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Background:

Sergio entered into a contract on March 25 to sell real estate for $1 million.  The sale was subject to a condition that the property was rezoned from R-7 to CN-2.  The adjusted basis of the property was $200,000.  The purchaser placed $50,000 in escrow, that was refundable if the zoning was not accomplished by September 30.

Sergio continued working on the rezoning up until the day he died.  He died on September 6.  The rezoning was approved on September 17 and on September 19 the remainder of the purchase price, $950,000 was paid to his estate.

The fiduciary of Sergio’s estate is trying to work out whether the sale goes on the final return for Sergioor is included in the return for the estateand is seeking your advice as to when the sale occurred, why and theincome tax and estate tax consequences.Did the sale occur before or after the death of Sergio?

Partial list of aids to help you with your research§§691 and 1014George W. Keck, 49 T.C. 313 (1968), rev’d 69-2 USTC ¶9626, 24 AFTR 2d 69-5554, 415 F.2d 531 (CA-6, 1969)Trust Company of Georgia v. Ross, 68-1 USTC ¶9133, 21 AFTR 2d 311, 392 F.2d 694 (CA-5. 1967)

Your responsibility:

Prepare a tax research memo addressing the question that has been raised.

Current date

To: Client file______________________________________________________________________________

Facts

1.The name of the US client is MacKenzie, Inc. (“MI”)

2.The JV partner is a Turkish company, TurkContracting and Trading Company (“Turk-Company”)

3.The joint venture vehicle is a Nevada (“NV”) LLC, named MacKenzie-TurkConstruction LLC (“MTLLC”)

4.The joint venture will be entering into a contract with the customer, a Cayman company with an Iraqi operation

5.The contract is a fixed pricecontract with the customer

6.Each JV partner has estimated the costs for their portion of the contract, assume $4 million for Turk-Company, and $1 million for MI

7.MTLLC will be charged the fixed price from each JV partner, and together with the direct costs incurred by MTLLC, a margin will be added to all the costs, resulting in a price for the fixed price contract with the customer

8.In order to ensure each JV partner is responsible for managing the respective costs for which they have quoted and are responsible it is preferable not to co-mingle the costs of the two partners. In essence, each partner is providing a service to the JV to fulfill the contract requirements

9.In addition to the Iraqi branch registration for MTLLC, each JV partner intends to register an Iraqi branch for their respective parts of the proposed operation to fulfill the contract obligations

10.The customer will likely withhold 7% from the gross payment to MTLLC.

11.Turk-Company will be doing the building and installation

12.MIwill be providing project management, QC, EH&S, cost scheduling, interface with the customer in Iraq, interface with the customer in the US (approx. 10% of the work performed by MIwill be done in the US).

Issues

1.Can the activities of a partner be attributed to the partnership?

2.Is it possible to utilize the Turkey-US tax treatyto avoid a Permanent Establishment (“PE”) in the US for Turk-Company?

3.Is it possible to form a non-US partnership between the two partners to undertake the foreign activities and have no services performed in the USA so that there is no little or no US ECTI?

4.What if the amounts to be paid to both partners in MTLLCare structured as guaranteed payments?

5.If the payments for services to both partners are structured as guaranteed payments are there specific recommendations in regard to the guaranteed payments?

Conclusions

1)It is likely the activities of MI would be attributed to MTLLC, and thus Turk-Company would have a US trade or business, and thus US ECTIand the associated §1446 withholding.

2)There are court cases that would suggest that the Turk-Company would have a PE in the US from the activities of the partnership, MTLLC, and thus the income would likely be US ECTI with the associated §1446 withholding.

3)The formation of a non-US partnership with a US partner, MI, would likely still result in the same result of US ECTI and associated §1446 withholding.

4)If the payments for the services provided by both members of MTLLCare structured as guaranteed payments, then arguably the payment to the foreign partner, Turk-Companyis not US ECTI and is not subject to § 1446 withholding.

5)If guaranteed payments are to be utilized with respect to payments made to the foreign partner for services performed for the partnership, it is recommended that there be a written