internal_revenue_service number release date index number -------------------------- ------------------------------------------ ------------------------------- ---------------------------------- ------------------------------- -------------------------------------------------- ----------------------------------------------------------- ---------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact --------------------- id no ------------------ telephone number ---------------------- refer reply to cc psi b01 plr-151881-12 plr-151883-12 plr-151884-12 plr-151885-12 plr-151886-12 date date legend x1 ---------------------------------------------------- --------------------------- x2 ---------------------------------------------------- ------------------------------------------- x3 ---------------------------------------------------- -------------------------------- x4 ---------------------------------------------------- ----------------------------------- x5 ---------------------------------------------------- --------------------------- country date date date ---------------------------- --------------------------- ------------------- -------------------------- plr-151881-12 date date date ------------------------ ----------------------- ---------------------------- dear ---------------------- this responds to a letter dated date and subsequent correspondence submitted on behalf of x1 x2 x3 x4 and x5 the companies requesting that the service grant each of the companies an extension of time under sec_301_9100-3 of the procedure and administration regulations to file an election under sec_301_7701-3 to be treated as an association_taxable_as_a_corporation for federal tax purposes effective on date facts according to the information submitted x1 x2 x3 x4 and x5 were formed under the laws of country on date date date date and date respectively the companies represent that they are foreign entities eligible to elect to be treated as associations taxable as corporations for federal tax purposes the companies each intended to be treated as an association_taxable_as_a_corporation for federal tax purposes effective date however due to inadvertence each of the companies failed to timely file form_8832 entity classification election to elect to be treated as an association_taxable_as_a_corporation for federal tax purposes law and analysis sec_301_7701-3 provides in part that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes an eligible_entity with at least two members can elect to be classified as either an association or a partnership and an eligible_entity with a single owner can elect to be classified as an association or to be disregarded as an entity separate from its owner sec_301_7701-3 provides guidance on the classification of a foreign eligible_entity for federal tax purposes generally a foreign eligible_entity is treated as an association if all members have limited_liability unless the entity makes an election to be treated otherwise a foreign eligible_entity with a single member having limited_liability may elect to be treated as a disregarded_entity pursuant to the rules of sec_301_7701-3 sec_301_7701-3 provides that an entity classification election must be filed on form_8832 and can be effective up to days prior to the date the form is filed or up to months after the date the form is filed plr-151881-12 sec_301_7701-3 provides that such an election must be signed by either a each member of the electing entity who is an owner at the time the election is filed or b any officer manager or member of the electing entity who is authorized under local law or the entity's organization documents to make the election and who represents to having such authorization under penalties of perjury sec_301_9100-1 provides that the commissioner may 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 internal_revenue_code except subtitles e g h and i sec_301_9100-1 defines the term regulatory election as an election whose due_date is prescribed by a regulation published in the federal_register or a revenue_ruling revenue_procedure notice or announcement published in the internal_revenue_bulletin sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make the election sec_301_9100-2 provides the rules governing automatic extensions of time for making certain elections sec_301_9100-3 provides the standards the commissioner will use to determine whether to grant an extension of time for regulatory elections that do not meet the requirements of sec_301_9100-2 under sec_301_9100-3 a request for relief will be granted when the taxpayer provides evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and granting relief will not prejudice the interests of the government conclusion based solely on the information submitted and the representations made we conclude that the requirements of sec_301_9100-3 have been satisfied as a result the companies are each granted an extension of time of days from the date of this letter to file a form_8832 with the appropriate service_center to elect to be treated as an association_taxable_as_a_corporation for federal tax purposes effective date a copy of this letter should be attached to the form_8832 filed for each of the companies this ruling is contingent on the owners of each of the companies filing within days of this letter all required returns and amended returns for all open years consistent with the requested relief these returns may include but are not limited to the following forms i forms information_return of u s persons with respect to certain foreign_corporations ii forms return of u s persons with respect to certain foreign_partnerships and iii forms information_return of u s persons with respect to disregarded entities such that these forms reflect the consequences of the relief granted in this letter a copy of this letter should be attached to any such returns plr-151881-12 except as specifically set forth above we express or imply no opinion concerning the federal tax consequences of any aspect of any transaction or item discussed or referenced in this letter specifically we express or imply no opinion regarding the application of sec_1503 and the regulations thereunder to the transactions described in this ruling in addition sec_301_9100-1 provides that the granting of an extension of time for making an election is not a determination that the taxpayer is otherwise eligible to make the election this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file with this office we are sending a copy of this letter to each of the companies’ authorized representatives sincerely associate chief_counsel passthroughs special industries david r haglund david r haglund chief branch office of the associate chief_counsel passthroughs special industries enclosures copy of this letter copy of this letter for sec_6110 purposes cc


internal_revenue_service number release date index number 468a ------------------------- ----------------------------------- ----------------------------------------------- ---------------------------------- ----------------------------- legend seller department of the treasury washington dc person to contact ---------------------------- id no ------------- ---------------------------------------------------- telephone number --------------------- refer reply to cc psi b06 - plr-103080-04 date july ---------------------------------------------------- ------------------------ seller ------------------------------------------------------------ buyer ------------------------------------------------- ----------------------------------------------- ------------------------ plant closing date seller 1's parent seller 2's parent buyer's parent commission location state a b c d e f g h i j k ------------------------------------------ ----------------------- --------------------------------------- ----------------------------------- ---------------------------------- ----------------------------------------------------- -------------------------------------------------- -------------- --- --- ----- ------- ------------------------- ----------------- ------------------------------------ ---------------------- ----------- --------------- -------- plr-103080-04 dear ------------------- this letter responds to a letter dated date requesting a private_letter_ruling concerning the tax consequences of the sale of plant and associated assets and liabilities including nuclear decommissioning liability between seller seller and buyer specifically you have requested rulings regarding the tax consequences under sec_468a of the internal_revenue_code to the sellers' nuclear decommissioning funds and buyer s nuclear decommissioning fund as well as rulings regarding the proper realization and recognition of gain and loss on the sale of plant and associated assets the sellers and buyer in a jointly-filed ruling_request have represented the following facts and information relating to the ruling_request seller a regulated_public_utility company is a wholly-owned subsidiary of seller s parent an exempt public_utility holding_company seller is a member of seller s parent s consolidated_group and joins in filing a consolidated_return on a calendar_year basis using the accrual_method of accounting seller and seller s parent are under the audit jurisdiction of the industry director natural_resources lm nr immediately prior to the closing date seller owns as a tenant-in-common a a percent undivided_interest in the plant seller a regulated_public_utility company is a wholly-owned subsidiary of seller s parent a public_utility holding_company seller is a member of seller s parent s consolidated_group and joins in filing a consolidated_return on a calendar_year basis using the accrual_method of accounting seller and seller s parent are under the audit jurisdiction of the industry director natural_resources lm nr immediately prior to the closing date seller owns as a tenant-in-common a b percent undivided_interest in the plant seller and seller have each established with respect to plant a nuclear decommissioning fund qualifying under ' 468a and a nuclear decommissioning fund that did not meet the requirements of ' 468a after the sale the sellers will no longer be engaged in the trade_or_business of nuclear generation at plant or any other nuclear facility buyer is an indirect subsidiary of buyer s parent a public_utility holding_company buyer is a member of buyer s parent s consolidated_group and will join in filing a consolidated_return on a calendar_year basis using the accrual_method of accounting buyer and buyer s parent are under the audit jurisdiction of the industry director natural_resources lm nr immediately following the closing date buyer will own a c percent undivided_interest in the plant following the transfer of the plant to buyer buyer s wholesale electric power sales will be subject_to the jurisdiction of commission plr-103080-04 and its ownership and operation of plant will be subject_to the jurisdiction of the nuclear regulatory commission plant is located in location in state and consists of a single unit and associated assets located together on a single property plant began commercial service in d on e buyer entered into an asset sale agreement asa with the sellers the asa obligates the sellers to transfer to buyer at closing of the transaction the sellers' entire respective interests in the plant including all assets necessary to operate the plant in addition the sellers agree to transfer all assets of the qualified nuclear decommissioning funds maintained by seller and seller with respect to the plant to a qualified nuclear decommissioning fund established by buyer solely for the purpose of decommissioning plant the agreement contemplates that buyer pay a cash purchase_price to the sellers and assume all decommissioning liabilities associated with the plant the sellers and the buyer represent that they will treat the transaction as an asset purchase for tax purposes subject_to sec_1060 of the code and will agree to an allocation of the purchase_price among the purchased assets excluding the assets comprising the qualified nuclear decommissioning funds that is consistent with the allocation methodology provided by sec_1060 and sec_338 and the regulations thereunder as part of the asa buyer has also agreed to enter into power purchase agreements with each of the sellers the aggregate amount transferred from the sellers' qualified nuclear decommissioning funds to the buyer's qualified nuclear decommissioning fund may not be less than f dollars on a net cash_value basis the estimated cost of decommissioning plant is g dollars pursuant to the asa buyer agrees to complete at its expense all decommissioning of the plant including final restoration of the site after termination of its use for power generation in a manner consistent with the decommissioning study dated h submitted as part of the request for this letter_ruling the minimum transferred amount f represents i percent of the current cost of decommissioning plant buyer estimates that it will need to provide an additional j dollars to commission plant prior to the sale the sellers each had a qualifying percentage under sec_1_468a-3 of k thus it is clear that the portion of the cost of decommissioning the plant funded by the minimum transferred amount reasonably relates to the qualifying percentages of the sellers prior to the sale each seller is the grantor of its respective nonqualified nuclear decommissioning fund each of the sellers’ nonqualified nuclear decommissioning funds is managed by an independent_trustee all distributions from the sellers’ nonqualified nuclear decommissioning funds are made by their respective trustees prior to the sale under the terms of each seller's nonqualified nuclear decommissioning fund trust agreement all income as well as principal of that seller's nonqualified nuclear decommissioning fund was held to satisfy that seller's legal_obligation to decommission plant and upon completion of the decommissioning any remaining assets would be distributed to their respective grantors however as part of the sale sellers’ nonqualified nuclear plr-103080-04 decommissioning fund trust agreements will be amended to permit the release of the sellers’ nonqualified nuclear decommissioning funds from their obligation to the future decommissioning of plant therefore the sellers’ nonqualified nuclear decommissioning funds will no longer be retained for the purpose of decommissioning plant the assets held by the sellers in their respective nonqualified nuclear decommissioning funds will be retained by the sellers and disposed of as required by the applicable regulatory entities requested rulings and neither of the sellers' qualified nuclear decommissioning funds will become disqualified on the closing date by reason of the transfer of the assets in the qualified nuclear decommissioning funds to buyer s qualified nuclear decommissioning fund buyer s qualified nuclear decommissioning fund established to hold the assets transferred from the sellers' qualified nuclear decommissioning funds will be treated as a qualified nuclear decommissioning fund satisfying the requirements of sec_468a of the code sec_468a of the code provides that a taxpayer may elect to deduct payments made to a nuclear decommissioning reserve fund the qualified_fund sec_468a limits the annual deduction of the electing taxpayer to the lesser_of the ruling_amount or the amount of decommissioning costs included in the electing taxpayer s cost of service for ratemaking purposes for the taxable_year sec_468a provides in pertinent part that the assets in a qualified_fund shall be used exclusively for satisfying the liability of any taxpayer contributing to the qualified_fund sec_1_468a-5 of the federal_income_tax regulations sets out the qualification requirements for nuclear decommissioning funds it provides in part that a qualified_fund must be established and maintained pursuant to an arrangement that qualifies as a_trust under state law an electing taxpayer can establish and maintain only one qualified_fund for each nuclear power plant sec_1_468a-5 provides that if at any time during the taxable_year a nuclear decommissioning fund does not satisfy the requirements of sec_1_468a-5 the service may disqualify all or a portion of the fund as of the date that the fund does not satisfy the requirements sec_1 468a- c provides that if a qualified_fund is disqualified the fair_market_value with certain adjustments of the assets in the fund is deemed to be distributed to the electing taxpayer and included in that taxpayer s gross_income for the taxable_year sec_1_468a-6 generally provides rules for the transfer of an interest in a nuclear power plant and transfer of the qualified_fund where after the transfer the transferee is an eligible_taxpayer under sec_1_468a-6 the service may treat any disposition of an interest in a nuclear power plant occurring after date as satisfying the requirements of the regulations if the service determines that such treatment is necessary or appropriate to carry out the purposes of sec_468a under the specific facts herein the service will exercise its discretion to treat this transaction under sec_1_468a-6 as a disposition qualifying under the general plr-103080-04 provisions of sec_1_468a-6 this exercise of discretion however applies to the provisions of sec_1_468a-6 except those outlined in sec_1_468a-6 with respect to the calculation of a schedule of ruling amounts subsequent to a sale thus under sec_1_468a-6 the sellers' qualified nuclear decommissioning funds will not be disqualified upon the transfer of the assets of those funds to buyer's qualified nuclear decommissioning fund and buyer's qualified nuclear decommissioning fund will be treated as a qualified nuclear decommissioning fund as defined in sec_468a requested rulings and the sellers' qualified nuclear decommissioning funds will not recognize gain_or_loss upon the transfer of their assets to buyer s qualified nuclear decommissioning fund upon the sale of the plant on the closing date the sellers will not recognize income attributable to the assets of the sellers' qualified nuclear decommissioning funds upon the transfer of the assets of the sellers' qualified nuclear decommissioning funds to buyer's qualified nuclear decommissioning fund on the closing date the transfer will not constitute a payment or contribution of assets by buyer to the buyer's qualified nuclear decommissioning fund sec_1_468a-6 provides that neither a transferor nor its fund will sec_1_468a-6 provides that for purposes of the regulations under recognize gain_or_loss or otherwise take any income_or_deduction into account by reason of the transfer of the assets from a transferor s qualified_fund to a transferee s qualified_fund thus neither the sellers nor the qualified nuclear decommissioning funds maintained by the sellers for plant will recognize gain_or_loss or otherwise take any income_or_deduction into account by reason of the transfer of the qualified nuclear decommissioning funds assets to buyer's qualified nuclear decommissioning fund sec_468a the transfer of a transferor's qualified nuclear decommissioning fund will not constitute a payment or a contribution of assets by a transferee to its qualified nuclear decommissioning fund consequently the transfer of the assets of the sellers' qualified nuclear decommissioning funds to buyer's qualified nuclear decommissioning fund will not constitute a payment or contribution of assets by buyer to buyer's qualified nuclear decommissioning fund requested ruling neither buyer nor buyer's qualified nuclear decommissioning fund will recognize gain_or_loss or otherwise take any income_or_deduction into account by reason of the transfer of the assets of the sellers' qualified nuclear decommissioning funds to buyer s qualified nuclear decommissioning fund after the closing date buyer's qualified nuclear decommissioning fund will retain the same basis in the assets received as those assets had in the sellers' qualified nuclear decommissioning funds prior to the closing date sec_1_468a-6 provides that neither a transferee nor its fund will recognize gain_or_loss or otherwise take any income_or_deduction into account by reason of the transfer of the assets from a transferor s qualified_fund to a transferee s qualified_fund thus neither buyer nor buyer's qualified nuclear decommissioning fund sec_1_468a-6 provides that transfers of assets of a qualified nuclear plr-103080-04 will recognize gain_or_loss or otherwise take any income_or_deduction into account by reason of the transfer of the assets of the sellers' qualified nuclear decommissioning funds to buyer's qualified nuclear decommissioning fund decommissioning fund to which sec_1_468a-6 applies do not affect basis thus buyer's qualified nuclear decommissioning fund will have a basis in the assets received from the sellers' qualified nuclear decommissioning funds that is the same as the basis of those assets in the sellers' funds immediately before the date of transfer requested ruling buyer will not recognize any gain or otherwise take any income into account by reason of the purchase of the plant and its associated assets sec_1060 provides that in the case of an applicable_asset_acquisition the consideration received for such assets shall be allocated among the acquired assets in the same manner as amounts are allocated to assets under sec_338 sec_1_1060-1 provides that in the case of an applicable_asset_acquisition sellers and purchasers must allocate the consideration under the residual_method as described in sec_1_338-6 and sec_1_338-7 in order to determine respectively the amount_realized from and the basis in each of the transferred assets sec_1060 defines the term applicable_asset_acquisition as the transfer of assets constituting a trade_or_business if the acquirer's basis is determined wholly by reference to the consideration paid for such assets sec_1_1060-1 defines a seller's consideration as the amount in the aggregate realized from selling the assets in the applicable_asset_acquisition under sec_1001 sec_1060 provides no independent basis for determining the amount a taxpayer realizes on the sale of assets or the time such amount may be taken into account the amount_realized and the time such amount is taken into account are determined solely under generally applicable tax_accounting principles see sec_1001 and sec_461 sec_1_1060-1 defines a purchaser's consideration as the amount in the aggregate of its cost of purchasing the assets in the applicable_asset_acquisition that is properly taken into account in basis sec_1060 provides no independent basis for determining a taxpayer's cost of acquired assets cost is determined solely under generally applicable rules of tax_accounting the residual_method is based on a division of assets into seven classes class i generally consisting of cash and general deposit accounts held in banks savings and loan associations and other depository institutions class ii generally consisting of actively_traded personal_property such as u s government securities and publicly traded stock but also including certificates of deposit and foreign_currency even if they are not actively_traded personal_property class iii accounts_receivable mortgages and credit card receivables from customers which arise in the ordinary course of business class iv stock_in_trade of the taxpayer or other_property of a kind which plr-103080-04 would properly be included in the inventory of taxpayer if on hand at the close of the taxable_year or property held by the taxpayer primarily_for_sale_to_customers in the ordinary course of its trade_or_business class v all assets other than class i ii iii iv vi and vii assets class vi all sec_197 intangibles as defined in sec_197 except goodwill and going_concern_value and class vii goodwill and going_concern_value whether or not they qualify as sec_197 intangibles consideration is first reduced by the amount of class_i_assets transferred by the seller the remaining consideration is then allocated among the class_ii_assets pro_rata to the extent of their fair_market_value then among the class_iii_assets pro_rata to the extent of their fair_market_value then among the class_iv_assets pro_rata to the extent of their fair_market_value then among the class_v_assets pro_rata to the extent of their fair_market_value then among the class_vi_assets pro_rata to the extent of their fair_market_value and finally any remaining consideration is allocated among the class_vii_assets pro_rata according to their fair_market_value see sec_1 c b and b if under general tax principles there is a subsequent adjustment to the consideration eg if it is later determined that the actual amount of the liability assumed differs from the value that the parties assigned to such liability on the date of the applicable_asset_acquisition that amount is allocated in a manner that produces the same allocation that would have been made at the time of the acquisition had such amount been paid_or_incurred on the acquisition_date see sec_1_1060-1 sec_1_1060-1 and sec_1_338-7 the plant together with its related equipment and operating_assets constitutes a trade_or_business in its sellers’ hands and the gain_or_loss recognized by each seller with respect to those assets will be determined wholly by reference to each seller's amount_realized thus sellers’ transfer of the plant its equipment and operating_assets to buyer in exchange for cash and the assumption of certain liabilities and obligations including the decommissioning liability except to the extent funded by the qualified_fund is an applicable_asset_acquisition as defined in sec_1060 and the regulations thereunder as such the federal tax treatment of the plant's acquisition is determined under sec_1060 and the regulations thereunder the following example illustrates the operation of sec_1060 for a seller on date an applicable_asset_acquisition is made the assets sold consist of class_i_assets in the amount of dollar_figure class_ii_assets with a fair_market_value of dollar_figure and a basis in the hands of the seller of dollar_figure class_iii_assets with a fair_market_value of dollar_figure and a basis of dollar_figure class_iv_assets with a fair_market_value of dollar_figure and a basis of dollar_figure class_v_assets half of which are sec_1231 assets with a fair_market_value of dollar_figure and a basis of dollar_figure and the other half of which are not sec_1231 assets with a fair_market_value of dollar_figure and a basis of dollar_figure and class_vi_assets which are sec_1231 assets with a fair_market_value of dollar_figure and a basis of dollar_figure the consideration consists of dollar_figure cash and an assumed liability of dollar_figure that under applicable tax_accounting plr-103080-04 principles is taken into account at the time of the applicable_asset_acquisition the dollar_figure consideration first will be reduced by dollar_figure the amount of class_i_assets the remaining consideration will be allocated as follows dollar_figure to class_ii_assets pro_rata according to fair_market_value resulting in a dollar_figure gain dollar_figure to the class_iii_assets pro_rata according to fair_market_value resulting in no gain_or_loss dollar_figure to the class_iv_assets pro_rata according to the fair_market_value resulting in a dollar_figure gain dollar_figure to the class_v_assets pro_rata according to the fair_market_value resulting in a dollar_figure loss on the sec_1231 assets and a dollar_figure loss on the non- sec_1231 assets dollar_figure to the class_vi_assets pro_rata according to the fair_market_value resulting in a dollar_figure gain and the remaining dollar_figure to the class_vii_assets pro_rata according to the fair_market_value resulting in a dollar_figure gain therefore each seller's gain_or_loss on each of the purchased assets excluding the assets of sellers’ qualified funds will be the difference between each seller's basis in the asset and the amount_realized with respect to that asset taking into account the allocation of consideration pursuant to sec_1060 and the regulations thereunder in general a taxpayer does not realize income upon its purchase of a business' assets even where those assets include cash or marketable_securities and in connection with the purchase the taxpayer assumes liabilities of the seller see 194_f2d_190 2d cir revrul_55_675 1955_2_cb_567 in this case buyer cannot acquire an interest in the plant without assuming the decommissioning liabilities which are inextricably associated with the ownership and operation of the plant there is no indication that the transaction is other than a bona_fide purchase of the business and its associated assets and liabilities the exception to the general_rule set forth in revrul_71_450 1971_2_cb_78 does not apply in revrul_71_450 unlike the present situation the purchaser agreed to assume a prepaid subscription liability in return for a separate cash payment and the liability was not reflected in the sales_price of the business with respect to the acquisition of the plant equipment and operating_assets buyer will not recognize income except to the extent the class_i_assets as defined in sec_1_338-6 it receives exceed its total cost determined under sec_1012 which will be the sum of its cash consideration if any and the fair_market_value of any other consideration buyer provides to the sellers that is taken into account under applicable tax principles on the date of the applicable_asset_acquisition if buyer is thus required to take an amount into account as income and is subsequently permitted under general principles of tax law to take additional consideration into account eg when buyer satisfies the economic_performance requirement with respect to the decommissioning liability assumed buyer will be entitled to deduct and will not be required to capitalize such amount 344_us_6 accordingly buyer will not realize income from its acquisition of the plant except to the extent that under the rules of sec_1060 the amount of cash and other class i plr-103080-04 assets received by buyer exceeds the amount of consideration provided by buyer and taken into account in the year of the acquisition therefore we conclude that in the taxable_year of closing buyer will not recognize any gain or otherwise currently take any income into account by reason of the transfer of the sellers’ plant assets to buyer provided the class_i_assets buyer receives do not exceed its total cost for the plant requested ruling the buyer will have a tax basis in the assets purchased excluding the buyer's qualified nuclear decommissioning funds equal to the sum of the purchase_price and the assumed_liabilities that will be taken into account as liabilities for federal_income_tax purposes as of the closing date sec_1012 of the code provides in part that the basis_of_property shall be the cost of such property in cases similar to the instant case taxpayers have argued that the cost of acquiring the seller's interests in a nuclear power plant and the related assets including the decommissioning funds includes the amount of the assumed decommissioning liability in those similar cases taxpayers have cited 331_us_1 and 194_f2d_190 as support for the proposition that for purposes of determining basis the cost of property generally includes assumed_liabilities to which the acquired property is subject_to the extent such liabilities can be accurately valued and are not contingent at the time of purchase since buyer will pay cash and assume the liabilities and obligations of the sellers which includes the decommissioning liabilities in connection with the acquisition of the plant its total cost of the purchased assets excluding the qualified nuclear decommissioning funds will equal the cash paid plus the assumed_liabilities and obligations for any federal_income_tax purpose -- including basis -- until economic_performance occurs with respect to that liability sec_1_446-1 thus critical to determining whether buyer is entitled to treat the future decommissioning liability as a component of its cost_basis in the purchased assets at the time of the closing is deciding whether the liability will be incurred for tax purposes as of the closing it will not economic_performance does not occur with respect to a service liability such as the decommissioning obligation until and to the extent that costs are incurred in satisfaction of that liability sec_1_461-4 because buyer will not have performed any services relating to the decommissioning liability at the time of the purchase of the plant economic_performance will not have occurred and the liability will not have been incurred at that time for any purpose under the code including the cost_basis provisions of sec_1012 purchased excluding buyer’s qualified nuclear decommissioning funds equal to the sum of the purchase_price and the assumed_liabilities that will be taken into account as liabilities for federal_income_tax purposes the purchased assets and the liabilities incurred do not include the assets in the qualified nuclear decommissioning funds or the however the assumed decommissioning liability cannot be treated as incurred accordingly at the time of closing buyer will have a tax basis in the assets plr-103080-04 liability attributable to the qualified nuclear decommissioning funds because the tax effect of the qualified nuclear decommissioning funds is determined under sec_468a buyer will not be entitled to treat as a component of its cost_basis at the time of the closing any amount attributable to the future decommissioning liability because the transfer of the plant is an applicable_asset_acquisition as defined under sec_1060 of the code on the acquisition_date buyer's basis in the assets acquired must be determined by allocating its costs ie the consideration provided by buyer on the acquisition_date which includes cash but not the assumption of the decommissioning liability among the acquired assets in accordance with the provisions of sec_1060 and the regulations thereunder the following example illustrates the operation of sec_1060 for a purchaser on date an applicable acquisition is made the assets acquired consist of class_i_assets in the amount of dollar_figure class_ii_assets with a fair_market_value of dollar_figure class_iii_assets with a fair_market_value of dollar_figure class iv asserts with a fair_market_value of dollar_figure and class_v_assets with a fair_market_value of dollar_figure there are no class vi or vii assets the consideration paid consists of dollar_figure cash and an assumed liability for which economic_performance has not occurred on date the purchaser has provided dollar_figure of consideration that may be allocated as basis first it will be reduced by dollar_figure the amount of class_i_assets the remaining dollar_figure will be allocated to class_ii_assets pro_rata according to fair_market_value nothing is allocated to class iii or below on date economic_performance occurs with respect to the liability to the extent of dollar_figure at that time the purchaser has an additional dollar_figure of basis that may be taken into account of that amount dollar_figure is allocated to class_ii_assets which will then have been allocated their full dollar_figure fair market value--as determined on the acquisition_date and the remaining dollar_figure is allocated to the class_iii_assets pro_rata according to fair market value--as determined on the acquisition_date on date economic_performance occurs to the extent of an additional dollar_figure which is then taken into account as basis of that amount dollar_figure will be allocated to the class_iii_assets which will then have been allocated their full dollar_figure fair market value--as determined on the acquisition_date dollar_figure will be allocated to the class_iv_assets which will then have been allocated their full dollar_figure fair market value--as determined on the acquisition_date dollar_figure will be allocated to the class_v_assets which will then have been allocated their full dollar_figure fair_market_value as determined on the acquisition_date and the remaining dollar_figure will be allocated to the class_vii_assets as goodwill the last amount is allocated to goodwill even though goodwill was not identified as a separate asset having value on date if on date instead of an addition to purchaser's consideration there is a dollar_figure decrease in consideration the consideration previously allocated to the class_iii_assets would be reduced to zero and the consideration previously allocated to the class_ii_assets would be reduced by the remaining dollar_figure pro_rata according to fair_market_value accordingly with respect to the plant buyer will first reduce the consideration paid_by the amount of the class_i_assets it receives in the transaction to the extent the class_i_assets received exceed the consideration buyer provides buyer will recognize therefore we conclude that buyer's total consideration will be allocated among plr-103080-04 income to the extent buyer's consideration paid exceeds the class_i_assets it receives such excess will be allocated to the class_ii_assets pro_rata according to the fair_market_value of those assets up to their total fair_market_value any excess remaining after allocation to class_ii_assets will be allocated to class iii iv v vi and vii assets in accordance with sec_1_1060-1 and sec_1_338-6 when and to the extent additional_amounts are paid_or_incurred for the assets acquired in the applicable_asset_acquisition such amounts will be taken into account as increases to buyer's consideration paid and allocated in the same manner and subject_to the same conditions as though they were paid_or_incurred on the acquisition_date see sec_1_1060-1 sec_1_1060-1 sec_1_338-6 and sec_1_338-7 the purchased assets of the plant excluding the qualified funds for purposes of determining buyer's tax basis in any specific asset included in the purchased assets determined immediately after the closing and excluding the qualified funds pursuant to the residual_method as required by sec_1060 and the regulations thereunder requested ruling the sellers' nonqualified nuclear decommissioning funds to the extent not dissolved at closing will be treated as grantor trusts under sec_671 through of the code and each respective seller will be treated as the grantor of such seller's nonqualified nuclear decommissioning fund and the buyer will not be in constructive receipt of the sellers' nonqualified nuclear decommissioning funds through that the grantor or another person shall be treated as the owner of any portion of a_trust there shall be included in computing the taxable_income and credits of that person those items of income deduction and credits against tax of the trust which are attributable to that portion of the trust to the extent that such items would be taken into account in computing taxable_income or credits against the tax of an individual of part i of subchapter_j chapter of the code a grantor includes any person to the extent such person either creates a_trust or directly or indirectly makes a gratuitous transfer within the meaning of sec_1_671-2 of property to a_trust for purposes of sec_1_671-2 the term property includes cash sec_677 provides that the grantor shall be treated as the owner of any portion of a_trust whether or not he is treated as such under sec_674 whose income without the approval or consent of any adverse_party is or in the discretion of the grantor or a nonadverse_party or both may be distributed to the grantor or held or accumulated for future distribution to the grantor sec_1_677_a_-1 provides that under sec_677 a grantor is in general treated as the owner of a portion of a_trust whose income is or in the discretion of the sec_1_671-2 of the income_tax regulations provides that for purposes sec_671 of the code provides that where it is specified in sec_673 plr-103080-04 grantor or a nonadverse_party or both may be applied in discharge of a legal_obligation of the grantor accordingly each of the sellers is treated as the grantor and owner of its respective nonqualified nuclear decommissioning fund under sec_671and of the code and under sec_1_677_a_-1 each seller shall include in computing its taxable_income and credits all items of income deduction and credits against tax of that seller’s nonqualified nuclear decommissioning fund to the extent that such items would be taken into account in computing taxable_income or credits against the tax of that seller except as specifically determined above no opinion is expressed or implied concerning the federal_income_tax consequences of the transaction described above this ruling is directed only to the taxpayers who requested it sec_6110 of the code provides it may not be used or cited as precedent in accordance with the powers of attorney we are sending copies of this ruling to authorized representatives of buyer and the sellers we are also sending a copy of this letter_ruling to the industry director natural_resources lm nr sincerely peter c friedman senior technician reviewer office of associate chief_counsel cc passthroughs special industries


department of the treasury internal_revenue_service washington d c date of f i c e of c h i e f c ou n s e l number release date cc ita b01 tl-n-4349-00 uilc internal_revenue_service national_office field_service_advice memorandum for large midsize business from subject associate chief_counsel income_tax and accounting characterizations or allocations of payments made in settlement of litigation this chief_counsel_advice responds to your memorandum of date in accordance with sec_6110 this chief_counsel_advice should not be cited as precedent legend x plaintiff a plaintiff b plaintiff c year year year year year agreement a b date date tl-n-4349-00 date issue whether the characterization or allocation of certain payments made by the taxpayer pursuant to the settlement of a lawsuit is fixed by the terms of the settlement agreement entered into by the parties to the litigation conclusion where the terms of a written_agreement in settlement of litigation were not arrived at in bona_fide arm's-length adversarial negotiations are inconsistent with the true substance of the plaintiff’s claim or are entirely tax motivated the commissioner is not bound to respect the characterization or allocation of payments in the settlement facts beginning in year plaintiffs a b and c filed suit against the taxpayer although each suit was unique in the sense that it included counts specific to the state law of the jurisdiction in which filed there was a general pattern to the suits each contained allegations that increased costs incurred by the plaintiffs the suits also included one or more theories of recovery based on fraud or misrepresentation in reliance on either common_law concepts or state statutory schemes the plaintiffs sought equitable relief and damages under state laws including antitrust laws finally the suits included theories of recovery based on state statutes in year by year which led to a proposed settlement the proposed settlement provided for payments and other non-monetary relief the tl-n-4349-00 settlement package was rejected meanwhile in year the plaintiffs again undertook negotiations with the taxpayer and in year reached settlement the agreement section of the agreement states that the parties wish to avoid continued litigation that the settlement is in release of all claims by section specifically denies liability reiterates that the taxpayer has entered into the agreement solely to avoid litigation section of the agreement sets forth the terms and schedule of payments to be made by the taxpayer pursuant to the settlement the agreement contains detailed provisions regarding section of the agreement provides as follows tl-n-4349-00 payments to plaintiffs were made in year in year the taxpayer claimed sec_162 business_expense deductions for amounts paid law and analysis sec_162 provides for a deduction for ordinary and necessary business_expenses paid_or_incurred in carrying_on_a_trade_or_business amounts expended by a taxpayer engaged in a trade_or_business to avoid or settle litigation may be deductible as ordinary business_expenses 290_us_111 276_us_145 37_tc_845 302_f2d_481 2d cir whether a taxpayer may deduct under sec_162 payments made in settlement of a claim depends on the origin of the claim the characterization of costs depends upon the nature of the activities giving rise to the claim and does not depend on the consequence or result 397_us_572 372_us_39 427_f2d_429 7th cir thus the origin and character of the claim giving rise to the payment being deducted is controlling to the extent that the litigation originates from a claim which is personal in nature rather than business the amounts expended are nondeductible gilmore supra likewise a taxpayer settling a claim pertaining to the sale or acquisition of property will be required to capitalize rather than deduct the settlement payments kimbell v united_states 490_f2d_203 5th cir cert_denied 419_us_833 58_tc_931 sec_162 disallows deductions for fines_or_penalties paid to a government for the violation of any law in the event that the litigation or settlement involves more than one claim it is necessary to determine not only the nature and character of each claim but also the amount allocable to each hence in situations where lump-sum payments are made in settlements of multiple claims and differing tax consequences will result tl-n-4349-00 based on the allocation an allocation by the commissioner is necessary and proper 220_f3d_353 5th cir revrul_75_230 1975_1_cb_93 rev_rul 1958_2_cb_18 you have asked whether the commissioner is required to treat amounts paid in settlement of a lawsuit in accordance with the characterizations and allocations of the agreement it is service position that the commissioner is not necessarily bound by the characterization of payments or the allocation of damages or settlement payments pursuant to either a state court judgment or a settlement agreement between the parties the courts have agreed with the general proposition that the commissioner will not always be bound by characterizations of tax_attributes or allocations made by either the parties in litigation or a lower court 387_us_456 105_tc_396 aff’d 121_f3d_393 8th cir 102_tc_116 aff’d 70_f3d_34 5th cir cert_denied 519_us_824 as a general_rule the courts have tended to uphold the characterization or allocations in a settlement agreement where the record indicates there was a negotiated and bona_fide settlement arrived at in an adversarial proceeding at arm’s length and in good_faith mckay v commissioner 102_tc_396 vacated on other grounds 84_f3d_433 5th cir 87_tc_1294 aff’d 848_f2d_81 6th cir 79_tc_680 aff’d without published opinion 749_f2d_37 9th cir see also mitchell v commissioner tcmemo_1990_617 if a taxpayer's claims were settled and express allocations were made in the settlement agreement the court will carefully consider such allocations see 90_tc_1000 quoting 88_tc_834 aff’d without published opinion 845_f2d_1013 3d cir revd and remanded 883_f2d_211 3d cir 87_tc_236 aff’d 835_f2d_67 3d cir 76_tc_116 aff’d without published opinion 676_f2d_682 1st cir hence in mckay where the parties to the litigation were hostile adversaries for each of the parties both economic and other interests were affected by how the payments were characterized and the taxpayer was not given freedom to structure the settlement on his own the tax_court accepted the express allocations in the agreement in doing so the court pointed out that while the express language in a settlement agreement is the most important factor for deciding the purpose of the payment for purposes of sec_104 tl-n-4349-00 w e are not bound however by any factor or factors that are inconsistent with the true substance of the taxpayer's claim nor are we bound by express allocations in a written settlement agreement if the parties did not engage in bona_fide arm's-length adversarial negotiations t c pincite in contrast in robinson the taxpayer and the defendant bank reached a settlement with respect to a jury verdict awarding damages lost profit and punitive_damages the state trial_court entered a final judgment allocating percent of the settlement proceeds to tortlike personal injuries the commissioner made a determination that the settlement allocation should be disregarded the primary issue before the tax_court was what portion of the settlement proceeds were excludable from gross_income pursuant to sec_104 the tax_court found that while the parties were adversarial with respect to the dollar amount they were not adversarial on the issue of the allocation additionally the tax_court found that the taxpayer’s preparation of the final agreement was uncontested and not the product of bona_fide adversarial negotiations moreover the court noted that where the state of texas had no personal income_tax no state interest would be adversely affected by the allocation under those circumstances the tax_court pointed out that the state court might be inclined to approve the settlement with little deliberation see also mitchell v commissioner tcmemo_1990_617 express allocation in settlement agreement rejected aff’d 992_f2d_1219 9th cir cert_denied 510_us_861 kightlinger v commissioner tcmemo_1998_357 rejecting federal district court’s characterization of proceeds received in settlement of case under its jurisdiction you take the position that the language in section of the agreement is a factor in determining the deductibility of the payments but it is not determinative rather in your view an inquiry must be made into the facts and circumstances of the and then a reallocation of the settlement amounts can be made among the various claims resolved by the settlement in our analysis of the approach which has developed in the tax_court you should first look to the terms of the agreement and determine whether express allocations if any were negotiated by the parties in a bona_fide arm’s length and adversarial manner in the absence of bona_fide and adversarial negotiations or if settlement terms are inconsistent with the claims made by the plaintiff or entirely tax motivated the settlement allocation may be disregarded when assessing the tax implications of a settlement agreement courts should neither engage in speculation nor blind themselves to a settlement’s realties 121_f3d_393 8th cir tl-n-4349-00 the facts provided to this office do not allow us to determine whether these are cases in which the commissioner should look beyond the written terms of the settlement agreement to determine the proper character and allocation of payments prior to recharacterizing or reallocating the payments made pursuant to the agreement you should first look to determine if it was a bona_fide and adversarial settlement as to the allocation of payment between the claims its terms are consistent with the true substance of the plaintiff’s claims or the allocation was not entirely tax motivated if you conclude that any of these criteria are not satisfied then it is appropriate to look to all facts and circumstances surrounding the settlement including the details surrounding the litigation in the underlying proceeding the allegations contained in the payee's complaint and amended complaint in the underlying proceeding and the arguments made in the underlying proceeding by each party there in order to determine in lieu of what were damages paid 102_tc_116 rev'd in part on other grounds 70_f3d_34 5th cir cert_denied 519_us_824 although we cannot at this time take a position or draw a conclusion with respect to whether the commissioner should be required to respect the terms we do make the following observations from the facts provided while it appears that there were lengthy negotiations as to the terms of settlement in general it is not clear that these negotiations extended to any purported allocations to the claims in fact the parties made no allocation among the various claims asserted other than to provide that no payment is made in settlement of liability for the agreement contains detailed allocations between the parties as to amounts both paid_by the taxpayer and received by the plaintiffs yet the purported allocation among the multitude of claims is cursory or superficial case development hazards and other considerations you seek to make a reallocation of the settlement payments without first considering the authenticity of the settlement terms as agreed upon by the parties while there appears to be evidence which may ultimately support a determination to allocate or reallocate the payments we think that the better approach is to first carefully examine the settlement provisions as a whole before disregarding its terms we recommend that in doing so you consider the settlement as a whole and that you not look solely to the language of section it appears to this office that the allocation must also be read in light of sections and of the agreement which state that the agreement is in settlement of all claims tl-n-4349-00 you have orally expressed the view that the states had an interest in ensuring that all the payments were deductible by the taxpayer because to do so increases the amounts available to the states to the extent that this is true it would seem that while the parties’ interests on this point may not be adversarial this does not prevent the negotiations from being bona_fide the states have a legitimate nontax reason securing a greater monetary recovery for actively seeking the allocation in the agreement as to this point the fact may be that once the parties agreed upon the total amount to be paid each side had a bona_fide interest in bargaining for the allocation set forth in section ix of the agreement although their reasons for doing so were vastly different with respect to this argument we point out that the commissioner has argued that the parties must be adversarial from a federal tax standpoint but to date no court has addressed the argument as the fifth circuit has pointed out the appropriate test to be applied depends in part on the particular tax statute involved as well as the nature of the state proceeding the courts have frequently held that in the sec_104 area the intent of the payor is a key determinant whether a settlement recovery is excludable from gross_income see 349_f2d_610 10th cir 290_f2d_283 2d cir ray v united_states cl_ct aff'd 989_f2d_1204 fed cir 98_tc_1 yet we are not convinced that the intent of the payor should be as significant a factor on the deduction side after all in the sec_104 area the payor is not the taxpayer and will in general have an interest which is adverse to that of the taxpayer conversely on the deduction side the payor is the taxpayer whose motives in making the payments will be self- serving please call if you have any further questions heather maloy by clifford m harbourt senior technician reviewer


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 ita b01 plr-111449-12 date september in re letter_ruling request regarding charitable_contribution legend donor ------------------------- trust ------------------------------------------------------- charity -------------------------------------------------------------------------------- spouse ------------------------ state ------------- d1 ------------------- d2 --------------------------- x ---- y -- dear -------------- this responds to your letter dated date requesting rulings on behalf of yourself and trust taxpayers taxpayers request rulings on the income and gift_tax consequences under sec_170 sec_2522 and sec_664 of the internal_revenue_code of a contribution to a charitable_remainder beneficiary of trust of an undivided x interest in donor’s right to unitrust payments rulings requested donor will be entitled to a charitable_contribution_deduction for income_tax purposes under sec_170 for the contribution of an undivided_interest in a unitrust payment transferred to charity plr-111449-12 the amount of donor’s charitable_contribution_deduction will be equal to the present_value of the right to receive annual payments equal to y percent of the net fair_market_value of x of the trust assets determined annually for a term starting on the date of the contribution to charity and ending on the date of death of donor donor will be entitled to a gift_tax charitable_contribution_deduction under sec_2522 for the fair_market_value of his gift_for gift_tax purposes of x of the corpus of trust not in trust the transfer of the undivided x interest in the unitrust payment will not cause the trust to cease to be a_trust described in sec_664 to the extent that in prior years the trust realized capital_gain income and that income was not included in the income of donor such capital_gain shall not be included in the income of donor solely because of his transfer of the undivided_interest in the unitrust payment to charity facts on d1 donor and spouse as settlors created trust a charitable_remainder_unitrust pursuant to sec_664 trust is governed by the law of state and all property placed into trust at the outset was community_property trust provides for an annual payment to donor and spouse of a unitrust_amount equal to y percent of the net fair_market_value of the assets of trust valued as of the first day of each taxable_year of trust unitrust payment upon the death of either donor or spouse the survivor is entitled to the entire unitrust payment neither donor nor spouse retained a right to revoke the respective survivorship interest transferred at the time the trust was created trust also provides that on the death of the last to die of donor and spouse the trustee of trust is to distribute all of the principal and income of trust the remainder to charity an organization that meets the requirements of sec_170 and sec_2522 however donor and spouse retained the right to add or delete by inter_vivos or testamentary written instrument qualified exempt charities to receive the remainder on d2 spouse died leaving donor as the sole trustee of trust and the sole beneficiary of the unitrust payment as the surviving settlor of trust donor has the right to add or delete by inter_vivos or testamentary written instrument qualified exempt charities to receive the remainder donor’s proposed transaction donor proposes to contribute an undivided x interest in the unitrust payment to charity and to irrevocably designate charity as the beneficiary of an undivided x interest in the plr-111449-12 remainder donor will not receive any consideration from charity for the contribution and designation donor and charity will then consent to a partial_termination of trust in their respective capacities as settlor and beneficiary thereafter donor as trustee will distribute to charity x of trust’s corpus not in trust and continue to hold the balance of trust’s corpus in accordance with the terms of trust donor represents that the x interest in the unitrust payment and the x interest in the remainder that charity receives will merge pursuant to state law leaving charity with an undivided x interest in the corpus of trust and the basis of the assets distributed to charity in the partial_liquidation of trust will be fairly representative of the adjusted_basis of the property available for payment on the date of payment ruling_request law and analysis sec_170 provides that there shall be allowed as a deduction any charitable_contribution as defined in sec_170 payment of which is made within the taxable_year sec_170 provides that a contribution not made by a transfer in trust of less than the taxpayer’s entire_interest in property is not allowed as a charitable_contribution_deduction except to the extent such contribution would have been allowed as a deduction had it been transferred in trust sec_170 provides that sec_170 does not apply to a contribution of an undivided portion of the taxpayer’s entire_interest in property sec_1_170a-6 and sec_1_170a-7 of the income_tax regulations provide that a deduction is allowed for a contribution of a partial interest in property if such interest is the taxpayer’s entire_interest in the property such as an income_interest or a remainder_interest if however the property in which such partial interest exists was divided in order to create such interest and thus to avoid sec_170 the deduction will not be allowed sec_1_170a-7 provides that an undivided portion of a taxpayer’s entire_interest in property must consist of a fraction or percentage of each and every substantial interest or right owned by the taxpayer in the property and must extend over the entire term of the taxpayer’s interest in the property in revrul_86_60 1986_1_cb_302 the service considered whether donations of an annuity interest in a charitable_remainder_annuity_trust crat to the remainder beneficiary of the crat qualify for charitable_contribution deductions under sec_170 and sec_2522 in situation of that ruling grantor a created a crat described in sec_664 and retained the annuity interest for life the remainder beneficiary was a charitable_organization described in sec_170 and sec_2522 four years later a transferred the plr-111449-12 annuity interest in the crat to the remainder beneficiary revrul_86_60 concludes inter alia based partly on sec_1_170a-7 that the gift to the charity of a’s annuity interest in the crat qualifies for a charitable_contribution_deduction under sec_170 the present case is analogous to the situation in revrul_86_60 donor and spouse retained an income_interest in trust donor the surviving settlor of trust proposes to transfer a portion of his interest in the unitrust payment to charity the remainder beneficiary of trust based solely on the facts submitted and representations made including the representation that under state law donor’s undivided x interest in the unitrust payment transferred to charity merges with x of charity’s remainder_interest we conclude that donor’s transfer of an undivided portion of the unitrust_interest will qualify for a charitable_contribution_deduction under sec_170 ruling_request sec_1_170a-7 provides in part that the amount of the deduction under sec_170 in the case of a charitable_contribution not in trust of a partial interest in property to which sec_1_170a-7 applies is the fair_market_value of the partial interest at the time of the contribution see sec_1_170a-1 sec_1_170a-7 pertains to a gift of an undivided portion of a donor’s entire_interest sec_1_170a-7 further provides that the fair_market_value of such a partial interest must be determined in accordance with sec_20_2031-7 of the estate_tax regulations the valuation methodology set forth under sec_20_2031-7 is the same methodology described under sec_664 for valuing unitrust interests for income_tax purposes accordingly the amount of donor’s charitable_contribution_deduction will be equal to the present_value of the right to receive annual payments equal to y percent of the net fair_market_value of x of the assets of trust in order to compute the actuarial factor necessary to determine the value of donor’s contribution of an x undivided unitrust_interest irs publication actuarial values version 3b is required the y percent payout factor is calculated for a single life using the age of donor and the remainder factor contained in table u the actuarial factor so obtained multiplied by x of the value of the unitrust corpus at the time of the transfer will equal the value of the contribution for purposes of sec_170 ruling_request sec_2501 imposes a tax for each calendar_year on the transfer of property by gift during such calendar_year by an individual sec_2511 provides that the gift_tax applies to a transfer by gift whether the transfer is in trust or otherwise whether the gift is direct or indirect and whether the property is real or personal tangible or intangible plr-111449-12 sec_25_2511-2 of the gift_tax regulations provides that as to any property of which the donor has so parted with dominion and control as to leave in him no power to change its disposition whether for his own benefit or for the benefit of another the gift is complete sec_25_2511-2 provides that a gift is incomplete if and to the extent that a reserved power gives the donor the power to name new beneficiaries or to change the interests of the beneficiaries as between themselves unless the power is a fiduciary power limited by a fixed_or_ascertainable_standard sec_2522 provides that in computing taxable_gifts for the calendar_year there is allowed as a deduction the amount of all gifts made during such year to or for_the_use_of organizations described in sec_2522 sec_2522 provides that where a donor transfers an interest in property other than an interest described in sec_170 ie a remainder_interest in a farm or residence or an undivided portion of the donor's entire_interest to or for a charity and an interest in the same property is retained by the donor or is transferred or has been transferred for less than adequate_and_full_consideration in money_or_money's_worth from the donor to a person or for a use not described in sec_2522 or b no deduction shall be allowed under sec_2522 for the interest which is transferred unless in the case of any interest other than a remainder_interest the interest is in the form of a guaranteed annuity or a fixed percentage distributed yearly of the annual fair_market_value of the property to be determined yearly a unitrust_interest sec_25_2522_c_-3 provides that if a donor transfers an interest in property for charitable purposes and an interest in the same property is retained by the donor or is transferred or has been transferred for less than adequate_and_full_consideration in money’s or money’s worth for private purposes no deduction is allowed under sec_2522 unless the charitable interest is a deductible_interest as described in sec_25_2522_c_-3 sec_25_2522_c_-3 provides in relevant part that a deductible_interest for purposes of sec_25_2522_c_-3 includes a charitable interest in property where the charitable interest is an undivided portion not in trust of the donor’s entire_interest in property in this case on d1 donor and spouse created trust and contributed to it certain property that became the corpus of trust under the terms of trust donor and spouse retained the right to add or delete the charitable_remainder beneficiaries accordingly donor and spouse did not make a completed_gift of a remainder_interest in the corpus of trust for gift_tax purposes see sec_25_2511-2 on the date of spouse’s death donor became the sole owner of the corpus of trust for gift_tax purposes plr-111449-12 donor proposes to terminate trust as to x of its corpus and to contribute x of the corpus of trust not in trust to charity to accomplish this donor will transfer an undivided x interest in the unitrust payment to charity in addition donor will irrevocably designate charity as the sole beneficiary of an undivided x interest in remainder thereafter donor as trustee will transfer x of the corpus of trust not in trust to charity based solely on the facts submitted and representations made and specifically because charity will own a fee interest in x of the corpus of trust not in trust after donor’s transfers we conclude that for gift_tax purposes donor will make a gift of x of the corpus of trust not in trust and will be entitled to a gift_tax charitable_contribution_deduction under sec_2522 for the fair_market_value of its gift ruling_request sec_1_664-3 provides that the governing instrument may provide that an amount other than the unitrust_amount shall be paid or may be paid in the discretion of the trustee to an organization described in sec_170 provided that in the case of distributions in_kind the adjusted_basis of the property distributed is fairly representative of the adjusted_basis of the property available for the payment on the date of the payment the regulations thus authorized the current_distribution of unitrust assets to a charitable_organization in this case it is represented that under local law upon donor’s transfer of an undivided x portion of his unitrust payment to charity and donor’s irrevocable designation of x of the remainder to charity the charity’s interest in the unitrust payment and the remainder will merge although a partial_termination of trust will occur trust will continue to be in the form of and will function as a crut within the meaning of sec_664 accordingly based solely on the facts submitted and representations made we conclude that the transfer of the undivided x interest in the unitrust payment will not cause trust to cease to be a_trust described in sec_664 ruling_request we conclude based solely on the facts and representations submitted that to the extent trust realized capital_gain income in prior years which income was not included in the unitrust payments paid to donor and thereby included in the income of donor that capital_gain will not be currently included in donor’s income by reason of his transfer of a portion of his unitrust payments to charity plr-111449-12 conclusions donor will be entitled to a charitable_contribution_deduction for income_tax purposes under sec_170 for the contribution of the undivided_interest in a unitrust payment transferred to charity the amount of donor’s charitable_contribution_deduction will be equal to the present_value of the right to receive annual payments equal to y percent of the net fair_market_value of x of the trust assets determined annually for a term starting on the date of the contribution to charity and ending on the date of death of donor donor will be entitled to a gift_tax charitable_contribution_deduction under sec_2522 for the fair_market_value of its gift_for gift_tax purposes of x of the corpus of trust not in trust the transfer of the undivided x interest in the unitrust payment will not cause the trust to cease to be a_trust described in sec_664 to the extent that in prior years the trust realized capital_gain income and that income was not included in the income of donor such capital_gain shall not be included in the income of donor solely because of his transfer of the undivided_interest in the unitrust payment to charity the rulings contained in this letter are based upon information and representations submitted by taxpayers 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 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 including whether trust qualifies as a crut and whether requirements for merger will be satisfied under local law 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 a copy of this ruling should be attached to donor’s federal income and gift_tax returns for the tax years affected alternatively taxpayers filing returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of this ruling plr-111449-12 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 karin goldsmith gross acting branch chief branch income_tax accounting


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc psi 1-plr-135659-03 date aug legend x d1 dear this responds to your letter dated date requesting relief under sec_1362 of the internal_revenue_code facts x was incorporated on d1 the shareholders of x intended that x be treated as an s_corporation effective on d1 but the election to be treated as an s_corporation was not timely filed accordingly x requests a ruling that it will be treated as an s_corporation effective d1 law and analysis sec_1362 provides that a small_business_corporation may elect to be an s_corporation sec_1362 provides the rule on when an s election will be effective sec_1362 provides in relevant part that if an s election is made within the first two and one-half months of a corporation's taxable_year then the corporation will be treated as an s_corporation for the year in which the election is made under sec_1362 however if an s election is made after the first two and one-half months of a corporation's taxable_year then that corporation will not be treated as an s plr-135659-03 corporation until the taxable_year after the year in which the s election is filed sec_1362 provides that if no sec_1362 election is made for any taxable_year and the secretary determines that there was reasonable_cause for the failure to timely make such election then the secretary may treat such an election as timely made for such taxable_year and sec_1362 shall not apply x did not timely file an election to be treated as an s_corporation under sec_1362 x has however established reasonable_cause for not making a timely s election and is entitled to relief under sec_1362 conclusion based solely on the facts submitted and the representations made and provided that x otherwise qualifies as an s_corporation we conclude that x will be treated as an s_corporation effective d1 within days from the date of this letter x should submit a properly completed form_2553 with a copy of this letter attached to the appropriate service_center except as specifically set forth above no opinion is expressed or implied as to the federal tax consequences of the facts described above under any other provision of the code specifically no opinion is expressed concerning whether x is in fact an s_corporation for federal tax purposes this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent sincerely dianna k miosi chief branch office of the associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes cc


internal_revenue_service number release date index numbers ------------------------------------ ---------------------------- -------------------------- --------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ---------------------------- id no ------------- telephone number --------------------- refer reply to cc psi plr-127405-09 date date legend x -------------------------------------------------------- ------------------------------------ y ------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------ z date date date country -------------------------------- ------------------------- ---------------------- ------------------- ------------ dear --------------------- this responds to a letter dated date submitted on behalf of x requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations to file an election under sec_301_7701-3 to be treated as a partnership for federal tax purposes facts the information submitted states that x was formed on date under the laws of country on date y acquired a percent interest in x on date y transferred its plr-127405-09 entire_interest in x to z x represents that x is a foreign_entity eligible to elect to be treated as a partnership x intended to be treated as a partnership effective date due to inadvertence x failed to file a timely form_8832 entity classification election electing to treat x as a partnership effective date law and analysis sec_301_7701-3 provides that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes a business_entity is any entity recognized for federal tax purposes that is not properly classified as a_trust under sec_301_7701-4 or otherwise subject_to special treatment under the internal_revenue_code sec_301_7701-3 provides that except as provided in sec_301 b unless the entity elects otherwise a foreign eligible_entity is a a partnership if it has two or more members and at least one member does not have limited_liability or b an association if all members have limited_liability or c disregarded as an entity separate from its owner if it has a single owner that does not have limited_liability sec_301_7701-3 provides that to elect to be classified other than as provided in sec_301_7701-3 an eligible_entity must file form_8832 with the designated service_center sec_301_7701-3 provides that an entity classification election must be filed on form_8832 and can be effective up to seventy-five days prior to the date the form is filed or up to twelve months after the date on which the form is filed under sec_301_9100-1 the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i section b defines the term regulatory election as including an election whose due_date is prescribed by a regulation published in the federal_register sec_301_9100-1 through provide the standards that the commissioner will use to determine whether to grant an extension of time to make an election sec_301_9100-1 sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides rules for requesting extensions of time for regulatory elections that do not meet the requirements of sec_301_9100-2 plr-127405-09 requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government conclusion based solely on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-3 have been satisfied as a result x is granted an extension of time of days from the date of this letter to make an election to be treated as a partnership for federal tax purposes effective date x must make the election by filing a properly executed form_8832 with the appropriate service_center a copy of this letter should be attached to the form except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely curt g wilson curt g wilson associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes cc