t c memo united_states tax_court seagate technology inc successor_in_interest to seagate peripherals inc f k a conner peripherals inc petitioner v commissioner of internal revenue respondent docket no filed date p a domestic_corporation entered into a cost-- sharing_agreement with its foreign subsidiaries in connection with certain intangibles that were transferred to the subsidiaries r determined that p should have included in the cost-sharing pool the cost of stock_options for p’s employees who performed the research_and_development regarding the intangibles where there is a bona_fide cost-sharing arrangement r may make allocations only to reflect each participant’s arm’s-length share of the cost of the risks of developing the property sec_1_482-2 income_tax regs p contends that r is limited to making allocations only where r is aware of actual arm’ s-length circumstances where the cost of stock_options is shared p also contends that for purposes of summary_judgment r’s reliance on an expert’s opinion is not a fact for purposes of deciding whether the parties have a genuine dispute about a material fact held under the regulations r is not required to be aware of arm’s-length circumstances as a prereguisite to the making of a determination allocating a cost in connection with a sharing_agreement held further petitioner has not shown that there is no genuine issue of material fact mark a oates thomas v m linguanti john m peterson jr mary be wynn and andrew p crousore for petitioner debra k estrem jeffrey a hatfield michael j cooper bryce a kranzthor ewan d purkiss and mark s heroux for respondent memorandum opinion gerber judge petitioner moved for partial summary judgment’ concerning what has been denominated the section stock_option cost-sharing issue in particular petitioner questions whether respondent may employ sec_482 to make an ' petitioner has filed two motions for partial summary_judgment this opinion addresses the issue that the parties have denominated the sec_482 stock_option cost-sharing issue the other summary_judgment motion involves what has been denominated the read-rite issue addressing whether the relation_back_doctrine established in 344_us_6 applies in characterizing petitioner’s gain on the sale of stock for purposes of sec_954 see seagate technology inc v commissioner tcmemo_2000_ all section references are to the internal_revenue_code in effect for the and tax years and all rule references are to the tax_court rules_of_practice and procedure unless otherwise indicated allocation to include petitioner’s cost if any of employee stock_options in the cost-sharing pool for purposes of a cost- sharing_agreement between petitioner and its foreign subsidiaries in support of its motion petitioner argues that as a matter of law respondent is prohibited from making an allocation with respect to the cost-sharing arrangement for the following reasons respondent is not aware of specific arm’s-length dealings where stock_option costs were shared respondent relies on opinion as opposed to factual support for inclusion of the at-the-money stock_options in the pool of costs sec_1_482-2 income_tax regs excludes expenses associated with the issuance of stock and petitioner allocated and apportioned the costs of nonintegral support services consistently using a reasonable method in keeping with sound accounting practices within the meaning of sec_1 b income_tax regs an at-the-money stock_option is issued at an exercise price pegged to the market_value on the issue_date accordingly if the market_value of the stock remains at the option issue_price or lower the option will not be exercised conversely if the market price exceeds the option issue_price the option would more likely be exercised q4e- respondent counters that sec_1_482-2 and b income_tax regs requires that all costs be included in cost-sharing_arrangements and all costs include employee stock_options and there are disputed material facts concerning whether arm’s-length parties would share the cost of stock_options granted to employees who performed the research_and_development for the transferred intangible background petitioner is the successor_in_interest to conner peripherals inc conner domestic which developed and manufactured hard disk drives for sale to personal computer manufacturers and others effective date conner domestic and its wholly owned foreign manufacturing subsidiary conner peripherals singapore ltd conner foreign entered into a cost-sharing agreement effective date conner domestic conner foreign and conner domestic’s wholly owned singapore corporation conner peripherals pte ltd entered into a new cost-sharing agreement for sharing research_and_development r d costs and the cost-sharing agreement was sec_1_482-2 income_tax regs was amended in and respondent refers to the amended version sec_1_482-2a income_tax regs in his materials petitioner on the other hand refers to the unamended version while the years we consider predate the amendment the amended version to the extent pertinent here has not been changed accordingly the references used by the parties are interchangeable - - terminated pursuant to the new agreement the three corporations shared dollar_figure million dollar_figure million and dollar_figure million of r d costs for the development of a new generation of disk drives for and respectively in connection with an audit respondent challenged certain of the allocations under the cost-sharing agreement agreement was reached with respect to all determined allocations with the exception of respondent’s determination that the value or cost of stock_options granted to conner domestic’s employees had to be included in the cost-sharing pool petitioner contended that arm’ s-length parties would not share the cost if any of employee stock_options and respondent was not aware of any arm’ s-length cost-sharing arrangement where the parties shared the cost incurred with respect to the grant of an at-the-money stock_option to the employees of one of the parties discussion summary_judgment is an appropriate means by which to decide a legal issue if the pleadings admissions and other materials including affidavits demonstrate that no genuine issue exists as to any material fact and a decision may be rendered as a matter of law see rule b 98_tc_518 affd 17_f3d_965 7th cir summary_judgment is a device used to expedite litigation but it is not a substitute for a trial in that disputes over factual issues are -- - not to be resolved in such proceedings see 78_tc_412 61_tc_861 the party moving for summary_judgment has the burden of showing the absence of a genuine issue as to any material fact see shiosaki v commissioner supra the dispute here concerns a cross-border transfer of intangibles by a domestic parent to its foreign subsidiaries under the regulations in effect for the years under consideration if a group of controlled entities participated in a bona_fide cost-sharing arrangement as to the development of intangibles then the district_director is limited in his approach to reallocation sec_1_482-2 income_tax regs in particular the regulation provides that if there is a bona_fide cost-sharing arrangement then the district_director shall not make allocations with respect to such acquisition of intangibles except as may be appropriate to reflect each participant’s arm’s length share of the costs and risks of developing the property id the regulation goes on to direct that cost-sharing_arrangements will be considered arm’s length where the terms and conditions are comparable to those which would have been adopted by unrelated parties similarly situated had they entered into such an arrangement id there is no disagreement about the bona fides of the cost-sharing agreements between the - controlled entities in this case respondent and petitioner have also resolved their differences regarding several other reallocations determined by respondent the only question presented is whether the controlled entities must share the cost if any of the domestic parent’s stock_options given to the parent’s employees who performed research_and_development regarding particular intangibles petitioner argues that where a bona_fide cost-sharing arrangement exists sec_1_482-2 income_tax regs requires respondent to have a factual predicate in order to make any allocations petitioner also points out that respondent has admitted that he does not have evidence or knowledge of an actual arm’ s-length transaction where stock_option costs were shared respondent instead relies on an affidavit containing an expert’s opinion that options are part of the costs that would be shared between arm’s-length parties where a bona_fide cost- sharing arrangement exists petitioner contends that respondent may not rely solely on an expert’s opinion as a basis for a stock_option cost-sharing allocation petitioner also argues that respondent’s expert’s opinion is unreliable under the standard set forth in 509_us_579 and related cases additionally petitioner contends that even if the expert’s opinion was acceptable and or admissible it is opinion and not fact and therefore could --- - not be the basis for a genuine issue as to a material fact so as to preclude the use of summary_judgment petitioner contends that it has shown that stock_option costs would not be shared in an arm’s-length transaction petitioner’s proof on this point consists of the experiences of its officers and employees some of whom have worked for or with unrelated third parties petitioner also relies on the fact that the federal acquisition regulations system fars classifies qualifying_employee stock_purchase_plans as noncompensatory that classification precludes payment by the federal government for costs of qualified_employee stock_options in connection with contracts governed by fars because fars governs all civil and military federal executive branch contracts with private business for goods and services petitioner reasons that a large number of arm’ s-length transactions do not include the cost-sharing of employee stock_options respondent counters that the regulations provide that all costs should be included and that stock_option costs are costs that may be allocated in addition respondent relies on an expert’s opinion that stock_option costs would be accounted for in an arm’s-length business relationship respondent also relies on what he believes are analogous court opinions in which the stock_options have been treated as compensation or as part of the consideration for a transaction finally respondent contends --- - that the fars contracts are not comparable to the circumstances in this case the parties’ disagreement raises several questions about the regulations firstly we must consider whether the commissioner must be aware of an actual arm’s-length transaction before allocating costs between controlled entities that have a bona_fide cost-sharing arrangement secondly if an actual arm’ s-- length example is not required then we must decide whether the commissioner must possess facts and or admissible evidence before making such an allocation we do not agree with petitioner’s perception that respondent would have to be aware of an actual arm’s-length transaction as a prereguisite to making any allocations sec_1_482-2 income_tax regs limits the commissioner’s ability to make an allocation in the case of a bona_fide cost-sharing arrangement to the appropriate reflection of each participant’s arm’s--length share of the costs and risks of developing the property the regulation goes on to direct that cost-sharing_arrangements will be considered arm’s length where the terms and conditions are comparable to those which would have been adopted by unrelated parties similarly situated had they entered into such the parties have raised several other factual and or legal questions that need not be addressed in the setting of this summary_judgment motion because of our conclusion that there is a genuine issue as to a material fact -- - an _ arrangement emphasis added accordingly there is no requirement that the commissioner have actual knowledge of an arm’ s-length situation as a prerequisite to the determination of an allocation in the case of a cost-sharing arrangement in addition the regulatory standard does not require that the commissioner rely on fact as opposed to opinion before making an allocation where there is a bona_fide cost-sharing arrangement there is no specific minimum standard prerequisite to the commissioner’s determination that an allocation should be made such a determination however may ultimately be found to be arbitrary capricious or unreasonable but that standard is not the threshold enabling the commissioner’s determination that an allocation should be made we do not conclude that respondent’s determination is or is not well founded likewise we do not in the context of this opinion accept agree with or disagree with respondent’s expert’s opinion we must however observe that for better or for worse expert witnesses have become the prognosticators and the bane of transfer_pricing cases both parties may rely on expert advice opinions in reaching their conclusions and or defending their positions here we will be engaged in deciding whether the sharing of stock_option costs is a circumstance comparable to those which would have been adopted by unrelated parties sec_1 d income_tax regs petitioner from a limited universe of information has attempted to show that it is not aware of an arm’ s-length transaction where the costs of stock_options were shared ie that its officers and employees are not aware of any circumstances where costs of stock_options have been shared in petitioner’s experiences and in those of employees who have experience with other companies through government fars contract standards petitioner has attempted to show that some portion of the potential universe of unrelated arm’ s-length research_and_development transactions did not involve the sharing of the cost of employee stock_options in the context of a partial summary_judgment motion we should not undertake the role of a fact finder in sucha setting a judge should not engage in credibility determinations weighing the evidence or drawing inferences from the facts that the moving and nonmoving parties present see 477_us_242 85_tc_527 as significantly the evidence of the non-movant is to be believed and all justifiable inferences are to be drawn in his favor anderson v liberty lobby inc supra pincite see also 398_us_144 94_tc_491 neither party has advanced evidence or affidavits completely resolving as a factual matter the question of whether arm’ s-- length parties to a similar transaction would share the cost of employee stock_options there are also questions about whether the options had any cost to petitioner at the time of issuance and or the appropriate time to measure the cost of the stock_options under these circumstances we are compelled to hold that there is a genuine dispute about material facts we cannot say that either party has presented or had the opportunity to fully present facts or other evidence adequately addressing for the benefit of a fact finder whether the regulatory standard has been met accordingly this matter is not ripe for summary adjudication and further development and or a trial may be necessary to resolve the disputed factual aspects of this case as to petitioner’s argument that there is no genuine dispute about a material fact because respondent relies solely on opinion evidence we disagree with petitioner’s perspective petitioner chooses to focus on the means by which respondent may attempt to convince the court that his determination is well founded and or that his determination is based on conditions that are comparable to those that would have been adopted by unrelated parties similarly situated had they entered into such an arrangement even though an expert’s opinion may be hearsay e not based on the expert’s personal knowledge but on his perception of the operative facts of a case courts may rely on the expert’s affidavits in denying motions for summary_judgment see 864_f2d_1454 9th cir vacated and remanded 490_us_1087 see also newhouse broad corp v commissioner tcmemo_2000_270 as explained above under the regulations respondent is not required to present an actual example of an arm’s-length transaction where the costs of employee stock_options were shared petitioner if it follows its present approach will try to show that such costs are not shared by proving a negative ie no transactions where there was cost sharing respondent on the other hand if he follows his present approach will attempt to show by means of expert opinion that such costs would or should be shared within the meaning of the regulations obviously an expert’s opinion and or testimony is generally not admissible as fact because he or she generally renders opinions after the fact nevertheless experts’ opinions are received for the purpose of assisting the trier of fact in reaching a factual conclusion our conclusion that there remains a genuine dispute about a material fact does not presume that respondent’s expert s is qualified or that the opinion s is necessarily helpful or we note however that such a showing would be preferred to opinion evidence admissible but that such questions cannot be decided in the context of this summary_judgment motion likewise petitioner’s proposed evidence of the nonexistence of such an arm’s--length sharing of stock_option costs is not being judged at this time to reflect the foregoing an order will be issued denying petitioner’s motion for partial summary_judgment regarding the sec_482 stock-option cost-- sharing issue


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 b01 plr-137862-04 date date --------------------------------------------------- --------------------- -------------------------------- -------------------------- legend x country entity date dear ------------- requesting a ruling that x be granted an extension of time under sec_301_9100-3 of the procedure and administration regulations to file an election under sec_301_7701-3 to be treated as a disregarded_entity for federal tax purposes facts this letter responds to a letter dated date written on behalf of x according to the information submitted x is a country entity x intended to elect to be treated as a disregarded_entity for federal tax purposes effective date however the form_8832 entity classification election inadvertently was not timely filed x represents that it is an entity that is eligible to elect under sec_301_7701-3 to be a disregarded_entity for federal_income_tax purposes sec_301_7701-3 provides in part that a business_entity that is not law and analysis 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 generally a foreign eligible_entity is treated as plr-137862-04 an association_taxable_as_a_corporation if all members have limited_liability unless the entity makes an election to be treated otherwise if a foreign eligible_entity has one owner it may elect to be treated as a disregarded_entity pursuant to the rules in sec_301_7701-3 if a foreign eligible_entity has more than one owner it may elect to be treated as a partnership pursuant to the rules in sec_301_7701-3 sec_301_7701-3 provides that an entity classification election must be filed on form_8832 and can be effective up to days prior to the date the form is filed or up to months after the date on which the form is filed under sec_301_9100-1 the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the code except subtitles e g h and i sec_301_9100-1 defines the term regulatory election as including an election whose deadline is prescribed by a regulation published in the federal_register sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make an election sec_301_9100-1 sec_301_9100-2 provides automatic_extension 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 requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-3 conclusion based solely on the facts submitted and the representations made we conclude that the 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 with the appropriate service_center and elect to be treated as a disregarded_entity for federal tax purposes effective date a copy of this letter should be attached to the election except as specifically set forth above no opinion is expressed or implied as to the federal_income_tax consequences of the transactions described above under any other provision of the code this ruling is directed only to the taxpayer on whose behalf it was requested sec_6110 of the internal_revenue_code provides that it may not be used or cited as precedent plr-137862-04 pursuant to a power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely s heather c maloy heather c maloy associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes cc


o f f i c e o f t h e c h i e f c o u n s e l department of the treasury i n t e r n a l r e v e n u e s e r v i c e w a s h i n g t o n d c date number release date conex-126071-10 uil the honorable barbara boxer united_states senator montgomery street suite san francisco ca attention ----------------------- dear senator boxer this letter responds to your inquiry dated date on behalf of your constituent - ----------------------------- -------------asked whether ------------------- accountant was correct in advising her that she does not qualify for the first-time_homebuyer credit because she purchased her home from her father generally the law provides a refundable_credit to first-time homebuyers for the purchase of a principal_residence sec_36 of the internal_revenue_code the law defines a purchase as any acquisition but only if the buyer does not purchase the property from a family_member sec_36 of the code for this purpose a family_member includes an ancestor based on the facts presented --------------------------- does not qualify for the first-time_homebuyer credit because she purchased her home from a family_member the statute provides no administrative exceptions and we have no authority to modify the rules any changes to the law would require legislative action by the congress conex-126071-10 i am sorry my response is not more favorable but hope this information is helpful if you have any questions on the first-time_homebuyer credit please contact me or ------ ---------------------at --------------------- sincerely william a jackson chief branch office of associate chief_counsel income_tax accounting


internal_revenue_service department of the treasury index number washington dc number release date person to contact telephone number refer reply to cc dom p si br - plr-114497-99 date date legend x state d1 this responds to your letter dated date submitted on behalf of x requesting relief under sec_1362 of the internal_revenue_code facts x was incorporated under state law on d1 the shareholder of x intended that x elect to be treated as an s_corporation effective d1 however the election to be treated as an s_corporation was not timely filed law and analysis sec_1362 provides that a small_business_corporation can elect to be treated as an s_corporation sec_1362 provides when an s election becomes effective if an s election is made within the first two and one-half months of a corporation’s taxable_year then that corporation will be treated as an s_corporation for the year in which the election was made if an election is made after the first two and one-half months of a corporation’s taxable_year then the corporation will generally not be treated as an s_corporation until the following taxable_year however sec_1362 provides that if no election is made pursuant to sec_1362 or if the election is made after the date prescribed for making such an plr-114497-99 election and the secretary determines reasonable_cause existed for the failure to timely make the election then the secretary can treat such an election as timely made for that taxable_year and effective as of the first day of that taxable_year in the present case x failed to timely elect s_corporation treatment effective d1 however x has established reasonable_cause for not making a timely election and is thus entitled to relief under sec_1362 conclusion based solely on the facts submitted and representations made and provided that x otherwise qualifies as a subchapter_s_corporation we conclude that x will be recognized as an s_corporation effective d1 within days from the date of this letter x should submit a properly completed form_2553 with a copy of this letter attached to the relevant service_center 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 s requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to the taxpayer 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 signed daniel j coburn sincerely daniel j coburn assistant branch chief branch office of the assistant chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes


number release date id office uilc cca_2010050405580050 --------- from ----------------------- sent tuesday may am to --------------------- cc ------------------ subject re refunds and chapter debtors ----------- i just realized that you were asking about chapter debtors not chapter chapter is different i don't think there is any question that the irs is required to turnover pre-petition refunds because they are property of the estate the procedures for trustees to request refunds were negotiated with the eoust they're in the irm


t c memo united_states tax_court frank r courbois petitioner v commissioner of internal revenue respondent docket no filed date micael c chandler for petitioner ann l baker for respondent memorandum findings_of_fact and opinion whalen judge respondent determined that petitioner is liable for the following deficiency addition_to_tax and penalty for deficiency addition_to_tax penalty sec_6651 sec_6662 dollar_figure dollar_figure dollar_figure unless stated otherwise all section references are to the internal_revenue_code as amended and in effect during after concessions by petitioner the issues for decision are whether petitioner is entitled to treat a sailboat as property_held_for_the_production_of_income and to deduct certain expenditures and depreciation attributable to the sailboat or whether petitioner's activity with respect to the sailboat is an activity_not_engaged_in_for_profit as defined by sec_183 and whether petitioner is liable for the accuracy-related_penalty under sec_6662 as determined by respondent findings_of_fact petitioner resided in oklahoma city oklahoma when the instant petition was filed the stipulation of facts filed by the parties and the exhibits attached thereto are hereby incorporated in this opinion petitioner is an attorney who specializes in criminal_law in he purchased a 63-foot sailboat named cloudia for dollar_figure the cloudia is a former norwegian fishing vessel that was built in it was featured in a motion picture that was originally released with the title sea gypsy and was later renamed the shipwreck at no time after petitioner’s purchase of the cloudia in through the time of trial has the cloudia been seaworthy among other problems when petitioner purchased the cloudia it was infested with beetles and other parasites and her frames were badly worn back from the planking of the vessel the sails on the boat were theatrical sails that had been used in making the above- mentioned motion picture and were not designed to withstand winds further the sailboat has a foreign hull which prevents it from being chartered in the united_states after petitioner purchased the cloudia he began to repair the boat as his finances permitted in an attempt to make her seaworthy this work has included the following repair of the decks repair of the masts repair of the spreaders restoration of the frames and planking purchase of new sails installation of a new running rig fore and aft and restoration of the interior of the boat including new reefers sinks stove floors heads and bunks additionally in or around petitioner rewired and replaced the plumbing on the boat during the years through petitioner occasionally allowed friends or acquaintances to rent the cloudia as a place to stay the persons who rented the cloudia included a boatwright who had worked on the boat and several members of the oklahoma city boat club petitioner's activity of renting the cloudia was sporadic he did not advertise the cloudia’s availability for rental a summary of the income realized and expenses_incurred by petitioner from through the year in issue with respect to the cloudia is as follows year rental income mortgage interest 1net income cash expenditures depreciation loss -- -- dollar_figure big_number dollar_figure big_number -- -- -- -- -- -- -- -- dollar_figure dollar_figure big_number big_number big_number big_number big_number big_number dollar_figure big_number big_number big_number total big_number big_number big_number big_number big_number 1the amounts in this column were not deducted dollar-for-dollar on petitioner's returns because petitioner treated the rental of the cloudia as a passive_activity subject_to the limitation on the deduction of passive_activity_losses set forth in sec_469 2no net_income loss figure is computed for this year because petitioner claims that the vessel was not placed_in_service until petitioner did not maintain any formal or consistent method of recording his expenditures with respect to the cloudia he occasionally collected receipts and stored them in a box he kept receipts on the sailboat at home and at his attorney’s office petitioner used the same bank account for his law practice his activities involving the cloudia his personal expenses and his residential rental properties discussed below petitioner did not maintain a ledger or set of books with respect to any of his activities involving the cloudia over the years petitioner has built two sailboats one was a 24-foot sailboat which petitioner sold there is no information in the record concerning the costs petitioner incurred in building the 24-foot sailboat or the price for which petitioner ultimately sold the boat petitioner also built a 33-foot sailboat as of the time of trial petitioner still owned the 33-foot sailboat and he used it for recreational purposes in summary petitioner reported the following adjusted_gross_income on his form_1040 u s individual_income_tax_return for interest_income dollar_figure business income schedule c big_number capital_gain schedule d big_number other gains or losses form big_number rents royalties partnerships estates trusts etc schedule e big_number total adjustments big_number adjusted_gross_income big_number the above business income consists of the net profit from petitioner's law practice as reported on the schedule c profit or loss from business attached to petitioner's tax_return as follows gross_income total expenses dollar_figure big_number net profit loss big_number petitioner has conceded that for the year in issue he omitted from his schedule c gross_receipts from his law practice in the amount of dollar_figure petitioner reported the following capital_gains_and_losses on the schedule d attached to his return and he reported the following ordinary_income on form_4797 sales of business property attached to his return gain from the sale of nw 12th gain from the sale of carey place loss from the sale of the edmond lot dollar_figure big_number big_number dollar_figure -- schedule d form_4797 big_number big_number finally petitioner reported rental income and expenses from the cloudia and three residential rental properties on schedule e supplemental income and loss petitioner's schedule e claims an aggregate loss of dollar_figure of which dollar_figure is attributable to the cloudia petitioner's schedule e reports the following activity nw 12th nw 22d carey pl cloudia total rents received cleaning and maintenance insurance legal and professional fees mortgage interest repairs supplies taxes slip rental utilities depreciation -- -- -- -- -- -- -- -- -- -- dollar_figure dollar_figure -- big_number big_number -- -- big_number big_number -- dollar_figure dollar_figure -- -- -- -- -- -- -- -- -- -- big_number -- -- big_number -- big_number big_number -- -- -- -- -- -- -- -- -- -- total expenses big_number -- big_number -- loss big_number -- big_number -- deductible rental loss big_number big_number big_number big_number petitioner treated his activities with respect to the cloudia and the three residential rental properties identified on schedule e as passive activities within the meaning of sec_469 accordingly petitioner filed form_8582 passive_activity_loss limitations with his return in substance the losses deducted on schedule e in the aggregate amount of dollar_figure were computed as follows activity current_year gains current_year loss accumulated loss total gains total losses ratio of losses allowed losses passive_activity_loss carryforward amount deducted nw 12th dollar_figure -- big_number -- -- -- -- nw 22d -- dollar_figure -- big_number big_number big_number big_number carey pl cloudia total dollar_figure -- big_number big_number -- -- dollar_figure big_number dollar_figure -- -- -- big_number big_number big_number -- -- big_number big_number -- big_number big_number big_number big_number big_number in the subject notice_of_deficiency respondent determined that petitioner is not entitled to deduct the loss claimed on schedule e with respect to the cloudia the notice_of_deficiency explains this adjustment as follows it is determined the schedule e passive_activity_loss of dollar_figure relating to the vessel cloudia is disallowed because it has not been established that the property is held for use by customers pursuant to internal_revenue_code temporary_regulation 469-1t e and 469-4t b in addition the deductions are not allowed pursuant to sec_212 because it has not been established that the property is held_for_the_production_of_income the allowable passive_activity_losses have been adjusted to reflect the disallowance of this loss figured as shown on the attached exhibits through the notice_of_deficiency also determines as an alterna- tive position that the loss attributable to the cloudia is subject_to the limitation set forth in sec_183 the notice_of_deficiency states as follows alternatively if the determination set forth above is not sustained for the taxable_year ended date see the alternative position pursuant sic under sec_183 of the internal_revenue_code attached expenses_incurred in connection with an activity_not_engaged_in_for_profit are generally deduct- ible only to the extent of income from such activity however those expenses which would otherwise be allowable under the internal_revenue_code are deductible even if they exceed the income from the activity but reduce the amount of income against which other expenses can be offset the other expenses then offset the reduced income in the following order operating_expenses other than depreciation and depreciation and other basis_adjustment items accordingly your taxable_income for taxable_year ended date is decreased dollar_figure notwithstanding the amount of the adjustment set forth in the explanation quoted above respondent determined an adjustment with respect to petitioner's passive_activity_losses in the amount of dollar_figure the notice_of_deficiency does not explain how this adjustment was computed or why it is dollar_figure more than the deduction claimed with respect to the cloudia the amount of the adjustment appears to be the difference between the aggregate amount deducted on schedule e dollar_figure and the current_year loss with respect to the property pincite nw 12th dollar_figure thus it appears that in computing the adjustment respondent disallowed a current loss with respect to the property pincite nw 12th in the amount of dollar_figure and disallowed losses accumulated from prior years with respect to the properties pincite nw 22d and carey place in the amount of dollar_figure and dollar_figure respectively opinion the principal issue in this case involves respondent's disallowance of dollar_figure of the deductions claimed by petitioner on the schedule e supplemental income and loss filed as part of petitioner's return petitioner argues that this amount is deductible under sec_212 or the premise of petitioner's argument is that the entire amount of the adjustment is attributable to petitioner's conduct of the cloudia activity however according to petitioner's return after applying the passive loss limitation rules of sec_469 petitioner claimed a deduction of only dollar_figure with respect to the cloudia the record does not explain the nature of the additional_amount disallowed by respondent viz dollar_figure and petitioner has raised no issue regarding this additional_amount the dispute between the parties over the deduction of petitioner's alleged losses_incurred in connection with the cloudia turns on whether the losses were incurred in an activity not entered into for profit sec_183 provides a general_rule --in the case of an activity engaged in by an individual or an s_corporation if such activity is not engaged in for profit no deduction attributable to such activity shall be allowed under this chapter except as provided in this section for this purpose sec_183 defines the phrase activity_not_engaged_in_for_profit to mean any activity other than one with respect to which deductions are allow- able for the taxable_year under sec_162 or under paragraph or of sec_212 if we find on the basis of all of the facts and circumstances of the case that petitioner's activity with respect to the cloudia was not engaged in for profit within the meaning of sec_183 then no deductions with respect to that activity are allowable under sec_212 sec_183 sec_1_183-2 income_tax regs an activity is engaged in for profit if the taxpayer has an actual and honest objective of making a profit 94_tc_41 78_tc_642 affd without opinion 702_f2d_1205 d c cir although the expectation of profit need not be reasonable it must be shown that a bona_fide profit objective did exist 72_tc_411 affd without published opinion 647_f2d_170 9th cir sec_1_183-2 income_tax regs in this context profit means economic profit independent of tax savings 91_tc_371 whether petitioner engaged in the cloudia activity with the requisite profit objective is a question of fact to be determined from all the facts and circumstances keanini v commissioner supra pincite golanty v commissioner supra pincite sec_1_183-2 sec_1_212-1 income_tax regs petitioner bears the burden of proving that respondent's determination is wrong rule a tax_court rules_of_practice and procedure hereinafter all rule references are to the tax_court rules_of_practice and procedure sec_1_183-2 income_tax regs sets forth a nonexclusive list of nine factors to be considered in determining whether an activity is engaged in for profit these factors are the manner in which the taxpayer carries on the activity the expertise of the taxpayer or his advisers the time and effort of the taxpayer which is expended in carrying on the activity the expectation that the assets which are used in the activity may appreciate in value the taxpayer’s success in carrying on other similar or dissimilar activities the taxpayer’s history of income or loss with respect to the activity the amount of occasional profit if any which is earned the taxpayer’s financial status and whether the taxpayer experiences personal pleasure or recreation in carrying on the activity based entirely upon his own testimony at trial petitioner argues that he purchased the cloudia in and held it in with the actual and honest objective of making a profit he claims to have purchased the cloudia for the purpose of renting it to the partners of a bookstore venture to be opened in hawaii on the island of maui shortly after purchasing the sailboat petitioner claims that the bookstore venture was abandoned because the partners were not able to acquire certain property on which to operate the bookstore at the same time petitioner claims to have discovered various defects in the cloudia described above that necessitated substantial repairs in order to make the vessel seaworthy petitioner's brief describes his objective as follows subsequently upon the failure of this book- store venture and the discovery of the defects in the vessel's condition he petitioner decided to overhaul the vessel and rent it as he could and he has rented it albeit nominally as of until such time is sic it became seaworthy enough to sell at a price that would maximize the recovery on his investment in after owning the vessel for years petitioner permitted an individual who had worked on the vessel to stay on it in return for rent and claims to have thus placed the vessel in service as a rental_activity from through petitioner claims to have realized a total of dollar_figure in rental income from permitting various friends and acquaintances to stay aboard the cloudia during the same period petitioner claims to have incurred cash expenses of dollar_figure and depreciation of dollar_figure or total expenses of dollar_figure attributable to this activity after considering the record in this case we find that petitioner has failed to prove that he engaged in his activity with respect to the cloudia with the requisite profit objective we base our decision generally on all of the facts and circumstances of the record and specifically on the factors set forth in sec_1_183-2 income_tax regs petitioner acknowledged during his testimony that he was not businesslike in his approach to the activity see sec_1_183-2 income_tax regs he did not maintain receipts of his cash expenditures he did not establish a bank account for the activity he did not maintain any books_and_records for the activity he did not advertise the availability of the vessel we are skeptical about petitioner's testimony con- cerning his alleged intent for acquiring and holding the cloudia we find it difficult to believe that petitioner an attorney would pay dollar_figure for a sailboat without first determining whether it was seaworthy and whether it could be used for its intended purpose we note that petitioner made passing reference during his testimony to an initial survey of the vessel but he failed to introduce any such survey into evidence we are also skeptical about petitioner’s assertion that he held cloudia for appreciation in value see sec_1_183-2 income_tax regs petitioner testified that as of the time of trial he could sell the cloudia for somewhere between dollar_figure and dollar_figure however as of the end of petitioner had received total rental income from the cloudia of dollar_figure and had made cash expenditures amounting to dollar_figure thus as of the end of petitioner had made net out-of-pocket expenditures of dollar_figure on the cloudia that amount plus the original cost of the cloudia dollar_figure put petitioner’s total investment in the sailboat as of at dollar_figure petitioner also testified that at the time he purchased the cloudia for dollar_figure it would have cost him approx- imately dollar_figure to restore the boat thus considering petitioner's testimony we cannot find that petitioner has shown that he could profit from appreciation in the value of the cloudia see 949_f2d_345 10th cir a record of substantial losses over many years and the unlikelihood of achieving a profitable operation are important factors bearing on a taxpayer's intention affg tcmemo_1990_148 91_tc_686 any such appreciation would have allowed petitioners to do little more than break even and chartering a yacht to others in order to afford to keep it through tax savings for one’s personal enjoyment is not the same as having a profit objective affd 893_f2d_656 4th cir see also 50_tc_341 34_tc_1146 we also note that during petitioner reported substantial income from sources other than his activity with respect to the cloudia see sec_1_183-2 income_tax regs he reported gross_income from his legal practice in the amount of dollar_figure and a net profit from that activity in the amount of dollar_figure in addition petitioner reported capital_gains of dollar_figure from the sale of nw 12th and carey place two of his rental properties ordinary_income of dollar_figure from the sale of those two rental properties and a loss of dollar_figure from the sale of the edmond lot in sum for the tax_year petitioner realized income of dollar_figure from sources other than the rental of the cloudia finally the record suggests that petitioner derived personal enjoyment from his activity with respect to the cloudia see sec_1_183-2 income_tax regs petitioner testified that ever since he was young he wanted to be involved with boats and that the first time he stepped onto the cloudia he felt like errol flynn petitioner also testified that he had built two other sailboats one which he sold and one which he retained for recreational purposes in summary petitioner has not shown that he engaged in his activity with respect to the cloudia with an actual and honest objective of making a profit accordingly we find on the basis of all of the facts and circumstances of this case that petitioner's activity with respect to the cloudia is an activity_not_engaged_in_for_profit and is subject_to the limitation on deductions imposed by sec_183 we note that the notice_of_deficiency refers to the application of sec_183 as respondent's alternative position the notice_of_deficiency also suggests that the adjustment with respect to the cloudia would be computed differently under sec_183 than the adjustment determined in the notice for this reason the court will enter decision in this case under rule accuracy-related_penalty respondent determined that petitioner’s underpayment of income_tax for was due to negligence or disregard of rules or regulations and that he is liable for the accuracy-related_penalty under sec_6662 petitioner bears the burden of proving that respondent's determination is wrong rule a sec_6662 imposes an accuracy-related_penalty equal to percent of the portion of the underpayment which is attributable to negligence or disregard of rules or regulations the term negligence includes any failure to make a reasonable attempt to comply with the provisions of the internal_revenue_code and the term disregard includes any careless reckless or intentional disregard sec_6662 negligence is defined as the lack of due care or the failure to do what a reasonable and ordinarily prudent person would do under the circumstances e g 85_tc_934 sec_6664 provides that no penalty shall be imposed under sec_6662 with respect to any portion of an underpayment if it is shown that there was reasonable_cause for such portion and that the taxpayer acted in good_faith with respect to such portion petitioner does not assert that he has met the requirements of sec_6664 petitioner argues that the penalty under sec_6662 should not be imposed for two reasons first petitioner argues that the tax treatment of his investment in the vessel cloudia was based on substantial_authority according to petitioner an amount of understatement attributable to a treatment by a taxpayer based on sub- stantial authority does not constitute a substantial_understatement by definition sec_6662 d a second petitioner argues the failure of respondent to object to this treatment during examinations by respondent of petitioner's returns in prior years although not rising to the level of estoppel tend s to support the inference that the position adopted by petitioner was not under- taken without due regard for the rules and regulations and was adequately disclosed as to petitioner's first argument we agree that for the purpose of determining whether the portion of any underpayment is attributable to a substantial under- statement the amount of the understatement is reduced by that portion attributable to the tax treatment of any item by the taxpayer if there is or was substantial_authority for such treatment sec_6662 however we do not agree with petitioner's assertion that there was substantial_authority for the tax treatment of petitioner's loss attributable to the cloudia for the reasons discussed above we have found that petitioner did not engage in the cloudia activity with an actual and honest objective of making a profit we know of no authority that permits a deduction under sec_212 for the expenses paid_or_incurred with respect to such an activity see 91_tc_686 affd 893_f2d_656 4th cir we also reject petitioner's second argument that respondent's failure to object to petitioner's treatment of losses from the cloudia during prior audit examinations proves that there was no negligence petitioner testified that the first audit during which this issue was raised was the audit that led to the subject notice_of_deficiency based upon these facts we cannot draw the inference offered by petitioner that the position adopted by petitioner was not undertaken without due regard for the rules and regulations and was adequately disclosed in this case there is ample evidence of negligence petitioner kept no regular records or logs of his activities with respect to the cloudia he commingled funds from his business and personal activities and he claimed the subject deductions despite the fact that he had no actual and honest objective of making a profit further petitioner concedes the omission of dollar_figure of income from his legal practice petitioner has offered no evidence to rebut respondent’s determination of negligence accordingly we find that petitioner has not met his burden and we sustain respondent’s determination of the sec_6662 penalty to reflect the foregoing decision will be entered under rule


department of the treasury internal_revenue_service washington d c aug tax_exempt_and_government_entities_division uniform issue list legend taxpayer a taxpayer irac financial_institution d irae financial_institution f individual g amount amount amount amount4 dear this letter is in response to a letter dated date as supplemented by correspondence dated february april30 and date in which you request a waiver of the 60-day rollover requirement contained in sec_408 of the internal_revenue_code code the following facts and representations have been submitted under penalties of perjury in support of your request taxpayer a represents that she received a distribution from ira c totaling amount taxpayer b represents that he received a distribution from ira e totaling amount taxpayer a and taxpayer b assert that their failure to accomplish a rollover within the 60-day period prescribed by sec_408 of the code was due to their reliance on the inaccurate information provided by individual g a financial advisor with financial_institution d concerning the rollover period as well as taxpayer b's medical_condition taxpayer a maintained ira c with financial_institution d taxpayer b maintained ira e with financial_institution f on date taxpayer a withdrew amount from ira c on date taxpayer b withdrew amount from ira e the funds were intended to be used on a short-term basis for living_expenses taxpayer a states that she withdrew amount from ira c based on individual g's recommendation in addition individual g advised taxpayer a that she had days to complete a rollover taxpayer b used a portion amount of the withdrawal to pay for medical_expenses not covered by insurance taxpayer b was diagnosed with cancer in and had to have surgery on date he continued to face extensive post-operative treatment for this illness throughout the rollover period for amount taxpayer b represents that his medical_condition interfered with the management of his financial affairs the ruling_request is accompanied by medical documentation which supports taxpayer b's representations taxpayer a and b intended to roll these amounts back into iras within the 90-day period on date taxpayer a redeposited amount into ira c days after it was distributed because of taxpayer b's medical_condition on date taxpayer b redeposited amount into ira e days after it was distributed based upon the foregoing facts and representations you request that the service waive the 60-day rollover requirement with respect to the distributions of amount from ira c and amount from ira e sec_408 of the code provides that except as otherwise provided in sec_408 of the code any amount_paid or distributed out of an ira shall be included in gross_income by the payee or distributee as the case may be in the manner provided under sec_72 of the code sec_408 of the code defines and provides the rules applicable to ira_rollovers sec_408 of the code provides that sec_408 of the code does not apply to any amount_paid or distributed out of an ira to the individual for whose benefit the ira is maintained if- i ii the entire amount received including money and any other_property is paid into an ira for the benefit of such individual not later than the 60th day after the day on which the individual receives the payment or distribution or the entire amount received including money and any other_property is paid into an eligible_retirement_plan other than an ira for the benefit of such individual not later than the 60t day after the date on which the payment or distribution is received except that the maximum amount which may be paid into such plan may not exceed the portion of the amount received which is includible in gross_income determined without regard to sec_408 of the code sec_408 of the code provides that sec_408 does not apply to any amount described in sec_408 received by an individual from an ira if at any time during the 1-year period ending on the day of such receipt such individual received any other amount described in sec_408 from an ira which was not includible in gross_income because of the application of sec_408 sec_408 of the code provides a similar 60-day rollover period for partial rollovers sec_408 of the code provides that the rollover provisions of sec_408 do not apply to any amount required to be distributed under sec_408 sec_408 of the code provides that the secretary may waive the 60-day requirement under sec_408 and sec_408 of the code where the failure to waive such requirement would be against equity or good conscience including casualty disaster or other events beyond the reasonable control of the individual subject_to such requirement only distributions that occurred after date are eligible for the waiver under sec_408 of the code revproc_2003_16 i r s date provides that in determining whether to grant a waiver of the 60-day rollover requirement pursuant to sec_408 the service will consider all relevant facts and circumstances including errors committed by a financial_institution inability to complete a rollover due to death disability hospitalization incarceration restrictions imposed by a foreign_country or postal error the use of amount distributed for example in the case of payment by check whether the check was cashed and the time elapsed since the distribution occurred the information presented and documentation submitted by taxpayer a is consistent with her assertion that her failure to accomplish a timely rollover of amount was caused by her reliance on the erroneous advice concerning the 60-day rollover period she received from individual g in addition the information presented and documentation submitted by taxpayer b is consistent with his assertion that his failure to accomplish a timely rollover of amount was caused by complications from an ongoing medical_condition which interfered with the management of his financial affairs therefore pursuant to sec_408 of the code the service hereby waives the day rollover requirement with respect to the distribution of amount from ira c and amount from ira e provided all other requirements of sec_408 of the code except the 60-day requirement were met with respect to taxpayer a's contribution of amount into ira con date and taxpayer b's contribution of amount into ira eon date such contributions will be considered rollover_contributions within the meaning of sec_408 of the code no opinion is expressed as to the tax treatment of the transactions described herein under the provisions of any other section of either the code or regulations which may be applicable thereto this ruling is directed only to the taxpayer that requested it sec_6110 of the code provides that it may not be used or cited by others as precedent if you wish to inquire about this ruling please contact at i d sincerely yours a tj manager employee_plans technical group enclosures deleted copy of ruling letter notice of intention to disclose


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 b01 plr-151407-08 date date x --------------------------------------------------- ------------------------------------------ a -------------------------- ----------------------------------------------------- b ----------------------------------------------------- ---------------------- c ----------------------------------------------------- ----------------------------- trust ----------------------------------------------------------------- trust --------------------------------------------------- ------------------------------------------------------------ trust --------------------------------------------------- -------------------------------------------------------------- trust --------------------------------------------------- --------------------------------------------- trust --------------------------------------------------- --------------------------------------------- trust --------------------------------------------------- --------------------------------------- plr-151407-08 trust --------------------------------------------------- ------------------------------------------------------------ trust --------------------------------------------------- --------------------------------------------------------- trust --------------------------------------------------- ---------------------------------------------------- trust ---------------------------------------------------------------------------------------------------------- --------------------------------------------------- ----------------------------------------------------------------------------------------- -------------------------- ----------------------- ---------------------- ------------------------- -------------------------- -------------------------- ---------------------- ------ ------ ------ -------- ------- ------- ------- date date date date date date date p q r s year year year dear --------------- plr-151407-08 this responds to a letter dated date and subsequent correspondence submitted on behalf of x by its authorized representative requesting a ruling under sec_1362 of the internal_revenue_code facts x was incorporated on date and made an election to be treated as an s_corporation effective date a was the sole shareholder of x on date on date a transferred x stock to trust x represents that trust was a grantor_trust the assets of which were treated for federal_income_tax purposes as solely owned by a on date b transferred p shares of x to each of trust trust and trust on date b transferred q shares of x to each of trust trust and trust on date c transferred r share of x to each of trust trust and trust on date c transferred r share of x to trust on date trust terminated and trust transferred s shares of x to each of trust and trust trust trust trust trust trust trust trust trust and trust are collectively referred to as the trusts x represents that x and the grantors trustees and beneficiaries of the trusts intended that each of the trusts be treated as a qualified_subchapter_s_trust qsst the instruments for each of the trusts include the terms required of a qsst described in sec_1361 though the instruments for each of the trusts do not require the trustees of the trusts to distribute all of the trusts’ income within the meaning of sec_643 to each trust’s current income_beneficiary x represents that x and the grantors trustees and beneficiaries of the trusts intended that all such income would actually be distributed due to an oversight the beneficiaries of the trusts failed to make qsst elections for the trusts as a result x's s_corporation_election terminated on date when trust trust and trust became shareholders nevertheless x has represented that x has been treated as an s_corporation since date furthermore for year and all subsequent taxable years x has represented that the trusts were treated by their beneficiaries as qssts effective as of the trusts’ respective dates of formation furthermore x represents that each of the trusts’ beneficiaries reported all of their respective shares of x’s income on their individual income_tax returns for year and all subsequent taxable years though trust and trust did distribute all of their income within the meaning of sec_643 trust trust trust trust trust trust and trust each failed to distribute to their respective beneficiaries an immaterial amount of income x's s_corporation_election would also have terminated if it had not already terminated on date on date date and date due to the additional transfers of x stock furthermore x’s s_corporation_election would have terminated if it had not plr-151407-08 already terminated on date on the first day of year and of each subsequent year through year due to the failure of certain of the trusts to distribute all of their income to their respective beneficiaries x represents that the failure_to_file qsst elections for the trusts and the failure to distribute all of the income were not motivated by tax_avoidance or retroactive tax planning x and its shareholders have agreed to make any adjustments that the commissioner may require consistent with the treatment of x as an s_corporation law and analysis sec_1362 provides that except as provided in sec_1362 a small_business_corporation may elect in accordance with the provisions of sec_1362 to be an s_corporation sec_1361 provides that the term s_corporation means with respect to any taxable_year a small_business_corporation for which an election under sec_1362 is in effect for such year sec_1361 provides that for purposes of subchapter_s the term small_business_corporation means a domestic_corporation which is not an ineligible_corporation and which does not have as a shareholder a person other than an estate a_trust described in sec_1361 or an organization described in sec_1361 who is not an individual sec_1361 provides that for purposes of sec_1361 a_trust all of which is treated under subpart e of part i of subchapter_j of chapter as owned by an individual who is a citizen or resident_of_the_united_states may be an s_corporation shareholder sec_1361 provides that in the case of a qualified_subchapter_s_trust with respect to which a beneficiary makes an election under sec_1361 a such trust will be treated as a_trust described in sec_1361 and b for purposes of sec_678 the beneficiary of such trust shall be treated as the owner of that portion of the trust which consists of stock in an s_corporation with respect to which the election under sec_1361 is made sec_1_1361-1 of the income_tax regulations provides that the income_beneficiary who makes the qsst election and is treated for purposes of sec_678 as the owner of that portion of the trust that consists of s_corporation stock is treated as the shareholder for purposes of sec_1361 sec_1366 sec_1367 and sec_1368 sec_1361 provides that for purposes of sec_1361 the term qualified_subchapter_s_trust means a_trust the terms of which require that i during the life of the plr-151407-08 current income_beneficiary there shall be only income_beneficiary of the trust ii any corpus distributed during the life of the current income_beneficiary may be distributed only to such beneficiary iii the income_interest of the current income_beneficiary in the trust shall terminate on the earlier of such beneficiary’s death or the termination of the trust and iv upon the termination of the trust during the life of the current income_beneficiary the trust shall distribute all of its assets to such beneficiary sec_1361 provides that for purposes of sec_1361 the term qualified_subchapter_s_trust means a_trust all of the income within the meaning of sec_643 of which is distributed or required to be distributed currently to individual who is a citizen or resident_of_the_united_states sec_1361 provides that if any qsst ceases to meet any requirement of sec_1361 but continues to meet the requirements of sec_1361 regarding the terms of the trust the provisions of sec_1361 shall not apply to such trust as of the first day of the first taxable_year beginning after the first taxable_year for which it failed to meet the requirements of sec_1361 sec_1_1361-1 provides that the current income_beneficiary of a qsst must make the election under sec_1361 by signing and filing with the service_center with which the corporation files its income_tax returns the applicable form or a statement including the information listed in sec_1_1361-1 sec_1362 provides that a in general an election under sec_1362 shall be terminated whenever at any time on or after the first day of the first taxable_year for which the corporation is an s_corporation such corporation ceases to be a small_business_corporation and b any termination under sec_1362 shall be effective on and after the date of cessation sec_1_1361-1 provides that if a corporation’s s election terminates because of a late qsst election the corporation may request inadvertent termination relief under sec_1362 sec_1362 provides that if an election under sec_1362 by any corporation a was not effective for the taxable_year for which made determined without regard to sec_1362 by reason of a failure to meet the requirements of sec_1361 or to obtain shareholder consents or b was terminated under sec_1362 or the secretary determines that the circumstances resulting in the ineffectiveness or termination were inadvertent no later than a reasonable period of time after discovery of the circumstances resulting in the ineffectiveness or termination steps were taken a so that the corporation is a small_business_corporation or b to acquire the shareholder consents and the corporation and each person who was a shareholder of the corporation at any time during the period specified pursuant to sec_1362 agrees to make such adjustments consistent with the treatment of the plr-151407-08 corporation as an s_corporation as may be required by the secretary with respect to such period then notwithstanding the circumstances resulting in the ineffectiveness or termination the corporation will be treated as an s_corporation during the period specified by the secretary conclusions based solely on the facts submitted and the representations made we conclude that the termination of x's s_corporation_election on date was inadvertent within the meaning of sec_1362 we further hold that pursuant to the provisions of sec_1362 x will be treated as continuing to be an s_corporation from date and thereafter provided x's s_corporation_election was valid and provided that the election was not terminated under sec_1361 as a result of an event or a transaction other than those described in this ruling the trusts will be treated as qssts from date and thereafter this ruling is conditioned upon the beneficiaries of the trusts filing appropriately completed qsst elections for the trusts effective as of the date that each of the respective trusts first acquired x stock the qsst elections must be filed within days following the date of this letter and a copy of this letter should be attached to any such elections or returns the shareholders of x must include their pro-rata share of the separately_stated and nonseparately computed items of x as provided in sec_1366 make any adjustments to basis as provided in sec_1367 and take into account any distributions made by x as provided in sec_1368 if x or its shareholders fail to treat themselves as described above this ruling is null and void except as specifically ruled above we express no opinion concerning the federal tax consequences of the transactions described above under any other provisions of the code in particular we express no opinion on whether x is otherwise eligible to be an s_corporation or on whether the trusts are otherwise eligible to be qssts this ruling is directed only to the taxpayer that requested it sec_6110 provides that it may not be used or cited as precedent plr-151407-08 pursuant to a power_of_attorney on file a copy of this letter is being sent to x's authorized representative sincerely dianna k miosi dianna k miosi chief branch office of the associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes


internal_revenue_service number release date index numbers ----------------------------------------------- ----------------------------------------- ----------------------- --------------------------------------------------- --------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ----------------- id no ------------- telephone number --------------------- refer reply to cc psi plr-144488-08 date date legend x --------------------------------------------------- ----------------------------------------- d country ---------------------- ---------- dear ---------------- this is in response 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 to file an election under sec_301_7701-3 to be treated as a disregarded_entity for federal tax purposes facts according to the information submitted x was formed under the laws of country x intended to be treated as a disregarded_entity for federal tax purposes effective d however x inadvertently failed to timely file form_8832 entity classification election to be treated as a disregarded_entity for federal tax purposes 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 plr-144488-08 elect its classification for federal tax purposes an eligible_entity with a single owner can elect to be classified as an association or to be disregarded as an entity separate from its owner sec_301_7701-3 provides guidance on the classification of a foreign eligible_entity for federal tax purposes generally a foreign eligible_entity is treated as an association if all members have limited_liability unless the entity makes an election to be treated otherwise a foreign eligible_entity with a single owner having limited_liability may elect to be treated as a disregarded_entity pursuant to the rules of sec_301_7701-3 sec_301_7701-3 provides that an entity classification election must be filed on form_8832 and can be effective up to days prior to the date the form is filed or up to months after the date the form is filed under sec_301_9100-1 the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i section b defines the term regulatory election as including an election whose due_date is prescribed by a regulation published in the federal_register sec_301_9100-1 through provide the standards that the commissioner will use to determine whether to grant an extension of time to make an election sec_301_9100-1 sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides rules for requesting extensions of time for regulatory elections that do not meet the requirements of sec_301_9100-2 requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government conclusion based solely on the facts submitted and the representations made we conclude that the 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 make an election to be treated as a disregarded_entity for federal tax purposes effective d x must make the election by filing a properly executed form_8832 with the appropriate service_center a copy of this letter should be attached to the form except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter plr-144488-08 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 sincerely curt g wilson curt g wilson associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes cc


internal_revenue_service number release date index number 468a ---------------------------- ------------------------------------------------------------ --------------------------- ----------------------------------- ------------------------ -------------------------------------- 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 b06 plr-133660-16 date date legend seller parent operator taxpayer-buyer disregarded_entity unit state date date date date a b c d e f dear ------------- -------------------------------------------- ----------------------------- -------------------------------------------- ------------------------------------ --------------------------------------------------------------------------------- --------------------------------------------------------------------------------- ------------ -------------- ------------------------ ---------------------- --------------------- --------------------- -- ------------------ -------------------- ------------------ ------------------ ---------------- this letter responds to your request for private_letter_ruling dated date you requested that we rule on certain tax consequences of the proposed transaction discussed below taxpayer has represented that at the time that the private_letter_ruling was submitted the facts were as follows seller is a limited_liability_company that is wholly-owned indirectly by parent seller elected to be treated as an association taxable as corporation and is an accrual plr-133660-16 method taxpayer that files its federal_income_tax returns on a calendar_year basis seller owns all of the interests in the unit its sole electricity generation asset the unit is operated by operator a corporate affiliate of seller with respect to the unit seller is subject_to the jurisdiction of the federal energy regulatory commission ferc the nuclear regulatory commission nrc and the state public service commission taxpayer a corporation is a holding_company and the sole member of disregarded_entity a limited_liability_company that is disregarded for federal_income_tax purposes taxpayer is an accrual_method taxpayer that files a consolidated_return on a calendar_year basis with respect to the unit taxpayer will also be subject_to the jurisdiction of ferc nrc and the state public service commission through its subsidiaries taxpayer is engaged in two businesses i energy delivery and ii generation and sale of electricity at wholesale and retail disregarded_entity owns and operates electric generation facilities both directly and through other limited_liability companies that are wholly-owned by disregarded_entity and are also disregarded for federal_income_tax purposes seller maintains a master nuclear decommissioning trust which currently holds assets dedicated to the decommissioning of the unit in two separate subsidiary trusts one that meets the requirements for a qualified_fund within the meaning of sec_468a of the internal_revenue_code the qualified_fund and one that does not meet those requirements the nonqualified_fund as of date the qualified_fund totaled approximately dollar_figurea and the nonqualified_fund totaled approximately dollar_figureb as of date the date of the proposed transaction the estimated nuclear decommissioning liability is dollar_figurec which exceeds the fair_market_value of the assets held in the qualified_fund and the nonqualified_fund by approximately dollar_figured on the date of the proposed transaction the master nuclear decommissioning trust is expected to hold the assets valued at approximately dollar_figurea plus dollar_figureb on date seller and taxpayer entered into an agreement regarding the sale of the unit and the transfer of the assets of the master nuclear decommissioning trust the purchase agreement pursuant to the purchase agreement seller will contribute cash held in the nonqualified_fund to the qualified_fund to the extent that seller contributes an amount to the qualified_fund that is less than the full amount in the nonqualified_fund such remainder shall continue to be held in the nonqualified_fund at closing of the transaction seller will transfer the assets of the master nuclear decommissioning trust for the unit including those in the qualified_fund and those in the nonqualified_fund to corresponding qualified and nonqualified funds in a master nuclear decommissioning trust established and maintained by taxpayer with respect to the unit pursuant to the purchase agreement seller agrees to sell assign transfer convey and deliver to taxpayer and taxpayer agrees to purchase assume and accept plr-133660-16 from seller all of seller’s respective rights title and interest in the transferred assets including the unit and all of the assets in the master nuclear decommissioning trust for the unit taxpayer also agrees to assume pay perform and discharge any and all liabilities that arise out of the operation of the unit specifically taxpayer agreed to i purchase the transferred assets including the unit and the assets of the master nuclear decommissioning trust for the unit from seller for dollar_figuree and ii pay to seller a dollar_figuref nonrefundable signing fee on date taxpayer as the sole owner of disregarded_entity represents that the purchase and sale of the transferred assets including the unit and the master decommissioning trust for the unit that will be transferred to taxpayer’s trust pursuant to the purchase agreement is a taxable asset acquisition of a trade_or_business for federal_income_tax purposes as such taxpayer also represents that it will take a basis in the transferred assets other than the assets in taxpayer’s qualified_fund equal to the cash paid to seller plus any liabilities that are otherwise incurred and taken into account for federal_income_tax purposes for this purpose taxpayer will not treat the nuclear decommissioning liability as incurred rulings requested the qualified_fund will not be disqualified by reason of the proposed transaction the taxpayer’s qualified_fund will be treated as a qualified_fund that satisfies the requirements of sec_468a and sec_1_468a-5 after the proposed transaction the seller’s qualified_fund and the taxpayer’s qualified_fund will not recognize any gain_or_loss or otherwise take any income_or_deduction into account by reason of the proposed transaction neither taxpayer nor seller will be required to recognize gain_or_loss or take any income_or_deduction into account as a result of the transfer of the assets of the seller’s qualified_fund to the taxpayer’s qualified_fund as part of the proposed transaction pursuant to sec_1_468a-6 after the transaction the taxpayer’s qualified_fund will have a tax basis in each of its assets that is the same as the tax basis that the seller’s qualified_fund had in those assets immediately prior to the proposed transaction the amount_realized by seller from the proposed transaction will include the nuclear decommissioning liability associated with the unit but not including the portion plr-133660-16 of the nuclear decommissioning liability funded by the seller’s qualified_fund on the date of the proposed transaction seller will be entitled to treat the nuclear decommissioning liability as satisfying economic_performance under sec_1_461-4 to the extent that seller includes the nuclear decommissioning liability in the amount_realized from the proposed transaction law and analysis issues sec_468a of the code provides that a taxpayer may elect to deduct payments made to a nuclear decommissioning reserve fund that meets the requirements of sec_468a ie a fund that is a qualified nuclear decommissioning fund sec_1_468a-1 provides that a qualified nuclear decommissioning fund is a fund that satisfies the requirements of sec_1_468a-5 sec_1_468a-5 of the income_tax regulations sets out the qualification requirements for nuclear decommissioning funds it provides in part that a qualified nuclear decommissioning fund must be established and maintained pursuant to an arrangement that qualifies as a_trust under state law sec_1_468a-5 provides that an electing taxpayer can establish and maintain only one qualified nuclear decommissioning fund for each nuclear power plant if a nuclear power plant is subject_to the ratemaking jurisdiction of two or more public_utility commissions and any such public_utility commission requires a separate fund to be maintained for the benefit of ratepayers whose rates are established or approved by the public_utility commission the separate funds maintained for such plant whether or not established and maintained pursuant to a single trust agreement shall be considered a single nuclear decommissioning fund sec_1_468a-6 provides rules applicable to the transfer of an interest in a nuclear power plant and transfer of the qualified nuclear decommissioning fund where certain requirements are met specifically sec_1_468a-6 provides that sec_1_468a-6 applies if- immediately before the disposition the transferor maintained a qualified nuclear decommissioning fund with respect to the interest disposed of and immediately after the disposition-- plr-133660-16 i the transferee maintains a qualified nuclear decommissioning fund with respect to the interest acquired ii the interest acquired is a qualifying interest of the transferee in the nuclear power plant in connection with the disposition either- i the transferee acquires part or all of the transferor’s qualifying interest in the plant and a proportionate amount of the assets of the transferor’s fund all such assets if the transferee acquires the transferor’s entire qualifying interest in the fund is transferred to a fund of the transferee or ii the transferee acquires the transferor’s entire qualifying interest in the plant and the transferor’s entire fund is transferred to the transferee and the transferee continues to satisfy the requirements of sec_1 468a- a iii which permits an electing taxpayer to maintain only one qualified nuclear decommissioning fund for each plant sec_1_468a-6 provides that a disposition that satisfies the requirements of sec_1_468a-6 will have the following tax consequences at the time it occurs i neither the transferor nor the transferor’s qualified nuclear decommissioning fund will recognize gain_or_loss or otherwise take any income into account by reason of the transfer of a proportionate amount of the assets of the transferor’s qualified nuclear decommissioning fund to the transferee’s qualified nuclear decommissioning fund or by reason of the transfer of the transferor’s entire qualified nuclear decommissioning fund to the transferee for purposes of the regulations under sec_468a this transfer or the transfer of the transferor’s qualified nuclear decommissioning fund will not be considered a distribution of assets by the transferor’s qualified nuclear decommissioning fund ii notwithstanding sec_1_468a-6 if the transferor has made a special transfer under sec_1_468a-8 prior to the transfer of the fund or fund assets any deduction with respect to that special transfer allowable under sec_468a for a taxable_year ending after the date of the transfer of the fund or fund assets is allowed under sec_468a for the taxable_year that includes the date of the transfer of the fund or fund assets neither the transferee nor the transferee’s qualified nuclear decommissioning fund will recognize gain_or_loss or otherwise take any income into account by reason of the transfer of a proportionate amount of the assets of the transferor’s qualified nuclear plr-133660-16 decommissioning fund to the transferee’s qualified nuclear decommissioning fund or by reason of the transfer of the transferor’s entire qualified nuclear decommissioning fund to the transferee for purposes of the regulations under sec_468a this transfer or the transfer of the transferor’s qualified nuclear decommissioning fund will not constitute a payment or a contribution of assets by the transferee to its qualified nuclear decommissioning fund transfers of assets of a qualified nuclear decommissioning fund to which this section applies do not affect basis thus the transferee’s qualified nuclear decommissioning fund will have a basis in the assets received from the transferor’s qualified nuclear decommissioning fund that is the same as the basis of those assets in the transferor’s qualified nuclear decommissioning fund immediately before the distribution under sec_1_468a-6 the service may treat any disposition of an interest in a nuclear power plant occurring after date as satisfying the requirements of the regulations if the service determines that such treatment is necessary or appropriate to carry out the purposes of sec_468a issue sec_1001 provides that the amount_realized from the sale_or_other_disposition of property is the sum of any money received plus the fair_market_value of the property other than money received sec_1_1001-2 provides that the amount_realized from the sale_or_other_disposition of property includes the amount of liabilities from which the transferor is discharged as a result of the sale or disposition the decommissioning liabilities from which seller will be relieved are fixed and determinable for purposes of sec_461 and as discussed below under issue are described in sec_1_461-4 these amounts are included in the amount_realized as an owner of a nuclear-powered plant seller is required_by_law to provide for eventual decommissioning and the amount of seller’s liability can be determined with reasonable accuracy accordingly the amount of seller’s nuclear decommissioning liability that is assumed by taxpayer in excess of the fair_market_value of the assets in the qualified_fund on the date of the transfer will be included in seller’s amount_realized and taken into account in computing taxable_income in the year of the proposed transaction as discussed above the proposed transaction will not result in the disqualification of the qualified_fund and seller will not have any gain or income as a result of the transfer of its interests in the assets of the qualified_fund to taxpayer because the transfer of the qualified_fund from seller to taxpayer will not be a taxable transfer the amount of the liabilities assumed by taxpayer that are included in seller's amount_realized will not include the portion of the liability to decommission the unit that is equal to the fair_market_value of the assets in the qualified_fund on the date of the transfer plr-133660-16 issue sec_1_446-1 provides that under an accrual_method of accounting a liability is incurred and generally taken into account for federal_income_tax purposes in the year in which all the events have occurred that establish the fact of the liability the amount of the liability can be determined with reasonable accuracy and economic_performance has occurred with respect to the liability sec_461 provides that in determining whether an amount has been incurred with respect to any item during any taxable_year the all_events_test shall not be treated as met any earlier than when economic_performance with respect to such item occurs see also sec_1_461-4 sec_461 provides that the all_events_test is met with respect to any item if all events have occurred that determine the fact of liability and the amount of such liability can be determined with reasonable accuracy sec_461 provides that in the case of a liability that requires the taxpayer to provide services economic_performance occurs as the taxpayer provides the services sec_1_461-4 provides that except as otherwise provided in sec_1_461-4 if a liability requires the taxpayer to provide services to another person economic_performance occurs as the taxpayer incurs costs in connection with the satisfaction of the liability sec_1_461-4 provides an exception to the general economic_performance rule for services where the taxpayer sells or exchanges a trade_or_business where the purchaser expressly assumes a liability arising out of the taxpayer's trade_or_business that the taxpayer but for the economic_performance requirement would have been entitled to incur as of the date of the sale economic_performance with respect to that liability occurs as the amount of the liability is properly included in the amount_realized on the transaction by the taxpayer the first prong of the all_events_test requires that the fact of the liability be established at the time of the deduction this prong of the all_events_test is satisfied in the instant case for seller here seller as an owner of a nuclear-powered plant was required to obtain an operating license before commercial operations begun c f_r sec_50 see also c f_r sec_50 k seller also has an obligation to seek license termination c f_r sec_50 a and the license termination process provides that a licensee shall take actions necessary to decommission and decontaminate the facility c f_r sec_50 b and bb see also c f_r sec_72 the fact of the obligation arose at the time seller became subject_to the decommissioning requirements associated with the plant’s license moreover congress recognized the existence of the decommissioning liability when in it enacted sec_461 and sec_468a noting that g enerally under federal and state laws utilities that operate nuclear power plants are obligated to decommission the plants at the end of their useful lives h_r conf_rep no see also s prt no vol 98th cong 2d sess plr-133660-16 the second prong of the all_events_test requires that the amount of the liability be determined with reasonable accuracy see sec_1_461-1 this prong is also satisfied in the instant case the amount of seller’s decommissioning liability has been determined by experts in the nuclear decommissioning industry the estimate has been accepted by the nuclear regulatory commission which is charged with ensuring that sufficient funds are available to decommission the plants in addition there is also support in the internal_revenue_code for finding that the amount of the decommissioning liability can be determined with reasonable accuracy at the time of a sale sec_468a generally permits a current deduction for a ruling_amount based on estimated future decommissioning expenses to the extent the decommissioning costs are sufficiently determinable to entitle a utility to a deduction under sec_468a it is reasonable to conclude that the costs must also be sufficiently determinable to satisfy the second prong of the all_events_test conclusions based on the information submitted by seller and taxpayer we reach the following conclusions the qualified_fund will not be disqualified by reason of the proposed transaction the taxpayer’s qualified_fund will be treated as a qualified_fund that satisfies the requirements of sec_468a and sec_1_468a-5 after the proposed transaction the seller’s qualified_fund and the taxpayer’s qualified_fund will not recognize any gain_or_loss or otherwise take any income_or_deduction into account by reason of the proposed transaction neither taxpayer nor seller will be required to recognize gain_or_loss or take any income_or_deduction into account as a result of the transfer of the assets of the seller’s qualified_fund to the taxpayer’s qualified_fund as part of the proposed transaction pursuant to sec_1_468a-6 after the transaction the taxpayer’s qualified_fund will have a tax basis in each of its assets that is the same as the tax basis that the seller’s qualified_fund had in those assets immediately prior to the proposed transaction the amount_realized by seller from the proposed transaction will include the nuclear decommissioning liability associated with the unit but not including the portion of the nuclear decommissioning liability funded by the qualified_fund on the date of the proposed transaction plr-133660-16 seller will be entitled to treat the nuclear decommissioning liability as satisfying economic_performance under sec_1_461-4 to the extent that seller includes the nuclear decommissioning liability in the amount_realized from the proposed transaction except as specifically determined above no opinion is expressed or implied concerning the federal_income_tax consequences of the transaction described above specifically we express no opinion on the tax consequences of the transaction under sec_351 also except as specifically determined above we express no opinion on the federal_income_tax consequences to taxpayer resulting from the acquisition of assets and liabilities including the nuclear-powered electric generating plants and the nuclear decommissioning liabilities of seller this ruling is directed only to the taxpayer who requested it sec_6110 of the code provides 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 representatives we are also sending a copy of this letter_ruling to the director sincerely peter c friedman senior technician reviewer branch office of the associate chief_counsel passthroughs special industries cc