Gross Income v. Not Gross Income

Internal Revenue Service Department of the Treasury
Washington, DC 20224
Number: 202352011
Release Date: 12/29/2023
Index Number: 61.00-00, 1001.00-00
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Third Party Communication: None
Date of Communication: Not Applicable
Person To Contact:
---, ID No. ---
Telephone Number:
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Refer Reply To:
CC:ITA:B05
PLR-108357-23
Date:
September 29, 2023
TY: ---
Dear ---:
This responds to a letter ruling request by the taxpayer, --- ---
--- (TIN: ---) (---), dated ---, and as subsequently amended, regarding the application of sections 61 and 1001 of the Internal Revenue Code (Code) to the Proposed Transaction (described below). --- requests a ruling that it will be treated as receiving an amount realized from the Proposed Transaction measured by the present value, if any, of the ------ Guarantee (described below).

# FACTS

--- is a --- corporation incorporated under the laws of ---

For what are represented to be valid business purposes, --- and --- propose to engage in the following transaction.
PLR-108357-23 2

(1) --- will admit --- as its member. Such membership will not be transferable. --- will amend its corporate governance documents to reflect ---- membership in ---. As the member of ---, --- will have the right, among other things, to approve all directors of the Board of ---(the Control Right).

(2) --- will provide ---, ---, ---
--- for an arms-length charge (the Future Service
Transactions). The expected pricing on the Future Service Transactions is expected to yield cost savings to --- over their current pricing arrangements with current service providers. Similarly, --- is expected to be able to provide such cost savings to --- due to efficiencies of scale.

(3) --- will agree to the --- Guarantee, defined below.
The elements described in (1) through (3) above are collectively referred to as the
Proposed Transaction. Neither --- nor --- will pay any cash consideration at closing.
During the --- period following the closing of the Proposed Transaction, --- expects to realize at least $--- in cost savings attributable to Future Service Transactions. If --- does not realize at least $--- in such cost savings, then at the end of the --- period, --- will pay --- the excess, if any, of $--- ----- over the cost savings actually realized during the --- period (the ------Guarantee).
--- will pay for all future services provided by --- and its subsidiaries and affiliates in accordance with the arm’s length standard, as monitored by applicable regulators of ---.
--- status as the member of --- will not entitle --- to any economic rights in ---. Specifically, --- will not have the right to participate in the ------, nor will it have the right to share in the of --- in the event of --- liquidation. In addition, --- will not have access to the of --- as a result of the Proposed Transaction.
Under the relevant terms of the ---, --- will also be responsible for maintaining the of --- following the Proposed Transaction (the ------). It is not expected that --- will be at the time of closing of the Proposed Transaction.
Following the Proposed Transaction, ---’s Board will consist of --- directors, ---of whom will be appointed by ---. The remaining --- directors will consist of: (a) ----- residents; (b) ---; and (c) the --- CEO, all ---of whom will be PLR-108357-23 3 nominated by the Board and approved by --- in its capacity as the sole member of ---. Accordingly, once --- becomes the member of ---, --- will have final authority to approve all members of the Board. Each director will be entitled to one vote on all issues typically submitted for review and approved by boards of directors of ---- corporations. However, certain actions will also require the approval of --- as the member of ---.
--- represents that:
1. The Proposed Transaction will not result in a---; and
2. The Proposed Transaction will not result in --- becoming an includible corporation (within the meaning of § 1504(b)) with respect to the affiliated group of which --- is the common parent.
REQUESTED RULING
As a result of the Proposed Transaction, --- will be treated as receiving an amount realized measured by the present value, if any, of the --- Guarantee.

# LAW AND ANALYSIS

Section 61(a) provides that, except as otherwise provided by subtitle A of the Code, gross income means all income from whatever source derived. Specifically, gross income includes, but is not limited to, gains from dealings in property. See sec. 61(a)(3).
Section 1001(a) provides that the gain from the sale or other disposition of property is the excess of the amount realized therefrom over the adjusted basis provided in § 1011 for determining gain and that the loss is the excess of the adjusted basis provided in § 1011 for determining loss over the amount realized.
Section 1001(b) provides that the amount realized from the sale or other disposition of property is the sum of any money received plus the fair market value of property (other than money) received.
In Cottage Sav. Ass’n. v. Commissioner, 499 U.S. 554, 559 (1991), the Supreme Court described the language of § 1001(a) as providing a "straightforward test for realization: to realize a gain or loss in the value of property, the taxpayer must engage in a "sale or other disposition of [the] property." Upholding section 1.1001-1 of the Income Tax Regulations as a reasonable interpretation of section 1001(a), the Court held that "an exchange of property for other property differing materially in kind or in extent" constituted a disposition of property. See id. at 560-562.
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The exchange under the Proposed Transaction between --- and --- constitutes a disposition of property for each party for purposes of section 1001(a). As a result, --- will realize gain or loss from the Proposed Transaction.
In United States v. Davis, 370 U.S. 65 (1962), the Supreme Court held that the transfer of appreciated stock by a former husband to his former wife in an arm’s length transaction was a realization event under § 1001(a). The amount realized by the husband was the fair market value of the property received (the former wife’s relinquished marital rights), which were presumed to be equal in value to the property given in exchange by the husband (the appreciated stock). The husband’s realized (and recognized) gain was the difference between his amount realized and his adjusted basis in the appreciated stock. Although the specific result in divorce cases has been changed by enactment of § 1041, the Davis rationale continues to apply to arm’s length transfers of property.
Accordingly, we conclude that --- will be treated as receiving an amount realized under § 1001(a) from the Proposed Transaction measured by the present value, if any, of the --- Guarantee.
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. Specifically, we express no opinion on the application of section 482 to the Proposed Transaction or the consequences thereof; on the present value, fair market value, or other value of the --- Guarantee or any other consideration provided in the Proposed Transaction; or on whether there exists a valid business purpose for the Proposed Transaction.
This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the Code provides that it may not be used or cited as precedent.
In accordance with the Power of Attorney on file with this office, copies of this letter are being sent to --- authorized representatives.
A copy of this letter must be attached to any income tax return to which it is relevant.
Alternatively, taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of the letter ruling.
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 PLR-108357-23 5 by an appropriate party. While this office has not verified any of the material submitted in support of the request for a ruling, it is subject to verification on examination. cc: ------Sincerely, Sue-Jean Kim Senior Technician Reviewer, Branch 5 Office of Associate Chief Counsel (Income Tax & Accounting)