PLR 200709055: IRS revokes a capital contribution ruling after customer ties emerge

Plain-English summary

An earlier ruling said a transfer of facilities to a corporation was a nonshareholder capital contribution excluded from income under IRC § 118(a). That ruling relied on a representation that the contributor was neither a customer nor a potential customer. The taxpayer later disclosed customer relationships between the contributor and the corporation. The IRS treated the original representation as a controlling fact and revoked the earlier ruling. The revocation applies retroactively to all years still open under the period of limitations.

Ruling snapshot

• Question: Should the earlier exclusion ruling stand after disclosure of customer relationships?
• Outcome: Revocation, retroactive to all open years.
• Key authorities: IRC § 118(a), (b); Rev. Proc. 2006-1, §§ 11.04, 11.05(1).

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224
Number: 200709055
Third Party Communication: None
Release Date: 3/2/2007
Date of Communication: Not Applicable
Index Number: 118.01-02, 118.02-00
Person To Contact:
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Telephone Number:
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Refer Reply To:
In Re:
CC:PSI:B05
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PLR-153845-06
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Date:
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November 29, 2006

LEGEND

Taxpayer = -------------------------------------------------------------------------------
Contributor = ------------------------------------------------------------------------------------------
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Dear ----------------:

This letter revokes private letter ruling 200638002 issued to Taxpayer.

Section 118(a) provides the general rule that a corporation’s gross income does not include any contribution to the capital of the corporation. Section 118(b) excludes from section 118(a) a contribution in aid of construction or any other contribution as a customer or potential customer.

The letter ruling concluded that the transfer of the facilities by Contributor to Taxpayer will not be a contribution in aid of construction under section 118(b) and will be excludable from the gross income of Taxpayer as a nonshareholder contribution to capital under section 118(a). The conclusion was expressly based on a representation by Taxpayer and Contributor that Contributor is not a customer or potential customer of Taxpayer.

In a letter, dated September 8, 2006, Taxpayer’s authorized representative provided additional facts in which Contributor and Taxpayer engage in certain customer relationships.

Section 11.05(1) of Rev. Proc. 2006-1, 2006-1 I.R.B. 1, 49, provides that an Associate Office will revoke a letter ruling and apply the revocation retroactively to the taxpayer for whom the letter ruling was issued if there has been a misstatement or omission of controlling facts.
PLR-153845-06
2

The representation that Contributor was not a customer or potential customer of Taxpayer was a controlling fact in reaching the conclusion. Therefore, under section 11.04 of Rev. Proc. 2006-1, the revocation is retroactive to all years open under the period of limitations.

Sincerely,

/s/ Susan J. Reaman

SUSAN J. REAMAN
Branch Chief, Branch 5
Office of Associate Chief Counsel
(Passthroughs and Special Industries)

Enclosure: 6110 copy