t c memo united_states tax_court robert forlizzo and judith ingram petitioners v commissioner of internal revenue respondent robert forlizzo petitioner v commissioner of internal revenue respondent docket nos filed date robert forlizzo and judith ingram pro sese in docket no robert forlizzo pro_se in docket no christopher a pavilonis for respondent memorandum opinion gerber judge after concessions the issue for decision is whether mr forlizzo petitioner is entitled to loss deductions for relating to his interests in certain partnerships background petitioner is an attorney licensed in the state of florida who received a master of laws in taxation from new york university and primarily practiced real_estate transactions law petitioner paradise development group pdg and other real_estate professionals formed multiple partnerships which were operated as special purpose entities spe to acquire and develop real_property in florida georgia iowa pennsylvania and south carolina pdg historically sold the projects upon completion pdg created an spe for each real_estate venture in which it participated and controlled the general_partner of each spe petitioner was a minority partner in several of the spes managed by pdg including the limited_partnerships pincitethese cases were reassigned from chief_judge foley to senior judge gerber by an order dated date there was no trial or testimony and the parties submitted these cases fully stipulated pursuant to rule unless otherwise indicated all section references are to the internal_revenue_code relating to the years in issue and all rule references are to the tax_court rules_of_practice and procedure issue mtw-houston l p paradise shoppes of perry l p win-88 ltd win-wexford ltd paradise shoppes of hammond crossing ltd ofp- summerville ltd win-98 ltd win-adams ridge ltd shoppes at glen lakes ltd gkk-mills civic l p ofp-hutson ltd and win iv ltd collectively partnerships petitioner also made nominal financial contributions to the partnerships received on average a profits interest in each of the partnerships handled legal matters and acted as the registered agent for the partnerships as the registered agent petitioner filed annual reports for some of the partnerships before during and after each of the partnerships had a principal_place_of_business in florida the partnerships obtained loans construction loans from different banks to finance the construction of the partnerships’ real_estate projects petitioner along with the other partners personally guaranteed the construction loans he was also at risk with regard to the partnerships’ construction loans and the construction loans were recourse_liabilities with respect to him before during and after the partnerships amended some of the agreements relating to these construction loans beginning in or about date pdg’s management contributed available cash resources to the partnerships so that the partnerships could remain viable going concerns management also began selling assets from several of the partnerships to fund the partnerships’ cashflow requirements during the commercial and residential real_estate markets declined and as a result pdg closed several offices laid off employees and considered restructuring the partnerships’ debts including the construction loans in date pdg initiated a meeting with its creditors and pdg’s founder and president gave a presentation on the state of the company and the partnerships pdg’s management believed that the cashflow was inadequate for pdg to remain a going concern or service the debt and the liquidity of the principals including pdg had been depleted management however was concerned that the value of the projects of each of the partnerships would be destroyed if the projects were halted the presentation provided four available courses of action cease operations shutdown liquidate existing projects and raw land in a chapter bankruptcy through a trustee d eed in lieu of foreclosure on raw land and non-profitable projects and complete only profitable projects c omplet e existing construction_project and control liquidation of raw land and completed projects in chapter bankruptcy by the existing management team and enter a consensual work out with banks fund completion of construction_project and control liquidation of raw land and completed projects in a n out of court restructuring pdg’s goals for restructuring were to complete the restructuring outside of bankruptcy to maximize value for stakeholders and complete over existing projects as of date of the partnerships had a positive net stabilized value2 and a positive net current value and of the partnerships had a negative current lender exposure petitioner’s schedules k-1 partner’s share of income deductions credits etc also show that during nine of the partnerships incurred losses and three generated income petitioner did not provide evidence ie appraisals or valuations establishing that any partnership or subject real_estate was valueless at the end of after the creditors’ meeting and as of date the underlying real_estate owned by the partnerships retained value and the lenders and mortgage holders had not foreclosed on any of the properties owned by the partnerships although pdg retained the services of a bankruptcy firm to assist with the restructuring neither pdg nor the partnerships had filed for bankruptcy pdg and the partners of each of the spes continued negotiating the restructuring of the debt obligations into on date petitioner filed his individual federal_income_tax return on which he did not report any losses relating to his interests in the 2stabilized value is the value of a property after it reaches stabilized occupancy 3we understand the term lender exposure to be the lender’s risk of loss exposure in the event of default partnerships petitioner determined that his interests in the partnerships were worthless on date but did not inform his tax_return_preparer of that determination on date petitioner filed an amended federal_income_tax return on which he claimed loss deductions relating to his interests in the partnerships on date respondent issued petitioner a notice_of_deficiency relating to and and issued petitioner and ms ingram petitioners a notice_of_deficiency relating to and on date petitioners while residing in florida timely filed petitions relating to the notices of deficiency and on date the court filed petitioner’s first amended petition which alleged that the notices of deficiency did not reflect the loss deductions relating to his interests in the partnerships on date the court filed petitioner’s second amended petition contending that if petitioner’s claimed worthless partnership_interest loss deductions are denied he would 4petitioner did not file a joint federal_income_tax return with ms ingram until and not be bound these cases were consolidated by an order dated date petitioner did not abandon his interests in the partnerships during and and he subjectively concluded that his interests in the partnerships were worthless as of date because petitioners resided in florida at the time the petition was filed an appeal of these cases would normally be to the u s court_of_appeals for the eleventh circuit the only remaining issue for decision is whether a closed and completed transaction resulting in a loss occurred as of date discussion pursuant to sec_165 a taxpayer may claim an ordinary_loss deduction relating to his investment in a partnership if the investment becomes worthless and sale_or_exchange treatment does not apply see 935_f2d_703 5th cir noting the court did not address the issue of worthlessness rev’g 93_tc_553 see also tucker v commissioner 5petitioner reported recaptured income on petitioners’ and joint federal_income_tax returns relating to his worthless partnership_interest loss deductions for mtw-houston l p ofp-hutson ltd and win-88 ltd 6a loss from worthlessness of a partnership_interest will be ordinary if there is neither an actual nor a deemed_distribution to the partner pursuant to sec_731 sec_741 or sec_752 see 97_tc_200 f 3d 11th cir aff’g tcmemo_2015_185 a loss relating to a worthless interest in a partnership must be evidenced by closed and completed transactions fixed by identifiable events actually sustained during the taxable_year in order to qualify as a deductible loss sec_1_165-1 income_tax regs determining the year for which a taxpayer can claim a loss deduction evidenced by a closed and completed transaction is a question of fact 326_us_287 a decline in the assets’ value or mere shrinkage is not sufficient to establish a closed or completed transaction necessary to justify a loss deduction pursuant to sec_165 see 77_tc_992 sec_1_165-1 income_tax regs formal bankruptcy liquidation insolvency or market events and conditions can sufficiently establish a closed and completed transaction necessary to justify a loss deduction relating to a worthless interest in a partnership see tucker v commissioner f 3d pincite holding that attempts to obtain additional capital or minimize losses established that property subject_to recourse_debt retained enough value to avoid being ‘worthless’ echols v commissioner f 2d pincite petitioner bears the burden_of_proof of establishing that each of his interests in the partnerships became worthless as the result of a closed and completed transaction during see rule a 503_us_79 respondent contends that petitioner’s recourse_liabilities relating to the construction loans precluded him from claiming a worthlessness loss deduction relating to his interests in the partnerships until a foreclosure sale and that his interests in the partnerships had value at the end of petitioner argues on brief that respondent has focused on the assets of the partnerships and he contends that his partnership interests had become worthless even though the partnerships held assets that retained value he further contends that his interests in the partnerships were worthless in regardless of the recourse_liabilities to which the partnerships’ assets are subject because they relate to the underlying properties held by the partnerships each of petitioner’s interests in the partnerships must be tested for worthlessness as of date see echols v commissioner f 2d pincite see also tucker v commissioner f 3d pincite the partnerships were spes with a sole purpose of holding and developing real properties which were encumbered by the construction loans as of date the partnerships 7the stipulations do not establish that petitioner maintained the required records or cooperated with respondent’s requests sec_7491 accordingly the burden_of_proof does not shift to respondent and remains with petitioner see sec_7491 generally had positive current and stabilized values and the properties they held retained value although the partnerships generally incurred losses petitioner did not submit any evidence relating to the values of the partnerships or the underlying properties which would indicate that his interest in each of the partnerships was worthless as of date to the contrary there was value remaining in the partnerships relating to the underlying properties which pdg and the partners including petitioner recognized would be lost if certain projects were not completed and properties were immediately foreclosed upon in addition the partnerships renegotiated the financing of the construction loans through to add value for the partners by minimizing losses in short petitioner failed to meet his burden_of_proof and did not show that his interest in any of the partnerships was worthless as of date see rule a tucker v commissioner f 3d pincite echols v commissioner f 2d pincite we accordingly hold that for petitioner was not entitled to deduct losses relating to his interest in any of the partnerships to reflect the foregoing decisions will be entered under rule


t c no united_states tax_court florida progress corporation subsidiaries petitioner v commissioner of internal revenue respondent docket no filed date u a public_utility filing consolidated federal_income_tax returns with p engaged in the retail and wholesale distribution of electricity and related_services federal_income_tax rates were reduced in pursuant to the tax_reform_act_of_1986 publaw_99_514 sec 100_stat_2372 creating an excess in deferred federal_income_tax collected from customers of u u was required to adjust utility rates in and to compensate for this overcollection u was allowed to collect funds equal to its projected fuel and energy conservation costs pursuant to regulatory law monthly collections remained fixed over a 6-month recovery_period in order to decrease the volatility of customers’ bills held u’s rate reductions from through to compensate for excess deferred federal_income_tax are not deductible business_expenses within the meaning of sec_1341 i r c and therefore p is not entitled to the beneficial treatment of sec_1341 held further overcollections for fuel and energy conservation costs are not income to p under sec_61 because u acquired funds subject_to an unconditional obligation to repay david be jacobson and richard p swanson for petitioner james f kearney for respondent opinion cohen judge respondent determined deficiencies in petitioner’s consolidated federal_income_tax for and in the amounts of dollar_figure dollar_figure and dollar_figure respectively after concessions by the parties the issues for decision are whether one of petitioner’s subsidiaries is entitled to compute its tax_liability for and pursuant to sec_1341 and whether funds overcollected pursuant to fuel and energy conservation cost_recovery rates constitute income under sec_61 unless otherwise indicated all section references are to the internal_revenue_code in effect for the years in issue and all rule references are to the tax_court rules_of_practice and procedure background the parties submitted this case fully stipulated pursuant to rule the stipulated facts are incorporated by this reference florida progress corporation petitioner 1s a corporation organized and existing under the laws of the state of florida at the time of the filing of the petition petitioner’s principal_place_of_business was located in st petersburg florida petitioner operates florida power corporation florida power a public_utility that provides electricity service to approximately million retail customers over big_number square miles of central and northern florida florida power also provides wholesale electricity to other electricity providers petitioner and its subsidiaries including florida power filed consolidated federal_income_tax returns reported income on a calendar_year and used the accrual_method of accounting during all of the years in issue florida power is subject_to the rules and regulations of both the florida public service commission fpsc and the federal energy regulatory commission ferc the fpsc regulates the rates that florida power may charge its retail customers whereas the ferc regulates the rates that florida power may charge its wholesale customers both the fpsc and the ferc allow florida power to charge its customers a rate for electricity calculated from two components the estimated costs of providing future services and an approved rate of return on its invested capital the projected amount of federal_income_tax that florida power will pay is a component of the estimated costs of providing future services excess deferred federal_income_tax the federal_income_tax expense that florida power uses in determining its costs of providing future services for rate- making purposes is generally different from the federal_income_tax expense that it currently owes to the government this difference is attributable to timing differences in recognition of items of income and expense for example the fpsc and the ferc allow florida power to use straight-line_depreciation for rate-making purposes while accelerated_depreciation is used for determining current taxable_income in an earlier year when accelerated_depreciation is greater than straight-line_depreciation this timing difference causes a utility to collect a higher federal_income_tax component for rate-making purposes than the income taxes currently owed to the government for that year this excess of the estimated federal_income_tax expense is referred to as deferred federal_income_tax expense ina subsequent year when the timing differences reverse the income_tax component that the utility charges yields collections that are less than the federal income taxes owed by the utility the utility uses the amounts that it overcollects in earlier years to pay the taxes owed in later years both the fpsc and the ferc require the establishment and maintenance of deferred income_tax accounts that represent the net cumulative amount of federal_income_tax expected to be paid in future years if the income_tax rate remains constant the deferred income_tax account will zero out once the timing differences between rate-making income and taxable_income expire customers of florida power receive the economic benefit of all deferred income taxes for as long as they are held by florida power the ferc treats deferred income_tax as a reduction to the capital rate base used to calculate the approved rate of return on florida power’s invested capital the fpsc treats deferred income_tax as zero cost capital meaning that deferred income_tax is used to fund services for the benefit of the ratepayers and no return is collected because it was the ratepayers who supplied the capital customers get the resulting economic benefit in reduced rates from through florida power collected revenues based on a 46-percent federal_income_tax rate and increased its deferred income_tax account by the amount of tax related to net_income accrued for rate-making purposes over the amount accrued for tax purposes however the tax_reform_act_of_1986 tra publaw_99_514 sec 100_stat_289 effective for and later years lowered the maximum federal corporate_income_tax rates to dollar_figure percent in and percent in asa result florida power’s accumulated deferred income_tax balance on date exceeded the amount of federal_income_tax that florida power would be expected to pay to the government in later years as of date all deferred federal_income_tax expense collected by florida power from its retail customers in years prior to had been completely reversed both the fpsc and the ferc reserve the power to order refunds of excess amounts collected for deferred income taxes however tra section e 100_stat_2146 provides that the normalization provisions of sec_167 and sec_168 of the internal_revenue_code would be violated if a utility were to reduce its excess deferred income_tax reserve more rapidly than as provided under the average rate assumption method aram tra section e applies to excess deferred income taxes attributable to timing differences related to depreciation and described in sec_167 and sec_168 of the internal_revenue_code protected excess deferred taxes under aram protected excess deferred income taxes can be reversed only as the timing differences that created them reverse in addition to protected excess deferred taxes florida power had accumulated excess amounts of deferred income_tax for other timing differences not subject_to tra section e unprotected excess deferred taxes examples of other timing differences which created unprotected excess deferred taxes include deductible state and local_tax certain pension costs and research_and_development costs these costs were deducted for federal_income_tax purposes and capitalized for rate-making purposes for the fpsc ordered florida power pursuant to fla admin code ann r 25-dollar_figure fla rule to return one-fifth of its total excess deferred income_tax to its retail customers fla rule dollar_figure generally provided that excess deferred income_tax be returned to customers over a period of years the return amounted to a refund of dollar_figure of unprotected excess deferred tax and dollar_figure of protected excess deferred tax the refund was made to retail customers in the form of monthly credits on customers’ electric bills under the heading monthly rate reduction florida power also entered into a settlement agreement with its wholesale customers for a return of excess deferred income_tax in under the terms of settlement and pursuant to ferc regulation florida power agreed to refund dollar_figure to its wholesale customers from its unprotected excess deferred tax and dollar_figure from its protected excess deferred tax the settlement agreement was made effective as of date but because the agreement was not finalized until date credits that wholesale customers were entitled to receive from january through october were not reflected on those months’ bills to compensate wholesale customers for credits they did not receive checks were issued to each wholesale customer the wholesale customers received credits on their november and december bills on date occidental chemical corporation florida power’s largest retail customer filed a complaint with the fpsc alleging that florida power’s rates should be reduced further in fla rule dollar_figure was repealed on date because the 5-year refund period violated the aram method prescribed by tra on date the fpsc approved a settlement reached by the parties in which florida power agreed to refund dollar_figure the remainder of unprotected excess deferred tax owed to retail customers and dollar_figure of protected excess deferred tax to florida power’s retail customers according to aram the refund was made in the form of monthly credits on customers’ electric bills during under the heading monthly rate reduction in florida power also entered into a settlement agreement with its wholesale customers to refund excess deferred income_tax under the terms of the settlement florida power agreed to refund dollar_figure the remainder of the unprotected excess deferred tax owed to wholesale customers and dollar_figure from its protected excess deferred tax according to aram the settlement agreement was made effective as of date but because the agreement was not finalized until date credits that wholesale customers were entitled to receive from january through august were not reflected on those months’ bills to compensate wholesale customers for credits they did not receive checks were issued to each wholesale customer the wholesale customers received credits on their september october november and december bills no interest component was ever included with any refund florida power did not take a deduction for the credits and refund checks instead the credits and refund checks were netted against taxable revenues for and thereby lowering florida power’s gross_income in both years the amount of refund that was returned to a particular retail customer was based on the projected amount of electricity to be provided to that customer during the refund period and was not determined by the amount of excess deferred income_tax paid if any by a particular customer between and in addition many customers who paid excess deferred income_tax between and did not receive any refund because they left florida power’s service area died or otherwise terminated their accounts -- - respondent has denied florida power the right to relief under sec_1341 with respect to the fpsc and ferc and returns of excess deferred federal_income_tax fuel and energy conservation costs both the fpsc and ferc allow florida power to charge its customers for its actual necessary and prudently incurred fuel costs florida power uses enriched uranium coal natural_gas and oil as fuel to generate electricity the fpsc also allows florida power to charge its customers for reasonable and prudent energy conservation costs florida power is required by the fpsc to develop plans for increasing efficiency and decreasing energy consumption within its service area reducing the growth rate of electricity demand benefits not only the individual customer who reduces his demand but also all other customers on the system who realize the immediate benefit of reduced fuel costs and the long-term benefit of deferring the need for additional generating capacity fuel costs are recovered from customers through fuel rates set by the fpsc or ferc which are stated separately on customers’ bills energy conservation costs are recovered through rates set by the fpsc only florida power is not permitted to mark up or otherwise earn a profit on amounts it charges its customers for fuel or energy conservation costs in order to calculate fuel and energy conservation rates florida power must provide the fpsc and ferc with data that estimate fuel costs energy conservation costs and projected sales over a 6-month recovery_period recovery periods run from april through september and october through march the agencies calculate a fuel and energy conservation cost per kilowatt hour of electricity consumed that remains level over the entire period the fpsc and ferc have determined that level pricing over a 6-month period is beneficial to customers because it reduces the volatility of customers’ monthly bills caused by fluctuating fuel prices and random energy_conservation_expenditures because the rates approved by the regulatory agencies are based on estimates the amount billed by florida power for fuel or energy conservation costs in a given month may be more or less than the costs actually incurred in that month however an over or underrecovery at the close of a given month may be increased or decreased by over or underrecoveries occurring in a subsequent month during the same recovery_period therefore any overrecovery balance as of december of any taxable_year could be reduced or eliminated as a result of underrecoveries occurring during january february or march of the following year but same rate period if over and underrecoveries for retail fuel and energy conservation rates do not cancel during a recovery_period the fpsc allows for a true-up adjustment during the succeeding two recovery periods the ferc allows for a true-up rate adjustment for wholesale fuel costs during the single succeeding recovery_period both the fpsc and ferc require that overrecoveries be returned and underrecoveries be collected with interest when a customer receives and pays a bill rendered by florida power the bill shows that the portions relating to fuel and energy conservation costs are based on estimates and when the estimate 1s compared to the actual cost of fuel the customer knows he will be required either to pay more or he will be entitled to a setoff on a future electricity bill however the customer does not know the amount of future true-up involved or whether it will result in an additional payment by the customer or an amount received from florida power funds collected from customers for fuel and energy conservation costs are not segregated in separate bank accounts nor held in trust by florida power at the end of and florida power had combined retail and wholesale fuel cost overrecoveries of dollar_figure and dollar_figure respectively at the end of florida power had a combined fuel cost underrecovery of dollar_figure in and florida power had energy conservation cost overrecoveries of dollar_figure dollar_figure and dollar_figure respectively petitioner included the overrecoveries in income and deducted the underrecovery on its consolidated federal_income_tax returns for these years respondent has denied petitioner’s request to exclude the overrecoveries from gross_income discussion application of sec_1341 petitioner argues that it is entitled to sec_1341 treatment for the amount by which florida power reduced utility rates in and to compensate for excess deferred federal income taxes sec_1341 provides in pertinent part sec_1341 in general ----if-- an item was included in gross_income for a prior taxable_year or years because it appeared that the taxpayer had an unrestricted right to such item a deduction is allowable for the taxable_year because it was established after the close of such prior taxable_year or years that the taxpayer did not have an unrestricted right to such item or to a portion of such item and the amount of such deduction exceeds dollar_figure then the tax imposed by this chapter for the taxable_year shall be the lesser_of the following the tax for the taxable_year computed with such deduction or an amount equal to-- a the tax for the taxable_year computed without such deduction minus b the decrease in tax under this chapter for the prior taxable_year or years which would result solely from the exclusion of such item or portion thereof from gross_income for such prior taxable_year or years b special rules -- subsection a does not apply to any deduction allowable with respect to an item which was included in gross_income by reason of the sale_or_other_disposition of stock_in_trade of the taxpayer or other_property of a kind which would properly have been included in the inventory of the taxpayer if on hand at the close of the prior taxable_year or property held by the taxpayer primarily_for_sale_to_customers in the ordinary_course_of_his_trade_or_business this paragraph shall not apply if the deduction arises out of refunds or repayments with respect to rates made by a regulated_public_utility if such refunds or repayments are required to be made by the government political_subdivision agency_or_instrumentality referred to in such section or by an order of a court or are made in settlement of litigation or under threat of imminence of litigation petitioner’s argument is essentially the same as the argument raised by the taxpayer in midamerican energy co v commissioner t c filed this date and we find no reason to reach a different conclusion in this case in midamerican energy co a taxpayer-utility held excess deferred federal_income_tax after federal_income_tax rates were reduced in -- - pursuant to tra the taxpayer was forced by regulatory law to reduce its rates in subsequent years to offset the excess deferred federal_income_tax a deductible expense is required by sec_1341 to gualify for relief under the statute this court held that the taxpayer’s method of decreasing its deferred federal_income_tax account resembled a reduction in rates rather than a deductible expense factors that led to this court’s conclusion were first the taxpayer had returned excess deferred income_tax to customer classes based upon current energy consumption not upon amounts each individual customer actually overpaid during the years of overcollection second no interest component was included with the refunds and third the taxpayer set off the amount to be refunded against future amounts owed for goods and services on customers’ bills rather than actually returning money to customers this court decided that the taxpayer was not repaying its customers the excess deferred federal_income_tax that it collected in prior years rather the rate reductions served only to reduce income in future years and did not directly compensate the taxpayer’s customers for prior overcollection id at __ slip op pincite because these same factors are present in the case at hand we conclude that florida power’s return of excess deferred federal_income_tax resembles a reduction in rates rather than a deductible expense -- - although petitioner argues that florida power paid a form of constructive interest on deferred income_tax because both the fpsc and the ferc calculated allowable rates using formulas that penalized florida power for deferred income_tax these rate formulas were used even before tra triggered the liability to return excess deferred income_tax therefore no interest became payable upon the formation of the obligation to return excess deferred income_tax which would have suggested that a liability had arisen at that point in time our holding also applies to the portion of returns made to wholesale customers by check these returns were carried out by check only because they represented funds that should have been refunded to customers under ferc regulations in previous months the refund should have been returned to wholesale customers starting months earlier in and months earlier in had florida power made these returns in the time required by ferc regulations they would have been carried out by setoff on customers’ bills combined with the other characteristics of the refunds this characteristic makes the returns by check resemble a reduction in rates rather than a deductible expense petitioner also claims that sec_1341 and sec_1_1341-1 f income_tax regs provide that utility refunds shall be eligible for sec_1341 treatment however the language of sec_1341 that refers to utility refunds and sec_1_1341-1 income_tax regs does nothing more than create an exception to the exclusion for the sale of inventory_items also found in sec_1341 therefore although a public_utility will not be excluded from the benefits of sec_1341 because its refund stemmed from a sale of property characterized as inventory it still must satisfy all the requirements of sec_1341 before it is eligible for relief under the statute because the refunds by florida power do not meet the deduction requirement petitioner is not eligible for sec_1341 relief inclusion of overrecovered costs in income the second issue addresses the proper tax treatment of a portion of florida power’s receipts constituting an overrecovery of fuel and energy conservation costs respondent argues that the claim_of_right_doctrine applies to require inclusion of overrecoveries in income under section 6l a according to respondent’s view petitioner would be entitled to a deduction in a subsequent year if and when the overrecoveries are actually refunded to customers respondent contends that overrecoveries are income because the obligation to refund was contingent on no underrecoveries arising in the later months of the recovery_period that would reduce or eliminate the amount to be refunded respondent claims that one should look to -- - the end of a recovery_period to determine whether a refund is required petitioner argues that such overrecoveries are not includable in income under sec_61 because the obligation to repay imposed by regulatory law was unconditional according to petitioner’s view florida power is required to refund an overrecovery from any given month in a subsequent month of the same recovery_period by setoff or according to the true-up adjustment imposed by regulatory law over subsequent recovery periods petitioner claims one should look at a monthly collection to determine whether a refund is required sec_61 defines gross_income as all income from whatever source derived congress enacted this text intending to use the full measure of its taxing power see 309_us_331 the definition of gross_income is construed broadly to reach any accession to wealth realized by a taxpayer over which the taxpayer has complete dominion 348_us_426 in determining whether a taxpayer enjoys ‘complete dominion’ the key is whether the taxpayer has some guarantee that he will be allowed to keep the money indianapolis power light co v 493_us_203 a claim of right exists when property or funds are received and treated by a taxpayer as belonging to him see 345_us_278 income received under a claim of right is taxable in the year of receipt even though the taxpayer may be required to return it at a later time see 286_us_417 if ina subsequent year the claim to the funds or property is determined to be invalid the taxpayer would be entitled to a deduction in the year of repayment however the amount of tax due and reported in the year of receipt is unaffected by the return of property or funds see 394_us_678 property or funds are not received under a claim of right when there is a substantial restriction on its disposition or use or when there is a fixed obligation to return the property or funds received see indianapolis power light co supra pincite 55_tc_1020 affd 471_f2d_738 3d cir in indianapolis power light co the supreme court dealt with the issue of whether deposits paid_by customers to assure the taxpayer of payment for future electricity were reguired to be included in income the deposits were received by the taxpayer subject_to an express obligation to repay either at the time service was terminated or at the time a customer established good credit so long as a customer fulfilled his legal - - obligation to make timely payments the deposit ultimately was refunded and both the timing and method of refund were within the control of the customer the customer could demand that the taxpayer return the deposit payment by check or by setoff on the customer’s next utility bill the court held that the test for whether deposit payments paid_by customers constitute income when received by the taxpayer depends upon the rights and obligations of the parties at the time the payments are made see id pincite the court decided that because it was within the customer’s domain to prevent a forfeiture of a deposit payment and because the customer rather than the taxpayer determined how and when a deposit payment was returned the payments in question did not constitute income to the taxpayer where the time and manner of repayment is within the control of the taxpayer the payments would constitute income see 106_tc_184 the return of overrecoveries of fuel and energy conservation costs are not within the control of florida power the 6-month recovery_period price setting and true-up adjustment are all set by the fpsc and ferc which implemented the pricing schemes to reduce the volatility of customers’ bills florida power is required by regulatory law to overcollect for fuel and energy conservation costs in certain months and to return those funds by setoff on customers’ bills in the later months of the recovery_period in order to create level pricing any remaining overrecoveries existing at the end of the recovery_period because of inaccuracies in estimating its projected costs are returned to customers pursuant to the true-up adjustment required by the fpsc and ferc florida power cannot change or alter the time or method of refunding the overrecoveries because the time and method of refunding overrecoveries is controlled by the fpsc and ferc rather than by florida power florida power does not have complete dominion over the overrecoveries and is not required to recognize them as income when received respondent argues that indianapolis power light co does not apply to this case because the supreme court was addressing only the question of whether certain payments by customers were advanced payments for services or were deposits respondent maintains that in this case the overrecoveries were paid to florida power as part of the compensation it receives for providing electricity service rather than in the form of a deposit and therefore the test for income announced in indianapolis power light co was not intended by the supreme court to apply to overrecoveries we reject respondent’s argument that the holding in indianapolis power light co should be construed so narrowly respondent is essentially making the same arguments in this case regarding overrecoveries that were rejected by the supreme court in indianapolis power light co with regard to deposits respondent argues that the overrecoveries should be included in income under sec_61 because the overrecoveries are property of florida power under a claim of right and subject_to a conditional obligation to repay the conditional obligation to repay vests only if an offsetting underrecovery does not occur before the end of the 6-month recovery_period however the true economic_substance of florida power’s obligation is that at the end of the month florida power is not entitled to keep the amount held as an overrecovery and it must return that amount according to regulatory law either by setoff during the remainder of the recovery_period or by the true-up adjustment our decision is consistent with 125_f3d_1442 fed cir in houston indus the court_of_appeals held that overrecoveries of fuel costs are not required to be included in income when the overrecoveries are part of a plan to create level pricing over a 12-month recovery_period a taxpayer-utility collected funds from its customers egqual to the fuel costs it expected to incur the collections were based on estimates and were followed by a reconciliation procedure to account for any over or underrecoveries the governing regulatory agencies required the taxpayer to pay interest on any overrecoveries the taxpayer argued that it was not required to report in gross_income overrecoveries for fuel - - costs that were in the taxpayer’s possession at the close of the year interpreting indianapolis power light co the court_of_appeals agreed with the taxpayer respondent claims that the outcome of this case should instead be controlled by 291_us_193 the taxpayer in brown was an insurance agent who received a commission from premiums_paid on insurance policies the insurance policies included a right of cancellation which when exercised required the insurance_company to refund the premiums_paid in the event of cancellation the taxpayer was required to refund to the insurance_company a portion of the commission he had received with respect to a canceled policy on his books the taxpayer recorded an estimate of his future liability to refund commissions and sought to exclude the estimate from gross_income the court rejected the argument of the taxpayer stating that the mere fact that some portion of x the commissions might have to be refunded in some future year in the event of cancellation or reinsurance did not affect its quality as income id pincite the situation of florida power is distinguishable from that of the insurance agent in brown brown dealt with contingent liabilities that may or may not have vested in future years in making his estimates the taxpayer had no idea which policies if any might cancel creating a liability on his part nor did he know the amount of his liability at the end of the year florida power however is subject_to a fixed and certain liability to refund overrecoveries and those overrecoveries are determinable immediately after receipt of payment by subtracting its collections for a given month by its costs actually incurred our holding is also distinguishable from our opinions in 100_tc_500 and continental ill corp v commissioner tcmemo_1989_636 affd 998_f2d_513 7th cir in southwestern energy co the taxpayer collected monthly utility fees that were based on the costs that it expected to incur for purchasing gas in the subseguent month because the pricing was based on estimates over or undercollections occurred at the end of every month at the end of the year the taxpayer was bound by regulatory law to calculate the net overcollection for the year and return that amount during the following year using this collection method the fuel cost charged to customers by the taxpayer fluctuated each month the purpose of the monthly gas collections was to allow the taxpayer to recoup its cost of gas purchased and not to create level pricing this court held that the obligation to return a net overcollection during the next year was not an immediately deductible expense in continental ill corp the taxpayer made fixed-term loans with floating interest rates to corporate borrowers - - however the loan agreements provided that if the total amount of interest_paid by a borrower over the life of the loan exceeded a preset fixed-rate cap the taxpayer would refund the excess the taxpayer included in income the amount of interest collected with each monthly payment only to the extent it did not exceed the fixed-rate cap respondent argued and this court agreed that the excess collections should be included in gross_income because a contingent obligation to repay does not constitute a restriction on use sufficient to prevent their being classified as income the excess collections in southwestern energy co and continental ill corp differ from the excess fuel and energy conservation costs collected by florida power in three significant respects first florida power is required to pay interest on its overrecoveries whereas in southwestern energy co and continental ill corp the taxpayer did not include an interest component in its refunds of excess collections second florida power burdened by additional accounting and administrative responsibilities derives no benefit from the regulatory imposed recovery system florida power is forced by the fpsc and ferc to overrecover its costs and then give refunds in later months in order to reduce the volatility of customers’ monthly bills caused by fluctuating fuel prices and random energy_conservation_expenditures the regulatory recovery method is - - designed to spread the costs of the expenditures over the 6-month recovery_period for the sole benefit of customers by contrast the recovery methods in southwestern energy co and continental ill corp benefited only the taxpayer and not the customer third in a subsequent month if an undercollection occurred in southwestern energy co or if interest dipped below the fixed-rate cap in continental ill corp the taxpayer did not immediately return overcollections from a prior month by setoff thus no refund occurred until the following year in southwestern energy co or after the end of the loan period in continental tll corp in any event no question was raised or considered whether overrecoveries constituted gross_income in the year of receipt the final argument of respondent is that by not including overrecoveries in income petitioner has improperly changed its method_of_accounting with respect to a material_item without the consent of the secretary consent is required by sec_446 which reads sec_446 requirement respecting change_of_accounting_method --except as otherwise expressly provided in this chapter a taxpayer who changes the method_of_accounting on the basis of which he regularly computes his income in keeping his books shall before computing his taxable_income under the new method secure the consent of the secretary c hange in method_of_accounting includes a change in the overall plan of accounting for gross_income or deductions or a change in the treatment of any material_item used in such overall plan sec_1_446-1 a income_tax regs a material_item is defined as any item which involves the proper time for the inclusion of the item in income or the taking of a deduction sec_1_446-1 a income_tax regs when an accounting practice does nothing more than postpone the reporting of income rather than permanently avoiding the reporting of income over the taxpayer’s lifetime it involves the proper time for reporting income see 93_tc_500 c hange in method_of_accounting does not include adjustment of any item_of_income or deduction which does not involve the proper time for the inclusion of the item_of_income or the taking of a deduction sec_1_446-1 b income_tax regs in saline sewer co v commissioner tcmemo_1992_236 this court held that for purposes of sec_446 a question of whether collections should be reported in income is different from a question as to the proper time when collections should be reported in income if a taxpayer seeks to change his prior reporting position regarding whether a particular item is income or not a taxpayer is not required to seek the secretary’s permission before filing thus sec_446 is inapplicable to the reporting of overrecoveries by florida power during the years in issue - - we have considered all remaining arguments made by both parties for a result contrary to those expressed herein and to the extent not discussed above they are irrelevant or without merit to reflect the foregoing and the concessions of the parties decision will be entered under rule


number release date id office uilc cca_2011032411482037 ---------- from ------------------- sent thursday date am to --------------- cc ----------- subject re question under sec_6227 a taxpayer may file a request for administrative adjust resulting in a refund within three years of the date the partnership return is filed a form 872-p will extend the period for fling such a request under sec_6227 the government may agree to such an extension even if the taxpayer is not under audit there is no unconditional right of the taxpayer to enter into a form 872-p so the government could decline to agree to an extension if the agreement is restricted to one issue we will not be able to assess tax related to other issues sec_6227 does not address whether a right to file an aar is limited to the items for which an extension is secured but that would be the most obvious interpretation


department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division sep number release date uil se t ep ra t a2 re dear this letter constitutes notice that your requests for waivers of the minimum_funding_standard for the pian for the plan years ending and have been denied this decision was conveyed to your authorized - representative by john heil of this office by telephone on date the pian is a collectively-bargained multiemployer defined_benefit_plan benefiting employees who are covered by various collective bargaining agreements between the union and currently contributing employers based on information submitted with the request the majority of contributing employers are involved in the trucking industry in particular the majority of contributing or the wholesale food distribution industry employers operate warehouses which service major retail supermarket chains and deliver product from the warehouses to the supermarkets some employers perform warehousing and distribution of food products directly to business and institutions a limited number of contributing employers are engaged in the warehousing and distribution of products unrelated to retail food distribution such as liquor as a result of the downturn in the economy after date there has been a serious decline in the market served by the contributing employers resulting in layoffs and in some instances buyouts some of the contributing employers have suffered a steady loss of their customer base to non-union competitors and some are contemplating a bankruptcy filing or acquisition by another company not participating in the plan two of the major contributing employers have ceased operations and another is closing a large warehouse these closings resulted in the loss of participants which represent of all participants in the plan major non-union national firms have also begun to encroach into the market areas served by the contributing employers and are in direct competition with them the plan has also suffered a steady erosion of assets since date the investment return of plan assets was affected severely by the downturn in financial markets terminating employees concerned with the state of the economy have requested single sum distributions in lieu of monthly annuity payments in increasing numbers to cover these single sum distributions plan assets had to be liquidated at depressed values as a result employer contributions would have to be increased by over to eliminate the funding deficiency such an increase would be a substantial financial hardship for at least of the contributing employers the plan trustees took or considered taking the followings steps to improve the plan’s financial position _ in addition to the contributions governed by collective bargaining which are continuing to be made by each of the contributing employers an additional of their respective share of the employer_withdrawal_liability has been assessed since the prospective elimination of the single sum distribution option prospectively adopting a lifetime average for purposes of computing the monthly annuity payments prospectively decreasing benefits by across the board prospectively eliminating the year and out benefit or assessing an additional dollar_figure per hour to properly fund this benefit prospectively modifying the vesting schedule encouraging longer periods of service by permitting up to years of credited service prospectively reducing benefits in conjunction with significant contribution rate increases and establishing a money_purchase_pension_plan for new contributing employers in a letter dated date the pian trustees were notified of our decision to tentatively deny the funding waiver requests and offered a conference of right the conference of right was held on date with the pension_benefit_guaranty_corporation in attendance during the conference the authorized representatives of the plan trustees described a rescue plan that incorporated many of the elements described above at the conclusion of the conference an additional days was afforded the plan trustees to provide additional information in support of their requests for funding waivers in particular we were concerned that the rescue plan described during the conference indicated that accumulated funding deficiencies would be generated in the plan in future years even if the funding waivers were granted since the conference of right the service and the pbgc have tried to obtain additional information that was promised to be forthcoming from the plan trustees and their authorized representatives in a telephone call to the pbgc on we were informed that the pbgc had not received any substantial new information since the conference of right despite repeated requests and that the pbgc would have no objection to the denial of the waiver requests on date one of the plan trustees’ authorized representatives was notified that the deadline for submitting additional information was date we received a reply from this representative on date confirming receipt of our correspondence and informing us that additional information would be forwarded to the service by date on date we received a letter from the representative in this letter the representative informed us that the trustees have made little progress in getting the contributing employers to agree to the rescue plan since the conference of right and have also experienced difficulties in getting contributing employers to agree to make additional contributions to the plan to resolve the plans funding issues the accumulated_funding_deficiency in the plan exceeds dollar_figure as of the rescue plan described by the plan trustees and their authorized representatives during the conference of right held on date has not been implemented because of resistance from certain of the plan’s contributing employers based on the information we have received to date it is not reasonable to conclude that the plan will continue only if the waivers are granted because a substantial number of contributing employers are unwilling to make the contributions necessary to adequately fund the plan furthermore the pbgc has no objection to the service moving forward with the denial of the requests accordingly your requests for waivers of the minimum_funding_standard for the plan years ending and have been denied you should note that excise_taxes under sec_4971 of the internal_revenue_code are currently due on the accumulated funding deficiencies in the plan for the plan years ending you should file a form_5330 as soon as possible to report and pay the taxes and 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 and to your we have sent a copy of this letter to the authorized representatives pursuant to a power_of_attorney on file in this office if you require further assistance in this matter please contact sincerely yours chal at director mployee plans


department of the treasury internal_revenue_service washington d c number info release date dollar_figure cc intl genin-148095-01 br2 date dear this is in response to your correspondence dated date specifically you request information regarding the u s tax treatment of short-term_capital_gain distributions made by a u s regulated_investment_company ric to its foreign shareholders the following is a brief analysis of the applicable internal_revenue_code provisions a foreign_person is subject_to a tax collected by way of withholding on u s source fixed and determinable annual and periodical fdap_income a dividend distribution from a u s_corporation is u_s_source_fdap_income however capital_gains generally are not considered fdap_income a distribution of earnings_and_profits from a ric is either characterized as an ordinary dividend which is subject_to the tax and withholding or as a capital_gain dividend which is not subject_to the tax a capital_gain dividend is treated by the shareholders of a ric as gain from the sale_or_exchange of a capital_asset held for more than year a capital_gain dividend is defined as any dividend which is designated as a capital_gain dividend by the ric in a written notice to its shareholders such designation is only proper however for portions of a distribution that represent the ric’s net_capital_gain the code defines net_capital_gain as the excess of net_long-term_capital_gain for the taxable_year over the net_short-term_capital_loss for the year thus net_short-term_capital_gain is not included in net_capital_gain because the code does not provide special treatment for ric distributions of net short- term capital_gain the distributions are treated as ordinary dividends accordingly a ric distribution of net short term capital_gain to nonresident_alien shareholders constitutes fdap_income and the ric has a duty to withhold the applicable tax this letter is informational and not a ruling or determination it has no binding effect on the internal_revenue_service sec_2 revproc_2001_1 2001_1_irb_9 if you desire date page guidance from the internal_revenue_service in the form of a letter_ruling you will need to comply with the requirements set forth in revproc_2001_1 including payment of the appropriate user_fee as specified in appendix a to rev_proc we hope this information is helpful if you have any further questions concerning this matter please contact laurie hatten-boyd of my office at not a toll-free call sincerely valerie mark senior technical reviewer office of associate chief_counsel international


internal_revenue_service number info release date uil date genin-106537-02 cc ita b5 dear this responds to your letter dated date enclosing comments of members of the committee on exempt_organizations and the task force your letter and enclosure request confirmation from the irs that certain grants made by charities described in sec_501 of the internal_revenue_code hereinafter the code to for-profit business entities affected by the september 11th terrorist attacks are excludible from income as gifts within the meaning of sec_102 of the code your letter was supplemented by a letter dated date enclosing examples of small to medium-sized businesses in lower manhattan that may receive these grants these examples were prepared by and the supplemental letter presents three common scenarios a grant made to replace destroyed property that was used in a trade_or_business for example a pushcart vendor may receive a grant to provide the funds necessary to replace the pushcart destroyed in the terrorist attacks a grant made to assist relocation and reconstruction of a business for example a company may receive a grant to assist in relocating to new office space and in reconstructing its business records in order to continue in business a grant made to assist a business in meeting payroll and other operating_expenses for example a company experiencing a significant loss of business since the terrorist attacks may receive a grant to assist it in temporarily meeting its payroll rent and other ongoing operational expenses the supplemental letter states that in providing aid to businesses located in lower manhattan in close proximity to the world trade center site charities seek to provide relief to the poor and distressed and to combat community deterioration your letter does not ask however and this letter does not address in what circumstances a grant to a for-profit business would be consistent with the grantor’s charitable purposes under sec_501 of the code the letter additionally states that it is expected that charities will adopt and follow certain procedures in selecting business recipients to ensure that the grants will further charitable purposes and satisfy the requirements of sec_501 of the code for example charities are expected to require businesses seeking grants to provide detailed information describing operations and losses it is also expected that charities will require businesses to use grant funds solely in accordance with the intended uses and allow charities access to financial records to evaluate whether the grant funds are being used as intended conclusion an examination of the facts and circumstances surrounding a sec_501 charity’s transfer to a for-profit business will govern whether the business can exclude the amount transferred from gross_income under sec_102 of the code an important factor is whether the charity makes the transfer with donative_intent we believe that transfers by sec_501 charities to businesses in the examples described in the november 19th letter and similar scenarios will qualify as gifts under sec_102 of the code assuming the transfers are primarily motivated by charitable or similar impulses and not by moral or legal obligations or anticipation of economic benefit and are not in return for services in these examples we believe that the expenses_incurred for business purposes consistent with the charity’s grant are allocable to funds excluded from the business’ gross_income under sec_102 of the code accordingly under sec_265 of the code deductions of expenses for those business purposes are not allowed to the extent of the excluded amounts a sec_102 analysis sec_61 of the code provides that except as otherwise provided gross_income means all income from whatever source derived this definition encompasses any item representing undeniable accessions to wealth clearly realized and over which the taxpayers have complete dominion 348_us_426 reh’g denied 349_us_925 sec_102 of the code provides that gross_income does not include the value of property acquired by gift neither the code nor legislative_history accompanying sec_102 defines the term gift a leading interpretive authority on the meaning of the term gift_for sec_102 purposes is duberstein v 363_us_278 in duberstein the supreme court considered two cases involving payments made in a context with business overtones id pincite the court noted that a gift proceeds from a detached and disinterested generosity and is made out of affection respect admiration charity or like impulses if the payment proceeds primarily from any moral or legal duty or from the incentive of anticipated benefit of an economic nature it is not a gift further where the payment is in return for services rendered it is irrelevant that the donor derives no economic benefit from it id citations omitted thus under duberstein a factual analysis of the circumstances surrounding the transfer in each particular case is necessary to determine the dominant reason for the transfer and whether the circumstances support a finding of donative_intent insight into a transferor’s intention can be gained by examining the factors such as the economic need of the recipient that the transferor considered in deciding whether to make the transfer and the form of assistance see 363_us_299 since duberstein the courts have consistently applied its test to determine whether a transfer is a nontaxable_gift however there have been very few reported cases in which gift treatment has been claimed for a transfer to a for-profit business and in each of those cases the courts concluded that the transfers were not excludible gifts for example in 42_tc_396 a for- profit publisher solicited contributions to continue publishing its newspaper the court applied the duberstein intent test to transfers to the corporation and determined the contributions in issue were not gifts under sec_102 because the funds were not furnished with detached and disinterested generosity but were furnished by the contributors to obtain something the contributors desired namely the continued publication of the newspaper id pincite see also 21_tc_742 aff’d 219_f2d_834 10th cir minister who solicited funds on a radio program had to report the contributions as income because the contributions were not gifts but given in order to continue the radio program the opinion is prior to duberstein but consistent with its test 27_tc_722 aff’d 254_f2d_105 3d cir contributions provided by residents to a business in order for the residents to receive television signal transmission services were not gifts or contributions to capital but part of the price for services we have found no reported case in which it has been asserted that an outright transfer from a charity to a for-profit business was a nontaxable_gift under sec_102 the absence of authority relating to the tax treatment by the recipient of such transfers is consistent with our understanding that it is highly unusual for charities to make outright transfers to for-profit businesses cf revrul_74_587 1974_2_cb_162 charitable purposes may be served by providing low-cost or long-term loans to or purchasing equity interests in businesses in economically depressed areas we nonetheless believe that such a transfer is properly excluded from the recipient's gross_income under sec_102 if it constitutes a gift under the duberstein standard thus such a transfer may be an excludible gift to the recipient under sec_102 if it proceeds from a detached and disinterested generosity is made out of affection respect admiration charity or like impulses is not made from any moral or legal duty nor the incentive of anticipated benefit of an economic nature and is not in return for services rendered accordingly assuming the transfers by charities to businesses in the examples described in the november 19th letter and similar scenarios primarily proceed from charitable or similar impulses motivated by the needs of the recipient and not from moral or legal obligations or anticipation of economic benefit and are not in return for services the transfers will qualify as gifts under sec_102 of the code cf revrul_99_44 1999_2_cb_549 payment made by charity to individual that responds to individual’s needs and does not proceed from any moral or legal duty is motivated by detached and disinterested generosity similarly if a recoverable grant under which repayment is only required under certain circumstances constitutes a gift from the charity to the business the business realizes no income under sec_102 of the code b sec_265 if a recipient for-profit business properly excludes a sec_501 charity’s transfer from gross_income under sec_102 of the code then the rules preventing double tax benefits apply for example sec_265 of the code disallows any deductions which are allocable to one or more classes of income wholly exempt from federal income taxes the purpose of sec_265 is to prevent a double tax_benefit sec_265 applies where tax exempt_income is earmarked for a specific purpose and deductions are incurred in carrying out that purpose in that event it is proper to conclude that some or all of the deductions are allocable to the tax exempt_income revrul_83_3 1983_1_cb_72 mod in part revrul_85_96 1985_2_cb_87 expenses allocable to allowances excluded under sec_107 mod in part revrul_87_32 87_1_cb_131 to reflect sec_265 of the code regarding certain housing allowances a number of reported cases have concluded that deductions are disallowed under sec_265 because they were allocable to tax-exempt_income see eg 201_fsupp_155 e d la english teacher denied deduction for expenses_incurred for literary research trip to england because the expenses were allocable to a tax-exempt gift and fellowship_grant accord 88_tc_188 sec_265 barred indian_tribe member from deducting his farm_losses and an investment_tax_credit for farm equipment from unrelated taxable_income because his farm income was exempt from tax 78_tc_989 sec_265 barred a veteran pilot from deducting the cost of flight-training classes to the extent they were paid with tax-exempt reimbursement from the veterans’ administration aff’d on other grounds 710_f2d_1400 9th cir based on definition of an expense under sec_162 court denied pilot’s expense deductions that were later reimbursed by the veterans’ administration in the scenarios presented we believe that the expenses_incurred for business purposes consistent with the charity’s grant are allocable to funds excluded from the business’ gross_income under sec_102 of the code as a consequence under sec_265 of the code deductions of expenses for those business purposes are not allowed to the extent of the excluded amount for example if a company receives a grant from a sec_501 charity to help pay the company’s payroll expenses and the grant is excludible from gross_income under sec_102 of the code sec_265 disallows the company’s current deductions allocable to those payroll expenses we hope you will find our discussion of the law helpful please do not hesitate to call me at if you have any questions sincerely lewis j fernandez deputy associate chief_counsel income_tax and accounting cc


sicnificant index number department of the treasury ’ internal_revenue_service washington d c tax_exempt_and_government_entities_division jul se -tiep ra ar re taxpayer dear this letter constitutes notice that approval has been granted for your request for a 5-year automatic_extension for amortizing the unfunded liabilities as of date for the above-named plan which are described in sec_431 and sec_431 of the internal_revenue_code code and sec_304 and sec_304 of the employee_retirement_income_security_act_of_1974 erisa this extension is effective with the plan_year beginning date this extension applies to the amortization charge bases as identified in your application submission established as of july total outstanding balance of dollar_figure as of that date with a the extension of the amortization periods of the unfunded liabilities of the plan was granted in accordance with sec_431 of the code sec_431 of the code requires the secretary to extend the period of time required to amortize any unfunded_liability of a plan for a period of time not in excess of years if the plan submits an application meeting the criteria stated in sec_431 the plan has submitted the required information to meet the criteria in sec_431 including a certification from the plan’s actuary that i absent the extension under subparagraph a the plan would have an accumulated_funding_deficiency in the current plan_year or any of the succeeding pian years ii the plan_sponsor has adopted a plan to improve the plan's funding status iii the plan is projected to have sufficient assets to timely pay expected benefits and anticipated expenditures over the amortization period as extended and iv the notice required under paragraph a has been provided we have sent a copy of this letter to the ' to the and to your authorized representative pursuant to a power_of_attorney on file in this office this ruling is directed only to the taxpayer that requested it sec_6110 of the internal_revenue_code provides that it may not be used or cited by others as precedent if you require further assistance in this matter please contact sincerely yours rz david m ziegler manager ep actuarial group cc


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 fip b01 plr-103080-16 date date legend parent subsidiary investment adviser law firm accounting firm state a date date date date month month year ------------------------------------------------------ ---------------------- --------------------------------------------------- ---------------------- ----------------------------------------------------------------------- ---------------------- ---------------------------------------- ------------ ------------------------- ----------------------- --------------------------- ------------------------ --------- -------------- ------ plr-103080-16 dear ----------------- this responds to a letter dated date submitted on behalf of parent and subsidiary collectively taxpayers taxpayers request an extension of time under sec_301_9100-1 and sec_301_9100-3 of the procedure and administration regulations to elect to treat subsidiary as a taxable_reit_subsidiary trs of parent under sec_856 of the internal_revenue_code code facts parent is a state a limited_liability_company formed on date and began operations on date as of formation parent defaulted to an entity disregarded as separate from its owner for federal_income_tax purposes parent has not yet filed an initial federal_income_tax return parent intends to elect to be treated for federal_income_tax purposes as a real_estate_investment_trust reit under sec_856 by filing form reit u s income_tax return for real_estate_investment_trusts on or before date parent was formed with the intention of holding through a subsidiary a hotel property subsidiary is a state a limited_liability_company that was formed on date and began operations on date subsidiary submitted a form_8832 entity classification election seeking late election relief under revproc_2009_41 2009_39_irb_439 prior to the due_date of its first income_tax return to make an election to be classified as a domestic_corporation effective date form_8832 was filed on date and is currently pending with the internal_revenue_service service entity control unit taxpayers represent that they always intended to make an election for subsidiary to be a trs to satisfy the requirements of sec_856 taxpayers were formed by and currently are managed by investment_advisor investment_advisor engages outside tax professionals for tax_advice relating to many of the tax obligations of the entities it manages investment_advisor engaged law firm and accounting firm to advise investment_advisor with respect to certain legal and tax matters related to the hotel property transaction involving taxpayers investment_advisor believed that its external tax advisors filed the federal_income_tax forms required to elect to treat parent as a reit and to treat subsidiary as a trs including the preparation of form_8875 taxable_reit_subsidiary election in month of year however individuals from law firm and accounting firm participated in a conference call to discuss a different real_estate_transaction in which law firm was preparing reit-related elections for investment_advisor during the call the trs election that was believed to have been filed on behalf of taxpayers was discussed it was realized that due to an apparent miscommunication on who was to prepare and file the trs election the election inadvertently might not have been filed timely when the trs election could not be located accounting firm in month of plr-103080-16 year contacted the service and determined that there was no trs election on subsidiary’s account in the master_file investment_advisor requested advice from accounting firm on how to proceed because the desired effective date of date for subsidiary’s trs election is more than months and days prior to the discovery of the oversight form_8875 cannot be timely filed with an effective date of date as such accounting firm advised investment_advisor to submit a request for relief under sec_301_9100-1 for an extension of time to file the election under sec_856 taxpayers represent that notwithstanding the fact that no trs election was made by taxpayers for subsidiary parent and subsidiary have continually been treated as a reit and trs respectively since date all relevant tax years of taxpayers remain open and are not closed under the statute_of_limitations in support of their letter_ruling request taxpayers submitted affidavits from investment advisory accounting firm and law firm as required by sec_301_9100-3 taxpayers make the following additional representations the request for relief was filed by taxpayers before the failure to make the regulatory election was discovered by the service granting the relief will not result in parent or subsidiary having a lower tax_liability in the aggregate for all years to which the election applies than they would have had if the elections had been timely made taking into account the time_value_of_money taxpayers are not seeking to alter a return position for which an accuracy- related penalty has been or could have been imposed under sec_6662 of the code at the time taxpayers requested relief and the new position requires or permits a regulatory election for which relief is requested being fully informed of the required regulatory elections and related tax consequences taxpayers did not choose to not file the election taxpayers have not used hindsight to seek an extension of time to make the trs election no specific facts have changed since the due_date for making the election that makes this election advantageous to either parent or subsidiary plr-103080-16 law and analysis sec_856 of the code provides that a reit and a corporation other than a reit may jointly elect to treat such corporation as a trs to be eligible for treatment as a trs sec_856 provides that the reit must directly or indirectly own stock in the corporation and the reit and the corporation must jointly elect such treatment the election is irrevocable once made unless both the reit and the subsidiary consent to its revocation in addition sec_856 specifically provides that the election and any revocation thereof may be made without the consent of the secretary in announcement 2001_1_cb_716 the service announced the availability of new form_8875 taxable_reit_subsidiary election according to the announcement this form is to be used for tax years beginning after for eligible entities to elect treatment as a trs the instructions to form_8875 provide that the subsidiary and the reit can make the election at any time during the tax_year however the effective date of the election depends upon when the form_8875 is filed the instructions further provide that the effective date of the election cannot be more than months and days prior to the date of filing the election or more than months after the date of filing the election if no date is specified on the form the election is effective on the date the form is filed with the service sec_301_9100-1 of the procedure and administration regulations provides that the commissioner has discretion to grant a reasonable extension of time to make a regulatory election or a statutory election but no more than months except in the case of a taxpayer who is abroad under all subtitles of the code except subtitles e g h and i sec_301_9100-1 defines a regulatory election as an election whose due_date is prescribed by regulations or by a revenue_ruling a revenue_procedure a notice or an announcement published in the internal_revenue_bulletin sec_301_9100-3 through c i sets forth rules that the service generally will use to determine whether under the particular facts and circumstances of each situation the commissioner will grant an extension of time for regulatory elections that do not meet the requirements for automatic extensions under sec_301_9100-2 sec_301_9100-3 provides that subject_to paragraphs b i through iii of sec_301_9100-3 when a taxpayer applies for relief under this section before the failure to make the regulatory election is discovered by the service the taxpayer will be deemed to have acted reasonably and in good_faith sec_301_9100-3 provides that a reasonable extension of time to make a regulatory election will be granted only when the interests of the government will not be prejudiced by the granting of relief sec_301_9100-3 provides that the interests of the government are prejudiced if granting relief would result in the taxpayer having a lower tax_liability in the aggregate for all taxable years to which the regulatory election applies than the taxpayer would have had if the election had been timely made taking into account the time_value_of_money plr-103080-16 conclusion based on the information submitted and representations made we conclude that taxpayers have satisfied the requirements for granting a reasonable extension of time to elect under sec_856 to treat subsidiary as a trs of parent effective as of date accordingly taxpayers have days from the date of this letter to file their intended elections this ruling is limited to the timeliness of the filing of forms this ruling’s application is limited to the facts representations code sections and regulations cited herein 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 in particular no opinion is expressed with regard to whether parent qualifies as a reit or whether subsidiary otherwise qualifies as a trs under part ii of subchapter_m of the code no opinion is expressed with regard to whether the tax_liability of taxpayers is not lower in the aggregate for all years to which the election applies than such tax_liability would have been if the election had been timely made taking into account the time_value_of_money upon audit of the federal_income_tax returns involved the director’s office will determine such tax_liability for the years involved if the director’s office determines that such tax_liability is lower that office will determine the federal_income_tax effect the ruling contained in this letter is based upon information and representations submitted by taxpayers and accompanied by a penalty of perjury statements executed by appropriate parties 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 this ruling is directed only to the taxpayers requesting it sec_6110 of the code provides that it may not be used or cited as precedent plr-103080-16 in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely ___________________________ steven harrison branch chief branch office of associate chief_counsel financial institutions products enclosures copy of this letter copy for sec_6110 purposes cc


internal_revenue_service number release date index number ---------------------------------------------- ---------------------------------------------- ------------------------------------- ------------------------------ in re ------------------------------------------ legend department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------------------- id no ----------- ----------------- telephone number ---------------------- refer reply to cc psi b04 plr-103291-13 date date --------------------- -------------------- ------------------- ---------------------------------------------------------------------- ------------------------------------------------------------------------------------- decedent son daughter trust law firm investment firm --------------------------- year year date x ------- ------- ----------------------- ------------ dear ----------------------------------- this responds to your personal representative’s letter of date requesting an extension of time pursuant to sec_301_9100-3 of the procedure and administration regulations to file a form_8939 allocation of increase in basis for property_acquired_from_a_decedent to make the sec_1022 election and to allocate basis provided by sec_1022 of the internal_revenue_code code to eligible_property transferred as a result of decedent’s death the facts and representations submitted are as follows decedent died in survived by son and daughter decedent’s will appointed son and daughter as the personal_representatives of her estate decedent’s will provided that the residue of her estate is to pass to trust son and daughter are the co-trustees of trust prior to her death decedent timely filed form sec_709 united_states gift and generation-skipping_transfer_tax returns reporting gifts she made in year and year the year form_709 reported that decedent had made four gifts two cash gifts for the benefit of a grandson and two other gifts of significant amounts of cash one gift to son and one gift to daughter the form also reported that decedent paid gift_tax plr-103291-13 in the amount of dollar_figurex in connection with these gifts the year form_709 reported that decedent had made two gifts of significant amounts of cash one gift to son and one gift to daughter investment firm prepared the year form_709 it has been represented that investment firm was aware of the year form_709 son and daughter as personal_representatives of decedent’s estate retained law firm and investment firm to advise them as to the tax obligations of the estate law firm was not informed by investment firm or son and daughter of the prior taxable_gifts reported on the year and year form sec_709 investment firm provided an affidavit to the effect that it failed to inform law firm of the existence of the year form_709 as a result law firm believed decedent’s taxable_estate was valued less than dollar_figure law firm advised son and daughter to file a form_706 united_states estate and generation-skipping_transfer_tax return in order to allocate decedent’s available generation-skipping_transfer gst_exemption on line of the form_706 which is entitled a djusted taxable_gifts total gifts within the meaning of sec_2503 made by the decedent after date other than gifts that are includible in decedent’s gross_estate sect b an estate is required to report gifts made by the decedent during life the estate listed zero on line indicating decedent made no prior taxable_gifts prior to filing the estate_tax_return investment firm and son and daughter reviewed the form son and daughter signed the form_706 under penalties of perjury attesting that they had examined the return including accompanying schedules and statements and to the best of their knowledge and belief the return was true correct and complete on or about date the internal_revenue_service started to examine the estate’s form_706 in addition to the gifts reported on the form sec_709 the audit revealed that decedent had made other gifts that should have been reported on line of the estate’s form_706 son and daughter as co-trustees of trust are requesting an extension of time pursuant to sec_301_9100-3 to file the form_8939 to make the sec_1022 election and to allocate basis provided by sec_1022 to eligible_property transferred as a result of decedent’s death law and analysis sec_1022 provides that property_acquired_from_a_decedent who died after date is treated as transferred by gift and the basis of the person acquiring the property from such a decedent is the lesser_of the adjusted_basis of the decedent or the fair_market_value of the property at the date of the decedent's death plr-103291-13 sec_1022 provides in general that the basis_of_property under sec_1022 is increased by basis increase that is allocated to the property sec_1022 provides in general that basis increase is the portion of the aggregate basis increase that is allocated to the property sec_1022 and c provide that the aggregate basis increase is dollar_figure and that the aggregate basis increase is increased by-- i the sum of the amount of any capital_loss_carryover under sec_1212 and the amount of any net_operating_loss_carryover under sec_172 that would but for the decedent's death be carried from the decedent's last taxable_year to a later taxable_year of the decedent plus ii the sum of the amount of any losses that would have been allowable under sec_165 if the property acquired from the decedent had been sold at fair_market_value immediately before the decedent's death sec_1022 provides that in the case of property that is qualified spousal property the basis of such property under sec_1022 as increased under sec_1022 is increased by spousal property basis increase allocated to the property sec_1022 provides in general that spousal property basis increase is the portion of the aggregate spousal property basis increase which is allocated to the property sec_1022 provides that the aggregate spousal property basis increase is dollar_figure sec_1022 provides in general that the basis_of_property acquired from a decedent may be increased under sec_1022 or c only if the property was owned by the decedent at the time of death sec_1022 describes property that is considered to be owned by the decedent at the time of death sec_1022 provides that the basis adjustments under sec_1022 and c shall not increase the basis of any interest in property above its fair_market_value in the hands of the decedent as of the date of the decedent's death sec_1022 provides in general that the executor is to allocate the basis adjustments under sec_1022 and c on the return required by sec_6018 and that any allocation made may be changed only as provided by the secretary sec_1022 describes property that is considered to be acquired from the decedent for purposes of sec_1022 subtitle a of title v of the economic_growth_and_tax_relief_reconciliation_act_of_2001 p l stat enacted sec_2210 which made chapter the estate_tax inapplicable to the estate of any decedent who died in and chapter the gst tax inapplicable to generation-skipping transfers made in on plr-103291-13 date tax relief unemployment insurance reauthorization and job creation act of truirjca p l stat became law and sec_301 of truirjca retroactively reinstated the estate and gst taxes however sec_301 of truirjca allows the executor of the estate of a decedent who died in to elect to apply the code as though sec_301 of truirjca did not apply with respect to chapter and for property acquired or passing from a decedent within the meaning of sec_1014 thus sec_301 of truirjca allows the executor of the estate of a decedent who died in to elect not to have the provisions of chapter apply to the decedent’s estate but rather to have the provisions of sec_1022 apply the sec_1022 election notice_2011_66 2011_35_irb_184 section i a provides that the executor of the estate of a decedent who died in makes the sec_1022 election by filing a form_8939 on or before date notice_2011_76 2011_40_irb_479 extended the due_date of the form_8939 and thus the election from date to date notice_2011_66 section i d provides that the internal_revenue_service will not grant extensions of time to file a form_8939 and will not accept a form_8939 filed after the due_date except in four limited circumstances provided in section i d under this section of notice_2011_66 an executor may apply for relief under sec_301_9100-3 sec_301_9100-1 provides that the commissioner has discretion to grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make a regulatory election or a statutory election but no more than months except in the case of a taxpayer who is abroad under all subtitles of the code except subtitles e g h and i sec_301_9100-3 provides the standards used to determine whether to grant an extension of time to make an election whose due_date is prescribed by a regulation and not expressly provided by statute under sec_301_9100-1 a regulatory election includes an election whose due_date is prescribed by a notice published in the internal_revenue_bulletin requests for relief under sec_301_9100-3 will be granted when the taxpayer provides the evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-3 provides that a taxpayer is deemed to have acted reasonably and in good_faith if the taxpayer reasonably relied on a qualified_tax professional including a tax professional employed by the taxpayer and the tax professional failed to make or advise the taxpayer to make the election plr-103291-13 sec_301_9100-3 provides that a taxpayer will not be considered to have reasonably relied on a qualified_tax professional if the taxpayer knew or should have known that the professional was not i competent to render advice on the regulatory election or ii aware of all relevant facts based on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-3 have not been satisfied son and daughter received significant outright cash gifts from decedent prior to her death son and daughter failed to inform law firm of the existence of these gifts son and daughter reviewed and signed the form_706 under penalties of perjury attesting that the form was true correct and complete son and daughter did not reasonably rely on law firm or investment firm within the meaning of sec_301_9100-3 accordingly the request for the extension of time to make the sec_1022 election is denied except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination sincerely james f hogan james f hogan chief branch passthroughs special industries enclosures copy for sec_6110 purposes copy of this letter