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Private Letter Ruling
Number: 202001018
Internal Revenue Service
August 5, 2019
DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
1100 Commerce Street, MC 4920DAL
Dallas, TX 75242
TAX EXEMPT AND GOVERNMENT ENTITIES DIVISION
Number: 202001018
Release Date: 1/3/2020
Date: AUG 05 2019
EIN:
Person to Contact:
Identification Number:
Telephone Number:
Fax:
UIL: 501.03-00
CERTIFIED MAIL - Return Receipt Requested
LAST DAY FOR FILING A PETITION WITH THE TAX COURT:
Dear *******:
This is a final determination that you do not qualify for exemption from federal income tax under Internal Revenue Code (the "Code") section 501(a) as an organization described in Code section 501(c)(3), effective January 1, 20XX. Your determination letter dated November 14, 20XX is revoked.
Our adverse determination as to your exempt status was made for the following reasons:
Organizations described in I.R.C. § 501(c)(3) and exempt under section 501(a) must be both organized and operated exclusively for exempt purposes. You have not demonstrated that you are operated exclusively for charitable, educational, or other exempt purposes within the meaning of I.R.C. section 501(c)(3). An organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt purpose. You have not established that you have operated exclusively for an exempt purpose. As such, you failed to meet the requirements of I.R.C. § 501(c)(3) and Treasury Regulation §1.501(c)(3)-1(a), in that you have not established that you were organized and operated exclusively for exempt purposes and that no part of your earnings inured to the benefit of private shareholders or individuals.
Contributions to your organization are no longer deductible under section 170 of the Internal Revenue Code.
Organizations that are not exempt under section 501 generally are required to file federal income tax returns and pay tax, where applicable. For further instructions, forms, and information please visit www.irs.gov.
If you decide to contest this determination, you may file an action for declaratory judgment under the provisions of section 7428 of the Code in one of the following three venues: 1) United States Tax Court, 2) the United States Court of Federal Claims, or 3) the United States District Court for the District of Columbia. A petition or complaint in one of these three courts must be filed within 90 days from the date this determination was mailed to you. Please contact the clerk of the appropriate court for rules and the appropriate forms for filing petitions for declaratory judgment. Please refer to the enclosed Publication 892 for additional information. You may write to the courts at the following addresses:
United States Tax Court
400 Second Street, NW
Washington, DC 20217
U.S. Court of Federal Claims
717 Madison Place, NW
Washington, DC 20005
U.S. District Court for the District of Columbia
333 Constitution Ave., N.W.
Washington, DC 20001
Processing of income tax returns and assessments of any taxes due will not be delayed if you file a petition for declaratory judgment under section 7428 of the Internal Revenue Code.
You may be eligible for help from the Taxpayer Advocate Service (TAS). TAS is an independent organization within the IRS that can help protect your taxpayer rights. TAS can offer you help if your tax problem is causing a hardship, or you've tried but haven't been able to resolve your problem with the IRS. If you qualify for TAS assistance, which is always free, TAS will do everything possible to help you. Visit www.taxpayeradvocate.irs.gov or call 1-877-777-4778.
If you have any questions about this letter, please contact the person whose name and telephone number are shown in the heading of this letter.
Sincerely yours,
Maria Hooke
Director, EO Examinations
Enclosures:
Publication 892
Department of the Treasury
Internal Revenue Service
Tax Exempt and Government Entities Division
Exempt Organizations Examination
Date:
03/30/2018
Taxpayer ID number:
Form:
Tax periods ended:
Person to contact:
Employee ID number:
Telephone number:
Fax:
Address:
Manager's contact information:
Employee ID number
Telephone number:
Response due date:
CERTIFIED MAIL. -- Return Receipt Requested
Dear *******:
Why you're receiving this letter
If you agree
If you haven't already, please sign the enclosed Form 6018, Consent to Proposed Action, and return it to the contact person shown at the top of this letter. We'll issue a final adverse letter determining that you aren't an organization described in IRC Section 501(c)(3) for the periods above.
If you disagree
1. Request a meeting or telephone conference with the manager shown at the top of this letter.
2. Send any information you want us to consider.
3. File a protest with the IRS Appeals Office. If you request a meeting with the manager or send additional information as stated in 1 and 2, above, you'll still be able to file a protest with IRS Appeals Office after the meeting or after we consider the information.
The IRS Appeals Office is independent of the Exempt Organizations division and resolves most disputes informally. If you file a protest, the auditing agent may ask you to sign a consent to extend the period of limitations for assessing tax. This is to allow the IRS Appeals Office enough time to consider your case. For your protest to he valid, it must contain certain specific information, including a statement of the facts, applicable law, and arguments in support of your position. For specific information needed for a valid protest, refer to Publication 892, How to Appeal an IRS Determination on Tax-Exempt Status.
Fast Track Mediation (FTM) referred to in Publication 3498, The Examination Process, generally doesn't apply now that we've issued this letter.
4. Request technical advice from the Office of Associate Chief Counsel (Tax Exempt Government Entities) if you feel the issue hasn't been addressed in published precedent or has been treated inconsistently by the IRS.
If you're considering requesting technical advice, contact the person shown at the top of this letter. If you disagree with the technical advice decision, you will be able to appeal to the IRS Appeals Office, as explained above. A decision made in a technical advice memorandum, however, generally is final and binding on Appeals.
If we don't hear from you
If you don't respond to this proposal within 30 calendar days from the date of this letter, we'll issue a final adverse determination letter.
Contacting the Taxpayer Advocate Office is a taxpayer right
The Taxpayer Advocate Service (TAS) is an independent organization within the IRS that can help protect your taxpayer rights. TAS can offer you help if your tax problem is causing a hardship, or you've tried but haven't been able to resolve your problem with the IRS. If you qualify for TAS assistance, which is always free, TAS will do everything possible to help you. Visit www.taxpayeradvocate.irs.gov or call 877-777-4778.
Additional information
You can get any of the forms and publications mentioned in this letter by visiting our website at www.irs.gov/forms-pubs or by calling 800-TAX-FORM (800-829-3676).
If you have questions, you can contact the person shown at the top of this letter.
Sincerely,
Maria Hooke
Director, Exempt Organizations Examinations
Enclosures:
Form 886-A
Form 6018
ISSUE
Whether the tax-exempt status of ******* as an organization described in section 501(c)(3)
should be revoked, effective January 1, 20XX, due to the following:
a. ******* was engaged in for profit activities that were not properly reported;
b. More than an insubstantial part of ******* activities were in furtherance of a nonexempt purpose;
c. ******* was operated for benefit of private interests, rather than public interests; and
d. The net earnings of ******* inured to the benefit of ******* and other insiders.
FACTS
******* (*******) was incorporated pursuant to the Non-Profit Corporation Law in the state of in 20XX. According ******* Articles of Incorporation, provided with the Application for Recognition of Exemption-Form 1023, the corporation was formed to establish a charitable organization to operate exclusively for nonprofit purposes, including distributing contributions to other organizations operating as 501(c)(3) organizations. ******* F-1023 Application for Exemption was signed by ******* CPA on 6/17/XX. ******* were the officer/directors at that time. The application stated that 0% of net income was to be donated to 501(c)(3) charitable organizations. In 20XX the ******* State Liquor board had their own requirements in order to obtain a liquor license, 0% of gross receipts from liquor sales had to be donated to a 501(c)(3) org.
******* Articles of Incorporation, also included with the application, state no part of earnings shall inur to the benefit of any director, trustee, creator or organizer; the corporation is authorized to pay "reasonable" compensation and make payments in furtherance of its charitable purpose; the corporation shall not engage in political or legislative activities; and the corporation shall not directly or indirectly carry on any activity which would prevent it from obtaining exemption from federal income taxation as a non-profit.
As part of ******* application for recognition of exemption, the organization submitted a narrative description of their activities in which it was stated that ******* "plans to hold convention type rallies where motorcycle enthusiasts come together to share their common interests." Events "are designed to raise money for different charities that have been approved by the Internal Revenue Service as 501(c)(3) organizations."
The organization was granted exemption under section (c)(3) on letter 1045 dated 11/14/20XX. Their foundation status was granted under section 509(a)(1).
******* Form 990 Return for Organizations exempt from Income Tax for the year ended December 31, 20XX states that the organization's mission or most significant activities are " a week-long experience catering to individuals whom are active in riding motorcycles activities for these individual including rides, vendors, entertainment, food, drinking and camping " Their program services listed on Part III of the 990 described the organization's mission as "to raise funds through a series of various activities during ******* Bike Week. Other fun rides are schedule for the participation of avid motor cycle enthusiasts. We also help to provide support to other local charities."
******* Form 990 for the year ended December 31, 20XX and 20XX reiterate the statements reported on the 20XX return.
******* Forms 990 Returns of Organization Exempt from Tax for the years ending December 31, 20XX affirm that the organization did not become aware of an excess benefit transaction with a disqualified person from a prior year.
******* Forms 990 for the year ending December 31, 20XX report that with the exception of *******, vice president, who received $0 in 20XX from the organization, the organization officer's received no reportable compensation from the organization, from related organizations or any estimated other (non-reportable) compensation from the organization and related organizations. Furthermore, the returns convey that none of the officers received or accrued compensation from any unrelated organization or individual for services rendered to the organization. There are no directors listed on the Form 990.
******* is the president of ******* for all examined years. ******* has signature authority over the bank accounts as well as the accounts for related for-profit organizations, ******* (*******), ******* and ******* He has complete control over every aspect of the businesses. In 20XX he received wages from *******
******* does not have signature authority over the corporate bank accounts. She is listed as the ******* Vice President in part VII of the F-990 and received $0 from ******* in 20XX. As of 1/1/20XX, she is a shareholder in *******.
******* does not have signature authority over the corporate bank accounts. He is listed as the Treasurer in part VII of the F-990 and no compensation is reported. He resides in ******* and he and his son received "consulting fees" from ******* which were described as services provided on Farmland formerly owned by *******, and as of 20XX owned by ******* (0%) and ******* parents (0%). ******* became a shareholder in ******* on 1/1/20XX.
******* is a for-profit corporation, which files on a fiscal year in relationship to the annual ******* BIKE WEEK event (which occurs in *******). ******* and ******* are owners of this entity. Prior to 20XX, ******* reported the receipts and expenses related to the Bike Week event according to the taxpayer.
The history of ******* is intertwined with that of *******. In November 20XX, ******* established and purchased the rights to ******* BIKE WEEK from ******* owned and operated by ******* and *******, the original filers of the F-1023 for ******* (20XX). The assets, contracts and trade names were purchased under a promissory note signed by ******* for $0.00. The directors of ******* were ******* (0 shares of *******), ******* (0 shares of ******* under the name *******) & ******* (0 shares of *******). Total outstanding shares of ******* were 0 shares.
In January 20XX, ******* resigned and ******* represented by *******, as president, promised to pay $0 (principle & interest) for ******* 0 shares of ******* due on May 1, 20XX at 0% interest. ******* also agreed to sell their shares at the same terms for 0% interest 1. The redeemed stock was re-sold as follows:
1 An audit of ******* in 20XX (included in the administrative files and reference below) includes comments by the Revenue Agent: "0 of the original 0 partners want out of the arrangement and are in process of being bought out while 0 others are buying into the venture. As the original 0 partners remain on the note, shares of these 0 individuals are held in Trust, pending payoff. The 0 new partners have contributed capital. There were some questions during the interview concerning structure of the buy-outs. Agent has requested additional documentation and will consider.
*******, too, is interested in selling as the initial investment has created enormous debt. The company has generated minimal profit, if any, since the acquisition. The company pays no salary to the owner (owner living off income from his ******* firm and liquidation of investments). Company also pays no rent as it is operated out of same facility used by owner's ******* firm.
Note terms with the original seller were renegotiated in 20XX, reducing the annual payment from $0 to $0. ******* states $0 of the $0 is to be designated interest for extension of the note. Revisions to the note were not documented in writing. Agent takes issue with the $0 interest designation as the additional $0 payment is due irrespective of the outstanding principal. As a result the effective interest rate on the note incrementally increases from 0% to in excess of 0% in later years. As actual interest rates are decreasing with the depressed economy, and because no documentation exists specifying treatment of the $0, Agent will consider the amount as additional principal."
Evidence of the renegotiation which is "not documented in writing" was not produced during the current audit. However intangibles were addressed in the ******* Audit and therefore, will not be addressed here.
CHART DELETED
The existence of ******* is not disclosed on the F-990, with the exception of a comment as an asset on Part IX (Balance Sheet) of the 20XX F-990 [DUE FROM ******* $0). Related entities are not disclosed on line 34 part IV of the F-990 which asks the question "was the organization related to any tax exempt or taxable entity?" No compensation to officers from related organizations was reported on Part VII of the F-990.
The 20XX and 20XX F-1120s for ******* were audited in 20XX. The agent made the following statements in her interview notes in regard to the relationship between ******* and *******:
"Liquor laws in ******* stipulate liquor can't be provided unless a special events liquor license is obtained. Per *******, the company is ineligible to apply for the license, and as is typical, affiliates it(s)elf with a charity which acquires the event license. In turn, ******* contracts with the charity for right to use the license. In exchange, the company gives the charity 0% of the liquor proceeds."
This comment in the ******* audit file was discussed during the audit of ******* and according to the power of attorney, ******* is the charity described in this statement. It was also explained at that time that ******* liquor laws no longer have this requirement (this statement is in dispute now).
According to the current bookkeeper, *******, former CPA *******, suggested that ******* consolidate the operations for BIKE WEEK under *******.
In addition, to *******, ******* is 0% owner of ******* and ******* None of these organizations were disclosed on the ******* F-990.
The audit of ******* conducted in 20XX, also identified ******* as the owner of *******, described as "a design firm". The Revenue Agent states that ******* pays no rent "as it is operating out of the same facility used by (the) owner's design firm". In 20XX (and 20XX-20XX), *******, *******, ******* and ******* are still operating out the same address: *******, *******. However in 20XX, ******* paid $0 to ******* for the use of ******* and *******, as well as $0 for "consulting" which is comprised of compensation for ******* and ******* services according to ******* (******* and ******* wages are paid by *******). ******* which operates a year-round business paid $0 according to *******.
PRIVATE BENEFIT/INURMENT:
Over the course of the audit, transactions deducted as expenses on the ******* F-990 were examined. ******* possessed a ******* credit card #0 under the name of "*******/*******". ******* made all the payments on the credit card for the year ending 12/31/20XX. The total payments made in 20XX by ******* were $0. There were no records to support whether any of these charges were attributable to ******* nor that they are "in furtherance of. In addition, there was no evidence that ******* repaid ******* for any of these disbursements. Furthermore, ******* never claimed to have made any repayments to *******. The individual transactions were input into QuickBooks accounting software and coded as business expenses and eventually deducted from income on the ******* F-990 for the year ending December 31, 20XX.
As stated earlier, in 20XX ******* was involved in zero annual events which had previous been reported on the Form 1120 for *******. ******* Bike Week took place in the spring running primarily over 0 days. ******* is a one-day event which takes place in November. In previous years, ******* handled ******* for a ******* dealership in *******.
Despite the periodic activities, the transactions paid for and deducted by ******* occurred consistently over a 0 month period. Among the transactions appearing on the credit card statement were at least one trip for *******, his mother,*******, and his ******* children, ******* and *******; road trip expenses for ******* to a motorcycle event in ******* near his parent's home; and a trip to *******. There are numerous meals and entertainment expenses which are not supported with documentation of a business purpose. There are transactions related to the improvements to a residence owned by *******. There are dental payments and vehicle payments for which there are no supporting documents related to business purpose.
In addition to the credit card payments, direct payments were made from the ******* bank accounts; a small business checking account #0 (*******-0) and a ******* checking account #0 (*******-0).
These payments included $0 to *******. The memos on these checks reference ******* and *******, properties owned by ******* and his family. Check memo statements and QuickBook descriptions indicate the checks were for TV, Internet and telephone services. According to statements and records, ******* was occupied by ******* and ******* was occupied by ******* and *******, ******* corporations.
Direct payments were also made to ******* ($0), ******* ($0), ******* ($0), ******* (0), ******* ($0), ******* ($0), ******* ($0) and the ******* ($0). None of these payments have been tied to a charitable activity. Check#0 dated 4/30/XX to ******* in the amount of $0 is referenced as "*******" for ******* and dated 4/30/20XX. An additional check for $0 was paid by ******* in June for "sprinkler repair". The location is a residence owned by ******* and *******.
Check #0 dated 1/6/XX to ******* in the amount of $0 is referenced as "0". Note the bill was paid in 20XX, but was included as a deduction in 20XX as Repairs & Maintenance. ******* is a cash-based taxpayer according to the form 990.
Check #0 dated 5/8/XX to ******* Services in the amount of $0 is referenced as "Landscaping @*******". Additional payments to ******* are made from ******* personal account and an account under the name of *******.
Check #0 dated 1/5/XX to ******* in the amount of $0.00 is referenced as "*******". Note the bill was paid in 20XX, but was included as a deduction in 20XX as "Other Expenses" and then a journal entry was made which included this amount to reduce an income category entitled "commissions". ******* is a cash-based taxpayer according to the form 990.
Check #0 dated 1/9/XX to ******* in the amount of $0.00 is referenced as "*******". Other information reviewed stated that it is for a house remodel interior authorized by *******. Note the bill was paid in 20XX, but was included as a deduction in 20XX as Repairs & Maintenance. ******* is a cash based taxpayer according to the form 990.
Two checks totaling$0.00 were paid to *******. It was explained that ******* acts as a management company for some of ******* properties. Check #0 dated 3/20/XX for $0.00 is reference as "******* Repair". Other information reviewed indicated it was for "paint, shutters-******* repairs". A second check #0 dated 12/24/20XX in the amount of $0.00 referenced "******* house-labor-*******". Other information reviewed stated "*******, *******". *******. *******, is a residential property purchased by ******* Corporation in 20XX. ******* eventually uses this property as his residence. Note, he is paying for pool maintenance in 20XX on a monthly basis.
Two checks totaling $0.00 were paid to *******. The first check #0 dated 2/14/20XX for $0.00 was referenced as "concrete pad install". Receipt #0 dated 2/14/XX was a bill for $0.00. Handwritten on the bill was "paid $0k per *******". The second check #0 dated 4/18/XX was for 0.00 and referenced "Concrete pad Ck #0 $0.00". ******* explained that the concrete pad was needed to park a trailer used for the various events and that it would have removed when the property was sold.
Zero payments were made to the *******. The website states that payments are for Water & Sewer, Waste & Recycling, and Gas. The checks indicate that they are for "*******, *******" and they total $0.00.
Total payments made by ******* for the benefit of ******* or individuals and organizations associated with ******* were calculated to be $0.00.
In addition, ******* made $0,00 in payments to *******, ******* in 20XX. Some of these payments were identified as "consulting fees" and/or "rent". The taxpayers were requested to provide the methods used to calculate these payments, but none were provided. It was stated, however, that ******* and ******* salaries were paid by *******, ******* with funds provided by *******.
******* made payment of $0.00 to ******* in 20XX. A payment of $0.00 in July 20XX was identified as "dividend payback".
NON-EXEMPT PURPOSE:
As explained above, according to the bookkeeper, the festival activities formerly reported by for-profit entity, *******, were consolidated under the non-profit *******. ******* had formerly been responsible for collecting donations from designated charitable "rides" and turning the donations over to various other 501(c)(3) organizations. In 20XX, ******* F-990 reported $0.00 in charitable donations. According to QuickBooks records these donations are as follows:
CHART DELETED
The transactions making up the return item were traced to the bank records, support for three of these transactions (totaling $0.00 -- 0% of the deduction) could not be identified and was not provided by the taxpayer. In addition, Go Motorcycles, to which a donation of $0.00 was reported, is not a 501(c)(3) organization.
In 20XX, ******* reported gross receipts of $0.00. The $0.00 deducted as charitable contributions represents 0% of the funds reported as collected in conjunction with the Bike Week festivities and the two smaller events held during the year by *******.
******* reported $0 in deductible expenses that year, which included the "charitable" donations, as well as ******* personal expenses totaling $0.00, $0.00 to ******* and $0.00 to *******. The 20XX F-990 for ******* reported an excess of revenues less expenses of $0.00 in 20XX. Previous and subsequent returns reflect similar circumstances.
Furthermore, the 20XX ******* Form 990 reported beginning "net assets or fund balances" of $0.00 and ending balances of $0.00. Previous and subsequent F-990s reflect similar increases. In addition, the balance sheet on the F-990 reported loans to related organizations. The ending balance due from ******* was reported to be $0.00. The balance due from ******* was reported as $0.00 and another $0.00 was due from *******.
******* three major expenses reported in 20XX were reported as (1) entertainment expenses (0% of total expenses), (2) equipment rental expenses (0%) and (3) occupancy (0%). The entertainment expenses are consistent with information provided on the website "Out and About in *******, *******" which reported that the 20XX event included concerts with national known entertainers including ******* & the *******, ******* and *******. In addition, the website listed other events such as factory demo rides, vendors and attractions. Attractions in 20XX included *******, *******, *******, *******, ******* and a "*******" special appearance. The only charitable activities identified were seven "charity rides". The organizers also offered campground rental and RV space to attendees for a fee. ( EXHIBIT A )
The occupancy expense included rental of the ******* facility, but it also included monthly office rent paid to related corporation, *******. These were monthly payments totaling $0.00 for facilities shared with other ******* organizations.
In 20XX, the ******* Bike Week/******* website advertised the ******* event with links to events, vendors, camping and rally gear. The only mention of a possible charitable connection was the ******* logo on the homepage. ( EXHIBIT B )
LAW
Internal Revenue Code Section 501(c)(3) describes corporations exempt from income tax as, "Corporations, and any community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition (but only if no part of its activities involve the provision of athletic facilities or equipment), or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private shareholder or individual, no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation (except as otherwise provided in subsection (h)), and which does not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office. "
Treas.Reg. 1.501(c)(3)-1 explains that, "in order to be exempt as an organization described in section 501(c)(3), an organization must be both organized and operated exclusively for one or more of the purposes specified in such section. If an organization fails to meet either the organizational test or the operational test, it is not exempt." The regulations provide both an organization test, as well as an operational test which must be satisfied in order for an organization to maintain its exempt status.
Treas.Reg. 1.501(c)(3)-1(c)(1) is one of four tests that an organization must pass in order to sustain its status under section 501(c)(3). This section states that the organization must engage primarily in activities which accomplish one or more of the exempt purposes specified under the code section. This section provides that an organization will be regarded as "operating exclusively" for one or more exempt purposes only if it engages primarily in activities that accomplish one or more of the exempt purposes specified under IRC Section 501(c)(3).
The term "exclusively" has not been construed to mean "solely" or "absolutely without exception". An organization that engages in exempt activities qualifies for exempt status so long as those nonexempt activities are only incidental and less than substantial. Better Business Bureau of Washington, D.C. v. United States, 326 U.S. 2789 (1945); Copyright Clearance Center v. Commissioner, 79 T.C. 793, 804 (1982).
In Better Business Bureau of Washington D.C., the Supreme Court held that the presence of a single non-exempt purpose, if substantial in nature, will prevent exemption regardless of the number or importance of truly exempt purposes. The Court held that a trade association had an "underlying commercial motive" that distinguished its educational program from that carried on by a university.
Treas.Reg. 1.501(c)(3)-1(d)(2) defines the term charitable is used in section 501(c)(3) in its generally accepted legal sense and is, therefore, not to be construed as limited by the separate enumeration in section 501(c)(3) of other tax-exempt purposes which may fall within the broad outlines of charity as developed by judicial decision. Such term includes: Relief of the poor and distressed or of the underprivileged; advancement of religion; advancement of education or science; erection or maintenance of public buildings, monuments, or works; lessening of the burdens of Government; and promotion of social welfare by organizations designed to accomplish any of the above purposes, or (i) to lessen neighborhood tensions; (ii) to eliminate prejudice and discrimination; (iii) to defend human and civil rights secured by law; or (iv) to combat community deterioration and juvenile delinquency.
Treas.Reg. 1.501(c)(3)-1(c)(2) explains that an exempt organization must not allow its net earnings to inure to the benefit of private shareholder or individuals.
If an organization fails to comply with any of these requirements, it will fail the operation test and lose its IRC Section 501(c)(3) exemption. Harding Hospital, Inc. v. U.S., 505 F.2d 1068, 1072 (6th Cir. 1974).
I.R.C. § 503 explains that an organization operating under Section 501(c) shall not be exempt if it has engaged in a prohibited transaction. Such transactions include
(1) lends any part of its income or corpus, without the receipt of adequate security and a reasonable rate of interest, to;
(2) pays any compensation, in excess of a reasonable allowance for salaries or other compensation for personal services actually rendered, to:
(3) makes any part of its services available on a preferential basis to;
(4) makes any substantial purchase of securities or any other property, for more than adequate consideration in money or money's worth, from;
(5) sells any substantial part of its securities or other property, for less than an adequate consideration in money or money's worth, to; or
(6) engages in any other transaction which results in a substantial diversion of its income or corpus to;
the creator of such organization (if a trust); a person who has made a substantial contribution to such organization; a member of the family (as defined in section 267(c)(4)) of an individual who is the creator of such trust or who has made a substantial contribution to such organization; or a corporation controlled by such creator or person through the ownership, directly or indirectly, of 50 percent or more of the total combined voting power of all classes of stock entitled to vote or 50 percent or more of the total value of shares of all classes of stock of the corporation.
I.R.C. § 511 imposes a tax on unrelated business income of organizations described in Section 501(c).
I.R.C. § 512 describes "unrelated business taxable income" as the gross income derived by any organization from any unrelated trade or business (as defined in section 513) regularly carried on by it, less the deductions allowed by this chapter which are directly connected with the carrying on of such trade or business.
unrelated business income is income from a trade or business, regularly carried on, that is not substantially related to the charitable, educational, or other purpose that is the basis of the organization's exemption
TAXPAYER'S POSITION
The taxpayer states that the activities engaged in by the organization are all related to charity.
ARGUMENT/GOVERNMENTS POSITION
The taxpayer's opinion, as expressed during the audit, is that the activity involving charitable rides is sufficient to render the entire social event to be organized for charitable purposes. They illustrate this position with annual donations to various 501(c)(3) organizations, only a portion of which have been supported with adequate records.
However, the government argues that the events organized in the name of ******* are primarily social in nature and that the funds donated to charitable organizations are merely donations. The principle purpose as stated on the Form 990 is to provide an experience for motorcycle enthusiasts, which includes: rides, vendors, entertainment, food, drinking and camping. The program services activity reported as "raising funds" and supporting "local charities" is a minor and insignificant matter when compared with the entire experience.
Furthermore, under IRC § 1.501(c)(3) an organization is not described in this section "if it serves a private interest more than incidentally". The private interest doctrine is described in IRS General Counsel's Memorandum issued in 1987, which noted that:
An organization is not described in section 501(c)(3) if it serves a private interest more than incidentally....
A private benefit is considered incidental only if it is incidental in both a qualitative and a quantitative sense. In order to be incidental in a qualitative sense, the benefit must be a necessary concomitant of the activity which benefits the public at large, i.e., the activity can be accomplished only by benefitting certain private individuals.... To be incidental in a quantitative sense, the private benefit must not be substantial after considering the overall public benefit."
In the case of ******* the private benefit is not incidental. The Bike Week event, as well as the other events, benefit the shareholders of *******, ******* and his related organizations, as well as motorcycle enthusiasts who wish to pay to participate in the activities. The organization does not serve a broad charitable class. In this case, the incidental benefit is provided to the local charities.
CONCLUSION:
As of 1/1/20XX, ******* is determined to be organized and operated for primarily private benefit and activities social in nature rather than exclusively for an exempt purpose as described under IRC 501(c)(3). As a result, the organization exempt status is revoked as of that date. |
Private Letter Ruling
Number: 202006004
Internal Revenue Service
September 18, 2019
Internal Revenue Service
Department of the Treasury
Washington, DC 20224
Number: 202006004
Release Date: 2/7/2020
Index Number: 671.00-00, 671.02-00, 1014.00-00, 2041.03-00, 2511.00-00, 2514.03-00
Third Party Communication: None
Date of Communication: Not Applicable
Person To Contact:
ID No.
Telephone Number:
Refer Reply To:
CC:PSI:04
PLR-108365-19
Date: September 18, 2019
Dear ********:
This letter responds to your authorized representative's letter of April 11, 2019, requesting rulings under §§ 671, 2501, 2514, 2041 and 1014 of the Internal Revenue Code.
The facts submitted and representations made are as follows:
On Date, Grantor 1 and Grantor 2 (collectively, Grantors) created Trust, an irrevocable trust, for the benefit of Grantors and the following class of beneficiaries: Grantors' issue, Brother and Friend (collectively, the Beneficiaries). A corporate trustee located in State 1 is Trustee of Trust. Trust is a domestic legal trust sited in State 1 and, pursuant to the Trust agreement, is governed by the laws of State 1.
The Grantors represent that State 1 law provides that the interest of the grantor in a trust governed by State 1 law and in compliance with that law is not subject to claims of the creditors of the grantor, unless the grantor transferred property with an intent to defraud a specific creditor. Further, the Trust instrument provides that the interest of a beneficiary (including the Grantors) may not be voluntarily or involuntarily transferred before the payment or delivery of such interest to the beneficiary by the Trustee, and that the Trust shall not be liable for or subject to the debts of any beneficiary of such trust.
Grantors are married and reside in State 2, a community property state. Trust provides that all property transferred to Trust is community property. Moreover, any and all property transferred to Trust prior to the death of the first Grantor to die (the Predeceased Grantor) is and shall retain its character as community property.
If and only if the Power of Appointment Committee is in existence, then, until the Distribution Date ( i.e., the death of the survivor of Grantors), Trustee must distribute such amounts of net income and principal to each Grantor and/or the Beneficiaries as directed by the Power of Appointment Committee or Grantors, as follows:
(1) Trustee, pursuant to a writing executed by either of the Grantors and by a majority of the other members of the Power of Appointment Committee, shall distribute to the Beneficiaries or Grantors such amounts of income or principal as the Power of Appointment Committee appoints (Grantor's Consent Power);
(2) Trustee, pursuant to a writing executed by all then serving members of the Power of Appointment Committee other than Grantors, shall distribute to or for the benefit of the Beneficiaries or Grantors such amounts of income or principal as the Power of Appointment Committee appoints (Unanimous Member Power); and
(3) Each Grantor has the power, in a non-fiduciary capacity, at any time and from time to time, to appoint such amount of the principal to any one or more of the Beneficiaries as such Grantor deems advisable to provide for the health, education, maintenance, or support of the Beneficiaries (Grantor's Sole Power).
The Power of Appointment Committee may appoint income or principal equally or unequally to or for the benefit of either or both of Grantors, or any one or more of the Beneficiaries of Trust to the exclusion of others. Any net income not distributed by Trustee will be accumulated and added to principal.
If the Power of Appointment Committee ceases to exist prior to the termination of the trust, Trustee may, pursuant to a written instrument, at any time distribute to the Beneficiaries and/or Grantors such amounts of the net income or principal of Trust (including the whole thereof) as Trustee determines. In determining whether to make any such distribution to the Beneficiaries and/or Grantors, Trustee shall be required to take into consideration the distributee's own income and property and any other income or property which any individual provides or is obligated to provide.
Additionally, the Power of Appointment Committee and Trustee have the power until the Distribution Date to appoint all or any portion of Trust to any one or more Qualified Trusts. Qualified Trust is defined as a trust that benefits one or more members of Grantors' Family and complies with certain other technical requirements. Grantors' Family is defined in Trust as Grantors, the issue of each of Grantors' parents and all charities. The committee may exercise this power under the Grantor's Consent Power and the Unanimous Member Power.
The initial members of the Power of Appointment Committee are Grantors, Guardian 1 acting on behalf of Daughter, Guardian 2 acting on behalf of Son, Brother and Friend. Daughter and Son, while minors, are considered members of the Power of Appointment Committee acting through their Guardians. If at any time the Power of Appointment Committee includes three or more members, other than Grantors, then all the members of the Power of Appointment Committee including Grantors may by unanimous vote, at any time and from time to time, add one or more members of the Power of Appointment Committee provided that such members are Beneficiaries (i.e., a descendant of Grantors) and, provided further that, if any one or more of them is a minor, the members of the Power of Appointment Committee shall by unanimous vote designate an individual to serve as guardian for such minor. The members of the Power of Appointment Committee in their capacities as such shall not serve or act in a fiduciary capacity. The Power of Appointment Committee ceases to exist upon the first to occur of the Distribution Date or the date the Power of Appointment Committee is reduced to fewer than two (2) members other than Grantors.
Any distribution from Trust to either Grantor prior to the death of the Predeceased Grantor will be a distribution of community property. Any distribution of income or principal from Trust to a beneficiary prior to the death of the Predeceased Grantor, whether made by the Power of Appointment Committee, the Trustee, or a Grantor's exercise of the powers retained by Grantors will be a distribution of community property.
With respect to the lifetime powers of appointment retained by Grantors, prior to the death of the Predeceased Grantor, any such appointment by Grantor of the principal of Trust will be funded equally from each Grantor's share of community property. Each Grantor consents to all distributions by the other Grantor.
With respect to the testamentary power of appointment retained by the Predeceased Grantor, any appointment by the Predeceased Grantor shall be funded solely from the Predeceased Grantor's one-half interest in the property of Trust.
Upon the death of the Predeceased Grantor, Trustee shall distribute the Predeceased Grantor's entire one-half interest in the trust property to or for the benefit of any person or entity or entities, other than the Predeceased Grantor's estate, the Predeceased Grantor's creditors, or the creditors of the Predeceased Grantor's estate, as Predeceased Grantor appoints by will.
Upon the death of the Predeceased Grantor, any remaining property held in Trust in the Predeceased Grantor's one-half interest that has not been effectively appointed by will, shall be distributed **** percent ( **** %) to each serving member of the Power of Appointment Committee other than Grantors' issue, and any remaining balance shall be distributed, per stirpes, to Grantors' issue who are then living (subject to restrictions in the trust for beneficiaries article). If none, such remaining balance shall be disposed of under an alternate disposition article which provides for distributions to more distant relatives.
Upon the death of the Grantor surviving the Predeceased Grantor (the Surviving Grantor), Trustee shall distribute the balance of Trust to or for the benefit of any person or entity, other than the Surviving Grantor's estate, the Surviving Grantor's creditors, or the creditors of the Surviving Grantor's estate, as Surviving Grantor appoints by will.
Upon the death of the Surviving Grantor, any remaining property held in Trust that has not been effectively appointed by will shall be distributed **** percent ( **** %) to each serving member of the Power of Appointment Committee other than Grantors' issue, and any remaining balance shall be distributed, per stirpes, to Grantors' issue who are then living subject to restrictions in the trust for beneficiaries article. If none, such remaining balance shall be disposed of under an alternate disposition article which provides for distributions according to applicable state law.
No distribution by the Trustee to a beneficiary, and no distribution to a beneficiary pursuant to the exercise of a power of appointment granted hereunder, shall discharge any individual's legal obligation to support the beneficiary.
You have requested the following rulings:
1. As long as the Power of Appointment Committee is serving, no portion of the items of income, deductions, and credits against tax of Trust shall be included in computing under § 671 the taxable income, deductions, and credits of Grantors or any member of the Power of Appointment Committee.
2. The contribution of property to Trust by Grantors will not be a completed gift subject to federal gift tax.
3. Any distribution of property by the Power of Appointment Committee from Trust to either Grantor will not be a completed gift, subject to federal gift tax, by any member of the Power of Appointment Committee.
4. Any distribution of property by the Power of Appointment Committee from Trust to any beneficiary of Trust, other than to either Grantor, will not be a completed gift subject to federal gift tax, by any member of the Power of Appointment Committee.
5. No member of the Power of Appointment Committee upon his or her death will include in his or her estate any property held in Trust because such member is deemed to have a general power of appointment within the meaning of § 2041 over property held in Trust.
6. The basis of all community property in Trust on the date of the death of the Predeceased Grantor will receive an adjustment in basis to the fair market value of such property at the date of death of the Predeceased Grantor.
RULING 1
Section 671 provides that where it is specified in subpart E of part I of subchapter J that the grantor or another person shall be treated as the owner of any portion of a trust, there shall then be included in computing the taxable income and credits of the grantor or the other person those items of income, deductions, 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 under chapter 1 in computing taxable income or credits against the tax of an individual.
Section 672(a) provides, for purposes of subpart E, the term "adverse party" means any person having a substantial beneficial interest in the trust which would be adversely affected by the exercise or nonexercise of the power which he possesses respecting the trust.
Sections 673 through 677 specify the circumstances under which the grantor is treated as the owner of a portion of a trust.
Section 673(a) provides that the grantor shall be treated as the owner of any portion of a trust in which the grantor has a reversionary interest in either the corpus or the income therefrom, if, as of the inception of that portion of the trust, the value of such interest exceeds five (5) percent of the value of such portion.
Section 674(a) provides, in general, that the grantor shall be treated as the owner of any portion of a trust in respect of which the beneficial enjoyment of the corpus or the income therefrom is subject to a power of disposition, exercisable by the grantor or a nonadverse party, or both, without the approval or consent of any adverse party.
Section 674(b) provides that § 674(a) shall not apply to the powers described in § 674(b) regardless of whom held.
Section 674(b)(3) provides that § 674(a) shall not apply to a power exercisable only by will, other than a power in the grantor to appoint by will the income of the trust where the income is accumulated for such disposition by the grantor or may be so accumulated in the discretion of the grantor or a nonadverse party, or both, without the approval or consent of any adverse party.
Section 674(b)(5) provides that § 674(a) shall not apply to a power to distribute corpus to or for a beneficiary, provided that the power is limited by a reasonably definite standard.
Under § 675 and applicable regulations, the grantor is treated as the owner of any portion of a trust if, under the terms of the trust agreement or circumstances attendant on its operation, administrative control is exercisable primarily for the benefit of the grantor rather than the beneficiary of the trust.
Section 676(a) provides that the grantor shall be treated as the owner of any portion of a trust, whether or not he is treated as such owner under any other provision of part I, subchapter J, chapter 1, where at any time the power to revest in the grantor title to such portion is exercisable by the grantor or a nonadverse party, or both.
Section 677(a) provides, in general, that the grantor shall be treated as the owner of any portion of a trust, whether or not he is treated as such owner under § 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 (1) distributed to the grantor or the grantor's spouse; (2) held or accumulated for future distribution to the grantor or the grantor's spouse; or (3) applied to the payment of premiums on policies of insurance on the life of the grantor or the grantor's spouse.
Section 678(a) provides that a person other than the grantor shall be treated as the owner of any portion of a trust with respect to which: (1) such person has a power exercisable solely by himself to vest the corpus or the income therefrom in himself, or (2) such person has previously partially released or otherwise modified such a power and after the release or modification retains such control as would, within the principles of §§ 671-677, inclusive, subject a grantor of a trust to treatment as the owner thereof.
Accordingly, based solely on the facts submitted and the representations made, we conclude that an examination of Trust reveals none of the circumstances that would cause either Grantor to be treated as the owner of any portion of Trust under § 673, 674, 676, or 677 as long as the Power of Appointment Committee remains in existence. Because none of the members of the Power of Appointment Committee has a power exercisable by himself to vest trust income or corpus in himself, none shall be treated as the owner of Trust under § 678(a).
We further conclude that an examination of Trust reveals none of the circumstances that would cause administrative controls to be considered exercisable primarily for the benefit of either of the Grantors under § 675. Thus, the circumstances attendant on the operation of Trust will determine whether either of the Grantors will be treated as the owner of any portion of Trust under § 675. This is a question of fact, the determination of which must be deferred until the federal income tax returns of the parties involved have been examined by the office with responsibility for such examination.
RULINGS 2 AND 3
Section 2501(a)(1) provides that a tax is imposed for each calendar year on the transfer of property by gift during such calendar year by any individual, resident or nonresident.
Section 2511(a) provides that the gift tax applies 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.
Section 25.2511-2(b) of the Gift Tax Regulations provides that a gift is complete as to any property, or part thereof or interest therein, of which the donor has so parted with dominion and control as to leave in the donor no power to change its disposition, whether for his own benefit or for the benefit of another. But if upon a transfer of property (whether in trust or otherwise) the donor reserves any power over its disposition, the gift may be wholly incomplete, or may be partially complete and partially incomplete, depending upon all the facts in the particular case. Accordingly, in every case of a transfer of property subject to a reserved power, the terms of the power must be examined and its scope determined.
Section 25.2511-2(b) provides an example, where the donor transfers property to another in trust to pay the income to the donor or accumulate it in the discretion of the trustee, and the donor retains a testamentary power to appoint the remainder among the donor's descendants. The regulation concludes that no portion of the transfer is a completed gift. However, if the donor had not retained a testamentary power of appointment, but instead provided that the remainder should go to X or his heirs, the entire transfer would be a completed gift.
Section 25.2511-2(c) provides that a gift is incomplete in every instance in which a donor reserves the power to revest the beneficial title in himself or herself. A gift is also 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.
Under § 25.2511-2(e), a donor is considered as himself having a power if it is exercisable by the donor in conjunction with any person not having a substantial adverse interest in the disposition of the transferred property or the income therefrom. A trustee, as such, is not a person having an adverse interest in the disposition of the trust property or its income.
Section 25.2511-2(f) provides that the relinquishment or termination of a power to change the beneficiaries of transferred property, occurring otherwise than by death of the donor, is regarded as the event which completes the gift and causes the gift tax to apply.
Section 25.2511-2(g) provides that if a donor transfers property to himself as trustee (or to himself and some other person, not possessing a substantial adverse interest, as trustees), and retains no beneficial interest in the trust property and no power over it except fiduciary powers, the exercise or nonexercise of which is limited by a fixed or ascertainable standard, to change the beneficiaries of the transferred property, the donor has made a completed gift and the entire value of the transferred property is subject to the gift tax.
Section 25.2511-2(e) does not define "substantial adverse interest."
Section 25.2514-3(b)(2) provides, in part, that a taker in default of appointment under a power has an interest that is adverse to an exercise of the power. Section 25.2514-3(b)(2) also provides that a co-holder of a power is considered as having an adverse interest where he may possess the power after the possessor's death and may exercise it at that time in favor of himself, his estate, his creditors, or the creditors of his estate.
In Estate of Sanford v. Commissioner, 308 U.S. 39 (1939), the taxpayer created a trust for the benefit of named beneficiaries and reserved the power to revoke the trust in whole or in part, and to designate new beneficiaries other than himself. Six years later, in 1919, the taxpayer relinquished the power to revoke the trust, but retained the right to change the beneficiaries. In 1924, the taxpayer relinquished the right to change the beneficiaries. The Court stated that the taxpayer's gift is not complete, for purposes of the gift tax, when the donor has reserved the power to determine those others who would ultimately receive the property. Accordingly, the Court held that the taxpayer's gift was complete in 1924, when he relinquished his right to change the beneficiaries of the trust. A taxpayer's retention of a power to change the beneficial interests in a trust causes the transfer to the trust to be incomplete for gift tax purposes, even though the power may be defeated by the actions of third parties. Goldstein v. Commissioner, 37 T.C. 897 (1962); See also Estate of Goelet v. Commissioner, 51 T.C. 352 (1968).
In this case, Grantors each retained the Grantor's Consent Power over the income and principal of Trust. Under § 25.2511-2(e), a donor is considered as himself having a power if it is exercisable by him in conjunction with any person not having a substantial adverse interest in the disposition of the transferred property or the income therefrom. Pursuant to Trust, upon the Predeceased Grantor's death, the Predeceased Grantor's remaining interest in Trust (i.e., one-half) that the Predeceased Grantor did not effectively appoint pursuant to his or her limited testamentary power of appointment shall be distributed out of, and shall no longer be subject to, the terms of Trust. Consequently, upon the death of the Predeceased Grantor, the Power of Appointment Committee will no longer possess any powers over the property transferred to Trust by the Predeceased Grantor. Under § 25.2514-3(b)(2), a co-holder of a power is only considered as having an adverse interest where he may possess the power after the possessor's death and may exercise it at that time in favor of himself, his estate, his creditors, or the creditors of his estate. Accordingly, upon the Predeceased Grantor's death, the Power of Appointment Committee members would not be takers in default and do not have interests adverse to the Predeceased Grantor under § 25.2514-3(b)(2) and for purposes of § 25.2511-2(e). They are merely co-holders of the power at the time of the Predeceased Grantor's death. Therefore, the Predeceased Grantor is considered as himself or herself possessing the power to distribute income and principal to any beneficiary because he or she retained the Grantor's Consent Power. The retention of the power with respect to the Predeceased Grantor causes the transfer of property to Trust to be wholly incomplete for federal gift tax purposes.
Likewise, after the Predeceased Grantor's death, the Surviving Grantor continues to retain the Grantor's Consent Power over the balance of Trust. The Committee members are not takers in default for purposes of § 25.2514-3(b)(2). They are merely co-holders of the power. The Power of Appointment Committee ceases to exist upon the death of the Surviving Grantor. Accordingly, upon the Surviving Grantor's death, the Power of Appointment Committee members do not have interests adverse to the Surviving Grantor under § 25.2514-3(b)(2) and for purposes of § 25.2511-2(e). Therefore, the Surviving Grantor is considered as himself or herself possessing the power to distribute income and principal to any beneficiary because he or she retained the Grantor's Consent Power. The retention of the power with respect to the Surviving Grantor causes the transfer of property to Trust to be wholly incomplete for federal gift tax purposes.
If the Committee ceases to exist, the Trustee has the power to distribute net income or principal to the Beneficiaries. However, the Trustee's power is not a condition precedent to each Grantor's Consent Power. Each Grantor's Consent Power over income and principal is presently exercisable and not subject to a condition precedent. Thus, the Trustee's power to distribute net income and principal does not cause the transfer of property to be complete with respect to the interests in Trust for federal gift tax purposes. Therefore, each Grantor is considered as possessing the power to distribute income or principal to any beneficiary himself or herself because he or she retained the Grantor's Consent Power.
Each Grantor also retained the Grantor's Sole Power over the principal of Trust. Under § 25.2511-2(c), 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. In this case, the Grantor's Sole Power gives each Grantor the power to change the interests of the beneficiaries. Even though each Grantor's power is limited by an ascertainable standard ( i.e., health, education, maintenance and support) each Grantor's power is not a fiduciary power. Accordingly, the retention of the Grantor's Consent Power and the Grantor's Sole power causes the transfer of property to Trust to be incomplete for federal gift tax purposes.
If the Power of Appointment Committee ceases to exist, the Trustee, in its fiduciary capacity, also has the power to distribute principal to one or more beneficiaries. The powers of the Trustee are not conditions precedent to the Grantors' powers. Each Grantor's Sole Power over principal is presently exercisable and not subject to a condition precedent. Accordingly, each Grantor retains dominion and control over the principal of Trust until the Trustee exercises his or her power to appoint principal. See Goldstein v. Commissioner, 37 T.C. 897 (1962). Thus, the Trustee's powers to distribute principal do not cause the transfer of property to be complete with respect to the remainder in Trust for federal gift tax purposes. Accordingly, the retention of the Grantor's Consent Power and the Grantor's Sole Power causes the transfer of property to Trust to be incomplete for federal gift tax purposes.
Further, each Grantor retained either Predeceased Grantor's Testamentary Power or Surviving Grantor's Testamentary Power (depending on the order of deaths) to appoint the property in Trust to any persons, other than to the Grantor's estates, Grantor's creditors, or the creditors of Grantor's estates. Under § 25.2514-3(b)(2), the retention of a testamentary power to appoint the remainder of a trust is considered a retention of dominion and control over the remainder. Accordingly, the retention of this power causes the transfer of property to Trust to be incomplete with respect to the remainder for federal tax purposes.
Finally, the Power of Appointment Committee members possess the Unanimous Member Power over income and principal. This power is not a condition precedent to Grantors' powers. Each of Grantors' powers over the income and principal are presently exercisable and not subject to a condition precedent. Each Grantor retains dominion and control over the income and principal of Trust until the Power of Appointment Committee members exercise their Unanimous Member Powers. Accordingly, the Unanimous Member Power does not cause the transfer of property to be complete with respect to the income interest for federal gift tax purposes. See Goldstein v. Commissioner, 37 T.C. 897 (1962); Estate of Goelet v. Commissioner, 51 T.C. 352 (1968).
Accordingly, based on the facts submitted and the representations made, we conclude that the contribution of property to Trust by either Grantor is not a completed gift subject to federal gift tax. Any distribution from Trust to either Grantor prior to the death of the Predeceased Grantor is a distribution of community property. Any distribution from Trust to either Grantor is merely a return of each Grantor's property. Therefore, we conclude that any distribution of property from Trust by the Power of Appointment Committee to either Grantor will not be a completed gift subject to federal gift tax, by any member of the Power of Appointment Committee. Further, upon the Predeceased Grantor's death, the fair market value of the Predeceased Grantor's interest in Trust is includible in the Predeceased Grantor's gross estate for federal estate tax purposes. Moreover, upon the Surviving Grantor's death, the fair market value of the balance in Trust is includible in the Surviving Grantor's gross estate for federal estate tax purposes.
RULINGS 4 AND 5
Section 2514(b) provides that the exercise or release of a general power of appointment created after October 21, 1942, shall be deemed a transfer of property by the individual possessing such power.
Section 2514(c) provides that the term "general power of appointment" means a power which is exercisable in favor of the individual possessing the power (possessor), the possessor's estate, the possessor's creditors, or the creditors of the possessor's estate.
Section 25.2514-1(c)(1) provides that a power of appointment is not a general power if by its terms it is exercisable only in favor of one or more designated persons or classes other than the possessor or his creditors, or the possessor's estate or the creditors of the estate or expressly not exercisable in favor or the possessor or his creditors, or the possessor's estate or the creditors of his estate.
Section 2514(c)(3)(A) provides that, in the case of a power of appointment created after October 21, 1942, if the power is exercisable by the possessor only in conjunction with the creator of the power, such power is not deemed a general power of appointment.
Section 2514(c)(3)(B) provides, that in the case of a power of appointment created after October 21, 1942, if the power is not exercisable by the possessor except in conjunction with a person having a substantial interest in the property subject to the power, which is adverse to the exercise of the power in favor of the possessor, such power shall not be deemed a general power of appointment. For purposes of § 2514(c)(3)(B), a person who, after the death of the possessor, may be possessed of a power of appointment (with respect to the property subject to the possessor's power) which he may exercise in his own favor shall be deemed as having an interest in the property and such interest shall be deemed adverse to such exercise of the possessor's power.
Section 25.2514-3(b)(2) provides, in part, that a co-holder of a power has no adverse interest merely because of his joint possession of the power nor merely because he is a permissible appointee under a power. However, a co-holder of a power is considered as having an adverse interest where he may possess the power after the possessor's death and may exercise it at that time in favor of himself, his estate, his creditors, or the creditors of his estate. Thus, for example, if X, Y, and Z held a power jointly to appoint among a group of persons which includes themselves and if on the death of X the power will pass to Y and Z jointly, then Y and Z are considered to have interests adverse to the exercise of the power in favor of X. Similarly, if on Y's death the power will pass to Z, Z is considered to have an interest adverse to the exercise of the power in favor of Y.
Section 2041(a)(2) provides that the value of the gross estate shall include the value of all property to the extent of any property with respect to which the decedent has at the time of death a general power of appointment created after October 21, 1942, or with respect to which the decedent has at any time exercised or released such a power by a disposition which is of such nature that if it were a transfer of property owned by the decedent, such property would be includible in the decedent's gross estate under §§ 2035 to 2038, inclusive.
Under § 2041(b)(1), the term "general power of appointment" is defined,, in relevant part, to mean a power which is exercisable in favor of the decedent, his estate, his creditors, or the creditors of his estate.
Section 2041(b)(1)(C)(i) provides, however, that in the case of a power of appointment created after October 21, 1942, if the power is not exercisable by the decedent except in conjunction with the creator of the power, such power is not deemed a general power of appointment.
Section 2041(b)(1)(C)(ii) provides, however, that in the case of a power of appointment created after October 21, 1942, if the power is not exercisable by the decedent except in conjunction with a person having a substantial interest in the property, subject to the power, which is adverse to the exercise of the power in favor of the decedent--such power shall not be deemed a general power of appointment. For purposes of § 2041(b)(1)(C)(ii), a person who, after the death of the decedent, may be possessed of a power of appointment (with respect to the property subject to the decedent's power) which he may exercise in his own favor shall be deemed as having an interest in the property and such interest shall be deemed adverse to such exercise of the decedent's power.
Section 20.2041-3(c)(2) of the Estate Tax Regulations provides, in part, that a co-holder of a power of appointment has no adverse interest merely because of his joint possession of the power nor merely because he is a permissible appointee under a power. However, a co-holder of a power is considered as having an adverse interest where he may possess the power after the decedent's death and may exercise it at that time in favor of himself, his estate, his creditors, or the creditors of his estate. Thus, for example, if X, Y, and Z held a power jointly to appoint among a group of persons which includes themselves and if on the death of X the power will pass to Y and Z jointly, then Y and Z are considered to have interests adverse to the exercise of the power in favor of X. Similarly, if on Y's death the power will pass to Z, Z is considered to have an interest adverse to the exercise of the power in favor of Y.
The powers held by the Power of Appointment Committee members under the Grantor's Consent Power are powers that are exercisable only in conjunction with the creators (i.e., either Grantor, or the survivor thereof). Accordingly, under §§ 2514(b) and 2041(a)(2), the Power of Appointment Committee members do not possess general powers of appointment by virtue of possessing these powers.
Further, the powers held by the Power of Appointment Committee members under the Unanimous Member Power are not general powers of appointment for purposes of §§ 2514(b) and 2041(a)(2). As in the examples in §§ 25.2514-3(b)(2) and 20.2041-3(c)(2), the Power of Appointment Committee members have substantial adverse interests in the property subject to this power. Accordingly, any distribution made from Trust to a beneficiary, other than to either Grantor, pursuant to the exercise of these powers, the Grantor's Consent Power and the Unanimous Member Power, are not gifts by the Power of Appointment Committee members. Instead, such distributions are gifts by Grantors.
Based upon the facts submitted and representations made, we conclude that any distribution of property by the Power of Appointment Committee from Trust to any beneficiary of Trust, other than Grantors, will not be a completed gift subject to federal gift tax, by any member of the Power of Appointment Committee. Further, we conclude that any distribution of property from Trust to a beneficiary other than Grantors will be a completed gift by Grantors. Trust provides that all distributions of the net income or principal prior to the death of the Predeceased Grantor, whether made by the Power of Appointment Committee, the Trustee or a Grantor's exercise of the powers retained by such Grantor, to a beneficiary is and shall be a distribution out of community property. Accordingly, distributions to beneficiaries, other than Grantors, will be gifts made one-half by each Grantor. Finally, we conclude that the powers held by the Power of Appointment Committee members are not general powers of appointment for purposes of § 2041(a)(2) and, accordingly, the possession of these powers by the Power of Appointment Committee members will not cause Trust property to be includible in any Committee member's gross estate under § 2041(a)(2).
RULING 6
Section 1014(a) provides, in part, that, except as otherwise provided in this section, the basis of property in the hands of a person acquiring the property from a decedent or to whom the property passed from a decedent will, if not sold, exchanged, or otherwise disposed of before the decedent's death by such person, be the fair market value of the property at the date of the decedent's death.
Section 1014(b)(6) provides that, in the case of decedents dying after December 31, 1947, property which represents the surviving spouse's one-half share of community property held by the decedent and the surviving spouse under the community property laws of any State, is considered, for purposes of § 1014(a), to have been acquired from or to have passed from the decedent if at least one-half of the whole of the community interest in such property was includible in determining the value of the decedent's gross estate.
Section 2036(a) provides that the value of the gross estate shall include the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer (except in case of a bona fide sale for adequate and full consideration in money or money's worth), by trust or otherwise, under which he has retained for his life or for any period not ascertainable without reference to his death or for any period which does not in fact end before his death (1) the possession or enjoyment of, or the right to the income from, the property, or (2) the right, either alone or in conjunction with any person, to designate the persons who shall possess or enjoy the property or the income therefrom.
Section 2038(a)(1) provides that the value of the decedent's gross estate shall include the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer (except in case of a bona fide sale for adequate and full consideration in money or money's worth), by trust or otherwise, where the enjoyment thereof was subject at the date of his death to any change through the exercise of a power (in whatever capacity exercisable) by the decedent alone or by the decedent in conjunction with any other person (without regard to when or from what source the decedent acquired such power), to alter, amend, revoke, or terminate, or where any such power is relinquished during the three-year period on the date of the decedent's death.
Grantors are married and reside in State 2, a community property state. Trust provides that all transferred property to Trust is community property. Moreover, any and all property transferred to Trust prior to the death of the Predeceased Grantor shall be a distribution of community property. As concluded above, upon the death of each Grantor, his or her respective interest in Trust as either the Predeceased Grantor or the Surviving Grantor will be includible in his or her respective gross estate for federal estate tax purposes.
Accordingly, based upon the facts submitted and representations made, we conclude that the basis of all community property in Trust on the date of death of the Predeceased Grantor will receive an adjustment in basis to the fair market value of such property at the date of death of the Predeceased Grantor.
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 the tax consequences of the trust provisions permitting Trustee to distribute income or principal to trustees of other Qualified Trusts (decanting).
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, a copy of this letter is being sent to your authorized representative.
Sincerely,
Lorraine E. Gardner
Lorraine E. Gardner
Senior Counsel, Branch 4
Office of Associate Chief Counsel
(Passthroughs & Special Industries)
Enclosures (2):
Copy for § 6110 purposes
Copy of this letter
cc:
cc: |
Private Letter Ruling
Number 202422003
Internal Revenue Service
February 28, 2024
Internal Revenue Service
Department of the Treasury
Washington, DC 20224
Number: 202422003
Release Date: 5/31/2024
Index Number: 9100.00-00, 1400Z.02-00
[Third Party Communication:
Date of Communication: Month DD, YYYY]
Person To Contact:
ID No.
Telephone Number:
Refer Reply To:
CC:ITA:B05
PLR-117018-23
Date: February 28, 2024
Dear ******:
This ruling responds to Taxpayer's request dated Date 1. Specifically, Taxpayer requests relief under §§ 301.9100-1 and 301.9100-3 of the Procedure and Administration Regulations, granting an extension of time to make a timely election under § 1.1400Z-2(a)-1(a)(2)(i) of the Income Tax Regulations to self-certify as a Qualified Opportunity Fund (QOF), as defined in § 1400Z-2(d) of the Internal Revenue Code (Code).
This letter is being issued electronically in accordance with Rev.Proc. 2020-29, 2020-21 I.R.B. 859. A paper copy will not be mailed to Taxpayer.
FACTS
Taxpayer represents the facts as follows:
Taxpayer is a limited liability company organized under the laws of State on Date 2. Taxpayer is treated as a partnership for Federal income tax purposes. Taxpayer uses the accrual method of accounting and the calendar year as its taxable year.
Taxpayer was formed for the purpose of investing in real and personal property and operating as a QOF as defined in § 1400Z-2(d)(1) on Date 2. A second operating agreement was executed on Date 3 to reflect the entity's name change and additional members. The revised operating agreement also clearly states that the Taxpayer was formed for the purpose of operating as a QOF. Shortly after the Taxpayer was formed, all three investors made capital contributions to the Taxpayer, which were intended to be qualifying investments under § 1400Z-2 and the regulations thereunder.
Taxpayer engaged Accounting Firm to prepare and file its necessary tax filings for Year 1, including its partnership return and its Form 8996, Qualified Opportunity Fund. Accounting Firm had previously provided services to Taxpayer's related affiliates in prior tax periods. Accounting Firm was aware of Taxpayer's intent to be treated as a QOF.
Accounting Firm timely filed Form 7004, Application for Automatic Extension of Time for the Taxpayer's initial period in Year 1, extending the filing deadline to Date 4. Accounting Firm began preparing the return prior but failed to complete and file the return by Date 4 due to administrative error.
In Year 2, a member of Taxpayer received a notice that Taxpayer and its EIN as included on the member's Form 8997 were not associated with a certain QOF. Taxpayer's Manager reached out to Accounting Firm for assistance.
Upon review, Accounting Firm discovered that it had not completed and filed Taxpayer's Year 1 partnership return. Once it became clear that the return had not been filed, Taxpayer discussed the issue with Accounting Firm and sought assistance from Accounting Firm 2. Based on these discussions, Taxpayer requested this Private Letter Ruling.
LAW AND ANALYSIS
Section 1400Z-2(e)(4)(A) of the Internal Revenue Code directs the Secretary to prescribe regulations for rules for the certification of QOFs. Section 1.1400Z2(d)-1(a)(2) of the Income Tax Regulations provides the rules for an entity to self-certify as a QOF. Section 1.1400Z2(d)-1(a)(2)(i) provides that the entity electing to be certified as a QOF must do so annually on a timely filed return in such form and manner as may be prescribed by the Commissioner of Internal Revenue in the Internal Revenue Service forms or instructions, or in publications or guidance published in the Internal Revenue Bulletin.
To self-certify as a QOF, a taxpayer must file Form 8996, Qualified Opportunity Fund, with its tax return for the year to which the certification applies. The Form 8996 must be filed by the due date of the tax return (including extensions). The information pr ovided indicates that Taxpayer did not file its Form 8996 by the due date of its income tax return due to the Accounting Firm's failure to timely file Taxpayer's Year 1 return.
Because § 1.1400Z2(d)-1(a)(2)(i) sets forth the manner and timing for an entity to self-certify as a QOF, these elections are regulatory elections, as defined in section 301.9100-1(b).
Sections 301.9100-1 through 301.9100-3 provide the standards that the Commissioner will use to determine whether to grant an extension of time to make a regulatory election. Section 301.9100-3(a) provides that requests for extensions of time for regulatory elections (other than automatic extensions covered in § 301.9100-2) will be granted when the taxpayer provides evidence (including affidavits) to establish that the taxpayer acted reasonably and in good faith and the grant of relief will not prejudice the interests of the Government.
Under § 301.9100-3(b) a taxpayer is deemed to have acted reasonably and in good faith if the taxpayer requests relief before the failure to make the regulatory election is discovered by the Service, or reasonably relied on a qualified tax professional, and the tax professional failed to make, or advise the taxpayer to make, the election. However, a taxpayer is not considered to have reasonably relied on a qualified tax professional if the taxpayer knew or should have known that the professional was not competent to render advice on the regulatory election or was not aware of all relevant facts.
In addition, § 301.9100-3(b)(3) provides that a taxpayer is deemed not to have acted reasonably and in good faith if the taxpayer--
(i) seeks to alter a return position for which an accuracy-related penalty has been or could be imposed under § 6662 at the time the taxpayer requests relief, and the new position requires or permits a regulatory election for which relief is requested;
(ii) was fully informed in all material respects of the required election and related tax consequences but chose not to make the election; or
(iii) uses hindsight in requesting relief. If specific facts have changed since the original deadline that make the election advantageous to a taxpayer, the Service will not ordinarily grant relief.
Section 301.9100-3(c)(1) provides that the Commissioner will grant a reasonable extension of time to make the regulatory election only when the interests of the Government will not be prejudiced by the granting of relief.
Section 301.9100-3(c)(1)(i) provides that the interests of the Government are prejudiced if granting relief would result in a taxpayer having a lower tax liability in the aggregate for all taxable years affected by the election than the taxpayer would have had if the election had been timely made (taking into account the time value of money).
Section 301.9100-3(c)(1)(ii) provides that the interests of the government are ordinarily prejudiced if the taxable year in which the regulatory election should have been made or any taxable year that would have been affected by the election had it been timely made are closed by the period of limitations on assessment under § 6501(a) before the taxpayer's receipt of a ruling granting relief under this section.
Based on the facts and information submitted and the representations made, we conclude that Taxpayer has acted reasonably and in good faith, and that the granting of relief would not prejudice the interests of the government. Accordingly, based solely on the facts and information submitted, and the representations made in the ruling request, we grant Taxpayer an extension of 60 days from the date of this letter ruling to file a Form 8996 for Year 1 to make the election to self-certify as a QOF under section 1400Z-2 and section 1.1400Z2(d)-1(a)(2)(i). The election must be made on a completed Form 8996 attached to the Taxpayer's tax return for Year 1. This letter ruling grants an extension of time to file a Form 8996 for Year 1. This letter ruling does not grant an extension of time to file Taxpayer's Form 1065 for Year 1.
This ruling is based upon facts and representations submitted by Taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party. This office has not verified any of the material submitted in support of the request for a ruling. However, as part of an examination process, the Service may verify the factual information, representations, and other data submitted.
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, either express or implied, concerning whether any investments made into Taxpayer are qualifying investments as defined in § 1.1400Z2 (a)-1(b)(34) or whether Taxpayer meets the requirements under § 1400Z-2 and the regulations thereunder to be a QOF.
Further, we express no opinion on whether any interest owned in any entity by Taxpayer qualifies as qualified opportunity zone property, as defined in section 1400Z-2(d)(2), or whether such entity would be treated as a qualified opportunity zone business, as defined in section 1400Z-2(d)(3). We express no opinion regarding the tax treatment of the instant transaction under the provisions of any other sections of the Code or regulations that may be applicable, or regarding the tax treatment of any conditions existing at the time of, or effects resulting from, the instant 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.
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 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.
In accordance with the Power of Attorney on file with this office, a copy of this letter is being faxed to your authorized representative.
Sincerely,
Kyle C. Griffin
Senior Counsel, Branch 5
Office of Associate Chief Counsel
(Income Tax & Accounting)
cc: |
Treasury Decision 9973
Internal Revenue Service
2023-11 I.R.B. 557
26 CFR 1.1502-80(j): Special rules for application of section 951(a)(2)(B) to distributions to which section 959(b) applies
T.D. 9973
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
Single-Entity Treatment of Consolidated Groups for Specific Purposes
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains final regulations that treat members of a consolidated group as a single United States shareholder in certain cases for purposes of section 951(a)(2)(B) of the Internal Revenue Code (the "Code"). The document finalizes proposed regulations published on December 14, 2022. The final regulations affect consolidated groups that own stock of foreign corporations.
DATES: Effective date: These regulations are effective on February 23, 2023.
Applicability date: These regulations apply to taxable years for which the original consolidated return is due (without extensions) after February 23, 2023.
FOR FURTHER INFORMATION CONTACT: Austin Diamond-Jones, (202) 317 - 5085 (Corporate) and Julie T. Wang, (202) 317 - 6975 (Corporate) regarding section 1502 and the amendments to§1.1502 - 80, and Joshua P. Roffenbender, (202) 317 - 6934 (International) regarding sections 951, 951A, and 959.
SUPPLEMENTARY INFORMATION:
Background
On December 14, 2022, the Department of the Treasury ("Treasury Department") and the IRS published a notice of proposed rulemaking (REG-113839 - 22) in the Federal Register (87 FR 76430) under sections 1502 and 7805(a) of the Code (the "proposed regulations"). No comments were received from the public in response to the notice of proposed rulemaking. No public hearing was requested or held. This Treasury Decision adopts the proposed regulations as final regulations without modification.
Applicability Date
The final regulations apply to taxable years for which the original consolidated return is due (without extensions) after February 23, 2023. See section 1503(a).
Special Analyses
I. Regulatory Planning and Review -- Economic Analysis
These final regulations are not subject to review under section 6(b) of Executive Order 12866 pursuant to the Memorandum of Agreement (April 11, 2018) between the Treasury Department and the Office of Management and Budget regarding review of tax regulations.
II. Regulatory Flexibility Act
Pursuant to the Regulatory Flexibility Act (5 U.S.C. chapter 6), it is hereby certified that these final regulations will not have a significant economic impact on a substantial number of small entities. This certification is based on the fact that these final regulations apply only to corporations that file consolidated Federal income tax returns, and that such corporations almost exclusively consist of larger businesses. Specifically, based on data available to the IRS, corporations that file consolidated Federal income tax returns represent only approximately two percent of all filers of Forms 1120 (U.S. Corporation Income Tax Return). However, these consolidated Federal income tax returns account for approximately 95 percent of the aggregate amount of receipts provided on all Forms 1120. Therefore, these final regulations would not create additional obligations for, or impose an economic impact on, small entities. Accordingly, the Secretary certifies that the final regulations will not have a significant economic impact on a substantial number of small entities.
III. Section 7805(f)
Pursuant to section 7805(f), the proposed regulations (REG - 113839 - 22) preceding these final regulations were submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business, and no comments were received.
IV. Unfunded Mandates Reform Act
Section 202 of the Unfunded Mandates Reform Act of 1995 requires that agencies assess anticipated costs and benefits and take certain other actions before issuing a final rule that includes any Federal mandate that may result in expenditures in any one year by a state, local, or tribal government, in the aggregate, or by the private sector, of $100 million in 1995 dollars, updated annually for inflation. These final regulations do not include any Federal mandate that may result in expenditures by state, local, or tribal governments, or by the private sector in excess of that threshold.
V. Executive Order 13132: Federalism
Executive Order 13132 (entitled "Federalism") prohibits an agency from publishing any rule that has federalism implications if the rule either imposes substantial, direct compliance costs on state and local governments, and is not required by statute, or preempts state law, unless the agency meets the consultation and funding requirements of section 6 of the Executive order. These final regulations do not have federalism implications and do not impose substantial direct compliance costs on state and local governments or preempt state law within the meaning of the Executive order.
Drafting Information
The principal authors of these regulations are Joshua P. Roffenbender, Office of Associate Chief Counsel (International), and Jeremy Aron-Dine and Gregory J. Galvin, Office of Associate Chief Counsel (Corporate). However, other personnel from the IRS and the Treasury Department participated in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Adoption of Amendments to the Regulations
Accordingly, 26 CFR part 1 is amended as follows:
PART 1--INCOME TAXES
Paragraph 1. The authority citation for part 1 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. In§1.1502 - 80, reserved paragraph (i) and paragraph (j) are added to read as follows:§1.1502-80 Applicability of other provisions of law.
* * * * *
(i) [Reserved]
(j) Special rules for application of section 951(a)(2)(B) to distributions to which section 959(b) applies --(1) Single United States shareholder treatment. In determining the amount described in section 951(a)(2)(B) that is attributable to distributions to which section 959(b) applies, members of a group are treated as a single United States shareholder (within the meaning of section 951(b) (or section 953(c)(1)(A), if applicable)) for purposes of determining the part of the year during which such shareholder did not own (within the meaning of section 958(a)) the stock described in section 951(a)(2)(A). The purpose of this paragraph (j) is to facilitate the clear reflection of income of a consolidated group by ensuring that the location of ownership of stock of a foreign corporation within the group does not affect the amount of the group's income by reason of sections 951(a)(1)(A) and 951A(a).
(2) Examples. The following examples illustrate the application of paragraph (j)(1) of this section. For purposes of the examples in this paragraph (j)(2): M1 and M2 are members of a consolidated group of which P is the common parent (P group); each of CFC1, CFC2, and CFC3 is a controlled foreign corporation (within the meaning of section 957(a)) with the U.S. dollar as its functional currency (within the meaning of section 985); the taxable year of all entities is the calendar year for Federal income tax purposes; and a reference to stock owned means stock owned within the meaning of section 958(a). These examples do not address common law doctrines or other authorities that might apply to recast a transaction or to otherwise affect the tax treatment of a transaction.
(i) Example 1: Intercompany transfer of stock of a controlled foreign corporation --(A) Facts. Throughout Year 1, M1 directly owns all the stock of CFC1, which directly owns all the stock of CFC2. In Year 1, CFC2 has $100x of subpart F income (as defined in section 952). M1's pro rata share of CFC2's subpart F income for Year 1 is $100x, which M1 includes in its gross income under section 951(a)(1)(A). In Year 2, CFC2 has $80x of subpart F income and distributes $80x to CFC1 (the CFC2 Distribution). Section 959(b) applies to the entire CFC2 Distribution. On December 29, Year 2, M1 transfers all of its CFC1 stock to M2 in an exchange described in section 351(a). As a result, on December 31, Year 2 (the last day of Year 2 on which CFC2 is a controlled foreign corporation), M2 owns 100% of the stock of CFC1, which owns 100% of the stock of CFC2.
(B) Analysis. Under paragraph (j)(1) of this section, in determining the amount described in section 951(a)(2)(B) that is attributable to the CFC2 Distribution, all members of the P group are treated as a single United States shareholder for purposes of determining the part of Year 2 during which such shareholder did not own the stock of CFC2. Thus, the ratio of the number of days in Year 2 that such United States shareholder did not own the stock of CFC2 to the total number of days in Year 2 is 0/365. The amount described in section 951(a)(2)(B) is $0, M2's pro rata share of CFC2's subpart F income for Year 2 is $80x ($80x - $0), and M2 must include $80x in its gross income under section 951(a)(1)(A).
(ii) Example 2: Transfer of stock of a controlled foreign corporation between controlled foreign corporations --(A) Facts. The facts are the same as in paragraph (j)(2)(i)(A) of this section (the facts in Example 1 ), except that M1 does not transfer its CFC1 stock to M2. Additionally, throughout Year 1 and from January 1, Year 2, to December 29, Year 2, M2 directly owns all 90 shares of the only class of stock of CFC3. Further, on December 29, Year 2, CFC3 acquires all the CFC2 stock from CFC1 in exchange for 10 newly issued shares of the same class of CFC3 stock in a transaction described in section 368(a)(1)(B). As a result, on December 31, Year 2, M1 owns 10% of the stock of CFC2, and M2 owns 90% of the stock of CFC2.
(B) Analysis. Under paragraph (j)(1) of this section, in determining the amount described in section 951(a)(2)(B) that is attributable to the portion of the CFC2 Distribution with respect to each of the CFC2 stock that M1 owns on December 31, Year 2, and the CFC2 stock that M2 owns on that day, all members of the P group are treated as a single United States shareholder for purposes of determining the part of Year 2 during which such shareholder did not own such stock. In each case, the ratio of the number of days in Year 2 that such United States shareholder did not own such stock to the total number of days in Year 2 is 0/365, and the amount described in section 951(a)(2)(B) is $0. M1's and M2's pro rata shares of CFC2's subpart F income for Year 2 are $8x ($8x - $0) and $72x ($72x - $0), respectively, and M1 and M2 must include $8x and $72x in gross income under section 951(a)(1)(A), respectively.
(3) Applicability date. This paragraph (j) applies to taxable years for which the original consolidated Federal income tax return is due (without extensions) after February 23, 2023.
Melanie R. Krause,
Acting Deputy Commissioner for
Services and Enforcement.
Approved: February 6, 2023.
Lily L. Batchelder,
Assistant Secretary of the Treasury
(Tax Policy).
(Filed by the Office of the Federal Register on February 22, 2023, 8:45 a.m., and published in the issue of the Federal Register for February 23, 2023, 88 F.R. 11393) |
Private Letter Ruling
Number: 202343020
Internal Revenue Service
July 27, 2023
Internal Revenue Service
Department of the Treasury
Washington, DC 20224
Number: 202343020
Release Date: 10/27/2023
Index Number: 2501.00-00, 2601.00-00
Third Party Communication: None
Date of Communication: Not Applicable
Person To Contact:
ID No.
Telephone Number:
Refer Reply To:
CC:PSI:04 P
LR-102061-23
Date: July 27, 2023
Dear ******:
This letter responds to your authorized representative's letter dated December 27, 2022, and subsequent correspondence, requesting rulings concerning the federal gift and generation-skipping transfer tax consequences of a court-approved settlement agreement.
FACTS
The facts submitted and representations made are as follows. Settlor died testate on Date 1, a date prior to September 25, 1985. Settlor's Will consists of the original instrument dated Date 2, a first codicil dated Date 3, a second codicil dated Date 4, a third codicil dated Date 5, and a fourth codicil dated Date 6 (collectively, Settlor's Will). At his death, Article Fourth of Settlor's Will created separate trusts for the benefit of his three children, Child 1, Child 2, and Child 3 (collectively, Children), their spouses, and their descendants: Trust A for the benefit of Child 1; Trust B for the benefit of Child 2; and Trust C for the benefit of Child 3.
In addition to the trusts for the primary benefit of Children, Article Third of Settlor's Will created a marital trust for Settlor's wife, Spouse, which granted Spouse a testamentary general power of appointment over any trust property remaining in the marital trust at the time of her death. Spouse exercised her power of appointment under Article VII of Spouse's Will, dated Date 7, with a first codicil dated Date 8 (collectively, Spouse's Will). Pursuant to Spouse's Will, upon Spouse's death on Date 9, the remaining property of the marital trust was divided into three separate trusts for the benefit of Children, their spouses, and their descendants: Trust D for the benefit of Child 1; Trust E for the benefit of Child 2; and Trust F for the benefit of Child 3. Section 8 of Article VI of Spouse's Will provides that to the extent not specifically stated otherwise, all trusts created by Spouse's Will would be governed by the provisions of Settlor's Will.
Child 3 died on Date 10, leaving no surviving spouse or descendants. Upon Child 3's death, the property held in Trust C was divided into two equal shares and each share distributed to Trust A and Trust B. Similarly, the property of Trust F was divided into two equal shares and each share distributed to Trust D and Trust E.
On Date 11, pursuant to a State Court order, Trust D for the primary benefit of Child 1 was divided into six separate trusts for the benefit of Child 1's six children and their respective descendants, as well as Child 1 and Child 1's spouse: Trust D1 for the benefit of Grandchild 1; Trust D2 for the benefit of Grandchild 2; Trust D3 for the benefit of Grandchild 3; Trust D4 for the benefit of Grandchild 4; Trust D5 for the benefit of Grandchild 5; and Trust D6 for the benefit of Grandchild 6.
On Date 12, pursuant to a State Court order, Trust A for the primary benefit of Child 1 was divided into six separate trusts for the benefit of Child 1's six children and their respective descendants, as well as Child 1 and Child 1's spouse: Trust A1 for the benefit of Grandchild 1; Trust A2 for the benefit of Grandchild 2; Trust A3 for the benefit of Grandchild 3; Trust A4 for the benefit of Grandchild 4; Trust A5 for the benefit of Grandchild 5; and Trust A6 for the benefit of Grandchild 6. In a companion State Court order on the same date, Trust B for the primary benefit of Child 2 and Trust E for the primary benefit of Child 2, were divided into two separate trusts for the benefit of Child 2's two children, Grandchild 7 and Grandchild 8 and their respective descendants, as well as Child 2 and Child 2's spouse. The divided trusts were subsequently merged into two trusts known as Trust BE1 for the benefit of Grandchild 7 and Trust BE2 for the benefit of Grandchild 8.
Article Fourth of Settlor's Will governs the distribution provisions of Trust A, Trust B, Trust D, Trust E, Trusts A1 through A6, Trusts D1 through D6, and Trusts BE1 and BE2 (collectively, the Family Trusts). Until a trust for whom a grandchild is named terminates, the Trustee has discretion to make distributions of income from such trust to the grandchild. The portion of income not distributed may be accumulated or may be distributed to the grandchild's spouse, the surviving parents of the grandchild, and the descendants of grandchild, in whole or in part, in the discretion of the Trustee. Trustee has unfettered discretion to make distributions of principal to a grandchild for whom a trust is established. A trust for whom a grandchild is named shall terminate upon the later to occur of the death of the grandchild or the grandchild's spouse, if any, and at such time the share for such grandchild shall be distributed to the descendants of such grandchild, per stirpes.
Section 4 of Article Fifth of Settlor's Will provides that any trust established pursuant to Settlor's Will shall cease and terminate upon the expiration of twenty-one years after the death of the last surviving of Settlor's descendants who were in being at the time of Settlor's death, and if at the expiration of this period any property is still held in trust, such property shall immediately be distributed to and among the persons receiving or entitled to have the benefit of the income therefrom in equal shares.
Pursuant to Article Fourth of Settlor's Will, if a grandchild of Settlor dies without a living spouse or descendants, the trust principal of such grandchild's trust will be distributed to Settlor's other descendants.
Section 3 of Article Fifth of Settlor's Will provides as follows:
The words "children" and "descendants" shall be deemed to refer to issue of the body born in lawful wedlock and to children adopted by legal proceedings of public record and to their children and descendants so defined.
Of Settlor's eight grandchildren, Grandchild 5 and Grandchild 7 currently have biological descendants. Grandchild 2 adopted Adoptee 1 and Grandchild 3 adopted Adoptee 2 and Adoptee 3. Each adopted individual was adopted after reaching the age of majority (collectively, Adult Adoptees).
The Trustee of each Family Trust is Trust Company. On Date 13, Trustee filed a petition with the State Court requesting an order construing the terms "children" and "descendants" under Section 3 of Article Fifth of Settlor's Will to determine whether individuals adopted as adults qualify as "descendants" under Settlor's Will. A controversy exists among the descendants of Settlor as to whether the Adult Adoptees are "descendants" of Settlor under Settlor's Will. If the Adult Adoptees are considered descendants of Settlor, the number of potential remainder beneficiaries increases and affects the per stirpital shares at the time of final distribution of the Family Trusts.
On Date 14, State Court issued a memorandum opinion and order for evidentiary hearing to determine whether Grandchild 2 and/or Grandchild 3 functioned as parents to the Adult Adoptees before they reached age 18, based on State Law 1, which was enacted after Settlor's date of death. Grandchild 1, joined by other family members, filed a motion for summary judgment and amendment of the Date 14 order in objection to the State Court's application of State Law 1 rather than the law at the time of Settlor's date of death.
State Law 1 provides that in construing a dispositive provision of a transferor who is not the adoptive parent, an adoptee is not considered the child of the adoptive parent unless the adoptive parent functioned as a parent of the adoptee before the adoptee reached 18 years of age. State Law 2 provides that the effective date of the title of State Law 1 is Date 15, a date that is after Settlor's date of death, and applies to any proceedings in court then pending or thereafter commenced regardless of the time of the death of decedent except to the extent that in the opinion of the court the former procedure should be made applicable in a particular case in the interest of justice or because of infeasibility of application of the procedure of the title.
Over several years, the interested parties engaged in substantial litigation and other proceedings in preparation for trial, including filing cross motions for summary judgment, extensive discovery, and voluntary mediation. Based on the issue before State Court, the outcome of the litigation would be that the Adult Adoptees are determined to be or not be descendants of Settlor. After several attempts to resolve the contested issues, on Date 16 the parties entered into a Settlement Agreement resolving the litigation regarding the status of the Adult Adoptees as descendants of Settlor. The Settlement Agreement was revised on Date 17 (Revised Settlement Agreement). Both the Settlement Agreement and the Revised Settlement Agreement were approved by order of State Court and contingent upon receipt of a favorable private letter ruling from the Internal Revenue Service (IRS). All parties to the agreement were represented by legal counsel.
The Revised Settlement Agreement provides for certain payments to and for the benefit of Adoptee 1. It provides that the amount of $a will be distributed outright and in cash to Adoptee 1 from Trusts A1 through A6 and Trusts D1 through D6 (each trust distributing $b). In addition, the amount of $a will be distributed outright and in cash to Grandchild 2 (adoptive parent of Adoptee 1) from Trust A2 and Trust D2 (each trust for the primary benefit of Grandchild 2 and each distributing $c), whereupon Grandchild 2, as settlor and transferor, will immediately establish (and contribute the $a in cash to) a special needs trust for the primary benefit of Adoptee 1. Finally, the amount of $d will be distributed outright and in cash to Adoptee 1 from Trust A2 and Trust D2 (each trust distributing $e). Upon receipt of cash in the amounts of $a and $d, Adoptee 1, as settlor and transferor, will immediately establish (and contribute the sum of $a and $d in cash to) a revocable trust for his primary benefit.
The Revised Settlement Agreement provides for certain payments to and for the benefit of Adoptee 2 and Adoptee 3. It provides that the amount of $a will be distributed outright and in cash to each of Adoptee 2 and Adoptee 3 from Trusts A1 through A6 and Trusts D1 through D6 (each distributing $b). Further, after the cash distributions to Adoptee 2 and Adoptee 3 are made, the assets then making up Trust A3 and Trust D3 (collectively referred to going forward as the Grandchild 3 Settlement Trusts), each for the primary benefit of Grandchild 3 (adoptive parent of Adoptee 2 and Adoptee 3), will be kept separate and segregated from the assets of any other Family Trust. No further additions shall be made to the Grandchild 3 Settlement Trusts from any other Family Trust by reason of the death of any beneficiary of those other Family Trusts. Except for certain excluded property related to agricultural land and business interests in entities whose primary holding is agricultural land (Excluded Property), Adoptee 2 and Adoptee 3 are the named beneficiaries of the Grandchild 3 Settlement Trusts. Upon the death of the survivor of Child 1's spouse, Grandchild 3, and Grandchild 3's spouse, the remaining assets of the Grandchild 3 Settlement Trusts, less the Excluded Property, will be distributed in equal shares to Adoptee 2 and Adoptee 3, or all to the survivor. Adoptee 2 and Adoptee 3 have a testamentary power to appoint such individual's respective share of the Grandchild 3 Settlement Trusts to or for the benefit of such individual's spouse or descendants. If Adoptee 2 or Adoptee 3 does not exercise such power of appointment but has living descendants, the Trustee shall distribute such individual's respective share to such descendants, per stirpes. Any asset appointed under the terms of the Revised Settlement Agreement (including the assets of the Grandchild 3 Settlement Trusts) may not extend the time for vesting of that asset beyond a period of twenty-one years after the death of the last surviving descendant of Settlor who was in being on Date 18. Any remaining assets of the Grandchild 3 Settlement Trusts not otherwise distributed (including the Excluded Property) shall be distributed according to Settlor's Will without regard to any surviving Adult Adoptees or their descendants.
Under the Revised Settlement Agreement, all claims by the Adult Adoptees with regard to Settlor and Settlor's Spouse's trusts and estates are resolved and, after obtaining a favorable private letter ruling from the IRS, Trustee will agree to dismiss the petition filed in State Court with prejudice and all parties will agree that State Court can enter the dismissal without awarding costs to any party and without further notice.
It is represented that each Family Trust was irrevocable on September 25, 1985, and that there were no additions, constructive or actual, after that date.
You have requested the following rulings:
1. The Revised Settlement Agreement, the State Court order approving the Revised Settlement Agreement, and the implementation and distributions made in accordance with the Revised Settlement Agreement, will not cause any of the Family Trusts to lose their status as trusts exempt from GST tax for purposes of chapter 13 of the Code.
2. Entering into the Revised Settlement Agreement will not cause any party to the Settlement Agreement to be treated as having made a gift to any other individual for purposes of chapter 12 of the Code.
LAW AND ANALYSIS
Ruling 1
Section 2601 imposes a tax on every generation-skipping transfer (GST), which is defined under § 2611 as a taxable distribution, a taxable termination, and a direct skip.
Under § 1433(a) of the Tax Reform Act of 1986 (Act) and § 26.2601-1(a) of the Generation-Skipping Transfer Tax Regulations, the GST tax is generally applicable to GSTs made after October 22, 1986. However, under § 1433(b)(2)(A) of the Act and § 26.2601-1(b)(1)(i), the tax does not apply to a transfer under a trust (as defined in § 2652(b)) that was irrevocable on September 25, 1985, but only to the extent that such transfer is not made out of corpus added to the trust after September 25, 1985 (or out of income attributable to corpus so added).
Section 26.2601-1(b)(4) provides rules for determining when a modification, judicial construction, settlement agreement, or trustee action with respect to a trust that is exempt from the GST tax under § 26.2601-1(b)(1), (b)(2), or (b)(3) will not cause the trust to lose its exempt status. The rules of § 26.2601-1(b)(4) are applicable only for purposes of determining whether an exempt trust retains its exempt status for GST tax purposes. They do not apply in determining, for example, whether the transaction results in a gift subject to gift tax, or may cause the trust to be included in the gross estate of a beneficiary, or may result in the realization of capital gain for purposes of § 1001.
Section 26.2601-1(b)(4)(i)(B) provides that a court-approved settlement of a bona fide issue regarding the administration of a trust or the construction of terms of the governing instrument will not cause an exempt trust to be subject to the provisions of chapter 13, if -- ( 1 ) The settlement is the product of arm's length negotiations; and ( 2 ) The settlement is within the range of reasonable outcomes under the governing instrument and applicable state law addressing the issues resolved by the settlement. A settlement that results in a compromise between the positions of the litigating parties and reflects the parties' assessments of the relative strengths of their positions is a settlement that is within the range of reasonable outcomes.
In the present case, each Family Trust was created and was irrevocable before September 25, 1985. It is represented that no additions, constructive or actual, have been made to any of the Family Trusts on or after September 25, 1985. Consequently, each Family Trust is currently exempt from GST tax.
In this case, each party was represented by separate legal counsel. The prospective beneficiaries had distinct and adverse economic and administrative interests. The parties were involved in protracted and substantial litigation to resolve the issue of the identity of Settlor's descendants under Settlor's Will. Settlement negotiations were carried out over several years until the Revised Settlement Agreement was reached. The parties have obtained State Court approval of the Revised Settlement Agreement pending the issuance of this private letter ruling.
We conclude that the Revised Settlement Agreement constitutes a settlement of a bona fide issue regarding construction of the terms "children" and "descendants" in Settlor's Will. We further conclude that the terms of the Revised Settlement Agreement are the product of arm's length negotiations. Finally, we conclude that the Revised Settlement Agreement represents a compromise between the positions of the interested parties and reflects the assessments of the relative strengths of their positions; therefore, we additionally conclude that the Revised Settlement Agreement is within the range of reasonable outcomes under the governing instrument and the applicable State law addressing the issues resolved by the Revised Settlement Agreement.
Accordingly, based on the facts submitted and the representations made, we rule that the Revised Settlement Agreement, the State Court order approving the Revised Settlement Agreement, and the implementation and distributions made in accordance with the Revised Settlement Agreement, will not cause any of the Family Trusts to lose their status as trusts exempt from GST tax for purposes of chapter 13 of the Code.
Ruling 2
Section 2501 imposes a tax for each calendar year on the transfer of property by gift during such calendar year by any individual. Section 2511 provides that the tax imposed by § 2501 applies whether the transfer is in trust or otherwise, direct or indirect, and whether the property transferred is real or personal, tangible or intangible.
Section 25.2511-1(c)(1) of the Gift Tax Regulations provides that any transaction in which an interest in property is gratuitously passed or conferred upon another, regardless of the means or device employed, constitutes a gift subject to tax.
Whether an agreement settling a dispute is effective for gift tax purposes depends on whether the settlement is based on a valid enforceable claim asserted by the parties and, to the extent feasible, produces an economically fair result. See Ahmanson Foundation v. United States, 674 F.2d 761, 774-775 (9 th Cir. 1981). Thus, state law must be examined to ascertain the legitimacy of each party's claim. A settlement that fairly reflects the relative merits and economic values of the various claims asserted by the parties and reaches a settlement that is within a range of reasonable settlements will not result in a transfer for gift tax purposes.
As discussed above, the Revised Settlement Agreement represents the resolution of a bona fide controversy among the family members as beneficiaries of Settlor's Will. All interested parties have been represented in the proceedings that culminated in the Court Order approving the Revised Settlement Agreement. Further, based on the facts as presented, the terms of the Revised Settlement Agreement are the product of arm's length negotiations among all the interested parties. We conclude that the Revis ed Settlement Agreement reflects the rights of the parties under the applicable law of State that would be applied by the highest court of State. Accordingly, based on the facts submitted and representations made, we rule that implementation of the Revised Settlement Agreement will not result in a gift under § 2501 by the parties to the Revised Settlement Agreement.
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.
In accordance with the Power of Attorney on file with this office, a copy of this letter is being sent to your authorized representative.
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 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.
Sincerely,
Karlene M. Lesho
Karlene M. Lesho
Chief, Branch 4
Office of Associate Chief Counsel
(Passthroughs and Special Industries)
Enclosures
Copy for § 6110 purposes
cc: |
Private Letter Ruling
Number: 202223003
Internal Revenue Service
March 10, 2022
Internal Revenue Service
Department of the Treasury
Washington, DC 20224
Number: 202223003
Release Date: 6/10/2022
Index Number: 2010.04-00, 9100.35-00
Third Party Communication: None
Date of Communication: Not Applicable
Person To Contact:
ID No.
Telephone Number:
Refer Reply To:
CC:PSI:4
PLR-107717-21
Date: March 10, 2022
Dear *******:
This letter responds to a letter dated March 24, 2021, and subsequent correspondence, submitted on behalf of Decedent's estate, requesting an extension of time pursuant to § 301.9100-3 of the Procedure and Administration Regulations to make an election. Decedent's estate is requesting to make an election under § 2010(c)(5)(A) of the Internal Revenue Code (a "portability" election)) to allow a decedent's surviving spouse to take into account that decedent's deceased spousal unused exclusion (DSUE) amount.
The information submitted for consideration is summarized below.
Decedent died on Date, survived by Spouse. It is represented that based on the value of Decedent's gross estate and taking into account any taxable gifts, Decedent's estate is not required under § 6018(a) to file an estate tax return (Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return). It is further represented that there is an unused portion of Decedent's applicable exclusion amount and that a portability election is required to allow Spouse to take into account that amount (the "DSUE" amount)). A portability election is made upon the timely filing of a complete and properly prepared estate tax return, unless the requirements for opting out are satisfied. See § 20.2010-2(a)(2) of the Estate Tax Regulations. For various reasons, an estate tax return was not timely filed and a portability election was not made. After discovery of this, Decedent's estate submitted this request for an extension of time under § 301.9100-3 to make a portability election.
LAW AND ANALYSIS
Section 2001(a) imposes a tax on the transfer of the taxable estate of every decedent who is a citizen or resident of the United States.
Section 2010(a) provides that a credit of the applicable credit amount shall be allowed to the estate of every decedent against the tax imposed by § 2001.
Section 2010(c)(1) provides that the applicable credit amount is the amount of the tentative tax that would be determined under § 2001(c) if the amount with respect to which such tentative tax is to be computed were equal to the applicable exclusion amount.
On December 17, 2010, Congress amended § 2010(c), effective for estates of decedents dying and gifts made after December 31, 2010, to allow portability of a decedent's unused applicable exclusion amount between spouses. Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, Pub. L. No. 111-312, § 303, 124 Stat. 3296, 3302 (2010).
Section 2010(c)(2) provides that the applicable exclusion amount is the sum of the basic exclusion amount, and, in the case of a surviving spouse, the DSUE amount.
Section 2010(c)(3) provides the basic exclusion amount available to the estate of every decedent, an amount to be adjusted for inflation annually after calendar year 2011.
Section 2010(c)(4) defines the DSUE amount to mean the lesser of (A) the basic exclusion amount, or (B) the excess of -- (i) the applicable exclusion amount of the last deceased spouse of the surviving spouse, over (ii) the amount with respect to which the tentative tax is determined under § 2001(b)(1) on the estate of such deceased spouse.
Section 2010(c)(5)(A) provides that a DSUE amount may not be taken into account by a surviving spouse under § 2010(c)(2) unless the executor of the estate of the deceased spouse files an estate tax return on which such amount is computed and makes an election on such return that such amount may be so taken into account. The election, once made, shall be irrevocable. No election may be made if such return is filed after the time prescribed by law (including extensions) for filing such return.
Section 20.2010-2(a)(1) provides that the due date of an estate tax return required to elect portability is nine months after the decedent's date of death or the last day of the period covered by an extension (if an extension of time for filing has been obtained). Further, an extension of time under § 301.9100-3 to make a portability election may be granted in the case of an estate that is not required to file an estate tax return under § 6018(a), as determined solely based on the value of the gross estate and any adjusted taxable gifts (and without regard to § 20.2010-2(a)).
Under § 301.9100-1(c), the Commissioner has discretion to grant a reasonable extension of time under the rules set forth in §§ 301.9100-2 and 301.9100-3 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 301.9100-3 provides the standards the Commissioner will use to determine whether to grant an extension of time to make an election whose due date is prescribed by a regulation (and not expressly provided by statute). Requests for relief under § 301.9100-3 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 that granting relief will not prejudice the interests of the government.
In this case, based on the representation as to the value of the gross estate and any adjusted taxable gifts, the time for filing the portability election is fixed by the regulations. Therefore, the Commissioner has discretionary authority under § 301.9100-3 to grant an extension of time for Decedent's estate to elect portability, provided Decedent's estate establishes it acted reasonably and in good faith, the requirements of §§ 301.9100-1 and 301.9100-3 are satisfied, and granting relief will not prejudice the interests of the government.
Information, affidavits, and representations submitted on behalf of Decedent's estate explain the circumstances that resulted in the failure to timely file a valid election. Based solely on the information submitted and the representations made, we conclude that the requirements of §§ 301.9100-1 and 301.9100-3 have been satisfied. Therefore, we grant an extension of time of 120 days from the date of this letter in which to make the portability election.
The election should be made by filing a complete and properly prepared Form 706 and a copy of this letter, within 120 days from the date of this letter, with the Kansas City Service Center, at the following address: Department of the Treasury, Internal Revenue Center, Kansas City, MO 64999. For purposes of electing portability, a Form 706 filed by Decedent's estate within 120 days from the date of this letter will be considered to be timely filed.
If it is later determined that, based on the value of the gross estate and taking into account any taxable gifts, Decedent's estate is required to file an estate tax return pursuant to § 6018(a), the Commissioner is without authority under § 301.9100-3 to grant an extension of time to elect portability and the grant of the extension referred to in this letter is deemed null and void. See § 20.2010-2(a)(1).
We neither express nor imply any opinion concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter. In particular, we express no opinion as to the DSUE amount to be potentially taken into account by Spouse. Any claimed DSUE amount will be included in the applicable exclusion amount of Spouse only to the extent that Spouse can substantiate such amount and will be subject to determination by the Director's office upon audit of relevant Federal gift or estate tax returns. See § 20.2010-3(c)(1) and (d).
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 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.
This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) provides that it may not be used or cited as precedent.
In accordance with the Power of Attorney on file with this office, we have sent a copy of this letter to your authorized representative.
Sincerely,
Associate Chief Counsel
(Passthroughs & Special Industries)
By: Leslie H. Finlow
Leslie H. Finlow
Senior Technician Reviewer, Branch 4
Office of the Associate Chief Counsel
(Passthroughs & Special Industries)
Enclosure
Copy for § 6110 purposes
cc: |
Private Letter Ruling
Number: 202303006
Internal Revenue Service
October 18, 2022
Internal Revenue Service
Department of the Treasury
Washington, DC 20224
Number: 202303006
Release Date: 1/20/2023
Index Number: 1001.00-00, 1015.00-00, 1015.03-00, 1015.03-01, 1223.00-00, 2036.00-00, 2036.01-00, 2038.00-00, 2038.01-00, 2038.01-01, 2501.00-00, 2501.01-00, 2601.00-00, 2601.01-00, 61.00-00, 661.00-00, 662.00-00
Third Party Communication: None
Date of Communication: Not Applicable
Person To Contact:
ID No.
Telephone Number:
Refer Reply To:
CC:PSI:4
PLR-110418-22
Date: October 18, 2022
Dear ******:
This letter responds to your authorized representatives' letter of May 19, 2022, and subsequent correspondence, requesting rulings regarding the income, estate, gift, and generation-skipping transfer (GST) tax consequences of the proposed division of Trust 1.
The facts and representations submitted are as follows:
Grandparent died on Date 1, leaving the residue of Grandparent's probate estate in equal shares to Trust 1 and Trust 2, testamentary trusts established under Will. Trust 1 is held for the benefit of Grandchild 1 and Grandchild 1's descendants, and Trust 2 is held for the benefit of Grandchild 2 and Grandchild 2's descendants. Grandchild 1 has five children, Great-Grandchild 1, Great-Grandchild 2, Great-Grandchild 3, Great-Grandchild 4, and Great-Grandchild 5. Grandchild 2 has one child, Great-Grandchild 6. Neither Grandchild 1 nor Grandchild 2 has any deceased children. Trustees serve as trustees of Trust 1. Trust 1 is the subject of this ruling request.
Section 9(a) of Trust 1 provides that Trustees may distribute the net income of Trust 1 to or for the benefit of Grandchild 1 and Grandchild 1's descendants in such proportions and at such times as Trustees determine is desirable or necessary, considering their needs, best interests, and other sources of income, or may annually accumulate and add all or part of the net income to the principal of Trust 1.
Section 9(b) of Trust 1 provides that Trustees may distribute the principal of Trust 1 to or for the benefit of Grandchild 1 and Grandchild 1's descendants in such proportions and at such times as Trustees determine is desirable or necessary for their medical care, comfortable maintenance, education, or general support and welfare, considering their other resources.
Section 9(c) of Trust 1 provides that Trust 1 will terminate 21 years after the death of the survivor of Grandchild 1 and Grandchild 2, and the principal of Trust 1 will be distributed to Grandchild 1's descendants, per stirpes. If, however, Grandchild 1 and Grandchild 1's descendants all die before that date, Trust 1 will terminate early, and the principal of Trust 1 will be distributed to Trust 2.
Grandchild 1's descendants have differing personal and financial situations and, consequently, Trustees, propose to divide Trust 1 along family lines into five separate shares (Resulting Trusts), one for the benefit of each of Grandchild 1's children and their respective descendants plus Grandchild 1, and to fund each Resulting Trust with one-fifth of each asset of Trust 1 (Proposed Division). Any distribution to Grandchild 1 from a Resulting Trust will be made pro rata from each Resulting Trust. The provisions of each Resulting Trust otherwise will be identical and unchanged from the provisions of Trust 1.
In accordance with Trust 1, each Resulting Trust will terminate 21 years after the death of the survivor of Grandchild 1 and Grandchild 2, and the principal will be distributed to the child of Grandchild 1 for whom Resulting Trust was created or, if such child is deceased, to the child's descendants, per stirpes. If, however, Grandchild 1, the child of Grandchild 1 for whom Resulting Trust was created, and such child's descendants all die before that date, Resulting Trust will terminate early, and the principal will be distributed equally among the other Resulting Trusts. If Grandchild 1 and Grandchild 1's descendants all die before that date, the principal instead will be distributed to Trust 2.
Under the authority of Statutes, Court issued Order on Date 2 and Amended Order on Date 3 authorizing the Proposed Division upon receipt of a favorable private letter ruling from the Internal Revenue Service.
Trust 1 was irrevocable prior to September 25, 1985, and no additions, actual or constructive, have been made to Trust 1.
You request the following rulings:
1. Proposed Division will not cause Trust 1 or any Resulting Trust to lose grandfathered status for purposes of the GST tax, or otherwise become subject to GST tax.
2. Proposed Division will not be treated as a distribution and cause any Resulting Trust to recognize income, gain or loss from a sale or other disposition of property under § 61, § 661, § 662, or § 1001.
3. The adjusted basis and holding period of each of the Resulting Trust assets will be the same as the adjusted basis and holding periods of the Trust 1 assets under § 1015 and § 1223(2).
4. Proposed Division will not cause such assets to be includable in the gross estate of any of the beneficiaries under § 2036, § 2037, or § 2038.
5. Proposed Division will not constitute a transfer subject to federal gift tax under § 2501.
Ruling 1
Section 2601 imposes a tax on every GST, which is defined under § 2611 as a taxable distribution, a taxable termination, and a direct skip.
Under § 1433(a) of the Tax Reform Act of 1986 (Act) and § 26.2601-1(a) of the Generation-Skipping Transfer Tax Regulations, the GST tax is generally applicable to generation-skipping transfers made after October 22, 1986. However, under § 1433(b)(2)(A) of the Act and § 26.2601-1(b)(1)(i), the tax does not apply to a transfer under a trust that was irrevocable on September 25, 1985, but only to the extent that such transfer is not made out of corpus added to the trust after September 25, 1985 (or out of income attributable to corpus so added).
Section 26.2601-1(b)(4)(i) provides rules for determining when a modification, judicial construction, settlement agreement, or trustee action with respect to a trust that is exempt from the GST tax will not cause the trust to lose its exempt status. In general, unless specifically provided otherwise, the rules contained in this paragraph are applicable only for purposes of determining whether an exempt trust retains its exempt status for GST tax purposes. Thus (unless specifically noted), the rules do not apply in determining, for example, whether the transaction results in a gift subject to gift tax, or may cause the trust to be included in the gross estate of a beneficiary, or may result in the realization of gain for purposes of § 1001.
Section 26.2601-1(b)(4)(i)(D) provides that a modification of the governing instrument of an exempt trust (including a trustee distribution, settlement, or construction that does not satisfy § 26.2601-1(b)(4)(i)(A), (B), or (C)) by judicial reformation, or nonjudicial reformation that is valid under applicable state law, will not cause an exempt trust to be subject to the provisions of chapter 13, if the modification does not shift a beneficial interest in the trust to any beneficiary who occupies a lower generation (as defined in § 2651) than the person or persons who held the beneficial interest prior to the modification, and the modification does not extend the time for vesting of any beneficial interest in the trust beyond the period provided for in the original trust. A modification of an exempt trust will result in a shift in beneficial interest to a lower generation beneficiary if the modification can result in either an increase in the amount of a GST or the creation of a new GST.
Section 26.2601-1(b)(4)(i)(E), Example 5, provides as follows. In 1980, Trustor established an irrevocable trust for the benefit of his two children, A and B, and their issue. Under the terms of the trust, the trustee has the discretion to distribute income and principal to A, B, and their issue in such amounts as the trustee deems appropriate. On the death of the last to die of A and B, the trust principal is to be distributed to the living issue of A and B, per stirpes. In 2002, the appropriate local court approved the division of the trust into two equal trusts, one for the benefit of A and A's issue and one for the benefit of B and B's issue. The trust for A and A's issue provides that the trustee has the discretion to distribute trust income and principal to A and A's issue in such amounts as the trustee deems appropriate. On A's death, the trust principal is to be distributed equally to A's issue, per stirpes. If A dies with no living descendants, the principal will be added to the trust for B and B's issue. The trust for B and B's issue is identical (except for the beneficiaries), and terminates at B's death at which time the trust principal is to be distributed equally to B's issue, per stirpes. If B dies with no living descendants, principal will be added to the trust for A and A's issue. The division of the trust into two trusts does not shift any beneficial interest in the trust to a beneficiary who occupies a lower generation (as defined in § 2651) than the person or persons who held the beneficial interest prior to the division. In addition, the division does not extend the time for vesting of any beneficial interest in the trust beyond the period provided for in the original trust. Therefore, the two partitioned trusts resulting from the division will not be subject to the provisions of chapter 13.
In the present case, Trust 1 was irrevocable on September 25, 1985. It is represented that no additions, actual or constructive, have been made to Trust 1 after that date.
Proposed Division is substantially similar to the situation described in § 26.2601-1(b)(4)(i)(E), Example 5. Under Proposed Division, Resulting Trusts will, except as described above, be administered under the original provisions of Trust 1.
Based on the facts submitted and the representations made, we conclude that Proposed Division will not shift any beneficial interest in Trust 1 to a person who occupies a lower generation than the persons holding the beneficial interest prior to Proposed Division. In addition, Proposed Division will not extend the time for vesting of any beneficial interest beyond the period provided for in Trust 1. Accordingly, Proposed Division will not cause Trust 1 or any Resulting Trust to lose grandfathered status for purposes of the GST tax, or otherwise become subject to GST tax.
Ruling 2
Section 61(a)(3) and (15) provides that gross income includes gains derived from dealings in property and income from an interest in a trust.
Section 661(a) provides that in any taxable year a deduction is allowed in computing the taxable income of a trust (other than a trust to which subpart B applies), for the sum of (1) the amount of income for such taxable year required to be distributed currently; and (2) any other amounts properly paid or credited or required to be distributed for such taxable year.
Section 1.661(a)-2(f) of the Income Tax Regulations provides that gain or loss is realized by the trust or estate (or the other beneficiaries) by reason of a distribution of property in kind if the distribution is in satisfaction of a right to receive a distribution of a specific dollar amount, of specific property other than that distributed, or of income as defined under § 643(b) and the applicable regulations, if income is required to be distributed currently.
Section 662 provides that there shall be included in the gross income of a beneficiary to whom an amount specified in § 661(a) is paid, credited, or required to be distributed (by an estate or trust described in § 661), the sum of the following amounts: (1) the amount of income for the taxable year required to be distributed currently to such beneficiary, whether distributed or not; and (2) all other amounts properly paid, credited, or required to be distributed to such beneficiary for the taxable year.
Section 1001(a) provides that the gain from the sale or other disposition of property shall be the excess of the amount realized therefrom over the adjusted basis provided in § 1011 for determining gain, and the loss shall be the excess of the adjusted basis provided in § 1011 for determining loss over the amount realized.
Section 1001(b) states that the amount realized from the sale or other disposition of property shall be the sum of any money received plus the fair market value of the property (other than money) received. Under § 1001(c), except as otherwise provided in subtitle A, the entire amount of gain or loss, determined under § 1001, on the sale or exchange of property shall be recognized.
Section 1.1001-1(a) provides that the gain or loss realized from the conversion of property into cash, or from the exchange of property for other property differing materially either in kind or in extent, is treated as income or loss sustained.
A partition of jointly owned property is not a sale or other disposition of property where the co-owners of the joint property sever their joint interests, but do not acquire a new or additional interest as a result thereof. Thus, neither gain nor loss is realized on a partition. See Rev.Rul. 56-437, 1956-2 C.B. 507 (conversion of a joint tenancy in stock to a tenancy in common in order to eliminate the survivorship feature and the partition of a joint tenancy in stock are not sales or exchanges).
Similarly, divisions of trusts are also not sales or exchanges of trust interests where each asset is divided pro rata among the new trusts. See Rev.Rul. 69-486, 1969-2 C.B. 159 ( pro rata distribution of trust assets not a sale or exchange).
In the present case, the legal entitlements, as well as the rights and powers, of the beneficiaries will remain the same in kind and extent after Proposed Division. Accordingly, based on the facts submitted and representations made, Proposed Division will not result in the realization of gain or loss under § 61 and § 1001. Moreover, based solely on the facts submitted and representations made, we conclude that Proposed Division is not a distribution under § 661 or § 1.661(a)-2(f). We further conclude that Proposed Division will not cause Trust 1, Resulting Trusts, or the beneficiaries of Trust 1 or any Resulting Trust to recognize any income under § 662.
Ruling 3
Section 1015(b) provides that if property is acquired after December 31, 1920, by a transfer in trust (other than a transfer in trust by a gift, bequest, or devise), the basis shall be the same as it would be in the hands of the grantor increased in the amount of gain or decreased in the amount of loss recognized to the grantor on such transfer.
Section 1.1015-2(a)(1) provides that in the case of property acquired after December 31, 1920, by transfer in trust (other than by transfer in trust by gift, bequest, or devise), the basis of property so acquired is the same as it would be in the hands of the grantor increased in the amount of gain or decreased in the amount of loss recognized to the grantor on the transfer under the law applicable to the year in which the transfer was made. If the taxpayer acquired the property by transfer in trust, this basis applies whether the property is in the hands of the trustee or the beneficiary, and whether acquired prior to termination of the trust and distribution of the property, or thereafter.
Section 1223(2) provides that in determining the period for which the taxpayer has held property, however it is acquired, there shall be included the period for which the property was held by any other person, if under this chapter such property has, for the purpose of determining gain or loss from a sale or exchange, the same basis in whole or in part in his hands as it would have in the hands of the other person.
Based on the facts submitted and the representations made, we conclude that because § 1001 does not apply to Proposed Division, under § 1015 the basis of the assets received by Resulting Trusts will be the same as the respective basis of the assets held by Trust 1. We further conclude that under § 1223(2) the holding periods of the assets received by Resulting Trusts will be the same as the holding periods of the assets in Trust 1.
Ruling 4
Section 2001(a) imposes a tax on the transfer of the taxable estate of every decedent who is a citizen or resident of the United States.
Section 2033 provides that the value of the gross estate includes the value of all property to the extent of the interest therein of the decedent at the time of death.
Section 2036(a) provides that the value of the gross estate shall include the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer (except in case of a bona fide sale for an adequate and full consideration in money or money's worth), by trust or otherwise, under which he has retained for his life or for any period not ascertainable without reference to his death or for any period which does not in fact end before his death (1) the possession or enjoyment of, or the right to the income from, the property, or (2) the right, either alone or in conjunction with any person, to designate the persons who shall possess or enjoy the property or the income therefrom.
Section 2037(a) provides that the value of the gross estate shall include the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer (except in case of a bona fide sale for an adequate and full consideration in money or money's worth), by trust or otherwise, if (1) possession or enjoyment of the property can, through ownership of such interest, be obtained only by surviving the decedent, and (2) the decedent has retained a reversionary interest in the property, and the value of such reversionary interest immediately before the death of the decedent exceeds 5 percent of the value of such property.
Section 2038(a)(1) provides that the value of the gross estate shall include the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer (except in case of a bona fide sale for an adequate and full consideration in money or money's worth), by trust or otherwise, where the enjoyment thereof was subject at the date of decedent's death to any change through the exercise of a power, either by the decedent alone or in conjunction with any person, to alter, amend, revoke, or terminate, or where the decedent relinquished any such power during the 3-year period ending on the date of the decedent's death.
In order for § 2036 through § 2038 to apply, the decedent must have made a transfer of property or any interest therein (except in the case of a bona fide sale for an adequate and full consideration in money or money's worth) under which the decedent retained an interest in, or power over, the income or corpus of the transferred property.
In the present case, the beneficiaries of Resulting Trusts will have the same interests after Proposed Division that they had as beneficiaries under Trust 1. The distribution, management, and termination provisions of each Resulting Trust will be substantially similar to the current distribution, management, and distribution provisions of Trust 1. Accordingly, based on the facts submitted and the representations made, we conclude that Proposed Division will not cause any portion of the assets of Resulting Trusts to be includible in the gross estate of any of the beneficiaries of Resulting Trusts under § 2036, § 2037, or § 2038.
Ruling 5
Section 2501 imposes a tax for each calendar year on the transfer of property by gift during such calendar year by any individual, resident or nonresident.
Section 2511 provides that, subject to certain limitations, the gift tax applies whether the transfer is in trust or otherwise, direct or indirect, and whether the property transferred is real or personal, tangible or intangible.
Section 2512(a) provides that if the gift is made in property, the value thereof at the date of the gift is considered the amount of the gift.
Section 2512(b) provides that where property is transferred for less than an adequate and full consideration in money or money's worth, then the amount by which the value of the property exceeded the value of the consideration is deemed a gift that is included in computing the amount of gifts made during the calendar year.
In the present case, the beneficial interests, rights, and expectancies of the beneficiaries will be substantially the same, both before and after Proposed Division. Thus, no transfer of property will be deemed to occur as a result of Proposed Division. Accordingly, based on the facts submitted and representations made, we conclude that Proposed Division will not result in a transfer by any beneficiary of Trust 1 that is subject to the gift tax under § 2501.
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.
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 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.
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, a copy of this letter is being sent to your authorized representatives.
Sincerely,
Associate Chief Counsel
(Passthroughs & Special Industries)
By: Melissa C. Liquerman
Melissa C. Liquerman
Senior Counsel, Branch 4
Office of the Associate Chief Counsel
(Passthroughs & Special Industries)
Enclosure
Copy for § 6110 purposes
cc: |
Internal Revenue Service - Information Release
IR-2024-36
IRS warns tax professionals to be aware of EFIN scam email; special webinars offered next week
February 8, 2024
Media Relations Office
Washington, D.C.
www.IRS.gov/newsroom
Media Contact: 202.317.4000
Public Contact: 800.829.1040
IRS warns tax professionals to be aware of EFIN scam email;
special webinars offered next week
IR-2024-36, Feb. 8, 2024
WASHINGTON -- The Internal Revenue Service and Security Summit partners today alerted tax professionals of a scam email impersonating various software companies in an attempt to steal Electronic Filing Identification Numbers (EFINs).
The IRS warned that scammers are posing as tax software providers and requesting EFIN documents from tax professionals under the guise of a required verification to transmit tax returns. These thieves attempt to steal client data and tax preparers' identities, creating the potential for them to file fraudulent tax returns for refunds.
To help protect tax professionals against this emerging scam, the IRS is hosting a special series of educational webinars aimed at the tax community. The sessions will begin Feb. 12 and run each day next week.
"With filing season underway, scammers use this time of year to target tax professionals as well as taxpayers in hopes of stealing information that can be used to try filing fraudulent tax returns," said IRS Commissioner Danny Werfel. "The IRS and the Security Summit partners have noticed a new surge of an EFIN scam email that targets professionals. This scam serves as a powerful reminder that tax professionals should ensure strong security at their practices, including reminding employees to be careful with any emails coming in that could be posing as an official communication. A little extra caution can mean a world of difference for tax professionals during this busy period."
The IRS has already received dozens of reports of the scam targeting tax professionals. They should be alert for a scam email that includes a U.S.-based area code for faxing EFIN documents and also provides instructions on obtaining EFIN documentation from the IRS e-Services site if unavailable. Scam variations being seen use different fax numbers for software vendors. Other warning signs of a scam include inconsistencies in the email wording and a German footer in the email.
The IRS cautions tax professionals who receive these should not respond to the email and should not proceed with any of the steps displayed in the email. The body of the fraudulent email states:
Dear [recipient_email_address],
Help us protect you.
Because many Electronic Filing Identification Numbers (EFINs) are stolen each year and used to file fraudulent tax returns, the IRS has asked software vendors, such as Software A, to verify who the EFIN owner is by getting a copy of the IRS issued EFIN document(s). Our records show that we do not have a document for one or more of the EFINs that you transmit with.
What this means for you: Until your EFIN is verified, you will be unable to transmit returns. Please provide a copy of your EFIN Account Summary from IRS e-Services, with a status of 'Completed', to Software B for verification.
To send us your EFIN Summary document:
1. Fax to Software B at 631-995-5984
PLEASE NOTE THAT YOUR PREPARER TAX IDENTIFICATION NUMBER (PTIN) APPLICATION CANNOT BE USED AS DOCUMENTATION FOR YOUR EFIN.
If you do not have the above documentation you can get a copy of your IRS Application Summary from IRS e-Services by following the below steps or call the IRS e-Services helpline at 866-255-0654.
1. Sign in to your IRS e-Services account
2. Choose your organization from the list provided and click Submit
3. Click the Application link to access your existing application
4. Click the e-File Application link
5. Select the existing application link that applies to your organization
6. Click the Application Summary link for the area of the application you wish to enter
7. Click the Print Summary link at the bottom of the summary presented on the screen
If you have any questions please contact the Compliance Department at xxx-xx-xxxx for assistance.
Thank you for your business. We look forward to serving you this coming season. Software B (edited)
Special webinars planned to help tax professionals
To address this fast-moving scam, the IRS will be providing special webinars next week for tax professionals where agency cybersecurity experts will share information.
To register for a session, tax professionals can click on the date/time below. Space is limited; continuing education credits will not be offered:
- Monday, Feb. 12, at 12 p.m. Eastern 11 a.m. Central 10 a.m. Mountain & Arizona9 a.m. Pacific8 a.m. Alaska 7 a.m. Hawaii-Aleutian.
- Tuesday, Feb. 13, at 1 p.m. Eastern 12 p.m. Central 11 a.m. Mountain & Arizona10 a.m. Pacific9 a.m. Alaska 8 a.m. Hawaii-Aleutian.
- Wednesday, Feb. 14, at 2 p.m. Eastern 1 p.m. Central 12 p.m. Mountain & Arizona11 a.m. Pacific10 a.m. Alaska 9 a.m. Hawaii-Aleutian.
- Thursday, Feb. 15, at 3 p.m. Eastern 2 p.m. Central 1 p.m. Mountain & Arizona12 p.m. Pacific11 a.m. Alaska 10 a.m. Hawaii-Aleutian.
- Friday, Feb. 16, at 3 p.m. Eastern 2 p.m. Central 1 p.m. Mountain & Arizona12 p.m. Pacific11 a.m. Alaska 10 a.m. Hawaii-Aleutian.
Tips to avoid and how to report potential scams
Tax-related identity theft scams consistently target tax professionals with a slew of scams and schemes that seek to gain access to sensitive taxpayer information. As these schemes continue to evolve and increase in volume, they pose a threat to both tax professionals and the clients they serve.
Earlier this year, the IRS warned tax professionals of a surge of a new client scheme, and they should continue watching for this scam.
Some phishing scams are ransomware schemes in which the thief obtains control of the tax professionals' computer systems and holds the data hostage until a ransom is paid. The Federal Bureau of Investigation (FBI) has warned against paying a ransom because thieves typically leave the data encrypted.
Tax pros who receive the scam email should notify the Treasury Inspector General for Tax Administration (TIGTA) to report the IRS impersonation scam. They should also save the email and send it as an attachment to phishing@irs.gov.
If there is suspicion that data theft has occurred, tax pros should report it to their local IRS Stakeholder Liaison as soon as possible. IRS Stakeholder Liaison staff will ensure all appropriate IRS offices are alerted and can take steps to block fraudulent returns in the clients' names as well as assist tax pros through the process.
Tax professionals should be attentive to other phishing scams that seek EFINs, Preparer Tax Identification Numbers (PTINs), or e-Services usernames and passwords.
Additional Resources
- Identity Theft Central
- Publication 4557, Safeguarding Taxpayer Data PDF
- Identity Theft Information for Tax Professionals |
Private Letter Ruling
Number: 202406007
Internal Revenue Service
February 13, 2023
Internal Revenue Service
Department of the Treasury
Washington, DC 20224
Number: 202406007
Release Date: 2/9/2024
Index Number: 118.01-00, 305.04-00, 2501.00-00, 2511.00-00
Third Party Communication: None
Date of Communication: Not Applicable
Person To Contact:
ID No.
Telephone Number:
Refer Reply To:
CC:CORP:2
PLR-115608-22
Date: February 13, 2023
Dear ******:
This letter responds to your authorized representative's letter dated August 10, 2022, requesting rulings under sections 118, 305, 2501, 2511, 2512, and 2702 of the Internal Revenue Code (the "Code"). The information provided in that letter and in later correspondence is summarized below.
The rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalties of perjury statement executed by an appropriate party. This office has not verified any of the material submitted in support of the request for rulings, but such material is subject to verification on examination.
Summary of Facts
Company is a State A corporation and the parent of an affiliated group of corporations that files a consolidated U.S. federal income tax return on a calendar year basis. Company was incorporated in Year 1. Company is engaged in Business A. Executive is an executive of Company.
On Date 1, Executive established Trust 1 for the benefit of Family Member. Also on Date 1, Executive established Trust 2 for the benefit of the Family Beneficiaries. On Date 2 and Date 4, Executive established Trust 3 and Trust 4, respectively, for the benefit of Family Member. On Date 3, Executive established Trust 5 for the benefit of Person 1. Also on Date 2, Executive established GRAT (Grantor Retained Annuity Trust) 1 for the benefit of Executive and Person 1. On Date 8, Executive established GRAT 2 and GRAT 3 for the benefit of Executive, Person 2, Person 3, Person 4, and a trust, not part of this ruling request, for Person 2, Person 3, and Person 4. On Date 9, Executive established GRAT 4 for the benefit of Trust 2. Trust 1, Trust 2, Trust 3, Trust 4, Trust 5, GRAT 1, GRAT 2, GRAT 3, and GRAT 4 are hereinafter referred to collectively as "Trusts". Executive's interest in GRAT 4 is a "qualified interest" under section 2702(b). Executive's interests in GRAT 1, GRAT 2, and GRAT 3 are not subject to the special valuation rules of section 2702(a) because the beneficiaries of GRAT 1, GRAT 2, and GRAT 3 are not members of Executive's family as defined in section 2702(e) and section 2704(c)(2).
On Date 5, Company formed LLC, which is disregarded as an entity separate from Company for U.S. federal income tax purposes. LLC was formed for Company Purpose. However, Company is not required under the operating agreement to use LLC for Company Purpose and may dissolve LLC at any time.
Company has three classes of common stock outstanding: Stock A, Stock B, and Stock C. Stock A is widely held and, since Date 7, has been publicly traded on the Exchange. The shares of Stock A and Stock B are identical other than the voting power. Each share of Stock B has a times the voting power of each share of Stock A.
Stock B is held, in part, by Executive and GRATs 1 through 4, and Trusts 1 through 4. Trust 5 owns shares of Stock A.
All of the issued shares of Stock C are held by LLC and are not considered outstanding for U.S. federal income tax purposes. Stock C has no voting rights except as otherwise required by law. Upon the transfer to a holder other than LLC or another subsidiary of Company, shares of Stock C will automatically convert on a share-for-share basis into shares of Stock A.
On Date 6, Company made an initial contribution of b newly-issued shares of Stock C to LLC.
On Date 10, Company announced that its board of directors approved a share repurchase program with authorization to purchase Company's Stock A at the discretion of Company's management (the " Share Repurchase Program "). None of the Contributing Shareholders (defined below) have participated in the Share Repurchase Program. The Share Repurchase Program and the Proposed Transaction are each driven by separate valid business purposes.
Executive, Trusts, and Company intend to enter into a binding agreement ("Agreement") wherein Executive and Trusts will each surrender c percent (valued at approximately $d) of their shares of Stock A or Stock B, as the case may be, to Company. Company will subsequently retire those contributed shares and will transfer a like number of newly issued shares of Stock C to LLC.
Proposed Transaction
For what are represented to be valid business purposes, the following transaction has been proposed (the "Proposed Transaction"):
(i) Trusts and Executive (each a " Contributing Shareholder ", and collectively, the " Contributing Shareholders ") will contribute in one or more installments a portion of their Stock A or Stock B to the capital of Company for the benefit of LLC. Executive intends to contribute stock of an amount equal to approximately $d or c percent of shares of Stock B owned by Executive. The Trusts will contribute a number of shares to Company that is proportionate on a percentage basis to the number of shares contributed by Executive (collectively, the " Contribution ") or approximately c percent of their shares of Stock A or Stock B, as the case may be, to the capital of Company.
The Contributing Shareholders and Company will enter into a binding agreement pursuant to which the Contribution will be effected (the " Contribution Agreement " or " Agreement "). The Contribution may take place in more than one installment. The Contributing Shareholders and Company will enter into a new Contribution Agreement for each separate contribution, if any. The shareholders of Company other than the Contributing Shareholders are referred to as the " Non-Contributing Shareholders ".
(ii) When Company receives shares from Contributing Shareholders pursuant to the Contribution Agreement, Company will retire such shares and transfer a like number of newly issued shares of Stock C to LLC.
(iii) LLC will use cash derived from Stock C for Company Purpose.
(iv) Company owns all of the membership interests of the LLC and therefore will control the policies of LLC related to the Company Purpose.
Representations
Company and the Contributing Shareholders make the following representations regarding the Proposed Transaction:
(a) The Contributing Shareholders will not receive any consideration from Company with respect to the surrender of their stock to the capital of Company in the Proposed Transaction.
(b) The stock surrendered to the capital of Company in the Proposed Transaction will be canceled and such stock or similar shares of stock of Company will not be returned to the Contributing Shareholders following the Proposed Transaction.
(c) Company does not intend to fund LLC with property other than Stock C or cash.
(d) GRAT 1, GRAT 2, GRAT 3, and GRAT 4 each have the terms necessary to satisfy the requirements to be a qualified interest under § 25.2702-3 of the Gift Tax Regulations.
(e) There is no plan to transfer the shares of Stock C to any employee or independent contractor in connection with the performance of services within the meaning of section 83 or otherwise.
(f) The Contributing Shareholders are not related to any of the Non-Contributing Shareholders such that stock ownership of a Contributing Shareholder would be attributed to a Non-Contributing Shareholder pursuant to section 318(a)(1) or section 267(c)(2).
(g) There is no reason to believe that any of the stock purchases pursuant to the Share Repurchase Program will be taxed as dividends to the participating shareholders and there is no reason to believe that such stock purchases are dividends within the meaning of sections 301 and 302.
(h) The Proposed Transaction is an isolated transaction that is not related to any other past or future transactions.
(i) The Proposed Transaction is motivated solely by the Contributing Shareholders' and Company's business considerations and is not motivated by any intent to confer a U.S. federal income tax benefit on any shareholder, including as a substitute for a dividend.
(j) The Proposed Transaction is not part of a plan to periodically increase the proportionate share of any shareholder in the assets or earnings and profits of Company.
(k) There is no plan for the Contributing Shareholders to make contributions to Company that are not otherwise described herein.
(l) If the Contributions pursuant to the Proposed Transaction occur in more than one installment, the final contribution will occur within a e month period of the first contribution.
(m) Persons 1 through 4 are not employees of Company or Executive.
Transactional Rulings
Based solely on the information and representations submitted, we rule as follows:
(1) The surrenders of Stock A or Stock B by the Contributing Shareholders to Company in the Proposed Transaction are a non-taxable contribution to the capital of Company and accordingly, the Contributing Shareholders will not recognize gain or loss on such contribution. See Commissioner v. Fink, 483 U.S. 89 (1987).
(2) Each Contributing Shareholder's basis in the shares surrendered in the Proposed Transaction will be allocated to the Contributing Shareholder's basis in their remaining shares. See Commissioner v. Fink, 483 U.S. 89 (1987).
(3) Company's receipt of shares of Stock A or B from the Contributing Shareholders will not be taxable to Company. See section 118(a).
(4) The Non-Contributing Shareholders will not recognize any income as a result of the Proposed Transaction and the Contributing Shareholders' surrender of shares to Company will not be treated as a distribution of property to the Non-Contributing Shareholders. See Treas.Reg. §§ 1.305-3(b)(3) and 1.305-3(e), Example (13). See also Rev.Rul. 77-19, 1979-1 C.B. 83.
Gift Tax Rulings
Ruling 5
Under section 2501(a)(1) of the Code, tax is imposed for each calendar year on the transfer of property by gift during such calendar year by any individual, resident, or nonresident.
Under section 2511(a), the tax imposed by section 2501 shall apply 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.
Under section 2512(b), where property is transferred for less than an adequate and full consideration in money or money's worth, then the amount by which the value of the property exceeded the value of the consideration shall be deemed a gift, and shall be included in computing the amount of gifts made during the calendar year.
Section 25.2511-1(c)(1) of the Gift Tax Regulations provides that any transaction in which an interest in property is gratuitously passed or conferred upon another, regardless of the means or device employed, constitutes a gift subject to tax.
Under § 25.2511-1(g)(1), the gift tax is not applicable to a transfer for a full and adequate consideration in money or money's worth, or to ordinary business transactions, described in § 25.2512-8.
Under § 25.2511-1(h), a transfer of property by B to a corporation generally represents gifts by B to the other individual shareholders of the corporation to the extent of their proportionate interests in the corporation.
Under § 25.2512-8, a sale, exchange, or other transfer of property made in the ordinary course of business (a transaction which is bona fide, at arm's length, and free from any donative intent), will be considered as made for an adequate and full consideration in money or money's worth.
In Rev. Rul. 80-196, 1980-2 C.B. 32, two shareholders transferred stock to three employees as a bonus in consideration of past services to the corporation. The two shareholders were not related to the three employees, nor did any special personal relationship exist between the shareholders and the three employees. The ruling holds, for gift tax purposes, that the transfers to the three employees were in the ordinary course of business under § 25.2512-8 because the transfers were motivated by a valid business reason, that is, retaining valuable personnel in the employment of the corporation. Therefore, the transfers were not subject to gift tax.
In Anderson v. Commissioner, 8 T.C. 706 (1947), senior executives of a corporation sold shares to junior executives as part of a plan to shift management responsibilities to the junior executives. The Tax Court held that the sale was not subject to gift tax because it was made in the ordinary course of business. See Galluzzo v. Commission, 43 T.C.M. 199 (T.C. 1981).
Company is owned by Executive, Trusts, and Non-Contributing Shareholders. In Agreement, Executive and Trusts agree to surrender shares to Company in order to fund LLC. By entering into Agreement, Executive and Trusts are increasing the value of the shares held by the Non-Contributing Shareholders. For gift tax purposes, this transfer is characterized as an indirect transfer of property from Executive and Trusts to Non-Contributing Shareholders. See §§ 25.2511-1(c)(1) and 25.2511-1(h). See also Rev.Rul. 71-443, 1971 C.B. 337; Bosca v. Commissioner, T.C. Memo. 1998-251; Kincaid v. United States, 682 F.2d 1220 (5 th Cir. 1982); Estate of Trenchard, T.C. Memo. 1995-121.
Under § 25.2512-8, a transfer of property made in the ordinary course of business (a transaction which is bona fide, at arm's length, and free from any donative intent), will be considered as made for adequate and full consideration in money or money's worth. Under the facts presented in this ruling, the transfer made through Agreement satisfies all three of the requirements to be considered as made in the ordinary course of business. First, Agreement is for the bona fide business purpose of furthering Company Purpose. Second, the transfer from Executive and Trusts to Non-Contributing Shareholders is at arm's length because the transaction is a business transaction, the parties act in their own self-interest and are not subject to pressure from the other parties, and the Non-Contributing Shareholders are not related to Executive or Trusts. Finally, the transfer is made without donative intent because the transfer is made for the sole purpose of furthering Company Purpose. Accordingly, the indirect transfer from Executive and Trusts to the Non-Contributing Shareholders is deemed to be made for adequate and full consideration in money or money's worth. Therefore, based on the facts presented and the representations made, the transfers made to the Non-Contributing Shareholders pursuant to Agreement do not constitute gifts from Executive or Trusts.
By entering into Agreement, each party is increasing the value of the shares held by others (i.e., Executive is increasing the value of the shares held by Trusts, Trusts are increasing the value of shares held by Executive, and each individual trust is increasing the value of each other individual trust). The transfers between Executive and Trusts are not at arm's length, and, therefore, they are not made in the ordinary course of business. However, under Agreement, Executive and Trusts are each surrendering an equal proportion of their shares of Company, and, consequently, the value of the indirect transfers made by each of the parties to the Agreement will be equal to the value of the indirect transfers received by each party. Accordingly, the indirect transfers made from Executive to Trusts and from Trusts to Executive (and each other trust) are made for full and adequate consideration in money or money's worth. Therefore, based on the facts presented and the representations made, the Contributing Shareholders will not be subject to gift tax under sections 2501, 2511, 2512, and regulations thereunder as a result of the Proposed Transaction.
Ruling 6
Section 2702(a)(1) provides that solely for purposes of determining whether a transfer of an interest in trust to (or for the benefit of) a member of the transferor's family is a gift (and the value of such transfer), the value of any interest in such trust retained by the transferor or any applicable family member (as defined in section 2701(e)(2)) shall be determined as provided in section 2702(a)(2).
Section 2702(a)(2)(A) provides that the value of any retained interest which is not a qualified interest shall be treated as being zero.
Section 2702(b) provides that the term "qualified interest" means: (1) any interest which consists of the right to receive fixed amounts payable not less frequently than annually, (2) any interest which consists of the right to receive amounts which are payable not less frequently than annually and are a fixed percentage of the fair market value of the property in the trust (determined annually), and (3) any noncontingent remainder interest if all of the other interests in the trust consist of interests described in paragraph (1) or (2).
Section 25.2702-2(a)(6) provides, in part, that a qualified interest means a qualified annuity interest, a qualified unitrust interest, or a qualified remainder interest.
Section 25.2702-3(b)(1) provides that an interest is a qualified annuity interest only if it meets the requirements of this paragraph and § 25.2702-3(d). A qualified annuity interest is an irrevocable right to receive a fixed amount. The annuity amount must be payable to (or for the benefit of) the holder of the annuity interest at least annually.
Under § 25.2702-3(d)(3), the governing instrument must prohibit distributions from the trust to or for the benefit of any person other than the holder of the qualified annuity or unitrust interest during the term of the qualified interest.
The terms of GRAT 4 prohibit distributions to anyone other than Executive during the term of Executive's interest in GRAT 4 in accordance with § 25.2702-3(d)(3). Under the terms of Agreement, the contribution of shares to Company and resulting indirect transfer from GRAT 4 to Executive and Non-Contributing Shareholders will be made for adequate and full consideration in money or money's worth within the meaning of § 25.2511-1(g)(1). Accordingly, such transfers are not characterized as distributions from GRAT 4. These transfers are deemed investments because GRAT 4 receives or is deemed to receive value in money or money's worth equal to the transfer. As a result, GRAT 4 will not violate the terms of the trust instruments or the requirement under § 25.2702-3(d)(3) prohibiting a distribution for the benefit of any person other than Executive during the term of Executive's qualified interest. Therefore, based on the facts presented and the representations made, Executive's interest in GRAT 4 will not cease to qualify as a qualified interest under § 25.2702-3 or otherwise under section 2702(b) as a result of the Proposed Transaction.
Caveats
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.
Procedural Statements
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, a copy of this letter is being sent to your 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.
Sincerely,
Gerald B. Fleming
Senior Technician Reviewer, Branch 2 (Corporate)
cc: |
"Treasury Decision 9968\nInternal Revenue Service\n2022-45 I.R.B. 409\n \n \n \n 26 CFR§ 301.(...TRUNCATED) |
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