internal_revenue_service number release date index number -------------------- ------------------------- -------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------- id no ---------------- telephone number -------------------- refer reply to cc psi b02 plr-134675-13 date date ------------------------------------------------------- ----------------------------------------------------------------------------- grantor distribution committee ------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------- -------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------- trust state trustees ------------------------------------------------ ---------- ------------------------------------------------------ dear -------------- this responds to a letter dated date and subsequent correspondence requesting rulings under sec_671 sec_2501 and sec_2514 of the internal_revenue_code the information submitted states that grantor proposes to create an irrevocable_trust trust for the benefit of himself his parents siblings and issue which he intends to execute upon receipt of a favorable private_letter_ruling from the internal_revenue_service two independent trustees are the trustees trustees of trust during grantor’s lifetime the beneficiaries of trust are grantor and his siblings however if grantor’s siblings are not living the class of permissible beneficiaries will include grantor’s parents trustees must make distributions of income and principal as directed by distribution committee and or grantor as follows at any time trustees pursuant to the direction of a majority of distribution committee with the written consent of grantor shall distribute to grantor or the beneficiaries such amounts of the net_income or principal as directed by distribution committee grantor’s consent power plr-134675-13 at any time trustees pursuant to the direction of all distribution committee members other than grantor shall distribute to the beneficiaries such amounts of the net_income or principal as directed by distribution committee unanimous member power and at any time grantor in a nonfiduciary capacity may but shall not be required to distribute to any one or more of the beneficiaries other than himself such amounts of the principal including the whole thereof as grantor deems advisable to provide for the health maintenance support and education of grantor’s issue grantor’s sole power the distribution committee may direct that distributions be made equally or unequally and to or for the benefit of 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 distribution committee will be initially composed of grantor grantor’s siblings and grantor’s nephews and will cease to exist upon grantor’s death trust provides that at all times the distribution committee must consist of at least two adults other than grantor either who are members of the class of persons eligible to receive distributions of income or principal under trust or if there are not two adult members of such class who are willing and able to serve who are the parent or guardian of a member of such class of eligible distributes eligible individuals if at any time fewer than two eligible individuals are members the distribution committee shall be deemed not to exist a vacancy on distribution committee must be filled in the following order the oldest of the grantor’s adult issue who willing to serve and is not already serving as a member of distribution committee the oldest of the adult issue of grantor’s parents who is willing to serve and who is not already serving as a member of distribution committee the legal guardian if any or the parent of the oldest of the grantor’s minor issue who is not already serving as a member of distribution committee the legal guardian if any or the parent of the oldest minor issue of grantor’s parents who is willing to serve and is not already serving as a member of distribution committee grantor’s father or grantor’s mother if at any time distribution committee does not include at least two members distribution committee shall be deemed not to exist the distribution committee will cease to exist upon grantor’s death upon grantor’s death the trustee will dispose_of the then-remaining principal and undistributed_income of trust as grantor directs by a will specifically referring to this power_of_appointment the testamentary power provided that no such appointment may be made to grantor’s estate grantor’s creditors or the creditors of grantor’s estate grantor’s power includes the power to appoint outright or in trust and to create new powers in default of the exercise of grantor’s testamentary power the balance of trust will be distributed per stirpes to grantor’s then living issue in further trust if none plr-134675-13 of grantor’s issue is then living but any descendant of grantor’s parents is then living trustees are to allocate income and principal per stirpes among grantor’s parents issue in further trust if no descendant of grantor’s parents is then living trustees are to distribute the remaining income and principal pursuant to state law as if grantor had died intestate and unmarried you have requested the following rulings during the period distribution committee is serving no portion of the items of income deductions and credits against tax of the trust will be included in computing the taxable_income deductions and credits of the grantor under sec_671 the contribution of property to trust by grantor will not be a completed_gift subject_to federal gift_tax any distribution_of_property by the distribution committee from trust to grantor will not be a completed_gift subject_to federal gift_tax by any member of the distribution committee any distribution_of_property by distribution committee from trust to any beneficiary of trust other than grantor will not be a completed_gift subject_to federal gift_tax by any member of the distribution committee other than grantor ruling sec_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 in computing taxable_income or credits against the tax of an individual sec_672 provides that 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 sec_673 through specify the circumstances under which the grantor is treated as the owner of a portion of a_trust sec_673 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 plr-134675-13 interest exceed sec_5 percent of the value of such portion sec_674 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 sec_674 provides that sec_674 shall not apply to the power in sec_674 regardless of by whom held sec_674 describes a power to distribute corpus to or for a beneficiary provided that the power is limited by a reasonably_definite_standard which is set forth in the trust instrument sec_674 provides that sec_674 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 under sec_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 to its operation administrative control is exercisable primarily for the benefit of the grantor rather than the beneficiary of the trust sec_676 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 where at any time the power to re-vest in the grantor title to such portion is exercisable by the grantor or a nonadverse_party or both sec_677 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 sec_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 distributed to the grantor or the grantor’s spouse held or accumulated for future distribution to the grantor or the grantor’s spouse or applied to the payment of premiums on policies of insurance on the life of the grantor or the grantor’s spouse sec_678 provides that a person other than the grantor shall be treated as the owner of any portion of a_trust with respect to which such person has a power exercisable solely by himself to vest the corpus or the income therefrom in himself or 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 inclusive subject a grantor of a_trust to treatment as the owner thereof based solely on the facts submitted and representations made we conclude an plr-134675-13 examination of trust reveals none of the circumstances that would cause grantor to be treated as the owner of any portion of trust under sec_673 sec_674 sec_676 or sec_677 because none of the other distribution committee members has a power exercisable solely by himself to vest trust income or corpus in himself none shall be treated as the owner of any portion of the trust under sec_678 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 grantor under sec_675 thus the circumstances attendant on the operation of trust will determine whether grantor will be treated as the owner of any portion of trust under sec_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 ruling sec_2 and sec_2501 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 sec_2511 provides that the tax imposed by sec_2501 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 sec_25_2511-2 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 the donor’s 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 sec_25_2511-2 also 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 sec_25_2511-2 provides that a gift is incomplete in every instance in which a donor reserves the power to re-vest 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 plr-134675-13 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 sec_25_2511-2 provides that 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 sec_25_2511-2 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 sec_25_2511-2 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 sec_25_2511-2 does not define substantial adverse_interest sec_25_2514-3 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 sec_25_2514-3 also provides that a coholder 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 308_us_39 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 the taxpayer relinquished the power_to_revoke the trust but retained the right to change the beneficiaries in 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 when he relinquished his right to change the beneficiaries of the trust a grantor’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 37_tc_897 see also 51_tc_352 in this case grantor retained the grantor’s consent power over the income and principal of trust under sec_25_2511-2 a donor is considered as himself having a power if it is exercisable by him in conjunction with any person not having a substantial plr-134675-13 adverse_interest in the disposition of the transferred property or the income therefrom the distribution committee members are not takers in default for purposes of sec_25_2514-3 they are merely co-holders of the power the distribution committee ceases to exist upon the death of grantor under sec_25_2514-3 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 in this case the distribution committee ceases to exist upon grantor’s death accordingly the distribution committee members do not have interests adverse to grantor under sec_25_2514-3 and for purposes of sec_25_2511-2 therefore grantor is considered as possessing the power to distribute income and principal to any beneficiary himself because he retained the grantor’s consent power the retention of this power causes the transfer of property to trust to be wholly incomplete for federal gift_tax purposes grantor also retained the grantor’s sole power over the principal of trust under sec_25_2511-2 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 in this case grantor’s sole power gives grantor the power to change the interests of the beneficiaries accordingly the retention of the grantor’s sole power causes the transfer of property to trust to be wholly incomplete for federal gift_tax purposes further grantor retained grantor’s testamentary power to appoint the property in trust to anyone including trusts other than grantor’s estate grantor’s creditors or the creditors of grantor’s estate under sec_25_2511-2 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 in trust for federal gift_tax purposes finally the distribution committee possesses the unanimous member power over income and principal this power is not a condition_precedent to grantor’s powers grantor’s powers over the income and principal are presently exercisable and not subject_to a condition_precedent grantor retains dominion and control_over the income and principal of trust until the distribution committee members exercise their unanimous member power accordingly this power does not cause the transfer of property to be complete for federal gift_tax purposes see 37_tc_897 51_tc_352 accordingly based on the facts submitted and the representations made we conclude that the contribution of property to trust by grantor is not a completed_gift subject_to federal gift_tax any distribution from trust to grantor is merely a return of grantor’s property therefore we conclude that any distribution_of_property by the distribution committee from trust to grantor will not be a completed_gift subject_to plr-134675-13 federal gift_tax by any member of the distribution committee further upon grantor’s death the fair_market_value of the property in trust is includible in grantor’s gross_estate for federal estate_tax purposes ruling sec_2514 provides that the exercise or release of a general_power_of_appointment created after date shall be deemed a transfer of property by the individual possessing such power sec_2514 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 individual’s estate sec_25_2514-1 provides in part 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 sec_2514 provides that in the case of a power_of_appointment created after date 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 sec_2514 provides that in the case of a power_of_appointment created after date 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 sec_2514 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 sec_25_2514-3 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 plr-134675-13 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 distribution committee members under the grantor’s consent power are powers that are exercisable only in conjunction with the creator grantor accordingly under sec_2514 the distribution committee members do not possess general powers of appointment by virtue of possessing this power further the powers held by the distribution committee members under the unanimous member powers are not general powers of appointment as in the example in sec_25_2514-3 the distribution committee members have substantial adverse interests in the property subject_to this power accordingly any distribution made from trust to a beneficiary other than grantor pursuant to the exercise of these powers the grantor’s consent power and the unanimous member powers are not gifts by the distribution committee members instead such distributions are gifts by grantor based upon the facts submitted and representations made we conclude that any distribution_of_property by the distribution committee from trust to any beneficiary of trust other than grantor will not be a completed_gift subject_to federal gift_tax by any member of the distribution committee further we conclude that any distribution_of_property from trust to a beneficiary other than grantor will be a completed_gift by grantor except as specifically ruled herein we express no opinion on the federal tax consequences of the transaction under the cited provisions or under any other provisions of the code specifically we express no opinion on the trust provisions permitting trustee to distribute income or principal to trustees of other qualified trusts decanting plr-134675-13 this ruling is directed only to the taxpayer that requested it sec_6110 provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file a copy of this letter is being sent to x’s authorized representative sincerely bradford r poston senior counsel branch office of the associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes cc


department of the treasury internal_revenue_service washington d c date number release date cc dom it a plr-116126-98 uilc memorandum for from subject david l crawford chief cc dom it a notification of withdrawal of request_for_ruling legend taxpayer insurance_company x y year year dollar_figurea dollar_figureb dollar_figurec dollar_figured this memorandum and the attached materials are being forwarded to you in accordance with section of revproc_98_1 1998_1_cb_7 this document is not binding on examination or appeals and is not a final case determination this document is not to be cited as precedent facts taxpayer is an s_corporation and an import wholesaler of x in order to attract and retain quality executives taxpayer enters into termination compensation agreements tcas with selected key employees in year taxpayer entered into tcas with five key employees who are all officers of taxpayer the tcas provide that in the event the employee’s employment is terminated taxpayer will pay termination compensation equal to the amount of compensation plus annual bonus compensation amounts if any that is being paid to the employee prior to the termination_date payments will not be made if the key employee’s employment is terminated for any of the following reasons a b c d e death disability due to accident or sickness employee’s voluntary termination self-inflicted injuries or negligent or willful misconduct substance abuse dishonesty or fraud insubordination incompetence or inefficiency conflict of interest or breach of employment contract termination compensation will provide the employee with replacement wages during the period of unemployment limited to a maximum of two years if the employee finds new employment but at a lower salary taxpayer will pay replacement wages equal to the difference up to of the employees’ termination compensation between the new compensation and the former compensation_for the same two year period taxpayer will assist the employee in finding comparable new employment and will provide employment counseling thus for example taxpayer would be required to make compensation payments if a key employee’s employment were terminated due to taxpayer’s downsizing or as the result of a merger with another business also in year taxpayer purchased from insurance company1 a loss of income insurance loi policy on each employee who is a party to a tca the loi policy will reimburse taxpayer for an amount equal to its obligation to make termination compensation payments to a terminated employee loi policy claims are paid in accordance with provisions that are identical to the replacement wage provisions set forth in the tca the premiums_paid on the loi policies for each key_employee ranged in amount from dollar_figurea to dollar_figureb for one year of coverage and were due and payable on the policy effective date if taxpayer wishes to obtain coverage beyond the one year term it must purchase a new loi policy at the end of the previous policy period taxpayer is the policy owner and the beneficiary of the loi policies at the time it purchased the loi policies taxpayer also purchased from insurance_company a separate_return of premium rop rider for each loi policy the premiums_paid for the rop riders ranged from dollar_figurec to dollar_figured for a one year period of coverage the rop rider provides that if no claim is made under the loi policy during its one-year coverage period the rop rider will pay the taxpayer when the employee reaches age or after years whichever is greater an amount equal to of the loi premium premium return amount plus accrued earnings on the premium return amount from the date the rop rider becomes effective the amount of accrued earnings reflects the portfolio values on investments directed by insurance_company if the employee dies before reaching age or a period of years whichever is greater the premium return amount and the accrued earnings are forfeited for federal_income_tax purposes taxpayer deducted in year the loi policy premiums and the rop rider premiums that it paid to insurance_company in year taxpayer requested a ruling that both the loi premiums and the rop premiums are deductible under sec_162 of the internal_revenue_code as ordinary and necessary business_expenses taxpayer submitted additional information on date date and date insurance_company is an offshore entity located in y it is not authorized to do business in the united_states according to insurance company’s promotional materials however taxpayer may be able to direct the investment of the premiums after the first year to mutual funds or other investment vehicles with a higher potential rate of return insurance company’s promotional materials encourage investors to combine the rop rider with the purchase of guaranteed-issue annual renewable term life_insurance on the covered_employee as a means of insuring the value of the rop benefit against the risk that the employee will die before the maturity_date law and analysis sec_162 allows a deduction for all the ordinary and necessary expenses paid_or_incurred during a taxable_year in carrying on any trade_or_business sec_1_162-1 of the income_tax regulations includes among deductible business_expenses insurance premiums against fire storm theft accident or similar losses there is no general definition of insurance for tax purposes it is a well- established principle however that all insurance contracts in order to qualify as such must involve the shifting of an economic risk of loss away from the insured and the distribution of that risk among the insurance company’s other policyholders in this case assuming that a covered termination occurs during the policy period the value of insurance company’s obligation to indemnify taxpayer for monthly compensation payments and employment counseling services provided to key employees could exceed the amount of the premium for the loi policy hence elements of risk shifting and risk distributing are present under the purported insurance transaction however we do not believe that a presence of some element of risk shifting and risk distributing necessarily means that the total payments made by taxpayer to insurance_company are for insurance coverage if the premium for the loi policy is disproportionately high relative to the risk of a covered termination event occurring during the policy period and if the amount that would be received on the maturity of the rop rider is essentially equivalent to the return that taxpayer would have earned if the premium were placed in an alternative investment arrangement such as with a bank a savings and loan or a mutual_fund then the principal purpose of the loi policy is not solely for insurance protection because the loi policy and rop rider premiums were not solely for insurance protection our tentative conclusion is that the premiums are not deductible as ordinary and necessary business_expenses under sec_162 if you concur with our tentative conclusion that the loi policy premium paid_by taxpayer or at least some portion of it represents a non-insurance payment the question arises as to how the arrangement should be treated for federal tax see united parcel service of america inc v commissioner tcmemo_1999_268 in ups the tax_court concluded that none of the amounts paid_by ups for insurance were deductible under sec_162 even though some theoretical risk had been transferred the court specifically discussed the vastly inflated price paid_by ups to its commercial insurer relative to the remote risk transferred the court also noted that the entire transaction was a tax motivated sham and that expenses_incurred in furtherance of a sham_transaction are not deductible purposes other than taxpayer being denied a deduction under sec_162 for the loi policy and rop rider premiums the program marketed and sold by insurance_company recommends that a potential investor purchase three types of insurance namely i the loi policy ii the rop rider and iii a guaranteed-issue annual term life_insurance_policy the three policies held in combination provide taxpayer with a risk-free investment of percent of the loi policy premium premium return amount along with a guaranteed return equal to accrued earnings on the premium return amount thus the program represents a single investment transaction for federal tax purposes and as such arguably constitutes a debt_instrument on which taxpayer must accrue and include in its gross_income any original_issue_discount or other imputed_interest income as required by the internal_revenue_code and income_tax regulations for example see sec_1_1272-1 sec_1_1275-4 and sec_1_1275-5 we note however that if there is no term life_insurance_policy to cover the risk of loss arising from the death of an insured employee prior to the rop rider payout then a significant contingency exists that may prevent the transaction from being treated as a debt_instrument for federal tax purposes in making this factual determination it is important to keep in mind that the term life_insurance policies may have been purchased by taxpayer or by the insured employees themselves or by another related_party based on our tentative conclusion that the loi policy and rop rider premiums were not deductible under sec_162 we informed taxpayer that we were tentatively adverse to their ruling_request we held a telephone conference with taxpayer and its representatives on date during the conference we raised a number of questions concerning the ruling_request first we asked taxpayer to provide information establishing that the premium for the loi policy represented an actuarially computed premium necessary to cover anticipated losses under the policy taking into account such factors as the key employees’ employment status taxpayer’s prospective earnings during the policy period and insurance company’s loss experience with similar policies we also asked taxpayer whether it had taken action to negate the risk that the premium it is unclear from taxpayer’s submissions whether term life_insurance was purchased on the lives of the covered employees in its submission dated date taxpayer represented that insurance_company did not issue any term life_insurance on taxpayer’s employees in its submission dated date taxpayer represented that taxpayer does not own nor maintain policies of life_insurance on the lives of any employees covered by the loi policies this information however does not preclude the possibility that taxpayer’s employees or another related_party may have purchased term life_insurance on the lives of taxpayer’s employees payments and accumulated investment earnings would not be recovered by purchasing annual term life_insurance coverage on the key employees in connection with the purported insurance transaction taxpayer’s preliminary response was that it had no intention of acquiring life_insurance coverage on the key employees however we believe that this response does not make economic sense and is at odds with the strategy outlined in insurance company’s promotional materials taxpayer did not respond to our questions and subsequently requested to withdraw its ruling_request because taxpayer withdrew its request after we had formed a tentatively adverse opinion we are forwarding this information to you for whatever action you deem appropriate we have discussed this ruling_request with the industry specialist for offshore compliance foreign trusts after reviewing the information attached please contact the industry specialist for further assistance if you have any questions regarding this memorandum please contact me at attachments


number release date id office uilc cca-1217103-09 ---------------------------- from ------------------ sent to -------------------- cc --------------- subject health_fsa uniform coverage rules --------as per your request attached is my written response the cafeteria_plan rules require that a health_fsa provide uniform coverage throughout the coverage period which is the period when the employee is covered by the plan see proposed sec_1 d under the uniform coverage rules the maximum amount of reimbursement from a health_fsa must be available at all times during the coverage period this means that the employee’s entire health_fsa election is available from the first day of the plan_year to reimburse qualified_medical_expenses incurred during the coverage period the cafeteria_plan may not therefore base its reimbursements to an employee on what that employee may have contributed up to any particular date such as the date the employee is laid-off or terminated thus if an employee’s reimbursements from the health_fsa exceed his contributions to the health_fsa at the time of lay-off or termination the employer cannot recoup the difference from the employee


t c memo united_states tax_court stanley a and connie a wasik petitioners v commissioner of internal revenue respondent docket no filed date stanley a and connie a wasik pro sese blaine holiday for respondent memorandum findings_of_fact and opinion kroupa judge respondent determined a dollar_figure deficiency in petitioners’ federal_income_tax for after concessions we are asked to decide two issues first we are asked to decide whether petitioner stanley wasik mr wasik was away from home 1see infra note for the concessions each party made when he worked as an airline mechanic for northwest airlines nwa in milwaukee to determine whether petitioners are entitled to deduct expenses for his vehicle meals_and_lodging while mr wasik was away from prior lake minnesota in the minneapolis area where he normally lived we conclude that he was not away from home when he worked in milwaukee second we are asked to decide whether petitioners substantiated various other expenses we conclude that petitioners have substantiated and are entitled to deduct some of these other expenses findings_of_fact some of the facts have been stipulated and are so found petitioners resided in prior lake minnesota at the time they filed the petition mr wasik’s employment with nwa mr wasik began working in the airline industry as a mechanic in after working for years with trans world airlines mr wasik began working for nwa mr wasik worked for nwa for a total of years mostly in minneapolis nwa sent layoff notices to some of its employees when it experienced financial difficulties the employees receiving the notices could either choose to accept the layoff or exercise their seniority seniority depended on the length of time an 2as more fully described infra we do find that mr wasik is entitled to deduct vehicle expenses for a training trip to duluth minnesota employee had worked for nwa regardless of where the airline facility was located an employee with higher seniority could exercise his or her seniority to bump an employee with less seniority and take that employee’s position the employee with less seniority could then take the layoff or find another employee with less seniority to bump this seniority bumping arrangement was in place across the country so that an nwa mechanic looking to keep his or her job at nwa had to look at several different cities to find a less senior employee to bump most employees exercised their seniority in the way that would give them positions in cities as close as possible to their families mr wasik received a bump notice in date mr wasik looked into other job opportunities in the minneapolis area but did not find an opportunity that was right for him mr wasik chose to exercise his seniority and bump another employee rather than accept the layoff bumping another employee meant that mr wasik could retain his health care benefits mr wasik was able to bump to milwaukee wisconsin mr wasik was not experienced with the type of aircraft typically arriving in milwaukee so nwa first sent mr wasik for training in duluth minnesota to learn the skills he needed for the milwaukee job mr wasik was in duluth for weeks at the end of date nwa reimbursed mr wasik for his lodging and meals while he was attending training in duluth but not for vehicle expenses mr wasik began the milwaukee position on date mr wasik’s position in milwaukee had no defined end date he hoped to return to minneapolis soon he understood that union representatives were meeting with nwa representatives on behalf of the mechanics in an effort to return some of them to minneapolis he expected he would be able to return to minneapolis as soon as there was an nwa job available there that he had enough seniority to obtain the timing of a return to minneapolis would depend on nwa’s needs for mechanics in that city as well as the choices of the other mechanics also subject_to the seniority system mr wasik worked in milwaukee until the end of date days short of a year mr wasik and petitioner connie wasik mrs wasik decided that mrs wasik a homemaker and their children should remain in minnesota while mr wasik worked in milwaukee they did not want to uproot their family and thus decided that mr wasik would incur additional travel lodging and meal expenses in milwaukee rather than have the entire family move there mr wasik rented an apartment in the milwaukee area with three other nwa mechanics during the week and he traveled to the minneapolis area to visit his family on the weekends mr wasik had a cellular phone and bought some computer equipment during mr wasik also claimed he purchased safety shoes and supplies during petitioners subscribed to the minneapolis star tribune newspaper and everyone in the family read it mr wasik wore a uniform while he worked for nwa he needed to clean his uniforms often because his work involved airline fuel and oil and was messy petitioners claimed they contributed some items to charity and made cash contributions in petitioners’ return petitioners claimed certain expenses on schedule a itemized_deductions on the joint_return for respondent examined the return for and issued petitioners a deficiency_notice in which he disallowed many of the expenses of the expenses still in dispute petitioners assert they are entitled to deduct claimed cash and noncash charitable_contributions as well as unreimbursed employee business_expenses the unreimbursed employee_business_expense deductions petitioners claimed include expenses for mr wasik’s vehicle while in duluth and milwaukee lodging and meals while in milwaukee and expenses for safety 3respondent concedes that petitioners are entitled to deduct state and local_taxes real_estate_taxes a portion of personal_property_taxes home mortgage interest certain amounts for tools a portion of union dues and tax preparation fees petitioners have conceded they are not entitled to deduct fax machine expenses internet expenses and investment_expenses shoes supplies uniform cleaning financial publications cellular telephone and equipment petitioners timely filed a petition opinion the parties resolved many of the disputed expenses before trial we are asked to determine whether petitioners are entitled to deduct the remaining expenses we begin by considering whether mr wasik was away from home when he incurred expenses for his vehicle meals_and_lodging in milwaukee and his vehicle expenses he incurred when attending training in duluth travel_expenses while away from home we begin by briefly outlining the rules for deducting travel_expenses a taxpayer may deduct reasonable and necessary travel_expenses such as those for vehicles meals_and_lodging incurred while away from home in the pursuit of a trade_or_business sec_162 sec_262 a taxpayer must show that he or she was away from home when he or she incurred the expense that the expense is reasonable and necessary and that the expense was incurred in pursuit of a trade_or_business 326_us_465 the determination of whether the taxpayer has satisfied these requirements is a question of fact id 4all section references are to the internal_revenue_code in effect for and all rule references are to the tax_court rules_of_practice and procedure unless otherwise indicated the purpose of the deduction for expenses_incurred away from home is to alleviate the burden on the taxpayer whose business needs require him or her to maintain two homes and therefore incur duplicate living_expenses 49_tc_557 the duplicate costs are not deductible where the taxpayer maintains two homes for personal reasons sec_262 commissioner v flowers supra pincite a taxpayer may deduct the expenses he or she incurred while away from home sec_162 the word home for purposes of sec_162 has a special meaning it generally refers to the area of a taxpayer’s principal place of employment not the taxpayer’s personal_residence 72_tc_190 affd 662_f2d_253 4th cir kroll v commissioner supra pincite there is an exception to the general_rule that a taxpayer’s tax_home is his or her principal place of employment 358_us_59 the taxpayer’s tax_home may be the taxpayer’s personal_residence if the taxpayer’s employment away from home is temporary id mitchell v commissioner tcmemo_1999_283 on the other hand the exception does not apply and the taxpayer’s tax_home remains the principal place of employment if the employment away from home is indefinite kroll v commissioner supra pincite it is presumed that a taxpayer will generally choose to live near his or her place of employment 603_f2d_1292 8th cir a taxpayer must however have a principal place of employment and accept temporary work in another location to be away from home kroll v commissioner supra a person who has no principal_place_of_business nor a place he or she resides permanently is an itinerant and has no tax_home from which he or she can be away 752_f2d_337 8th cir affg tcmemo_1984_63 edwards v commissioner tcmemo_1987_396 all the facts and circumstances are considered in determining whether a taxpayer has a tax_home see revrul_73_ 1973_2_cb_37 describing objective factors the commissioner considers in determining whether a taxpayer has a tax_home the taxpayer must generally have some business justification to maintain the first residence beyond purely personal reasons to be entitled to deduct expenses_incurred while temporarily away from that home 638_f2d_248 1st cir 67_tc_824 55_tc_783 where a taxpayer has no business connections with the primary residence there is no compelling reason to maintain that residence and incur substantial continuous and duplicative expenses elsewhere see 143_f3d_497 9th cir affg tcmemo_1995_559 deamer v commissioner supra hantzis v commissioner supra in that situation the expenses_incurred while temporarily away from that residence are not deductible hantzis v commissioner supra bochner v commissioner supra tucker v commissioner supra see mcneill v commissioner tcmemo_2003_65 aldea v commissioner tcmemo_2000_136 we now consider whether mr wasik was away from home when he was bumped from minneapolis and took a position in milwaukee once mr wasik was bumped from minneapolis he had no job to return to there his choices were to be laid off and have no work or to bump other employees and move to different cities to continue working nwa gave mr wasik no end date for his position in milwaukee nwa no longer required mr wasik to perform any services whatsoever in the minneapolis area once he was bumped mr wasik introduced evidence that he searched for work in the minneapolis area but was unsuccessful although mrs wasik and the family remained in the family residence with occasional visits from mr wasik while mr wasik worked in milwaukee this fact alone does not dictate that mr wasik’s tax_home was in prior lake minnesota where the family residence was located unlike traveling salespersons who may be required to return to the home city occasionally between business trips mr wasik’s business ties to the minneapolis area ceased when he was bumped the court understands that the nwa mechanics’ lives were unsettled and disrupted mechanics did not know how long they would have a job in one specific location they only knew the system was based on seniority they could bump less senior employees and they could be bumped by more senior employees while we acknowledge that mr wasik would have liked to return to the minneapolis area to work for nwa mr wasik did not know when such a return would be possible due to the seniority system the likelihood of mr wasik’s return to a position in minneapolis depended on nwa’s needs for mechanics there as well as the choices of more senior mechanics mr wasik did not know how long he would be in milwaukee or where he might go next it was not foreseeable that he would be able to return to minneapolis at any time due to the seniority system mr wasik testified that he thought his position in milwaukee would not last very long because he thought union representatives were negotiating with nwa to return some displaced mechanics to minneapolis mr wasik acknowledged that nothing was guaranteed however although he believed the union was doing what it could for the mechanics petitioners did not introduce evidence pertaining to the status of negotiations between nwa and the union at the time mr wasik accepted the milwaukee job nor evidence indicating that mr wasik even would have known the substance of the negotiations or how they were proceeding moreover even assuming the union representatives did ultimately agree with nwa that nwa would add new mechanic jobs in minneapolis at some future time these jobs would likely also be subject_to the seniority system thus mr wasik would have no way to know whether he would be senior enough to obtain one of the minneapolis jobs if and when the minneapolis jobs were made available at some future unknown date the court also takes judicial_notice that union negotiations did not prevail mr wasik’s return to minneapolis was not foreseeable because of the prospect of union negotiations we conclude there was no business reason for petitioners to maintain a home in the minneapolis area petitioners kept the family residence in the minneapolis area for purely personal reasons accordingly mr wasik was not away from home in milwaukee and the expenses he incurred while there are not deductible we next examine petitioners’ argument that they are entitled to deduct vehicle expenses mr wasik incurred traveling to duluth for training before beginning the milwaukee position respondent focuses his arguments on brief on the milwaukee position and fails to address whether mr wasik was away from home while he was training in duluth respondent acknowledges that nwa considered mr wasik to be away from milwaukee during that time and reimbursed mr wasik’s meals_and_lodging for that reason it appears under the circumstances that respondent has conceded that mr wasik was temporarily away from home with respect to the week training session in duluth we shall discuss therefore infra whether petitioners met the strict substantiation requirements under sec_274 concerning the vehicle expenses_incurred traveling to duluth for training substantiation of expenses we next turn to the substantiation issues to determine whether petitioners are entitled to deduct any remaining expenses we begin by noting the fundamental principle that the commissioner’s determinations are generally presumed correct and the taxpayer bears the burden of proving that these determinations are erroneous rule a 503_us_79 290_us_111 moreover deductions are a matter of legislative grace and the taxpayer has the burden to prove he or she is entitled to any deduction claimed rule a 308_us_488 292_us_435 welch v helvering supra 5petitioners do not claim the burden_of_proof shifts to respondent under sec_7491 petitioners also did not establish they satisfy the requirements of sec_7491 we therefore find that the burden_of_proof remains with petitioners this includes the burden of substantiation 65_tc_87 affd per curiam 540_f2d_821 5th cir a taxpayer must substantiate amounts claimed as deductions by maintaining the records necessary to establish he or she is entitled to the deductions sec_6001 hradesky v commissioner supra the taxpayer shall keep such permanent records or books of account as are sufficient to establish the amounts of deductions claimed on the return sec_6001 sec_1_6001-1 e income_tax regs the court need not accept a taxpayer’s self-serving testimony when the taxpayer fails to present corroborative evidence beam v commissioner tcmemo_1990_ citing 87_tc_74 affd without published opinion 956_f2d_1166 9th cir unreimbursed employee business_expenses we shall now consider whether petitioners are entitled to deduct the claimed expenses beginning with the unreimbursed employee business_expenses petitioners claimed on schedule a in general all ordinary and necessary expenses paid_or_incurred in carrying_on_a_trade_or_business during the taxable_year are deductible but personal living or family_expenses are not deductible sec_162 sec_262 services performed by an employee constitute a trade_or_business 91_tc_352 sec_1_162-17 income_tax regs if a taxpayer establishes that he or she paid_or_incurred a deductible business_expense but does not establish the amount of the deduction we may approximate the amount of the allowable deduction bearing heavily against the taxpayer whose inexactitude is of his or her own making 39_f2d_540 2d cir for the cohan_rule to apply however a basis must exist on which this court can make an approximation 85_tc_731 without such a basis any allowance would amount to unguided largesse 245_f2d_559 5th cir certain business_expenses may not be estimated because of the strict substantiation requirements of sec_274 see sec_280f 50_tc_823 affd per curiam 412_f2d_201 2d cir for such expenses only certain types of documentary_evidence will suffice safety shoes we now examine those expenses not subject_to the strict substantiation requirements petitioners claimed dollar_figure for safety shoes during a taxpayer is entitled to deduct unreimbursed employee_expenses only to the extent that the taxpayer demonstrates that he or she could not have been reimbursed for such expenses by his or her employer sec_162 24_tc_21 petitioners offered no receipts from the store where the safety shoes were allegedly purchased moreover petitioners failed to show that nwa did not reimburse mr wasik for the safety shoes petitioners have not provided adequate substantiation for this claimed expense petitioners are therefore not entitled to a deduction for safety shoes for supplies petitioners claimed dollar_figure for supplies during mr wasik acknowledged at trial that he was not sure what supplies he sought to deduct on the return petitioners offered no testimony regarding what specific supplies mr wasik needed for his job or even what supplies petitioners sought to deduct we conclude that petitioners are not entitled to a deduction for supplies for cleaning expenses for uniforms petitioners claimed dollar_figure for cleaning expenses for mr wasik’s nwa uniforms expenses for uniforms are deductible if the uniforms are of a type specifically required as a condition_of_employment the uniforms are not adaptable to general use as ordinary clothing and the uniforms are not worn as ordinary clothing 30_tc_757 beckey v commissioner tcmemo_1994_514 we are satisfied that petitioners incurred deductible expenses to clean mr wasik’s uniforms mr wasik gave unclear testimony however regarding how he calculated the cleaning costs petitioners introduced a document on the letterhead of his certified_public_accountant that purports to indicate how the sum was calculated but it suggests an excessive_amount cleanings for shirts and pants per month roughly corresponding to the number of days per month mr wasik worked we may estimate the amount of deductible cleaning expenses under the cohan_rule we adopt the unit cost of dollar_figure listed on petitioners’ exhibit as the cost to wash or dry one load of laundry we find that approximately eight loads of laundry per month is a reasonable number to yield clean shirts and pairs of pants per month petitioners are therefore entitled to deduct dollar_figure for cleaning expenses for mr wasik’s uniforms in publications petitioners claimed dollar_figure for publications petitioners introduced copies of checks made out to star tribune totaling dollar_figure mr wasik testified that the amount petitioners claimed included the star tribune delivered to the family home in minnesota that everyone in the family read as well as costs for financial publications that mr wasik used to monitor investments petitioners did not keep receipts for the purchase of the financial publications the cost of a daily newspaper of general circulation is generally nondeductible wheeler v commissioner tcmemo_1984_425 petitioners also have not introduced any receipts for the other financial publications and thus have not substantiated expenses for these publications we conclude that petitioners are therefore not entitled to any deduction for publications in expenses subject_to strict substantiation requirements we now consider those expenses that are subject_to the additional strict substantiation requirements under sec_274 expenses subject_to strict substantiation may not be estimated under the cohan_rule sanford v commissioner supra pincite cellular phone expenses petitioners claimed dollar_figure for cellular phone expenses for cellular phones are included in the definition of listed_property for purposes of sec_274 and sec_280f and are thus subject_to the strict substantiation requirements gaylord v commissioner tcmemo_2003_273 a taxpayer must establish the amount of business use and the amount of total use for the property nitschke v commissioner tcmemo_2000_230 sec_1_274-5t temporary income_tax regs fed reg date petitioners offered no testimony regarding their claimed expenses for the cellular phone petitioners did introduce copies of checks made out to verizon wireless totaling dollar_figure which is less than the claimed deduction petitioners did not provide any breakdown of the personal versus business use of the cellular phone in addition petitioners failed to introduce any testimony or evidence to prove that nwa required mr wasik to have a cellular phone petitioners are therefore not entitled to deduct any cellular phone expenses for equipment expenses petitioners claimed dollar_figure of equipment expenses petitioners introduced a best buy receipt for a computer for dollar_figure to support their deduction petitioners did not introduce any evidence that nwa required mr wasik to have a computer or that he used the computer for business purposes petitioners also gave no explanation of what equipment made up the roughly dollar_figure difference between the cost of the computer and the amount petitioners claimed mr wasik admitted that the deduction was a mistake we conclude that petitioners are not entitled to deduct dollar_figure for equipment vehicle expenses for travel to duluth for training we now consider whether petitioners are entitled to deduct vehicle expenses_incurred in connection with mr wasik’s training trip to duluth passenger automobiles are listed_property under sec_280f and strict substantiation is therefore required sec_274 no deduction is allowed for any travel expense unless the taxpayer corroborates by adequate_records or by sufficient evidence corroborating the taxpayer’s own statement the amount of the expense the mileage for each business use of the automobile and the total mileage for all use of the automobile during the taxable_period the date of the business use and the business_purpose for the use sec_1_274-5t temporary income_tax regs fed reg date adequate_records include the maintenance of an account book diary log statement of expenses trip sheets and or other documentary_evidence which in combination are sufficient to establish each element of expenditure or use sec_1_274-5t temporary income_tax regs fed reg date taxpayers may use a standard mileage rate established by the internal_revenue_service in lieu of substantiating the actual amount of the expenditure see sec_1_274-5 income_tax regs the standard mileage rate is generally multiplied by the number of business miles traveled see revproc_2002_61 2002_2_cb_616 in effect for transportation_expenses incurred during the use of the standard mileage rate establishes only the amount deemed expended with respect to the business use of a passenger_automobile sec_1_274-5 income_tax regs the taxpayer must still establish the actual mileage the time and the business_purpose of each use nicely v commissioner tcmemo_2006_172 sec_1_274-5 income_tax regs petitioners claimed dollar_figure for vehicle expenses a portion of which is attributable to mr wasik’s travel to duluth for training petitioners used the standard business mileage rate of cents per mile in effect for in computing their vehicle expenses petitioners introduced a calendar indicating the days in september and october mr wasik drove from prior lake minnesota to duluth minnesota a total of two round trips petitioners also introduced evidence indicating the 180-mile distance between petitioners’ home and duluth we are satisfied that petitioners substantiated the mileage and met the strict substantiation requirements relating to the vehicle expenses for the duluth travel after applying the standard mileage rate in effect for we find that petitioners are entitled to deduct dollar_figure for vehicle expenses for charitable_contributions we finally consider petitioners’ charitable_contributions petitioners claimed they contributed dollar_figure cash and dollar_figure of property to charitable organizations in charitable_contributions are generally deductible under sec_170 no deduction is allowed however for any contribution of dollar_figure or more unless the taxpayer substantiates the contribution by a contemporaneous written acknowledgment of the contribution by a qualified donee organization sec_170 the deduction for a contribution of property equals its fair_market_value on the date contributed sec_1_170a-1 income_tax regs a taxpayer claiming a charitable_contribution of money is generally required to maintain for each contribution a canceled check a receipt from the donee charitable_organization showing the name of the organization and the date and amount of the contribution or other reliable written records showing the name of the donee and the date and amount of the contribution sec_1_170a-13 income_tax regs we first consider petitioners’ cash contributions petitioners claimed they donated to their hometown church in and introduced a list they created with the name and address of the church and the dates and amounts of contributions totaling dollar_figure petitioners did not use the numbered envelopes provided by the church that would have allowed the church to verify and 6the remaining balance of the dollar_figure claimed cash donations appears not to be a donation of cash at all but the videotapes mr wasik claims to have purchased and allowed prior lake athletics for youth p l a y coaches to view substantiate donations they made and introduced no receipts or acknowledgment from the church of any contributions the balance of the evidence introduced to substantiate petitioners’ cash contributions relates to prior lake athletics for youth p l a y mr wasik testified that he purchased instructional videos and kept them at his home but that he told the other p l a y coaches they were free to use the videos mr wasik acknowledged that he did not donate money to the organization we are convinced that petitioners attended the church and donated money we may estimate such cash charitable_contributions under the cohan_rule see fontanilla v commissioner tcmemo_1999_156 we conclude that petitioners are entitled to deduct dollar_figure of cash charitable_contributions to the church petitioners are not entitled to deduct any amount for cash charitable_contributions related to the instructional videos as they acknowledged they did not make any cash contributions to that organization moreover we note that donations must be to the charity petitioners may not deduct the costs of videos they purchased as a charitable_contribution 7there are now stricter requirements for contributions of money sec_170 no deduction for a contribution of money in any amount is allowed unless the donor maintains a bank record or written communication from the donee showing the name of the donee organization the date of the contribution and the amount of the contribution id this new provision is effective for contributions made in tax years beginning after date pension_protection_act of publaw_109_280 sec 120_stat_1080 unless they actually contributed the videos to the charity and substantiated the contribution with a receipt from the charity for the donation we next turn to petitioners’ contributions of property petitioners provided a receipt from the cap agency and mrs wasik testified she added the amount dollar_figure to the receipt petitioners also introduced a detailed three-page handwritten list of the items donated and the estimated values totaling about dollar_figure well over the dollar_figure written on the receipt petitioners stated on the return however that they donated property worth dollar_figure to goodwill industries mrs wasik stated that when preparing the detailed list of items she simply estimated their values according to what each item was and how old it was we are troubled by the significant inconsistencies and contradictions in the evidence and testimony on this issue petitioners introduced a receipt from an organization different from the organization they claimed on their return in addition petitioners’ tax_return reflects a different amount from petitioners’ receipt which reflects a still different amount from petitioners’ handwritten notes mrs wasik did not explain these discrepancies at trial to the court’s satisfaction we do not find this inconsistent contradictory testimony to be credible and we decline to accept it we find that petitioners have not substantiated to which charities they donated property or the value of that property petitioners are therefore not entitled to deduct any amount for charitable_contributions of property to reflect the foregoing and the concessions of the parties decision will be entered under rule


internal_revenue_service number release date index number ----------------- -------------------------------- ---------------------------------------------------------- ----------------------------- ---------------------- -------------------------- department of the treasury washington dc person to contact --------------------- id no --------------- telephone number --------------------- refer reply to cc intl br1 - plr-138261-03 date april - legend transferor us holdco corp w corp x corp y corp z country c holdco business a state b country c year year year year year year date date date ty -------------- ------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------ ------------------------------ ------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------ ---------------------------------------------------- ------------------------------------------------------------------------------------------ ---------------------------------- ------------------------------------------------------------------------------------------ ------------------------ ------------------------------------------------------------------------------------------ ----------------------------------- ---------------------------------------------- ------------------- ------------ ---------- ------- ------- ------- ------- ------- ------- --------------- --------------- ------------------ ----------------- the rulings contained in this letter are based upon information and this is in response to a letter dated date from your authorized transferor was incorporated over years ago in country c to engage in plr-138261-03 date dear -------------- representatives requesting a ruling that the proposed disposition of the stock of corp x by transferor will not constitute a disposition within the meaning of sec_1 2t d additional information was submitted in letters dated date date and date and date the information submitted is summarized below 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 a ruling it is subject_to verification on examination business a corp x was incorporated in state b in year as a wholly owned subsidiary of transferor at the time of this ruling_request it was the common parent of an affiliated_group_of_corporations that since year has filed a consolidated federal_income_tax return subsidiary of corp x corp y formerly was a wholly owned subsidiary of corp z a u s affiliate of corp x and corp z in turn was a wholly owned subsidiary of transferor as described below in year transferor transferred the stock of corp z to corp x and in year corp z was merged into corp y between year and year transferor restructured its branch operations through a series of transactions so that thereafter it no longer conducted any business in the united_states other than through subsidiaries these transactions are described in greater detail below previous transactions the year transaction certain branch assets by private_letter_ruling the service ruled that the year indirect transfers of branch assets to corp y were treated as back-to-back sec_351 transfers transferor also conducted operations in the united_states through a u s branch in year transferor transferred to corp y either directly or through corp z corp y was incorporated prior to corp x and is now a wholly owned state b in year transferor transferred to corp y either directly or through corp z plr-138261-03 of assets from transferor to corp z and from corp z to corp y transferor and corp z made the sec_351 earnings_and_profits election contemplated by sec_1_884-2t and transferor attached the relevant statement to its timely filed year federal_income_tax return the year transaction in year transferor transferred to corp x additional assets of its u s branch in exchange for additional shares of corp x stock following that transaction transferor and corp x made the sec_351 earnings_and_profits election contemplated by sec_1_884-2t and transferor attached the relevant statement to its timely filed year federal_income_tax return the year transactions most of the remaining u s branch assets on the same day transferor also transferred to corp z the remainder of its branch assets immediately thereafter transferor transferred all the stock of corp z to corp x in exchange for additional shares of corp x stock favorable rulings were obtained from the irs regarding the tax-free nature of each of the year transactions on behalf of transferor corp z and corp x and the branch_profits_tax consequences of the year transactions for corporate tax purposes the first and second transactions were treated as if transferor had transferred the assets to corp z in a transaction that qualified under sec_351 and corp z had then transferred the assets from corp z to corp y in a related transaction that qualified under sec_351 for corporate tax purposes the year stock transfer was treated as if transferor had transferred certain assets and stock of corp z to corp x in a transaction that qualified under sec_351 and corp x had then transferred those assets to corp z with respect to the branch_profits_tax the irs ruled that the year transaction would not be treated as a disposition of the corp z stock for branch_profits_tax purposes and that in essence the branch_profits_tax taint ie the triggering of a branch_profits_tax on any disposition of stock by the foreign transferor would attach to the shares of corp x stock more specifically the irs ruled as follows provided that corp x makes a valid election to increase its earnings_and_profits by an amount equal to the earnings_and_profits previously allocated to corp z pursuant to elections made previously or made with respect to the transfers described in this letter_ruling by transferor under sec_1_884-2t and provided that transferor attaches a statement to its timely filed including extensions federal_income_tax return treating such earnings_and_profits as if they plr-138261-03 had been allocated from transferor to corp x pursuant to an election under sec_1_884-2t of the temporary regulations a transferor’s transfer of the stock of corp z to corp x will not constitute a disposition of part or all of the stock of corp z within the meaning of sec_1_884-2t and b corp z’s earnings_and_profits will be reduced by an amount equal to the earnings_and_profits allocated to corp x on date in year transferor formed u s holdco a single member limited transferor requested a ruling pursuant to sec_1_884-2t prior to exchange corp x made the sec_351 earnings_and_profits election contemplated by sec_1_884-2t and transferor attached the relevant statement to its timely filed year federal_income_tax return transactions for which ruling requested and exchange exchange liability company organized under the laws of delaware in order to provide transferor with a new u s holding_company that is not engaged in business a and that it can use to make acquisitions of and enter into transactions with non-business a companies u s holdco will timely elect under sec_301_7701-3 to be classified as an association and therefore will be treated as a corporation for federal tax purposes pursuant to sec_301_7701-2 this will allow transferor to achieve certain country c tax efficiencies on date in year transferor transferred all the stock of corp x to u s holdco in exchange for the sole equity_interest in u s holdco exchange exchange subsidiary country c holdco in order to provide transferor with a country c corporate structure that will facilitate its ability to borrow funds the interest on which will be fully deductible for country c tax purposes on date transferor transferred all the stock of u s holdco to country c holdco in exchange for shares of country c holdco common_stock exchange consequently country c holdco now holds certain of transferor’s high-value assets namely the stock of transferor’s u s subsidiaries of country c holdco country c holdco owns the sole equity_interest in u s holdco and u s holdco owns all the stock of corp x immediately following the transactions transferor owns percent of the stock on date in year transferor formed a new wholly-owned country c plr-138261-03 proposed transactions transferor has made the following representations in connection with the exchange will qualify for tax-free treatment under sec_351 exchange will qualify for tax-free treatment under sec_351 u s holdco will be treated as a corporation for u s federal tax purposes and transferor is a qualifying person for purposes of the u s -country c income for country c tax purposes tax_treaty country c holdco will be a qualifying person for purposes of the u s -country c income_tax treaty transferor does not intend to dispose_of country c holdco us holdco corp x or any of its existing u s operations outside of corp w’s country c corporate group under sec_1_884-2t if a foreign_corporation engaged in the transferor requests a ruling that the back-to-back transfers of the corp x stock by transferor to us holdco and then the transfer of the us holdco stock from transferor to country c holdco will not be treated as dispositions of the corp x stock under sec_1_884-2t law and analysis conduct of a u s trade_or_business makes a transfer under sec_351 of the code of all or part of its u_s_assets to a u s_corporation in exchange for stock_or_securities in the transferee the transferor corporation’s dividend_equivalent_amount will be determined without regard to the sec_351 transfer provided the u s transferee corporation makes an election under sec_1_884-2t to increase its earnings_and_profits by an allocable portion of the transferor corporation’s effectively_connected_earnings_and_profits and non-previously taxed effectively connected accumulated_earnings_and_profits the transferor must also file a statement agreeing that upon the disposition of part or all of the stock_or_securities it owns in the transferee or a successor_in_interest it will treat as a dividend_equivalent_amount for the taxable_year in which the disposition occurs an amount equal to the lesser_of a the amount_realized upon such disposition or b the total amount of the effectively_connected_earnings_and_profits and non-previously taxed effectively connected accumulated_earnings_and_profits that was allocated from the transferor_corporation to the transferee corporation pursuant to the election under sec_1_884-2t sec_1_884-2t pursuant to sec_1_884-2t a disposition does not include a plr-138261-03 transfer of stock_or_securities of the transferee corporation by the transferor_corporation pursuant to a complete_liquidation described in sec_332 or a transfer pursuant to a reorganization described in sec_368 any other transfer of transferee shares that qualifies for non-recognition of gain_or_loss shall be treated as a disposition for purposes of paragraph d i unless the commissioner has determined otherwise by published guidance or by prior ruling issued to the taxpayer upon its request the commissioner has not determined otherwise by published guidance would trigger a branch_profits_tax because of the sec_884 elections made in connection with prior transfers that qualified under sec_351 above we rule as follows based solely on the information submitted and on the representations set forth thus absent the relief requested any disposition of shares of corp x stock assuming that the back-to-back transfers of the corp x stock by transferor to us holdco in exchange and of us holdco stock from transferor to country c holdco in exchange qualify under sec_351 and provided that u s holdco makes an election under sec_1_884-2t to increase its earnings_and_profits by an amount equal to the earnings_and_profits allocated to corp x pursuant to elections made previously that country c holdco attaches a statement to its timely filed including extensions federal_income_tax return for year agreeing that upon disposition of all or part of its interest in us holdco country c holdco will treat as a dividend_equivalent_amount for the taxable_year in which the disposition occurs an amount equal to the lesser_of a the amount_realized upon such disposition or b the total amount of effectively_connected_earnings_and_profits and non-previously taxed accumulated_earnings_and_profits that was treated as allocated to us holdco from corp x except to the extent such amount was previously taken into account by country c holdco as dividends or dividend_equivalent amounts for branch_profits_tax purposes then neither transferor’s transfer of the stock of corp x to us holdco nor transferor’s transfer of the stock of us holdco to country c holdco will constitute a disposition of all or part of the stock of corp x or us holdco within the meaning of sec_1_884-2t and corp x’s earnings_and_profits will be reduced by an amount equal to the earnings_and_profits allocated to us holdco 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 plr-138261-03 this ruling is directed only to the taxpayer s requesting it sec_6110 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 sincerely elizabeth u karzon chief branch office of the associate chief_counsel international cc


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc psi b1-plr-121748-03 date july legend x state d1 t1 t2 t3 t4 t5 t6 t7 d2 plr-121748-03 y d3 dear this responds to the letter dated date together with related documents submitted on behalf of x requesting a ruling under sec_1362 of the internal_revenue_code facts x is a corporation formed under the laws of the state which elected to be treated as a subchapter_s_corporation effective d1 t1 through t7 shareholders of x elected to be treated as qualified subchapter_s trusts qssts effective d2 during y the trustees of t1 through t7 failed to make the requisite trust income distributions as a result x’s s election terminated as of d3 x represents that the failure of timely making the requisite trust income distributions was not purposeful further x and its shareholders agree to make any adjustments consistent with the treatment of x as an s_corporation as may be required by the secretary with respect to the period specified by sec_1362 of the code law and analysis sec_1361 defines an s_corporation with respect to any taxable_year as a small_business_corporation for which an s election under sec_1362 is in effect for such year sec_1361 provides that a small_business_corporation cannot have as a shareholder a person other than an estate a_trust described in sec_1361 or an organization described in sec_1361 who is not an individual sec_1361 provides that a_trust all of which is treated under subpart e of part i of subchapter_j of chapter as owned by an individual who is a citizen or resident_of_the_united_states may be a subchapter_s_corporation shareholder sec_1361 defines the term qualified_subchapter_s_trust as a_trust - a the terms of which require that plr-121748-03 i during the life of the current income_beneficiary there shall be only income_beneficiary of the trust ii any corpus distributed during the life of the current income_beneficiary may be distributed only to such beneficiary iii the income_interest of the current income_beneficiary in the trust shall terminate on the earlier of such beneficiary’s death or the termination of the trust and iv upon the termination of the trust during the life of the current beneficiary the trust shall distribute all its assets to such beneficiary and b all of the income within the meaning of sec_643 of which is distributed or required to be distributed currently to individual who is a citizen or resident_of_the_united_states sec_1361 states that a qsst whose beneficiary makes an election under sec_1361 will be treated as a_trust described in sec_1361 and the qsst’s beneficiary will be treated as the owner for purposes of sec_678 of that portion of the qsst’s s_corporation stock to which the election under sec_1362 applies under sec_1361 the beneficiary of a qsst may elect to have sec_1361 apply under sec_1361 this election will be effective up to days and two months before the date of the election sec_1_1361-1 of the income_tax regulations provides that if a qsst ceases to meet the income distribution requirement specified in sec_1_1361-1 but continues to meet all of the requirements in sec_1_1361-1 the provisions of sec_1 j will cease to apply as of the first day of the first taxable_year beginning after the first taxable_year in which the trust ceased to meet the income distribution requirement if a corporation’s s election is inadvertently terminated as a result of a_trust ceasing to meet the qsst requirements the corporation may request relief under sec_1362 sec_1362 provides that an election under sec_1362 shall be terminated whenever at any time on or after the first day of the taxable_year for which the corporation is an s_corporation the corporation ceases to be a small_business_corporation the termination is effective on and after the day of the cessation sec_1362 sec_1362 in relevant part provides that if an election under sec_1362 by any corporation was terminated under sec_1362 the secretary determines that the termination was inadvertent no later than a reasonable period of time after discovery of the event resulting in the termination steps were taken so that the corporation is once more a small_business_corporation and the corporation and each person who was a shareholder in the corporation at any time during the period specified pursuant to sec_1362 agrees to make any adjustments consistent with the treatment of the corporation as an s_corporation as may be required by the secretary with respect to such period then plr-121748-03 notwithstanding the terminating event the corporation shall be treated as continuing to be an s_corporation during the period specified by the secretary the committee reports accompanying the subchapter_s_revision_act_of_1982 explain sec_1362 as follows if the internal_revenue_service determines that a corporation’s subchapter_s_election is inadvertently terminated the service can waive the effect of the terminating event for any period if the corporation timely corrects the event and if the corporation and the shareholders agree to be treated as if the election had been in effect for such period the committee intends that the internal_revenue_service be reasonable in granting waivers so that corporations whose subchapter_s eligibility requirements have been inadvertently violated do not suffer the tax consequence of a termination if no tax_avoidance would result from the continued subchapter_s treatment in granting a waiver it is hoped that the taxpayers and the government will work out agreements that protect the revenues without undue_hardship to taxpayers it is expected that the waiver may be made retroactive for all years or retroactive for the period in which the corporation again became eligible for subchapter_s treatment depending on the facts s rep no 97th cong 2d sess 1982_2_cb_718 h_r rep no 97th cong 2d sess 1982_2_cb_730 conclusions based solely on the facts submitted and the representations made we conclude that x’s subchapter_s_election terminated on d3 when t1 through t7 failed to make the requisite trust income distributions during the preceding year we also conclude that the termination constituted an inadvertent termination within the meaning of sec_1362 further we conclude that pursuant to sec_1362 x will be treated as continuing to be an s_corporation from d3 assuming x’s s_corporation_election is valid and not otherwise terminated under sec_1362 and provided that the trustees of t1 through t7 make the required income distributions at issue within days of the date of this letter except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of the facts described above under any other provision of the code specifically no opinion is expressed concerning whether x is a valid s_corporation or whether t1 through t7 are valid qssts this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent plr-121748-03 in accordance with the power_of_attorney on file with this office a copy of this letter is being mailed to x sincerely david r haglund senior technician reviewer branch associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes