internal_revenue_service number release date --------------------------------------- ------------------------ ---------------------- ------------------------------------------------------------ ----------- 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 tege eb qp1 plr-t-103159-15 date july ------------------------------------------------------- --------------- legend employer a --------------------------------------- plan b city c dear ------------- this letter is in response to your ruling_request dated date as supplemented by correspondence dated date date date date and june16 submitted by your authorized representative concerning the pick up of certain designated employee contributions to plan b under sec_414 of the internal_revenue_code the code the following facts and representations are submitted under penalties of perjury in support of your request employer a is a medical center owned by city c you have represented that employer a is a governmental entity employer a adopted plan b on date intending it to be effective as of date however employer a did not implement plan b while it sought this ruling by resolution of the board_of trustees of employer a the board duly adopted by the board on date plan b was amended and restated effective as of date plan b is a defined_contribution_plan and is represented to be qualified under sec_401 and a governmental_plan under sec_414 the plan b document consists plr-t-103159-15 of a specimen document and an adoption_agreement the amendment and restatement of plan b effective as of date was implemented through the execution of a new adoption_agreement pursuant to its terms plan b will be funded through a_trust or a custodial_account or annuity_contract described in sec_401 for the exclusive benefit of participants and their beneficiaries plan b received a favorable determination_letter from the irs on date plan b provides that only senior management employees of employer a vice presidents and president and ceo eligible employees are eligible to participate in plan b plan b imposes no age or service requirements on date the board adopted a resolution authorizing employer a to pick up designated contributions made to plan b by eligible employees who are participants the resolution also provides that the contributions of eligible employees in plan b that are picked up by employer a under sec_414 will be paid_by employer a on behalf of the eligible employees and that the eligible employees will not have the option of receiving such picked-up contributions in cash instead of having the contributions made to plan b as noted above employer a did not implement plan b or the associated pick-up while it sought this ruling in connection with the amendment and restatement of plan b the board adopted resolutions on date providing that employer a shall pick up contributions to plan b as amended and restated effective date that are made pursuant to salary reduction contributions from eligible employees moreover the date resolutions reiterate that the participants in the amended and restated plan b will not have the option of receiving such contributions in cash instead of having them contributed to the amended and restated plan b the adoption_agreement with respect to plan b as amended and restated effective date states that for purposes of the designated employee contributions that will be picked up by employer a under the terms of plan b hereinafter referred to as mandatory_contributions an eligible_employee shall become a participant as of the first day of the month coinciding with or next following the date on which the eligible_employee met all requirements for participation the amended and restated adoption_agreement additionally provides that for an employee who is an eligible_employee on date participation shall commence on date under plan b mandatory_contributions are mandatory_contributions that all eligible employees must make if required under the adoption_agreement plan b further provides that mandatory_contributions are picked up by employer a in accordance with sec_414 and are treated as employer contributions for federal_income_tax purposes but are considered wages for purposes of fica plr-t-103159-15 the adoption_agreement with respect to plan b as amended and restated effective date provides that as of the effective date of an eligible_employee becoming a participant in plan b mandatory_contributions will be made to plan b at a fixed rate of of compensation the amended and restated adoption_agreement also states that the fixed percentage shall be applied only to the compensation earned during an eligible employee’s period of participation furthermore the adoption_agreement mandates that the mandatory contribution will remain in effect for the duration of that participant’s employment with employer a as an eligible_employee the adoption_agreement with respect to plan b additionally provides that for each plan_year each eligible_employee may elect to make voluntary contributions plan b defines voluntary contribution as a contribution made to plan b by an eligible_employee on an after-tax basis pursuant to the election of the eligible_employee an eligible employee’s election to make voluntary contributions remains in effect until revoked or completion of a superseding voluntary contribution election you request the following rulings the provisions of plan b regarding the pick-up of mandatory_contributions satisfy the requirements of sec_414 the mandatory_contributions made by eligible employees pursuant to salary reduction and picked up by employer a in accordance with sec_414 will be treated as employer contributions for federal_income_tax purposes no part of the mandatory_contributions picked up by employer a in accordance with sec_414 will be includible by eligible employees as gross_income for federal_income_tax purposes in the year of contribution with respect to your first and second requested rulings sec_414 provides that any amount contributed to an employees’ trust described in sec_401 shall not be treated as having been made by the employer if it is designated as an employee contribution sec_414 provides that for purposes of sec_414 in the case of any plan established by the government of any state or political_subdivision thereof or by any agency_or_instrumentality of any of the foregoing or a governmental_plan described in the last sentence of sec_414 relating to plans of indian tribal governments where the contributions of employing units are designated as employee contributions but where any employing unit picks up the contributions the contributions so picked up shall be treated as employer contributions the federal_income_tax treatment to be afforded contributions that are picked up by the employer within the meaning of sec_414 has been described in a series of plr-t-103159-15 revenue rulings in revrul_77_462 1977_2_cb_358 the employer school district agreed to assume and pay the amounts employees were required by state law to contribute to a state pension_plan revrul_77_462 concluded that the school district’s picked-up contributions to the plan were excluded from the employees’ gross_income until such time as they were distributed to the employees revrul_77_462 further held that under the provisions of sec_3401 the school district’s contributions to the plan were excluded from wages for purposes of the collection of income_tax at the source on wages therefore no withholding was required for federal_income_tax purposes from the employees’ salaries with respect to such picked-up contributions revrul_81_35 1981_1_cb_255 and revrul_81_36 1981_1_cb_255 established that the following two criteria must be met the employer must specify that the contributions although designated as employee contributions are being paid_by the employer in lieu of contributions by the employee and the employee must not be given the option of choosing to receive the contributed amounts directly instead of having them paid_by the employer to the pension_plan revrul_87_10 1987_1_cb_136 provides that the required specification of designated employee contributions must be completed before the period to which such contributions relate if not the designated employee contributions paid_by the employer are actually employee contributions paid_by the employee and recharacterized at a later date the retroactive specification of designated employee contributions as paid_by the employing unit ie the retroactive pick-up of designated employee contributions by a governmental employer is not permitted under sec_414 thus employees may not exclude from current gross_income designated employee contributions to a qualified_plan that relate to compensation earned for services rendered prior to the date of the last governmental action necessary to effect the pick-up sec_1_401_k_-1 of the income_tax regulations defines a cash or deferred election as any direct or indirect election or modification of an earlier election by an employee to have the employer either a provide an amount to the employee in the form of cash or some other taxable benefit that is not currently available or b contribute an amount to a_trust or provide an accrual or other benefit under a plan deferring the receipt of compensation revrul_2006_43 2006_35_irb_329 amplifying and modifying revrul_81_35 revrul_81_36 and revrul_87_10 describes the actions required for a state or political_subdivision of a state or an agency_or_instrumentality of either to pick up employee contributions to a plan qualified under sec_401 so that the contributions are treated as employer contributions pursuant to sec_414 plr-t-103159-15 specifically revrul_2006_43 provides that a contribution to a qualified_plan established by an eligible_employer ie a governmental employer will be treated as picked up by the employing unit under sec_414 if certain conditions are satisfied including that the pick-up arrangement must not permit a participating employee from and after the effective date of the pick-up to have a cash or deferred election right within the meaning of sec_1_401_k_-1 with respect to designated employee contributions revrul_2006_43 states that the pick-up rules expressed in revrul_81_35 and revrul_81_36 apply even if the employer picks up contributions through a reduction in salary or through an offset against future salary increases summarizing the requirements of revrul_81_35 revrul_81_36 revrul_87_10 and revrul_2006_43 in order to have a valid pick up arrangement employer a must specify that the contributions although designated as employee contributions are being paid_by the employer in lieu of contributions by the employee and the required specification of designated employee contributions must be completed before the period to which such contributions relate employer a must take formal action through a person duly authorized to do so to provide that the contributions on behalf of a specific class of employees of the employing unit although designated as employee contributions will be paid_by the employing unit in lieu of employee contributions the action must apply only prospectively and be evidenced by a contemporaneous written document an employee must not be given the option of choosing to receive the contributed amounts directly instead of having them paid_by employer a to the pension_plan further the pick-up arrangement must not permit a participating employee from and after the effective date of the pick-up to have a cash or deferred election right within the meaning of sec_1 k - a with respect to designated employee contributions in the present case the facts represented state that the written provisions of plan b and the adoption_agreement explicitly mandate that the mandatory_contributions be picked up by employer a in accordance with sec_414 and that the mandatory_contributions although required to be made under the terms of plan b by each eligible_employee will be paid ie picked up by employer a in addition the board formally adopted a resolution on date authorizing employer a to pick up the mandatory_contributions under plan b as amended and restated effective date thus the arrangement satisfies the first two requirements above plr-t-103159-15 with respect to the third requirement pursuant to the plan b adoption_agreement as amended and restated effective date mandatory_contributions to plan b equal to of compensation will be picked up by employer a on behalf of every eligible_employee effective as of the date of the eligible employee’s participation in plan b therefore because the mandatory_contributions are designated mandatory employee contributions eligible employees are not given the option of choosing to receive the contributed amounts directly instead of having them paid_by employer a to plan b moreover because the mandatory_contributions are non-elective the pick-up arrangement under plan b does not permit eligible employees from and after the effective date of the pick-up to have a cash or deferred election right within the meaning of sec_1_401_k_-1 with respect to the designated employee contributions in addition in accordance with revrul_2006_43 the pick-up arrangement under plan b does not fail to satisfy the requirements of sec_414 merely because the mandatory_contributions are made by employer a to plan b on behalf of the eligible employees through a reduction in salary consequently based on the foregoing we conclude that the provisions of plan b as amended and restated effective date regarding the pick-up of mandatory_contributions satisfy the requirements of sec_414 and therefore the mandatory_contributions made by eligible employees pursuant to salary reduction and picked up by employer a in accordance with sec_414 will be treated as employer contributions for federal_income_tax purposes with respect to your third requested ruling sec_402 generally provides that any amount actually distributed to any recipient by any employees’ trust described in sec_401 which is exempt from tax under sec_501 shall be taxable to the recipient in the taxable_year of the distribution under sec_72 relating to annuities sec_1_402_a_-1 provides that if an employer makes a contribution for the benefit of an employee to a_trust described in sec_401 for the taxable_year of the employer which ends within or with a taxable_year of the trust for which the trust is exempt under sec_501 the employee is not required to include such contribution in his income except with respect to the year or years in which such contribution is distributed or made available to him as stated above we have concluded with respect to your second ruling_request that the mandatory_contributions that are picked up by employer a under plan b as amended and restated effective date on behalf of eligible employees in accordance with sec_414 will be treated as employer contributions for federal_income_tax purposes accordingly we further conclude with respect to your third ruling_request that pursuant to sec_402 sec_1_402_a_-1 and revrul_77_462 such mandatory_contributions picked up by employer a in accordance with section plr-t-103159-15 h will not be includible by eligible employees as gross_income for federal_income_tax purposes until these amounts are distributed or made available to them notwithstanding the foregoing all payments of remuneration by an employer for services performed by an employee are generally subject_to taxes under the federal_insurance_contributions_act fica unless the payments are specifically excepted from the term wages or the services are specifically excepted from the term employment_fica_taxes include social_security and medicare taxes sec_3121 provides that other than the social_security_tax wage_base limitation nothing in sec_3121 excludes from the term wages any amount picked up as an employer_contribution under sec_414 if the pick-up is pursuant to a salary reduction agreement whether evidenced by a written instrument or otherwise for these purposes the term salary reduction agreement includes any salary reduction arrangement regardless of whether there is approval or choice of participation by individual employees or whether such approval or choice is mandated by state statute h_r conf_rep no 98th cong 2d sess see also public employees’ retirement board v shalala f 3rd 10th cir therefore under sec_3121 if an employee’s services are covered included in employment for social_security_tax purposes pick-up contributions under sec_414 that are made pursuant to a salary reduction agreement are generally subject_to social_security_taxes unless the maximum wage_base exception applies also under sec_3121 if an employee’s services are covered included in employment for medicare_tax purposes pick-up contributions under sec_414 that are made pursuant to a salary reduction agreement are subject_to medicare taxes without any limit based on the_amount_of_wages this does not constitute a ruling on whether the pick-up contributions under plan b are made pursuant to a salary reduction agreement for fica tax purposes this ruling is based on the assumptions that employer a is a governmental entity and that plan b satisfies the qualification requirements set forth in sec_401 and constitutes a governmental_plan within the meaning of sec_414 at all relevant times except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative plr-t-103159-15 the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination sincerely laura b warshawsky senior tax law specialist qualified_plans branch tax exempt and government entities cc


office_of_chief_counsel internal_revenue_service memorandum number release date cc psi posts-161891-05 uilc date date to patricia e kuehl technical guidance coordinator ap ------------------------- -------------------------------------------- arthur lee keenan technical advisor lm pftg from heather c maloy associate chief_counsel income_tax accounting sec_41 credit_for_increasing_research_activities treatment of receipts attributable to intra-group transfers subject this memorandum responds to requests for assistance concerning numerous return examinations and claims for refund pending in the large_and_mid-size_business_division hereinafter lmsb and appeals on the above-referenced issue in accordance with sec_6110 this chief_counsel_advice should not be cited as precedent issue whether under the facts and circumstances described a taxpayer may exclude receipts from its foreign subsidiaries when computing gross_receipts for purposes of determining the base_amount under sec_41 conclusion under the facts and circumstances described a taxpayer may not exclude receipts from its foreign subsidiaries when computing gross_receipts for purposes of determining the base_amount under sec_41 posts-161891-05 facts there are numerous examinations pending in lmsb and appeals involving the above-referenced issue the typical fact pattern is as follows the taxpayer hereinafter taxpayer is a domestic_corporation taxpayer owns more than fifty percent of certain foreign subsidiaries for purposes of sec_1563 taxpayer performed research in addition to research taxpayer manufactured product and sold some of that product to its foreign subsidiaries taxpayer also developed and subsequently licensed intangibles to its foreign subsidiaries for which it was paid royalties on its income_tax returns for the years in issue taxpayer included all sales to the foreign subsidiaries in its gross_receipts for purposes of determining the average annual gross_receipts and the aggregate gross_receipts under sec_41 taxpayer later filed claims for refund increasing the amount of its research_credit in computing the base_amount and determining the increased amount of its credit taxpayer excluded all receipts from its foreign subsidiaries in determining gross_receipts law and analysis sec_41 hereinafter research_credit was originally enacted as part of the economic_recovery_tax_act_of_1981 hereinafter the act to provide a credit against tax to serve as an incentive to taxpayers to conduct certain types of research activities when the research_credit was enacted in it was computed by multiplying the research_credit rate by the excess of the taxpayer's current_year qualified_research_expenses hereinafter qres over the average of the taxpayer's qres for the preceding three years as originally enacted in the research_credit provisions contained special rules to prevent its manipulation one of these rules sec_41 hereinafter aggregation rule treats all members of a controlled_group as a single_taxpayer for purposes of computing the credit and allocates the credit to the members of the group based on the member's proportionate share of the increase in qres giving rise to the credit the legislative_history to the act indicates that the research_credit aggregation rule was enacted to ensure that the research_credit would be allowed only for actual increases in research expenditures the aggregation rule was intended to the research_credit provisions were enacted by sec_221 of the economic_recovery_tax_act_of_1981 1981_2_cb_256 as sec_44f sec_44f was redesignated as sec_30 by sec_471 of the deficit_reduction_act_of_1984 vol c b sec_30 was redesignated as sec_41 by d of the tax_reform_act_of_1986 vol c b posts-161891-05 prevent artificial increases in research expenditures by shifting expenditures among commonly controlled or otherwise related_persons h_r rep no 1981_3_cb_364 s rep no 1981_3_cb_442 there is no special rule in the research_credit provisions as enacted in or as amended by the act infra that addresses the treatment of transactions among members of the same controlled_group_of_corporations or trades_or_businesses under common_control on date however the service and treasury issued regulations for determining the amount of the research_credit for a controlled_group_of_corporations and trades_or_businesses under common_control see former sec_1_41-6 t d f_r promulgated as sec_1 e consistent with congressional purpose sec_1_41-8 provided rules intended to prevent the shifting of research expenditures among members of a controlled_group sec_1_41-8 provided the general_rule that b ecause all members of a group under common_control are treated as a single_taxpayer for purposes of determining the research_credit transfers between members of the group are generally disregarded sec_1_41-8 - provided clarifying rules on how controlled groups should treat specific types of intra-group transfers that generate research expenditures such as in-house_research_expenses and contract_research_expenses in late after the issuance of the aforementioned regulations congress made significant changes to the treatment of qres in computing the base_amount f k a base_period_research_expenses section b of the reconciliation act of hereinafter the act amended sec_41 to provide a new method of computing the research_credit for taxable years beginning after date in revising the credit computation congress retained the incremental structure of the credit to maximize its efficacy because businesses often determine their research budgets as a fixed percentage of gross_receipts congress determined that it was appropriate to index each taxpayer’s base_amount to average growth in its gross_receipts sec_41 as amended by the act continues to provide special rules for computing the research_credit while the act amendments did not change the aggregation requirement in sec_41 other rules in sec_41 were revised to reflect the change in computation of the credit these revised rules include the allocation rule in sec_41 the consistency_requirement in sec_41 the adjustment for acquisitions and dispositions rule in sec_41 and the short on date the service and treasury issued temporary regulations for determining the amount of the research_credit for a controlled_group_of_corporations and trades_or_businesses under common_control these temporary regulations renumber the intra-group transaction rule_of sec_1 e as temp sec_1_41-6t i substantively without change posts-161891-05 taxable years rule in sec_41 neither the act’s statutory language nor its legislative_history indicates that congress intended that intra-group transfers generating gross_receipts be disregarded in fact congress specifically indicated what gross_receipts should be disregarded for purposes of sec_41 when it enacted sec_41 sec_41 provides that in the case of a foreign_corporation there shall be taken into account only gross_receipts that are effectively connected with the conduct_of_a_trade_or_business within the united_states on date sec_1_41-8 was amended and renumbered as sec_1_41-6 by t d f_r date on date in t d f_r the service and treasury issued temporary regulations determining the amount of the research_credit for a controlled_group_of_corporations and trades_or_businesses under common_control see temp sec_1_41-6t temp sec_1_41-6t renumbered sec_1_41-6 as temp sec_1_41-6t i neither t d nor t d amended the intra-group transaction rule to make it applicable to gross_receipts the operative language of temp sec_1_41-6t i remains substantively unchanged from that of former sec_1 e and e accordingly temp sec_1_41-6t and former sec_1_41-6 continue to require that a controlled_group_of_corporations or trades_or_businesses under common_control only disregard generally intra-group transfers with respect to research expenditures not gross_receipts under the foregoing facts and circumstances it is not appropriate for taxpayer to exclude these receipts from its foreign subsidiaries when computing gross_receipts for purposes of determining its base_amount under sec_41 as you know the treatment of gross_receipts attributable to intra-group transactions is on the priority guidance plan please contact brenda stewart of this office at if you have any further questions heather c maloy associate chief_counsel passthroughs special industries


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 corp b02 plr-111184-11 date date parent ------------------------------------------------------------------- ------------------------------------------------------------ ----------------------------------- sub ------------------------------------------------------------------- ------------------------------------------------------------ -------------------------------------------------- sub ------------------------------------------------------------------- ------------------------------------------------------------ ------------------------------------------------ sub ------------------------------------------------------------------- ------------------------------------------------------------ ---------------------------- sub ------------------------------------------------------------------- ------------------------------------------------------------ ------------------------------------------------ sub ------------------------------------------------------------------- ------------------------------------------------------------ ------------------------------------------------------- sub -------------------------------------------------------------------- ------------------------------------------------------------ -------------------------------------------------------------------------------- llc ----------------------- plr-111184-11 ------------------------------------------------------------ partnership ----------------------------------------------------------------------------- ------------------------------------------------------------ ------------------------------------ date date date date date date year month agreement i agreement ii agreement iii rescission agreement i ---------------------- ------------------- ------------------- -------------------------- -------------------------- -------------------------- ------- ---------------------- --------------------------------------------------------------------------------- --------------------------------------------------------------------------------- --------------------------------------------------------------------------------- --------------------------------------------------------------------------------- ------------------------------------------------- --------------------------------------------------------------------------------- --------------------------------------------------------------------------------- --------------------------------------------------------------------------------- --------------------------------------------------------------------------------- ------------------- --------------------------------------------------------------------------------- --------------------------------------------------------------------------------- --------------------------------------------------------------------------------- ----------------------------------------------------------------------- --------------------------------------------------------------------------------- --------------------------------------------------------------------------------- --------------------------------------------------------------------------------- plr-111184-11 --------------------------------------------------------------------------------- ---------------------------------------------- --------------------------------------------------------------------------------- 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--------------------------------------------------------------------------------- ---------------------------------------- --------------------------------------------------------------------------------- ---------- ------ ----------------- ----------------- --------------- rescission agreement ii rescission agreement iii partnership_interest sale agreement segment a a b c d dear ----------------- we respond to your letter dated date submitted on behalf of parent requesting rulings concerning the federal_income_tax consequences of certain completed transactions the information submitted is summarized below plr-111184-11 facts parent is the common parent of an affiliated_group_of_corporations the parent group that files a consolidated federal_income_tax return on a calendar_year basis at the beginning of year parent owns all the common_stock of sub parent and sub own all of the preferred_stock of sub sub owns all the stock of sub and all the class a common_stock of sub the class a shares sub indirectly owns all the class b common_stock of sub in addition sub owns all the stock of sub each of sub sub sub and sub is a member of the parent group sub is a holding_company that owns all of the outstanding_stock of sub and the sole membership interest in llc collectively the equity interests sub also owns a partnership_interest in partnership the partnership_interest the partnership_interest is part of segment a but the equity interests are not part of that business segment sub owns and owned at all times during year approximately a percent of the outstanding_stock of sub a holding_company with interests in numerous entities parent owns the remaining stock in sub to align sub 3's segment a assets with sub and its subsidiaries that conduct segment a sub and sub entered into agreement i which was made as of date and executed on date pursuant to this agreement sub engaged in multiple sales of equity interests to sub including sub 1’s sale of the class a shares to sub in exchange for the extinguishment of indebtedness under a revolving loan facility in the amount of dollar_figureb which was the book_value of those shares initial sale i parent then realized that initial sale i inadvertently resulted in assets not related to segment a being transferred to sub and thus initial sale ii and initial sale iii described below were carried out to remove those assets from sub following initial sale i sub sold the equity interests to sub in exchange for dollar_figurec which was the book_value of those interests initial sale ii sub sold those interests to sub in exchange for dollar_figurec initial sale iii and together with initial sale i and initial sale ii the initial sales transactions initial sale ii and initial sale iii were carried out pursuant to agreement ii and agreement iii respectively both agreements were made as of date agreement ii was executed on date and agreement iii was executed on date taxpayer explains that the execution of agreement iii prior to the execution of agreement ii was an administrative oversight and that any breach of contract that might have occurred as a result was remedied on date when the original intent of the agreements made as of date was effectuated at the time of the initial sales transactions parent was not aware of sub 3's small indirect ownership_interest in sub and that as a result these transactions would require the fair market valuation of the class a shares the equity interests and the a percent interest in sub which would require significant time and expense the parties to the initial sales transactions thus undertook the following steps to rescind those transactions plr-111184-11 i ii iii sub transferred the equity interests to sub in exchange for sub 2’s reconveyance of the consideration transferred to sub in connection with agreement iii in an amount equal to dollar_figurec rescission transaction i sub transferred the equity interests to sub in exchange for sub 3’s reconveyance of the consideration transferred to sub in connection with agreement ii in an amount equal to dollar_figurec rescission transaction ii and sub transferred the class a shares to sub in exchange for sub 1’s reconveyance of the consideration transferred to sub in connection with agreement i in an amount equal to dollar_figureb rescission transaction iii and together the rescission transaction i and rescission transaction ii the rescission transactions rescission transaction i rescission transaction ii and rescission transaction iii were carried out pursuant to rescission agreement i rescission agreement ii and rescission agreement iii respectively which were each made as of and executed on date following the rescission transactions to carry out the initial objective of aligning sub 3's segment a assets with sub and its subsidiaries sub sold the partnership_interest to sub in exchange for consideration equal to dollar_figured subject_to a purchase_price_adjustment based on the financial results attributable to the partnership_interest in month the partnership_interest sale this sale was carried out pursuant to the partnership_interest sale agreement which was made as of date and executed on date representations parent has made the following representations with respect to the rescission transactions a b the intent and effect of the rescission transactions was to restore in all material respects the legal and financial arrangements with respect to the ownership of the class a shares and the equity interests that would have existed if the initial sales transactions had never occurred during the period beginning with the effective date of the initial sales transactions and ending on the effective date of the rescission transactions the initial sales transactions had no practical or material economic consequences to any of sub sub or sub other than to transfer the economic ownership of the partnership_interest as reflected on their respective financial reports from sub to sub plr-111184-11 c none of sub sub sub or any member of the parent group has taken or will take any material position for federal tax purposes inconsistent with the position that would have existed if the initial sales transactions had never occurred rulings based solely on the facts and representations submitted we rule that for federal_income_tax purposes the initial sales transactions and the rescission transactions will be disregarded sub will be treated as not having sold the class a shares to sub sub will be treated as having owned the class a shares at all times during the year taxable_year sub will be treated as not having sold the equity interests to sub and sub will be treated as not having owned the equity interests and as not having sold the equity interests to sub sub will be treated as having owned the equity interests at all times during the year taxable_year and the partnership_interest until date and sub owns the partnership_interest as of date caveats except as expressly provide 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 we express no opinion about the tax treatment under any other provisions of the code or the regulations or on the tax treatment of any condition existing at the time of or effect resulting from the transactions that are not specifically covered by the above rulings specifically we do not express any opinion on the tax consequences regarding the sale of the partnership_interest procedural statements 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 plr-111184-11 this ruling is directed only to the taxpayer requesting it sec_6110 of the internal_revenue_code provides that it may not be used or cited as precedent a copy of this letter must be attached to any income_tax return to which it is relevant alternatively taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of the letter_ruling in accordance with a power_of_attorney on file with this office a copy of this letter is being sent to your authorized representatives sincerely __________________ fillz a serbes chief branch office of associate chief_counsel corporate cc


id office uilc cca_2008070818243142 -------------- number release date from ------------------------- sent tuesday july pm to ---------------------- cc subject interest_netting for unresolved periods - informal your questions as i understand them are as follows what should the service do when it receives a request for interest_netting under sec_6621 and one or more of the identified periods is still under examination unresolved periods more specifically is there any such creature as a protective interest_netting claim if the service has accepted requests for netting under sec_6621 that include unresolved periods should the claims be denied answer sec_1 in my opinion it is not appropriate for taxpayers to claim the benefits of interest_netting for unresolved periods interest_netting is available under sec_6621 only to the extent that for any period interest is payable under subchapter_a and allowable under subchapter_b on equivalent underpayments and overpayments by the same taxpayer this presumes there exists both overpayment and underpayment interest for overlapping periods which itself presumes that there is an overpayment and an underpayment upon which the interest could be computed no final principal upon which interest can be computed so the statutory requirements cannot be met if a period is still under examination there is fn even if it is clear that an overpayment or underpayment will ultimately occur and that it is only the final amount of underpayment or overpayment as of yet unresolved i think the request for netting is premature and should be disallowed to the extent unresolved the request for netting may be partially allowed to the extent of the resolved available periods of overlap requests for netting just like claims for refund are subject_to periods of limitation for a reason the purpose of a period of limitation is to avoid stale claims and to ensure that the necessary information is available to be considered it is well established that for interest_netting to apply the periods of limitation for both overlapping periods must be open see revproc_2000_26 2000_1_cb_1257 and 467_f3d_1322 fed cir cert_denied 127_sct_2033 apr a protective claim is a creature of administrative convenience and is not statutorily provided absence of published guidance authorizing and specifying how a taxpayer may make a protective netting claim they should not be accepted in the of primary concern is that all similarly situated taxpayers all be treated the same thus it is important to establish a service wide initiative to ensure that any pending protective netting claims are consistently resolved since in my opinion there is no legal authority for accepting a protective netting request it is appropriate to deny the request to the extent that it involves unresolved periods feel free to call if you have any questions __________________________________ fn there are reasons too numerous to mention why overpayment interest and underpayment interest may not be appropriate even after a particular tax_year is finally resolved also at what point in an exam is close enough to resolution to be able to file a request for netting from an historical perspective while the service tries to accommodate taxpayers as much as legally permissible we cannot do so to the extent that the accommodation adversely affects administering the tax laws two examples where the service has limited its accommodations to taxpayers for the benefit of efficient tax_administration include the service's application of sec_6601 which permits the service in its discretion to apply an overpayment to satisfy an underpayment thereby affecting the computation of interest on these amounts and by not allowing taxpayers to dump money on the government to suspend the accruing of interest on potential deficiencies unless the relevant revenue procedures are followed on balance these restrictions are appropriate under the circumstances


t c memo united_states tax_court patricia a hendricks and john j hendricks petitioners v commissioner of internal revenue respondent docket no 11416-03l filed date randall m willard for petitioners john a weeda for respondent memorandum findings_of_fact and opinion haines judge the petition and amended petition in this case were filed in response to notices of determination concerning collection action s under sec_6320 and or notices of determination sent separately to patricia a hendricks petitioner and john j hendricks mr hendricks in the notice_of_determination sent to petitioner respondent denied her request for relief from joint_and_several_liability pursuant to sec_6015 after concessions the sole issue for decision is whether respondent abused his discretion in denying petitioner’s request for relief from joint_and_several tax_liability pursuant to sec_6015 as to unless otherwise noted all section references are to the internal_revenue_code in effect at all relevant times and amounts are rounded to the nearest dollar findings_of_fact some facts have been stipulated and are so found the stipulation of facts with accompanying exhibits is incorporated herein by this reference petitioner and mr hendricks collectively the hendrickses were residents of the state of colorado at all times relevant to this case the hendrickses have been married for more than years and have at all times filed joint federal_income_tax returns ie form_1040 u s individual_income_tax_return both petitioner and mr hendricks are more than years of age and are retired before the hendrickses married they agreed to separate their responsibilities deciding that petitioner would run the household while mr hendricks would be responsible for their finances mr hendricks worked as a farm manager and a farm and ranch real_estate broker and he invested in real_estate mr hendricks did not discuss business matters with petitioner nor was petitioner ever an employee of any of mr hendricks’s businesses mr hendricks maintained several separate business bank accounts to which petitioner had no access the hendrickses maintained only one joint checking account from which petitioner paid personal and household expenses petitioner completed years of college where she studied art petitioner did not take any business courses or classes on income_taxation or preparation of income_tax returns after marrying mr hendricks petitioner stayed at home to raise their five children and run their household petitioner’s only involvement in family finances was to pay the monthly household expenses petitioner relied upon mr hendricks for financial business and tax decisions the hendrickses have led frugal lifestyles there is no evidence that during the relevant years they made any lavish or unusual expenditures on date mr hendricks met with the hendrickses’ certified_public_accountant kurt grosser mr grosser and a broker for a partnership called boulder oil_and_gas associates boulder oil_and_gas despite its being the first he had heard of the partnership during the meeting mr hendricks agreed to invest dollar_figure in boulder oil_and_gas and gave the broker an initial installment check from one of his business checking accounts mr hendricks completed the purchase by paying two additional installments over the next years by checks drawn on his business accounts the partnership_interest in boulder oil_and_gas was placed in mr hendricks’s name alone petitioner had no knowledge that mr hendricks was making an investment in boulder oil_and_gas mr hendricks did not consult petitioner about making the investment petitioner did not receive any mail regarding boulder oil_and_gas because all mail from the partnership was sent to mr hendricks’s business address just prior to mr hendricks’s investment in boulder oil_and_gas on date mr hendricks traded various pieces of farmland that the hendrickses had previously owned for condominiums in fort collins colorado the condominiums were not acquired from proceeds made available through mr hendricks’s investment in boulder oil_and_gas the condominiums were owned jointly by the hendrickses during the relevant years the hendrickses relied upon mr grosser who had promoted boulder oil_and_gas to prepare their tax returns petitioner’s only involvement in preparing the tax returns for the relevant years at issue was to complete a questionnaire about personal and household expenses petitioner relied on mr hendricks to communicate with mr grosser for the preparation of their tax returns when mr hendricks brought home the income_tax returns prepared and signed by mr grosser petitioner would sign them in reliance on the accountant’s and her husband’s recommendations to sign except for the years they reported loss activity from boulder oil_and_gas ie the hendrickses have neither had their federal tax returns examined nor have they had taxes in excess of the amount reported on their returns assessed the hendrickses claimed dollar_figure in losses arising from boulder oil_and_gas on their joint tax_return on schedule e supplemental income and loss this amount did not appear on the face of the return but was listed on schedule e combined with the income and expenses of at least other properties including the condominiums and an office building on date respondent sent the hendrickses a form_4549 income_tax examination changes which reflected proposed changes to the hendrickses’ joint federal_income_tax returns for this was the first time petitioner learned of mr hendricks’s investment in boulder oil_and_gas on date the hendrickses received a notice_of_deficiency for the hendrickses failed to petition the court for redetermination of the deficiencies set out in the notice_of_deficiency and consented to an extension of the assessment_date on date respondent assessed the following amounts as determined in the notice_of_deficiency with respect to year deficiency additions to tax and increased interest sec_6659 sec_6661 sec_6621 dollar_figure dollar_figure dollar_figure -- dollar_figure dollar_figure -- -- dollar_figure dollar_figure dollar_figure dollar_figure with respect to respondent subsequently abated the additions to tax under sec_6659 and sec_6661 the hendrickses began making payments shortly after the assessment was made paying the balance due for in full by date the liability for was paid in full by date and the liability for was paid in full by date over the year sec_46 payments in varying amounts were made totaling dollar_figure the moneys being derived in part from the sale of several of the condominiums on date the same day the hendrickses received the notice_of_deficiency for respondent sent a letter to mr hendricks with respect to informing him that boulder oil_and_gas was being examined under the administrative procedures enacted by the tax equity and fiscal responsibility act of tefra publaw_97_248 96_stat_324 mr hendricks received this letter at his place of business and did not take the letter home on date respondent mailed a letter to the hendrickses at their home address which stated that respondent was proposing adjustment to their joint tax_return the only other correspondence sent to the hendrickses was a notice of final partnership administrative adjustments fpaa mailed to the hendrickses on date on date boulder oil_and_gas filed a petition with the court in response to the fpaa boulder oil_and_gas case on date mr hendricks transferred his jointly held interest in the remaining condominiums to petitioner for years before the transfer of his interest in the remaining condominiums mr hendricks had been advised by his attorney and john angeli mr angeli the hendrickses’ new certified_public_accountant to transfer his interest in the condominiums to petitioner in order to protect the condominiums from any creditors of mr hendricks in the substantial farming enterprise mr hendricks was engaged in at the time mr hendricks’s actual intent in making the transfers was to protect the investment in the condominiums because they constituted the hendrickses’ only financial resource for their retirement outside of social_security at the time of the transfer the hendrickses mistakenly believed that they had settled the tax_year and did not owe any_tax liabilities associated with or any other years the farming enterprise mr hendricks was engaged in at the time of the transfer to petitioner involved a 10-year lease- purchase of big_number acres of colorado farmland between him as lessee and colmeno of colorado inc as lessor the lease commenced in date and was to run until the arrangements required mr hendricks to make annual payments totaling dollar_figure consisting of payments for the land lease an equipment lease a loan of dollar_figure from a firm called menotex a prior mortgage and real_property_taxes the farming enterprise failed because mr hendricks was unable to meet the income projections needed to service the payments on date he liquidated the farming enterprise and sold its assets at an auction it took mr hendricks until date to finally pay off all creditors from that undertaking on date we issued an order to show cause why the boulder oil_and_gas case should not be decided in accordance with several test cases on date we issued an order and decision granting respondent’s motion for entry of decision making adjustments to the partnership items of boulder oil_and_gas for the tax_year on date respondent sent a letter to the hendrickses transmitting a form 4549a-cg income_tax examination changes explaining how the adjustments made during the tefra proceeding affected their individual_income_tax_return for respondent assessed the hendrickses’ deficiency for on date on date and date mr angeli faxed correspondence to respondent alleging that the hendrickses had settled the tax_liabilities and questioned the propriety and timeliness of the assessment respondent sent a letter to the hendrickses dated date explaining the origin of the tax_liability in the tefra proceeding and attaching copies of the various notices sent to the hendrickses over the years from the time the proceeding began respondent included transcripts of account showing that while the tax_liabilities had been assessed and paid the deficiency had not been assessed until date because of the stay on assessment caused by the tefra proceeding respondent filed a notice_of_federal_tax_lien in larimer county colorado for the assessed tax_liability and sent the hendrickses a notice_of_federal_tax_lien and your right to a hearing under sec_6320 on date on date petitioner and mr hendricks submitted their separate forms request for a collection_due_process_hearing and petitioner submitted a form_8857 request for innocent spouse relief a hearing was held by telephone on date respondent issued separate notices of determination to petitioner and mr hendricks on date sustaining the filing of notices of federal_tax_lien and denying relief to petitioner under sec_6015 the hendrickses have made payments totaling approximately dollar_figure against the balance due on their tax_liabilities the deficiency attributable to mr hendricks’s investment in boulder oil_and_gas for was dollar_figure after accounting for the payments previously made the hendrickses’ current balance due for is approximately dollar_figure the main source of the hendrickses’ current income consists of monthly social_security checks and approximately dollar_figure in rental income per month from the remaining condominiums the hendrickses’ monthly living_expenses exceed their income by about dollar_figure they are able to meet their living_expenses only through financial assistance from their children opinion pursuant to sec_6330 petitioner sought relief from respondent’s notice_of_determination sustaining the proposed collection action sec_6330 allows a taxpayer to raise appropriate spousal defenses under sec_6015 sec_6330 sec_301_6330-1 proced admin regs generally married taxpayers may elect to file a joint federal_income_tax return sec_6013 after making the election each spouse is jointly and severally liable to pay the entire tax due sec_6013 a spouse requesting spouse may however seek relief from joint_and_several_liability under sec_6015 or if eligible may allocate liability according to provisions under sec_6015 sec_6015 if relief is not available under sec_6015 or c an individual may seek equitable relief under sec_6015 to qualify for relief from joint_and_several_liability under sec_6015 a requesting spouse must establish a a joint_return has been made for a taxable_year b on such return there is an understatement_of_tax attributable to erroneous items of individual filing the joint_return c the other individual filing the joint_return establishes that in signing the return he or she did not know and had no reason to know that there was such understatement d taking into account all the facts and circumstances it is inequitable to hold the other individual liable for the deficiency in tax for such taxable_year attributable to such understatement and e the other individual elects in such form as the secretary may prescribe the benefits of this subsection not later than the date which i sec_2 years after the date the secretary has begun collection activities with respect to the individual making the election the requirements of sec_6015 are stated in the conjunctive accordingly a failure to meet any one of them prevents a requesting spouse from qualifying for the relief offered therein 119_tc_306 affd 101_fedappx_34 6th cir respondent does not dispute that petitioner satisfies the requirements of subparagraphs a b and e of sec_6015 therefore the controversy arising from the deduction of the boulder oil_and_gas losses focuses on whether petitioner in signing the joint tax_return knew or had reason to know of the understatement and taking into account all the facts and circumstances whether it would be inequitable to hold petitioner liable for the resulting deficiency the requirement of sec_6015 is similar to the requirement of former sec_6013 in that both provisions require the requesting spouse to establish in signing the return he or she did not know and had no reason to know of the understatement because of their similarities analysis in opinions concerning former sec_6013 remains instructive to our analysis for sec_6015 118_tc_106 affd 353_f3d_1181 10th cir 114_tc_276 an examination of the record reveals that only mr hendricks executed the investment papers in boulder oil_and_gas and that the partnership_interest was placed in his name alone mr hendricks paid for the boulder oil_and_gas investment with checks drawn from one of his business accounts to which petitioner had no access all mail from boulder oil_and_gas was sent to mr hendricks’s business address petitioner did not see any mail from boulder oil_and_gas because mr hendricks did not bring any of this mail home petitioner’s lack of knowledge regarding the transaction is corroborated by the hendrickses’ testimonies at trial mr hendricks testified that he did not discuss business or financial matters including his investment in boulder oil_and_gas with petitioner and that he did not consult petitioner when he decided to make the investment having observed the hendrickses’ appearances and demeanors at trial we find their testimonies to be honest forthright and credible in view of their testimonies we find that petitioner did not have actual knowledge of mr hendricks’s investment in boulder oil_and_gas at the time the joint tax_return was signed sec_6015 also requires that petitioner establish that she did not have reason to know that there was an understatement whether petitioner had reason to know of an understatement is a question of fact which must be determined based upon the entire record 897_f2d_441 9th cir affg tcmemo_1987_522 72_tc_1164 petitioner had reason to know of an understatement if a reasonably prudent taxpayer under her circumstances could be expected to know that the tax_liability stated was erroneous or that further investigation was warranted 872_f2d_1499 11th cir affg tcmemo_1988_63 780_f2d_561 6th cir affg in part and revg in part on another ground tcmemo_1984_310 94_tc_126 affd 992_f2d_1132 11th cir when deciding whether petitioner had reason to know of an understatement we consider several factors including petitioner’s level of education her involvement in the financial transactions which gave rise to the deductions the presence of lavish or unusual expenditures compared to her past standard of living and her husband’s openness concerning these transactions see stevens v commissioner supra pincite butler v commissioner supra pincite 93_tc_355 in making our determination we must consider the interplay or balance of the factors instead of merely counting the factors in a requesting spouse’s favor guth v commissioner supra pincite at the time petitioner signed the returns petitioner had completed years of college where she studied art she did not have any education or work experience in tax financial or accounting matters we find nothing in the record regarding her education and experiences that would or should have alerted her to the pitfalls of this situation mr hendricks dominated the financial side of the marriage with petitioner playing a minor role in the family’s finances petitioner did not participate in any of mr hendricks’s business activities although mr hendricks was not deceitful regarding their finances he did not consult with petitioner about making the investment in boulder oil_and_gas and did not disclose that the investment had been made moreover petitioner played a minimal role in the preparation of the tax returns the only information petitioner provided was a list of personal and household expenses she relied upon mr hendricks to provide the remainder of the information the hendrickes have led frugal lifestyles we find no evidence in the record that the hendrickses made any lavish or unusual expenditures during the relevant years considering all of the circumstances concerning the joint tax_return a reasonably prudent taxpayer under petitioner’s circumstances--living a modest life raising a family of five children uninvolved in the financial affairs of the family and without any financial background--at the time of signing could not be expected to know about the understatement attributable to mr hendricks’s investment in boulder oil_and_gas is there however a duty_of inquiry in order for petitioner’s duty_of inquiry to arise she must first harbor doubts about the accuracy of the return stevens v commissioner supra pincite petitioner may be put on notice of the understatement if a reasonably prudent taxpayer in her position would be led to question the legitimacy of the deduction id pincite the court_of_appeals for the second circuit has concluded tax returns setting forth large deductions such as tax_shelter losses offsetting income from other sources and substantially reducing or eliminating the couple’s tax_liability generally put a taxpayer on notice that there may be an understatement_of_tax liability see 992_f2d_1256 2d cir affg tcmemo_1992_228 mr hendricks was a farm and ranch real_estate broker and an investor which required him to report his various investment activities on schedule e on the hendrickses’ federal_income_tax return on their joint tax_return the hendrickses claimed dollar_figure in losses arising from boulder oil_and_gas this amount did not appear on the face of the return but it was listed on schedule e combined with the income and expenses of at least other properties including the condominiums and an office building considering all of the circumstances we conclude that petitioner was not put on notice of the understatement see boyle v commissioner tcmemo_1994_438 we conclude that a reasonably prudent taxpayer in petitioner’s position at the time of signing the return could not be expected to know about the understatement_of_tax or that further investigation was warranted petitioner has satisfied the sec_6015 requirement the final question is whether taking into account all the facts and circumstances it would be inequitable to hold petitioner liable for the deficiency attributable to the understatement on the joint tax_return sec_6015 respondent argues that it would not be inequitable for petitioner to be held liable for the understatement on the joint tax_return because title to the remaining condominiums was transferred in to her name alone the hendrickses acquired the condominiums before mr hendricks invested in boulder oil_and_gas the condominiums were acquired by exchanging other_property the hendrickses had previously owned and were not acquired from proceeds made available through the investment in boulder oil_and_gas mr hendricks transferred his joint interest in the remaining condominiums to petitioner nearly years before respondent assessed the deficiency for and began collection action against the hendrickses for that tax_year the hendrickses had paid the balances due for with moneys derived in part from the sale of several of the condominiums and the hendrickses mistakenly believed that they had settled the tax_year and did not owe any more tax_liabilities mr hendricks and mr angeli testified at trial that the risks associated with the substantial farming enterprise with which mr hendricks was engaged at the time were what motivated the transfer of the remaining condominiums petitioner was not involved in the farming enterprise and the hendrickses wanted to protect their investment in the remaining condominiums because they constituted the hendrickses’ only financial resource for their retirement outside of social_security furthermore despite the lack of success with the farming enterprise mr hendricks paid all of his debts from the farming enterprise there is nothing in the record to indicate that the hendrickses’ standard of living increased in comparison to their standard of living in prior years their lifestyle was not lavish and they made no unusual expenditures we find that petitioner did not significantly benefit from the deduction attributable to mr hendricks’s investment in boulder oil_and_gas see hayman v commissioner supra 118_tc_106 affd 353_f3d_1181 10th cir as retirees the hendrickses rely on the social_security checks they receive monthly and depend upon the rents from the remaining condominiums for income their current monthly living_expenses exceed their income by about dollar_figure they are able to meet their living_expenses only through financial assistance from their children we conclude that petitioner would experience considerable economic hardship if relief from the liabilities were not granted given the hendrickses’ current level of income and assets see 122_tc_32 we also consider the fact that the hendrickses have made a good_faith effort to comply with federal_income_tax laws in the tax years following except for the years they reported loss activity from boulder oil_and_gas ie the hendrickses neither have had their federal tax returns examined nor have they had taxes in excess of the amount reported on their returns assessed furthermore the hendrickses have made an honest attempt to pay their tax_liabilities when they were able and did so as quickly as possible the hendrickses paid in full the balances due for by the end of and have already paid more than dollar_figure toward the balance due for dollar_figure of which represents the underpayment attributable to mr hendricks’s investment in boulder oil_and_gas considering that petitioner did not receive significant benefit from the understatements that petitioner would suffer considerable economic hardship if relief were denied and that the hendrickses have complied with federal tax laws at least since we conclude that on the basis of all the facts and circumstances it would be inequitable to hold petitioner liable for the understatement_of_tax for petitioner has satisfied the sec_6015 requirement in summary we find that petitioner has established in signing the joint tax_return she did not know nor did she have reason to know of the understatement and taking into account all the facts and circumstances it would be inequitable to hold petitioner liable for the resulting deficiency petitioner has met all the requirements of sec_6015 and she is entitled to relief from joint_and_several tax_liability as to to reflect the foregoing an appropriate decision will be entered


internal_revenue_service number release date index number ------------------ ------------------------------- ------------------------- ---------------------- -------------------------- legend department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------- id no ------------- telephone number --------------------- refer reply to cc corp b01 plr-140665-09 date date parent ---------------------------------------------------------- -------------------------------------------------- ------------------------- ---------------------------------------- distributing --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------- ----------------------------------------------------- -------------------------------------------------------- controlled --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------- ----------------------------------------------------- sub ---------------------------------------------------------- -------------------------------------------------- ------------------------------------------------- sub ---------------------------------------------------------- -------------------------------------------------- ------------------------------------------ sub ---------------------------------------------------------- -------------------------------------------------- ----------------------------------- sub ----------------------------------------------------- ----------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------- plr-140665-09 -------------------------------------------------- sub -------------------------------------------------------- ----------------------------------------------------- ------------------ -------------------------------- sub --------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------- -------------------------------------------------- ----------------- sub --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------- ----------------------------------------------------- sub ------------------------------------------------------------ ----------------------------------------------------- ------------------------------------------- sub -------------------------------------------------------- ----------------------------------------------------- ---------------------------------------------------------- ---------------------- sub --------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------- -------------------------------------------------- ------------------------------------------------------- sub --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------- ----------------------------------------------------- ----------------------- sub --------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------- ------------------------------------------------------ third party --------------------------------------------------------------- -------------------------------------------------- -------------------------------- plr-140665-09 country a country b country c country d country e --------- ---------------- ---------- --------------- ------------ business a --------------------------------------------------------------- business b -------------------------------------------------- a b c d e f g h date a -------- -------- -------- ------ ------ --- ---- ---- ---------------- dear ------------ this letter responds to your representative's letter dated date requesting rulings as to the federal_income_tax consequences of the proposed transactions as defined below additional information was submitted in letters dated october and date the material for consideration is summarized below information submitted the rulings contained in this letter are based on facts and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party this office has not verified any of the material submitted in plr-140665-09 support of the request for rulings verification of the information representations and other data may be required as part of the audit process in particular this office has not reviewed any information pertaining to and has made no determination regarding whether the proposed transactions i satisfy the business_purpose requirement of sec_1_355-2 of the income_tax regulations ii are used principally as a device for the distribution of earnings_and_profits of distributing or controlled or both see sec_355 of the internal_revenue_code and sec_1_355-2 or iii are part of a plan or series of related transactions pursuant to which one or more persons will acquire directly or indirectly stock representing a 50-percent_or_greater_interest in the distributing_corporation or the controlled_corporation see sec_355 and sec_1_355-7 summary of facts parent is the common parent of an affiliated_group_of_corporations that files a consolidated federal_income_tax return the parent group parent is engaged through direct and indirect subsidiaries in various businesses including business a and business b parent wholly owns sub parent also owns a of sub third party owns the remaining b of sub sub owns c of sub the remaining d sub is owned by third party sub wholly owns sub an entity that is disregarded as separate from its owner for u s federal tax purposes under sec_301_7701-3 a disregarded_entity and sub a country a company that is a disregarded_entity sub owns all of sub a disregarded_entity and e of sub a country b company that is a disregarded_entity the remaining f of sub is owned by sub sub wholly owns distributing a country b corporation among its other subsidiaries distributing wholly owns controlled a country c_corporation and sub a country d corporation controlled wholly owns sub a country a corporation on date a a date within the past five years distributing completed its purchase of all of controlled stock distributing and controlled are each controlled_foreign_corporations cfcs as defined in sec_957 sub wholly owns sub a disregarded_entity sub wholly owns sub a country e company that is a disregarded_entity sub owns g and sub owns the remaining h of sub a disregarded_entity distributing and members of its separate_affiliated_group as defined in sec_355 the distributing sag conduct business a and business b following the proposed transaction i the distributing sag will conduct business a and ii controlled and members of its separate_affiliated_group as defined in sec_355 the controlled sag will conduct business b plr-140665-09 financial information has been received indicating that each of business a and business b has had gross_receipts and operating_expenses representing the active_conduct_of_a_trade_or_business for each of the past five years proposed transaction for what are represented to be valid business purposes distributing proposes the following steps the proposed transactions i ii iii iv v distributing will distribute its controlled stock to sub a disregarded_entity which will distribute such shares to sub a disregarded_entity the distribution sub will sell its controlled stock to parent for cash and or a note parent will contribute the controlled stock to sub in exchange for sub stock the contribution controlled will elect to become a disregarded_entity the election and together with the contribution the reorganization controlled will either i sell or contribute its assets including all of the issued and outstanding shares in sub to sub for cash and or a note or ii contribute all of its assets including all of the issued and outstanding shares in sub to sub for additional shares in sub representations the distribution following representations have been made in connection with the a b c the indebtedness if any owed by controlled to distributing after the distribution will not constitute stock_or_securities no part of the consideration to be distributed by distributing in the distribution will be received by a shareholder as a creditor employee or in any capacity other than that of a shareholder of distributing the five years of financial information submitted for business a and business b are representative of their present operations and there have been no substantial operational changes since the date of the last financial statements submitted plr-140665-09 d e f g h i j k following the distribution distributing through its sag and sub as controlled’s successor will continue the active_conduct of its businesses independently and with its separate employees the distribution is being carried out for the corporate business purposes of enhanced management focus and cost savings the distribution is motivated in whole or substantial part by these corporate business purposes the distribution is not used principally as a device for distributing the earnings_and_profits of distributing or controlled or both for purposes of sec_355 immediately after the distribution no person determined after applying sec_355 will hold stock possessing percent or more of the total combined voting power of all classes of distributing stock entitled to vote or percent or more of the total value of shares of all classes of distributing stock that was acquired by purchase as defined in sec_355 and during the five-year period determined after applying sec_355 ending on the date of the distribution for purposes of sec_355 immediately after the distribution no person determined after applying sec_355 will hold stock possessing percent or more of the total combined voting power of all classes of controlled stock entitled to vote or percent or more of the total value of shares of all classes of controlled stock that was either i acquired by purchase as defined in sec_355 and during the five-year period determined after applying sec_355 ending on the date of the distribution or ii attributable to distributions on distributing stock_or_securities that was acquired by purchase as defined in sec_355 and during the five-year period determined after applying sec_355 ending on the date of the distribution the distribution is not part of a plan or series of related transactions within the meaning of sec_1_355-7 pursuant to which one or more persons other than persons described in sec_355 will acquire directly or indirectly stock representing a percent or greater interest within the meaning of sec_355 in distributing or controlled including any predecessor or successor of any such corporation no intercorporate debt will exist between distributing and controlled or sub as controlled’s successor at the time of or subsequent to the distribution payments made in connection with continuing transactions if any between distributing and controlled or sub as controlled’s successor will be for plr-140665-09 l m n o p q r s fair_market_value based on terms and conditions arrived at by the parties bargaining at arm's length following the distribution no person will hold a greater-than-50 percent interest in either distributing or controlled within the meaning of sec_355 who did not hold such an interest immediately before the distribution distributing and controlled each will pay its own expenses if any incurred in connection with the distribution controlled was not and will not be a united_states_real_property_holding_corporation as defined in sec_897 either i at any time during the five- year period ending on the date of the distribution or ii immediately following the distribution distributing and controlled are controlled_foreign_corporations cfcs as defined in sec_957 immediately before or immediately after the distribution sub will be a sec_1248 shareholder within the meaning of sec_1_367_b_-2 with respect to distributing and controlled immediately before and after the distribution distributing and controlled will not be passive foreign investment companies as defined in sec_1297 immediately before or immediately after the distribution the notice requirements of sec_1_367_b_-1 of the income_tax regulations will be met with respect to the distribution the distribution will not include the transfer of stock of any corporation that has been a u s transferor the transferee corporation or the transferred corporation with respect to any unexpired gain_recognition_agreement within the meaning of sec_1_367_a_-3 sec_1_367_a_-8 and sec_1_367_a_-8t the following representations have been made in connection with the reorganization t u the fair_market_value of sub stock and any other consideration received by parent will be approximately equal to the fair_market_value of controlled stock surrendered in the exchange sub will acquire at least percent of the fair_market_value of the net assets and at least percent of the fair_market_value of the gross assets held by controlled immediately prior to the reorganization for purposes of this plr-140665-09 representation amounts paid_by controlled to dissenters amounts paid_by controlled to shareholders who receive cash or other_property amounts used by controlled to pay its reorganization expenses and all redemptions and distributions except for regular normal dividends made by controlled immediately preceding the transfer will be included as assets of controlled held immediately prior to the reorganization after the reorganization parent will be in control of sub within the meaning of sec_368 at least of the proprietary interest in controlled will be exchanged for sub stock and preserved within the meaning of sec_1_368-1 there is no plan or intention for sub or any person related as defined in sec_1_368-1 to sub to reacquire any sub stock issued in the reorganization sub through disregarded entities has no plan or intention to sell or otherwise dispose_of any of the assets of controlled to be acquired in the reorganization except for dispositions made in the ordinary course of business the adjusted_basis and fair_market_value of the assets of controlled to be transferred by controlled to sub each will equal or exceed the amount of the liabilities to be assumed by sub in the reorganization plus the amount of the liabilities if any to which the transferred assets are subject v w x y z aa the liabilities of controlled to be assumed by sub plus the liabilities if any to which the transferred assets are subject were incurred by controlled in the ordinary course of business and are associated with the assets to be transferred bb sub will continue the business of controlled in the same manner as it was conducted by controlled prior to the reorganization cc sub through disregarded entities will continue the business of controlled in the same manner as it was conducted by controlled prior to the reorganization dd at the time of the reorganization sub will not have outstanding any warrants options convertible securities or any other type of right pursuant to which any person could acquire stock in sub that if exercised or converted would affect the acquisition or retention of control as defined in sec_368 plr-140665-09 ee each of the entities involved in the reorganization will pay its own expenses if any incurred in connection with the proposed transaction ff there is no intercorporate indebtedness existing between any of the entities involved in the reorganization that was issued acquired or will be settled at a discount gg none of the entities involved in the reorganization is an investment_company as defined in sec_368 and iv hh the adjusted_basis and fair_market_value of the assets of controlled to be transferred by controlled to sub will each equal or exceed the amount of the liabilities to be assumed by sub in the controlled reorganization plus the amount of the liabilities to which the assets transferred will be subject if any ii jj kk ll none of the entities involved in the reorganization are under the jurisdiction of a court in a title_11_or_similar_case within the meaning of sec_368 the reorganization will be consummated pursuant to a written plan_of_reorganization adopted by the boards of directors of parent and its relevant affiliates and each step in the reorganization will be carried out pursuant to such plan parent has no plan or intention to sell exchange or otherwise dispose_of any shares of sub stock to be received in the reorganization controlled will not hold any united_states real_property interests within the meaning of sec_897 immediately before the reorganization mm the reorganization will not include the transfer of stock of any corporation that has been a u s transferor the transferee corporation or the transferred corporation with respect to any unexpired gain_recognition_agreement within the meaning of sec_1_367_a_-3 sec_1_367_a_-8 and sec_1_367_a_-8t rulings based solely on the information submitted and the representations set forth above we rule as follows on the distribution no gain_or_loss will be recognized by distributing upon the distribution of controlled stock to sub through disregarded entities in the distribution sec_355 and sec_355 plr-140665-09 no gain_or_loss will be recognized by and no amount will be included in the income of sub upon the receipt of controlled stock through disregarded entities in the distribution sec_355 the aggregate basis of distributing stock and controlled stock in the hands of sub immediately after the distribution will be the same as sub 3’s aggregate basis in distributing stock held immediately before the distribution allocated between distributing and controlled stock in the manner described in sec_1_358-2 sec_358 b and c the holding_period of controlled stock received by sub in the distribution will include the holding_period of distributing stock with respect to which the distribution was made provided that sub held the distributing stock as a capital_asset on the date of the distribution sec_1223 earnings_and_profits of distributing if any will be allocated between distributing and controlled in accordance with sec_312 and sec_1_312-10 the transfer of the controlled stock by distributing will be a distribution to which sec_1_367_b_-1 and sec_1_367_b_-5 -5 c and -5 f apply if sub 3's post- distribution amount as defined in sec_1_367_b_-5 with respect to distributing or controlled is less than its pre-distribution amount as defined in sec_1 b - e with respect to distributing or controlled sub 3's basis in such stock immediately after the distribution must be reduced by the amount of the difference however sub 3's basis in such stock must not be reduced below zero and to the extent the foregoing reduction would reduce its basis below zero sub must instead include such amount in income as a deemed_dividend from such corporation if sub reduces its basis in the stock of distributing or controlled or has an inclusion with respect to such stock sub must increase its basis in the stock of the other corporation to the extent provided in sec_1 b - c based solely on the information submitted and the representations set forth above we rule as follows on the reorganization the contribution and election will be treated for federal_income_tax purposes as a transfer by controlled of substantially_all of its assets to sub in exchange for sub stock and sub 1’s assumption of controlled’s liabilities followed by controlled’s distribution of sub stock to parent which will qualify as a reorganization under sec_368 for purposes of this ruling substantially_all means at least percent of the fair_market_value of the net assets and at least percent of the fair_market_value of the gross assets held by controlled plr-140665-09 immediately before the reorganization controlled and sub each will be a_party_to_a_reorganization within the meaning of sec_368 no gain_or_loss will be recognized by controlled on the transfer of substantially_all of its assets to sub in exchange for sub stock and sub 1’s assumption of controlled’s liabilities sec_361 and sec_357 no gain_or_loss will be recognized by sub upon its receipt of the assets of controlled in exchange for sub stock sec_1032 no gain_or_loss will be recognized by parent upon its receipt of sub stock in exchange for its controlled stock as described above sec_354 the basis of each asset of controlled acquired by sub will be the same as the basis of such asset in the hands of controlled immediately prior to the reorganization sec_362 the holding_period for each controlled asset in the hands of sub will include the period during which such asset was held by controlled sec_1223 following the reorganization sub will succeed to and take into account the items of controlled described in sec_381 subject_to the provisions and limitations of sec_381 sec_382 sec_383 and sec_384 and the regulations thereunder the basis of the sub stock received by parent in the reorganization will equal the basis of the controlled stock surrendered by parent in exchange therefor sec_358 the holding_period of the sub stock received by parent in the reorganization will include the holding_period of the controlled stock surrendered in exchange therefor provided that the controlled stock is held as a capital_asset on the date of the exchange sec_1223 sub shall include in income as a deemed_dividend the all_earnings_and_profits_amount if any with respect to its stock in controlled as required by sec_1 b - b caveats no opinion is expressed or implied about the tax treatment of the proposed transactions under other provisions of the code or regulations or the tax treatment of any conditions existing at the time of or effects resulting from the proposed transactions that are not specifically covered by the above rulings in particular this office has not reviewed any information pertaining to and has made no determination plr-140665-09 regarding i whether the distribution satisfies the business_purpose requirement of sec_1_355-2 ii whether the distribution is used principally as a device for the distribution of the earnings_and_profits of distributing or controlled or both see sec_355 and sec_1_355-2 iii whether the distribution and an acquisition or acquisitions are part of a plan or series of related transactions under sec_355 iv whether any of the proposed transactions will result in the recapture of any dual_consolidated_loss within the meaning of sec_1_1503-2 or sec_1_1503_d_-1 v to the extent not otherwise ruled on above the adjustments to earnings_and_profits or deficits in earnings_and_profits if any in any of the transactions to which sec_367 applies vi to the extent not otherwise ruled on above any other consequences under sec_367 on any internal restructuring transaction in this ruling letter and vii whether any or all of the foreign_corporations involved in the transaction are passive foreign investment companies within the meaning of sec_1297 finally if it is determined that any or all of the foreign_corporations are passive foreign investment companies no opinion is expressed with respect to the application of sec_1291 through to the proposed transactions in particular in a transaction in which gain is not otherwise recognized regulations under sec_1291 may require gain recognition notwithstanding any other provisions of the code the rulings contained in this letter are based upon facts and representations submitted by the taxpayer and accompanied by a penalties of perjury statement executed by an appropriate party this office has not verified any of the material submitted in support of the request for rulings verification of the information representations and other data may be required as part of the audit process procedural matters this ruling is directed only to the taxpayers who requested it sec_6110 provides that it may not be used or cited as precedent plr-140665-09 a copy of this ruling letter must be attached to the federal_income_tax return of each party involved in the proposed transactions for the taxable_year in which the proposed transactions are completed alternatively taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their returns that provides the date and control number of the letter_ruling 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 mark j weiss assistant to the chief branch office of associate chief_counsel corporate cc


number release date internal_revenue_service index numbers - ---------------------------------------- ----------------------------------------------- ------------------------- ------------------------- --------------------- department of the treasury washington dc person to contact ----------------------------------------------------- -------- telephone number -------------------- refer reply to cc psi - plr-100364-06 date date legend x ----------------------------------------------- --------- ---------------- ------------------ ---------- d1 country dear -------------------- this letter responds to a letter dated date and subsequent correspondence submitted on behalf of x requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations for x to file an election to be treated as a disregarded_entity under the laws of country was acquired by a single owner with limited_liability on d1 x intended to be treated as a disregarded_entity for federal tax purposes effective d1 however x did not timely file a form_8832 entity classification election according to the information submitted all of the interest in x an entity formed sec_301_7701-3 provides that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes as provided in sec_301_7701-3 sec_301_7701-3 provides guidance on the classification of a foreign eligible_entity for federal tax purposes under sec_301_7701-3 except as provided in sec_301 b unless it elects otherwise a foreign eligible_entity is classified as an association if all members have limited_liability sec_301_7701-3 provides that for purposes of sec_301_7701-3 a sec_301_7701-3 provides that an election under sec_301_7701-3 member of a foreign eligible_entity has limited_liability if the member has no personal liability for the debts of or claims against the entity by reason of being a member will be effective on the date specified on form_8832 or on the date filed if no such date is specified on the form the effective date specified on form_8832 cannot be more than days prior to the date the form is filed and cannot be more than months after the date on which the form is filed 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 six months except in the case of a taxpayer who is abroad under all subtitles of the code except subtitles e g h and i sec_301_9100-1 defines a regulatory election to include an election whose due_date is prescribed by a regulation published in the federal_register sec_301_9100-2 provides the rules governing automatic extensions of time for making certain elections sec_301_9100-3 sets forth the standards the commissioner will use to based on the facts submitted and representations made we conclude that the determine whether to grant an extension of time for regulatory elections that do not meet the requirements of sec_301_9100-2 under sec_301_9100-3 a request for relief 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 granting relief will not prejudice the interests of the government requirements of sec_301_9100-3 have been satisfied as a result x is granted an extension of time of days from the date of this letter to file form_8832 and elect to be treated as a disregarded_entity for federal tax purposes effective d1 a copy of this letter should be attached to the form_8832 the federal tax consequences of the transaction described above under any other provision of the code except as specifically set forth above no opinion is expressed or implied as to sec_6110 provides that it may not be used or cited as precedent this ruling is directed only to the taxpayer on whose behalf it was requested in accordance with the power_of_attorney on file with this office a copy of this sincerely letter is being sent to x’s authorized representative enclosures copy of this letter copy for sec_6110 purposes heather c maloy associate chief_counsel passthroughs and special industries