internal_revenue_service department of the treasury number release date index number washington d c person to contact telephone number refer reply to cc corp plr-149854-01 date date parent distributing controlled division i division ii subsidiary a susidiary b subsidiary c subsidiary d susidiary e subsidiary f subsidiary g susidiary h subsidiary i subsidiary j susidiary k subsidiary l subsidiary m susidiary n llc ss llc tt llc uu llc vv llc ww llc xx llc yy llc zz partnership mergerco1 mergerco2 busine sec_1 busine sec_2 busine sec_3 state a state b financial advisor assets q business_assets r amount x amount y date date date date date date date date date date date date date year year z aa dear this letter responds to your letter dated date which requests rulings on certain federal_income_tax consequences of a proposed and partially completed transaction additional information was submitted in letters dated date date date date date and date the information submitted for our review is summarized below parent a publicly traded state a corporation is the common parent of an affiliated_group_of_corporations that files a consolidated federal_income_tax return the parent group parent has one class of publicly held common_stock outstanding and prior to step of the transaction described below had one class of nonvoting preferred_stock the preferred_stock outstanding the parent group as a whole is engaged in busine sec_1 busine sec_2 and busine sec_3 as well as various other regulated and unregulated businesses prior to the transaction described below parent wholly owned subsidiary a subsidiary b subsidiary c subsidiary h subsidiary i subsidiary k subsidiary l subsidiary j and llc ss a limited_liability_company that is disregarded as a separate_entity from its owner for federal tax purposes subsidiary a wholly owned subsidiary d subsidiary e subsidiary f and subsidiary g prior to the transaction described below parent was directly engaged through division i in busine sec_1 busine sec_2 and busine sec_3 subsidiaries a b c d h i l j e f and g were each engaged in one or more of these businesses and other businesses either directly or indirectly through controlled entities we have received financial information indicating that each of busine sec_2 and busine sec_3 as conducted by parent and its subsidiaries has had gross_receipts and operating_expenses representing the active_conduct_of_a_trade_or_business for each of the past five years parent has determined that the parent group needs to raise significant amounts of capital to fund the operations and growth of its businesses through the equity markets based on advice provided by financial advisor parent has determined that capital would be raised more efficiently if certain of its businesses were separated into two groups of corporations specifically financial advisor has advised that the separation of these businesses will enable the parent group to raise significantly more funds per share with regard to a public offering of the stock of controlled as described below than would a public offering of controlled stock if controlled remained as a subsidiary of distributing to accomplish these goals the following transaction which is partially consumated has been proposed on date parent formed controlled as a wholly owned state b subsidiary controlled has a single class of common_stock outstanding on date controlled formed llc tt as a wholly owned limited_liability_company that will be disregarded as a separate_entity from its owner for federal tax purposes on date date and date respectively llc tt formed llc uu llc vv and llc ww as wholly owned limited_liability companies that will be disregarded as separate entities from their owners for federal tax purposes on date parent formed distributing as a wholly owned state b subsidiary effective as of date parent transferred to controlled in constructive exchange for additional stock of controlled and the assumption by controlled of certain liabilities i its busine sec_2 assets and operations ii its interests in llc ss iii the stock of subsidiaries b c g h i j and l iv an option to acquire any remaining stock of subsidiary m held by controlled after step below from llc xx v less than all substantial rights in certain intellectual_property interests and vi other miscellaneous assets that are subject_to a transitional agreement the contributions subsidiary m and llc xx were formed as described in steps and below respectively the option to acquire subsidiary m will not become exercisable until year effective as of date controlled contributed its busine sec_2 assets and operations and all of its member interests in llc ss to llc tt effective as of date llc tt contributed various of its busine sec_2 assets and operations to llc uu and the remainder of its busine sec_2 assets and operations to llc vv effective as of date subsidiary a sold the stock of subsidiaries e f and g which had nominal value to controlled for a nominal amount of cash effective as of date subsidiary d contributed its division ii assets to subsidiary n effective as of date subsidiary d transferred the stock of subsidiary n to subsidiary a in a taxable_distribution effective as of date mergerco1 a newly formed wholly owned subsidiary of controlled merged with and into subsidiary d in an all cash-merger pursuant to which subsidiary d survived as a direct subsidiary of controlled and subsidiary a received cash on date controlled declared a stock split with respect to its common_stock on date controlled issued slightly less than percent of its stock in an initial_public_offering the controlled ipo fifty percent of the proceeds from the ipo in excess of amount x were contributed to subsidiary b and used by subsidiary b to retire indebtedness owed to parent parent contributed to the capital of controlled the remaining indebtedness owed by controlled and subsidiary b to parent except for certain indebtedness owed to parent which will be repaid on or prior to the distribution as defined below on date parent formed subsidiary m as a wholly owned subsidiary on date distributing formed llc xx as a wholly owned state b limited_liability_company that will be disregarded as a separate_entity from its owner for federal tax purposes on date llc xx formed mergerco2 as a wholly owned subsidiary on date distributing reincorporated in state a by merging into a newly formed state a corporation wholly owned by parent on date parent redeemed the preferred_stock which represented less than z percent of the value of the outstanding_stock of parent on that date subsidiary m will form llc yy and llc zz as wholly owned limited_liability companies that will be disregarded as entities separate from their owners for federal tax purposes llcs yy and zz will then form partnership llc yy will have a one percent general_partnership interest in partnership and llc zz will have a percent limited_partner interest in partnership parent will contribute its division i assets engaged in busine sec_1 to subsidiary m which will in turn contribute one percent of such assets to llc yy and percent of such assets to llc zz llc yy and llc zz will then contribute such assets to partnership parent will contribute assets q to subsidiary k and assets r to distributing mergerco2 will merge with and into parent pursuant to the merger parent’s common_stock will be converted into common_stock of distributing on a one- share-for-one-share basis and the distributing stock held by parent will be cancelled distributing will succeed parent as the common parent of the former parent group parent will convert to a limited_liability_company under state a law and will be disregarded as an entity separate from its owner for federal tax purposes distributing will assume approximately amount y of outstanding indebtedness of parent in connection with this assumption parent will distribute to llc xx i the outstanding_stock of all of parent’s wholly owned subsidiaries except for certain financing partnerships the distributed subsidiaries and ii all its controlled stock llc xx will in turn distribute the stock of the distributed subsidiaries and all of its controlled stock to distributing distributing will recontribute the stock of the distributed subsidiaries to llc xx distributing will distribute all of its stock in controlled which will be greater than percent of controlled’s outstanding_stock pro_rata to distributing’s shareholders the distribution except that in lieu of distributing fractional shares of controlled common_stock distributing will aggregate all such fractional share interests sell the aggregated shares and remit the proceeds to the distributing shareholders entitled to fractional shares as a result of certain changes in the requirements of credit rating agencies it is likely that controlled will need to raise additional equity_capital to improve its liquidity and demonstrate its available credit capacity subsequent to the distribution such a transaction would involve the issuance by controlled of either debt or stock that would be convertible into controlled common_stock the post-distribution offering it is anticipated that the debt or stock issued in the post-distribution offering will be convertible into an amount of controlled common_stock that represents less than aa percent of all the outstanding controlled common_stock in year which is the same year in which the distribution will occur either i subsidiary m will issue not more than percent of its stock in a public offering or ii distributing will distribute a stock_dividend of not more than percent of subsidiary m’s stock to distributing’s shareholders the subsidiary m stock_dividend in year controlled’s option to purchase the remaining stock of subsidiary m held by llc xx will become exercisable parent distributing controlled and their affiliated subsidiaries have also entered into an agreement the tax_sharing_agreement governing the allocation of tax benefits and liabilities arising on or attributable to periods before the date of the distribution the following representations have been made with respect to the proposed transaction a no part of the consideration to be distributed by distributing in the distribution will be received by a shareholder as a creditor employee or in any capacity other than that of a shareholder of distributing b the five years of financial information submitted on behalf of parent is representative of the corporation’s present operations and with regard to such corporation there have been no substantial operational changes since the date of the last financial statements submitted c the five years of financial information submitted on behalf of controlled is representative of the corporation’s present operations and with regard to such corporation there have been no substantial operational changes since the date of the last financial statements submitted d immediately after the distribution the gross assets of distributing’s busine sec_3 will have a fair_market_value equal to or greater than five percent of the fair_market_value of all of distributing’s gross assets e immediately after the distribution the gross assets of controlled’s busine sec_2 will have a fair_market_value equal or greater than five percent of the fair_market_value of all of controlled’s gross assets f following the distribution distributing and controlled will each continue the active_conduct of its business independently and each with its separate employees except that i two individuals will serve on the board_of directors for both distributing and controlled with one of those individuals serving as chairman of the board for both companies for a transitional period of time and ii parent distributing and controlled will provide certain services to one another through their respective employees g the distribution is carried out to enable the parent group to raise capital on a more efficient basis in the controlled ipo the distribution is motivated in whole or in substantial part by this corporate business_purpose h there is no plan or intention by any shareholder who owns five percent or more of the stock of parent or distributing as successor to parent and the management of parent to its best knowledge is not aware of any plan or intention on the part of any particular remaining shareholder or security holder to sell exchange transfer by gift or otherwise dispose_of any stock in or securities of distributing or controlled after the distribution except for limited sales by distributing’s employee_stock_ownership_plan of various shares of controlled common_stock in order to satisfy requirements under the internal_revenue_code and the accompanying regulations i there is no plan or intention by either distributing or controlled directly or through any subsidiary_corporation to purchase any of its outstanding_stock after the distribution other than through stock purchases meeting the requirements of sec_4 b of revproc_96_30 j there is no plan or intention to liquidate distributing or controlled to merge either of these corporations with any other corporation or to sell or otherwise dispose_of the assets of either of these corporations after the transaction except for the disposition by controlled of various investment and inactive assets constituting less than one percent of the value of controlled’s assets after the distribution k the total adjusted bases and the fair_market_value of the assets to be transferred to controlled by parent in the contributions will equal or exceed the sum of the liabilities assumed as determined under sec_357 the liabilities assumed in the contributions as determined under sec_357 and the liabilities to which the transferred assets are subject were incurred in the ordinary course of business and are associated with the assets being transferred l neither parent nor distributing have accumulated its receivables or made extraordinary payment of its payables in anticipation of the proposed transaction m except for certain obligations arising under regulatory requirements certain debts which are expected to be repaid prior to the distribution and obligations which may arise under service agreements entered into among parent distributing and controlled no intercorporate debt will exist between distributing and controlled at the time of or subsequent to the distribution the indebtedness if any owed by controlled to distributing after the distribution will not constitute stock_or_securities n immediately before the distribution items of income gain loss deduction and credit will be taken into account by distributing as required by the applicable intercompany_transaction regulations furthermore distributing’s excess_loss_account if any with respect to the stock of controlled and any excess_loss_account with respect to the stock of any direct or indirect subsidiary of controlled will be included in income immediately before the distribution see sec_1_1502-19 o payments made in connection with all continuing transactions if any between distributing and controlled will be for fair_market_value based on the terms and conditions arrived at by the parties at arm’s length except for payments made under a tax sharing arrangement and payments made for the provision of various technical customer support corporate support and other services provided pursuant to certain other transitional service arrangements which will generally be provided at cost p neither distributing nor controlled are investment companies as defined in sec_368 and iv q the distribution is not part of a plan or series of related transactions within the meaning of sec_355 pursuant to which one or more persons will acquire directly or indirectly stock possessing percent or more of the total combined voting power of all classes of stock of either distributing or controlled or stock possessing percent or more of the total value of all classes of stock of either distributing or controlled r cash distributed in lieu of fractional shares will be provided through a sale by distributing of aggregated fractional shares of controlled common_stock the sale of fractional shares i is merely a method of rounding off fractional share interests ii is undertaken solely for the purpose of avoiding the expense and inconvenience of issuing and transferring fractional shares and iii does not represent separately bargained for consideration the method used for handling fractional share interests is intended to limit the amount of cash received by any one shareholder to less than the value of one full share of controlled common_stock s the distribution will occur by the later of i the last day of the sixth month beginning after the date of the controlled ipo or ii the last day of the third month beginning after the receipt of a favorable private_letter_ruling regarding the distribution t the formation of distributing in step above the reincorporation of distributing in step the merger of mergerco2 into parent in step above and the conversion of parent to a limited_liability_company in step above will collectively constitute either a single reorganization within the meaning of sec_368 or two reorganizations within the meaning of sec_368 u none of the limited_liability companies formed in steps or above will elect to be taxed as an association for federal_income_tax purposes based solely on the information submitted and the representations as set forth above it is held as follows the contributions followed by the distribution will qualify as a reorganization under sec_368 parent and controlled will each be a_party_to_a_reorganization within the meaning of sec_368 parent will recognize no gain_or_loss upon the contributions to controlled in exchange for controlled common_stock and the assumption by controlled of certain liabilities sec_361 controlled will recognize no gain_or_loss upon the issuance of stock in connection with the contributions sec_1032 the basis of the assets received by controlled in the contributions will be the same as the basis of such assets in the hands of parent immediately prior to the contributions sec_362 the holding_period of the assets received by controlled in the contributions will include the period during which such assets were held by parent sec_1223 distributing will recognize no gain_or_loss on the distribution of all of the stock of controlled to its shareholders in the distribution sec_361 as provided in sec_312 proper allocation of earnings_and_profits between distributing and controlled will be made in accordance with sec_1_312-10 and sec_1_1502-33 no gain_or_loss will be recognized by and no amount will otherwise be included in the income of distributing’s shareholders on their receipt of the controlled common_stock in the distribution sec_355 sec_355 will not treat as other_property any part of the controlled stock considered issued by controlled to distributing in constructive exchange for intellectual_property interests if a distributing shareholder receives cash as the result of distributing’s sale of a fractional share of controlled common_stock on behalf of the shareholder the shareholder will recognize gain_or_loss in an amount equal to the difference between the basis of the fractional share interest and the amount of cash received if the fractional share interest is a capital_asset in the hands of the shareholder the gain_or_loss will be capital_gain or loss subject_to the provisions and limitations of subchapter_p of chapter of the code sec_1221 and sec_1222 the basis of the distributing and controlled stock in the hands of distributing’s shareholders will be the same as the basis of distributing’s stock held immediately before the distribution allocated in proportion to the fair_market_value of each in accordance with sec_1_358-2 sec_358 and b the holding_period of the controlled common_stock received by each distributing shareholder in the distribution will include the holding_period of the distributing stock held by such shareholder immediately before the distribution provided that such shareholder held the distributing stock as a capital_asset on the date of the distribution sec_1223 payments made under the tax_sharing_agreement entered into by parent distributing controlled and their affiliated subsidiaries regarding liabilities that a relate to periods or a portion of a period ending on or before the distribution and b will not become fixed and ascertainable until after the distribution will be treated as occurring immediately before the distribution if the subsidiary m stock_dividend occurs the subsidiary m stock distributed will be treated as other_property within the meaning of sec_356 and certain of the above rulings must be modified accordingly no opinion is expressed about the tax treatment of the proposed transaction under other provisions of the code and regulations or about the tax treatment of any conditions existing at the time of or effects resulting from the proposed transaction that are not specifically covered by the above rulings in particular no opinion is expressed and no ruling was requested regarding the following a the tax treatment of the transfer of intellectual_property in the contributions except as set forth in ruling above b the tax treatment of the contributions to the capital of controlled and subsidiary b described in step and the transfers and assumptions described in steps and c the tax treatment of the collective effects of steps and and d the validity of any election under sec_301_7701-3 made by any entity involved in the transaction this ruling letter is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent a copy of this letter should be attached to the federal_income_tax returns of the taxpayers involved for the taxable_year in which the transaction covered by this ruling letter is consummated the rulings contained in this letter are predicated upon facts and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by the appropriate party this office has not verified any of the materials submitted in support of the request for rulings verification of the factual information representations and other data may be required as part of the audit process in accordance with the power_of_attorney on file in this office a copy of this letter is being sent to your authorized representative sincerely yours michael j wilder senior technician reviewer branch office of associate chief_counsel corporate


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc psi 2-plr-152385-01 date date legend x a d1 year dear this responds to your letter dated date submitted on behalf of x requesting a ruling under sec_1362 of the internal_revenue_code the information submitted states that x was incorporated on d1 of year a is x’s president and majority shareholder a represents that a always intended for x to be an s_corporation the written action by sole director in lieu of organizational meeting indicates that intention additionally x filed a form_1120s u s income_tax return for an s_corporation for its year taxable_year which also indicates that intention however a timely form_2553 election by a small_business_corporation was not filed sec_1362 of the code provides that if -- a an election under sec_1362 is made for any taxable_year after the date prescribed by sec_1362 for making such election for such taxable_year or no such election is made for any taxable_year and b the secretary determines that there was reasonable_cause for the failure to timely make such election the secretary may treat such an election as timely made for such taxable_year based solely on the facts and the representations submitted we conclude that x has established reasonable_cause for failing to make a timely election to be an s_corporation for x's first taxable_year accordingly provided that x makes an election to be an s_corporation by filing a completed form_2553 with the appropriate service_center plr-152385-01 effective for its year taxable_year within days following the date of this letter then such election will be treated as timely made for x’s year taxable_year a copy of this letter should be attached to the form_2553 except as specifically set forth above no opinion is expressed concerning the federal tax consequences of the facts described above under any other provision of the code including whether x was or is a small_business_corporation under sec_1361 of the code this ruling is directed only to the taxpayer who requested it sec_6110 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 x sincerely yours j thomas hines chief branch office of the associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes


t c summary opinion united_states tax_court george n seman petitioner v commissioner of internal revenue respondent docket no 7195-o0s filed date george n seman pro_se richard a stone for respondent goldberg special_trial_judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect at the time the petition was filed the decision to be entered is not reviewable by any other court and this opinion should not be cited as authority unless otherwise indicated subseguent section references are to the internal_revenue_code in effect for the year in issue respondent determined a deficiency in petitioner’s federal - - income_tax of dollar_figure for the taxable_year after concessions by petitioner ’ the sole issue for decision is whether petitioner’s schedule c profit or loss from business net profit is subject_to self-employment_tax some of the facts have been stipulated and are so found the stipulation of facts and the attached exhibits are incorporated herein by this reference at the time of filing the petition petitioner resided in brandywine maryland petitioner wa sec_67 years old during the year in issue since and including the year in issue petitioner has been in the business of operating a dump truck as an independent_contractor in petitioner contracted his services to a company that washed and sold sand and gravel payments were made to petitioner based on the number of loads carried petitioner was also in the military for approximately years during the year in issue petitioner was retired from military service and was receiving a military pension and social_security_benefits petitioner timely filed his income_tax return for the taxable_year reporting dollar_figure in schedule c income from his business as an independent_contractor petitioner also reported taxable pensions and annuities of dollar_figure petitioner concedes that he failed to include dollar_figure of capital_gain dividends and dollar_figure of ordinary dividends received from the fidelity-egquity income fund in a notice_of_deficiency respondent determined that petitioner’s schedule c income was subject_to self-employment_tax for the tax_year petitioner contends that he should not have to pay self-employment_tax since he will not gain any additional benefit from paying self-employment_tax while he is receiving a military pension and social_security_benefits sec_1401 imposes a tax on an individual’s self- employment income self-employment_income is defined as net_earnings_from_self-employment sec_1402 the term net_earnings_from_self-employment is defined as an individual’s gross_income from a trade_or_business carried on by such individual less the deductions attributable to such trade_or_business sec_1402 petitioner reported gross_receipts of dollar_figure on his schedule c he deducted total business_expenses of dollar_figure resulting in a net profit of dollar_figure respondent does not contest the amount of petitioner’s gross_receipts or expenses the law is clear in this case there is no exception to the self-employment_tax provisions of the code that will provide petitioner relief from self-employment_tax liability although petitioner feels that it is unfair that he should pay self-employment_tax when it will not add to his individual benefit he is bound by the law as it is written by congress the power to legislate is exclusively the power of congress and - - not of this court 270_us_245 upon the basis of the record we conclude that petitioner received self-employment net_earnings and accordingly is subject_to self-employment_tax respondent is sustained on this issue reviewed and adopted as the report of the small_tax_case division decision will be entered for respondent


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 intl b04 plr-133457-05 date march ------------------------------------------- ------------------------ ------------------------------------------------------- --------------------------------------------------------- -------------------------- ------------------------ ------------------------ ------- ------- ------- ------- ------- ----------------------- legend taxpayer taxpayer x y tax advisor individual a individual b year year year year year date c dear ----------------- this replies to your representative’s letter dated date in which your representative requests on behalf of taxpayer an extension of time under sec_301_9100-3 to attach to an amended federal_income_tax return for year the documentation required under sec_1_1503-2 to rebut the presumption that the sale of x and y constituted a triggering event within the meaning of sec_1_1503-2 since the letter dated date contained errors this ruling letter revokes and replaces the date letter the information submitted for consideration is substantially as set forth below plr-133457-05 taxpayer was the parent_corporation of a group of entities filing federal consolidated income_tax returns for year through date c on date c taxpayer acquired taxpayer in a transaction that constituted a triggering event under sec_1_1503-2 in order to be excepted from recapture of dual consolidated losses taxpayer and taxpayer timely filed a request to enter into a closing_agreement pursuant to sec_1_1503-2 while preparing the request for the closing_agreement outside tax advisor discovered that certain elections and certifications relating to dual consolidated losses were not filed or were incorrectly filed a private_letter_ruling was requested under sec_301_9100-1 and sec_3 to permit taxpayer to file the applicable elections and certifications in a ruling letter dated date the service granted taxpayer 1’s request for an extension of time to file the g elections and annual certifications with respect to x and y for year year year year and year during the process of gathering information related to the request for a closing_agreement the irs inquired whether documentation to rebut the presumption that the sale of x and y in year was a triggering event according to an affidavit submitted by individual a who has worked for the predecessor of taxpayer and currently works for taxpayer upon reviewing the documentation individual a became aware that the required rebuttal information had not been submitted by individual b who works for tax advisor taxpayer was promptly advised to request relief under sec_301_9100-1 and sec_3 to file an amended_return for year attaching the required rebuttal documentation sec_301_9100-1 provides that the commissioner has discretion to grant a taxpayer a reasonable extension of time under the rules set forth in sec_301_9100-3 to make a regulatory election under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-1 provides that an election includes an application_for relief in respect of tax and defines a regulatory election as an election whose due_date is prescribed by a regulation a revenue_ruling revenue_procedure notice or announcement sec_301_9100-3 provides that requests for relief subject_to this section will be granted when the taxpayer provides the evidence including affidavits described in sec_301_9100-3 to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and the grant of relief will not prejudice the interests of the government in the present situation the requirement in sec_1_1503-2 that a taxpayer must submit contemporaneous documentation to rebut the presumption that an asset transfer was a triggering event is a regulatory election as defined in plr-133457-05 sec_301_9100-1 therefore the commissioner has discretionary authority under sec_301_9100-1 to grant taxpayer an extension of time provided that taxpayer satisfies the rules set forth in sec_301_9100-3 based on the facts and information submitted we conclude that taxpayer satisfies sec_301_9100-3 accordingly taxpayer is granted an extension of time of days from the date of this ruling letter to attach to its u s income_tax return for year the documentation required under sec_1_1503-2 to rebut the presumption that the sale of x and y in year constituted a triggering event within the meaning of sec_1_1503-2 the ruling contained in this letter is predicated 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 this request for a ruling verification of the factual information representations and other data may be required as a part of the audit process the granting of an extension of time is not a determination that taxpayer is otherwise eligible to file the rebuttal documents sec_301_9100-1 a copy of this ruling letter should be associated with the rebuttal documents this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent no ruling has been requested and none is expressed as to the application of any other section of the code or regulations to the facts presented pursuant to a power_of_attorney on file in this office a copy of this ruling letter is being furnished to your authorized representative sincerely steven a musher acting associate chief_counsel international by ___________________________________ thomas d beem senior technical reviewer branch office of associate chief_counsel international enclosure copy for purposes 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 7-plr-128840-00 date february legend a a b c d e plr-128840-00 f trust b c_corporation x d state y e corporation f dear sir or madam we received your letter dated date requesting a ruling under sec_1235 of the internal_revenue_code this letter responds to your request the information submitted and the representations made are summarized as follows on a a b c d e and f individually grantor collectively grantors formed the trust a and b are co-trustees of the trust each grantor transferred to the trust without consideration all his or its interest in certain patent applications which have been or will be filed with the united_states patent office the various patents complement each other the trust has b subtrusts each subtrust contains the patents or interests in plr-128840-00 patents assigned to the trust by the grantor who is the beneficiary of the subtrust the trustee is required to distribute to each grantor all of the net_income ie royalties minus administration_expenses of the respective grantor’s subtrust within c days after receipt of payments from the licensee the trust agreement provides that the purpose of the trust including the subtrusts is to control the exploitation of the patents and after administration_expenses and other required_payments as set forth in the trust agreement to distribute the royalties received from licensing the patents the trust is only to enter into exclusive license agreements that conform to sec_1_1235-2 of the income_tax regulations to ensure that the royalties received by the trust which are allocable to individual grantors qualify for capital_gain treatment under sec_1235 of the internal_revenue_code sec_1 of the trust agreement provides that only the grantors may contribute additional assets to the trust which assets when contributed shall be added to the respective contributing grantor’s subtrust sec_1 of the trust agreement provides that e a and others are entering into a loan agreement dated a which sets forth certain financial obligations of e to a and corporation e obligations until such time as all of the e obligations are paid in full e shall not be a trustee of the trust and shall only have a vote on x matters as one of the b grantors who will decide all matters by a vote of a majority in number sec_1 of the trust agreement provides generally that the trust is irrevocable and shall not be altered amended or revoked by any person and except on final termination or dissolution of the trust no part of the assets of the trust shall revert to any grantor at any time or under any circumstances the trust may be altered amended or revoked only by a vote as set forth in sec_1 of the trust agreement provided that any alteration or amendment which diminishes a grantor’s rights as a beneficiary in the trust must be approved in writing in advance by such grantor beneficiary sec_2 of the trust agreement provides that on termination and liquidation of the trust the intellectual_property assigned to the trust by e shall be distributed to e and the grantors of subtrusts no d - b shall receive their interests in the intellectual_property they contributed to the trust sec_4 of the trust agreement provides that the trust has been accepted by the trustee in state and shall be construed under the laws of state the federal and state courts having jurisdiction in the county of y shall be the appropriate venue for any and all actions or disputes arising out of or in connection with the interpretation or enforcement of the trust agreement plr-128840-00 in e a and b began contract negotiations with corporation on f a and b entered into an agreement with corporation the agreement included an exclusive license to make use and sell the inventions for royalties set forth in the agreement the allocation of relative values to the various patents was the result of arm’s length negotiations between the grantors themselves and between corporation and the trustees on behalf of the grantors you have requested a ruling that royalties received by each grantors who is an individual from the exclusive license with corporation to make use and sell the patents the grantor transferred to the trust will be treated by the grantor individually as capital_gain under sec_1235 sec_301_7701-1 of the procedure and administration regulations provides that the internal_revenue_code prescribes the classification of various organizations for federal tax purposes whether an organization is an entity separate from its owners for federal tax purposes is a matter of federal tax law and does not depend on whether the organization is recognized as an entity under local law sec_301_7701-1 provides that the classification of organizations that are recognized as separate entities is determined under sec_301_7701-2 sec_301_7701-3 and sec_301_7701-4 unless a provision of the internal_revenue_code such as sec_860a addressing real_estate mortgage investment conduits remics provides for special treatment of that organization sec_301_7701-2 provides that for purposes of sec_301_7701-2 and sec_301_7701-3 a business_entity is any entity recognized for federal tax purposes including an entity with a single owner that may be disregarded as an entity separate from its owner under sec_301_7701-3 that is not properly classified as a_trust under sec_301_7701-4 or otherwise subject_to special treatment under the internal_revenue_code sec_301_7701-3 provides that except as provided in sec_301_7701-3 unless the entity elects otherwise a domestic eligible_entity is a a partnership if it has two or more members or b disregarded as an entity separate from its owner if it has a single owner sec_301_7701-4 provides that in general the term trust as used in the internal_revenue_code refers to an arrangement created either by will or by an inter_vivos declaration whereby trustees take title to property for the purpose of protecting or conserving it for the beneficiaries under the ordinary rules provided in chancery or probate courts usually the beneficiaries of such a_trust do no more than accept the benefits thereof and are not the voluntary planners or creators of the trust arrangement however the beneficiaries of such a_trust may be the persons who create it and it will be recognized as a_trust under the internal_revenue_code if it was created for the purpose of protecting or conserving the trust property for beneficiaries who stand in the same relation to the trust as they would if the trust had been created by others for them plr-128840-00 generally speaking an arrangement will be treated as a_trust under the internal_revenue_code if it can be shown that the purpose of the arrangement is to vest in trustees responsibility for the protection and conservation of property for beneficiaries who cannot share in the discharge of this responsibility and therefore are not associates in a joint enterprise for the conduct of business for profit sec_1235 provides that a transfer other than by gift inheritance or devise of property consisting of all_substantial_rights_to_a_patent or an undivided_interest therein which includes a part of all such rights by any holder shall be considered the sale_or_exchange of a capital_asset held for more than year regardless of whether or not payments in consideration of the transfer are- payable periodically over a period generally coterminous with the transferee’s use of the patent or contingent on productivity use or disposition of the property transferred sec_1235 b provides that for purposes of sec_1235 the term holder means any individual whose efforts created the property sec_1_1235-2 of the income_tax regulations provides that the term holder means any individual whose efforts created the patent property and who would qualify as the original and first inventor or joint inventor within the meaning of title of the united_states_code sec_1_1235-2 provides that although a partnership cannot be a holder each member of a partnership who is an individual may qualify as a holder as to his share of a patent owned by the partnership for example if an inventor who is a member of a partnership composed solely of individuals uses partnership property in the development of his invention with the understanding that the patent when issued will become partnership property each of the inventor’s partners during this period would qualify as a holder if in this example the partnership were not composed solely of individuals nevertheless each of the individual partners’ distributive shares of income attributable to the transfer of all substantial rights to the patent or an undivided_interest therein would be considered proceeds from the sale_or_exchange of a capital_asset held for more than year based on the information submitted and the representations made we conclude that the trust is not a_trust under sec_301_7701-4 because its primary purpose is not protecting and preserving the trust property for beneficiaries who cannot share in the discharge of this responsibility but rather it is to exploit the patents jointly through the licensing agreement and after payment of certain expenses to distribute the royalties to the grantors under sec_1 of the trust agreement the grantors generally retain the right to vote on all trust matters by a majority vote further the trust is not subject plr-128840-00 to special treatment under the code therefore the trust is classified as a business_entity under sec_301_7701-2 because the trust has more than one member it will be classified as a partnership for federal tax purpose if it does not elect otherwise based on the information submitted and the representations made we also conclude that provided the trust does not elect to be treated as other than a partnership and also provided that the other requirements of sec_1235 are satisfied each of the individual partners’ distributive shares of income attributable to the transfer of all substantial rights to the patents held by the partnership or an undivided_interest in the patents held by the partnership will be considered proceeds from the sale_or_exchange of a capital_asset held for more than year 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 joseph h makurath senior technician reviewer branch office of the associate chief_counsel passthroughs and special industries sincerely yours