can elect to be classified as an association or to be disregarded as an entity separate from its owner sec_301_7701-3 provides that except as provided in sec_301 b unless the entity elects otherwise a domestic eligible_entity is i a partnership if it has two or more members ii disregarded as an entity separate from its owner if it has a single owner sec_301_7701-3 provides in part that except as provided in sec_301_7701-3 and v an eligible_entity may elect to be classified other than as provided under sec_301_7701-3 or to change its classification by filing form_8832 with the service_center designated on form_8832 sec_301_7701-3 provides in part that an election made under sec_301_7701-3 will be effective on the date specified by the entity on form_8832 or on the date filed if no such date is specified on the election form the effective date specified on form_8832 can not be more than days prior to the date on which the election is filed and can not be more than months after the date on which the election is filed under sec_301_9100-1 the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code code except subtitles e g h and i sec_301_9100-1 provides that the term regulatory election includes an election whose due_date is prescribed by a regulation published in the federal_register sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make an plr-127692-17 election sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides extensions of time for regulatory elections that do not meet the requirements of sec_301_9100-2 sec_301_9100-3 provides that requests for relief under sec_301_9100-3 will be granted when the taxpayer provides the evidence including affidavits described in sec_301_9100-3 to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and the grant of relief will not prejudice the interests of the government conclusion based solely on the facts and representations submitted we conclude that x has satisfied the requirements of sec_301_9100-1 and sec_301_9100-3 consequently x is granted an extension of time of one hundred twenty days from the date of this letter to elect under sec_301_7701-3 to be classified as a partnership effective d2 x must file form_8832 within the extension period with the appropriate service_center with a copy of this letter attached this ruling is contingent on x and its owners filing within days of the date of this letter all required federal_income_tax returns including amended returns for all years consistent with the requested relief a copy of this letter should be attached to any such returns we express no opinion concerning the assessment of any interest additions to tax additional_amounts or penalties for failure_to_file a timely income_tax or information_return with respect to any taxable_year that may be affected by this ruling for example we express no opinion as to whether a taxpayer is entitled to relief from any penalty on the basis that the taxpayer had reasonable_cause for failure_to_file timely any income_tax or information returns except for the specific ruling above we express or imply no opinion concerning the federal tax consequences of the facts of this case under any other provision of the code in addition sec_301_9100-1 provides that the granting of an extension of time for making an election is not a determination that the taxpayer is otherwise eligible to make the election this ruling is directed only to the taxpayer requesting it according to sec_6110 of the code this ruling may not be used or cited as precedent under a power_of_attorney on file with this office we are sending a copy of this letter to x’s authorized representatives plr-127692-17 the ruling contained in this letter is based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the ruling_request it is subject_to verification on examination sincerely associate chief_counsel passthroughs special industries by _ s ____________________________ richard t probst senior technician reviewer branch office of the associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes