department of the treasury_department of the treasury internal_revenue_service internal_revenue_service washington d c washington d c date number release date cc ita tl-n-1114-00 uilc internal_revenue_service national_office field_service_advice memorandum for from associate chief_counsel income_tax accounting cc ita subject sec_172 - eligibility for carryback various expenses this chief_counsel_advice responds to your request dated date in accordance with sec_6110 this chief_counsel_advice should not to be cited as precedent legend taxpayer date a date b products public entity dollar_figurex tax_year tax_year tax_year tax_year tax_year tax_year issues whether any of the following categories of expenses_incurred by taxpayer in tax_year are specified liability losses under sec_172 in effect for that year and thus qualify for a ten-year net_operating_loss_carryback period state sales and use taxes federal payroll_taxes workers’ compensation payment sec_4 certain environmental remediation cost sec_5 litigation settlement payment to former employee federal insurance act contributions fica in conjunction with issue settlement payment contract settlement payment to public entity conclusions the expenditures described in issue sec_3 and as discussed herein may qualify as specified liability losses under sec_172 while those described in issue sec_1 and do not qualify facts taxpayer a corporation reporting income on the accrual_method distributes products and provides certain services for those products to a wide range of industries for tax_year taxpayer incurred a net_operating_loss nol a significant portion of which dollar_figurex taxpayer alleges is attributable to specified liability losses under sec_172 taxpayer filed form_1139 on date a seeking tentative refund for tax_year and tax_year the earliest year in the putative carryback period tax_year absorbed none of the loss since taxpayer had no net_income in that year the service issued a refund about six to eight weeks after the filing of the form_1139 subsequently on date b the service issued a letter disallowing the specified_liability_loss carryback for ease of reference additional facts relevant to each category of expenses are discussed infra with respect to the specific discussion of each particular category law and analysis background the net_operating_loss_deduction of sec_172 responds to a potential unfairness resulting from the fact that the income_tax is generally computed on an annual accounting basis without the ability to deduct net operating losses businesses with fluctuating incomes would lose the benefit of their deductions in taxable years in which expenses exceeded income as the supreme court has stated the net_operating_loss provisions were designed to permit a taxpayer to set off its lean years against its lush years 353_us_382 under the original net_operating_loss_deduction enacted after world war i as a temporary measure losses could be carried only to the taxable years immediately preceding and succeeding the loss_year revenue act of b 40_stat_1057 since then the congressionally prescribed periods for carrybacks and or carryforwards have been changed frequently see eg h_r rep no 83d cong 2d sess s rep no 83d cong 2d sess the current general rule-enacted in the taxpayer_relief_act_of_1997 sec_1082 and effective for tax years beginning after date--is that a net_operating_loss should be carried back to the preceding two years with any unabsorbed excess thereafter carried forward to the twenty succeeding years sec_172 that was an immediate change from three and fifteen years respectively in certain circumstances depending upon the type of taxpayer or the nature of the loss involved a different carryback or carryforward period may apply the issue presented here entails one of those special situations ie the scope of the alternative 10-year carryback allowance for deferred liabilities provided for in sec_172 a component of total specified_liability_loss under sec_172 the applicable statute and legislative_history congress first enacted the statutory language pertinent to this case in the tax_reform_act_of_1984 1984_act when it enacted sec_172 of the internal_revenue_code of the amounts described in sec_172 as specified liability losses were originally described in sec_172 as deferred statutory or tort liability losses prior to its amendment in section a of the tax and trade relief extension act of sec_172 treated as a specified_liability_loss the portion of a nol generated by b any amount other than product_liability expenses and certain expenses related thereto allowable as a deduction under chapter of the internal_revenue_code with respect to a liability which arises under a f ederal or s tate law or out of any tort of the taxpayer if - i in the case of a liability arising out of a f ederal or s tate law the act or failure to act congress has clarified the scope of the section--prospectively see tax and trade relief extension act of yet the new statute is only effective for tax years ending after enactment thus we are still confronted by the problem of application in earlier years giving rise to such liability occurs at least years before the beginning of the taxable_year or ii in the case of a liability arising out of a tort such liability arises out of a series of actions or failures to act over an extended period of time a substantial portion of which occurs at least years before the beginning of the taxable_year the statutory context as well as the limited legislative_history indicate that congress intended the ten-year carryback to apply to only a narrow class of liabilities this specified_liability_loss exception in other words is much more severely limited than that which would be extant under a supposed plain meaning reading of the sec_172 elements the correct narrower reading is based upon our interpretation of the scant legislative_history as well as the statutory and practical context within which this relief provision was adopted by congress the distinguishing feature of those liabilities within the eligible narrow class is an element of delay in the timing of the deduction that is inherent in the nature of the deduction itself for example arguably land used for mining purposes cannot be reclaimed environmentally during the time which it is actually being mined accordingly there is an inherent delay of the deduction for reclamation expenses to later years prior to the enactment of the economic_performance requirement in sec_461 sec_1_461-1 generally treated an accrual_method taxpayer as incurring a liability for federal_income_tax purposes when the following two- pronged test was satisfied all the events occurred that established the fact of the liability and the amount of the liability could be determined with reasonable accuracy this is the so-called all-events test the treasury_department became concerned when courts began interpreting the two-pronged all-events test in a manner that allowed accrual_method taxpayers to deduct liabilities far in advance of when the liabilities had to be satisfied by payment or other performance because of the time_value_of_money the benefit to taxpayers from such accruals could be substantial especially in periods of exceptionally high interest rates for example state and or federal laws generally require miners to restore the surface of land they have strip mined to a condition comparable to its prior state a miner's legal_obligation to restore arises when the miner disturbs the land although actual restoration may not occur until some time thereafter if miners failed to estimate reasonable future costs to restore the land the service succeeded in preventing them from deducting estimated restoration costs for taxable years when the land was disturbed 208_f2d_532 3d cir 212_f2d_52 4th cir cert_denied 348_us_828 on the other hand if the deductions claimed were based on reasonably accurate estimates of future costs to restore the courts generally allowed the strip miners to deduct the estimated costs for the taxable years when the land was disturbed 192_f2d_1002 4th cir 271_f2d_930 3d cir 77_tc_1369 of similar concern courts concluded that the occurrence of a work-related injury satisfied the first prong of the all-events test in the case of uncontested self- insured workmen’s compensation liabilities this allowed taxpayers which could reasonably estimate liabilities to be paid well in the future such as workmen’s compensation disability or survivor annuities to deduct such amounts currently rather than when actually paid 518_f2d_772 9th cir 60_tc_13 aff'd 528_f2d_735 9th cir another situation offering a much greater potential for a taxpayer to deduct an amount far in excess of the present_value of the legal_obligation giving rise to that deduction involved the obligation to decommission a nuclear power plant in the case of a nuclear power plant the legal_obligation to decommission could arise well in advance of the time when the decommissioning was completed the administration decided to seek a legislative solution to the problem caused by such cases specifically the administration proposed the addition of an economic_performance requirement to the all-events test see staff of the joint_committee on taxation summary of administration's revenue proposals in the fiscal_year budget proposal comm print under the proposed change the all-events test would be clarified so that with certain exceptions deductions would not be permitted until services were performed the use of property actually occurred or in the case of workmen's_compensation or similar liabilities the liability was actually satisfied id under the proposal the net_operating_loss_carryback rules would be amended to allow losses to be carried back to the year in which the obligation generating the loss arose id the subcommittee on oversight of the house ways_and_means_committee held a hearing on the administration's proposal to deal with premature accruals by the addition of a new economic_performance requirement see timing and measurement of taxpayer deductions for obligations to be paid in the future hearing before the subcommittee on oversight of the committee on ways and means house of representatives 98th cong 2d sess date many of the taxpayers and tax practitioners who testified at the hearing objected to the proposal because in their view it would result in a mismatching of revenue and expenses in the case of mining reclamation for example if reclamation costs can only be deducted in the taxable_year when the work is actually done such deductions will not be matched with the earlier income these costs helped generate on the other hand immediately deducting the total estimated cost of restoration overstates the true economic cost to the taxpayer thus treasury proposed liberalizing the nol provisions for deductions deferred because of economic_performance our proposals provide for extension of the carryback period in appropriate circumstances to insure that the deferred expenses will be able to be fully utilized generally expenses attributable to liabilities arising more than years prior to economic_performance will be permitted to be carried back for a period not to exceed years subject_to certain transition_rules special carryback rules might be appropriate for certain expenses to be paid in the future such as the nuclear_powerplant decommissioning costs id pincite statement of ronald a pearlman deputy assistant secretary for tax policy u s treasury congress adopted the economic_performance requirements by enacting sec_461 of the code in sec_91 of the 1984_act in sec_91 it also enacted the ten-year carryback for deferred statutory or tort liability losses the discussion of the new carryback provision appears in the same section of the committee reports as the sec_461 discussion although the house and senate reports describe the operation of the proposed new ten-year carryback neither of those reports discuss the reason for its enactment the conference_report however alludes to the carryback for losses attributable to certain liabilities deferred under these provisions of the bill h_r conf_rep no 98th cong 2d sess context indicates the reference is to the economic_performance requirements sealy corp v commissioner the first tax_court opinion to consider the application of sec_172 was 107_tc_177 aff’d 171_f3d_655 9th cir in sealy the taxpayer asserted that a portion of a net operating lo sec_2 another tax_court case 111_tc_294 rev’d and remanded 209_f3d_901 6th cir presented the issue of whether state taxes and interest on state and federal taxes qualify as specified liability losses we argued therein that those expenditures are ineligible for the ten-year carryback under sec_172 the tax court’s opinion however did not reach that issue rather the case was resolved at the trial level in favor of the commissioner upon what the court generated by deductions for the following items constituted a specified_liability_loss within the meaning of sec_172 professional fees incurred to comply with reporting filing and disclosure requirements imposed by the securities and exchange act of professional fees incurred to comply with erisa reporting requirements and professional fees incurred in connection with an irs income_tax audit the tax_court held that deduction of the above expenses did not result in a specified_liability_loss because the liability for the expenses did not arise under a federal or state law within the meaning of sec_172 the tax_court gave three reasons for its conclusion first the court noted that the federal_law cited by the taxpayer did not establish its liability to pay the amounts at issue the taxpayer’s liability did not arise until the services were contracted for and received and the taxpayer’s choice of the means of compliance rather than the cited regulatory provisions determined the nature and amount of their costs if the taxpayer had failed to comply with the auditing and reporting requirements or had not obtained the particular services at issue liability would not have been measured by the value of the services they actually contracted for and received t c pincite second the tax_court read the legislative_history to suggest that congress intended the provision to apply only to liabilities the deduction of which the economic_performance requirement caused to be deferred because the economic_performance requirement did not delay taxpayer’s accrual of the deductions at issue the court concluded that congress did not intend for losses generated by those deductions to qualify as specified liability losses id pincite third in determining the scope of liabilities arising under either federal or state law within the meaning of sec_172 the court considered the specific types of liabilities referred to in sec_172 ie product_liability nuclear decommissioning liabilities and torts invoking the statutory construction rule_of ejusdem generis the court concluded that congress intended the 10-year carryback to apply to a relatively narrow class of liabilities similar to those identified in the statute the court thought the costs at issue in sealy were routine costs not like those identified in the statute id pincite saw as the dispositive threshold matter of whether there was a net_operating_loss under sec_172 and the consolidated_return_regulations ie the netting issue see sec_1_1502-12 1502-21a f upon taxpayer’s appeal however the sixth circuit reversed on that netting issue and remanded the case for a determination of whether the tax and interest_expenses in issue were qualified as specified liability losses under sec_172 a subsequent tax_court ruling is still pending the ninth circuit focused on the fact that the acts giving rise to the liabilities at issue in sealy did not occur at least three years before the beginning of the taxable_year of the related deductions as required by sec_172 the ninth circuit did application of the statutory construction doctrine_of ejusdem generis requires a determination of the characteristics of the class suggested by the enumerated items the specific liabilities arising under federal or state law identified in the statute and discussed in the legislative_history to the 1984_act share a distinguishing characteristic inherent in the nature of each type of identified liability is an element of substantial delay between the act or failure to act giving rise to the liability and the time a deduction may be claimed for the liability because of the economic_performance requirement for example because of the economic_performance requirement a taxpayer's deduction for nuclear decommissioning costs is inherently delayed by the substantial number of years that expire between the time a nuclear power plant begins operation resulting in a legal_obligation to decommission and the actual decommissioning of the plant in contrast to the types of liabilities arising under federal or state law identified in the statute and the legislative_history to the 1984_act the liabilities in issue here-except for workers’ compensation payments--constitute costs that do not involve an inherent substantial delay between the time the events giving rise to the liability occur and when the deduction for such liability becomes allowable while there may be substantial delays between the events giving rise to liability and the time when such liability becomes an allowable deduction for example an accrual_method taxpayer may contest a liability and then may ultimately prove unsuccessful in court such delays are not inherent in the nature of the liability host marriott corp v united_states in 113_fsupp2d_790 d md the taxpayer claimed the portion of its nol generated by deductions for workers’ compensation payments and federal tax_deficiency interest as a specified_liability_loss within the meaning of sec_172 the service contended that those liabilities did not qualify as inherent delay liabilities and therefore did not fall within the narrow class of liabilities arising under federal or state law within the meaning of the statute the district_court specifically rejected the government’s arguments with respect to an inherent delay factor in doing so the court disavowed sealy to the extent that an inherent delay requirement was announced there in addition as a corollary to that inherent delay holding the court also found the application of the ejusdem_generis_rule to be inapposite to that taxpayer and by implication to any sec_172 determination because the court found the statutory language to be clear it also considered as inappropriate any resort to legislative_history to determine the not expressly address the tax court’s conclusion that the liabilities at issue did not arise under federal or state law within the meaning of sec_172 meaning of the phrase liability which arises under federal or state law the court concluded that the workers’ compensation and federal tax_deficiency interest liabilities arose under federal or state law within the meaning of the statute the court also concluded that the act or failure to act giving rise to all of the interest liabilities at issue occurred when the taxpayer filed its tax returns without paying all of the tax ultimately determined to be due that result is clearly erroneous in our view thus we have appealed host marriott to the fourth circuit as is noted in this advice below as well as in our previous tam we now recognize that some workers’ compensation liabilities have the inherent delay characteristic and therefore fall within the narrow class of liabilities that arise under federal or state law within the meaning of sec_172 however notwithstanding the service-adverse decision in host marriott we continue to believe that the tax_court in sealy correctly concluded that only a narrow class of liabilities arise under federal or state law within the meaning of sec_172 consequently we have appealed only that portion of the host marriott judgment pertaining to the federal tax_deficiency interest to the fourth circuit specific expenditures of taxpayer asserted as specified liability losse sec_1 state sales and use taxes taxpayer claims specified_liability_loss treatment for state sales and use_tax payments there is some factual question as to whether those amounts constitute contested_liabilities for previous years nevertheless we must presume for present purposes that is the case since the three-year_rule would obviously not be met if the tax obligations went to loss_year liabilities ie in tax_year any contested versus uncontested aspect of these payments however is of no moment in our determination merely delaying payment--whether through contesting the liability or other extraneous means--is inadequate to support sec_172 applicability taxpayer apparently asserts that any liability literally imposed by federal or state law constitutes a liability arising under either federal or state law within the meaning of sec_172 in contrast to the fact pattern in sealy presumably state or federal statutes directly impose the tax_liabilities at issue here we agree with the tax_court however that congress intended sec_172 to apply to deductions allowable with respect to a relatively narrow class of liabilities rather than to deductions allowable with respect to any liability literally imposed under federal or state law in intermet supra we argued that the state tax_liabilities at issue do not have that inherent delay nature consequently taxes are not within that narrow class of expenses that are eligible for the ten-year carryback as stated in our intermet taxpayer has apparently not provided specifics with regard to these expenses briefs congress did not intend the special carryback rule to apply to all liabilities for which a deduction is delayed by the economic_performance rules if merely routine costs-which surely includes state income taxes and interest-were within the eligible class then simply nonpayment of current liabilities for more than three years would qualify a taxpayer for a ten-year carryback upon the payment of those costs on the facts presented that is what appears to be the case here when we consider the legislative_history of the 1984_act as well as the characteristics of the specifically enumerated liabilities in sec_172 to determine the characteristics of the liabilities for which congress intended sec_172 to apply we must conclude that congress did not intend state taxes or interest thereon to be included within that class application of the rule_of ejusdem generis requires a determination of the characteristics of the class suggested by the enumerated items the specific liabilities arising under federal or state law identified in the statute and discussed in the legislative_history to the 1984_act share a distinguishing characteristic inherent in the nature of each type of identified liability is an element of substantial delay between the the act or failure to act giving rise to the liability and the time a deduction may be claimed for the liability because of the economic_performance requirement in contrast to the types of liabilities arising under federal or state law identified in the statute and the legislative_history to the 1984_act a state tax_liability constitutes a routine cost that does not involve an inherent substantial delay between the time the events giving rise to the liability occur and when the deduction for such liability becomes allowable there may be substantial delays between the events giving rise to a state tax_liability and the time when such liability becomes an allowable deduction for example an accrual_method taxpayer may report too little state tax_liability on its tax_return and then may unsuccessfully contest the assertion of a greater tax_liability in this case assuming that the taxpayer does not pay the tax_liability pending resolution of the contest the tax deduction will be delayed until resolution of the contest and payment of the liability such a delay however is not part of the inherent nature of the liability a taxpayer need not report and pay less than the proper amount of its state tax_liability thus a state tax_liability does not have the inherent delay feature required to qualify for the narrow class of liabilities that arise under federal or state law within the meaning of sec_172 federal payroll taxe sec_5 it also follows that an interest liability on a due but unpaid tax_liability does not possess the inherent delay characteristics necessary to qualify as arising under federal or state law within the meaning of sec_172 as discussed above with regard to state tax_liabilities the same rationale applies to disqualify federal payroll taxes-notwithstanding the liability meets the three-year test congress did not intend the special carryback rule to apply to all liabilities for which a deduction is delayed if routine costs-including payroll taxes-were within the eligible class then the mere nonpayment of current liabilities for more than three years would qualify a taxpayer for a ten-year carryback upon payment of those costs congress clearly could not have intended that result thus federal payroll_taxes also cannot be specified liability losses under sec_172 workers’ compensation payments in contrast to our previous litigating positions the service now believes as a technical matter that deductions for a taxpayer’s self-insured workers’ compensation liabilities that meet certain criteria satisfy the inherent delay test and therefore may generate a specified_liability_loss within the meaning of sec_172 consequently while taxpayer may have certain costs which-as a factual matter-might not qualify under this revised position as a general matter we do recommend allowing the specified_liability_loss carryback for workers’ compensation expenses notwithstanding this technical position it remains taxpayer’s obligation to demonstrate that it meets the aforementioned criteria for qualified workers’ compensation expenses we defer to your application of these standards to the factual scenario taxpayer proffers as discussed above the question of when workers’ compensation liabilities satisfy the pre-economic performance two-pronged all-events test has received judicial consideration in 59_tc_751 rev’d remanded 518_f2d_772 9th cir a case involving both california and federal workers’ compensation law the taxpayer retained an outside administrator to estimate the maximum amount of its exposure for self- insured workers’ compensation liabilities the tax_court concluded that worker injury did not constitute all of the events necessary to fix all of the worker’s compensation liabilities claimed as deductions by the taxpayer on appeal the ninth circuit agreed with the taxpayer’s assertion that in an uncontested case a work-related employee injury constituted the only event necessary to establish workers’ compensation liability attributable to that injury in that circuit’s view if an injury occurs so that economic consequences ensue to the employer under the statutes the only relevant remaining consideration the payroll_taxes in issue here apparently resulted from a reclassification of putative independent contractors as employees for earlier years on the other hand periodic_payments for workers’ compensation insurance would still not generate a specified_liability_loss there is apparently some question as to whether that is in fact what taxpayer seeks to claim here to the accrual question is whether the amount of the liability may be reasonably estimated f 2d pincite in 60_tc_13 aff’d 528_f2d_735 9th cir a case involving workers’ compensation survivor benefits an alaskan airline elected to be self-insured under the alaska workmen’s compensation act for the taxable_year at issue and other taxable years affecting the tax_liability for that year because of carryback and carryover provisions a total of three of the taxpayer’s pilots were killed in airplane crashes the taxpayer did not contest its workers’ compensation liabilities attributable to those deaths alaskan law required the taxpayer to make periodic_payments to each pilot’s widow until her death or remarriage it also required the taxpayer to make periodic_payments to each of the minor children of the deceased pilots until the child’s death or the attainment of age nineteen the tax_court and ninth circuit determined that all the events fixing the taxpayer’s liability occurred when the pilots were killed in revrul_80_191 1980_2_cb_168 the service announced it would not follow the holding in certain workers’ compensation deduction cases it had lost and would continue to disallow accruals of workers’ compensation liabilities subject_to the types of contingencies in those cases following the issuance of that revenue_ruling however the service lost each litigated case addressing the accrual of workers’ compensation liabilities see 717_f2d_1304 9th cir under california law once a worker injury has occurred in the course of employment and liability is not contested by the employer all events have occurred determining the fact of liability and the first prong of the all-events test has been met 599_fsupp_653 s d w va adopted the ninth circuit’s reasoning concluding that all the events necessary to fix the liabilities at issue occurred upon worker injuries suffered during the course of employment see also 476_us_593 casino could deduct amounts not yet won but guaranteed for payment on progressive slot machines even though such amounts might never have to be paid if the casino went out of business united_states v 773_f2d_1224 fed cir rev’d 481_us_239 the receipt of medical_care by covered individuals was not the last event necessary to fix the taxpayer’s liability when the 1984_act amended sec_461 to require that accrual_method taxpayers not be able to deduct workers’ compensation liabilities until paid this prospectively changed the result that otherwise would have been required by a number of prior cases-from the standpoint of when workers’ compensation liabilities may be accrued see sec_461 some courts had believed that the fact of liability was determined at the time of injury and that the amount of the liability could be reasonably estimated in many cases at the time of injury after the enactment of sec_461 which required_payment to deduct a workers’ compensation liability it was clear that in some cases there would be an inherent substantial delay between the act giving rise to such liability under prior case law and the allowance of the deduction because of the economic_performance requirement we believe that the legislative record supports the conclusion that congress intended for many workers’ compensation deductions to generate sec_172 specified liability losses to the extent such deductions generate nols in the 1984_act congress amended sec_461 to specifically prohibit accrual_method taxpayers from deducting workers’ compensation liabilities until paid sec_461 from the standpoint of when workers’ compensation liabilities may be accrued this legislative fix prospectively changed the result that otherwise would have been required by a number of prior service-adverse cases in keeping with our prior position regarding taxes we disagree with the contention that in the case of a contested liability the act within the meaning of sec_172 giving rise to that liability does not occur until resolution of the contest as we have said previously the contest does not constitute the final act or failure to act giving rise to the taxpayer’s liability see am jur 2d judgments the principal function of a judgment is to adjudicate the existence or nonexistence of the right or liability in question adams v davies p 2d sup ct utah a judgment or decree duly entered establishes in the most authentic form that which had theretofore been in dispute or unsettled or uncertain a judgment for monetary damages for past acts does not create any liability that did not already exist however it merely confirms its existence thus entry of a judgment or other settlement of a contested claim should not be considered the act or failure to act which gives rise to a liability for purposes of sec_172 our view is also consistent with the meaning of the phrase act or failure to act as used in sec_6501 to satisfy the requirements of the 1984_act version of sec_172 any liability at issue must be directly imposed under federal or state law and must involve an inherent substantial delay between the act giving rise to the liability and the deduction therefore it is uncontested that state law directly imposes the workers’ compensation liabilities at issue here taxpayer apparently asserts as inappropriate as a matter of statutory interpretation the addition of an inherent delay requirement for a liability to arise under federal or state law within the meaning of sec_172 see host marriott supra most workers’ compensation liabilities involve periodic_payments and these liabilities cannot be deducted until paid because of the economic_performance requirement consequently such liabilities that are inherently due a substantial time after the liability arises have the inherent delay characteristic inherently due means the due_date of the liability provided by federal or state law disregarding any effect on the actual payment_date that might arise as the result of the liability being contested the application of these rules is illustrated by the following two examples a on the last day of an employee becomes totally disabled as a result of a job related injury on that day and the employee also takes whatever procedural steps are necessary to make the employer liable for the injury such as notifying the employer of the injury under state law the employee is entitled to disability payments of dollar_figure every two weeks until death or the end of the disability such payments to begin two weeks after the date of injury rather than make the payments the employer contests the liability in a final judgment is entered in favor of the employee and the employer makes all of the payments for through payments allocable to through are made with respect to inherent delay liabilities the original due_date for such payments falls in taxable years beginning at least three years after the date of injury the payments allocable to through are not made with respect to inherent delay liabilities and cannot generate a specified_liability_loss b an employee loses an arm in a job-related injury on the last day of for the loss of the arm the employee is entitled to a single workers’ compensation payment of dollar_figure due three weeks after the loss of the arm rather than paying the employer contests the liability in a final judgment is entered in favor of the employee and the employer pays the dollar_figure the effect of the contest on the actual payment_date is disregarded in determining if the payment qualifies as an inherent delay liability because the liability’s original due_date falls in the dollar_figure deduction cannot generate a specified_liability_loss on the basis of the foregoing for sec_172 purposes we conclude that once a person is disabled by a compensable on-the-job injury and meets any required procedural conditions such as the reporting of the injury to the employer necessary to make the employer liable for the injury the act giving rise to any liability for future workers’ compensation disability payments attributable to the injury has occurred similarly we conclude that when an employee dies because of a compensable on the job injury and any required procedural conditions necessary to make the employer liable for the injury have been satisfied the act giving rise to the employer’s obligation to pay any future workers’ compensation survivor benefits attributable to that injury has occurred finally in instances in which workers’ compensation statutes make an employer liable for an employee’s medical_expenses attributable to an on the job injury we conclude that once the injury has occurred and the employee has satisfied any required procedural conditions such as the reporting of the injury to the employer necessary to make the employer liable for the injury the act giving rise to the employer’s obligation to pay the employee’s medical_expenses has occurred certain environmental remediation costs as a general proposition in light of the legislative_history to the 1984_act it is the service position that environmental remediation costs should be recognized as specified liability losses under sec_172 yet this is not to say that the other elements of the section are in any way waived in short to qualify such expenses must still be with respect to a federal or state law liability that arose or a tort which occurred at least three years before the beginning of the tax_year for which the expenses are incurred sec_172 as a factual matter simply put whether taxpayer gets a ten-year carryback for cleanup costs is a function of whether it is cleaning up contamination that occurred at least three years prior to the beginning of its tax_year to the extent it has allocable_costs cleaning up environmental damage that occurred within the immediately preceding three years or during tax_year itself such costs fail the three-year test element of sec_172 and are not specified liability losses revrul_94_38 1994_1_cb_35 holds that costs incurred to clean up land and to treat groundwater that a taxpayer has contaminated with hazardous waste from its business are deductible by the taxpayer as current expenses under sec_162 costs properly allocable to the construction of groundwater treatment facilities however are capital expenditures under sec_263 and are subject_to depreciation only taxpayer’s form_1139 claimed an amount for state mandated environmental cleanup payments for contamination occurring in years prior to tax_year although several sites are listed apparently over percent of the deduction is related to just four sites with respect to these various sites there are apparently some factual questions as to acquisition dates and knowledge as to extent of contamination whether taxpayer has a current deduction or must capitalize its expenditures_for the various costs in issue here is of only limited relevance to the sec_172 inquiry the key is determining when the contamination that is being remedied occurred if the underlying remediation expenditure must be capitalized then only that portion of the depreciation allowance a current deduction for tax_year which is properly allocable to contamination occurring at least three years earlier can be classified as a specified_liability_loss consequently subsequent factual development as well as the taxpayer’s substantiation burden should focus on this aspect of the contamination whether there is a current deduction or capital_expenditure in and of itself is not dispositive of the specified_liability_loss issue as with other factual determinations we defer to the field offices here as well litigation settlement payment to former employee in tax_year a former employee filed a state court action against taxpayer and one of its supervisory managers alleging age discrimination under two state statutes as well as infliction of emotional distress against the manager individually the employee also asserted interference with contractual relations in tax_year taxpayer reached an agreement with the former employee-while admitting no wrongdoing or liability-settling all claims against it and the manager specific monetary apportionments were included in the agreement as to each allegation as to the age discrimination counts specifically whether such a liability would have an inherent delay factor at all is highly questionable an unlawful discriminatory employment practice which may be subject_to punitive action or damages in the hiring process or employee retention situation is not somehow inherent in the act of assembling or maintaining a workforce consequently that particular liability would not be within the narrow class reached by the specified liability provisions and-strictly speaking-would be outside of sec_172 nevertheless it is possible that a cause of action couched primarily in age discrimination terms may actually have a tort aspect that would support a separate sec_172 applicability argument this case offers a variation on that possibility the former employee also asserted separate specific tort counts infliction of emotional distress and interference with contractual relations albeit that these arose essentially from the same set of facts as the age discrimination counts moreover the alleged torts here do not appear to be the so-called single act torts that the office has taken the position are not within the ambit of sec_172 common sense likely tells us that the putative acts complained of here would necessarily result from a series of actions over an extended period of time within the meaning of sec_172 we will concede that there may be some factual disagreement on what critical events occurred and when once again we defer to field development of this area in our view however it appears to overstate the case for holding that it is a single act tort to focus purely on the single act of taxpayer’s demotion of the employee alone even that purported single act just standing alone could reasonably be viewed as having multiple facets eg reduction in pay changed office space lowered fringe_benefits or other adverse results brought to bear on the complaining employee according to the submitted facts any relevant acts or failures to act indeed appear to have occurred by the end of tax_year which puts those acts or failures well outside the applicable required three-year period assuming that such a scenario has been factually demonstrated a multiple act tort within the meaning of sec_172 probably does exist and the 10-year carryback should be allowed for the tort settlement payments although there appears to be none here to the extent that legal or other professional fees represent a part of the total outlay on the basis of sealy it is our position that these fees are not specified liability losses these include age race religion or sex consequently while the age discrimination counts may fail to be specified liability losses since these lack the necessary inherent delay character the cost of separately alleged multiple act torts can qualify without that element assuming of course that the three-year test is also met that element seems not wanting here federal insurance act contributions fica in conjunction with issue settlement payment this expense is essentially identical to those discussed under issue payroll_taxes consequently the same rationale for disallowing those routine costs as was elucidated above in respect to state taxes issue also applies here for purposes of sec_172 contract settlement payment to public entity in tax_year taxpayer contracted with public entity to provide certain finished products to the latter taxpayer warranted that the products would conform to certain specifications and particulars the contract provided for an election of various remedies if taxpayer failed to meet these requirements including ones which called for an adjustment of the purchase_price or a payment of costs to public entity to make corrective actions public entity accepted the products as delivered and retained these despite the purported deviance from the contract specifications there is no evidence of injury as to persons or property as a result of the use of these products although formal legal action was never taken taxpayer settled the matter with respect to the products supplied by a cash payment to public entity in tax_year taxpayer now asserts that this payment was for a product_liability and as such it qualifies as a specified_liability_loss taxpayer’s position is incorrect sec_172 defines product_liability as liability for damages on account of physical injury or emotional harm to individuals or damage to or loss of the use of property on account of any defect in any product which is manufactured leased or sold by the taxpayer but only if such injury harm or damage arises after the taxpayer has completed or terminated operations with respect to and has relinquished possession of such product sec_1_172-13 excludes warranties which are essentially contract liabilities from coverage under the statutory definition in our view the payment in issue here is clearly not one that congress meant to include and is unquestionably covered by the proscription of a contract warranty claim barred from specified_liability_loss treatment under sec_1 b ii it merits no further serious discussion case development hazards and other considerations this writing may contain privileged information any unauthorized disclosure of this writing may have an adverse effect on privileges such as the attorney-client_privilege if disclosure becomes necessary please contact this office for our views heather c maloy by clifford m harbourt senior technician reviewer branch


department of the treasury internal rev enue se rvice washington d c ta x e x e m p t a n d g o v e r n m e n t e n t i t i e s d i v i s i o n contact person telephone number identification_number employer_identification_number number release date date date sin legend l city dear sir or madam this is in reply to your request for private letter rulings initially submitted on date and amended by letters of august and date facts you are a not-for-profit corporation organized under the laws of the state of l the internal_revenue_service has recognized you as an organization described in sec_501 of the internal_revenue_code you are also recognized as an organization of the type described in sec_170 and sec_509 and treated as an organization that is not a private_foundation your purposes include funding assisting and undertaking programs and activities designed to strengthen the services organization performance competence and professionalism of the police department of the city and its officers and members in addition you may pursue independent research studies projects and programs to assist and improve the police department and its facilities operations effectiveness membership and the public understanding thereof you carry on this charitable mission through many programs such as supplying equipment and other critical resources to specialty units of the police department fostering a wide array of police and community partnerships and providing support to a comprehensive counter-terrorism training program in addition you operate programs that serve to improve the health and well-being of police department personnel and their families with health services such as assistance in accessing health-related resources a bullet proof vest program and a suicide awareness program although you generally carry out your charitable mission in conjunction with the police department or the city you are wholly independent of each you are governed by a board_of directors consisting of civic leaders and a small executive staff police officers are employees of the city and you do not employ or otherwise control them you state that recently the city has been challenged to ensure public safety in the face of reduced anti-terrorism funding and other financial and budget constrains you have submitted evidence that residents of the city consider crime and terrorist attacks two of their greatest concerns you have also submitted information supporting your assertion that the cost of living in the city continues to be exceptionally high and that budget pressures have caused the starting salaries of police officers to be cut you are concerned that unexpected events such as illness or job loss by a family_member can result in extreme financial hardship for police officers in addition you are concerned that the reduced salaries of police officers will discourage highly qualified potential applicants from applying to the police department and will pose an unreasonable financial burden on first-year officers to relieve unexpected financial hardship suffered by officers you propose to adopt a hardship program under which any current or retired police department officer or their survivors may submit an application_for financial assistance eligible recipients will be current or retired officers or their survivors who demonstrate financial need and meet other eligibility criteria the application will ask about income and financial resources of the applicant and dependents and their monthly expenditures_for food housing medical_care and other essentials applications will be reviewed by an independent selection committee which will make all final decisions based on an objective determination of need support payments will be awarded consistent with your financial resources ranging in amount from dollar_figure to dollar_figure an applicant may not submit additional applications for temporary financial assistance within_12_months of the date of a payment no grantee or members of a grantee’s family will perform any services for or provide benefits to you or anyone else as a condition of receiving a support payment you also propose to adopt two programs to assist the city in recruiting and retaining qualified police officers you state that the incentive program will specifically address the financial burden placed on first-year officers while the college loan reimbursement program will attract more highly qualified individuals to pursue a career with the police department you plan to publicize and make the incentive program known to potential officers by i announcing it a press conference specifically held to raise awareness of the effort ii incorporating the program information into the department’s print and radio advertising campaign iii providing program information to potential officers at recruiting events and iv calling potential officers and describing the program to them qualifying officers receiving an award under the incentive program will receive the award in three equal installments of dollar_figure the installments will be made on an annual basis beginning after the qualifying officer has completed days continuous enrollment in the city police academy qualifying officers will receive each annual installment only if he or she is employed by and in good standing with the police department at the time of the annual payment these payments will be made directly to the officer you indicate that the award was structured in this manner to maximize its potential to retain candidates over a number of years you indicate that the police department keeps statistics on recruitment goals the number of applicants and the success rates to evaluate the effectiveness of the incentive program you plan to coordinate with the police department to analyze the empirical effect of the payments on recruitment and retention goals within two years of its implementation you will discontinue the program if it is not effective the college loan reimbursement program recently announced via a press release is specifically designed to recruit and retain highly qualified applicants under this program an eligible officer will be any graduate of the police academy who received an associate degree or a degree level of bachelor of arts bachelor of science or higher prior to enrollment in the police academy you indicate that the requirement that an eligible officer hold the degree prior to enrollment specifically targets highly qualified applicants and will attract potential officers who through their ability to successfully complete a college degree program have demonstrated intelligence maturity and resolve you believe this program will result in an increase in applications by highly qualified individuals and help alleviate the current recruitment crisis in the department under this program officers will be eligible to receive up to dollar_figure per year for a five year period to reduce or eliminate their college loan burdens the total grant may not exceed dollar_figure payments will be made directly to the holder of the student_loan debt not to exceed the amount of the debt if an officer receiving loan payments ceases to be employed by the department payments will terminate applications for the loan reimbursement program will gather information regarding the applicant’s student loans degrees held and the dates conferred the names of institutions awarding the degree and a copy of all transcripts applications will be reviewed by an independent selection committee that will take into consideration all information submitted you have already announced the college loan reimbursement program by press release and will further publicize it to potential officers by i sending an email regarding the program to all applicants registered for the applicable civil service examination ii distributing promotional flyers at police entry exams held at various universities and iii sending letters including printouts and links of websites describing the program to applicants who pass the civil service exam to evaluate the effectiveness of the college loan reimbursement program as a recruiting tool you plan to coordinate with the police department to analyze the empirical data after two full academy sessions to see if the number of highly qualified applicants increased by a statistically meaningful amount you plan to discontinue the program if it is not effective rulings requested your operation of the hardship program will not jeopardize your tax exempt status under sec_501 of the code your operation of the incentive program will not jeopardize your tax exempt status under sec_501 of the code your operation of the college loan reimbursement program will not jeopardize your tax exempt status under sec_501 of the code you have asked for additional rulings regarding the treatment of payments under these programs by individual officers and your responsibility for withholding or information reporting requirements other than those required by form_990 law sec_501 of the code describes organizations that are organized and operated exclusively for certain purposes such as religious charitable scientific or educational sec_1_501_c_3_-1 of the income_tax regulations provides that an organization will be regarded as operated exclusively for one or more exempt purposes only if it engages primarily in activities which accomplish one or more of the exempt purposes specified in sec_501 of the code but an organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt_purpose sec_1_501_c_3_-1 of the regulations provides that an organization may be exempt as an organization described in sec_501 of the code if it is operated exclusively for one or more of these purposes including charitable purposes sec_1_501_c_3_-1 of the regulations provides that an organization is not organized or operated exclusively for one or more exempt purposes unless it serves a public rather than a private interest thus to meet the requirements of this subsection it is necessary for an organization to establish that it is not organized or operated for the benefit of private interests such as designated individuals the creator or his family shareholders of the organization or persons controlled directly or indirectly by such private interests sec_1_501_c_3_-1 of the regulations provides that the term charitable is used in sec_501 of the code in its generally accepted legal and is therefore not to be construed as limited by the separate enumeration in sec_501 of other tax-exempt purposes which may fall within the broad outlines of charity as developed by judicial decisions such term includes relief of the poor and distressed or of the underprivileged advancement of religion advancement of education or science erection or maintenance of public buildings monuments or works lessening of the burdens of government and promotion of social welfare by organizations designed to accomplish any of the above purposes or i to lessen neighborhood tensions ii to eliminate prejudice and discrimination iii to defend human and civil rights secured_by law or iv to combat community deterioration and juvenile delinquency revrul_55_406 1955_1_cb_73 holds that an organization providing financial assistance to widows and orphans of police officers and firefighters killed in the line of duty qualifies for exemption under sec_501 because it is charitable the financial assistance was provided at the complete discretion of the organization’s board_of directors revrul_67_138 1967_1_cb_129 holds that one basis for finding an organization created to provide instruction and guidance to low income families in need of adequate housing and selling them building sites at cost is exempt under sec_501 is that the organization's activities are charitable since they provide relief to the poor and underprivileged revrul_69_441 1969_2_cb_115 holds that one basis for finding an organization created to reduce the incidence of personal bankruptcy among low income individuals and families with financial problems was exempt under sec_501 of the code is that its activities were relieving the poor and distressed revrul_72_559 1972_2_cb_247 holds that an organization that subsidized recent law graduates during the first three years of their practice to enable them to establish legal practices in economically depressed communities that have a shortage of available legal services and to provide free legal services to needy members of the community qualifies for exemption under sec_501 of the code although the recipients of the subsidies were not members of a charitable_class the resulting benefit to them did not detract from the charitable purpose the young lawyers were merely the instruments by which the organization accomplished the charitable purpose of providing free legal services for those unable to pay for or obtain such services revrul_74_587 1974_2_cb_162 holds that an organization providing low-cost and long-term loans to or equity investments in businesses operating in economically depressed areas qualifies for exemption under sec_501 the organization provided financial assistance only to businesses that were unable to obtain funds from conventional sources and gave preference to businesses that would provide training and employment opportunities for unemployed or under-employed area residents although some of the individual business owners receiving financial assistance from the organization were not members of a charitable_class the benefit to them did not detract from the charitable character of the organization’s program as in revrul_72_559 the recipients of aid were the instruments for accomplishing the organization’s charitable purposes analysis ruling no the regulations under sec_501 of the code provide that an organization will be regarded as operated exclusively for one or more exempt purposes if it engages primarily in activities that accomplish such exempt purposes and will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt_purpose relief of the poor and distressed is among the most traditional of charitable purposes as that term is generally used the hardship program is intended to relieve unexpected financial distress of police officers and their families by providing financial assistance to members of this charitable_class the potential pool of applicants for support payments is an open ended class consisting of any current or retired police officer employed and or formerly employed by the city or their survivors to be eligible for assistance recipients are required to demonstrate actual financial need your operations are similar to those recognized as charitable in rev ruls and supra since they provide direct relief to the poor and distressed in addition recipients of your assistance are selected by an independent selection committee having no connection with the police department or the grantees based on the above we have determined that your hardship program furthers your charitable purposes within the meaning of sec_501 of the code by providing direct relief to the poor and distressed it also furthers your social welfare purposes of funding assisting and undertaking programs and activities designed to strengthen the police department of the city and its officers and members in addition it is not operated in a manner that will result in more than incidental private benefit accordingly it will not jeopardize your exempt status under sec_501 of the code analysis ruling no included in the purview of charitable purposes enumerated in sec_1_501_c_3_-1 of the regulations is the promotion of social welfare you believe that the city has been hampered in its ability to attract and retain bright and dedicated police officers because of budgetary cuts necessitating a reduction in compensation_for first-year officers your purpose in offering an incentive award is to help ameliorate the financial distress of these officers thereby assisting the city in maintaining public safety by attracting and retaining qualified police officers you plan to evaluate the effectiveness of the program within two years of its implementation by coordinating with the police department to analyze the empirical effect of the payments on recruitment and retention goals you will discontinue the program if you determine it is not effective the making of payments to individuals that are not themselves members of a charitable_class may further the exempt_purpose of promoting social welfare within the meaning of sec_501 of the code in revrul_72_559 supra for instance we determined that the subsidy being offered as an incentive to recent law graduates willing to set up a practice in an economically disadvantaged area and provide free legal services for needy members of the community achieved an exempt_purpose the recipients of the subsidies were not members of a charitable_class they were however the instruments by which the organization accomplished its charitable purpose of providing free legal services for those unable to pay for them similarly in revrul_74_587 supra we held that providing loans to attract businesses willing to locate in an economically depressed area and provide training and employment opportunities for unemployed or under-employed area residents was a reasonable means of furthering exempt social welfare purposes the individual business owners although not members of a charitable_class were the instruments for accomplishing the organization’s charitable purposes based on the above we have determined that your incentive program furthers your sec_501 social welfare purposes of funding assisting and undertaking programs and activities designed to strengthen the police department of the city and its officers and members in addition it is not operated in a manner that will result in more than incidental private benefit accordingly it will not jeopardize your exempt status under sec_501 of the code analysis ruling no your operation of the college loan reimbursement program is also designed to attract and retain highly qualified police officers thereby assisting the city in maintaining public safety you plan to evaluate the effectiveness of this program as a recruiting tool after two years by coordinating with the police department to analyze the empirical data to see if the number of highly qualified applicants increased by a statistically meaningful amount if the program doesn’t work you plan to discontinue it for the reasons stated above we have determined that this program also furthers your sec_501 social welfare purposes of funding assisting and undertaking programs and activities designed to strengthen the police department of the city and its officers and members in addition it is not operated in a manner that will result in more than incidental private benefit accordingly it will not jeopardize your exempt status under sec_501 of the code analysis ruling no these issues are not within the jurisdiction of the tax_exempt_and_government_entities_division and will not be discussed here rulings your operation of the hardship program will not jeopardize your tax exempt status under sec_501 of the code your operation of the incentive program will not jeopardize your tax exempt status under sec_501 of the code your operation of the college loan reimbursement program will not jeopardize your tax exempt status under sec_501 of the code this ruling will be made available for public inspection under sec_6110 of the code after certain deletions of identifying information are made for details see enclosed notice notice of intention to disclose a copy of this ruling with deletions that we intend to make available for public inspection is attached to notice if you disagree with our proposed deletions you should follow the instructions in notice this ruling is directed only to the organization that requested it sec_6110 of the code provides that it may not be used or cited by others as precedent this ruling is based on the facts as they were presented and on the understanding that there will be no material changes in these facts this ruling does not address the applicability of any section of the code or regulations to the facts submitted other than with respect to the sections described because it could help resolved questions concerning your federal_income_tax status this ruling should be kept in your permanent records if you have any questions about this ruling please contact the person whose name and telephone number are shown in the heading of this letter in accordance with the power_of_attorney currently on file with the internal_revenue_service we are sending a copy of this letter to your authorized representative enclosure notice steven grodnitzky manager exempt_organizations technical group sincerely


internal_revenue_service number release date index number --------------------- -------------------------------- ----------------------------------- -------------------------------------- ---------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ---------------------- id no ------------- telephone number --------------------- refer reply to cc psi b03 plr-117738-09 date date x --------------------------------------------------------------------------------------------------- ----------------------- legend country ------------- date ----------------------- dear ------------- this letter responds to your letter dated date and subsequent correspondence submitted on behalf of x requesting a ruling under sec_301_9100-1 and sec_301_9100-3 of the procedure and administration regulations that x be granted an extension of time to file an election to be disregarded as an entity separate from its owner under sec_301_7701-3 facts x was incorporated under the laws of country on date x represents that it intended to make an election to be disregarded as an entity separate from its owner effective date however x inadvertently failed to timely file a form_8832 entity classification election law and analysis 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 an eligible plr-117738-09 entity with a single owner can elect to be classified as an association and thus a corporation under sec_301_7701-2 or to be disregarded as an entity separate from its owner sec_301_7701-3 provides that unless it elects otherwise a foreign eligible_entity is a a partnership if it has two or more members and at least one member does not have limited_liability b an association if all members have limited_liability or c disregarded as an entity separate from its owner if it has a single owner that does not have limited_liability sec_301_7701-3 provides that for purposes of sec_301_7701-3 a 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 sec_301_7701-3 provides that an eligible_entity may elect to be classified other than as provided under sec_301_7701-3 or to change its classification by filing form_8832 with the service_center designated on form_8832 sec_301_7701-3 provides that an election made under sec_301 c i will be effective on the date specified by the entity on form_8832 or on the date filed if no such date is specified on the election form the effective date specified on form_8832 can not be more than days prior to the date on which the election is filed and can not be more than months after the date on which the election is filed if an election specifies an effective date more than days prior to the date on which the election is filed it will be effective days prior to the date it was 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 internal_revenue_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 automatic extensions of time for making certain elections sec_301_9100-3 provides extensions of time for making elections that do not meet the requirements of sec_301_9100-2 sec_301_9100-3 provides that requests for relief subject_to sec_301_9100-3 will be granted when the taxpayer provides the evidence including affidavits described in sec_301_9100-3 to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and the grant of relief will not prejudice the interests of the government plr-117738-09 conclusion based solely on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-1 and 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 with the appropriate service_center and to elect to be classified as a disregarded_entity for federal tax purposes effective date a copy of this letter should be attached to the form_8832 a copy is enclosed for that purpose except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with a power_of_attorney on file with this office we are sending a copy of this letter to your authorized representatives the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination sincerely s curtis g wilson associate chief_counsel passthroughs special industries enclosures a copy of this letter a copy for sec_6110 purposes cc


internal_revenue_service department of the treasury number release date index number 9100-dollar_figure washington dc person to contact telephone number refer reply to cc it a 3-plr-127245-00 date date legend taxpayer partnership accountant a x accountant b accountant c dollar_figurex dear this is in reply to your private_letter_ruling request in which you request an extension of time to make an election under sec_108 of the internal_revenue_code specifically you have requested an extension of time to make an election under sec_108 and sec_1 c -1 of the income_tax regulations to reduce the basis of depreciable_property and to exclude income resulting from the discharge of qualified_real_property_business_indebtedness facts partnership is a limited_liability_company which is treated as a partnership for federal_income_tax purposes taxpayer is a partner in partnership partnership was allocated dollar_figurex cancellation_of_indebtedness_income accountant a was responsible for preparing partnership’s federal_income_tax return accountant a properly informed x regarding the cancellation_of_indebtedness_income and the necessity for each partner to make an election to exclude the income accountant a also delivered taxpayer’s k-1 with an attachment that described the necessity of filing form_982 to elect to exclude the cancellation_of_indebtedness_income however x misunderstood the information and believed it was not necessary to file form_982 if the taxpayer had sufficient basis in partnership to fully reduce the excluded cod income x transmitted the k-1 plr-127245-00 information to accountant b who was responsible for filing taxpayer’s return however accountant b underwent a medical emergency days prior to the deadline for filing taxpayer’s return and was unable to complete the return accountant c prepared the return in accountant b’s absence and accountant c relied on x’s erroneous information therefore accountant c prepared the taxpayer’s return and excluded the cod income consistent with having made the election but did not properly attach form_982 to taxpayer’s income_tax return if the late election is granted then the only change to taxpayer’s return will be the attachment of form_982 taxpayer x and accountant b have submitted affidavits consistent with the above stated facts applicable law sec_108 of the code provides that gross_income does not include any amount includible in gross_income by reason of the discharge_of_indebtedness if in the case of a taxpayer other than a c_corporation the indebtedness discharged is qualified_real_property_business_indebtedness sec_108 provides that the taxpayer must make an election in order to take advantage of the exclusion provided by sec_108 sec_108 of the code provides that in the case of a partnership sec_108 and sec_108 shall be applied at the partner level sec_1 c -1 b of the income_tax regulations provides that the election available under sec_108 must be made on the timely-filed including extensions federal_income_tax return for the taxable_year in which the taxpayer has discharge_of_indebtedness income that is excludible from gross_income under sec_108 the election is to be made on a completed form_982 sec_301_9100-3 of the regulations provides that requests for extensions of time for regulatory elections other than automatic changes covered in sec_301_9100-2 will be granted when the taxpayer provides evidence including affidavits to establish that the taxpayer acted reasonably and in good_faith and granting relief will not prejudice the interests of the government sec_301_9100-3 states that a taxpayer will be deemed to have acted reasonably and in good_faith if the taxpayer-- i requests relief before the failure to make the regulatory election is discovered by the service ii inadvertently failed to make the election because of intervening events beyond the taxpayer's control iii failed to make the election because after exercising due diligence the taxpayer was unaware of the necessity for the election iv reasonably relied on the written advice of the service or v reasonably relied on a qualified_tax professional and the tax plr-127245-00 professional failed to make or advise the taxpayer to make the election under sec_301_9100-3 a taxpayer will not be considered to have acted reasonably and in good_faith if the taxpayer-- i seeks to alter a return position for which an accuracy-related_penalty could be imposed under sec_6662 at the time the taxpayer requests relief and the new position requires a regulatory election for which relief is requested ii was fully informed of the required election and related tax consequences but chose not to file the election or iii uses hindsight in requesting relief if specific facts have changed since the original deadline that make the election advantageous to a taxpayer the service will not ordinarily grant relief sec_301_9100-3 states that the commissioner will grant a reasonable extension of time only when the interests of the government will not be prejudiced by the granting of relief under paragraph i the interests of the government are prejudiced if granting relief would result in a taxpayer having a lower tax_liability in the aggregate for all taxable years affected by the election than the taxpayer would have had if the election had been timely made taking into account the time_value_of_money analysis taxpayer requested relief before the failure to make the election was discovered by the service in addition under the facts as represented taxpayer reasonably relied upon the advice of a qualified_tax professional accountant b who failed to advise the taxpayer to make the election therefore taxpayer is deemed to have acted reasonably and in good_faith under sec_301_9100-3 in addition based on the facts as represented we have determined that sec_301_9100-3 does not apply under sec_301_9100-3 a taxpayer will not be considered to have acted reasonably and in good_faith if the taxpayer-- i seeks to alter a return position for which an accuracy-related_penalty could be imposed under sec_6662 at the time the taxpayer requests relief and the new position requires a regulatory election for which relief is requested in this case taxpayer filed the return consistent with making a timely election under sec_1_108-5 of the regulations by excluding the cod income on taxpayer’s income_tax return however taxpayer did not make the proper election with the return because form_982 was not attached to the return therefore taxpayer is not requesting permission to make a late election that will alter a return position the only difference between the tax_return as filed and the tax_return if the elections are granted is the attachment of form_982 therefore the return position will not be altered if a late election is permitted therefore sec_301_9100-3 does not apply to plr-127245-00 taxpayer furthermore based on the facts as represented we have determined that the interests of the government will not be prejudiced by the granting of relief conclusion based solely on the facts as represented and the applicable law we conclude that the request for relief under sec_301_9100-3 of the regulations should be granted accordingly taxpayer is granted an extension of time of days from the date of this letter to file an amended_return making the election under sec_108 of the code the election is to be made on form_982 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 or facts assumed in support of the request for rulings it is subject_to verification on examination 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 letter does not rule on whether the income at issue is properly treated as cancellation_of_indebtedness_income this letter also does not rule on whether the income can be excluded from gross_income under sec_108 of the code a copy of this letter must be attached to any income_tax return to which it is relevant this ruling is directly only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent sincerely assistant chief_counsel income_tax accounting by christopher f kane assistant to the chief branch enclosure copy for sec_6110 purposes