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 b04 plr-150554-10 date june internal_revenue_service number release date index number ------------------------------- ----------------------------- --------------------------------------- ---------------------------------------------------- ----------------------------- re ---------------------------------------- -------------- legend legend ----------------- ------------- ------- ------------------------- ---------------------------- ---------------------------- ------------------------- -------------------------------- ------------------------ ---------------------------------- --------------------- ------------------------------------------------------------------------------------------ decedent state a year spouse child child child grandchild grandchild grandchild grandchild trust --------------------------------------------------------------------------------------------------------- charity charity ----------------------------------------------------------- ----------------------------------------------------- -------------------------------- ------- ------- year year great-grandchild ------------------------- great-grandchild ------------------------------ great-grandchild ----------------------------- great-grandchild ----------------------- great-grandchild ------------------- year trust trust -------- ---------------------------------------------------------------- ------------------------ -------------------------------------------------------------------- ----------------------- plr-150554-10 trust trust trust state b ------------------------------------------------------------------- -------------------------- ----------------------------------------------------------------- ----------------------- --------------------------------------------------------------- ----------------------- -------------------- dear -------------------- this letter responds to your submission dated date and subsequent correspondence submitted by your authorized representative requesting rulings regarding the income gift and generation-skipping_transfer gst tax consequences of a proposed judicial construction of trust to permit sales of remainder interests in trust facts the facts submitted and representations made are as follows decedent a resident of state a died testate in year a date prior to article sixth of decedent's will created trust to benefit child child and his issue child and her issue and spouse under the will upon the termination of trust the trustee will distribute the corpus and undistributed_income to charity and charity trust will terminate upon the death of the last to die of spouse child child child grandchild grandchild grandchild grandchild great-grandchild great-grandchild and great-grandchild spouse child child and child are deceased child had no issue child is survived by grandchild grandchild grandchild and grandchild collectively grandchildren and eleven great-grandchildren collectively great-grandchildren which include great-grandchildren through under the will the grandchildren are the current income beneficiaries of trust this private_letter_ruling request pertains to the proposed sales of remainder interests in trust by great-grandchild great-grandchild great-grandchild great-grandchild and great-grandchild the will also contains a spendthrift_clause which provides that each beneficiary hereunder is hereby restrained from anticipating encumbering alienating or in any other manner assigning his or her interest or estate in either principal or income and is without power to do so nor shall such interest or estate be subject_to his or her liabilities or obligations nor to judgment or other legal process bankruptcy proceedings or claims of creditors or others all income and principal or either of them shall be payable and deliverable only and personally to the respective beneficiaries entitled thereto plr-150554-10 in year pursuant to a year court order and year settlement among the parties charity sold its remainder_interest in trust to the eleven great-grandchildren for purposes of this ruling after the sale great-grandchild great-grandchild great-grandchild great-grandchild and great-grandchild each owned a percent remainder_interest in trust in year pursuant to a court order great-grandchild purchased a percent remainder_interest in trust from great- grandchild and great-grandchild and great-grandchild each purchased a percent remainder_interest in trust from another of the great-grandchildren the year court order stated that the spendthrift_clause of trust does not prohibit the sales because the clause applies only to beneficial interests arising under the terms of decedent’s will and does not apply to interests acquired after decedent’s death under the year settlement great-grandchild great-grandchild great-grandchild great-grandchild and great-grandchild each propose to sell all or part of his or her remainder_interest in trust to trust trust trust trust and trust respectively trust trust trust trust and trust are trusts that were previously established by grandchild to benefit great-grandchild great-grandchild great-grandchild great-grandchild and great-grandchild respectively on the date of the proposed sales of the remainder interests in trust all of the assets of trust will be marketable_securities with the fair_market_value of the trust assets determined by prices listed on an established exchange each proposed seller intends to sell his or her remainder_interest in trust for a sales_price equal to i the fair_market_value of trust property as of the date of sale multiplied by ii the sec_7520 actuarial remainder factor then in effect and multiplied again by iii the fraction representing the portion of the entire remainder subject_to the sale the purchase_price will be paid in cash to the respective great-grandchild under the terms of trust trust trust trust and trust each great-grandchild is the primary beneficiary of his or her respective trust during his or her life subject_to certain withdrawal rights each trustee may in the trustee’s uncontrolled discretion at any time or times and for any reason pay any part of the net_income and principal of the trust to any among the primary beneficiary and the primary beneficiary’s issue whenever born any net_income not distributed will be added to the principal of the trust a primary beneficiary is granted a testamentary special power to appoint the trust property to any persons in a specified class trust trust trust trust and trust will terminate unless sooner terminated upon the first to occur of the death of the primary beneficiary and all of his or her issue whenever born and the expiration of years of certain lives in being upon termination the trustee shall distribute the remaining principal of the trust to the then living issue of the primary beneficiary by right of representation if there are no living issue of the primary beneficiary remaining trust principal is distributable to the living issue of grandchild by right of representation plr-150554-10 and in default of such issue to the heirs of grandchild as determined under the laws of intestacy of state b it is represented that no additions constructive or otherwise have been made to trust subsequent to date and that other than the earlier court order and settlement_trust has not been amended or otherwise altered in any manner since date the trustee of trust petitioned the appropriate court for an order that construes the spendthrift provision of trust to permit the proposed sales the court’s order states that the spendthrift_clause of trust does not prohibit the proposed sales of the purchased remainder interests because the spendthrift_clause does not apply to the interests acquired after decedent’s death under the year settlement but only to beneficial interests arising under the terms of decedent’s will itself the trustee has requested the following rulings the court construction of the spendthrift_clause and the provisions of trust to allow the proposed sales of remainder interests in trust will not affect the exempt status of trust for gst tax purposes the proposed sales of remainder interests in trust will not affect the exempt status of trust for gst tax purposes the proposed sales of remainder interests in trust will not result in any taxable_gifts for federal gift_tax purposes as to the buyers or sellers of such interests the court approval of the proposed sales of remainder interests in trust will not result in the recognition of gain_or_loss to trust or any trust beneficiaries a gain_or_loss for each of the proposed sales will equal the difference between the amount_realized for the remainder_interest and the adjusted_basis of the remainder_interest law and analysis ruling sec_1 sec_2601 of the internal_revenue_code imposes a tax on each generation-skipping_transfer which includes under sec_2611 a taxable_distribution a taxable_termination and a direct_skip sec_2631 provides that for purposes of determining the inclusion_ratio every individual shall be allowed a gst_exemption amount which may be allocated by such plr-150554-10 individual or his executor to any property with respect to which such individual is the transferor sec_2631 provides that any allocation under sec_2631 once made shall be irrevocable under sec_2652 for purposes of chapter the term transferor means the decedent in the case of any property subject_to tax imposed by chapter and the donor in the case of any property subject_to tax imposed by chapter the individual with respect to whom property was most recently subject_to federal estate or gift_tax is the transferor of that property for purposes of chapter sec_26_2652-1 of the generation-skipping_transfer_tax regulations thus an individual may be a transferor even though there is no transfer of property under local law at the time the federal estate or gift_tax applies sec_26_2652-1 provides that for purposes of chapter a transfer is subject_to federal gift_tax if a gift_tax is imposed under sec_2501 without regard to exemptions exclusions deductions and credits under a of the tax_reform_act_of_1986 act the generation-skipping_transfer_tax is generally applicable to generation-skipping transfers made after date under b a of the act and sec_26_2601-1 the tax does not apply to any generation-skipping_transfer from a_trust if the trust was irrevocable on date and no addition actual or constructive was made to the trust after that date under sec_26_2601-1 any trust in existence on date will be considered irrevocable unless the settlor had a power that would have caused inclusion of the trust in his or her gross_estate under sec_2038 or sec_2042 if the settlor had died on date sec_26_2601-1 provides rules for determining when a modification judicial construction settlement agreement or trustee action with respect to a_trust that is exempt from the generation-skipping_transfer_tax will not cause the trust to lose its exempt status sec_26_2601-1 provides that a modification of the governing instrument of an exempt trust including a trustee distribution settlement or construction that does not satisfy paragraph b i a b or c of this section by judicial reformation or nonjudicial reformation that is valid under applicable state law will not cause an exempt trust to be subject_to the provisions of chapter if the modification does not shift a beneficial_interest in the trust to any beneficiary who occupies a lower generation as defined in sec_2651 than the person or persons who held the beneficial_interest prior to the modification and the modification does not extend the time for vesting of any beneficial_interest in the trust beyond the period provided for in the original trust a modification of an exempt trust will result in a shift in beneficial_interest to a lower generation beneficiary if the modification can result in either an increase in the amount of a gst transfer or the creation of a new gst transfer plr-150554-10 in the present case trust is not subject_to gst tax because it became irrevocable before date it is represented that no additions constructive or otherwise have been made to trust subsequent to that date the court construction of the spendthrift_clause and the provisions of trust to allow the proposed sales of remainder interests in trust will not shift any beneficial interests in trust to a lower generation and will not extend the time for vesting of any beneficial_interest in trust beyond the period provided for in the original trust accordingly based upon the facts submitted and the representations made and pursuant to sec_26_2601-1 we conclude that the court construction of the spendthrift_clause and the provisions of trust to allow the proposed sales of remainder interests in trust will not affect the exempt status of trust for gst tax purposes further the proposed sales of remainder interests in trust will not affect the exempt status of trust for gst tax purposes we note that under sec_2652 grandchild is the transferor of trust trust trust trust and trust for gst tax purposes ruling sec_2501 imposes a tax on the transfer of property by gift by an individual 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_2512 provides that if a gift is made in property the value thereof at the date of the gift shall be considered the amount_of_the_gift sec_2512 provides that where property is transferred for less than an adequate_consideration in money or money’s worth then the amount by which the value of the property exceeded the value of the consideration is deemed a gift under sec_25_2512-5 of the gift_tax regulations in general the fair_market_value of remainders transferred by gift is the present_value of the remainders determined by use of the appropriate sec_7520 actuarial factor sec_7520 provides that the value of an annuity any interest for life or a term of years or any remainder_interest or reversionary_interest is determined under tables prescribed by the secretary and by using an interest rate rounded to the nearest two-tenths of one percent equal to percent of the applicable federal midterm rate for the month in which the valuation_date falls in the proposed sales of remainder interests in trust the sales_price of the remainder interests will equal the fair_market_value of trust assets on the date of sale multiplied by the sec_7520 actuarial remainder factor then in effect and then multiplied plr-150554-10 by the fraction representing that portion of the remainder_interest subject_to the sale the sales_price will be paid in cash based upon the facts submitted and the representations made we conclude that the proposed sales of remainder interests in trust will not result in any taxable_gifts for federal gift_tax purposes as to the buyers or sellers of such interests ruling sec_61 provides that gross_income means all income from whatever source derived sec_61 provides that gross_income includes gains derived from dealings in property sec_1001 provides that the gain from the sale_or_other_disposition of property shall be the excess of the amount_realized therefrom over the adjusted_basis provided in sec_1011 for determining gain and the loss shall be the excess of the adjusted_basis provided in such section for determining loss over the amount_realized sec_1001 provides that the amount_realized from the sale_or_other_disposition of property shall be the sum of any money received plus the fair_market_value of the property other than money received sec_1001 provides that except as otherwise provided in subtitle a the entire amount of the gain_or_loss determined under sec_1001 on the sale_or_exchange of property shall be recognized sec_1_1001-1 of the income_tax regulations provides that the gain_or_loss realized from the conversion of property into cash or from the exchange of property for other_property differing materially either in_kind or in extent is treated as income or as loss sustained an exchange of property results in the realization of gain_or_loss under sec_1001 if the properties are materially different 499_us_554 in cottage savings the supreme court held that mortgage loans made to different obligors and secured_by different homes embody distinct legal entitlements and that the taxpayer realized losses when it exchanged participation interests in different loans id in defining what constitutes a material difference for purposes of sec_1001 the court stated that properties are different in the sense that is material to the code so long as their respective possessors enjoy legal entitlements that are different in_kind or extent id pincite the issue for purposes of this ruling is whether great-grandchild great-grandchild great-grandchild great-grandchild and great-grandchild would have the same property interests and legal entitlements as a result of the court’s determination that the spendthrift_clause does not prohibit the proposed sales of the remainder interests it is represented that the court has entered a preliminary order determining that the plr-150554-10 spendthrift_clause does not prohibit the proposed sales the court’s preliminary order becomes effective only upon the issuance of the requested letter_ruling accordingly because the court’s construction of the spendthrift_clause does not change the property interests and legal entitlements of the remaindermen the court’s construction of the spendthrift_clause does not give rise to a realization of income to the trust or any of the beneficiaries under sec_61 or sec_1001 ruling sec_1001 sec_1001 and sec_1001 as set forth above apply to this ruling_request as well additionally sec_1001 provides that in determining gain_or_loss from the sale_or_other_disposition of a term_interest_in_property that portion of the adjusted_basis of such interest which is determined pursuant to sec_1014 sec_1015 or sec_1041 to the extent that such adjusted_basis is a portion of the entire adjusted_basis of the property shall be disregarded the term term_interest_in_property means a life interest in property an interest in property for a term of years or an income_interest in a_trust sec_1_1001-1 provides that the term term_interest_in_property does not refer to remainder or reversionary interests in the property itself or other interests in property which will ripen into ownership of the entire property upon termination or failure of a preceding term_interest sec_1012 generally provides that the basis_of_property shall be the cost of the property sec_1_1012-1 defines cost to be the amount_paid for the property in cash or other_property in the present case great-grandchild great-grandchild great-grandchild great-grandchild and great-grandchild purchased their initial remainder interests in trust from an unrelated third party charity in addition great-grandchild great-grandchild and great-grandchild purchased a portion of their respective remainder interests in trust from other relatives consequently under sec_1012 the basis of each great-grandchild great-grandchild great-grandchild great-grandchild and great-grandchild respective remainder_interest in trust is the amount that each paid for the property accordingly we conclude that each seller will realize gain_or_loss from the sale of their remainder_interest in an amount equal to the difference between his or her amount_realized over the cost that the seller incurred to acquire his or her remainder_interest pursuant to sec_1001 any gain realized must be recognized any loss realized is subject_to disallowance under sec_267 we express no opinion on whether the proposed sales are authorized under trust or applicable state laws plr-150554-10 the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination except as specifically ruled herein we express or imply no opinion on the federal tax consequences of the transaction under the cited provisions or under any other provisions of the code this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative a copy of this letter must be attached to any income_tax return to which it is relevant alternatively taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of the letter_ruling sincerely _____________________________ lorraine e gardner senior counsel branch passthroughs special industries enclosures copy for sec_6110 purposes cc


t c memo united_states tax_court kathleen a carr petitioner v commissioner of internal revenue respondent docket no filed date kathleen a carr pro_se david r jojola for respondent memorandum opinion nameroff special_trial_judge this case was heard pursuant to the provisions of sec_7443a and rule sec_180 sec_181 and sec_182 respondent determined a deficiency in petitioner's federal_income_tax in the amount of dollar_figure unless otherwise indicated all section references are to the internal_revenue_code in effect for the year at issue all rule references are to the tax_court rules_of_practice and procedure the sole issue for decision is whether various schedule c expenses were ordinary and necessary in carrying on petitioner's business as a personal manager some of the facts have been stipulated and they are so found the stipulation of facts the stipulation of settled issues and the attached exhibits are incorporated herein by this reference at the time of the filing of the petition petitioner resided in los angeles california when she wa sec_3 years old petitioner became involved in the entertainment industry as an actress with the broadway touring company production of the sound of music in petitioner became a talent agent for emerald artists agency emerald in petitioner received a subagent franchise from the screen actors guild inc which licensed petitioner as a talent agent and allowed her to work under her own name rather than emerald's name petitioner was a successful talent agent a talent agent is a person or corporation who engages in the occupation of procuring offering promising or attempting to procure employment or engagements for artists in addition a talent agent may counsel artists in the development of their professional careers cal lab code sec a west to procure employment for artists the talent agent must obtain a license from the california labor commissioner cal lab code secs and west for this purpose the term artist includes actors actresses radio artists musical artists directors writers cinematographers composers lyricists arrangers models or others rendering professional services in radio movies theater or television cal lab code sec b west at the end of petitioner decided to leave emerald to start her own agency at the beginning of petitioner left emerald and started k c co through k c co petitioner functioned as a personal manager for various artists when she left emerald petitioner took six artists with her and began looking for other artists to represent by the end of petitioner had developed her own stable of artists including artists who had signed contractual agreements with k c co in these contracts k c co agreed to advise counsel and direct the development and enhancement of the artists' careers in exchange for compensation of percent of the artists' gross earnings several artists did not sign contracts with k c co because they were newly referred to petitioner and their relationship was on a trial basis part of petitioner's role as personal manager was to promote the careers of her artists to promote her artists petitioner unlike a talent agent a personal manager is not covered by the talent agencies act cal lab code secs 1700-dollar_figure west or any other statutory scheme and is not required to obtain a license the primary function of a personal manager is that of advertising counseling directing and coordinating the artist in the development of the artist's career this function can include personal and business matters of the artist waisbren v peppercorn prods inc cal app 4th cal rptr 2d personal managers may find themselves in situations where they would like to procure employment for their artists however to do so the personal manager must become a licensed talent agent or work in conjunction with a licensed talent agent cal lab code secs see waisbren v peppercorn prods inc supra used showcase sec_4 to demonstrate their talents petitioner used the showcases as a method to familiarize entertainment industry professionals with the names faces and talents of petitioner's artists so that they would be invited to interviews and ultimately obtain a job in the entertainment industry numerous casting people directors and producers who were involved in the entertainment industry were invited to the showcases so that they could see the work of petitioner's clients petitioner put together a showcase in date at a small theater in north hollywood the theater space was free and held people the theater was filled by directors producers and casting people who were invited by petitioner petitioner also organized a showcase at the coronet theatre in la cienega in date the coronet theatre space was free because petitioner knew someone who let her use the space the person theater was filled with invited entertainment industry people some of petitioner's artists obtained interviews or work after this showcase in date petitioner and her artists were invited by steven wright productions to present a showcase at the convention center in st louis missouri petitioner's artists were paid as we understand it a showcase is a production of short skits excerpts from theatrical works musical numbers or other forms of entertainment which are performed by actors and actresses dollar_figure for the showcase in date petitioner organized a country and western showcase at the court theatre in la cienega the theater space was free the theater was filled with about entertainment industry people some of petitioner's artists obtained interviews and employment after this showcase petitioner incurred numerous expenses in connection with these showcases these expenses included advertising and publicity photographs of the showcase which were mailed to producers directors and casting agents to invite them to attend the showcases in addition petitioner rented a tape recorder and hired a musician a choreographer and a musical director to work on the showcases petitioner also incurred costs for props and sets for the showcases further petitioner incurred dry cleaning expenses in connection with borrowed costumes that were worn by the artists during the showcases petitioner incurred other expenses in connection with her work as a personal manager specifically petitioner incurred expenses for resumes that contained background information on her artists these resumes were sent to entertainment industry professionals to promote her artists in addition petitioner incurred expenses for resumes for k c co that were used to advertise her services and to attract more artists to her agency in addition petitioner incurred expenses for reference books and other materials that she used to find out about the latest trends in the entertainment industry and to obtain information about directors producers and casting people in petitioner received wages from medcom billing services of dollar_figure and gross_income from k c co of dollar_figure on the schedule c petitioner claimed expenses related to k c co which totaled dollar_figure in the notice_of_deficiency respondent disallowed all or part of the expenses claimed as follows claimed expense advertising dollar_figure union dues dollar_figure education dollar_figure photos dollar_figure resumes dollar_figure instrument rental dollar_figure props sets dollar_figure education materials dollar_figure airline tickets dry cleaning car and truck allowed -0- dollar_figure -0- -0- -0- -0- -0- -0- dollar_figure big_number -0- dollar_figure dollar_figure big_number disallowed dollar_figure big_number big_number big_number big_number in the stipulation of settled issues and the stipulation of facts the parties stipulated that petitioner was entitled to deduct a total of dollar_figure for schedule c car and truck expenses at trial respondent's counsel stipulated that petitioner was entitled to deduct an additional dollar_figure for union dues and dollar_figure for airline tickets therefore these amounts are no longer in dispute we note that petitioner claimed a schedule c deduction continued petitioner has substantiated the amounts in dispute the issue for decision is whether these expenses are ordinary and necessary preliminary matters in the stipulation of facts respondent reserved objections to several joint exhibits specifically respondent objected on the basis of relevancy to joint exhibit 4-d a subagent franchise agreement joint exhibit 5-e a directory from the conference of personal managers and joint exhibit 10-j a breakdown of available jobs in the entertainment industry in addition respondent objected on the basis of hearsay to joint exhibit 7-g excerpts from a book entitled managers' entertainers' agents book joint exhibit 8-h excerpts from a book entitled how to manage talent and joint exhibit 9-i an excerpt entitled but what does a personal manager do from the national conference of personal managers proceedings in this court are conducted in accordance with the federal rules of evidence sec_7453 rule relevant evidence means evidence having any tendency to make the existence of any fact that is of consequence to the determination of the action more or less probable than it would be without the continued for repairs and maintenance of dollar_figure which was neither allowed nor disallowed by the notice_of_deficiency and was not mentioned in the stipulation of facts of stipulation of settled issues thus we will assume such amount is not in dispute evidence fed r evid joint exhibits 4-d and 5-e support petitioner's testimony that she was a licensed talent agent and that she offered her services as a talent agent these facts are relevant and we overrule respondent's objection with respect to joint exhibit 10-j which is an example of the service petitioner used to find acting parts for her artists we sustain respondent's objection the amount claimed by petitioner for this service was allowed in the notice_of_deficiency and is not in dispute therefore this exhibit is not relevant with respect to respondent's hearsay objections we sustain them the federal rules of evidence define hearsay as a statement other than one made by the declarant while testifying at the trial or hearing offered in evidence to prove the truth of the matter asserted fed r evid c normally hearsay is excluded from evidence unless an exception to the hearsay rule applies 93_tc_529 joint exhibits 7-g 8-h and 9-i are excerpts from reference books and articles which were offered by petitioner to show that her expenses were ordinary and necessary for personal managers thus these exhibits are hearsay an exception to the hearsay rule allows the introduction of learned treatises in evidence when they have been established as reliable authority by an expert witness at trial and have been either relied upon by an expert witness on direct examination or called to his attention on cross-examination fed r evid the certain implication from this exception is that statements from treatises that have not been established as reliable authority were not relied on by an expert at trial or were not called to an expert's attention at trial are not admissible snyder v commissioner supra the excerpts in issue were neither relied on nor referred to by an expert witness at trial they were not established as reliable authority by any expert or by judicial_notice thus these excerpts are not admissible under the exception to the hearsay rule for learned treatises none of the other exceptions to the hearsay rule applies in this case accordingly we sustain respondent's objections to these exhibits discussion deductions are strictly a matter of legislative grace and petitioner bears the burden of proving that she is entitled to any deductions claimed rule a 292_us_435 sec_162 provides for the deduction of all ordinary and necessary expenses paid_or_incurred during the taxable_year in carrying on any trade_or_business the terms ordinary and necessary mean that the expenditure must be normal usual and customary as well as appropriate and helpful to the operation of the business 383_us_687 320_us_467 308_us_488 this usually requires that the expenditure bear a reasonably direct relationship to the taxpayer's trade_or_business commissioner v heininger supra pincite deputy v du pont supra pincite 56_tc_936 affd without published opinion 456_f2d_1335 2d cir 50_tc_503 sec_1_162-1 income_tax regs the issue of whether the expenses are ordinary and necessary is a question of fact commissioner v heininger supra pincite 72_tc_433 because the entertainment industry is visual publicity is extremely important as a talent manager petitioner guided the careers of at least artists to get these artists work and generate income for her business petitioner organized advertised and put on showcases for directors producers and casting people involved in the entertainment industry to demonstrate the talents of her artists because her artists were lesser known individuals petitioner put together several showcases in an effort to get her artists maximum exposure showcases are a common method used by talent managers to get their clients work in the entertainment industry all of the expenses at issue were incurred in connection with these showcases or petitioner's business as a talent manager we find that the expenses_incurred by petitioner both were ordinary and necessary within the meaning of sec_162 and arose out of the conduct of petitioner's business in reaching our decision we have relied on the testimony of petitioner whom we had an opportunity to observe at trial we found her testimony to be candid and credible as well as supported by the record accordingly petitioner is entitled to a deduction for the expenses at issue to reflect the foregoing resolution of the issues in this case decision will be entered under rule


internal_revenue_service department of the treasury number release date index number u i l no washington dc person to contact telephone number refer reply to cc psi b3 plr-111232-00 date date legend company state shareholders a dear this letter responds to a letter dated date and subsequent correspondence requesting a ruling on behalf of company under sec_1362 of the internal_revenue_code the information submitted discloses that company was incorporated on a in state company has two shareholders shareholders it is represented that company has intended to be an s_corporation since its incorporation however company discovered that its s election had not been timely filed company requests a ruling that its sec_1362 election will be treated as timely made for its taxable_year that begins on a sec_1362 provides that a small_business_corporation may elect to be an s_corporation sec_1362 explains when an s election will be effective generally if an s election is made within the first two and one half months of a corporation's taxable_year then that corporation will be treated as an s_corporation for the year in which the election is made sec_1362 provides that if an s election is made after the first two and one half months of a corporation's taxable_year then that corporation will not be treated as an s_corporation until the taxable_year following the year in which the s plr-111232-00 election is made sec_1362 provides that if no sec_1362 election is made for any taxable_year and the secretary determines that there was reasonable_cause for the failure to timely make such election then the secretary may treat such an election as timely made for such taxable_year and sec_1362 shall not apply applying the relevant law to the facts submitted and representations made we rule that company's sec_1362 election will be treated as timely made for its taxable_year that begins on a however this ruling is contingent on company filing form_2553 election by a small_business_corporation with an effective date of a with the appropriate service_center within days from the date of this ruling a copy of this letter should be attached to the form_2553 the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination except as specifically set forth above we express no opinion concerning the federal tax consequences of the foregoing facts specifically we express no opinion on whether company otherwise qualifies as an s_corporation pursuant to a power_of_attorney on file with this office a copy of this letter is being sent to the taxpayer’s authorized representative this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent sincerely yours robert honigman assistant to the chief branch office of the associate chief_counsel passthroughs and special industries enclosure copy for sec_6110 purposes


internal_revenue_service number release date index numbers department of the treasury washington dc -------------------------------------------- -------------------------------------- ------------------------------------- attention ------------------------ ------------------------------------------------------------ -- person to contact ---------------- id no ------------ telephone number --------------------- refer reply to cc ita br05 - plr-103676-10 date date legend x taxpayer ------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------- ein ---------------- y --------------------------------------- amounts m n o p q r s t ------- ------- ------- ----- ------- ------- ------- ----- ----- date -------------------------- dear ------------ this is in response to your authorized representatives’ letters and submissions of date in which they requested on your behalf rulings under sec_117 of the internal_revenue_code_of_1986 code regarding the proper federal_income_tax treatment of certain tuition reduction benefits provided by you x sometimes referred to herein as the taxpayer under x’s tuition fully described below we are pleased to address your concerns reduction program the program more facts the information submitted indicates that x is an educational_organization described in sec_170 of the code providing both undergraduate and graduate-level education the purpose of x’s tuition reduction program is to assist faculty and staff with the cost of providing undergraduate college education for their children the program as amended consists of two component plans plan a a tuition exemption program for children of employees and plan b a tuition scholarship program plan a is available with respect to the eligible children of all full-time benefits-eligible employees of x which includes faculty and staff employees provided the eligible children are selected through normal admissions processes to attend x and maintain standards of scholarship and conduct considered satisfactory to x’s deans plan a provides a benefit of of x’s tuition plan b is available to tenured faculty members associate professors assistant professors members of x’s administrative council and other administrative officers certain employees of y and certain upper-level management employees plan b provides tuition reduction benefits with respect to studies of eligible children outside of x at another sec_170 higher-educational institution the benefit is equal to of the actual tuition and academic fees charged by the other school not to exceed of x’s current tuition certain other benefit limitations apply under plan b as of date x including affiliates controlled by x employed approximately m employees excluding those who have failed to complete a year_of_service n of these are highly compensated nonexcludable employees of which o are eligible to participate in the program all o program-eligible highly compensated employees are eligible to participate in plan a p are eligible to participate in plan b x employs approximately q non-highly compensated nonexcludable employees nhces r of these are eligible to participate in the program s in plan a and t in plan b law and analysis generally amounts paid to or for the benefit of employees are presumptively compensatory in nature and ordinarily includible in gross_income as wages sec_117 of the internal_revenue_code however provides a special rule in the case of a aqualified tuition reduction sec_117 provides that gross_income shall not include any aqualified tuition reduction sec_117 defines a aqualified tuition reduction as the amount of any reduction in tuition provided to any employee of a sec_170 educational_organization for the education below the graduate level at such organization or another organization described in sec_170 of a such employee or b any person treated as an employee or whose use is treated as an employee_use under the rules of sec_132 sec_132 refers generally to spouses and dependent_children of employees sec_170 describes an educational_organization as one which normally maintains a regular faculty and curriculum and normally has a regular enrolled body of pupils or students in attendance at the place where its education activities are regularly carried on an entity described in sec_170 or of the code or an institution that is operated as an activity or function of such an entity may qualify as an aeducational organization described in sec_170 for purposes of sec_117 except for the case of certain graduate teaching and research assistants the exclusion from income provided by sec_117 is limited to education abelow the graduate level sec_117 provides an exception for individuals who are graduate students at the employing institution and who are engaged in providing teaching or research activities for that educational_institution sec_117 of the code provides that the exclusion from income of a qualified_tuition_reduction will apply to highly compensated employees only if such reduction is available on substantially the same terms to each member of a group_of_employees which is defined under a reasonable classification set up by the employer which does not discriminate in favor of highly compensated employees within the meaning of sec_414 sec_1_410_b_-4 of the income_tax regulations generally provides the test for determining whether a classification is reasonable and nondiscriminatory that test has two parts sec_1_410_b_-4 requiring that a classification established by an employer for its employees be reasonable and sec_1_410_b_-4 requiring that a plan pass an objective test to assure that the reasonable classification is nondiscriminatory the objective test has a safe_harbor an unsafe harbor and a facts_and_circumstances_test for situations falling between the safe and unsafe harbors the test applies with respect to the minimum_coverage_rules of code sec_410 and may be incorporated into code sec_117 taking into account the differences between a qualified_retirement_plan and a qualified_tuition_reduction plan nonetheless although sec_117 prohibits discrimination in favor of highly compensated employees described in sec_414 there is no specific language in sec_117 mandating that the same coverage tests applicable under sec_410 are also applicable under sec_117 thus the determination of whether a tuition reduction plan in fact discriminates in favor of highly compensated employees for purposes of sec_117 is made based upon an analysis of all relevant facts and circumstances sec_1_410_b_-4 of the regulations provides that a classification will be reasonable if based on all of the facts and circumstances the classification is reasonable and established under objective business criteria that identify the category of employees who benefit under the plan reasonable classifications include specified job categories nature of compensation ie salaried or hourly geographic location and other similar bona_fide business criteria the house ways_and_means_committee report on the deficit_reduction_act_of_1984 h_r rep no part 98th cong 2d sess provides additional examples of reasonable classifications the report explains that an employer could establish a classification based on such factors as seniority full-time vs part-time employment or job description provided that the classification is nondiscriminatory in the instant case plan a satisfies the reasonable classification of employees test of sec_117 pending the adoption of temporary or final regulations providing differently plan b will also be treated as satisfying the reasonable classification of employees test of that section plan a satisfies the safe_harbor test and does not discriminate in favor of highly compensated employees plan b falls below the unsafe harbor percentages thus whether that plan is discriminatory for purposes of sec_117 is determined based on all relevant facts and circumstances based on the consideration that x maintains as well as a part of its overall tuition reduction benefits program plan a which plan is available to a much larger cross-section of its workforce including significant number of non-highly compensated employees and the fact that the different eligibility criteria for plans a and b appear to be grounded in bona_fide business and educational considerations not related to compensation we conclude that plan b will be treated as not discriminating in favor of highly compensated employees thus x's tuition reduction program consisting of plans a and b satisfies the prohibition against discrimination in favor of highly compensated employees as described in sec_117 of the code conclusion based on the information provided and representations furnished we have determined that the described tuition reduction benefits provided under the taxpayer s tuition reduction program consisting of both plan a and plan b to employees within the meaning of sec_117 of the code of the taxpayer for the education below the graduate level of such persons at x or at any other educational_institution described in sec_170 are excludable from the gross incomes of such employees under sec_117 of the internal_revenue_code as aqualified tuition reductions accordingly the value of the described tuition reduction benefits granted under x's tuition reduction program to employees within the meaning of sec_117 of the code of the taxpayer for the education below the graduate level of such individuals does not constitute wages for purposes of sec_3401 additionally such amounts are not subject_to sec_3402 relating to withholding for income taxes at source sec_3102 relating to withholding under the federal_insurance_contribution_act fica or sec_3301 relating to the federal_unemployment_tax_act futa x is not required to file forms w-2 or any returns of information under sec_6041 with respect to such payments or remissions this letter_ruling is based on the facts and representations provided by the taxpayer and its authorized representatives and is limited to the matters specifically addressed no opinion is expressed as to the tax treatment of the transactions considered herein under the provisions of any other sections of the code or regulations which may be applicable thereto or the tax treatment of any conditions existing at the time of or effects resulting from such transactions which are not specifically addressed herein temporary or final regulations pertaining to one or more of the issues addressed in this ruling have not yet been adopted therefore this ruling may be modified or revoked by adoption of final regulations to the extent the regulations are inconsistent with any conclusions in this ruling see section dollar_figure of revproc_2010_1 2010_1_irb_1 pincite however when the criteria in section dollar_figure of revproc_2010_1 are satisfied a ruling is not revoked or modified retroactively except in rare or unusual circumstances because it could help resolve federal tax issues a copy of this letter_ruling should be maintained with x's permanent records pursuant to a power_of_attorney currently on file with this office copies of this letter are being sent to x's designated authorized representatives this ruling is directed only to the taxpayer who requested it sec_6110 of the internal_revenue_code provides that it may not be used or cited as precedent sincerely yours s william a jackson ___________________________ william a jackson chief branch office of associate chief_counsel income_tax and accounting enclosures copy of this letter copy for sec_6110 purposes


internal_revenue_service number release date index number 2032a ------------------------------------------------------------ --------------------- -------------------------------- ----------------------------- ------------------------ re ---------------------------------------- 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 plr-102524-16 date date legend decedent date x accountant date date --------------------------- ---------------------- ------------------------------ ----------------------- --------------------- ------------------- dear -------------------- this letter responds to your authorized representative’s letter of date and subsequent correspondence requesting an extension of time pursuant to sec_301_9100-3 of the procedure and administration regulations to elect to specially value qualified_real_property under sec_2032a of the internal_revenue_code the facts and representations submitted are as follows decedent died on date decedent’s estate included farmland x was appointed as personal representative of decedent’s estate x retained accountant to prepare and timely file decedent’s form_706 united_states estate and generation-skipping_transfer_tax return accountant did not advise x to make an election to specially value the farmland under sec_2032a on date x timely filed form_706 however x failed to make the sec_2032a election after filing decedent’s form_706 accountant discovered the failure to advise x of the sec_2032a election and to make the election on decedent’s form_706 on date accountant filed a supplemental form_706 and elected to specially value the farmland plr-102524-16 under sec_2032a the estate now requests an extension of time to date to make the sec_2032a election sec_2001 imposes a tax on the transfer of the taxable_estate of every decedent who is a citizen or resident_of_the_united_states sec_2032a provides generally that if the decedent was at the time of his death a citizen or resident_of_the_united_states and the executor elects the application of sec_2032a and files the agreement referred to in sec_2032a then for purposes of chapter the value of qualified_real_property shall be its value for the use under which it qualifies under sec_2032a as qualified_real_property sec_2032a provides that the election under sec_2032a shall be made on the return of tax imposed by sec_2001 such election shall be made in such manner as the secretary shall by regulations prescribe such an election once made shall be irrevocable under sec_301_9100-1 the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than months except in the case of a taxpayer who is abroad under all subtitles of the code except subtitles e g h and i sec_301_9100-3 provides the standards used to determine whether to grant an extension of time to make an election whose due_date is prescribed by a regulation and not expressly provided by statute requests for relief under sec_301_9100-3 will be granted when the taxpayer provides the evidence 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 sec_301_9100-3 provides that a taxpayer is deemed to have acted reasonably and in good_faith if the taxpayer reasonably relied on a qualified_tax professional including a tax professional employed by the taxpayer and the tax professional failed to make or advise the taxpayer to make the election based upon the facts submitted and the representations made we conclude that the standards of sec_301_9100-1 and sec_301_9100-3 have been satisfied accordingly an extension of time to date is granted to elect to specially value the farmland under sec_2032a except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter specifically we express or imply no opinion on whether the estate qualifies for special_use_valuation under sec_2032a plr-102524-16 this ruling is directed only to the taxpayer requesting 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 your authorized representative the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination sincerely associate chief_counsel passthroughs special industries by lorraine e gardner lorraine e gardner senior counsel branch passthroughs special industries enclosures copy for sec_6110 purposes copy of this letter


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 ------------------------ telephone number ---------------------- refer reply to cc intl b05 plr-106580-15 date august legend a ------------------------ cfc ----------------------------- cfc ------------------------------------------ country a -------------- parent ---------------- us sub ------------------------------------------------ corp a -------------------------------------------------------- corp b --------------------------------------------------------- x ----------- y ----------- z ----------- regulator -------------------------------------------------------- day x ------------ dear ---------------- in a letter dated a you requested a ruling allowing cfc and cfc collectively the cfcs to use certain foreign statement insurance reserves in computing foreign_personal_holding_company_income under sec_954 on the grounds that these insurance reserves are an appropriate means of measuring income within the meaning of sec_954 specifically you requested permission to use the underwriting reserves loss_reserves and policyholders’ dividend reserves for life_insurance and annuity_contracts reported by cfcs on their country a annual report and the underwriting reserves loss_reserves and associated asset bases plr-106580-15 attributable to cfcs’ separate account-type contracts as reported on the country a annual report the rulings given in this letter are based on facts and representations submitted by parent and accompanied by a statement executed under penalty of perjury by an appropriate party this office has not verified any of the materials submitted in support of the request for rulings verification of the information representations and other data may be required as part of the audit process facts parent is a publicly-traded domestic_corporation that is engaged through its subsidiaries in various lines of business which primarily include life_insurance accident_and_health_insurance credit insurance annuities endowment and retirement and savings products parent directly and indirectly owns all the stock of us sub us sub owns all the stock of corp a corp a owns all the stock of corp b corp b owns approximately x of cfc us sub owns approximately y of cfc corp b also owns approximately z of cfc parent represents that cfcs are controlled_foreign_corporations as defined in sec_957 cfcs are both engaged in the life_insurance business in country a cfc 1’s principal products are traditional life both term_insurance and permanent insurance variable whole life that employ separate_account funds variable universal whole life fixed annuities and retirement insurance for both companies and individuals cfc 2’s principal products are individual and group voluntary annuities and pension annuities country a regulates any insurance_business conducted in country a through its insurance laws and regulations regulator developed and is responsible for enforcing insurance laws and regulations in country a an insurance_company must obtain a license from the regulator to conduct an insurance_business in country a cfcs are licensed by the regulator to sell life_insurance and annuity_contracts to persons in country a and are subject_to regulation by regulator as life_insurance_companies cfcs do not carry on business other than life_insurance and certain activities that are incidental to the life_insurance business each of the cfcs derives greater than percent of its aggregate net written premiums from the issuance of life_insurance and annuity_contracts covering applicable_home_country_risks no policyholder insured annuitant or beneficiary to a life_insurance or annuity_contract that the cfcs issue is a related_person as defined in sec_954 parent has represented that cfcs would be subject_to tax under subchapter_l if they were domestic corporations the cfcs also issue separate account-type variable life_insurance and annuity_contracts which are separately identified and maintained and are supported by separately identifiable pools of assets the assets in the pools are marked to market for local regulatory reporting purposes and the associated reserve follows movements in plr-106580-15 the value of the assets with very limited exceptions such as surrender charges for country a tax and insurance regulatory purposes the cfcs are required to make asset basis and reserve-related adjustments to its separate_accounts including premiums received but not yet allocated to the separate_accounts as required by country a’s insurance laws and regulations cfcs file annual reports and financial statements with the regulator the annual reports are audited by an external accounting firm in addition to the companies’ internal auditor the accounting_records of cfcs that form the basis for preparing the annual reports are subject_to inspection by the regulator at any time the annual reports are made available to the public in addition to their use for regulatory purposes the annual reports are used for financial purposes such as country a credit rating by lenders and the public day x is the official year end for life_insurance_companies operating in country a to comply with country a’s insurance laws cfcs must establish and maintain reserves for their obligations to holders of their life_insurance and annuity_contracts and must report the amount of such reserves on the country a annual report the reserves at issue in the ruling_request are limited to the underwriting reserves loss_reserves and policyholders’ dividend reserves that the cfcs maintain on their country a annual reports for life_insurance or annuity_contracts cfcs have appointed a qualified actuary to be involved in matters designated by the regulator as actuarial matters including the method of calculating reserves the actuary has knowledge and experience concerning actuarial matters for a company in country a engaged in the insurance_business the reserve system for country a includes the following requirements as to assumptions and method with respect to life_insurance and annuity_contracts issued by cfc underwriting reserves are required to secure the performance of future obligations arising from life_insurance contracts cfc 1’s underwriting reserves are comprised of insurance premium mathematical reserves and unearned_premium reserves generally the reserve methods and mortality and interest assumptions are submitted to the regulator by a qualified actuary and subject_to approval by the regulator cfc currently holds traditional life_insurance_reserves determined using the net_level_premium method universal life reserves using full account values and other fund-based reserves also using full account value cfc also holds loss_reserves for outstanding claims including claims that have been incurred but not reported under life_insurance issued by cfc and calculates the reserves using the company’s individual accrued liability experience and estimates of liabilities for claims incurred but not reported the policyholders’ dividend reserves represent portfolio profit-sharing components of the policies as of the statement date for profit sharing to be credited at the next contract anniversary the reserve system for country a includes the following requirements as to assumptions and method with respect to life_insurance and annuity_contracts issued by plr-106580-15 cfc underwriting reserves are comprised of annuity account values during the deferred_annuity accumulation periods and annuity mathematical reserves for annuities in the payout period generally the reserve methods and mortality and interest assumptions are submitted to the regulator by a qualified actuary and subject_to regulator approval cfc also holds loss_reserves for outstanding benefit payments under annuity_contracts issued by cfc and calculates the reserves using the company’s individual accrued liability experience in the case of a contract that is treated as participating in the profit of a line-of-business portfolio an amount of policyholders’ dividend reserves would be held on the balance_sheet for this provision parent represents that cfcs are not engaged in any insurance_business outside of country a and do not carry on any non-life insurance_business and each contract covered by the rulings requested is a life_insurance_contract or annuity_contract for federal_income_tax purposes without regard to sec_72 sec_101 sec_817 and sec_7702 the reserves covered by this ruling do not include deficiency_reserves contingency reserves equalization reserves excess_interest reserves for excess_interest credited beyond the end of the taxable_year reserves for administrative expenses including guarantees intended to cover future expenses associated with the payment of claims such as bank fees or inflation risk underwriting or loss_reserves for non-cancellable and guaranteed renewable accident and health contracts reserves for any amount to protect against a future decline in the value of investment_assets or any reserves for accrued liabilities law in general a united_states_shareholder of a controlled_foreign_corporation cfc must include in gross_income its pro_rata share of the cfc’s subpart_f_income for each year subpart_f_income includes among other types of income insurance_income under sec_953 and foreign_base_company_income under sec_954 sec_953 defines the term_insurance income to include any income that is attributable to the issuing or reinsuring of an insurance_or_annuity_contract and that would be taxed under subchapter_l if such income were the income of a domestic insurance_company sec_953 provides that sec_953 insurance_income does not include exempt_insurance_income derived by a qualifying_insurance_company sec_953 provides that reserves for any insurance_or_annuity_contract shall be determined in the same manner as under sec_954 sec_953 defines exempt_insurance_income as income derived by a qualifying_insurance_company that is attributable to the issuing or reinsuring of an exempt_contract by such company and that is treated as earned by such company in its home_country for purposes of such country’s tax laws exempt contracts are defined under sec_953 to include insurance or annuity_contracts issued by a qualifying plr-106580-15 insurance_company in connection with the lives or health of residents of a country other than the united_states but only if such company derives more than percent of its net written premiums from otherwise exempt contracts which cover applicable_home_country_risks and with respect to which no policyholder insured annuitant or beneficiary is a related_person within the meaning of sec_954 in general sec_953 defines a qualifying_insurance_company as any cfc that a is subject_to regulation as an insurance_company by its home_country and is licensed authorized or regulated by the applicable_insurance_regulatory_body for its home_country to sell insurance or annuity_contracts to persons other than related_persons within the meaning of sec_954 in such home_country b derives more than percent of its aggregate net written premiums from the issuance by such controlled_foreign_corporation of contracts covering applicable_home_country_risks of such corporation and with respect to which no policyholder insured annuitant or beneficiary is a related_person as defined in sec_954 and c is engaged in the insurance_business and would be subject_to tax under subchapter_l if it were a domestic_corporation sec_954 defines the term foreign_base_company_income to include among other types of income foreign_personal_holding_company_income sec_954 sets forth the types of income that are considered foreign_personal_holding_company_income sec_954 provides that for purposes of sec_954 foreign_personal_holding_company_income does not include qualified_insurance_income of a qualifying_insurance_company sec_954 defines the term qualified_insurance_income to mean income of a qualifying_insurance_company falling into two categories the first category is income received from unrelated persons and derived from investments made by a qualifying_insurance_company or qualifying_insurance_company_branch collectively referred to as a qic either of its reserves allocable to exempt contracts or of percent of its unearned premiums from exempt contracts as both are determined in accordance with sec_954 the second category is income received from unrelated persons and derived from investments made by a qic of an amount of its assets allocable to exempt contracts equal to in the case of property casualty or health insurance contracts one-third of the premiums earned on those contracts during such year and in the case of life_insurance or annuity_contracts percent of the reserves described in sec_954 for such contracts sec_817 generally provides special rules for certain variable_contracts for purposes of part i of subchapter_l of the code sec_817 defines a variable_contract as any contract that provides for the allocation of all or part of the amounts received under the contract to an account which pursuant to state law is segregated from the general asset accounts of the company and either provides for the payment of annuities is a life_insurance_contract or provides funding for insurance on retired lives plr-106580-15 if a contract satisfies the variable_contract requirements and the separate_account that funds the variable_contract is treated as a segregated_asset_account sec_817 requires that certain adjustments be made to the insurance company’s asset basis and insurance tax_reserves with respect to the segregated_asset_account sec_817 provides that with respect to any variable_contract reserves are adjusted by subtracting an amount equal to the sum of the amounts added from time to time for the taxable_year to the reserves separately accounted for by reason of appreciation in value of assets whether or not the assets have been disposed of and by adding thereto an amount equal to the sum of the amounts subtracted from time to time for the taxable_year from such reserves by reason of depreciation in value of assets under sec_817 the basis of each asset in a segregated_asset_account is increased or decreased by the amount of appreciation or depreciation respectively to the extent the reserves or other items referred to in sec_817 are adjusted the asset basis and insurance tax reserve adjustments offset any realized gain loss attributable to such marked assets at the insurance_company level sec_954 imposes separate contract treatment for separate account-type contracts a term which includes contracts not meeting the requirements of sec_817 sec_954 provides that for purposes of applying sec_954 and with respect to any separate account-type contract including any variable_contract not meeting the requirements of sec_817 income credited under such contract is allocable only to such contract income not allocable to a separate account-type contract is allocated ratably among contracts sec_954 generally provides that in the case of life_insurance and annuity_contracts a qic’s reserves allocable to exempt contracts are equal to the greater of the net_surrender_value of the contract or the reserve determined under sec_954 sec_954 however provides the amount of the reserves under sec_954 shall be the foreign statement reserve for the contract less any catastrophe deficiency equalization or similar reserves if pursuant to a ruling_request submitted by the taxpayer or as provided in published guidance the secretary determines that the factors taken into account in determining the foreign statement reserve provide an appropriate means of measuring income sec_954 was originally enacted by sec_614 of the job creation and worker assistance act of under the protecting americans from tax hikes path act of p l sec_954 was permanently extended and made effective for taxable years of foreign_corporations beginning after date and for taxable years of u s shareholders with or within which such taxable years of such foreign_corporations end in its technical explanation to the plr-106580-15 path act the staff of the joint_committee on taxation explains sec_954 as follows the provision does however permit a taxpayer in certain circumstances subject_to approval by the irs through the ruling process or in published guidance to establish that the reserve for such contracts is the amount taken into account in determining the foreign statement reserve for the contract reduced by catastrophe equalization or deficiency reserve or any similar reserve irs approval is to be based on whether the method the interest rate the mortality and morbidity assumptions and any other factors taken into account in determining foreign statement reserves taken together or separately provide an appropriate means of measuring income for federal_income_tax purposes joint comm on taxation technical explanation of the revenue provisions of the protecting americans from tax hikes act of house amendment to the senate amendment to h_r rules committee print jcx-144-15 date analysis cfc and cfc are subject_to regulation as life_insurance_companies by country a cfc and cfc are licensed authorized and regulated by the regulator which is the insurance regulatory body for country a to sell life_insurance and annuity_contracts to persons other than related_persons within the meaning of sec_954 in country a parent has represented that cfc and cfc each derive more than percent of their aggregate net written premiums from the issuance of life_insurance and annuity_contracts covering applicable_home_country_risks and with respect to which no policyholder insured annuitant or beneficiary is a related_person as defined in sec_954 finally parent has represented that cfc and cfc are engaged in the life_insurance business and would be subject_to tax under subchapter_l if they were domestic corporations accordingly cfc and cfc are qics under sec_953 cfc and cfc issue life_insurance and annuity_contracts in connection with the lives and health of residents of country a a country other than the united_states cfc and cfc derive more than percent of their net written premiums from contracts that cover country a risks with respect to which no policyholder insured annuitant or beneficiary is a related_person within the meaning of sec_954 such contracts are therefore exempt contracts within the meaning of sec_953 cfc and cfc must establish maintain and calculate their underwriting reserves and loss_reserves in accordance with the insurance laws and regulations prescribed by the regulator the regulator requires a life_insurance_company to determine the amount of its underwriting reserves based on guidance provided by the regulator cfc and cfc must set forth their underwriting reserves and loss_reserves on the plr-106580-15 country a annual report which must be filed annually with the regulator these reserves are the measure of the legal obligations to policyholders on the financial statement used for regulatory purposes by life_insurance_companies doing business in country a whether u s -owned locally-owned or owned by companies headquartered in other foreign countries the regulator requires cfc and cfc to hold reserves for the fulfillment of claims owed to policyholders and beneficiaries the reserves are not catastrophe deficiency equalization or similar reserves under the rules prescribed by the regulator for determining reserves required to be calculated for purposes of the country a annual report the method interest rate the mortality and morbidity assumptions and other factors taken into account provide an appropriate means of measuring income within the meaning of sec_954 for country a insurance regulatory purposes cfc and cfc are each required to mark to market its portfolio investment_assets held pursuant to its separate account- type contracts to adjust the bases of its marked portfolio investment_assets to fair_market_value and to adjust its underwriting reserves and loss_reserves in order to offset any realized gain_or_loss attributable to the marked assets the asset basis and reserve-related adjustments prevent cfc and cfc from reporting distortions in the amount and timing of its income on its country a annual report to the regulator this method clearly reflects income as does the rules provided by sec_817 for domestic insurance_companies taxed under subchapter_l under the rules prescribed by the regulator for determining reserves required to be calculated for purposes of the country a annual report the method interest rate the mortality and morbidity assumptions and other factors taken into account provide an appropriate means of measuring income within the meaning of sec_954 ruling based on the information submitted and the representations made we rule as follows under the facts set forth above the foreign statement underwriting reserves loss_reserves and policyholders’ dividend reserves maintained by cfc and cfc with respect to their exempt life_insurance or annuity_contracts are an appropriate means of measuring income within the meaning of sec_954 and may be used in determining the foreign_personal_holding_company_income of cfc and cfc under sec_954 under the facts set forth above the foreign statement underwriting reserves loss_reserves and associated asset bases attributable to cfc 1’s and cfc 2’s separate account-type contracts are an appropriate means of measuring income within the meaning of sec_954 and may be used in determining the foreign_personal_holding_company_income of cfc and cfc under sec_954 caveats plr-106580-15 we express no opinion on any provisions of the code or regulations not specifically covered by the above ruling this ruling will be subject_to revocation if any of the following circumstances occurs a change in the material facts on which this ruling was based a material_change in the business circumstances of cfc or cfc which would impact its reserving method or a change in the applicable law or foreign rules relating to the current reserving method of cfc or cfc procedural statements this ruling is directed only to cfc and cfc sec_6110 provides that it may not be used or cited as precedent 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 in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative a copy of this letter must be attached to any income_tax return to which it is relevant alternatively taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of the letter_ruling sincerely mark e erwin branch chief branch office of associate chief_counsel international cc