t c no united_states tax_court dover corporation and subsidiaries petitioner v commissioner of internal revenue respondent docket no filed date d and h united kingdom corporations were controlled_foreign_corporations with respect to p h was a wholly owned subsidiary of d in d sold the stock of h to an unrelated third party in p requested that h be granted an extension of time to retroactively elect to be treated as a disregarded_entity pursuant to sec_301_7701-3 proced admin regs effective immediately prior to d’s sale of the h stock r granted the requested extension of time on date h’s retroactive disregarded_entity election was filed on or about date pursuant to that election there was for federal tax purposes a deemed sec_332 i r c liquidation of h followed immediately by d’s deemed sale of h’s assets rather than a sale by d of the h stock held in light of r’s administrative guidance pertaining to the tax effects of a liquidation governed by sec_332 and sec_381 i r c d’s deemed sale of h’s assets constitutes a sale of property used in d’s trade_or_business within the meaning of sec_1 e ii through iv income_tax regs with the result that d’s gain on that sale does not constitute subpart_f_foreign_personal_holding_company_income to p pursuant to sec_954 i r c 119_tc_157 applied robert d whoriskey george pompetzki eduardo a cukier and linda galler for petitioner lyle b press for respondent opinion halpern judge dover corporation petitioner is the common parent of an affiliated_group_of_corporations making a consolidated_return of income the group or affiliated_group by notice_of_deficiency dated date the notice respondent determined deficiencies in federal_income_tax for the group for its and taxable calendar years in the amounts of dollar_figure and dollar_figure respectively all but one of the adjustments that gave rise to those determinations have been settled and this report addresses the sole remaining issue which involves an interaction between the so-called check-the-box_regulations and the definition of foreign_personal_holding_company_income fphci viz whether the deemed sale of assets immediately following their deemed receipt pursuant to the check-the-box_regulations from a disregarded foreign_entity gives rise to fphci unless otherwise stated all section references are to the internal_revenue_code in effect for the year at issue and all rule references are to the tax_court rules_of_practice and procedure introduction background this case was submitted for decision without trial pursuant to rule facts stipulated by the parties are so found the stipulation of facts filed by the parties with attached exhibits is included herein by this reference respondent objects on the grounds of relevance to exhibits referenced in certain of the stipulations see the discussion infra section iv petitioner is a delaware corporation whose shares are publicly traded and which maintains its principal_place_of_business in new york new york business activities of the affiliated_group together the affiliated_group is a diversified industrial manufacturer producing through its members and foreign subsidiaries a broad range of products and sophisticated manufacturing equipment for other industries and businesses during and prior to the group’s business activities were divided into five business groups one of which was known as dover elevator dover elevator dover elevator like each of the other business groups was managed by a headquarters corporation dover elevator international inc dei a domestic_corporation however not all of the corporations that constituted dover elevator were direct or indirect subsidiaries of dei during dei’s united kingdom uk elevator business was conducted by hammond champness limited h c a uk corporation engaged in the business of installing and servicing elevators h c was wholly owned by a uk holding_company dover u k holdings limited dover uk which was wholly owned by a delaware corporation delaware capital formation dcf which finally was wholly owned by petitioner sale of h c on date dover uk and petitioner entered into an agreement with thyssen industrie holdings u k plc thyssen a german corporation registered in england and wales and its german parent thyssen industrie ag for the sale by dover uk to thyssen of the entire issued share capital of h c the agreement or stock sale agreement the agreement provided that it and other specified documents and agreements relating to the sale were to be held in escrow until the escrow release date date by which time it was anticipated that the purchaser would have completed its due diligence inquiries and determined that it does wish to proceed with the sale the escrow condition dover uk as vendor also agreed to accomplish certain document deliveries and undertakings by july at which time thyssen as purchaser was required to satisfy the consideration for the shares dover uk also agreed to carry on the h c business in the normal course without any interruption between june and date on date thyssen notified dover uk that the escrow condition had been satisfied and we assume since there is no stipulation the purchase_price was received by dover petitioner obtained an opinion of uk counsel dated date that as a matter of english law beneficial title to the h c shares passed from dover uk to thyssen on date when the escrow condition was satisfied retroactive election to treat h c as a disregarded_entity by letter dated date petitioner on behalf of its then former indirect subsidiary h c requested that respondent grant an extension of time pursuant to sec_301_9100-1 and sec_301_9100-3 proced admin regs for h c to file a retroactive election to be a disregarded_entity for federal tax purposes the request for relief dei sold its german elevator service subsidiaries to thyssen effective date and members of the affiliated_group sold the remainder of the group’s elevator business within and without the united_states to thyssen industrie ag and thyssen elevator holding corp in date thus in a series of three transactions the thyssen group purchased the group’s worldwide elevator business specifically petitioner requested h c be granted an extension of time to make an election a to be disregarded as an entity separate from its owner for u s tax purposes and b effective immediately prior to the sale of stock in h c by dover uk to thyssen uk in the request for relief petitioner stated that the date of the sale was date and on the form_8832 entity classification election form attached to the request for relief it set forth date as the proposed effective date of the election initially respondent was reluctant to grant the request for relief in large part because in respondent’s view petitioner should not be entitled to benefits it might claim resulted from the disregarded_entity election ie the avoidance of fphci on the deemed sale of the h c assets however after representatives of petitioner and respondent conferred and petitioner made a supplemental submission respondent on date granted the requested relief specifically respondent granted to h c an extension of time for making the election to be disregarded as an entity separate from pursuant to sec_301_7701-3 proced admin regs h c could have made the election to be a disregarded_entity at any time within days after the date date specified on the election form form entity classification election because petitioner inadvertently missed that deadline it was required to request an extension of time pursuant to sec_301_9100-1 and sec_301_9100-3 proced admin regs to make the election its owner for federal tax purposes effective immediately prior to the sale on date3 until days following the date of this letter respondent however added the following caveat no inference should be drawn from this letter that any gain from the sale of h c’s assets immediately following its election to be disregarded as an entity separate from its owner gives rise to gain that is not foreign_personal_holding_company_income as defined in sec_954 of the internal_revenue_code on or about date h c made an election on form_8832 to be disregarded as a separate_entity the form_8832 specifies that the election is to be effective beginning date i introduction discussion this case presents an issue of first impression and insofar as we are aware the first occasion that any court has had to opine on the impact of the so-called check-the-box_regulations on the application of a specific provision of the internal_revenue_code_of_1986 the code in this case sec_954 defining in part fphci based upon petitioner’s representation that is the assumed date of the sale of the h c stock by dover uk there has however been much commentary concerning the issue before us today e g sheppard behind the eight ball on check-the-box abuses tax notes date yoder everson check-and-sell transactions proposed_regulations continued ii code and regulations a the code the provision of the code principally at issue is sec_954 sec_954 is found in subpart_f of part iii subchapter_n chapter subtitle a of the code subpart_f which encompasses sections subpart_f is concerned with controlled_foreign_corporations cfcs neither party disputes that in both dover uk and h c up until it became a disregarded_entity were cfcs as that term is defined in sec_957 sec_951 provides that each united_states_shareholder of a cfc shall include in gross_income certain amounts including his pro_rata share of the cfc’s subpart_f_income for the taxable_year sec_951 subpart_f_income includes foreign_base_company_income as determined under sec_954 sec_952 pursuant to sec_954 foreign_base_company_income includes fphci which is defined in pertinent part in sec_954 as follows c foreign_personal_holding_company_income -- in general --for purposes of subsection a the term foreign_personal_holding_company_income means the continued withdrawn but still under attack tax mgmt int j date click treasury withdraws extraordinary check- the-box regulations tax notes date the parties do not dispute that petitioner constituted a united_states_shareholder as defined in sec_951 with respect to dover uk on the date of the sale of the h c stock portion of the gross_income which consists of b certain property transactions --the excess of gains over losses from the sale_or_exchange of property-- iii which does not give rise to any income b the regulation sec_1 regulations under sec_954 in pertinent part sec_1_954-2 income_tax regs which defines property that does not give rise to income provides property that does not give rise to income except as otherwise provided in this paragraph e for purposes of this section the term property that does not give rise to income includes all rights and interests in property whether or not a capital_asset including for example forwards futures and options property that does not give rise to income shall not include-- ii tangible_property other than real_property used or held for use in the controlled foreign corporation’s trade_or_business that is of a character that would be subject_to the allowance for depreciation under sec_167 or sec_168 and the regulations under those sections including tangible_property described in sec_1_167_a_-2 iii real_property that does not give rise to rental or similar income to the extent used or held for use in the controlled foreign corporation’s trade_or_business iv intangible_property as defined in sec_936 goodwill or going_concern_value to the extent used or held for use in the controlled foreign corporation’s trade_or_business in pertinent part sec_1_954-2 income_tax regs provides the use for which property is held is that use for which it was held for more than one-half of the period during which the controlled_foreign_corporation held the property prior to the disposition the check-the-box_regulations a development and issuance of the regulations the commissioner announced in notice_95_14 1995_1_cb_297 that the internal_revenue_service irs and the department of the treasury treasury were considering simplifying the entity classification regulations to allow taxpayers to treat both domestic unincorporated and foreign business organizations as partnerships or associations generally taxable as corporations on an elective basis in notice_95_14 the commissioner justified the proposed radical departure from the existing classification regulations by observing that as a consequence of the narrowing of the differences under local law between corporations and partnerships taxpayers can achieve partnership tax classification for a non-publicly traded organization that in all meaningful respects is virtually indistinguishable from a corporation id the commissioner further observed that the proliferation of revenue rulings revenue procedures and letter rulings determining or relating to the classification for federal tax purposes of limited_liability companies and partnerships formed under state law had made the existing classification regulations unnecessarily cumbersome to administer and the resulting complexities risked leaving small unincorporated organizations with insufficient resources and expertise to apply the current classification regulation to achieve the organization’s desired classification id the commissioner also stated that because the same types of concerns are mirrored in the foreign context the irs and treasury are considering simplifying the classification rules for foreign organizations id pincite notice_95_14 invited comments and scheduled a public hearing id pincite in the written comments and public hearing were followed by the issuance of first proposed and then final classification regulations see ps-43-95 proposed income_tax regs fed reg date the proposed_regulations t d date 1997_1_cb_215 the final regulations the classification regulations are commonly referred to as the check-the-box_regulations because of their elective feature see eg schler initial thoughts on the proposed ‘check-the-box’ regulations tax notes date not only did both sets of regulations permit most domestic unincorporated and foreign business organizations to elect between association and partnership classification for federal tax purposes as first proposed in notice_95_14 but of particular relevance to this case they both extended the elective regime to single-owner organizations under the final regulations single-owner organizations are permitted to elect to be recognized or disregarded as entities separate from their owners sec_301_7701-1 proced admin regs the final regulations became effective as of date with a special transition rule for existing entities t d c b pincite the final regulations provide a list of organizations substantially the same as those listed in the proposed_regulations formed under foreign or u s possession law that subject_to certain grandfather rules are treated as per se corporations see sec_301_7701-2 d proced admin regs in general the list includes the publicly traded limited_liability organization that may be formed under the law of each country or possession the per_se_corporation under united kingdom law is a public limited_company h c was not such a company the check-the-box_regulations like the classification regulations that they replaced were issued under sec_7701 and which defines the terms partnership and corporation some commentators have questioned whether the regulations constitute a valid exercise of the treasury secretary’s authority under sec_7805 to issue interpretive regulations see eg staff of joint_committee on taxation review of selected entity classification and partnership tax issues pincite j comm print date mckee et al federal taxation of partnerships and partners par dollar_figure pincite 3d ed dougan et al check the box --looking under the lid continued the preamble to the final regulations contains the following warning to taxpayers in light of the increased flexibility under an elective regime for the creation of organizations classified as partnerships treasury and the irs will continue to monitor carefully the uses of partnerships in the international context and will take appropriate action when partnerships are used to achieve results that are inconsistent with the policies and rules of particular code provisions or of u s tax_treaties t d c b pincite the preamble to the proposed_regulations contains a substantially identical warning except that the promise is to issue appropriate substantive guidance rather than take appropriate action with regard to the use of partnerships for what treasury and irs consider improper purposes in the international context see fed reg pincite0 date we surmise that the change in language signaled an intent not only to address perceived abuses in the use of partnerships in amended regulations revenue rulings or other public pronouncements that generally would have prospective effect but also to challenge those perceived abuses on audit for no apparent reason the warning did not extend to allegedly inappropriate uses of disregarded entities the type of organization involved in this case continued tax notes date mundstock a unified approach to subchapters k s ndollar_figure neither party has challenged the validity of all or any portion of the regulations therefore for purposes of this case we accept without deciding that the regulations are valid b amendments to the regulations since they were issued the final check-the-box_regulations have been amended several times the only relevant amendments were additions to the regulations that together constitute the existing paragraph g of sec_301_7701-3 proced admin regs see t d 1999_2_cb_661 t d 2002_1_cb_281 although those amendments are generally effective as of the dates of issuance date and date respectively both amendments provide for retroactive application_for elections filed before those dates if all affected persons take consistent filing positions see sec_301_7701-3 proced admin regs the parties have stipulated that the election by h c on form_8832 to be a disregarded_entity was filed on or about date which precedes the general effective dates on brief both parties have cited and relied upon portions of sec_301_7701-3 proced admin regs therefore we find that the parties agree to the retroactive application of paragraph g of sec_301_7701-3 proced admin regs to h c’s disregarded_entity election c applicable provisions of the regulations sec_301_7701-3 proced admin regs sets forth the general_rule that a business_entity that is not classified as a corporation can elect its classification for federal tax purposes as provided in this section in pertinent part sec_301_7701-3 proced admin regs provides iii association to disregarded_entity if an eligible_entity classified as an association elects to be disregarded as an entity separate from its owner the following is deemed to occur the association distributes all of its assets and liabilities to its single owner in liquidation of the association sec_301_7701-2 proced admin regs states that if an entity is disregarded its activities are treated in the same manner as a sole_proprietorship branch or division of the owner under sec_301_7701-3 proced admin regs a classification election including an election to change classification is made by filing a form_8832 with the irs service_center designated on that form under subdivision iii the election is effective on the date specified by the entity on form if as in this case one is specified under sec_301_7701-3 proced admin regs an election to change classification is treated as occurring at the start of the day for which the election is effective and a ny transactions that are deemed to occur as a result of a change in classification eg in the case of a change in classification from association to disregarded_entity the deemed liquidation are treated as occurring immediately before the close of the day before the election is effective for example if h c’s disregarded_entity election is effective as of the start of business on date the deemed liquidation of h c is treated as occurring immediately before the close of business on date the making of a disregarded_entity election is considered to be the adoption of a plan_of_liquidation immediately before the deemed liquidation thereby qualifying the parties to the deemed liquidation for tax-free treatment under sec_332 and sec_337 sec_301_7701-3 proced admin regs lastly sec_301_7701-3 proced admin regs provides effect of elective changes -- i in general the tax treatment of a change in the classification of an entity for federal tax purposes by election under paragraph c i of this section is determined under all relevant provisions of the internal_revenue_code and general principles of tax law including the step_transaction_doctrine the preamble to the proposed_regulations which contains the identical provision explains the purpose of the above quoted provision this provision is intended to ensure that the tax consequences of an elective change will be identical to the consequences that would have occurred if the taxpayer had actually taken the steps described in the regulations reg-105162-97 fed reg date iii summary of the parties’ arguments a petitioner’s argument petitioner argues that by permitting a corporate taxpayer to disregard the separate_entity status of a subsidiary and instead treat the subsidiary’s business as a hypothetical branch or division of the parent the check-the-box_regulations override the principle based upon 319_us_436 that the separate_entity status of a corporation may not be ignored for federal tax purposes as a result as petitioner sees it dover uk is deemed not only to sell h c’s assets rather than its shares in h c but is deemed to be engaged in h c’s business at the time of that sale therefore petitioner argues that the h c assets are excluded by sec_1_954-2 through iv income_tax regs from the definition of property which does not give rise to any income with the result that the deemed sale of those assets did not give rise to fphci pursuant to sec_954 alternatively petitioner argues that giving effect to the plain and ordinary meaning of sec_954 dover uk’s deemed sale of the operating_assets of h c could not we find the parties to be in agreement that whatever our decision regarding the issue of whether dover uk’s deemed sale of the h c operating_assets constituted a sale of property which does not give rise to any income that decision applies to all of h c’s assets as of the date of the deemed asset sale to thyssen possibly have been a sale of property ‘which does not give rise to any income’ because those assets were components of an active ongoing commercial enterprise which did give rise to income therefore petitioner argues that because the requirement in sec_1_954-2 through iv income_tax regs that such assets be used in the seller’s trade_or_business goes beyond the narrow statutory mandate that such assets simply not be property which does not give rise to any income that regulation is invalid b respondent’s arguments respondent argues that the deemed sale of the h c operating_assets was not a sale of property used or held for use in dover uk’s business therefore respondent continues that property was not excluded from the definition of property which does not give rise to any income pursuant to sec_1_954-2 through iv income_tax regs and its deemed sale by dover uk gave rise to fphci taxable to petitioner sec_951 sec_952 sec_954 c b iii based primarily on the statutory language and legislative_history of sec_954 respondent also rejects petitioner’s argument that sec_1_954-2 through iv income_tax regs is invalid iv motion and evidentiary objection a petitioner’s motion to strike introduction on date after the parties’ submission of briefs pursuant to rule petitioner moved to strike respondent’s argument that as a matter of law the doctrine_of duty_of_consistency mandates a finding that dover uk’s sale of h c stock to thyssen was completed as of date not july as urged by petitioner duty_of_consistency argument in its motion petitioner denies that it is attempting to change or recharacterize the facts regarding the date of the sale of the h c stock in this fully stipulated case or that it has acted in a deceitful or misleading way as implied by respondent rather petitioner states that the issue as to whether the stock sale agreement provided for a june or july sale of the h c stock presents an issue of law and its prior representation that the date of sale was date constituted a clear cut mistake of law not a misrepresentation of fact petitioner also argues that respondent was not surprised by petitioner’s argument because on date more than a year before it filed its opening brief on date petitioner apprised respondent of its new position regarding the date of sale that notification consisted of a letter to respondent’s counsel enclosing a copy of an opinion of u k counsel that under english law date was the actual date on which the sale of the h c stock was completed respondent objects to petitioner’s motion on the ground that respondent’s position is nothing more than a legitimate legal argument and petitioner has not shown that respondent’s arguments are redundant immaterial impertinent frivolous or scandalous matter within the meaning of rule in essence petitioner’s motion raises the issue of whether we should strike respondent’s attack on petitioner’s argument that the sale of the h c stock occurred on date the date referred to in the stock sale agreement as the escrow release date rather than on date the date of that agreement and the date represented by petitioner to be the date of sale in the request for relief in framing that issue the parties have assumed that were we to find that the stock sale occurred on date rather than on date there necessarily would be an 11-day period between the deemed liquidation of h c into dover uk and dover uk’s deemed sale of the h c operating_assets during which period dover uk must be deemed to have operated the h c business as its own under those circumstances petitioner’s assertion that dover uk’s deemed sale of the h c operating_assets constituted a sale of property used in its dover uk’s business is arguably more persuasive than it would be if the assets are deemed to have been sold immediately after the deemed liquidation of h c the underlying assumption by both parties is that whether the sale of the h c stock and therefore the deemed sale of h c’s assets occurred on june or date the deemed liquidation of h c is considered to have occurred immediately before the close of business on date the day before the effective date of h c’s disregarded_entity election as specified in the form_8832 filed by h c see sec_301_7701-3 g i proced admin regs we question that underlying assumption in its initial request for relief petitioner specifically requested that h c be granted an extension of time to make a disregarded_entity election effective immediately prior to the sale of stock in h c by dover uk to thyssen uk emphasis added consistent with petitioner’s request respondent granted to h c an 60-day extension of time for making a disregarded_entity election effective immediately prior to the sale of h c stock on date emphasis added both petitioner in filing the form_8832 listing date as the effective date of the disregarded_entity election and respondent in accepting that filing believed that date was the date of the h c stock sale and that the deemed liquidation occurred immediately prior to that sale therefore although it is not addressed by the parties we believe that the parties’ mutual understanding that the deemed liquidation of h c was to be effective immediately prior to the sale of the h c stock raises an issue as to whether that deemed liquidation should be treated as occurring immediately prior to the sale whether that sale occurred on june or date or regardless of the actual date of sale immediately before the close of business on date the day before the effective date of the disregarded_entity election as specified in the form_8832 filed by h c we find it unnecessary to resolve that issue however because as discussed infra section v c our decision does not depend upon the length of time between the deemed liquidation of h c and the actual sale of its stock ie deemed sale of its assets because resolution of the date-of-sale issue is unnecessary to our decision in this case the issue as to whether respondent’s duty_of_consistency argument should be stricken is essentially moot conclusion petitioner’s motion to strike will be denied b respondent’s objection to stipulated exhibits the exhibits to which respondent objects on the grounds of relevance were all executed in connection with the sale of the h c stock to thyssen they were introduced by petitioner in order to show the multiplicity of steps taken and documents executed between june and date in order to complete the sale in accordance with the terms of the date agreement as stated supra section iv a our decision in this case does not depend upon the actual date of the h c stock sale as a result respondent’s evidentiary objection like petitioner’s motion to strike respondent’s duty-of-consistency argument is essentially moot therefore we shall overrule respondent’s objection v status of the h c assets as assets used in dover uk’s business application of sec_1_954-2 income_tax regs a introduction petitioner argues that dover uk’s deemed sale of the h c assets qualifies as a sale of property used in dover uk’s trade_or_business therefore pursuant to sec_1_954-2 through iv income_tax regs that property is not within the meaning of sec_954 property which does not give rise to any income and dover uk’s sale does not give rise to fphci taxable to petitioner in support of its argument petitioner relies upon the check-the-box_regulations and revenue rulings previously issued by respondent respondent disagrees on the basis of caselaw which he cites in support of his argument that dover uk’s deemed sale of the h c operating_assets did not constitute a sale of assets used or held for use in dover uk’s business within the meaning of sec_1_954-2 through iv income_tax regs b the relevant authoritie sec_1 sec_301_7701-2 proced admin regs petitioner argues that the check-the-box_regulations impose continuity of business_enterprise as a consequence of a disregarded_entity election citing sec_301_7701-2 proced admin regs in pertinent part that regulation provides if a business_entity with only one owner is disregarded its activities are treated in the same manner as a sole_proprietorship branch or division of the owner petitioner argues as a consequence of the above-quoted regulation there was as a matter of law and under respondent’s own check-the-box_regulations a continuing business use of h c’s assets which were deemed to be a branch or division of dover uk the revenue rulings petitioner also argues that respondent’s position in this case is wholly inconsistent with his position contained in published revenue rulings which under principles derived from the attribute carryover rules of sec_381 applicable to sec_332 liquidations unequivocally attribute the trade_or_business of a subsidiary that is liquidated under sec_332 to its parent therefore because h c’s disregarded_entity election involved a deemed sec_332 liquidation of h c see sec_301_7701-3 and ii proced admin regs petitioner concludes that respondent’s position violates the principle of 119_tc_157 that taxpayers should be entitled to rely on revenue rulings in structuring their transactions and they should not be faced with the daunting prospect of the commissioner’s disavowing his rulings in subsequent litigation the revenue rulings cited by petitioner involve the question of whether the liquidation_of_a_subsidiary followed by a pro_rata distribution of the proceeds of the sale of the subsidiary’s assets to the parent’s shareholders in partial_redemption of the parent’s stock may qualify as a partial_liquidation of the parent under former sec_346 the seminal ruling upon which petitioner relies is rev_rul at the time of the issuance of the revenue rulings cited by petitioner sec_331 and sec_336 governed the tax consequences to the shareholders and distributing_corporation respectively of a partial or complete_liquidation of the corporation and sec_346 defined the term partial_liquidation sec_222 of the tax equity and fiscal responsibility act of tefra publaw_97_248 96_stat_478 amended sec_346 to eliminate the definition of partial_liquidation contained therein and sec_331 and sec_336 to omit the reference in each to a partial_liquidation sec_222 of tefra also amended sec_302 so that essentially it embodies the former sec_346 definition of a partial_liquidation and sec_302 so that it treats a redemption of stock from a non-corporate shareholder in connection with a partial_liquidation of the distributing_corporation as a distribution in part or full payment in exchange for the stock under sec_302 1975_2_cb_109 that ruling describes three situations in which a parent_corporation p disposes of a wholly owned operating subsidiary s in situation p liquidates s in a tax-free sec_332 liquidation and sells the s assets for cash p distributes the cash to p’s shareholders in redemption of a portion of their p stock situation is the same as situation except that s sells its own assets for cash prior to the sec_332 liquidation and subsequent redemption distribution by p in situation p simply distributes the s stock pro_rata to its shareholders in redemption of a portion of their p stock the issue as stated in the ruling is whether and to what extent the fact that a corporation has conducted a portion of its business activities through a subsidiary rather than directly precludes the application of sec_346 of the code c b pincite under former sec_346 a distribution in partial_redemption of the stock of a corporation is considered to be made in partial_liquidation of the corporation if the distribution is on account of the distributing corporation’s ceasing to conduct or consists of the assets of a trade_or_business actively conducted throughout the prior 5-year period and not acquired by the corporation within such period in a taxable transaction former sec_346 and b see also sec_1_346-1 income_tax regs stating an example of a distribution which will qualify as a partial_liquidation under sec_346 is a distribution resulting from a genuine contraction of the corporate business the revenue_ruling after noting that t he business activities of a subsidiary are not generally considered to be business activities of its parent_corporation recognizes that under a sec_332 liquidation where the carryover_basis rules of sec_334 apply s ection in effect integrates the past business results of the subsidiary as represented by its earnings_and_profits net_operating_loss_carryover etc with those of the parent_corporation revrul_75_223 c b pincite the revenue_ruling then states for most practical purposes the parent_corporation after the liquidation of the subsidiary is viewed as if it has always operated the business of the liquidated subsidiary consequently there is no meaningful distinction for purposes of sec_346 between a corporation that distributes the assets of a division or the proceeds of a sale of those assets and a parent_corporation that distributes assets of a subsidiary or the proceeds of a sale of such assets received from the subsidiary in a liquidation governed by sec_332 and sec_381 id accordingly the ruling holds that in situation sec_1 and the fact that the distributions were attributable to assets that were used by a subsidiary rather than directly by the parent will not prevent the distribution from qualifying as a ‘genuine contraction of the corporate business’ of the parent within the meaning of sec_1_346-1 of the regulations iddollar_figure in chief_counsel memorandum g_c_m big_number date the irs chief_counsel described the position taken in revrul_75_223 and in g_c_m big_number date in which the chief_counsel gave advance approval to the position taken in revrul_75_223 as follows under that ruling rev_rul and g_c_m a distribution by a parent_corporation of the assets of a subsidiary or the proceeds of a sale of such assets received in a liquidation governed by code sec_332 and sec_381 is to be treated no differently than a distribution by a corporation of the assets of a branch or division or the proceeds of a sale of such assets the ruling contrasts the partial_redemption distribution in situation and treats it as a corporate separation governed by sec_355 rather than as a corporate_contraction qualifying as a partial_liquidation within the meaning of sec_346 revrul_75_223 1975_1_cb_109 unlike situation sec_1 and situation does not involve a sec_332 liquidation entailing a carryover of tax_attributes under sec_381 see also revrul_79_184 1979_1_cb_143 involving a parent’s sale of the stock of its wholly owned subsidiary followed by a distribution pro_rata of the sales proceeds to the shareholders of the parent in partial_redemption of their stock analogizing the facts of that ruling to the facts of situation of revrul_75_223 revrul_79_184 c b pincite holds that the overall transaction has the economic significance of the sale of an investment and distribution of the proceeds and does not qualify as a distribution in partial_liquidation within the meaning of sec_346 although under treasury regulations g_c_m s do not establish precedent see sec_1 b income_tax regs they have been described as an expression of agency policy 646_f2d_666 d c cir moreover the court_of_appeals for the second circuit the court to which an appeal of this decision most likely would lie has stated that under certain circumstances it may be proper to rely on g_c_m s for interpretive guidance 984_f2d_560 2d cir respondent reaffirmed his revrul_75_223 position in revrul_77_376 1977_2_cb_107 he also reaffirmed that position in subsequent private letter rulingsdollar_figure see eg priv ltr rul date priv ltr rul date and priv ltr rul date applying the principles of revrul_75_223 in finding partial_liquidation distributions under sec_302 and e respondent has also reaffirmed his revrul_75_223 position in the context of transactions other than partial liquidations see eg priv ltr rul date involving an amalgamation of a united_states shareholder’s country x cfcs which qualified as a corporate acquisition within the meaning of sec_381 pursuant to the amalgamation cfc f1 contributed the stock of its subsidiary f2 to a new cfc newco in exchange for newco stock and debentures the latter consideration constituting a dividend to f1 under sec_356 newco combined with several operating company cfcs three of which were same country country x subsidiaries of f1 to form newco ii in the private_letter_ruling the commissioner private letter rulings may be cited to show the practice of the commissioner see 452_us_247 ndollar_figure 369_us_672 119_tc_157 n 97_tc_74 n 85_tc_274 ndollar_figure states that a surviving corporation carries with it all those characteristics which the merged corporation had prior to the merger including the attribute of a predecessor_corporation having engaged in a trade_or_business with respect to the use of its assets even though that is not an item specifically listed in sec_381 as carrying over to the surviving corporation accordingly the irs ruled that the amounts treated as sec_356 dividends_paid to f1 out of the earnings_and_profits of a party to the newco ii amalgamation which were accumulated when that party was a related_person to f1 within the meaning of sec_954 had been created or organized under the same foreign_country laws as f1 and had a substantial part of the assets used in its trade_or_business located in such foreign_country would not be includable in fphci of f1 for purposes of sec_954 by reason of sec_954 now sec_954 the so- called same_country_exception to the treatment as fphci of related_party dividends or interest in other words the irs found that newco ii inherited from former operating subsidiaries of f1 collapsed into it in a transaction subject_to sec_381 the attribute of being engaged in a trade_or_business with respect to the use of those subsidiaries’ assets therefore a portion of the newco ii dividend to f1 arising out of f1's receipt of the newco i debentures which become newco ii debentures was excluded from fphci by the same_country_exception the caselaw respondent relies principally upon four cases in support of his argument that the h c assets were not used in dover uk’s business before their deemed sale by dover uk 615_f2d_226 5th cir affg tcmemo_1976_275 94_tc_455 affd 931_f2d_314 5th cir 39_tc_377 affd 334_f2d_40 6th cir and ouderkirk v commissioner tcmemo_1977_120 in three of those cases reese azar nut and ouderkirk the issue is whether an individual’s gain_or_loss on the sale of a parcel of real_property is capital or ordinary a reese v commissioner in reese the taxpayer financed the construction of a manufacturing plant which he intended to sell to investors who would agree to lease the building to a corporation for use in the corporation’s manufacturing business the taxpayer was the chief officer and principal_shareholder of the corporation the partially completed plant was sold at a loss to satisfy a judgment against the taxpayer the issue was whether the loss was capital or ordinary the taxpayer argued for ordinary_loss treatment on the ground that the plant was either held primarily_for_sale_to_customers in the ordinary course of his construction business or used in a trade_or_business excludable in either case from capital_asset status under what respectively are now paragraphs and of sec_1221 the court_of_appeals for the fifth circuit found that the taxpayer’s activities in financing and acting as builder developer and general contractor for the construction of the plant between and when the building was sold constituted an isolated non-recurring venture which did not constitute a trade_or_business and the property sold was intended for use by the corporation in its manufacturing business not by the taxpayer in his business of being a corporate executive reese v commissioner f 2d pincite therefore the court_of_appeals held that the property was not excluded from the definition of a capital_asset as either property_held_for_sale to customers in the ordinary course of business or as property used in the taxpayer’s trade_or_business id in support of his argument that dover uk’s deemed holding of the h c operating_assets for only a moment before the sale did not transform those assets into assets used in dover uk’s business respondent relies on the conclusion of the court_of_appeals in reese that an isolated non-recurring venture cannot amount to the conduct_of_a_trade_or_business the facts before the court_of_appeals and the question it answered however are distinguishable from the facts and question before us in reese the court_of_appeals was asked to conclude and did conclude that the taxpayer’s venture into real_property construction never amounted to the conduct_of_a_trade_or_business here on the deemed liquidation of h c dover uk is deemed to have received the assets of what undeniably was an ongoing business the question is whether that business was ever conducted by dover uk reese does not answer that questiondollar_figure b ouderkirk v commissioner and azar nut co v commissioner ouderkirk v commissioner tcmemo_1977_120 involved an individual who in connection with the liquidation of a corporation received big_number acres of cut-over timberland and an obsolete and inefficient sawmill both of which the taxpayer contributed to a partnership owned by him and his wife after refurbishment the sawmill was placed in operation over an year period approximately percent of the timber processed by the sawmill was acquired from sources outside the big_number acres of timberland owned by the partnership at the end of that period the partnership sold the sawmill at a loss which it reported the position of the court_of_appeals for the fifth circuit in 615_f2d_226 5th cir affg tcmemo_1976_275 that a single nonrecurring venture ordinarily will not be considered a trade_or_business has been referred to as the one-bite rule a rule that has been specifically rejected by this court see 89_tc_467 87_tc_1206 s h inc v commis78_tc_234 and passed through to the taxpayer and his wife as an ordinary_loss from the sale of property used in a trade_or_business and sold the timberland at a gain which it reported and passed through to the taxpayer and his wife as a capital_gain from the sale of an investment_asset the commissioner challenged the characterization of the timberland gain as capital_gain arguing that the timberland was not a capital_asset because it was property used in the partnership’s sawmill and lumber business we rejected the commissioner’s position and sustained the taxpayer’s argument that the property was investment_property in the hands of the partnership in reaching that conclusion we noted that t he incidental_use of this big_number acre tract in connection with the cutting of scattered timber did not convert the tract from investment_property to real_property used in the partnership’s sawmill business within the meaning of sec_1231 id in ouderkirk as in reese v commissioner supra the issue was whether the property in question had a business connection sufficient to require its exclusion from the definition of a capital_asset in ouderkirk as property used in a trade_or_business and in reese as inventory type property therefore ouderkirk like reese is distinguishable from this case where the issue is whether assets undeniably used in a trade_or_business were used in a trade_or_business conducted by dover uk in 94_tc_455 the taxpayer in connection with its termination of an individual’s employment purchased the employee’s residence at an appraised fair_market_value pursuant to the terms of an employment agreement the taxpayer immediately listed the house for sale at the purchase_price paid to its former employee but eventually incurred a substantial loss on the sale some months later because the house was never held for rental by the taxpayer or used or intended for use in the taxpayer’s business we held that it was not exempt from capital_asset status as property used in a trade_or_business and that the loss was therefore capital lossdollar_figure id pincite in azar nut as in ouderkirk v commissioner supra and reese v commissioner supra capital_asset status was based upon insufficient or no business use not as respondent argues in this case upon the identity of the user of assets undeniably used in a trade_or_business the taxpayer in 94_tc_455 affd 931_f2d_314 5th cir argued that the house was not a capital_asset because its purchase from the terminated employee and subsequent resale were connected with the taxpayer’s business ie the transactions arose out of a business necessity not an investment purpose we rejected that argument on the basis of 485_us_212 that case rejected the business connection- business motivation rationale of such cases as 221_f2d_944 2d cir relied upon by the taxpayer in azar nut affg 20_tc_983 and held that property constitutes a capital_asset unless it is excluded from capital_asset status by one of the specific statutory exclusions listed in what is now sec_1221 ark best corp v commissioner supra pincite c acro manufacturing co v commissioner in 39_tc_377 the taxpayer a manufacturer of precision switches and thermostatic controls acquired in a tax-free reorganization the stock of universal button company button a manufacturer of metal buttons for work_clothes some months later the taxpayer received an offer to buy all of the stock or assets of button because the taxpayer wished to avoid capital_loss on a sale of the button stock the parties to the transaction negotiated an agreement for the sale of button’s assets whereby the taxpayer would liquidate button and sell its assets to the purchaser pursuant to that agreement button adopted a plan of complete_liquidation on the following day less than months after its acquisition by the taxpayer button underwent a tax- free sec_332 liquidation and its assets were sold by the taxpayer to the purchaser for cash plus the purchaser’s assumption of the liabilities relating to the business formerly carried on by button button’s business continued uninterrupted during the foregoing ownership transfers the taxpayer argued that the non-capital asset character of the assets in button’s hands should carry over to the taxpayer after the sec_332 liquidation because under the sec_1223 holding_period tacking provisions the taxpayer is deemed to have held or owned those assets while they were used by button in the conduct of its business acro manufacturing co v commissioner supra pincite respondent while admitting that the assets distributed to the taxpayer in connection with the sec_332 liquidation of button were not capital assets in button’s hands argued that because the former button assets were never used in the taxpayer’s business they constituted capital assets in the taxpayer’s hands id pincite we rejected the taxpayer’s arguments and held that the character of the button assets did not automatically carry over to the taxpayer rather we stated that our concern was with the tax nature of those assets in the taxpayer’s hands we asked were the assets acquired or used in connection with a business_of_the_taxpayer id we found that the taxpayer neither acquired nor used the button assets in its business neither did the taxpayer enter into the button business id pincite in connection with those findings we rejected the taxpayer’s argument that it used the former button assets in its business for a short time between the same-day liquidation of button and sale of its assets stating that ownership for such a minimal transitory period is insufficient to establish ‘use’ of the distributed assets in the taxpayer’s business or to place the taxpayer in the button business id pincite as a result we found that the former button assets were capital assets in the taxpayer’s hands and the taxpayer’s sale of those assets resulted in a capital_loss id pincite both the result in acro manufacturing co v commissioner supra and our reasoning in reaching that result were affirmed by the court_of_appeals for the sixth circuit 334_f2d_40 6th cir in affirming our decision that the taxpayer’s minimal transitory period of actual ownership of assets whose character was non-capital in button’s hands was insufficient to establish their character as non-capital assets in the taxpayer’s hands the court_of_appeals observed that it was not advised of any showing by the taxpayer’s corporate records that the taxpayer did in fact operate the button business for any period of time id at dollar_figure while the facts of 39_tc_377 involve an actual rather than a deemed sec_332 liquidation we do not believe that that is a consequential difference because the period between the deemed_distribution in liquidation of h c’s assets and the deemed sale of those assets can be described as a minimal transitory respondent points out that dover uk failed to report any income from h c’s business on its return filed with the united kingdom inland revenue while we deem that fact irrelevant we note that dover uk’s united kingdom tax reporting position is justified by the fact that h c’s disregarded_entity election resulted in a deemed liquidation of h c effective for united_states but not united kingdom tax purposes period we conclude that the facts before us are as pertinent not distinguishable from the facts in acro manufacturing co c analysis and application of authorities respondent specifically acknowledges that for tax purposes h c’s disregarded_entity election constituted a deemed sec_332 liquidation of h c into dover uk whereby h c became a branch or division of dover uk respondent refers to the disregarded_entity election as a check-the-box liquidation and states that there is no difference between it and an actual sec_332 liquidation accordingly the principal question before us is whether attendant to a sec_332 liquidation the transferee parent_corporation succeeds to the business history of its liquidated subsidiary with the result that the subsidiary’s assets used in its trade_or_business constitute assets used in the parent’s trade_or_business upon receipt of those assets by the parent because dover uk’s disregarded_entity election is characterized as an actual liquidation of h c for income_tax purposes among the undisputed tax consequences are the following dover uk recognized neither gain nor loss on its deemed receipt of h c’s assets see sec_332 it succeeded to h c’s basis in those assets see sec_334 and it would add h c’s holding_period to its own deemed holding_period in those assets see sec_1223 moreover the deemed-received assets did not constitute a single mass asset with a unitary holding_period but comprised the numerous classes of both tangible and intangible_property necessary to constitute a going elevator installation and service business eg tools spare parts fixtures and accounts_receivable each item deemed received by dover uk came with a distinct carryover_basis and an existing holding_period cf 152_f2d_570 2d cir capital_asset status of the assets of a business sold shortly after the partnership conducting the business was terminated must be determined on an asset by asset basis agreeing as he must to the foregoing description of the tax consequences resulting to dover uk from its deemed receipt of h c’s assets respondent nevertheless argues dover uk must use or hold for use such assets for the requisite period of time in its trade_or_business before dover uk is allowed to exclude from fphci the gain from the deemed sale of those assets respondent refuses to attribute h c’s business history to dover uk dover uk had a separate identity from h c and the business of h c installing and servicing elevators was not the business of dover uk a holding_company in addition dover uk never intended to use the assets in an elevator business it acquired the assets for the purpose of selling those assets and avoiding fphci the arguments of the parties concerning whether we must deem dover uk to have succeeded to h c’s business history center on sec_381 which provides that the acquiring_corporation in a sec_332 liquidation succeeds to the various tax_attributes of the distributing_corporation described in sec_381dollar_figure while sec_381 does not list among the carryover attributes the distributing corporation’s business history we agree with petitioner that respondent’s denial that dover uk succeeded to h c’s business history is inconsistent with his position in revrul_75_223 1975_1_cb_109 revrul_77_376 1977_2_cb_107 g_c_m big_number date and a number of private letter rulings discussed supra section v b respondent argues that the conclusion reached in revrul_75_223 and reaffirmed in subsequent published and private rulings should be limited to sec_346 respondent further states that petitioner should not be allowed to argue that the tax_attributes of a subsidiary are carried over to the parent in all cases under sec_381 we disagree the crucial finding in all of the rulings discussed supra section v b is that in any corporate amalgamation involving the attribute carryover rules of sec_381 the surviving or recipient corporation is viewed as if it had always conducted the business of the formerly separate corporation s whose assets are among the tax_attributes of the transferor subsidiary that carry over to the transferee parent pursuant to sec_381 are net_operating_loss and capital_loss carryovers earnings_and_profits and the subsidiary’s overall_method_of_accounting method of computing inventories and method of computing the allowance for depreciation acquired by the surviving corporation see eg revrul_75_ c b pincite the chief_counsel has stated unequivocally that the impact of that finding on a distribution by a corporation of assets received by it in a sec_332 liquidation is that the distribution is to be treated no differently than a distribution by a corporation of the assets of a branch or division g_c_m big_number date although that principle has been applied by the commissioner in specific contexts generally in connection with former sec_346 or sec_302 partial liquidations it has been stated as a principle of law applicable in any case involving a corporate combination to which sec_381 applies that includes a sec_332 liquidation moreover if a parent corporation’s distribution to its shareholders of the operating_assets of a former subsidiary immediately after receiving those assets in a sec_332 liquidation of the subsidiary qualifies as a genuine contraction of the parent corporation’s business for purposes of sec_1_346-1 income_tax regs we fail to see any basis for not applying the same rationale to the parent’s sale of the liquidated subsidiary’s assets so that the sale is treated as a sale of assets used in the parent corporation’s business for purposes of sec_1_954-2 through iv income_tax regs in 119_tc_157 we refused to allow irs counsel to argue the legal principles of opinions against the principles and public guidance articulated in the commissioner’s currently outstanding revenue rulings id pincite consistent with our holding in rauenhorst we refuse to allow respondent to argue the legal principles of 39_tc_377 against the principles subsequently articulated in revrul_75_223 1975_2_cb_109 revrul_77_376 1977_2_cb_107 and g_c_m big_number date we therefore consider respondent to have conceded that as a direct result of a sec_332 liquidation of an operating subsidiary the surviving parent_corporation is considered as having been engaged in the liquidated subsidiary’s preliquidation trade_or_business with the result that the assets of that trade_or_business are deemed assets used in the surviving parent’s trade_or_business at the time of receipt see rauenhorst v commissioner supra pincite- as stated by respondent on brief pursuant to sec_301_7701-3 and i proced admin regs there is no difference between a check-the-box liquidation and an actual liquidation therefore notwithstanding our holding in acro manufacturing co v commissioner supra we conclude that we need not revisit our decision in that case at this time respondent has conceded that dover uk’s deemed sale of the h c assets immediately after the check-the-box liquidation of h c constituted a sale of property used in dover uk’s business within the meaning of sec_1_954-2 through iv income_tax regsdollar_figure that result is consistent with the conclusion of the court_of_appeals for the second circuit in 152_f2d_570 2d cir that depreciable_property and inventory that had been part of a business sold shortly after the partnership conducting the business was terminated retain their status as non-capital assets in the hands of the individual seller respondent’s acknowledgment that the business history and activities of a subsidiary carry over to its parent in connection with a sec_332 liquidation of the subsidiary is also reflected in sec_301_7701-2 proced admin regs which provides that if the entity is disregarded its activities are treated in the same manner as a sole_proprietorship branch or division of the owner in the context of a business organization a branch is defined as a division of a business and a division as an area of corporate because h c’s use of its assets was entirely business related that use almost certainly covered more than one-half of the various periods that taking into account sec_1223 dover uk is deemed to have held those assets therefore that use is deemed to be the use for which those assets were held for purposes of sec_1_954-2 income_tax regs activity organized as an administrative or functional unit american heritage dictionary 4th ed see also black’s law dictionary 6th ed defining a branch in relevant part as a d ivision office or other unit of business located at a different location from main office or headquarters and a division as an o perating or administrative unit of business thus the plainly understood import of the cited regulation’s use of the terms branch and division to describe the impact of the deemed sec_332 liquidation resulting from a disregarded_entity election with respect to an operating subsidiary particularly in light of respondent’s ruling position as set forth supra is that the activities of the business operation indirectly owned by the parent through its former subsidiary become the activities of a functional or operating business unit directly owned and conducted by the parentdollar_figure it follows from the language of the regulation that the assets used in the business of the deemed liquidated subsidiary retain their status as assets used in the sec_301_7701-2 proced admin regs does not specify a minimum period of time after which a disregarded_entity election results in branch or division status for the disregarded_entity rather the disregarded_entity is deemed a branch or division of the owner upon the effective date of the election a point that is conceded by respondent on brief nor do the check- the-box regulations require that the taxpayer have a business_purpose for such an election or indeed for any election under those regulations such elections are specifically authorized for federal tax purposes sec_301_7701-3 proced admin regs same business by the deemed branch or division of the parent we interpret our statement in acro manufacturing co v commissioner t c pincite that the taxpayer neither acquired nor used the button assets in its business as tantamount to a statement that the button business never became an operating branch or division of the taxpayer therefore the secretary and the commissioner in effect rejected our position in that case by issuing sec_301_7701-2 proced admin regs as well as revrul_75_223 revrul_77_376 and g_c_m dollar_figure finally we note that consistent with his admonition in the preamble to the final check-the-box_regulations t d c b pincite that treasury and the irs will continue to monitor carefully the uses of partnerships and by extension disregarded entities in the international context and will take appropriate action when such entities are used to achieve results that are inconsistent with the policies and rules of because of revrul_75_223 1975_2_cb_109 and its progeny petitioner’s interpretation of sec_301_7701-2 proced admin regs as requiring the post- deemed liquidation business activities of h c to be considered business activities of dover uk immediately following the deemed liquidation of h c is certainly a plausible interpretation of that regulation as we stated in 52_tc_636 in sustaining the taxpayer’s plausible interpretation of an ambiguous ruling t axpayers are already burdened with an incredibly long and complicated tax law we see no reason to add to this burden by requiring them anticipatorily to interpret ambiguities in respondent’s rulings to conform to his subsequent clarifications particular code provisions respondent was of course free to amend his regulations to require a minimum period of continuous operation of a foreign disregarded entity’s business prior to the disposition of that business as a condition_precedent to treating the owner as having been engaged in the trade_or_business for purposes of characterizing the gain_or_loss but in the absence of respondent’s exercise of that authority we must apply the regulation as written see 88_f3d_968 fed cir 85_tc_274 41_tc_616 as we observed in sustaining the application of a provision of the consolidated_return_regulations the fact that the regulation gives rise to a perceived abuse is a problem of respondent’s own making a problem that respondent has allowed to persist by choosing not to amend the regulations to correct the problem 103_tc_398 affd 62_f3d_136 5th cir dollar_figure respondent did include an allegedly corrective amendment as part of proposed_regulations issued on date see reg-110385-99 fed reg date the proposed_regulations contained a special rule for foreign disregarded entities used in a so-called extraordinary transaction one of which constitutes the sale of a 10-percent or greater interest in such an entity within_12_months of the entity’s change in classification from association_taxable_as_a_corporation to disregarded_entity under those circumstances the proposed_regulations provided that the disregarded_entity will instead be continued vi validity of sec_1_954-2 income_tax regs because we find that dover uk’s deemed sale of the h c assets constituted a sale of assets used in dover uk’s business within the meaning of sec_1_954-2 through iv income_tax regs we do not address petitioner’s argument that sec_1_954-2 income_tax regs is invalid vii conclusion dover uk’s gain on the deemed sale of the h c assets does not constitute fphci to petitioner pursuant to sec_954 decision will be entered under rule continued classified as an association_taxable_as_a_corporation sec_301_7701-3 proposed proced admin regs fed reg date we assume that the consequence of that approach would be that a cfc’s sale of the stock of the disregarded_entity would be treated as a sale of property described in sec_954 rather than as a sale of property described in sec_954 which is respondent’s approach in this case under the existing regulations after receiving a number of unfavorable comments respondent on date issued notice_2003_46 2003_28_irb_53 announcing his intention to withdraw the so-called extraordinary transaction rule_of the proposed_regulations formal withdrawal of that portion of the proposed_regulations occurred on date see reg-1110385-99 fed reg date


internal_revenue_service number release date index number --------------------------------- ---------------------------- ------------------------------- re e re ------------------------------------------ department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------------ id no -------------- telephone number ---------------------- refer reply to cc psi b04 plr-130037-16 date february legend decedent ------------------------------- ----------------------------------------------------------- spouse --------------------------- date ----------------------- date ---------------------------- date --------------------------------------------- dear ------------------ this letter responds to your representative’s letter of date requesting an extension of time pursuant to sec_301_9100-3 of the procedure and administration regulations to make the portability election under sec_2010 of the internal_revenue_code code to allow a decedent's surviving_spouse to take into account that decedent's deceased spousal unused exclusion dsue amount the facts and representations submitted are as follows decedent died on date survived by spouse date is a date after the effective date of the amendment to sec_2010 which provides for portability of a dsue amount to a surviving_spouse to obtain the benefit of portability of decedent's dsue amount to spouse decedent's_estate was required to file form_706 united_states estate and generation-skipping_transfer_tax return on or before the date that is months after decedent's date of death or the last day of the period covered by an extension decedent's form_706 was due on date but the estate did not file a form_706 to make the portability election by that date the failure to elect portability was discovered after the due_date for making the election subsequently on date the estate filed form_706 spouse as the representative of decedent's_estate represents that the value of decedent's gross_estate is less than the basic exclusion amount in the year of plr-130037-16 decedent's death and that during his lifetime decedent made no taxable_gifts as representative spouse requests an extension of time pursuant to sec_301_9100-3 to elect portability of decedent's dsue amount pursuant to sec_2010 law and analysis sec_2001 imposes a tax on the transfer of the taxable_estate of every decedent who is a citizen or resident_of_the_united_states sec_2010 provides that a credit of the applicable credit_amount shall be allowed to the estate of every decedent against the tax imposed by sec_2001 sec_2010 provides that the applicable credit_amount is the amount of the tentative_tax that would be determined under sec_2001 if the amount with respect to which such tentative_tax is to be computed were equal to the applicable_exclusion_amount on date congress amended sec_2010 effective for estates of decedents dying and gifts made after date to allow portability of a decedent’s unused applicable_exclusion_amount between spouses tax relief unemployment insurance reauthorization and job creation act of pub_l_no sec_303 124_stat_3296 sec_2010 provides that the applicable_exclusion_amount is the sum of the basic exclusion amount and in the case of a surviving_spouse the dsue amount sec_2010 generally provides that the basic exclusion amount is dollar_figure to be adjusted for inflation annually after calendar_year sec_2010 defines the dsue amount to mean the lesser_of a the basic exclusion amount or b the excess of -- i the applicable_exclusion_amount of the last deceased spouse of the surviving_spouse over ii the amount with respect to which the tentative_tax is determined under sec_2001 on the estate of such deceased spouse sec_2010 provides that a dsue amount may not be taken into account by a surviving_spouse under sec_2010 unless the executor of the estate of the deceased spouse files an estate_tax_return on which such amount is computed and makes an election on such return that such amount may be so taken into account the election once made shall be irrevocable no election may be made if such return is filed after the time prescribed by law including extensions for filing such return sec_2010 provides that the secretary shall prescribe regulations as may be necessary or appropriate to implement sec_2010 plr-130037-16 sec_20_2010-2t a of the estate_tax regulations as in effect on date provides that to allow a decedent’s surviving_spouse to take into account that decedent’s dsue amount the executor of the decedent’s estate must elect portability of the dsue amount on a timely filed form_706 under sec_20_2010-2t a the due_date of an estate_tax_return required to elect portability is nine months after the decedent’s date of death or the last day of the period covered by an extension if an extension of time for filing has been granted under sec_20_2010-2t a the portability election is made by timely filing a complete and properly prepared estate_tax_return unless the executor satisfies the requirements for the election not to apply in sec_20_2010-2t a i sec_301_9100-1 provides that the commissioner may grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make a regulatory election or a statutory election but no more than six months except in the case of taxpayer who is abroad under all subtitles of the code except subtitles e g h and i sec_301_9100-1 provides that the term statutory election means an election whose due_date is prescribed by statute the term regulatory election means an election whose due_date is prescribed by a regulation published in the federal_register or a revenue_ruling revenue_procedure notice or announcement published in the internal_revenue_bulletin sec_301_9100-3 provides the standards the commissioner will use to determine whether to grant an extension of time to make an election whose due_date is prescribed by a regulation and not expressly provided by statute a request for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-3 provides that a taxpayer is deemed to have acted reasonably and in good_faith if the taxpayer reasonably relied on a qualified_tax professional including a tax professional employed by the taxpayer and the tax professional failed to make or advise the taxpayer to make the election the due_date for the portability election is prescribed by statute in the case of an estate required to file an estate_tax_return under sec_6018 see sec_2010 sec_6075 and sec_6018 in the case of an estate that is not required to file an estate_tax_return under sec_6018 the due_date is prescribed by regulation see sec_20_2010-2t a see also sec_20_2010-2 and revproc_2014_18 2014_7_irb_513 sec_2 plr-130037-16 accordingly in the latter case a taxpayer may seek an extension of time to elect portability under the provisions of sec_301_9100-3 sec_6018 requires the filing of an estate_tax_return in all cases where the gross_estate exceeds the basic exclusion amount in effect under sec_2010 for the calendar_year which includes the date of death for purposes of this determination under sec_6018 the basic exclusion amount is reduced but not below zero by the sum of -- a the amount of the adjusted_taxable_gifts within the meaning of sec_2001 made by the decedent after date plus b the aggregate amount allowed as a specific exemption under sec_2521 as in effect before its repeal by the tax reform act of with respect to gifts made by the decedent after date as representative spouse represents that based on the value of the gross_estate and taking into account any taxable_gifts decedent’s estate is not required to file an estate_tax_return under sec_6018 under these facts the commissioner has discretionary authority under sec_301_9100-3 to grant to decedent’s estate an extension of time to elect portability based on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-3 have been satisfied accordingly we grant an extension of time of days from the date of this letter in which to elect portability under sec_2010 the election should be made by filing a complete and properly prepared supplemental form_706 and a copy of this letter within days from the date of this letter to the cincinnati service_center at the following address internal_revenue_service cincinnati service_center stop cincinnati oh for purposes of electing portability a form_706 filed by decedent’s estate within days from the date of this letter will be considered to be timely filed the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination if it is later determined that based on the value of the gross_estate and taking into account any taxable_gifts decedent’s estate is required to file an estate_tax_return pursuant to sec_6018 the commissioner is without authority under sec_301_9100-3 to grant to decedent’s estate an extension of time to elect portability and the grant of the extension referred to in this letter is deemed null and void this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent plr-130037-16 in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely associate chief_counsel passthroughs and special industries by karlene lesho karlene lesho senior technician reviewer branch office of associate chief_counsel passthroughs and special industries enclosure copy of letter for sec_6110 purposes


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc psi b09 plr-135076-02 date date legend taxpayer spouse year year date trust a corporation school a b_trust b date c d plr-135076-02 dear sir this is in response to your letter dated date requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations to make an allocation of generation-skipping_transfer gst tax exemption this letter responds to your request the facts and representations submitted are summarized as follows taxpayer and spouse were married during year and year on date taxpayer and spouse created trust a_trust a was funded with gifts of corporation stock date is in year the year transfers were the only transfers taxpayer made to trust a article of the trust a instrument provides that the beneficiaries of the trust shall be the children of taxpayer and spouse and their natural born but not adopted descendants article provides that during the term of the trust the trustee shall annually distribute the trust’s net_income equally to the beneficiaries who are then alive and may pay to or apply for the benefit of any one all or none of the beneficiaries so much of the principal to a maximum of five percent of the principal in a twelve-month period of the trust as the trustee in its sole discretion shall deem advisable for the support health maintenance and education of such beneficiary or beneficiaries accumulating the surplus if any distributions of principal need not be equalized or pro-rated and the trustee may consider other assets and sources of income reasonably available to the beneficiary in deciding whether or not to make a distribution payments of principal to or for any such beneficiary shall not be taken into account in any later or final distribution of trust principal to such beneficiary article provides that trust a shall terminate twenty-one years after the death of the last survivor of the group of taxpayer taxpayer’s spouse and taxpayer’s issue who were alive when the trust was executed article provides that upon termination the trust estate then remaining including accumulated and accrued but undistributed_income shall be distributed free of any trust to taxpayer’s issue per stirpes or if none under article article provides that if at any time the foregoing provisions do not provide persons qualified to take the trust estate then the trust estate shall be distributed to school taxpayer timely filed a form_709 united_states gift and generation-skipping_transfer_tax return gift_tax_return for year taxpayer reported gifts totaling dollar_figurea to plr-135076-02 trust a during year a notice of allocation was not attached to taxpayer’s gift_tax_return and accordingly none of taxpayer’s generation-skipping_transfer_tax_exemption was allocated to the transfers made to trust a on taxpayer’s year gift_tax_return on the gift_tax_return taxpayer and spouse consented under sec_2513 of the internal_revenue_code to have the gifts treated as if one-half dollar_figureb had been made by each of them on date taxpayer created trust b_trust b was funded with gifts of corporation stock date is in year the year transfers were the only transfers taxpayer made to trust b article ii sec_2_1 of the trust b instrument provides that trust or trusts established by the instrument shall be known collectively as trust b each separate trust established hereunder for the primary benefit of a person shall be known by the name of that person article iii sec_3_1 provides the trustee shall hold the trust estate in a single trust the common trust administered and distributed as follows sec_3_1a provides the primary purpose of the common trust is to provide for the needs of taxpayer’s children and their descendants sec_3_1 b provides that the family trustee may distribute to taxpayer’s children and their descendants so much of the net_income as will provide for their needs the distribution trustee may distribute to taxpayer’s children and their descendants so much of the income as will provide for their best interests sec_3_1 b provides that the family trustee may distribute to taxpayer’s children and their descendants so much of the principal as will provide for the beneficiaries’ needs the distribution trustee may distribute to taxpayer’s children and their descendants so much of the principal as will provide for their best interests sec_3_1 c provides that subject_to article v taxpayer’s children and each of their descendants shall have a withdrawal right with respect to all gifts to the common trust sec_3_1 d provides that the common trust shall continue until the second anniversary of the date of death of the last to die of taxpayer and spouse at which time the common trust shall terminate if any descendant of taxpayer is then living the remaining trust estate shall be held and administered in accordance with the provisions of sec_3_2 if all of taxpayer’s descendants die the common trust shall terminate and the remaining trust estate shall be distributed in accordance with the provisions for contingent beneficiaries sec_3_2 provides that if one or more of taxpayer’s descendants are living at the date of termination of the common trust the division date the trustee shall plr-135076-02 divide the trust property into separate equal shares one share for each then living child and one share the then living descendants collectively of each deceased child taxpayer timely filed a gift_tax_return for year taxpayer reported gifts totaling dollar_figurec to trust b during year a notice of allocation was not attached to taxpayer’s gift_tax_return and accordingly none of taxpayer’s generation-skipping_transfer_tax_exemption was allocated to the transfers made to trust b on taxpayer’s year gift_tax_return on the gift_tax_return taxpayer and spouse consented under sec_2513 to treat the gifts as if one-half dollar_figured had been made by each of them a memorandum written by taxpayer to his accountant in year indicates that taxpayer intended to allocate sufficient generation-skipping_transfer_tax_exemption to the transfer to trust a in year that would result in trust a having an inclusion_ratio of zero taxpayer represents that he intended that both trust a and trust b have an inclusion_ratio of zero and that he discussed his intentions with his accountant taxpayer’s accountant inadvertently did not properly allocate taxpayer’s generation- skipping transfer_tax to the transfers to trust a for year and to trust b for year taxpayer has requested an extension of time to make allocations with respect to transfers of dollar_figureb to trust a in year and dollar_figured to trust b in year sec_2513 of the internal_revenue_code provides that a gift made by one spouse to any person other than the other spouse shall for the purposes of this chapter be considered as made one-half by him and one-half by his spouse but only if at the time of the gift each spouse is a citizen or resident_of_the_united_states sec_2513 provides that paragraph shall apply only if both spouses have signified under the regulations provided for in subsection b their consent to the application of paragraph in the case of all such gifts made during the calendar_year by either while married to the other sec_25_2513-2 of the gift_tax regulations provides that consent to the application of the provisions of sec_2513 with respect to a calendar_period shall in order to be effective be signified by both spouses if both spouses file gift_tax returns within the time for signifying consent it is sufficient if the consent of each spouse is signified on his own return sec_2601 imposes a tax on every generation-skipping_transfer a generation-skipping_transfer is defined under sec_2611 as a taxable_distribution a taxable_termination and a direct_skip sec_2631 provides that for purposes of determining the inclusion_ratio every individual shall be allowed a gst_exemption of dollar_figure adjusted for inflation plr-135076-02 under sec_2631 which may be allocated by such individual or his executor to any property with respect to which such individual is the transferor sec_2632 provides that any allocation by an individual of his or her gst_exemption under sec_2631 may be made at any time on or before the date prescribed for filing the estate_tax_return for such individual’s estate determined with regard to extensions regardless of whether such a return is required to be filed sec_2642 provides that except as provided in sec_2642 if the allocation of the gst_exemption to any transfers of property is made on a gift_tax_return filed on or before the date prescribed by sec_6075 for such transfer or is deemed to be made under sec_2632 or c the value of such property for purposes of sec_2642 shall be its value as finally determined for purposes of chapter within the meaning of sec_2001 or in the case of an allocation deemed to have been made at the close of an estate_tax_inclusion_period on and after the close of such estate_tax_inclusion_period sec_2642 provides generally that the secretary shall by regulation prescribe such circumstances and procedures under which extensions of time will be granted to make an allocation of gst_exemption described in sec_2642 or and an election under sec_2632 or c such regulations shall include procedures for requesting comparable relief with respect to transfers made before the date of the enactment of this paragraph sec_2642 provides that in determining whether to grant relief under this paragraph the secretary shall take into account all relevant circumstances including evidence of intent contained in the trust instrument or instrument of transfer and such other factors as the secretary deems relevant for purposes of determining whether to grant relief under this paragraph the time for making the allocation or election shall be treated as if not expressly prescribed by statute notice_2001_50 2001_34_irb_189 provides that under sec_2642 the time for allocating the gst_exemption to lifetime transfers and transfers at death the time for electing out of the automatic allocation rules and the time for electing to treat any trust as a generation-skipping_trust are to be treated as if not expressly prescribed by statute the notice further provides that taxpayers may seek an extension of time to make an allocation described in sec_2642 or b or an election described in sec_2632 or c under the provisions of sec_301_9100-3 sec_301_9100-1 provides that the commissioner has discretion to grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make a regulatory election or a statutory election but no more than months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i plr-135076-02 sec_301_9100-3 provides that in general requests for extensions of time for regulatory elections that do not meet the requirements of sec_301_9100-2 must be made under the rules of sec_301_9100-3 under sec_301_9100-1 a regulatory election includes an election whose due_date is prescribed by a notice published in the internal_revenue_bulletin in accordance with sec_2642 and notice_2001_50 taxpayers may seek an extension of time to make an allocation described in sec_2642 or b or an election described in sec_2632 or c under the provisions of sec_301_9100-3 requests for relief under sec_301_9100-3 will be granted when the taxpayer provides the evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-3 provides that a taxpayer is deemed to have acted reasonably and in good_faith if the taxpayer reasonably relied on a qualified_tax professional including a tax professional employed by the taxpayer and the tax professional failed to make or advise the taxpayer to make the election based on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-3 have been satisfied therefore taxpayer is granted an extension of time of days from the date of this letter to file supplemental form sec_709 and notices of allocation for year and year on which taxpayer will allocate gst_exemption to the trusts the allocation will be effective as of the date of the individual transfers to trust and the gift_tax value of the transfers to trust will be used in determining the amount of gst_exemption to be allocated to trust a copy of this letter should be attached to each supplemental form_709 and filed with the internal_revenue_service center cincinnati ohio except as expressly provided herein no opinion is expressed or implied concerning the federal tax consequences of any aspect of any transaction or item discussed or referenced in this letter specifically we have reviewed no evidence and make no conclusions regarding the accuracy of the valuation of corporation stock on the year and year returns the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination pursuant to the power_of_attorney on file with this office a copy of this letter is being sent to your attorney plr-135076-02 this ruling is directed only to the taxpayer s requesting it sec_6110 provides that it may not be used or cited as precedent sincerely heather c maloy heather c maloy associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes