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 plr-127118-11 date date re request for private_letter_ruling under sec_168 re request for private_letter_ruling under sec_168 taxpayer ----------------------------------------------------------------------------------------- contract ------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------- -------------- -------------- ----------------------- ------------------------------------------------------------------ ------------------------------- ------------------------------------------------------------------------- ------------------------------------------------------ ------------------------------------------------- ----------------------------------------------------- ------------------------------------ -------------------------------- --------------------- ----------------- state1 city1 a b c d e f g h i j k number1 ----- number2 ----- number3 ------------------- number4 ------------- number5 ----- number6 ---- number7 --------------- year1 year2 year3 date1 date2 date3 date4 ------- ------- ------- --------------------- ----------------- ----------------------- ----------------------- plr-127118-11 date5 date6 date7 date8 date9 -------------------------- -------------- ----------------------- ----------------------- ------------------------- dear --------------- this letter responds to a letter dated date submitted by taxpayer requesting rulings under sec_168 of the internal_revenue_code facts taxpayer represents that the facts are as follows taxpayer is a limited_liability_company that is number1-percent owned by a a limited_liability_company that is a disregarded_entity for federal_income_tax purposes a disregarded_entity a is number1-percent owned by b through the year1 taxable_year taxpayer was treated as a disregarded_entity taxpayer elected to be treated as a separate corporation effective for the year2 calendar_year for its initial federal_income_tax return taxpayer is adopting a method_of_accounting for purposes of sec_1_461-4 of the income_tax regulations that will treat property as provided to taxpayer when the property is accepted by taxpayer b is a corporation organized and incorporated under the laws of state1 that directly or indirectly owns several regulated and unregulated energy companies taxpayer and d among other entities join in the consolidated federal_income_tax return filed for the affiliated_group headed by b b files its consolidated_return on a calendar_year end basis taxpayer’s and b’s overall_method_of_accounting is the accrual_method d is a public_utility providing electric gas and steam service to customers and is subject_to the regulatory jurisdiction of the e the f and the g d is a wholly-owned subsidiary of b taxpayer was formed to own two number2 megawatts -------------units to be located adjacent to the site of the existing c owned by d in date1 the e issued an order granting taxpayer b and d the right to construct these two units i as agent for taxpayer and h entered into a contract dated date2 i is a disregarded_entity that is number1-percent owned by a taxpayer represents that the contract is a written binding contract under the law of state1 which is the governing law under the contract further taxpayer represents that the contract did not limit damages to an amount that is less than five percent of the contract_price plr-127118-11 under the contract h was to construct on a lump sum fixed priced turnkey basis two nominal number2 megawatts --------------------------------------------------electric generating units hereinafter the two units separately are referred to as unit and unit and the two units together are referred to as the units and certain related equipment and facilities the common facilities hereinafter the units and the common facilities together are referred to as the facility the facility is located in city1 state1 taxpayer has full responsibility and liability for payment under the contract under the contract taxpayer may terminate the contract for its convenience at any time by notice to h indicating the termination_date upon cancellation taxpayer must compensate h for all payment events completed up to the date of termination and that had not previously been paid to h and an amount mutually agreed to for the completed percentage of partially completed payment events costs incurred by h to demobilize the facility site and costs incurred by h in terminating contracts with subcontractors the contract_price was the lump sum turnkey price of initially dollar_figurenumber3 payment under the contract was made by taxpayer according to a payment schedule based on payment events the contract was subject_to a number of change orders on date3 h submitted claims for schedule and cost relief related to the delay of the in-service dates for unit and unit this claim was amended on date4 effective date5 taxpayer and h entered into a settlement agreement and release the settlement agreement that settled all claims regarding unit and unit under the settlement agreement the contract_price for the facility was increased by dollar_figurenumber4 and the guaranteed turnover dates under the contract were extended for number5 days for unit and number6 days for unit none of the amendments to the contract changed the location of the facility or the nominal nameplate_capacity of either unit or unit h commenced construction under the contract in date6 by this time taxpayer had made payments to h of approximately dollar_figurenumber7 under the contract if taxpayer had terminated the contract then it would be required to pay h additional_amounts that would have equaled when added together with the dollar_figurenumber8 paid more than five percent of the contract_price sec_1 of the contract defines the term turnover as meaning a the completion of all work by h and other requirements of article completion sequence that are conditions to the turning-over of a phase and b the transfer of care custody and control and risk of loss of a phase to taxpayer or at taxpayer’s direction to d pursuant to the terms and conditions of this contract sec_15 of the contract provides that title to work passes from h upon the work being identified as ready for shipment at the manufacture fabrication site sec_15 of the contract plr-127118-11 provides that i risk of loss for each phase of the facility shall pass from h at turnover of such phase ii prior to the turnover of any phase h is obligated to replace repair or reconstruct any part of the facility that is lost damaged or destroyed and iii from and after the turnover taxpayer assumes all risk of loss or damage to the phase turned- over there were three phases under the contract--the common facilities unit and unit turnover of each phase occurred upon the completion of all work by h and the transfer of care custody and control and risk of loss of that phase to taxpayer turnover of each of the units occurred separately as did turnover of certain common facilities turnover of a common facility a -----------------------------------that serves the existing units occurred in year3 and ----------------------------------was placed_in_service during year3 turnover of a second common facility a ----------------------------that serves the existing units occurred in year1 and this -----------------------------was placed_in_service during year1 taxpayer represents that these two common facilities do not qualify for any additional first year depreciation under sec_168 turnover of unit occurred on date7 when commercial operation was reached taxpayer represents that unit was originally placed_in_service on date7 and that taxpayer was the original user of unit turnover of unit occurred on date8 when commercial operation of this unit was reached taxpayer represents that unit was originally placed_in_service on date8 and that taxpayer was the original user of unit taxpayer leased its undivided_interest in the facility to d in a lease that is treated as a true lease for federal_income_tax purposes the lease with respect to each unit commenced on the date it was first placed_in_service in addition to the costs incurred by h taxpayer and its affiliates incurred a small amount of other costs for items like permitting project development project design engineering preconstruction construction management and troubleshooting costs taxpayer represents that with respect to unit assuming that no costs were incurred with respect to the contract until turnover the costs that were incurred as of date were percent or less of the final tax basis of unit as of the original placed-in- service date taxpayer represents that the prior sentence is not altered even if one accrues capitalized_interest on costs incurred by taxpayer and payments made to h through date taxpayer represents that with respect to unit assuming that no costs were incurred with respect to the contract until turnover the costs that were incurred as of date were percent or less of the final tax basis of unit as of the original placed-in-service date taxpayer represents that the prior sentence is not altered even if one accrues capitalized_interest on costs incurred by taxpayer and payments made to h through date plr-127118-11 taxpayer represents that with respect to unit assuming that no costs were incurred with respect to the contract until turnover the costs that were incurred as of date excluding any capitalized_interest were percent or less of the final tax basis of unit as of the original placed-in-service date pursuant to a telephone conversation on date9 between taxpayer’s representative j and k of this office j said that he believes that with respect to unit assuming that no costs were incurred with respect to the contract until turnover the costs that were incurred as of date including any capitalized_interest were probably more than percent of the final tax basis of unit as of the original placed-in-service date taxpayer represents that both unit and unit are described in asset class dollar_figure of revproc_87_56 1987_2_cb_674 also taxpayer represents that unit and unit may include a small amount of transmission property that is described in asset class dollar_figure of revproc_87_56 moreover taxpayer represents that the property subject_to this ruling_request with respect to unit and unit are not required to be depreciated under the alternative_depreciation_system of sec_168 rulings requested unit and unit are each self-constructed property as defined in sec_1 k - b iii a the fact that taxpayer and h entered into the contract prior to date does not prevent unit and unit from meeting the acquisition requirements in sec_168 and e i for purposes of determining for each of the units when physical work of a significant nature begins under the safe_harbor under sec_1_168_k_-1 no costs are incurred by taxpayer under the contract until turnover as defined in the contract has occurred as a result no costs attributable to the contract were incurred before a date7 in the case of unit when turnover of unit occurred and b date8 in the case of unit when turnover of unit occurred for purposes of sec_1_168_k_-1 construction of unit began after date for purposes of sec_1_168_k_-1 construction of unit began after date the sec_1245 property at unit qualifies for the 50-percent additional first year depreciation allowance under sec_168 plr-127118-11 the sec_1245 property at unit qualifies for the 50-percent additional first year depreciation allowance under sec_168 if a proper election is made pursuant to sec_3 b of revproc_2011_26 2011_16_irb_664 any components of unit acquired or self-constructed by taxpayer after date qualify for the percent additional first year depreciation allowance under sec_168 law and analysis sec_168 as amended by the economic stimulus act of pub_l_no 122_stat_613 date stimulus act provides a 50-percent additional first year depreciation deduction for the taxable_year in which qualified_property is placed_in_service by a taxpayer sec_168 as amended by the tax relief unemployment insurance reauthorization and job creation act of pub_l_no 124_stat_3296 date truirjca defines the term qualified_property as meaning property i among other things to which sec_168 applies with a recovery_period of years or less ii the original_use of which commences with the taxpayer after date iii that is acquired by the taxpayer after date and before date but only if no written binding contract for the acquisition was in effect before date or that is acquired by the taxpayer pursuant to a written binding contract which was entered into after date and before date and iv that is placed_in_service by the taxpayer before date or in the case of property described in sec_168 or c before date for purposes of sec_168 sec_1_168_k_-1 provides that the recovery_period is determined in accordance with sec_168 regardless of any election made by the taxpayer under sec_168 the recovery_period under sec_168 is determined by the property’s classification under sec_168 for purposes of sec_168 a property’s classification is determined by reference to the property’s class_life or by statute sec_168 provides that property with a class_life of or more years is 20-year_property sec_168 defines the term class_life as meaning the class_life if any that would be applicable with respect to any property as of date under sec_167 determined without regard to sec_167 and as if the taxpayer had made an election under sec_167 as in effect on the day before the date of enactment of the revenue reconciliation act of former sec_167 provided that in the case of a taxpayer who elected the class_life_asset_depreciation_range adr system of depreciation the depreciation allowance was based on the class_life prescribed by the secretary that reasonably reflected the anticipated useful_life of that class of property to the industry or other group plr-127118-11 sec_1_167_a_-11 provides rules for classifying property under former sec_167 property is included in the asset_guideline_class for the activity in which the property is primarily used_property is classified according to primary use even though the activity in which the property is primarily used is insubstantial in relation to all the taxpayer’s activities sec_1_167_a_-11 provides that in the case of a lessor of property unless there is an asset_guideline_class in effect for lessors of such property the asset_guideline_class for such property is determined as if the property were owned by the lessee however in the case of an asset_guideline_class based upon the type of property such as trucks or railroad cars as distinguished from the activity in which used the property is classified without regard to the activity of the lessee revproc_87_56 sets forth the class lives of property that are necessary to compute the depreciation allowance under sec_168 this revenue_procedure establishes two broad categories of depreciable assets asset classes dollar_figure through that consist of specific depreciable assets used in all business activities and asset classes through that consist of depreciable assets used in specific business activities an asset that falls within both an asset group that is asset classes dollar_figure through and an activity group that is asset classes through would be classified in the asset group see 111_tc_105 the asset classes described below are set forth in revproc_87_56 asset cla sec_49 electric utility steam production plant of revproc_87_56 includes assets used in the steam power production of electricity for sale combustion turbines operated in a combined cycle with a conventional steam unit and related land improvements asset class dollar_figure also includes package boilers electric generators and related assets such as electricity and steam distribution systems as used by a waste reduction and resource recovery plant if the steam or electricity is normally for sale to others assets in class dollar_figure have a class_life of years and in accordance with sec_168 are classified as 20-year_property pursuant to sec_168 the recovery_period for 20-year_property is years asset cla sec_49 electric utility transmission and distribution plant of revproc_87_56 includes assets used in the transmission and distribution of electricity for sale and related land improvements asset class dollar_figure excludes initial clearing and grading land improvements are specified in revrul_72_403 1972_2_cb_102 assets in class dollar_figure have a class_life of years and in accordance with sec_168 are classified as 20-year_property pursuant to sec_168 the recovery_period for 20-year_property is years sec_168 as amended by the truirjca provides that in the case of a taxpayer manufacturing constructing or producing property for the taxpayer’s own plr-127118-11 use the requirements of sec_168 shall be treated as met if the taxpayer begins manufacturing constructing or producing the property after date and before date with the exception of the increased amount and the revised dates the rules for determining whether depreciable_property is eligible for the 50-percent additional first year depreciation deduction are the same as the rules in sec_168 in effect before the enactment of the stimulus act accordingly rules similar to the rules in sec_1_168_k_-1 for qualified_property or for 30-percent additional first year depreciation deduction apply see section dollar_figure of revproc_2008_54 2008_2_cb_722 sec_1_168_k_-1 provides the rules relating to sec_168 the acquisition requirement and sec_1_168_k_-1 provides the rules relating to sec_168 self-constructed property for purposes of the 50-percent additional first year depreciation deduction sec_1_168_k_-1 provides that depreciable_property will meet the requirements of sec_1_168_k_-1 if the property is acquired by the taxpayer after date and before date but only if no written binding contract for the acquisition of the property was in effect before date or acquired by the taxpayer pursuant to a written binding contract that was entered into after date and before date sec_1_168_k_-1 defines a binding contract sec_1_168_k_-1 defines a binding contract pursuant to sec_1_168_k_-1 a contract is binding only if it is enforceable under state law against the taxpayer or a predecessor and does not limit damages to a specified amount for example by use of a liquidated_damages provision for this purpose a contractual provision that limits damages to an amount equal to at least percent of the total_contract_price will not be treated as limiting damages to a specified amount in determining whether a contract limits damages the fact that there may be little or no damages because the contract_price does not significantly differ from fair_market_value will not be taken into account for example if a taxpayer entered into an irrevocable written contract to purchase an asset for dollar_figure and the contract contained no provision for liquidated_damages the contract is considered binding notwithstanding the fact that the asset has a fair_market_value of dollar_figure and under local law the seller would only recover the difference in the event the purchaser failed to perform if the contract provided for a full refund of the purchase_price in lieu of any damages allowable by law in the event of breach or cancellation the contract is not considered binding sec_1_168_k_-1 provides in part that a contract will continue to be binding if the parties make insubstantial changes in its terms and conditions or because any term is to be determined by a standard beyond the control of either party plr-127118-11 sec_1_168_k_-1 provides that if a taxpayer manufactures constructs or produces property for use by the taxpayer in its trade_or_business or for its production_of_income the acquisition rules in sec_1_168_k_-1 are treated as met for qualified_property if the taxpayer begins manufacturing constructing or producing the property after date and before date this regulation further provides that property that is manufactured constructed or produced for the taxpayer by another person under a written binding contract as defined in sec_1_168_k_-1 that is entered into prior to the manufacture construction or production of the property for use by the taxpayer in its trade_or_business or for its production_of_income is considered to be manufactured constructed or produced_by_the_taxpayer sec_1_168_k_-1 provides that for purposes of sec_1 k - b iii manufacture construction or production of property begins when physical work of a significant nature begins physical work does not include preliminary activities such as planning or designing securing financing exploring or researching the determination of when physical work of a significant nature begins depends on the facts and circumstances sec_1_168_k_-1 provides that for purposes of sec_1 k - b iii b a taxpayer may choose to determine when physical work of a significant nature begins in accordance with the safe_harbor_rule provided in sec_1_168_k_-1 under this safe_harbor_rule physical work of a significant nature will not be considered to begin before the taxpayer incurs in the case of an accrual basis taxpayer or pays in the case of a cash_basis taxpayer more than percent of the total cost of the property excluding the cost of any land and preliminary activities such as planning or designing securing financing exploring or researching when property is manufactured constructed or produced for the taxpayer by another person this safe_harbor_rule must be satisfied by the taxpayer a taxpayer chooses to apply sec_1_168_k_-1 by filing an income_tax return for the placed-in- service year of the property that determines when physical work of a significant nature begins consistent with sec_1_168_k_-1 sec_1_168_k_-1 provides the rules relating to components of self- constructed property if such component is acquired by the taxpayer the rules in sec_1_168_k_-1 apply to the acquired component if the component is self-constructed the rules in sec_1_168_k_-1 apply to the self- constructed component sec_1_168_k_-1 provides that if a binding contract as defined in sec_1_168_k_-1 to acquire a component does not satisfy the requirements of sec_1_168_k_-1 the component does not qualify for the 50-percent additional first year depreciation deduction a binding contract to acquire one or more components of a larger self-constructed property will not preclude the larger self- plr-127118-11 constructed property from satisfying the acquisition rules in sec_1 k - b iii a accordingly the unadjusted depreciable basis of the larger self- constructed property that is eligible for the 50-percent additional first year depreciation deduction must not include the unadjusted depreciable basis of any component that does not satisfy the requirements of sec_1_168_k_-1 if the manufacture construction or production of the larger self-constructed property begins before date the larger self-constructed property and any acquired components related to the larger self-constructed property do not qualify for the 50-percent additional first year depreciation deduction sec_1_168_k_-1 provides that if the manufacture construction or production of a component does not satisfy the requirements of sec_1 k - b iii a the component does not qualify for the 50-percent additional first year depreciation deduction however if the manufacture construction or production of component does not satisfy the requirements of sec_1_168_k_-1 but the manufacture construction or production of the larger self-constructed property satisfies the requirements of sec_1_168_k_-1 the larger self-constructed property qualifies for the 50-percent additional first year depreciation deduction assuming all other requirements in sec_168 are met accordingly the unadjusted depreciable basis of the larger self-constructed property that is eligible for the percent additional first year depreciation deduction must not include the unadjusted depreciable basis of any component that does not qualify for the 50-percent additional first year depreciation deduction if the manufacture construction or production of the larger self-constructed property began before date the larger self- constructed property and any self-constructed components related to the larger self- constructed property do not qualify for the 50-percent additional first year depreciation deduction sec_168 provides that in the case of qualified_property acquired by the taxpayer under rules similar to the rules of sec_168 and iii after date and before date and which is placed_in_service by the taxpayer before date date in the case of property described in sec_168 or c a 100-percent additional first year depreciation deduction for the taxable_year in which such qualified_property is placed_in_service by the taxpayer is allowable section dollar_figure of revproc_2011_26 provides that depreciable_property is eligible for the 100-percent additional first year depreciation deduction if the property is qualified_property as defined in sec_168 and also meets the additional requirements in section dollar_figure of revproc_2011_26 further it provides that for purposes of determining whether depreciable_property is qualified_property rules similar to the rules in sec_1_168_k_-1 for qualified_property or for 30-percent additional first year depreciation deduction apply plr-127118-11 sec_3 of revproc_2011_26 provides that for purposes of sec_168 qualified_property is eligible for the 100-percent additional first year depreciation deduction if the property meets all of the following requirements in the first taxable_year in which the property is subject_to depreciation by the taxpayer whether or not depreciation_deductions for that property are allowable a the taxpayer acquires the qualified_property after date and before date before date in the case of qualified_property described in sec_168 or c solely for purposes of sec_168 and sec_3 a of revproc_2011_26 a taxpayer acquires the qualified_property when the taxpayer pays or incurs the cost of the property qualified_property that a taxpayer manufactures constructs or produces as defined under sec_1 k - b iii a and modified by sec_3 a of this revenue_procedure solely for purposes of sec_168 for use in its trade_or_business or for its production_of_income is acquired by the taxpayer for purposes of sec_168 and sec_3 a of revproc_2011_26 when the taxpayer begins constructing manufacturing or producing that property as determined under sec_1_168_k_-1 b the taxpayer places the qualified_property in service after date and before date before date in the case of qualified_property described in sec_168 or c c the original_use of the qualified_property commences with the taxpayer after date sec_3 a of revproc_2011_26 provides in relevant part that if a taxpayer manufactures constructs or produces qualified_property for use by the taxpayer in its trade_or_business or for its production_of_income rules similar to the self- constructed property rules in sec_1_168_k_-1 apply for determining whether this property meets the acquisition requirement of sec_3 a of revproc_2011_26 sec_3 b of revproc_2011_26 however provides a limited exception to sec_1_168_k_-1 and for certain components of a larger self- constructed property solely for purposes of sec_168 and sec_3 a of revproc_2011_26 if before date a taxpayer begins the manufacture construction or production of the larger self-constructed property that is qualified_property for use in its trade_or_business or for its production_of_income but this larger self-constructed property meets the requirements of sec_3 b and c of revproc_2011_26 the taxpayer may elect to treat any acquired or self-constructed component of that larger self-constructed property as being eligible for the 100-percent additional first year depreciation deduction if the component is qualified_property and is acquired or self-constructed by the taxpayer after date and before date before date in the case of qualified_property described in plr-127118-11 sec_168 or c the taxpayer may make this election for one or more components that are described in sec_3 b of revproc_2011_26 sec_461 provides in part that a deduction shall be taken for the taxable_year which is the proper taxable_year under the method_of_accounting used in computing taxable_income sec_1_461-1 provides in part that under an accrual_method of accounting a liability as defined in sec_1_446-1 is incurred and generally is taken into account for federal_income_tax purposes in the taxable_year in which all the events have occurred that establish the fact of the liability the amount of the liability can be determined with reasonable accuracy and economic_performance has occurred with respect to the liability the first two requirements are commonly referred to as the all_events_test and the third requirement is called the economic_performance requirement see also sec_1_446-1 sec_461 and sec_1_461-4 provide in part that in determining whether an amount has been incurred with respect to any item during the taxable_year the all_events_test shall not be treated as met any earlier than when economic_performance with respect to such item has occurred sec_461 and ii and sec_1_461-4 provide that if the liability of the taxpayer arises out of the providing of services or property to the taxpayer by another person economic_performance occurs as services or property is provided sec_1_461-4 provides the rules relating to the provision of services or property to the taxpayer for purposes of sec_1_461-4 sec_1_461-4 provides that a taxpayer is permitted to treat property as provided to the taxpayer when the property is delivered or accepted or when title to the property passes the method used by the taxpayer to determine when property is provided is a method_of_accounting that must comply with the rules of sec_1_446-1 thus the method of determining when property is provided must be used consistently from year to year and cannot be changed without the consent of the commissioner of internal revenue sec_1_461-4 provides that in the case of interest economic_performance occurs as the interest cost economically accrues in accordance with the principles of relevant provisions of the code sec_461 provides that in the case of any other liability not specifically mentioned in sec_461 economic_performance occurs at the time determined by the internal_revenue_service in regulations sec_1_461-4 provides a list of specifically enumerated items for which economic_performance is satisfied by payment sec_1_461-4 provides that in plr-127118-11 the case of a taxpayer’s liability for which economic_performance rules are not otherwise provided elsewhere in the code or other rules economic_performance occurs as the taxpayer makes payments in satisfaction of the liability sec_1_461-4 further states that its only application is if the liability in question is not covered by rules provided elsewhere under sec_461 sec_263a provides that in the case of any property to which sec_263a applies the direct costs of the property and the indirect_costs properly allocable to the property shall be included in inventory costs in the case of property that is inventory in the hands of the taxpayer or shall be capitalized in the case of other_property sec_263a provides that except as otherwise provided sec_263a shall apply to real or tangible_personal_property produced_by_the_taxpayer see also sec_1_263a-1 for purposes of sec_263a sec_263a provides that the term produce includes construct build install manufacture develop or improve see also sec_1_263a-2 sec_263a provides that interest costs for property produced_by_the_taxpayer is capitalized in case of interest costs which are paid_or_incurred during the production_period and allocable to property described in sec_263a and which has a i long_useful_life ii an estimated production_period exceeding years or iii an estimated production_period exceeding year and a cost exceeding dollar_figure sec_263a provides that property has a long_useful_life if such property is real_property or property with a class_life of years or more under sec_168 sec_263a provides that the term production_period means when used with respect to any property the period beginning on the date on which production of the property begins and ending on the date on which the property is ready to be placed_in_service or is ready to be held_for_sale see also sec_1_263a-12 sec_1_263a-8 provides that capitalization of interest under the avoided_cost_method described in sec_1_263a-9 is required with respect to the production of designated property described in sec_1_263a-8 sec_1_263a-8 provides that interest that is capitalized under sec_1_263a-8 is treated as a cost of the designated property and is recovered in accordance with sec_1_263a-1 the term designated property is defined in sec_1_263a-8 as meaning in general any property that is produced and that is either i real_property as defined in sec_1_263a-8 or ii tangible_personal_property as defined in sec_1 263a- a that meets any of the following criteria a property with a class_life of years or more under sec_168 but only if the property is not property described in section plr-127118-11 in the hands of the taxpayer or a related_person b property with an estimated production_period as defined in sec_1_263a-12 exceeding years or c property with an estimated production_period exceeding year and an estimated cost of production exceeding dollar_figure ruling_request sec_1 and for purposes of applying the 50-percent additional first year depreciation deduction the determination of whether property is a self-constructed property is made under sec_1_168_k_-1 in this case unit and unit are constructed for taxpayer by h under the contract that taxpayer represents was entered into before construction of unit and unit the contract is dated date2 which is prior to date taxpayer represents that the contract is a written binding contract under the law of state1 and does not limit damages to an amount that is less than five percent of the contract_price however the contract was subject_to a number of change orders and was amended by the settlement agreement in year1 which is after the settlement agreement increased the total cost of the facility by approximately percent and extended the turnover dates for the units neither the change orders nor the settlement agreement changed the location of the facility or the nominal nameplate_capacity of either unit or unit sec_1_168_k_-1 provides in part that a contract will continue to be binding if the parties make insubstantial changes in its terms and conditions we find the 6-percent increase in the total cost of the facility and the extended turnover dates to be insubstantial changes to the terms and conditions of the contract accordingly the contract dated date2 continues to be binding for purposes of sec_1_168_k_-1 consequently unit and unit are self-constructed property for purposes of the 50-percent additional first year depreciation deduction provided by sec_168 because unit and unit are self-constructed property they are acquired by taxpayer when taxpayer begins construction of each respective unit for purposes of the acquisition requirement of sec_168 sec_168 and sec_1_168_k_-1 for self-constructed property the acquisition requirement for purposes of the percent additional first year depreciation deduction is treated as met if taxpayer begins manufacturing constructing or producing the property after date and before date before date in the case of qualified_property described in sec_168 or c for purposes of the 50-percent additional first year depreciation deduction manufacture construction or production of property begins when physical work of a plr-127118-11 significant nature begins to make this determination the taxpayer may choose to apply the 10-percent safe_harbor_rule under sec_1_168_k_-1 under this safe_harbor physical work of a significant nature will not be considered to begin before an accrual basis taxpayer incurs more than percent of the total cost of the property excluding the cost of any land and preliminary activities because the term incurred is neither defined nor given any special meaning in sec_168 or its underlying regulations or legislative_history the determination of when an accrual basis taxpayer has incurred more than percent of the total cost of the property is made using the all_events_test and economic_performance requirement of sec_461 which specifically governs the timing of the deductions costs and expenses at issue if taxpayer chooses the safe_harbor_rule of sec_1_168_k_-1 for unit and unit such rule applies for determining when taxpayer began construction of unit and unit under this safe_harbor_rule taxpayer an accrual basis taxpayer determines when it incurred more than percent of the total cost of each unit by applying the all_events_test and economic_performance requirement of sec_461 in the case of unit and unit taxpayer represents that each unit are phases of a turnkey contract where turnover as defined under the contract occurs when the contractor h has completed all work required for turnover and when the care custody and control and risk of loss for each phase has transferred to taxpayer costs associated with the provision of property are incurred when all the events have occurred that establish the fact of liability the amount of the liability can be determined with reasonable accuracy and the property has been provided to taxpayer in this case taxpayer represents that for its initial federal_income_tax return taxpayer is adopting a method_of_accounting for purposes of sec_1_461-4 that will treat property as provided to taxpayer when the property is accepted by taxpayer thus the all_events_test is satisfied and economic_performance has occurred when the turnover as defined under the contract occurs at that time the liability is fixed the amount of the liability has been determined with reasonable accuracy and risk of loss has passed to taxpayer taxpayer represents that turnover as defined under the contract of unit occurred on date7 and of unit occurred on date8 thus no costs attributable to the contract were incurred by taxpayer before date7 for unit and before date8 for unit ruling_request sec_4 and however in addition to the costs attributable to the contract taxpayer and its affiliates incurred a small amount of other costs for the construction of the facility for items like permitting project development project design engineering preconstruction plr-127118-11 construction management and troubleshooting costs further in accordance with sec_263a and sec_1_263a-8 taxpayer capitalized_interest during the production periods of unit and unit pursuant to sec_1_263a-8 the interest that taxpayer capitalized under sec_1_263a-8 to unit and unit is treated as a cost of unit and unit respectively for purposes of the safe_harbor_rule under sec_1_168_k_-1 the total cost of the property excludes the cost of any land and preliminary activities such as planning or designing securing financing exploring or researching we do not consider interest capitalized under sec_263a to be a preliminary activity accordingly for purposes of the safe_harbor_rule under sec_1 k - b iii b the total cost of the property includes any interest capitalized under sec_263a to that property in the case of interest sec_1_461-4 provides that economic_performance occurs as the interest cost economically accrues in accordance with the principles of relevant provisions of the code taxpayer represents that with respect to unit assuming that no costs were incurred with respect to the contract until turnover the costs that were incurred as of date were percent or less of the final tax basis of unit as of the original placed-in-service date taxpayer represents that the prior sentence is not altered even if one accrues capitalized_interest on costs incurred by taxpayer and payments made to h through date taxpayer represents that with respect to unit assuming that no costs were incurred with respect to the contract until turnover the costs that were incurred as of date were percent or less of the final tax basis of unit as of the original placed-in-service date taxpayer represents that the prior sentence is not altered even if one accrues capitalized_interest on costs incurred by taxpayer and payments made to h through date therefore if taxpayer chooses the safe_harbor_rule of sec_1 k - b iii b for unit and unit taxpayer began construction of unit and unit after date ruling_request to qualify for the 50-percent additional first year depreciation under sec_168 property must be qualified_property under sec_168 under sec_168 qualified_property is in general property i among other things to which sec_168 applies with a recovery_period of years or less ii the original_use of which commences with the taxpayer after date iii that is acquired by the taxpayer after date and before date but only if no written binding contract for the acquisition was in effect before date or that is acquired by the taxpayer pursuant to a written binding contract which was entered plr-127118-11 into after date and before date and iv that is placed_in_service by the taxpayer before date or in the case of property described in sec_168 or c before date in the case of self-constructed property sec_168 as amended by the truirjca provides that the requirements of sec_168 shall be treated as met if the taxpayer begins manufacturing constructing or producing the property after date and before date however property is not qualified_property if the property is required to be depreciated under the alternative_depreciation_system of sec_168 pursuant to sec_168 through d or other provisions of the code sec_168 and sec_1_168_k_-1 in the case of unit taxpayer represents that unit is described in asset class dollar_figure of revproc_87_56 taxpayer also represents that unit may include a small amount of transmission property that is described in asset class dollar_figure of revproc_87_56 property included in asset class dollar_figure or asset class dollar_figure is 20-year_property thus for purposes of sec_168 the recovery_period of unit is years further sec_168 applies to unit moreover taxpayer represents that the property subject_to this ruling_request with respect to unit is not required to be depreciated under the alternative_depreciation_system of sec_168 taxpayer represents that the original_use of unit commenced with taxpayer and unit was originally placed_in_service on date7 which is after date and before date thus the original_use of unit commenced with taxpayer after date and taxpayer placed_in_service unit after date and before date further as previously discussed unit is self-constructed property and if taxpayer chooses the safe_harbor_rule of sec_1_168_k_-1 for unit construction of unit began after date consequently if taxpayer chooses the safe_harbor_rule of sec_1_168_k_-1 for unit unit satisfies the requirements of sec_168 and therefore the acquisition requirement in sec_168 is treated as met therefore the sec_1245 property of unit meets all of the requirements to be qualified_property under sec_168 and is eligible for the 50-percent additional first year depreciation deduction under sec_168 assuming sec_168 and iii sec_168 ii - iv and sec_168 do not apply ruling_request plr-127118-11 in the case of unit taxpayer represents that unit is described in asset class dollar_figure of revproc_87_56 taxpayer also represents that unit may include a small amount of transmission property that is described in asset class dollar_figure of revproc_87_56 property included in asset class dollar_figure or asset class dollar_figure is 20-year_property thus for purposes of sec_168 the recovery_period of unit is years further sec_168 applies to unit moreover taxpayer represents that the property subject_to this ruling_request with respect to unit is not required to be depreciated under the alternative_depreciation_system of sec_168 taxpayer represents that the original_use of unit commenced with taxpayer and unit was originally placed_in_service on date8 which is after date and before date thus the original_use of unit commenced with taxpayer after date and taxpayer placed_in_service unit after date and before date further as previously discussed unit is self-constructed property and if taxpayer chooses the safe_harbor_rule of sec_1_168_k_-1 for unit construction of unit began after date consequently if taxpayer chooses the safe_harbor_rule of sec_1_168_k_-1 for unit unit satisfies the requirements of sec_168 and therefore the acquisition requirement in sec_168 is treated as met therefore the sec_1245 property of unit meets all of the requirements to be qualified_property under sec_168 and is eligible for the 50-percent additional first year depreciation deduction under sec_168 assuming sec_168 and iii sec_168 ii - iv and sec_168 do not apply if unit and all of its components are qualified_property taxpayer intends to determine whether any component of unit is eligible for the 100-percent additional first year depreciation by applying the limited election in sec_3 b of revproc_2011_26 that election applies to a taxpayer that began manufacturing constructing or producing a larger self-constructed property that is qualified_property before date but the taxpayer placed this larger self-constructed property in service after date and before date before date in the case of qualified_property described in sec_168 or c and the original_use of the larger self-constructed property commenced with the taxpayer after date in such a case the taxpayer may elect to treat any acquired or self-constructed component of that larger self-constructed property as being eligible for the 100-percent additional first year depreciation deduction if the component is qualified_property and is acquired or self-constructed by the taxpayer after date and before date before date in the case of qualified_property described in sec_168 or c plr-127118-11 solely for purposes of sec_168 and sec_3 a of revproc_2011_26 sec_3 a of this revenue_procedure provides that a taxpayer acquires the qualified_property when the taxpayer pays or incurs the cost of the property the term pays or incurs means pays or incurs within the meaning of sec_1_461-1 and accordingly an accrual basis taxpayer acquires qualified_property solely for purposes of sec_168 when the accrual basis taxpayer incurs the cost of the property and a cash_basis taxpayer acquires qualified_property solely for purposes of sec_168 when the cash_basis taxpayer pays the cost of the property if a taxpayer manufactures constructs or produces qualified_property for use in its trade_or_business sec_3 a of revproc_2011_26 also provides that such property is acquired by the taxpayer for purposes of sec_168 and sec_3 a of this revenue_procedure when the taxpayer begins constructing manufacturing or producing that property as determined under sec_1 k - b iii b under the limited election of sec_3 b of revproc_2011_26 the component must be qualified_property and must be acquired or self-constructed by the taxpayer after date and before date before date in the case of qualified_property described in sec_168 or c the dates of this acquisition requirement are the same dates as in the acquisition requirements in sec_3 a of revproc_2011_26 although the acquisition requirements in sec_3 a of revproc_2011_26 do not specifically incorporate the limited election under sec_3 b of revproc_2011_26 the service intended to apply such acquisition requirements also for purposes of sec_3 b of revproc_2011_26 for any acquired or self-constructed component of the larger self-constructed property described in sec_3 b of revproc_2011_26 thus for purposes of sec_3 b of revproc_2011_26 a taxpayer may elect to treat any acquired component of the larger self-constructed property described in sec_3 b of revproc_2011_26 as being eligible for the 100-percent additional first year depreciation deduction if the acquired component is qualified_property and if the taxpayer incurs in the case of an accrual basis taxpayer or pays in the case of a cash_basis taxpayer the cost of the acquired component after date and before date before date in the case of property described in sec_168 or c further for purposes of sec_3 b of revproc_2011_26 a taxpayer may elect to treat any self-constructed component of the larger self-constructed property described in sec_3 b of revproc_2011_26 as being eligible for the percent additional first year depreciation deduction if the self-constructed component is qualified_property and if the taxpayer begins manufacturing constructing or producing the component as determined under sec_1_168_k_-1 after date and before date before date in the case of property plr-127118-11 described in sec_168 or c pursuant to sec_1_168_k_-1 manufacture construction or production of property begins when physical work of a significant nature begins to make this determination a taxpayer may choose to apply the 10-percent safe_harbor_rule under sec_1_168_k_-1 under this safe_harbor_rule physical work of a significant nature will not be considered to begin before an accrual basis taxpayer incurs more than percent of the total cost of the property excluding the cost of any land and preliminary activities as we previously discussed under ruling_request sec_1 and the term incurred is neither defined nor given any special meaning in sec_168 or its underlying regulations or legislative_history such term also is not defined nor given any special meaning in revproc_2011_26 for purposes of the 10-percent safe_harbor_rule under sec_1_168_k_-1 accordingly our conclusion reached under ruling_request sec_1 and also applies for purposes of sec_168 and sec_3 a and b of revproc_2011_26 that is the determination of when an accrual basis taxpayer has incurred the cost of the acquired component is made using the all_events_test and economic_performance requirement of sec_461 and for purposes of the safe_harbor_rule under sec_1_168_k_-1 has incurred more than percent of the total cost of a self-constructed component is made using the all_events_test and economic_performance requirement of sec_461 in the case of unit taxpayer represents that assuming that no costs were incurred with respect to the contract until turnover the costs that were incurred as of date excluding any capitalized_interest were percent or less of the final tax basis of unit as of the original placed_in_service_date further taxpayer’s representative j stated that assuming that no costs were incurred with respect to the contract until turnover the costs that were incurred as of date including any capitalized_interest were probably more than percent of the final tax basis of unit as of the original placed_in_service_date as previously discussed under ruling_request sec_4 and the total cost of the property includes any interest capitalized under sec_263a to that property for purposes of the safe_harbor_rule under sec_1_168_k_-1 thus if taxpayer chooses the safe_harbor_rule of sec_1_168_k_-1 for unit the construction of unit began after date and before date consequently unit is not eligible for the percent additional first year depreciation deduction provided under sec_168 however as previously discussed under this ruling_request the original_use of unit commenced with taxpayer after date and taxpayer placed_in_service unit after date and before date consequently unit the larger self-constructed property is described in sec_3 b of revproc_2011_26 thus taxpayer may elect to treat any acquired or self-constructed component of that larger self-constructed property as being eligible for the 100-percent additional first year depreciation deduction if the component is qualified_property and is acquired or self-constructed by taxpayer after date and before january plr-127118-11 before date in the case of qualified_property described in sec_168 or c taxpayer may make this election for one or more components that are described in sec_3 b of revproc_2011_26 conclusion based solely on taxpayer’s representations and the relevant law and analysis set forth above we conclude that unit and unit are each self-constructed property as defined in sec_1_168_k_-1 the fact that taxpayer and h entered into the contract prior to date does not prevent unit and unit from meeting the acquisition requirements in sec_168 and e i for purposes of determining for each of the units when physical work of a significant nature begins under the 10-percent safe_harbor_rule under sec_1 k - b iii b no costs are incurred by taxpayer under the contract until turnover as defined in the contract has occurred as a result no costs attributable to the contract were incurred before a date7 in the case of unit when turnover of unit occurred and b date8 in the case of unit when turnover of unit occurred for purposes of sec_1_168_k_-1 construction of unit began after date if taxpayer chooses the 10-percent safe_harbor_rule under sec_1_168_k_-1 for purposes of sec_1_168_k_-1 construction of unit began after date if taxpayer chooses the 10-percent safe_harbor_rule under sec_1_168_k_-1 the sec_1245 property at unit qualifies for the 50-percent additional first year depreciation deduction under sec_168 assuming sec_168 and iii sec_168 ii - iv and sec_168 do not apply the sec_1245 property at unit qualifies for the 50-percent additional first year depreciation deduction under sec_168 assuming sec_168 and iii sec_168 ii - iv and sec_168 do not apply if a proper election is made pursuant to sec_3 b of revproc_2011_26 any components of unit acquired or self-constructed by taxpayer after date may qualify for the 100-percent additional first year depreciation deduction under sec_168 provided that the component s is qualified_property as defined in sec_168 plr-127118-11 except as specifically set forth above no opinion is expressed or implied concerning the tax consequences of the facts described above under any other provisions of the code including other subsections of sec_168 specifically no opinion is expressed or implied on i whether the contract is a binding contract under the law of state1 or any other state ii the original-use-date and the placed-in-service date of unit and unit iii the asset classification under revproc_87_56 of unit and unit iv whether the lease of the facility to d is a lease for federal_income_tax purposes or v whether taxpayer’s method of capitalizing interest is in accordance with sec_263a and the regulations thereunder taxpayer’s interest capitalization method_of_accounting includes but is not limited to when production starts and ends what expenses are included in accumulated production_expenditures measurement periods etc in accordance with the power_of_attorney we are sending a copy of this letter to taxpayer’s authorized representatives we are also sending a copy of this letter to the appropriate operating division director this letter_ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent sincerely kathleen reed kathleen reed branch chief branch office of associate chief_counsel income_tax and accounting


t c no united_states tax_court robert c and nancy l arnold petitioners v commissioner of internal revenue respondent docket no filed date in date following p's retirement p began receiving annual distributions from his individual_retirement_account ira at that time p wa sec_55 years old the distributions were intended to constitute a series of substantially_equal_periodic_payments within the purview of sec_72 i r c so as to avoid p's having to pay the 10-percent tax pursuant to sec_72 i r c in date after five distributions of dollar_figure each had been made and when p attained age p received dollar_figure from his ira in the notice_of_deficiency r determined that the date distribution impermissibly modified the series of substantially_equal_periodic_payments within the 5-year period beginning on the date of the first distribution and therefore the 10-percent recapture_tax under sec_72 i r c should be imposed on all distributions p received prior to attaining age p contends that the series of substantially_equal_periodic_payments was completed with the fifth distribution in date or in the alternative that the date distribution represented a cost-of-living adjustment held p modified the series of substantially_equal_periodic_payments by receiving the dollar_figure from his ira in date prior to the close of the 5-year period beginning on the date of the first distribution in date and is therefore subject_to the 10-percent recapture_tax on all distributions received prior to attaining age as provided in sec_72 i r c held further p failed to prove that the date distribution constituted a permissible cost-of-living adjustment robert c and nancy l arnold pro sese michael f o'donnell and george w bezold for respondent jacobs judge respondent determined a dollar_figure deficiency in petitioners' federal_income_tax for the deficiency arises due to the imposition of the 10-percent recapture_tax under sec_72 which was triggered by a date distribution to robert c arnold hereinafter petitioner from his individual_retirement_account the sole issue for decision is whether the date distribution impermissibly modified a series of substantially_equal_periodic_payments all section references are to 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 some of the facts have been stipulated and are so found the stipulated facts are incorporated in our findings by this reference findings_of_fact at the time petitioners filed their petition they resided in delafield wisconsin background from approximately until petitioner was a percent shareholder and vice president of arco industries arco a wisconsin corporation that manufactured chemicals for the swimming pool industry carl ulrich who served as president of arco owned the remaining 50-percent interest in arco in petitioner and mr ulrich sold their interests in arco to sowhite chemical corp sowhite chemical another wisconsin corporation in the same business as arco and petitioner then retired sowhite chemical agreed to pay the purchase_price for petitioner's and mr ulrich's interests in arco through monthly installments over an 11-year period the amount of petitioner's monthly installment was approximately dollar_figure in date sowhite chemical filed for bankruptcy protection and stopped making payments to petitioner ira_distributions when petitioner sold arco he rolled his qualified_pension plan into an individual_retirement_account ira in petitioner retained emjay corp emjay an actuary to calculate the needed series of substantially_equal_periodic_payments from his ira pursuant to sec_72 to avoid the imposition of the 10-percent tax on premature distributions under sec_72 in a date letter an executive vice president of emjay advised petitioner of the different calculation methods petitioner could employ petitioner elected the calculation method that allowed him to receive annual distributions of approximately dollar_figure in date when petitioner wa sec_55 years old he began receiving annual distributions from his ira the distributions from petitioner's ira were as follows date date date date date date dollar_figure big_number big_number big_number big_number big_number petitioner received the dollar_figure distribution in date to compensate for the lack of payment by sowhite chemical after it filed for bankruptcy in date petitioner was over the age of the three permissible methods for calculating the series of substantially_equal_periodic_payments under sec_72 are provided in notice_89_25 q a-12 1989_1_cb_662 the parties agree that the method selected by petitioner satisfies the requirements of notice_89_25 petitioner was born on date notice_of_deficiency in the notice_of_deficiency respondent determined that the date distribution to petitioner was an impermissible modification of a series of substantially_equal_periodic_payments as a result respondent determined that the 10-percent recapture_tax under sec_72 should be imposed on all distributions made prior to the date petitioner attained age opinion the sole issue for decision is whether the date distribution from petitioner's ira impermissibly modified a series of substantially_equal_periodic_payments so as to trigger the imposition of the 10-percent recapture_tax under sec_72 generally amounts distributed from an ira are includable in gross_income as provided in sec_72 sec_408 additionally a 10-percent tax is imposed under sec_72 on any distribution that fails to satisfy one of the exceptions for premature distributions as provided in sec_72 sec_72 states in pertinent part subsection not to apply to certain distributions --except as provided in paragraphs and paragraph shall not apply to any of the following distributions a in general --distributions which are-- iv part of a series of substantially_equal_periodic_payments not less frequently than annually made for the life or life expectancy of the employee or the joint lives or joint life expectancies of such employee and his designated_beneficiary sec_72 dictates however that if the series of substantially_equal_periodic_payments which otherwise is excepted from the 10-percent tax is subsequently modified other than by reason of death or disability within a 5-year period beginning on the date of the first distribution then the 10-percent tax under sec_72 states in part change in substantially equal payments -- a in general --if-- paragraph does not apply i to a distribution by reason of paragraph a iv and ii the series of payments under such paragraph are subsequently modified other than by reason of death or disability -- before the close of i the 5-year period beginning with the date of the first payment and after the employee attains age or ii before the employee attains age the taxpayer's tax for the 1st taxable_year in which such modification occurs shall be increased by an amount determined under regulations equal to the tax which but for paragraph a iv would have been imposed plus interest for the deferral_period sec_72 will be imposed retroactively on prior distributions made before the taxpayer attains age plus interest this retroactive application of the 10-percent tax under sec_72 is known generally as a recapture_tax see infra petitioners contend that the date distribution of dollar_figure did not impermissibly modify a series of substantially_equal_periodic_payments petitioners make two principal arguments in support of this claim first petitioners contend that the date distribution occurred after the series of substantially_equal_periodic_payments was completed in date and thus no modification occurred respondent asserts that petitioners' contention contradicts the plain language of sec_72 which requires no modifications within a 5-year period respondent notes that in this case the year period beginning with the date of the first distribution ran from through thus respondent argues the date distribution was premature and hence impermissibly modified the series of substantially_equal_periodic_payments respondent's position is supported by the legislative_history of sec_72 the conference_report accompanying the tax_reform_act_of_1986 publaw_99_514 100_stat_2085 supports the proposition that the period described in sec_72 must be completed before further distributions can be received to avoid imposition of the 10-percent recapture_tax under sec_72 in addition the recapture_tax will apply if an individual does not receive payments under a method that qualifies for the exception for at least years even if the method of distribution is modified after the individual attains age thus for example if an individual begins receiving payments in substantially equal installments at age and alters the distribution method to a form that does not qualify for the exception prior to attainment of age the additional tax will be imposed on amounts distributed prior to age as if the exception had not applied the additional tax will not be imposed on amounts distributed after attainment of age this 5-year minimum payout rule is waived upon the death or disability of the employee h conf rept at ii-457 1986_3_cb_1 it is evident that the 5-year period in sec_72 closes at the end of years from the date of the first distribution it does not end on the date of the fifth annual distribution pursuant to a series of substantially equal periodic annual payments in the case herein petitioner received the fifth distribution from his ira in date slightly more than years from the date of the first distribution under sec_72 petitioner was required to wait until sometime in date before he could receive additional distributions that would avoid modifying the prior series of substantially_equal_periodic_payments he did not meet the required waiting_period instead petitioner received his distribution in date prior to the close of the 5-year period as provided in sec_72 next petitioners argue that the date distribution was part of a cost-of-living adjustment which respondent concedes would be a permissible modification to the series of substantially_equal_periodic_payments during the applicable_5-year_period see staff of joint comm on taxation general explanation of the tax_reform_act_of_1986 pincite j comm print in this regard petitioners note that the dollar_figure distribution spread over the latter years of distributions was only a 65-percent increase over the prior dollar_figure distributions and was well within the limits of a reasonable cost of living adjustment cla and thus not a modification respondent claims and we agree that petitioners have failed to prove that the purpose of the date distribution was to serve as a cost-of-living adjustment rule a 290_us_111 petitioners did not put forth any evidence of the appropriate cost-of-living adjustment for the relevant time period nor did they explain how they arrived at the figure calculated or why the adjustment was made in the form of a lump-sum payment in date rather than allocated over each of the years petitioner testified that the date distribution was received after sowhite chemical filed for bankruptcy protection in date and ceased making its monthly installment payments to him thus it is evident that petitioner received the distribution as a result of a financial hardship when his monthly cash_flow was suddenly reduced however no exception exists under sec_72 for financial hardship see duffy v commissioner tcmemo_1996_556 pulliam v commissioner tcmemo_1996_354 the legislative purpose underlying the sec_72 tax is that premature distributions from ira's frustrate the intention of saving for retirement and sec_72 discourages this from happening 106_tc_337 see also s rept pincite c b supp in order to avoid the sec_72 tax petitioners must show that the date distribution falls within one of the exceptions provided under sec_72 they have not done so consequently we hold that the date distribution impermissibly modified a series of substantially_equal_periodic_payments thus the 10-percent recapture_tax under sec_72 is applicable to all distributions petitioner received prior to the date he attained to reflect the foregoing decision will be entered for respondent


internal_revenue_service national_office technical_advice_memorandum number release date date index uil no case mis no tam-109462-99 cc dom p si b7 district_director taxpayer’s name taxpayer’s address taxpayer’s identification no years involved date of conference legend taxpayer a a b c d e issue does sec_29 c of the internal_revenue_code reinstate the sec_29 credit for any gas from a tight formation that was committed or dedicated to interstate commerce as of date or only for gas from a tight formation that was not subject_to decontrol under the natural_gas policy act of ngpa tam-109462-99 conclusion sec_29 reinstates the sec_29 credit for any gas from a tight formation that was committed or dedicated to interstate commerce as of date without regard to whether the gas was subject_to decontrol under the ngpa facts taxpayer a subsidiary of a claimed sec_29 credits on its income_tax returns for a b and c for two wells producing gas from tight formations in amounts totaling d and e respectively on audit the wells were verified using a database to ascertain whether the federal energy regulatory commission had determined that they were producing gas from a tight formation in addition the gas sales contracts were verified to insure that the gas was committed or dedicated to interstate commerce as of date both wells were categorized as sec_102 and sec_107 wells under the ngpa although gas from both wells was committed or dedicated to interstate commerce as of date the price of the produced gas was decontrolled under the ngpa law and analysis sec_29 provides a credit for qualified_fuels sold by the taxpayer to an unrelated_person during the taxable and the production of which is attributable to the taxpayer sec_29 defines the term qualified_fuels to include gas_produced_from_a_tight_formation sec_29 provides that the term gas_produced_from_a_tight_formation only includes gas from a tight formation- i which as of date was committed or dedicated to interstate commerce as defined in sec_2 of the ngpa as in effect on the date of the enactment of this clause or ii which is produced from a well drilled after the date of enactment prior to date gas_produced_from_a_tight_formation included only gas the price of which was regulated by the united_states and gas for which the maximum lawful price applicable under the ngpa was at least percent of the then applicable price under sec_103 of the ngpa the phased deregulation of natural_gas under the ngpa began in the wellhead decontrol act of provided for the deregulation of all previously regulated gas as of date thus in the sec_29 credit was not available to most gas produced from tight formations and as of tam-109462-99 date would no longer be available to any gas produced from tight formations sec_29 was enacted to reinstate the sec_29 credit for gas from certain tight formations and to eliminate any requirement that the gas be regulated or eligible for price incentives the senate report underlying sec_29 states as follows specifically the bill treats as qualifying tight formation gas any gas_produced_from_a_tight_formation which is produced from a well drilled after date or which as of date was committed or dedicated to interstate commerce within the meaning of sec_2 of the natural_gas policy act of as in effect on the date of enactment of this bill wells producing gas that was not committed or dedicated to interstate commerce as of date and thus was subject_to decontrol under provisions of the natural_gas policy act of will not qualify for the credit under the bill emphasis added cong rec s15674 date see also h_r rep no 101st cong 2d sess conference_report neither sec_29 nor its legislative_history distinguishes between tight formation gas that was subject_to decontrol under the ngpa and tight formation gas that would not have been decontrolled under the ngpa the statue simply provides that tight formation gas must be produced from wells that were committed or dedicated to interstate commerce as of date consistent with the statute the senate report indicates that any gas from a tight formation that was committed or dedicated to interstate commerce as of date qualifies for the credit accordingly we conclude that sec_29 reinstates the sec_29 credit for any gas from a tight formation that was committed or dedicated to interstate commerce as of date without regard to whether the gas was subject_to decontrol under the ngpa caveat s a copy of this technical_advice_memorandum is to be given to the taxpayer s sec_6110 of the code provides that it may not be used or cited as precedent


department of the treasury exempt_organizations rulings and agreements employer_identification_number contact person - id number contact telephone numbers phone fax uil internal_revenue_service p o box room cincinnati oh release number release date date date legend m foundation n school system x fund z county state dear we have considered your request for advance approval of your grant-making program under sec_4945 of the internal_revenue_code dated date our records indicate that x was recognized as exempt from federal_income_tax under sec_501 of the code and that it is classified as a private_foundation as defined in sec_509 your letter indicates that x will operate a program to award scholarships to worthy young men and women to assist them with obtaining a high school college or professional education without limitation regarding the students’ earning capacity during their school career each scholarship awarded will constitute a scholarship or fellowship_grant subject_to the provisions of sec_117 and will be used to pay all or a part of a recipient’s expenses_incurred in attending an educational_institution described in sec_170 x may publicize the availability of the scholarships through direct and indirect contacts with the general_public the scholarships may also be publicized through various charitable and educational organizations that work with and provide services to youth and other worthy individuals in and around z publicized through guidance counselors and other appropriate staff and faculty at high schools located in z and through n x may expand its publicity efforts as appropriate in particular the scholarships may be the approximate number of eligible recipients of all such scholarship each year is initially x anticipates that it will award approximately scholarships each year but in the future that number may increase page the selection of all scholarship recipients will be on an objective and nondiscriminatory basis no disqualified_person with respect to x will be eligible for consideration donors to x will not be allowed to designate scholarship recipients or other educational grantees scholarships will be made on the basis of merit to worthy students from z to enable them to procure a high school college or professional education in the united_states x will accept application_for the scholarships that include some or all of the following a transcript of prior academic achievements a report of performance on tests designed to measure ability and aptitude for academic work a description of financial need an essay written by the applicant describing the applicant’s interest and aspirations a description of past involvement in extracurricular activities a list of academic honors and recognitions written recommendations by individuals not related to the applicant the names of the educational institutions to which the applicant intends to apply when appropriate scholarship applicants will be interviewed by the group making the selection committee in person or by telephone the criteria used in selecting recipients from the group of applicants will be reasonably related to the purposes of the particular scholarship criteria may include but will not be limited to prior academic performance performance on tests designed to measure ability and aptitude for college work recommendations from educators social workers and others not related to the potential recipient financial need and the conclusions that the selection committee might draw from personal interviews as to the applicant’s motivations character ability and potential factors that are not reasonably related to the purposes of the scholarships such as race and gender will not be considered and will have no influence on the selection of recipients the selection committees for the scholarships will consist of the superintendent of n or his her appointees or designees no member of a selection committee will be in a position to derive a private benefit directly or indirectly by the selection of one or more particular scholarship recipients furthermore spouses and dependents of members of a selection committee will be ineligible to receive a scholarship the following terms and conditions will apply to the scholarships awarded pursuant to the procedure described herein i each scholarship will be awarded by the selection committee in an amount determined by it not to exceed the anticipated cost of the recipient’s tuition board room fees books supplies travel costs and incidental_expenses for attendance at the educational_institution by the recipient the institution must be described in code sec_170qi page il iii iv v generally each scholarship will continue for the designated term of the scholarship during the recipient’s course of study at such institution provided the recipient maintains satisfactory progress toward completion of his or her course of study and otherwise conforms to the terms and conditions of this procedure in any event each scholarship will continue only so long as it constitutes a scholarship or fellowship_grant described in code sec_117 the course of study for which scholarships are available will not be limited in a manner that benefits directly any donor employer or x x will make scholarship payments directly to the educational_institution in which instance x will secure the agreement of such institution i to use such payments for the recipient’s expenses and ii to pay the excess if any to the recipient only if the recipient is enrolled at the institution and the recipient’s standing at the institution is consistent with the purposes and conditions of the scholarship in certain other instances x may make payments directly to the recipient subject_to the supervision and investigation requirements set forth herein x will retain written records pertaining to all scholarships awarded under this procedure including the following i ii iii iv all information used to evaluate the qualifications of potential recipients identification of each recipient including any relationship of the recipient to x sufficient to make the recipient a disqualified_person of x within the meaning of code sec_4946 specifications of the amount and purpose of each scholarship the reports and other follow-up information obtained under this procedure x will employ the following procedure to supervise investigate and review the scholarships awarded under these procedures i it with respect to a scholarship paid on behalf of a recipient to an educational_institution in code sec_170 x proposes to supervise investigate and review scholarships by complying with the requirements of sec_53_4945-4 each institution to which such scholarships are paid will be required to agree to use the funds from a scholarship to defray a recipient’s expenses or to pay the funds or a portion of them to a recipient only if the recipient is enrolled at such institution and the recipient’s standing at it is consistent with the purposes and condition of the scholarship with respect to a scholarship paid directly for study at an education institution described in code sec_170 x will obtain reports investigate any suspected diversion of funds form their proper_purpose and recover diverted funds as follows page a b c d x will ensure that it receives at least once each year a report verified by the educational_institution attended by the recipient that sets forth the recipient’s courses taken and grades received in each academic period in the case of a recipient whose study at an educational_institution does not involve the taking of courses but only the preparation of research papers or projects such as the writing of a doctoral dissertation x shall ensure that it receives at least once each year a brief report approved by the faculty_member supervising the recipient or by another appropriate university official regarding the progress of the recipient’s paper or project upon completion of t recipient’s study at the educational_institution x also will obtain a final report describing the recipient’s accomplishments with respect to the scholarship and accounting for the funds received under such scholarship from the recipient when the reports submitted under this paragraph including the failure to submit such reports indicate that all or part of the scholarship is not being used in furtherance of the purposes of the scholarship the selection committee will investigate the matter immediately while conducting an investigation of a recipient x will withhold further payments until any delinquent reports required under this procedure have been submitted if x determines that any part of a scholarship has been used for improper purposes and a recipient previously has not diverted funds x will take all reasonable and appropriate steps either to recover the funds or to ensure the restoration of the diverted funds and the dedication of other scholarship funds held by the recipient to the proper purposes furthermore x will withhold any further payments to the recipient until it has received the recipient’s written assurance that future diversions will not occur and has required the recipient to take extraordinary precautions to prevent future diversions from occurring in cases where a recipient previously has diverted funds received from x and x determines that any part of a scholarship again has been used for improper purposes x will take all reasonable and appropriate steps to recover the funds or to ensure the restoration of the funds and the dedication of other scholarship funds held by the recipient to their proper purposes moreover x will withhold further payments until these conditions are met i such funds are in fact so recovered or restored ii x has received the recipient’s written assurance that future diversions will not occur and iii x requires the recipient to take extraordinary precautions to prevent future diversions from occurring e as used in this paragraph the phrase all reasonable and appropriate steps includes legal action where appropriate but need not include legal action if such action would in all probability not result in the satisfaction of execution on a judgment page sec_4945 and b of the code impose certain excise_taxes on taxable_expenditures made by a private_foundation sec_4945 of the code provides that the term taxable_expenditure means any amount_paid or incurred by a private_foundation as a grant to an individual for travel study or other similar purposes by such individual unless such grant satisfies the requirements of subsection g sec_4945 of the code provides that sec_4945 shall not apply to individual grants awarded on an objective and nondiscriminatory basis pursuant to a procedure approved in advance if it is demonstrated that the grant constitutes a scholarship or fellowship_grant which is subject_to the provisions of sec_117 and is to be used for study at an educational_organization described in sec_170 the grant constitutes a prize or award which is subject_to the provisions of sec_74 if the recipient of such prize or award is selected from the general_public or the purpose of the grant is to achieve a specific objective produce a report or similar product or improve or enhance a literary artistic musical scientific teaching or other similar capacity skill or talent of the grantee sec_53_4945-4 of the regulations provides that to secure approval a private_foundation must demonstrate that i ii its grant procedure includes an objective and nondiscriminatory selection process such procedure is reasonably calculated to result in performance by grantees of the activities that the grants are intended to finance and iii the foundation plans to obtain reports to determine whether the grantees performed activities that the grants are intended to finance based on the information submitted and assuming your award programs will be conducted as proposed with a view to provide objectivity and nondiscrimination in making the awards we have determined that your procedures for granting the awards comply with the requirements contained in sec_4945 of the code and that awards granted in accordance with such procedures will not constitute taxable_expenditures within the meaning of sec_4945 in addition we have determined that awards made under your procedures are excludable from the gross_income of the recipients subject_to the limitations provided by sec_117 of the code this determination is conditioned on the understanding that there will be no material_change in the facts upon which it is based it is further conditioned on the premise that no grants will be awarded to foundation managers or members of the selection committee or for a purpose that is inconsistent with the purpose described in sec_170 of the code page the approval of your award program procedures herein constitutes a one-time approval of your system standards and procedures designed to result in awards which meet the requirements of sec_4945 of the code this determination only covers the grant programs described above thus approval shall apply to subsequent award programs only as long as the standards and procedures under which they are conducted do not differ materially from those described in your request any funds you distribute to individuals must be made on a true charitable basis in furtherance of the purposes for which you are organized therefore you should maintain adequate_records and case histories so that any or all award distributions can be substantiated upon request by the internal_revenue_service this determination is directed only to the organization that requested it sec_6110 of the code provides that it may not be used or cited as a precedent you must report any future changes in your grant making procedures please keep a copy of this letter in your permanent records we have sent a copy of this letter to your representative as indicated in your power_of_attorney if you have any questions please contact the person whose name and telephone number are shown above sincerely yours robert choi director exempt_organizations rulings and agreements enclosures notice redacted copy of letter


internal_revenue_service department of the treasury number release date index number in re washington dc person to contact telephone number refer reply to cc fip plr-157427-02 date date legend taxpayer year a date a date b date c date d state a number number number number form a form b form c form d form e rider a rider b dear this is in response to your letter of date a requesting a waiver pursuant to sec_7702 of the internal_revenue_code for number insurance contracts issued by taxpayer that failed to meet the requirements of sec_7702 the information submitted indicates that taxpayer founded in year a is organized and operated under the laws of state a taxpayer is licensed to issue life_insurance and annuity_contracts in number states all of the life_insurance hereinafter referred to as policies that are the subject of this request are participating flexible premium universal_life_insurance contracts all of the policies were issued after date b and were intended to comply with sec_7702 by both satisfying the guideline premium requirements of sec_7702 and c and falling within the cash_value corridor of sec_7702 and d as of date c taxpayer had number policies in force taxpayer has determined that number of its policies failed to qualify as life_insurance contracts under sec_7702 number of the policies failed to satisfy the guideline premium requirements for the reasons set forth below the remaining policies are the subject of a separate request for a closing_agreement the policies at issue in this letter used forms a b c d and e the contract values of these policies on is the initial premium less the monthly deduction for the first policy month the contract value on any monthly anniversary of is the contract value on the preceding monthly anniversary with interest credits received to that date plus any premium received since the preceding monthly anniversary date with interest credits from the day received to that date plus any dividend added on that date less any withdrawal since the preceding monthly anniversary with interest credits from the day of withdrawal to that date less the monthly deduction for the month that begins on that date the monthly deduction consists of an expense charge charges for the cost of insurance and charges for the costs of any riders the policies could be issued with one or both of the following riders rider a or rider b the riders a and b provide for the waiver of monthly deductions under certain circumstances both of these riders are qualified_additional_benefits qabs within the meaning of sec_7702 riders a and b are funded with charges that are assessed against the contract value of a policy these charges are guaranteed not to exceed certain specified amounts in practice taxpayer has imposed charges for the riders that are less that the guaranteed amounts the current rider charges imposed vary directly with the current cost of insurance imposed under a policy taxpayer has reflected however the guaranteed amount of charges in the guideline premium calculations for policies under sec_7702 in connection with a prior submission that the taxpayer made to the service on date d pursuant to revproc_99_27 1997_1_cb_1186 taxpayer discovered certain errors affecting the compliance of the policies with sec_7702 in reaction to this discovery taxpayer with the assistance of an outside consulting firm undertook an extensive review and analysis of the manner in which its life_insurance policies are administered including the manner in which taxpayer seeks to assure compliance with sec_7702 as a result of this review taxpayer realized its treatment of riders a and b was incorrect taxpayer has recalculated the guideline_premium_limitation for policies with the riders taking into account only reasonable charges that it reasonably expects to impose in accordance with sec_7702 as a result of this recalculation taxpayer discovered that number of its policies failed to comply with the guideline premium requirements of sec_7702 due to treatment of qabs hereinafter referred to as the qab error taxpayer has modified its sec_7702 compliance administrative system to eliminate the qab error under its modified system and any successor system taxpayer’s calculation of guideline premiums will reflect only reasonable charges for the riders that taxpayer actually expects to impose consistent with the requirements of sec_7702 taxpayer believes that the administrative procedures that it maintains relating to the compliance of policies under sec_7702 are now adequate taxpayer proposes to remedy the noncompliance of each of the failed policies that is in force on the effective date of the requested waiver as appropriate and under which the sum of the premiums_paid as of that date exceeds the guideline_premium_limitation as of that date by refunding to the policyholder the amount of such excess with interest using rates at least as high as those applied for purposes of crediting interest to the policies’ contract values taxpayer has already or will implement these corrective measures within days of the date of this letter law and analysis sec_7702 defines the term life_insurance_contract for all purposes of the code under sec_7702 a life_insurance_contract must qualify as such under the applicable law and must satisfy either the cash_value_accumulation_test of sec_7702 and sec_7702 or both the guideline premium requirements of sec_7702 and sec_7702 and the cash_value corridor of sec_7702 and sec_7702 with respect to the guideline premium requirements sec_7702 requires that the premium paid under the contract at any time must not exceed the greater of the guideline_single_premium or the sum of the guideline_level_premium to that date the guideline_single_premium is the single premium at issue that is needed to fund the future_benefits under the contract determined on the basis of the following three elements enumerated in sec_7702 i - iii i reasonable mortality charges which meet the requirements if any prescribed in regulations and which except as provided in regulations do not exceed the mortality charges specified in the prevailing_commissioners’_standard_tables as defined in sec_807 as of the time the contract is issued ii any reasonable charges other than mortality charges which on the basis of the company’s experience if any with respect to similar contracts are reasonably expected to be actually paid and iii interest at the greater of an annual effective rate of percent or the rate or rates guaranteed on issuance of the contract the guideline_level_premium is the level annual equivalent of the guideline_single_premium payable until a deemed_maturity_date between the insured’s attained ages and using a minimum interest rate of percent rather than percent accordingly the amount of both the guideline_single_premium and guideline_level_premium is proportional to the amount of future_benefits under the contract the computational rules of sec_7702 and the definitions of sec_7702 apply to both the guideline_single_premium and the guideline_level_premium sec_7702 defines the term future_benefits to mean death_benefits and endowment benefits sec_7702 i - v provides that the term qualified_additional_benefits means any-- i guaranteed insurability ii accidental death or disability benefit iii family term coverage iv disability waiver benefit or v other benefit prescribed under regulations sec_7702 provides that qualified_additional_benefits shall not be treated as future_benefits under the contract but that charges for such benefits shall be treated as future_benefits in computing the guideline premium for a policy to which rider a or rider b was attached taxpayer treated the charges for the rider as a future benefit and accordingly increased the guideline premium for each policy by that amount taxpayer however treated those charges under the reasonable mortality charge standard set forth in sec_7702 rather than the reasonable expense charge standard set forth in sec_7702 charges contemplated by sec_7702 are deemed reasonable if they do not exceed the charges set forth in the cso mortality_table regardless of whether the charges actually set forth in the contract are less than the cso amount in contrast charges contemplated by sec_7702 are deemed reasonable only if they reflect the amount expected to be actually paid which typically correlates to a company’s actual charges consequently in many instances the guideline premium attributable to certain benefits will be higher if treated under sec_7702 rather than sec_7702 although the code in setting forth the guideline premium limitations does not specifically direct taxpayers to treat riders a and b under sec_7702 rather than c b i the rules applicable to the cash_value_accumulation_test are controlling in this regard particularly sec_7702 provides one of the computational rules for determining the net_single_premium used to ascertain compliance with the cash_value_accumulation_test sec_7702 states that such computation in the case of qualified_additional_benefits shall be made on the basis of sec_7702 thus for purposes of the cash_value_accumulation_test riders a and b are treated under sec_7702 although the requirement set forth in sec_7702 refers only to the determination required for the cash_value_accumulation_test and does not expressly apply to the guideline premium limitations this provision is the only direction provided by congress as to how charges for qualified_additional_benefits are to be considered from a computational standpoint the legislative_history moreover is absent of any indication that there be two separate standards for inclusion of such charges one for the cash_value_accumulation_test and one for the guideline_premium_limitation given congress’ indication that qabs should be treated under sec_7702 for purposes of the cash_value_accumulation_test and absent any indication to the contrary we conclude that sec_7702 b b implicitly requires riders a and b benefits to be treated under sec_7702 c b ii for purposes of the guideline premium limitations as well under sec_7702 the secretary_of_the_treasury may waive the failure to satisfy the requirements of sec_7702 if the taxpayer establishes that the requirements were not satisfied due to reasonable error s and that reasonable steps are being taken to remedy the error s after considering all the facts and circumstances we find that failure of number policies to satisfy the requirement of sec_7702 was due to reasonable errors and taxpayer is taking reasonable steps to remedy the errors conclusion accordingly based on the information submitted the failure of number contracts to satisfy the requirements of sec_7702 is waived pursuant to sec_7702 provided that the excess premiums are refunded with interest calculated equal to or greater than the contract crediting rate as of the date of the cure any contracts that are not cured within days of the date of this letter are not covered by this waiver the rulings contained in this letter are based on information 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 a ruling it is subject_to verification on examination except as 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 s requesting it sec_6110 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 taxpayer sincerely yours s mark s smith chief branch office of associate chief_counsel financial institutions and products