A brand-license termination payment need not be capitalized for one replacement agreement

Plain-English summary

A partnership group paid to terminate a sublicense allowing it to use an individual's name and related brand rights, then entered three new agreements concerning the brand. One replacement license was with a section 501(c)(3) organization rather than the for-profit corporation that had been party to the terminated sublicense. The IRS ruled that the exempt organization and for-profit corporation were not the same or substantially the same party for the applicable capitalization regulation, so the new license was not treated as a renegotiation and none of the termination payment had to be capitalized because of that agreement. The IRS declined to rule on allocation to two other replacement agreements because the necessary facts could not be determined in a letter ruling.

Ruling snapshot

• Question: Must a payment terminating a brand sublicense be capitalized because the taxpayer entered a replacement license with a tax-exempt organization?
• Outcome: approved in part (no amount was capitalized by reason of that replacement license; the IRS declined to rule on two other agreements)
• Key authorities: IRC § 263(a); Treas. Reg. §§ 1.263(a)-4(d)(2), (d)(6), (d)(7), and (e)

Full text (IRS public release)

Internal Revenue Service                                      Department of the Treasury
                                                              Washington, DC 20224

Number: 202021018                                             Third Party Communication: None
Release Date: 5/22/2020                                       Date of Communication: Not Applicable
Index Number: 263.00-00                                       Person To Contact:
                                                              -----------------, ID No. -----------------
----------------------------------------------------          Telephone Number:
-----------------------------------------------               --------------------
-----------------------                                       Refer Reply To:
--------------------------------                              CC:ITA:B01
                                                              PLR-125631-17
                                                              Date:
                                                              February 13, 2018


Legend

Taxpayer       =   -------------------------------------------------------------------------
A              =   ------------------------
B              =   --------------------------------------------------------------
C              =   --------------------------------------------------------------
D              =   -----------------------------------------------------------
E              =   -----------------------------
F              =   ----------------
G              =   ---------------------------
H              =   ----------------------------------
I              =   --------------------------------------
J              =   --------------------------------------
K              =   ------------------------------------------
L              =   ------------------------------------
M              =   -----------------------
N              =   ------------
O              =   ---------
P              =   ------------
Q              =   --------------
R              =   ----------------------
S              =   -----------
T              =   -------------------
U              =   ---------------------------------
V              =   ----------------------------------------
W              =   --------------------
X              =   ---------------
Y              =   --------------------------
Z              =   ----------------------------------------------------
A1             =   ---------------------
N1             =   ---
N2             =   ---
N3             =   --
N4             =   ---
                                                  2
PLR-125631-17

 N5         =       -----------
 N6         =       --
 N7         =       -------------
 N8         =       -------------
 N9         =       -------
 N10        =       --
 N11        =       ---
 N12        =       ---
 N13        =       ----------------
 Date1      =       --------------------------
 Date2      =       -----------------
 Date3      =       ---------------------------
 Date4      =       -------
 Date5      =       ------------------
 Date6      =       ------------------
 Date7      =       ------------------
 Date8      =       -------
 Date9      =       -------------------
 Date10     =       ----------------------
 Date11     =       ----------------------
 Date12     =       --------------------------
 Date 13    =       --------------------------
 Date 14    =       --------------------------
 Date 15    =       ----------------------
 Date 16    =       --------------------------


Dear            :

This letter responds to your letter dated August 18, 2017, and supplemental
correspondence, submitted on behalf of Taxpayer and three disregarded entities that
are owned directly or indirectly by Taxpayer (hereinafter, collectively referred to as
“Taxpayer’s Group”), requesting a ruling concerning the federal income tax treatment of
consideration paid pursuant to a termination agreement. Specifically, you requested a
ruling as to whether D’s payment to terminate a sub-license agreement with H is
required to be capitalized by Taxpayer for its taxable year ended Date1 under the
provisions in section 1.263(a)-4(d)(6)(iii) of the Income Tax Regulations.

FACTS

Taxpayer is a A limited liability company that is treated as a partnership for federal
income tax purposes. Taxpayer was formed in Date2 in connection with a restructuring
arrangement. Taxpayer uses an overall accrual method of accounting and uses a
calendar year end taxable year. Taxpayer, through its various affiliates, is engaged in
the production and marketing of S and related products for T. Taxpayer is owned by
three partners: I, J, and K.
PLR-125631-17                                3

The other members of Taxpayer’s Group are B, C, and D. B is a A limited liability
company that is disregarded entity for federal income tax purposes. B is wholly owned
by Taxpayer and was created in connection with the formation of Taxpayer. C is a A
limited liability company that is a disregarded entity for federal income tax purposes. C
is wholly owned by B. D is a E limited liability company that is a disregarded for federal
income tax purposes. D is wholly owned by C.

The intellectual property that is at issue is the name of , F, an individual and the
trademarks, image, recognition, and goodwill that are associated with the F name
(hereinafter, referred to as the “F name brand”). Ownership or an exclusive license in
the F name brand was held by G, a limited liability company that is wholly owned by F.
G entered into a licensing agreement with H conveying to H an exclusive sub-license in
the rights of the F name brand that were owned by or licensed to G. H is an S
corporation that is owned by F and by F’s spouse. F and F’s spouse have filed joint
federal income tax returns for all taxable years in issue.

On Date3, H entered into a development and sub-license agreement (hereinafter,
referred to as the “Date3 Sub-License”) providing D with certain rights relating to the F
name brand and permitting the development of certain S products under the F name
brand. D was and is not related to H, G, or F. D manufactures S and related products
for T. At the time that the Date3 Sub-License was entered into, D was a partnership
that was owned N1 percent by U and N2 percent by V. U was the same entity, prior to
a change in its name, that is currently named I. Subsequent to entering into the Date3
Sub-License, I transferred its ownership interest in D to C. V was a partnership in which
C held a majority interest. The Date3 Sub-License covered H’s rights, as sub-licensee,
to use the F name brand in connection with the manufacture, marketing, distribution,
and sale of S food and products for T.

In consideration for the grant of the Date3 Sub-License to D, D agreed to pay two
separate royalties to H. The first royalty that was payable under the terms of the Date3
Sub-License was an annual amount equal to N3 percent of D’s net sales revenue from
sales of products covered by the Date3 Sub-License (“sales royalty”). The second
royalty that was payable under the terms of the Date3 Sub-License was an annual
amount equal to N4 percent of D’s net profits derived from D’s sales of products
covered by the Date3 Sub-License (“profit royalty”). Also, under the Date3 Sub-
License, W agreed that F would participate in a designated number of key promotional
events each year, subject to reimbursement of F’s out-of-pocket expenses associated
with such promotion. In addition, D agreed to donate to W designated by H an
aggregate annual amount of N5.

The term of the Date3 Sub-License was to expire N6 years after the date of the initial
commercial launch of the products covered by the Date3 Sub-License. If, during this
initial term, H received at least N7 in aggregate royalties under the Date3 Sub-License,
D would be entitled to renew the agreement for an additional N6 years. If, during the
initial renewal term, H received at least N8 in aggregate royalties under the Date3 Sub-
PLR-125631-17                                 4

License, D would be entitled to renew the agreement for an additional N6 years
following the end of the initial renewal term. If the royalties paid to H fell short of the
minimum required to renew the agreement, D had the option to pay H the shortfall in
order to renew the agreement. The Date3 Sub-License in its original form remained in
effect under D’s Date4 taxable year.

During D’s Date4 taxable year, the Date3 Sub-License was amended on two separate
occasions. The first amendment to the Date3 Sub-License was entered on Date5 and
amended the Date3 Sub-License in several ways. First, the original renewal options
were eliminated, and the term of the Date3 Sub-License extended to Date14, with the
possibility of renewal. Second, the intellectual property rights were defined in a more
precise manner. Third, the royalty provisions in the Date3 Sub-License were amended
so that the N4 percent profit royalty payable to H would be converted into an additional
N9 percent sales royalty on D’s net sales revenue from products covered by the Date3
Sub-License. Fourth, the N3 percent sales royalty that was payable to H would be
payable to a different entity, A1, another limited liability company wholly owned by F and
treated as an S-corporation for federal income tax purposes. Finally, D was given the
option to discontinue producing and selling products using the F name brand, effective
Date15, subject to a transition period.

A second amendment to the Date3 Sub-License was entered on Date6. Under this
second amendment, in the event that H licensed a third party to sell any X and Y
bearing F’s name or image or bearing any of the trademarks subject to the amended
Date3 Sub-License in exchange for a royalty, H agreed to pay D N4 percent of any such
royalty received by H.

On Date7, following the amendments to the Date3 Sub-License, K acquired an interest
in C from I. In Date8, the ownership structures of D and C were modified. As a result,
D became wholly owned by C and consequently also became a disregarded entity for
federal income tax purposes.

In Date2, the partners in C contributed their ownership interests in C to Taxpayer, a
newly formed entity treated as a partnership for federal income tax purposes, in
exchange for interests in Taxpayer. In turn, Taxpayer contributed the ownership
interests in C to B, a newly formed entity that is a disregarded entity for federal income
tax purposes. As a result of the contribution of the interests in C to Taxpayer, C
became a disregarded entity for federal income tax purposes, and it retained this status
after the contribution of these interests by Taxpayer to B. Taxpayer is treated as a
continuation of the C partnership for tax purposes.

On Date9, F and F’s spouse, formed a foundation called L, which is described in section
501(c)(3) of the Internal Revenue Code (the Code). The by-laws of L were adopted on
Date10. L filed an application with the Internal Revenue Service (“IRS”) for recognition
of exemption under Section 501(c)(3) of the Code. On Date16, L received a favorable
PLR-125631-17                                5

determination letter from the Internal Revenue Service recognizing L as a tax-exempt
entity under section 501(c)(3) from its date of organization.

To implement its goals of increasing its charitable giving and to have a dedicated
revenue source for L, F desired to have L, rather than H, become the licensor of the F
name brand. Also, the owners of Taxpayer had become concerned that the amended
terms of the Date3 Sub-License between H and D, which called for an additional N9
percent sales royalty on certain D product sales and that would become effective
Date11, would be a burdensome financial obligation in future years. Accordingly,
Taxpayer and representatives of F entered into negotiations to terminate the amended
Date3 Sub-License.

The Date3 Sub-License did not contain any express provisions governing the
termination of the agreement. However, in light of expectations as to the amount of
royalties that would be owed by D under the agreement starting Date11, Taxpayer was
willing to pay a substantial sum to terminate the Date3 Sub-License with H and enter
into a new agreement with L.

These negotiations resulted in an agreement (“Termination Agreement”), dated Date10,
to terminate the Date3 Sub-License between D and H. In exchange for the termination
of the Sub-License, D agreed to pay H a termination fee of N13. The Termination
Agreement does not provide that entry into a new agreement with L is a prerequisite to
the termination of the Date3 Sub-License.

Taxpayer assumes that subsequent to the termination of the Date3 Sub-License, G’s
sub-license of the rights to the F name brand to H was terminated as well. Also
subsequent to the termination of the Date3 Sub-License, F assigned some portion of
the rights to the F name brand to M, a A limited liability company that was, at the time of
assignment, wholly owned by F.

On Date10, G and M entered into trademark license agreements with L for no
consideration. These trademark license agreements granted L sublicenses in
trademarks bearing the names F, N, O, and P, F’s image or likeness, and any other
trademarks that G or M might thereafter authorize, with respect to S products. The
initial terms of these trademark license agreements will expire on Date12. At the
expiration of the initial terms of the agreements, the agreements will be automatically
renewed annually, unless notice is given by L to terminate the agreements.

On Date10, immediately after the termination of the Date3 Sub-License between H and
D, C entered into a new sub-licensing agreement (hereinafter, referred to as the
“License and Product Agreement”) with L to sub-license the F name, trademarks
incorporating the words N, O, P, and other trademarks developed in the future, and F’s
image for use in connection with the manufacture and sale of certain S products. The
License and Product Agreement permits C to sub-license its rights to D. As
PLR-125631-17                                6

consideration for these rights, C agreed to pay an annual royalty to L equal to N3
percent of L’s and/or D’s net sales of licensed products.

The term of the License and Product Agreement will expire on Date13. However, C
may terminate the License and Product Agreement at any time after Date14, after giving
N4 days’ notice to L. In addition, C may at any time, upon giving written notice to L,
elect to terminate the use of the licensed property.

On Date10, C entered into an appearance and promotion agreement (hereinafter,
referred to as the “Appearance and Promotion Agreement”) with Q (an organization
owned by F), under which Q undertook to cause F to perform promotional services,
such as appearing in television commercials or photographic opportunities or
participating in other promotional-type events, and giving C the right to use various
licensed materials, with respect to the products licensed under the License and Product
Agreement between C and L. The consideration for these services was the issuance to
Q of a profits interest represented by Class B units in Taxpayer.

The term of the Appearance and Promotion Agreement is N10 years for promotional
services to be performed by F. The term of C’s right to use licensed materials created
as a result of the Appearance and Promotion Agreement is coterminous with the term of
the License and Product Agreement. However, C has the right to terminate the
agreement upon giving N11 days’ written notice to Q.

In addition, on Date10, H and C entered into a separate license and fee agreement
(hereinafter, referred to as the “License and Fee Agreement”) under which H granted C
a license to use the trademark R with respect to products licensed under the License
and Product Agreement, for purposes of publicizing the charitable aspects of the
arrangement between L and C. In addition, if during the term of the License and Fee
Agreement, H enters into a license with a third party to produce and sell certain licensed
accessories, such as X, Y, and supplies for T (but not Z for T) bearing the trademarks
covered by the License and Product Agreement, H agreed to pay C consideration in the
amount of N12 percent of H’s gross royalties collected from any sales of accessories
covered by the agreement. This License and Fee Agreement replaced a similar
provision in the Date5 amendment to the Date3 Sub-License that was terminated in
Date8. That earlier agreement called for the payment by H of a N4 percent royalty with
respect to such third-party sales, but the royalty rate on this category of sales was
reduced to N12 percent in this License and Fee Agreement. The term of the License
and Fee Agreement lasts until such time as C or D discontinues sales of products that
are subject to the royalty provided in the License and Product Agreement between L
and C.

LAW

Section 263(a) of the Code provides generally that no deduction is allowed for any
amount paid out for new buildings or for permanent improvements or betterments made
PLR-125631-17                                 7

to increase the value of any property or estate or any amount expended in restoring
property or in making good the exhaustion thereof for which an allowance is or has
been made.

Section 1.263(a)-1(d) provides examples of expenditures that are capitalized under
section 263, including amounts paid to acquire or create intangibles. See section
1.263(a)-1(d)(3).

Section 1.263(a)-4 provides rules for applying § 263 to amounts paid to acquire or
create intangibles. Section 1.263(a)-4(b)(1) provides that except as otherwise provided
in section 1.263(a)-4, a taxpayer must capitalize an amount paid to (i) acquire an
intangible (see section 1.263(a)-4(c)); (ii) create an intangible described in section
1.263(a)-4(d); (iii) create or enhance a separate and distinct intangible asset within the
meaning of section 1.263(a)-4(b)(3); (iv) create or enhance a future benefit identified in
the Federal Register or the Internal Revenue Bulletin as an intangible for which
capitalization is required; and (v) facilitate (as defined in section 1.263(a)-4(e)(1)) the
acquisition or creation of an intangible.

Neither sections 1.263(a)-4(b)(1)(i) ,(iii), nor (iv) apply to the N3 payment made by D to
H under the Termination Agreement. First, D’s payment is not an amount paid to H to
acquire an intangible from H in a purchase or similar transaction as described in section
1.263(a)-4(c). The payment was made primarily to terminate the Date3 Sub-License
agreement, and was not made to H in a purchase or similar transaction. Second, as of
the date of this letter, this payment does not create or enhance a future benefit identified
in published guidance. Third, the payment by D to H is not an amount paid to create or
enhance a separate and distinct intangible asset as defined in section 1.263(a)-4(b)(3).
Section 1.263(a)-4(b)(3)(ii) specifically provides that amounts paid to another party to
terminate (or facilitate the termination of) an agreement with that party are treated as
amounts that do not create a separate and distinct intangible asset within the meaning
of section 1.263(a)-4(b)(i). However, section 1.263(a)-4(b)(3)(ii) provides a cross-
reference to sections 1.263(a)-4(d)(2), (6), and (7), which have rules that specifically
require capitalization of amounts paid to terminate to create certain new agreements.

Section 1.263(a)-4(d)(1) provides a general rule that a taxpayer must capitalize
amounts paid to create an intangible described in section 1.263(a)-4(d). Section
1.263(a)-4(d)(2)(i) provides that a taxpayer must capitalize amounts paid to another
party to create, originate, enter into, renew or renegotiate with that party any of the
financial interests enumerated in section 1.263(a)-4(d)(2)(i). Taxpayer does not need to
capitalize under section 1.263(a)-4(d)(2)(i) the amounts paid under the Termination
Agreement because Taxpayer’s Group did not create, originate, enter into, renew, or
renegotiate financial interests in connection with the Termination Agreement.

Section 1.263(a)-4(d)(7)(i) provides that a taxpayer must capitalize amounts paid to
another party to terminate: (i) a lease of real or tangible personal property between the
taxpayer (as lessor) and the other party (as lessee); (ii) an agreement that grants that
PLR-125631-17                                 8

party the exclusive right to acquire or use the taxpayer’s property or services or to
conduct the taxpayer’s business; or (iii) an agreement that prohibits the taxpayer from
competing with that party or from acquiring property or services from a competitor of
that party. Taxpayer is not required to capitalize the payments made under the
Termination Agreement under this subparagraph because the parties did not terminate
an agreement that is listed in section 1.263(a)-4(d)(7)(i).

Section 1.263(a)-4(d)(6) provides rules for capitalization of a payment made by a
taxpayer to another party to create, originate, enter into, renew, or renegotiate with that
party certain enumerated agreements or covenants. Under sections 1.263(a)-
4(d)(6)(i)(A) and (B), these agreements include, in part, an agreement providing the
taxpayer the right to use tangible or intangible property or an agreement providing the
taxpayer the right to receive services.

Section 1.263(a)-4(d)(6)(iii) provides that a taxpayer is treated as renegotiating an
agreement specified under 1.263(a)-4(d)(6)(i) if the terms of the agreement are
modified. Section 1.263(a)-4(d)(6)(iii) provides that a taxpayer is also treated as
renegotiating an agreement if: (i) the taxpayer enters a new agreement with the same
party (or substantially the same parties) to a terminated agreement, (ii) the taxpayer
could not cancel the terminated agreement without the consent of the other party or
parties, and (iii) the other party or parties would not have consented to the cancellation
unless the taxpayer entered into the new agreement. Thus, for purposes of section
1.263(a)-4(d)(6)(iii), a termination payment must be treated as an amount paid
renegotiate an agreement, and therefore capitalized, if taxpayer enters a new
agreement of a type specified in section 1.263(a)-4(d)(i) and the three requirements are
satisfied. Or, in other words, if one of the above requirements is not satisfied, then the
termination payment is not required to be capitalized under section 1.263(a)-4(d)(2).

Accordingly, each of Taxpayer’s new agreements must be analyzed to determine
whether they meet each of the criteria under section 1.263(a)-4(d)(6)(iii). If they meet
all three of these criteria, the new contract is treated as a renegotiation, and any
termination costs allocable to the new contract must be capitalized under section
1.263(a)-4(d)(6) as an amount paid to renegotiating a contract.

As discussed in the facts, C entered into three different agreements immediately
following the termination of the Date3 Sub-License between H and D: (1) the License
and Product Agreement; (2) the Appearance and Promotion Agreement; and (3) the
License and Fee Agreement. Taxpayer acknowledges, and this office agrees, that each
of these agreements as well as the terminated agreement involve agreements providing
the taxpayer with the contracts rights defined under section 1.263(a)-4(d)(6)(i).
Specifically, these agreements provide taxpayer with the right to use intangible property,
and/or the right to receive services under sections 1.263(a)-4(d)(6)(i)(A) and (B).
PLR-125631-17                                  9

In regards to (1) the License and Product Agreement, Taxpayer argues that the first
requirement of section 1.263(a)-4(d)(6)(iii) is not met, and as a result, the termination
payment would not be considered an amount paid to renegotiate the License and
Product Agreement. Specifically, with regard to this agreement, Taxpayer argues that it
is not entering a new agreement with the same party or substantially the same parties to
the terminated agreement. The License and Product Agreement covers the same
subject matter as the terminated Date3 Sub-License as they both relate to the right to
use the F name brand by a member of Taxpayer’s Group in connection with the
manufacture and sale of S products. However, the Date3 Sub-License was entered into
with H, whereas the License and Product Agreement was entered into with L. H is a
for-profit S-corporation wholly owned by F and F’s spouse, whereas L is a tax-exempt
entity. As noted, L received a favorable determination letter from the IRS recognizing L
as a tax-exempt entity under section 501(c)(3) from its date of organization, a date
before the parties entered the new agreement.

In general, an organization described in section 501(c)(3) is not substantially the same
as an unrelated for-profit entity because the organization must be organized and
operated exclusively for exempt purposes and no part of the net earnings of the
organization may inure to the benefit of any private shareholder or individual. See
sections 1.501(c)(3)-1(a) – (c). As noted above, L received a determination letter from
the IRS recognizing L as a tax-exempt entity under section 501(c)(3), effective prior to
the termination of the Date3 Sub-License and prior to L’s entrance into the License and
Product Agreement with C. Accordingly, for the sole purpose of interpreting the
language, “the same party or (substantially the same party)” under section 1.263(a)-
4(d)(2)(iii) under these facts, L and H will not be treated as the same or substantially the
same party. Therefore, the first criteria of section 1.263(a)-4(d)(6)(iii) is not met, and the
License and Product Agreement will not be treated as a renegotiation of the Date3 Sub-
License. As such, no portion of the N13 termination payment by C to H is allocable to
the License and Product Agreement as a cost of creating or entering into that contract
under section 1.263(a)-4(d)(2).

In addition, section 1.263(a)-4(b)(v) provides that a taxpayer must capitalize an amount
paid to facilitate (as defined in section 1.263(a)-4(e)(1)) the acquisition or creation of an
intangible. Section 1.263(a)-4(e)(1)(i) specifically provides that an amount is paid to
facilitate the acquisition or creation of an intangible if the amount is paid in the process
of investigating or otherwise pursuing the transaction. Section 1.263(a)-4(e)(1)(ii)
provides that an amount paid to terminate (or facilitate the termination) of an existing
agreement does not facilitate the acquisition of another agreement under this section,
except as provided in section 1.263(a)-4(d)(6)(iii). As discussed above, section
1.263(a)-4(d)(6)(iii) does not apply to the License and Product Agreement. As a result,
the termination payment is also not considered an amount paid to facilitate the creation
of the License and Product Agreement under section 1.263(a)-4(e).

In regards to (2) the Appearance and Promotion Agreement and (3) the License and
Fee Agreement, Taxpayer acknowledges that C has entered into these new
PLR-125631-17                                10

agreements with the same, or substantially the same, parties as the Date3 Sub-License
(i.e., Q and H, both entities wholly owned by F, and/or its spouse). Thus, the first
requirement of section 1.263(a)-4(d)(6)(iii) is met with respect to these agreements.
Taxpayer also acknowledges that the second requirement of this section was met for
each of these agreements because, under the terms of the Date3 Sub-License,
Taxpayer could not cancel the terminated agreement without the consent of H and F.
However, for the each of these two contracts, we cannot ascertain whether the third
requirement of section 1.263(a)-4(d)(6)(iii), is met. Specifically, under the facts
provided, we cannot determine whether the other parties, H or F (on behalf of H), would
not have consented to the cancellation of the Date3 Sub-License unless C or any other
member of Taxpayer’s Group entered into these new agreements. Moreover, because
it is a factual determination, we are unable to ascertain what portion, if any, of the N13
termination payment is properly allocable to the Appearance and Promotion Agreement
or the License and Fee Agreement. Accordingly, we are unable to rule on these
agreements.

CONCLUSION

Based solely on the facts and representations submitted, we conclude that D’s payment
to H of N13 to terminate the Date3 Sub-License is not an amount paid for creating or
entering the License and Product Agreement between C and L because the new
contract is not treated as a renegotiation of the Date3 Sub-License under section
1.263(a)-4(d)(6)(iii). Accordingly, no portion of the N13 termination payment made by D
to H is required to be capitalized under the provisions in section 1.263(a)-4(d)(6)(iii) by
reason of C’s entry into the new License and Product Agreement with L.

Further, we express no opinion as to whether any portion of the N13 termination
payment by D to H is an amount paid to create the License and Fee Agreement with H
and/or the Appearance and Promotion Agreement with Q under section 1.263(a)-4(d)(6)
or whether either of the those agreements represent a renegotiation of the Date3 Sub-
License under the provisions of section 1.263(a)-4(d)(6)(iii). As discussed above, we
believe that with respect to these contracts, these issues must be resolved on the basis
of facts that cannot be determined or sufficiently verified in the context of this letter
ruling request. Section 6.02 of Rev. Proc. 2018-1, 2018-1 I.R.B. 1, 18, provides that the
Service ordinarily does not issue letter rulings or determination letters in certain areas
because of the factual nature of the matter involved or for other reasons. Rev. Proc.
2018-3 and Rev. Proc. 2018-7 provide a list of these areas. Section 4.02(1) of Rev.
Proc. 2018-3, I.R.B.130, 141, provides that the Service ordinarily does not issue letter
rulings or determination letters in any matter in which the determination requested is
primarily one of fact.

The rulings contained in this letter are based upon information and representations
submitted by Taxpayer and accompanied by a penalty of perjury statement executed by
an appropriate party. While this office has not verified any of the material submitted in
support of the request for rulings, it is subject to verification on examination.
PLR-125631-17                                    11

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. Section 6110(k)(3) of the Code
provides that it may not be used or cited as precedent.

A copy of this ruling should be attached to Taxpayer’s federal tax returns for the tax
year(s) affected. 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.

In accordance with the provisions of the power of attorney currently on file with this
office, a copy of this letter is being sent to your authorized representatives.

                                    Sincerely,

                                    Charlotte Chyr

                                    Charlotte Chyr
                                    Acting Branch Chief, Branch 1
                                    Office of Associate Chief Counsel
                                    (Income Tax & Accounting)



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