department of the treasury internal_revenue_service washington d c sep on04 a ef he ta ore tax_exempt_and_government_entities_division uics legend taxpayer a taxpayer b company m insurance_company n company o individual d individual e company p company q company r company s company t court cp state s state t date date date page date date date date date month sec_1 and amount amount amount amount amount amount dear concerning the status of contributions this is in response to a ruling_request dated to your individual_retirement_accounts iras the facts upon which you base your requests are as follows taxpayer a is married to taxpayer b taxpayers a an taxpayer a terminated employment with company m plans represented to be qualified within the meaning of in which taxpayer a participated at his termination ' distributions from said retirement plans db are residents of state t which sponsored one or more retirement sec_401 of the internal_revenue_code taxpayer a was entitled to receive in also participated in taxpayer b also terminated employment with in company m’s qualified_retirement_plans at her termination taxpayer b was entitled to receive distributions from said retirement plans induced by representations made by employees of company p a licensed securities broker-dealer yers a and b authorized companies p and and company q a registered investment_advisor taxp q to manage the investment of their qualified retiremen company m taxpayer b it funds page each rolled over upon the advice of representatives of companies p and q taxpayers a and b distributions received respectively from the qualified_retirement_plan s maintained by company m into separate individual retirement annuities described in code sec_408 issued by taxpayer a rolled over amount on date sec_1 and taxpayer b insurance_company n rolled over amount on date year as of date the value s of taxpayers a and b’s ira_annuities had decreased significantly insurance_company n is a state s_corporation authorized to do business in state t insurance_company n sells financial products primarily to individuals most of its sales are made through independent financial advisors and other distribution channels including but not limited to investment firms and financial institutions on or about date taxpayers a and b along with other similarly situated taxpayers filed a lawsuit in court cp state t a court of competent jurisdiction against insurance_company n company o the distributor of insurance_company n products company p company q company r company s individual d and individual e individuals d and e owned and operated companies p q r and s the lawsuit alleged that individuals d and e and companies p through by taxpayers a and b said lawsuit was s sold and or recommended the ira_annuities purchased amended on or about date the lawsuit as amended contains a factual allegation to the effect that each plaintiff signed a document captioned group annuity application_for participation for submission to insurance_company n these applications were either signed by ndividual d or individual e who was listed as agent along with a reference to company p as the individual d or individual e as agent and to company p as firm on the application itself was also was acting simultaneously as an agent intended to indicate that individual d and individual e wuity of insurance_company n in procuring the sale of the a a sample group annuity application_for participation attached to the copy of the lawsuit submitted with taxpayers a and b’s ruling_request indicates that qualified ira_annuities may be purchased from insurance_company n agent’s firm the reference to either from qualified_retirement_plans companies p through s and individuals d and e the lawsuit as amended alleged that breached their fiduciary duty to taxpayers a and b by i them to purchase and selling them ira_annuities as vehicles to receive distributions made insurance_company n was vicariously liable for said b eaches of fiduciary duty by its agents company p and individuals d and e companies p hrough s and individuals d and e defrauded taxpayers a and b by either intentionally misrepresenting or omitting material facts from them when they sold them their ira_annuities f rthermore taxpayers a and b said misrepresentations when they purchased their ira_annuities finally company p and individuals d and e were acting within the scope of th ir duties as agents of insurance_company n when they made the fraudulent misrepresentations and committed constructive fraud against taxpayers a and b furthermore company p and individuals d and e wer acting within the scope of their duties as agents of insurance_company n when they committed constructive fraud companies p through s and individuals d and e were negligent when they sold ira_annuities to taxpayers a and b omissions all of the named defendants in selling them their ira_annuities relied upon ees in relevant part article of the settlement provides which negligence caused the decline in value of taxpayers a and b’s ira_annuities furthermore company p and individuals d and e were acting within the scope of their duties as agents of insurance_company n when they negligently recommended and sold the ira_annuities to taxpayers a and b and companies p through s and individuals d and e negligently misrepresented and negligently failed to disclose material facts to taxpayers a and b when they sold them their ira_annuities which negligence caused ihe decline in value of taxpayers a and b’s ira_annuities furthermore company p and individuals d and e were acting within the scope of their duties as agents of insurance_company n when they made their negligent misrepresentations and when they negligently failed to disclose material we in month sec_1 and taxpayers a and b entered into a settlement agreement with insurance_company n and company o pursuant to which insurance_company n agreed to pay taxpayers a and b sum s of money in exchange for their agreeing to the dismissal of the above-referenced date lawsuit under the terms of the settlement taxpayer a was entitled to receive amount and taxpayer b entitled to received amount that insurance_company n shall make separate transfers of the surrender amounts for each of the plaintiff's annuities to plaintiff's respective designees within seven business days after the processing of such paperwork from documentation contained in the file it appears th t the above-referenced settlement was the result of arm’s-length negotiations between various parties with adverse interests pursuant to the settlement agreement the date lawsuit against insurance_company n company o companies p through s and individuals d and e was dismissed on or about date the above referenced amount sec_3 and payments were made by check from insurance_company n to taxpayers a and b maintained by taxpayers a and b’s counsel on or about date checks in the amounts of amount sec_5 and were issued by said counsel to taxpayers a and b respectively amount sec_5 and represented amount sec_3 and less attorney’s fees on or about date taxpayer a contributed amount into an ira set up and maintained in his name with company t also on or about date taxpayer b contributed amount into an ira set up and maintained in her name with company t contributory iras met the requirements of code sec_408 were made within days of date the date amount sec_3 and were paid to taxpayers a and b checks were deposited into a_trust account it has been represented that both said date contributions said settlement agreement the value of the b’s ira annuity which consisted of the it has been represented that pursuant to article of th respective taxpayer’s either taxpayer a’s or taxpayer respective ira annuity value exclusive of amounts received as a result of the settlement referenced herein less the applicable surrender charge was transf red by insurance_company n by means of a direct trustee to trustee transfer to the respective axoners ira account maintained with company t it has also been represented that the sum of the settlem nt proceeds paid either to taxpayer a amount or to taxpayer b amount and of the a ounts transferred by either taxpayer a or page taxpayer b respect to taxpayer a or amount with respect to taxpayer b to his her ira maintained with company t did not exceed either amount with based upon the foregoing you request the following rulings that taxpayer a’s receipt of amount from insurance_company n pursuant to the above described settlement of a lawsuit and its subsequent contribution into an ira set up and maintained in his name with company t constitutes a valid rollover transaction within the meaning of sec_408 of the internal_revenue_code and ans a_trust created or organized in the that taxpayer b’s receipt of amount from insurance_company n pursuant to the above described settlement of a lawsuit and its subsequent contribution into an ira set up and maintained in her name with company t constitutes a valid rollovet transaction within the meaning of sec_408 of the internal_revenue_code with respect to the requested letter rulings section oe of the code provides that for purposes of this section the term individual retirement accoun united_states for the exclusive benefit of an individual or his beneficiaries but only if the written governing instrument creating the trust meets certain requirements among these requirements is the one found in paragraph of sec_408 which states that except in the case of a rollover_contribution described in subsection d in section tee a b or e no contribution will be accepted unless it is in cash and contributions will not be accepted for the taxable_year in excess of the amount in effect for such taxable_year under sec_219 on behalf of any individual sec_408 of the code provides the general_rule for the tax treatment of distributions from iras this section provides in pertinent part that except as otherwise provided in subsection d any amount_paid or distributed out of an individual_retirement_plan or under an individual_retirement_annuity shall be included in gross_income by the payee or distributee as the case may be in the manner provided under sec_72 sec_408 of the code establishes an exception to the contribution rules of sec_408 and the income inclusion rule_of sec_408 for certain transactions characterized as rollover_contributions under sec_408 an amount is described i in paragraph as a rollover_contribution if it meets the requirements of subparagraphs a and b subparagraph a of sec_408 of the code states in pertinent part that paragraph of sec_408 does not apply to any amount_paid or distributed out of an individual_retirement_account or individual_retirement_annuity to the individual for whose benefit the account or annuity is maintained if -- i the entire amount received including money and any other_property is paid into an individual_retirement_account or individual reine annuity other than an endowment_contract for the benefit of such individual not later than the 60th day after the day on which he receives the payment or distribution subparagraph b of sec_408 in short provides that this paragraph does not apply to any amount described in subparagraph a i received by an individual from an ira account or annuity if at any time during the 1-year period ending on the day of such receipt such individual received page rr the part of a number of defendants any other amount described in that subparagraph from an ira account or annuity which was not includible in his gross_income because of the application of this paragraph with respect to the requested letter rulings it has been represented that taxpayers a and b and a court of competent jurisdiction against other similarly situated taxpayers initiated a lawsuit in various defendants named in the lawsuit including insurance_company n relating to a significant loss in value of ira_annuities described in code sec_408 owned by taxpayers a and b the lawsuit alleged various causes of said loss of value relating to activities taken either by insurance_company n company o or other named parties allegedly acting as the agents of insurance_company n said lawsuit was settled pursuant to said settlement taxpayers a and b recovered after attorney’s fees were deducted amount sec_5 and respectively which they rolled into iras described in code sec_408 within days of receipt the above reference settlement proceeds were designed ito replace a portion of taxpayers a and b’s ira annuity amounts lost due to alleged misconduct o including insurance_company n no distribution occutted until the issuance of the checks in amount sec_3 and by insurance_company n accordingly based on the particular facts and circumstances contained herein we hold that taxpayers a and b’s receipt of amount sec_5 and from insurance_company n as the replacement of a portion of their original ira_annuities pursuant to the above-reference lawsuit settlement and the payment of these amounts to the newly-established ind vidual retirement accounts at company t represent valid rollovers thus with respect to your ru ing requests we conclude as follows that taxpayer a’s receipt of amount from sure company n pursuant to the above described settlement of a lawsuit and its subsequent contribution into an ira set up and maintained in his name with company t constitutes a valid rollover transaction within the meaning of sec_408 of the internal_revenue_code and that taxpayer b’s receipt of amount from insurance_company n pursuant to the above described settlement of a lawsuit and its subsequent contribution into an ira set up and maintained in her name with company t constitutes a valid rollover transaction within the meaning of sec_408 of the internal_revenue_code this ruling letter is based on the assumption that taxpayers a and b’s ira_annuities were described in code sec_408 as represented it also assumes that the contributory iras set up and maintained in the names of taxpayers a and b described above meet the requirements of code sec_408 as represented representations made with respect thereto a copy of this letter has been sent to your authorized representatives in accordance with a power_of_attorney on file in this office additionally it assumes the correctness of all facts and page if you have any questions concerning this letter_ruling please contact fax who may be reached at not a toll-free number or esquire sincerely yours on slam rances v sloan manager employee_plans technical group enclosures deleted copy of this letter notice of intention to disclose


department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division jun tn ra-t3 le 97f legend company a company b company c country h dear this is in response to a request for a private_letter_ruling dated date as supplemented by correspondence dated date date and date submitted on your behalf by your authorized representatives concerning the tax treatment of dividends_paid on stock held by an employee_stock_ownership_plan esop within the meaning of sec_4975 of the internal_revenue_code authorized representatives have presented the following facts and representations in support of your request your company a is a united_states_corporation which is wholly owned by company b another united_states_corporation company b is wholly owned by company c which is a corporation in country h and is subject_to tax under code sec_881 on income that is not connected with a united_states trade_or_business stock ’ 2h as the shares of company c’s common_stock company c ar as oe 2c af 2k ab fe ake fe fe of ker ab feof fe oie 2c fe 2c ae fe ofc oe ok fe ake afc ake af ae 2s fe ake ake ake 2k ok afe ake ake ake ak 2a i fe 2h fe ke oie a ke page io goo ii oeic ioi i i gk ak a i ak ak ge ak fe ak ak ak ake ak fico icrc oro fri cioriioici foc cir ior oicri sigir oi io gir gigi gio a ik ae ak a a a ik ak a oiro igor gigi iiis ig ir gi a a ke ak a ake ake af ake ake feo ooo fe sk ak ak ak a ori odio io cii icici ris gi io i sk ack ak ak ak ak ak sooo icici aiag gi ci kx ak ak ake ak ak ak sago i rr i uk sg ak ak ak soic iii occ oo corio ioi rggi soi ioc the timing of corporate events including dividend payments occurs on the same day worldwide company c stock is traded on the new york ficc oooo goo ico ico oi ioi igor ici kak ak ici ak ak a ae stock exchanges io oo ioi gok gk ak a ak kg a ak ake ake ae or io igg io iorir ecg ak xk ak ak sk ak ak ioi a a ie ak ak ak ae ake ak company a maintains two retirement plans the ‘plans for its employees that include a cash- or-deferred arrangement under code sec_401 and are qualified under code sec_401 a company a intends to designate a portion of each plan as an esop proposed esops that will hold company c stock company a will apply for determination letters from the appropriate service area on the proposed esops company c pays dividends on its stock to shareholders once a year receive the dividends_paid with respect to the company c stock heid in the proposed esops net of any_tax withheld by company c as required under country h law or to reinvest the net dividends in company c stock in the proposed esops the proposed esops would permit all participants to elect either to under country h law tax is automatically withheld on payments of dividends by a country h corporation to foreign shareholders dividends_paid by company c with respect to company c stock to be held in the proposed esops are subject_to_withholding at a rate of approximately percent as owner of the shares to which the dividends relate and on behalf of the participants whose accounts hold the shares the proposed esops can recover a portion of the withholding directly from country h resulting in a net withholding rate of percent on these dividends thus only percent of each dividend declared on company c stock held in the proposed esops would be subject_to the election described above specifically participants in the proposed esops with accounts invested in company c stock as of the dividend record_date will receive the dividend less the full amount of country h withholding_tax this amount will be credited to participants’ accounts on the dividend payment_date in addition an agent for the trustee of the proposed esops will file for a partial refund of the withholding_tax on behalf of all such participants the partial refund will be received and allocated to the participants’ accounts approximately weeks after the dividend payment_date only participants with company c stock allocated to their accounts as of the record_date receive the refund because the annual dividend is declared and payable in the spring participants in the proposed esops will receive both the initial net dividend and the partial refund in the same plan page year and the same taxable_year of company a both the dividend and the partial refund will either be reinvested or distributed within that plan_year the balance of the dividend that will be withheld by the country h tax authorities is not available for refund company a will deduct only the amount of the dividends credited to the participants’ accounts both the initial net dividend payment and the amount refunded but not the amount of the dividend withheld that is non-refundable based on the above facts and representations company a requests the following rulings shares of company c stock are qualifying employer_securities under code sec_4975 and sec_409 shares of company c stock are applicable_employer_securities under code sec_404 and net dividends_paid on company c stock and subject_to the participant elections described above are deductible by company a under code sec_404 as added by the economic_growth_and_tax_relief_reconciliation_act_of_2001 for taxable years beginning on or after date code sec_4975 provides in pertinent part that the term employee_stock_ownership_plan means a defined_contribution_plan that is a stock_bonus_plan qualified under sec_401 and designed to invest primarily in qualifying employer_securities code sec_4975 states that the term qualifying_employer_security means any employer_security within the meaning of sec_409 code sec_409 states in general that the term employer_securities means common_stock issued by the employer or by a corporation which is a member of the same controlled_group which is readily_tradable on an established_securities_market in general that for purposes of this subsection the term controlled_group_of_corporations has the meaning given to such term by sec_1563 determined without regard to subsections a and e c of sec_1563 sec_409 provides code sec_1563 defines a parent-subsidiary_controlled_group of corporations as one or more chains of corporations connected through stock ownership with a common parent_corporation if a stock possessing at least percent of the total combined voting power of all classes of stock entitled to vote or at least percent of the total value of all shares of all classes of stock of each of the corporations except the common parent_corporation is owned within the meaning of subsection d by one or more of the other corporations and b the common parent owns within the meaning of subsection d stock possessing at least percent of the total combined voting power of all classes of stock entitled to vote or at least percent of the total value of shares of all classes of stock of at least one of the other corporations excluding in computing such voting power or value stock owned directly by such other corporations page code sec_1563 provides that a corporation which is a member of a controlled_group_of_corporations on december of any taxable_year shall be treated as an excluded_member of such group for the taxable_year including such december if such corporation is a foreign_corporation subject_to tax under sec_881 for such taxable_year sec_1_46-8 of the income_tax regulations provides in part that employer_securities are common_stock and securities convertible into common_stock of the employer or of a corporation that is a member of a controlled_group_of_corporations including the employer membership in a controlled_group for purposes of this section is determined under sec_414 of the code sec_1_414_b_-1 of the regulations provides in part that for purposes of code sec_414 the term members of a controlled_group means two or more corporations connected through stock ownership described in code sec_1563 or whether or not such corporations are component members of a controlled_group within the meaning of sec_1563 even though sec_1_46-8 of the regulations applies by its terms to trasops we believe that it also extends to esops for purposes of code sec_409 determination of whether a controlled_group exists in the present situation will be made without regard to sec_1563 which would operate to exclude company c if it were applicable since it is not applicable pursuant to sec_1_414_b_-1 of the regulations company c is included in the controlled_group together with company a and company b for purposes of sec_409 therefore the the service has previously ruled that until regulations are issued defining readily_tradable on an established_securities_market under code sec_409 this term would be considered to have the same general meaning as publicly traded under sec_54 b iv of the excise_tax regulations t d date sec_54_4975-7 states that the term publicly traded refers to a security that is listed on a national securities exchange registered under section of the securities exchange act of or that is quoted on a system sponsored by a national securities association registered under sec_15a b of the securities exchange act company c stock is traded on the new york stock exchange which is a national securities exchange registered under section of the securities exchange act of accordingly with respect to your first requested ruling we conclude that shares of company c stock are qualifying employer_securities under code sec_4975 and sec_409 with respect to your second and third requested rulings code sec_404 provides that in the case of a c_corporation there shall be allowed as a deduction for a taxable_year the amount of any applicable_dividend paid in cash by such corporation during the taxable_year with respect to applicable_employer_securities such deduction shall be in addition to the deduction allowed under sec_404 page code sec_404 as amended by the economic_growth_and_tax_relief_reconciliation_act_of_2001 egtrra p l stat date for taxable years beginning on or after date generally provides that the term applicable_dividend means any dividend which in accordance with the plan provisions -- i is paid in cash to the participants in the plan or their beneficiaries ii is paid to the plan and is distributed in cash to participants in the plan or their beneficiaries not later than days after the close of the plan_year in which paid iii is at the election of such participants or their beneficiaries i payable as provided in clause i or ii or ie paid to the plan and reinvested in qualifying employer_securities or iv is used to make payments on a loan described in sec_404 the proceeds of which were used to acquire the employer_securities whether or not allocated to participants with respect to which the dividend is paid code sec_404 provides that for purposes of this subsection the term applicable_employer_securities means with respect to any dividend employer_securities which are held on the record_date for such dividend by an esop which is maintained by a the corporation paying such dividend or b any other corporation which is a member of a controlled_group_of_corporations within the meaning of sec_409 which includes such corporation code sec_404 provides that the secretary may disallow the deduction under paragraph for any dividend if the secretary determines that such dividend constitutes in substance an avoidance or evasion of taxation notice_2002_2 lr b q a-2 states in pertinent part that under code sec_404 the election provided to esop participants with respect to dividends_paid on applicable_employer_securities must be offered in accordance with the terms of the plan and offer participants an election between a either i the payment of dividends in cash to participants or ii the payment to the esop and distribution in cash to participants not later than days after the close of the plan_year in which the dividends are paid_by the corporation and b the payment of dividends to the esop and reinvestment in employer_securities in the present case company a will maintain the proposed esops which will hold employer_securities company c stock upon which company c pays dividends we determined above that company a and company c are members of a controlled_group for purposes of code sec_409 of company c stock are applicable_employer_securities under code sec_404 therefore with respect to your second requested ruling we conclude that shares with respect to your third requested ruling the proposed esops will permit participants to elect either to receive from the proposed esops the dividends_paid on company c stock net of the page withheld tax that will not be refunded as described above or to reinvest these net dividends in company c stock participants will receive both the initial net dividend and the partial refund in the same plan_year and the same taxable_year of company a both the initial net dividend and the partial refund will either be reinvested or distributed within that same plan_year accordingly based on the facts and circumstances of this case we conclude with respect to your third requested ruling that net dividends_paid on company c stock and subject_to the participant elections described above are deductible by company a under code sec_404gii as added by egtrra for taxable years beginning on or after january this ruling letter is based on the assumption that the proposed esops will be qualified under code sec_401 and that they will meet the requirements of sec_4975 and that their related trusts will be tax-exempt under sec_501 at all times relevant to the transactions described herein this ruling letter is also based on the assumption that the participant elections described above meet the requirements set forth in notice_2002_2 this ruling letter is directed only to the taxpayer who requested it sec_61 k of the code provides that this ruling may not be used or cited as precedent if you have any questions about this letter please contact alice v lynch id at please refer to t ep ra t the original of this letter and a copy have been sent to your authorized representatives in accordance with the power_of_attorney on file in this office sincerely yours somme ue fon rances v sloan manager employee_plans technical branch tax_exempt_and_government_entities_division enclosures notice deleted copy of ruling letter


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 plr-118495-99 date date legend x d dear this letter responds to your letter dated date written on behalf of x requesting a ruling under sec_1362 of the internal_revenue_code that x's s_corporation_election will be effective as of the taxable_year beginning d according to the information submitted x was incorporated on d and it was decided that x would be an s_corporation the form_2553 election by a small_business_corporation however was not timely filed facts x requests a ruling that it will be recognized as an s_corporation effective for the taxable_year beginning d under sec_1362 law and analysis sec_1362 provides that a small_business_corporation may elect to be an s_corporation sec_1362 provides when an s election will be 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 beginning the year in which the election is made if an s election is made after the first two and one half months of a corporation's taxable_year then that corporation will not be treated as an s_corporation plr-118495-99 until the taxable_year after the year in which the s election is made sec_1362 provides that if an election under sec_1362 is made for any taxable_year after the date prescribed by sec_1362 for making the election or no sec_1362 election is made for any taxable_year and the secretary determines that there was reasonable_cause for the failure to timely make the election then the secretary may treat the election as timely made for such taxable_year conclusions after applying the law to the facts submitted and the representations made we conclude that x has established reasonable_cause for not making a timely election and is eligible for relief under sec_1362 accordingly if x makes an election to be an s_corporation by filing with the appropriate service_center a completed form_2553 containing an effective date of d for the election within days following the date of this letter then such election will be treated as timely made a copy of this letter should be attached to the form_2553 filed with the service_center a copy is enclosed for that purpose except as specifically set forth above no opinion is expressed concerning the federal tax consequences of the facts described above under any other provision of the code specifically no opinion is expressed concerning whether x is an s_corporation for federal tax purposes this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent under the power_of_attorney on file with this office we are sending a copy of this letter to your authorized representative sincerely yours william p o’shea chief branch office of the assistant chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes


cca_2016030315450658 id uilc number release date from -------------------- sent thursday march pm to ---------------------- cc bcc subject your question about sec_597 and sec_7507 you have raised a question about the application of sec_7507 in cases in which federal_financial_assistance ffa was provided to a failed bank bank that also reported taxable_income unrelated to the receipt of ffa due to its insolvency bank was closed and a bank regulatory agency agency was appointed as receiver pursuant to this transaction bank’s assets and liabilities were transferred to another bank and agency provided ffa to bank as set forth in sec_597 and the accompanying regulations agency in its fiduciary capacity as bank’s receiver filed bank’s tax_return for the taxable_year in issue bank reported taxable_income attributable to a litigation recovery which in turn generated a tax_liability none of bank’s tax_liability is attributable to its receipt of ffa bank through agency acting as bank’s fiduciary asserts that sec_7507 prevents the service from pursuing collection on the tax_liability we conclude that bank’s position is correct and you have requested that we clarify our views in writing sec_7507 provides that in the case of a bank that has ceased to do business by reason of bankruptcy or insolvency no tax shall be assessed or collected on account of such bank which shall diminish the assets thereof necessary for the full payment of all its depositors there is no dispute as to whether bank qualifies as a bank for purposes of sec_7507 the regulations under sec_7507 however seem to preclude application of sec_7507 in cases where the bankrupt or insolvent bank has transferred assets or liabilities to any person in a transaction in which ffa is provided see sec_301_7507-1 explaining that a bank will not be considered to have ceased to do business under sec_7507 on account of a transaction in which ffa is provided thus it appears that bank cannot rely upon sec_7507 in this case because bank transferred assets and liabilities as part of a transaction in which ffa was provided and thus bank never ceased to do business for purposes of sec_7507 this reading however is erroneous the regulations under sec_7507 insofar as they address transactions involving ffa were amended to reflect congressional intent upon enactment of the financial institutions reform recovery and enforcement act of publaw_101_73 firrea the legislative_history for firrea describes the intended application of sec_7507 to ffa transactions as follows f inancial assistance received by or paid with respect to financially troubled financial institutions is generally treated as taxable such assistance is deemed to be received by the financially troubled financial_institution at the time the assets of such institution are sold or transferred as a result the financial assistance generally will be offset by the net operating losses and built-in losses of the financially troubled financial_institution thus an acquired financially troubled financial_institution will generally have no net tax_liability resulting from the receipt or deemed receipt of financial assistance t he net operating losses and built-in losses of a financially troubled institution may not always be sufficient to offset the amount of financial assistance received or deemed received by the troubled institution in this regard the conferees intend that the regulatory authority granted by the bill may be exercised to limit the potential applicability of sec_7507 of the code in cases where financially troubled financial institutions are acquired in transactions in which federal_financial_assistance is provided nonetheless the conferees understand that the treasury_department may exercise the regulatory authority provided to it in this bill to issue regulations or other guidance providing that in certain circumstances no net tax_liability would be payable by financially troubled financial institutions as a result of the receipt of federal_financial_assistance h_r rep no date at pp footnotes omitted accordingly congress intended that ffa would be taxable to failed banks but no net tax_liability would generally result in instances where inclusion of ffa in a failed bank’s income resulted in a tax_liability congress intended that service would be able to assess and collect tax even if sec_7507 would otherwise apply and authorized the service to issue regulations to determine when assessment would be appropriate in this regard the regulations cited previously under sec_301_7507-1 were amended at the same time that regulations under sec_597 were issued see t d 1996_1_cb_103 final regs sec_1_597-6 provides if an institution is liable for income_tax that is attributable to the inclusion in income of ffa the tax will not be collected if it will be borne by agency the final_determination of whether the tax would be borne by agency is within the sole discretion of the commissioner the treasury_department in proposed the regulations that later became finalized as sec_1_597-6 and sec_301_7507-1 -9 d see fi-46-89 fed reg 1992_1_cb_1037 proposed regs the notice of proposed rulemaking nprm accompanying issuance of the proposed_regulations explains the noncollection policy eventually finalized in sec_1_597-6 and sec_301_7507-1 as follows the proposed amendments to sec_301_7507-1 and sec_301_7507-9 are intended to clarify the existing regulations under sec_7507 and to reflect the changes made by firrea that congress intended to affect sec_7507 text omitted sec_301_7507-1 is intended to prevent any institution from avoiding the income_tax consequences of receipt of ffa c b pincite thus the language of sec_301_7507-1 must be read to preclude application of sec_7507 only in cases where the item_of_income generating the tax_liability is attributable to ffa bank’s income for litigation recovery is not ffa income but merely happens to arise with respect to a taxpayer that also received ffa even if the tax in issue arose from ffa income the service would be required under sec_1_597-6 to determine whether the tax would be borne by agency before collecting the tax therefore we conclude that bank through agency acting as bank’s fiduciary can raise sec_7507 to the extent that collection of tax would diminish assets necessary for paying bank’s depositors ---------------------- ------------------------------------ --------------------------------------------------- -----------------------------------------------------


acknowledged significant advice may be disseminated cc ebeo-tl-n-1538-97 br2 agkelley acknowledged sca associate district_counsel louisville assistant chief_counsel employee_benefits and exempt_organizations significant service_center advice this responds to your request for technical assistance dated date in connection with questions posed by the self- employment_tax coordinator of the cincinnati service_center disclosure statement unless specifically marked acknowledged significant advice may be disseminated above this memorandum is not to be circulated or disseminated except as provided in paragraphs iii d and iv a of chief_counsel notice n this document may contain confidential information subject_to the attorney-client and deliberative_process privileges therefore this document shall not be disclosed beyond the office or individual s who originated the question discussed herein and are working the matter with the requisite need to know in no event shall it be disclosed to taxpayers or their representatives issues what is the correct method of taking the deduction provided by sec_1402 whether the taxpayer has an option in the method used to take the deduction provided by sec_1402 whether sec_1402 provides an optional method of calculating self-employment_tax liability whether the deduction provided by sec_164 of the internal_revenue_code for one half of self-employment_tax liability can be taken in computing net_earnings from self- employment under sec_1402 conclusions associate district_counsel louisville the deduction provided by sec_1402 is built into the calculation of self-employment_tax liability on form_1040 schedule se the taking of this deduction is reflected in the step on schedule se in which taxpayers multiply trade and business income by to arrive at net_earnings from self- employment see line of short schedule se and line sec_4a and sec_5b of long schedule se the only correct method of taking the deduction provided by sec_1402 is to complete the computation of self- employment_tax liability on the schedule se the sec_1402 deduction cannot be taken as a deduction on schedule c or as a deduction on schedule se additional to the deduction already built into the self-employment calculation on schedule se sec_1402 does not provide an optional method of computing self-employment_tax liability taxpayers must follow the computational method set forth on schedule se in calculating self-employment_tax liability the deduction provided by sec_164 cannot be taken in computing self-employment_tax liability under sec_1402 the deduction provided by sec_1402 is taken in place of the sec_164 deduction in calculating net_earnings_from_self-employment the deduction provided by sec_164 can only be taken as a deduction in calculating income_tax_liability as provided on line of form_1040 facts according to the information submitted issues have been raised about the calculation of liability for self-employment_tax different methods of taking the deductions provided by sec_164 and sec_1402 a have been proposed by taxpayers that are inconsistent with the forms and instructions provided by the service under the method as set forth in forms the deduction provided by sec_164 is taken on line of form_1040 the deduction provided by sec_1402 is built into the calculation of self-employment_tax liability on schedule se and is reflected in the computational step on line if short schedule se is used or line 4a or 5b if long schedule se the proposed methods below include one method raised by another service_center we also note that the numbering of the methods below does not correspond to the numbering used in the incoming correspondence associate district_counsel louisville in one method proposed method one the taxpayer attempts to take a deduction equal to the amount of the deduction provided by sec_1402 in calculating business income on schedule c for income_tax purposes the taxpayer apparently does not take the deduction for one-half of self-employment_tax liability provided by sec_164 in calculating federal_income_tax liability the amount calculated under schedule c is then treated as the net profit from schedule c for purposes schedule se ie line on short schedule se the taxpayer then also takes the computational step reflected on line ie multiplying the net profit from schedule c by in arriving at self-employment_tax liability the taxpayer’s self-employment_tax liability is considerably reduced under this method from the method permitted by service forms and also income_tax_liability may be reduced in a second method proposed method two the taxpayer does not take an additional deduction for income_tax purposes in calculating self-employment_tax liability the taxpayer reduces trade_or_business income by an amount equal to the amount of the deduction provided by sec_1402 and also takes the computational step provided by line of short schedule se ie multiplying the net profit from schedule c by under this method self-employment_tax liability is considerably reduced from the amount calculated on service forms in another method proposed method three a taxpayer has proposed that if the taxpayer has no income_tax_liability the taxpayer should be able to take the deduction allowed by sec_164 in computing self-employment_tax liability under this method of computation the taxpayer would take both the deduction allowed by sec_164 and the deduction allowed by sec_1402 in computing self-employment_tax liability no deduction would be taken in computing income_tax_liability because the sec_164 deduction does not reduce the taxpayer’s income_tax_liability this method also reduces self- employment_tax liability for the taxpayer from the amount calculated on service forms discussion sec_164 provides that in the case of an individual in addition to the taxes described in subsection a there shall be allowed as a deduction for the taxable_year an amount equal to one half of the taxes imposed by sec_1401 for such taxable_year associate district_counsel louisville sec_164 provides that for purposes of this chapter ie chapter - normal taxes and surtaxes the deduction allowed by paragraph shall be treated as attributable to a trade_or_business carried on by the taxpayer which does not consist of the performance of services by the taxpayer as an employee before the f amount can be determined a taxpayer must first compute the amount of the self-employment taxes imposed the self-employment taxes are imposed under sec_1401 self- employment_taxes are a specified percentage for of an individual’s net_earnings_from_self-employment under the first sentence of sec_1402 net_earnings are generally computed by subtracting trade_or_business deductions attributable to the business from the self-employed individual’s gross_income derived from that trade_or_business subject_to certain deductions and adjustments enumerated in sec_1402 sec_1402 provides that in computing gross_income and deductions and distributive_share of partnership ordinary_income or loss for purposes of determining net_earnings_from_self-employment in lieu of the deduction provided by sec_164 relating to deduction for one-half of self-employment taxes there shall be allowed a deduction equal to the product of -- a the taxpayer’s net_earnings from self- employment for the taxable_year determined without regard to this paragraph and b one-half of the sum of the rates imposed by subsections a and b of sec_1401 for such year as an initial matter there seems to be confusion concerning whether the schedule se incorporates the deduction provided by sec_1402 therefore we will attempt to show how the deduction is built into the schedule se the deduction provided by sec_1402 is taken by the taxpayer when the taxpayer performs the computational step of multiplying by trade_or_business income on line of the short schedule se or on line sec_4a and sec_5b of long schedule se the figure is derived by subtracting one half of the sum of the rates imposed by sec_1401 and b from the sum of the sec_1401 and b rates i sec_15 percent for one half of that sum is dollar_figure percent to determine the sec_1402 deduction that dollar_figure percent is multiplied by the net_earnings from self- associate district_counsel louisville employment calculated without regard to the sec_1402 after subtracting the deduction allowed by sec_1402 the taxpayer is left with his or her net_earnings from self- employment which will equal dollar_figure percent of the net_earnings_from_self-employment calculated without regard to sec_1402 thus the computational step of multiplying trade_or_business income by provides the taxpayer with the deduction provided by sec_1402 algebraically this can be expressed as follows where m equals the taxpayer’s net_earnings_from_self-employment without regard to the sec_1402 deduction sec_1402 deduction m x m x m the taxpayer’s net_earnings_from_self-employment equals m less the sec_1402 deduction since m equals the net_earnings_from_self-employment before taking the sec_1402 deduction expressed algebraically net_earnings_from_self-employment m - 0765m m this is exactly the computation that is reflected on the schedule se thus the sec_1402 deduction is built into the schedule se computation and taxpayers cannot take an additional deduction based on sec_1402 the purpose of the sec_1402 and sec_164 deductions is to place individuals who are subject_to self- employment_tax in parity with those who are subject_to the federal_insurance_contributions_act fica tax in computing net_earnings_from_self-employment sec_1402 of the code allows a deduction equal to a taxpayer’s net_earnings disregarding sec_1402 multiplied by one-half of the sum of the old-age_survivors_and_disability_insurance_tax rate and the hospital insurance rate sec_1402 provides that the deduction is in lieu of the deduction provided by sec_164 we interpret this to mean that solely for purposes of computing net_earnings from self- employment the sec_1402 deduction is in lieu of the trade_or_business deduction equal to the amount computed under associate district_counsel louisville sec_164 that would otherwise have been allowed under the first sentence of sec_1402 sec_1402 breaks the circular calculation that would occur if net_earnings were initially determined for seca_tax purposes providing a tentative sec_164 deduction which in turn would be used as a deduction attributable to the trade_or_business in the first sentence of a generating a new net_earnings figure the deduction under sec_1402 does not cancel the deduction under sec_164 which is available for income_tax purposes instead it is used merely as a computational adjustment to net_earnings in lieu of using the sec_164 amount as a trade_or_business deduction to adjust net_earnings under the first sentence of sec_1402 we considered and rejected an alternative interpretation of the phrase in lieu of - that the taxpayer can choose either the deduction for self-employment purposes under a or the income_tax deduction under sec_164 sec_1402 does not give the self-employed_person a choice between the deductions it unequivocally provides that sec_1402 is in lieu of the sec_164 deduction if the phrase in lieu of is interpreted to cancel the income_tax deduction under sec_164 the taxpayer cannot make an election to disregard sec_1402 in order to take a deduction under sec_164 the three proposed methods as described in the facts are not permissible methods of taking the sec_164 and sec_1402 deductions the positions set forth in the service’s publications and forms as to the computation of self-employment_tax liability are correct the first two proposed methods do not reflect the fact that taxpayers are getting the benefit of the sec_1402 deduction simply by following the method on the schedule se for computing liability these two proposed methods would give taxpayers the sec_1402 deduction twice under proposed method one the taxpayer proposes to take the deduction provided by sec_1402 on schedule c and for income_tax purposes however the deduction provided by sec_1402 may only be taken in computing net_earnings_from_self-employment for self-employment_tax purposes this deduction cannot be taken in computing income_tax_liability under sec_1 the language at the beginning of sec_1402 indicates that the paragraphs of sec_1402 such as sec_1402 apply for the computation of net_earnings_from_self-employment in associate district_counsel louisville determining a taxpayer’s self-employment_tax liability also the deduction provided by sec_1402 cannot be taken twice in computing self-employment_tax liability under this method the deduction is taken once on schedule c and again when doing the computation on schedule se as described above ie multiplying trade_or_business income by to arrive at net_earnings_from_self-employment under proposed method two the taxpayer would also be taking the sec_1402 deduction twice there is no authority providing that the taxpayer can take the sec_1402 deduction twice with regard to proposed method three the deduction allowed by sec_164 is reflected on line of form_1040 and correctly reflects the fact that the deduction may be taken only in computing income_tax_liability there is no option to deduct the deduction provided by sec_164 in computing net_earnings_from_self-employment the only deduction that may be made in computing net_earnings_from_self-employment is the deduction provided by sec_1402 the sec_1402 deduction is in lieu of the deduction provided by sec_164 the words in lieu of mean in place of or instead of thus under sec_1402 in computing net_earnings_from_self-employment in place of the deduction provided by sec_164 there shall be allowed a deduction computed under sec_1402 the language in lieu of means that the taxpayer does not get the deduction provided by sec_164 in calculating net_earnings_from_self-employment but instead gets the deduction provided by sec_1402 the requirement that for self-employment_tax purposes the deduction must be taken as computed under sec_1402 is supported by the language shall be allowed there is nothing in the language of the code that gives a taxpayer the option as to whether to take the sec_164 deduction or the sec_1402 in computing net_earnings_from_self-employment the taxpayer is required to use the deduction calculated under sec_1402 in computing net_earnings_from_self-employment ie the product of the taxpayer’s net_earnings_from_self-employment and one-half of the sum of the rates imposed under sub sec_1401 and b proposed method three would in effect interpret the sec_1402 language in lieu of as in addition to which is not consistent with the meaning of in lieu of the principle that the deduction provided by sec_164 may only be taken in computing income_tax_liability and not associate district_counsel louisville self-employment_tax liability is consistent with the legislative_history of this provision the conference_report in connection with the social_security amendments of 1983_2_cb_309 which enacted sec_164 and sec_1402 into the code stated as follows b effective in and thereafter the credit against self-employment_tax liability would terminate and be replaced with a system designed to achieve parity between employees and the self-employed under this system the base of the self-employment_tax would be adjusted downward to reflect the fact that employees do not pay fica tax on the value of the employer’s fica tax a deduction would be allowed for income_tax purposes for half of seca liability to allow for the fact that employees do not pay income_tax on the value of the employer’s fica tax h_r rep no 98th cong 1st sess pincite 1983_2_cb_342 this legislative_history indicates that the deduction provided by sec_164 for one half of seca_tax liability was intended to be a deduction for income_tax purposes only this deduction is designed to allow for the fact that employees do not pay income_tax on the value of the employer’s fica tax an employee who owes no income_tax or who would owe no income_tax if the value of the employer’s payment of fica tax were added to his or her gross_income gets no benefit from the fact that employees do not pay income_tax on the value of the employer’s fica tax similarly a self-employed_person who owes no income_tax should derive no benefit from the deduction provided by sec_164 in summary our position is that sec_164 and sec_1402 of the code are separate deductions available to all individuals who are subject_to self-employment taxes the deduction under sec_164 is taken above_the_line and is available for income_tax purposes only the deduction under sec_1402 is available only for determining net_earnings_from_self-employment and is built into the calculation of self-employment_tax liability on the current schedule se this interpretation is consistent with current service forms instructions and other guidance we find no support for associate district_counsel louisville the proposed computation methods in the statute or legislative_history associate district_counsel louisville if you have any question about this memorandum please contact al kelley at mary e oppenheimer assistant chief_counsel by jerry e holmes chief branch office of the associate chief_counsel employee_benefits and exempt_organizations


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 b06 plr-140122-14 date date legend ------------------------------------ -------------------------- taxpayer ----------------------------------------------------------- parent ------------------------------------------------------------ state a state b state c state d commission date a director ------- --------------- ---------- ------------ ------------------------------------------------------- ------------------ -------------------------------------------------------------------------------- ------------------------------------------------------------------------------------- ----------------------------------------------------- dear --------------- this letter responds to parent’s request made on behalf of taxpayer dated date for a ruling on the consequences under the normalization provisions of taxpayer’s use of the commission-approved formula rates as described below the representations set out in your letter follow taxpayer a single member limited_liability_company is an independent transmission utility engaged in the transmission of electricity and operates a high- voltage system in states a b c and d it is subject_to regulation by commission with respect to terms and conditions of services including the rates it may charge for its services taxpayer uses commission-approved formula rates that are set annually plr-140122-14 the formula uses a cost-of-service model on date a of each year taxpayer estimates its revenue requirement for the following calendar_year the service year based in part on the facilities in service at that time or expected to be placed_in_service during that year this estimate of taxpayer’s revenue requirement and a commission-approved rate of return are entered into the template for the formula to calculate the rates the rates for that calendar_year are determined under that formula approved by commission and go into effect on january of the following calendar_year with no additional action by commission in calculating its net annual revenue requirement for the formula taxpayer calculates average rate base all elements of average rate base are calculated using the same test period the service year taxpayer reduces its gross rate base by the average accumulated deferred income taxes when taxpayer estimates accumulated deferred income taxes for purposes of estimating it’s revenue requirement for the service year taxpayer does not use the proration formula required for future test periods by sec_1_167_l_-1 of the income_tax regulations average rate base is computed using monthly averages for plant balances including accumulated depreciation for this purpose depreciation begins when the asset is placed_in_service certain other elements of average rate base such as land held for future use materials_and_supplies prepayments and accumulated deferred income taxes are calculated using an average of the beginning and end of year balances in both cases the averages are calculated in accordance with the provisions of the commission-approved template the formula rate template contains a true-up mechanism under which the taxpayer compares its actual revenue requirement to its actually-billed revenues for the service year if billed revenue is greater than the actual revenue requirement for the service year the over-collection is refunded in customer bills within two years of the service year if billed revenue is less than the actual revenue requirement for the service year the under-collection is collected two years after the service year for both under and over collections a carrying_charge equivalent to commission’s standard refund interest rate is imposed commission at all times has required that all public_utilities under its jurisdiction use normalized methods_of_accounting taxpayer requests that we rule as follows the computation of average rate base by taxpayer with reference to 13-month average for plant and accumulated depreciation for a given service year and a simple average of the beginning- and end-of-year balances for accumulated deferred income taxes for the same service year complies with the consistency_requirement of the normalization rules for accelerated_depreciation under sec_168 of the internal_revenue_code plr-140122-14 in the event that the service does not agree with the taxpayer’s conclusion regarding the first issue taxpayer’s historical use of the averaging methodology described above is nevertheless not inconsistent with the requirements of sec_168 and therefore the sanctions for violation of the deferred tax normalization requirements involving disallowance of accelerated_depreciation do not apply to taxpayer as a result of its use of the historical averaging methodology employed the computation by taxpayer of accumulated deferred income taxes for purposes of calculating average rate base without application of the rules for future test periods under sec_1_167_l_-1 involving the proration formula complies with the normalization requirements of sec_168 in the event that the service does not agree with the taxpayer’s conclusion regarding issue sanctions for violation of the deferred tax normalization requirements involving disallowance of accelerated_depreciation do not apply as a result of the methodology employed law and analysis issue sec_1 and former sec_167 of the code generally provided that public_utilities were entitled to use accelerated methods for depreciation if they used a normalization method_of_accounting a normalization method_of_accounting was defined in former sec_167 in a manner consistent with that found in sec_168 sec_1 -1 a of the income_tax regulations provides that the normalization requirements for public_utility_property pertain only to the deferral of federal_income_tax liability resulting from the use of an accelerated method_of_depreciation for computing the allowance for depreciation under sec_167 and the use of straight-line_depreciation for computing tax expense and depreciation expense for purposes of establishing cost of services and for reflecting operating results in regulated books of account these regulations do not pertain to other book-tax timing differences with respect to state income taxes f i c a taxes construction costs or any other taxes and items sec_168 of the code provides that the depreciation deduction determined under sec_168 shall not apply to any public_utility_property within the meaning of sec_168 if the taxpayer does not use a normalization method_of_accounting in order to use a normalization method_of_accounting sec_168 requires that a taxpayer in computing its tax expense for establishing its cost of service for ratemaking purposes of establishing its cost of service for ratemaking purposes and reflecting operating results in its regulated books of account to use a method_of_depreciation with respect to public_utility_property that is the same as and a plr-140122-14 depreciation period for such property that is not shorter than the method and period used to compute its depreciation expense for such purposes under sec_168 if the amount allowable as a deduction under sec_168 differs from the amount that-would be allowable as a deduction under sec_167 using the method period first and last year convention and salvage_value used to compute regulated tax expense under sec_168 the taxpayer must make adjustments to a reserve to reflect the deferral of taxes resulting from such difference sec_168 of the code provides that one way the requirements of sec_168 will not be satisfied is if the taxpayer for ratemaking purposes uses a procedure or adjustment which is inconsistent with such requirements under sec_168 such inconsistent procedures and adjustments include the use of an estimate or projection of the taxpayer's tax expense depreciation expense or reserve for deferred taxes under sec_168 unless such estimate or projection is also used for ratemaking purposes with respect to all three of these items and with respect to the rate base in order to satisfy the requirements of sec_168 there must be consistency in the treatment of costs for rate base regulated depreciation expense tax expense and deferred tax revenue purposes here rate base depreciation expense and accumulated deferred income taxes are all calculated in consistent fashion - all are averaged over the same period while there are minor differences in the convention used to average all elements of rate base including depreciation expense on the one hand and accumulated deferred income taxes on the other for purposes of sec_168 it is sufficient that both are determined by averaging and both are determined over the same period of time thus the calculation of average rate base and accumulated deferred income taxes as described above complies with the consistency_requirement of sec_168 because of the conclusion reached above taxpayer’s second issue is moot and will not be considered further issue sec_1_167_l_-1 sets forth additional normalization requirements with respect to public_utility_property under sec_1_167_l_-1 a taxpayer does not use a normalization method_of_accounting if for ratemaking purposes the amount of the reserve for deferred taxes excluded from the rate base or treated as cost-free capital exceeds the amount of the reserve for the period used in determining the taxpayer's ratemaking tax expense sec_1_167_l_-1 also provides the procedure for determining the amount of the reserve for deferred taxes to be excluded from rate base or to be included as no-cost capital if in determining depreciation for ratemaking tax expense a period the test period is used which is part historical and part future then the amount of the reserve_account for this period is the amount of the reserve at the end plr-140122-14 of the historical portion of the period and a pro_rata amount of any projected increase to be credited to the account during the future portion of the period the pro_rata amount of any increase during the future portion of the period is determined by multiplying the increase by a fraction the numerator of which is the number of days remaining in the period at the time the increase is to accrue and the denominator of which is the total number of days in the future portion of the period sec_1_167_l_-1 makes it clear that the reserve excluded from rate base must be determined by reference to the same period as is used in determining ratemaking tax expense a taxpayer may use either historical data or projected data in calculating these two amounts but it must be consistent as explained in sec_1_167_l_-1 the rules provided in sec_1_167_l_-1 are to insure that the same time period is used to determine the deferred tax reserve amount resulting from the use of an accelerated method_of_depreciation for cost of service purposes and the reserve amount that may be excluded from the rate base or included in no-cost capital in determining such cost of services if a taxpayer chooses to compute its ratemaking tax expense and rate base exclusion amount using projected data then it must use the formula provided in sec_1_167_l_-1 to calculate the amount of deferred taxes subject_to exclusion from the rate base this formula prorates the projected accruals to the reserve so as to account for the actual time these amounts are expected to be in the reserve as explained in sec_1_167_l_-1 the formula in sec_1_167_l_-1 provides a method to determine the period of time during which the taxpayer will be treated as having received amounts credited or charged to the reserve_account so that the disallowance of earnings with respect to such amounts through rate base exclusion or treatment as no-cost capital will take into account the factor of time for which such amounts are held by the taxpayer the purpose of the proration formula is the same as that of the requirement for consistent periods discussed above to prevent the immediate flow-through of the benefits of accelerated_depreciation to ratepayers the proration formula stops flow- through by limiting the deferred tax reserve accruals that may be excluded from rate base and thus the earnings on rate base that may be disallowed according to the length of time these accruals are actually in the reserve_account the effectiveness of sec_1_167_l_-1 in resolving the timing issue has been limited by its failure to define some key terms nowhere does this provision state what is meant by the terms historical and future in relation to the period for determining depreciation for ratemaking tax expense the test period how are these time periods to be measured one interpretation focuses on the type or quality of the data used in the ratemaking process according to this interpretation the historical period is that portion of the test period for which actual data is used while the portion of the period for which data is estimated is the future period the second interpretation focuses on when plr-140122-14 the utility rates become effective under this interpretation the historical period is that portion of the test period before rates go into effect while the portion of the test period after the effective date of the rate order is the future period the first interpretation which focuses on the quality of the ratemaking data is an attractive one it proposes a simple rule easy to follow and to enforce any portion of the reserve for deferred taxes based on estimated data must be prorated in determining the amount to be deducted from rate base the actual passage of time between the date ratemaking data is submitted and the date rates become effective is of no importance but this interpretation of the regulations achieves simplicity at the expense of precision in other words it is overbroad the proration of all estimated deferred tax data does serve to magnify the benefits of accelerated_depreciation to the utility but this is not the purpose of normalization congress was explicit normalization in no way diminishes whatever power the utility regulatory agency may have to require that the deferred taxes reserve be excluded from the base upon which the utility's permitted rate of return is calculated h_r rep no 91st cong 1st sess in contrast the second interpretation of sec_1_167_l_-1 of the regulations is consistent with the purpose of normalization which is to preserve for regulated utilities the benefits of accelerated_depreciation as a source of cost-free capital the availability of this capital is ensured by prohibiting flow-through but whether or not flow-through can even be accomplished by means of rate base exclusions depends primarily on whether at the time rates become effective the amounts originally projected to accrue to the deferred tax reserve have actually accrued if rates go into effect before the end of the test period and the rate base reduction is not prorated the utility commission is denying a current return for accelerated_depreciation benefits the utility is only projected to have this procedure is a form of flow-through for current rates are reduced to reflect the capital cost savings of accelerated_depreciation deductions not yet claimed or accrued by the utility yet projected data is often necessary in determining rates since historical data by itself is rarely an accurate indication of future utility operating results thus the regulations provide that as long as the portion of the deferred tax reserve based on truly projected future estimated data is prorated according to the formula in sec_1_167_l_-1 a regulator may deduct this reserve from rate base in determining a utility's allowable return in other words a utility regulator using projected data in computing ratemaking tax expense and rate base exclusion must account for the passage of time if it is to avoid flow-through but if rates go into effect after the end of the test period the opportunity to flow through the benefits of future accelerated_depreciation to current ratepayers is gone and so too is the need to apply the proration formula in this situation the only question that is important for the purpose of rate base exclusion is the amount in the deferred tax plr-140122-14 reserve whether actual or estimated once the future period the period over which accruals to the reserve were projected is no longer future the question of when the amounts in the reserve accrued is no longer relevant at the time the new rate order takes effect the projected increases have accrued and the amounts to be excluded from rate base are no longer projected but historical even though based on estimates taxpayer uses formula rates with the elements determined by estimates of the various elements being averaged as discussed above rates go into effect as of the beginning of the service year as such the rates are in effect during the test year and the proration formula must be used the addition of the true up increases the ultimate accuracy of the rates but does not convert a future test period into a historical test period as those terms are used in the normalization regulations therefore taxpayer is required to apply the proration formula in calculating accumulated deferred income taxes for purposes of calculating rate base issue because the service has ruled in issue that taxpayer’s use of formula rates with true-up adjustments with carrying charges mandates use of the proration formula applicable to future test periods for the projected revenue requirement prospectively adhering to the service’s interpretation of sec_1_167_l_-1 may require taxpayer to seek and obtain an order from commission to make the necessary changes to the rate templates not simply unilaterally adjusting the calculations or the manner in which the templates are completed in the next annual projections or true-up adjustments if taxpayer must request these changes through a filing with commission taxpayer has represented that in the event of an adverse conclusion with respect to issue by the service it will make a filing with commission to amend its formula rate template within six months of receipt of this ruling letter requesting that commission apply a methodology in accordance with this letter using an effective date of the first month following the date of the filing made with commission following commission’s order in that filing taxpayer will prospectively apply the methodology consistent with this letter approved by commission until commission acts on the filing taxpayer will continue to use the methodology described above if taxpayer determines that it is not required to make a formal filing with commission to implement the computational changes required by the letter_ruling taxpayer would reflect the holding of the private_letter_ruling in its next annual projected revenue requirement filing for example assuming that the letter_ruling is received in date indicating that the projected revenue requirement is based solely on a future period and the actual revenue requirement used for the true-up mechanism is based solely on a historical period taxpayer would compute its year-end accumulated deferred income_tax amount for its beginning-of-year end-of-year average of we note that because taxpayer is using estimated data for the test period the test period at issue here constitutes a future test period under the first interpretation discussed above as well plr-140122-14 accumulated deferred income taxes based on application of the proration formula to the monthly net increases or decreases to its accumulated deferred income taxes for annual projected revenue requirement filings after receipt of the private_letter_ruling ie beginning with the filing due_date for the calendar-year test year and service period sec_168 of the code provides that the depreciation deduction determined under sec_168 shall not apply to any public_utility_property within the meaning of sec_168 if the taxpayer does not use a normalization method_of_accounting however in the legislative_history to the enactment of the normalization requirements of the investment_tax_credit congress has stated that it hopes that sanctions will not have to be imposed and that disallowance of the tax_benefit there the itc should be imposed only after a regulatory body has required or insisted upon such treatment by a utility see senate report no 92nd cong 1st sess 1972_2_cb_559 here taxpayer has used a template approved by commission to calculate formula-based rates commission has at all times required that utilities under its jurisdiction use normalization methods_of_accounting taxpayer also intended at all times to comply with the normalization rules however taxpayer concluded that the use of the true-up would allow the entirety of the rate calculation to be considered a purely historical period and thus not require the application of the proration formula described in sec_1_167_l_-1 as concluded above this conclusion is not in accord with the normalization rules however because both commission and taxpayer at all times sought to comply because taxpayer merely populated a commission-approved formula template rather than commission carefully considering the calculation and ordering its use by taxpayer and because taxpayer will take the corrective actions described above it is not currently appropriate to apply the sanction of denial of accelerated_depreciation to taxpayer conclusion sec_1 the computation of average rate base by taxpayer with reference to 13-month average for plant and accumulated depreciation for a given service year and a simple average of the beginning- and end-of-year balances for accumulated deferred income taxes for the same service year complies with the consistency_requirement of the normalization rules for accelerated_depreciation under sec_168 of the internal_revenue_code because of the conclusion reached in issue issue is moot the computation by taxpayer of accumulated deferred income taxes for purposes of calculating average rate base without application of the rules for future test periods under sec_1_167_l_-1 involving the proration formula for its projected revenue requirement does not comply with the normalization requirements of sec_168 the computation by taxpayer of accumulated plr-140122-14 deferred income taxes for purposes of calculating average rate base without application of the rules for future test periods under sec_1_167_l_-1 involving the proration formula for its actual revenue requirement used for the true-up mechanism complies with the normalization requirements of sec_168 if the taxpayer takes the corrective actions described above and assuming compliance by the commission with this methodology on a prospective basis sanctions for violation of the deferred tax normalization requirements involving disallowance of accelerated_depreciation do not apply as a result of the methodology employed except as specifically determined above no opinion is expressed or implied concerning the federal_income_tax consequences of the matters described above 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 representative 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